EX-13 9 annual2003.txt EXHIBIT 13 2003 ANNUAL REPORT - MIDDLE PAGES 10 Table 1 Consolidated Selected Financial Data (Dollars In Thousands Except Per Share Data) December 31, --------------------------------------------------------------------- 2003 2002 (4) 2001 (4) 2000 (4) 1999 (4) --------------------------------------------------------------------- Selected Financial Data For the year: Interest revenue $ 565,173 $ 574,913 $ 654,633 $ 638,730 $ 500,274 Interest expense 175,144 206,712 325,681 368,915 263,935 Net interest revenue 390,029 368,201 328,952 269,815 236,339 Provision for loan losses 35,636 33,730 37,610 17,204 10,365 Net income 158,360 147,871 114,439 98,665 87,536 Period-end: Loans, net of reserve 7,355,250 6,784,913 6,193,473 5,435,207 4,567,255 Assets 13,581,743 12,251,014 11,145,984 9,751,550 8,376,290 Deposits 9,219,863 8,128,525 6,905,744 6,046,005 5,263,184 Subordinated debentures 154,332 155,419 186,302 148,816 148,642 Shareholders' equity 1,228,630 1,099,526 832,866 706,793 559,457 Nonperforming assets (2) 59,867 56,574 50,708 43,599 22,943 Profitability Statistics Earnings per share (based on average equivalent shares): Basic $ 2.75 $ 2.66 $ 2.09 $ 1.81 $ 1.60 Diluted 2.45 2.37 1.86 1.62 1.43 Pro forma diluted earnings per share with FAS 142 and 2.45 2.37 2.01 1.70 1.52 FAS 147 Percentages (based on daily averages): Return on average assets 1.24% 1.31% 1.12% 1.13% 1.15% Return on average shareholders' equity 13.66 15.75 14.65 16.18 16.10 Average shareholders' equity to average assets 9.08 8.31 7.63 7.02 7.14 Common Stock Performance Per Share: Book value per common share $ 21.21 $ 19.12 $ 15.06 $ 12.86 $ 10.15 Market price: December 31 close 38.72 32.39 31.51 21.25 20.19 Market range - High trade 41.02 36.52 32.75 21.25 25.94 - Low trade 31.00 26.80 21.31 15.31 18.94 Selected Balance Sheet Statistics Period-end: Tier 1 capital ratio 9.15% 8.98% 8.08% 8.06% 7.27% Total capital ratio 11.31 11.95 11.56 11.23 10.72 Leverage ratio 7.17 6.88 6.38 6.51 5.92 Reserve for loan losses to nonperforming loans 244.18 232.82 233.90 207.95 391.65 Reserve for loan losses to loans (1) 1.73 1.72 1.66 1.51 1.66 Miscellaneous (at December 31) Number of employees (full-time equivalent) 3,449 3,402 3,392 3,003 3,101 Number of banking locations 142 130 114 105 100 Number of TransFund locations 1,442 1,390 1,325 1,111 1,020 Mortgage loan servicing portfolio (3) $4,746,279 $5,754,548 $6,645,868 $6,874,995 $7,028,247 ------------------------------------------------------------------------------------------------------------------------------ 1 Excludes residential mortgage loans held for sale. 2 Includes nonaccrual loans, renegotiated loans and assets acquired in satisfaction of loans. Excludes loans past due 90 days or more and still accruing. 3 Includes outstanding principal for loans serviced for Bank of Oklahoma. 4 Restated for adoption of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," and stock dividends.
11 MANAGEMENT'S ASSESSMENT OF OPERATIONS AND FINANCIAL CONDITION BOK Financial Corporation ("BOK Financial" or "the Company") is a financial holding company that offers full service banking in Oklahoma, Northwest Arkansas, Dallas and Houston, Texas, Albuquerque, New Mexico and Denver, Colorado. Our principal subsidiaries are Bank of Oklahoma, N.A. ("BOk"), Bank of Albuquerque, N.A., Bank of Arkansas, N.A., Bank of Texas, N.A. and Colorado State Bank and Trust, N.A. ("CSBT"). Other subsidiaries include BOSC, Inc., a broker/dealer that engages in retail and institutional securities sales and municipal bond underwriting. CSBT was acquired during the third quarter of 2003. This acquisition added four branches in Denver, Colorado, and total assets of $396 million, including intangible assets of $61 million. CSBT also added $1.6 billion to total trust assets. BOK Financial adopted the fair value accounting provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," during 2003. This change in accounting required expense recognition for employee stock options. Net income and earnings per share for prior years have been restated. No other accounting standards with significant effects on our financial condition or results of operations were initially adopted in 2003. CRITICAL ACCOUNTING POLICIES APPLICATION OF CRITICAL ACCOUNTING POLICIES Preparation of our consolidated financial statements is based on the selection of certain accounting policies, which requires management to make significant assumptions and estimates. The following discussion addresses the more critical areas where these assumptions and estimates could materially affect financial condition and results of operations. Application of these critical accounting policies and estimates has been discussed with the appropriate committees of the Board of Directors. RESERVE FOR LOAN LOSSES The reserve for loan losses is assessed by management based on an ongoing evaluation of the probable estimated losses inherent in the portfolio, including probable losses on both outstanding loans and unused commitments to provide financing. A consistent, well-documented methodology has been developed that includes reserves assigned to specific loans, general reserves that are based on a statistical migration analysis and nonspecific reserves that are based on analysis of current economic conditions, loan concentrations, portfolio growth and other relevant factors. An independent Credit Administration department is responsible for performing this evaluation for all of our subsidiaries to ensure that the methodology is applied consistently. All significant loans that exhibit weaknesses or deteriorating trends are reviewed quarterly. Specific reserves for impairment are determined through evaluation of estimated future cash flows and collateral values in accordance with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for the Impairment of a Loan," and regulatory accounting standards. A general reserve for commercial and commercial real estate loan losses is determined primarily through an internally developed migration analysis model. The purpose of this model is to determine the probability that each loan in the portfolio has an inherent loss based on historical trends. We use an eight-quarter aggregate accumulation of net losses as a basis for this model. Greater emphasis is placed on loan losses in more recent periods. This model assigns a general reserve to all commercial loans and leases and commercial real estate loans, excluding loans that have a specific impairment reserve. Separate models are used to determine the general reserve for residential mortgage loans, excluding residential mortgage loans held for sale, and consumer loans. The general reserve for residential mortgage loans is based on an eight-quarter average percent of loss. General reserves for consumer loans are based on a migration of loans from current status to loss. Separate migration factors are determined by major product line, such as indirect automobile loans and direct consumer loans. Nonspecific reserves are maintained for risks beyond those factors specific to a particular loan 12 or those identified by the migration models. These factors include trends in the general economy in our primary lending areas, conditions in specific industries where we have a concentration, such as energy, real estate and agriculture, and overall growth in the loan portfolio. Evaluation of the nonspecific reserves also considers duration of the business cycle, regulatory examination results, potential errors in the migration analysis models and the underlying data, and other relevant factors. A range of potential losses is determined for each factor identified. VALUATION AND AMORTIZATION OF MORTGAGE SERVICING RIGHTS We have a significant investment in mortgage servicing rights. These rights are either purchased from other lenders or retained from sales of loans we have originated. Mortgage servicing rights are carried at the lower of amortized cost, adjusted for the effects of past hedging activities, or fair value. Amortized cost and fair value are stratified by interest rate and loan type. A valuation allowance is provided when the net amortized cost of any strata exceeds the calculated fair value. There is no active market for trading in mortgage servicing rights. We use a cash flow model to determine fair value. Key assumptions and estimates, including projected prepayment speeds and assumed servicing costs, earnings on escrow deposits, ancillary income and discount rates, used by this model are based on current market sources. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors. The prepayment model is updated daily for changes in market conditions. We periodically request estimates of fair value from outside sources to corroborate the results of the valuation model. The sensitivity of our valuation of mortgage servicing rights to changes in interest rates is presented in Table 9 in the Lines of Business - Mortgage Banking section of this report. Prepayment assumptions also affect the amortization of mortgage servicing rights. Amortization is determined in proportion to the projected cash flows over the estimated life of each loan serviced. The same third party model that estimates prepayment speeds for determining the fair value of mortgage servicing rights determines the estimated life of each loan serviced. INTANGIBLE ASSETS Intangible assets consist primarily of goodwill, core deposit intangible assets and other acquired intangibles. During 2002, we adopted Statements of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142") and No. 147, "Acquisitions of Certain Financial Institutions" ("FAS 147"). These standards eliminated amortization of intangible assets with indefinite lives, such as goodwill. Instead, goodwill for each business unit must be evaluated for impairment annually or more frequently if conditions indicate that impairment may have occurred. The evaluation of possible impairment of intangible assets involves significant judgment based upon short-term and long-term projections of future performance. The fair value of each of our business units is estimated by the discounted future earnings method. Income growth is projected over five years for each unit, and a terminal value is computed. The projected income stream is converted to current fair value by using a discount rate that reflects a rate of return required by a willing buyer. At December 31, 2003, Bank of Texas had $155 million or 70% of consolidated goodwill. Because of the large concentration of goodwill in this business unit, the fair value determined by the discounted future earnings method was corroborated by comparison to the fair value of publicly traded banks of similar size and characteristics. No goodwill impairment was indicated by either valuation method. Intangible assets with finite lives, such as core deposit intangible assets, are amortized over their estimated useful lives. Such assets are reviewed for impairment whenever events indicate that the remaining carrying amount may not be recoverable. 13 VALUATION OF DERIVATIVE INSTRUMENTS We use various types of interest rate derivative instruments as part of an interest rate risk management program. We also offer interest rate, energy and foreign exchange derivative contracts to our customers. All derivative instruments are carried on the balance sheet at fair value. Fair values for exchange-traded contracts are based on quoted prices. Fair values for over-the-counter interest rate, energy and foreign exchange contracts are based on valuations provided by either third-party dealers in the contracts or quotes from independent pricing services. SUMMARY OF PERFORMANCE BOK Financial recorded net income for 2003 of $158.4 million or $2.45 per diluted share, compared with $147.9 million or $2.37 per diluted share in 2002 and $114.4 million or $1.86 per diluted share in 2001. Prior years' earnings per share have been restated for the adoption of FAS 123 and a 3% stock dividend in 2003. As previously noted, we adopted FAS 142 and 147 in 2002. These new accounting standards did not permit restatement of prior years' financial statements. If FAS 142 and 147 had been applied retroactively to 2001, pro forma net income and earnings per diluted share would have been $123.6 million and $2.01, respectively. The trend of returns on average equity on a comparable basis for 2003, 2002 and 2001 was 13.66%, 15.75% and 15.83%, respectively. This trend of return on equity was due primarily to growth in average equity. During 2003, average equity increased 24% due to retained earnings and a full-year's effect of an acquisition-related stock issuance during the fourth quarter of 2002. Net income increased 7% for this same period. Net interest revenue grew $21.8 million or 6% during 2003 due to increases in average earning assets, partially offset by the net effect of lower interest rates. Fees and commission revenue increased $48.7 million or 19%. All categories of fee income increased, most notably brokerage and trading revenue, which grew 58%, and deposit fees, which rose 21%. Operating expenses decreased $16.5 million or 4% compared to 2002. The provision for impairment of mortgage servicing rights shifted from a $45.9 million expense in 2002 to a $22.9 million recovery in 2003. Excluding the provision for mortgage servicing rights, operating expenses increased $52.4 million or 14% due primarily to increased personnel costs, including incentive compensation that varies directly with operating revenue changes. Gains and losses on securities and derivatives decreased from a $64.6 million net gain in 2002 to a $1.6 million net loss in 2003. These results included gains and losses on securities held as an economic hedge of our mortgage servicing rights, on securities held in our general portfolio and derivatives held for interest rate risk management purposes. Accounting for securities held as an economic hedge of mortgage servicing rights is more fully discussed in the Lines of Business - Mortgage Banking section of this report. Net income for the fourth quarter of 2003 decreased $2.8 million or 7% compared to the previous year. Net revenue from mortgage banking activities, including gains and losses on securities held as an economic hedge of our mortgage servicing rights, decreased $15.0 million. The decrease in mortgage banking revenue was partially offset by an $8.4 million decrease in mortgage banking costs. 14 ASSESSMENT OF OPERATIONS NET INTEREST REVENUE Tax-equivalent net interest revenue totaled $395.2 million for 2003 compared to $374.3 million for 2002. The increase was due primarily to a $1.2 billion increase in average earning assets. The growth in average earning assets included a $543 million increase in securities and a $700 million increase in loans. This increase in average earning assets was funded primarily by a $1.1 billion increase in interest-bearing liabilities. Table 2 shows the effects on net interest revenue of changes in average balances and interest rates for the various types of earning assets and interest-bearing liabilities. Yields on average earning assets and rates paid on average interest-bearing liabilities both continued to decline in 2003. The net interest margin, the ratio of tax-equivalent net interest revenue to average earning assets, decreased to 3.43% in 2003 compared to 3.70% for the previous year. This decrease reflected the effects of low interest rates on the spread between yields on earning assets and rates paid on interest-bearing liabilities. Our net interest margin decreased for the first three quarters of 2003 as interest rates declined, but increased during the fourth quarter as rates stabilized. The effects of interest rates on yields and rates paid during 2003 are reflected in the Annual and Quarterly Financial Summaries. Table 2 Volume/Rate Analysis (In Thousands) 2003/2002 2002/2001 ------------------------------------- ------------------------------------ Change Due To(1) Change Due To(1) ------------------------ ------------------------ Change Volume Yield/Rate Change Volume Yield/Rate ------------ ----------- ------------ ----------- ------------ ----------- Tax-equivalent interest revenue: Securities $(8,583) $31,722 $(40,305) $(2,708) $28,736 $(31,444) Trading securities (56) 129 (185) (450) (252) (198) Loans (2,040) 39,229 (41,269) (77,950) 27,886 (105,836) Funds sold and resell agreements (10) 149 (159) (538) (76) (462) ---------------------------------------------- ------------ ----------- ------------ ------------- ------------ ----------- Total (10,689) 71,229 (81,918) (81,646) 56,294 (137,940) ---------------------------------------------- ------------ ----------- ------------ ------------- ------------ ----------- Interest expense: Transaction deposits (7,927) 9,169 (17,096) (10,620) 9,580 (20,200) Savings deposits (1,032) 60 (1,092) (305) 147 (452) Time deposits (4,578) 12,034 (16,612) (49,818) 4,197 (54,015) Funds purchased and repurchase agreements (9,628) (157) (9,471) (39,140) (2,857) (36,283) Other borrowings (7,129) (144) (6,985) (18,914) 2,900 (21,814) Subordinated debentures (1,274) (1,622) 348 (172) 102 (274) ---------------------------------------------- ------------ ----------- ------------ ------------- ------------ ----------- Total (31,568) 19,340 (50,908) (118,969) 14,069 (133,038) ---------------------------------------------- ------------ ------------- ----------- ------------ ------------ ----------- Tax-equivalent net interest revenue 20,879 $51,889 $(31,010) 37,323 $42,225 $ (4,902) ----------- ------------ ------------ ----------- Decrease in tax-equivalent adjustment 949 1,926 ---------------------------------------------- ------------ ------------- Net interest revenue $21,828 $39,249 ---------------------------------------------- ------------ -------------
4th Qtr 2003/4th Qtr 2002 ----------------------------------- Change Due To(1) ----------------------- Change Volume Yield/Rate ----------- ------------ ---------- Tax-equivalent interest revenue: Securities $ (321) $7,127 $(7,448) Trading securities 60 81 (21) Loans 195 8,137 (7,942) Funds sold and resell agreements (27) 6 (33) ------------------------------------------- ----------- ------------ ---------- Total (93) 15,351 (15,444) ------------------------------------------- ----------- ------------ ---------- Interest expense: Transaction deposits (2,271) 2,300 (4,571) Savings deposits (236) 14 (250) Time deposits (437) 1,469 (1,906) Funds purchased and repurchase agreements (1,550) 461 (2,011) Other borrowings (1,511) (250) (1,261) Subordinated debentures (364) (227) (137) ------------------------------------------- ----------- ------------ ---------- Total (6,369) 3,767 (10,136) ------------------------------------------- ----------- ------------ ---------- Tax-equivalent net interest revenue 6,276 $11,584 $(5,308) ------------ ---------- Decrease in tax-equivalent adjustment 220 ------------------------------------------- ----------- Net interest revenue $6,496 ------------------------------------------- ----------- (1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis. 15 BOK Financial follows a strategy of fully utilizing capital resources by borrowing funds in the capital markets to supplement deposit growth. The proceeds of these borrowed funds are invested in securities. The primary objective of this strategy is to enhance revenue opportunities. In the current market conditions, this strategy also helps manage our overall interest rate risk. The interest rate on these borrowed funds, which generally reacts quickly to changes in market interest rates, tends to match the effects of changes in interest rates on the loan portfolio. Interest rates earned on the securities purchased with the proceeds of the borrowings are affected less quickly by changes in market interest rates. The timing of these changes in interest rates earned on the securities more closely matches the timing of changes in interest paid on deposits. Although this strategy may reduce net interest margin, it provides positive net interest revenue. We estimated that this strategy enhanced net interest revenue $61 million during 2003 compared to $67 million in 2002. Excluding this strategy, net interest margin for 2003 and 2002 would have been 3.49% and 3.76%, respectively. Average securities purchased and funds borrowed under this strategy were $2.0 billion in 2003 and $1.9 billion in 2002. As more fully discussed in the subsequent Market Risk section, we employ various techniques to manage, within established parameters, the interest rate and liquidity risk inherent in this strategy. The effectiveness of these techniques is reflected in the overall change in net interest revenue due to changes in interest rates as shown in Table 23. Tax-equivalent net interest revenue for the fourth quarter of 2003 totaled $102.0 million, compared to $95.7 million for the fourth quarter of 2002. The increase was due to growth in average earning assets, which increased $1.0 billion or 9%. Net interest margin declined 16 basis points to 3.39% as yields on earning assets decreased more rapidly than the cost of interest-bearing liabilities due to the effects of falling interest rates as discussed above. Tax-equivalent net interest revenue for 2002 was $374.3 million, a $37.3 million or 11% increase from 2001. This increase was due to growth in average earning assets. As shown in Table 2, net interest revenue increased $42.2 million due to changes in earning assets and interest-bearing liabilities. The increase in net interest revenue due to asset growth was partially offset by a $4.9 million decrease due to falling yields and rates. OTHER OPERATING REVENUE Other operating revenue decreased $17.8 million due to a $66.2 million decrease in net gains on securities sales and derivatives. Fees and commission revenue increased $48.7 million or 19% compared to 2002. These sources of non-interest revenue are a significant part of our business strategy and represented 44% of total revenue, excluding gains and losses on securities and derivatives. Brokerage and trading revenue increased $14.2 million or 58% compared to 2002. During the past several years, we have increased the number of sales staff to take advantage of current market opportunities. These opportunities included transactions with mortgage lenders that want to hedge the economic risks of their loan production. Deposit fees increased $14.4 million or 21% due to an overdraft privilege product that was initiated in 2002. Transaction card revenue grew $5.1 million or 10%. Check card fees and merchant fees increased 19% and 15%, respectively, while ATM network revenue increased 3%. Trust revenue and mortgage banking revenue, which are discussed more fully in the Lines of Business section of this report, increased $5.7 million or 14% and $3.4 million or 7%, respectively. BOK Financial realized net gains on securities sold of $7.2 million in 2003 compared to $58.7 million last year. These amounts included net gains on sales of securities held as economic hedges of the mortgage servicing rights of $4.0 million in 2003 and $26.3 million in 2002. The decrease in net gains on securities reflected current market interest rates over the past two years. Falling interest rates during 2002 presented us with the opportunity to actively manage the portfolio and recognize gains from selling securities that had limited potential for further appreciation. While we continued to sell securities during 2003 to manage the portfolio's duration, consistently low interest rates during 2003 presented fewer opportunities to recognize gains. Derivative instruments, which we used primarily to manage interest rate risk, resulted in mark-to-market losses of $8.8 million in 2003 compared to gains of $5.9 million in 2002. We have not designated these derivatives as hedges for accounting purposes. Additional discussion regarding use of derivative instruments as part of our interest rate risk management program is located in the Market Risk section of this report. 16 Table 3 Other Operating Revenue (In Thousands) Years ended December 31, ------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------- ----------- ----------- ----------- ----------- Brokerage and trading revenue $ 38,681 $ 24,450 $ 19,644 $ 15,146 $ 16,018 Transaction card revenue 55,491 50,385 42,471 37,287 31,399 Trust fees and commissions 45,763 40,092 40,567 39,316 35,127 Service charges and fees on deposit accounts 82,042 67,632 51,284 42,932 41,067 Mortgage banking revenue 52,336 48,910 50,155 37,179 36,986 Leasing revenue 3,508 3,330 3,745 4,244 3,725 Other revenue 25,969 20,276 20,087 17,965 17,589 ----------------------------------------------------------- ------------- ----------- ----------- ----------- ----------- Total fees and commissions 303,790 255,075 227,953 194,069 181,911 ----------------------------------------------------------- ------------- ----------- ----------- ----------- ----------- Gain on sale of assets 822 1,157 557 381 5,496 Gain (loss) on sales of securities, net 7,188 58,704 30,640 2,059 (419) Gain (loss) on derivatives, net (8,808) 5,894 (4,062) - - ----------------------------------------------------------- ------------- ----------- ----------- ----------- ----------- Total other operating revenue $302,992 $320,830 $255,088 $ 196,509 $186,988 ----------------------------------------------------------- ------------- ----------- ----------- ----------- -----------
Other operating revenue for the fourth quarter of 2003, excluding net losses on securities and derivatives, totaled $74.0 million compared to $68.8 million for the fourth quarter of 2002. Trust fees rose 32% to $13.0 million due to growth in the fair value of trust assets and the addition of Colorado State Bank and Trust. Brokerage and trading revenue grew 25%. Revenue from our public finance unit, which is included in other revenue, totaled $2.8 million for the fourth quarter of 2003 compared with $439 thousand for the fourth quarter of 2002. Mortgage banking revenue decreased 50% to $7.5 million due to a decrease in mortgage loan production during the fourth quarter. Mortgage servicing revenue also decreased compared to last year due to a reduction in loans serviced. Losses on securities sales totaled $951 thousand, including $757 thousand of losses on securities used to hedge mortgage servicing rights for the fourth quarter of 2003. These results are compared to gains on securities sales of $10.3 million, including $6.8 million on securities used to hedge mortgage servicing rights, last year. Mark-to-market losses on derivative contracts totaled $2.0 million in 2003 compared to gains of $665 thousand in 2002. Other operating revenue for 2002 totaled $320.8 million, a 26% increase compared to 2001. Fees and commissions revenue increased 12% to $255.1 million due primarily to a 32% increase in service charges on deposit accounts. Brokerage and trading revenue and transaction card revenue increased 24% and 19%, respectively, due to increased transaction volumes in both areas. Growth in these fee income sources was offset by a decrease in trust revenue. The fair value of trust assets decreased due to market conditions in 2002. Mortgage banking revenue also decreased due to a reduction in servicing revenue. Net gains on securities totaled $58.7 million in 2002, compared to $30.6 million in 2001. These amounts included net gains from securities designated as economic hedges of mortgage servicing rights of $26.3 million in 2002 and $12.8 million in 2001. The increase in net realized gains reflected active management of the securities portfolio as interest rates declined during 2002. Management strategy in 2002 was to sell securities that had limited potential for further appreciation and to replace them with securities with less prepayment risk. Net gains on derivatives, which totaled $5.9 million in 2002 compared to losses of $4.1 million in 2001, primarily represented the mark-to-market of derivatives used for interest rate risk management. We expect continued growth in other operating revenue through offering new products and services and by expanding into new markets. However, increased competition and saturation in our existing markets could affect the rate of future increases. We also believe that our diverse sources of fee revenue mitigate the effects of changes in interest rates, values in the equity markets and consumer spending, all of which can be volatile. 17 OTHER OPERATING EXPENSE Other operating expense for 2003 totaled $410.1 million, a 4% decrease from 2002. This decrease resulted from the provision for impairment of mortgage servicing rights. This provision shifted from a $45.9 million expense in 2002 to a $22.9 million recovery in 2003 due to slowing prepayment speeds. Excluding the effects of the provision for impairment of mortgage servicing rights, other operating expense increased $52.4 million or 14%. Personnel expense increased $35.5 million or 19% to $222.9 million. Regular compensation expense totaled $140.2 million, a 10% increase over 2002. This increase was due to a 6% increase in average regular compensation per full-time equivalent employee combined with a 4% increase in staffing. Incentive compensation, which varies directly with revenue, increased 45% to $45.8 million. Incentive compensation expense included brokerage commissions, which increased 26% to $11.2 million, and stock-based compensation expense, which increased $1.7 million or 40%. Expense for other incentive compensation plans increased $10.2 million, primarily due to revenue growth. Employee benefit expenses increased 27% to $35.9 million due to a 49% increase in medical and employee insurance costs and a 21% increase in retirement expenses. We have taken several actions intended to reduce the future growth in personnel expense, including a five percent reduction in staffing. This reduction is expected to reduce personnel expense by more than $9 million annually beginning in 2004. Professional fees increased $4.9 million or 38% compared to 2002. This increase was due primarily to a $2.5 million increase in consulting fees associated with deposit fee programs. This consulting engagement ended in 2003. The increased data processing and communications expense included $4.9 million of expenses associated with the conversion of our primary data processing systems, which occurred in the fourth quarter. We expect that the new system will allow us to be more responsive to future technology changes and to better control ongoing costs. Operating expenses for the fourth quarter of 2003 totaled $108.3 million, a 3% increase from the fourth quarter of 2002. Personnel costs increased $7.5 million or 15%, while mortgage banking costs decreased $8.4 million. The increase in personnel costs for the quarter included $1.1 million of severance expense related to the staffing reduction noted previously. The decrease in mortgage banking costs was due primarily to a reduction in amortization of mortgage servicing rights. This amortization is directly related to actual and anticipated loan prepayments, which decreased significantly during the fourth quarter as interest rates began to rise. Additionally, the fourth quarter of 2003 included operating expenses of $4.5 million from CSBT. Operating expenses for 2002 increased $56.8 million or 15% over 2001. Mortgage banking costs increased $12.0 million due to increased amortization of mortgage servicing rights. A provision for impairment of mortgage servicing rights of $45.9 million was also recognized due to increased actual and anticipated loan prepayments during the year. Excluding the increase in amortization expense and provision for impairment of mortgage servicing rights, operating expenses increased $14.4 million or 4%. Personnel costs increased $20.6 million or 12% due primarily to an 8% increase in average salaries per employee combined with a 2% increase in staffing. Incentive compensation, which is directly related to revenue growth, increased $4.7 million. Data processing expenses increased $6.1 million or 16% due primarily to an increase in transaction volumes. Amortization expense decreased $12.5 million due primarily to the adoption of FAS 142 and FAS 147, as previously discussed. 18 Table 4 Other Operating Expense (In Thousands) Years ended December 31, ----------------------------------------------------------- 2003 2002 2001 2000 1999 ----------- ------------ ----------- ---------- ----------- Personnel expense $222,922 $ 187,439 $166,864 $148,614 $138,633 Business promotion 12,937 11,367 10,658 8,395 9,077 Professional fees and services 17,935 12,987 13,391 9,618 9,584 Net occupancy and equipment 45,967 42,347 42,764 35,447 30,789 Data processing and communications 51,537 44,084 38,003 33,496 30,789 FDIC and other insurance 2,267 1,903 1,717 1,569 1,356 Printing, postage and supplies 13,930 12,665 12,329 11,260 11,599 Net gains and operating expenses on repossessed assets 271 1,014 1,401 (1,283 (3,473) Amortization of intangible assets 8,101 7,638 20,113 15,478 15,823 Mortgage banking costs 40,296 42,271 30,261 22,274 23,932 Provision (recovery) for impairment of mortgage servicing rights (22,923) 45,923 15,551 2,900 - Other expense 16,871 16,957 16,729 15,980 13,781 ---------------------------------------- ----------- ------------ ----------- ---------- ----------- Total $410,111 $ 426,595 $369,781 $303,748 $281,890 ---------------------------------------- ----------- ------------ ----------- ---------- -----------
INCOME TAXES Income tax expense was $88.9 million in 2003, compared to $80.8 million in 2002 and $62.4 million in 2001. This represented 36%, 35% and 35%, respectively, of book taxable income. Tax expense currently payable totaled $82.6 million in 2003 compared to $95.9 million in 2002 and $74.2 million in 2001. The Internal Revenue Service closed its examination of 2000 during 2003. No significant adjustments resulted from this examination, and no other examinations are currently in process. 19 Table 5 Selected Quarterly Financial Data (In Thousands Except Per Share Data) Fourth Third Second First ------------ ------------ ------------ ------------ 2003 --------------------------------------------------- Interest revenue $143,883 $137,804 $141,534 $141,952 Interest expense 43,103 41,633 43,967 46,441 --------------------------------------------------------- ------------ ------------ ------------ ------------ Net interest revenue 100,780 96,171 97,567 95,511 Provision for loan losses 8,001 8,220 9,503 9,912 --------------------------------------------------------- ------------ ------------ ------------ ------------ Net interest revenue after provision for loan losses 92,779 87,951 88,064 85,599 Other operating revenue 74,021 80,001 77,946 72,644 Gain (loss) on sales of securities, net (951) (12,007) 10,457 9,689 Gain (loss) on derivatives, net (2,019) (4,566) (1,121) (1,102) Other operating expense 110,581 106,957 108,511 106,985 Provision (recovery) for impairment of mortgage servicing rights (2,260) (16,186) 3,353 (7,830) --------------------------------------------------------- ------------ ------------ ------------ ------------ Income before taxes 55,509 60,608 63,482 67,675 Income tax expense 20,207 21,792 22,707 24,208 --------------------------------------------------------- ------------ ------------ ------------ ------------ Net income $ 35,302 $ 38,816 $ 40,775 $ 43,467 --------------------------------------------------------- ------------ ------------ ------------ ------------ Earnings per share: Basic $ 0.61 $ 0.67 $ 0.71 $ 0.76 --------------------------------------------------------- ------------ ------------ ------------ ------------ Diluted $ 0.55 $ 0.60 $ 0.63 $ 0.67 --------------------------------------------------------- ------------ ------------ ------------ ------------ Average shares: Basic 57,137 57,059 56,940 56,821 --------------------------------------------------------- ------------ ------------ ------------ ------------ Diluted 64,592 64,693 64,569 64,456 --------------------------------------------------------- ------------ ------------ ------------ ------------ 2002 --------------------------------------------------- Interest revenue $143,756 $144,430 $142,997 $143,730 Interest expense 49,472 51,861 52,716 52,663 --------------------------------------------------------- ------------ ------------ ------------ ------------ Net interest revenue 94,284 92,569 90,281 91,067 Provision for loan losses 10,001 8,029 6,834 8,866 --------------------------------------------------------- ------------ ------------ ------------ ------------ Net interest revenue after provision for loan losses 84,283 84,540 83,447 82,201 Other operating revenue 68,800 65,090 62,976 59,366 Gain (loss) on sales of securities, net 10,342 34,341 21,602 (7,581) Gain (loss) on derivatives, net 665 7,218 (1,453) (536) Other operating expense 106,696 94,871 90,317 88,788 Provision (recovery) for impairment of mortgage servicing rights (1,615) 29,042 23,774 (5,278) --------------------------------------------------------- ------------ ------------ ------------ ------------ Income before taxes 59,009 67,276 52,481 49,940 Income tax expense 20,858 23,784 18,547 17,646 --------------------------------------------------------- ------------ ------------ ------------ ------------ Net income $ 38,151 $ 43,492 $ 33,934 $ 32,294 --------------------------------------------------------- ------------ ------------ ------------ ------------ Earnings per share: Basic $ 0.67 $ 0.79 $ 0.61 $ 0.59 --------------------------------------------------------- ------------ ------------ ------------ ------------ Diluted $ 0.60 $ 0.70 $ 0.55 $ 0.52 --------------------------------------------------------- ------------ ------------ ------------ ------------ Average shares: Basic 56,166 54,634 54,573 54,466 --------------------------------------------------------- ------------ ------------ ------------ ------------ Diluted 63,785 62,082 62,112 61,938 --------------------------------------------------------- ------------ ------------ ------------ ------------
LINES OF BUSINESS BOK Financial operates four principal lines of business under its Bank of Oklahoma franchise: corporate banking, consumer banking, mortgage banking and wealth management. It also operates a fifth principal line of business, regional banks, which includes all banking functions for Bank of Albuquerque, N.A., Bank of Arkansas, N.A., Bank of Texas, N.A., and Colorado State Bank and Trust, N.A. In addition to its lines of business, BOK Financial has a funds management unit. The primary purpose of this unit is to manage the overall liquidity needs and interest rate risk of the company. Each line of business borrows funds from and provides funds to the funds management unit as needed to support their operations. BOK Financial allocates resources and evaluates performance of its lines of business 20 after allocation of funds, certain indirect expenses, taxes and capital costs. The cost of funds borrowed from the funds management unit by the operating lines of business is transfer-priced at rates that approximate market for funds with similar duration. Market is generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of transfer-pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk. The value of funds provided by the operating lines of business to the funds management unit is based on applicable Federal Home Loan Bank advance rates. Deposit accounts with indeterminate maturities, such as demand deposit accounts and interest-bearing transaction accounts, are transfer-priced at a rolling average based on expected duration of the accounts. The expected duration ranges from 90 days for certain rate-sensitive deposits to five years. During 2002, the average transfer-pricing rate for these deposit accounts decreased by approximately 200 basis points. Since many of these deposit accounts are either noninterest-bearing accounts or interest bearing accounts whose rates cannot be readily reset lower due to market constraints, the decline in the transfer-pricing rates shifted net interest revenue from providers of funds, primarily consumer banking and wealth management, to the funds management unit. The effects of this shift are seen in the comparison of earnings between 2002 and 2001. Economic capital is assigned to the business units based on an allocation method that reflects management's assessment of risk. During 2003, we adopted a third-party developed capital allocation model. This model assigns capital based upon credit, operating, interest rate and market risk inherent in our business lines and recognizes the diversification benefits among the units. The level of assigned economic capital is a combination of the risk taken by each business line based on its actual exposures and calibrated to its own loss history where possible. Previously, capital was assigned to the business units based on an internally-developed model that focused primarily on credit risk as defined by regulatory standards. While adoption of this new model has not significantly affected our assessment of the overall capital levels required for the company, it has assigned more capital to business units with operating, interest rate, and market risk, and assigned less capital to business units with credit risk. Additional capital is assigned to the regional banks line of business based on our investment in those entities. Capital assignments for prior periods have been restated to reflect this new allocation model. CORPORATE BANKING The Corporate Banking Division provides loan and lease financing and treasury and cash management services to businesses throughout Oklahoma and surrounding states. In addition to serving the banking needs of small businesses, middle market and larger customers, the Corporate Banking Division has specialized groups that serve customers in the energy, agriculture, healthcare and banking/finance industries and includes the TransFund ATM network. The Corporate Banking Division contributed $59.7 million or 38% to consolidated net income for 2003. This compares to $58.1 million or 39% of consolidated net income for 2002. Net interest revenue from external sources decreased due to lower yields on average assets, primarily loans. The lower yield on loans was offset by a decline in net interest expense from internal sources. Other operating revenue increased $7.1 million or 10% due primarily to an increase in merchant discount and deposit fees. Operating expenses increased to $88.5 million for 2003 from $81.4 million for last year due primarily to an increase in personnel and transaction processing costs. Average assets increased $324 million or 8% for 2003 due primarily to loan growth. Table 6 Corporate Banking (Dollars in Thousands) Years ended December 31, -------------------------------------- 2003 2002 2001 -------------------------------------- NIR (expense)from external sources $ 144,791 $ 155,648 $ 199,727 NIR (expense)from internal sources (28,218) (45,573) (86,150) -------------------------------------- Total net interest revenue 116,573 110,075 113,577 Other operating revenue 79,316 72,234 62,648 Operating expense 88,478 81,434 78,190 Net loans charged off 10,325 6,475 10,481 Net income 59,693 58,081 53,344 Average assets $4,362,396 $4,038,353 $3,867,850 Average equity 311,140 298,020 275,090 Return on assets 1.37% 1.44% 1.38% Return on equity 19.19 19.49 19.39 Efficiency ratio 45.17 44.67 44.37 21 CONSUMER BANKING The Consumer Banking Division provides a full line of deposit, loan and fee-based services to customers throughout Oklahoma through four major distribution channels: traditional branches, supermarket branches, the 24-hour ExpressBank call center and Online Banking. Additionally, the division is a significant referral source for the Bank of Oklahoma Mortgage Division ("BOk Mortgage") and BOSC's retail brokerage division. The Consumer Banking Division contributed $9.2 million or 6% to consolidated net income for 2003. This compares to $6.8 million or 5% of consolidated net income for 2002. Revenue from internal sources, primarily funds provided to other business lines, decreased $3.4 million due to lower transfer-pricing rates. Other operating revenue increased $8.5 million, or 22%, over 2002 due primarily to increases in deposit service charges. Operating expenses increased 5% to $66.6 million. Personnel costs contributed $2.4 million to this increase. Table 7 Consumer Banking (Dollars in Thousands) Years ended December 31, ----------------------------------------- 2003 2002 2001 ----------------------------------------- NIR (expense) from external sources $ (16,725) $ (17,875) $ (34,049) NIR (expense) from internal sources 57,925 61,301 94,393 ----------------------------------------- Total net interest revenue 41,200 43,426 60,344 Other operating revenue 47,361 38,862 29,995 Operating expense 66,639 63,401 59,099 Net loans charged off 6,887 7,829 4,180 Net income 9,186 6,756 16,533 Average assets $2,514,262 $2,341,239 $2,192,698 Average equity 58,000 60,910 53,250 Return on assets .37% .29% .75% Return on equity 15.84 11.09 31.05 Efficiency ratio 75.25 77.05 65.42 MORTGAGE BANKING BOK Financial engages in mortgage banking activities through BOk Mortgage. These activities include the origination, marketing and servicing of conventional and government-sponsored mortgage loans. Consolidated mortgage banking revenue, which is included in other operating revenue, increased $3.4 million or 7% compared to 2002. However, mortgage banking activities contributed $28.4 million or 18% to consolidated net income in 2003 compared to $1.6 million or 1% in 2002, due primarily to a reduction in provision for mortgage servicing rights, net of gains on financial instruments held as an economic hedge of the servicing rights. Mortgage banking activities consist of two sectors, loan production and loan servicing. The increased contribution to net income in 2003 reflected both strong performance of the loan production sector and the partial reversal of reserves established for impairment of mortgage servicing rights in the loan servicing sector. Table 8 Mortgage Banking (Dollars in Thousands) Years ended December 31, ------------------------------------------- 2003 2002 2001 ------------------------------------------- NIR (expense) from external sources $ 27,770 $ 32,199 $ 32,545 NIR (expense) from internal sources (9,415) (13,713) (20,867) ------------------------------------------- Total net interest revenue 18,355 18,486 11,678 Capitalized mortgage servicing rights 23,922 20,832 22,695 Other operating revenue 36,379 37,845 30,119 Operating expense 58,204 54,795 47,750 Provision (recovery) for impairment of mortgage servicing rights (22,923) 45,923 15,551 Gain on sales of financial instruments, net 4,025 26,345 12,757 Net income 28,401 1,551 8,493 Average assets $623,823 $ 671,798 $651,103 Average equity 69,100 34,160 18,700 Return on assets 4.55% .23% 1.30% Return on equity 41.10 4.54 45.42 Efficiency ratio 74.00 71.01 74.04 22 LOAN PRODUCTION SECTOR Loan production revenue totaled $33.8 million in 2003, including $23.9 million of capitalized mortgage servicing rights, compared to loan production revenue of $27.4 million in 2002, including $20.8 million of capitalized mortgage servicing rights. The increase in loan production revenue, excluding the value of capitalized mortgage servicing rights, was due to improved market conditions for loan sales. The value of mortgage loans sold remained high during the year as interest rates stayed low. Mortgage loans funded totaled $1.3 billion in 2003, including $457 million for home purchases and $859 million of refinanced loans. Mortgage loans funded in 2002 totaled $1.0 billion, including $451 million for home purchases and $563 million of refinanced loans. Approximately 70% of the loans funded during 2003 were in Oklahoma. The increase in volume of loans funded, combined with steady loan pricing, resulted in pre-tax income from loan production of $32.0 million for 2003 compared to $23.7 million for the previous year. The pipeline of mortgage loan applications totaled $208 million at December 31, 2003, compared to $323 million at December 31, 2002. LOAN SERVICING SECTOR The loan servicing sector had pre-tax income of $12.9 million for 2003 compared to a pre-tax loss of $22.5 million for 2002. The improved operating results were due primarily to the partial reversal of the reserve for impairment of mortgage servicing rights. Interest rates affected servicing revenue, the value of mortgage servicing rights and amortization expense during 2002 and 2003. As interest rates fell during 2002, both actual and anticipated loan prepayments increased. Actual loan prepayments reduce the outstanding balance of loans serviced, which is a primary factor for determining servicing revenue and the fair value of servicing rights. The fair value of servicing rights decrease whenever prepayment speeds are high. Conversely, the fair value of servicing rights increase whenever prepayment speeds are low. Prepayment speeds were high during 2002 as a result of the historically low mortgage interest rates. Prepayment speeds slowed during 2003 as interest rates increased slightly. Servicing fees totaled $21.8 million in 2003 compared to $28.2 million in 2002. The decrease in servicing fees was due primarily to a lower outstanding principal balance of loans serviced. The average outstanding balance of loans serviced was $4.9 billion during 2003 compared to $6.2 billion during 2002. The decrease in loans serviced reflected both the rapid refinancing of mortgage loans and BOk Mortgage's decision to curtail purchases of mortgage loan servicing. This decision also affected the geographic distribution of the loan servicing portfolio. Approximately 72% of loans serviced are in our primary market areas at December 31, 2003, compared to 69% at December 31, 2002. Amortization of mortgage servicing rights, which is included in operating expense, was $35.6 million in 2003 compared to $36.0 million in 2002. Amortization expense is determined in proportion to the estimated future cash flows that will be generated by the mortgage servicing rights. The valuation allowance for impairment of mortgage servicing rights totaled $32 million at December 31, 2003 compared to $55 million at December 31, 2002. The valuation allowance was reduced by $22.9 million during 2003. An impairment provision of $45.9 million increased the valuation allowance in 2002. As discussed in the Critical Accounting Policies section of this report, a valuation allowance is provided to reduce the carrying value of servicing rights to the lower of fair value or amortized cost segregated by impairment strata. Impairment strata are determined by interest rate bands and by loan types, either conventional or government-backed. The fair value of servicing rights is based on estimated revenues that will be generated over the servicing period, less estimated costs to service the loans. The valuation allowance may be reversed, in part or in whole, if the fair value of servicing rights in a particular impairment strata increase or if the amortized cost of servicing rights in a particular strata decrease. Note 8 to the Consolidated Financial Statements presents additional information about the fair value and amortized cost of servicing rights and the valuation allowance. 23 BOK Financial designates a portion of its securities portfolio as an economic hedge against the risk of loss on its mortgage servicing rights. Mortgage-backed securities and U.S. government agency debentures are acquired and held as available for sale when prepayment risks exceed certain levels. Because the fair value of these securities is expected to vary inversely to the fair value of the servicing rights, they are expected to partially offset risk. No special hedge accounting treatment is applicable to either the mortgage servicing rights or the securities designated as an economic hedge. The securities designated as an economic hedge are classified as available for sale and carried at fair market value. We may sell these securities and realize gains when necessary to offset the impairment provision of the mortgage servicing rights. During 2003, we realized gains of $4.0 million from economic hedging activities compared to gains of $26.3 million in 2002. This hedging strategy presents certain risks. A well-developed market determines the fair value for the securities. However, there is no comparable market for mortgage servicing rights. Therefore, the computed change in value of the servicing rights for a specified change in interest rates may not correlate to the change in value of the securities. At December 31, 2003, securities with a fair value of $124 million and an unrealized loss of $1.6 million were held for the economic hedge program. This unrealized loss, net of income taxes, is included in shareholders' equity as part of other comprehensive income. The interest rate sensitivity of the mortgage servicing rights and securities held as a hedge is modeled over a range of +/- 50 basis points. At December 31, 2003, the pre-tax results of this modeling on reported earnings were: Table 9 Interest Rate Sensitivity - Mortgage Servicing (Dollars in Thousands) 50 bp 50 bp Increase Decrease ------------- ----------- Anticipated change in: Fair value of mortgage servicing rights $8,016 $(11,002) Fair value of hedging securities (6,538) 6,307 ----------------------------------- ------------- ----------- Net $1,478 $ (4,695) ----------------------------------- ------------- ----------- WEALTH MANAGEMENT BOK Financial provides a wide range of financial services through its wealth management line of business, including trust and private financial services and brokerage and trading activities. This line of business includes the activities of BOSC, Inc., a registered broker/dealer. Trust and private financial services include sales of institutional, investment and retirement products, loans and other services to affluent individuals, businesses, not-for-profit organizations, and governmental agencies. Trust services are provided primarily to clients throughout Oklahoma, Texas and New Mexico. Additionally, trust services include a nationally competitive, self-directed 401-(k) program. Brokerage and trading activities within the wealth management line of business consist of retail sales of mutual funds, securities, and annuities, institutional sales of securities and derivatives, bond underwriting and other financial advisory services. Wealth management contributed $13.2 million or 8% to consolidated net income for 2003. This compared to $6.1 million or 4% of consolidated net income for 2002. Trust and private financial services provided $7.6 million of net income in 2003, a 22% increase over 2002. At December 31, 2003 and 2002, the wealth management line of business was responsible for trust assets with aggregate market values of $20 billion and $16 billion, respectively, under various fiduciary arrangements. The growth in trust assets reflected increased market value of assets managed in addition to new business generated during the year. We have sole or joint discretionary authority over $8 billion of trust assets at December 31, 2003 compared to $9 billion of trust assets at December 31, 2002. 24 Brokerage and trading activities provided $5.7 million of net income in 2003 compared to a $115 thousand loss in the previous year. Operating revenue increased $17.7 million or 59% due to increased institutional sales volumes and financial advisory fees. During 2003, we expanded a program that assists mortgage bankers in hedging their interest rate risk through transactions in mortgage-backed securities. This program contributed significantly to the increased revenue and sales volume. Operating expenses increased $8.2 million primarily due to incentive compensation. Table 10 Wealth Management (Dollars in Thousands) Years ended December 31, -------------------------------------- 2003 2002 2001 ------------- ------------ ------------ NIR (expense) from external sources $ 1,967 $ 1,958 $ 839 NIR (expense) from internal sources 8,954 8,162 13,136 ---------------------- ------------- ------------ ------------ Total net interest revenue 10,921 10,120 13,975 Other operating revenue 91,534 69,932 67,564 Operating expense 80,440 69,709 63,186 Net income 13,246 6,082 11,129 Average assets $ 731,303 $556,390 $ 492,811 Average equity 69,690 60,880 52,290 Return on assets 1.81% 1.09% 2.26% Return on equity 19.01 9.99 21.28 Efficiency ratio 78.51 87.08 77.49 REGIONAL BANKING Regional banks include Bank of Texas, Bank of Albuquerque, Bank of Arkansas, and Colorado State Bank and Trust. Each of these banks provides a full range of corporate and consumer banking services in their respective markets. Small businesses and middle-market corporations are the regional banks' primary customer focus. Regional banks contributed $41.1 million or 26% to consolidated net income during 2003. This compares to $35.4 million or 24% of consolidated net income in 2002. Net interest revenue from external customers increased $26.6 million or 19% due to growth in average earning assets. Other operating revenue increased $9.7 million or 36% in 2003 from last year due primarily to service charges on deposit accounts. Operating expenses increased $24.0 million or 25% compared to last year. Personnel costs accounted for approximately $13.7 million of this increase. Operations in Texas, New Mexico, and Arkansas contributed $26.3 million, $10.9 million, and $2.0 million, respectively, to consolidated net income for 2003. This compared to $23.9 million, $10.4 million, and $1.3 million, respectively, for 2002. Operations in Colorado contributed $1.9 million in 2003. Table 11 Regional Banks (Dollars in Thousands) Years ended December 31, ------------------------------------------ 2003 2002 2001 ------------------------------------------ NIR (expense) from external sources $ 164,755 $ 138,145 $ 138,846 NIR (expense) from internal sources (12,151) (12,835) (11,689) ------------------------------------------ Total net interest revenue 152,604 125,310 127,157 Other operating revenue 36,531 26,876 19,642 Operating expense 118,386 94,383 91,088 Gains on sales of financial instruments, net 339 4,205 484 Net loans charged off 6,425 6,161 5,873 Net income 41,057 35,432 31,804 Average assets $4,899,360 $3,915,411 $3,352,149 Average equity 360,220 286,730 234,420 Return on assets 0.84% 0.90% 0.95% Return on equity 11.40 12.36 13.57 Efficiency ratio 62.59 62.02 62.05 25 ASSESSMENT OF FINANCIAL CONDITION SECURITIES PORTFOLIO Securities are classified as either held for investment or available for sale based upon asset/liability management strategies, liquidity and profitability objectives and regulatory requirements. Investment securities, which consist primarily of Oklahoma municipal bonds, are carried at cost and adjusted for amortization of premiums or accretion of discounts. Management has the ability and intent to hold these securities until they mature. Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, less deferred taxes, are recorded as accumulated other comprehensive income in shareholders' equity. During 2003, the amortized cost of available for sale securities increased $642 million. Mortgage-backed securities increased $627 million and now represent 97% of total available for sale securities. The increase in securities reflected an increase in available funds due to a combination of strong deposit growth and weaker loan demand during 2003. Approximately $2.0 billion of mortgage-backed securities are held for our strategy of fully utilizing available capital resources by borrowing funds and investing in securities, as previously discussed in the Net Interest Revenue section of this report. Mortgage-backed securities designated as an economic hedge of mortgage servicing rights totaled $124 million at December 31, 2003 compared to $127 million a year earlier. At December 31, 2003, available for sale securities with an amortized cost basis and a fair value of $2.7 billion were pledged as collateral for repurchase agreement borrowings, deposits of public funds, and other purposes. The expected duration of the mortgage-backed securities portfolio was 3 years at December 31, 2003 compared to 2 years at December 31, 2002. This increase in duration reflected the slower anticipated prepayments of the loans represented by these securities as interest rates rose. Table 12 Securities (Dollars in Thousands) December 31, ----------------------------------------------------------------------------- 2003 2002 2001 ------------------------- ------------------------- ------------------------- Amortized Fair Amortized Fair Amortized Fair Cost Value Cost Value Cost Value ------------ ------------ ------------ ------------ ------------ ------------ Investment: U.S. Treasury $ - $ - $ - $ - $ 7,982 $ 7,981 Municipal and other tax-exempt 184,192 187,354 191,305 195,266 222,195 223,487 Mortgage-backed U.S. agency securities 2,296 2,418 4,380 4,618 7,381 7,620 Other debt securities 1,463 1,484 2,265 2,269 3,555 3,540 -------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------ Total $ 187,951 $ 191,256 $ 197,950 $ 202,153 $ 241,113 $ 242,628 -------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------ Available for sale: U.S. Treasury $ 44,679 $45,424 $ 31,013 $ 32,233 $ 34,538 $ 35,197 Municipal and other tax-exempt 3,271 3,257 11,465 11,511 4,262 4,299 Mortgage-backed securities: U.S. agencies 3,514,158 3,518,926 3,005,698 3,067,148 2,637,636 2,638,425 Other 845,430 848,911 727,088 732,542 669,057 673,737 -------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------ Total mortgage-backed securities 4,359,588 4,367,837 3,732,786 3,799,690 3,306,693 3,312,162 -------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------ Other debt securities 1,140 1,177 138 139 536 538 Equity securities and mutual funds 96,460 101,173 87,434 89,770 93,918 97,353 -------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------ Total $4,505,138 $4,518,868 $3,862,836 $3,933,343 $3,439,947 $3,449,549 -------------------------------------------- ------------ ------------ ------------ ------------ ------------ ------------
Net unrealized gains on available for sale securities decreased to $14 million at December 31, 2003 from $71 million at December 31, 2002 due primarily to rising interest rates during 2003. Although the aggregate fair value of the available for sale securities portfolio exceeded amortized cost, individual securities within the portfolio had unrealized losses at year-end. Management evaluated the securities with unrealized losses to determine if we believe that the losses were temporary. This evaluation considered factors such as causes of the unrealized losses and prospects for recovery over various interest rate scenarios and time periods. We also considered our plans for either holding or selling the securities. It is our belief, based on currently available information and our evaluation, that the unrealized losses in these securities were temporary. Information regarding these securities is summarized in Table 13. 26 Table 13 Temporarily Impaired Securities (In Thousands) Less Than 12 Months 12 Months or Longer Total ------------------------- ------------------------- ------------------------- Fair Unrealized Fair Unrealized Fair Unrealized Value Loss Value Loss Value Loss ---------------------------------------------------------------------------------- Investment: Municipal and other tax exempt $ 24,193 $ 317 $ 37,671 $ 570 $ 61,864 $ 887 Available for sale: U. S. Treasury 1,006 1 - - 1,006 1 Municipal and other tax-exempt 803 17 320 3 1,123 20 Mortgage-backed securities: U. S. agencies 1,371,317 24,194 - - 1,371,317 24,194 Other 252,604 2,502 20,047 13 272,651 2,515 Equity securities and mutual funds - - 2,878 737 2,878 737 ------------------------------------------------------------------------------------------------------------------------ Total $1,649,923 $27,031 $ 60,916 $1,323 $1,710,839 $ 28,354 ------------------------------------------------------------------------------------------------------------------------
LOANS The aggregate loan portfolio at December 31, 2003 totaled $7.5 billion, a $583 million or 8% increase since last year. The acquisition of CSBT increased loans by $223 million. Additionally, mortgage loans held for sale decreased $77 million. Excluding the acquisition and change in loans held for sale, the loan portfolio grew by 6%. The commercial loan portfolio increased $347 million during 2003. Much of this increase was focused in the services and energy segments of the portfolio, which increased $134 million and $99 million, respectively. Services comprised 18% of the total loan portfolio and included $256 million of loans to nursing homes, $138 million of loans to medical facilities, and $35 million to the hotel industry. Energy loans totaled $1.2 billion or 16% of total loans. Approximately $1.0 billion was to oil and gas producers. The amount of credit available to these customers generally depends on the value of their proven energy reserves based on current prices. The energy category also included loans to borrowers involved in the transportation and sale of oil and gas and to borrowers that manufacture equipment or provide other services to the energy industry. Agriculture included $197 million of loans to the cattle industry. Other notable loan concentrations by primary industry of the borrowers are presented in Table 14. Table 14 Loans (Dollars in Thousands) December 31, ---------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------ ------------ ------------ ------------ ------------ Commercial: Energy $1,231,599 $1,132,178 $ 987,556 $ 837,223 $ 606,561 Manufacturing 482,657 501,506 467,260 421,046 344,175 Wholesale/retail 668,202 627,422 600,470 499,017 407,785 Agriculture 228,222 186,976 170,861 185,407 173,653 Services 1,383,835 1,249,622 1,084,480 963,171 807,184 Other commercial and industrial 342,187 292,094 364,123 342,169 325,343 ------------ ------------ ------------ ------------ ------------ Total commercial 4,336,702 3,989,798 3,674,750 3,248,033 2,664,701 Commercial real estate: Construction and land development 436,087 356,227 327,455 311,700 249,160 Multifamily 271,119 307,119 291,687 271,459 257,187 Other real estate loans 922,886 772,492 722,633 687,335 588,195 ------------ ------------ ------------ ------------ ------------ Total commercial real estate 1,630,092 1,435,838 1,341,775 1,270,494 1,094,542 Residential mortgage: Secured by 1-4 family residential properties 1,015,643 929,759 703,080 638,044 531,058 Residential mortgages held for sale 56,543 133,421 166,093 48,901 57,057 ------------ ------------ ------------ ------------ ------------ Total residential mortgage 1,072,186 1,063,180 869,173 686,945 588,115 Consumer 444,909 412,167 409,680 312,390 296,131 ----------------------------------------------- ------------ ------------ ------------ ------------ ------------ Total $7,483,889 $6,900,983 $6,295,378 $5,517,862 $4,643,489 ----------------------------------------------- ------------ ------------ ------------ ------------ ------------
27 BOK Financial participates in shared national credits when appropriate to obtain or maintain business relationships with local customers. At December 31, 2003, the outstanding principal balance of these loans totaled $719 million, including $704 million to borrowers with local market relationships. BOK Financial is the agent lender in approximately 39% of these loans. Commercial real estate loans totaled $1.6 billion or 22% of the loan portfolio at December 31, 2003. This represented a 14% increase from the previous year. Construction and land development included $280 million for single family residential lots and premises. The major components of other commercial real estate loans were retail facilities at $313 million and office buildings at $290 million. Commercial real estate loans secured by retail facilities increased $118 million during the past year. This growth focused on retail shopping developments with strong anchor tenants, primarily in our Texas markets. Residential mortgage loans, excluding loans held for sale, included $342 million of home equity loans, $305 million of loans for business relationship purposes, $234 million of adjustable rate mortgages and $101 million of community development loans. Consumer loans included $203 million of indirect automobile loans. Substantially all of these loans were purchased from dealers in Oklahoma. Approximately 15% of the indirect automobile loan portfolio was considered sub-prime. Table 15 Loan Maturity and Interest Rate Sensitivity at December 31, 2003 (Dollars in Thousands) Remaining Maturities of Selected Loans --------------------------------------- Total Within 1 Year 1-5 Years After 5 Years ------------------------------------------------------ Loan maturity: Commercial $4,336,702 $1,682,922 $2,183,950 $469,830 Commercial real estate 1,630,092 663,166 750,936 215,990 --------------------------------------------- -------------- ------------ ------------ ------------- Total $5,966,794 $2,346,088 $2,934,886 $685,820 --------------------------------------------- -------------- ------------ ------------ ------------- Interest rate sensitivity for selected loans with: Predetermined interest rates $2,061,181 $ 514,235 $1,227,437 $319,509 Floating or adjustable interest rates 3,905,613 1,831,853 1,707,449 366,311 --------------------------------------------- -------------- ------------ ------------ ------------- Total $5,966,794 $2,346,088 $2,934,886 $685,820 --------------------------------------------- -------------- ------------ ------------ -------------
BOK Financial continued to increase the geographic distribution of the loan portfolio by expansion into Colorado in addition to growth in Texas. Total loans in the Oklahoma market area comprised 62% of the total loan portfolio at December 31, 2003 compared to 66% a year ago. Table 16 reflects the distribution of major loan categories among our principal market areas. 28 Table 16 Loans by Principal Market Area (Dollars in Thousands) December 31, ---------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------ ------------ ------------ ------------ ------------ Oklahoma: Commercial $2,802,852 $2,677,616 $2,576,808 $2,476,389 $2,165,873 Commercial real estate 789,868 763,469 739,419 768,232 704,999 Residential mortgage 699,274 656,391 476,023 409,494 319,749 Residential mortgage held for sale 56,543 133,421 166,093 48,901 57,057 Consumer 324,305 294,404 314,060 250,298 236,565 ------------ ------------ ------------ ------------ ------------ Total Oklahoma $4,672,842 $4,525,301 $4,272,403 $3,953,314 $3,484,243 ------------ ------------ ------------ ------------ ------------ Texas: Commercial $ 963,340 $ 866,905 $ 775,788 $ 549,505 $ 383,460 Commercial real estate 477,561 455,364 380,602 299,357 227,748 Residential mortgage 204,481 192,575 136,181 122,082 102,888 Consumer 101,269 104,353 85,347 53,397 50,923 ------------ ------------ ------------ ------------ ------------ Total Texas $1,746,651 $1,619,197 $1,377,918 $1,024,341 $ 765,019 ------------ ------------ ------------ ------------ ------------ Albuquerque: Commercial $ 297,896 $ 286,622 $ 219,257 $ 167,023 $ 63,370 Commercial real estate 175,745 150,293 136,425 118,492 87,759 Residential mortgage 66,179 76,020 85,309 101,920 103,684 Consumer 11,070 11,399 8,200 6,107 5,410 ------------ ------------ ------------ ------------ ------------ Total Albuquerque $ 550,890 $ 524,334 $ 449,191 $ 393,542 $ 260,223 ------------ ------------ ------------ ------------ ------------ Northwest Arkansas: Commercial $ 63,480 $ 63,113 $ 72,728 $ 50,680 $ 45,603 Commercial real estate 75,452 66,712 85,329 84,413 74,036 Residential mortgage 6,245 4,773 5,567 4,548 4,737 Consumer 2,671 2,011 2,073 2,588 3,233 ------------ ------------ ------------ ------------ ------------ Total Northwest Arkansas $ 147,848 $ 136,609 $ 165,697 $ 142,229 $ 127,609 ------------ ------------ ------------ ------------ ------------ Colorado (1): Commercial $ 209,134 $ 95,542 $ 30,169 $ 4,436 $ 6,395 Commercial real estate 111,466 - - - - Residential mortgage 39,464 - - - - Consumer 5,594 - - - - ------------ ------------ ------------ ------------ ------------ Total Colorado $ 365,658 $ 95,542 $ 30,169 $ 4,436 $ 6,395 ------------ ------------ ------------ ------------ ------------ Total BOK Financial loans $7,483,889 $6,900,983 $6,295,378 $5,517,862 $4,643,489 ------------ ------------ ------------ ------------ ------------ 1 Includes Denver loan production office.
DERIVATIVES WITH CREDIT RISK BOK Financial offers programs that permit its customers to hedge various risks. Much of the focus of these programs had been on assisting energy producing customers to hedge against price fluctuations and to take positions through energy derivative contracts. We have added or expanded programs to assist customers in managing their interest rate and foreign exchange risks during 2003. Each of these programs work essentially the same way. Derivative contracts are executed between the customers and BOk. Offsetting contracts are executed between BOk and selected counterparties to minimize the risk to us of changes in energy prices, interest rates or foreign exchange rates. The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or a fee paid to BOk as compensation for administrative costs, credit risk and profit. These programs create credit risk for amounts due to BOk from its customers and counterparties. Customer credit risk is monitored through existing credit policies. Changes in energy prices, interest rates or foreign exchange rates are evaluated across a range of possible scenarios to determine the maximum likely exposure we are willing to have individually to any customer. Customers may also be required to provide margin collateral to further limit our credit risk. Counterparty credit risk is evaluated through existing policies. This evaluation considers the total relationship between BOK Financial and each counterparty. Individual limits are established by management and approved by the Asset/Liability Committee. Margin collateral is required if the exposure between BOk and any counterparty exceeds established limits. These limits are reduced and additional margin collateral is based on changes in the counterparties' credit ratings. 29 A deterioration of the credit standing of one or more of the counterparties to these contracts may result in BOK Financial recognizing a loss as the fair value of the affected contracts may no longer move in tandem with the offsetting contracts. This could occur if the credit standing of the counterparty deteriorated such that either the fair value of energy production no longer supported the contract or the counterparty's ability to provide margin collateral was impaired. Derivative contracts are carried at fair value. At December 31, 2003, the fair values of derivative contracts reported as assets totaled $145 million. This included energy contracts with fair values of $137 million, interest rate contracts with fair values of $3 million and foreign exchange contracts with fair values of $5 million. The fair values of derivative contracts reported as liabilities totaled $146 million. Approximately 66% of the fair value of asset contracts was with customers. The remaining 34% was with counterparties. Conversely, 64% of the liability contracts was with counterparties. The remaining 36% was with customers. The maximum net exposure to any single customer or counterparty totaled $24 million. SUMMARY OF LOAN LOSS EXPERIENCE The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $129 million at December 31, 2003 compared to $116 million at December 31, 2002. These amounts represented 1.73% and 1.72% of loans, excluding loans held for sale, at December 31, 2003 and 2002, respectively. Losses on loans held for sale, principally mortgage loans accumulated for placement into security pools, are charged to earnings through adjustment in the carrying value. The reserve for loan losses also represented 244% of nonperforming loans at year-end 2003 compared to 233% at year-end 2002. Net loans charged off during 2003 increased to $25 million in 2003 compared to $21 million in the previous year. Net commercial loans charged-off during 2003 totaled $15.4 million, a $3.4 million increase from 2002. Table 17 provides statistical information regarding the reserve for loan losses for the past five years. Table 17 Summary of Loan Loss Experience (Dollars in Thousands) Years ended December 31, ------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------------------------------------------------------------- Beginning balance $116,070 $101,905 $ 82,655 $76,234 $65,922 Loans charged off: Commercial 16,331 13,326 18,042 7,747 2,136 Commercial real estate 88 286 71 1,176 35 Residential mortgage 1,721 412 308 285 617 Consumer 13,335 11,881 6,827 5,593 4,560 ----------------------------------------------------------------------------------------------------------------------- Total 31,475 25,905 25,248 14,801 7,348 ----------------------------------------------------------------------------------------------------------------------- Recoveries of loans previously charged off: Commercial 887 1,276 1,151 1,126 3,110 Commercial real estate 53 118 653 428 487 Residential mortgage 83 146 57 157 17 Consumer 5,102 3,436 2,727 2,307 2,156 ----------------------------------------------------------------------------------------------------------------------- Total 6,125 4,976 4,588 4,018 5,770 ----------------------------------------------------------------------------------------------------------------------- Net loans charged off 25,350 20,929 20,660 10,783 1,578 Provision for loan losses 35,636 33,730 37,610 17,204 10,365 Additions due to acquisitions 2,283 1,364 2,300 - 1,525 ----------------------------------------------------------------------------------------------------------------------- Ending balance $128,639 $116,070 $101,905 $82,655 $76,234 ----------------------------------------------------------------------------------------------------------------------- Reserve for loan losses to loans outstanding at 1.73% 1.72% 1.66% 1.51% 1.66% year-end (1) Net charge-offs to average loans (1) .36 .33 .35 .22 .04 Provision for loan losses to average loans (1) .50 .54 .63 .35 .26 Recoveries to gross charge-offs 19.46 19.21 18.17 27.15 78.52 Reserve as a multiple of net charge-offs 5.07x 5.55x 4.93x 7.67x 48.31x ----------------------------------------------------------------------------------------------------------------------- Problem Loans: Loans past due (90 days) $ 14,944 $ 8,117 $ 8,108 $15,467 $11,336 Nonaccrual (2) 52,681 49,855 43,540 39,661 19,465 Renegotiated - - 27 87 - ----------------------------------------------------------------------------------------------------------------------- Total $ 67,625 $ 57,972 $ 51,675 $55,215 $30,801 ----------------------------------------------------------------------------------------------------------------------- Foregone interest on nonaccrual loans (2) $ 5,268 $ 4,770 $ 5,163 $ 3,803 $ 2,321 ----------------------------------------------------------------------------------------------------------------------- 1 Excludes residential mortgage loans held for sale. 2 Interest collected and recognized on nonaccrual loans was not significant in 2003 and previous years disclosed.
30 Specific impairment reserves are determined through evaluation of estimated future cash flows and collateral value. At December 31, 2003, specific impairment reserves totaled $6.4 million on total impaired loans of $47 million. Nonspecific reserves are maintained for risks beyond factors specific to an individual loan or those identified through migration analysis. A range of potential losses is determined for each risk factor identified. At December 31, 2003, the ranges of potential losses for the more significant factors were: General economic conditions - $8.0 million to $10.8 million. Concentration in large loans - $1.3 million to $2.5 million. Allocation of the loan loss reserve to the major loan categories is presented in Table 18. Table 18 Loan Loss Reserve Allocation (Dollars in Thousands) December 31, ------------------------------------------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------------ ------------------- ------------------- ------------------- ------------------ % of % of % of % of % of Reserve(3)Loans(1) Reserve(3)Loans(1) Reserve(3)Loans(1) Reserve(3) Loans(1) Reserve(3)Loans(1) --------- -------- --------- --------- --------- --------- --------- --------- --------- -------- Loan category: Commercial (2) $ 69,594 58.39% $ 65,280 58.95% $ 61,164 59.95% $55,187 59.39% $47,261 58.10% Commercial real estate 17,791 21.95 17,753 21.22 15,923 21.89 12,393 23.23 11,216 23.86 Residential mortgage 6,949 13.67 4,099 13.74 3,774 11.47 2,019 11.67 2,137 11.58 Consumer 16,697 5.99 14,384 6.09 6,890 6.69 6,407 5.71 6,721 6.46 Nonspecific allowance 17,608 - 14,554 - 14,154 - 6,649 - 8,899 - -------------------------- --------- -------- --------- --------- --------- --------- --------- --------- --------- -------- Total $128,639 100.00% $116,070 100.00% $101,905 100.00% $82,655 100.00% $76,234 100.00% -------------------------- --------- -------- --------- --------- --------- --------- --------- --------- --------- -------- 1 Excludes residential mortgage loans held for sale. 2 Specific allocation for Year 2000 risks was $2.0 million in 1999. 3 Specific allocation for the loan concentration risks are included in the appropriate category.
NONPERFORMING ASSETS Information regarding nonperforming assets, which totaled $60 million at December 31, 2003 and $57 million at December 31, 2002, is presented in Table 19. Nonperforming assets included nonaccrual and renegotiated loans and excluded loans 90 days or more past due but still accruing interest. Nonaccrual loans increased $2.8 million during 2003. Newly identified nonaccruing loans totaled $33 million during the year. Nonaccruing loans decreased $18 million for loans charged off and foreclosed and $11 million for cash payments received. Table 19 Nonperforming Assets (Dollars in Thousands) December 31, ----------------------------------------------------------------- 2003 2002 2001 2000 1999 ------------ ------------ ------------ ------------ ------------- Nonperforming loans Nonaccrual loans: Commercial $41,360 $39,114 $35,075 $37,146 $12,686 Commercial real estate 2,311 3,395 3,856 161 2,046 Residential mortgage 7,821 5,950 4,140 1,855 3,383 Consumer 1,189 1,396 469 499 1,350 ------------------------------------------------------------ ------------ ------------ ------------ ------------ ------------- Total nonaccrual loans 52,681 49,855 43,540 39,661 19,465 Renegotiated loans - - 27 87 - ------------------------------------------------------------ ------------ ------------ ------------ ------------ ------------- Total nonperforming loans 52,681 49,855 43,567 39,748 19,465 Other nonperforming assets 7,186 6,719 7,141 3,851 3,478 ------------------------------------------------------------ ------------ ------------ ------------ ------------ ------------- Total nonperforming assets $59,867 $56,574 $50,708 $43,599 $22,943 ------------------------------------------------------------ ------------ ------------ ------------ ------------ ------------- Ratios: Reserve for loan losses to nonperforming loans 244.18% 232.82% 233.90% 207.95% 391.65% Nonperforming loans to period-end loans (2) .71 .74 .71 .73 .42 ------------------------------------------------------------ ------------ ------------ ------------ ------------ ------------- Loans past due (90 days) (1) $14,944 $ 8,117 $ 8,108 $15,467 $11,336 ------------------------------------------------------------ ------------ ------------ ------------ ------------ ------------- 1 Includes residential mortgages guaranteed by agencies of the U.S. Government. $ 4,132 $ 4,956 $ 6,222 $ 7,616 $ 8,538 2 Excludes residential mortgage loans held for sale.
31 The loan review process also identified loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrowers or the value of the collateral. Because the borrowers are still performing in accordance with the original terms of the loan agreements, and no loss of principal or interest is anticipated, these loans were not included in Nonperforming Assets. Known information does, however, cause management concerns as to the borrowers' ability to comply with current repayment terms. These potential problem loans totaled $56 million at December 31, 2003 and $75 million at December 31, 2002. The current composition of potential problem loans by primary industry included general services at $16 million, healthcare at $14 million and energy at $11 million. DEPOSITS Deposit accounts, which are the primary funding source for our asset growth, increased 13% to $9.2 billion during 2003. Excluding deposits of $301 million acquired with CSBT, deposits grew by 10%. Interest-bearing transaction accounts, which are the largest category of our deposit accounts, increased 27% to $4.0 billion. Additionally, noninterest-bearing demand deposits increased 8%, while time deposits increased 3%. The strong growth in interest-bearing transaction accounts compared to time deposits reflected customer expectations regarding the current low interest rates. Average deposits increased $1.3 billion or 18% during 2003. Core deposits, which we define as deposits of less than $100,000, excluding public funds and brokered deposits, increased 15% to $4.6 billion. Average public funds and brokered deposits were $573 million and $394 million, respectively, for 2003. Public funds and brokered deposits averaged $488 million and $379 million, respectively, during 2002. The remaining average deposits, which were comprised of account balances in excess of $100,000, increased 27% to $2.9 billion. Table 20 Maturity of Domestic CDs and Public Funds in Amounts of $100,000 or More (In Thousands) December 31, --------------------------- 2003 2002 --------------------------- Months to maturity: 3 or less $ 545,555 $ 448,548 Over 3 through 6 300,094 442,651 Over 6 through 12 171,258 194,241 Over 12 1,093,750 961,413 -------------------------------------------------------- Total $2,110,657 $2,046,853 -------------------------------------------------------- BOK Financial competed for retail and commercial deposits by offering a broad range of products and services. Retail deposit growth was supported by customer convenience through Online Banking and free Billpay services. We also offered an extensive branch and ATM network, including 32 supermarket branches with extended service hours and a 24-hour Express Bank call center. Commercial deposit growth was supported by offering treasury management and lockbox products. The distribution of deposit accounts among our principal markets is shown in Table 21. We continued to see strong deposit growth in the Texas and Albuquerque markets. Deposit growth in Texas was evenly spread between Dallas and Houston, which demonstrated our ability to compete in these markets. 32 Table 21 Deposits by Principal Market Area (In Thousands) December 31, ---------------------------- 2003 2002 ---------------------------- Oklahoma: Demand $1,025,483 $1,044,628 Interest-bearing: Transaction 2,246,675 1,897,353 Savings 98,611 103,749 Time 2,403,293 2,334,949 ---------------------------- Total interest-bearing 4,748,579 4,336,051 ---------------------------- Total Oklahoma $5,774,062 $5,380,679 ---------------------------- Texas: Demand $ 421,292 $ 394,164 Interest-bearing: Transaction 1,213,777 953,550 Savings 35,702 33,071 Time 505,463 510,512 ---------------------------- Total interest-bearing 1,754,942 1,497,133 ---------------------------- Total Texas $2,176,234 $1,891,297 ---------------------------- Colorado: Demand $ 79,424 $ - Interest-bearing: Transaction 162,651 - Savings 18,347 - Time 42,448 - ---------------------------- Total interest-bearing 223,446 - ---------------------------- Total Colorado $ 302,870 $ - ---------------------------- December 31, ---------------------------- 2003 2002 ---------------------------- Albuquerque: Demand $ 106,050 $ 79,953 Interest-bearing: Transaction 370,294 295,174 Savings 20,728 26,704 Time 317,924 287,607 ---------------------------- Total interest-bearing 708,946 609,485 ---------------------------- Total Albuquerque $ 814,996 $ 689,438 ---------------------------- Northwest Arkansas: Demand $ 16,351 $ 12,949 Interest-bearing: Transaction 28,411 18,025 Savings 1,341 1,214 Time 105,598 134,923 ---------------------------- Total interest-bearing 135,350 154,162 ---------------------------- Total Northwest Arkansas $ 151,701 $ 167,111 ---------------------------- BORROWINGS AND CAPITAL PARENT COMPANY BOK Financial (parent company) has a $125 million unsecured revolving line of credit with certain banks that matures in December 2006. The outstanding principal balance of this credit agreement was $95 million at December 31, 2003. Interest is based upon either a base rate or the British Bankers' Association Eurodollar rate plus a defined margin that is determined by our credit rating. This margin ranges from 0.625% to 1.25%. The base rate is defined as the greater of the daily federal funds rate plus 0.5% or the prime rate. This credit agreement includes certain restrictive covenants that limit our ability to borrow additional funds and to pay cash dividends on common stock. These covenants also require BOK Financial and subsidiary banks to maintain minimum capital levels and to exceed minimum net worth ratios. BOK Financial met all of the restrictive covenants at December 31, 2003. The primary source of liquidity for BOK Financial is dividends from subsidiary banks, which are limited by various banking regulations to net profits, as defined, for the preceding two years. Dividends are further restricted by minimum capital requirements. Based on the most restrictive limitations, the subsidiary banks could declare up to $121 million of dividends without regulatory approval. Management has developed and the Board of Directors has approved an internal capital policy that is more restrictive than the regulatory capital standards. The subsidiary banks could declare dividends of up to $71 million under this policy. Equity capital for BOK Financial increased $129 million to $1.2 billion during 2003. Net income provided $158 million to this increase, partially offset by a $35 million reduction in net unrealized gains on available for sale securities. The remaining increase in capital during 2003 resulted primarily from the exercise of employee stock options. During 2003 and 2002, 3% dividends payable in shares of BOK Financial's common stock were declared and paid. The shares issued were valued at $58 million and $52 million, respectively, based on current stock prices when declared. No cash dividends were paid on common stock. Management plans to recommend continued payment of an annual dividend in shares of common stock. 33 BOK Financial and subsidiary banks are subject to various capital requirements administered by federal agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that could have material impact on operations. These capital requirements include quantitative measures of assets, liabilities, and off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulators. The capital ratios for BOK Financial and each subsidiary bank are presented in Note 15 to the Consolidated Financial Statements. SUBSIDIARY BANKS BOK Financial's subsidiary banks use borrowings to supplement deposits as a source of funds for loans and securities growth. Sources of these borrowings include federal funds purchased, securities repurchase agreements, and advances from the Federal Home Loan Banks. Interest rates and maturity dates for the various borrowings are matched with specific asset types in the asset/liability management process. In 1997, BOk issued $150 million of 7.125% fixed rate subordinated debentures that mature in 2007. Interest rate swaps were used as a fair value hedge to convert the fixed interest on these debentures to a LIBOR-based floating rate, which required an adjustment of the carrying value of this debt to fair value. In 2001, the interest rate swap was terminated. The related fair value adjustment of the debt of $8 million was fixed at that time and is being amortized over the remaining life of the debt. OFF-BALANCE SHEET ARRANGEMENTS BOK Financial enters into certain off-balance sheet arrangements in the normal course of business. These arrangements include standby letters of credit which totaled $497 million at December 31, 2003. Standby letters of credit are conditional commitments to guarantee the performance of our customer to a third party. Since credit risk is involved in issuing standby letters of credit, we use the same credit policies in evaluating the credit worthiness of the customer as are used for lending decisions. We also use the same evaluation process in obtaining collateral on standby letters of credit as is used for loan commitments. During 2002, BOK Financial issued shares of common stock and options to purchase additional shares with a fair value of $65 million for its purchase of Bank of Tanglewood. In addition, BOK Financial agreed to a limited price guarantee on a portion of the shares issued in this purchase. The fair value of this guarantee, estimated to be $3 million based upon the Black-Scholes Option Pricing Model, was included in the purchase price. Pursuant to this guarantee, any holder of BOK Financial common shares issued in this acquisition may annually make a claim for the excess of the guaranteed price and the actual sales price of any shares sold during a 60-day period after each of the first five anniversary dates after October 25, 2002. The maximum annual number of shares subject to this guarantee is 203,951. The price guarantee is non-transferable and non-cumulative. BOK Financial may elect, in its sole discretion, to issue additional shares of common stock to satisfy any obligation under the price guarantee or to pay cash. The maximum remaining number of shares that may be issued to satisfy any price guarantee obligations is 10 million. If, as of any benchmark date, we have already issued 10 million shares, we are not obligated to make any further benchmark payments. Additionally, our ability to pay cash to satisfy any price guarantee obligation is limited by applicable banking capital and dividend regulations. The following table presents the estimated number of common shares that would be required to be issued and the cash equivalent value if the market value of our stock remained at $38.72, its closing price on December 31, 2003 and if all holders exercised their rights under the price guarantee agreement. The benchmark price and number of shares subject to protection have been restated to reflect the 3% stock dividend issued during the second quarter of 2003. Cash Equivalent of Additional Additional Number Shares Shares Benchmark Benchmark Of To (In Period Price Shares Issue Thousands) ------------------------------------------------------------------ October 25, 2004 - December 24, 2004 $36.30 203,951 - - October 25, 2005 - December 24, 2005 $38.80 203,951 415 $ 16 October 25, 2006 - December 24, 2006 $41.30 203,951 13,600 $ 527 October 25, 2007 - December 24, 2007 $43.81 203,951 26,785 $1,037 34 AGGREGATE CONTRACTUAL OBLIGATIONS BOK Financial has numerous contractual obligations in the normal course of business. These obligations include time deposits and other borrowed funds, premises used under various operating leases, commitments to extend credit to borrowers and to purchase securities, derivative contracts and contracts for services such as data processing that are integral to our operations. The following table summarizes payments due per these contractual obligations at December 31, 2003. Table 22 Contractual Obligations as of December 31, 2003 (In Thousands) Less Than 1 to 3 4 to 5 More Than 1 Year Years Years 5 Years Total -------------- ------------- ------------ ------------ ------------- Time deposits $ 987,230 $ 790,867 $ 717,306 $ 41,251 $2,536,654 Other borrowings 488,931 532,360 3,325 8,487 1,033,103 Subordinated debenture 10,688 21,375 156,234 - 188,297 Operating lease obligations 12,389 22,931 18,018 36,803 90,141 Derivative contracts 104,258 39,994 2,267 2,807 149,326 Loan commitments 1,414,931 815,603 281,349 366,556 2,878,439 Securities commitments 243,492 - - - 243,492 Data processing contracts 12,486 23,091 19,509 11,949 67,035 ------------------------------------ -------------- ------------- ------------ ------------ ------------- Total $3,274,405 $2,246,221 $1,198,008 $467,853 $7,186,487 ------------------------------------ -------------- ------------- ------------ ------------ -------------
Payments on time deposits and other borrowed funds include interest that has been calculated from rates at December 31, 2003. Many of these obligations have variable interest rates, and actual payments will differ from the amounts shown on this table. Obligations under derivative contracts used for interest rate risk management purposes are included with projected payments from time deposits and other borrowed funds as appropriate. Only time deposits with an original term exceeding one year are presented in Table 22. Payments on time deposits are based on contractual maturity dates. These funds may be withdrawn prior to maturity. We may charge the customer a penalty for early withdrawal. Operating lease commitments generally represent real property we rent for branch offices, corporate offices and operations facilities. Payments presented represent the minimum lease payments and exclude related costs such as utilities and property taxes. Obligations under derivative contracts are used in customer hedging programs. As previously discussed, we have entered into derivative contracts that are expected to substantially offset the cash payments due on these obligations. Loan commitments represent legally binding obligations to provide financing to our customers. Because some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Data processing and communications contracts represent the minimum obligations under these contracts. Additional payments that are based on the volume of transactions processed are excluded. The Company also has obligations with respect to its employee and executive benefit plans. See Notes 12 and 13 to the Consolidated Financial Statements. MARKET RISK Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange prices, commodity prices or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading. BOK Financial is subject to market risk primarily through the effect of changes in interest rates on both its assets held for purposes other than trading and trading assets. The effects of other changes, such as foreign exchange rates, commodity prices or equity prices do not pose significant market risk to BOK Financial. BOK Financial has no material investments in assets that are affected by changes in foreign exchange rates or equity prices. Energy derivative contracts, which are affected by changes in commodity prices, are matched against offsetting contracts as previously discussed. 35 Responsibility for managing market risk rests with the Asset / Liability Committee that operates under policy guidelines established by the Board of Directors. The acceptable negative variation in net interest revenue, net income or economic value of equity due to a specified basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 10%. These guidelines also set maximum levels for short-term borrowings, short-term assets, public funds and brokered deposits and establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is reviewed monthly. INTEREST RATE RISK MANAGEMENT (OTHER THAN TRADING) BOK Financial has a large portion of its earning assets in variable rate loans and a large portion of its liabilities in demand deposit accounts and interest bearing transaction accounts. Changes in interest rates affect earning assets more rapidly than interest bearing liabilities in the short term. Management has adopted several strategies to reduce this interest rate sensitivity. As previously noted in the Net Interest Revenue section of this report, management acquires securities that are funded by borrowings in the capital markets. These securities have an expected average duration of 3 years while the related funds borrowed have an average duration of 90 days. Securities purchased and funds borrowed under this strategy averaged $2.0 billion during 2003. BOK Financial uses interest rate swaps in managing its interest rate sensitivity. These products are generally used to more closely match interest on certain fixed-rate loans with funding sources and long-term certificates of deposit with earning assets. During 2003 and 2002, net interest revenue increased $14.0 million and $12.7 million, respectively, from periodic settlements of these contracts. Although the purpose of these derivative contracts is to manage interest rate risk, we have not designated them as hedges for accounting purposes. The contracts are carried on the balance sheet at fair value, and changes in fair value are reported in income as derivatives gains or losses. A net loss of $9.5 million was recognized in 2003 compared to a net gain of $4.7 million in 2002 from adjustments of these swaps to fair value. Credit risk from these swaps is closely monitored as part of our overall process of managing credit exposure to other financial institutions. Additional information regarding interest rate swap contracts is presented in Note 4 to the Consolidated Financial Statements. The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model. BOK Financial performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions, on net interest revenue, net income and the economic value of equity. A simulation model is used to estimate the effect of changes in interest rates over the next twelve months based on eight interest rate scenarios. Three specified interest rate scenarios are used to evaluate interest rate risk against policy guidelines. These are a "most likely" rate scenario and two "shock test" scenarios, first assuming a sustained parallel 200 basis point increase and second assuming a sustained parallel 100 basis point decrease in interest rates. Management historically evaluated interest rate sensitivity for a sustained 200 basis point decrease in rates. However, these results are not meaningful in the current low-rate environment. An independent source is used to determine the most likely interest rate scenario. Our primary interest rate exposures include the Federal Funds rate, which affects short-term borrowings, and the prime lending rate and LIBOR, which are the basis for much of the variable-rate loan pricing. Additionally, mortgage rates directly affect the prepayment speeds for mortgage-backed securities and mortgage servicing rights. Derivative financial instruments and other financial instruments used for purposes other than trading are included in this simulation. The model incorporates assumptions regarding the effects of changes in interest rates and account balances on indeterminable maturity deposits based on a combination of historical analysis and expected behavior. The impact of planned growth and new business activities is factored into the simulation model. The effects of changes in interest rates on the value of mortgage servicing rights are excluded from Table 23 due to the extreme volatility over such a large rate range. The effects of interest rate changes on the value of mortgage servicing rights and securities identified as economic hedges are presented in the Lines of Business - Mortgage Banking section of this report. 36 Table 23 Interest Rate Sensitivity (Dollars in Thousands) 200 bp Increase 100 bp Decrease Most Likely --------------------------------------------------------- ------------------------- 2003 2002 2003 2002 2003 2002 --------------------------------------------------------- ------------------------- Anticipated impact over the next twelve months: Net interest revenue $ 7,213 $12,354 $ (3,921) $ (7,456) $ 1,688 $ 7,983 1.6% 3.1% (.9)% (1.8)% .4% 2.0% ---------------------------------------------------------------------------------------------------- ------------------------- Net income $ 4,508 $ 7,722 $(2,450) $ (4,660) $ 1,055 $ 4,990 2.4% 5.0% (1.3)% (3.0)% .6% 3.2% ---------------------------------------------------------------------------------------------------- ------------------------- Economic value of equity $(71,325) $12,398 $ 10,893 $(36,768) $(41,388) $43,799 (4.6)% 0.9% .7% (2.6)% (2.7)% 3.1% ---------------------------------------------------------------------------------------------------- -------------------------
The simulations used to manage market risk are based on numerous assumptions regarding the effects of changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest revenue, net income or the economic value of equity or precisely predict the impact of higher or lower interest rates on net interest revenue, net income or the economic value of equity. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, market conditions and management strategies, among other factors. TRADING ACTIVITIES BOK Financial enters into trading activities both as an intermediary for customers and for its own account. As an intermediary, BOK Financial will take positions in securities, generally mortgage-backed securities, government agency securities and municipal bonds. These securities are purchased for resale to customers, which include individuals, corporations, foundations and financial institutions. BOK Financial will also take trading positions in U.S. Treasury securities, mortgage-backed securities, municipal bonds and financial futures for its own account. These positions are taken with the objective of generating trading profits. Both of these activities involve interest rate risk. A variety of methods are used to manage the interest rate risk of trading activities. These methods include daily marking of all positions to market value, independent verification of inventory pricing and position limits for each trading activity. Hedges in either the futures or cash markets may be used to reduce the risk associated with some trading programs. The Risk Management Department monitors trading activity daily and reports to senior management and the Risk Oversight and Audit Committee of the BOK Financial Board of Directors any exceptions to trading position limits and risk management policy exceptions. Management uses a Value at Risk ("VAR") methodology to measure the market risk inherent in its trading activities. VAR is calculated based upon historical simulations over the past five years using a variance / covariance matrix of interest rate changes. It represents an amount of market loss that is likely to be exceeded only one out of every 100 two-week periods. Trading positions are managed within guidelines approved by the Board of Directors. These guidelines limit the VAR to $1.6 million. At December 31, 2003, the VAR was $135 thousand. The greatest VAR during 2003 was $1.4 million. NEW ACCOUNTING STANDARDS In January 2003, the Financial Accounting Standards Board ("FASB") issued FASB Interpretation 46 "Consolidation of Variable Interest Entities" ("FIN 46"). FIN 46 clarified the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements" and provided a new framework for identifying variable interest entities ("VIEs") and determining when a company should include the assets, liabilities, noncontrolling interests and results of operations of a VIE in its consolidated financial statements. VIEs are generally defined in FIN 46 as entities that either do not have sufficient equity to finance their activities without support from other parties or whose equity investors lack a controlling financial interest. Examples of such entities may include partnerships, joint ventures, securitization vehicles or similarly structured entities. FIN 46 was effective immediately for VIEs created after January 31, 2003 and at the beginning of the 37 fourth quarter of 2003 for VIEs created prior to February 1, 2003. FIN 46 was revised in December 2003. This revision addressed certain issues in the original interpretation, including the application of FIN 46 to trust relationships, mutual funds organized as trusts and troubled debt restructurings. BOK Financial has limited use of partnerships, joint ventures or securitization vehicles in its operations and the implementation of FIN 46, as revised, had no impact on the consolidated financial statements. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities." This statement amended and clarified financial accounting and reporting for derivative instruments, including certain derivatives embedded in other contracts, and hedging activities. This statement was effective for contracts entered into or modified and for hedging relationships designated after June 30, 2003. This statement did not have a significant impact on the consolidated financial statements. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." This statement, which established new standards for how an issuer classifies and measures certain financial instruments, was effective for financial instruments issued or modified after May 31, 2003. Other provisions of this statement were effective for fiscal periods beginning after June 15, 2003. This statement did not have a significant impact on the consolidated financial statements. FORWARD-LOOKING STATEMENTS This report contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about BOK Financial, the financial services industry and the economy in general. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the provision and reserve for loan losses involve judgments as to expected events and are inherently forward-looking statements. Assessments that BOK Financial's acquisitions and other growth endeavors will be profitable are necessary statements of belief as to the outcome of future events, based in part on information provided by others that BOK Financial has not independently verified. These statements are not guarantees of future performance and involve certain risks, uncertainties and assumptions that are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expressed, implied or forecasted in such forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to: (1) the ability to fully realize expected cost savings from mergers within the expected time frames, (2) the ability of other companies on which BOK Financial relies to provide goods and services in a timely and accurate manner, (3) changes in interest rates and interest rate relationships, (4) demand for products and services, (5) the degree of competition by traditional and nontraditional competitors, (6) changes in banking regulations, tax laws, prices, levies, and assessments, (7) the impact of technological advances and (8) trends in customer behavior as well as their ability to repay loans. BOK Financial and its affiliates undertake no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events or otherwise. 38 REPORT OF MANAGEMENT ON FINANCIAL STATEMENTS Management is responsible for the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, and all related information appearing in this annual report. In management's opinion, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial conditions, results of operations and cash flows of BOK Financial and its subsidiaries at the dates and for the periods presented. As of December 31, 2003, an evaluation was performed under the supervision and with the participation of BOK Financial's management, including the Chief Executive Officer ("CEO") and Chief Financial Officer ("CFO"), of the effectiveness of the design and operations of our disclosure controls and procedures. Based on that evaluation, BOK Financial's management, including the CEO and CFO, concluded that BOK Financial's disclosure controls and procedures were effective as of December 31, 2003. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2003. BOK Financial and its subsidiaries maintain a system of internal accounting controls designed to provide reasonable assurance that transactions are executed in accordance with management's general or specific authorization and are recorded as necessary to maintain accountability for assets and to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States. This system includes written policies and procedures, a corporate code of conduct, an internal audit program and standards for the hiring and training of qualified personnel. The Board of Directors of BOK Financial maintains a Risk Oversight and Audit Committee consisting of outside directors that meet periodically with management and BOK Financial's internal and independent auditors. The Committee considers the audit and nonaudit services to be performed by the independent auditors, makes arrangements for the internal and independent audits and recommends BOK Financial's selection of independent auditors. The Committee also reviews the results of the internal and independent audits, critical accounting policies and practices and various shareholder reports and other reports and filings. Ernst & Young, LLP, certified public accountants, have been engaged to audit the consolidated financial statements of BOK Financial and its subsidiaries. Their audit is conducted in accordance with auditing standards generally accepted in the United States and their report on BOK Financial's consolidated financial statements follows this page. 39 REPORT OF INDEPENDENT AUDITORS We have audited the accompanying consolidated balance sheets of BOK Financial Corporation as of December 31, 2003 and 2002, and the related consolidated statements of earnings, changes in shareholders' equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BOK Financial Corporation at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, in 2003, the Company retroactively changed its method of accounting for stock-based employee compensation, and effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Ernst & Young LLP Tulsa, Oklahoma January 28, 2004 40 BOK FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF EARNINGS (In Thousands Except Share And Per Share Data) 2003 2002 2001 ----------------- ----------------- ----------------- Interest Revenue Loans $ 375,788 $ 377,708 $ 455,332 Taxable securities 180,581 186,902 184,464 Tax-exempt securities 7,898 9,359 12,979 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Total securities 188,479 196,261 197,443 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Trading securities 625 653 1,029 Funds sold and resell agreements 281 291 829 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Total interest revenue 565,173 574,913 654,633 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Interest Expense Deposits 131,929 145,466 206,209 Borrowed funds 33,738 50,495 108,549 Subordinated debentures 9,477 10,751 10,923 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Total interest expense 175,144 206,712 325,681 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Net Interest Revenue 390,029 368,201 328,952 Provision for Loan Losses 35,636 33,730 37,610 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Net Interest Revenue After Provision for Loan Losses 354,393 334,471 291,342 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Other Operating Revenue Brokerage and trading revenue 38,681 24,450 19,644 Transaction card revenue 55,491 50,385 42,471 Trust fees and commissions 45,763 40,092 40,567 Service charges and fees on deposit accounts 82,042 67,632 51,284 Mortgage banking revenue 52,336 48,910 50,155 Leasing revenue 3,508 3,330 3,745 Other revenue 25,969 20,276 20,087 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Total fees and commissions 303,790 255,075 227,953 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Gain on sale of assets 822 1,157 557 Gain on sales of securities, net 7,188 58,704 30,640 Gain (loss) on derivatives, net (8,808) 5,894 (4,062) ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Total other operating revenue 302,992 320,830 255,088 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Other Operating Expense Personnel expense 222,922 187,439 166,864 Business promotion 12,937 11,367 10,658 Professional fees and services 17,935 12,987 13,391 Net occupancy and equipment 45,967 42,347 42,764 Data processing and communications 51,537 44,084 38,003 FDIC and other insurance 2,267 1,903 1,717 Printing, postage and supplies 13,930 12,665 12,329 Net gains and operating expenses on repossessed assets 271 1,014 1,401 Amortization of intangible assets 8,101 7,638 20,113 Mortgage banking costs 40,296 42,271 30,261 Provision (recovery) for impairment of mortgage servicing rights (22,923) 45,923 15,551 Other expense 16,871 16,957 16,729 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Total other operating expense 410,111 426,595 369,781 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Income Before Taxes 247,274 228,706 176,649 Federal and state income tax 88,914 80,835 62,446 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Income Before Cumulative Effect of a Change in Accounting Principle, Net of Tax 158,360 147,871 114,203 Transition adjustment of adoption of FAS 133 - - 236 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Net Income $ 158,360 $ 147,871 $ 114,439 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Earnings Per Share: Basic: Before cumulative effect of change in accounting principle $ 2.75 $ 2.66 $ 2.09 Transition adjustment of adoption of FAS 133 - - - ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Net Income $ 2.75 $ 2.66 $ 2.09 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Diluted: Before cumulative effect of change in accounting principle $ 2.45 $ 2.37 $ 1.86 Transition adjustment of adoption of FAS 133 - - - ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Net Income $ 2.45 $ 2.37 $ 1.86 ------------------------------------------------------------------------- ----------------- ----------------- ----------------- Average Shares Used in Computation: Basic 56,990,244 54,964,747 54,150,255 Diluted 64,571,962 62,479,183 61,539,309 ------------------------------------------------------------------------- ----------------- ----------------- -----------------
See accompanying notes to consolidated financial statements. 41 BOK FINANCIAL CORPORATION CONSOLIDATED BALANCE SHEETS (In Thousands Except Share Data) December 31, ----------------------------------- 2003 2002 ----------------- ----------------- Assets Cash and due from banks $ 629,480 $ 604,680 Funds sold and resell agreements 14,432 19,535 Trading securities 7,823 5,110 Securities: Available for sale 3,833,449 3,204,973 Available for sale securities pledged to creditors 685,419 728,370 Investment (fair value: 2003 - $191,256; 2002 - $202,153) 187,951 197,950 ------------------------------------------------------------------------------------------- ----------------- ----------------- Total securities 4,706,819 4,131,293 ------------------------------------------------------------------------------------------- ----------------- ----------------- Loans 7,483,889 6,900,983 Less reserve for loan losses (128,639) (116,070) ------------------------------------------------------------------------------------------- ----------------- ----------------- Net loans 7,355,250 6,784,913 ------------------------------------------------------------------------------------------- ----------------- ----------------- Premises and equipment, net 175,901 151,715 Accrued revenue receivable 74,980 72,018 Intangible assets, net 250,686 197,868 Mortgage servicing rights, net 48,550 37,288 Real estate and other repossessed assets 7,186 6,719 Bankers' acceptances 30,884 3,728 Receivable on unsettled security transactions - 65,901 Derivative contracts 149,100 90,776 Other assets 130,652 79,470 ------------------------------------------------------------------------------------------- ----------------- ----------------- Total assets $ 13,581,743 $ 12,251,014 ------------------------------------------------------------------------------------------- ----------------- ----------------- Liabilities and Shareholders' Equity Noninterest-bearing demand deposits $ 1,648,600 $ 1,531,694 Interest-bearing deposits: Transaction 4,021,808 3,164,102 Savings 174,729 164,738 Time 3,374,726 3,267,991 ------------------------------------------------------------------------------------------- ----------------- ----------------- Total deposits 9,219,863 8,128,525 ------------------------------------------------------------------------------------------- ----------------- ----------------- Funds purchased and repurchase agreements 1,609,668 1,567,686 Other borrowings 1,016,650 1,088,022 Subordinated debenture 154,332 155,419 Accrued interest, taxes and expense 85,409 74,043 Bankers' acceptances 30,884 3,728 Due on unsettled security transactions 8,259 - Derivative contracts 149,326 80,079 Other liabilities 78,722 53,986 ------------------------------------------------------------------------------------------- ----------------- ----------------- Total liabilities 12,353,113 11,151,488 ------------------------------------------------------------------------------------------- ----------------- ----------------- Shareholders' equity: Preferred stock 12 25 Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued: 2003 - 58,055,697; 2002 - 55,749,596) 4 3 Capital surplus 546,594 475,054 Retained earnings 698,052 598,777 Treasury stock (shares at cost: 2003 - 848,892; 2002 - 682,967) (24,491) (17,421) Accumulated other comprehensive income 8,459 43,088 ------------------------------------------------------------------------------------------- ----------------- ----------------- Total shareholders' equity 1,228,630 1,099,526 ------------------------------------------------------------------------------------------- ----------------- ----------------- Total liabilities and shareholders' equity $ 13,581,743 $ 12,251,014 ------------------------------------------------------------------------------------------- ----------------- -----------------
See accompanying notes to consolidated financial statements. 42 BOK FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands) 2003 2002 2001 -------------- -------------- --------------- Cash Flows From Operating Activities: Net income $ 158,360 $ 147,871 $ 114,439 Adjustments to reconcile net income to net cash provided by operating activities: Provisions for loan losses 35,636 33,730 37,610 Provision (recovery) for mortgage servicing rights impairment (22,923) 45,923 15,551 Transition adjustment of adoption of FAS 133 - - (236) Unrealized (gains) losses from derivatives 5,888 (5,112) 12,082 Depreciation and amortization 64,425 65,790 69,165 Tax benefit on exercise of stock options 1,325 5,482 3,408 Stock-based compensation 5,746 4,124 3,029 Net amortization of securities discounts and premiums 8,965 5,818 (5,615) Net gain on sale of assets (44,426) (83,501) (47,954) Mortgage loans originated for resale (1,314,453) (1,014,009) (972,066) Proceeds from sale of mortgage loans held for resale 1,420,475 1,073,044 1,008,073 Change in trading securities (2,713) 5,217 29,538 Change in accrued revenue receivable (2,962) (2,776) 6,253 Change in other assets (28,442) (12,452) 1,715 Change in accrued interest, taxes and expense 11,366 7,029 (3,125) Change in other liabilities (13,906) 8,010 9,599 ------------------------------------------------------------------------------- -------------- -------------- --------------- Net cash provided by operating activities 282,361 284,188 281,466 ------------------------------------------------------------------------------- -------------- -------------- --------------- Cash Flows From Investing Activities: Proceeds from sales of available for sale securities 5,089,734 6,873,320 9,142,248 Proceeds from maturities of investment securities 65,504 139,591 80,273 Proceeds from maturities of available for sale securities 2,410,213 1,802,845 930,494 Purchases of investment securities (55,678) (96,627) (88,282) Purchases of available for sale securities (8,145,655) (8,985,019) (10,496,575) Loans originated or acquired net of principal collected (741,405) (586,281) (675,612) Payments on derivative asset contracts (41,226) (12,912) - Net change in other investment assets (3,849) 43 - Proceeds from disposition of assets 65,989 58,390 68,088 Purchases of assets (62,926) (46,729) (75,655) Cash and cash equivalents of subsidiaries and branches acquired and sold, net 2,123 46,295 (72,990) ------------------------------------------------------------------------------- -------------- -------------- --------------- Net cash used by investing activities (1,417,176) (807,084) (1,188,011) ------------------------------------------------------------------------------- -------------- -------------- --------------- Cash Flows From Financing Activities: Net change in demand deposits, transaction deposits and savings accounts 984,603 604,771 346,034 Net change in certificates of deposit 107,522 395,740 146,075 Net change in other borrowings 65,610 (165,744) 141,660 Change in amount receivable (due) on unsettled security transactions 74,160 (297,055) 231,660 Pay down of other borrowings (95,000) (10,095) (95,000) Issuance of subordinated debenture - - 30,000 Issuance of preferred, common and treasury stock, net 4,627 4,172 2,745 Pay down of subordinated debenture - (30,000) - Net change in collateral on derivative accounts (31,763) (5,148) - Proceeds from derivative liability contracts 45,538 3,162 - Dividends paid (785) (30) (20) ------------------------------------------------------------------------------- -------------- -------------- --------------- Net cash provided by financing activities 1,154,512 499,773 803,154 ------------------------------------------------------------------------------- -------------- -------------- --------------- Net increase (decrease) in cash and cash equivalents 19,697 (23,123) (103,391) Cash and cash equivalents at beginning of period 624,215 647,338 750,729 ------------------------------------------------------------------------------- -------------- -------------- --------------- Cash and cash equivalents at end of period $ 643,912 $ 624,215 $ 647,338 ------------------------------------------------------------------------------- -------------- -------------- --------------- Cash paid for interest $ 176,225 $ 208,612 $ 334,103 ------------------------------------------------------------------------------- -------------- -------------- --------------- Cash paid for taxes 81,596 81,154 70,699 ------------------------------------------------------------------------------- -------------- -------------- --------------- Net loans transferred to repossessed real estate 6,378 4,550 7,228 ------------------------------------------------------------------------------- -------------- -------------- --------------- Payment of dividends in common stock 58,300 53,165 36,371 ------------------------------------------------------------------------------- -------------- -------------- --------------- Common stock and price guarantee issued for acquisition - 67,745 - ------------------------------------------------------------------------------- -------------- -------------- ---------------
See accompanying notes to consolidated financial statements. 43 BOK FINANCIAL CORPORATION CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (In Thousands) Preferred Stock Common Stock ------------------------------ ------------------------------ Shares Amount Shares Amount ------------------------------ ------------------------------ December 31, 2000 250,000 $25 49,706 $3 Comprehensive income: Net income - - - - Other comprehensive loss, net of tax: Unrealized gain on securities available for sale - - - - Total comprehensive income Director retainer shares - - 5 - Exercise of stock options - - 598 - Tax benefit on exercise of stock options - - - - Stock-based compensation Preferred stock dividend - - - - Dividends paid in shares of common stock: Preferred stock - - 51 - Common stock - - 1,377 - ------------------------------------------------------------------------------------------------------------------------------ December 31, 2001 250,000 25 51,737 3 Comprehensive income: Net income - - - - Other comprehensive loss, net of tax: Unrealized gain on securities available for sale - - - - Total comprehensive income Director retainer shares - - 8 - Exercise of stock options - - 687 - Tax benefit on exercise of stock options - - - - Stock-based compensation Preferred stock dividend - - - - Issue shares for acquisition - - 1,711 - Fair value of stock price guarantee - - - - Dividends paid in shares of common stock: Preferred stock - - 48 - Common stock - - 1,559 - ------------------------------------------------------------------------------------------------------------------------------ December 31, 2002 250,000 25 55,750 3 Comprehensive income: Net income - - - - Other comprehensive loss, net of tax: Unrealized loss on securities available for sale - - - - Total comprehensive income - - - - Director retainer shares - - 8 - Exercise of stock options - - 595 - Tax benefit on exercise of stock options - - - - Stock-based compensation - - - - Cash dividends paid on preferred stock - - - - Redeem nonvoting preferred units - (13) - - Dividends paid in shares of common stock: Preferred stock - - 23 - Common stock - - 1,680 1 ------------------------------------------------------------------------------------------------------------------------------ December 31, 2003 250,000 $12 58,056 $4 ------------------------------------------------------------------------------------------------------------------------------
December 31, ------------------------------------------- 2003 2002 2001 ------------------------------------------- 1 Changes in other comprehensive income: Unrealized gains (losses) on available for sale securities $ (46,884) $119,609 $34,800 Tax benefit (expense) on unrealized gains (losses) on available for sale securities 16,858 (44,390) (12,412) Reclassification adjustment for (gains) losses realized and included in net income (7,188) (58,704) (30,640) Reclassification adjustment for tax expense (benefit) on realized (gains) losses 2,585 20,781 10,724 ------------------------------------------- Net change in unrealized gains (losses) on securities $ (34,629) $ 37,296 $ 2,472 -------------------------------------------
See accompanying notes to consolidated financial statements. 44 Accumulated Other Comprehensive Capital Retained Treasury Stock ------------------------------------ Income (Loss) (1) Surplus Earnings Shares Amount Total -------------------- ----------------- ----------------- ----------------- ------------------ --------------- $ 3,320 $287,436 $426,053 488 $(10,044) $ 706,793 - - 114,439 - - 114,439 2,472 - - - - 2,472 --------------- 116,911 --------------- - 165 - (7) 126 291 - 7,551 - 185 (5,097) 2,454 - 3,408 - - - 3,408 - 3,029 - - - 3,029 - - (1) - - (1) - 1,114 (1,500) (21) 386 - - 32,740 (34,890) (104) 2,131 (19) -------------------- ----------------- ----------------- ----------------- ------------------ --------------- 5,792 335,443 504,101 541 (12,498) 832,866 - - 147,871 - - 147,871 37,296 - - - - 37,296 --------------- 185,167 --------------- - 272 - - - 272 - 8,243 - 125 (4,343) 3,900 - 5,482 - - - 5,482 - 4,124 - - - 4,124 - - (2) - - (2) - 64,550 - - - 64,550 - 3,195 - - - 3,195 - 1,500 (1,500) - - - - 52,245 (51,693) 17 (580) (28) -------------------- ----------------- ----------------- ----------------- ------------------ --------------- 43,088 475,054 598,777 683 (17,421) 1,099,526 - - 158,360 - - 158,360 (34,629) - - - - (34,629) --------------- 123,731 --------------- - 276 - - - 276 - 10,677 - 145 (6,326) 4,351 - 1,325 - - - 1,325 - 219 - - - 219 - - (750) - - (750) - - - - - (13) - 750 (750) - - - - 58,293 (57,585) 21 (744) (35) -------------------- ----------------- ----------------- ----------------- ------------------ --------------- $ 8,459 $ 546,594 $ 698,052 849 $ (24,491) $ 1,228,630 -------------------- ----------------- ----------------- ----------------- ------------------ ---------------
45 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (1) SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The Consolidated Financial Statements of BOK Financial Corporation ("BOK Financial") have been prepared in conformity with accounting principles generally accepted in the United States, including general practices of the banking industry. The consolidated financial statements include the accounts of BOK Financial and its subsidiaries, principally Bank of Oklahoma, N.A. and its subsidiaries ("BOk"), Bank of Texas, N.A., Bank of Arkansas, N.A., Bank of Albuquerque, N.A., Colorado State Bank and Trust, N.A. and BOSC, Inc. Certain prior year amounts have been reclassified to conform to current year classifications. NATURE OF OPERATIONS BOK Financial, through its subsidiaries, provides a wide range of financial services to commercial and industrial customers, other financial institutions and consumers throughout Oklahoma, Northwest Arkansas, Dallas and Houston, Texas metropolitan areas, Albuquerque, New Mexico, and Denver, Colorado. These services include depository and cash management; lending and lease financing; mortgage banking; securities brokerage, trading and underwriting; and personal and corporate trust. USE OF ESTIMATES Preparation of BOK Financial's consolidated financial statements requires management to make estimates of future economic activities, including interest rates, loan collectibility and prepayments and cash flows from customer accounts. These estimates are based upon current conditions and information available to management. Actual results may differ significantly from these estimates. ACQUISITIONS Assets and liabilities acquired by purchase, including identifiable intangible assets, are recorded at fair values on the acquisition dates. The Consolidated Statements of Earnings include the results of purchases from the dates of acquisition. INTANGIBLE ASSETS BOK Financial adopted Statements of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("FAS 142"), and No. 147, "Acquisitions of Certain Financial Institutions" ("FAS 147"), on January 1, 2002. The following table presents the impact on previously reported net income and earnings per share after application of FAS 142 and FAS 147: 2001 -------------- Net income as reported $ 114,439 Pro forma net income 123,601 Diluted earnings per share previously reported $ 1.86 Pro forma diluted earnings per share 2.01 Intangible assets with indefinite lives, such as goodwill, are evaluated for each of BOK Financial's business units for impairment at least annually or more frequently if conditions indicate impairment. The evaluation of possible impairment of intangible assets involves significant judgment based upon short-term and long-term projections of future performance. The fair value of BOK Financial's business units is estimated by the discounted future earnings method. Income growth is projected over a five-year period for each unit and a terminal value is computed. This projected income stream is converted to current fair value by using a discount rate that reflects a rate of return required by a willing buyer. Other identifiable intangible assets and core deposit intangibles are amortized using straight-line and accelerated methods over the estimated benefit periods. These periods generally range from 5 to 10 years for other intangible assets and core deposit intangibles. The net book value of these other intangibles and core deposit intangibles are evaluated for impairment when economic conditions indicate an impairment may exist. 46 CASH EQUIVALENTS Due from banks, funds sold (generally federal funds sold for one-day periods) and resell agreements (which generally mature within one to 30 days) are considered cash equivalents. SECURITIES Securities are identified as trading, investment (held to maturity) or available for sale at the time of purchase based upon the intent of management, liquidity and capital requirements, regulatory limitations and other relevant factors. Trading securities, which are acquired for profit through resale, are carried at market value with unrealized gains and losses included in current period earnings. Investment securities are carried at amortized cost. Amortization is computed by methods that approximate level yield and is adjusted for changes in prepayment estimates. Investment securities may be sold or transferred to trading or available for sale classification in certain limited circumstances specified in generally accepted accounting principles. Securities identified as available for sale are carried at fair value. Unrealized gains and losses are recorded, net of deferred income taxes, as accumulated other comprehensive income (loss) in shareholders' equity. Unrealized losses on securities are evaluated to determine if the losses are temporary based on various factors, including the cause of the loss and prospects for recovery. An impairment charge is recorded against earnings if the loss is determined to be other than temporary. Realized gains and losses on sales of securities are based upon the amortized cost of the specific security sold. Available for sale securities are separately identified as pledged to creditors if the creditor has the right to sell or repledge the collateral. The purchase or sale of securities is recognized on a trade date basis. A net receivable or payable is recognized for subsequent transaction settlement. BOK Financial will periodically commit to purchase to-be-announced ("TBA") mortgage-backed securities. These commitments are carried at fair value if they are considered derivative contracts. These commitments are not reflected in BOK Financial's balance sheet until settlement date if they meet specific criteria exempting them from the definition of derivative contracts. DERIVATIVE INSTRUMENTS Derivative instruments, primarily interest rate swaps and forward sales contracts, are used as part of an interest rate risk management strategy. Interest rate swaps modify the interest income and expense on certain long-term, fixed rate assets and liabilities. Amounts payable to or receivable from the counterparties are reported in interest income and expense using the accrual method. Interest rate swaps are carried at fair value. Changes in the fair value of interest rate swaps are included in other operating revenue. In certain circumstances, interest rate swaps may be designated as fair value hedges and may qualify for hedge accounting. Changes in the fair value of the hedged asset or liability that are attributable to the hedged risk are reported in other operating revenue. These changes may partially or completely offset the mark-to-market adjustments of the interest rate swaps. Fair value hedges are considered to be effective if the cumulative fair value adjustments of the interest rate swaps are within a range of 80% to 125% of the cumulative fair value adjustment of the hedged assets or liabilities. Interest rate swaps may be designated as cash flow hedges of variable rate assets or liabilities or anticipated transactions. Changes in fair value of interest rate swaps are recorded in other comprehensive income to the extent they are effective. Amounts recorded as other comprehensive income are recognized in net income in the same periods as the cash flows from the hedged transactions. In conjunction with its mortgage banking activities, BOK Financial enters into mortgage loan commitments that are considered derivative instruments under Financial Accounting Standards Board Statement No. 133, "Accounting for Derivative Instruments and Hedging Activities." Forward sales contracts are used to hedge these mortgage loan commitments and mortgage loans held for sale. Changes in the fair value of the mortgage loan commitments and forward sales contracts are recognized in other operating revenue. The Securities and Exchange Commission staff recently expressed an opinion that the fair value of certain mortgage loan commitments may result in an unrealized loss, but cannot result in an unrealized gain. This opinion, which is effective for commitments originated after March 15, 2004, may increase short-term earnings volatility. Derivative contracts are used to assist certain customers in hedging their risk of adverse changes in natural gas and oil prices, interest rates and foreign exchange rates. BOK Financial serves as an intermediary between its customers and the markets. Each contract between BOK Financial and its customer is offset by a contract between BOK Financial and various counterparties. These 47 contracts are carried at fair value. Compensation for credit risk and reimbursement of administrative costs are recognized over the life of the contracts. LOANS Loans are either secured or unsecured based on the type of loan and the financial condition of the borrower. Repayment is generally expected from cash flow or proceeds from the sale of selected assets of the borrower. BOK Financial is exposed to risk of loss on loans due to the borrower's difficulties, which may arise from any number of factors, including problems within the respective industry or local economic conditions. Access to collateral, in the event of borrower default, is reasonably assured through adherence to applicable lending laws and through sound lending standards and credit review procedures. Interest is accrued at the applicable interest rate on the principal amount outstanding. Loans are placed on nonaccrual status when, in the opinion of management, full collection of principal or interest is uncertain, generally when the collection of principal or interest is 90 days or more past due. Interest previously accrued but not collected is charged against interest income when the loan is placed on nonaccrual status. Payments on nonaccrual loans are applied to principal or reported as interest income, according to management's judgment as to the collectibility of principal. Loan origination and commitment fees and direct loan acquisition and origination costs, when significant, are deferred and amortized as an adjustment to yield over the life of the loan or over the commitment period, as applicable. Mortgage loans held for sale are carried at the lower of aggregate cost or market value. Mortgage loans held for sale that are designated as hedged assets are carried at fair value based on sales commitments or market quotes. Changes in fair value after the date of designation of an effective hedge are recorded in other operating revenue. RESERVE FOR LOAN LOSSES The adequacy of the reserve for loan losses is assessed by management, based upon an ongoing quarterly evaluation of the probable estimated losses inherent in the portfolio, and includes probable losses on both outstanding loans and unused commitments to provide financing. A consistent methodology has been developed that includes reserves assigned to specific criticized loans, general reserves that are based upon statistical migration analyses for each category of loans, and a nonspecific allowance that is based upon an analysis of current economic conditions, loan concentrations, portfolio growth and other relevant factors. The reserve for loan losses related to loans that are identified for evaluation in accordance with Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114"), is based on discounted cash flows using the loan's initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Loans are considered to be impaired when it becomes probable that BOK Financial will be unable to collect all amounts due according to the contractual terms of the loan agreement. This is substantially the same criteria used to determine when a loan should be placed on nonaccrual status. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In accordance with the provisions of FAS 114, management has excluded small balance, homogeneous loans from the impairment evaluation specified in FAS 114. Such loans include 1-4 family mortgage loans, consumer loans, and commercial loans with committed amounts less than $1 million. The adequacy of the reserve for loan losses applicable to these loans is evaluated in accordance with generally accepted accounting principles and standards established by the banking regulatory authorities and adopted as policy by BOK Financial. A provision for loan losses is charged against earnings in amounts necessary to maintain an adequate reserve for loan losses. Loans are charged off when the loan balance or a portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value. Loans are evaluated quarterly and charge-offs are taken in the quarter in which the loss is identified. Additionally, all unsecured or under-secured loans that are past due by 180 days or more are charged off within 30 days. Recoveries of loans previously charged off are added to the reserve. 48 ASSET SECURITIZATION BOK Financial periodically securitizes and sells pools of assets. These transactions are recorded as sales for financial reporting purposes when the criteria for surrender of control specified in Statement of Financial Accounting Standards, No. 140 "Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities" are met. BOK Financial may retain the right to service the assets and a residual interest in excess cash flows generated by the assets. The carrying value of the assets sold is allocated between the portion sold and the portion retained based on relative fair values. The fair value of these retained assets is determined by a discounting of expected future net cash to be received using assumed market interest rates for these instruments. Residual interests are carried at fair value. Changes in fair values are recorded in income. Servicing rights are carried at the lower of amortized cost or fair value. A valuation allowance is provided when amortized cost of servicing rights exceeds fair value. REAL ESTATE AND OTHER REPOSSESSED ASSETS Real estate and other repossessed assets are assets acquired in partial or total forgiveness of debt. These assets are carried at the lower of cost, which is determined by fair value at date of foreclosure, or current fair value. Income generated by these assets is recognized as received, and operating expenses are recognized as incurred. PREMISES AND EQUIPMENT Premises and equipment are carried at cost including capitalized interest, when appropriate, less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets or, for leasehold improvements, over the shorter of the estimated useful lives or remaining lease terms. Repair and maintenance costs are charged to expense as incurred. MORTGAGE SERVICING RIGHTS Capitalized mortgage servicing rights are carried at the lower of amortized cost, adjusted for the effect of hedging activities, or fair value. Amortization is determined in proportion to the projected cash flows over the estimated lives of the servicing portfolios. The actual cash flows are dependent upon the prepayment of the mortgage loans and may differ significantly from the estimates. Fair value is determined by discounting the estimated cash flows of servicing revenue, less projected servicing costs, using risk-adjusted rates, which is the assumed market rate for these instruments. Prepayment assumptions were based on industry consensus provided by independent reporting sources in 2001. During 2002, BOK Financial changed the source of prepayment assumptions used to value its mortgage servicing rights. Industry consensus prepayment speeds were not updated frequently enough to reflect rapidly changing market conditions that existed in 2002. A separate, third-party model that is generally accepted by the financial markets is now used to estimate prepayment speeds. This model is updated daily for changes in market conditions. Changes in current interest rates may significantly affect these assumptions by changing loan refinancing activity. Amortized cost and fair value are stratified by interest rate and loan type. A valuation allowance is provided when the net amortized cost of any strata exceeds the calculated fair value. Originated mortgage servicing rights are recognized when either mortgage loans are originated pursuant to an existing plan for sale or, if no such plan exists, when the mortgage loans are sold. Substantially all fixed rate mortgage loans originated by BOK Financial are sold under existing commitments. The right to service mortgage loans sold is generally retained. The fair value of the originated servicing rights is determined at closing based upon current market rates. FEDERAL AND STATE INCOME TAXES BOK Financial utilizes the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statement and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax law or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. BOK Financial and its subsidiaries file consolidated tax returns. The subsidiaries provide for income taxes on a separate return basis and remit to BOK Financial amounts determined to be currently payable. 49 EMPLOYEE BENEFIT PLANS BOK Financial sponsors various plans, including a defined benefit pension plan ("Pension Plan"), qualified profit sharing plans ("Thrift Plans"), and employee healthcare plans. Employer contributions to the Thrift Plans, which match employee contributions subject to percentage and years of service limits, are expensed when incurred. Pension Plan costs, which are based upon actuarial computations of current costs, are expensed annually. Unrecognized prior service cost and net gains or losses are amortized on a straight-line basis over the estimated remaining lives of the participants. BOK Financial recognizes the expense of health care benefits on the accrual method. Employer contributions to the Pension Plan and various health care plans are in accordance with Federal income tax regulations. EXECUTIVE BENEFIT PLANS BOK Financial has various stock compensation plans for its employees. Historically, BOK Financial had accounted for those plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), and related interpretations. Under APB 25, because the exercise price of employee stock options equaled the market price of the underlying stock on the date of grant, no significant stock-based employee compensation had been recognized. During 2003, BOK Financial adopted the expense recognition provisions of Financial Accounting Standards Board Statement No. 123, "Accounting for Stock-Based Compensation" ("FAS 123"), as amended by Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure" ("FAS 148"). Under FAS 123, compensation expense is recognized based on the fair value of stock options granted. BOK Financial chose to retroactively restate its results of operations for the accounting change, as provided by FAS 148. The years ended December 31, 2003, 2002 and 2001 include $5.7 million, $4.1 million and $3.0 million, respectively, of pretax stock option expense, which represents approximately $0.06, $0.04, and $0.03 per diluted share in each year, respectively. Adoption of the fair value method resulted in a reduction of retained earnings as of January 1, 2001 of $5.3 million, representing the cumulative stock option compensation expense recorded for the six years ended December 31, 2000, net of the tax effect. As of December 31, 2000, the net effect upon total shareholders' equity from stock-based compensation was an increase of $3.2 million due primarily to recognition of deferred tax assets related to stock option expense. BOK Financial also permits certain executive officers to defer the recognition of income from the exercise of stock options for income tax purposes and to diversify the deferred income into alternative investments. Because the Company is expected to settle these amounts in cash, they are recognized as a liability. Changes in the liability are recognized as additional compensation expense. FIDUCIARY SERVICES Fees and commissions on approximately $21 billion of assets managed by BOK Financial under various fiduciary arrangements are recognized on the accrual method. EFFECT OF PENDING STATEMENTS OF FINANCIAL ACCOUNTING STANDARDS During 2003, the Financial Accounting Standards Board ("FASB") issued several statements and interpretations that may have an effect on BOK Financial's accounting policies and financial reporting in future periods. These included FASB Interpretation 46, "Consolidation of Variable Interest Entities" ("FIN 46"), FASB Statement No. 149, "Amendment of Statement 133 on Derivative Instruments and Hedging Activities" ("FAS 149"), and FASB Statement No. 150, "Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity" ("FAS 150"). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, "Consolidated Financial Statements," and provides a new framework for identifying variable interest entities ("VIEs") and determining when a company should include the assets, liabilities, noncontrolling interests and results of operations of a VIE in its consolidated financial statements. VIEs are generally defined in FIN 46 as entities that either do not have sufficient equity to finance their activities without support from other parties or whose equity investors lack a controlling financial interest. FIN 46 was effective immediately for VIEs created after January 31, 2003 and was effective beginning in the fourth quarter of 2003 for VIEs created prior to February 1, 2003. FIN 46 was revised in December 2003. This revision addressed the application of FIN 46 to trust relationships, mutual funds organized as trusts and troubled debt restructurings. BOK Financial has limited use of VIEs in its operations and the implementation of FIN 46, as revised, had no impact on the consolidated financial statements. 50 FAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. This statement was effective for contracts entered into or modified and for hedging relationships designated after June 30, 2003. This statement did not have a significant impact on the consolidated financial statements. FAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement was effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for fiscal periods beginning after June 15, 2003. This statement did not have a significant impact on the consolidated financial statements. (2) ACQUISITIONS On September 10, 2003, BOK Financial paid $77.9 million in cash for all outstanding stock of Colorado Funding Company and its Colorado State Bank and Trust subsidiary. On October 25, 2002, BOK Financial acquired Bank of Tanglewood, N.A. for 1,711,127 shares of common stock and 292,225 options to purchase shares, valued at approximately $65 million. The options to purchase shares expired February 25, 2003. BOK Financial agreed to a price guarantee on 50 percent of the stock issued, which resulted in a contingent obligation to issue additional shares or cash over the next five years based on certain predetermined market valuations. The value of the contingent price guarantee was $3 million, which was included in the total purchase price. More discussion of this contingency is at Note 15. These transactions were accounted for by the purchase method of accounting. Aggregate allocation of the purchase price to the net assets acquired was as follows (in thousands): 2003 2002 ------------ ------------- Cash and cash equivalents $ 80,051 $ 46,295 Securities 14,507 62,484 Loans 222,530 132,278 Less reserve for loan losses 2,282 1,364 ------------ ------------- Loans, net 220,248 130,914 Identifiable intangible assets 18,770 3,718 Other assets 20,855 8,568 ------------ ------------- Total assets acquired 354,431 251,979 Deposits: Noninterest-bearing 75,078 49,213 Interest-bearing 226,361 173,887 ------------ ------------- Total deposits 301,439 223,100 Other borrowings 5,098 8,610 Other liabilities 11,951 2,736 ------------ ------------- Net assets acquired 35,943 17,533 Less purchase price 77,928 67,745 ------------ ------------- Goodwill $ 41,985 $ 50,212 ------------ ------------- The following unaudited condensed consolidated pro forma statements of earnings for BOK Financial present the effects on income had the purchase acquisitions described above occurred at the beginning of 2001: Condensed Consolidated Pro Forma Statements of Earnings (In Thousands Except Per Share Data) (Unaudited) Year ended December 31, ----------------------------------- 2003 2002 2001 ------------ ----------- ---------- Net interest revenue $ 398,693 $ 388,517 $ 348,537 Provision for loan losses 35,941 35,162 38,594 --------------------------- ------------ ----------- ---------- Net interest revenue after provision for loan losses 362,752 353,355 309,943 Other operating revenue 309,512 330,224 264,134 Other operating expense 425,163 449,695 388,889 --------------------------- ------------ ----------- ---------- Income before taxes 247,101 233,884 185,188 Federal and state income tax 88,914 80,825 63,367 Net effect of change in accounting principle - - 236 --------------------------- ------------ ----------- ---------- Net income $ 158,187 $ 153,059 $ 122,057 --------------------------- ------------ ----------- ---------- Earnings per share: Basic net income $ 2.75 $ 2.69 $ 2.16 Diluted net income 2.45 2.38 1.91 --------------------------- ------------ ----------- ---------- Average shares: Basic 56,990 56,410 55,890 Diluted 64,572 64,370 63,818 --------------------------- ------------ ----------- ---------- 51 (3) SECURITIES INVESTMENT SECURITIES The amortized cost and fair values of investment securities are as follows (in thousands): December 31, ---------------------------------------------------------------------------------------------- 2003 2002 ----------------------------------------------- ---------------------------------------------- Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized ------------------------ ----------------------- Cost Value Gain Loss Cost Value Gain Loss ---------------------------------------------------------------------------------------------- Municipal and other tax-exempt $184,192 $187,354 $4,049 $ (887) $191,305 $195,266 $4,837 $(876) Mortgage-backed U.S. agency Securities 2,296 2,418 122 - 4,380 4,618 238 - Other debt securities 1,463 1,484 21 - 2,265 2,269 5 (1) ---------------------------------------------------------------------------------------------------------------------------- Total $187,951 $191,256 $4,192 $ (887) $197,950 $202,153 $5,080 $(877) ----------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of investment securities at December 31, 2003, by contractual maturity, are as shown in the following table (dollars in thousands): Weighted Less than One to Five to Over Average One Year Five Years Ten Years Ten Years Total Maturity (4) ------------ -------------- ------------- ------------- ------------- ------------- Municipal and other tax-exempt: Amortized cost $50,561 $ 102,386 $26,251 $ 4,994 $ 184,192 2.94 Fair value 50,742 104,803 26,952 4,857 187,354 Nominal yield(1) 5.45 6.20 6.64 5.83 6.05 Other debt securities: Amortized cost $ 442 $ 296 $ 725 $ - $ 1,463 5.00 Fair value 443 304 737 - 1,484 Nominal yield 1.25 6.83 5.43 - 4.45 ------------ -------------- ------------- ------------- ------------- ------------- Total fixed maturity securities: Amortized cost $51,003 $ 102,682 $26,976 $ 4,994 $ 185,655 2.95 Fair value 51,185 105,107 27,689 4,857 188,838 Nominal yield 5.41 6.20 6.61 5.83 6.03 ------------ -------------- ------------- ------------- Mortgage-backed securities: Amortized cost $ 2,296 (2) Fair value 2,418 Nominal yield(3) 6.53 ------------- Total investment securities: Amortized cost $ 187,951 Fair value 191,256 Nominal yield 6.04 -------------
(1) Calculated on a taxable equivalent basis using a 39% effective tax rate. (2) The average expected lives of mortgage-backed securities were 4.96 years based upon current prepayment assumptions. (3) The nominal yield on mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. (4) Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty. 52 AVAILABLE FOR SALE SECURITIES The amortized cost and fair value of available for sale securities are as follows (in thousands): December 31, ---------------------------------------------------------------------------------------------- 2003 2002 ---------------------------------------------- ----------------------------------------------- Amortized Fair Gross Unrealized Amortized Fair Gross Unrealized ---------------------- ---------------------- Cost Value Gain Loss Cost Value Gain Loss ---------------------------------------------------------------------------------------------- U.S. Treasury $ 44,679 $ 45,424 $ 746 $ (1) $ 31,013 $ 32,233 $ 1,220 $ - Municipal and other tax-exempt 3,271 3,257 6 (20) 11,465 11,511 56 (10) Mortgage-backed securities: U. S. agencies 3,514,158 3,518,926 28,962 (24,194) 3,005,698 3,067,148 61,589 (139) Other 845,430 848,911 5,996 (2,515) 727,088 732,542 5,469 (15) ------------------------------------------------------------------------------------------------------------------------------ Total mortgage-backed securities 4,359,588 4,367,837 34,958 (26,709) 3,732,786 3,799,690 67,058 (154) ------------------------------------------------------------------------------------------------------------------------------ Other debt securities 1,140 1,177 37 - 138 139 1 - Equity securities and mutual funds 96,460 101,173 5,450 (737) 87,434 89,770 2,648 (312) ------------------------------------------------------------------------------------------------------------------------------ Total $ 4,505,138 $4,518,868 $ 41,197 $(27,467) $3,862,836 $ 3,933,343 $70,983 $(476) ------------------------------------------------------------------------------------------------------------------------------
The amortized cost and fair values of available for sale securities at December 31, 2003, by contractual maturity, are as shown in the following table (dollars in thousands): Weighted Less than One to Five to Over Average One Year Five Years Ten Years Ten Years Total Maturity (5) ------------- ------------- ------------- ------------- --------------- ----------- U.S. Treasuries: Amortized cost $ 29,338 $ 15,341 $ - $ - $ 44,679 .99 Fair value 29,894 15,530 - - 45,424 Nominal yield 3.50 2.34 - - 3.10 Municipal and other tax-exempt: Amortized cost $ 358 $ 273 $ 1,125 $1,515 $ 3,271 10.37 Fair value 354 277 1,112 1,514 3,257 Nominal yield (1) 7.75 10.79 8.89 12.69 10.68 Other debt securities: Amortized cost $ 600 $ 456 $ 84 $ - $ 1,140 1.45 Fair value 607 485 85 - 1,177 Nominal yield (1) 6.30 6.04 5.59 - 6.15 ------------- ------------- ------------- ------------- --------------- ----------- Total fixed maturity securities: Amortized cost $ 30,296 $ 16,070 $ 1,209 $1,515 $ 49,090 1.63 Fair value 30,855 16,292 1,197 1,514 49,858 Nominal yield 3.60 2.59 8.66 12.69 3.68 ------------- ------------- ------------- ------------- Mortgage-backed securities: Amortized cost $4,359,588 (2) Fair value 4,367,837 Nominal yield (4) 4.28 --------------- Equity securities and mutual funds: Amortized cost $ 96,460 (3) Fair value 101,173 Nominal yield 2.21 --------------- Total available-for-sale securities: Amortized cost $4,505,138 Fair value 4,518,868 Nominal yield 4.23 ---------------
(1) Calculated on a taxable equivalent basis using a 39% effective tax rate. (2) The average expected lives of mortgage-backed securities were 3.04 years based upon current prepayment assumptions. (3) Primarily common stock and preferred stock of U.S. Government agencies with no stated maturity. (4) The nominal yield on mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. (5) Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty. At December 31, 2003, there were outstanding commitments to buy $235 million of securities that have not yet been issued. These commitments are not reflected in BOK Financial's balance sheet as of December 31, 2003, because they have not settled and meet specific criteria exempting them from the definition of derivative contracts. 53 Sales of available for sale securities resulted in gains and losses as follows (in thousands): 2003 2002 2001 ----------------------------------- Proceeds $5,089,734 $6,873,320 $9,142,248 Gross realized gains 30,373 85,346 55,418 Gross realized losses 23,185 26,642 24,778 Related federal and state income tax expense (benefit) 2,585 20,781 10,724 -------------------------------------------------------------- In addition to securities that have been reclassified as pledged to creditors, securities with an amortized cost of $2.1 billion and $2.0 billion at December 31, 2003 and 2002 have been pledged as collateral for repurchase agreements, public and trust funds on deposit and for other purposes as required by law. The secured parties do not have the right to sell or repledge these securities. See information regarding temporarily impaired securities at Table 13. (4) DERIVATIVES INTEREST RATE RISK MANAGEMENT PROGRAM INTEREST RATE SWAPS BOK Financial uses interest rate swaps to manage its interest rate sensitivity. During 2003 and 2002, net interest revenue was increased by $14.7 million and $12.7 million, respectively, from the settlements of amounts receivable or payable on interest rate swaps. A net loss of $9.5 million was recognized in 2003 compared to a net gain of $4.7 million in 2002 from adjustments of these swaps to fair value. Interest Rate Swaps (dollars in thousands): Notional Pay Receive Positive Negative Amount Rate Rate Fair Value Fair Value -------------------------------------------------------------------------------- Expiration: 2004 $71,554 1.12(1)- 4.22 1.12(1)- 7.36 $ 564 $ (118) 2006 13,940 5.43 1.12(1) - (984) 2007 275,000 1.15(1) 4.09 - 4.51 3,628 - 2011 38,480 5.21 - 5.51 1.12(1) - (2,532) -------------------------------- $ 4,192 $(3,634) --------------------------------
(1) Rates are variable based on LIBOR and reset monthly or quarterly. Scheduled repricing periods for the swaps are as follows (notional value in thousands): 31-90 91-365 Over Days Days 1 Year Total --------------------------------------------------------- Pay floating $(335,000) $ - $ - $(335,000) Receive fixed - - 335,000 335,000 Pay fixed - - (63,974) (63,974) Receive floating 63,974 - - 63,974 ----------------------------------------------------------------------------------------- Total $(271,026) $ - $271,026 $ - -----------------------------------------------------------------------------------------
FORWARD SALES CONTRACTS BOK Financial uses mortgage-backed securities forward sales contracts to manage exposure to interest rate fluctuations on mortgage loans held for sale and mortgage loan commitments. At December 31, 2003, the notional amount of forward sales contracts totaled $76 million, with a negative fair value of $340 thousand. Additional discussion of these contracts can be found in Note 8. CUSTOMER RISK MANAGEMENT PROGRAMS BOK Financial offers programs that permit its customers to manage various risks. We have programs to assist energy producing customers to hedge against price fluctuations and to take positions through energy derivative contracts. In 2003, we have added or expanded programs to assist customers in managing their interest rate and foreign exchange risks. These programs work essentially the same way. Derivative contracts are executed between the customers and BOK Financial. Offsetting contracts are executed between BOK Financial and selected counterparties to minimize the risk of changes in energy prices, interest rates or foreign exchange 54 rates. The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or a fee paid to BOK Financial as compensation for administrative costs, credit risks and profit. Derivative contracts are carried at fair value. At December 31, 2003, the fair value of energy derivative contracts, interest rate swaps and foreign exchange contracts totaled $137 million, $3 million and $5 million, respectively. (5) LOANS Significant components of the loan portfolio are as follows (in thousands): December 31, ----------------------------------------------------------------------------------------------- 2003 2002 ------------------------------------------------ ---------------------------------------------- Fixed Variable Non- Fixed Variable Non- Rate Rate accrual Total Rate Rate accrual Total ------------------------------------------------ ---------------------------------------------- Commercial $1,603,095 $2,692,247 $41,360 $4,336,702 $ 531,456 $3,419,228 $39,114 $3,989,798 Commercial real estate 446,751 1,181,030 2,311 1,630,092 306,796 1,126,347 3,395 1,435,838 Residential mortgage 522,240 485,582 7,821 1,015,643 749,573 174,236 5,950 929,759 Residential mortgage - held for sale 56,543 - - 56,543 133,421 - - 133,421 Consumer 298,465 145,255 1,189 444,909 276,278 134,493 1,396 412,167 ----------------------------------------------------------------------------------------------------------------------------- Total $2,927,094 $4,504,114 $52,681 $7,483,889 $1,996,824 $4,854,304 $49,855 $6,900,983 ----------------------------------------------------------------------------------------------------------------------------- Loans past due (90 days) $ 14,944 $ 8,117 ----------------------------------------------------------------------------------------------------------------------------- Foregone interest on nonaccrual loans $ 5,268 $ 4,770 -----------------------------------------------------------------------------------------------------------------------------
Approximately 61% of the commercial and consumer loan portfolios and approximately 69% of the residential mortgage loan portfolio (excluding loans held for sale) are loans to businesses and individuals in Oklahoma. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. Within the commercial loan classification, loans to energy-related businesses total $1.2 billion or 16% of total loans. Other notable segments include wholesale/retail, $668 million; manufacturing, $483 million; agriculture, $228 million, which includes $197 million of loans to the cattle industry; and services, $1.4 billion, which includes nursing homes of $256 million, hotels of $35 million and healthcare of $138 million. Approximately 39% of commercial real estate loans are secured by properties located in Oklahoma, primarily in the Tulsa or Oklahoma City metropolitan areas. An additional 28% of commercial real estate loans are secured by property located in Texas. The major components of these properties are multifamily residences, $271 million; construction and land development, $436 million; retail facilities, $313 million; and office buildings, $290 million. RELATED PARTY Included in loans at December 31 are loans to executive officers, directors or principal shareholders of BOK Financial, as defined in Regulation S-X of the Securities and Exchange Commission. Such loans have been made on substantially the same terms as those prevailing at the time for loans to other customers in comparable transactions. Information relating to loans to executive officers, directors or principal shareholders is summarized as follows (in thousands): 2003 2002 ------------ ------------ Beginning balance $ 124,568 $ 90,712 Advances 57,487 35,992 Payments (13,903) (2,106) Adjustments (1) (30) ------------------------------- ------------ ------------ Ending balance $ 168,151 $124,568 ------------------------------- ------------ ------------ 55 RESERVE FOR LOAN LOSS The activity in the reserve for loan losses is summarized as follows (in thousands): 2003 2002 2001 -------------------------------- Beginning balance $ 116,070 $101,905 $ 82,655 Provision for loan losses 35,636 33,730 37,610 Loans charged off (31,475) (25,905) (25,248) Recoveries 6,125 4,976 4,588 Addition due to acquisitions 2,283 1,364 2,300 ----------------------------------------------------------- Ending balance $ 128,639 $116,070 $101,905 ----------------------------------------------------------- IMPAIRED LOANS Investments in loans considered to be impaired under FAS 114 were as follows (in thousands): December 31, -------------------------------- 2003 2002 2001 -------------------------------- Investment in loans impaired under FAS 114 (all of which were on a nonaccrual basis) $46,990 $44,912 $ 39,848 Loans with specific reserves for loss 18,947 4,685 10,723 Specific reserve balance 6,377 2,269 2,509 No specific related reserve for loss 28,043 40,227 29,125 Average recorded investment in impaired loans 47,415 41,828 44,474 Interest income recognized on impaired loans during 2003, 2002 and 2001 was not significant. (6) PREMISES AND EQUIPMENT Premises and equipment at December 31 are summarized as follows (in thousands): December 31, ---------------------- 2003 2002 ----------- ---------- Land $ 40,098 $ 32,381 Buildings and improvements 126,665 115,399 Software 26,338 13,702 Furniture and equipment 95,833 84,578 ------------------------------------ ----------- ---------- Subtotal 288,934 246,060 Less accumulated depreciation 113,033 94,345 ------------------------------------ ----------- ---------- Total $175,901 $151,715 ------------------------------------ ----------- ---------- Depreciation expense of premises and equipment was $22.4 million, $20.5 million and $21.0 million for the years ended December 31, 2003, 2002 and 2001, respectively. 56 (7) INTANGIBLE ASSETS The following table presents the original cost and accumulated amortization of intangible assets (in thousands): December 31, ----------------------- 2003 2002 ----------- ----------- Core deposit premiums $ 86,257 $ 75,668 Less accumulated amortization 64,012 56,555 ------------------------------------- ----------- ----------- Net core deposit premiums 22,245 19,113 Other identifiable intangible assets 11,526 3,346 Less accumulated amortization 3,257 2,613 ------------------------------------- ----------- ----------- Net other identifiable intangible assets 8,269 733 Goodwill 273,307 231,157 Less accumulated amortization 53,135 53,135 ------------------------------------- ----------- ----------- Net goodwill 220,172 178,022 ------------------------------------- ----------- ----------- Total intangible assets, net $250,686 $197,868 ------------------------------------- ----------- ----------- The net amortized cost of intangible assets at December 31, 2003 is assigned to reporting units as follows (in thousands): Core deposit premiums: Bank of Albuquerque $ 1,718 Bank of Texas 10,752 Colorado State Bank and Trust 9,775 ----------------------------------- ---------- $22,245 ----------------------------------- ---------- Other identifiable intangible assets: Bank of Oklahoma $ 367 Colorado State Bank and Trust 7,902 ----------------------------------- ---------- $8,269 ----------------------------------- ---------- Goodwill: Bank of Oklahoma $ 8,173 Bank of Texas 154,741 Bank of Albuquerque 15,273 Colorado State Bank and Trust 41,985 ----------------------------------- ----------- $220,172 ----------------------------------- ----------- Expected amortization expense for intangible assets that will continue to be amortized under FAS 142, as amended by FAS 147, (in thousands): Core Other Deposit Identifiable Premiums Intangible Assets Total -------------- ----------------- ------------- 2004 $ 7,146 $ 992 $ 8,138 2005 5,175 962 6,137 2006 3,628 796 4,424 2007 2,935 763 3,698 2008 1,577 780 2,357 Thereafter 1,784 3,976 5,760 ---------------- -------------- ----------------- ------------- $22,245 $8,269 $30,514 ---------------- -------------- ----------------- ------------- 57 (8) MORTGAGE BANKING ACTIVITIES BOK Financial engages in mortgage banking activities through the BOk Mortgage Division of BOk. Residential mortgage loans held for sale totaled $57 million and $133 million, and outstanding mortgage loan commitments totaled $208 million and $323 million at December 31, 2003 and 2002, respectively. Mortgage loan commitments are generally outstanding for 60 to 90 days and are subject to both credit and interest rate risk. Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Exposure to interest rate fluctuations is partially hedged through the use of mortgage-backed securities forward sales contracts. These contracts set the price for loans that will be delivered in the next 60 to 90 days. As of December 31, 2003, the unrealized loss on forward contracts used to hedge the mortgage pipeline was approximately $340,000. At December 31, 2003, BOK Financial owned the rights to service 61,254 mortgage loans with outstanding principal balances of $4.7 billion, including $357 million serviced for affiliates, and held related funds of $83 million for investors and borrowers. The weighted average interest rate and remaining term was 6.50% and 266 months, respectively. Mortgage loans sold with recourse totaled $103 million at December 31, 2003. At December 31, 2002, BOK Financial owned the rights to service 76,298 mortgage loans with outstanding principal balances of $5.8 billion and held related funds of $174 million for investors and borrowers. The weighted average interest rate and remaining term was 7.05% and 265 months, respectively. The portfolio of mortgage servicing rights exposes BOK Financial to interest rate risk. During periods of falling interest rates, mortgage loan prepayments increase, reducing the value of the mortgage servicing rights. See Note 1 for specific accounting policies for mortgage servicing rights and the related hedges. Activity in capitalized mortgage servicing rights and related valuation allowance during 2003, 2002 and 2001 are as follows (in thousands): Capitalized Mortgage Servicing Rights Valuation Hedging ------------------------------------- Purchased Originated Total Allowance (Gain)/Loss(2) Net ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2000 $63,361 $ 40,325 $103,686 $ (2,900) $10,005 $110,791 Additions 4,400 22,695 27,095 - - 27,095 Amortization expense (12,705) (9,409) (22,114) - (1,425) (23,539) Provision for impairment - - - (15,551) - (15,551) ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2001 55,056 53,611 108,667 (18,451) 8,580 98,796 Additions (412) 20,832 20,420 - - 20,420 Amortization expense (17,421) (17,159) (34,580) - (1,425) (36,005) Write-off - (7,435) (7,435) 9,456 (2,021) - Provision for impairment - - - (45,923) - (45,923) ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2002 37,223 49,849 87,072 (54,918) 5,134 37,288 Additions, net (3) 23,922 23,919 - - 23,919 Amortization expense (14,840) (19,315) (34,155) - (1,425) (35,580) Recovery of impairment - - - 22,923 - 22,923 ------------------------------------------------------------------------------------------------------------------------- Balance at December 31, 2003 $22,380 $ 54,456 $ 76,836 $(31,995) $ 3,709 $ 48,550 ------------------------------------------------------------------------------------------------------------------------- Estimated fair value of mortgage servicing rights at: December 31, 20011 $53,174 $ 46,789 $ 99,963 $ 99,963 December 31, 20021 $17,311 $ 20,477 $ 37,788 $ 37,788 December 31, 20031 $12,625 $ 36,564 $ 49,189 $ 49,189 -------------------------------------------------------------------------------------------------------------------------
1 Excludes approximately $1.4 million, $2 million and $5 million at December 31, 2003, 2002 and 2001, respectively, of loan servicing rights on mortgage loans originated prior to the adoption of FAS 122. 2 Hedging (gain)/loss represents the deferred (gains)/losses on a derivatives-based hedging program prior to the adoption of FAS 133. 58 Fair value is determined by discounting the projected net cash flows. Significant assumptions are: Discount rate - Indexed to a risk-free rate commensurate with the average life of the servicing portfolio plus a market premium. The discount rate at December 31, 2003 was 8.9%. Prepayment rate - Annual prepayment estimates ranging from 9.45% to 36.34% based upon loan interest rate, original term and loan type. Loan servicing costs - $35 to $46 annually per loan based upon loan type. Escrow earnings rate - Indexed to rates paid on deposit accounts with a comparable average life. The escrow earnings rate at December 31, 2003 was 4.33%. Stratification of the mortgage loan-servicing portfolio, outstanding principal of loans serviced, and related hedging information by interest rate at December 31, 2003 follows (in thousands): < 5.51% 5.51% - 6.49% 6.50% - 7.49% => 7.50% Total --------------------------------------------------------------------------- Cost less accumulated amortization $ 12,491 $ 23,786 $ 29,758 $ 10,801 $ 76,836 Deferred hedge losses - - 3,246 463 3,709 ------------------------------------------------------------------------------------------------------------------------- Adjusted cost $ 12,491 $ 23,786 $ 33,004 $ 11,264 $ 80,545 ------------------------------------------------------------------------------------------------------------------------- Fair value $ 10,489 $ 16,780 $ 16,064 $ 5,856 $ 49,189 ------------------------------------------------------------------------------------------------------------------------- Impairment (2) $ 2,233 $ 7,008 $ 16,941 $ 5,813 $ 31,995 ------------------------------------------------------------------------------------------------------------------------- Outstanding principal of loans serviced (1) $ 909,206 $1,333,210 $ 1,498,370 $ 523,371 $4,264,157 ------------------------------------------------------------------------------------------------------------------------- 1 Excludes outstanding principal of $357 million for loans serviced for BOk and $125 million of mortgage loans originated prior to FAS 122, for which there are no capitalized mortgage servicing rights. 2 Impairment is determined by both an interest rate and loan type stratification.
(9) DEPOSITS Interest expense on deposits is summarized as follows (in thousands): 2003 2002 2001 ----------------------------------- Transaction deposits $ 31,346 $ 39,273 $ 49,893 Savings 944 1,976 2,281 Time: Certificates of deposits under $100,000 39,098 50,036 61,626 Certificates of deposits $100,000 and over 48,181 42,291 81,524 Other time deposits 12,360 11,890 10,885 ------------------------------------------------------------ Total time 99,639 104,217 154,035 ------------------------------------------------------------ Total $131,929 $145,466 $206,209 ------------------------------------------------------------ The aggregate amounts of time deposits in denominations of $100,000 or more at December 31, 2003 and 2002 were $2.1 billion and $2.0 billion, respectively. Time deposit maturities are as follows: 2004 - $1.4 billion, 2005 - $190 million, 2006 - $119 million, 2007 - $1.1 billion, 2008 - $211 million, and $359 million thereafter. Interest expense on time deposits during 2003 and 2002 was reduced by the net accrued settlement from interest rate swaps of $14.0 million and $11.9 million, respectively. 59 (10) OTHER BORROWINGS Information relating to other borrowings is summarized as follows (dollars in thousands): December 31 ------------------------------------------------------------------------------------ 2003 2002 ------------------------------------------------------------------------------------ Maximum Maximum Outstanding Outstanding At Any At Any Balance Rate Month End Balance Rate Month End ------------------------------------------------------------------------------------ Parent Company: Revolving, unsecured line $ 95,000 1.75% $ 95,000 $ 85,000 2.17% $ 95,000 Subordinated debenture - - - - - 30,000 Other - - - - - 95 -------------- --------------- Total parent company 95,000 1.75 85,000 2.17 -------------- --------------- Subsidiary Banks: Funds purchased and repurchase agreements 1,609,668 1.37 1,904,269 1,567,686 1.67 1,895,315 Federal Home Loan Bank advances 899,426 1.21 974,729 973,454 1.48 1,036,387 Subordinated debenture 154,332 6.02 155,345 155,419 6.19 156,229 Other 22,224 1.58 29,116 29,568 1.49 29,853 -------------- --------------- Total subsidiary bank 2,685,650 1.58 2,726,127 1.86 -------------- --------------- Total other borrowings $2,780,650 1.74 $2,811,127 1.93 -------------- ---------------
Aggregate annual principal repayments of long-term debt at December 31, 2003 are as follows (in thousands): Parent Subsidiary Company Banks --------------------------- 2004 $ - $2,089,707 2005 - 425,994 2006 95,000 3,805 2007 - 2,128 2008 - 1,197 Thereafter - 162,819 --------------------------- Total $95,000 $2,685,650 --------------------------- Borrowings from the Federal Home Loan Bank are used for funding purposes. In accordance with policies of the Federal Home Loan Bank, BOK Financial has granted a blanket pledge of eligible assets (generally unencumbered U.S. Treasury and mortgage-backed securities, 1-4 family loans and multifamily loans) as collateral for these advances. The unused credit available to BOK Financial at December 31, 2003 pursuant to the Federal Home Loan Bank's collateral policies is $498 million. BOK Financial has a revolving, unsecured credit agreement from certain banks at December 31, 2003 of $125 million. Interest is based upon either a base rate or the British Bankers' Association Eurodollar rate plus a defined margin that is determined by BOK Financial's credit rating. This margin ranges from 0.625% to 1.25%. The base rate is defined as the greater of the daily federal funds rate plus 0.5% or the prime rate. Interest is generally paid quarterly. Facility fees are paid quarterly on the unused portion of the commitment at a rate of 0.20% to 0.25% as determined by BOK Financial's current debt rating. This credit agreement includes certain restrictive covenants that limit BOK Financial's ability to borrow additional funds and to pay cash dividends on common stock. These covenants also require BOK Financial and its subsidiaries to maintain minimum capital levels and to exceed minimum net worth ratios. BOK Financial met all of the restrictive covenants at December 31, 2003. In 1997, BOk issued $150 million of 7.125% fixed rate subordinated debentures that mature in 2007. Interest rate swaps were used as a fair value hedge to convert the fixed interest on these debentures to a LIBOR-based floating rate. This required BOk to adjust the carrying value of the subordinated debentures to fair value. In 2001, the interest rate swaps were terminated. The related market value adjustment of the subordinated debenture of $8 million is being recognized over the remaining life of the debt. BOK Financial issued a $30 million, seven year subordinated debenture, bearing interest at LIBOR plus 1.75%, on March 23, 2001 to its principal shareholder, George B. Kaiser. This debt was paid off in its entirety in November 2002. Funds purchased generally mature within one to ninety days from the transaction date. At December 31, 2003, securities sold under agreements to repurchase totaled $1.0 billion with related accrued interest payable of $374 thousand. 60 Additional information relating to repurchase agreements at December 31, 2003 is as follows (dollars in thousands): Amortized Market Repurchase Average Security Sold/Maturity Cost Value Liability1 Rate ------------------------------------------------------------------------------------------------------------- U.S. Agency Securities: Overnight $ 450,807 $ 449,642 $ 403,473 0.93% Term of up to 30 days 84,554 85,272 81,485 1.10 Term of 30 to 90 days 599,170 600,147 554,060 1.12 ------------------------------------------------------------------------------------------------------------- Total Agency Securities $1,134,531 $ 1,135,061 $1,039,018 1.04% -------------------------------------------------------------------------------------------------------------
1 BOK Financial maintains control over the securities underlying overnight repurchase agreements and generally transfers control over securities underlying longer-term dealer repurchase agreements to the respective counterparty. (11) FEDERAL AND STATE INCOME TAXES Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities are as follows (in thousands): December 31, ---------------------- 2003 2002 ---------------------- Deferred tax liabilities: Available for sale securities mark-to-market $ 5,300 $ 27,400 Pension contributions in excess of book expense 10,800 6,900 Valuation adjustments 24,900 13,800 Mortgage servicing 25,900 21,100 Lease financing 14,600 12,800 Other 6,400 9,800 ------------------------------------------------------------ Total deferred tax liabilities 87,900 91,800 ------------------------------------------------------------ Deferred tax assets: Stock-based compensation 3,500 2,100 Loan loss reserve 48,900 44,100 Valuation adjustments 20,800 29,900 Deferred book income 19,700 15,400 Other 14,800 14,300 Deferred compensation 4,300 1,800 ------------------------------------------------------------ Total deferred tax assets 112,000 107,600 ------------------------------------------------------------ Deferred tax assets in excess of deferred tax liabilities $ 24,100 $ 15,800 ------------------------------------------------------------ The significant components of the provision for income taxes attributable to continuing operations for BOK Financial are shown below (in thousands): Years ended December 31, ----------------------------------- 2003 2002 2001 ----------------------------------- Current: Federal $77,015 $89,879 $69,971 State 5,551 6,011 4,240 ----------------------------------------------------------- Total current 82,566 95,890 74,211 ----------------------------------------------------------- Deferred: Federal 5,369 (12,978) (10,130) State 979 (2,077) (1,635) ----------------------------------------------------------- Total deferred 6,348 (15,055) (11,765) ----------------------------------------------------------- Total income tax $88,914 $80,835 $62,446 ----------------------------------------------------------- The reconciliations of income attributable to continuing operations computed at the U.S. federal statutory tax rates to income tax expense are as follows (in thousands): Years ended December 31, ------------------------------- 2003 2002 2001 ------------------------------- Amount: Federal statutory tax $86,538 $79,903 $61,721 Tax exempt revenue (2,815) (3,233) (3,600) Effect of state income taxes, net of federal benefit 4,110 2,482 2,605 Intangible amortization 763 914 3,965 Utilization of tax credits (794) (937) (800) Other, net 1,112 1,706 (1,445) ------------------------------------------------------------ Total $88,914 $80,835 $62,446 ------------------------------------------------------------ Years ended December 31, ------------------------------- 2003 2002 2001 ------------------------------- Percent of pretax income: Federal statutory rate 35% 35% 35% Tax-exempt revenue (1) (1) (2) Effect of state income taxes, net of federal benefit 2 1 2 Intangible amortization - - 2 Utilization of tax credits - - (1) Other, net - - (1) ------------------------------------------------------------- Total 36% 35% 35% ------------------------------------------------------------- 61 (12) EMPLOYEE BENEFITS BOK Financial sponsors a defined benefit Pension Plan for all employees who satisfy certain age and service requirements. The following table presents information regarding this plan (dollars in thousands): December 31, ----------------------- 2003 2002 ----------------------- Change in projected benefit obligation: Projected benefit obligation, at beginning of year $ 30,606 $ 24,141 Service cost 5,178 4,016 Interest cost 2,015 1,768 Actuarial loss 2,161 1,995 Benefits paid (2,187) (1,314) ------------------------------------------------------------------------------------------- Projected benefit obligation at end of year1,2 $ 37,773 $ 30,606 ------------------------------------------------------------------------------------------- Change in plan assets: Plan assets at fair value, at beginning of year $ 30,945 $ 27,307 Actual return on plan assets 7,286 (3,098) Company contributions 7,231 8,050 Benefits paid (2,187) (1,314) ------------------------------------------------------------------------------------------- Plan assets at fair value at end of year $ 43,275 $ 30,945 ------------------------------------------------------------------------------------------- Reconciliation of prepaid (accrued) and total amount recognized: Benefit obligation $(37,773) $(30,606) Fair value of assets 43,275 30,945 ------------------------------------------------------------------------------------------- Funded status of the plan 5,502 339 Unrecognized net loss 13,387 16,373 Unrecognized prior service cost 503 563 ------------------------------------------------------------------------------------------- Prepaid pension costs $ 19,392 $ 17,275 ------------------------------------------------------------------------------------------- Components of net periodic benefit costs: Service cost $ 5,178 $ 4,016 Interest cost 2,015 1,768 Expected return on plan assets (2,957) (2,384) Amortization of unrecognized amounts: Net loss 818 251 Prior service cost 60 60 ------------------------------------------------------------------------------------------- Net periodic pension cost $ 5,114 $ 3,711 ------------------------------------------------------------------------------------------- 1 Projected benefit obligation equals accumulated benefit obligation. 2 Projected benefit obligation is based on a January 1 measurement date. Weighted-average assumptions as of December 31: Discount rate 6.25% 6.75% Expected return on plan assets 7.50% 7.50% Rate of compensation increase 5.25% 5.25%
Assets of the Pension Plan consist primarily of shares in the American Performance Balanced Fund. The stated objective of this fund is to provide an attractive total return through a broadly diversified mix of equities and bonds. The typical portfolio mix is approximately 60% equities and 40% bonds. The life-to-date return on the fund, which is used as an indicator when setting the expected return on plan assets, was 7.95%. The maximum and minimum required Pension Plan contributions for 2003 were $12.7 million and $0, respectively. Amounts contributed to the Pension Plan during 2003 included $5.0 million attributable to the current year and $2.2 million attributable to 2002. Employee contributions to the Thrift Plans are matched by BOK Financial up to 5% of base compensation, based upon years of service. Participants may direct the investments of their accounts in a variety of options, including BOK Financial Common Stock. Employer contributions vest over five years. Expenses incurred by BOK Financial for the Thrift Plans totaled $3.6 million, $3.1 million and $2.8 million for 2003, 2002 and 2001, respectively. BOK Financial also sponsors a defined benefit post-retirement employee medical plan, which pays 50 percent of annual medical insurance premiums for retirees who meet certain age and service requirements. Assets of the retiree medical plan consist primarily of shares in a cash management fund. Eligibility for the post-retirement plan is limited to current retirees and certain employees who were age 60 or older at the time the plan was frozen in 1993. The net obligation recognized under the plan was $2.4 million at December 31, 62 2003. A 1% change in medical expense trends would not significantly affect the net obligation or cost of this plan. Under various performance incentive plans, participating employees may be granted awards based on defined formulas or other criteria. Earnings were charged $52.0 million in 2003, $32.1 million in 2002 and $27.2 million in 2001 for such awards. (13) EXECUTIVE BENEFIT PLANS The shareholders and Board of Directors of BOK Financial have approved various stock-based compensation plans. The number of awards and the employees to receive awards are determined by an independent compensation committee of the Board of Directors for the Chief Executive Officer and other senior executives. Other stock-based compensation awards are determined by the Chairman of the Board and the Chief Executive Officer. These awards consist primarily of stock options that are subject to vesting requirements. Generally, one-seventh of the options awarded vest annually and expire three years after vesting. Additionally, stock options that vest in two years and expire 45 days after vesting have been awarded. The following table presents options outstanding during 2001, 2002 and 2003 under these plans: Weighted- Average Exercise Number Price -------------------------- Options outstanding at December 31, 2000 3,448,924 $15.38 Options awarded 722,119 28.68 Options exercised (640,234) 11.79 Options forfeited (48,469) 16.06 Options expired (1,057) 16.70 ------------------------------------------------------------ Options outstanding at December 31, 2001 3,481,283 18.74 Options awarded 169,183 32.22 Options exercised (477,623) 13.71 Options forfeited (38,936) 20.49 Options expired (4) 7.91 ------------------------------------------------------------ Options outstanding at December 31, 2002 3,133,903 20.29 Options awarded 861,898 33.64 Options exercised (652,871) 17.24 Options forfeited (60,137) 23.76 Options expired (51) 19.29 ------------------------------------------------------------ Options outstanding at December 31, 2003 3,282,742 $24.34 ------------------------------------------------------------ Options vested at December 31, 2003 1,010,099 $18.13 ------------------------------------------------------------ The following table summarizes information concerning currently outstanding and vested stock options: Options Outstanding Options Vested ------------------------------------------------------------------------ Weighted Weighted Average Average Weighted Range of Remaining Exercise Average Exercise Number Contractual Price Number Exercise Prices Outstanding Life (years) Vested Price $ 8.29 - $9.98 196,788 1.61 $ 9.25 196,788 $ 9.25 16.65 236,587 2.42 16.65 152,191 16.65 17.89 - 19.59 1,258,771 3.56 18.62 509,809 18.74 28.52 - 32.51 1,353,763 4.97 30.70 151,311 29.12 38.33 - 38.78 236,833 2.00 38.55 - - ----------------------------------------------------------------------- Compensation expense for stock options is generally recognized based on the fair value of options granted over the options' vesting period. No compensation expense is recognized for options that are forfeited before vesting. The fair value of options was determined as of the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: 2003 2002 2001 --------- --------- --------- Average risk-free interest rate 2.57% 1.59% 6.04% Dividend yield None None None Volatility factors .178 .190 .195 Weighted-average expected life 7 years 2 years 7 years Weighted-average fair value $6.66 $4.18 $8.65 BOK Financial also may issue nonvested common shares under the various stock-based compensation plans. These shares, which generally are issued only to the Chief Executive Officer and selected senior executives, vest five years after the grant date. The holders of these shares may be required to retain the shares for a three-year period after vesting. At December 31, 2003, a total of 18,635 nonvested common shares have been awarded. 63 BOK Financial permits certain executive officers to defer recognition of taxable income from their stock-based compensation. These officers are also able to diversify their deferred compensation into investments other than BOK Financial common stock. Accordingly, stock-based compensation for these officers is recognized as liability awards rather than equity awards. Compensation expense is based on the intrinsic value of the award over the vesting period. Additional compensation expense is recognized based on changes in the fair value of the deferred compensation liability after the vesting period. At December 31, 2003, the total deferred compensation liability attributed to these arrangements was $6.8 million. During January 2004, BOK Financial awarded the following stock-based compensation: Exercise Fair Value/ Number Price Award ---------- --------- ------------ Equity awards: Stock options 487,559 $38.87 $ 8.99 Liability awards: Stock options 125,756 38.87 8.99 Nonvested stock 24,800 - 38.87 ---------- Total Liability awards 150,556 ---------- Total stock-based awards 638,115 -------------------------- ---------- --------- ------------ (14) COMMITMENTS AND CONTINGENT LIABILITIES In the ordinary course of business, BOK Financial and its subsidiaries are subject to legal actions and complaints. Management believes, based upon the opinion of counsel, that the actions and liability or loss, if any, resulting from the final outcomes of the proceedings will not be material in the aggregate. BOk is obligated under a long-term lease for its bank premises located in downtown Tulsa. The lease term, which began November 1, 1976, is for fifty-seven years with options to terminate in 2013 and 2023. Annual base rent is $3.3 million. BOk subleases portions of its space for annual rents of $386 thousand in 2004, $370 thousand in 2005 and $213 thousand in years 2006 through 2008. Net rent expense on this lease was $2.9 million in years 2003, 2002 and 2001. Total rent expense for BOK Financial was $13.0 million in 2003, $12.4 million in 2002 and $11.8 million in 2001. At December 31, 2003, the future minimum lease payments for equipment and premises under operating leases were as follows: $12.4 million in 2004, $11.7 million in 2005, $11.2 million in 2006, $9.7 million in 2007, $8.3 million in 2008 and a total of $36.8 million thereafter. BOk and Williams Companies, Inc. severally guaranteed 30 percent and 70 percent, respectively, of the $13 million debt and operating deficit of two parking facilities operated by the Tulsa Parking Authority. The debt had a maturity date of May 15, 2007. In 2003, BOk funded the remaining amount of this commitment and paid $2.9 million to retire the Company's obligation with respect to this debt. Total expenditures related to this guarantee were $3.2 million in 2003, $373 thousand in 2002 and $441 thousand in 2001. The Federal Reserve Bank requires member banks to maintain certain minimum average cash balances. These balances were approximately $303 million for 2003 and $283 million for 2002. 64 (15) SHAREHOLDERS' EQUITY PREFERRED STOCK One billion shares of preferred stock with a par value of $0.00005 per share are authorized. A single series of 250,000,000 shares designated as Series A Preferred Stock ("Series A Preferred Stock") is currently issued and outstanding. The Series A Preferred Stock has no voting rights except as otherwise provided by Oklahoma corporate law and may be converted into one share of Common Stock for each 37 shares of Series A Preferred Stock at the option of the holder. Dividends are cumulative at an annual rate of ten percent of the $0.06 per share liquidation preference value when declared and are payable in cash. Aggregate liquidation preference is $15 million. During 2003, 2002 and 2001, 23,214 shares, 47,961 shares, and 72,141 shares, respectively, of BOK Financial common stock were issued in payment of dividends on the Series A Preferred Stock in lieu of cash by mutual agreement of BOK Financial and the holders of the Series A Preferred Stock. These shares were valued at $750,000 in 2003, and $1.5 million in 2002 and 2001, based on average market price, as defined, for a 65 business day period preceding declaration. In 2003, cash dividends paid on preferred stock totaled $750,000. George B. Kaiser owns substantially all Series A Preferred Stock. COMMON STOCK Common stock consists of 2.5 billion authorized shares with a $0.00006 par value. Holders of common shares are entitled to one vote per share at the election of the Board of Directors and on any question arising at any shareholders' meeting and to receive dividends when and as declared. No common stock dividends can be paid unless all accrued dividends on the Series A Preferred Stock have been paid. The present policy of BOK Financial is to retain earnings for capital and future growth, and management has no current plans to recommend payment of cash dividends on common stock. Additionally, regulations restrict the ability of national banks and bank holding companies to pay dividends, and BOK Financial's credit agreement restricts the payment of dividends by the holding company. During 2003, 2002 and 2001, 3% dividends payable in shares of BOK Financial common stock were declared and paid. The shares issued were valued at $58 million, $52 million and $35 million, respectively, based on the average closing bid/ask prices on the day preceding declaration. Per share data has been restated to reflect these stock dividends. Presently, management plans to recommend continued payment of an annual dividend in shares of common stock. On October 25, 2002, BOK Financial issued 1,711,127 shares of common stock and 292,225 options to purchase shares, with a fair value at the issuance date of $65 million for its purchase of Bank of Tanglewood. In addition, BOK Financial agreed to a limited price guarantee on a portion of the shares issued in this purchase. The fair value of this price guarantee, estimated to be $3 million based upon the Black-Scholes Option pricing model, was included in the purchase price of Bank of Tanglewood (see Note 2). Pursuant to this guarantee, any holder of BOK Financial common shares issued in this acquisition may annually make a claim for the excess of the guaranteed price and the actual sales price of any shares sold during a 60-day period after each of the first five anniversary dates after October 25, 2002. The maximum annual number of shares subject to this guarantee is 203,951. The guaranteed price for each anniversary period is $36.30 for 2004, $38.80 for 2005, $41.30 for 2006 and $43.81 for 2007. The price guarantee is nontransferable and noncumulative. BOK Financial may elect, in its sole discretion, to issue additional shares of common stock to satisfy any obligation under the price guarantee or to pay cash. The maximum aggregate number of common shares that may be issued to satisfy any price guarantee obligations is 10 million. If, as of any benchmark date, BOK Financial has already issued 10 million shares, BOK Financial is not obligated to make any further benchmark payments. BOK Financial's ability to pay cash to satisfy any price guarantee obligations is limited by applicable bank holding company and bank capital and dividend regulations. 65 SUBSIDIARY BANKS The amounts of dividends that BOK Financial's subsidiary banks can declare and the amounts of loans the subsidiary banks can extend to affiliates are limited by various federal and state banking regulations. Generally, dividends declared during a calendar year are limited to net profits, as defined, for the year plus retained profits for the preceding two years. The amounts of dividends are further restricted by minimum capital requirements. Pursuant to the most restrictive of the regulations at December 31, 2003, BOK Financial's subsidiary banks could declare dividends up to $121 million without prior regulatory approval. The subsidiary banks declared and paid dividends of $60 million in 2003, $40 million in 2002 and $92 million in 2001. Loans to a single affiliate may not exceed 10% and loans to all affiliates may not exceed 20% of unimpaired capital and surplus, as defined. Additionally, loans to affiliates must be fully secured. As of December 31, 2003 and 2002, these loans totaled $10 million. None of the affiliate loans in 2002 were to consolidated entities. Total loan commitments to affiliates at December 31, 2003 were $95 million. REGULATORY CAPITAL BOK Financial and its banking subsidiaries are subject to various capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and additional discretionary actions by regulators that could have a material effect on BOK Financial's operations. These capital requirements include quantitative measures of assets, liabilities and certain off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. For a banking institution to qualify as well capitalized, its Tier I, Total and Leverage capital ratios must be at least 6%, 10% and 5%, respectively. Tier I capital consists primarily of common stockholders' equity, excluding unrealized gains or losses on available for sale securities, less goodwill, core deposit premiums and certain other intangible assets. As directed by the Federal Reserve Bank, Tier I capital excludes $29 million, the combined value of common shares issued subject to the market value protection program and the value of the market value guarantee. These values will be restored to Tier I capital as the market price guarantee expires. Total capital consists primarily of Tier I capital plus preferred stock, subordinated debt and reserves for loan losses, subject to certain limitations. All of BOK Financial's banking subsidiaries exceeded the regulatory definition of well capitalized. 66 December 31, ------------------------------------------------------------ 2003 2002 ------------------------------ ----------------------------- Amount Ratio Amount Ratio ------------------------------ ----------------------------- (Dollars in thousands) Total Capital (to Risk Weighted Assets): Consolidated $ 1,157,782 11.31% $ 1,083,244 11.95% BOk 900,888 11.06 864,519 11.91 Bank of Texas 201,984 11.13 199,659 12.00 Bank of Albuquerque 91,412 17.35 81,458 16.59 Bank of Arkansas 15,218 21.56 14,079 18.08 Colorado State Bank and Trust 26,222 10.19 - - Tier I Capital (to Risk Weighted Assets): Consolidated $ 935,932 9.15% $ 813,845 8.98% BOk 718,538 8.82 624,968 8.61 Bank of Texas 179,256 9.88 178,832 10.75 Bank of Albuquerque 84,811 16.10 75,310 15.34 Bank of Arkansas 14,328 20.30 13,099 16.82 Colorado State Bank and Trust 22,997 8.94 - - Tier I Capital (to Average Assets): Consolidated $ 935,932 7.17% $ 813,845 6.88% BOk 718,538 6.69 624,968 6.39 Bank of Texas 179,256 7.22 178,832 8.43 Bank of Albuquerque 84,811 6.37 75,310 6.48 Bank of Arkansas 14,328 7.82 13,099 6.95 Colorado State Bank and Trust 22,997 6.86 - -
(16) EARNINGS PER SHARE The following table presents the computation of basic and diluted earnings per share (dollars in thousands except per share data): Years ended December 31, -------------------------------------------- 2003 2002 2001 -------------------------------------------- Numerator: Net income $ 158,360 $ 147,871 $ 114,439 Preferred stock dividends (1,500) (1,500) (1,500) --------------------------------------------------------------------------------------------------------------------- Numerator for basic earnings per share - income available to common stockholders 156,860 146,371 112,939 --------------------------------------------------------------------------------------------------------------------- Effect of dilutive securities: Preferred stock dividends 1,500 1,500 1,500 --------------------------------------------------------------------------------------------------------------------- Numerator for diluted earnings per share - income available to common stockholders after assumed conversion $ 158,360 $ 147,871 $ 114,439 --------------------------------------------------------------------------------------------------------------------- Denominator: Denominator for basic earnings per share -weighted average shares 56,990,244 54,964,747 54,150,255 Effect of dilutive securities: Employee stock compensation plans (1) 754,262 751,095 669,477 Convertible preferred stock 6,719,577 6,719,577 6,719,577 Tanglewood market value guarantee (see Note 15) 107,879 43,764 - --------------------------------------------------------------------------------------------------------------------- Dilutive potential common shares 7,581,718 7,514,436 7,389,054 --------------------------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 64,571,962 62,479,183 61,539,309 --------------------------------------------------------------------------------------------------------------------- Basic earnings per share $2.75 $2.66 $2.09 --------------------------------------------------------------------------------------------------------------------- Diluted earnings per share $2.45 $2.37 $1.86 --------------------------------------------------------------------------------------------------------------------- 1 Excludes employee stock options with exercise prices 26,158 83,704 615,662 greater than the current market price.
67 (17) REPORTABLE SEGMENTS BOK Financial operates four principal lines of business under its Bank of Oklahoma franchise: corporate banking, consumer banking, mortgage banking and wealth management. It also operates a fifth principal line of business, regional banks, which includes all banking functions for Bank of Albuquerque, N.A., Bank of Arkansas, N.A., Bank of Texas, N.A. and Colorado State Bank and Trust, N.A. These five principal lines of business combined account for approximately 94% of total revenue. In addition to its lines of business, BOK Financial has a funds management unit. The primary purpose of this unit is to manage the overall liquidity needs and interest rate risk of the company. Each line of business borrows funds from and provides funds to the funds management unit as needed to support their operations. The Corporate Banking segment provides loan and lease financing and treasury and cash management services to businesses throughout Oklahoma and surrounding states. Corporate Banking also includes our TransFund unit, which provides ATM and merchant deposit services. The Consumer Banking segment provides a full line of deposit, loan and fee-based services to customers throughout Oklahoma through four major distribution channels: traditional branches, supermarket branches, the 24-hour ExpressBank call center and the Internet. The Mortgage Banking segment consists of two operating sectors that originate a full range of mortgage products from federally sponsored programs to "jumbo loans" on higher priced homes in BOK Financial's primary market areas. The Mortgage Banking segment also services mortgage loans acquired from throughout the United States. The Wealth Management segment provides a wide range of trust and private financial services, including institutional, investment and retirement products, loans and other services to affluent individuals, businesses, not-for-profit organizations, and governmental agencies. Trust services are primarily provided to clients in Oklahoma, Texas, Arkansas and New Mexico. Wealth Management includes a nationally competitive, self-directed 401-(k) program. Additionally, Wealth Management engages in securities brokerage and trading activities and investment banking. Wealth Management includes BOSC, Inc., a registered broker/dealer. Regional banks include Bank of Texas, Bank of Albuquerque, Bank of Arkansas, and Colorado State Bank and Trust. Each of these banks provides a full range of corporate and consumer banking services in their respective markets. Trust Services provided through Colorado State Bank and Trust are included in the Regional Banks segment. BOK Financial identifies reportable segments by type of service provided for the Mortgage Banking and the Wealth Management segments and by type of customer for the Corporate Banking and Consumer Banking segments. Regional Banks are identified by legal entity. Operating results are adjusted for intercompany loan participations and allocated service costs and management fees. BOK Financial allocates resources and evaluates performance of its lines of business after allocation of funds, certain indirect expenses, taxes and capital costs. The cost of funds borrowed from the funds management unit by the operating lines of business is transfer priced at rates that approximate market for funds with similar duration. Market is generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of transfer-pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk. The value of funds provided by the operating lines of business to the funds management unit is based on applicable Federal Home Loan Bank advance rates. Deposit accounts with indeterminate maturities, such as demand deposit accounts and interest-bearing transaction accounts, are transfer-priced at a rolling average based on expected duration of the accounts. The expected duration ranges from 90 days for certain rate-sensitive deposits to five years. The accounting policies of the reportable segments generally follow those described in the summary of significant account policies except interest income is reported on a fully tax-equivalent basis, loan losses are based on actual net amounts charged off and the amortization of intangible assets is generally excluded. Economic capital is assigned to the business units based on an allocation method that reflects management's assessment of risk. In the second quarter of 2003, management adopted a third-party developed capital allocation model. This model assigns capital based upon credit, operating, interest rate, liquidity and market risk inherent in BOK Financial's business lines and recognizes the diversification benefits among the units. The level of assigned economic capital is a combination of the risk taken by each business 68 line, based on its actual exposures and calibrated to its own loss history where possible. Previously, capital was assigned to the business units based on an internally developed model that focused primarily on credit risk as defined by regulatory standards. While adoption of this new model has not significantly affected management's assessment of the overall capital levels required for the company, it has assigned more capital to business units with operating, interest rate and market risk and assigned less capital to business units with credit risk. Additional capital is assigned to the regional banks line of business based on BOK Financial's investment in those entities. Capital assignments for prior periods have been restated to reflect this new allocation model. Substantially all revenue is from domestic customers. No single external customer accounts for more than 10% of total revenue. 69 All Corporate Consumer Mortgage Wealth Regional Other/ (In Thousands) Banking Banking Banking Management Banks Eliminations Total ------------------------------------------------------------------------------------------------ Year ended December 31, 2003 Net interest revenue/(expense) from external sources $ 144,791 $ (16,725) $ 27,770 $ 1,967 $ 164,755 $ 67,471 $ 390,029 Net interest revenue/(expense) from internal sources (28,218) 57,925 (9,415) 8,954 (12,151) (17,095) - ---------------------------------------------------------------------------------------------------------------------------- Total net interest revenue 116,573 41,200 18,355 10,921 152,604 50,376 390,029 Provision for loan losses 10,325 6,887 917 390 6,425 10,692 35,636 Other operating revenue 79,316 47,361 36,379 91,534 36,531 (10,431) 280,690 Capitalized mortgage servicing rights - - 23,922 - - - 23,922 Financial instruments gains/(losses) 614 - 4,025 53 339 (6,651) (1,620) Operating expense 88,478 66,639 58,204 80,440 118,386 20,887 433,034 Recovery for impairment of mortgage servicing rights - - (22,923) - - - (22,923) Income taxes 38,007 5,849 18,082 8,432 23,606 (5,062) 88,914 ---------------------------------------------------------------------------------------------------------------------------- Net income $ 59,693 $ 9,186 $ 28,401 $ 13,246 $ 41,057 $ 6,777 $ 158,360 ---------------------------------------------------------------------------------------------------------------------------- Average assets $4,362,396 $2,514,262 $ 623,823 $731,303 $ 4,899,360 $(365,583) $12,765,561 Average equity 311,140 58,000 69,100 69,690 360,220 291,406 1,159,556 Performance measurements: Return on assets 1.37% .37% 4.55% 1.81% 0.84% - 1.24% Return on equity 19.19 15.84 41.10 19.01 11.40 - 13.66 Efficiency ratio 45.17 75.25 74.00 78.51 62.59 - 62.34
Reconciliation to Consolidated Financial Statements Other Other Net Interest Operating Operating Net Average Revenue Revenue(1) Expense Income Assets --------------------------------------------------------------------- Total reportable segments $339,653 $ 315,043 $389,224 $151,583 $13,131,144 Unallocated items: Tax-equivalent adjustment 5,170 - - 5,170 - Funds management 59,520 (6,520) 13,926 4,972 1,379,319 All others (including eliminations), net (14,314) (3,911) 6,961 (3,365) (1,744,902) -------------------------------------------------------------------------------------------------- BOK Financial consolidated $390,029 $ 304,612 $410,111 $158,360 $12,765,561 --------------------------------------------------------------------------------------------------
(1)Excluding financial instrument gains/(losses) 70 All Corporate Consumer Mortgage Wealth Regional Other/ (In Thousands) Banking Banking Banking Management Banks Eliminations Total ------------------------------------------------------------------------------------------------ Year ended December 31, 2002 Net interest revenue/(expense) from external sources $ 155,648 $ (17,875) $ 32,199 $ 1,958 $ 138,145 $ 58,126 $ 368,201 Net interest revenue/(expense) from internal sources (45,573) 61,301 (13,713) 8,162 (12,835) 2,658 - ---------------------------------------------------------------------------------------------------------------------------- Total net interest revenue 110,075 43,426 18,486 10,120 125,310 60,784 368,201 Provision for loan losses 6,475 7,829 252 363 6,161 12,650 33,730 Other operating revenue 72,234 38,862 37,845 69,932 26,876 (10,349) 235,400 Capitalized mortgage servicing rights - - 20,832 - - - 20,832 Financial instruments gains/(losses) 658 - 26,345 68 4,205 33,322 64,598 Operating expense 81,434 63,401 54,795 69,709 94,383 16,950 380,672 Provision for impairment of mortgage servicing rights - - 45,923 - - - 45,923 Income taxes 36,977 4,302 987 3,966 20,415 14,188 80,835 ---------------------------------------------------------------------------------------------------------------------------- Net income $ 58,081 $ 6,756 $ 1,551 $ 6,082 $ 35,432 $ 39,969 $ 147,871 ---------------------------------------------------------------------------------------------------------------------------- Average assets $4,038,353 $2,341,239 $ 671,798 $556,390 $ 3,915,411 $(230,621) $11,292,570 Average equity 298,020 60,910 34,160 60,880 286,730 198,138 938,838 Performance measurements: Return on assets 1.44% .29% .23% 1.09% .90% - 1.31% Return on equity 19.49 11.09 4.54 9.99 12.36 - 15.75 Efficiency ratio 44.67 77.05 71.01 87.08 62.02 - 60.96
Reconciliation to Consolidated Financial Statements Other Other Net Interest Operating Operating Net Average Revenue Revenue(1) Expense Income Assets --------------------------------------------------------------------- Total reportable segments $307,417 $ 266,581 $409,645 $107,902 $11,523,191 Unallocated items: Tax-equivalent adjustment 6,119 - - 6,119 - Funds management 72,802 (7,245) 10,503 40,652 661,182 All others (including eliminations), net (18,137) (3,104) 6,447 (6,802) (891,803) -------------------------------------------------------------------------------------------------- BOK Financial consolidated $368,201 $ 256,232 $426,595 $147,871 $11,292,570 --------------------------------------------------------------------------------------------------
(1)Excluding financial instrument gains/(losses) 71 All Corporate Consumer Mortgage Wealth Regional Other/ (In Thousands) Banking Banking Banking Management Banks Eliminations Total ------------------------------------------------------------------------------------------------ Year ended December 31, 2001 Net interest revenue/(expense) from external sources $ 199,727 $ (34,049) $ 32,545 $ 839 $ 138,846 $ (8,956) $ 328,952 Net interest revenue/(expense) from internal sources (86,150) 94,393 (20,867) 13,136 (11,689) 11,177 - ---------------------------------------------------------------------------------------------------------------------------- Total net interest revenue 113,577 60,344 11,678 13,975 127,157 2,221 328,952 Provision for loan losses 10,481 4,180 47 128 5,873 16,901 37,610 Other operating revenue 62,648 29,995 30,119 67,564 19,642 (4,153) 205,815 Capitalized mortgage servicing rights - - 22,695 - - - 22,695 Financial instruments gains/(losses) (250) - 12,757 - 484 13,587 26,578 Operating expense 78,190 59,099 47,750 63,186 91,088 14,917 354,230 Provision for impairment of mortgage servicing rights - - 15,551 - - - 15,551 Income taxes 33,960 10,527 5,408 7,096 18,518 (13,063) 62,446 Transition adjustment of adoption of FAS 133 - - - - - 236 236 ---------------------------------------------------------------------------------------------------------------------------- Net income $ 53,344 $ 16,533 $ 8,493 $ 11,129 $ 31,804 $ (6,864) $ 114,439 ---------------------------------------------------------------------------------------------------------------------------- Average assets $3,867,850 $2,192,698 $651,103 $492,811 $3,352,149 $(315,009) $10,241,602 Average equity 275,090 53,250 18,700 52,290 234,420 147,285 781,035 Performance measurements: Return on assets 1.38% 0.75% 1.30% 2.26% 0.95% - 1.12% Return on equity 19.39 31.05 45.42 21.28 13.57 - 14.65 Efficiency ratio 44.37 65.42 74.04 77.49 62.05 - 63.54
Reconciliation to Consolidated Financial Statements Other Other Net Interest Operating Operating Net Average Revenue Revenue(1) Expense Income Assets --------------------------------------------------------------------- Total reportable segments $326,731 $232,663 $354,864 $ 121,303 $10,556,611 Unallocated items: Tax-equivalent adjustment 8,045 - - 8,045 - Funds management 15,177 (408) 7,946 (719) 323,113 All others (including eliminations), net (21,001) (3,745) 6,971 (14,190) (638,122) -------------------------------------------------------------------------------------------------- BOK Financial consolidated $328,952 $228,510 $369,781 $ 114,439 $10,241,602 --------------------------------------------------------------------------------------------------
(1)Excluding financial instrument gains/(losses) 72 (18) FAIR VALUE OF FINANCIAL INSTRUMENTS The following table presents the carrying values and estimated fair values of financial instruments as of December 31, 2003 and 2002 (dollars in thousands): Range of Average Estimated Carrying Contractual Repricing Discount Fair Value Yields (in years) Rate Value --------------------------------------------------------------------- 2003: Cash and cash equivalents $ 643,912 $ 643,912 Securities 4,714,642 4,717,947 Loans: Commercial 4,336,702 2.75 - 18.94% 0.38 1.20 - 5.43% 4,528,247 Commercial real estate 1,630,092 2.45 - 11.50 1.26 4.45 - 6.35 1,637,499 Residential mortgage 1,015,643 2.75 - 7.96 2.55 3.83 - 6.28 1,020,330 Residential mortgage - held for sale 56,543 - - - 56,543 Consumer 444,909 1.11 - 18.69 2.63 3.43 - 7.50 442,485 --------------------------------------------------------------------------------------------------------------------- Total loans 7,483,889 7,685,104 Reserve for loan losses (128,639) - --------------------------------------------------------------------------------------------------------------------- Net loans 7,355,250 7,685,104 Derivative instruments with positive fair value 149,100 149,100 Deposits with no stated maturity 5,845,137 5,845,137 Time deposits 3,374,726 0.60 - 7.65 2.03 1.05 - 2.27 3,413,556 Other borrowings 2,626,318 1.05 - 7.74 .05 1.00 - 3.29 2,626,136 Subordinated debt 154,332 6.22 3.60 5.01 170,612 Derivative instruments with negative fair value 149,326 149,326 --------------------------------------------------------------------------------------------------------------------- 2002: Cash and cash equivalents $ 624,215 $ 624,215 Securities 4,136,403 4,140,606 Loans: Commercial 3,989,798 1.78 - 12.25% 0.32 1.45 - 5.68% 4,058,743 Commercial real estate 1,435,838 2.70 - 12.50 1.09 4.70 - 6.60 1,450,552 Residential mortgage 929,759 3.50 - 8.50 2.74 3.92 - 6.67 933,161 Residential mortgage - held for sale 133,421 - - - 133,421 Consumer 412,167 1.33 - 21.00 2.49 3.64 - 7.75 416,643 --------------------------------------------------------------------------------------------------------------------- Total loans 6,900,983 6,992,520 Reserve for loan losses (116,070) - --------------------------------------------------------------------------------------------------------------------- Net loans 6,784,913 6,992,520 Derivative instruments with positive fair value 90,776 90,776 Deposits with no stated maturity 4,860,534 4,860,534 Time deposits 3,267,991 0.90 - 7.65 1.54 1.26 - 2.34 3,353,243 Other borrowings 2,655,708 3.29 - 5.84 0.05 1.13 - 3.29 2,658,930 Subordinated debt 155,419 6.45 4.60 4.50 175,307 Derivative instruments with negative fair value 80,079 80,079 ---------------------------------------------------------------------------------------------------------------------
The preceding table presents the estimated fair values of financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involved significant judgments by management. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and management does not intend to sell these financial instruments, BOK Financial does not know whether the fair values shown above represent values at which the respective financial instruments could be sold individually or in the aggregate. 73 The following methods and assumptions were used in estimating the fair value of these financial instruments: CASH AND CASH EQUIVALENTS The book value reported in the consolidated balance sheet for cash and short-term instruments approximates those assets' fair values. SECURITIES The fair values of securities are based on quoted market prices or dealer quotes, when available. If quotes are not available, fair values are based on quoted prices of comparable instruments. DERIVATIVES All derivative instruments are carried on the balance sheet at fair value. Fair values for exchange-traded contracts are based on quoted prices. Fair values for over-the-counter interest rate, energy and foreign exchange contracts are based on valuations provided either by third-party dealers in the contracts or by quotes provided by independent pricing services. LOANS The fair value of loans, excluding loans held for sale, are based on discounted cash flow analyses using interest rates currently being offered for loans with similar remaining terms to maturity and credit risk, adjusted for the impact of interest rate floors and ceilings. The fair values of classified loans were estimated to approximate their carrying values less loan loss reserves allocated to these loans of $30 million and $29 million at December 31, 2003 and 2002, respectively. The fair values of residential mortgage loans held for sale are based upon quoted market prices of such loans sold in securitization transactions, including related unfunded loan commitments and hedging transactions. DEPOSITS The fair values of time deposits are based on discounted cash flow analyses using interest rates currently being offered on similar transactions. Statement of Financial Accounting Standard No. 107, "Disclosures about Fair Value of Financial Instruments," ("FAS 107") defines the estimated fair value of deposits with no stated maturity, which includes demand deposits, transaction deposits, money market deposits and savings accounts, to equal the amount payable on demand. Although market premiums paid reflect an additional value for these low cost deposits, FAS 107 prohibits adjusting fair value for the expected benefit of these deposits. Accordingly, the positive effect of such deposits is not included in this table. OTHER BORROWINGS AND SUBORDINATED DEBENTURE The fair values of these instruments are based upon discounted cash flow analyses using interest rates currently being offered on similar instruments. OFF-BALANCE SHEET INSTRUMENTS The fair values of commercial loan commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of these off-balance sheet instruments were not significant at December 31, 2003 and 2002. 74 (19) FINANCIAL INSTRUMENTS WITH OFF-BALANCE SHEET RISK BOK Financial is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage interest rate risk. Those financial instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in BOK Financial's Consolidated Balance Sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At December 31, 2003, outstanding commitments totaled $3 billion. Because some of the commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. BOK Financial uses the same credit policies in making commitments as it does loans. The amount of collateral obtained, if deemed necessary, is based on management's credit evaluation of the borrower. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Because the credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan commitments, BOK Financial uses the same credit policies in evaluating the creditworthiness of the customer. Additionally, BOK Financial uses the same evaluation process in obtaining collateral on standby letters of credit as it does for loan commitments. The term of these standby letters of credit is defined in each commitment and typically corresponds with the underlying loan commitment. At December 31, 2003, outstanding standby letters of credit totaled $497 million. Commercial letters of credit are used to facilitate customer trade transactions with the drafts being drawn when the underlying transaction is consummated. At December 31, 2003, outstanding commercial letters of credit totaled $7 million. 75 (20) PARENT COMPANY ONLY FINANCIAL STATEMENTS Summarized financial information for BOK Financial - Parent Company Only follows: BALANCE SHEETS (In Thousands) December 31, ---------------------------- 2003 2002 ---------------------------- Assets Cash and cash equivalents $ 10,881 $ 16,466 Securities - available for sale 16,657 14,253 Investment in subsidiaries 1,296,749 1,146,915 Other assets 1,750 8,102 ------------------------------------------------------------------------------------------------ Total assets $1,326,037 $ 1,185,736 ------------------------------------------------------------------------------------------------ Liabilities and Shareholders' Equity Other borrowings $ 95,000 $ 85,000 Other liabilities 2,407 1,210 ------------------------------------------------------------------------------------------------ Total liabilities 97,407 86,210 ------------------------------------------------------------------------------------------------ Preferred stock 12 25 Common stock 4 3 Capital surplus 546,594 475,054 Retained earnings 698,052 598,777 Treasury stock (24,491) (17,421) Accumulated other comprehensive income 8,459 43,088 ------------------------------------------------------------------------------------------------ Total shareholders' equity 1,228,630 1,099,526 ------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $1,326,037 $ 1,185,736 ------------------------------------------------------------------------------------------------
STATEMENTS OF EARNINGS (In Thousands) 2003 2002 2001 ------------------------------------------- Dividends, interest and fees received from subsidiaries $ 66,165 $ 42,821 $ 91,960 Other operating revenue 431 441 425 ------------------------------------------------------------------------------------------------ Total revenue 66,596 43,262 92,385 ------------------------------------------------------------------------------------------------ Interest expense 1,771 3,453 6,458 Personnel expense - - 2 Professional fees and services 545 433 471 Other operating expense (4) 205 265 ------------------------------------------------------------------------------------------------ Total expense 2,312 4,091 7,196 ------------------------------------------------------------------------------------------------ Income before taxes and equity in undistributed income of subsidiaries 64,284 39,171 85,189 Federal and state income tax credit (678) (1,879) (3,092) ------------------------------------------------------------------------------------------------ Income before equity in undistributed income of subsidiaries 64,962 41,050 88,281 Equity in undistributed income of subsidiaries 93,398 106,821 26,158 ------------------------------------------------------------------------------------------------ Net income $158,360 $147,871 $ 114,439 ------------------------------------------------------------------------------------------------
76 STATEMENTS OF CASH FLOWS (In Thousands) 2003 2002 2001 ---------------------------------------- Cash flows from operating activities: Net income $158,360 $147,871 $114,439 Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries (93,398) (106,821) (26,158) Tax benefit on exercise of stock options 1,325 5,482 3,408 Change in other assets (944) (104) (57) Change in other liabilities 272 (930) 166 ------------------------------------------------------------------------------------------------ Net cash provided by operating activities 65,615 45,498 91,798 ------------------------------------------------------------------------------------------------ Cash flows from investing activities: Purchases of available for sale securities (27) (568) (1,961) Investment in subsidiaries (85,015) (5,482) (119,309) ------------------------------------------------------------------------------------------------ Net cash used by investing activities (85,042) (6,050) (121,270) ------------------------------------------------------------------------------------------------ Cash flows from financing activities: Increase in other borrowings 105,000 - 124,963 Pay down of other borrowings (95,000) (40,095) (95,000) Issuance of preferred, common and treasury stock, net 4,627 4,172 2,745 Cash dividends (785) (30) (20) ------------------------------------------------------------------------------------------------ Net cash provided (used) by financing activities 13,842 (35,953) 32,688 ------------------------------------------------------------------------------------------------ Net change in cash and cash equivalents (5,585) 3,495 3,216 Cash and cash equivalents at beginning of period 16,466 12,971 9,755 ------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 10,881 $ 16,466 $ 12,971 ------------------------------------------------------------------------------------------------ Payment of dividends in common stock $ 58,300 $ 53,165 $ 36,371 ------------------------------------------------------------------------------------------------ Cash paid for interest 1,947 3,482 6,726 ------------------------------------------------------------------------------------------------ Common stock and price guarantee issued for acquisition - 67,745 - ------------------------------------------------------------------------------------------------
77 BOK FINANCIAL CORPORATION ANNUAL FINANCIAL SUMMARY - UNAUDITED Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands) 2003 ---------------------------------------------- Average Revenue/ Yield/ Balance Expense (1) Rate ---------------------------------------------- Assets Taxable securities (3) $ 4,316,303 $180,581 4.22% Tax-exempt securities (3) 191,982 12,527 6.59 ------------------------------------------------------------------------------------------------------ Total securities (3) 4,508,285 193,108 4.32 ------------------------------------------------------------------------------------------------------ Trading securities 16,975 694 4.09 Funds sold and resell agreements 26,330 281 1.07 Loans (2) 7,101,543 376,260 5.30 Less reserve for loan losses 124,646 - - ------------------------------------------------------------------------------------------------------ Loans, net of reserve 6,976,897 376,260 5.39 ------------------------------------------------------------------------------------------------------ Total earning assets (3) 11,528,487 570,343 4.96 ------------------------------------------------------------------------------------------------------ Cash and other assets 1,237,074 ------------------------------------------------------------------------------------------------------ Total assets $12,765,561 ------------------------------------------------------------------------------------------------------ Liabilities and Shareholders' Equity Transaction deposits $ 3,605,539 $ 31,346 0.87% Savings deposits 172,938 944 0.55 Time deposits 3,439,361 99,639 2.90 ------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 7,217,838 131,929 1.83 ------------------------------------------------------------------------------------------------------ Funds purchased and repurchase agreements 1,537,100 15,590 1.01 Other borrowings 1,051,685 18,148 1.73 Subordinated debentures 154,940 9,477 6.12 ------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 9,961,563 175,144 1.76 ------------------------------------------------------------------------------------------------------ Demand deposits 1,309,744 Other liabilities 334,698 Shareholders' equity 1,159,556 ------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $12,765,561 ------------------------------------------------------------------------------------------------------ Tax-equivalent Net Interest Revenue (3) $ 395,199 3.20% Tax-equivalent Net Interest Revenue to Earning Assets (3) 3.43 Less tax-equivalent adjustment (1) 5,170 ------------------------------------------------------------------------------------------------------ Net Interest Revenue 390,029 Provision for loan losses 35,636 Other operating revenue 302,992 Other operating expense 410,111 ------------------------------------------------------------------------------------------------------ Income before taxes 247,274 Federal and state income tax 88,914 ------------------------------------------------------------------------------------------------------ Net Income $158,360 ------------------------------------------------------------------------------------------------------
1 Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments shown are for comparative purposes. 2 The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned income. See Note 1 of Notes to the Consolidated Financial Statements for a description of income recognition policy. 3 Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income. 78 2002 2001 ------------------------------------------------------------------------------------------------------ Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense(1) Rate Balance Expense(1) Rate ----------------------------------------------- ------------------------------------------------ $ 3,756,666 $186,902 5.22% $2,989,967 $184,464 6.17% 208,503 14,789 7.09 277,309 19,935 7.19 ------------------------------------------------------------------------------------------------------ 3,965,169 201,691 5.32 3,267,276 204,399 6.26 ------------------------------------------------------------------------------------------------------ 14,215 750 5.28 18,504 1,200 6.49 16,024 291 1.82 18,419 829 4.50 6,401,510 378,300 5.91 5,989,224 456,250 7.62 109,985 - - 92,392 - - ------------------------------------------------------------------------------------------------------ 6,291,525 378,300 6.01 5,896,832 456,250 7.74 ------------------------------------------------------------------------------------------------------ 10,286,933 581,032 5.75 9,201,031 662,678 7.20 ------------------------------------------------------------------------------------------------------ 1,005,637 1,040,571 ------------------------------------------------------------------------------------------------------ $11,292,570 $10,241,602 ------------------------------------------------------------------------------------------------------ $ 2,798,639 $ 39,273 1.40% $ 2,267,032 $ 49,893 2.20% 165,988 1,976 1.19 154,934 2,281 1.47 3,057,645 104,217 3.41 2,960,170 154,035 5.20 ------------------------------------------------------------------------------------------------------ 6,022,272 145,466 2.42 5,382,136 206,209 3.83 ------------------------------------------------------------------------------------------------------ 1,549,021 25,218 1.63 1,652,467 64,358 3.89 1,058,717 25,277 2.39 974,907 44,191 4.53 181,911 10,751 5.91 180,211 10,923 6.06 ------------------------------------------------------------------------------------------------------ 8,811,921 206,712 2.35 8,189,721 325,681 3.98 ------------------------------------------------------------------------------------------------------ 1,185,891 1,102,958 355,920 167,888 938,838 781,035 ------------------------------------------------------------------------------------------------------ $11,292,570 $10,241,602 ------------------------------------------------------------------------------------------------------ $374,320 3.40% $336,997 3.22% 3.70 3.66 6,119 8,045 ------------------------------------------------------------------------------------------------------ 368,201 328,952 33,730 37,610 320,830 255,452 426,595 369,781 ------------------------------------------------------------------------------------------------------ 228,706 177,013 80,835 62,574 ------------------------------------------------------------------------------------------------------ $147,871 $114,439 ------------------------------------------------------------------------------------------------------
79 BOK FINANCIAL CORPORATION QUARTERLY FINANCIAL SUMMARY - UNAUDITED Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands Except Per Share Data) Three Months Ended ------------------------------------------------------------------------- December 31, 2003 September 30, 2003 ---------------------------------- ---------------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense(1) Rate Balance Expense(1) Rate ---------------------------------- ---------------------------------- Assets Taxable securities (3) $ 4,421,278 $45,838 4.08% $ 4,360,340 $42,698 3.86% Tax-exempt securities (3) 189,829 2,958 6.19 186,827 3,003 6.38 -------------------------------------------------------------------------------------- ---------------------------------- Total securities (3) 4,611,107 48,796 4.17 4,547,167 45,701 3.96 -------------------------------------------------------------------------------------- ---------------------------------- Trading securities 17,325 147 3.37 27,830 295 4.21 Funds sold and resell agreements 26,730 65 0.96 32,491 51 0.62 Loans (2) 7,359,126 96,059 5.18 7,122,211 93,013 5.18 Less reserve for loan losses 129,445 - - 125,966 - - -------------------------------------------------------------------------------------- ---------------------------------- Loans, net of reserve 7,229,681 96,059 5.27 6,996,245 93,013 5.27 -------------------------------------------------------------------------------------- ---------------------------------- Total earning assets (3) 11,884,843 145,067 4.83 11,603,733 139,060 4.74 -------------------------------------------------------------------------------------- ---------------------------------- Cash and other assets 1,342,042 1,252,896 -------------------------------------------------------------------------------------- ---------------------------------- Total assets $13,226,885 $12,856,629 -------------------------------------------------------------------------------------- ---------------------------------- Liabilities and Shareholders' Equity Transaction deposits $ 3,886,546 $ 7,377 0.75% $ 3,715,035 $ 7,200 0.77% Savings deposits 179,867 255 0.56 170,796 200 0.46 Time deposits 3,442,358 25,094 2.89 3,423,920 23,863 2.77 -------------------------------------------------------------------------------------- ---------------------------------- Total interest-bearing deposits 7,508,771 32,726 1.73 7,309,751 31,263 1.70 -------------------------------------------------------------------------------------- ---------------------------------- Funds purchased and repurchase agreements 1,679,540 3,921 0.93 1,529,721 3,566 0.92 Other borrowings 1,031,414 4,240 1.63 1,062,734 4,383 1.64 Subordinated debentures 154,524 2,216 5.69 154,865 2,421 6.20 -------------------------------------------------------------------------------------- ---------------------------------- Total interest-bearing liabilities 10,374,249 43,103 1.65 10,057,071 41,633 1.64 -------------------------------------------------------------------------------------- ---------------------------------- Demand deposits 1,370,088 1,323,641 Other liabilities 284,432 314,583 Shareholders' equity 1,198,116 1,161,334 -------------------------------------------------------------------------------------- ---------------------------------- Total liabilities and shareholders' equity $13,226,885 $12,856,629 -------------------------------------------------------------------------------------- ---------------------------------- Tax-equivalent Net Interest Revenue (3) $101,964 3.18% $97,427 3.10% Tax-equivalent Net Interest Revenue to Earning Assets (3) 3.39 3.32 Less tax-equivalent adjustment (1) 1,184 1,256 -------------------------------------------------------------------------------------- ---------------------------------- Net Interest Revenue 100,780 96,171 Provision for loan losses 8,001 8,220 Other operating revenue 71,051 63,428 Other operating expense 108,321 90,771 -------------------------------------------------------------------------------------- ---------------------------------- Income before taxes 55,509 60,608 Federal and state income tax 20,207 21,792 -------------------------------------------------------------------------------------- ---------------------------------- Net Income $ 35,302 $38,816 -------------------------------------------------------------------------------------- ---------------------------------- Earnings Per Average Common Share Equivalent: Net income: Basic $0.61 $0.67 -------------------------------------------------------------------------------------- ---------------------------------- Diluted $0.55 $0.60 -------------------------------------------------------------------------------------- ----------------------------------
1 Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments shown are for comparative purposes. 2 The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned income. See Note 1 of Notes to the Consolidated Financial Statements for a description of income recognition policy. 3 Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income. 80 Three Months Ended -------------------------------------------------------------------------------------------------------------- June 30, 2003 March 31, 2003 December 31, 2002 ---------------------------------- ----------------------------------- ----------------------------------- Average Revenue/ Yield/ Average Revenue/ Yield/ Average Revenue/ Yield/ Balance Expense(1) Rate Balance Expense(1) Rate Balance Expense(1) Rate ---------------------------------- ----------------------------------- ----------------------------------- $ 4,388,733 $46,911 4.30% $4,145,472 $45,134 4.64% $ 4,000,780 $45,710 4.76% 185,908 3,179 6.86 197,902 3,387 6.94 194,586 3,407 6.95 ---------------------------------- ----------------------------------- ----------------------------------- 4,574,641 50,090 4.41 4,343,374 48,521 4.75 4,195,366 49,117 4.87 ---------------------------------- ----------------------------------- ----------------------------------- 12,207 136 4.47 10,342 116 4.55 8,639 87 4.00 16,669 59 1.42 29,392 106 1.46 24,856 92 1.47 6,970,905 92,576 5.33 6,949,113 94,612 5.52 6,761,498 95,864 5.62 123,095 - - 119,959 - - 114,711 - - ---------------------------------- ----------------------------------- ----------------------------------- 6,847,810 92,576 5.42 6,829,154 94,612 5.62 6,646,787 95,864 5.72 ---------------------------------- ----------------------------------- ----------------------------------- 11,451,327 142,861 5.01 11,212,262 143,355 5.28 10,875,648 145,160 5.39 ---------------------------------- ----------------------------------- ----------------------------------- 1,207,690 1,154,403 1,057,625 ---------------------------------- ----------------------------------- ----------------------------------- $12,659,017 $12,366,665 $11,933,273 ---------------------------------- ----------------------------------- ----------------------------------- $ 3,523,932 $ 7,992 0.91% $3,288,874 $ 8,777 1.08% $ 2,988,986 $ 9,648 1.28% 172,258 183 0.43 168,730 306 0.74 173,286 491 1.12 3,491,055 24,688 2.84 3,399,813 25,994 3.10 3,248,364 25,531 3.12 ---------------------------------- ----------------------------------- ----------------------------------- 7,187,245 32,863 1.83 6,857,417 35,077 2.07 6,410,636 35,670 2.21 ---------------------------------- ----------------------------------- ----------------------------------- 1,515,597 4,080 1.08 1,420,781 4,023 1.15 1,523,923 5,471 1.42 1,053,573 4,604 1.75 1,059,201 4,921 1.88 1,084,616 5,751 2.10 155,078 2,420 6.26 155,304 2,420 6.32 169,874 2,580 6.03 ---------------------------------- ----------------------------------- ----------------------------------- 9,911,493 43,967 1.78 9,492,703 46,441 1.98 9,189,049 49,472 2.14 ---------------------------------- ----------------------------------- ----------------------------------- 1,252,076 1,292,077 1,310,932 332,430 465,820 378,573 1,163,018 1,116,065 1,054,719 ---------------------------------- ----------------------------------- ----------------------------------- $12,659,017 $12,366,665 $11,933,273 ---------------------------------- ----------------------------------- ----------------------------------- $98,894 3.23% $96,914 3.30% $95,688 3.25% 3.47 3.57 3.55 1,327 1,403 1,404 ---------------------------------- ----------------------------------- ----------------------------------- 97,567 95,511 94,284 9,503 9,912 10,001 87,282 81,231 79,807 111,864 99,155 105,081 ---------------------------------- ----------------------------------- ----------------------------------- 63,482 67,675 59,009 22,707 24,208 20,858 ---------------------------------- ----------------------------------- ----------------------------------- $40,775 $43,467 $38,151 ---------------------------------- ----------------------------------- ----------------------------------- $0.71 $0.76 $0.67 ---------------------------------- ----------------------------------- ----------------------------------- $0.63 ` $0.67 $0.60 ---------------------------------- ----------------------------------- -----------------------------------