EX-13 6 insidecover.txt 2002 ANNUAL REPORT TO SHAREHOLDERS MISSION STATEMENT BOK Financial Corporation's goal is to be the financial institution of first choice in our chosen markets. By delivering our best to our customers, employees, and communities, we will maximize long term value for our shareholders. WE VALUE OUR PEOPLE WE VALUE OUR CUSTOMERS WE ARE COMMITTED TO THE COMMUNITIES WE SERVE 2 Letter From Management 9 Consolidated Selected Financial Data 10 Management's Assessment of Operations and Financial Condition 30 Report of Management on Financial Statements 30 Report of Independent Auditors 31 Consolidated Financial Statements 66 Shareholder and Corporate Information 1 BOK FINANCIAL CORPORATION RIGHT VALUES, RIGHT STRATEGIES, RIGHT RESULTS Picture of Board of Directors shown here. Right Leadership BOK Financial Board of Directors C. Fred Ball, Jr. Robert G. Greer David L. Kyle Steven E. Moore Chairman & CEO Vice Chairman Chairman, President & CEO Chairman, President & CEO Bank of Texas, N.A. Bank of Texas, N.A. ONEOK, Inc. OGE Energy Corp. Sharon J. Bell David F. Griffin Robert J. LaFortune J. Larry Nichols Managing Partner President & General Manager Personal Investments Chairman, President & CEO Rogers & Bell Griffin Television, LLC Devon Energy Corporation Peter C. Boylan, III V. Burns Hargis Philip C. Lauinger, Jr. Robert L. Parker, Sr. President, CEO & Director Vice Chairman Chairman & CEO Chairman of the Board Liberty Broadband BOK Financial Corporation and Lauinger Publishing Co. Parker Drilling Company Interactive TV Bank of Oklahoma, N.A. Joseph E. Cappy Eugene A. Harris John C. Lopez James A. Robinson Chairman, President & CEO Executive Vice President Chairman & CEO Personal Investments Dollar Thrifty Automotive BOK Financial Corporation and Lopez Foods, Inc. Group Bank of Oklahoma, N.A. Luke R. Corbett Howard E. Janzen Stanley A. Lybarger L. Francis Rooney, III Chairman & CEO Former President & CEO President & CEO Chairman and CEO Kerr-McGee Corporation Williams Communications BOK Financial Corporation and Manhattan Construction Company Bank of Oklahoma, N.A. William E. Durrett E. Carey Joullian, IV Steven J. Malcolm Scott F. Zarrow Senior Chairman President & CEO Chairman, President & CEO President American Fidelity Corp. Mustang Fuel Corporation Williams Foreman Investment Capital LLC James O. Goodwin George B. Kaiser Paula Marshall-Chapman Frank A. McPherson Chief Executive Officer Chairman CEO Retired Chairman & CEO The Oklahoma Eagle BOK Financial Corporation Bama Companies Kerr-McGee Corporation Publishing Company, Inc. and Bank of Oklahoma, N.A. LLC
2 RIGHT VALUES LETTER FROM MANAGEMENT Right values. Right strategies. Right results. The theme of this year's annual report to shareholders seems fitting as we look back at our past achievements and ahead to anticipated successes on behalf of our stockholders, customers and employees. Since the company's inception 12 years ago, our aim at BOK Financial Corporation has been to produce consistently superior returns for investors. To do this we have utilized strategies that promote growth at home, expansion into high-growth markets, superior service to middle market commercial clients and a diverse revenue base to help us succeed through economic cycles. At no time in the company's history has the prudence of our approach been more evident than in 2002, when we reported record net income of $150 million, an increase of 29 percent over the previous year. Yet, behind all of our strategies and accomplishments are core beliefs that govern what we do and how we think, year in and year out. Simply put, our values dictate that we do things right. We take a discreet, forthright approach in applying accounting rules and standards to ensure our financial reports accurately and fairly represent the financial condition of the company. We manage our resources and base our decisions on sound ethical and legal principles. Our outlook is evident in the caliber of our board of directors, the experience and expertise of our management team and the talent and dedication of front-line employees who are ultimately responsible for our achievements. The BOK Financial board of directors consists of veteran business professionals and corporate and community leaders whose integrity, expertise and business acumen set the tone for our success. Our managers demonstrate seasoned, insightful judgment to devise and execute progressive strategies. Our employees' dedication to quality and innovation is second to none. Our values will carry us forward as we continue to implement far-sighted strategies that produce solid performance across-the-board--even during economic slowdowns. Despite the soft economy, our diluted earnings per share in 2002 rose 27 percent, to $2.48. Total loans grew 10 percent and deposits 18 percent, contributing to growth in net interest revenue of 12 percent. Altogether, total revenue rose 18 percent. Non-interest revenue from fees and commissions comprised 41 percent of revenue when excluding gains from sales of securities and derivatives. That puts our diversification of revenue well ahead of comparable banking companies. Total assets increased 10 percent to $12.2 billion, and loans rose to $6.9 billion, with the company experiencing growth in commercial loans, commercial real estate loans and residential mortgage loans. Our loan growth was aided by the acquisition of Bank of Tanglewood in Houston and the opening of a Denver loan production office, which enhanced the portfolio by $132 million and $65 million, respectively. Deposits were $8.1 billion at year-end, and deposit growth enabled us to fund asset growth and reduce borrowed funds by $198 million. In the securities portfolio, our strategy of investing for total return served us well in 2002. Gains from the sales of securities and derivatives generated revenue of $65 million, up $38 million from 2001. Total gains included $26 million from a hedge program designed to offset the volatility in the market value of our mortgage servicing rights (MSR). The MSR impairment and associated amortization costs have increased because of the high volume of mortgage refinancing during times of record low interest rates. BOK Financial adopted a new accounting standard in 2002 that discontinued amortization of goodwill, but even if the standard had been effective during 2001, income growth in 2002 would have been 22 percent over the previous year. When the MSR accounting charge and the sales of securities and derivatives from both 2001 and 2002 are excluded, the company produced 18 percent growth in net income. Asset quality continued to be evident in 2002 as key measures remained well ahead of peer banks with assets from $7 billion to $20 billion. Nonperforming assets to period-end loans remained relatively steady at 0.84 percent while loan loss reserves were 1.72 percent of period-end loans, compared with 1.59 percent for our peers. Net charge-offs to average loans declined to 0.33 percent for the year from 0.35 percent while the average for our peers was 0.57 percent. This year, we are committed to achieving more success with the expansion in Houston, where we also opened new locations over the past year. The success of our loan production office in Denver is providing us with a solid platform for exploring a full service banking presence in that fast-growing metropolitan area. We remain confident that our sound strategies backed by the right values will continue to produce solid results. Through it all, we will continue to value our people, our customers and the communities we serve as we carry out our mission of generating optimal long-term returns for our shareholders. 3 Pictures of George B. Kaiser (Chairman) and Stanley Lybarger (President & CEO) shown here. 4 RIGHT STRATEGIES ENHANCE OKLAHOMA LEADERSHIP Over the past five years, south Tulsa and the adjacent suburb of Jenks have experienced a surge of residential construction and commercial development. To serve the bustling area, Branch Manager Cathy Wilson and her staff opened the doors in October on a new Bank of Oklahoma location that brings service even closer to our customers. In just over two months, new deposits and loans there exceeded targets by 96 percent and 162 percent, respectively. A new branch in a growing area is but one example of our resolve to remain the dominant bank in our original market. During the past decade, we emerged as the clear financial services leader in Oklahoma while our chief rivals sold to large out-of-state banks with distant, impersonal customer service. We offered nationally competitive products with the personal touch of a community bank, an approach that continues to appeal to businesses and consumers. As a result of our commitment, Bank of Oklahoma has 12 percent of the state's total deposits and an estimated 27 percent of commercial loans, according to SNL DataSource. That compares with 6 percent of deposits and 7 percent of commercial loans for our nearest competitors. In Tulsa County alone, we have an estimated 50 percent of the commercial lending market. In Oklahoma County, which includes Oklahoma City, our commercial lending market share has grown to almost 24 percent. Pictures of Cathy Wilson (Branch Manager, Tulsa) and Sheryl Eastwood (Manager of Mortgage Origination, Oklahoma City) shown here. See #1 Market Share data in Appendix A. We have 68 full-service locations statewide, including community banks serving Bartlesville, Enid, Eufaula, Grove, McAlester, Muskogee, Newkirk, Ponca City and Sand Springs. But we refuse to take our Oklahoma lead for granted. Growth in middle market commercial and small business lending remained major priorities in 2002, and we were able to grow total loans 7 percent, despite a slowdown in the overall market. We introduced check cards with logos of the University of Oklahoma and Oklahoma State University, which remain popular with customers. Our customers also enjoyed our new Overdraft Privilege service on checking accounts. In 2002, record low interest rates accelerated loan growth at BOk Mortgage, which does business in six states. The company remains the leading provider of residential mortgages in Oklahoma, accounting for a major portion of statewide originations. In Tulsa County, the mortgage company enjoyed an estimated 22 percent share of all loan fundings among the Top 20 lenders, according to public filings. And in 2002 we continued to make strides in Oklahoma City, where Vice President Sheryl Eastwood heads up a team of lenders dedicated to expanding market share already estimated at 20 percent. Bank of Oklahoma will continue to offer convenience, a broader array of products and services and small business and commercial lending initiatives to fuel our growth and enhance our leadership. 5 RIGHT STRATEGIES EXPAND IN ATTRACTIVE MARKETS In 2002, CEO Rich Jochetz and his shareholders at Bank of Tanglewood were at a crossroads after six years of rapid growth into a $236 million institution catering to affluent Houstonians and their businesses. The bank could invest millions to introduce additional services and open new locations to keep pace--or find the right merger partner. BOK Financial persuaded this successful group of bankers to take the latter course, and the acquisition of Bank of Tanglewood and its merger with Bank of Texas marked the latest milestone in our strategic expansion into high-growth metropolitan areas in neighboring states. We formed Bank of Texas in 1997 from acquisitions in the Dallas-Fort Worth Metroplex and launched Bank of Texas-Houston with the purchase of CNBT Bancshares in 2001. Our efforts have allowed us to compete in two of the country's most vibrant markets. Both Dallas-Fort Worth and Greater Houston had more than 25 percent population growth during the 1990s and now have more than 11 million residents combined. Median incomes are well above the national average. We have acquired established, well-managed institutions, then formed a solid foundation for new growth by combining community banking expertise with a desirable local brand name and our strengths in middle market lending, trust and private financial services. Pictures of Ralph Williams (Chairman, Bank of Texas - Houston), Rich Jochetz (President, Bank of Texas - Houston), and Tom Foncannon (SVP & Manger, Denver Loan Production Office) shown here. See Total Deposits Per Market data in Appendix A. See Companies With Revenue $10-750 million in Appendix A. To run our operations, we recruited and retained talented, experienced bankers with strong local roots. Jochetz is now president of Bank of Texas-Houston and, Ralph Williams, formerly of CNBT, is the Houston chairman. Both work in concert with Barry Kelly, executive vice president over corporate banking in the Houston market. Growth didn't stop with acquisitions. While we have acquired assets of $1.5 billion in Texas, we have added another $900 million in new business as we successfully marketed our products and services. We added locations in 2002, including one in the Dallas suburb of Plano and two in Greater Houston. Bank of Texas has 28 locations, including 12 in the Houston area. We continue to look for new opportunities in other markets. We formed Bank of Albuquerque in 1998 and continue to experience healthy growth in a metro area that accounts for almost half of New Mexico's economic output. In 2002, Bank of Oklahoma opened a loan production office in Denver headed by Senior Vice President Tom Foncannon. At year-end, we had $65 million in loans outstanding, and by January 31, that had grown to more than $100 million. Greater success is expected as we forge ahead with plans to establish a full banking presence in the Denver area, the economic and business hub of Colorado and home to more than 2 million residents. 6 RIGHT STRATEGIES FILL MIDDLE MARKET VACUUM Bank of Texas-Dallas President Tom Swiley keeps his eye on a potentially huge prize in the Dallas-Fort Worth Metroplex--more than 3,000 companies with revenue from $10 million to $750 million, according to Dun & Bradstreet. The bank focuses on about 400 of those, but Swiley and Bank of Texas Chairman and CEO Fred Ball know there's plenty of new business to be won as more middle market companies feel alienated from merging mega banks. Bank of Texas specializes in exceptional customer service that gives business executives easy access to account officers and the bank's senior management. Big bank consolidation over the past decade created a void in the crucial middle market, where entrepreneurial companies are in need of responsive bankers. Utilizing the skills we honed financing emerging companies in Oklahoma and Arkansas, BOK Financial implemented a strategy of catering to the commercial middle market as we formed new banks and expanded into high-growth markets in neighboring states. In Dallas-Fort Worth and Greater Houston, the commercial lending outlook is especially promising. Thousands of companies in the Dallas-Fort Worth Metroplex contribute to a gross domestic product of more than $250 billion, 19th largest compared with the world's nations. Greater Houston's GDP is approaching $245 billion and its middle market companies seek personal banking relationships. Despite an economic slowdown in 2002, commercial loan growth attributable to our Texas operations rose more than 11 percent. Pictures of Tom Swiley (President, Bank of Texas - Dallas), Fred Ball (Chairman & CEO, Bank of Texas), Paul Sowards (President, Bank of Albuquerque), and Greg Symons (Chairman & CEO, Bank of Albuquerque) shown here. See Loans - 3-year Compound Annual Growth Rate data in Appendix A. See Deposits - 3-year Compound Annual Growth Rate data in Appendix A. In 2002, we made big strides in New Mexico, where there are considerable opportunities in small business and middle market lending. Bank of Albuquerque is competing successfully against the country's largest banks by attracting top banking talent and new customer relationships. Commercial loans grew 31 percent in 2002, with commercial real estate loans up 10 percent and total loans rising 17 percent, to $524 million. Bank of Albuquerque was formed in 1998 when we purchased 17 branch locations from Bank of America with combined loans valued at $172 million. In addition to establishing a full-service location in Santa Fe, the bank since its founding has recruited the top commercial bankers in the market from larger competitors, forming a premier lending group under the direction of Chairman and CEO Greg Symons and bank President Paul Sowards. We continue to establish new relationships in Northwest Arkansas and in Oklahoma, where we are already the dominant force in the commercial middle market. We are also attracting additional customers by cross-selling loans, treasury services and international banking. Especially appealing are innovative products such as Treasury Services' new NetConnect Internet service that allows customers to instantly initiate transactions. All these efforts continue to demonstrate our superior service to the middle market wherever we do business. 7 RIGHT STRATEGIES INCREASE DIVERSE FEE REVENUE BASE For Senior Vice President Dave Sharpe and his staff at TransFund, rapid growth has become more the rule than the exception. TransFund started as a small, proprietary ATM network in Tulsa in 1976, but its growth has been especially vibrant since we embarked on a strategy six years ago to expand into neighboring states. In 2002, TransFund emerged as the 12th largest electronic funds transfer (EFT) network in the country with transaction volumes in a nine-state area surpassing 100 million for the first time and the number of cardholders exceeding 1.6 million. Visa check card transactions rose 27 percent for the year, and overall transactions were up 18 percent. That capped transaction volume growth of 146 percent over five years with merchant card processing climbing 192 percent. TransFund is an important part of BOK Financial's strategy of developing fee-generating business lines that enable the company to expand earnings through economic cycles. In 2002, revenue from fees and commissions grew 12 percent over 2001 and accounted for 41 percent of revenue when excluding gains on sales of securities and derivatives. That compares with a 30 percent average for banks in our peer group. TransFund also outperformed the industry, according to Thomson's 2003 EFT survey comparing March 2002 to March 2001. Our volumes were up 19 percent versus an industry average of 15 percent. Sharpe and his staff served 325 financial institutions, gaining ground in spite of the financial industry's ongoing consolidation. Pictures of Dave Sharpe (SVP & Mananger, Transfund) and JoAnn Schaub (SVP & Manager, Institutional and Employee Benefits) shown here. See Transfund data in Appendix A. See Employee Benefits data in Appendix A. Our Trust Division dates from the founding in 1918 of Oklahoma's first trust company and continues to pioneer revenue-generating products. Senior Vice President JoAnn Schaub, manager of Institutional and Employee Benefits Trust in Tulsa, sees first-hand the role that innovative products play in meeting our customers' needs. I&EB initiated a self-directed 401(k) plan that allows participants to allocate their assets among mutual funds, individual stocks and bonds. This flexibility has special appeal to law firms, medical clinics and other professional businesses where a high percentage of participants are motivated to manage their own investments. In 2002, additional self-directed plans contributed to an overall increase in 401(k) plans of almost 10 percent. New self-directed plans brought in $165 million in assets and more than $460,000 in additional revenue in 2002. Our diverse non-interest revenue base also includes fees and commissions from other trust services, deposit services, mortgage and international banking, cash management, and brokerage and trading. In fact, revenue grew 32 percent in 2002 from service charges and fees on deposit accounts and increased 24 percent at our BOSC, Inc. broker/dealer subsidiary. International fee revenue was up 21 percent with strong growth along all product lines and new business from our Exporters' Plus (SM) document preparation service. BOK Financial remains committed to introducing innovative products and services that enhance and diversify our revenue base and support our growth. 8 RIGHT RESULTS See Loan graph data in Appendix A. See Deposit graph data in Appendix A. Our values and strategies would be of little consequence if they didn't produce right results for our stakeholders. We again demonstrated in 2002 that right results emanate from consistently applied strategies based on values that promote progress and growth on a solid foundation of business ethics and financial integrity. Net income of $150.4 million for the year - highest in the company's history - resulted from accomplishments by many individuals, all working under the umbrella of our corporate goals. Despite margin pressure and a generally sluggish environment during 2002, we achieved growth by most measures: assets, loans, deposits, net interest revenue, fees and commissions, and earnings per share. Our vision for 2003 looks remarkably similar to our past. In spite of the challenges of an economic slowdown and international uncertainty, we look for new growth in 2003 and beyond. We will continue to follow the four primary strategies outlined in this report, and we will pursue excellence in all that we do. For our shareholders, customers and employees, the combination of these right strategies supported by right values will continue to produce results that are right on the money. See Revenue graph data in Appendix A. See Earnings Per Share graph data in Appendix A. 2002 Annual Report BOK FINANCIAL CORPORATION 9 Table 1 Consolidated Selected Financial Data (Dollars In Thousands Except Per Share Data) December 31, --------------------------------------------------------------------- 2002 2001 2000 1999 1998 (2) --------------------------------------------------------------------- Selected Financial Data For the year: Interest revenue $ 574,913 $ 654,633 $ 638,730 $ 500,274 $ 402,832 Interest expense 206,712 325,681 368,915 263,935 212,249 Net interest revenue ("NIR") 368,201 328,952 269,815 236,339 190,583 Provision for loan losses 33,730 37,610 17,204 10,365 14,591 Net income 150,409 116,302 100,140 89,226 79,611 Period-end: Loans, net of reserve 6,784,913 6,193,473 5,435,207 4,567,255 3,581,177 Assets 12,245,045 11,141,602 9,748,334 8,373,997 7,059,507 Deposits 8,128,525 6,905,744 6,046,005 5,263,184 4,607,727 Subordinated debentures 155,419 186,302 148,816 148,642 146,921 Shareholders' equity 1,093,557 828,483 703,576 557,164 524,793 Nonperforming assets (3) 56,574 50,708 43,599 22,943 18,762 Profitability Statistics Earnings per share (based on average equivalent shares): Basic $ 2.79 $ 2.18 $ 1.89 $ 1.68 $ 1.50 Diluted 2.48 1.95 1.69 1.50 1.34 Pro forma diluted earnings per share with FAS 142 and FAS 147 2.48 2.10 1.78 1.59 1.42 Percentages (based on daily averages): Return on average assets 1.33% 1.14% 1.15% 1.17% 1.34% Return on average shareholders' equity 16.07 14.93 16.46 16.45 16.38 Average shareholders' equity to average assets 8.29 7.61 7.00 7.12 8.17 Common Stock Performance Per Share: Book value per common share $ 19.59 $ 15.43 $ 13.19 $ 10.42 $ 10.35 Market price: December 31 close 32.39 31.51 21.25 20.19 23.38 Market range - High trade 36.52 32.75 21.25 25.94 25.63 - Low trade 26.80 21.31 15.31 18.94 19.50 Selected Balance Sheet Statistics Period-end: Tier 1 capital ratio 8.98% 8.08% 8.06% 7.27% 7.93% Total capital ratio 11.95 11.56 11.23 10.72 12.02 Leverage ratio 6.88 6.38 6.51 5.92 6.60 Reserve for loan losses to nonperforming loans 232.82 233.90 207.95 391.65 467.70 Reserve for loan losses to loans (1) 1.72 1.66 1.51 1.66 1.86 Miscellaneous (at December 31) Number of employees (FTE) 3,402 3,392 3,003 3,101 2,850 Number of banking locations 130 114 105 100 91 Number of TransFund locations 1,390 1,325 1,111 1,020 998 Mortgage loan servicing portfolio $5,754,548 $ 6,645,868 $6,874,995 $7,028,247 $6,375,239 ------------------------------------------------------------------------------------------------------------------------------ 1 Excludes residential mortgage loans held for sale. 2 Restated for pooling of interest in 1999. 3 Includes nonaccrual loans, renegotiated loans and assets acquired in satisfaction of loans. Excludes loans past due 90 days or more and still accruing.
10 MANAGEMENT'S ASSESSMENT OF OPERATIONS AND FINANCIAL CONDITION BOK Financial Corporation ("BOK Financial") is a financial holding company that offers full service banking in Oklahoma, Northwest Arkansas, Dallas and Houston, Texas metropolitan areas and Albuquerque, New Mexico. BOK Financial's principal subsidiaries are Bank of Oklahoma, N.A. ("BOk"), Bank of Texas, N.A., Bank of Albuquerque, N.A., and Bank of Arkansas, N.A. Other subsidiaries include BOSC, Inc., a broker/dealer that engages in retail and institutional securities sales and municipal underwriting. CRITICAL ACCOUNTING POLICIES APPLICATION OF CRITICAL ACCOUNTING POLICIES Preparation of BOK Financial's consolidated financial statements is based on the selection of certain accounting policies, which requires management to make significant assumptions and estimates. The following discussion addresses the more critical areas where these assumptions and estimates could affect financial condition and results of operations. Application of these critical accounting policies and estimates has been discussed with the appropriate committees of the Board of Directors. RESERVE FOR LOAN LOSSES The reserve for loan losses is assessed by management based 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 loans, general reserves that are based on a statistical migration analysis and nonspecific reserves that are based on analysis of current economic conditions, loan concentrations, portfolio growth and other relevant factors. An independent Credit Administration department is responsible for performing this evaluation for all of 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 estimated future cash flows and collateral values in accordance with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for the Impairment of a Loan" and regulatory accounting standards. The general reserve for commercial and commercial real estate loan losses is determined primarily through an internally developed migration analysis model. The purpose of this model is to determine the probability that each loan in the portfolio has an inherent loss based on historic trends. Management uses an eight-quarter aggregate accumulation of net losses as a basis for this model. Greater emphasis is placed on loan losses in more recent periods. This model assigns a general reserve for loan losses to all commercial loans and leases, excluding loans that have a specific impairment reserve, residential mortgage loans, excluding loans held for sale, and consumer loans. Separate models are used to determine general reserves for residential mortgage loans, excluding loans held for sale, and consumer loans. The general reserve for residential mortgage loans is based on an eight-quarter average percent of loss. General reserves for consumer loans are based on a migration of loans from current status to loss. Separate migration factors are determined by major loan products, such as indirect automobile loans and direct 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 models. 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 models or the underlying data and other relevant factors. A range of potential losses is determined for each factor identified. VALUATION AND AMORTIZATION OF MORTGAGE SERVICING RIGHTS BOK Financial has a significant investment in mortgage servicing rights. These rights are either purchased from other lenders or retained from sales of loans originated by BOK Financial in the secondary market. Mortgage servicing rights are carried at the lower of amortized cost, adjusted for the effects of past hedging activities, or fair value. Amortized cost and fair value are stratified by interest rate and loan type. A valuation allowance is provided when the net amortized cost of any strata exceeds the calculated fair values. There is no active market for trading in mortgage servicing rights. BOK Financial uses a cash flow model to determine fair value. Key assumptions and estimates, including projected prepayment speeds and assumed servicing costs, earnings on escrow deposits, ancillary income and discount rates, used in this model are provided by independent sources. During 2002, BOK Financial changed the source of prepayment assumptions used to value its mortgage servicing rights. Previously, industry consensus prepayment speeds were used to project future cash flows. This information was not updated frequently enough to reflect current market conditions. A separate third-party model that is generally accepted by the financial markets is now used to estimate prepayment speeds based upon interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors. The prepayment model is updated daily for changes in market conditions. Published sources are generally used for other key assumptions and estimates. Management periodically requests estimates of fair value from outside sources to corroborate the results of the valuation model. 11 Prepayment assumptions also affect the amortization of mortgage servicing rights. Amortization is determined in proportion to projected cash flows over the estimated life of each loan serviced. The same third party model that estimates prepayment speeds for determining the fair value of mortgage servicing rights determines the estimated life of each loan serviced. INTANGIBLE ASSETS During 2002, Statements of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142") and No. 147, "Acquisitions of Certain Financial Institutions" ("FAS 147") were adopted. These standards eliminated amortization of intangible assets with indefinite lives, such as goodwill. Instead, goodwill for each of BOK Financial's business units must be evaluated for impairment annually or more frequently if conditions indicate impairment may have occurred. The evaluation of possible impairment of intangible assets involves significant judgment based upon short-term and long-term projections of future performance. The fair value of BOK Financial's business units is estimated by the discounted future earnings method. Income growth is projected over a five-year period for each unit and a terminal value is computed. This projected income stream is converted to current fair value by using a discount rate that reflects a rate of return required by a willing buyer. At December 31, 2002, Bank of Texas had $155 million or 87% of goodwill. Because of the large concentration of goodwill in this business unit, the fair value determined by the discounted future earnings method for Bank of Texas was corroborated by comparison to the fair value of publicly traded banks of similar size and characteristics. No goodwill impairment was indicated by either valuation method. SUMMARY OF PERFORMANCE BOK Financial recorded net income of $150.4 million or $2.48 per diluted share for 2002 compared to $116.3 million or $1.95 per diluted share for 2001. Prior years' earnings per share have been restated to reflect a 3% stock dividend in 2002. Returns on average assets and average equity were 1.33% and 16.07%, respectively, for 2002 compared to 1.14% and 14.93%, respectively, for 2001. If FAS 142 and FAS 147 had been applied retroactively to 2001, the pro forma net income and earnings per diluted share would have been $125.5 million and $2.10, respectively. Return on average assets and average equity for 2001 would have been 1.23% and 16.11%. Net income for 2000 was $100.1 million or $1.69 per diluted share. Returns on average assets and equity were $1.15% and 16.46%. Net income in 2000 included a $3.0 million reduction in income tax expense due to favorable resolution of an Internal Revenue Service examination. If FAS 142 and FAS 147 had been applied retroactively to 2000, net income and diluted earnings per share would have been $105.3 million or $1.78, respectively. Return on average assets and average equity for 2000 would have been 1.21% and 17.31%. Return on average equity is impacted by the change in unrealized gains and losses of securities due to the changes in the market valuation of available for sale securities. Excluding these unrealized gains and losses on securities in addition to the effects of FAS 142 and FAS 147, return on average equity would have been 16.57%, 16.51% and 16.23% in 2002, 2001 and 2000, respectively. Net interest revenue grew $39.2 million or 12% during 2002 due to increases in average earning assets, partially offset by the net effect of declining interest rates. Fees and commissions grew $28.3 million or 12% with increases in service charges and fees on deposit accounts, transaction card revenue, and brokerage and trading revenues and decreases in trust fees and commissions and mortgage banking revenues. Gains on sales of securities, including gains on sales of securities used as an economic hedge of the mortgage-servicing portfolio, increased $28.1 million. Operating expenses for 2002 increased $56.9 million or 15% over 2001 due to a $42.4 million increase in expenses related to mortgage banking activities and a $19.5 million increase in personnel expense, partially offset by a $12.5 million decrease in amortization of intangible assets. Net income for the fourth quarter 2002 increased 29% to $38.8 million or $0.63 per diluted common share. This increase included an increase of $6.6 million or 7% in net interest revenue, an $8.1 million or 13% increase in fee and commission revenue and an $18.1 million increase in gains on sales of securities and gains on derivative contracts. These increases were offset by increases in operating expense of $20.2 million or 24%. ASSESSMENT OF OPERATIONS NET INTEREST REVENUE Tax-equivalent net interest revenue totaled $374.3 million for 2002 compared to $337.0 million for 2001. The increase in net interest revenue was due primarily to a $1.1 billion increase in average earning assets offset by a $622 million increase in interest-bearing liabilities. The growth in average earning assets included a $698 million increase in securities and a $395 million increase in net loans. The increase in average interest-bearing liabilities was due to growth in average interest-bearing deposits of $640 million, offset slightly by a net decrease in other borrowings. Table 2 reflects the effect on net interest revenue of changes in average balances and interest rates for the various types of earning assets and interest-bearing liabilities. Yields on average earning assets and rates paid on average interest-bearing liabilities both continued to decline throughout 2002. The net interest margin, the ratio of tax-equivalent net interest revenue to average earning assets, increased to 3.70% for 2002 compared to 3.66% for 2001. This increase reflected the effects of changes in interest rates on BOK Financial's earning assets and interest-bearing liabilities. During the first quarter of 2002 BOK Financial's interest-bearing liabilities reacted more quickly to changes in interest rates than its earning assets, causing the net interest margin to increase during a period of declining interest rates. This favorable effect of falling interest rates began to decline after the first quarter of 2002 as the yields on earning assets continued to decrease and the over-all rates paid on interest-bearing liabilities became more stable. The effects of the declining interest rates on yields and rates paid during 2002 are reflected in the Annual and Quarterly Financial Summaries. 12 Table 2 Volume/Rate Analysis (In Thousands) 2002/2001 2001/2000 ------------------------------------- ------------------------------------ Change Due To (1) Change Due To (1) ------------------------ ------------------------ Change Volume Yield/Rate Change Volume Yield/Rate ------------ ----------- ------------ ----------- ------------ ----------- Tax-equivalent interest revenue: Securities $ (2,708) $ 28,736 $(31,444) $17,329 $ 26,009 $ (8,680) Trading securities (450) (252) (198) (250) 226 (476) Loans (77,950) 27,886 (105,836) 1,149 88,815 (87,666) Funds sold and resell agreements (538) (76) (462) (2,133) (1,516) (617) ------------------------------------------------------ ----------- ------------ ----------- ------------ ----------- Total (81,646) 56,294 (137,940) 16,095 113,534 (97,439) ------------------------------------------------------ ----------- ------------ ----------- ------------ ----------- Interest expense: Transaction deposits (10,620) 9,580 (20,200) (5,126) 9,642 (14,768) Savings deposits (305) 147 (452) (422) 50 (472) Time deposits (49,818) 4,197 (54,015) 4,436 26,046 (21,610) Borrowed funds (58,054) 43 (58,097) (42,608) 15,392 (58,000) Subordinated debenture (172) 102 (274) 486 2,059 (1,573) ------------------------------------------------------ ----------- ------------ ----------- ------------ ----------- Total (118,969) 14,069 (133,038) (43,234) 53,189 (96,423) ------------------------------------------------------ ----------- ----------- ------------ ------------ ----------- Tax-equivalent net interest revenue 37,323 $ 42,225 $ 59,329 $ 60,345 $ (1,016) (4,902) ----------- ------------ ------------ ----------- (Increase) decrease in tax-equivalent adjustment 1,926 (192) ------------------------------------------------------ ----------- Net interest revenue $ 39,249 $59,137 ------------------------------------------------------ ----------- 1 Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.
4th Qtr 2002/4th Qtr 2001 ------------------------------------ Change Due To (1) ------------------------ Change Volume Yield/Rate ---------- ------------ ----------- Tax-equivalent interest revenue: Securities $ (934) $7,849 $(8,783) Trading securities (158) (145) (13) Loans (3,779) 8,437 (12,216) Funds sold and resell agreements 7 50 (43) ----------------------------------------------------- ------------ ----------- Total (4,864) 16,191 (21,055) ----------------------------------------------------- ------------ ----------- Interest expense: Transaction deposits (285) 2,045 (2,330) Savings deposits 2 45 (43) Time deposits (4,513) 3,767 (8,280) Borrowed funds (6,051) (806) (5,245) Subordinated debenture (184) (248) 64 ----------------------------------------------------- ------------ ----------- Total (11,031) 4,803 (15,834) (1) ----------------------------------------------------- ------------ ----------- Tax-equivalent net interest revenue 6,167 $11,388 $(5,221) ------------ ----------- Decrease in tax-equivalent adjustment 398 ----------------------------------------------------- Net interest revenue $6,565 ----------------------------------------------------- 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. This strategy also reduces 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 this strategy enhanced net interest revenue $67 million during 2002, compared to $39 million in 2001. Excluding this strategy, net interest margin for 2002 and 2001 would have been 3.76% and 3.95%, respectively. Average securities purchased and funds borrowed under this strategy were $1.9 billion in 2002 and $1.7 billion in 2001. As more fully discussed in the subsequent Market Risk Section, management employs various techniques to manage, within established parameters, the interest rate and liquidity risk inherent in this strategy. The effectiveness of these strategies is reflected in the overall changes in net interest revenue due to changes in interest rates as shown in Table 2. Tax-equivalent net interest revenue for the fourth quarter of 2002 was $95.7 million compared to $89.5 million for the fourth quarter 2001. This increase was due to the growth in average earning assets, which increased $1.3 billion or 14%. Net interest margin declined 17 basis points to 3.55% as yields in earning assets decreased more rapidly than the cost of interest bearing liabilities due to the effect of declining rates over the past year as discussed above. Tax-equivalent net interest revenue totaled $337.0 million for 2001 compared to $277.7 million for 2000. The increase in net interest revenue was primarily due to an increase in average earning assets. Average earning assets increased by $1.4 billion during 2001 due most notably to average net loan growth of $1.0 billion. This growth in loans improved the mix of earning assets since loans generally have higher yields than other types of earning assets. The growth in average earning assets was funded by a $1.2 billion increase in interest-bearing liabilities, including an $845 million increase in interest-bearing deposits. 13 The financial services environment in BOK Financial's primary markets is highly competitive due to a large number of commercial banks, thrifts, credit unions and brokerage firms. Additionally, many customers have access to national and regional financial institutions for many products and services. Management expects that BOK Financial will continue to be able to successfully compete with these financial institutions by delivering the loan and deposit products and other financial services traditionally associated with a large bank with the responsiveness of a smaller, community bank. OTHER OPERATING REVENUE Other operating revenue increased $66.9 million or 26% compared to 2001. Fees and commissions increased $28.3 million or 12% compared to 2001. Fees and commissions continue to represent a significant portion of BOK Financial's total revenue at 41%, excluding gains on securities and derivatives, during 2002. A significant portion of the increase in fees and commissions is due to the increase in service charges and fees on deposit accounts of $16.3 million or 32% primarily from an overdraft privilege product initiated in 2002. Transaction card revenues have increased $9.1 million or 20% over 2001 due to growth in merchant fees, ATM network fees (TransFund) and check card fees. Brokerage and trading fees have increased $4.8 million or 24% during 2002 due to increased institutional sales. Trust fees declined $475 thousand during 2002 due to declines in the asset values on which many fees are based. Mortgage banking revenue decreased $1.2 million, see discussion of mortgage banking in the lines of business section of this report. BOK Financial realized net gains on sales of securities of $58.7 million in 2002 and $30.6 million in 2001. These amounts included net gains from securities designated as economic hedges of the mortgage-servicing portfolio of $26.3 million in 2002 and $12.8 million in 2001. The increase in net realized gains reflected the active management of the securities portfolio as interest rates declined during 2002. Management's strategy during 2002 was to sell securities that had limited potential for further appreciation and to replace them with securities with less prepayment risk. Net gain on derivatives primarily represented the mark to market of the derivative portfolio used for interest rate risk management. Additional discussion regarding the mortgage servicing rights and related hedge portfolio and BOK Financial's use of derivative instruments is located in the Market Risk section of this report. Table 3 Other Operating Revenue (In Thousands) Years ended December 31, ------------------------------------------------------------ 2002 2001 2000 1999 1998 ------------ ----------- ----------- ----------- ----------- Brokerage and trading revenue $ 24,450 $ 19,644 $ 15,146 $ 16,018 $ 15,144 Transaction card revenue 53,552 44,481 38,753 32,648 24,426 Trust fees and commissions 40,092 40,567 39,316 35,127 29,956 Service charges and fees on deposit accounts 67,632 51,284 42,932 41,067 33,920 Mortgage banking revenue 48,910 50,155 37,179 36,986 41,733 Leasing revenue 3,330 3,745 4,244 3,725 7,111 Other revenue 20,276 20,087 17,965 17,589 11,688 ------------------------------------------------------------ ----------- ----------- ----------- ----------- Total fees and commissions 258,242 229,963 195,535 183,160 163,978 ------------------------------------------------------------ ----------- ----------- ----------- ----------- Gain on sale of assets 1,157 557 381 5,496 1,548 Gain (loss) on sales of securities, net 58,704 30,640 2,059 (419) 9,337 Gain (loss) on derivatives, net 5,894 (4,062) - - - ------------------------------------------------------------ ----------- ----------- ----------- ----------- Total other operating revenue $ 323,997 $257,098 $197,975 $188,237 $174,863 ------------------------------------------------------------ ----------- ----------- ----------- -----------
Other operating revenue for the fourth quarter of 2002, excluding net gains on sales of securities and gains on derivatives, totaled $69.7 million compared to $61.6 million for the fourth quarter 2001. Service charges during the fourth quarter 2002 increased $5.3 million or 38% over same period of 2001. Transaction card revenue increased $2.5 million or 22% for the fourth quarter 2002 over the previous period. Brokerage and trading revenue increased $1.5 million or 29% for the fourth quarter 2002 as compared to 2001. The fourth quarter of 2002 included securities gains of $10.3 million compared to securities losses of $3.8 million during the fourth quarter of 2001 and gains on derivatives of $665 thousand in 2002 compared to derivatives losses of $3.3 million in 2001. Net securities gains from the portion of the available for sale portfolio, which serves as an economic hedge of mortgage servicing rights, totaled $6.8 million for the fourth quarter of 2002 compared to an $11.1 million loss in the same period of 2001. Other operating revenue in 2001 increased $34.6 million or 18% from 2000, excluding a $24.5 million increase from gains on financial instruments. All major categories of fees and commissions increased over the same period in 2000. Most notably, mortgage-banking revenue increased $13.0 million or 35% from 2000 due to improved conditions for sales of loans into the secondary market. Service charges and fees on deposit accounts grew $8.4 million or 19% over 2000 due to growth in nonsufficient fund charges and growth of treasury services revenue. Brokerage and trading revenue grew 30% to $19.6 million during 2001 due to diversification into corporate bonds, favorable reception to the product mix in our newer markets and continued expansion in revenue from traditional brokerage products. Growth in transaction card revenue of $5.7 million or 15% was due to growth in merchant fees. 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 interest rates, values in the equity market and consumer spending, all of which can be volatile. 14 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. In addition to its lines of business, BOK Financial has a funds management unit. The primary purpose of this unit is to manage the overall liquidity needs and interest rate risk of the company. Each line of business borrows funds from and provides funds to the funds management unit as needed to support their operations. BOK Financial allocates resources and evaluates performance of its lines of business after allocation of funds, certain indirect expenses, taxes and capital costs. The cost of funds borrowed from the funds management unit by the operating lines of business is transfer priced at rates that approximate market for funds with similar duration. Market is generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of transfer-pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk. The value of funds provided by the operating lines of business to the funds management unit is based on applicable Federal Home Loan Bank advance rates. Deposit accounts with indeterminate maturities, such as demand deposit accounts and interest-bearing transaction accounts, are transfer-priced at a rolling average based on the expected duration of the accounts. The expected duration ranges from 90 days for certain rate-sensitive deposits to five years. During 2002, the average transfer-pricing rate for these deposit accounts decreased by approximately 200 basis points. Since many of these deposit accounts are either noninterest bearing accounts or interest-bearing accounts whose rates cannot be readily reset lower due to market constraints, the decline in the transfer-pricing rates shifted net interest revenue from providers of funds to the funds management unit. This is reflected in net interest revenue of the funds management unit, which increased by $58 million to $73 million in 2002. The following table summarizes the effects that the transfer pricing of deposits with indeterminate maturities had on the lines of business as an aid to analyzing performance in 2002. Table 4 Transfer Pricing Effect on Line of Business (Dollars in Thousands) Corporate Consumer Mortgage Trust Regional Banking Banking Banking Services Banks -------------------------------------------------------------- Line of business net income for 2002 $ 48,171 $ 6,756 $ 1,551 $ 6,197 $ 42,089 (1) Adjustment for pricing of indeterminate deposits, net of income tax 4,116 13,009 1,070 3,502 13,644 -------------------------------------------------------------------------------------------------------- Line of business net income, adjusted $ 52,287 $19,765 $ 2,621 $ 9,699 $55,733 -------------------------------------------------------------------------------------------------------- Return on assets 1.30% 0.84% 0.39% 1.81% 1.43% Return on equity 11.50% 26.85% 4.69% 21.87% 12.10% Efficiency ratio 38.94% 61.21% 69.44% 70.63% 53.72% -------------------------------------------------------------------------------------------------------- 1 Tangible net income and returns on assets and equity for regional banks.
Economic capital is assigned to the business units based on an internal allocation method that reflects management's assessment of risk as if they were stand-alone entities. Additional capital is assigned to the regional banks line of business based on BOK Financial's investment in those entities. The aggregate economic capital assigned to the lines of business does not reflect interdependencies among the lines of business and exceeds the capital required by BOK Financial in total. Total capital required by BOK Financial reflects management's estimate of capital required by the Company as a whole. The provision for loan losses assigned to each line of business reflects actual charge-offs, net of recoveries. The aggregate provision for loan losses charged to the lines of business will differ from the consolidated provision for loan losses based on the timing of net charge-offs. 15 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. BOk's Corporate Banking Division includes the Denver loan production office. 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 $48.2 million or 32% to consolidated net income for 2002 compared to $45.6 million or 39% for 2001. The decline in net interest revenue from external sources is due to the decline in market rates on loans which is offset by the decline in net interest expense from internal sources due to declining transfer-pricing rates, as discussed above. Other operating revenue increased $3.2 million or 11% over 2001 due mostly to increases in activity fees on treasury service products. Operating expenses increased slightly to $58.3 million in 2002 compared to $57.3 million in 2001. The provision for loan loss represents net loans charged off or recovered for the Corporate Banking Division. Table 5 Corporate Banking (Dollars in Thousands) Years ended December 31, ---------------------------------------- 2002 2001 2000 ---------------------------------------- NIR (expense) from external sources $ 156,474 $ 199,771 $ 238,610 NIR (expense) from internal sources (46,231) (86,615) (136,367) ---------------------------------------- Total net interest revenue 110,243 113,156 102,243 Other operating revenue 32,702 29,506 26,013 Operating expense 58,289 57,322 53,451 Provision for loan loss 6,475 10,481 3,149 Net income 48,171 45,587 43,782 Average assets $4,032,473 $3,854,310 $3,370,044 Average equity 454,572 442,876 392,711 Return on assets 1.19% 1.18% 1.30% Return on equity 10.60 10.29 11.15 Efficiency ratio 40.78 40.18 41.68 CONSUMER BANKING The Consumer Banking Division provides a full line of deposit, loan and fee-based services to customers throughout Oklahoma through four major distribution channels: traditional branches, supermarket branches, the 24-hour ExpressBank call center and the Internet. Additionally, the division is a significant referral source for the Bank of Oklahoma Mortgage Division ("BOk Mortgage") and BOSC's retail brokerage division. The Consumer Banking Division contributed $6.8 million or 4% to consolidated net income for 2002 and $16.5 million or 14% for 2001. Revenue from internal sources, primarily funds provided to other business lines, decreased $33.1 million due to lower transfer-pricing rates. At the same time, interest expense from external sources decreased $16.2 million due to lower interest paid on deposit accounts. Other operating revenue increased $8.9 million or 30% over 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 during 2002 of $3.6 million, which represents actual net charge-offs, included $766 thousand of charge-offs from the overdraft privilege product and $1.7 million to indirect auto loans. Operating expenses increased $4.3 million or 7% to $63.4 million for 2002 as compared to 2001, which included a $2.4 million increase in personnel costs due mostly to incentive compensation. Table 6 Consumer Banking (Dollars in Thousands) Years ended December 31, ----------------------------------------- 2002 2001 2000 ----------------------------------------- NIR (expense) from external sources $ (17,875) $ (34,049) $ (46,916) NIR (expense) from internal sources 61,301 94,393 107,172 ------------- ------------- ------------- Total net interest revenue 43,426 60,344 60,256 Other operating revenue 38,862 29,995 26,762 Operating expense 63,401 59,099 54,906 Provision for loan loss 7,829 4,180 3,669 Net income 6,756 16,533 17,379 Average assets $2,341,239 $2,192,698 $2,140,383 Average equity 73,604 69,123 60,813 Return on assets .29% .75% .81% Return on equity 9.18 23.92 28.58 Efficiency ratio 77.05 65.42 63.10 16 MORTGAGE BANKING BOK Financial engages in mortgage banking activities through the BOk Mortgage Division of Bank of Oklahoma. These activities include the origination, marketing and servicing of conventional and government-sponsored mortgage loans. BOk Mortgage contributed $1.6 million or 1% to consolidated net income for 2002 compared to $8.5 million or 7% for 2001. BOk Mortgage is comprised of two sectors, loan production and loan servicing. The loan production sector generally performs best when mortgage interest rates are low and loan origination volumes are high. Conversely, the loan servicing sector generally performs best when mortgage interest rates are relatively high and prepayments are low. The historically low mortgage loan interest rate environment during 2002 produced net profits for the loan production sector and net losses for the loan servicing sector. Table 7 Mortgage Banking (Dollars in Thousands) Years ended December 31, ------------------------------------- 2002 2001 2000 ------------------------------------- NIR (expense) from external sources $ 32,199 $ 32,545 $ 16,434 NIR (expense) from internal sources (13,713) (20,867) (15,006) ------------------------------------- Total net interest revenue 18,486 11,678 1,428 Capitalized mortgage servicing rights 20,832 22,695 11,267 Other operating revenue 37,845 30,119 28,473 Operating expense 54,795 47,750 37,762 Provision for impairment of mortgage servicing rights 45,923 15,551 2,900 Gain on sales of financial instruments, net 26,345 12,757 5,257 Net income 1,551 8,493 3,486 Average assets $671,798 $651,103 $412,219 Average equity 55,826 45,915 32,053 Return on assets .23% 1.30% .85% Return on equity 2.78 18.50 10.88 Efficiency ratio 71.01 74.04 91.73 LOAN PRODUCTION SECTOR Revenue from loan production was $27.4 million, including $20.8 million of capitalized servicing rights, for 2002, compared to revenue from loan production of $17.8 million, including $22.7 million of capitalized servicing rights, for 2001. The increase in net loan production revenue, excluding the value of capitalized servicing rights, was due to an improved market for loan sales in 2002. The value of mortgage loans sold increased over the year as interest rates declined. Mortgage loans funded totaled $1.3 billion for 2002, including $557 million for home purchases and $696 million of loan refinanced. Mortgage loans funded in 2001 totaled $1.1 billion, including $562 million for home purchases and $566 million of loan refinanced. Approximately 77% of the loans funded during 2002 were in Oklahoma. The largest growth in loans funded occurred in the Dallas market with an increase of $45 million to $103 million of loans funded for the year. The combination of increased loan production volume and value of loans sold increased pre-tax income from production to $23.7 million for 2002 compared to $12.1 million for 2001. LOAN SERVICING SECTOR The loan-servicing sector incurred a pre-tax loss of $22.5 million in 2002 compared to pre-tax income of $378 thousand in 2001. This was due to the effects of falling interest rates on both actual and anticipated loan prepayments. Actual mortgage loan prepayments reduce the outstanding balance of loans serviced, which is the primary factor for determining servicing revenue. Actual and anticipated loan prepayments are also key factors in determining amortization expense and the fair value of servicing rights. Amortization expense increases and the fair value of servicing rights decrease whenever prepayment speeds are high. Conversely, amortization expense decreases and the fair value of servicing rights increase whenever prepayment speeds are low. Both actual and anticipated prepayment speeds were high during 2002 as a result of the historically low mortgage interest rates. Mortgage servicing revenue totaled $28.2 million for 2002 compared to $32.3 million for 2001. The decrease in mortgage servicing revenue was due primarily to a lower outstanding principal balance of loans serviced. The average outstanding principal balance of loans serviced decreased by 8% to $6.2 billion during 2002. The outstanding principal balance of mortgage loans serviced was $5.8 billion at December 31, 2002. This decrease in loans serviced reflected both the rapid refinancing of mortgages and BOk Mortgage's decision to curtail purchases of mortgage servicing. This decision also affected the geographic distribution of BOk Mortgage's servicing portfolio. Approximately 69% of the loans serviced were in BOK Financial's primary market area at December 31, 2002 compared to 60% at December 31, 2001. Amortization of mortgage servicing rights, which is included in operating expense, increased by $12.5 million to $36.0 million for 2002. Amortization expense is determined in proportion to the estimated cash flow that will be generated by the mortgage servicing rights. The valuation allowance for impairment of mortgage servicing rights totaled $55 million at December 31, 2002 compared to $18 million at December 31, 2001. An impairment provision of $45.9 million was recognized during 2002 compared to an impairment provision of $15.6 million in 2001. As discussed in the Critical Accounting Policies section of this report, BOK Financial provides a valuation allowance to reduce the carrying value of its mortgage servicing rights to the lower of fair value or amortized cost segregated by impairment strata. Impairment strata are determined by interest rate bands and by loan types, either conventional or government-backed. The fair value of servicing rights is based on estimated revenues that will be generated over the servicing period, less estimated costs to service the loans. The valuation allowance may be reversed in part or in whole, if the fair value of servicing rights in a particular impairment strata increase. This may occur if anticipated loan prepayment speeds decrease. Note 8 to the Consolidated Financial Statements presents additional information about fair value and amortized cost of servicing rights and valuation allowance. 17 BOK Financial designates a portion of its securities portfolio as an economic hedge against the risk of loss on its mortgage servicing rights. Mortgage-backed securities and U.S. government agency debentures are acquired and held as available for sale when prepayment risks exceed certain levels. The fair value of these securities is expected to vary inversely to the fair value of the servicing rights. Management may sell these securities and realize gains or losses when necessary to offset the impairment provision of the mortgage servicing rights. During 2002, BOK Financial realized gains of $26.3 million from hedging activities compared to gains of $12.8 million in 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. TRUST SERVICES BOK Financial provides a wide range of trust services, including institutional, investment and retirement products and services to affluent individuals, businesses, not-for-profit organizations, and governmental agencies. Trust services are primarily provided to clients in Oklahoma, Texas, Arkansas and New Mexico. Additionally, Trust Services include a nationally competitive, self-directed 401-(k) program with clients in Dallas, Chicago, New York and Los Angeles. At December 31, 2002 and 2001, trust assets with an aggregate market value of $17 billion and $18 billion, respectively, were subject to various fiduciary arrangements. BOK Financial has sole or joint discretionary authority over $8 billion of trust assets at December 31, 2002 compared to $10 billion of trust assets at December 31, 2001. Trust Services contributed $6.2 million or 4% of consolidated net income for 2002 and $9.7 million or 8% for 2001. Net interest revenue from internal services declined $5.2 million or 38% due to lower transfer pricing rates. Other operating revenue declined $1.0 million compared to 2001 due to declines in the asset values on which many fees are based. Table 8 Trust Services (Dollars in Thousands) Years ended December 31, -------------------------------------- 2002 2001 2000 -------------------------------------- NIR (expense) from external sources $ 1,315 $ 209 $ 3,429 NIR (expense) from internal sources 8,397 13,588 8,995 ------------- ----------- ------------ Total net interest revenue 9,712 13,797 12,424 Other operating revenue 39,838 40,877 40,004 Operating expense 39,044 38,699 35,916 Net income 6,197 9,683 10,087 Average assets $ 535,997 $475,721 $355,150 Average equity 44,339 41,345 37,895 Return on assets 1.16% 2.04% 2.84% Return on equity 13.98 23.42 26.62 Efficiency ratio 78.80 70.78 68.51 REGIONAL BANKS 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 services in their respective markets. Small businesses and middle-market corporations are the regional banks' primary customer focus. Regional banks contributed $35.6 million or 24% to consolidated net income for 2002 and $31.8 million or 27% for 2001. Net interest revenue from external customers declined $1.7 million. A $523 million increase in average earning assets contributed $32.5 million to net interest revenue from external sources, offset by a $10 million increase in the cost of interest-bearing liabilities. The increase in net interest revenue from external sources was offset by declining interest rates. Other operating revenue increased $7.2 million or 37% due to increases merchant fees, mostly from new business in Texas, and service charges on deposit accounts, due to an overdraft privilege product initiated in 2002. Operating expenses increased $2.3 million or 3% including a reduction of goodwill amortization of $7.6 million from the implementation of FAS 142 and FAS 147. Excluding the effect of FAS 142 and FAS 147, operating expenses increased $9.9 million or 12% due largely to an increase in personnel cost. BOK Financial's operations in Texas, New Mexico and Arkansas contributed $23.9 million, $10.4 million and $1.3 million, respectively, to consolidated net income for 2002 compared to net income of $21.1 million, $8.2 million, and $2.5 million, respectively, for 2001. Table 9 Regional Banks (Dollars in Thousands) Years ended December 31, ----------------------------------------- 2002 2001 2000 ------------------------------------------- NIR (expense) from external sources $ 137,142 $ 138,846 $ 105,849 NIR (expense) from internal sources (12,474) (11,689) (12,709) ------------- ------------- ------------- Total net interest revenue 124,668 127,157 93,140 Other operating revenue 26,871 19,642 13,187 Operating expense 93,397 91,088 68,224 Gains (losses) on sales of securities 4,205 484 (356) Provision for loan losses 6,161 5,873 3,492 Net income 35,639 31,804 21,729 Tangible net income 42,089 47,001 31,940 Average assets $3,895,613 $3,352,149 $2,467,530 Average equity 460,619 409,579 282,223 Tangible return on assets 1.08% 1.40% 1.29% Tangible return on equity 9.14 11.48 11.32 Efficiency ratio 61.63 62.05 64.16 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. 18 OTHER OPERATING EXPENSE Other operating expense for 2002 increased $56.9 million or 15% over 2001. Mortgage banking costs increased $12.0 million or 40% due to an increase in amortization of capitalized mortgage servicing rights. An impairment of mortgage servicing rights of $45.9 million was also recognized due to market conditions existing during 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. Excluding the increases in provision for impairment of mortgage servicing rights and amortization of mortgage servicing rights, other operating expense increased $14.0 million or 4%. Personnel costs increased $19.5 million or 12%, of which $11.6 million was salaries and benefits attributable to a 10% increase in salaries and benefits per FTE, plus a $4.7 million increase in incentive bonuses tied directly to production. Data processing and communications increased during 2002, $7.2 million or 18% as compared to 2001. Included in the increase in data processing were increases in transaction card processing fees of $4.2 million, which are directly related to the increase in transaction card revenue of $9.1 million. Also included in the increase in data processing was a $2.0 million or 14% increase in external data processing due to increased transaction volumes. Amortization of intangible assets decreased $12.5 million during 2002 as compared to 2001. The implementation of FAS 142 and FAS 147 accounted for $10.2 million of the change during 2002, as previously discussed. If these rules had been applied retroactively to the prior year, operating expense would have decreased $10.2 million for 2001 and $2.6 million for the fourth quarter of 2001. 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 $987 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 10 Other Operating Expense (Dollars in Thousands) Years ended December 31, ------------------------------------------------------ 2002 2001 2000 1999 1998 ---------- ---------- ---------- ---------- ---------- Personnel expense $183,314 $163,835 $146,215 $136,010 $109,437 Business promotion 11,367 10,658 8,395 9,077 8,220 Contribution of stock to BOk Charitable Foundation - - - - 2,257 Professional fees and services 12,987 13,391 9,618 9,584 9,781 Net occupancy and equipment 42,347 42,764 35,447 30,789 21,811 Data processing and communications 47,251 40,013 34,962 32,038 23,764 FDIC and other insurance 1,903 1,717 1,569 1,356 1,368 Printing, postage and supplies 12,665 12,329 11,260 11,599 9,524 Net gains and operating expenses on repossessed assets 1,014 1,401 (1,283) (3,473) (474) Amortization of intangible assets 7,638 20,113 15,478 15,823 9,515 Mortgage banking costs 42,271 30,261 22,274 23,932 25,949 Provision for impairment of mortgage servicing rights 45,923 15,551 2,900 - (2,290) Other expense 16,957 16,729 15,980 13,781 15,133 --------------------------------------------------------- ---------- ---------- ---------- ---------- ---------- Total $425,637 $368,762 $302,815 $280,516 $233,995 --------------------------------------------------------- ---------- ---------- ---------- ---------- ----------
Operating expenses for the fourth quarter of 2002 totaled $105.0 million compared to $84.8 million for the fourth quarter of 2001. The fourth quarter of 2002 included a $1.6 million reversal of previous provisions for impairment of mortgage servicing rights compared to an $8.9 million reversal in 2001. Amortization of mortgage servicing rights during the fourth quarter of 2002 was $12.9 million compared to $7.9 million during the same quarter of 2001. Excluding the effects of this impairment reversal and amortization on mortgage servicing rights, operating expenses for the fourth quarter of 2002 increased by 9% from 2001 due to reasons consistent with those discussed above. Other operating expense totaled $368.8 million for 2001 compared to $302.8 million for 2000. Excluding a $15.6 million provision for impairment of mortgage servicing rights in 2001 compared to $2.9 million in 2000 and $20.7 million of operating expenses from the CNBT acquisition in 2001, other operating expense increased $32.5 million or 11% from 2000. The following discussion excludes CNBT operating expenses (personnel of $6.3 million, net occupancy and equipment of $1.7 million and amortization of intangible assets of $7.4 million) to improve comparability. Personnel costs increased $11.4 million or 8%. Regular compensation (including overtime and temporary assistance) and benefits increased $9.3 million or 7%. Average staffing on a full time equivalent ("FTE") basis increased by 141 employees or 5%, while average compensation expense per FTE increased by 3%. Incentive compensation increased by $2.0 million or 10% compared to 2000 due to growth in revenue over pre-determined targets. Professional fees for 2001 increased $3.4 million or 36%, which included $1.5 million in consulting fees for public finance business at BOSC, Inc. and $320 thousand for the Perfect Banking sales and service program. Net occupancy and equipment expense for 2001 increased $5.6 million or 16% due primarily to a $3.2 million increase in depreciation expense. This increase reflects additional investments in facilities and technology improvements over the past two years. Data processing and communications increased $4.4 million or 13% primarily in transaction card servicing and external processing due to increased volumes. Mortgage banking costs increased $8.0 million or 36% due primarily to amortization of mortgage servicing rights, which is caused by an increase in loan prepayments. A provision for impairment of mortgage servicing rights of $15.6 million was taken during 2001 due primarily to the interest rate and prepayment environment. 19 INCOME TAXES Income tax expense was $82.4 million, $63.6 million and $47.6 million for 2002, 2001 and 2000, respectively, representing 35%, 35% and 32%, respectively, of book taxable income. Tax expense currently payable totaled $95.9 million in 2002 compared to $74.2 million in 2001 and $38.4 million in 2000. The Internal Revenue Service is currently examining the carryback of $30.8 million of capital loss generated in 1999. Such loss was applied against capital gains generated in 1997 and 1998 resulting in a $9.8 million refund. Management expects no material adverse impact on the financial statements as a result of this examination. The Internal Revenue Service closed its examination of 1996 during 2000. As a result of the outcome of this examination, BOK Financial reduced its tax accrual by $3.0 million. Income tax expense for 2000 was 34% of pre-tax book income, excluding the reversal of this accrual. Table 11 Selected Quarterly Financial Data (In Thousands Except Per Share Data) Fourth Third Second First ------------ ------------ ------------ ------------ 2002 --------------------------------------------------- Interest revenue $143,756 $144,430 $142,997 $143,730 Interest expense 49,472 51,861 52,716 52,663 ------------------------------------------------------------------- ------------ ------------ ------------ Net interest revenue 94,284 92,569 90,281 91,067 Provision for loan losses 10,001 8,029 6,834 8,866 ------------------------------------------------------------------- ------------ ------------ ------------ Net interest revenue after provision for loan losses 84,283 84,540 83,447 82,201 Other operating revenue 69,732 65,908 63,715 60,044 Gain (loss) on sales of securities, net 10,342 34,341 21,602 (7,581) Gain (loss) on derivatives, net 665 7,218 (1,453) (536) Other operating expense 104,993 123,695 113,798 83,151 ------------------------------------------------------------------- ------------ ------------ ------------ Income before taxes 60,029 68,312 53,513 50,977 Income tax expense 21,250 24,183 18,944 18,045 ------------------------------------------------------------------- ------------ ------------ ------------ Net income $ 38,779 $ 44,129 $ 34,569 $ 32,932 ------------------------------------------------------------------- ------------ ------------ ------------ Earnings per share: Basic $ 0.70 $ 0.83 $ 0.65 $ 0.62 ------------------------------------------------------------------- ------------ ------------ ------------ Diluted $ 0.63 $ 0.73 $ 0.57 $ 0.55 ------------------------------------------------------------------- ------------ ------------ ------------ Average shares: Basic 54,507 53,020 52,961 52,857 ------------------------------------------------------------------- ------------ ------------ ------------ Diluted 61,905 60,251 60,280 60,111 ------------------------------------------------------------------- ------------ ------------ ------------ 2001 ---------------------------------------------------- Interest revenue $148,222 $161,863 $168,270 $176,278 Interest expense 60,503 76,791 88,066 100,321 ------------------------------------------------------------------- ------------ ------------ ------------- Net interest revenue 87,719 85,072 80,204 75,957 Provision for loan losses 10,517 11,023 8,497 7,573 ------------------------------------------------------------------- ------------ ------------ ------------- Net interest revenue after provision for loan losses 77,202 74,049 71,707 68,384 Other operating revenue 61,630 56,904 57,909 54,077 Gain (loss) on sales of securities, net (3,770) 19,746 2,030 12,634 Gain (loss) on derivatives, net (3,300) (1,105) (303) 646 Other operating expense 84,801 103,591 86,584 93,786 ------------------------------------------------------------------- ------------ ------------ ------------- Income before taxes 46,961 46,003 44,759 41,955 Income tax expense 16,829 16,216 15,778 14,789 ------------------------------------------------------------------- ------------ ------------ ------------- Net income before cumulative effect of a change in accounting principle, net of tax 30,132 29,787 28,981 27,166 Transition adjustment of adoption of FAS 133 - - - 236 ------------------------------------------------------------------- ------------ ------------ ------------- Net income $ 30,132 $ 29,787 $ 28,981 $ 27,402 ------------------------------------------------------------------- ------------ ------------ ------------- Earnings per share: Basic $ .56 $ .56 $ .55 $ .52 ------------------------------------------------------------------- ------------ ------------ ------------- Diluted $ .50 $ .50 $ .49 $ .46 ------------------------------------------------------------------- ------------ ------------ ------------- Average shares: Basic 52,721 52,594 52,482 52,402 ------------------------------------------------------------------- ------------ ------------ ------------- Diluted 59,996 59,887 59,621 59,404 ------------------------------------------------------------------- ------------ ------------ -------------
20 ASSESSMENT OF FINANCIAL CONDITION SECURITIES PORTFOLIO Securities are classified as either held for investment or available for sale based upon asset/liability management strategies, liquidity and profitability objectives and regulatory requirements. Investment securities, which consist primarily of Oklahoma municipal bonds, are carried at cost and adjusted for amortization of premiums or accretion of discounts. Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses on available for sale securities, less deferred taxes, are recorded as accumulated other comprehensive income in stockholders' equity. During 2002, the amortized cost of available for sale securities increased by $423 million. Mortgage-backed securities increased by $426 million and now represent 97% of total available for sale securities. Approximately, $210 million of the increase in mortgage-backed securities reflects BOK Financial's strategy of fully utilizing available capital resources by borrowing funds in the capital markets, as previously discussed in the Net Interest Revenue section of this report. Mortgage-backed securities designated as an economic hedge of the mortgage servicing portfolio decreased $235 million to $127 million. At December 31, 2002, available for sale securities with an amortized cost of $2.0 billion were pledged as collateral for repurchase agreement borrowings, deposits of public funds and other purposes. Net unrealized gains in the available for sale securities portfolio increased from $10 million at December 31, 2001 to $71 million at December 31, 2002, due primarily to lower interest rates. The expected duration of the mortgage-backed securities portfolio is 2.0 years. Additional information about the securities portfolio is presented in Note 3 to the Consolidated Financial Statements. Table 12 Securities (Dollars in Thousands) December 31, ----------------------------------------------------------------------------- 2002 2001 2000 ------------------------- ------------------------- ------------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value ------------ ------------ ------------ ------------ ------------ ------------ Investment: U.S. Treasury $ - $ - $ 7,982 $ 7,981 $ - $ - Municipal and other tax-exempt 191,305 195,266 222,195 223,487 207,177 207,641 Mortgage-backed U.S. agency securities 4,380 4,618 7,381 7,620 11,541 11,567 Other debt securities 2,265 2,269 3,555 3,540 14,653 14,659 -------------------------------------------------------- ------------ ------------ ------------ ------------ ------------ Total $ 197,950 $ 202,153 $ 241,113 $ 242,628 $ 233,371 $ 233,867 -------------------------------------------------------- ------------ ------------ ------------ ------------ ------------ Available for sale: U.S. Treasury $ 31,013 $ 32,233 $ 34,538 $ 35,197 $ 85,656 $ 85,564 Municipal and other tax-exempt 11,465 11,511 4,262 4,299 14,492 14,552 Mortgage-backed securities: U.S. agencies 3,005,698 3,067,148 2,637,636 2,638,425 2,050,100 2,046,318 Other 727,088 732,542 669,057 673,737 478,065 486,170 -------------------------------------------------------- ------------ ------------ ------------ ------------ ------------ Total mortgage-backed securities 3,732,786 3,799,690 3,306,693 3,312,162 2,528,165 2,532,488 -------------------------------------------------------- ------------ ------------ ------------ ------------ ------------ Other debt securities 138 139 536 538 242 245 Equity securities and mutual funds 87,434 89,770 93,918 97,353 129,823 130,971 -------------------------------------------------------- ------------ ------------ ------------ ------------ ------------ Total $3,862,836 $3,933,343 $3,439,947 $3,449,549 $2,758,378 $2,763,820 -------------------------------------------------------- ------------ ------------ ------------ ------------ ------------
21 LOANS The aggregate loan portfolio at December 31, 2002 totaled $6.9 billion, an increase of $606 million since December 31, 2001. Growth in the loan portfolio included $132 million from the Bank of Tanglewood acquisition and a decrease of $33 million from residential mortgage loans held for sale. Excluding the acquisition and change in loans held for sale, total loans increased 8% during the year. Commercial loans increased $315 million or 9% during the year. This increase was primarily in the energy and services sectors of the portfolio. Residential mortgage loans, excluding loans held for sale increased $227 million or 32%. Table 13 Loans (Dollars in Thousands) December 31, ---------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------ Commercial: Energy $1,132,178 $ 987,556 $ 837,223 $ 606,561 $ 468,700 Manufacturing 501,506 467,260 421,046 344,175 245,268 Wholesale/retail 627,422 600,470 499,017 407,785 279,265 Agriculture 186,976 170,861 185,407 173,653 160,241 Services 1,249,622 1,084,480 963,171 807,184 635,585 Other commercial and industrial 292,094 364,123 342,169 325,343 200,214 ------------ ------------ ------------ ------------ ------------ Total commercial 3,989,798 3,674,750 3,248,033 2,664,701 1,989,273 Commercial real estate: Construction and land development 356,227 327,455 311,700 249,160 174,059 Multifamily 307,119 291,687 271,459 257,187 181,525 Other real estate loans 772,492 722,633 687,335 588,195 404,985 ------------ ------------ ------------ ------------ ------------ Total commercial real estate 1,435,838 1,341,775 1,270,494 1,094,542 760,569 Residential mortgage: Secured by 1-4 family residential properties 929,759 703,080 638,044 531,058 500,690 Residential mortgages held for sale 133,421 166,093 48,901 57,057 100,269 ------------ ------------ ------------ ------------ ------------ Total residential mortgage 1,063,180 869,173 686,945 588,115 600,959 Consumer 412,167 409,680 312,390 296,131 296,298 -------------------------------------------------- ------------ ------------ ------------ ------------ ------------ Total $6,900,983 $6,295,378 $5,517,862 $4,643,489 $3,647,099 -------------------------------------------------- ------------ ------------ ------------ ------------ ------------
Outstanding loans to energy customers totaled $1.1 billion or 16% of total loans at December 31, 2002. This represented an increase of 15% over last year. Small and medium size customers in the Denver and Oklahoma markets were the primary sources of this loan growth. Approximately $899 million of the energy loan portfolio was to oil and gas producers. The amount of credit available to these customers generally depends on the value of their proven energy reserves based on current prices. The energy category also included loans to borrowers involved in the transportation and sale of oil and gas and loans to borrowers that manufacture equipment and provide other services to the energy industry. Outstanding loans to the services industry totaled $1.2 billion, a 15% increase during 2002. Services included loans that totaled $218 million to nursing homes, $114 million to the healthcare industry and $68 million to the hotel industry. Agriculture included $163 million of loans to the cattle industry. Other notable loan concentrations by primary industry of the borrowers are presented in Table 13. BOK Financial participates in shared national credits when appropriate to obtain or maintain business relationships with local customers. At December 31, 2002, the outstanding principal balance of these loans totaled $661 million, including $620 million to borrowers with local market relationships. BOK Financial is the agent lender in approximately 36% of these loans. Commercial real estate loans totaled $1.4 billion or 21% of the loan portfolio at December 31, 2002. This represented a $94 million or 7% increase in commercial real estate loans during 2002. Construction and land development loans included $287 million for single-family residential lots and premises. The major components of other commercial real estate loans were office buildings - $292 million and retail facilities - $195 million. Residential mortgage loans, excluding loans held for sale included $319 million of home equity loans, $249 million of loans held for business relationship purposes, $233 million of adjustable rate mortgage loans and $112 million of loans held for community development. Adjustable rate mortgage loans increased $79 million and community development loans increased $85 million during 2002. Consumer loans included $173 million of indirect automobile loans at December 31, 2002. Substantially all of these loans were purchased from dealers in Oklahoma. Approximately 24% of the indirect automobile loan portfolio was considered sub-prime. Table 14 Loan Maturity and Interest Rate Sensitivity at December 31, 2002 (Dollars in Thousands) Remaining Maturities of Selected Loans -------------------------------------- Total Within 1 Year 1-5 Years After 5 Years -------------- ------------ ------------ ------------ Loan maturity: Commercial $3,989,798 $1,554,216 $1,874,733 $560,849 Commercial real estate 1,435,838 534,489 750,568 150,781 --------------------------------------------- -------------- ------------ ------------ ------------ Total $5,425,636 $2,088,705 $2,625,301 $711,630 --------------------------------------------- -------------- ------------ ------------ ------------ Interest rate sensitivity for selected loans with: Predetermined interest rates $ 842,680 $ 115,388 $ 507,444 $219,848 Floating or adjustable interest rates 4,582,956 1,973,317 2,117,857 491,782 --------------------------------------------- -------------- ------------ ------------ ------------ Total $5,425,636 $2,088,705 $2,625,301 $711,630 --------------------------------------------- -------------- ------------ ------------ ------------
22 While BOK Financial continued to increase geographic diversification through expansion into Texas and New Mexico, geographic concentration subjects the loan portfolio to the general economic conditions in Oklahoma. Table 15 reflects the distribution of the major loan categories among BOK Financial's principal market areas. Table 15 Loans by Principal Market Area (Dollars in Thousands) December 31, ---------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------ Oklahoma (1): Commercial $2,773,158 $2,606,977 $2,480,825 $2,172,268 $1,785,961 Commercial real estate 763,469 739,419 768,232 704,999 538,529 Residential mortgage 789,812 642,116 458,395 376,806 427,004 Consumer 294,404 314,060 250,298 236,565 266,453 ------------ ------------ ------------ ------------ ------------ Total Oklahoma $4,620,843 $4,302,572 $3,957,750 $3,490,638 $3,017,947 ------------ ------------ ------------ ------------ ------------ Texas: Commercial $ 866,905 $ 775,788 $ 549,505 $ 383,460 $ 154,593 Commercial real estate 455,364 380,602 299,357 227,748 105,208 Residential mortgage 192,575 136,181 122,082 102,888 58,185 Consumer 104,353 85,347 53,397 50,923 23,431 ------------ ------------ ------------ ------------ ------------ Total Texas $1,619,197 $1,377,918 $1,024,341 $ 765,019 $ 341,417 ------------ ------------ ------------ ------------ ------------ Albuquerque: Commercial $ 286,622 $ 219,257 $ 167,023 $ 63,370 $ 13,480 Commercial real estate 150,293 136,425 118,492 87,759 45,331 Residential mortgage 76,020 85,309 101,920 103,684 109,741 Consumer 11,399 8,200 6,107 5,410 3,038 ------------ ------------ ------------ ------------ ------------ Total Albuquerque $ 524,334 $ 449,191 $ 393,542 $ 260,223 $ 171,590 ------------ ------------ ------------ ------------ ------------ Northwest Arkansas: Commercial $ 63,113 $ 72,728 $ 50,680 $ 45,603 $ 35,239 Commercial real estate 66,712 85,329 84,413 74,036 71,501 Residential mortgage 4,773 5,567 4,548 4,737 6,029 Consumer 2,011 2,073 2,588 3,233 3,376 ------------ ------------ ------------ ------------ ------------ Total Northwest Arkansas $ 136,609 $ 165,697 $ 142,229 $ 127,609 $ 116,145 ------------ ------------ ------------ ------------ ------------ 1 Includes Denver loan production office.
ENERGY DERIVATIVES WITH CREDIT RISK BOK Financial offers a program that permits its energy-producing customers to hedge against price fluctuations and take positions through energy option and swap contracts. These contracts are executed between BOk and its customers. Offsetting contracts are executed between BOk and selected energy dealers to minimize the risk of changes in energy prices. The dealer contracts are identical to the customer contracts, except for a fixed pricing spread paid to BOk as compensation for administrative costs, credit risk and profit. This program creates credit risk for potential amounts due to BOk from its customers and energy dealers. Customer credit risk is monitored through existing lending policies and procedures. The value of energy production, which secures customer contracts, is evaluated across a range of prices to determine a maximum exposure BOk is willing to have individually to any customer. Customers may also be required to provide collateral in addition to the value of energy production to further limit credit risk. Dealer credit risk is monitored through existing policies and procedures used to evaluate counterparty risk. This evaluation considers all relationships among BOK Financial and each counterparty. Individual limits are established by management and approved by the Risk Oversight and Audit Committee of the Board of Directors. Margin collateral is required if the exposure between BOk and any counterparty exceeds established limits. These limits are reduced and additional margin collateral is required if a dealer's credit rating is downgraded. BOK Financial carries the energy contracts at fair value in other assets and liabilities. At December 31, 2002, other assets included $71 million and other liabilities included $71 million of energy contracts. Approximately 73% of the fair value of asset contracts are with customers of BOK Financial. The remaining 27% are with energy dealers, primarily J. P. Morgan-Chase and Bank of Montreal. Conversely, approximately 73% of the fair value of liability contracts are with energy dealers, primarily Morgan Stanley, Coral Energy and J. P. Morgan-Chase. The remaining 27% are with various customers. A deterioration in the credit standing of one or more counterparties may result in BOK Financial recognizing a loss as the fair value of the affected contracts may no longer move in tandem with the offsetting contracts. This could occur if the credit standing of a counterparty deteriorated such that either the fair value of the energy production no longer supported the contract or the counterparty's ability to provide margin collateral was impaired. The growth in the fair value of energy contracts during 2002 reflected both new business added during the year and increased energy prices. New business grew by approximately $2.6 million based on anticipated revenue to be recognized over the life of the contracts. 23 SUMMARY OF LOAN LOSS EXPERIENCE The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $116 million at December 31, 2002 compared to $102 million at December 31, 2001. These amounts represented 1.72% and 1.66% of total loans, excluding loans held for sale, at December 31, 2002 and 2001, respectively. Losses on loans held for sale, principally mortgage loans accumulated for placement in security pools, are charged to earnings through adjustments in the carrying value. The reserve for loan losses also represented 233% of nonperforming loans at December 31, 2002 compared to 234% at December 31, 2001. Net loans charged off during 2002 remained constant from the previous year at $21 million. Improved credit quality of the commercial loan portfolio was offset by an increase in net loans charged-off in the consumer loan portfolio. Net loans that were charged-off from indirect automobile lending totaled $4.6 million in 2002 compared to $1.8 million in 2001. The increase in net charge-offs of indirect automobile loans reflected the effect of current economic conditions, particularly on the sub-prime portion of the loan portfolio. Increases in unemployment rates have adversely affected the borrowers' ability to repay their loans, while manufacturers' incentives on new vehicles have created an oversupply of used vehicles. This oversupply has reduced the value of collateral securing these loans. Net consumer overdrafts charged-off increased from $814 thousand in 2001 to $2.2 million in 2002. This increase is primarily related to the introduction of the overdraft privilege program previously discussed in the other revenue section of this report. Table 16 presents statistical information regarding the reserve for loan losses for the past five years. Table 16 Summary of Loan Loss Experience (Dollars in Thousands) Years ended December 31, ------------------------------------------------------------------ 2002 2001 2000 1999 1998 ------------------------------------------------------------------ Beginning balance $101,905 $ 82,655 $76,234 $65,922 $54,044 Loans charged off: Commercial 13,326 18,042 7,747 2,136 3,219 Commercial real estate 286 71 1,176 35 175 Residential mortgage 412 308 285 617 202 Consumer 11,881 6,827 5,593 4,560 4,000 -------------------------------------------------------------------------------------------------------------------- Total 25,905 25,248 14,801 7,348 7,596 -------------------------------------------------------------------------------------------------------------------- Recoveries of loans previously charged off: Commercial 1,276 1,151 1,126 3,110 1,487 Commercial real estate 118 653 428 487 1,398 Residential mortgage 146 57 157 17 162 Consumer 3,436 2,727 2,307 2,156 1,836 -------------------------------------------------------------------------------------------------------------------- Total 4,976 4,588 4,018 5,770 4,883 -------------------------------------------------------------------------------------------------------------------- Net loans charged off 20,929 20,660 10,783 1,578 2,713 Provision for loan losses 33,730 37,610 17,204 10,365 14,591 Additions due to acquisitions 1,364 2,300 - 1,525 - -------------------------------------------------------------------------------------------------------------------- Ending balance $116,070 $101,905 $82,655 $76,234 $65,922 -------------------------------------------------------------------------------------------------------------------- Reserve for loan losses to loans outstanding at year-end (1) 1.72% 1.66% 1.51% 1.66% 1.86% Net charge-offs to average loans (1) .33 .35 .22 .04 .09 Provision for loan losses to average loans (1) .54 .63 .35 .26 .48 Recoveries to gross charge-offs 19.21 18.17 27.15 78.52 64.28 Reserve as a multiple of net charge-offs 5.55x 4.93x 7.67x 48.31x 24.30x -------------------------------------------------------------------------------------------------------------------- Problem Loans: Loans past due (90 days) $ 8,117 $ 8,108 $15,467 $11,336 $ 9,553 Nonaccrual (2) 49,855 43,540 39,661 19,465 14,095 Renegotiated - 27 87 - - -------------------------------------------------------------------------------------------------------------------- Total $ 57,972 $ 51,675 $55,215 $30,801 $23,648 -------------------------------------------------------------------------------------------------------------------- Foregone interest on nonaccrual loans (2) $ 4,770 $ 5,163 $ 3,803 $ 2,321 $ 2,271 -------------------------------------------------------------------------------------------------------------------- 1 Excludes residential mortgage loans held for sale. 2 Interest collected and recognized on nonaccrual loans was $3.3 million in 1998 and was not significant in 2002 and previous years disclosed.
Specific reserves for impairment are determined through evaluation of estimated future cash flows and collateral value. At December 31, 2002 specific impairment reserves totaled $2 million on total impaired loans of $45 million. Nonspecific reserves are maintained for risks beyond factors specific to an individual loan or those identified through migration analysis. A range of potential losses is determined for each factor identified. At December 31, 2002 the range of potential losses for the more significant factors were: General economic conditions - $3.5 million - $4.3 million Concentration of large loans - $900 thousand -$1.8 million Loan portfolio growth - $475 thousand - $950 thousand Allocation of the loan loss reserve to the major loan categories is presented in Table 17. The increase in reserves allocated to consumer lending reflected the increased risk associated with the indirect automobile loan portfolio and the consumer overdraft privilege program. 24 Table 17 Loan Loss Reserve Allocation (Dollars in Thousands) December 31, ------------------------------------------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------------ ------------------- ------------------- ------------------- ------------------ % of % of % of % of % of Reserve(3) Loans(1) Reserve(3) Loans(1) Reserve(3) Loans(1) Reserve(3) Loans(1) Reserve(3) Loans(1) --------- -------- --------- --------- --------- --------- --------- --------- --------- -------- Loan category: Commercial (2) $65,280 58.95% $61,164 59.95% $55,187 59.39% $47,261 58.10% $37,570 56.09% Commercial real estate 17,753 21.22 15,923 21.89 12,393 23.23 11,216 23.86 7,949 21.44 Residential mortgage 4,099 13.74 3,774 11.47 2,019 11.67 2,137 11.58 1,807 14.12 Consumer 14,384 6.09 6,890 6.69 6,407 5.71 6,721 6.46 6,689 8.35 Nonspecific allowance 14,554 - 14,154 - 6,649 - 8,899 - 11,907 - -------------------------- --------- -------- --------- --------- --------- --------- --------- --------- --------- -------- Total $116,070 100.00% $101,905 100.00% $82,655 100.00% $76,234 100.00% $65,922 100.00% -------------------------- --------- -------- --------- --------- --------- --------- --------- --------- --------- -------- 1 Excludes residential mortgage loans held for sale. 2 Specific allocation for Year 2000 risks were $2.0 million in 1999 and $3.6 million in 1998. 3 Specific allocation for the loan concentration risks are included in the appropriate category.
NONPERFORMING ASSETS Information regarding nonperforming assets, which totaled $57 million at December 31, 2002 and $51 million at December 31, 2001, is presented in Table 18. Nonperforming assets included nonaccrual and renegotiated loans and excluded loans 90 days or more past due but still accruing interest. Nonaccrual loans increased by $6.3 million during 2002. Newly identified nonaccruing loans totaled $38.1 million during 2002. This amount included $14.7 million for one borrower in the cattle industry. Management determined that it was probable that all amounts due would not be recovered due to declining cattle prices and other factors unique to this borrower. Nonaccruing loans decreased by $10.2 million for loans restored to accruing status after a period of satisfactory performance, $9.3 million for charge-offs and foreclosures and $9.2 million for cash payments received. Table 18 Nonperforming Assets (Dollars in Thousands) December 31, ----------------------------------------------------------------- 2002 2001 2000 1999 1998 ------------ ------------ ------------ ------------ ------------- Nonperforming loans Nonaccrual loans: Commercial $39,114 $35,075 $37,146 $12,686 $ 8,394 Commercial real estate 3,395 3,856 161 2,046 1,950 Residential mortgage 5,950 4,140 1,855 3,383 2,583 Consumer 1,396 469 499 1,350 1,168 ------------------------------------------------------------ ------------ ------------ ------------ ------------ ------------- Total nonaccrual loans 49,855 43,540 39,661 19,465 14,095 Renegotiated loans - 27 87 - - ------------------------------------------------------------ ------------ ------------ ------------ ------------ ------------- Total nonperforming loans 49,855 43,567 39,748 19,465 14,095 Other nonperforming assets 6,719 7,141 3,851 3,478 4,667 ------------------------------------------------------------ ------------ ------------ ------------ ------------ ------------- Total nonperforming assets $56,574 $50,708 $43,599 $22,943 $18,762 ------------------------------------------------------------ ------------ ------------ ------------ ------------ ------------- Ratios: Reserve for loan losses to nonperforming loans 232.82% 233.90% 207.95% 391.65% 467.70% Nonperforming loans to period-end loans (2) .74 .71 .73 .42 .40 ------------------------------------------------------------ ------------ ------------ ------------ ------------ ------------- Loans past due (90 days) (1) $ 8,117 $ 8,108 $15,467 $11,336 $ 9,553 ------------------------------------------------------------ ------------ ------------ ------------ ------------ ------------- 1 Includes residential mortgages guaranteed by agencies of the U.S. Government. $ 4,956 $ 6,222 $ 7,616 $ 8,538 $ 8,122 Excludes residential mortgages guaranteed by agencies of the U.S. Government in foreclosure. 3,630 4,396 5,630 8,310 6,953 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. Because the borrowers are still performing in accordance with the original terms of the loan agreements, and no loss of principal or interest is anticipated, these loans are not included in Nonperforming Assets. Known information does, however, cause management to have concerns as to the borrowers' ability to comply with current repayment terms. Potential problem loans totaled $75 million at December 31, 2002 and $50 million at December 31, 2001. At December 31, 2002, the composition of potential problem loans by primary industry categories included energy - $16 million, recreation property management - $14 million, manufacturing - $13 million and healthcare - $11 million. 25 DEPOSITS Average deposits for 2002 increased $723 million or 11% compared to 2001. Most notably, average transaction deposits increased $532 million or 23% compared to 2001 and was attributable to investor fund growth. The growth in investor funds has been a result of increased sales training in consumer and the depressed equity market. Demand deposits grew $83 million or 8% due to sales initiatives and training as well as strong product development. Time deposits increased $97 million or 3%. Table 19 Average Deposits (In Thousands) 2002 2001 ---------------------------- Core deposits $4,039,117 $3,331,210 Public funds 488,309 447,846 Uninsured deposits 2,680,737 2,706,038 ----------------------------------------------------------- Total $7,208,163 $6,485,094 ----------------------------------------------------------- Average core deposits increased 21% compared to the previous year and comprised 56% of total deposits for 2002. Average uninsured deposits, which decreased by 1% during the year, represented 37% of total deposits for 2002 compared to 42% of total deposits for 2001. Uninsured deposits as used in this presentation are based on a simple analysis of account balances and do not reflect combined ownership and other account styling that would determine insurance based on FDIC regulations. Table 20 Maturity of Domestic CDs and Public Funds in Amounts of $100,000 or More (In Thousands) December 31, --------------------------- 2002 2001 --------------------------- Months to maturity: 3 or less $ 448,548 $ 625,686 Over 3 through 6 442,651 311,743 Over 6 through 12 194,241 221,264 Over 12 961,413 449,263 ----------------------------------------------------------- Total $2,046,853 $1,607,956 ----------------------------------------------------------- BOK Financial competes for deposits by offering a broad range of products and services to its customers, including competitive rates, fees and convenience. Bank of Oklahoma offers banking convenience through 72 locations, including 28 supermarket locations. Bank of Texas has 18 locations in the Dallas metropolitan area and 13 in Houston. Bank of Albuquerque has 20 banking locations in Albuquerque, New Mexico and Bank of Arkansas has 5 locations in northwest Arkansas. A 24-hour Express Bank call center is available to serve customers from all of BOK Financial's subsidiary banks. The distribution of deposit accounts among BOK Financial's principal markets is shown in Table 21. Deposit growth in Texas included $223 million from the Tanglewood acquisition. Excluding this acquisition, deposits in Texas grew $212 million or 15%. Table 21 Deposits by Principal Market Area (In Thousands) December 31, ---------------------------- 2002 2001 ---------------------------- Oklahoma: Demand $1,044,628 $ 992,663 Interest-bearing: Transaction 1,897,353 1,650,269 Savings 103,749 101,433 Time 2,334,949 2,041,025 ---------------------------- Total interest-bearing 4,336,051 3,792,727 ---------------------------- Total Oklahoma $5,380,679 $4,785,390 ---------------------------- Texas: Demand $ 394,164 $ 305,745 Interest-bearing: Transaction 953,550 670,728 Savings 33,071 28,918 Time 510,512 451,031 ---------------------------- Total interest-bearing 1,497,133 1,150,677 ---------------------------- Total Texas $1,891,297 $1,456,422 ---------------------------- December 31, ---------------------------- 2002 2001 ---------------------------- Albuquerque: Demand $ 79,953 $ 57,648 Interest-bearing: Transaction 295,174 224,265 Savings 26,704 26,848 Time 287,607 241,549 ---------------------------- Total interest-bearing 609,485 492,662 ---------------------------- Total Albuquerque $ 689,438 $ 550,310 ---------------------------- Northwest Arkansas: Demand $ 12,949 $ 10,634 Interest-bearing: Transaction 18,025 14,452 Savings 1,214 1,035 Time 134,923 87,501 ---------------------------- Total interest-bearing 154,162 102,988 ---------------------------- Total Northwest Arkansas $ 167,111 $ 113,622 ---------------------------- 26 BORROWINGS AND CAPITAL PARENT COMPANY BOK Financial (parent company) has a $122.5 million unsecured revolving credit agreement with certain banks that matures in October 2004. The outstanding principal balance of this credit agreement at December 31, 2002 was $85 million. Interest is based on either the London Interbank Offering Rate ("LIBOR") plus a defined margin that is determined by the principal balance outstanding and BOK Financial's credit rating or a base rate. The base rate is defined as the greater of the daily federal funds rate plus 0.5% or the prime rate. This credit agreement includes certain restrictive covenants that limit BOK Financial's ability to borrow additional funds and to pay cash dividends on common stock. These covenants also require BOK Financial and its subsidiaries to maintain minimum capital levels and to exceed minimum net worth ratios. BOK Financial met all of the restrictive covenants at December 31, 2002. The primary sources of liquidity available to BOK Financial are earnings on investments and dividends from subsidiaries. Dividends from subsidiary banks are generally limited by various banking regulations to net profits, as defined, for the year plus retained net profits for the preceding two years. Dividends are further restricted by minimum capital regulations. Based on the most restrictive limitations, BOK Financial's subsidiary banks could declare up to $177 million of dividends without regulatory approval. Management has developed and the Board of Directors has approved an internal capital policy that is more restrictive than the regulatory capital standards. The subsidiary banks could declare dividends of up to $125 million under this policy. During 2002, BOK Financial issued 1,711,127 shares of common stock and 292,225 options to purchase shares, with a fair value at the issuance date of $65 million for its purchase of Bank of Tanglewood. In addition, BOK Financial agreed to a limited price guarantee on a portion of the shares issued in this purchase. The fair value of this price guarantee, estimated to be $3 million based upon the Black-Sholes Option pricing model, was included in the purchase price of Bank of Tanglewood. Pursuant to this guarantee, any holder of BOK Financial common shares issued in this acquisition may annually make a claim for the excess of the guaranteed price and the actual sales price of any shares sold during a 60-day period after each of the first five anniversary dates after October 25, 2002. The maximum annual number of shares subject to this guarantee is 198,010. The price guarantee is non-transferable and non-cumulative. BOK Financial may elect, in its sole discretion, to issue additional shares of common stock to satisfy any obligation under the price guarantee or to pay cash. The maximum aggregate number of common shares that may be issued to satisfy any price guarantee obligations is 10 million. If, as of any benchmark date, BOK Financial has already issued 10 million shares, BOK financial is not obligated to make any further benchmark payments. BOK Financial's ability to pay cash to satisfy any price guarantee obligations is limited by applicable bank holding company and bank capital and dividend regulations. The following table presents the estimated number of common shares that would be required to be issued and the cash value equivalent if the market value of BOK Financial's common stock remained at $32.39, its closing price on December 31, 2002, and if all holders exercised their rights under the price guarantee agreement. Cash Equivalent of AdditionalAdditional Number Shares Shares Benchmark Benchmark Of To (In Period Price Shares Issue Thousands) ----------------------------------------------------------- October 25, 2003 - December 24, 2003 $34.81 198,010 14,771 $ 478 October 25, 2004 - December 24, 2004 37.38 198,010 30,532 989 October 25, 2005 - December 24, 2005 39.96 198,010 46,296 1,499 October 25, 2006 - December 24, 2006 42.54 198,010 65,055 2,010 October 25, 2007 - December 24, 2007 45.12 198,010 77,817 2,520 If the market value of BOK Financial's common stock fell to $3.60 per share and remained at that value for each of the benchmark periods and if all shares were sold during the applicable periods, BOK Financial would be required to issue shares or, at its discretion, pay cash as follows: Cash Equivalent Additional Of Shares Additional Benchmark To Shares Period Issue (In Thousands) ------------------------------------------------------ October 25, 2003 - December 24, 2003 1,716,386 $ 6,179 October 25, 2004 - December 24, 2004 1,858,193 6,690 October 25, 2005 - December 24, 2005 2,000,000 7,200 October 25, 2006 - December 24, 2006 2,141,807 7,711 October 25, 2007 - December 24, 2007 2,283,614 8,221 ------------------------------------------------------ 10,000,000 $36,001 ------------------------------------------------------ SUBSIDIARY BANKS BOK Financial's subsidiary banks use borrowings to supplement deposits as a source of funds for loan and securities growth. These sources include federal funds purchased, securities repurchase agreements, and advances from the Federal Home Loan Bank. Interest rates and maturity dates for the various sources of funds are matched with specific types of assets in the asset/liability management process. See Note 10 to the Consolidated Financial Statements for additional information about the interest rates and maturity dates of these borrowings. 27 In 1997, BOk issued $150 million of 7.125% fixed rate subordinated debentures that mature in 2007. Interest rate swaps were used as a fair value hedge to convert the fixed interest on these debentures to a LIBOR-based floating rate requiring BOk to adjust the carrying value of the subordinated debentures to fair value. In 2001, the interest rate swaps were terminated. The related market value adjustment of the subordinated debentures of $8 million is being recognized over the remaining life of the debt. Equity capital for BOK Financial increased by $265 million to $1.1 billion during 2002. Retained earnings provided $150 million of this increase. Other comprehensive income increased $37 million due primarily to the appreciation of available for sale securities. Securities issued in the Bank of Tanglewood acquisition increased shareholders' equity by $68 million. BOK Financial and its subsidiary banks are subject to various capital requirements administered by federal agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that could have a material effect on operations. These capital requirements include quantitative measures of assets, liabilities and off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulators. The capital ratios for BOK Financial and each of its subsidiary banks generally increased during 2002 as retained capital was used to support asset growth. See Note 16 to the Consolidated Financial Statements for additional information regarding regulatory capital. MARKET RISK Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange prices, commodity prices or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading. BOK Financial is subject to market risk primarily through the effect of changes in interest rates on both its assets held for purposes other than trading and trading assets. The effects of other changes, such as foreign exchange rates, commodity prices or equity prices do not pose significant market risk to BOK Financial. BOK Financial has no material investments in assets that are affected by changes in foreign exchange rates or equity prices. Energy derivative contracts, which are affected by changes in commodity prices, are matched against offsetting contracts as previously discussed. Responsibility for managing market risk rests with the Asset/Liability Committee that operates under policy guidelines established by the Board of Directors. The acceptable negative variation in net interest revenue, net income or economic value of equity due to a specified basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 10%. These guidelines also set maximum levels for short-term borrowings, short-term assets, public funds, and brokered deposits, and establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is reviewed monthly. INTEREST RATE RISK MANAGEMENT (OTHER THAN TRADING) BOK Financial has a large portion of its earning assets in variable rate loans and a large portion of its liabilities in demand deposit accounts and interest bearing transaction accounts. This combination results in a balance sheet that is naturally asset sensitive. Changes in interest rates affect earning assets more rapidly than interest bearing liabilities in the short term. Management has adopted several strategies to reduce this interest rate sensitivity. As previously noted in the Net Interest Revenue section of this report, management acquires securities that are funded by borrowings in the capital markets. These securities have an average duration of approximately 2 years while the related funds borrowed have an average duration of 90 days. Average securities purchased and funds borrowed under this strategy were $1.9 billion in 2002 compared to $1.7 billion in 2001. Additionally, BOK Financial uses interest rate swaps 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. During 2002 and 2001, net interest revenue increased by $12.7 million and $4.0 million, respectively, from the periodic settlement of these swaps. Additionally, net gains of $4.7 million were recognized in 2002 compared to net losses of $3.4 million recognized in 2001 from the adjustment to fair value of the interest rate swaps. Credit risk from these swaps is closely monitored and counterparties to these contracts are factors. Derivative products are not used for speculative purposes. See Note 4 to the consolidated Financial Statements for additional information. The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model. BOK Financial performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions, on net interest revenue, net income and economic value of equity. A simulation model is used to estimate the effect of changes in interest rates over the next twelve months based on eight interest rate scenarios. Three specified interest rate scenarios are used to evaluate interest rate risk against policy guidelines. These are a "most likely" rate scenario and two "shock test" scenarios, first assuming a sustained parallel 200 basis point increase and second assuming a sustained parallel 100 basis point decrease in interest rates. Management historically evaluated interest rate sensitivity for a sustained 200 basis point decrease in rates. However, these results are not meaningful in the current low-rate environment. An independent source is used to determine the most likely interest rate scenario. BOK Financial's primary interest rate exposures included the Federal Reserve Bank's targeted federal funds rate, which affects short-term borrowings, and the prime lending rate and LIBOR, which are the basis for much of the variable-rate loan pricing. Additionally, mortgage rates directly affect the prepayment speeds for mortgage-backed securities and mortgage servicing rights. Derivative financial instruments and other financial instruments used for purposes other than trading are included in this simulation. The model incorporates assumptions regarding the effects of changes in interest rates and account balances on indeterminable maturity deposits based on a combination of historical analysis and expected behavior. The impact of planned growth and new business activities is factored into the simulation model. The effects of changes in interest rates on the value of mortgage servicing rights are excluded from Table 22 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 23. 28 Table 22 Interest Rate Sensitivity (Dollars in Thousands) 200 bp Increase 100 bp Decrease Most Likely --------------------------------------------------------- ------------------------- 2002 2001 2002 2001 2002 2001 --------------------------------------------------------- ------------------------- Anticipated impact over the next twelve months: Net interest revenue $12,354 $7,380 $ (7,456) $ (10,403) $ 7,983 $3,896 3.1% 2.0% (1.8)% (2.8)% 2.0% 1.1% ---------------------------------------------------------------------------------------------------- ------------------------- Net income $ 7,722 $4,612 $(4,660) $ (6,502) $ 4,990 $2,435 5.0% 3.3% (3.0)% (4.6)% 3.2% 1.7% ---------------------------------------------------------------------------------------------------- ------------------------- Economic value of equity $12,398 $ 705 $(36,768) $(109,487) $43,799 $ (398) 0.9% 0.1% (2.6)% (8.5)% 3.1% - ---------------------------------------------------------------------------------------------------- -------------------------
As noted in the Lines of Business - Mortgage Banking section of this report, BOK Financial has market risk associated with its portfolio of mortgage servicing rights, primarily due to loan prepayments. BOK Financial designates a portion of its securities portfolio as an economic hedge against the risk of loss on its mortgage servicing rights. Mortgage-backed securities and U.S. government agency debentures are acquired and held as available for sale when prepayment risk exceeds certain levels. The fair value of these securities is expected to vary inversely to the fair value of the mortgage servicing rights. This strategy presents certain risks. A well-developed market determines the fair value for securities, however, there is no comparable market for mortgage servicing rights. Therefore, the computed change in value of the servicing rights for a specified change in interest rates may not highly correlate with the change in value of the securities. At December 31, 2002, securities with a fair value of $129 million and an unrealized gain of $1.6 million were held for the mortgage servicing rights hedge program. This unrealized gain, net of income taxes, is included in shareholders' equity as part of other comprehensive income. The interest rate sensitivity of the mortgage servicing rights and securities held as a hedge is modeled over a range of +/-50 basis points. At December 31, 2002, the pre-tax results of this modeling on reported earnings were: Table 23 Interest Rate Sensitivity - Mortgage Servicing (Dollars In Thousands) 50 bp 50 bp Increase Decrease ---------------------------- Anticipated change in: Mortgage servicing rights $18,186 $(7,330) Hedging securities (3,826) 4,640 ---------------------------- Net $14,360 $(2,690) ---------------------------- 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 interests revenue, net income or economic value of equity. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, market conditions and management strategies, among other factors. TRADING ACTIVITIES BOK Financial enters into trading activities both as an intermediary for customers and for its own account. As an intermediary, BOK Financial will take positions in securities, generally mortgage-backed securities, government agency securities, and municipal bonds. These securities are purchased for resale to customers, which include individuals, corporations, foundations and financial institutions. BOK Financial will also take trading positions in U.S. Treasury securities, mortgage-backed securities, municipal bonds and financial futures for its own account. These positions are taken with the objective of generating trading profits. Both of these activities involve market and credit 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 December 31, 2002, the nominal aggregate trading positions was $5.2 million and the VAR was $213 thousand. The greatest value at risk during 2002 was $1.7 million. 29 NEW ACCOUNTING STANDARDS During 2002, the Financial Accounting Standards Board ("FASB") issued several statements and interpretations that may have an effect on BOK Financial's accounting policies and financial reporting in future periods. These included Statements of Financial Accounting Standards No. 146, "Obligations Associated with Disposal Activities" ("FAS 146") and No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("FAS 148") and Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FAS 146 addresses the accounting and reporting for costs associated with exit or disposal for Certain Employee Termination Benefits and Other Costs to Exit an Activity ("EITF 94-3"). Under the provisions of FAS 146, a liability for costs associated with an exit or disposal activity should be initially recognized when it is incurred and measured at fair value. The main effect of FAS 146 will be on the timing of recognition of such costs. They will be recognized as liabilities in periods following a commitment to a plan of exit or disposal rather than at the date of commitment as required under EITF 94-3. FAS 146 is not expected to have a significant impact on BOK Financial. FAS 148 provides alternative methods of transition to the fair value accounting method for stock-based employee compensation as required by FASB Statement No. 123, "Accounting for Stock-Based Compensation ("FAS 123"). FAS 148 also amends the disclosure requirements of FAS 123 to include additional details of the effects of FAS 123 on both annual and interim financial statements. These additional disclosures are required regardless of whether a company accounts for stock-based compensation using the fair value method or the intrinsic value method. FAS 148 provides three transition methods for companies that adopt the fair value accounting method defined in FAS 123, the prospective method, the retroactive restatement method and the modified prospective method. The prospective method would apply to awards granted, modified or settled after the beginning of the fiscal year in which FAS 123 is first adopted. This transition method is only available if BOK Financial adopts fair value accounting in 2003. The retroactive restatement method requires a restatement of all periods presented to reflect the fair value accounting method for all awards granted, modified or settled after 1994. The results of this transition method are consistent with the pro forma disclosures currently required by FAS 123. The modified prospective method recognizes compensation cost from the beginning of the fiscal year in which the recognition provisions are first adopted as if the fair value method of accounting had been used for awards granted, modified or settled after 1994. This method would affect compensation costs in the year adopted but would not restate prior periods. FAS 148 does not require adoption of the fair value method of accounting for stock-based compensation provided by FAS 123. FIN 45 requires guarantees that meet certain specified definitions to be initially recorded at fair value and requires expanded disclosure of all guarantees by the guarantor. The recognition provisions of FIN 45 are applicable to all guarantees issued or modified after December 31, 2002; the disclosures applicable to existing guarantees have been provided in Note 15 to the Consolidated Financial Statements. FIN 45, which will primarily be applicable to standby letters of credit issued by BOK Financial's subsidiary banks, is not expected to have a material effect on the results of operations. FORWARD-LOOKING STATEMENTS This Annual Report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about BOK Financial, the financial services industry and the economy in general. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the provision and reserve for loan losses involve judgments as to expected events and are inherently forward-looking statements. Assessments that BOK Financial's acquisitions and other growth endeavors will be profitable are necessary statements of belief as to the outcome of future events, based in part on information provided by others that BOK Financial has not independently verified. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied or forecasted in such forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to: (1) the ability to fully realize expected cost savings from mergers within the expected time frames, (2) the ability of other companies on which BOK Financial relies to provide goods and services in a timely and accurate manner, (3) changes in interest rates and interest rate relationships, (4) demand for products and services, (5) the degree of competition by traditional and nontraditional competitors, (6) changes in banking regulations, tax laws, prices, levies and assessments, (7) the impact of technological advances and (8) trends in customer behavior as well as their ability to repay loans. BOK Financial and its affiliates undertake no obligation to update, amend, or clarify forward-looking statements, whether as a result of new information, future events or otherwise. 30 REPORT OF MANAGEMENT ON FINANCIAL STATEMENTS Management is responsible for the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. In management's opinion, the accompanying consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial conditions, results of operations and cash flows of BOK Financial and its subsidiaries at the dates and for the periods presented. As of December 31, 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 December 31, 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 December 31, 2002. BOK Financial and its subsidiaries maintain a system of internal accounting controls designed to provide reasonable assurance that transactions are executed in accordance with management's general or specific authorization, and are recorded as necessary to maintain accountability for assets and to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States. This system includes written policies and procedures, a corporate code of conduct, an internal audit program and standards for the hiring and training of qualified personnel. The Board of Directors of BOK Financial maintains a Risk Oversight and Audit Committee consisting of outside directors that meet periodically with management and BOK Financial's internal and independent auditors. The Committee considers the audit and nonaudit services to be performed by the independent auditors, makes arrangements for the internal and independent audits and recommends BOK Financial's selection of independent auditors. The Committee also reviews the results of the internal and independent audits, critical accounting policies and practices, and various shareholder reports and other reports and filings. Ernst & Young LLP, certified public accountants, have been engaged to audit the consolidated financial statements of BOK Financial and its subsidiaries. Their audit is conducted in accordance with auditing standards generally accepted in the United States and their report on BOK Financial's consolidated financial statements is set forth below. REPORT OF INDEPENDENT AUDITORS We have audited the accompanying consolidated balance sheets of BOK Financial Corporation as of December 31, 2002 and 2001, and the related consolidated statements of earnings, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2002. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BOK Financial Corporation at December 31, 2002 and 2001, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Ernst & Young LLP Tulsa, Oklahoma January 22, 2003 31 BOK FINANCIAL CORPORATION Consolidated Statements of Earnings (Dollars In Thousands Except Per Share Data) 2002 2001 2000 ----------------- ----------------- ----------------- Interest Revenue Loans $377,708 $455,332 $454,077 Taxable securities 186,902 184,464 167,493 Tax-exempt securities 9,359 12,979 12,782 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Total securities 196,261 197,443 180,275 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Trading securities 653 1,029 1,416 Funds sold and resell agreements 291 829 2,962 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Total interest revenue 574,913 654,633 638,730 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Interest Expense Deposits 145,466 206,209 207,321 Borrowed funds 50,495 108,549 151,157 Subordinated debentures 10,751 10,923 10,437 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Total interest expense 206,712 325,681 368,915 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Net Interest Revenue 368,201 328,952 269,815 Provision for Loan Losses 33,730 37,610 17,204 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Net Interest Revenue After Provision for Loan Losses 334,471 291,342 252,611 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Other Operating Revenue Brokerage and trading revenue 24,450 19,644 15,146 Transaction card revenue 53,552 44,481 38,753 Trust fees and commissions 40,092 40,567 39,316 Service charges and fees on deposit accounts 67,632 51,284 42,932 Mortgage banking revenue 48,910 50,155 37,179 Leasing revenue 3,330 3,745 4,244 Other revenue 20,276 20,087 17,965 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Total fees and commissions 258,242 229,963 195,535 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Gain on sale of assets 1,157 557 381 Gain on sales of securities, net 58,704 30,640 2,059 Gain (loss) on derivatives, net 5,894 (4,062) - ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Total other operating revenue 323,997 257,098 197,975 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Other Operating Expense Personnel expense 183,314 163,835 146,215 Business promotion 11,367 10,658 8,395 Professional fees and services 12,987 13,391 9,618 Net occupancy and equipment 42,347 42,764 35,447 Data processing and communications 47,251 40,013 34,962 FDIC and other insurance 1,903 1,717 1,569 Printing, postage and supplies 12,665 12,329 11,260 Net gains and operating expenses on repossessed assets 1,014 1,401 (1,283) Amortization of intangible assets 7,638 20,113 15,478 Mortgage banking costs 42,271 30,261 22,274 Provision for impairment of mortgage servicing rights 45,923 15,551 2,900 Other expense 16,957 16,729 15,980 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Total other operating expense 425,637 368,762 302,815 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Income Before Taxes 232,831 179,678 147,771 Federal and state income tax 82,422 63,612 47,631 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Income Before Cumulative Effect of a Change in Accounting Principle, Net of Tax 150,409 116,066 100,140 Transition adjustment of adoption of FAS 133 - 236 - ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Net Income $150,409 $116,302 $100,140 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Earnings Per Share: Basic: Before cumulative effect of change in accounting principle $ 2.79 $ 2.18 $ 1.89 Transition adjustment of adoption of FAS 133 - - - ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Net Income $ 2.79 $ 2.18 $ 1.89 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Diluted: Before cumulative effect of change in accounting principle $ 2.48 $ 1.95 $ 1.69 Transition adjustment of adoption of FAS 133 - - - ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Net Income $ 2.48 $ 1.95 $ 1.69 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Average Shares Used in Computation: Basic 53,341,294 52,550,525 52,234,195 Diluted 60,636,863 59,724,364 59,097,486 ------------------------------------------------------------------------- ----------------- ----------------- -----------------
See accompanying notes to consolidated financial statements. 32 BOK FINANCIAL CORPORATION Consolidated Balance Sheets (In Thousands Except Share Data) December 31, ------------------------------- 2002 2001 --------------- --------------- Assets Cash and due from banks $ 604,680 $ 643,938 Funds sold and resell agreements 19,535 3,400 Trading securities 5,110 10,327 Securities: Available for sale 3,204,973 2,815,070 Available for sale securities pledged to creditors 728,370 634,479 Investment (fair value: 2002 - $202,153; 2001 - $242,628) 197,950 241,113 -------------------------------------------------------------------------------- --------------- --------------- Total securities 4,131,293 3,690,662 -------------------------------------------------------------------------------- --------------- --------------- Loans 6,900,983 6,295,378 Less reserve for loan losses (116,070) (101,905) -------------------------------------------------------------------------------- --------------- --------------- Net loans 6,784,913 6,193,473 -------------------------------------------------------------------------------- --------------- --------------- Premises and equipment, net 151,715 141,425 Accrued revenue receivable 72,018 68,728 Intangible assets, net 197,868 152,076 Mortgage servicing rights, net 37,288 98,796 Real estate and other repossessed assets 6,719 7,141 Bankers' acceptances 3,728 15,393 Receivable on unsettled security transactions 65,395 - Other assets 164,783 116,243 -------------------------------------------------------------------------------- --------------- --------------- Total assets $12,245,045 $11,141,602 -------------------------------------------------------------------------------- --------------- --------------- Liabilities and Shareholders' Equity Noninterest-bearing demand deposits $1,531,694 $ 1,366,690 Interest-bearing deposits: Transaction 3,164,102 2,559,714 Savings 164,738 158,234 Time 3,267,991 2,821,106 -------------------------------------------------------------------------------- --------------- --------------- Total deposits 8,128,525 6,905,744 -------------------------------------------------------------------------------- --------------- --------------- Funds purchased and repurchase agreements 1,567,686 1,601,989 Other borrowings 1,088,022 1,220,948 Subordinated debentures 155,419 186,302 Accrued interest, taxes and expense 74,043 67,014 Bankers' acceptances 3,728 15,393 Due on unsettled security transactions - 231,660 Other liabilities 134,065 84,069 -------------------------------------------------------------------------------- --------------- --------------- Total liabilities 11,151,488 10,313,119 -------------------------------------------------------------------------------- --------------- --------------- Shareholders' equity: Preferred stock 25 25 Common stock ($.00006 par value; 2,500,000,000 shares authorized; issued: 2002 - 55,749,596; 2001 - 51,737,154) 3 3 Capital surplus 459,347 323,860 Retained earnings 608,515 511,301 Treasury stock (shares at cost: 2002 - 682,967; 2001 - 541,240) (17,421) (12,498) Accumulated other comprehensive income 43,088 5,792 -------------------------------------------------------------------------------- --------------- --------------- Total shareholders' equity 1,093,557 828,483 -------------------------------------------------------------------------------- --------------- --------------- Total liabilities and shareholders' equity $12,245,045 $11,141,602 -------------------------------------------------------------------------------- --------------- ---------------
See accompanying notes to consolidated financial statements. 33 BOK FINANCIAL CORPORATION Consolidated Statements of Cash Flows (In Thousands) 2002 2001 2000 ------------ ------------ ------------- Cash Flows From Operating Activities: Net income $ 150,409 $ 116,302 $ 100,140 Adjustments to reconcile net income to net cash provided by operating activities: Provisions for loan losses 33,730 37,610 17,204 Provisions for mortgage servicing rights impairment 45,923 15,551 2,900 Transition adjustment of adoption of FAS 133 - (236) - Unrealized (gains) losses from derivatives (5,112) 12,082 - Depreciation and amortization 65,790 69,165 54,444 Tax benefit on exercise of stock options 5,482 3,408 1,010 Tax accrual reversal - - 3,000 Net amortization of securities discounts and premiums 5,818 (5,615) (4,975) Net gain on sale of assets (83,501) (47,954) (11,694) Mortgage loans originated for resale (1,014,009) (972,066) (494,675) Proceeds from sale of mortgage loans held for resale 1,073,044 1,008,073 547,140 Change in trading securities 5,217 29,538 (25,132) Change in accrued revenue receivable (2,776) 6,253 (7,341) Change in other assets (44,201) 2,881 73,177 Change in accrued interest, taxes and expense 7,029 (3,125) (18,393) Change in other liabilities 5,270 9,599 (15,992) ------------------------------------------------------------------------- ------------ ------------ ------------- Net cash provided by operating activities 248,113 281,466 220,813 ------------------------------------------------------------------------- ------------ ------------ ------------- Cash Flows From Investing Activities: Proceeds from sales of investment securities - - 175 Proceeds from sales of available for sale securities 6,873,320 9,142,248 1,677,078 Proceeds from maturities of investment securities 139,591 80,273 41,764 Proceeds from maturities of available for sale securities 1,802,845 930,494 445,384 Purchases of investment securities (96,627) (88,282) (62,334) Purchases of available for sale securities (8,985,019) (10,496,575) (2,227,911) Loans originated or acquired net of principal collected (586,281) (675,612) (974,220) Proceeds from derivative contracts 21,221 - - Proceeds from sales of assets 62,909 68,088 69,201 Purchases of assets (51,249) (75,655) (98,822) Cash and cash equivalents of subsidiaries and branches acquired and sold, net 46,295 (72,990) (14) ------------------------------------------------------------------------- ------------ ------------ ------------- Net cash used by investing activities (772,995) (1,188,011) (1,129,699) ------------------------------------------------------------------------- ------------ ------------ ------------- Cash Flows From Financing Activities: Net change in demand deposits, transaction deposits, and savings accounts 604,771 346,034 329,483 Net change in certificates of deposit 395,740 146,075 453,338 Net change in other borrowings (165,744) 141,660 451,574 Change in amount (due) receivable on unsettled security transaction (297,055) 231,660 - Pay down of other borrowings (10,095) (95,000) - Issuance of subordinated debenture - 30,000 - Issuance of preferred, common and treasury stock, net 4,172 2,745 999 Pay down of subordinated debenture (30,000) - - Purchase of treasury stock - - (2,633) Dividends paid (30) (20) (1) ------------------------------------------------------------------------- ------------ ------------ ------------- Net cash provided by financing activities 501,759 803,154 1,232,760 ------------------------------------------------------------------------- ------------ ------------ ------------- Net increase (decrease) in cash and cash equivalents (23,123) (103,391) 323,874 Cash and cash equivalents at beginning of period 647,338 750,729 426,855 ------------------------------------------------------------------------- ------------ ------------ ------------- Cash and cash equivalents at end of period $ 624,215 $ 647,338 $ 750,729 ------------------------------------------------------------------------- ------------ ------------ ------------- Cash paid for interest $ 208,612 $ 334,103 $ 361,645 ------------------------------------------------------------------------- ------------ ------------ ------------- Cash paid for taxes 81,154 70,699 51,669 ------------------------------------------------------------------------- ------------ ------------ ------------- Net loans transferred to repossessed real estate 4,550 7,228 2,226 ------------------------------------------------------------------------- ------------ ------------ ------------- Payment of dividends in common stock 53,165 36,371 1,500 ------------------------------------------------------------------------- ------------ ------------ ------------- Common stock and price guarantee issued for acquisition 67,745 - - ------------------------------------------------------------------------- ------------ ------------ -------------
See accompanying notes to consolidated financial statements. 34 BOK FINANCIAL CORPORATION Consolidated Statements of Changes in Shareholders' Equity (In Thousands) Preferred Stock Common Stock ------------------------------ ------------------------------ Shares Amount Shares Amount ------------------------------ ------------------------------ ------------------------------------------------------------------------------------------------------------------------------ December 31, 1999 250,000 $25 49,382 $3 Comprehensive income: Net income - - - - Other comprehensive loss, net of tax: Unrealized gain on securities available for sale - - - - Total comprehensive income Director retainer shares - - 4 - Treasury stock purchase - - - - Exercise of stock options - - 294 - Tax benefit on exercise of stock options - - - - Preferred stock dividend - - - - Dividends paid in shares of common stock: Preferred stock - - 26 - ------------------------------------------------------------------------------------------------------------------------------ December 31, 2000 250,000 25 49,706 3 Comprehensive income: Net income - - - - Other comprehensive loss, net of tax: Unrealized gain on securities available for sale - - - - Total comprehensive income Director retainer shares - - 5 - Exercise of stock options - - 598 - Tax benefit on exercise of stock options - - - - Preferred stock dividend - - - - Dividends paid in shares of common stock: Preferred stock - - 51 - Common stock - - 1,377 - ------------------------------------------------------------------------------------------------------------------------------ December 31, 2001 250,000 25 51,737 3 Comprehensive income: Net income - - - - Other comprehensive loss, net of tax: Unrealized gain on securities available for sale - - - - Total comprehensive income Director retainer shares - - 8 - Exercise of stock options - - 687 - Tax benefit on exercise of stock options - - - - Preferred stock dividend - - - - Issue shares for acquisition - - 1,711 - Fair value of stock price guarantee - - - - Dividends paid in shares of common stock: Preferred stock - - 48 - Common stock - - 1,559 - ------------------------------------------------------------------------------------------------------------------------------ December 31, 2002 250,000 $25 55,750 $3 ------------------------------------------------------------------------------------------------------------------------------
December 31, ------------------------------------------- 2002 2001 2000 ------------------------------------------- 1 Changes in net unrealized gains on securities: Unrealized gains (losses) on available for sale $119,609 $34,800 $78,759 securities Tax (expense) benefit on unrealized gains (losses) on available for sale securities (44,390) (12,412) (30,467) Reclassification adjustment for (gains) losses realized and included in net income (58,704) (30,640) (2,059) Reclassification adjustment for tax expense (benefit) on realized (gains) losses 20,781 10,724 664 ------------------------------------------- Net change in unrealized gains on securities $ 37,296 $ 2,472 $46,897 -------------------------------------------
See accompanying notes to consolidated financial statements. 35 Accumulated Other Comprehensive Capital Retained Treasury Stock ------------------------------------ Income (Loss)(1) Surplus Earnings Shares Amount Total -------------------- ----------------- ----------------- ----------------- ------------------ --------------- $(43,577) $274,980 $332,751 316 $ (7,018) $557,164 - - 100,140 - - 100,140 46,897 - - - - 46,897 --------------- 147,037 --------------- - 50 - (13) 263 313 - - - 151 (2,633) (2,633) - 2,554 - 97 (1,868) 686 - 1,010 - - - 1,010 - (1) - - (1) - 288 (1,500) (63) 1,212 - -------------------- ----------------- ----------------- ----------------- ------------------ --------------- 3,320 278,882 431,390 488 (10,044) 703,576 - - 116,302 - - 116,302 2,472 - - - - 2,472 --------------- 118,774 --------------- - 165 - (7) 126 291 - 7,551 - 185 (5,097) 2,454 - 3,408 - - - 3,408 - - (1) - - (1) - 1,114 (1,500) (21) 386 - - 32,740 (34,890) (104) 2,131 (19) -------------------- ----------------- ----------------- ----------------- ------------------ --------------- 5,792 323,860 511,301 541 (12,498) 828,483 - - 150,409 - - 150,409 37,296 - - - - 37,296 --------------- 187,705 --------------- - 272 - - - 272 - 8,243 - 125 (4,343) 3,900 - 5,482 - - - 5,482 - - (2) - - (2) - 64,550 - - - 64,550 - 3,195 - - - 3,195 - 1,500 (1,500) - - - - 52,245 (51,693) 17 (580) (28) -------------------- ----------------- ----------------- ----------------- ------------------ --------------- $43,088 $459,347 $608,515 683 $(17,421) $1,093,557 -------------------- ----------------- ----------------- ----------------- ------------------ ---------------
36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The Consolidated Financial Statements of BOK Financial Corporation ("BOK Financial") have been prepared in conformity with accounting principles generally accepted in the United States, including general practices of the banking industry. The consolidated financial statements include the accounts of BOK Financial and its subsidiaries, principally Bank of Oklahoma, N.A. and its subsidiaries ("BOk"), Bank of Texas, N.A., Bank of Arkansas, N.A., Bank of Albuquerque, N.A. and BOSC, Inc. Certain prior year amounts have been reclassified to conform to current year classifications. NATURE OF OPERATIONS BOK Financial, through its subsidiaries, provides a wide range of financial services to commercial and industrial customers, other financial institutions and consumers throughout Oklahoma, Northwest Arkansas, Dallas and Houston, Texas metropolitan areas and New Mexico. These services include depository and cash management; lending and lease financing; mortgage banking; securities brokerage, trading and underwriting; and personal and corporate trust. USE OF ESTIMATES Preparation of BOK Financial's consolidated financial statements requires management to make estimates of future economic activities, including interest rates, loan collectibility and prepayments and cash flows from customer accounts. These estimates are based upon current conditions and information available to management. Actual results may differ significantly from these estimates. ACQUISITIONS Assets and liabilities acquired by purchase are recorded at fair values on the acquisition dates. The Consolidated Statements of Earnings include the results of purchases from the dates of acquisition. INTANGIBLE ASSETS BOK Financial adopted Statements of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142") and No. 147, "Acquisitions of Certain Financial Institutions" ("FAS 147") on January 1, 2002. The following table presents the impact on previously reported net income and earnings per share after application of FAS 142 and FAS 147: 2001 2000 ------------- ------------- Net income previously reported $ 116,302 $ 100,140 Pro forma net income 125,464 105,282 Diluted earnings per share previously reported $1.95 $1.69 Pro forma diluted earnings per share 2.10 1.78 Intangible assets with indefinite lives, such as goodwill, are no longer amortized and must be evaluated for each of BOK Financial's business units for impairment at least annually or more frequently if conditions indicate impairment. The evaluation of possible impairment of intangible assets involves significant judgment based upon short-term and long-term projections of future performance. The fair value of BOK Financial's business units is estimated by the discounted future earnings method. Income growth is projected over a five-year period for each unit and a terminal value is computed. This projected income stream is converted to current fair value by using a discount rate that reflects a rate of return required by a willing buyer. Other identifiable intangible assets and core deposit intangibles are amortized using straight-line and accelerated methods over the estimated benefit periods. These periods range from 5-7 years for other intangible assets and core deposit intangibles. The net book value of these other intangibles and core deposit intangibles are evaluated for impairment when economic conditions indicate an impairment may exist. CASH EQUIVALENTS Due from banks, funds sold (generally federal funds sold for one-day periods) and resell agreements (which generally mature within one to 30 days) are considered cash equivalents. SECURITIES Securities are identified as trading, investment (held to maturity) or available for sale at the time of purchase based upon the intent of management, liquidity and capital requirements, regulatory limitations and other relevant factors. Trading securities, which are acquired for profit through resale, are carried at market value with unrealized gains and losses included in current period earnings. Investment securities are carried at amortized cost. Amortization is computed by methods that approximate level yield and is adjusted for changes in prepayment estimates. Investment securities may be sold or transferred to trading or available for sale classification in certain limited circumstances specified in generally accepted accounting principles. Securities identified as available for sale are carried at fair value. Unrealized gains and losses are recorded, net of deferred income taxes, as accumulated other comprehensive income (loss) in shareholders' equity. Realized gains and losses on sales of securities are based upon the amortized cost of the specific security sold. Available for sale securities are separately identified as pledged to creditors if the creditor has the right to sell or repledge the collateral. The purchase or sale of securities is recognized on a trade date basis. A net receivable or payable is recognized for subsequent transaction settlement. BOK Financial will periodically commit to purchase or sell to-be-announced ("TBA") mortgage-backed securities. These commitments are not reflected in BOK Financial's balance sheet until settlement date, in accordance with the accounting guidance of the Comptroller of the Currency. However, any losses from TBA securities sales are recognized as of the commitment date. 37 DERIVATIVE INSTRUMENTS Derivative instruments, primarily interest rate swaps and forward sales contracts, are used as part of an interest rate risk management strategy. Interest rate swaps modify the interest income and expense on certain long-term, fixed rate assets and liabilities. Amounts payable to or receivable from the counterparties are reported in interest income and expense using the accrual method. The fair value of the interest rate swaps is included in other assets or liabilities. Changes in the fair value of interest rate swaps are included in other operating revenue. In certain circumstances, interest rate swaps may be designated as fair value hedges and may qualify for hedge accounting. Changes in the fair value of the hedged asset or liability that are attributable to the hedged risk are reported in other operating revenue. These changes may partially or completely offset the mark-to-market adjustments of the interest rate swaps. Fair value hedges are considered to be effective if the cumulative fair value adjustments of the interest rate swaps are within a range of 80% to 120% of the cumulative fair value adjustment of the hedged assets or liabilities. Interest rate swaps may be designated as cash flow hedges of variable rate assets or liabilities or anticipated transactions. Changes in fair value of interest rate swaps are recorded in other comprehensive income to the extent they are effective. Amounts recorded as other comprehensive income are recognized in net income in the same periods as the cash flows from the hedged transactions. In conjunction with its mortgage banking activities, BOK Financial enters into mortgage loan commitments that are considered derivative instruments under FAS 133. Forward sales contracts are used to hedge these mortgage loan commitments and mortgage loans held for sale. Changes in the fair value of the mortgage loan commitments and forward sales contracts are recognized in other operating revenue. Energy contracts are used to assist certain customers in hedging their risk of adverse changes in natural gas and oil prices. BOK Financial serves as an intermediary between its energy customers and the commodities market by arranging fixed price/floating price contracts. Each contract between BOK Financial and its customer is offset by a contract between BOK Financial and dealers in the commodities market. The fair value of these contracts are carried in other assets and other liabilities. Compensation for credit risk and reimbursement of administrative costs are recognized over the life of the contracts. LOANS Loans are either secured or unsecured based on the type of loan and the financial condition of the borrower. Repayment is generally expected from cash flow or proceeds from the sale of selected assets of the borrower. BOK Financial is exposed to risk of loss on loans due to the borrower's difficulties, which may arise from any number of factors, including problems within the respective industry or local economic conditions. Access to collateral, in the event of borrower default, is reasonably assured through adherence to applicable lending laws and through sound lending standards and credit review procedures. Interest is accrued at the applicable interest rate on the principal amount outstanding. Loans are placed on nonaccrual status when, in the opinion of management, full collection of principal or interest is uncertain, generally when the collection of principal or interest is 90 days or more past due. Interest previously accrued but not collected is charged against interest income when the loan is placed on nonaccrual status. Payments on nonaccrual loans are applied to principal or reported as interest income, according to management's judgment as to the collectibility of principal. Loan origination and commitment fees and direct loan acquisition and origination costs, when significant, are deferred and amortized as an adjustment to yield over the life of the loan or over the commitment period, as applicable. Mortgage loans held for sale are carried at the lower of aggregate cost or market value, including estimated losses on unfunded commitments and gains or losses on related forward sales contracts. Effective with the adoption of FAS 133, mortgage loans held for sale that are designated as hedged assets are carried at fair value based on sales commitments or market quotes. Changes in fair value after the date of designation of an effective hedge are recorded in other operating revenue. RESERVE FOR LOAN LOSSES The adequacy of the reserve for loan losses is assessed by management, based upon an ongoing quarterly evaluation of the probable estimated losses inherent in the portfolio, and includes probable losses on both outstanding loans and unused commitments to provide financing. A consistent methodology has been developed that includes reserves assigned to specific criticized loans, general reserves that are based upon statistical migration analyses for each category of loans, and a nonspecific allowance that is based upon an analysis of current economic conditions, loan concentrations, portfolio growth and other relevant factors. The reserve for loan losses related to loans that are identified for evaluation in accordance with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114"), is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Loans are considered to be impaired when it becomes probable that BOK Financial will be unable to collect all amounts due according to the contractual terms of the loan agreement. This is substantially the same criteria used to determine when a loan should be placed on nonaccrual status. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In accordance with the provisions of FAS 114, management has excluded small balance, homogeneous loans from the impairment evaluation specified in FAS 114. Such loans include 1-4 family mortgage loans, consumer loans, and commercial loans with committed amounts less than $1 million. The adequacy of the reserve for loan losses applicable to these loans is evaluated in accordance with generally accepted accounting principles and standards established by the banking regulatory authorities and adopted as policy by BOK Financial. A provision for loan losses is charged against earnings in amounts necessary to maintain an adequate reserve for loan losses. Loans are charged off when the loan balance or a portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value. Loans are evaluated quarterly and charge-offs are taken in the quarter in which the loss is identified. Additionally, all unsecured or under-secured loans that are past due by 180 days or more are charged off within 30 days. Recoveries of loans previously charged off are added to the reserve. ASSET SECURITIZATION BOK Financial periodically securitizes and sells pools of assets. These transactions are recorded as sales for financial reporting purposes when the criteria for surrender of control specified in Statement of Financial Accounting Standards, No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" are met. BOK Financial may retain the right to service the assets and a residual interest in excess cash flows generated by the assets. The carrying value of the assets sold is allocated between the portion sold and the portion retained based on relative fair values. The fair value of these retained assets is determined by a discounting of expected future net cash to be received using assumed market interest rates for these instruments. Residual interests are carried at fair value. Changes in fair values are recorded in income. Servicing rights are carried at the lower of amortized cost or fair value. A valuation allowance is provided when amortized cost of servicing rights exceeds fair value. 38 REAL ESTATE AND OTHER REPOSSESSED ASSETS Real estate and other repossessed assets are assets acquired in partial or total forgiveness of debt. These assets are carried at the lower of cost, which is determined by fair value at date of foreclosure, or current fair value. Income generated by these assets is recognized as received, and operating expenses are recognized as incurred. PREMISES AND EQUIPMENT Premises and equipment are carried at cost including capitalized interest, when appropriate, less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets or, for leasehold improvements, over the shorter of the estimated useful lives or remaining lease terms. Repair and maintenance costs are charged to expense as incurred. MORTGAGE SERVICING RIGHTS Capitalized mortgage servicing rights are carried at the lower of amortized cost, adjusted for the effect of hedging activities, or fair value. Amortization is determined in proportion to the projected cash flows over the estimated lives of the servicing portfolios. The actual cash flows are dependent upon the prepayment of the mortgage loans and may differ significantly from the estimates. Fair value is determined by discounting the estimated cash flows of servicing revenue, less projected servicing costs, using risk-adjusted rates, which is the assumed market rate for these instruments. Prepayment assumptions were based on industry consensus provided by independent reporting sources in 2001 and 2000. During 2002, BOK Financial changed the source of prepayment assumptions used to value its mortgage servicing rights. Industry consensus prepayment speeds were not updated frequently enough to reflect rapidly changing market conditions that existed in 2002. A separate, third-party model that is generally accepted by the financial markets is now used to estimate prepayment speeds. This model is updated daily for changes in market conditions. Changes in current interest rates may significantly affect these assumptions by changing loan refinancing activity. Amortized cost and fair value are stratified by interest rate and loan type. A valuation allowance is provided when the net amortized cost of any strata exceeds the calculated fair value. Originated mortgage servicing rights are recognized when either mortgage loans are originated pursuant to an existing plan for sale or, if no such plan exists, when the mortgage loans are sold. Substantially all fixed rate mortgage loans originated by BOK Financial are sold under existing commitments. The right to service mortgage loans sold is generally retained. The fair value of the originated servicing rights is determined at closing based upon current market rates. HEDGING OF MORTGAGE SERVICING RIGHTS During 1998 through the first quarter of 2000, BOK Financial entered into futures contracts and call and put options on futures contracts to hedge against the risk of loss on mortgage servicing rights due to accelerated loan prepayments during periods of falling interest rates. Contracts on underlying securities that were expected to have a similar duration to the mortgage servicing portfolio, such as ten-year U.S. Treasury notes, were used for these hedges. The combination of contracts selected was expected to achieve a high degree of correlation between changes in the fair value of the mortgage servicing rights and changes in the market value of the contracts. These contracts were designated as hedges on the trade date. Both unrealized and realized gains and losses on futures contracts and option contracts were deferred as part of the capitalized mortgage servicing rights. These deferred gains and losses are amortized over the estimated life of the loan servicing portfolio. This derivatives-based hedging program was discontinued in 2000. BOK Financial currently acquires mortgage-backed securities and U.S. government agency debentures when the prepayment risk exceeds certain levels to serve as an economic hedge against changes in value of its portfolio of mortgage servicing rights. The fair value of these securities is expected to vary inversely to the value of the mortgage servicing rights. These securities are classified as available for sale and carried at fair value. Changes in fair value are recorded, net of deferred income taxes, as other accumulated comprehensive income (loss) in shareholders' equity. Management may sell these securities and recognize gains when necessary to offset losses on the mortgage servicing rights. FEDERAL AND STATE INCOME TAXES BOK Financial utilizes the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statement and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax law or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. BOK Financial and its subsidiaries file consolidated tax returns. The subsidiaries provide for income taxes on a separate return basis, and remit to BOK Financial amounts determined to be currently payable. EMPLOYEE BENEFIT PLANS BOK Financial sponsors various plans, including a defined benefit pension plan ("Pension Plan"), qualified profit sharing plans ("Thrift Plans"), and employee healthcare plans. Employer contributions to the Thrift Plans, which match employee contributions subject to percentage and years of service limits, are expensed when incurred. Pension Plan costs, which are based upon actuarial computations of current costs, are expensed annually. Unrecognized prior service cost and net gains or losses are amortized on a straight-line basis over the estimated remaining lives of the participants. BOK Financial recognizes the expense of health care benefits on the accrual method. Employer contributions to the Pension Plan and various health care plans are in accordance with Federal income tax regulations. 39 EXECUTIVE BENEFIT PLANS BOK Financial has elected to follow Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and related interpretations in accounting for its employee stock options. Under APB 25, because the exercise price of employee stock options equals the market price of the underlying stock options on the date of grant, no compensation expense is recorded. BOK Financial has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," ("FAS 123"), as amended by Statements of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("FAS 148"). The following table represents the required pro forma disclosures for options granted subsequent to December 31, 1994 (in thousands, except per share data): 2002 2001 2000 --------- ---------- ----------- Net income as reported $150,409 $116,302 $100,140 Stock-based employee compensation, net of tax, reported in current net income - - - Stock-based employee compensation, net of tax, as if fair value method were applied 2,538 1,863 1,475 --------- ---------- ----------- Pro forma net income $147,871 $114,439 $98,665 ========= ========== =========== Earnings per share as reported: Basic $2.79 $2.18 $1.89 Diluted 2.48 1.95 1.69 Pro forma earnings per share: Basic $2.74 $2.15 $1.86 Diluted 2.44 1.92 1.67 1 Because Statement 123 is applicable only to options granted subsequent to December 31, 1994, its pro forma effect will not be fully reflected until 2003. FIDUCIARY SERVICES Fees and commissions on approximately $17 billion of assets managed by BOK Financial under various fiduciary arrangements are recognized on the accrual method. EFFECT OF PENDING STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS During 2002, the Financial Accounting Standards Board ("FASB") issued several statements and interpretations that may have an effect on BOK Financial's accounting policies and financial reporting in future periods. These included Statements of Financial Accounting Standards No. 146, "Obligations Associated with Disposal Activities" ("FAS 146") and FAS 148 and Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FAS 146 addresses the accounting and reporting for costs associated with exit or disposal for Certain Employee Termination Benefits and Other Costs to Exit an Activity ("EITF 94-3"). Under the provisions of FAS 146, a liability for costs associated with an exit or disposal activity should be initially recognized when it is incurred and measured at fair value. The main effect of FAS 146 will be on the timing of recognition of such costs. They will be recognized as liabilities in periods following a commitment to a plan of exit or disposal rather than at the date of commitment as required under EITF 94-3. FAS 146 is not expected to have a significant impact on BOK Financial. FAS 148 provides alternative methods of transition to the fair value accounting method for stock-based employee compensation as required by FAS 123. FAS 148 also amends the disclosure requirements of FAS 123 to include additional details of the effects of FAS 123 on both annual and interim financial statements. These additional disclosures are required regardless of whether a company accounts for stock-based compensation using the fair value method or the intrinsic value method. FAS 148 provides three transition methods for companies that adopt the fair value accounting method defined in FAS 123, the prospective method, the retroactive restatement method and the modified prospective method. The prospective method would apply to awards granted, modified or settled after the beginning of the fiscal year in which FAS 123 is first adopted. This transition method is only available if BOK Financial adopts fair value accounting in 2003. The retroactive restatement method requires a restatement of all periods presented to reflect the fair value accounting method for all awards granted, modified or settled after 1994. The results of this transition method are consistent with the pro forma disclosures currently required by FAS 123. The modified prospective method recognizes compensation cost from the beginning of the fiscal year in which the recognition provisions are first adopted as if the fair value method of accounting had been used for awards granted, modified or settled after 1994. This method would affect compensation costs in the year adopted, but would not restate prior periods. FAS 148 does not require adoption of the fair value method of accounting for stock-based compensation provided by FAS 123. FIN 45 requires guarantees that meet certain specified definitions to be initially recorded at fair value and requires expanded disclosure of all guarantees. The recognition provisions of FIN 45 are applicable to all guarantees issued or modified after December 31, 2002; the disclosures applicable to existing guarantees have been provided in Note 15 to the Consolidated Financial Statements. FIN 45, which will primarily be applicable to standby letters of credit issued by BOK Financial's subsidiary banks, is not expected to have a material effect on the results of operations. 40 (2) ACQUISITIONS On October 25, 2002, BOK Financial acquired Bank of Tanglewood, N.A. for 1,711,127 shares of common stock and 292,225 options to purchase shares, valued at approximately $65 million. The options to purchase shares were issued at an average exercise price of $7.73 and expire February 25, 2003. In addition, BOK Financial agreed to a price guarantee on 50 percent of the stock issued under this agreement. The price guarantee resulted in a contingent obligation to issue additional shares or cash over the next five years based on certain predetermined market valuations of its common stock. The value of the contingent price guarantee based on the Black-Scholes Option Pricing Model, was $3 million, which was included in the total purchase price. More discussion of this contingency is at Note 16. On January 11, 2001, BOK Financial paid $91 million to acquire all outstanding common shares of CNBT Bancshares, Inc. and its subsidiary Citizen National Bank of Texas in Houston (collectively "CNBT"). These transactions were accounted for by the purchase method of accounting. Aggregate allocation of the purchase price to the net assets acquired were as follows (in thousands): 2002 2001 ----------- ----------- Cash and cash equivalents $ 46,295 $ 17,973 Securities 62,484 226,922 Loans 132,278 184,461 Less reserve for loan losses 1,364 2,300 ----------- ----------- Loans, net 130,914 182,161 Core deposit premium 3,718 13,715 Other assets 8,568 15,125 ----------- ----------- Total assets acquired 251,979 455,896 Deposits: Noninterest bearing 49,213 78,482 Interest bearing 173,887 287,305 ----------- ----------- Total deposits 223,100 365,787 Borrowed funds 8,610 41,000 Other liabilities 2,736 7,575 ----------- ----------- Net assets acquired 17,533 41,534 Less purchase price 67,745 90,963 ----------- ----------- Goodwill $ 50,212 $ 49,429 ----------- ----------- The following unaudited condensed consolidated pro forma statement of earnings for BOK Financial presents the effects on income had the purchase acquisitions described above occurred at the beginning of 2000: Condensed Consolidated Pro Forma Statement of Earnings (In Thousands Except Per Share Data) (Unaudited) Year ended December 31, --------------------------------- 2002 2001 2000 ----------- ---------- ---------- Net interest revenue $376,478 $334,821 $289,193 Provision for loan losses 33,885 37,882 19,068 ----------------------------- ----------- ---------- ---------- Net interest revenue after provision for loan losses 342,593 296,939 270,125 Other operating revenue 324,785 260,304 202,482 Other operating expense 434,378 374,620 317,837 ----------------------------- ----------- ---------- ---------- Income before taxes 233,000 182,623 154,770 Federal and state income tax 82,412 64,533 49,084 Net effect of change in accounting principle - 236 - ----------------------------- ----------- ---------- ---------- Net income $150,588 $118,326 $105,686 ----------------------------- ----------- ---------- ---------- Earnings per share: Basic net income $ 2.72 $ 2.15 $ 1.93 Diluted net income 2.41 1.91 1.72 ----------------------------- ----------- ---------- ---------- Average shares: Basic 54,767 54,262 53,945 Diluted 62,495 61,959 61,332 ----------------------------- ----------- ---------- ---------- 41 (3) SECURITIES INVESTMENT SECURITIES The amortized cost and fair values of investment securities are as follows (in thousands): December 31, ---------------------------------------------------------------------------------------------- 2002 2001 ----------------------------------------------- ---------------------------------------------- Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized ------------------------ ----------------------- Cost Value Gain Loss Cost Value Gain Loss ---------------------------------------------------------------------------------------------- U.S. Treasury $ - $ - $ - $ - $ 7,982 $ 7,981 $ - $ (1) Municipal and other tax-exempt 191,305 195,266 4,837 (876) 222,195 223,487 2,634 (1,342) Mortgage-backed U.S. agency Securities 4,380 4,618 238 - 7,381 7,620 240 (1) Other debt securities 2,265 2,269 5 (1) 3,555 3,540 - (15) ---------------------------------------------------------------------------------------------- Total $197,950 $202,153 $5,080 $(877) $241,113 $242,628 $2,874 $(1,359) ----------------------------------------------------------------------------------------------
The amortized cost and fair values of investment securities at December 31, 2002, by contractual maturity, are as shown in the following table (dollars in thousands): Weighted Less than One to Five to Over Average One Year Five Years Ten Years Ten Years Total Maturity (4) ------------ -------------- ------------- ------------- ------------- ------------- Municipal and other tax-exempt: Amortized cost $47,250 $ 114,752 $28,994 $309 $ 191,305 2.80 Fair value 47,417 117,699 29,831 319 195,266 Nominal yield (1) 6.90 6.68 7.43 7.33 6.85 Other debt securities: Amortized cost $ 955 $ 1,160 $ 125 $ 25 $ 2,265 1.87 Fair value 955 1,164 126 24 2,269 Nominal yield 2.13 6.77 7.00 7.00 4.83 ------------ -------------- ------------- ------------- ------------- ------------- Total fixed maturity securities: Amortized cost $48,205 $ 115,912 $29,119 $ 334 $ 193,570 2.79 Fair value 48,372 118,863 29,957 343 197,535 Nominal yield 6.81 6.68 7.43 7.31 6.82 ------------ -------------- ------------- ------------- Mortgage-backed securities: Amortized cost $ 4,380 (2) Fair value 4,618 Nominal yield (3) 6.62 ------------- Total investment securities: Amortized cost $ 197,950 Fair value 202,153 Nominal yield 6.82 ------------- 1 Calculated on a taxable equivalent basis using a 39% effective tax rate. 2 The average expected lives of mortgage-backed securities were 1.75 years based upon current prepayment assumptions. 3 The nominal yield on mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. 4 Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty.
42 AVAILABLE FOR SALE SECURITIES The amortized cost and fair value of available for sale securities are as follows (in thousands): December 31, ---------------------------------------------------------------------------------------------- 2002 2001 ---------------------------------------------- ----------------------------------------------- Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized ---------------------- ---------------------- Cost Value Gain Loss Cost Value Gain Loss ---------------------------------------------------------------------------------------------- U.S. Treasury $ 31,013 $ 32,233 $ 1,220 $ - $ 34,538 $ 35,197 $ 659 $ - Municipal and other tax-exempt 11,465 11,511 56 (10) 4,262 4,299 55 (18) Mortgage-backed securities: U. S. agencies 3,005,698 3,067,148 61,589 (139) 2,637,636 2,638,425 26,660 (25,871) Other 727,088 732,542 5,469 (15) 669,057 673,737 6,270 (1,590) ------------------------------------------------------------------------------------------------------------------------------ Total mortgage-backed securities 3,732,786 3,799,690 67,058 (154) 3,306,693 3,312,162 32,930 (27,461) ------------------------------------------------------------------------------ ----------------------------------------------- Other debt securities 138 139 1 - 536 538 2 - Equity securities and mutual 87,434 89,770 2,648 (312) 93,918 97,353 3,688 (253) funds ------------------------------------------------------------------------------------------------------------------------------ Total $3,862,836 $3,933,343 $ 70,983 $(476) $3,439,947 $3,449,549 $37,334 $(27,732) ------------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of available for sale securities at December 31, 2002, by contractual maturity, are as shown in the following table (dollars in thousands): Weighted Less than One to Five to Over Average One Year Five Years Ten Years Ten Years Total Maturity (5) ------------- ------------- ------------- ------------- --------------- ----------- U.S. Treasuries: Amortized cost $ - $ 31,013 $ - $ - $ 31,013 1.90 Fair value - 32,233 - - 32,233 Nominal yield - 3.86 - - 3.86 Municipal and other tax-exempt: Amortized cost $ 988 $ 6,148 $ 2,744 $1,585 $ 11,465 5.39 Fair value 983 6,177 2,766 1,585 11,511 Nominal yield (1) 7.72 6.36 4.51 12.69 7.52 Other debt securities: Amortized cost $ 1 $ 46 $ 91 $ - $ 138 6.53 Fair value 1 46 92 - 139 Nominal yield (1) 5.00 4.78 5.84 - 5.48 ------------- ------------- ------------- ------------- --------------- ----------- Total fixed maturity securities: Amortized cost $ 989 $ 37,207 $ 2,835 $1,585 $ 42,616 2.85 Fair value 984 38,456 2,858 1,585 43,883 Nominal yield 7.72 4.28 4.55 12.69 4.85 ------------- ------------- ------------- ------------- Mortgage-backed securities: Amortized cost $3,732,786 (2) Fair value 3,799,690 Nominal yield (4) 5.21 --------------- Equity securities and mutual funds: Amortized cost $ 87,434 (3) Fair value 89,770 Nominal yield 3.21 --------------- Total available-for-sale securities: Amortized cost $3,862,836 Fair value 3,933,343 Nominal yield 5.16 --------------- 1 Calculated on a taxable equivalent basis using a 39% effective tax rate. 2 The average expected lives of mortgage-backed securities were 2.03 years based upon current prepayment assumptions. 3 Primarily common stock and preferred stock of U.S. Government agencies with no stated maturity. 4 The nominal yield on mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. 5 Expected maturities may differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without penalty. At December 31, 2001, there were outstanding commitments to buy $277 million securities that have not yet been issued.
43 Sales of available for sale securities resulted in gains and losses as follows (in thousands): 2002 2001 2000 ---------- ----------- ---------- Proceeds $6,873,320 $9,142,248 $1,677,078 Gross realized gains 85,346 55,418 6,969 Gross realized losses 26,642 24,778 4,910 Related federal and state income tax expense (benefit) 20,781 10,724 664 ---------------------------- ---------- ----------- ---------- In addition to securities that have been reclassified as pledged to creditors, securities with an amortized cost of $2.0 billion and $1.9 billion at December 31, 2002 and 2001 have been pledged as collateral for repurchase agreements, public and trust funds on deposit and for other purposes as required by law. The secured parties do not have the right to sell or repledge these securities. (4) DERIVATIVES INTEREST RATE SWAPS BOK Financial uses interest rate swaps to manage its interest rate sensitivity. During 2002 and 2001, net interest revenue was increased by $12.7 million and $4.0 million, respectively, from the settlements of amounts receivable or payable on interest rate swaps. Interest Rate Swaps (dollars in thousands): Notional Pay Receive Positive Negative Amount Rate Rate Fair Value Fair Value -------------------------------------------------------------------------------------- Expiration: 2004 $71,869 1.38(1) - 4.22 1.38(1) - 7.36 $ 3,962 $ (419) 2006 222,585 1.38(1) - 5.85 1.38(1) - 5.85 5,021 (1,667) 2007 275,000 1.38(1) 4.09 - 4.51 6,756 - 2009 5,466 1.38(1) - 4.75 1.38(1) - 4.75 355 (355) 2011 43,724 5.21 - 5.51 1.38(1) - (3,620) ------------------------------------ $16,094 $(6,061) ------------------------------------ 1 Rates are variable based on LIBOR and reset monthly, quarterly or semiannually.
Scheduled repricing periods for the swaps are as follows (notional value in thousands): 31-90 91-365 Over Days Days 1 Year Total ------------------------------------------------------- Pay floating $(541,733) $ - $ - $(541,733) Receive fixed - - 541,733 541,733 Pay fixed - - (76,911) (76,911) Receive floating 76,911 - - 76,911 ---------------------------------------------------------------------------- Total $(464,822) $ - $464,822 $ - ---------------------------------------------------------------------------- FORWARD SALES CONTRACTS BOK Financial uses mortgage-backed securities forward sales contracts to manage exposure to interest rate fluctuations on mortgage loans held for sale and mortgage loan commitments. At December 31, 2002, the notional amount of forward sales contracts totaled $178 million, with a negative fair value of $2.1 million. Additional discussion of these contracts can be found in Note 8. ENERGY DERIVATIVES BOK Financial manages a program that permits its energy-producing customers to hedge against price fluctuations and take positions through energy option and swap contracts. These contracts are executed between BOk and its customers. Offsetting contracts are executed between BOk and selected energy dealers. 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. This program creates credit risk for potential amounts due to BOk from the customers and dealers. Customer credit risk is monitored through existing lending policies and procedures. The value of energy production is evaluated across a range of prices to determine a maximum exposure BOk is willing to accept individually to any one customer. Dealer credit risk is monitored through existing policies and procedures used to evaluate counterparty risk. This evaluation considers all relationships between BOK Financial and each counterparty. Individual limits are established by management and approved by the Risk Oversight Committee of the Board of Directors. BOK Financial carries the energy contracts at fair value in other assets and other liabilities. At December 31, 2002, other assets included $71 million and other liabilities included $71 million of energy contracts. At December 31, 2001, other assets included $28 million and other liabilities included $29 million of energy contracts. Changes in fair value are recorded in income. Closing prices on the New York Mercantile Exchange and values provided by energy dealers are used as the basis to determine fair values of contracts with both dealers. 44 (5) LOANS Significant components of the loan portfolio are as follows (in thousands): December 31, ----------------------------------------------------------------------------------------------- 2002 2001 ------------------------------------------------ ---------------------------------------------- Fixed Variable Non- Fixed Variable Non- Rate Rate accrual Total Rate Rate accrual Total ------------------------------------------------ ---------------------------------------------- Commercial $531,456 $3,419,228 $39,114 $3,989,798 $739,532 $2,900,143 $35,075 $3,674,750 Commercial real estate 306,796 1,126,347 3,395 1,435,838 411,453 926,466 3,856 1,341,775 Residential mortgage 749,573 174,236 5,950 929,759 575,536 123,404 4,140 703,080 Residential mortgage - held 133,421 - - 133,421 166,093 - - 166,093 for sale Consumer 276,278 134,493 1,396 412,167 294,099 115,112 469 409,680 ----------------------------------------------------------------------------------------------------------------------------- Total $1,996,824 $4,854,304 $49,855 $6,900,983 $2,186,713 $4,065,125 $43,540 $6,295,378 ----------------------------------------------------------------------------------------------------------------------------- Loans past due (90 days) $ 8,117 $ 8,108 ----------------------------------------------------------------------------------------------------------------------------- Foregone interest on nonaccrual loans $ 4,770 $ 5,163 -----------------------------------------------------------------------------------------------------------------------------
The majority of the commercial and consumer loan portfolios and approximately 74% of the residential mortgage loan portfolio (excluding loans held for sale) are loans to businesses and individuals in Oklahoma. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. Within the commercial loan classification, loans to energy-related businesses total $1.1 billion, or 16% of total loans. Other notable segments include wholesale/retail, $627 million; manufacturing, $502 million; agriculture, $187 million, which includes $163 million loans to the cattle industry; and services, $1.2 billion, which include nursing homes of $218 million, hotels of $68 million and healthcare of $114 million. Approximately 43% of commercial real estate loans are secured by properties located in Oklahoma, primarily in the Tulsa or Oklahoma City metropolitan areas. An additional 30% of commercial real estate loans are secured by property located in Texas. The major components of these properties are multifamily residences, $307 million; construction and land development, $356 million; retail facilities, $195 million; and office buildings, $292 million. RELATED PARTY Included in loans at December 31 are loans to executive officers, directors or principal shareholders of BOK Financial, as defined in Regulation S-X of the Securities and Exchange Commission. Such loans have been made on substantially the same terms as those prevailing at the time for loans to other customers in comparable transactions. Information relating to loans to executive officers, directors or principal shareholders is summarized as follows (in thousands): 2002 2001 ------------ ------------ Beginning balance $ 90,712 $96,621 Advances 35,992 12,436 Payments (2,106) (17,602) Adjustments (30) (743) ------------------------------- ------------ ------------ Ending balance $124,568 $90,712 ------------------------------- ------------ ------------ Adjustments are primarily due to certain individuals being included for the first time or no longer being included as an executive officer or director of BOK Financial. RESERVE FOR LOAN LOSS The activity in the reserve for loan losses is summarized as follows (in thousands): 2002 2001 2000 -------------------------------- Beginning balance $101,905 $ 82,655 $76,234 Provision for loan losses 33,730 37,610 17,204 Loans charged off (25,905) (25,248) (14,801) Recoveries 4,976 4,588 4,018 Addition due to 1,364 2,300 - acquisitions ----------------------------------------------------------- Ending balance $116,070 $101,905 $82,655 ----------------------------------------------------------- IMPAIRED LOANS Investments in loans considered to be impaired under FAS 114 were as follows (in thousands): December 31, -------------------------------- 2002 2001 2000 -------------------------------- Investment in loans impaired under FAS 114 (all of which were on a nonaccrual basis) $44,912 $39,848 $37,822 Loans with specific reserves for loss 4,685 10,723 19,789 Specific reserve balance 2,269 2,509 7,991 No specific related reserve for loss 40,227 29,125 18,033 Average recorded investment in impaired loans 41,828 44,474 27,750 Interest income recognized on impaired loans during 2002, 2001 and 2000 was not significant. 45 (6) PREMISES AND EQUIPMENT Premises and equipment at December 31 are summarized as follows (in thousands): December 31, ------------------------ 2002 2001 ----------- ------------ Land $ 32,381 $ 28,212 Buildings and improvements 115,399 97,812 Software 13,702 15,457 Furniture and equipment 84,578 101,138 ------------------------------------ ----------- ------------ Subtotal 246,060 242,619 Less accumulated 94,345 101,194 depreciation ------------------------------------ ----------- ------------ Total $151,715 $141,425 ------------------------------------ ----------- ------------ Depreciation expense of premises and equipment was $20.5 million, $21.0 million and $17.3 million for the years ended December 31, 2002, 2001 and 2000, respectively. (7) INTANGIBLE ASSETS The following table presents the original cost and accumulated amortization of intangible assets (in thousands): December 31, ----------------------- 2002 2001 ----------- ----------- Core deposit premiums $ 75,668 $ 71,950 Less accumulated amortization 56,555 49,418 ------------------------------------- ----------- ----------- Net core deposit premiums 19,113 22,532 Other identifiable intangible assets 3,346 3,346 Less accumulated amortization 2,613 2,111 ------------------------------------- ----------- ----------- Net other identifiable intangible assets 733 1,235 Goodwill 231,157 181,444 Less accumulated amortization 53,135 53,135 ------------------------------------- ----------- ----------- Net goodwill 178,022 128,309 ------------------------------------- ----------- ----------- Total intangible assets, net $197,868 $152,076 ------------------------------------- ----------- ----------- The net amortized cost of intangible assets at December 31, 2002 is assigned to reporting units as follows (in thousands): Core deposit premiums: Bank of Albuquerque $ 3,181 Bank of Texas 15,932 ----------------------------------- ----------- $ 19,113 ----------------------------------- ----------- Other identifiable intangible assets: Bank of Oklahoma $ 536 BOSC, Inc. 197 ----------------------------------- ----------- $ 733 ----------------------------------- ----------- Goodwill: Bank of Oklahoma $ 8,173 Bank of Texas 154,576 Bank of Albuquerque 15,273 ----------------------------------- ----------- $178,022 ----------------------------------- ----------- Expected amortization expense for intangible assets that will continue to be amortized under FAS 142, as amended by FAS 147, (in thousands): Core Other Deposit Identified Premiums Intangible Assets Total -------------- ----------------- ------------- 2003 $6,470 $367 $ 6,837 2004 4,986 169 5,155 2005 3,387 169 3,556 2006 2,053 28 2,081 2007 1,524 - 1,524 Thereafter 693 - 693 ---------------- -------------- ----------------- ------------- $19,113 $733 $19,846 ---------------- -------------- ----------------- ------------- 46 (8) MORTGAGE BANKING ACTIVITIES BOK Financial engages in mortgage banking activities through the BOk Mortgage Division of BOk. Residential mortgage loans held for sale totaled $133 million and $166 million and outstanding mortgage loan commitments totaled $323 million and $261 million at December 31, 2002 and 2001, respectively. Mortgage loan commitments are generally outstanding for 60 to 90 days and are subject to both credit and interest rate risk. Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Exposure to interest rate fluctuations is partially hedged through the use of mortgage-backed securities forward sales contracts. These contracts set the price for loans that will be delivered in the next 60 to 90 days. At December 31, 2002, BOk owned the rights to service 76,298 mortgage loans with outstanding principal balances of $5.8 billion, including $358 million serviced for BOk, and held related funds of $174 million for investors and borrowers. The weighted average interest rate and remaining term was 7.05% and 265 months, respectively. Mortgage loans sold with recourse totaled $1.8 million at December 31, 2002. At December 31, 2001, BOk owned the rights to service 88,916 mortgage loans with outstanding principal balances of $6.6 billion and held related funds of $177 million for investors and borrowers. The weighted average interest rate and remaining term was 7.30% and 266 months, respectively. The portfolio of mortgage servicing rights exposes BOk to interest rate risk. During periods of falling interest rates, mortgage loan prepayments increase, reducing the value of the mortgage servicing rights. See Note 1 for specific accounting policies for mortgage servicing rights and the related hedges. Activity in capitalized mortgage servicing rights and related valuation allowance during 2002, 2001 and 2000 are as follows (in thousands): Capitalized Mortgage Servicing Rights ------------------------------------- Valuation Hedging Purchased Originated Total Allowance (Gain)/Loss Net ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 1999 $70,409 $33,318 $103,727 $ - $10,407 $114,134 Additions 2,449 11,267 13,716 - - 13,716 Amortization expense (9,497) (4,260) (13,757) - (1,445) (15,202) Provision for impairment - - - (2,900) - (2,900) Realized hedge losses - - - - 4,389 4,389 Unrealized hedge gains - - - - (3,346) (3,346) ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 63,361 40,325 103,686 (2,900) 10,005 110,791 Additions 4,400 22,695 27,095 - - 27,095 Amortization expense (12,705) (9,409) (22,114) - (1,425) (23,539) Provision for impairment - - - (15,551) - (15,551) ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 55,056 53,611 108,667 (18,451) 8,580 98,796 Additions (412) 20,832 20,420 - - 20,420 Amortization expense (17,421) (17,159) (34,580) - (1,425) (36,005) Write-off - (7,435) (7,435) 9,456 (2,021) - Provision for impairment - - - (45,923) - (45,923) ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 200 $37,223 $49,849 $87,072 $(54,918) $5,134 $37,288 ------------------------------------------------------------------------------------------------------------------------- Estimated fair value of mortgage servicing rights at: December 31, 2000 (1) $74,400 $42,125 $116,525 $116,525 December 31, 2001 (1) $53,174 $46,789 $ 99,963 $99,963 December 31, 2002 (1) $17,311 $20,477 $37,788 $37,788 ------------------------------------------------------------------------------------------------------------------------- 1 Excludes approximately, $2 million, $5 million and $7 million at December 31, 2002, 2001 and 2000, respectively, of loan servicing rights on mortgage loans originated prior to the adoption of FAS 122.
Fair value is determined by discounting the projected net cash flows. Significant assumptions are: Discount rate - Risk adjusted rates by loan product, ranging from 8.88% to 22.00%. Prepayment rate - Annual prepayment estimates ranging from 24.78% to 68.07% based upon loan interest rate, original term and loan type. Loan servicing costs - $35 to $50 annually per loan based upon loan type. Stratification of the mortgage loan-servicing portfolio, outstanding principal of loans serviced, and related hedging information by interest rate at December 31, 2002 follows (in thousands): < 6.50% 6.50% - 7.49% 7.50% - 8.49% => 8.50% Total ------------------------------------------------------------------------------- Cost less accumulated amortization $ 19,875 $ 49,334 $ 16,539 $ 1,324 $ 87,072 Deferred hedge losses - 4,025 1,109 - 5,134 ----------------------------------------------------------------------------------------------------------------------------- Adjusted cost $ 19,875 $ 53,359 $ 17,648 $ 1,324 $ 92,206 ----------------------------------------------------------------------------------------------------------------------------- Fair value $ 10,493 $ 19,547 $ 6,426 $ 1,322 $ 37,788 ----------------------------------------------------------------------------------------------------------------------------- Impairment (2) $ 9,548 $ 33,816 $ 11,223 $ 331 $ 54,918 ----------------------------------------------------------------------------------------------------------------------------- Outstanding principal of loans serviced (1) $1,226,990 $2,938,558 $ 878,358 $134,068 $5,177,974 ----------------------------------------------------------------------------------------------------------------------------- 1 Excludes outstanding principal of $358 million for loans serviced for BOk and $218 million of mortgage loans originated prior to FAS 122, for which there are no capitalized mortgage servicing rights. 2 Impairment is determined by both an interest rate and loan type stratification.
47 (9) DEPOSITS Interest expense on deposits is summarized as follows (in thousands): 2002 2001 2000 ----------------------------------- Transaction deposits $ 39,273 $ 49,893 $ 55,019 Savings 1,976 2,281 2,703 Time: Certificates of deposits under 50,036 61,626 56,570 $100,000 Certificates of deposits $100,000 42,291 81,524 81,721 and over Other time deposits 11,890 10,885 11,308 ------------------------------------------------------------ Total time 104,217 154,035 149,599 ------------------------------------------------------------ Total $145,466 $206,209 $207,321 ------------------------------------------------------------ The aggregate amounts of time deposits in denominations of $100,000 or more at December 31, 2002 and 2001 were $2.0 billion and $1.6 billion, respectively. Time deposit maturities are as follows: 2003 - $1.5 billion, 2004 - $370 million, 2005 - $107 million, 2006 - $249 million, 2007 - $946 million, and $100 million thereafter. Interest expense on time deposits during 2002 and 2001 was reduced by the net accrued settlement from interest rate swaps of $11.9 million and $3.1 million, respectively. (10) OTHER BORROWINGS Information relating to other borrowings is summarized as follows (dollars in thousands): December 31 ---------------------------------------------------------------------------------------------- 2002 2001 ---------------------------------------------------------------------------------------------- Maximum Maximum Outstanding Outstanding At Any At Any Balance Rate Month End Balance Rate Month End ---------------------------------------------------------------------------------------------- Parent Company: Revolving, unsecured line $ 85,000 2.17% $ 95,000 $ 95,000 2.77% $ 95,000 Subordinated debenture - - 30,000 30,000 3.86 30,000 Other - - 95 95 6.23 132 -------------- ------------------ Total parent company 85,000 2.17 125,095 3.03 -------------- ------------------ Subsidiary Banks: Funds purchased and repurchase agreements 1,567,686 1.67 1,895,315 1,601,989 1.71 1,949,260 Federal Home Loan Bank advances 973,454 1.48 1,036,387 1,096,194 2.37 1,121,494 Subordinated debenture 155,419 6.19 156,229 156,302 6.15 158,890 Other 29,568 1.49 29,853 29,659 2.14 30,320 -------------- ------------------ Total subsidiary bank 2,726,127 1.86 2,884,144 2.21 -------------- ------------------ Total other borrowings $2,811,127 1.93 $3,009,239 2.28 -------------- ------------------
Aggregate annual repayments of long-term debt at December 31, 2002 are as follows (in thousands): Parent Subsidiary Company Banks --------------------------- 2003 $ - $2,374,164 2004 85,000 179,262 2005 - 1,120 2006 - 4,293 2007 - 2,220 Thereafter - 165,068 --------------------------- Total $85,000 $2,726,127 --------------------------- Borrowings from the Federal Home Loan Bank are used for funding purposes. In accordance with policies of the Federal Home Loan Bank, BOK Financial has granted a blanket pledge of eligible assets (generally unencumbered U.S. Treasury and mortgage-backed securities, 1-4 family loans and multifamily loans) as collateral for these advances. The unused credit available to BOK Financial at December 31, 2002 pursuant to the Federal Home Loan Bank's collateral policies is $340 million. BOK Financial has a revolving, unsecured credit agreement from certain banks at December 31, 2002 of $122.5 million. Interest is based on either the London Interbank Offering Rate ("LIBOR") plus a defined margin that is determined by the principal balance outstanding and BOK Financial's credit rating or a base rate. The base rate is defined as the greater of the daily federal funds rate plus 0.5% or the prime rate. Interest is paid quarterly. Facility fees are paid quarterly on the average daily undrawn commitment at a rate of 0.20% - 0.30% as determined by BOK Financial's current debt rating. This credit agreement includes certain restrictive covenants that limit BOK Financial's ability to borrow additional funds and to pay cash dividends on common stock. These covenants also require BOK Financial and its subsidiaries to maintain minimum capital levels and to exceed minimum net worth ratios. BOK Financial met all of the restrictive covenants at December 31, 2002. 48 In 1997, BOk issued $150 million of 7.125% fixed rate subordinated debentures that mature in 2007. Interest rate swaps were used as a fair value hedge to convert the fixed interest on these debentures to a LIBOR-based floating rate. This required BOk to adjust the carrying value of the subordinated debentures to fair value. In 2001, the interest rate swaps were terminated. The related market value adjustment of the subordinated debenture of $8 million is being recognized over the remaining life of the debt. BOK Financial issued a $30 million, seven year subordinated debenture, bearing interest at LIBOR plus 1.75%, on March 23, 2001 to its principal shareholder George B. Kaiser ("Kaiser"). This debt was paid off in its entirety in November 2002. Funds purchased generally mature within one to ninety days from the transaction date. At December 31, 2002, securities sold under agreements to repurchase totaled $1.0 billion with related accrued interest payable of $473 thousand. Additional information relating to repurchase agreements at December 31, 2002 is as follows (dollars in thousands): Amortized Market Repurchase Average Security Sold/Maturity Cost Value Liability (1) Rate ------------------------------------------------------------------------------- U.S. Agency Securities: Overnight $ 523,460 $ 533,298 $ 382,122 1.07% Term of up to 30 days 39,952 41,574 25,903 1.40 Term of 30 to 90 days 712,815 728,370 618,679 1.37 -------------------------------------------------------------------- Total Agency Securities $1,276,227 $ 1,303,242 $1,026,704 1.26 -------------------------------------------------------------------- 1 BOK Financial maintains control over the securities underlying overnight repurchase agreements and generally transfers control over securities underlying longer-term dealer repurchase agreements to the respective counterparty. (11) FEDERAL AND STATE INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities are as follows (in thousands): December 31, ---------------------- 2002 2001 ---------------------- Deferred tax liabilities: Available for sale securities mark-to-market $27,400 $ 3,600 Pension contributions in excess of book expense 6,900 5,200 Valuation adjustments 13,800 17,200 Mortgage servicing 21,100 23,800 Lease financing 12,800 4,100 Other 9,800 4,000 ------------------------------------------------------------ Total deferred tax liabilities 91,800 57,900 ------------------------------------------------------------ Deferred tax assets: Loan loss reserve 44,100 38,900 Valuation adjustments 29,900 15,700 Deferred book income 15,400 14,500 Other 14,300 11,700 ------------------------------------------------------------ Total deferred tax assets 103,700 80,800 ------------------------------------------------------------ Deferred tax assets in excess of deferred tax liabilities $11,900 $22,900 ------------------------------------------------------------ The Internal Revenue Service closed its examination of 1996 during the first quarter of 2000. As a result of the outcome of this examination, BOK Financial reduced its federal income tax expense by $3.0 million in 2000. The Internal Revenue Service is currently examining the carryback of $30.8 million of capital loss generated in 1999. Such loss was applied against capital gains generated in 1997 and 1998, resulting in a $9.8 million refund. Management expects no material adverse impact on the financial statements as a result of this examination. The significant components of the provision for income taxes attributable to continuing operations for BOK Financial are shown below (in thousands): Years ended December 31, ----------------------------------- 2002 2001 2000 ----------------------------------- Current: Federal $89,879 $69,971 $37,258 State 6,011 4,240 1,112 ----------------------------------------------------------- Total current 95,890 74,211 38,370 ----------------------------------------------------------- Deferred: Federal (11,391) (8,964) 7,833 State (2,077) (1,635) 1,428 ----------------------------------------------------------- Total deferred (13,468) (10,599) 9,261 ----------------------------------------------------------- Total income tax $82,422 $63,612 $47,631 ----------------------------------------------------------- The reconciliations of income attributable to continuing operations computed at the U.S. federal statutory tax rates to income tax expense are as follows (in thousands): Years ended December 31, ------------------------------- 2002 2001 2000 ------------------------------- Amount: Federal statutory tax $81,490 $62,887 $51,720 Tax exempt revenue (3,233) (3,600) (3,250) Effect of state income taxes, net of federal benefit 2,482 2,605 2,540 Intangible amortization 914 3,965 3,144 Utilization of tax credits (937) (800) (600) Reduction of tax accrual - - (3,000) Other, net 1,706 (1,445) (2,923) ------------------------------------------------------------ Total $82,422 $63,612 $47,631 ------------------------------------------------------------ Years ended December 31, ------------------------------- 2002 2001 2000 ------------------------------- Percent of pretax income: Federal statutory rate 35% 35% 35% Tax-exempt revenue (1) (2) (2) Effect of state income taxes, net of federal benefit 1 2 2 Intangible amortization - 2 2 Utilization of tax credits - (1) (1) Reduction of tax accrual - - (2) Other, net - (1) (2) ------------------------------------------------------------- Total 35% 35% 32% ------------------------------------------------------------- 49 (12) EMPLOYEE BENEFITS BOK Financial sponsors a defined benefit Pension Plan for all employees who satisfy certain age and service requirements. The following table presents information regarding this plan (dollars in thousands): December 31, ------------------------- 2002 2001 ------------------------- Change in projected benefit obligation: Projected benefit obligation, at beginning of year $ 24,141 $ 19,837 Service cost 4,016 3,320 Interest cost 1,768 1,527 Actuarial loss 1,995 964 Benefits paid (1,314) (1,507) ------------------------------------------------------------------------------- Projected benefit obligation at end of year $ 30,606 $ 24,141 ------------------------------------------------------------------------------- Change in plan assets: Plan assets at fair value, at beginning of year $ 27,307 $ 26,084 Actual return on plan assets (3,098) (867) Company contributions 8,050 3,597 Benefits paid (1,314) (1,507) ------------------------------------------------------------------------------- Plan assets at fair value at end of year $ 30,945 $ 27,307 ------------------------------------------------------------------------------- Reconciliation of prepaid (accrued) and total amount recognized: Benefit obligation $(30,606) $(24,141) Fair value of assets 30,945 27,307 ------------------------------------------------------------------------------- Funded status of the plan 339 3,166 Unrecognized net loss 16,373 9,149 Unrecognized prior service cost 563 622 ------------------------------------------------------------------------------- Prepaid pension costs $ 17,275 $ 12,937 ------------------------------------------------------------------------------- Components of net periodic benefit costs: Service cost $ 4,016 $ 3,320 Interest cost 1,768 1,527 Expected return on plan assets (2,384) (2,906) Amortization of unrecognized amounts: Net loss 251 - Prior service cost 60 60 ------------------------------------------------------------------------------- Net periodic pension cost $ 3,711 $ 2,001 ------------------------------------------------------------------------------- Weighted-average assumptions as of December 31, 2002: Discount rate 6.75% 7.50% Expected return on plan assets 7.50% 10.00% Rate of compensation increase 5.25% 5.25% Assets of the Pension Plan consist primarily of shares in cash management funds, common stock and bond funds, and guaranteed investment contract funds. Benefits are based on the employee's age and length of service. Employee contributions to the Thrift Plans are matched by BOK Financial up to 5% of base compensation, based upon years of service. Participants may direct the investments of their accounts in a variety of options, including BOK Financial Common Stock. Employer contributions vest over five years. Expenses incurred by BOK Financial for the Thrift Plans totaled $3.1 million, $2.8 million and $2.3 million for 2002, 2001 and 2000, respectively. BOK Financial also sponsors a defined benefit post-retirement employee medical plan, which pays 50 percent of annual medical insurance premiums for retirees who meet certain age and service requirements. Assets of the retiree medical plan consist primarily of shares in a cash management fund. Eligibility for the post-retirement plan is limited to current retirees and certain employees currently age 60 or older at the time the plan was frozen in 1993. Under various performance incentive plans, participating employees may be granted awards based on defined formulas or other criteria. Earnings were charged $32.1 million in 2002, $27.2 million in 2001, and $22.2 million in 2000, for such awards. 50 (13) EXECUTIVE BENEFIT PLANS The Board of Directors of BOK Financial has approved various stock option plans. The number of options awarded and the employees to receive the options are determined by the Chairman of the Board and the Chief Executive Officer, subject to approval of the Board of Directors or a committee thereof. None of these plans have been or are required to be approved by BOK Financial's shareholders. Options awarded under these plans are subject to vesting requirements. Generally, one-seventh of the options awarded vest annually and expire three years after vesting. During 2001, BOK Financial initiated an additional plan which awards options that vest in two years. These options expire 45 days after vesting. The following table presents options outstanding during 2000, 2001 and 2002 under these plans: Weighted- Average Exercise Number Price -------------------------- Options outstanding at December 31, 1999 3,139,411 $14.78 Options awarded 619,910 18.44 Options exercised (236,276) 8.64 Options forfeited (173,703) 15.76 Options expired (872) 7.60 ------------------------------------------------------------ Options outstanding at December 31, 2000 3,348,470 15.84 Options awarded 701,086 29.54 Options exercised (621,586) 12.14 Options forfeited (47,058) 16.55 Options expired (1,026) 17.20 ------------------------------------------------------------ Options outstanding at December 31, 2001 3,379,886 19.30 Options awarded 164,255 33.19 Options exercised (463,712) 14.12 Options forfeited (37,802) 21.10 Options expired (3) 8.15 ------------------------------------------------------------ Options outstanding at December 31, 2002 3,042,624 $20.90 ------------------------------------------------------------ Options vested at December 31, 2002 1,079,187 $16.87 ------------------------------------------------------------ The following table summarizes information concerning currently outstanding and vested options: Options Outstanding Options Vested ----------------------------------------- -------------------- Weighted Average Weighted Weighted Range of Remaining Average Average Exercise Number Contractual Exercise Number Exercise Prices Outstanding Life(years) Price Vested Price -------------------------------------------------------------- $8.54 - 10.28 374,383 2.46 $ 9.43 318,417 $ 9.28 17.15 338,442 3.34 17.15 172,670 17.15 18.43 - 20.18 1,495,987 4.17 19.23 504,725 19.40 29.38 - 33.49 833,812 4.72 30.56 83,375 29.99 Under APB 25 no compensation expense is recognized at the date of grant since the exercise price of BOK Financial's employee stock option equals the market price of the underlying stock on the date of grant. FAS 123, requires disclosure of pro forma information regarding net income and earnings per share as if BOK Financial accounted for employee stock options granted subsequent to December 31, 1994 under the fair value method of the Statement. The fair value of these options was estimated at the date of grant using a Black-Scholes option pricing model with the following weighted-average assumptions: 2002 2001 2000 --------- --------- --------- Average risk-free interest 1.59% 6.04% 5.99% rate Dividend yield None None None Volatility factors .190 .195 .194 Weighted-average expected life 2 years 7 years 7 years The weighted-average fair value of options granted during 2002, 2001 and 2000 was $4.18, $8.65 and $5.98, respectively. The Black-Scholes option valuation model was developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. In addition, option valuation models require the input of highly subjective assumptions including the expected stock price volatility. Because BOK Financial's employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the fair value estimate, in management's opinion, the existing models do not necessarily provide a reliable single measure of the fair value of its employee stock options. For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options' vesting period. Pro forma disclosures are in Note 1 -Significant Accounting Policies. During January 2003, BOK Financial awarded 569,105 options to buy shares at an exercise price of $32.75. One-seventh of the options awarded vest annually and expire three years after vesting. The weighted-average fair value of this grant was $8.37. This award was determined by the Chairman of the Board and CEO, approved by a committee of the Board of Directors and is subject to the approval of the shareholders. The approval of the shareholders is considered a formality since the Board of Directors controls the majority of the voting shares of common stock. 51 (14) COMMITMENTS AND CONTINGENT LIABILITIES In the ordinary course of business, BOK Financial and its subsidiaries are subject to legal actions and complaints. Management believes, based upon the opinion of counsel, that the actions and liability or loss, if any, resulting from the final outcomes of the proceedings will not be material in the aggregate. BOk is obligated under a long-term lease for its bank premises located in downtown Tulsa. The lease term, which began November 1, 1976, is for fifty-seven years with options to terminate in 2013 and 2023. Annual base rent is $3.3 million. BOk subleases portions of its space for annual rents of $406 thousand in 2003, $388 thousand in 2004, $384 thousand in 2005 and $213 thousand in years 2006 and 2007. Net rent expense on this lease was $2.9 million in both 2002 and 2001 and $3.1 million in 2000. Total rent expense for BOK Financial was $12.4 million in 2002, $11.8 million in 2001 and $10.5 million in 2000. At December 31, 2002, the future minimum lease payments for equipment and premises under operating leases were as follows: $11.5 million in 2003, $11.0 million in 2004, $10.3 million in 2005, $9.7 million in 2006, $8.0 million in 2007 and a total of $103.4 million thereafter. BOk and Williams Companies, Inc. severally guaranteed 30 percent and 70 percent, respectively, of the $13 million debt, which matures May 15, 2007, and operating deficit of two parking facilities operated by the Tulsa Parking Authority. Total expenditures related to this guarantee were $373 thousand in 2002, $441 thousand in 2001 and $319 thousand in 2000. The Federal Reserve Bank requires member banks to maintain certain minimum average cash balances. These balances were approximately $283 million for 2002 and $262 million for 2001. (15) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK BOK Financial is a party to financial instruments with off-balance-sheet risk in the normal course of business to meet the financing needs of its customers and to manage interest rate risk. Those financial instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in BOK Financial's Consolidated Balance Sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At December 31, 2002, outstanding commitments totaled $2.9 billion. Since some of the commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. BOK Financial uses the same credit policies in making commitments as it does loans. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the borrower. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Since the credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan commitments, BOK Financial uses the same credit policies in evaluating the creditworthiness of the customer. Additionally, BOK Financial uses the same evaluation process in obtaining collateral on standby letters of credit as it does for loan commitments. The term of these standby letters of credit is defined in each commitment and typically corresponds with the underlying loan commitment. At December 31, 2002, outstanding standby letters of credit totaled $360 million. Commercial letters of credit are used to facilitate customer trade transactions with the drafts being drawn when the underlying transaction is consummated. At December 31, 2002, outstanding commercial letters of credit totaled $4 million. (16) SHAREHOLDERS' EQUITY PREFERRED STOCK One billion shares of preferred stock with a par value of $0.00005 per share are authorized. A single series of 250,000,000 shares designated as Series A Preferred Stock ("Series A Preferred Stock") is currently issued and outstanding. The Series A Preferred Stock has no voting rights except as otherwise provided by Oklahoma corporate law and may be converted into one share of Common Stock for each 38 shares of Series A Preferred Stock at the option of the holder. Dividends are cumulative at an annual rate of ten percent of the $0.06 per share liquidation preference value when declared and are payable in cash. Aggregate liquidation preference is $15 million. During 2002, 2001 and 2000, 47,961 shares, 72,141 shares and 88,628 shares, respectively, of BOK Financial common stock were issued in payment of dividends on the Series A Preferred Stock in lieu of cash by mutual agreement of BOK Financial and the holders of the Series A Preferred Stock. These shares were valued at $1.5 million in 2002, 2001, 2000, based on average market price, as defined, for a 65 business day period preceding declaration. Kaiser owns substantially all Series A Preferred Stock. Various officers own 125 nonvoting units in an entity owned and consolidated by BOk. These units are eligible for an annual, cumulative distribution of $8 per unit and have a preferred value upon liquidation of $100 per unit. 52 COMMON STOCK Common stock consists of 2.5 billion authorized shares with a $0.00006 par value. Holders of common shares are entitled to one vote per share at the election of the Board of Directors and on any question arising at any shareholders' meeting and to receive dividends when and as declared. No common stock dividends can be paid unless all accrued dividends on the Series A Preferred Stock have been paid. The present policy of BOK Financial is to retain earnings for capital and future growth, and management has no current plans to recommend payment of cash dividends on common stock. Additionally, regulations restrict the ability of national banks and bank holding companies to pay dividends, and BOK Financial's credit agreement restricts the payment of dividends by the holding company. During 2002 and 2001, 3% dividends payable in shares of BOK Financial common stock were declared and paid. The shares issued were valued at $52 million and $35 million, respectively, based on the average closing bid/ask prices on the day preceding declaration. No common stock dividends were paid in 2000. Per share data has been restated to reflect these stock dividends. Presently, management plans to recommend continued payment of an annual dividend in shares of common stock. On October 25, 2002, BOK Financial issued 1,711,127 shares of common stock and 292,225 options to purchase shares, with a fair value at the issuance date of $65 million for its purchase of Bank of Tanglewood. In addition, BOK Financial agreed to a limited price guarantee on a portion of the shares issued in this purchase. The fair value of this price guarantee, estimated to be $3 million based upon the Black-Sholes Option pricing model, was included in the purchase price of Bank of Tanglewood (see Note 2). Pursuant to this guarantee, any holder of BOK Financial common shares issued in this acquisition may annually make a claim for the excess of the guaranteed price and the actual sales price of any shares sold during a 60-day period after each of the first five anniversary dates after October 25, 2002. The maximum annual number of shares subject to this guarantee is 198,010. The guaranteed price for each anniversary period is $34.81 for 2003, $37.38 for 2004, $39.96 for 2005, $42.54 for 2006 and $45.12 for 2007. The price guarantee is nontransferable and noncumulative. BOK Financial may elect, in its sole discretion, to issue additional shares of common stock to satisfy any obligation under the price guarantee or to pay cash. The maximum aggregate number of common shares that may be issued to satisfy any price guarantee obligations is 10 million. If, as of any benchmark date, BOK Financial has already issued 10 million shares, BOK Financial is not obligated to make any further benchmark payments. BOK Financial's ability to pay cash to satisfy any price guarantee obligations is limited by applicable bank holding company and bank capital and dividend regulations. SUBSIDIARY BANKS The amounts of dividends that BOK Financial's subsidiary banks can declare and the amounts of loans the subsidiary banks can extend to affiliates are limited by various federal and state banking regulations. Generally, dividends declared during a calendar year are limited to net profits, as defined, for the year plus retained profits for the preceding two years. The amounts of dividends are further restricted by minimum capital requirements. Pursuant to the most restrictive of the regulations at December 31, 2002, BOK Financial's subsidiary banks could declare dividends up to $177 million without prior regulatory approval. The subsidiary banks declared and paid dividends of $40 million in 2002, $92 million in 2001 and $8 million in 2000. Loans to a single affiliate may not exceed 10.0% and loans to all affiliates may not exceed 20.0% of unimpaired capital and surplus, as defined. Additionally, loans to affiliates must be fully secured. As of December 31, 2002 and 2001, these loans totaled $10 million and $16 million, respectively. None of the affiliate loans in 2002 were to consolidated entities. Total loan commitments to affiliates at December 31, 2002 were $95 million. REGULATORY CAPITAL BOK Financial and its banking subsidiaries are subject to various capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory, and additional discretionary actions by regulators that could have a material effect on BOK Financial's operations. These capital requirements include quantitative measures of assets, liabilities and certain off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. For a banking institution to qualify as well capitalized, its Tier I, Total and Leverage capital ratios must be at least 6%, 10% and 5%, respectively. Tier I capital consists primarily of common stockholders' equity, excluding unrealized gains or losses on available for sale securities, less goodwill, core deposit premiums and certain other intangible assets. As directed by the Federal Reserve Bank, Tier I capital excludes $35 million, the combined value of common shares issued subject to the market value protection program and the value of the market value guarantee. These values will be restored to Tier I capital as the market price guarantee expires. Total capital consists primarily of Tier I capital plus preferred stock, subordinated debt and reserves for loan losses, subject to certain limitations. All of BOK Financial's banking subsidiaries exceeded the regulatory definition of well capitalized. 53 December 31, --------------------------------------------------------- 2002 2001 --------------------------- ----------------------------- Amount Ratio Amount Ratio --------------------------- ----------------------------- (Dollars in thousands) Total Capital (to Risk Weighted Assets): Consolidated $1,083,244 11.95% $959,703 11.56% BOk 864,519 11.91 769,031 11.39 Bank of Texas 199,659 12.00 156,380 12.27 Bank of Albuquerque 81,458 16.59 70,969 15.42 Bank of Arkansas 14,079 18.08 12,824 17.29 Tier I Capital (to Risk Weighted Assets): Consolidated $ 813,845 8.98% $670,600 8.08% BOk 624,968 8.61 536,267 7.94 Bank of Texas 178,832 10.75 140,421 11.02 Bank of Albuquerque 75,310 15.34 66,465 14.44 Bank of Arkansas 13,099 16.82 11,886 16.03 Tier I Capital (to Average Assets): Consolidated $ 813,845 6.88% $670,600 6.38% BOk 624,968 6.39 536,267 6.23 Bank of Texas 178,832 8.43 140,421 8.28 Bank of Albuquerque 75,310 6.48 66,465 6.35 Bank of Arkansas 13,099 6.95 11,886 8.99
(17) Earnings Per Share The following table presents the computation of basic and diluted earnings per share (dollars in thousands except per share data): Years ended December 31, -------------------------------------------- 2002 2001 2000 -------------------------------------------- Numerator: Net income $ 150,409 $ 116,302 $ 100,140 Preferred stock dividends (1,500) (1,500) (1,500) --------------------------------------------------------------------------------------------------------------------- Numerator for basic earnings per share - income available to common stockholders 148,909 114,802 98,640 --------------------------------------------------------------------------------------------------------------------- Effect of dilutive securities: Preferred stock dividends 1,500 1,500 1,500 --------------------------------------------------------------------------------------------------------------------- Numerator for diluted earnings per share - income available to common stockholders after assumed conversion $ 150,409 $ 116,302 $ 100,140 --------------------------------------------------------------------------------------------------------------------- Denominator: Denominator for basic earnings per share -weighted average shares 53,341,294 52,550,525 52,234,195 Effect of dilutive securities: Employee stock options (1) 729,219 649,978 339,430 Convertible preferred stock 6,523,861 6,523,861 6,523,861 Tanglewood market value guarantee (see Note 16) 42,489 - - --------------------------------------------------------------------------------------------------------------------- Dilutive potential common shares 7,295,569 7,173,839 6,863,291 --------------------------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 60,636,863 59,724,364 59,097,486 --------------------------------------------------------------------------------------------------------------------- Basic earnings per share $2.79 $2.18 $1.89 --------------------------------------------------------------------------------------------------------------------- Diluted earnings per share $2.48 $1.95 $1.69 --------------------------------------------------------------------------------------------------------------------- 1 Excludes employee stock options with exercise price 81,266 597,730 1,710,477 greater than current market price
54 (18) REPORTABLE SEGMENTS BOK Financial operates four principal lines of business under its Bank of Oklahoma franchise: corporate banking, consumer banking, mortgage banking and trust services. It also operates a fifth principal line of business, regional banks, which includes all banking functions for Bank of Albuquerque, Bank of Arkansas and Bank of Texas. These five principal lines of business combined account for approximately 80% of total revenue. Other lines of business include the TransFund ATM network and BOSC, Inc. In addition to its lines of business, BOK Financial has a funds management unit. The primary purpose of this unit is to manage the overall liquidity needs and interest rate risk of the company. Each line of business borrows funds from and provides funds to the funds management unit as needed to support their operations. The Corporate Banking segment consists of eight operating units that provide credit and lease financing, deposit and cash management and international collection services to commercial and industrial customers and to other financial institutions in Oklahoma and surrounding states. The Consumer Banking segment consists of two operating units that provide direct and indirect consumer loans and deposit services to individuals primarily within Oklahoma. The Mortgage Banking segment consists of two operating sectors that originate a full range of mortgage products from federally sponsored programs to "jumbo loans" on higher priced homes in BOK Financial's primary market areas. The Mortgage Banking segment also services mortgage loans acquired from throughout the United States. The Trust Services segment consists of one operating unit that provides financial services to both individual and corporate clients. Individual financial services include personal trust management, administration of estates and management of investment and custodial accounts. Individual financial services also include lending and investment services to select individuals. Corporate financial services include administration of employee benefit plans, transfer and paying agent services and investment advisory services. Regional Banks include Bank of Arkansas, Bank of Albuquerque and Bank of Texas. BOK Financial identifies reportable segments by type of service provided for the Mortgage Banking and the Trust Services segments and by type of customer for the Corporate Banking and Consumer Banking segments. Regional Banks are identified by legal entity. Operating results are adjusted for intercompany loan participations and allocated service costs and management fees. BOK Financial allocates resources and evaluates performance of its lines of business after allocation of funds, certain indirect expenses, taxes and capital costs. The cost of funds borrowed from the funds management unit by the operating lines of business is transfer priced at rates that approximate market for funds with similar duration. Market is generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of transfer-pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk. The value of funds provided by the operating lines of business to the funds management unit is based on applicable Federal Home Loan Bank advance rates. Deposit accounts with indeterminate maturities, such as demand deposit accounts and interest-bearing transaction accounts, are transfer-priced at a rolling average based on the expected duration of the accounts. The expected duration ranges from 90 days for certain rate-sensitive deposits to five years. The accounting policies of the reportable segments generally follow those described in the summary of significant account policies except interest income is reported on a fully tax-equivalent basis, loan losses are based on actual net amounts charged off and the amortization of intangible assets is generally excluded. Economic capital is assigned to the business units based on an internal allocation method that reflects management's assessment of risk. Additional capital is assigned to the regional banks line of business based on BOK Financial's investment in those entities. The aggregate economic capital assigned to the lines of business exceeds the capital required by BOK Financial in total. Total capital required by BOK Financial reflects management's estimate of capital required based on the interaction of risk mitigation strategies that cross lines of business including regulatory requirements. Capital assigned to the lines of business does not reflect the company-wide risk mitigation strategies. Nonreportable business segments include TransFund ATM networks and BOSC, Inc. The sources of revenue in these segments include interest, commissions earned on securities transactions, securities trading gains or losses, underwriting and financial advisory fees and fees earned on various banking activities, including merchant discounts and interchange fees. Substantially all revenue is from domestic customers. No single external customer accounts for more than 10% of total revenue. 55 All Corporate Consumer Mortgage Trust Regional Other/ (In Thousands) Banking Banking Banking Services Banks Eliminations Total ------------------------------------------------------------------------------------------------ Year ended December 31, 2002 Net interest revenue/(expense) from external sources $ 156,474 $ (17,875) $ 32,199 $ 1,315 $ 137,142 $ 58,946 $ 368,201 Net interest revenue/(expense) from internal sources (46,231) 61,301 (13,713) 8,397 (12,474) 2,720 - ---------------------------------------------------------------------------------------------------------------------------- Total net interest revenue 110,243 43,426 18,486 9,712 124,668 61,666 368,201 Provision for loan losses 6,475 7,829 252 363 6,161 12,650 33,730 Other operating revenue 32,702 38,862 37,845 39,838 26,871 62,449 238,567 Capitalized mortgage servicing rights - - 20,832 - - - 20,832 Financial instruments gains/(losses) 658 - 26,345 - 4,205 33,390 64,598 Operating expense 58,289 63,401 54,795 39,044 93,397 70,788 379,714 Provision for impairment of mortgage servicing rights - - 45,923 - - - 45,923 Income taxes 30,668 4,302 987 3,946 20,547 21,972 82,422 ---------------------------------------------------------------------------------------------------------------------------- Net income $ 48,171 $ 6,756 $ 1,551 $ 6,197 $ 35,639 $ 52,095 $ 150,409 ---------------------------------------------------------------------------------------------------------------------------- Average assets $4,032,473 $2,341,239 $ 671,798 $535,997 $ 3,895,613 $(186,595) $11,290,525 Average equity 454,572 73,604 55,826 44,339 460,619 (153,107) 935,853 Performance measurements: Return on assets 1.19% .29% .23% 1.16% .91% - 1.33% Return on equity 10.60 9.18 2.78 13.98 7.74 - 16.07 Efficiency ratio 40.78 77.05 71.01 78.80 61.63 - 60.50
Reconciliation to Consolidated Financial Statements Other Other Net Interest Operating Operating Average Revenue Revenue(1) Expense Assets -------------------------------------------------- Total reportable segments $306,535 $ 196,950 $354,849 $11,477,120 Total nonreportable segments 465 69,631 54,795 46,071 Unallocated items: Tax-equivalent adjustment 6,119 - - - Funds management 72,802 (7,245) 10,503 661,182 All others (including eliminations), net (17,720) 63 5,490 (893,848) ------------------------------------------------------------------------------- BOK Financial consolidated $368,201 $ 259,399 $425,637 $11,290,525 ------------------------------------------------------------------------------- 1 Excluding financial instrument gains/(losses) 56 All Corporate Consumer Mortgage Trust Regional Other/ (In Thousands) Banking Banking Banking Services Banks Eliminations Total ------------------------------------------------------------------------------------------------ Year ended December 31, 2001 Net interest revenue/(expense) from external sources $ 199,771 $ (34,049) $ 32,545 $ 209 $ 138,846 $ (8,370) $ 328,952 Net interest revenue/(expense) from internal sources (86,615) 94,393 (20,867) 13,588 (11,689) 11,190 - ---------------------------------------------------------------------------------------------------------------------------- Total net interest revenue 113,156 60,344 11,678 13,797 127,157 2,820 328,952 Provision for loan losses 10,481 4,180 47 128 5,873 16,901 37,610 Operating revenue 29,506 29,995 30,119 40,877 19,642 57,686 207,825 Capitalized mortgage servicing rights - - 22,695 - - - 22,695 Financial instruments gains/(losses) (250) - 12,757 - 484 13,587 26,578 Operating expense 57,322 59,099 47,750 38,699 91,088 59,253 353,211 Provision for impairment of mortgage servicing rights - - 15,551 - - - 15,551 Income taxes 29,022 10,527 5,408 6,164 18,518 (6,027) 63,612 Transition adjustment of adoption of FAS 133 - - - - - 236 236 ---------------------------------------------------------------------------------------------------------------------------- Net income $ 45,587 $ 16,533 $ 8,493 $ 9,683 $ 31,804 $ 4,202 $ 116,302 ---------------------------------------------------------------------------------------------------------------------------- Average assets $3,854,310 $2,192,698 $651,103 $475,721 $3,352,149 $(286,570) $10,239,411 Average equity 442,876 69,123 45,915 41,345 409,579 (229,994) 778,844 Performance measurements: Return on assets 1.18% 0.75% 1.30% 2.04% 0.95% - 1.14% Return on equity 10.29 23.92 18.50 23.42 7.77 - 14.93 Efficiency ratio 40.18 65.42 74.04 70.78 62.05 - 63.13
Reconciliation to Consolidated Financial Statements Other Other Net Interest Operating Operating Average Revenue Revenue(1) Expense Assets -------------------------------------------------- Total reportable segments $326,132 $172,834 $309,509 $10,525,981 Total nonreportable segments 586 59,829 45,355 30,630 Unallocated items: Tax-equivalent adjustment 8,045 - - - Funds management 15,177 (408) 7,946 323,113 All others (including eliminations), net (20,988) (1,735) 5,952 (640,313) ------------------------------------------------------------------------------- BOK Financial consolidated $328,952 $230,520 $368,762 $10,239,411 ------------------------------------------------------------------------------- 1 Excluding financial instrument gains/(losses) 57 All Corporate Consumer Mortgage Trust Regional Other/ (In Thousands) Banking Banking Banking Services Banks Eliminations Total ------------------------------------------------------------------------------------------------ Year ended December 31, 2000 Net interest revenue/(expense) from external sources $ 238,610 $ (46,916) $ 16,434 $ 3,429 $ 105,849 $ (47,591) $ 269,815 Net interest revenue/(expense) from internal sources (136,367) 107,172 (15,006) 8,995 (12,709) 47,915 - ---------------------------------------------------------------------------------------------------------------------------- Total net interest revenue 102,243 60,256 1,428 12,424 93,140 324 269,815 Provision for loan losses 3,149 3,669 57 3 3,492 6,834 17,204 Operating revenue 26,013 26,762 28,473 40,004 13,187 50,210 184,649 Capitalized mortgage servicing rights - - 11,267 - - - 11,267 Financial instruments gains/(losses) - - 5,257 - (356) (2,842) 2,059 Operating expense 53,451 54,906 37,762 35,916 68,224 49,656 299,915 Provision for impairment of mortgage servicing rights - - 2,900 - - - 2,900 Income taxes 27,874 11,064 2,220 6,422 12,526 (12,475) 47,631 ---------------------------------------------------------------------------------------------------------------------------- Net income $ 43,782 $ 17,379 $ 3,486 $ 10,087 $ 21,729 $ 3,677 $ 100,140 ---------------------------------------------------------------------------------------------------------------------------- Average assets $3,370,044 $2,140,383 $412,219 $355,150 $2,467,530 $(53,822) $8,691,504 Average equity 392,711 60,813 32,053 37,895 282,223 (197,453) 608,242 Performance measurements: Return on assets 1.30% 0.81% 0.85% 2.84% 0.88% - 1.15% Return on equity 11.15 28.58 10.88 26.62 7.70 - 16.46 Efficiency ratio 41.68 63.10 91.73 68.51 64.16 - 64.40
Reconciliation to Consolidated Financial Statements Other Other Net Interest Operating Operating Average Revenue Revenue(1) Expense Assets -------------------------------------------------- Total reportable segments $269,491 $145,706 $253,159 $8,745,326 Total nonreportable segments 723 49,660 37,460 28,978 Unallocated items: Tax-equivalent adjustment 7,853 - - - Funds management 12,083 914 8,560 199,231 All others (including eliminations), net (20,335) (364) 3,636 (282,031) ------------------------------------------------------------------------------- BOK Financial consolidated $269,815 $195,916 $302,815 $8,691,504 ------------------------------------------------------------------------------- 1 Excluding financial instrument gains/(losses) 58 (19) FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying values and estimated fair values of financial instruments as of December 31, 2002 and 2001 (dollars in thousands): Range of Average Estimated Carrying Contractual Repricing Discount Fair Value Yields (in years) Rate Value ------------------------------------------------------------------- 2002: Cash and cash equivalents $ 624,215 $ 624,215 Securities 4,136,403 4,140,606 Loans: Commercial 3,989,798 1.78 - 12.25% 0.32 1.45 - 5.68% 4,058,743 Commercial real estate 1,435,838 2.70 - 12.50 1.09 4.70 - 6.60 1,450,552 Residential mortgage 929,759 3.50 - 8.50 2.74 3.92 - 6.67 933,161 Residential mortgage - held for sale 133,421 - - - 133,421 Consumer 412,167 1.33 - 21.00 2.49 3.64 - 7.75 416,643 ------------------------------------------------------------------------------------------------------------- Total loans 6,900,983 6,992,520 Reserve for loan losses (116,070) - ------------------------------------------------------------------------------------------------------------- Net loans 6,784,913 6,992,520 Derivative instruments with positive fair value 87,928 87,928 Deposits with no stated maturity 4,860,534 - - - 4,860,534 Time deposits 3,267,991 0.90 - 7.65 1.54 1.26 - 2.34 3,353,243 Other borrowings 2,655,708 3.29 - 5.84 0.05 1.13 - 3.29 2,658,930 Subordinated debt 155,419 6.45 6.27 4.50 175,307 Derivative instruments with negative fair value 77,339 77,339 ------------------------------------------------------------------------------------------------------------- 2001: Cash and cash equivalents $ 647,338 $ 647,338 Securities 3,700,989 3,702,504 Loans: Commercial 3,674,750 2.04 - 17.70% 0.42 1.96 - 4.90% 3,693,209 Commercial real estate 1,341,775 2.25 - 13.90 1.39 4.64 - 4.83 1,402,885 Residential mortgage 703,080 3.81 - 13.00 2.04 4.05 - 7.62 701,349 Residential mortgage - held for sale 166,093 - - - 166,093 Consumer 409,680 2.03 - 21.00 2.73 4.26 - 6.98 438,625 ------------------------------------------------------------------------------------------------------------- Total loans 6,295,378 6,402,161 Reserve for loan losses (101,905) - ------------------------------------------------------------------------------------------------------------- Net loans 6,193,473 6,402,161 Derivative instruments with positive fair value 34,131 34,131 Deposits with no stated maturity 4,084,638 - - 4,084,638 Time deposits 2,821,106 1.25 - 7.65 0.64 1.50 - 2.80 2,861,413 Other borrowings 2,822,937 4.17 - 8.51 0.06 1.37 - 3.70 2,824,409 Subordinated debt 186,302 6.03 6.27 5.87 189,775 Derivative instruments with negative fair value 38,517 38,517 -------------------------------------------------------------------------------------------------------------
The preceding table presents the estimated fair values of financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involved significant judgments by management. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, BOK Financial does not know whether the fair values shown above represent values at which the respective financial instruments could be sold individually or in the aggregate. 59 The following methods and assumptions were used in estimating the fair value of these financial instruments: CASH AND CASH EQUIVALENTS The book value reported in the consolidated balance sheet for cash and short-term instruments approximates those assets' fair values. SECURITIES The fair values of securities are based on quoted market prices or dealer quotes, when available. If quotes are not available, fair values are based on quoted prices of comparable instruments. DERIVATIVES Fair value on interest rate contracts is calculated by a third party based on discounted cash flows using a yield curve and current applicable market rates. Fair value of energy contracts are based on closing prices on the New York Mercantile Exchange and values provided by energy dealers. LOANS The fair value of loans, excluding loans held for sale, are based on discounted cash flow analyses using interest rates currently being offered for loans with similar remaining terms to maturity and credit risk, adjusted for the impact of interest rate floors and ceilings. The fair values of classified loans were estimated to approximate their carrying values less loan loss reserves allocated to these loans of $29 million at December 31, 2002 and 2001. The fair values of residential mortgage loans held for sale are based upon quoted market prices of such loans sold in securitization transactions, including related unfunded loan commitments and hedging transactions. DEPOSITS The fair values of time deposits are based on discounted cash flow analyses using interest rates currently being offered on similar transactions. Statement of Financial Accounting Standard No. 107, "Disclosures about Fair Value of Financial Instruments," ("FAS 107") defines the estimated fair value of deposits with no stated maturity, which includes demand deposits, transaction deposits, money market deposits and savings accounts, to equal the amount payable on demand. Although market premiums paid reflect an additional value for these low cost deposits, FAS 107 prohibits adjusting fair value for the expected benefit of these deposits. Accordingly, the positive effect of such deposits is not included in this table. OTHER BORROWINGS AND SUBORDINATED DEBENTURE The fair values of these instruments are based upon discounted cash flow analyses using interest rates currently being offered on similar instruments. OFF-BALANCE-SHEET INSTRUMENTS The fair values of commercial loan commitments and letters of credit are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of these off-balance-sheet instruments were not significant at December 31, 2002 and 2001. 60 (20) PARENT COMPANY ONLY FINANCIAL STATEMENTS Summarized financial information for BOK Financial - Parent Company Only follows: Balance Sheets (In Thousands) December 31, ---------------------------- 2002 2001 ---------------------------- Assets Cash and cash equivalents $ 16,466 $ 12,971 Securities - available for sale 14,253 14,355 Investment in subsidiaries 1,146,915 926,623 Other assets 2,133 2,029 ----------------------------------------------------------------------------- Total assets $1,179,767 $955,978 ----------------------------------------------------------------------------- Liabilities and Shareholders' Equity Other borrowings $ 85,000 $125,095 Other liabilities 1,210 2,400 ----------------------------------------------------------------------------- Total liabilities 86,210 127,495 ----------------------------------------------------------------------------- Preferred stock 25 25 Common stock 3 3 Capital surplus 459,347 323,860 Retained earnings 608,515 511,301 Treasury stock (17,421) (12,498) Accumulated other comprehensive income 43,088 5,792 ----------------------------------------------------------------------------- Total shareholders' equity 1,093,557 828,483 ----------------------------------------------------------------------------- Total liabilities and shareholders' equity $1,179,767 $955,978 ----------------------------------------------------------------------------- Statements of Earnings (In Thousands) 2002 2001 2000 ------------------------------- Dividends, interest and fees received from $ 42,821 $ 91,960 $ 8,082 subsidiaries Other operating revenue 441 425 637 ------------------------------------------------------------------------------- Total revenue 43,262 92,385 8,719 ------------------------------------------------------------------------------- Interest expense 3,453 6,458 7,551 Personnel expense - 2 - Professional fees and services 433 471 728 Other operating expense 205 265 45 ------------------------------------------------------------------------------- Total expense 4,091 7,196 8,324 ------------------------------------------------------------------------------- Income before taxes and equity in undistributed income of subsidiaries 39,171 85,189 395 Federal and state income tax credit (1,879) (3,092) (3,520) ------------------------------------------------------------------------------- Income before equity in undistributed income of subsidiaries 41,050 88,281 3,915 Equity in undistributed income of subsidiaries 109,359 28,021 96,225 ------------------------------------------------------------------------------- Net income $150,409 $116,302 $100,140 ------------------------------------------------------------------------------- 61 Statements of Cash Flows (In Thousands) 2002 2001 2000 ---------------------------------------- Cash flows from operating activities: Net income $150,409 $116,302 $100,140 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (109,359) (28,021) (96,225) Tax benefit on exercise of stock options 5,482 3,408 1,010 Change in other assets (104) (57) 1,239 Change in other liabilities (930) 166 (44) ------------------------------------------------------------------------------------------------ Net cash provided by operating activities 45,498 91,798 6,120 ------------------------------------------------------------------------------------------------ Cash flows from investing activities: Purchases of available for sale securities (568) (1,961) (1,019) Investment in subsidiaries (5,482) (119,309) 3,800 ------------------------------------------------------------------------------------------------ Net cash provided (used) by investing activities (6,050) (121,270) 2,781 ------------------------------------------------------------------------------------------------ Cash flows from financing activities: Increase in other borrowings - 124,963 - Pay down of other borrowings (40,095) (95,000) (10,000) Issuance of preferred, common and treasury stock, net 4,172 2,745 999 Purchase treasury stock - - (2,633) Cash dividends (30) (20) (1) ------------------------------------------------------------------------------------------------ Net cash provided (used) by financing activities (35,953) 32,688 (11,635) ------------------------------------------------------------------------------------------------ Net change in cash and cash equivalents 3,495 3,216 (2,734) Cash and cash equivalents at beginning of period 12,971 9,755 12,489 ------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 16,466 $ 12,971 $ 9,755 ------------------------------------------------------------------------------------------------ Payment of dividends in common stock $ 53,165 $ 36,371 $ 1,500 ------------------------------------------------------------------------------------------------ Cash paid for interest $ 3,482 $ 6,726 $ 7,741 ------------------------------------------------------------------------------------------------ Common stock and price guarantee issued for acquisition 67,745 - - ------------------------------------------------------------------------------------------------
62 BOK FINANCIAL CORPORATION Annual Financial Summary - Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands) 2002 ----------------------------------------------- Average Revenue/ Yield/ Balance Expense (1) Rate ----------------------------------------------- Assets Taxable securities (3) $ 3,756,666 $186,902 5.22% Tax-exempt securities 208,503 14,789 7.09 ----------------------------------------------------------------------------------------------------------- Total securities (3) 3,965,169 201,691 5.32 ----------------------------------------------------------------------------------------------------------- Trading securities 14,215 750 5.28 Funds sold and resell agreements 16,024 291 1.82 Loans (2) 6,401,510 378,300 5.91 Less reserve for loan losses 109,985 - - ----------------------------------------------------------------------------------------------------------- Loans, net of reserve 6,291,525 378,300 6.01 ----------------------------------------------------------------------------------------------------------- Total earning assets (3) 10,286,933 581,032 5.75 ----------------------------------------------------------------------------------------------------------- Cash and other assets 1,003,592 ----------------------------------------------------------------------------------------------------------- Total assets $11,290,525 ----------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Transaction deposits $ 2,798,639 $ 39,273 1.40% Savings deposits 165,988 1,976 1.19 Time deposits 3,057,645 104,217 3.41 ----------------------------------------------------------------------------------------------------------- Total interest-bearing deposits 6,022,272 145,466 2.42 ----------------------------------------------------------------------------------------------------------- Federal funds purchased and repurchase agreements 1,549,021 25,218 1.63 Other borrowed funds 1,058,717 25,277 2.39 Subordinated debenture 181,911 10,751 5.91 ----------------------------------------------------------------------------------------------------------- Total interest-bearing liabilities 8,811,921 206,712 2.35 ----------------------------------------------------------------------------------------------------------- Demand deposits 1,185,891 Other liabilities 356,860 Shareholders' equity 935,853 ----------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $11,290,525 ----------------------------------------------------------------------------------------------------------- Tax-equivalent Net Interest Revenue (3) 374,320 3.40% Tax-equivalent Net Interest Revenue to Earning Assets (3) 3.70 Less tax-equivalent adjustment 6,119 ----------------------------------------------------------------------------------------------------------- Net Interest Revenue 368,201 Provision for loan losses 33,730 Other operating revenue 323,997 Other operating expense 425,637 ----------------------------------------------------------------------------------------------------------- Income before taxes 232,831 Federal and state income tax 82,422 ----------------------------------------------------------------------------------------------------------- Net Income $150,409 ----------------------------------------------------------------------------------------------------------- 1 Tax equivalent at the statutory federal and state rates of 38.9% for the periods presented. The taxable equivalent adjustments shown are for comparative purposes. 2 The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned income. See Note 1 of Notes to the Consolidated Financial Statements for a description of income recognition policy. 3 Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income.
63 2001 2000 --------------------------------------- --------------------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense (1) Rate Balance Expense (1) Rate --------------------------------------- --------------------------------------- $2,989,967 $184,464 6.17% $2,587,183 $167,493 6.47% 277,309 19,935 7.19 269,731 19,577 7.26 --------------------------------------- --------------------------------------- 3,267,276 204,399 6.26 2,856,914 187,070 6.55 --------------------------------------- --------------------------------------- 18,504 1,200 6.49 15,633 1,450 9.28 18,419 829 4.50 46,219 2,962 6.41 5,989,224 456,250 7.62 4,934,462 455,101 9.22 92,392 - - 80,447 - - --------------------------------------- --------------------------------------- 5,896,832 456,250 7.74 4,854,015 455,101 9.38 --------------------------------------- --------------------------------------- 9,201,031 662,678 7.20 7,772,781 646,583 8.32 --------------------------------------- --------------------------------------- 1,038,380 918,723 --------------------------------------- --------------------------------------- $10,239,411 $8,691,504 --------------------------------------- --------------------------------------- $ 2,267,032 49,893 2.20% $1,889,806 55,019 2.91% 154,934 2,281 1.47 151,870 2,703 1.78 2,960,170 154,035 5.20 2,495,038 149,599 6.00 --------------------------------------- --------------------------------------- 5,382,136 206,209 3.83 4,536,714 207,321 4.57 --------------------------------------- --------------------------------------- 1,652,467 64,358 3.89 1,444,830 91,456 6.33 974,907 44,191 4.53 889,919 59,701 6.71 180,211 10,923 6.06 148,728 10,437 7.02 --------------------------------------- --------------------------------------- 8,189,721 325,681 3.98 7,020,191 368,915 5.26 --------------------------------------- --------------------------------------- 1,102,958 980,401 167,888 82,670 778,844 608,242 --------------------------------------- --------------------------------------- $10,239,411 $8,691,504 --------------------------------------- --------------------------------------- 336,997 3.22% 277,668 3.06% 3.66 3.57 8,045 7,853 --------------------------------------- --------------------------------------- 328,952 269,815 37,610 17,204 257,462 197,975 368,762 302,815 --------------------------------------- --------------------------------------- 180,042 147,771 63,740 47,631 --------------------------------------- --------------------------------------- $116,302 $100,140 --------------------------------------- --------------------------------------- 64 BOK FINANCIAL CORPORATION Quarterly Financial Summary - Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands Except Per Share Data) Three Months Ended ------------------------------------------------------------------------- December 31, 2002 September 30, 2002 ---------------------------------- ---------------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense(1) Rate Balance Expense(1) Rate ---------------------------------- ---------------------------------- Assets Taxable securities $ 4,024,291 $45,710 4.73% $ 3,794,732 $46,473 5.06% Tax-exempt securities 194,586 3,407 6.95 193,645 3,335 6.83 -------------------------------------------------------------------------------------- ---------------------------------- Total securities 4,218,877 49,117 4.84 3,988,377 49,808 5.15 -------------------------------------------------------------------------------------- ---------------------------------- Trading securities 8,639 87 4.00 13,341 221 6.57 Funds sold 24,856 92 1.47 11,331 57 2.00 Loans (2) 6,761,498 95,864 5.62 6,444,933 95,731 5.89 Less reserve for loan losses 114,711 - - 110,590 - - -------------------------------------------------------------------------------------- ---------------------------------- Loans, net of reserve 6,646,787 95,864 5.72 6,334,343 95,731 6.00 -------------------------------------------------------------------------------------- ---------------------------------- Total earning assets 10,899,159 145,160 5.38 10,347,392 145,817 5.67 -------------------------------------------------------------------------------------- ---------------------------------- Cash and other assets 1,032,760 981,246 -------------------------------------------------------------------------------------- ---------------------------------- Total assets $11,931,919 $11,328,638 -------------------------------------------------------------------------------------- ---------------------------------- Liabilities and Shareholders' Equity Transaction deposits $ 2,988,986 $ 9,648 1.28 $ 2,795,449 $ 9,882 1.40 Savings deposits 173,286 491 1.12 164,952 502 1.21 Other time deposits 3,248,364 25,531 3.12 3,090,272 26,154 3.36 -------------------------------------------------------------------------------------- ---------------------------------- Total interest-bearing deposits 6,410,636 35,670 2.21 6,050,673 36,538 2.40 -------------------------------------------------------------------------------------- ---------------------------------- Federal funds purchased and repurchase agreements 1,523,923 5,471 1.42 1,615,075 6,635 1.63 Other borrowed funds 1,084,616 5,751 2.10 999,140 5,963 2.37 Subordinated debenture 169,874 2,580 6.03 185,748 2,725 5.82 -------------------------------------------------------------------------------------- ---------------------------------- Total interest-bearing liabilities 9,189,049 49,472 2.14 8,850,636 51,861 2.32 -------------------------------------------------------------------------------------- ---------------------------------- Demand deposits 1,310,932 1,188,441 Other liabilities 380,204 340,264 Shareholders' equity 1,051,734 949,297 -------------------------------------------------------------------------------------- ---------------------------------- Total liabilities and shareholders' equity $11,931,919 $11,328,638 -------------------------------------------------------------------------------------- ---------------------------------- Tax-equivalent Net Interest Revenue 95,688 3.24% 93,956 3.35% Tax-equivalent Net Interest Revenue to Earning Assets 3.55 3.65 Less tax-equivalent adjustment 1,404 1,387 -------------------------------------------------------------------------------------- ---------------------------------- Net Interest Revenue 94,284 92,569 Provision for loan losses 10,001 8,029 Other operating revenue 80,739 107,467 Other operating expense 104,993 123,695 -------------------------------------------------------------------------------------- ---------------------------------- Income before taxes 60,029 68,312 Federal and state income tax 21,250 24,183 -------------------------------------------------------------------------------------- ---------------------------------- Net Income $38,779 $44,129 -------------------------------------------------------------------------------------- ---------------------------------- Earnings Per Average Common Share Equivalent: Net income: Basic $0.70 $0.83 -------------------------------------------------------------------------------------- ---------------------------------- Diluted $0.63 $0.73 -------------------------------------------------------------------------------------- ---------------------------------- 1 Tax equivalent at the statutory federal and state rates of 38.9% for the periods presented. The taxable equivalent adjustments shown are for comparative purposes. 2 The loan averages included loans on which the accrual of interest has been discounted and are stated net of unearned income. See Note 1 of Notes to the Consolidated Financial Statements for a description of income recognition policy.
65 Three Months Ended -------------------------------------------------------------------------------------------------------------- June 30, 2002 March 31, 2002 December 31, 2001 ---------------------------------- ----------------------------------- ----------------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense(1) Rate Balance Expense(1) Rate Balance Expense(1) Rate ---------------------------------- ----------------------------------- ----------------------------------- $3,696,603 $46,564 5.50% $3,442,504 $48,153 5.68% $3,177,731 $45,777 5.72% 218,747 3,948 7.24 230,755 4,101 7.21 238,634 4,274 7.11 ---------------------------------- ----------------------------------- ----------------------------------- 3,915,350 50,512 5.60 3,673,259 52,254 5.77 3,416,365 50,051 5.82 ---------------------------------- ----------------------------------- ----------------------------------- 19,989 238 4.78 14,971 204 5.53 22,508 245 4.32 17,148 92 2.15 10,656 50 1.90 14,362 85 2.35 6,225,134 93,787 6.04 6,164,060 92,918 6.11 6,203,512 99,643 6.37 109,366 - - 105,166 - - 99,541 - - ---------------------------------- ----------------------------------- ----------------------------------- 6,115,768 93,787 6.15 6,058,894 92,918 6.22 6,103,971 99,643 6.48 ---------------------------------- ----------------------------------- ----------------------------------- 10,068,255 144,629 5.94 9,757,780 145,426 6.05 9,557,206 150,024 6.23 ---------------------------------- ----------------------------------- ----------------------------------- 1,005,122 999,738 1,024,243 ---------------------------------- ----------------------------------- ----------------------------------- $11,073,377 $10,757,518 $10,581,449 ---------------------------------- ----------------------------------- ----------------------------------- $ 2,740,454 $ 9,841 1.44% $ 2,666,154 $ 9,902 1.51% $ 2,429,978 9,933 1.62% 165,496 503 1.22 160,082 481 1.22 158,040 489 1.23 2,969,488 26,814 3.62 2,918,473 25,718 3.57 2,839,770 30,044 4.20 ---------------------------------- ----------------------------------- ----------------------------------- 5,875,438 37,158 2.54 5,744,709 36,101 2.55 5,427,788 40,466 2.96 ---------------------------------- ----------------------------------- ----------------------------------- 1,485,816 6,197 1.67 1,571,063 6,915 1.79 1,701,655 8,813 2.05 1,032,685 6,637 2.58 1,119,466 6,925 2.51 1,088,792 8,460 3.08 185,968 2,724 5.88 186,189 2,722 5.93 186,409 2,764 5.88 ---------------------------------- ----------------------------------- ----------------------------------- 8,579,907 52,716 2.46 8,621,427 52,663 2.48 8,404,644 60,503 2.86 ---------------------------------- ----------------------------------- ----------------------------------- 1,129,412 1,112,571 1,150,498 476,886 170,643 191,023 887,172 852,877 835,284 ---------------------------------- ----------------------------------- ----------------------------------- $11,073,377 $10,757,518 $10,581,449 ---------------------------------- ----------------------------------- ----------------------------------- 91,913 3.48% 92,763 3.57% 89,521 3.37% 3.77 3.86 3.72 1,632 1,696 1,802 ---------------------------------- ----------------------------------- ----------------------------------- 90,281 91,067 87,719 6,834 8,866 10,517 83,864 51,927 54,560 113,798 83,151 84,801 ---------------------------------- ----------------------------------- ----------------------------------- 53,513 50,977 46,961 18,944 18,045 16,829 ---------------------------------- ----------------------------------- ----------------------------------- $34,569 $32,932 $ 30,132 ---------------------------------- ----------------------------------- ----------------------------------- $0.65 $0.62 $0.56 ---------------------------------- ----------------------------------- ----------------------------------- $0.57 ` $0.55 $0.50 ---------------------------------- ----------------------------------- -----------------------------------
66 BOK FINANCIAL CORPORATION BOARD OF DIRECTORS C. Fred Ball, Jr. (3) Chairman & CEO Bank of Texas, N.A. Sharon J. Bell 1 Managing Partner Rogers & Bell Peter C. Boylan, III (1) President, CEO & Director Liberty Broadband Interactive TV Joseph E. Cappy (1) Chairman, President & CEO Dollar Thrifty Automotive Group Luke R. Corbett Chairman & CEO Kerr-McGee Corporation William E. Durrett Senior Chairman American Fidelity Corp. James O. Goodwin (1) Chief Executive Officer The Oklahoma Eagle Publishing Company, Inc. LLC Robert G. Greer (3), (4) Vice Chairman Bank of Texas David F. Griffin (1), (4) President & General Manager Griffin Communications, LLC V. Burns Hargis (1) Vice Chairman BOK Financial Corporation and Bank of Oklahoma, N.A. Eugene A. Harris (2) Executive Vice President BOK Financial Corporation and Bank of Oklahoma, N.A. Howard E. Janzen (1) Former President & CEO Williams Communications E. Carey Joullian, IV (1) President & CEO Mustang Fuel Corporation George B. Kaiser (1) Chairman BOK Financial Corporation and Bank of Oklahoma, N.A. David L. Kyle (1) Chairman, President & CEO ONEOK, Inc. Robert J. LaFortune Personal Investments Philip C. Lauinger, Jr. Chairman & CEO Lauinger Publishing Co. John C. Lopez (1) Chairman & CEO Lopez Foods, Inc. Stanley A. Lybarger (1), (3) President & CEO BOK Financial Corporation and Bank of Oklahoma, N.A. Steven J. Malcolm (1) Chairman, President & CEO Williams Paula Marshall-Chapman (1), (4) CEO Bama Companies Frank A. McPherson Retired Chairman & CEO Kerr-McGee Corporation Steven E. Moore Chairman, President & CEO OGE Energy Corp. J. Larry Nichols Chairman, President & CEO Devon Energy Corporation Robert L. Parker, Sr. Chairman of the Board Parker Drilling Company James A. Robinson Personal Investments L. Francis Rooney, III (1) Chairman and CEO Manhattan Construction Company Scott F. Zarrow (1) President Foreman Investment Capital LLC 1 Director of BOK Financial Corp. and Bank of Oklahoma, N.A. 2 Director of Bank of Oklahoma, N.A. 3 Director of BOK Financial Corp. and Bank of Texas, N.A. 4 Pending election at shareholders meeting April 29 67 BANK OF ALBUQUERQUE, N.A. BOARD OF DIRECTORS Susan Barker-Kalangis, Esq. Partner, Modrall, Sperling, Roehl, Harris and Sisk P.A. Steven G. Bradshaw Executive Vice President Bank of Oklahoma, N.A. Douglas M. Brown President & CEO Tuition Plan, Inc. Rudy A. Davolos Athletic Director University of New Mexico William E. Garcia Retired Sr. Manager, Public Affairs Intel Corporation Robert M. Goodman Vice Chairman Bank of Albuquerque, N.A. Thomas D. Growney President Tom Growney Equipment, Inc. Eugene A. Harris Executive Vice President BOK Financial Corporation and Bank of Oklahoma, N.A. W. Jeffrey Pickryl Executive Vice President Bank of Oklahoma, N.A. Mark E. Sauters Senior Vice President Bank of Albuquerque, N.A. Michael D. Sivage Chief Executive Officer Sivage-Thomas Homes, Inc. Paul A. Sowards President Bank of Albuquerque, N.A. David L. Sutter Senior Vice President Bank of Oklahoma, N.A. Gregory K. Symons Chairman & CEO Bank of Albuquerque, N.A. Jennifer S. Thomas Executive Vice President Bank of Albuquerque, N.A. BANK OF ARKANSAS, N.A. BOARD OF DIRECTORS John W. Anderson Senior Vice President Bank of Oklahoma, N.A. Jeffrey R. Dunn Chairman, President & CEO Bank of Arkansas, N.A. George C. Faucette, Jr. President Coldwell Banker Faucette Real Estate Mark W. Funke President Bank of Oklahoma, N.A. Oklahoma City Gerald Jones President Jones Motorcars, Inc. Ronald E. Leffler Senior Vice President Bank of Oklahoma, N.A. Jerry D. Sweetser Sweetser Properties, Inc. BANK OF TEXAS, N.A. BOARD OF DIRECTORS C. Thomas Abbott Vice Chairman Bank of Texas, N.A. Charles A. Angel, Jr. Vice Chairman Bank of Texas, N.A. C. Fred Ball, Jr. (2) Chairman & CEO Bank of Texas, N.A. C. Huston Bell Retired President The Vantage Companies Edward O. Boshell, Jr. Columbia General Investments, LP R. Neal Bright Managing Partner Bright & Bright, LLP Dudley Chambers Partner, Jackson & Walker, LLP H. Lynn Craft President & CEO Baptist Foundation of Texas Edward F. Doran, Sr. Charles W. Eisemann Investments James J. Ellis Managing Partner Ellis/Roiser Associates R. William Gribble, Jr. President Gribble Oil Company Robert G. Greer Vice Chairman Bank of Texas, N.A. J. T. Hairston, Jr. Investments Douglas D. Hawthorne President & CEO Texas Health Resources Jerry Lastelick Attorney Lastelick, Anderson and Arneson Stanley A. Lybarger (2) President & CEO BOK Financial Corp. Michael A. McBee Owner McBee Operating Co. Steven E. Nell (1) Chief Financial Officer BOK Financial Corp. Albert W. Niemi, Jr. Dean, Cox School of Business Southern Methodist University Thomas S. Swiley President Bank of Texas, N.A. Mrs. Jere W. Thompson Community Leader Tom E. Turner (2) Retired Chairman Bank of Texas, N.A. John C. Vogt Investments Ralph Williams Chairman Bank of Texas, N.A. - Houston 1 Park Cities Bancshares, Inc. only 2 Park Cities Bancshares, Inc./ Bank of Texas, N.A. 68 SHAREHOLDER INFORMATION Corporate Headquarters Bank of Oklahoma Tower P.O. Box 2300 Tulsa, Oklahoma 74192 (918) 588-6000 Independent Auditors Ernst & Young LLP 3900 One Williams Center Tulsa, Oklahoma 74172 (918) 560-3600 Legal Counsel Frederic Dorwart Lawyers Old City Hall 124 E. Fourth St. Tulsa, Oklahoma 74103-5010 (918) 583-9922 Common Shares: Traded NASDAQ National Market NASDAQ Symbol: BOKF Number of common shareholders of record at December 31, 2002: 1,235 Market Makers: CIBC World Markets Corp. Deutsche Bank Securities Inc. Goldman Sachs & Company Howe Barnes Investments, Inc. Jefferies & Company, Inc. Keefe, Bruyette & Woods, Inc. Knight Securities, L.P. Merrill Lynch, Pierce, Fenner & Smith, Inc. Morgan Stanley & Company, Inc. Salomon Smith Barney Sandler O'Neill & Partners Southwest Securities, Inc. Stephens, Inc. SunTrust Robinson Humphrey Transfer Agent and Registrar SunTrust Bank (800) 568-3476 Address Shareholder Inquiries Send certificates for transfer and address changes to: By Mail SunTrust Bank P.O. Box 4625 Atlanta, GA 30302 By Hand or Overnight Courier: SunTrust Bank Stock Transfer Department 58 Edgewood Avenue, Room 225 Atlanta, GA 30303 Copies of BOK Financial Corporation's Annual Report to Shareholders, Quarterly Reports and Form 10-K to the Securities and Exchange Commission are available without charge upon written request. Analysts, shareholders and other investors seeking financial information about BOK Financial Corporation are invited to contact James F. Ulrich, Senior Vice President, Investor Relations, (918) 588-6752. Information about BOK Financial is also readily available at our website: www.bokf.com