-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, MTCS33CP4IliG5/rCjsKEYjqaP5REZ86V35htM8F53Mje1QwaAKV1mg5+225GE/D +KFRZgWwYQ8KEqPmyc29ZA== 0000875357-04-000026.txt : 20040809 0000875357-04-000026.hdr.sgml : 20040809 20040809142608 ACCESSION NUMBER: 0000875357-04-000026 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20040630 FILED AS OF DATE: 20040809 FILER: COMPANY DATA: COMPANY CONFORMED NAME: BOK FINANCIAL CORP ET AL CENTRAL INDEX KEY: 0000875357 STANDARD INDUSTRIAL CLASSIFICATION: NATIONAL COMMERCIAL BANKS [6021] IRS NUMBER: 731373454 STATE OF INCORPORATION: OK FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: 1934 Act SEC FILE NUMBER: 000-19341 FILM NUMBER: 04960709 BUSINESS ADDRESS: STREET 1: BANK OF OKLAHOMA TOWER STREET 2: PO BOX 2300 CITY: TULSA STATE: OK ZIP: 74192 BUSINESS PHONE: 9185953025 MAIL ADDRESS: STREET 1: BANK OF OKLAHOMA TOWER STREET 2: P O BOX 2300 CITY: TULSA STATE: OK ZIP: 74192 10-Q 1 quarterly063004.txt FORM 10-Q 6/30/04 As filed with the Securities and Exchange Commission on August 9, 2004 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) |X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended June 30, 2004 OR |_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from _____________ to ______________ Commission File No. 0-19341 BOK FINANCIAL CORPORATION (Exact name of registrant as specified in its charter) Oklahoma 73-1373454 (State or other jurisdiction (IRS Employer of Incorporation or Organization) Identification No.) Bank of Oklahoma Tower P.O. Box 2300 Tulsa, Oklahoma 74192 (Address of Principal Executive Offices) (Zip Code) (918) 588-6000 (Registrant's telephone number, including area code) Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes |X| No |_| Indicate the number of shares outstanding of each of the Registrant's classes of common stock, as of the latest practicable date: 59,193,548 shares of common stock ($.00006 par value) as of July 31, 2004. =============================================================================== 2 BOK Financial Corporation Form 10-Q Quarter Ended June 30, 2004 Index Part I. Financial Information Management's Discussion and Analysis (Item 2) 2 Quantitative and Qualitative Disclosures about Market Risk (Item 3) 20 Controls and Procedures (Item 4) 22 Report of Management on Consolidated Financial Statements 23 Consolidated Financial Statements (Unaudited) (Item 1) 24 Six Month Financial Summary - Unaudited (Item 2) 32 Quarterly Financial Summary - Unaudited (Item 2) 33 Part II. Other Information Item 2. Changes in Securities and Use of Proceeds 35 Item 4. Submission of Matters to a Vote of Security Holders 36 Item 6. Exhibits and Reports on Form 8-K 36 Signatures 37 Management's Discussion and Analysis of Financial Condition and Results of Operations Results of Operations Summary of Performance BOK Financial Corporation ("BOK Financial") recorded net income of $45.5 million or $0.68 per diluted common share for the second quarter of 2004 compared with $40.8 million or $0.61 per diluted common share for the same period of 2003. Prior year earnings per share have been restated for a 3% dividend paid in common shares on May 31, 2004. The annualized returns on average assets and equity were 1.32% and 14.36% for the quarter ended June 30, 2004 compared to returns of 1.29% and 14.06% for the second quarter of 2003. The increase in return on average equity between the two quarters resulted primarily from net income growth. Average shareholders' equity increased $112 million to $1.3 billion due to retained earnings being partially offset by a $48 million decrease in average accumulated other comprehensive income, which is a component of shareholders' equity. Net income increased $4.8 million or 12% due primarily to a $7.3 million increase in net interest revenue and a $5.5 million decrease in provision for loan losses. Net interest revenue increased 7% due primarily to earning asset growth. The provision for loan losses decreased due primarily to a continued decline in net charge-offs. Additionally, fees and commission revenue grew $2.1 million or 3%, primarily due to increased deposit, trust and transaction card fees. This growth in fee revenue was largely offset by a 55% reduction in mortgage banking revenue. Securities losses during the second quarter of 2004 totaled $11.0 million. Substantially all of these losses were incurred on securities held as economic hedges of mortgage servicing rights ("MSRs") and were largely offset by a $10.9 million recovery in the fair value of the MSRs. Securities losses, net of recovery of MSR fair values totaled $752 thousand for the second quarter of 2004. Net securities gains less MSR provision totaled $7.1 million for the second quarter of 2003. Operating expenses, excluding the MSR provision, increased $976 thousand compared with the second quarter last year. Year-to-date net income totaled $84.7 million for 2004 compared with $84.2 million for 2003. Diluted earnings per share were $1.27 for both years. Net interest revenue grew $14.6 million or 8% due primarily to a $963 million increase in average earning assets, partially offset by a decrease in net interest margin. The provision for loan losses for the first half of 2004 totaled $11.0 million; $8.4 million lower than the first half of 2003. Fees and commissions increased $5.9 million or 4%. Double digit percentage growth in deposit fees, trust and transaction card revenues were partially offset by a 52% reduction in mortgage banking revenue. Securities losses of $6.7 million were recognized during the first six months of 2004. These losses, which primarily resulted from securities held as economic hedges of the MSR portfolio, were offset by a $7.2 million recovery in the fair value of MSRs. During the first half of 2003, net 3 gains of $12.1 million from the combined effects of securities used to hedge the risk of MSRs and the increase in fair value of the servicing rights were recognized. Net gains on sales of securities not designated for the MSR hedging program totaled $12.5 million for the first half of 2003. Operating expenses increased $6.5 million or 3%, excluding the MSR provision. Net Interest Revenue Tax-equivalent net interest revenue totaled $106.3 million for the second quarter of 2004 compared to $99.3 million for the same period of 2003. The increase in net interest revenue was due to an $873 million increase in average earning assets, partially offset by a 2 basis point decrease in net interest margin. The growth in average earning assets included a $577 million increase in outstanding loan balances and a $293 million increase in securities. The growth in average earning assets was funded by a $411 million increase in average interest-bearing deposits and a $547 million increase in average noninterest-bearing demand deposits. The growth in interest-bearing deposits consisted primarily of a $336 million increase in transaction deposit accounts. Table 1 reflects 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 interest-bearing liabilities both declined in the second quarter of 2004 compared to the second quarter of 2003. The net interest margin, the ratio of tax-equivalent net interest revenue to average earning assets, declined to 3.46% from 3.48% for the same period of 2003. The decrease in net interest margin was due to yields on earning assets falling more than rates paid on interest-bearing liabilities. The yield on the loan portfolio decreased 22 basis points and the yield on the securities portfolio decreased 11 basis points compared to the previous year. Average loans, net of reserves, comprised 60% of average earning assets for the second quarters of 2004 and 2003. The remaining average earning assets consisted of securities. The cost of interest-bearing liabilities decreased 12 basis points for the same periods. Growth in non-interest bearing funding sources, primarily demand deposit accounts and capital, increased the net interest margin by 2 basis points. The effects of declining interest rates on asset yields and cost of funds for the past five quarters are presented in the Quarterly Financial Summary. Tax-equivalent net interest revenue for the first six months of 2004 increased $14.2 million or 7% compared with last year. This increase was also due to growth in average earning assets, partially offset by a decrease in net interest margin. Average earning assets increased $963 million or 9%, including a $561 million increase in average outstanding loan balances and a $415 million increase in securities. The growth in average earning assets was funded by a $576 million increase in average interest-bearing liabilities and a $449 million increase in average noninterest-bearing demand deposit accounts. The net interest margin decreased 7 basis points to 3.46%. Yields on average earning assets fell 28 basis points while the cost of interest-bearing liabilities decreased 20 basis points. 4 - --------------------------------------------------------------------------------------------------------------------- Table 1 - Volume / Rate Analysis (In thousands) Three Months Ended Six Months Ended June 30, 2004 / 2003 June 30, 2004 / 2003 -------------------------------------------------------------------------- Change Due To (1) Change Due To (1) -------------------------------------------------------------------------- Yield / Yield / Change Volume Rate Change Volume Rate -------------------------------------------------------------------------- Tax-equivalent interest revenue: Securities $ 2,115 $ 3,439 $ (1,324) $ 3,996 $ 10,008 $ (6,012) Trading securities 83 115 (32) 193 186 7 Loans 3,385 7,382 (3,997) 5,309 14,980 (9,671) Funds sold and resell agreements (6) (1) (5) (73) (80) 7 - --------------------------------------------------------------------------------------------------------------------- Total 5,577 10,935 (5,358) 9,425 25,094 (15,669) - --------------------------------------------------------------------------------------------------------------------- Interest expense: Transaction deposits (117) 713 (830) (1,311) 1,955 (3,266) Savings deposits 52 1 51 (11) 11 (22) Time deposits (112) 486 (598) (1,446) 571 (2,017) Federal funds purchased and repurchase agreements (349) 123 (472) (408) 779 (1,187) Other borrowings (858) (166) (692) (1,456) (352) (1,104) Subordinated debentures (53) (39) (14) (137) (46) (91) - --------------------------------------------------------------------------------------------------------------------- Total (1,437) 1,118 (2,555) (4,769) 2,918 (7,687) - --------------------------------------------------------------------------------------------------------------------- Tax-equivalent net interest revenue 7,014 9,817 (2,803) 14,194 22,176 (7,982) Decrease in tax-equivalent adjustment 238 444 - --------------------------------------------------------------------------------------------------------------------- Net interest revenue $ 7,252 $ 14,638 - --------------------------------------------------------------------------------------------------------------------- (1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.
BOK Financial follows a strategy of fully utilizing its 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. This strategy also helps manage overall interest rate risk. Interest rates on these borrowed funds, which generally react quickly to changes in market interest rates, tend to match the effect of changes in interest rates on the loan portfolio. Interest rates earned on the securities purchased with the proceeds of these borrowed funds are affected less quickly by changes in market interest rates. The timing of changes in interest rates earned on securities more closely matches the timing of changes in interest rates paid on deposits. Although this strategy may reduce net interest margin, it provides positive net interest revenue. We estimate that for the second quarter of 2004, this strategy enhanced net interest revenue $14.3 million, compared with $15.1 million for the second quarter of 2003. Excluding this strategy, net interest margin was 3.52% and 3.56% for the second quarters of 2004 and 2003. The average balance of securities purchased and funds borrowed under this strategy was $1.8 billion. As more fully discussed in the Market Risk section of this report, we employ various techniques to manage, within certain parameters, the interest rate and liquidity risks 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 17. Other Operating Revenue Other operating revenue for the second quarter of 2004 decreased $18.0 million compared with the second quarter of 2003 due to a $21.5 million reduction in net gains from securities sales. Fees and commissions increased $2.1 million or 3% and continue to represent a significant portion of total revenue. Fees and commissions represented 43% of total revenue, excluding gains and losses on securities and derivatives, in the second quarter of 2004. This is compared with 44% for the same period of 2003. Colorado State Bank and Trust ("CSBT"), which was acquired in the third quarter of 2003, contributed $2.2 million to the increase in fees and commissions revenue, including $1.8 million of trust fees. In total, trust fees and commissions grew $3.1 million or 29%. The fair value of trust assets increased 33% to $23 billion compared to a year ago, including $4.1 billion due to value appreciation and new business and $1.6 billion from the CSBT acquisition. Service charges on deposit accounts increased $4.3 million or 22% and transaction card revenue increased $2.8 million or 20%. Deposit service charges increased due to continued growth in overdraft fees. The growth in transaction card revenue reflected increased ATM processing volume. Mortgage banking revenue decreased $9.1 million or 55% due to an $8.0 million decrease in secondary marketing gains related to the lower volume of loans funded and a $1.1 million decrease in mortgage servicing revenue related to a 14% reduction in the outstanding balance 5 of loans serviced for others. The reduction in mortgage banking revenue is more fully discussed in the Lines of Business - Mortgage Banking section of this report. BOK Financial recognized net securities losses of $11.0 million during the second quarter of 2004 compared with net gains of $10.5 million during the second quarter of 2003. Net losses on securities designated as an economic hedge of the mortgage servicing portfolio totaled $10.1 million in 2004, including $4.4 million from other than temporary impairment. Certain securities, which were purchased during the first quarter of 2004, declined in value due to increased market interest rates. Management determined that it did not intend to hold these securities long enough for the impairment to reverse. This impairment was partially realized through a sale of securities subsequent to June 30, 2004. Net gains on securities designated as an economic hedge of the mortgage servicing portfolio totaled $4.4 million in 2003. BOK Financial also recognized net losses of $892 thousand during the second quarter of 2004 from sales of securities not used to hedge MSRs, compared with net gains of $6.1 million during the second quarter of 2003. Strategies utilized during the second quarter of 2004 were to maintain the size of the securities portfolio at approximately $4.7 billion and to continue management of extension risk. Approximately $253 million of proceeds were generated from securities sales during the second quarter and $372 million was received from maturities. A total of $668 million was invested in the securities portfolio during the quarter. Management estimated that the average life of the securities portfolio was approximately 3.4 years, up from 2.5 years for the second quarter of 2003 and 3.0 years for the first quarter of 2004. At June 30, 2004, BOK Financial held available for sale securities with a net unrealized loss of $75 million, or 2% of the total fair value of available for sale securities, caused by recent increases in market interest rates. These unrealized losses are considered temporary based upon the company's ability and management's intent to hold the securities until the value recovers. Net gains and losses on derivatives primarily represent the mark to market of the derivative portfolio used for interest rate risk management. Additional discussion regarding the use of derivative instruments is located in the Market Risk section of this report. Fees and commissions revenue for the first six months of 2004 increased $5.9 million or 4% compared to the same period of 2003. CSBT contributed $4.2 million to fees and commissions revenue in 2004, including $3.3 million of trust fees. Total trust, deposit and transaction card fees increased 32%, 19% and 18%, respectively. Service charges on deposit accounts increased due to growth in overdraft fees, and transaction card fees increased due to increased processing volumes. Mortgage banking revenue decreased 52% due to reductions in loan origination and refinancing activities and servicing fee revenue. Net losses on securities totaled $6.7 million for the first half of 2004, including losses of $7.9 million on securities designated as economic hedges of MSRs. Net gains on securities totaled $20.1 million for the first half of 2003, including gains of $7.6 million from MSR hedge securities. - -------------------------------------------------------------------------------------------------------------------------- Table 2 - Other Operating Revenue (In thousands) Three Months Ended ------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, 2004 2004 2003 2003 2003 ------------------------------------------------------------------------------- Brokerage and trading revenue $ 11,166 $ 10,011 $ 9,259 $ 12,220 $ 10,459 Transaction card revenue 16,817 14,724 14,496 14,260 14,059 Trust fees and commissions 13,939 13,709 12,976 11,762 10,845 Service charges and fees on deposit accounts 23,928 22,155 22,346 21,106 19,606 Mortgage banking revenue, net 7,555 7,744 7,457 12,735 16,609 Leasing revenue 860 887 905 949 795 Other revenue 5,774 6,624 6,752 7,098 5,555 - -------------------------------------------------------------------------------------------------------------------------- Total fees and commissions 80,039 75,854 74,191 80,130 77,928 - -------------------------------------------------------------------------------------------------------------------------- Gain on sale of assets 35 684 70 14 8 Gain (loss) on securities, net (11,005) 4,277 (951) (12,007) 10,457 Gain (loss) on derivatives, net 201 (995) (2,259) (4,709) (1,111) - -------------------------------------------------------------------------------------------------------------------------- Total other operating revenue $ 69,270 $ 79,820 $ 71,051 $ 63,428 $ 87,282 - --------------------------------------------------------------------------------------------------------------------------
6 Other Operating Expense Other operating expense for the quarter ended June 30, 2004 totaled $99.0 million, a $13.2 million decrease compared to the second quarter of 2003. Operating expenses in 2004 were reduced by $10.9 million from the recovery in fair value of MSRs. A provision for impairment of MSRs increased operating expenses by $3.4 million in the second quarter of 2003. Excluding the provision for MSR impairment, operating expenses for the second quarter of 2004 increased $976 thousand or 1% compared with the same period in 2003. Operating expenses for the second quarter of 2004 included $4.8 million for CSBT. Mortgage banking costs, which consisted primarily of MSR amortization expense, decreased $7.0 million. Variations in mortgage banking costs are more fully discussed in the Lines of Business - Mortgage Banking section of this report. Personnel expense increased $6.2 million or 12% compared with the second quarter of 2003, including $2.8 million related to CSBT. The remaining increase in personnel expense of $3.4 million was due primarily to growth in incentive compensation. Including CSBT, average regular compensation per full-time equivalent employee ("FTE") increased 3% and the number of FTE increased by 41. Employee benefit costs, which totaled $9.6 million, increased 4% compared to last year. Data processing and communications costs increased $2.3 million or 18%. This increase was due primarily to a $1.0 million increase related to transaction card processing volumes, $493 thousand due to increased amortization expense and $250 thousand from CSBT. Operating expenses for the first six months of 2004 increased $3.7 million or 2% compared with the same period of 2003. Excluding the provision for mortgage servicing rights, operating expenses increased $6.4 million or 3%. Operating expenses for CSBT totaled $4.8 million and we recognized $4.1 million for the cost of appreciated securities contributed to the BOK Charitable Foundation. Personnel expenses increased $10.7 million or 10%, including $5.3 million from CSBT. The remaining increase in personnel costs was primarily due to increased incentive compensation. Data processing expenses increased 22% to $29.9 million due to the same factors that affected the second quarter. Mortgage banking costs decreased $15.6 million or 60% due to lower amortization of mortgage servicing rights. - ---------------------------------------------------------------------------------------------------------------------- Table 3 - Other Operating Expense (In thousands) Three Months Ended ---------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, 2004 2004 2003 2003 2003 ---------------------------------------------------------------------------------- Personnel $ 59,810 $ 58,209 $ 58,639 $ 56,915 $ 53,584 Business promotion 3,831 3,350 3,773 2,912 2,781 Contribution of stock to BOk Charitable Foundation - 4,125 - - - Professional fees and services 3,994 3,899 4,312 4,454 5,404 Net occupancy and equipment 11,732 11,851 12,066 11,600 11,240 Data processing & communications 15,270 14,641 13,869 13,008 12,940 Printing, postage and supplies 3,130 3,317 3,589 3,459 3,523 Amortization of intangible assets 2,121 2,138 2,588 1,959 1,777 Mortgage banking costs 4,433 5,843 6,105 8,268 11,481 Provision (recovery) for impairment of mortgage servicing rights (10,865) 3,703 (2,260) (16,186) 3,353 Other expense 5,536 5,372 6,065 4,743 6,151 - --------------------------------------------------------------------------------------------------------------------- Total $ 98,992 $ 116,448 $ 108,746 $ 91,132 $ 112,234 - ---------------------------------------------------------------------------------------------------------------------
7 Income Taxes Income tax expense totaled $25.9 million for the second quarter of 2004 and $46.3 million for the first half of 2004. These amounts represent 36% and 35%, respectively, of pre-tax book income. Income tax expense for the first half of 2004 reflected the benefit of contributing appreciated securities to the BOk Charitable Foundation during the first quarter of the year. Excluding this benefit, income tax expense for the first half of 2004 would have been $47.5 million or 36% of pre-tax book income. Lines of Business BOK Financial operates four principal lines of business under its Bank of Oklahoma ("BOk") franchise: corporate banking, consumer banking, mortgage banking and 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 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. Over the past year, the average transfer-pricing rate for these deposit accounts decreased. Economic capital is assigned to the business units based on an allocation method that reflects management's assessment of risk. Management uses a third-party developed capital allocation model. This model assigns capital based upon credit, operating, interest rate and market risk inherent in our business lines and recognizes the diversification benefits among the units. The level of assigned economic capital is a combination of the risk taken by each business line, based on its actual exposures and calibrated to its own loss history where possible. Additional capital is assigned to the regional banks line of business based on BOK Financial's investment in those entities. 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 $16.8 million or 37% to consolidated net income for the second quarter of 2004. This contribution to net income compares with $14.0 million or 34% of consolidated net income for the second quarter of 2003. Other operating revenue increased $2.7 million or 13% due primarily due to a $2.0 million increase in revenue from TransFund. Operating expenses increased $2.7 million to $25.0 million for the second quarter of 2004 from $22.3 million for the same period of the prior year. The increase in operating expenses included $1.2 million in TransFund transaction processing costs. 8 Table 4 - Corporate Banking (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2004 2003 2004 2003 ------------------------------- ---------------------------------- NIR (expense) from external sources $ 36,436 $ 36,047 $ 72,741 $ 72,481 NIR (expense) from internal sources (5,258) (7,395) (10,887) (15,396) ------------- ------------- -------------- ------------- Total net interest revenue 31,178 28,652 61,854 57,085 Other operating revenue 22,646 19,980 44,310 38,508 Operating expense 24,998 22,336 48,003 43,358 Net loans charged off 1,310 3,401 4,075 6,255 Net income 16,811 13,988 33,046 28,094 Average assets $ 4,678,643 $ 4,336,009 $ 4,714,515 $ 4,346,168 Average equity 322,780 312,670 324,660 301,390 Return on assets 1.45% 1.29% 1.41% 1.30% Return on equity 20.95% 17.94% 20.47% 18.80% Efficiency ratio 46.44% 45.93% 45.22% 45.36%
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 $3.3 million or 7% to consolidated net income for the second quarter of 2004. This compares to $2.1 million or 5% of consolidated net income for the second quarter of 2003. Other operating revenue increased $2.4 million or 21% over the second quarter of 2003 due primarily to deposit account service charges. Table 5 - Consumer Banking (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ---------------------------------- ---------------------------------- 2004 2003 2004 2003 ------------------------------- ---------------------------------- NIR (expense) from external sources $ (4,340) $ (4,202) $ (8,331) $ (8,626) NIR (expense) from internal sources 15,227 14,535 29,908 29,056 ------------- -------------- ------------- ------------ Total net interest revenue 10,887 10,333 21,577 20,430 Other operating revenue 14,078 11,662 27,095 22,897 Operating expense 18,147 17,020 36,316 33,380 Net loans charged off 1,477 1,547 3,266 3,465 Net income 3,262 2,095 5,553 3,961 Average assets $ 2,665,074 $ 2,461,655 $ 2,679,631 $ 2,476,000 Average equity 67,380 62,550 59,790 62,030 Return on assets 0.49% 0.34% 0.42% 0.32% Return on equity 19.47% 13.43% 18.68% 12.88% Efficiency ratio 72.69% 77.38% 74.61% 77.04%
9 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, decreased $9.1 million or 55% compared to the second quarter of 2003. Mortgage servicing revenue fell by $1.1 million due to a 14% decrease in the principal balance of loans serviced for others. Secondary marketing gains decreased $8.0 million as the volume of loans funded fell. The decrease in mortgage banking revenue reduced Mortgage Banking's contribution to consolidated net income to $2.2 million or 5% for the second quarter of 2004 compared with $5.6 million or 14% for the same period of 2003. BOK Mortgage comprises two sectors, loan production and loan servicing. The loan production sector generally performs best over a period of decreasing mortgage interest rates when loan origination volumes are high. Conversely, the loan servicing sector generally performs best when mortgage interest rates are relatively stable or increasing and prepayments are low. Rising interest rates, which began in the second half of 2003, significantly reduced the volume of loan applications and funding, which has substantially reduced loan production revenue. However, rising mortgage interest rates have increased the value of mortgage servicing rights and reduced related amortization expense. Loan Production Sector Pre-tax income from loan production decreased to $2.5 million for the second quarter of 2004 compared to $11.6 million for the previous year's second quarter. Operating revenue from loan production was $4.3 million in the second quarter of 2004, including $3.6 million of capitalized mortgage servicing rights, compared to revenue from loan production of $12.1 million in the second quarter of 2003, including $7.1 million of capitalized mortgage servicing rights. Mortgage loans funded totaled $197 million in the second quarter of 2004 compared to $400 million during the same period last year. The decrease in loan production revenue and volume of loans funded reflected the effects of higher interest rates on refinancing activities. Approximately 37% of loans funded during the second quarter of 2004 were for refinanced loans compared to 69% for the second quarter of 2003. The pipeline of mortgage loan applications totaled $232 million at June 30, 2004, down from $300 million at the end of the preceding quarter. Loan Servicing Sector The loan servicing sector earned a pre-tax profit of $307 thousand for the second quarter of 2004 compared to a pre-tax loss of $2.8 million for the same period of 2003. Rising interest rates during the second quarter of 2004 increased the fair value of the MSRs and required a $10.9 million reduction in the valuation allowance. The reversal of this allowance was partially offset by $10.1 million of losses on securities designated as economic hedges. During the second quarter of 2003, the fair value of MSRs declined due to falling interest rates. The decline in fair value required a $3.4 million impairment provision which was offset by realized gains of $4.4 million on securities held as an economic hedge of the MSRs. Amortization expense, which is based on both actual and anticipated loan prepayments, decreased to $3.8 million in the second quarter of 2004 compared to $10.1 million in the same period of 2003 due to rising interest rates and a reduction in loan prepayment speeds relative to a year ago. Servicing revenue totaled $4.5 million in 2004 compared to $5.6 million in 2003. The decrease in servicing revenue was due primarily to a lower outstanding principal balance of loans serviced. The average outstanding balance of loans serviced was $4.2 billion for the second quarter of 2004 compared to $4.9 billion for the second quarter of 2003. The decrease in loans serviced reflected both the rapid refinancing of mortgage loans and a decision to curtail purchases of mortgage loan servicing. The valuation allowance for impairment of mortgage servicing rights totaled $12 million at June 30, 2004 compared to $50 million at June 30, 2003. 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. Fair value may increase if anticipated loan prepayment speeds decrease. Amortized cost of a particular impairment stratum will decrease through amortization. We periodically review the various impairment strata to determine whether the values of the impaired 10 servicing rights are likely to recover. When it becomes probable that the impairment is other than temporary based on an estimate of fair values over a range of interest rates and prepayment speeds, a permanent impairment write-down of the servicing rights is charged against the valuation allowance. A $2.7 million write-down of mortgage servicing rights against the valuation allowance was recorded during the second quarter of 2004. Table 6 - Mortgage Banking (Dollars in Thousands) Three months ended June 30, Six months ended June 30, ----------------------------------- -------------------------------- 2004 2003 2004 2003 ---------------------------------- -------------------------------- NIR (expense) from external sources $ 5,524 $ 7,647 $ 11,309 $ 15,336 NIR (expense) from internal sources (2,632) (2,176) (5,670) (4,974) ------------- -------------- -------------- ------------- Total net interest revenue 2,892 5,471 5,639 10,362 Capitalized mortgage servicing rights 3,559 7,112 6,255 12,633 Other operating revenue 5,411 11,939 11,378 24,737 Operating expense 9,015 16,198 18,981 35,028 Provision (recovery) for impairment of mortgage servicing rights (10,865) 3,353 (7,162) (4,477) Gains (losses) on financial instruments, net (10,113) 4,412 (7,880) 7,605 Net income 2,205 5,653 2,105 14,966 Average assets $ 586,577 $ 665,045 $ 584,395 $ 673,458 Average equity 24,430 37,560 27,590 39,150 Return on assets 1.51% 3.41% 0.72% 4.48% Return on equity 36.30% 60.37% 15.34% 77.09% Efficiency ratio 76.00% 66.05% 81.56% 73.38%
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 are acquired and held as available for sale when prepayment risks exceed certain levels. We may also use "to be announced" ("TBA") securities as part of our economic hedging strategy. These TBA securities are considered derivative instruments. Because the fair values of these securities and derivatives are expected to vary inversely to the fair value of the servicing rights, they are expected to offset risk. No special hedge accounting treatment is applicable to either the mortgage servicing rights or the assets designated as an economic hedge. Changes in fair value of available for sale securities are recognized in shareholders' equity, net of taxes, and changes in the fair value of TBA securities are recognized in income. This hedging strategy presents certain risks. A well-developed market determines the fair value for securities and related derivatives. However, there is no comparable market for mortgage servicing rights. Therefore, the computed change in value of the servicing rights for a specified change in interest rates may not correlate to the change in value of the securities. At June 30, 2004, assets with a fair value of $32 million were held for the economic hedge program. The interest rate sensitivity of the mortgage servicing rights and assets held as a hedge is modeled over a range of +/- 50 basis points. The pre-tax results of this modeling on reported earnings were: Table 7 - Interest Rate Sensitivity - Mortgage Servicing (Dollars in Thousands) 50 bp increase 50 bp decrease ----------------- ---------------- Anticipated change in: Fair value of mortgage servicing rights $ 5,235 $ (7,909) Fair value of hedging securities (253) 1,792 ----------------- ---------------- Net $ 4,982 $( 6,117) ----------------- ---------------- 11 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 primarily provided to clients in Oklahoma, Texas, Arkansas and New Mexico. Trust services provided through Colorado State Bank and Trust are included in the regional banking line of business. 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 $1.9 million or 4% to consolidated net income for the second quarter of 2004 compared to $2.7 million or 7% last year. Operating revenue grew $1.1 million or 5% compared with the same quarter of 2003. The growth in operating revenue came primarily from trust fees and commissions. At June 30, 2004, the wealth management line of business was responsible for trust assets with aggregate market values of $20.9 billion under various fiduciary arrangements, compared to $16.9 billion a year ago. The growth in trust assets reflected increased market value of assets managed in addition to new business generated. We have sole or joint discretionary authority over $7.6 billion of trust assets at June 30, 2004 compared to $7.0 billion at June 30, 2003. Operating expenses increased $3.1 million or 15%, including $1.3 million for the cost to restructure an incentive compensation agreement. Table 8 - Wealth Management (Dollars in Thousands) Three months ended June 30, Six months ended June 30, -------------------------------- --------------------------------- 2004 2003 2004 2003 ------------------------------- --------------------------------- NIR (expense) from external sources $ 1,035 $ 317 $ 2,073 $ 646 NIR (expense) from internal sources 2,015 2,243 3,826 4,493 ------------- -------------- ------------- ------------- Total net interest revenue 3,050 2,560 5,899 5,139 Other operating revenue 23,302 22,217 46,232 42,702 Operating expense 23,251 20,134 44,236 39,378 Net income 1,901 2,698 4,796 5,006 Average assets $ 727,393 $ 665,757 $ 741,709 $ 694,197 Average equity 72,120 72,510 73,120 67,920 Return on assets 1.05% 1.63% 1.30% 1.45% Return on equity 10.60% 14.92% 13.19% 14.86% Efficiency ratio 88.23% 81.26% 84.86% 82.31%
12 Regional Banks 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 $12.2 million or 27% to consolidated net income for the second quarter of 2004. This compares to $10.6 million or 26% of consolidated net income for the second quarter of 2003. Operations in Texas, New Mexico, Arkansas and Colorado contributed $8.3 million, $3.2 million, $673 thousand and $41 thousand, respectively, to consolidated net income for the second quarter of 2004. This is compared with $6.9 million, $2.6 million, $625 thousand and $426 thousand, respectively, for the second quarter of 2003. Net income from operations in Texas increased $1.4 million or 20% compared with the second quarter of 2003. Net interest revenue increased $5.2 million or 14% due primarily to an 18% increase in average assets. The increase in net interest revenue was partially offset by a $1.0 million increase in net loans charged off. Net income from operations in New Mexico increased $578 thousand or 22% due primarily to an $880 thousand increase in fees and commissions revenue. Table 9 - Regional Banks (Dollars in Thousands) Three months ended June 30, Six months ended June 30, -------------------------------- ---------------------------------- 2004 2003 2004 2003 ------------------------------- ---------------------------------- NIR (expense) from external sources $ 45,798 $ 39,754 $ 92,257 $ 78,244 NIR (expense) from internal sources (3,638) (2,781) (7,485) (5,713) ------------- -------------- ------------- ------------- Total net interest revenue 42,160 36,973 84,772 72,531 Other operating revenue 11,667 8,370 22,499 16,193 Operating expense 32,585 27,606 64,156 54,668 Net loans charged off 2,142 1,137 3,260 2,454 Gains on sales of financial instruments, net - - - 339 Net income 12,222 10,570 25,448 20,295 Average assets $ 5,487,610 $ 4,641,192 $ 5,509,537 $ 4,656,233 Average equity 498,550 427,530 496,160 422,760 Return on assets 0.90% 0.91% 0.93% 0.88% Return on equity 9.86% 9.92% 10.31% 9.68% Efficiency ratio 60.54% 60.88% 59.81% 61.62%
13 Discussion and Analysis of Operations Loans The aggregate loan portfolio at June 30, 2004 totaled $7.5 billion and increased $25 million during the quarter. Residential mortgage loans, including loans held for sale, increased $43 million and commercial loans increased $14 million. These were partially offset by a $30 million reduction in outstanding commercial real estate loans. - --------------------------------------------------------------------------------------------------------------------- Table 10 - Loans (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2004 2004 2003 2003 2003 --------------------------------------------------------------------------------- Commercial: Energy $ 1,079,746 $ 1,107,866 $ 1,231,599 $ 1,144,354 $ 1,121,285 Manufacturing 485,657 501,296 482,657 531,242 532,849 Wholesale/retail 697,761 717,409 668,202 670,151 693,175 Agricultural 232,445 228,334 228,222 188,925 164,480 Services 1,488,963 1,400,521 1,383,835 1,303,186 1,247,129 Other commercial and industrial 349,129 364,239 342,187 342,364 331,070 - --------------------------------------------------------------------------------------------------------------------- Total commercial 4,333,701 4,319,665 4,336,702 4,180,222 4,089,988 - --------------------------------------------------------------------------------------------------------------------- Commercial real estate: Construction and land development 436,727 451,119 436,087 414,288 363,956 Multifamily 245,731 253,272 271,119 296,136 287,613 Other real estate loans 907,084 914,834 922,886 861,659 812,282 - --------------------------------------------------------------------------------------------------------------------- Total commercial real estate 1,589,542 1,619,225 1,630,092 1,572,083 1,463,851 - --------------------------------------------------------------------------------------------------------------------- Residential mortgage: Secured by 1-4 family residential properties 1,080,399 1,032,396 1,015,643 1,002,080 921,320 Residential mortgages held for sale 79,034 83,556 56,543 109,035 144,890 - --------------------------------------------------------------------------------------------------------------------- Total residential mortgage 1,159,433 1,115,952 1,072,186 1,111,115 1,066,210 - --------------------------------------------------------------------------------------------------------------------- Consumer 442,424 445,734 444,909 428,136 422,839 - --------------------------------------------------------------------------------------------------------------------- Total $ 7,525,100 $ 7,500,576 $ 7,483,889 $ 7,291,556 $ 7,042,888 - ---------------------------------------------------------------------------------------------------------------------
Outstanding loans to energy customers totaled $1.1 billion or 14% of total loans at June 30, 2004. Approximately $918 million of the energy loan portfolio was to oil and gas producers. The amount of credit available to these customers generally depends on the value of their proven energy reserves based on current prices. The energy loan category also included loans to borrowers involved in the transportation of oil and gas and loans to borrowers that manufacture equipment and provide other services to the energy industry. The aggregate outstanding balance of energy loans decreased $28 million or 3% during the second quarter as continued high energy prices provided cash flow to the industry. Outstanding loans to the services industry totaled $1.5 billion at June 30, 2004. Loans to the services industries now comprise 20% of the total loan portfolio. Services included loans that totaled $271 million to nursing homes and $134 million to the healthcare industry. The remainder of the services sector of the loan portfolio is comprised of a large number of loans to small and medium-sized businesses with no notable concentrations. Agriculture loans, which increased $4 million during the quarter, included $200 million of loans to the cattle industry. Other notable loan concentrations by primary industry of the borrowers are presented in Table 10. Commercial real estate loans totaled $1.6 billion at June 30, 2004 or 21% of the total loan portfolio. Construction and land development loans decreased $14 million. Construction and land development loans included $286 million for single-family residential lots and premises. Multifamily real estate loans decreased $8 million or 3% due primarily to one large payoff and limited loan funding during the quarter. The major components of other commercial real estate loans were office buildings at $288 million and retail facilities at $310 million. Residential mortgage loans, excluding loans held for sale, included $401 million of home equity loans, $298 million of loans held for business relationship, $231 million of adjustable rate mortgage loans and $133 million of loans held for 14 community development. Consumer loans included $209 million of indirect automobile loans. Substantially all of these loans were purchased from dealers in Oklahoma. Approximately 13% of the indirect automobile loan portfolio was considered sub-prime. While BOK Financial continued to increase geographic diversification through expansion into Texas, New Mexico and Colorado, geographic concentration subjects the loan portfolio to the general economic conditions in Oklahoma. Table 11 presents the distribution of the major loan categories among BOK Financial's principal market areas. - --------------------------------------------------------------------------------------------------------------------- Table 11 - Loans by Principal Market Area (In thousands) March 31, March 31, Dec. 31, Sept. 30, June 30, 2004 2004 2003 2003 2003 --------------------------------------------------------------------------------- Oklahoma: Commercial $ 2,843,013 $ 2,811,555 $ 2,802,852 $ 2,713,411 $ 2,754,718 Commercial real estate 795,145 833,317 789,868 742,444 770,486 Residential mortgage 770,749 716,512 699,274 691,233 644,942 Residential mortgage held for 79,034 83,556 56,543 109,035 144,890 sale Consumer 336,057 332,036 324,305 313,113 309,632 --------------------------------------------------------------------------------- Total Oklahoma $ 4,823,998 $ 4,776,976 $ 4,672,842 $ 4,569,236 $ 4,624,668 --------------------------------------------------------------------------------- Texas: Commercial $ 939,471 $ 932,302 $ 963,340 $ 898,075 $ 840,470 Commercial real estate 453,724 460,659 477,561 460,292 444,162 Residential mortgage 194,760 205,163 204,481 197,814 202,423 Consumer 85,742 91,331 101,269 96,668 100,148 --------------------------------------------------------------------------------- Total Texas $ 1,673,697 $ 1,689,455 $ 1,746,651 $ 1,652,849 $ 1,587,203 --------------------------------------------------------------------------------- Albuquerque: Commercial $ 317,647 $ 317,488 $ 297,896 $ 296,710 $ 297,371 Commercial real estate 175,537 161,529 175,745 167,412 180,000 Residential mortgage 65,184 64,887 66,179 65,853 68,374 Consumer 11,251 10,837 11,070 10,371 10,703 --------------------------------------------------------------------------------- Total Albuquerque $ 569,619 $ 554,741 $ 550,890 $ 540,346 $ 556,448 --------------------------------------------------------------------------------- Northwest Arkansas: Commercial $ 61,252 $ 58,398 $ 63,480 $ 68,977 $ 58,346 Commercial real estate 65,980 59,181 75,452 77,607 69,203 Residential mortgage 9,289 8,271 6,245 5,209 5,581 Consumer 3,018 2,970 2,671 2,480 2,356 --------------------------------------------------------------------------------- Total Northwest Arkansas $ 139,539 $ 128,820 $ 147,848 $ 154,273 $ 135,486 --------------------------------------------------------------------------------- Colorado (1): Commercial $ 172,318 $ 199,922 $ 209,134 $ 203,049 $ 139,083 Commercial real estate 99,156 104,539 111,466 124,328 - Residential mortgage 40,417 37,563 39,464 41,971 - Consumer 6,356 8,560 5,594 5,504 - --------------------------------------------------------------------------------- Total Colorado $ 318,247 $ 350,584 $ 365,658 $ 374,852 $ 139,083 --------------------------------------------------------------------------------- Total BOK Financial loans $ 7,525,100 $ 7,500,576 $ 7,483,889 $ 7,291,556 $ 7,042,888 --------------------------------------------------------------------------------- (1) Includes Denver loan production office.
Other Derivatives with Credit Risk BOK Financial offers a program that permits 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 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 Financial. Offsetting contracts are executed between BOK Financial and selected counterparties to minimize the risk to BOK Financial of changes in energy prices, interest rates or foreign 15 exchange rates. The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or fee paid to BOK Financial as compensation for administrative costs, credit risk and profit. These programs create credit risk for amounts due to BOK Financial from its customers and counterparties. Customer and counterparty credit risks are monitored through existing policies. Margin collateral may be required from customers and counterparties based on assessment of credit risk. A deterioration of the credit standing of one or more counterparties may result in BOK Financial recognizing a loss as the fair value of the affected contracts may no longer move in tandem with the offsetting contracts. This could occur if the credit standing of a counterparty deteriorated such that either the fair value of 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 June 30, 2004, the fair value of derivative contracts reported as assets under these programs totaled $294 million. This included energy contracts with fair values of $285 million and foreign exchange contracts with fair values of $7 million. The aggregate fair values of offsetting liability contracts totaled $296 million. Approximately 64% of the fair value of asset contracts was with customers. The remaining 36% was with counterparties. Conversely, approximately 65% of the fair value of liability contracts was with counterparties. The remaining 35% was due to various customers. The maximum exposure to any single customer or counterparty totaled $38 million at June 30, 2004. 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 June 30, 2004 compared to $130 million at March 31, 2004 and $123 million at June 30, 2003. These amounts represent 1.73%, 1.75%, and 1.78%, respectively, of total loans, excluding loans held for sale. Losses on loans held for sale, principally mortgage loans accumulated for placement in security pools, are charged to earnings through adjustments in the carrying value. The reserve for loan losses also represented 224% of nonperforming loans at June 30, 2004, compared with 280% at March 31, 2004 and 221% at June 30, 2003. Net loans charged off during the second quarter totaled $4.9 million, compared to $5.8 million in the first quarter of 2004 and $6.4 million the second quarter of 2003. Table 12 presents statistical information regarding the reserve for loan losses. - ------------------------------------------------------------------------------------------------------------------- Table 12 - Summary of Loan Loss Experience (In thousands) Three Months Ended -------------------------------------------------------------------------------- June 30, March 31, Dec. 31, Sept. 30, June 30, 2004 2004 2003 2003 2003 -------------------------------------------------------------------------------- Beginning balance $ 129,838 $ 128,639 $ 126,971 $ 122,772 $ 119,699 Loans charged off: Commercial 2,826 4,188 3,116 4,362 4,709 Commercial real estate 617 - 37 46 - Residential mortgage 231 349 594 590 137 Consumer 2,998 3,425 3,802 3,158 2,873 - ------------------------------------------------------------------------------------------------------------------- Total 6,672 7,962 7,549 8,156 7,719 - ------------------------------------------------------------------------------------------------------------------- Recoveries of loans previously charged off: Commercial 359 580 111 553 128 Commercial real estate 4 17 2 40 3 Residential mortgage 87 20 6 25 14 Consumer 1,302 1,517 1,097 1,234 1,144 - ------------------------------------------------------------------------------------------------------------------- Total 1,752 2,134 1,216 1,852 1,289 - ------------------------------------------------------------------------------------------------------------------- Net loans charged off 4,920 5,828 6,333 6,304 6,430 Provision for loan losses 3,987 7,027 8,001 8,220 9,503 Additions due to acquisitions - - - 2,283 - - ------------------------------------------------------------------------------------------------------------------- Ending balance $ 128,905 $ 129,838 $ 128,639 $ 126,971 $ 122,772 - ------------------------------------------------------------------------------------------------------------------- Reserve to loans outstanding at period-end (1) 1.73% 1.75% 1.73% 1.77% 1.78% Net loan losses (annualized) to average loans (1) 0.26 0.31 0.35 0.36 0.38 - ------------------------------------------------------------------------------------------------------------------- (1) Excludes residential mortgage loans held for sale.
16 Specific reserves for impairment are determined through evaluation of estimated future cash flows and collateral value. At June 30, 2004, specific impairment reserves totaled $3.7 million on total impaired loans of $48 million. Nonspecific reserves are maintained for risks beyond factors specific to an individual loan or those identified through migration analysis. A range of potential losses is determined for each factor identified. At June 30, 2004, the range of potential losses for the more significant factors were: General economic conditions $ 6.6 million - $ 10.4 million Concentration of large loans $ 1.6 million - $ 3.1 million Evaluation of the loan loss reserve requires a significant level of assumptions by management including estimation of future cash flows, collateral values, relevance of historical loss trends to the loan portfolio and assessment of current economic conditions on the borrowers' ability to repay. The required loan loss reserve could be materially affected by changes in these assumptions. The loan loss reserve is adequate to absorb losses inherent in the loan portfolio based upon current conditions and information available to management. However, actual losses may differ significantly due to changing conditions or information that is not currently available. Nonperforming Assets Information regarding nonperforming assets, which totaled $62 million at June 30, 2004, $52 million at March 31, 2004 and $61 million at June 30, 2003 is presented in Table 13. Nonperforming assets included nonaccrual loans and excluded loans 90 days or more past due but still accruing interest. Nonaccrual loans increased $11.2 million during the second quarter of 2004. Newly identified nonaccruing loans totaled $22.7 million. Two loans in unrelated industries comprised $15.9 million of the newly identified nonaccruing loans. This increase in nonaccruing loans was partially offset by $4.6 million from cash payments received and $2.1 million from charge-offs and foreclosure. Nonaccruing loans also decreased $4.6 million due to a loan returned to accruing status after a period of satisfactory performance. - --------------------------------------------------------------------------------------------------------------------- Table 13 - Nonperforming Assets (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2004 2004 2003 2003 2003 ---------------------------------------------------------------------- Nonperforming loans: Nonaccrual loans: Commercial $ 38,264 $ 30,751 $ 41,360 $ 38,253 $ 41,364 Commercial real estate 10,208 5,953 2,311 2,528 4,719 Residential mortgage 8,346 8,649 7,821 8,568 8,323 Consumer 792 1,024 1,189 1,439 1,213 - --------------------------------------------------------------------------------------------------------------------- Total nonperforming loans 57,610 46,377 52,681 50,788 55,619 Other nonperforming assets 4,776 5,954 7,186 7,920 5,713 - --------------------------------------------------------------------------------------------------------------------- Total nonperforming assets $ 62,386 $ 52,331 $ 59,867 $ 58,708 $ 61,332 - --------------------------------------------------------------------------------------------------------------------- Ratios: Reserve for loan losses to nonperforming loans 223.75% 279.96% 244.18% 250.00% 220.74% Nonperforming loans to period-end loans (2) 0.77 0.63 0.71 0.71 0.81 - --------------------------------------------------------------------------------------------------------------------- Loans past due (90 days) (1) $ 10,280 $ 16,376 $ 14,944 $ 12,372 $ 6,996 - --------------------------------------------------------------------------------------------------------------------- (1) Includes residential mortgages guaranteed by agencies of the U.S. Government. $ 3,226 $ 4,420 $ 4,132 $ 4,519 $ 4,669 (2) Excludes residential mortgage loans held for sale. - ---------------------------------------------------------------------------------------------------------------------
The loan review process also identifies loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrower or value of the collateral. Because the borrowers are still performing in 17 accordance with the original terms of the loan agreements and no loss of principal or interest is anticipated, these loans are not included in nonperforming assets. Known information does, however, cause management to have concerns as to the borrowers' ability to comply with current repayment terms. Potential problem loans totaled $60 million at June 30, 2004 compared to $69 million at March 31, 2004 and $57 million at June 30, 2003. At June 30, 2004, the composition of potential problem loans by primary industry categories included services industries - $17 million, energy and related services - $11 million, healthcare - $10 million and manufacturing - $7 million. Deposits Total deposits increased $245 million to $9.6 billion during the second quarter of 2004. Deposit growth came primarily from time deposits, which increased $243 million. Brokered time deposits increased $194 million to $437 million at June 30, 2004. The increase in brokered deposits was the result of a strategy to lower brokered deposit funding costs without affecting liquidity. Existing shorter-term brokered deposits were replaced with longer-term fixed-rate brokered deposits. The longer-term deposits have more standardized terms and can be hedged more effectively with interest rate swaps, which are used to convert the cost of the funds to a LIBOR-based floating rate. A discussion of the hedging of the brokered time deposits with interest rate swaps is included in the Market Risk section of this report. Average core deposits, which we define as deposits of less than $100,000 excluding public funds and brokered time deposits, increased $199 million or 4% compared to the first quarter of 2004. Public funds decreased $10 million or 1% during this same period due to the timing of tax receipts. Average brokered deposits increased $94 million or 38%. The remaining deposits, which were comprised of account balances in excess of $100,000, increased $80 million or 2%. The distribution of deposit accounts among BOK Financial's principal markets is shown in Table 14. Total deposits grew by 2% and 3%, respectively, in the Oklahoma and Texas markets, and 5% in New Mexico during the second quarter. 18 - --------------------------------------------------------------------------------------------------------------------- Table 14 - Deposits by Principal Market Area (In thousands) June 30, March 31, Dec. 31, Sept. 30, June 30, 2004 2004 2003 2003 2003 --------------------------------------------------------------------------------- Oklahoma: Demand $ 1,069,823 $ 1,137,710 $ 1,025,483 $ 944,670 $ 1,216,746 Interest-bearing: Transaction 2,229,366 2,212,752 2,246,675 2,098,537 2,100,705 Savings 96,091 101,656 98,611 103,292 107,591 Time 2,615,179 2,439,732 2,403,293 2,498,235 2,380,844 --------------------------------------------------------------------------------- Total interest-bearing 4,940,636 4,754,140 4,748,579 4,700,064 4,589,140 --------------------------------------------------------------------------------- Total Oklahoma $ 6,010,459 $ 5,891,850 $ 5,774,062 $ 5,644,734 $ 5,805,886 --------------------------------------------------------------------------------- Texas: Demand $ 578,727 $ 562,089 $ 421,292 $ 427,473 $ 412,301 Interest-bearing: Transaction 1,124,279 1,087,918 1,213,777 1,064,835 1,004,029 Savings 34,370 34,734 35,702 36,594 36,289 Time 548,001 526,082 505,463 507,702 532,402 --------------------------------------------------------------------------------- Total interest-bearing 1,706,650 1,648,734 1,754,942 1,609,131 1,572,720 --------------------------------------------------------------------------------- Total Texas $ 2,285,377 $ 2,210,823 $ 2,176,234 $ 2,036,604 $ 1,985,021 --------------------------------------------------------------------------------- Albuquerque: Demand $ 135,648 $ 124,557 $ 106,050 $ 103,262 $ 104,896 Interest-bearing: Transaction 350,453 347,763 370,294 348,579 308,901 Savings 19,153 20,306 20,728 22,720 24,621 Time 353,650 329,063 317,924 306,920 299,877 --------------------------------------------------------------------------------- Total interest-bearing 723,256 697,132 708,946 678,219 633,399 --------------------------------------------------------------------------------- Total Albuquerque $ 858,904 $ 821,689 $ 814,996 $ 781,481 $ 738,295 --------------------------------------------------------------------------------- Northwest Arkansas: Demand $ 11,816 $ 12,402 $ 16,351 $ 15,788 $ 12,723 Interest-bearing: Transaction 21,929 24,003 28,411 22,226 21,652 Savings 1,191 1,545 1,341 1,059 1,039 Time 112,634 90,699 105,598 123,789 126,566 --------------------------------------------------------------------------------- Total interest-bearing 135,754 116,247 135,350 147,074 149,257 --------------------------------------------------------------------------------- Total Northwest Arkansas $ 147,570 $ 128,649 $ 151,701 $ 162,862 $ 161,980 --------------------------------------------------------------------------------- Colorado: Demand $ 81,478 $ 84,505 $ 79,424 $ 75,183 $ - Interest-bearing: Transaction 166,139 166,179 162,651 164,350 - Savings 19,021 19,847 18,347 17,140 - Time 41,361 42,032 42,448 44,871 - --------------------------------------------------------------------------------- Total interest-bearing 226,521 228,058 223,446 226,361 - --------------------------------------------------------------------------------- Total Colorado $ 307,999 $ 312,563 $ 302,870 $ 301,544 $ - --------------------------------------------------------------------------------- Total BOK Financial deposits $ 9,610,309 $ 9,365,574 $ 9,219,863 $ 8,927,225 $ 8,691,182 ---------------------------------------------------------------------------------
19 Capital Shareholders' equity decreased $37 million during the second quarter of 2004 and totaled $1.3 billion at June 30, 2004. Net income for the quarter of $45.5 million was offset by an $83 million decrease in accumulated other comprehensive income. The decrease in accumulated other comprehensive income resulted from depreciation in the fair value of BOK Financial's portfolio of available for sale securities due to rising interest rates. This decrease in accumulated other comprehensive income is considered temporary based upon the company's ability and management's intent to hold the securities until the value recovers. BOK Financial and its subsidiary banks are subject to various capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can result in certain mandatory and additional discretionary actions by regulators that could have a material effect on operations. These capital requirements include quantitative measures of assets, liabilities and certain off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulatory agencies about components, risk weightings and other factors. For a banking institution to qualify as well capitalized, as defined by the banking agencies, its Tier 1, Total and Leverage capital ratios must be at least 6%, 10% and 5%, respectively. BOK Financial's capital ratios are presented in Table 15. Additionally, each subsidiary bank exceeds the regulatory definition of well capitalized. - --------------------------------------------------------------------------------------------------------- Table 15 - Capital Ratios June 30, March 31, Dec. 31, Sept. 30, June 30, 2004 2004 2003 2003 2003 -------------------------------------------------------------------------- Average shareholders' equity to average assets 9.20% 9.24% 9.06% 9.03% 9.19% Risk-based capital: Tier 1 capital 9.79 9.32 9.15 8.84 9.32 Total capital 11.90 11.45 11.31 11.02 11.85 Leverage 7.52 7.34 7.17 7.03 7.21
During 2002, BOK Financial issued shares of common stock 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. Pursuant to this guarantee, any holder of BOK Financial common shares issued in this acquisition may annually make a claim for the excess of the guaranteed price and the actual sales price of any shares sold during a 60-day period after each of the first five anniversary dates after October 25, 2002. The maximum annual number of shares subject to this guarantee is 210,069 after adjustment for the 3% dividend paid in common shares in the second quarter of 2004. 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 following table presents the estimated number of common shares that would be required to be issued and the cash value equivalent if the market value of BOK Financial's common stock remained at $39.27, its closing price on June 30, 2004 and if all holders exercised their rights under the price guarantee agreement. Cash Equivalent of Additional Additional Number Shares Shares Benchmark Benchmark Of To (In Period Price Shares Issue Thousands) - ------------------------------------------------------------------------------------------------------------ October 25, 2004 - December 24, 2004 35.24 210,069 - - October 25, 2005 - December 24, 2005 37.67 210,069 - - October 25, 2006 - December 24, 2006 40.10 210,069 4,434 174 October 25, 2007 - December 24, 2007 42.53 210,069 17,434 685
20 Quantitative and Qualitative Disclosures about Market Risk Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange prices, commodity prices or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading. BOK Financial is subject to market risk primarily through the effect of changes in interest rates on both its assets held for purposes other than trading and trading assets. The effects of other changes, such as foreign exchange rates, commodity prices or equity prices do not pose significant market risk to BOK Financial. BOK Financial has no material investments in assets that are affected by changes in foreign exchange rates or equity prices. Energy derivative contracts, which are affected by changes in commodity prices, are matched against offsetting contracts as previously discussed. Responsibility for managing market risk rests with the Asset / Liability Committee that operates under policy guidelines established by the Board of Directors. The acceptable negative variation in net interest revenue, net income or economic value of equity due to a specified basis point increase or decrease in interest rates is generally limited by these guidelines to +/- 10%. These guidelines also set maximum levels for short-term borrowings, short-term assets, public funds, and brokered deposits, and establish minimum levels for unpledged assets, among other things. Compliance with these guidelines is reviewed monthly. Interest Rate Risk - Other than Trading BOK Financial has a large portion of its earning assets in variable rate loans and a large portion of its liabilities in demand deposit accounts and interest-bearing transaction accounts. Changes in interest rates affect earning assets more rapidly than interest-bearing liabilities in the short term. Management has adopted several strategies to reduce this interest rate sensitivity. As previously noted in the Net Interest Revenue section of this report, management acquires securities that are funded by borrowings in the capital markets. These securities have an expected average duration of 3.0 years while the related funds borrowed have an average duration of 90 days. Securities purchased and funds borrowed under this strategy averaged $1.8 billion during the second quarter of 2004. BOK Financial uses interest rate swaps in managing its interest rate sensitivity. These products are generally used to more closely match interest on certain loans with funding sources and long-term certificates of deposit with earning assets. During the second quarters of 2004 and 2003, net interest revenue increased $3.7 million and $4.0 million, respectively, from periodic settlements of these contracts. Interest rate derivatives with notional amounts of $472 million have been designated as fair value hedges of fixed-rate brokered certificates of deposit and debt. During the second quarter of 2004, the fair values of these derivatives decreased $7.3 million. The corresponding fair values of the hedged liabilities increased $7.8 million during this same period. The net effect of these changes in fair values, combined with changes in fair value of interest rate derivatives not designated as hedges for accounting purposes, resulted in a net gain of $201 thousand in the second quarter of 2004. This is compared with a net loss of $1.1 million in the second quarter of 2003 from adjustments of interest rate swaps to fair value. No interest rate derivatives were designated as hedges in the prior year. Credit risk from these swaps is closely monitored. Derivative contracts are not used for speculative purposes. - --------------------------------------------------------------------------------------------------------------------- Table 16 - Interest Rate Swaps (In Thousands) Notional Pay Receive Positive Negative Amount Rate Rate Fair Value Fair Value ----------------------------------------------------------------------------------------------------- Expiration: 2005 $65,000 1.37%(1) 1.57% - 4.06% $ 2 $ (96) 2006 93,599 1.37%(1) - 5.43% 1.37%(1) - 4.45% 47 (1,380) 2007 475,000 1.37%(1) - 1.61%(1) 3.10% - 4.51% 1,014 (2,819) 2008 122,000 1.37%(1) 2.90% - 5.99% - (2,972) 2009 65,000 1.37%(1) 3.26% - 4.39% 218 (584) 2010 10,000 1.37%(1) 3.54% - 3.77% - (397) 2011 65,103 1.37%(1) - 5.51% 1.37%(1) - 4.10% - (2,556) - --------------------------------------------------------------------------------------------------------------------- $ 1,281 $ (10,804) ----------------------------------- (1) Rates are variable based on LIBOR and reset monthly, quarterly or semi-annually.
21 The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model. BOK Financial performs a sensitivity analysis to identify more dynamic interest rate risk exposures, including embedded option positions, on net interest revenue, net income and economic value of equity. A simulation model is used to estimate the effect of changes in interest rates over the next twelve months based on eight interest rate scenarios. Three specified interest rate scenarios are used to evaluate interest rate risk against policy guidelines. These are a "most likely" rate scenario and two "shock test" scenarios, first assuming a sustained parallel 200 basis point increase and second assuming a sustained parallel 100 basis point decrease in interest rates. Management historically evaluated interest rate sensitivity for a sustained 200 basis point decrease in rates. However, these results are not meaningful in the current low-rate environment. An independent source is used to determine the most likely interest rate scenario. BOK Financial's primary interest rate exposures included the Federal Funds rate, which affects short-term borrowings, and the prime lending rate and the London Interbank Offering Rate, which are the basis for much of the variable-rate loan pricing. Additionally, mortgage rates directly affect the prepayment speeds for mortgage-backed securities and mortgage servicing rights. Derivative financial instruments and other financial instruments used for purposes other than trading are included in this simulation. The model incorporates assumptions regarding the effects of changes in interest rates and account balances on indeterminable maturity deposits based on a combination of historical analysis and expected behavior. The impact of planned growth and new business activities is factored into the simulation model. The effects of changes in interest rates on the value of mortgage servicing rights are excluded from Table 17 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. The simulations used to manage market risk are based on numerous assumptions regarding the effects of changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest revenue, net income or economic value of equity or precisely predict the impact of higher or lower interest rates on net interest revenue, net income or economic value of equity. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, market conditions and management strategies, among other factors. Table 17 - Interest Rate Sensitivity (Dollars in Thousands) Increase Decrease -------------------------- --------------------------- ------------------------ 200 bp 100 bp Most Likely -------------------------- --------------------------- ------------------------ 2004 2003 2004 2003 2004 2003 -------------------------- --------------------------- ------------------------ Anticipated impact over the next twelve months: Net interest revenue $ 9,477 $ 4,840 $ (4,915) $ (4,414) $ 7,750 $ 305 2.2% 1.2% (1.2)% (1.1)% 1.8% 0.1% - ---------------------------------------------------------------------------------------------------------------------- Net income $ 5,924 $ 3,025 $ (3,071) $ (2,758) $ 4,844 $ 191 3.3% 2.0% (1.7)% (1.8)% 2.7% 0.1% - ---------------------------------------------------------------------------------------------------------------------- Economic value of equity $ (63,010) $ (51,081) $ 29,616 $ (4,812) $ (9,739) $ 7,824 (4.0)% (3.7)% 1.9% (0.3)% (0.6)% 0.6% - ----------------------------------------------------------------------------------------------------------------------
The decrease in economic value of equity assuming a 200 basis point rate shock was due primarily to projected decreases in the fair values of securities of $325 million and fixed-rate loans of $125 million. A 200 basis point rate shock is estimated to extend the duration of the securities portfolio by less than one year. The decrease in fair value of securities and loans would be partially offset by an estimated $384 million increase in the fair values of fixed rate deposits and other borrowed funds. 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, 22 corporations, foundations and financial institutions. BOK Financial will also take trading positions in U.S. Treasury securities, mortgage-backed securities, municipal bonds and financial futures for its own account. These positions are taken with the objective of generating trading profits. Both of these activities involve interest rate risk. A variety of methods are used to manage the interest rate risk of trading activities. These methods include daily marking of all positions to market value, independent verification of inventory pricing, and position limits for each trading activity. Hedges in either the futures or cash markets may be used to reduce the risk associated with some trading programs. The Risk Management Department monitors trading activity daily and reports to senior management and the Risk Oversight and Audit Committee of the BOK Financial Board of Directors any exceptions to trading position limits and risk management policy exceptions. BOK Financial uses a Value at Risk ("VAR") methodology to measure the market risk inherent in its trading activities. VAR is calculated based upon historical simulations over the past five years using a variance / covariance matrix of interest rate changes. It represents an amount of market loss that is likely to be exceeded only one out of every 100 two-week periods. Trading positions are managed within guidelines approved by the Board of Directors. These guidelines limit the VAR to $1.6 million. At June 30, 2004, the VAR was $223 thousand. The greatest value at risk during the second quarter of 2004 was $793 thousand. Controls and Procedures As required by Rule 13a-15(b), BOK Financial's management, including the Chief Executive Officer and Chief Financial Officer, conducted an evaluation as of the end of the period covered by their report, of the effectiveness of the company's disclosure controls and procedures as defined in Exchange Act Rule 13a-15(e). Based on that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that the disclosure controls and procedures were effective as of the end of the period covered by this report. As required by Rule 13a-15(d), BOK Financial's management, including the Chief Executive Officer and Chief Financial Officer, also conducted an evaluation of the company's internal controls over financial reporting to determine whether any changes occurred during the quarter covered by this report that have materially affected, or are reasonably likely to materially affect, the company's internal controls over financial reporting. Based on that evaluation, there has been no such change during the quarter covered by this report. 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. 23 Report of Management on Consolidated Financial Statements Management is responsible for the unaudited consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States and all related information in this report. In management's opinion, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal recurring accruals) necessary to present fairly the financial conditions, results of operations and cash flows of BOK Financial and its subsidiaries at the dates and for the periods presented. 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. The financial information included in this interim report has been prepared by management without audit by independent public accountants and should be read in conjunction with BOK Financial's 2003 Form 10-K filed with the Securities and Exchange Commission which contains audited financial statements. 24 - ------------------------------------------------------- --- --------- --- ------------ ------------------------------------- Consolidated Statements of Earnings (Unaudited) (Dollars In Thousands, Except Per Share Data) Three Months Ended Six Months Ended June 30, June 30, 2004 2003 2004 2003 ---------------------------------------------------------------- Interest Revenue Loans $ 95,956 $ 92,446 $ 192,451 $ 186,922 Taxable securities 49,321 46,911 96,837 92,045 Tax-exempt securities 1,818 2,004 3,638 4,140 - -------------------------------------------------------------------------------------------------------------------------- Total securities 51,139 48,915 100,475 96,185 - -------------------------------------------------------------------------------------------------------------------------- Trading securities 201 114 337 214 Funds sold and resell agreements 53 59 92 165 - -------------------------------------------------------------------------------------------------------------------------- Total interest revenue 147,349 141,534 293,355 283,486 - -------------------------------------------------------------------------------------------------------------------------- Interest Expense Deposits 32,686 32,863 65,172 67,940 Other borrowings 7,107 8,314 15,084 16,948 Subordinated debentures 2,367 2,420 4,703 4,840 - -------------------------------------------------------------------------------------------------------------------------- Total interest expense 42,160 43,597 84,959 89,728 - -------------------------------------------------------------------------------------------------------------------------- Net Interest Revenue 105,189 97,937 208,396 193,758 Provision for Loan Losses 3,987 9,503 11,014 19,415 - -------------------------------------------------------------------------------------------------------------------------- Net Interest Revenue After Loan Loss Provision 101,202 88,434 197,382 174,343 - -------------------------------------------------------------------------------------------------------------------------- Other Operating Revenue Brokerage and trading revenue 11,166 10,459 21,177 19,673 Transaction card revenue 16,817 14,059 31,541 26,735 Trust fees and commissions 13,939 10,845 27,648 21,025 Service charges and fees on deposit accounts 23,928 19,606 46,083 38,590 Mortgage banking revenue, net 7,555 16,609 15,299 32,144 Leasing revenue 860 795 1,747 1,654 Other revenue 5,774 5,555 12,398 10,215 - -------------------------------------------------------------------------------------------------------------------------- Total fees and commissions revenue 80,039 77,928 155,893 150,036 - -------------------------------------------------------------------------------------------------------------------------- Gain on sales of assets 35 8 719 738 Gain (loss) on securities, net (11,005) 10,457 (6,728) 20,146 Gain (loss) on derivatives, net 201 (1,111) (794) (2,407) - -------------------------------------------------------------------------------------------------------------------------- Total other operating revenue 69,270 87,282 149,090 168,513 - -------------------------------------------------------------------------------------------------------------------------- Other Operating Expense Personnel 59,810 53,584 118,019 107,368 Business promotion 3,831 2,781 7,181 6,252 Contribution of stock to BOk Charitable Foundation - - 4,125 - Professional fees and services 3,994 5,404 7,893 9,169 Net occupancy and equipment 11,732 11,240 23,583 22,301 Data processing and communications 15,270 12,940 29,911 24,660 Printing, postage and supplies 3,130 3,523 6,447 6,882 Amortization of intangible assets 2,121 1,777 4,259 3,554 Mortgage banking costs 4,433 11,481 10,276 25,923 Provision (recovery) for impairment of mortgage servicing rights (10,865) 3,353 (7,162) (4,477) Other expense 5,536 6,151 10,908 10,067 - -------------------------------------------------------------------------------------------------------------------------- Total other operating expense 98,992 112,234 215,440 211,699 - -------------------------------------------------------------------------------------------------------------------------- Income Before Taxes 71,480 63,482 131,032 131,157 Federal and state income tax 25,947 22,707 46,347 46,915 Net Income $ 45,533 $ 40,775 $ 84,685 $ 84,242 - -------------------------------------------------------------------------------------------------------------------------- Earnings Per Share: - ------------------------------------------------------------------------------------------------------------------------- Basic $ 0.76 $ 0.69 $ 1.42 $ 1.43 - ------------------------------------------------------------------------------------------------------------------------- Diluted $ 0.68 $ 0.61 $ 1.27 $ 1.27 - ------------------------------------------------------------------------------------------------------------------------- Average Shares Used in Computation: - ------------------------------------------------------------------------------------------------------------------------- Basic 59,146,624 58,647,952 59,098,913 58,587,197 - ------------------------------------------------------------------------------------------------------------------------- Diluted 66,719,734 66,506,486 66,688,766 66,434,786 - -------------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 25 - -------------------------------------------------------------------------------------------------------------------- Consolidated Balance Sheets (Dollars In Thousands, Except Per Share Data) June 30, December 31, June 30, 2004 2003 2003 -------------------------------------------------- (Unaudited) (Unaudited) Assets Cash and due from banks $ 574,549 $ 629,480 $ 718,497 Funds sold and resell agreements 148,035 14,432 10,395 Trading securities 15,133 7,823 38,143 Securities: Available for sale 3,925,068 3,833,449 4,355,669 Available for sale securities pledged to creditors 646,959 685,419 644,767 Investment (fair value: June 30, 2004 - $205,998; December 31, 2003 - $191,256; June 30, 2003 - $197,541) 205,933 187,951 192,185 - -------------------------------------------------------------------------------------------------------------------- Total securities 4,777,960 4,706,819 5,192,621 - -------------------------------------------------------------------------------------------------------------------- Loans 7,525,100 7,483,889 7,042,888 Less reserve for loan losses (128,905) (128,639) (122,772) - -------------------------------------------------------------------------------------------------------------------- Loans, net of reserve 7,396,195 7,355,250 6,920,116 - -------------------------------------------------------------------------------------------------------------------- Premises and equipment, net 173,798 175,901 160,474 Accrued revenue receivable 76,422 74,980 66,689 Intangible assets, net 246,539 250,686 194,478 Mortgage servicing rights, net 53,000 48,550 31,141 Real estate and other repossessed assets 4,776 7,186 5,713 Bankers' acceptances 18,783 30,884 33,857 Receivable on unsettled security transactions 8,018 - - Derivative contracts 294,900 149,100 142,605 Other assets 199,888 130,652 116,527 - -------------------------------------------------------------------------------------------------------------------- Total assets $ 13,987,996 $ 13,581,743 $ 13,631,256 - -------------------------------------------------------------------------------------------------------------------- Liabilities and Shareholders' Equity Noninterest-bearing demand deposits $ 1,877,492 $ 1,648,600 $ 1,746,666 Interest-bearing deposits: Transaction 3,892,166 4,021,808 3,435,287 Savings 169,826 174,729 169,540 Time 3,670,825 3,374,726 3,339,689 - -------------------------------------------------------------------------------------------------------------------- Total deposits 9,610,309 9,219,863 8,691,182 - -------------------------------------------------------------------------------------------------------------------- Funds purchased and repurchase agreements 1,497,685 1,609,668 1,723,711 Other borrowings 1,016,327 1,016,650 1,057,476 Subordinated debentures 151,538 154,332 154,977 Accrued interest, taxes and expense 49,692 85,409 65,316 Bankers' acceptances 18,783 30,884 33,857 Due on unsettled security transactions - 8,259 518,782 Derivative contracts 307,102 149,326 136,485 Other liabilities 77,485 78,722 64,280 - -------------------------------------------------------------------------------------------------------------------- Total liabilities 12,728,921 12,353,113 12,446,066 - -------------------------------------------------------------------------------------------------------------------- Shareholders' equity: Preferred stock 12 12 25 Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: June 30, 2004 - 60,095,270; December 31, 2003 - 58,055,697; June 30, 2003 - 57,818,775) 4 4 4 Capital surplus 618,866 546,594 538,468 Retained earnings 716,049 698,052 624,309 Treasury stock (shares at cost: June 30, 2004 - 932,223; December 31, 2003 - 848,892; June 30, 2003 - 786,484) (27,892) (24,491) (21,129) Accumulated other comprehensive income (loss) (47,964) 8,459 43,513 - -------------------------------------------------------------------------------------------------------------------- Total shareholders' equity 1,259,075 1,228,630 1,185,190 - -------------------------------------------------------------------------------------------------------------------- Total liabilities and shareholders' equity $ 13,987,996 $ 13,581,743 $ 13,631,256 - -------------------------------------------------------------------------------------------------------------------- See accompanying notes to consolidated financial statements.
26 - --------------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Changes in Shareholders' Equity (Unaudited) (In Thousands) Accumulated Preferred Stock Common Stock Other Treasury Stock ------------------------------------ Comprehensive Capital Retained -------------------- Shares Amount Shares Amount Income (Loss) Surplus Earnings Shares Amount Total ------------------------------------------------------------------------------------------------------------ Balances at December 31, 2002 250,000 $ 25 55,750 $ 3 $ 43,088 $475,054 $598,777 683 $ (17,421) $1,099,526 Comprehensive income: Net income - - - - - - 84,242 - - 84,242 Other comprehensive income, net of tax: Unrealized gain (loss) on securities available for sale (1)- - - - 425 - - - - 425 ------- Comprehensive income 84,667 ------- Exercise of stock options - - 366 - - 5,319 - 82 (2,964) 2,355 Stock-based compensation - - - - - (948) - - - (948) Cash dividends on preferred stock - - - - - - (375) - - (375) Dividends paid in shares of common stock: Common stock - - 1,680 1 - 58,293 (57,585) 21 (744) (35) Preferred stock - - 23 - - 750 (750) - - - - ----------------------------------------------------------------------------------------------------------------------------------- Balances at June 30, 2003 250,000 $ 25 57,819 $ 4 $ 43,513 $538,468 $624,309 786 $ (21,129) $1,185,190 - ----------------------------------------------------------------------------------------------------------------------------------- Balances at December 31, 2003 250,000 $ 12 58,056 $ 4 $ 8,459 $ 546,594 $698,052 849 $ (24,491) $1,228,630 Comprehensive income: Net income - - - - - - 84,685 - - 84,685 Other comprehensive income, net of tax: Unrealized gain (loss) on securities available for sale(1) - - - - (56,423) - - - - (56,423) ---------- Comprehensive income 28,262 ---------- Exercise of stock options - - 290 - - 4,813 - 56 (2,362) 2,451 Conversion of preferred stock to common (13) - - - - - - - - - Tax benefit on exercise of stock options - - - - - 1,263 - - - 1,263 Stock-based compensation - - - - - (742) - - - (742) Cash dividends on preferred stock - - - - - - (750) - - (750) Dividends paid in shares of common stock: Common stock - - 1,749 - - 66,938 (65,938) 27 (1,039) (39) - ----------------------------------------------------------------------------------------------------------------------------------- Balances at June 30, 2004 249,987 $ 12 60,095 $ 4 $ (47,964) $ 618,866 $ 716,049 932 $(27,892) $1,259,075 - -----------------------------------------------------------------------------------------------------------------------------------
(1) June 30, 2004 June 30, 2003 ------------- ------------- Changes in other comprehensive income: Unrealized gains (losses) on available for sale securities $ (94,126) $ 20,896 Tax benefit (expense) on unrealized gains (losses) on available for sale securities 33,592 (7,537) Reclassification adjustment for (gains) losses realized and included in net income 6,728 (20,146) Reclassification adjustment for tax expense (benefit) on realized (gains) losses (2,617) 7,212 ---------------------------------- Net change in unrealized gains (losses) on securities $ (56,423) $ 425 ---------------------------------- See accompanying notes to consolidated financial statements. 27 - -------------------------------------------------------------------------------------------------------------------- Consolidated Statements of Cash Flows (Unaudited) (In Thousands) Six Months Ended June 30, -------------------------------------- 2004 2003 -------------------------------------- Cash Flows From Operating Activities: Net income $ 84,685 $ 84,242 Adjustments to reconcile net income to net cash provided by operating activities: Provision for loan losses 11,014 19,415 Recovery for mortgage servicing rights (7,162) (4,477) Unrealized losses from derivatives 12,894 2,928 Stock-based compensation 3,667 2,307 Tax benefit of stock option exercises 1,263 - Depreciation and amortization 25,376 15,521 Net amortization of financial instrument discounts and premiums (3,164) 5,195 Net (gain) loss on sale of assets 68 (42,982) Mortgage loans originated for resale (355,981) (730,423) Proceeds from sale of mortgage loans held for resale 371,224 738,096 Change in trading securities (7,310) (33,033) Change in accrued revenue receivable (1,442) 5,329 Change in other operating assets (22,502) (33,780) Change in accrued interest, taxes and expense (35,717) (8,727) Change in other liabilities 8,477 36,148 - ------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 85,390 55,759 - ------------------------------------------------------------------------------------------------------------ Cash Flows From Investing Activities: Proceeds from maturities of investment securities 39,696 30,865 Proceeds from maturities of available for sale securities 556,393 1,157,603 Purchases of investment securities (57,797) (25,201) Purchases of available for sale securities (2,188,475) (4,358,803) Proceeds from sales of available for sale securities 1,484,216 2,149,080 Loans originated or acquired net of principal collected (118,164) (197,927) Payments on derivative asset contracts (82,039) (27,285) Net change in other investment assets 4,525 (9,708) Proceeds from disposition of assets 59,250 80,957 Purchases of assets (16,897) (31,423) - ------------------------------------------------------------------------------------------------------------ Net cash used by investing activities (319,292) (1,231,842) - ------------------------------------------------------------------------------------------------------------ Cash Flows From Financing Activities: Net change in demand deposits, transaction deposits, money market deposits, and savings accounts 94,347 490,959 Net change in certificates of deposit 296,099 72,087 Net change in other borrowings (112,306) 125,479 Proceeds from derivative liability contracts 81,121 28,705 Net change in derivative margin accounts (32,072) (28,397) Change in amount due on unsettled security transactions (16,277) 589,982 Issuance of preferred, common and treasury stock, net 2,451 2,355 Payment of dividends (789) (410) - ------------------------------------------------------------------------------------------------------------ Net cash provided by financing activities 312,574 1,280,760 - ------------------------------------------------------------------------------------------------------------ Net change in cash and cash equivalents 78,672 104,677 Cash and cash equivalents at beginning of period 643,912 624,215 - ------------------------------------------------------------------------------------------------------------ Cash and cash equivalents at end of period $ 722,584 $ 728,892 - ------------------------------------------------------------------------------------------------------------ Cash paid for interest $ 87,400 $ 93,078 - ------------------------------------------------------------------------------------------------------------ Cash paid for taxes $ 44,586 $ 43,544 - ------------------------------------------------------------------------------------------------------------ Net loans transferred to repossessed real estate and other assets $ 2,219 $ 356 - ------------------------------------------------------------------------------------------------------------ Payment of dividends in common stock $ 65,899 $ 58,300 - ------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements. 28 Notes to Consolidated Financial Statements (Unaudited) (1) 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 period amounts have been reclassified to conform to current period classifications. (2) Mortgage Banking Activities At June 30, 2004, BOK Financial owned the rights to service 57,891 mortgage loans with outstanding principal balances of $4.6 billion, including $427 million serviced for BOK Financial. The weighted average interest rate and remaining term was 6.36% and 268 months, respectively. Activity in capitalized mortgage servicing rights and related valuation allowance during the six months ending June 30, 2004 is as follows (in thousands): Capitalized Mortgage Servicing Rights ----------------------------------------------------------------------------------------- Valuation Hedging Purchased Originated Total Allowance (Gain)/Loss Net ----------------------------------------------------------------------------------------- Balance at December 31, 2003 $ 22,380 $ 54,456 $ 76,836 $ (31,995) $ 3,709 $ 48,550 Additions, net - 6,255 6,255 - - 6,255 Amortization expense (2,843) (5,768) (8,611) - (356) (8,967) Write-off (4,044) (5,403) (9,447) 12,800 (3,353) - Recovery (provision) for impairment - - - 7,162 - 7,162 - ------------------------------------------------------------------------------------------------------------------------ Balance at June 30, 2004 $ 15,493 $ 49,540 $ 65,033 $ (12,033) $ - $ 53,000 - ------------------------------------------------------------------------------------------------------------------------ Estimated fair value of mortgage servicing rights (1) $ 11,971 $ 41,673 $ 53,644 - - $ 53,644 - ------------------------------------------------------------------------------------------------------------------------ (1) Excludes approximately $1.4 million of loan servicing rights on mortgage loans originated prior to the adoption of FAS 122.
Stratification of the mortgage loan servicing portfolio and outstanding principal of loans serviced by interest rate at June 30, 2004 follows (in thousands): < 5.51% 5.51% - 6.49% 6.50% - 7.49% => 7.50% Total Cost less accumulated amortization $ 14,275 $ 23,295 $ 20,785 $ 6,678 $ 65,033 - ---------------------------------------------------------------------------------------------------------------------- Fair value $ 13,053 $ 19,433 $ 15,876 $ 5,282 $ 53,644 - ---------------------------------------------------------------------------------------------------------------------- Impairment (2) $ 1,454 $ 3,864 $ 4,911 $ 1,804 $ 12,033 - ---------------------------------------------------------------------------------------------------------------------- Outstanding principal of loans serviced (1) $ 921,300 $1,336,320 $1,207,620 $ 426,060 $3,891,300 - ----------------------------------------------------------------------------------------------------------------------
(1) Excludes outstanding principal of $427 million for loans serviced for BOK Financial and $103 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. 29 (3) Disposal of Available for Sale Securities Sales of available for sale securities resulted in gains and losses as follows (in thousands): Six Months Ended June 30, ---------------------------------- 2004 2003 -------------- --------------- Proceeds $ 1,484,216 $ 2,149,080 Gross realized gains 5,123 21,178 Gross realized losses 11,851 1,032 Related federal and state income tax expense (benefit) (2,380) 7,212 (4) Employee Benefits BOK Financial sponsors a defined benefit Pension Plan for all employees who satisfy certain age and service requirements. The following table presents components of net periodic pension cost (dollars in thousands): Three Months Ended June 30, Six Months Ended June 30, -------------------------------------------------------------------- 2004 2003 2004 2003 -------------------------------------------------------------------- Service cost $ 1,563 $ 1,294 $ 3,240 $ 2,589 Interest cost 579 504 1,158 1,008 Expected return on plan assets (912) (740) (1,814) (1,479) Amortization of prior service cost 15 15 30 30 Amortization of net (gain) loss 265 204 530 409 - ------------------------------------------------------------------------------------------------------------- Net periodic pension cost $ 1,510 $ 1,277 $ 3,144 $ 2,557 - -------------------------------------------------------------------------------------------------------------
During the first quarter of 2004, the Company made Pension Plan contributions totaling $7.7 million, which funded the remaining maximum contribution for 2003 permitted under applicable regulations. During the second quarter of 2004, the Company made contributions totaling $1.0 million applicable to 2004. Management has been advised that no minimum contribution will be required for 2004. The maximum allowable contribution has not yet been determined. 30 (5) Earnings Per Share The following table presents the computation of basic and diluted earnings per share (dollars in thousands, except share data): Three Months Ended Six Months Ended ----------------------------------------------------- June 30, June 30, June 30, June 30, 2004 2003 (2) 2004 2003 (2) ----------------------------------------------------- Numerator: Net income $ 45,533 $ 40,775 $ 84,685 $ 84,242 Preferred stock dividends (375) (375) (750) (750) - --------------------------------------------------------------------------------------------------------------- Numerator for basic earnings per share - income available to common shareholders 45,158 40,400 83,935 83,492 - --------------------------------------------------------------------------------------------------------------- Effect of dilutive securities: Preferred stock dividends 375 375 750 750 - --------------------------------------------------------------------------------------------------------------- Numerator for diluted earnings per share - income available to common shareholders after assumed conversion $ 45,533 $ 40,775 $ 84,685 $ 84,242 - --------------------------------------------------------------------------------------------------------------- Denominator: Denominator for basic earnings per share - weighted average shares 59,146,624 58,647,952 59,098,913 58,587,197 Effect of dilutive securities: Employee stock compensation plans (1) 620,203 813,367 637,490 744,048 Convertible preferred stock 6,927,178 6,921,164 6,927,289 6,921,164 Tanglewood market value guarantee 25,729 124,003 25,074 182,377 - --------------------------------------------------------------------------------------------------------------- Dilutive potential common shares 7,573,110 7,858,534 7,589,853 7,847,589 - --------------------------------------------------------------------------------------------------------------- Denominator for diluted earnings per share - adjusted weighted average shares and assumed conversions 66,719,734 66,506,486 66,688,766 66,434,786 - --------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 0.76 $ 0.69 $ 1.42 $ 1.43 - --------------------------------------------------------------------------------------------------------------- Diluted earnings per share $ 0.68 $ 0.61 $ 1.27 $ 1.27 - ---------------------------------------------------------------------------------------------------------------
(1) Current market price was greater than exercise price on all employee stock options. (2) Restated for 3% dividend paid in common shares in May 2004. (6) Reportable Segments Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2004 is as follows (in thousands): Net Other Other Interest Operating Operating Net Average Revenue Revenue(1) Expense Income Assets ----------------------------------------------------------------------------- Total reportable segments $ 179,741 $ 157,769 $ 204,530 $ 70,948 $ 14,229,787 Unallocated items: Tax-equivalent adjustment 2,286 - - 2,286 - Funds management 31,722 (1,217) 4,153 11,194 1,519,548 All others (including eliminations), net (5,353) 60 6,757 257 (2,046,173) ----------------------------------------------------------------------------- BOK Financial consolidated $ 208,396 $ 156,612 $ 215,440 $ 84,685 $ 13,703,162 ============================================================================= (1) Excluding financial instruments gains/(losses).
31 Reportable segments reconciliation to the Consolidated Financial Statements for the six months ended June 30, 2003 is as follows (in thousands): Net Other Other Interest Operating Operating Net Average Revenue Revenue(1) Expense Income Assets ----------------------------------------------------------------------------- Total reportable segments $ 165,547 $ 157,670 $ 201,335 $ 72,322 $ 12,846,056 Unallocated items: Tax-equivalent adjustment 2,730 - - 2,730 - Funds management 33,660 (4,949) 5,002 11,661 1,205,862 All others (including eliminations), net (8,179) (1,947) 5,362 (2,471) (1,584,594) ----------------------------------------------------------------------------- BOK Financial consolidated $ 193,758 $ 150,774 $ 211,699 $ 84,242 $ 12,467,324 ============================================================================= (1) Excluding financial instruments gains/(losses).
(7) Contingent Liabilities In the ordinary course of business, BOK Financial and its subsidiaries are subject to legal actions and complaints. Management believes, based upon the opinion of counsel, that the actions and liability or loss, if any, resulting from the final outcomes of the proceedings, will not be material in the aggregate. (8) 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. As of June 30, 2004, outstanding commitments and letters of credit were as follows (in thousands): June 30, 2004 -------------- Commitments to extend credit $ 3,087,349 Standby letters of credit 539,427 Commercial letters of credit 5,139 Commitments to purchase securities 26,802 32 - ------------------------------------------------------------------------------------------------------------------------------ Six Month Financial Summary - Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands, Except Per Share Data) Six Months Ended ------------------------------------------------------------------------------------ June 30, 2004 June 30, 2003 ----------------------------------------- -------------------------------------- Average Revenue/ Yield Average Revenue/ Yield Balance Expense(1) /Rate Balance Expense(1) /Rate ------------------------------------------------------------------------------------ Assets Taxable securities (3) $ 4,631,025 $ 96,837 4.22% $ 4,221,462 $ 92,045 4.46% Tax-exempt securities (3) 197,094 5,770 5.89 191,872 6,566 6.90 - ------------------------------------------------------------------------------------------------------------------------------ Total securities (3) 4,828,119 102,607 4.29 4,413,334 98,611 4.57 - ------------------------------------------------------------------------------------------------------------------------------ Trading securities 19,506 445 4.59 11,280 252 4.51 Funds sold and resell agreements 12,140 92 1.52 22,996 165 1.45 Loans (2) 7,521,485 192,497 5.15 6,960,069 187,188 5.42 Less reserve for loan losses 131,902 - - 121,536 - - - ------------------------------------------------------------------------------------------------------------------------------ Loans, net of reserve 7,389,583 192,497 5.24 6,838,533 187,188 5.52 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets (3) 12,249,348 295,641 4.86 11,286,143 286,216 5.14 - ------------------------------------------------------------------------------------------------------------------------------ Cash and other assets 1,453,814 1,181,181 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 13,703,162 $ 12,467,324 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities And Shareholders' Equity Transaction deposits $ 3,839,843 15,458 0.81% $ 3,407,053 16,769 0.99% Savings deposits 174,262 478 0.55 170,504 489 0.58 Time deposits 3,480,555 49,236 2.84 3,445,686 50,682 2.97 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 7,494,660 65,172 1.75 7,023,243 67,940 1.95 - ------------------------------------------------------------------------------------------------------------------------------ Funds purchased and repurchase agreements 1,620,822 7,695 0.95 1,468,451 8,103 1.11 Other borrowings 1,010,143 7,389 1.47 1,056,372 8,845 1.69 Subordinated debentures 153,487 4,703 6.16 155,190 4,840 6.29 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 10,279,112 84,959 1.66 9,703,256 89,728 1.86 - ------------------------------------------------------------------------------------------------------------------------------ Demand deposits 1,721,443 1,271,966 Other liabilities 439,619 352,431 Shareholders' equity 1,262,988 1,139,671 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 13,703,162 $ 12,467,324 - ------------------------------------------------------------------------------------------------------------------------------ Tax-Equivalent Net Interest Revenue (3) 210,682 3.20% 196,488 3.28% Tax-Equivalent Net Interest Revenue To Earning Assets (3) 3.46 3.53 Less tax-equivalent adjustment (1) 2,286 2,730 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Revenue 208,396 193,758 Provision for loan losses 11,014 19,415 Other operating revenue 149,090 168,513 Other operating expense 215,440 211,699 - ------------------------------------------------------------------------------------------------------------------------------ Income Before Taxes 131,032 131,157 Federal and state income tax 46,347 46,915 - ------------------------------------------------------------------------------------------------------------------------------ Net Income $ 84,685 $ 84,242 - ------------------------------------------------------------------------------------------------------------------------------ Earnings Per Share: Net Income Basic $ 1.42 $ 1.43 - ------------------------------------------------------------------------------------------------------------------------------ Diluted $ 1.27 $ 1.27 - ------------------------------------------------------------------------------------------------------------------------------ (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. (3) Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income.
33 - ------------------------------------------------------------------------------------------------------------------------------ Quarterly Financial Summary - Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands, Except Per Share Data) Three Months Ended ------------------------------------------------------------------------------------- June 30, 2004 March 31, 2004 ------------------------------------------ ------------------------------------- Average Revenue/ Yield Average Revenue/ Yield Balance Expense(1) /Rate Balance Expense(1) /Rate ------------------------------------------------------------------------------------- Assets Taxable securities (3) $ 4,667,360 $ 49,321 4.24% $ 4,594,690 $ 47,516 4.22% Tax-exempt securities (3) 200,380 2,884 5.79 193,808 2,886 5.99 - ------------------------------------------------------------------------------------------------------------------------------ Total securities (3) 4,867,740 52,205 4.30 4,788,498 50,402 4.29 - ------------------------------------------------------------------------------------------------------------------------------ Trading securities 23,513 219 3.75 15,499 226 5.86 Funds sold and resell agreements 16,284 53 1.31 7,995 39 1.96 Loans (2) 7,548,257 95,961 5.11 7,494,713 96,536 5.18 Less reserve for loan losses 131,310 - - 132,494 - - - ------------------------------------------------------------------------------------------------------------------------------ Loans, net of reserve 7,416,947 95,961 5.20 7,362,219 96,536 5.27 - ------------------------------------------------------------------------------------------------------------------------------ Total earning assets (3) 12,324,484 148,438 4.84 12,174,211 147,203 4.89 - ------------------------------------------------------------------------------------------------------------------------------ Cash and other assets 1,529,841 1,357,791 - ------------------------------------------------------------------------------------------------------------------------------ Total assets $ 13,854,325 $ 13,532,002 - ------------------------------------------------------------------------------------------------------------------------------ Liabilities And Shareholders' Equity Transaction deposits $ 3,859,706 $ 7,875 0.82% $ 3,819,981 $ 7,583 0.80% Savings deposits 173,566 235 0.54 174,958 243 0.56 Time deposits 3,565,324 24,576 2.77 3,395,785 24,660 2.92 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing deposits 7,598,596 32,686 1.73 7,390,724 32,486 1.77 - ------------------------------------------------------------------------------------------------------------------------------ Funds purchased and repurchase agreements 1,565,922 3,731 0.96 1,675,722 3,964 0.95 Other borrowings 1,009,871 3,376 1.34 1,010,414 4,013 1.60 Subordinated debentures 152,799 2,367 6.23 154,175 2,336 6.09 - ------------------------------------------------------------------------------------------------------------------------------ Total interest-bearing liabilities 10,327,188 42,160 1.64 10,231,035 42,799 1.68 - ------------------------------------------------------------------------------------------------------------------------------ Demand deposits 1,799,249 1,643,638 Other liabilities 452,780 406,461 Shareholders' equity 1,275,108 1,250,868 - ------------------------------------------------------------------------------------------------------------------------------ Total liabilities and shareholders' equity $ 13,854,325 $ 13,532,002 - ------------------------------------------------------------------------------------------------------------------------------ Tax-Equivalent Net Interest Revenue (3) $ 106,278 3.20% $ 104,404 3.21% Tax-Equivalent Net Interest Revenue To Earning Assets (3) 3.46 3.47 Less tax-equivalent adjustment (1) 1,089 1,197 - ------------------------------------------------------------------------------------------------------------------------------ Net Interest Revenue 105,189 103,207 Provision for loan losses 3,987 7,027 Other operating revenue 69,270 79,820 Other operating expense 98,992 116,448 - ------------------------------------------------------------------------------------------------------------------------------ Income Before Taxes 71,480 59,552 Federal and state income tax 25,947 20,400 - ------------------------------------------------------------------------------------------------------------------------------ Net Income $ 45,533 $ 39,152 - ------------------------------------------------------------------------------------------------------------------------------ Earnings Per Share: Net income: Basic $ 0.76 $ 0.66 - ------------------------------------------------------------------------------------------------------------------------------ Diluted $ 0.68 $ 0.59 - ------------------------------------------------------------------------------------------------------------------------------ (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. (3) Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income.
34 - ------------------------------------------------------------------------------------------------------------------------- Three Months Ended - ------------------------------------------------------------------------------------------------------------------------- December 31, 2003 September 30, 2003 June 30, 2003 - ------------------------------------------------------------------------------------------------------------------------- Average Revenue/ Yield Average Revenue/ Yield Average Revenue/ Yield Balance Expense(1) /Rate Balance Expense(1) /Rate Balance Expense(1) /Rate - ------------------------------------------------------------------------------------------------------------------------- $ 4,421,278 $ 45,838 4.08% $ 4,360,340 $ 42,698 3.86% $ 4,388,733 $ 46,911 4.30% 189,829 2,958 6.19 186,827 3,003 6.38 185,908 3,179 6.86 - ------------------------------------------------------------------------------------------------------------------------- 4,611,107 48,796 4.17 4,547,167 45,701 3.96 4,574,641 50,090 4.41 - ------------------------------------------------------------------------------------------------------------------------- 17,325 147 3.37 27,830 295 4.21 12,207 136 4.47 26,730 65 0.96 32,491 51 0.62 16,669 59 1.42 7,359,126 96,059 5.18 7,122,211 93,013 5.18 6,970,905 92,576 5.33 129,445 - - 125,966 - - 123,095 - - - ------------------------------------------------------------------------------------------------------------------------- 7,229,681 96,059 5.27 6,996,245 93,013 5.27 6,847,810 92,576 5.42 - ------------------------------------------------------------------------------------------------------------------------- 11,884,843 145,067 4.83 11,603,733 139,060 4.74 11,451,327 142,861 5.01 - ------------------------------------------------------------------------------------------------------------------------- 1,342,042 1,252,896 1,207,690 - ------------------------------------------------------------------------------------------------------------------------- $ 13,226,885 $ 12,856,629 $ 12,659,017 - ------------------------------------------------------------------------------------------------------------------------- $ 3,886,546 $ 7,377 0.75% $ 3,715,035 $ 7,200 0.77% $ 3,523,932 $ 7,992 0.91% 179,867 255 0.56 170,796 200 0.46 172,258 183 0.43 3,442,358 25,094 2.89 3,423,920 23,863 2.77 3,491,055 24,688 2.84 - ------------------------------------------------------------------------------------------------------------------------- 7,508,771 32,726 1.73 7,309,751 31,263 1.70 7,187,245 32,863 1.83 - ------------------------------------------------------------------------------------------------------------------------- 1,679,540 3,921 0.93 1,529,721 3,566 0.92 1,515,597 4,080 1.08 1,031,414 3,815 1.47 1,062,734 4,022 1.50 1,053,573 4,234 1.61 154,524 2,216 5.69 154,865 2,421 6.20 155,078 2,420 6.26 - ------------------------------------------------------------------------------------------------------------------------- 10,374,249 42,678 1.63 10,057,071 41,272 1.63 9,911,493 43,597 1.76 - ------------------------------------------------------------------------------------------------------------------------- 1,370,088 1,323,641 1,252,076 284,432 314,583 332,430 1,198,116 1,161,334 1,163,018 - ------------------------------------------------------------------------------------------------------------------------- $ 13,226,885 $ 12,856,629 $ 12,659,017 - ------------------------------------------------------------------------------------------------------------------------- $ 102,389 3.20% $ 97,788 3.11% $ 99,264 3.25% 3.41 3.34 3.48 1,184 1,256 1,327 - ------------------------------------------------------------------------------------------------------------------------- 101,205 96,532 97,937 8,001 8,220 9,503 71,051 63,428 87,282 108,746 91,132 112,234 - ------------------------------------------------------------------------------------------------------------------------- 55,509 60,608 63,482 20,207 21,792 22,707 - ------------------------------------------------------------------------------------------------------------------------- $ 35,302 $ 38,816 $ 40,775 - ------------------------------------------------------------------------------------------------------------------------- $ 0.59 $ 0.65 $ 0.69 - ------------------------------------------------------------------------------------------------------------------------- $ 0.53 $ 0.58 $ 0.61 - -------------------------------------------------------------------------------------------------------------------------
35 PART II. Other Information Item 2. Changes in Securities and Use of Proceeds The following table provides information with respect to purchases made by or on behalf of the Company or any "affiliated purchaser" (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934), of the Company's common stock during the three months ended June 30, 2004. - -------------------------------------------------------------------------------------------------------------------- Total Number of Average Price Total Number of Shares Purchased as Maximum Number of Shares Shares Paid per Part of Publicly Announced Plans or that May Yet Be Purchased Period Purchased (2) Share Programs (1) Under the Plans - ------------------- ----------------- --------------- ------------------------------------- ---------------------------- April 1, 2004 to 21,806 $ 40.62 - 191,058 April 30, 2004 - ------------------- ----------------- --------------- ------------------------------------- ---------------------------- May 1, 2004 to 444 $ 37.67 - 191,058 May 31, 2004 - ------------------- ----------------- --------------- ------------------------------------- ---------------------------- June 1, 2004 to 787 $ 38.74 - 191,058 June 30, 2004 - ------------------- ----------------- --------------- ------------------------------------- ---------------------------- Total 23,037 - - ------------------- ----------------- --------------- ------------------------------------- ---------------------------- (1) The Company has a stock repurchase plan that was initially authorized by the Company's board of directors on February 24, 1998 and amended on May 25, 1999. Under the terms of the plan, the Company may repurchase up to 800,000 shares of its common stock. To date, the Company has repurchased 608,942 shares under this plan. (2) The Company routinely repurchases mature shares from employees to cover the exercise price and taxes in connection with employee stock option exercises.
36 Item 4. Submission of Matters to a Vote of Security Holders Our Annual Meeting of Shareholders was held on April 27, 2004 (the "Annual Meeting"). At the Annual Meeting, shareholders voted on one matter: (i) to fix the number of directors to be elected at nineteen (19) and to elect nineteen (19) persons as directors for a term of one year or until their successors have been elected and qualified. The shareholders elected management's nominees as directors in an uncontested election by the following votes, respectively: (i) Election of nineteen (19) directors for a term of one year: Votes Withheld/ Votes For Against ----------------- ----------------- C. Fred Ball, Jr. 52,345,307 2,527,219 Sharon J. Bell 54,735,147 137,379 Joseph E. Cappy 54,868,151 4,375 Luke R. Corbett 54,868,177 4,349 William E. Durrett 54,737,217 135,309 Robert G. Greer 52,349,665 2,522,861 David F. Griffin 54,866,437 6,089 V. Burns Hargis 52,347,225 2,525,301 E. Carey Joullian IV 54,274,096 598,430 George B. Kaiser 51,790,319 3,082,207 Judith Z. Kishner 54,859,455 13,071 David L. Kyle 51,415,452 3,457,074 Robert J. LaFortune 54,276,593 595,933 Stanley A. Lybarger 51,788,615 3,083,911 Steven J. Malcolm 54,866,090 6,436 Paula Marshall-Chapman 54,865,855 6,671 Steven E. Moore 51,748,844 3,123,682 James A. Robinson 52,291,570 2,580,956 L. Francis Rooney, III 54,864,919 7,607 Item 6. Exhibits and Reports on Form 8-K (A) Exhibits: 31.1 Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 31.2 Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 32 Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (B) Reports on Form 8-K: On April 28, 2004, a report on Form 8-K was filed reporting under Item 5 the announcement that BOK Financial Corporation issued a press release on April 27, 2004 announcing its financial results for the first quarter ended March 31, 2004. Items 1, 3, and 5 are not applicable and have been omitted. 37 Signatures Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. BOK FINANCIAL CORPORATION -------------------------------- (Registrant) Date: August 9, 2004 /s/ Steven E. Nell ------------------------ -------------------------------- Steven E. Nell Executive Vice President and Chief Financial Officer /s/ John C. Morrow -------------------------------- John C. Morrow Senior Vice President and Director of Financial Accounting & Reporting EX-99 2 certificationceo.txt SECTION 302 CERTIFICATIONS - CEO Exhibit 31.1 CERTIFICATION OF CHIEF EXECUTIVE OFFICER I, Stanley A. Lybarger, President and Chief Executive Officer of BOK Financial Corporation ("BOK Financial"), certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of BOK Financial; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 9, 2004 /s/ Stanley A. Lybarger - ---------------------------------- Stanley A. Lybarger President Chief Executive Officer BOK Financial Corporation EX-99 3 certificationcfo.txt SECTION 302 CERTIFICATIONS - CFO Exhibit 31.2 CERTIFICATION OF CHIEF FINANCIAL OFFICER I, Steven E. Nell, Executive Vice President and Chief Financial Officer of BOK Financial Corporation ("BOK Financial"), certify that: 1. I have reviewed this Quarterly Report on Form 10-Q of BOK Financial; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the registrant and have: (a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; (b) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and (c) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions): (a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and (b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. Date: August 9, 2004 /s/ Steven E. Nell - -------------------------------- Steven E. Nell Executive Vice President Chief Financial Officer BOK Financial Corporation EX-99 4 certificationsboth.txt SECTION 906 CERTIFICATIONS Exhibit 32 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of BOK Financial Corporation ("BOK Financial") on Form 10-Q for the fiscal period ending June 30, 2004 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), we, Stanley A. Lybarger and Steven E. Nell, Chief Executive Officer and Chief Financial Officer, respectively, of BOK Financial, certify, pursuant to 18 U.S.C. ss. 1350, as adopted pursuant to ss. 906 of the Sarbanes-Oxley Act of 2002, that to our knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of BOK Financial. August 9, 2004 /s/ Stanley A. Lybarger - ------------------------------- Stanley A. Lybarger President Chief Executive Officer BOK Financial Corporation /s/ Steven E. Nell - ------------------------------- Steven E. Nell Executive Vice President Chief Financial Officer BOK Financial Corporation -----END PRIVACY-ENHANCED MESSAGE-----