BOK Financial
Annual Report 2003

Plain-text annual report

Building On A Successful Past, Positioning For A Successful Future BOK FINANCIAL BOK FINANCIAL VOLUME 13, ISSUE 2003 PLUSPLUS IN THE LONG RUN- How An Extended Outlook Guides BOKF’s Strategy AIMING FOR PERFECTION- Customer Focus Spells Success G-R-O-W-T-H NEW HORIZONS- A Winning Strategy For Regional Banking Expansion www.bokf.com BOK FINANCIAL 2003 MANAGEMENT LETTER Building on a Successful Past. Positioning for a Successful Future. The theme of this year’s annual report appropriately sums up our plans to keep building on the accomplishments of the past 13 years. As we celebrate the past—including a continuation of record earnings in 2003— we look forward to new opportunities and have already taken steps to better position ourselves to meet the challenges ahead. Since 1991, we have consistently built on our non-interest lines of business in order to maintain balance and ensure success through economic cycles. This strategy continued to pay off in 2003, when loan growth slowed in a soft economy. Our 2003 net income was $158.4 million, or $2.45 per share, compared with $147.9 million, or $2.37 per share, the previous year. It was the 13th consecutive year of growth and was strongly supported by a 19 percent increase in fees and commissions from mortgage banking, trust, brokerage and trading, and deposit services. The right balance among these businesses also helped support earnings when the mortgage refinancing boom ended late in the year. Even in a sluggish economy, loans grew 8 percent, and signs indicate that things are picking up in our markets in early 2004. We experienced solid loan growth in Houston and Denver, where we acquired Colorado State Bank and Trust. This honored institution should provide a strong platform for further growth in the Mile High City. We also saw deposit growth of $1.1 billion over the course of the year. We continued to pave the way for additional success by upgrading our technology base and restructuring management. Our Operations and Technology staff undertook the most demanding technical project in company history with the conversion to a new core processing system. This new system provides a more efficient and effective platform for future growth, giving us the ability to bring new products and services to market more quickly. To augment an already strong management group, we appointed three officers to the newly created posts of senior executive vice president. Dan Ellinor came aboard to assume leadership of the Oklahoma commercial banking group while Jeff Pickryl moved to Dallas to manage regional banking operations. Steve Bradshaw now heads up the corporate-wide Consumer and Wealth Management Division. Our longtime friend and chief credit officer, Gene Harris, is retiring in 2004 after helping us establish consistent credit standards and build a quality loan portfolio. We thank Gene and welcome Chuck Cotter as the new chief credit officer. With this transition, we will continue to ensure prudent credit administration that has helped establish sound loan quality. On the following pages of this report, executives in their own words provide a glimpse into our company, our results and our goals. As always, we will continue to value our people, our customers and the communities we serve while working to generate optimal long-term returns for our shareholders. With this in mind, we celebrate our first 13 years of growth with an eye on positioning ourselves to ensure continued success, both now and into the future. George Kaiser chairman How does BOK Financial make decisions? There is no principle more emphasized in our organization than managing for long-term value rather than short-term results. We evaluate all decisions based on discounted cash flow present value or rate of return rather than short- term accounting results. Our officers all own significant amounts of stock and have compensation that is more performance based than tenure based. When shareholders do well, they do well, so we all think like shareholders because the board and officers are collectively the majority shareholders of the company. Describe the corporate culture at BOKF. The CEO, rather than the board chair, has primary influence on the corporate culture and the attitudes of key personnel. Stan Lybarger has a strong entrepreneurial bent and understands what is necessary to encourage innovative approaches to business problem solving and aggressive pursuit of opportunities. Through incentive plans, hiring practices, personal brainstorming and repeated emphasis on maximizing long-term enterprise and shareholder value in all decisions, he, and, to a lesser extent, I, lead by example. New products, services and market positioning decisions that reflect that approach would include our acquisition strategies and tactics. It would also include our new business solicitation techniques and several new services, such as energy, foreign currency and interest rate derivatives and other narrowly targeted investment banking products, as well as our methods of previewing entry into new markets and our nationally competitive 401(k) and TransFund services. B O K F I N A N C I A L 2 0 0 3 A N N U A L R E P O R T What are your long-term expectations for the company? The large national banks continue to evacuate the market sector occupied by most of American business and make individual banking more impersonal. Community banks do a wonderful job of filling that vacuum but many customers outgrow the credit limits or product sophistication of community banks. We see a long-term future for BOKF in providing major national bank services but delivering them in a responsive, community bank style. What are your plans for your ownership stake? I have no intention of selling my stock. I have committed all of it over time to my charitable foundations. There is no financial reason for me or for the trustees of those foundations to cause a sale of the company so long as it is competently fulfilling its mission and growing in per share value faster than a potential acquirer. Discuss the company position on paying a dividend. To this point, we have been able to use our capital intelligently in building our business and thereby earn a greater return for the shareholders than they could earn after paying a tax on a dividend distribution. If we should become over-capitalized in comparison with our attractive business opportunities, we would reconsider the appropriateness of paying cash dividends. In the meantime, we plan to continue to declare stock dividends. The reduction in the dividend tax certainly makes the payment of a cash dividend a closer question. VISION “There is no principle more emphasized in our organization than managing for long-term value rather than short-term results.” Stan Lybarger president and chief executive officer T R O P E R L A U N N A 3 0 0 2 L A I C N A N I F K O B What has been the foundation of BOKF’s success? Our success has resulted from our ability to attract and retain talented people and create and maintain an environment that encourages creativity, teamwork and an entrepreneurial spirit. We manage for continuous improvement, striving to enhance our capabilities and performance in every line of business in every market we serve. We emphasize highly responsive personal customer service at a level no longer available from the large national banks. These characteristics, coupled with a proven strategy of expansion in rapidly growing metropolitan areas in our region, have produced a superior track record of growth and returns for our investors. How did this contribute to earnings for 2003 in a soft economic environment? The balance we have been able to achieve in our revenue streams was a key ingredient in our success in 2003. With much lower loan demand and compressed margins, this past year was particularly challenging for the industry. Our success was largely based on our 19 percent growth in fee revenues led by growth in deposit service charges and growth in brokerage, mortgage banking and trust revenues. Loan growth of 8 percent, while much slower than the 16 percent we have averaged for the past five years, was materially better than the industry as a whole. Core deposit growth of 15 percent remained strong. What is your strategy for acquisitions? We have pursued acquisitions to gain access and a competitive presence in rapidly growing markets in our region. We target quality organizations that have demonstrated solid growth in their lines of business. Rather than focusing on adding dots to a map, we look for opportunities to enhance the company and propel future growth in earnings per share and shareholder value. What are your financial objectives? We are targeting long-term EPS growth in the upper quartile of our peer group. For the past five years, our EPS growth has averaged 13 percent, well ahead of our peer group, which averaged 11 percent for the same time period. Our return on equity has averaged 15 percent for the same time period. These results have translated to our stock price as it has appreciated 92 percent over the last five years, versus a decline in most major stock indices over the same period. Discuss the attention BOKF is getting nationally. We focus on building a track record of superior performance. Only in the past few years have we actively sought more visibility at analysts’ conferences and by visiting prospective institutional investors. The recognition from the business media and analysts has been gratifying. In 2003, Forbes listed us among the top 500 companies ranked by a composite of sales, assets, profits and market value, and Investor’s Business Daily named us among the 70 most stable companies for U.S. investors. BOK Financial was also among 12 companies recognized on the Honor Roll compiled by investment banking firm Keefe, Bruyette & Woods. RESULTS “Our success has resulted from our ability to attract and retain talented people and create and maintain an environment that encourages creativity, teamwork and an entrepreneurial spirit.” B O K F I N A N C I A L 2 0 0 3 A N N U A L R E P O R T Steve Bradshaw senior executive vice president consumer banking and wealth management What were the key factors for Consumer Banking’s strong performance in 2003? We gained momentum by focusing the last three years on growing our checking base. Combining net interest revenue and fees, checking generates 76 percent of consumer banking revenue. Since introducing free checking in January 2001, checking accounts—excluding our Houston acquisition in 2001and Denver in 2003—grew 55 percent, or by a compound annual growth rate of 24 percent, to 258,627 at the end of 2003. Checking related fees grew 81 percent—with a compound annual growth rate of 35 percent—over the same period. In 2004, we will continue to expand our successful strategies for attracting accounts, with an increased focus on improving checking account retention. Boosting online banking capabilities and introducing free BillPay are key strategies. Explain the “Perfect Banking” strategy. We believe our profit growth results from a sustained strategy of giving clients the best possible experience each and every time. In the fall of 2001, we introduced a breakthrough sales and service process we call Perfect Banking. Its core principle is creating a perfect client experience with each interaction, whether in our branches, through our 24 hour contact center—ExpressBank—or via online banking. Perfect Banking defines key activities that we believe result in an experience that will compel clients to bring additional business and referrals to our bank. This includes a client profiling and contact methodology that allows us to provide a level of professional advice and counsel not found in other retail banks. And we have implemented comprehensive training, coaching, and reward and recognition programs that prepare and motivate our staff to constantly improve results. In the past two years, sales have improved 29 percent based on a compound annual growth rate, and client satisfaction has remained high at 95 percent. As one key fee-based line of business, how did brokerage and trading contribute to the company’s success in 2003? This was a record-setting year, generating almost $39 million in revenue, up 58 percent over 2002. The revenue mix is diverse with significant contributions from retail and institutional sales and investment banking. According to the Fixed Income Clearing Corp., we ranked 23rd nationally in mortgage-backed securities volume. Investment banking revenue also jumped significantly in 2003. How does Wealth Management and its fee-based business lines contribute? In Wealth Management, we manage over $20 billion in assets and have grown through national product innovation and integration with our commercial bank. Our Private Financial Services (PFS) group has focused on a team approach to serving affluent individuals and business owners. BOK Financial has also added investment management staff, including portfolio managers. We have also recently introduced our own private equity offering. In 2004, we are focusing on consolidating our trust, investment management and affluent market brokerage sales groups into a single investment advisor approach. Clients will then have a unified source for investment expertise and full access to all investment products available in the market. We are also expanding PFS in Houston, Dallas and Denver and integrating the Trust group from Colorado State Bank and Trust. GROWTH “We believe our profit growth results from a sustained strategy of giving clients the best possible experience each and every time.” Dan Ellinor senior executive vice president commercial banking - oklahoma/arkansas T R O P E R L A U N N A 3 0 0 2 L A I C N A N I F K O B Since joining BOKF last fall, how do you assess the company compared with the competition? Each company I have worked for in my 22-year career has had a unique brand identity, a defined strategy and a history of growth. BOKF is no different. But our company excels and distances itself from its competitors in how we live out our brand with our customers, how we execute strategies for the benefit of our customers and shareholders, and in the reliability of our core earnings—through all economic cycles. Every decision we make has the customer at the center, and we remain very nimble so we can react opportunistically. We have a solid earnings stream that has diversification, resiliency and growth potential without placing undue risk on the business model. What perspectives do you bring that will benefit BOKF? I have seen how poorly managed corporate growth can be detrimental to customer service, product development, delivery, retention of top talent and creation of shareholder value—which is a losing strategy. We have a winning growth strategy at BOKF, and we intend to bring all our constituents with us along the way—customers, employees and our shareholders. What were the key success factors for Oklahoma commercial banking in 2003? Despite a sluggish economy in 2003, we had positive loan growth, improved loan quality and strong growth in our fee- based businesses. This and double-digit deposit growth helped us maintain our strong earnings momentum in our Oklahoma and Arkansas commercial banking franchise. How do you maintain growth in fee-based lines? Treasury Management and our EFT network, TransFund, are our strongest commercial fee-based business lines, and we are positioned to enjoy continued growth. With Treasury Management, the strategy is simple—we’ll aggressively provide treasury solutions to our expanding commercial customer base with solid technology backing the delivery channel and at a cost that is economically sound to both the bank and our clients. We are making additional investments in the product line that are enhancing basic functionality and positioning the bank for the imaging revolution. Our strategy for TransFund is to continue to deepen existing customer relationships where we play a key role in their operations, and continue to expand the customer base through our proven sales process. How can you keep growing Oklahoma market share? As in our other franchise states, Oklahoma’s competitive landscape is crowded. Compounding this is a statewide growth rate below the national average. But while we enjoy significant market share, there is still big upside for us. We have been successful in Oklahoma because we are part of the fabric of our communities, we have extraordinary bankers who truly care for our customers, and we provide banking solutions that are second-to-none. This is a winning strategy and is particularly appealing to customers in the middle market and small business sectors. We will continue to build on our strong service-oriented sales strategy and grow market share in Oklahoma. PERFORMANCE “Our company excels and distances itself from its competitors in how we live out our brand with our customers, how we execute strategies for the benefit of our customers and shareholders, and in the reliability of our core earnings— through all economic cycles.” Jeff Pickryl senior executive vice president commercial banking - regional banks Why did you decide to move to Dallas to manage regional banks? I believe the future success of our company depends greatly on effective expansion and growth, particularly where we can leverage our geographic strength and infrastructure. Clearly, the Dallas, Houston and Denver markets are deep and broad in both consumer and commercial opportunities. There is substantial market share to gain in these markets. There are also avenues for us to expand in the New Mexico market. Moving to Dallas has given me the opportunity to manage our expansion and help create a strong future for our regional banks. Discuss returns in regional banking. Lines of business such as energy, real estate and mortgage are BOKF stalwarts and have delivered spectacular returns. We are very proud of their ongoing success. There is no doubt that our regional banks will also deliver great financial returns. Those banks are in high-growth markets where we are newly established. We initially invest to hire talent, set up banking locations and provide incentives to help us expand and gain market share. We also charge our regional banks for the capital they need to support their existing business and for the investment premium we paid through acquiring these banks. We expect revenue growth and strong returns on the entire investment made in the expansion markets. B O K F I N A N C I A L 2 0 0 3 A N N U A L R E P O R T How does BOKF differentiate itself in these markets where it is still gaining brand recognition? We have been able to stand out in our markets by promoting our “big bank” products, services and lending capacity combined with the community bank delivery strategy. A key component of our market strategy is to ensure that we have the most highly qualified and talented relationship managers in the marketplace. We also concentrate on serving a market segment, such as the commercial middle market, that is not optimally served by the large national banks or by the smaller community banks. Furthermore, our technology, infrastructure and dedication to service allow us to be flexible in how we structure credit facilities and other transactions. We’ve executed this strategy through every one of our acquisitions with great results, including our most recent acquisition in Denver. Discuss the process of expansion into new markets. We take a three-pronged approach. First is a scouting phase in which we study the market, market potential and alternative means of entry. If we decide that our brand of banking would be a good fit, we may enter phase two by establishing a loan production office (LPO). The LPO usually focuses on energy or real estate. In the third phase, we make an acquisition to gain a full-service banking presence and introduce our wide array of products and services. What are the current regional banking goals? We want to increase market share in Dallas and Houston, establish a market presence and build a reputation in Denver, and continue to expand our presence in New Mexico. We’re increasingly active in Phoenix and plan to establish an LPO there in 2004. EXPANSION “Clearly, the Dallas, Houston and Denver markets are deep and broad in both consumer and commercial opportunities. There is substantial market share to gain in these markets.” Gene Harris executive vice president chief credit officer T R O P E R L A U N N A 3 0 0 2 L A I C N A N I F K O B BOKF has enjoyed credit quality that is ahead of peer banks. Assess credit quality at BOKF. Charge-offs have remained well within industry standards and we’re right on target with our expectations. We should see continued improvement in credit quality this year. In terms of 2003, it was a challenging year dealing with the results of the recession. As cycles occur, we expect those events to take time to show up in the portfolio, and we deal with them. In fact, we really don’t see any unusual problems for our portfolio. For the more cyclical businesses, we give our borrowers the opportunity to utilize derivatives and hedging to protect themselves. Many of these borrowers take advantage of that, so the impact of a significant event in the marketplace will be lessened as a result. How are credit standards applied at BOKF? We have a loan policy with consistent credit standards and everybody operates under the same policy. Credit concurrence officers administer the policy and apply it consistently in every geographic area. We also have a centralized loan review function, monthly reporting, quarterly asset quality reviews, regular meetings and constant communications. These processes ensure consistent risk grading throughout the organization. For those unfamiliar with BOKF, explain the concentration of energy loans. Oil and gas production is prevalent in the region. We have superior people and excellent underwriting standards. We underwrite for the cycles and, as a result, we can handle $7 gas and $3 gas, $32 oil and $20 oil. The use of derivatives has helped smooth out the cycles because the biggest risk on energy lending in the past was the cyclical nature of prices. With the economy beginning to show signs of improvement, do you plan to change credit standards? No, we don’t plan on changing our credit standards because our standards remain consistent through all cycles. We have always stressed the importance of maintaining reliable standards and we’ll continue the emphasis. The same prudent underwriting policies applied year after year mean that our customers and our account officers know what we’re willing to do and they can make the appropriate decisions accordingly. Gene, after 23 years with BOKF, you are retiring this year. Discuss the succession plan for chief credit officer. Throughout my career here, we have worked to establish and maintain consistent credit standards that have enabled us to establish a quality loan portfolio. After I retire, that focus will continue when Chuck Cotter becomes chief credit officer and manager of the Credit Administration Division. Chuck has been a part of the organization for 25 years and will continue to ensure that credit quality remains high. CONSISTENCY “The same prudent underwriting policies applied year after year mean that our customers and our account officers know what we’re willing to do and they can make the appropriate decisions accordingly.” Mike Elvir executive vice president operations and technology No one relishes a major core processing systems conversion, but you spent 2003 introducing one. This was the largest, most complex effort ever undertaken by this company. It’s important to understand that it was not just an Information Technology project, but one that involved hundreds of people from every area of the company for 18 months. We had reached a point with our previous system where our ability to grow and aggressively offer new services was being restricted by its architecture. With our new IT platform, we have numerous opportunities to take advantage of current and future technologies that advance our service offerings on behalf of our customers while allowing for growth opportunities. Our services can be expanded while costs are less impacted by transaction volume. How do you assess the upgrade? It occurred within the time frame we had originally projected, it was done within cost estimates and took place with limited customer impact. Our staff worked long and hard to correct issues that surfaced after conversion and to improve their skills on the new system as quickly as possible. There was never a time when the daily work had to be rerun or where we were not able to operate the company effectively because of system failures. For a project of this magnitude, that is rare, and it’s totally due to the dedication of hundreds of BOKF staff members. B O K F I N A N C I A L 2 0 0 3 A N N U A L R E P O R T Given the organization’s strong commitment to service quality, how do you measure it? Our division is responsible for delivering nearly all operational support for the company, and our service commitment must set the pace. If we do not provide high service levels, no amount of service commitment on the part of the customer-facing staff can overcome it. In 1999 we embarked on a continuous improvement program with established performance expectations and measures in all key areas of our operation. We were delighted to be recognized during 2003 by the Oklahoma Quality Award (OQA) Foundation with their Award for Achievement. We’ve been receiving feedback for several years from the BOKF lines of business we support that they were seeing significant improvement in our service levels, and the OQA award served as recognition by an outside group that we are now among the leaders in Oklahoma in service quality. What key technology initiatives are planned this year? To ensure that we are able to take full advantage of the new legislation regarding check clearing, which goes into effect in October, we are expanding our existing check imaging capability. Our customers should be seeing new services based on this effort before the year is out. We will also be further automating a number of our internal functions relating to check clearing and returns, overdraft processing, and loan documentation and booking. These initiatives will improve efficiency and service quality. QUALITY “With our new IT platform, we have numerous opportunities to take advantage of current and future technologies that advance our service offerings on behalf of our customers while allowing for growth opportunities.” Steven Nell executive vice president chief financial officer T R O P E R L A U N N A 3 0 0 2 L A I C N A N I F K O B Earnings were a record again in 2003. What were the key factors to your success? The majority of our earnings are traditionally driven by spread-related businesses in lending and deposit gathering with strong contributions from fee-based businesses. In 2003, fee-based businesses played a major role in our success, particularly mortgage banking and brokerage and trading activities. Interest rates in early 2003 were at 40-year historical lows, which resulted in record mortgage banking activity. As rates begin to rise with an improving economy, our loan growth and net interest margin should improve and help offset reduced earnings from mortgage banking. This is an example of the benefit of our diverse sources of revenue from fee-based businesses. When one aspect of our business—such as lending—slows, other business units have been able to provide balance and contribute to earnings growth. We have a diversified revenue stream that helps counteract cyclical moves in our markets. Have net interest margins bottomed out? Barring any additional downward rate adjustments by the Federal Reserve, we feel our net interest margin is probably at its lowest. We have fully absorbed in our operations the deposit pricing compression that most banks have realized during the low-rate environment. Our asset/ liability mix is positioned to benefit slightly from rising rates, and net interest margin and net interest revenue should improve going forward. Discuss BOKF’s approach to interest rate risk. In most interest rate environments, we seek to maintain a relatively neutral position with regard to interest rate risk. We neither benefit nor suffer greatly from rising or falling rates. In connection with that approach and integral to it, we maintain a larger and generally less risky securities portfolio than our peer banks. This larger securities portfolio generates more net interest revenue for us year-in and year- out than having a much smaller riskier portfolio. Although one result of a larger securities portfolio is a net interest margin generally below the norm, we think our approach contributes more to net interest revenue. What do you see as the role of the accounting and finance groups in supporting BOKF’s stated strategy? Our primary responsibility is to ensure integrity and accountability of financial information provided to internal and external users. There’s just no long-term advantage— ethically, legally or financially—in doing any rule bending. There are many people internally who rely on financial information to make business decisions and externally who rely on our information to make investment decisions. We ensure the integrity and legal soundness of all of our financial information through strict adherence to accounting standards and all disclosure requirements. We have always been very conservative in our financial accounting and we have always maintained a philosophy of providing transparent disclosures. All BOKF stakeholders—investors, employees and customers—have an opportunity to gain a clear understanding of our business operations and risks because we’ve described them appropriately in our financial statements. INTEGRITY “When one aspect of our business—such as lending—slows, other business units have been able to provide balance and contribute to earnings growth.” Table 1 Consolidated Selected Financial Data (Dollars In Thousands Except Per Share Data) Selected Financial Data For the year: Interest revenue Interest expense Net interest revenue Provision for loan losses Net income Period-end: Loans, net of reserve Assets Deposits Subordinated debentures Shareholders’ equity Nonperforming assets2 December 31, 2003 20024 20014 20004 19994 $ 565,173 175,144 390,029 35,636 158,360 $ 574,913 206,712 368,201 33,730 147,871 $ 654,633 325,681 328,952 37,610 114,439 $ 638,730 368,915 269,815 17,204 98,665 $ 500,274 263,935 236,339 10,365 87,536 7,355,250 13,581,743 9,219,863 154,332 1,228,630 59,867 6,784,913 12,251,014 8,128,525 155,419 1,099,526 56,574 6,193,473 11,145,984 6,905,744 186,302 832,866 50,708 5,435,207 9,751,550 6,046,005 148,816 706,793 43,599 4,567,255 8,376,290 5,263,184 148,642 559,457 22,943 Profitability Statistics Earnings per share (based on average equivalent shares): Basic Diluted Pro forma diluted earnings per share with FAS 142 and FAS 147 Percentages (based on daily averages): Return on average assets Return on average shareholders’ equity Average shareholders’ equity to average assets $ $ 2.75 2.45 2.45 2.66 2.37 2.37 $ $ 2.09 1.86 2.01 1.81 1.62 1.70 $ 1.60 1.43 1.52 1.24% 13.66 9.08 1.31% 15.75 8.31 1.12% 14.65 7.63 1.13% 16.18 7.02 1.15% 16.10 7.14 Common Stock Performance Per Share: Book value per common share Market price: December 31 close Market range – High trade – Low trade Selected Balance Sheet Statistics Period-end: $ $ 21.21 38.72 41.02 31.00 19.12 32.39 36.52 26.80 $ $ 15.06 31.51 32.75 21.31 12.86 21.25 21.25 15.31 $ 10.15 20.19 25.94 18.94 Tier 1 capital ratio Total capital ratio Leverage ratio Reserve for loan losses to nonperforming loans Reserve for loan losses to loans1 9.15% 8.98% 8.08% 8.06% 7.27% 11.31 7.17 244.18 1.73 11.95 6.88 232.82 1.72 11.56 6.38 233.90 1.66 11.23 6.51 207.95 1.51 10.72 5.92 391.65 1.66 Miscellaneous (at December 31) Number of employees (full-time equivalent) Number of banking locations Number of TransFund locations Mortgage loan servicing portfolio3 3,449 142 1,442 $ 4,746,279 3,402 130 1,390 $ 5,754,548 3,392 114 1,325 $ 6,645,868 3,003 105 1,111 $6,874,995 3,101 100 1,020 $7,028,247 1 Excludes residential mortgage loans held for sale. 2 Includes nonaccrual loans, renegotiated loans and assets acquired in satisfaction of loans. Excludes loans past due 90 days or more and still accruing. Includes outstanding principal for loans serviced for Bank of Oklahoma. 3 4 Restated for adoption of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” and stock dividends. 10 Management’s Assessment of Operations and Financial Condition BOK Financial Corporation (“BOK Financial” or “the Company”) is a financial holding company that offers full service banking in Oklahoma, Northwest Arkansas, Dallas and Houston, Texas, Albuquerque, New Mexico and Denver, Colorado. Our principal subsidiaries are Bank of Oklahoma, N.A. (“BOk”), Bank of Albuquerque, N.A., Bank of Arkansas, N.A., Bank of Texas, N.A. and Colorado State Bank and Trust, N.A. (“CSBT”). Other subsidiaries include BOSC, Inc., a broker/dealer that engages in retail and institutional securities sales and municipal bond underwriting. CSBT was acquired during the third quarter of 2003. This acquisition added four branches in Critical Accounting Policies Application of Critical Accounting Policies Preparation of our consolidated financial statements is based on the selection of certain accounting policies, which requires management to make significant assumptions and estimates. The following discussion addresses the more critical areas where these assumptions and Reserve for Loan Losses The reserve for loan losses is assessed by management based on an ongoing evaluation of the probable estimated losses inherent in the portfolio, including probable losses on both outstanding loans and unused commitments to provide financing. A consistent, well- documented methodology has been developed that includes reserves assigned to specific loans, general reserves that are based on a statistical migration analysis and nonspecific reserves that are based on analysis of current economic conditions, loan concentrations, portfolio growth and other relevant factors. An independent Credit Administration department is responsible for performing this evaluation for all of our subsidiaries to ensure that the methodology is applied consistently. All significant loans that exhibit weaknesses or deteriorating trends are reviewed quarterly. Specific reserves for impairment are determined through evaluation of estimated future cash flows and collateral values in accordance with Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for the Impairment of a Loan,” and regulatory accounting standards. 11 Denver, Colorado, and total assets of $396 million, including intangible assets of $61 million. CSBT also added $1.6 billion to total trust assets. BOK Financial adopted the fair value accounting provisions of Statement of Financial Accounting Standards No. 123, “Accounting for Stock-Based Compensation,” during 2003. This change in accounting required expense recognition for employee stock options. Net income and earnings per share for prior years have been restated. No other accounting standards with significant effects on our financial condition or results of operations were initially adopted in 2003. estimates could materially affect financial condition and results of operations. Application of these critical accounting policies and estimates has been discussed with the appropriate committees of the Board of Directors. A general reserve for commercial and commercial real estate loan losses is determined primarily through an internally developed migration analysis model. The purpose of this model is to determine the probability that each loan in the portfolio has an inherent loss based on historical trends. We use an eight-quarter aggregate accumulation of net losses as a basis for this model. Greater emphasis is placed on loan losses in more recent periods. This model assigns a general reserve to all commercial loans and leases and commercial real estate loans, excluding loans that have a specific impairment reserve. Separate models are used to determine the general reserve for residential mortgage loans, excluding residential mortgage loans held for sale, and consumer loans. The general reserve for residential mortgage loans is based on an eight- quarter average percent of loss. General reserves for consumer loans are based on a migration of loans from current status to loss. Separate migration factors are determined by major product line, such as indirect automobile loans and direct consumer loans. Nonspecific reserves are maintained for risks beyond those factors specific to a particular loan or those identified by the migration models. These factors include trends in the general economy in our primary lending areas, conditions in specific industries where we have a concentration, such as energy, real estate and agriculture, and overall growth in the loan portfolio. Evaluation of the nonspecific reserves also considers duration of the business cycle, regulatory examination results, potential errors in the migration analysis models and the underlying data, and other relevant factors. A range of potential losses is determined for each factor identified. Valuation and Amortization of Mortgage Servicing Rights We have a significant investment in mortgage servicing rights. These rights are either purchased from other lenders or retained from sales of loans we have originated. Mortgage servicing rights are carried at the lower of amortized cost, adjusted for the effects of past hedging activities, or fair value. Amortized cost and fair value are stratified by interest rate and loan type. A valuation allowance is provided when the net amortized cost of any strata exceeds the calculated fair value. There is no active market for trading in mortgage servicing rights. We use a cash flow model to determine fair value. Key assumptions and estimates, including projected prepayment speeds and assumed servicing costs, earnings on escrow deposits, ancillary income and discount rates, used by this model are based on current market sources. A separate third party model is used to estimate prepayment speeds based on Intangible Assets Intangible assets consist primarily of goodwill, core deposit intangible assets and other acquired intangibles. During 2002, we adopted Statements of Financial Accounting Standards No. 142, “Goodwi ll and Other Intangible Assets” (“FAS 142”) and No. 147, “Acquisitions of Certain Financial Institutions” (“FAS 147”). These standards eliminated amortization of intangible assets with indefinite lives, such as goodwill. Instead, goodwill for each business unit must be evaluated for impairment annually or more frequently if conditions indicate that impairment may have occurred. The evaluation of possible impairment of intangible assets involves significant judgment based upon short- term and long-term projections of future performance. The fair value of each of our business units is estimated by the discounted future earnings method. Income growth is projected over five interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors. The prepayment model is updated daily for changes in market conditions. We periodically request estimates of fair value from outside sources to corroborate the results of the valuation model. The sensitivity of our valuation of mortgage servicing rights to changes in interest rates is presented in Table 9 in the Lines of Business – Mortgage Banking section of this report. Prepayment assumptions also affect the amortization of mortgage servicing rights. Amortization is determined in proportion to the projected cash flows over the estimated life of each loan serviced. The same third party model that estimates prepayment speeds for determining the fair value of mortgage servicing rights determines the estimated life of each loan serviced. years for each unit, and a terminal value is computed. The projected income stream is converted to current fair value by using a discount rate that reflects a rate of return required by a willing buyer. At December 31, 2003, Bank of Texas had $155 million or 70% of consolidated goodwill. Because of the large concentration of goodwill in this business unit, the fair value determined by the discounted future earnings method was corroborated by comparison to the fair value of publicly traded banks of similar size and characteristics. No goodwill impairment was indicated by either valuation method. Intangible assets with finite lives, such as core deposit intangible assets, are amortized over their estimated useful lives. Such assets are reviewed for impairment whenever events indicate that the remaining carrying amount may not be recoverable. 12 Valuation of Derivative Instruments We use various types of interest rate derivative instruments as part of an interest rate risk management program. We also offer interest rate, energy and foreign exchange derivative contracts to our customers. All derivative instruments are carried on the balance sheet at fair value. Fair values for exchange-traded Summary of Performance BOK Financial recorded net income for 2003 of $158.4 million or $2.45 per diluted share, compared with $147.9 million or $2.37 per diluted share in 2002 and $114.4 million or $1.86 per diluted share in 2001. Prior years’ earnings per share have been restated for the adoption of FAS 123 and a 3% stock dividend in 2003. As previously noted, we adopted FAS 142 and 147 in 2002. These new accounting standards did not permit restatement of prior years’ financial statements. If FAS 142 and 147 had been applied retroactively to 2001, pro forma net income and earnings per diluted share would have been $123.6 million and $2.01, respectively. The trend of returns on average equity on a comparable basis for 2003, 2002 and 2001 was 13.66%, 15.75% and 15.83%, respectively. This trend of return on equity was due primarily to growth in average equity. During 2003, average equity increased 24% due to retained earnings and a full-year’s effect of an acquisition-related stock issuance during the fourth quarter of 2002. Net income increased 7% for this same period. Net interest revenue grew $21.8 million or 6% during 2003 due to increases in average earning assets, partially offset by the net effect of lower interest rates. Fees and commission revenue increased $48.7 million or 19%. All categories of fee income increased, most notably brokerage and trading revenue, which grew 58%, and deposit fees, which rose 21%. contracts are based on quoted prices. Fair values for over-the-counter interest rate, energy and foreign exchange contracts are based on valuations provided by either third-party dealers in the contracts or quotes from independent pricing services. Operating expenses decreased $16.5 million or 4% compared to 2002. The provision for impairment of mortgage servicing rights shifted from a $45.9 million expense in 2002 to a $22.9 million recovery in 2003. Excluding the provision for mortgage servicing rights, operating expenses increased $52.4 million or 14% due primarily to increased personnel costs, including incentive compensation that varies directly with operating revenue changes. Gains and losses on securities and derivatives decreased from a $64.6 million net gain in 2002 to a $1.6 million net loss in 2003. These results included gains and losses on securities held as an economic hedge of our mortgage servicing rights, on securities held in our general portfolio and derivatives held for interest rate risk management purposes. Accounting for securities held as an economic hedge of mortgage servicing rights is more fully discussed in the Lines of Business – Mortgage Banking section of this report. Net income for the fourth quarter of 2003 decreased $2.8 million or 7% compared to the previous year. Net revenue from mortgage banking activities, including gains and losses on securities held as an economic hedge of our mortgage servicing rights, decreased $15.0 million. The decrease in mortgage banking revenue was partially offset by an $8.4 million decrease in mortgage banking costs. 13 Assessment of Operations Net Interest Revenue Tax-equivalent net interest revenue totaled $395.2 million for 2003 compared to $374.3 million for 2002. The increase was due primarily to a $1.2 billion increase in average earning assets. The growth in average earning assets included a $543 million increase in securities and a $700 million increase in loans. This increase in average earning assets was funded primarily by a $1.1 billion increase in interest-bearing liabilities. Table 2 shows the effects on net interest revenue of changes in average balances and interest rates for the various types of earning assets and interest-bearing liabilities. Yields on average earning assets and rates paid on average interest-bearing liabilities both continued to decline in 2003. The net interest margin, the ratio of tax-equivalent net interest revenue to average earning assets, decreased to 3.43% in 2003 compared to 3.70% for the previous year. This decrease reflected the effects of low interest rates on the spread between yields on earning assets and rates paid on interest- bearing liabilities. Our net interest margin decreased for the first three quarters of 2003 as interest rates declined, but increased during the fourth quarter as rates stabilized. The effects of interest rates on yields and rates paid during 2003 are reflected in the Annual and Quarterly Financial Summaries. Table 2 Volume/Rate Analysis (In Thousands) Tax-equivalent interest revenue: Securities Trading securities Loans Funds sold and resell agreements Total Interest expense: 2003/2002 Change Due To¹ 2002/2001 Change Due To¹ Change Volume Yield/Rate Change Volume Yield/Rate $ (8,583) (56) (2,040) (10) (10,689) $ 31,722 129 39,229 149 71,229 $ (40,305) (185) (41,269) (159) (81,918) $ (2,708) (450) (77,950) (538) (81,646) $ 28,736 (252) 27,886 (76) 56,294 $ (31,444) (198) (105,836) (462) (137,940) Transaction deposits Savings deposits Time deposits Funds purchased and repurchase agreements Other borrowings Subordinated debentures Total Tax-equivalent net interest revenue Decrease in tax-equivalent adjustment Net interest revenue (7,927) (1,032) (4,578) (9,628) (7,129) (1,274) (31,568) 20,879 949 $ 21,828 9,169 60 12,034 (157) (144) (1,622) 19,340 $ 51,889 (17,096) (1,092) (16,612) (9,471) (6,985) 348 (50,908) $ (31,010) (10,620) (305) (49,818) (39,140) (18,914) (172) (118,969) 37,323 1,926 $ 39,249 9,580 147 4,197 (2,857) 2,900 102 14,069 $42,225 (20,200) (452) (54,015) (36,283) (21,814) (274) (133,038) $ (4,902) Tax-equivalent interest revenue: Securities Trading securities Loans Funds sold and resell agreements Total Interest expense: Transaction deposits Savings deposits Time deposits Funds purchased and repurchase agreements Other borrowings Subordinated debentures Total Tax-equivalent net interest revenue Decrease in tax-equivalent adjustment Net interest revenue 4th Qtr 2003/4th Qtr 2002 Change Due To¹ Change Volume Yield/Rate $ 7,127 81 8,137 6 15,351 2,300 14 1,469 461 (250) (227) 3,767 $11,584 $ (7,448) (21) (7,942) (33) (15,444) (4,571) (250) (1,906) (2,011) (1,261) (137) (10,136) $ (5,308) $ (321) 60 195 (27) (93) (2,271) (236) (437) (1,550) (1,511) (364) (6,369) 6,276 220 $ 6,496 ¹ Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis. 14 BOK Financial follows a strategy of fully utilizing capital resources by borrowing funds in the capital markets to supplement deposit growth. The proceeds of these borrowed funds are invested in securities. The primary objective of this strategy is to enhance revenue opportunities. In the current market conditions, this strategy also helps manage our overall interest rate risk. The interest rate on these borrowed funds, which generally reacts quickly to changes in market interest rates, tends to match the effects of changes in interest rates on the loan portfolio. Interest rates earned on the securities purchased with the proceeds of the borrowings are affected less quickly by changes in market interest rates. The timing of these changes in interest rates earned on the securities more closely matches the timing of changes in interest paid on deposits. Although this strategy may reduce net interest margin, it provides positive net interest revenue. We estimated that this strategy enhanced net interest revenue $61 million during 2003 compared to $67 million in 2002. Excluding this strategy, net interest margin for 2003 and 2002 would have been 3.49% and 3.76%, respectively. Average securities purchased and funds borrowed under this strategy were $2.0 billion in 2003 and $1.9 billion in 2002. As more fully discussed in the subsequent Market Risk section, we employ Other Operating Revenue Other operating revenue decreased $17.8 million due to a $66.2 million decrease in net gains on securities sales and derivatives. Fees and commission revenue increased $48.7 million or 19% compared to 2002. These sources of non- interest revenue are a significant part of our business strategy and represented 44% of total revenue, excluding gains and losses on securities and derivatives. Brokerage and trading revenue increased $14.2 million or 58% compared to 2002. During the past several years, we have increased the number of sales staff to take advantage of current market opportunities. These opportunities included transactions with mortgage lenders that want to hedge the economic risks of their loan production. Deposit fees increased $14.4 million or 21% due to an overdraft privilege product that was initiated in 2002. Transaction card revenue grew $5.1 million or 10%. Check card fees and merchant fees increased 19% and 15%, respectively, while ATM network revenue increased 3%. Trust revenue and mortgage banking revenue, which are discussed more fully in the Lines of Business section of this report, increased $5.7 million or 14% and $3.4 million or 7%, respectively. 15 various techniques to manage, within established parameters, the interest rate and liquidity risk inherent in this strategy. The effectiveness of these techniques is reflected in the overall change in net interest revenue due to changes in interest rates as shown in Table 23. Tax-equivalent net interest revenue for the fourth quarter of 2003 totaled $102.0 million, compared to $95.7 million for the fourth quarter of 2002. The increase was due to growth in average earning assets, which increased $1.0 billion or 9%. Net interest margin declined 16 basis points to 3.39% as yields on earning assets decreased more rapidly than the cost of interest- bearing liabilities due to the effects of falling interest rates as discussed above. Tax-equivalent net interest revenue for 2002 was $374.3 million, a $37.3 million or 11% increase from 2001. This increase was due to growth in average earning assets. As shown in Table 2, net interest revenue increased $42.2 million due to changes in earning assets and interest-bearing liabilities. The increase in net interest revenue due to asset growth was partially offset by a $4.9 million decrease due to falling yields and rates. BOK Financial realized net gains on securities sold of $7.2 million in 2003 compared to $58.7 million last year. These amounts included net gains on sales of securities held as economic hedges of the mortgage servicing rights of $4.0 million in 2003 and $26.3 million in 2002. The decrease in net gains on securities reflected current market interest rates over the past two years. Falling interest rates during 2002 presented us with the opportunity to actively manage the portfolio and recognize gains from selling securities that had limited potential for further appreciation. While we continued to sell securities during 2003 to manage the portfolio’s duration, consistently low interest rates during 2003 presented fewer opportunities to recognize gains. Derivative instruments, which we used primarily to manage interest rate risk, resulted in mark-to-market losses of $8.8 million in 2003 compared to gains of $5.9 million in 2002. We have not designated these derivatives as hedges for accounting purposes. Additional discussion regarding use of derivative instruments as part of our interest rate risk management program is located in the Market Risk section of this report. Table 3 Other Operating Revenue (In Thousands) Brokerage and trading revenue Transaction card revenue Trust fees and commissions Service charges and fees on deposit accounts Mortgage banking revenue Leasing revenue Other revenue Total fees and commissions Gain on sale of assets Gain (loss) on sales of securities, net Gain (loss) on derivatives, net Total other operating revenue 2003 $ 38,681 55,491 45,763 82,042 52,336 3,508 25,969 303,790 822 7,188 (8,808) $ 302,992 Years ended December 31, 2000 2001 2002 1999 $ 24,450 50,385 40,092 67,632 48,910 3,330 20,276 255,075 1,157 58,704 5,894 $320,830 $ 19,644 42,471 40,567 51,284 50,155 3,745 20,087 227,953 $ 15,146 $ 16,018 31,399 35,127 41,067 36,986 3,725 17,589 181,911 37,287 39,316 42,932 37,179 4,244 17,965 194,069 557 30,640 (4,062) $ 255,088 381 2,059 – 5,496 (419) – $ 196,509 $ 186,988 Other operating revenue for the fourth quarter of 2003, excluding net losses on securities and derivatives, totaled $74.0 million compared to $68.8 million for the fourth quarter of 2002. Trust fees rose 32% to $13.0 million due to growth in the fair value of trust assets and the addition of Colorado State Bank and Trust. Brokerage and trading revenue grew 25%. Revenue from our public finance unit, which is included in other revenue, totaled $2.8 million for the fourth quarter of 2003 compared with $439 thousand for the fourth quarter of 2002. Mortgage banking revenue decreased 50% to $7.5 million due to a decrease in mortgage loan production during the fourth quarter. Mortgage servicing revenue also decreased compared to last year due to a reduction in loans serviced. Losses on securities sales totaled $951 thousand, including $757 thousand of losses on securities used to hedge mortgage servicing rights for the fourth quarter of 2003. These results are compared to gains on securities sales of $10.3 million, including $6.8 million on securities used to hedge mortgage servicing rights, last year. Mark-to-market losses on derivative contracts totaled $2.0 million in 2003 compared to gains of $665 thousand in 2002. Other operating revenue for 2002 totaled $320.8 million, a 26% increase compared to 2001. Fees and commissions revenue increased 12% to $255.1 million due primarily to a 32% increase in service charges on deposit accounts. Brokerage and trading revenue and transaction card revenue increased 24% and 19%, respectively, due to increased transaction volumes in both areas. Growth in these fee income sources was offset by a decrease in trust revenue. The fair value of trust assets decreased due to market conditions in 2002. Mortgage banking revenue also decreased due to a reduction in servicing revenue. Net gains on securities totaled $58.7 million in 2002, compared to $30.6 million in 2001. These amounts included net gains from securities designated as economic hedges of mortgage servicing rights of $26.3 million in 2002 and $12.8 million in 2001. The increase in net realized gains reflected active management of the securities portfolio as interest rates declined during 2002. Management strategy in 2002 was to sell securities that had limited potential for further appreciation and to replace them with securities with less prepayment risk. Net gains on derivatives, which totaled $5.9 million in 2002 compared to losses of $4.1 million in 2001, primarily represented the mark-to-market of derivatives used for interest rate risk management. We expect continued growth in other operating revenue through offering new products and services and by expanding into new markets. However, increased competition and saturation in our existing markets could affect the rate of future increases. We also believe that our diverse sources of fee revenue mitigate the effects of changes in interest rates, values in the equity markets and consumer spending, all of which can be volatile. 16 Other Operating Expense Other operating expense for 2003 totaled $410.1 million, a 4% decrease from 2002. This decrease resulted from the provision for impairment of mortgage servicing rights. This provision shifted from a $45.9 million expense in 2002 to a $22.9 million recovery in 2003 due to slowing prepayment speeds. Excluding the effects of the provision for impairment of mortgage servicing rights, other operating expense increased $52.4 million or 14%. Personnel expense increased $35.5 million or 19% to $222.9 million. Regular compensation expense totaled $140.2 million, a 10% increase over 2002. This increase was due to a 6% increase in average regular compensation per full-time equivalent employee combined with a 4% increase in staffing. Incentive compensation, which varies directly with revenue, increased 45% to $45.8 million. Incentive compensation expense included brokerage commissions, which increased 26% to $11.2 million, and stock-based compensation expense, which increased $1.7 million or 40%. Expense for other incentive compensation plans increased $10.2 million, primarily due to revenue growth. Employee benefit expenses increased 27% to $35.9 million due to a 49% increase in medical and employee insurance costs and a 21% increase in retirement expenses. We have taken several actions intended to reduce the future growth in personnel expense, including a five percent reduction in staffing. This reduction is expected to reduce personnel expense by more than $9 million annually beginning in 2004. Professional fees increased $4.9 million or 38% compared to 2002. This increase was due primarily to a $2.5 million increase in consulting fees associated with deposit fee programs. This consulting engagement ended in 2003. The increased data processing and communications expense included $4.9 million of expenses associated with the conversion of our primary data processing systems, which occurred in the fourth quarter. We expect that the new system will allow us to be more responsive to future technology changes and to better control ongoing costs. Operating expenses for the fourth quarter of 2003 totaled $108.3 million, a 3% increase from the fourth quarter of 2002. Personnel costs increased $7.5 million or 15%, while mortgage banking costs decreased $8.4 million. The increase in personnel costs for the quarter included $1.1 million of severance expense related to the staffing reduction noted previously. The decrease in mortgage banking costs was due primarily to a reduction in amortization of mortgage servicing rights. This amortization is directly related to actual and anticipated loan prepayments, which decreased significantly during the fourth quarter as interest rates began to rise. Additionally, the fourth quarter of 2003 included operating expenses of $4.5 million from CSBT. Operating expenses for 2002 increased $56.8 million or 15% over 2001. Mortgage banking costs increased $12.0 million due to increased amortization of mortgage servicing rights. A provision for impairment of mortgage servicing rights of $45.9 million was also recognized due to increased actual and anticipated loan prepayments during the year. Excluding the increase in amortization expense and provision for impairment of mortgage servicing rights, operating expenses increased $14.4 million or 4%. Personnel costs increased $20.6 million or 12% due primarily to an 8% increase in average salaries per employee combined with a 2% increase in staffing. Incentive compensation, which is directly related to revenue growth, increased $4.7 million. Data processing expenses increased $6.1 million or 16% due primarily to an increase in transaction volumes. Amortization expense decreased $12.5 million due primarily to the adoption of FAS 142 and FAS 147, as previously discussed. 17 Table 4 Other Operating Expense (In Thousands) Personnel expense Business promotion Professional fees and services Net occupancy and equipment Data processing and communications FDIC and other insurance Printing, postage and supplies Net gains and operating expenses on repossessed assets Amortization of intangible assets Mortgage banking costs Provision (recovery) for impairment of mortgage servicing rights Other expense Total 2003 $ 222,922 12,937 17,935 45,967 51,537 2,267 13,930 271 8,101 40,296 Years ended December 31, 2001 2002 2000 $ 187,439 11,367 12,987 42,347 44,084 1,903 12,665 1,014 7,638 42,271 $ 166,864 10,658 13,391 42,764 38,003 1,717 12,329 $ 148,614 8,395 9,618 35,447 33,496 1,569 11,260 1999 $ 138,633 9,077 9,584 30,789 30,789 1,356 11,599 1,401 20,113 30,261 (1,283) 15,478 22,274 (3,473) 15,823 23,932 (22,923) 16,871 $ 410,111 45,923 16,957 $ 426,595 15,551 16,729 $ 369,781 2,900 15,980 $ 303,748 – 13,781 $ 281,890 Income Taxes Income tax expense was $88.9 million in 2003, compared to $80.8 million in 2002 and $62.4 million in 2001. This represented 36%, 35% and 35%, respectively, of book taxable income. Tax expense currently payable totaled $82.6 million in 2003 compared to $95.9 million in 2002 and $74.2 million in 2001. The Internal Revenue Service closed its examination of 2000 during 2003. No significant adjustments resulted from this examination, and no other examinations are currently in process. 18 Table 5 Selected Quarterly Financial Data (In Thousands Except Per Share Data) Interest revenue Interest expense Net interest revenue Provision for loan losses Net interest revenue after provision for loan losses Other operating revenue Gain (loss) on sales of securities, net Gain (loss) on derivatives, net Other operating expense Provision (recovery) for impairment of mortgage servicing rights Income before taxes Income tax expense Net income Earnings per share: Basic Diluted Average shares: Basic Diluted Interest revenue Interest expense Net interest revenue Provision for loan losses Net interest revenue after provision for loan losses Other operating revenue Gain (loss) on sales of securities, net Gain (loss) on derivatives, net Other operating expense Provision (recovery) for impairment of mortgage servicing rights Income before taxes Income tax expense Net income Earnings per share: Basic Diluted Average shares: Basic Diluted Lines of Business Fourth Third Second First 2003 $143,883 43,103 100,780 8,001 92,779 74,021 (951) (2,019) 110,581 $ 137,804 41,633 96,171 8,220 87,951 80,001 (12,007) (4,566) 106,957 $ 141,534 43,967 97,567 9,503 88,064 77,946 10,457 (1,121) 108,511 $141,952 46,441 95,511 9,912 85,599 72,644 9,689 (1,102) 106,985 (2,260) 55,509 20,207 $ 35,302 (16,186) 60,608 21,792 $ 38,816 3,353 63,482 22,707 $ 40,775 (7,830) 67,675 24,208 $ 43,467 $ 0.61 $ 0.55 $ $ 0.67 0.60 $ $ 0.71 0.63 $ $ 0.76 0.67 57,137 64,592 57,059 64,693 56,940 64,569 56,821 64,456 2002 $143,756 49,472 94,284 10,001 84,283 68,800 10,342 665 106,696 $ 144,430 51,861 92,569 8,029 84,540 65,090 34,341 7,218 94,871 $ 142,997 52,716 90,281 6,834 83,447 62,976 21,602 (1,453) 90,317 $143,730 52,663 91,067 8,866 82,201 59,366 (7,581) (536) 88,788 (1,615) 59,009 20,858 $ 38,151 29,042 67,276 23,784 $ 43,492 23,774 52,481 18,547 $ 33,934 (5,278) 49,940 17,646 $ 32,294 $ 0.67 $ 0.60 $ $ 0.79 0.70 $ $ 0.61 0.55 $ $ 0.59 0.52 56,166 63,785 54,634 62,082 54,573 62,112 54,466 61,938 BOK Financial operates four principal lines of business under its Bank of Oklahoma franchise: corporate banking, consumer banking, mortgage banking and wealth management. It also operates a fifth principal line of business, regional banks, which includes all banking functions for Bank of Albuquerque, N.A., Bank of Arkansas, N.A., Bank of Texas, N.A., and Colorado State Bank and Trust, N.A. In addition to its lines of business, BOK Financial has a funds management unit. The primary purpose of this unit is to manage the overall liquidity needs and interest rate risk of the company. Each line of business borrows funds from and provides funds to the funds management unit as needed to support their operations. BOK Financial allocates resources and evaluates performance of its lines of business 19 after allocation of funds, certain indirect expenses, taxes and capital costs. The cost of funds borrowed from the funds management unit by the operating lines of business is transfer- priced at rates that approximate market for funds with similar duration. Market is generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of transfer-pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk. The value of funds provided by the operating lines of business to the funds management unit is based on applicable Federal Home Loan Bank advance rates. Deposit accounts with indeterminate maturities, such as demand deposit accounts and interest-bearing transaction accounts, are transfer-priced at a rolling average based on expected duration of the accounts. The expected duration ranges from 90 days for certain rate-sensitive deposits to five years. During 2002, the average transfer-pricing rate for these deposit accounts decreased by approximately 200 basis points. Since many of these deposit accounts are either noninterest-bearing accounts or interest bearing accounts whose rates cannot be readily reset lower due to market constraints, the decline in the transfer-pricing rates shifted net interest revenue from providers of funds, primarily consumer banking and wealth management, to the Corporate Banking The Corporate Banking Division provides loan and lease financing and treasury and cash management services to businesses throughout Oklahoma and surrounding states. In addition to serving the banking needs of small businesses, middle market and larger customers, the Corporate Banking Division has specialized groups that serve customers in the energy, agriculture, healthcare and banking/finance industries and includes the TransFund ATM network. The Corporate Banking Division contributed $59.7 million or 38% to consolidated net income for 2003. This compares to $58.1 million or 39% of consolidated net income for 2002. Net interest revenue from external sources decreased due to lower yields on average assets, primarily loans. The lower yield on loans was offset by a decline in net interest expense from internal sources. Other operating revenue increased $7.1 million or 10% due primarily to an increase in merchant discount and deposit fees. Operating expenses increased to $88.5 million for 2003 from $81.4 million for last year due primarily to an increase in personnel and funds management unit. The effects of this shift are seen in the comparison of earnings between 2002 and 2001. Economic capital is assigned to the business units based on an allocation method that reflects management’s assessment of risk. During 2003, we adopted a third-party developed capital allocation model. This model assigns capital based upon credit, operating, interest rate and market risk inherent in our business lines and recognizes the diversification benefits among the units. The level of assigned economic capital is a combination of the risk taken by each business line based on its actual exposures and calibrated to its own loss history where possible. Previously, capital was assigned to the business units based on an internally-developed model that focused primarily on credit risk as defined by regulatory standards. While adoption of this new model has not significantly affected our assessment of the overall capital levels required for the company, it has assigned more capital to business units with operating, interest rate, and market risk, and assigned less capital to business units with credit risk. Additional capital is assigned to the regional banks line of business based on our investment in those entities. Capital assignments for prior periods have been restated to reflect this new allocation model. transaction processing costs. Average assets increased $324 million or 8% for 2003 due primarily to loan growth. Table 6 Corporate Banking (Dollars in Thousands) Years ended December 31, 2003 2002 2001 NIR (expense) from external sources NIR (expense) from internal sources Total net interest revenue Other operating revenue Operating expense Net loans charged off Net income Average assets Average equity Return on assets Return on equity Efficiency ratio $ 144,791 $ 155,648 $ 199,727 (28,218) (45,573) (86,150) 116,573 110,075 113,577 79,316 88,478 72,234 81,434 62,648 78,190 10,325 59,693 $ 4,362,396 311,140 6,475 58,081 $ 4,038,353 298,020 10,481 53,344 $3,867,850 275,090 1.37% 19.19 45.17 1.44% 19.49 44.67 1.38% 19.39 44.37 20 Consumer Banking The Consumer Banking Division provides a full line of deposit, loan and fee-based services to customers throughout Oklahoma through four major distribution channels: traditional branches, supermarket branches, the 24-hour ExpressBank call center and Online Banking. Additionally, the division is a significant referral source for the Bank of Oklahoma Mortgage Division (“BOk Mortgage”) and BOSC’s retail brokerage division. The Consumer Banking Division contributed $9.2 million or 6% to consolidated net income for 2003. This compares to $6.8 million or 5% of consolidated net income for 2002. Revenue from internal sources, primarily funds provided to other business lines, decreased $3.4 million due to lower transfer-pricing rates. Other operating revenue increased $8.5 million, or 22%, over 2002 due primarily to increases in deposit service charges. Operating expenses increased 5% to $66.6 million. Personnel costs contributed $2.4 million to this increase. Mortgage Banking BOK Financial engages in mortgage banking activities through BOk Mortgage. These activities include the origination, marketing and servicing of conventional and government-sponsored mortgage loans. Consolidated mortgage banking revenue, which is included in other operating revenue, increased $3.4 million or 7% compared to 2002. However, mortgage banking activities contributed $28.4 million or 18% to consolidated net income in 2003 compared to $1.6 million or 1% in 2002, due primarily to a reduction in provision for mortgage servicing rights, net of gains on financial instruments held as an economic hedge of the servicing rights. Mortgage banking activities consist of two sectors, loan production and loan servicing. The increased contribution to net income in 2003 reflected both strong performance of the loan production sector and the partial reversal of reserves established for impairment of mortgage servicing rights in the loan servicing sector. 21 Table 7 Consumer Banking (Dollars in Thousands) Years ended December 31, 2002 2001 2003 NIR (expense) from external sources NIR (expense) from internal sources Total net interest revenue Other operating revenue Operating expense Net loans charged off Net income Average assets Average equity Return on assets Return on equity Efficiency ratio $ (16,725) $ (17,875) $ (34,049) 57,925 61,301 94,393 41,200 43,426 60,344 47,361 66,639 38,862 63,401 29,995 59,099 6,887 9,186 $2,514,262 58,000 7,829 6,756 $2,341,239 60,910 4,180 16,533 $2,192,698 53,250 .37% 15.84 75.25 .29% 11.09 77.05 .75% 31.05 65.42 Table 8 Mortgage Banking (Dollars in Thousands) Years ended December 31, 2003 2002 2001 NIR (expense) from external sources $ 27,770 $ 32,199 $ 32,545 (9,415) (13,713) (20,867) 18,355 18,486 23,922 20,832 36,379 58,204 37,845 54,795 11,678 22,695 30,119 47,750 (22,923) 45,923 15,551 NIR (expense) from internal sources Total net interest revenue Capitalized mortgage servicing rights Other operating revenue Operating expense Provision (recovery) for impairment of mortgage servicing rights Gain on sales of financial instruments, net Net income 4,025 28,401 26,345 1,551 Average assets Average equity $ 623,823 69,100 $ 671,798 34,160 12,757 8,493 $651,103 18,700 Return on assets Return on equity Efficiency ratio 4.55% 41.10 74.00 .23% 4.54 71.01 1.30% 45.42 74.04 Loan Production Sector Loan production revenue totaled $33.8 million in 2003, including $23.9 million of capitalized mortgage servicing rights, compared to loan production revenue of $27.4 million in 2002, including $20.8 million of capitalized mortgage servicing rights. The increase in loan production revenue, excluding the value of capitalized mortgage servicing rights, was due to improved market conditions for loan sales. The value of mortgage loans sold remained high during the year as interest rates stayed low. Mortgage loans funded totaled $1.3 billion in 2003, including $457 million for home purchases and $859 Loan Servicing Sector The loan servicing sector had pre-tax income of $12.9 million for 2003 compared to a pre-tax loss of $22.5 million for 2002. The improved operating results were due primarily to the partial reversal of the reserve for impairment of mortgage servicing rights. Interest rates affected servicing revenue, the value of mortgage servicing rights and amortization expense during 2002 and 2003. As interest rates fell during 2002, both actual and anticipated loan prepayments increased. Actual loan prepayments reduce the outstanding balance of loans serviced, which is a primary factor for determining servicing revenue and the fair value of servicing rights. The fair value of servicing rights decrease whenever prepayment speeds are high. Conversely, the fair value of servicing rights increase whenever prepayment speeds are low. Prepayment speeds were high during 2002 as a result of the historically low mortgage interest rates. Prepayment speeds slowed during 2003 as interest rates increased slightly. Servicing fees totaled $21.8 million in 2003 compared to $28.2 million in 2002. The decrease in servicing fees was due primarily to a lower outstanding principal balance of loans serviced. The average outstanding balance of loans serviced was $4.9 billion during 2003 compared to $6.2 billion during 2002. The decrease in loans serviced reflected both the rapid refinancing of mortgage loans and BOk Mortgage’s decision to curtail purchases of mortgage loan servicing. This decision also affected the geographic distribution of the loan servicing portfolio. Approximately 72% of loans serviced are in our primary market areas at December 31, 2003, compared to 69% at December 31, 2002. million of refinanced loans. Mortgage loans funded in 2002 totaled $1.0 billion, including $451 million for home purchases and $563 million of refinanced loans. Approximately 70% of the loans funded during 2003 were in Oklahoma. The increase in volume of loans funded, combined with steady loan pricing, resulted in pre-tax income from loan production of $32.0 million for 2003 compared to $23.7 million for the previous year. The pipeline of mortgage loan applications totaled $208 million at December 31, 2003, compared to $323 million at December 31, 2002. Amortization of mortgage servicing rights, which is included in operating expense, was $35.6 million in 2003 compared to $36.0 million in 2002. Amortization expense is determined in proportion to the estimated future cash flows that will be generated by the mortgage servicing rights. The valuation allowance for impairment of mortgage servicing rights totaled $32 million at December 31, 2003 compared to $55 million at December 31, 2002. The valuation allowance was reduced by $22.9 million during 2003. An impairment provision of $45.9 million increased the valuation allowance in 2002. As discussed in the Critical Accounting Policies section of this report, a valuation allowance is provided to reduce the carrying value of servicing rights to the lower of fair value or amortized cost segregated by impairment strata. Impairment strata are determined by interest rate bands and by loan types, either conventional or government- backed. The fair value of servicing rights is based on estimated revenues that will be generated over the servicing period, less estimated costs to service the loans. The valuation allowance may be reversed, in part or in whole, if the fair value of servicing rights in a particular impairment strata increase or if the amortized cost of servicing rights in a particular strata decrease. Note 8 to the Consolidated Financial Statements presents additional information about the fair value and amortized cost of servicing rights and the valuation allowance. 22 BOK Financial designates a portion of its securities portfolio as an economic hedge against the risk of loss on its mortgage servicing rights. Mortgage-backed securities and U.S. government agency debentures are acquired and held as available for sale when prepayment risks exceed certain levels. Because the fair value of these securities is expected to vary inversely to the fair value of the servicing rights, they are expected to partially offset risk. No special hedge accounting treatment is applicable to either the mortgage servicing rights or the securities designated as an economic hedge. The securities designated as an economic hedge are classified as available for sale and carried at fair market value. We may sell these securities and realize gains when necessary to offset the impairment provision of the mortgage servicing rights. During 2003, we realized gains of $4.0 million from economic hedging activities compared to gains of $26.3 million in 2002. This hedging strategy presents certain risks. A well-developed market determines the fair value for the securities. However, there is no comparable market for mortgage servicing rights. Wealth Management BOK Financial provides a wide range of financial services through its wealth management line of business, including trust and private financial services and brokerage and trading activities. This line of business includes the activities of BOSC, Inc., a registered broker/dealer. Trust and private financial services include sales of institutional, investment and retirement products, loans and other services to affluent individuals, businesses, not-for-profit organizations, and governmental agencies. Trust services are provided primarily to clients throughout Oklahoma, Texas and New Mexico. Additionally, trust services include a nationally competitive, self-directed 401-(k) program. Brokerage and trading activities within the wealth management line of business consist of retail sales of mutual funds, securities, and annuities, institutional sales of securities and derivatives, bond underwriting and other financial advisory services. Therefore, the computed change in value of the servicing rights for a specified change in interest rates may not correlate to the change in value of the securities. At December 31, 2003, securities with a fair value of $124 million and an unrealized loss of $1.6 million were held for the economic hedge program. This unrealized loss, net of income taxes, is included in shareholders' equity as part of other comprehensive income. The interest rate sensitivity of the mortgage servicing rights and securities held as a hedge is modeled over a range of +/- 50 basis points. At December 31, 2003, the pre-tax results of this modeling on reported earnings were: Table 9 Interest Rate Sensitivity – Mortgage Servicing (Dollars in Thousands) Anticipated change in: Fair value of mortgage servicing rights Fair value of hedging securities Net 50 bp Increase 50 bp Decrease $8,016 (6,538) $1,478 $ (11,002) 6,307 $ (4,695) Wealth management contributed $13.2 million or 8% to consolidated net income for 2003. This compared to $6.1 million or 4% of consolidated net income for 2002. Trust and private financial services provided $7.6 million of net income in 2003, a 22% increase over 2002. At December 31, 2003 and 2002, the wealth management line of business was responsible for trust assets with aggregate market values of $20 billion and $16 billion, respectively, under various fiduciary arrangements. The growth in trust assets reflected increased market value of assets managed in addition to new business generated during the year. We have sole or joint discretionary authority over $8 billion of trust assets at December 31, 2003 compared to $9 billion of trust assets at December 31, 2002. 23 Brokerage and trading activities provided $5.7 million of net income in 2003 compared to a $115 thousand loss in the previous year. Operating revenue increased $17.7 million or 59% due to increased institutional sales volumes and financial advisory fees. During 2003, we expanded a program that assists mortgage bankers in hedging their interest rate risk through transactions in mortgage-backed securities. This program contributed significantly to the increased revenue and sales volume. Operating expenses increased $8.2 million primarily due to incentive compensation. Regional Banking Regional banks include Bank of Texas, Bank of Albuquerque, Bank of Arkansas, and Colorado State Bank and Trust. Each of these banks provides a full range of corporate and consumer banking services in their respective markets. Small businesses and middle-market corporations are the regional banks' primary customer focus. Regional banks contributed $41.1 million or 26% to consolidated net income during 2003. This compares to $35.4 million or 24% of consolidated net income in 2002. Net interest revenue from external customers increased $26.6 million or 19% due to growth in average earning assets. Other operating revenue increased $9.7 million or 36% in 2003 from last year due primarily to service charges on deposit accounts. Operating expenses increased $24.0 million or 25% compared to last year. Personnel costs accounted for approximately $13.7 million of this increase. Operations in Texas, New Mexico, and Arkansas contributed $26.3 million, $10.9 million, and $2.0 million, respectively, to consolidated net income for 2003. This compared to $23.9 million, $10.4 million, and $1.3 million, respectively, for 2002. Operations in Colorado contributed $1.9 million in 2003. Table 10 Wealth Management (Dollars in Thousands) Years ended December 31, 2002 2003 2001 NIR (expense) from external sources NIR (expense) from internal sources Total net interest revenue Other operating revenue Operating expense Net income Average assets Average equity Return on assets Return on equity Efficiency ratio $ 1,967 $ 1,958 $ 839 8,954 8,162 13,136 10,921 10,120 13,975 91,534 80,440 13,246 69,932 69,709 6,082 67,564 63,186 11,129 $ 731,303 69,690 $ 556,390 60,880 $ 492,811 52,290 1.81% 19.01 78.51 1.09% 9.99 87.08 2.26% 21.28 77.49 Table 11 Regional Banks (Dollars in Thousands) Years ended December 31, 2002 2003 2001 NIR (expense) from external sources NIR (expense) from internal sources Total net interest revenue Other operating revenue Operating expense Gains on sales of financial instruments, net Net loans charged off Net income $ 164,755 $ 138,145 $ 138,846 (12,151) (12,835) (11,689) 152,604 125,310 127,157 36,531 118,386 26,876 94,383 19,642 91,088 339 4,205 484 6,425 41,057 6,161 35,432 5,873 31,804 Average assets Average equity $ 4,899,360 360,220 $ 3,915,411 286,730 $3,352,149 234,420 Return on assets Return on equity Efficiency ratio 0.84% 11.40 62.59 0.90% 12.36 62.02 0.95% 13.57 62.05 24 Assessment of Financial Condition Securities Portfolio Securities are classified as either held for investment or available for sale based upon asset/liability management strategies, liquidity and profitability objectives and regulatory requirements. Investment securities, which consist primarily of Oklahoma municipal bonds, are carried at cost and adjusted for amortization of premiums or accretion of discounts. Management has the ability and intent to hold these securities until they mature. Available for sale securities, which may be sold prior to maturity, are carried at fair value. Unrealized gains or losses, less deferred taxes, are recorded as accumulated other comprehensive income in shareholders’ equity. During 2003, the amortized cost of available for sale securities increased $642 million. Mortgage-backed securities increased $627 million and now represent 97% of total available for sale securities. The increase in securities reflected an increase in available funds due to a combination of strong deposit growth and weaker loan demand during 2003. Table 12 Securities (Dollars in Thousands) Approximately $2.0 billion of mortgage-backed securities are held for our strategy of fully utilizing available capital resources by borrowing funds and investing in securities, as previously discussed in the Net Interest Revenue section of this report. Mortgage-backed securities designated as an economic hedge of mortgage servicing rights totaled $124 million at December 31, 2003 compared to $127 million a year earlier. At December 31, 2003, available for sale securities with an amortized cost basis and a fair value of $2.7 billion were pledged as collateral for repurchase agreement borrowings, deposits of public funds, and other purposes. The expected duration of the mortgage-backed securities portfolio was 3 years at December 31, 2003 compared to 2 years at December 31, 2002. This increase in duration reflected the slower anticipated prepayments of the loans represented by these securities as interest rates rose. Investment: U.S. Treasury Municipal and other tax-exempt Mortgage-backed U.S. agency securities Other debt securities Total Available for sale: U.S. Treasury Municipal and other tax-exempt Mortgage-backed securities: U.S. agencies Other Total mortgage-backed securities Other debt securities Equity securities and mutual funds Total 2003 December 31, 2002 2001 Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value $ – 184,192 2,296 1,463 $ 187,951 $ – 187,354 2,418 1,484 $ 191,256 $ – 191,305 4,380 2,265 $ 197,950 $ – 195,266 4,618 2,269 $ 202,153 $ 7,982 222,195 7,381 3,555 $ 241,113 $ 7,981 223,487 7,620 3,540 $ 242,628 $ 44,679 3,271 $ 45,424 3,257 $ 31,013 11,465 $ 32,233 11,511 $ 34,538 4,262 $ 35,197 4,299 3,514,158 845,430 4,359,588 1,140 96,460 $4,505,138 3,518,926 848,911 4,367,837 1,177 101,173 $ 4,518,868 3,005,698 727,088 3,732,786 138 87,434 $3,862,836 3,067,148 732,542 3,799,690 139 89,770 $ 3,933,343 2,637,636 669,057 3,306,693 536 93,918 $3,439,947 2,638,425 673,737 3,312,162 538 97,353 $3,449,549 Net unrealized gains on available for sale securities decreased to $14 million at December 31, 2003 from $71 million at December 31, 2002 due primarily to rising interest rates during 2003. Although the aggregate fair value of the available for sale securities portfolio exceeded amortized cost, individual securities within the portfolio had unrealized losses at year- end. Management evaluated the securities with unrealized losses to determine if we believe that 25 the losses were temporary. This evaluation considered factors such as causes of the unrealized losses and prospects for recovery over various interest rate scenarios and time periods. We also considered our plans for either holding or selling the securities. It is our belief, based on currently available information and our evaluation, that the unrealized losses in these securities were temporary. Information regarding these securities is summarized in Table 13. Table 13 Temporarily Impaired Securities (In Thousands) Less Than 12 Months Fair Value Unrealized Loss 12 Months or Longer Fair Value Unrealized Loss Total Fair Value Unrealized Loss Investment: Municipal and other tax exempt $ 24,193 $ 317 $ 37,671 $ 570 $ 61,864 $ 887 Available for sale: U. S. Treasury Municipal and other tax-exempt Mortgage-backed securities: U. S. agencies Other Equity securities and mutual funds Total Loans 1,006 803 1 17 1,371,317 252,604 – $ 1,649,923 24,194 2,502 – $ 27,031 – 320 – 20,047 2,878 $ 60,916 – 3 – 13 737 $1,323 1,006 1,123 1 20 1,371,317 272,651 2,878 $1,710,839 24,194 2,515 737 $ 28,354 The aggregate loan portfolio at December 31, 2003 totaled $7.5 billion, a $583 million or 8% increase since last year. The acquisition of CSBT increased loans by $223 million. Additionally, mortgage loans held for sale decreased $77 million. Excluding the acquisition and change in loans held for sale, the loan portfolio grew by 6%. The commercial loan portfolio increased $347 million during 2003. Much of this increase was focused in the services and energy segments of the portfolio, which increased $134 million and $99 million, respectively. Services comprised 18% of the total loan portfolio and included $256 million of loans to nursing homes, $138 million of loans to medical facilities, and $35 million to the hotel industry. Energy loans totaled $1.2 billion or 16% of total loans. Approximately $1.0 billion was to oil and gas producers. The amount of credit available to these customers generally depends on the value of their proven energy reserves based on current prices. The energy category also included loans to borrowers involved in the transportation and sale of oil and gas and to borrowers that manufacture equipment or provide other services to the energy industry. Agriculture included $197 million of loans to the cattle industry. Other notable loan concentrations by primary industry of the borrowers are presented in Table 14. Table 14 Loans (Dollars in Thousands) Commercial: Energy Manufacturing Wholesale/retail Agriculture Services Other commercial and industrial Total commercial Commercial real estate: Construction and land development Multifamily Other real estate loans Total commercial real estate Residential mortgage: Secured by 1-4 family residential properties Residential mortgages held for sale Total residential mortgage Consumer Total 2003 2002 2001 2000 1999 December 31, $ 1,231,599 482,657 668,202 228,222 1,383,835 342,187 4,336,702 $ 1,132,178 501,506 627,422 186,976 1,249,622 292,094 3,989,798 $ 987,556 467,260 600,470 170,861 1,084,480 364,123 3,674,750 $ 837,223 421,046 499,017 185,407 963,171 342,169 3,248,033 $ 606,561 344,175 407,785 173,653 807,184 325,343 2,664,701 436,087 271,119 922,886 1,630,092 1,015,643 56,543 1,072,186 356,227 307,119 772,492 1,435,838 929,759 133,421 1,063,180 327,455 291,687 722,633 1,341,775 703,080 166,093 869,173 311,700 271,459 687,335 1,270,494 638,044 48,901 686,945 249,160 257,187 588,195 1,094,542 531,058 57,057 588,115 444,909 $ 7,483,889 412,167 $ 6,900,983 409,680 $ 6,295,378 312,390 $ 5,517,862 296,131 $ 4,643,489 26 BOK Financial participates in shared national credits when appropriate to obtain or maintain business relationships with local customers. At December 31, 2003, the outstanding principal balance of these loans totaled $719 million, including $704 million to borrowers with local market relationships. BOK Financial is the agent lender in approximately 39% of these loans. Commercial real estate loans totaled $1.6 billion or 22% of the loan portfolio at December 31, 2003. This represented a 14% increase from the previous year. Construction and land development included $280 million for single family residential lots and premises. The major components of other commercial real estate loans were retail facilities at $313 million and office buildings at $290 million. Commercial real estate loans secured by retail facilities increased $118 million during the past year. This growth focused on retail shopping developments with strong anchor tenants, primarily in our Texas markets. Residential mortgage loans, excluding loans held for sale, included $342 million of home equity loans, $305 million of loans for business relationship purposes, $234 million of adjustable rate mortgages and $101 million of community development loans. Consumer loans included $203 million of indirect automobile loans. Substantially all of these loans were purchased from dealers in Oklahoma. Approximately 15% of the indirect automobile loan portfolio was considered sub-prime. Table 15 Loan Maturity and Interest Rate Sensitivity at December 31, 2003 (Dollars in Thousands) Total Remaining Maturities of Selected Loans Within 1 Year 1-5 Years After 5 Years Loan maturity: Commercial Commercial real estate Total Interest rate sensitivity for selected loans with: Predetermined interest rates Floating or adjustable interest rates Total $ 4,336,702 1,630,092 $ 5,966,794 $ 2,061,181 3,905,613 $ 5,966,794 $ 1,682,922 $ 2,183,950 $ 469,830 215,990 $ 2,934,886 $ 685,820 663,166 $ 2,346,088 750,936 $ 514,235 $ 1,227,437 $ 319,509 366,311 $ 2,346,088 $ 2,934,886 $ 685,820 1,831,853 1,707,449 BOK Financial continued to increase the geographic distribution of the loan portfolio by expansion into Colorado in addition to growth in Texas. Total loans in the Oklahoma market area comprised 62% of the total loan portfolio at December 31, 2003 compared to 66% a year ago. Table 16 reflects the distribution of major loan categories among our principal market areas. 27 Table 16 Loans by Principal Market Area (Dollars in Thousands) Oklahoma: Commercial Commercial real estate Residential mortgage Residential mortgage held for sale Consumer Total Oklahoma Texas: Commercial Commercial real estate Residential mortgage Consumer Total Texas Albuquerque: Commercial Commercial real estate Residential mortgage Consumer Total Albuquerque Northwest Arkansas: Commercial Commercial real estate Residential mortgage Consumer Total Northwest Arkansas Colorado1: Commercial Commercial real estate Residential mortgage Consumer Total Colorado Total BOK Financial loans 2003 2002 2001 2000 1999 December 31, $ 2,802,852 789,868 699,274 56,543 324,305 $ 4,672,842 $ 2,677,616 763,469 656,391 133,421 294,404 $ 4,525,301 $ 2,576,808 739,419 476,023 166,093 314,060 $ 4,272,403 $ 2,476,389 768,232 409,494 48,901 250,298 $ 3,953,314 $ 2,165,873 704,999 319,749 57,057 236,565 $ 3,484,243 $ 963,340 477,561 204,481 101,269 $ 1,746,651 $ 866,905 455,364 192,575 104,353 $ 1,619,197 $ 775,788 380,602 136,181 85,347 $ 1,377,918 $ 549,505 299,357 122,082 53,397 $ 1,024,341 $ 383,460 227,748 102,888 50,923 $ 765,019 $ 297,896 175,745 66,179 11,070 $ 550,890 $ 286,622 150,293 76,020 11,399 $ 524,334 $ 219,257 136,425 85,309 8,200 $ 449,191 $ 167,023 118,492 101,920 6,107 $ 393,542 $ 63,370 87,759 103,684 5,410 $ 260,223 $ 63,480 75,452 6,245 2,671 $ 147,848 $ 63,113 66,712 4,773 2,011 $ 136,609 $ 72,728 85,329 5,567 2,073 $ 165,697 $ 50,680 84,413 4,548 2,588 $ 142,229 $ 45,603 74,036 4,737 3,233 $ 127,609 $ 209,134 111,466 39,464 5,594 $ 365,658 $ 7,483,889 $ 95,542 – – – $ 95,542 $ 6,900,983 $ 30,169 – – – $ 30,169 $ 6,295,378 $ 4,436 – – – $ 4,436 $ 5,517,862 $ 6,395 – – – $ 6,395 $ 4,643,489 1 Includes Denver loan production office. Derivatives with Credit Risk BOK Financial offers programs that permit its customers to hedge various risks. Much of the focus of these programs had been on assisting energy producing customers to hedge against price fluctuations and to take positions through energy derivative contracts. We have added or expanded programs to assist customers in managing their interest rate and foreign exchange risks during 2003. Each of these programs work essentially the same way. Derivative contracts are executed between the customers and BOk. Offsetting contracts are executed between BOk and selected counterparties to minimize the risk to us of changes in energy prices, interest rates or foreign exchange rates. The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or a fee paid to BOk as compensation for administrative costs, credit risk and profit. These programs create credit risk for amounts due to BOk from its customers and counterparties. Customer credit risk is monitored through existing credit policies. Changes in energy prices, interest rates or foreign exchange rates are evaluated across a range of possible scenarios to determine the maximum likely exposure we are willing to have individually to any customer. Customers may also be required to provide margin collateral to further limit our credit risk. Counterparty credit risk is evaluated through existing policies. This evaluation considers the total relationship between BOK Financial and each counterparty. Individual limits are established by management and approved by the Asset/Liability Committee. Margin collateral is required if the exposure between BOk and any counterparty exceeds established limits. These limits are reduced and additional margin collateral is based on changes in the counterparties’ credit ratings. 28 A deterioration of the credit standing of one or more of the counterparties to these contracts may result in BOK Financial recognizing a loss as the fair value of the affected contracts may no longer move in tandem with the offsetting contracts. This could occur if the credit standing of the counterparty deteriorated such that either the fair value of energy production no longer supported the contract or the counterparty’s ability to provide margin collateral was impaired. Derivative contracts are carried at fair value. At December 31, 2003, the fair values of derivative contracts reported as assets totaled $145 million. This included energy contracts Summary of Loan Loss Experience with fair values of $137 million, interest rate contracts with fair values of $3 million and foreign exchange contracts with fair values of $5 million. The fair values of derivative contracts reported as liabilities totaled $146 million. Approximately 66% of the fair value of asset contracts was with customers. The remaining 34% was with counterparties. Conversely, 64% of the liability contracts was with counterparties. The remaining 36% was with customers. The maximum net exposure to any single customer or counterparty totaled $24 million. The reserve for loan losses, which is available to absorb losses inherent in the loan portfolio, totaled $129 million at December 31, 2003 compared to $116 million at December 31, 2002. These amounts represented 1.73% and 1.72% of loans, excluding loans held for sale, at December 31, 2003 and 2002, respectively. Losses on loans held for sale, principally mortgage loans accumulated for placement into security pools, are charged to earnings through adjustment in the carrying value. The reserve for loan losses also represented 244% of nonperforming loans at year- end 2003 compared to 233% at year-end 2002. Net loans charged off during 2003 increased to $25 million in 2003 compared to $21 million in the previous year. Net commercial loans charged- off during 2003 totaled $15.4 million, a $3.4 million increase from 2002. Table 17 provides statistical information regarding the reserve for loan losses for the past five years. Table 17 Summary of Loan Loss Experience (Dollars in Thousands) 2003 Years ended December 31, 2001 2000 2002 1999 Beginning balance Loans charged off: Commercial Commercial real estate Residential mortgage Consumer Total Recoveries of loans previously charged off: Commercial Commercial real estate Residential mortgage Consumer Total Net loans charged off Provision for loan losses Additions due to acquisitions Ending balance Reserve for loan losses to loans outstanding at year-end1 Net charge-offs to average loans1 Provision for loan losses to average loans1 Recoveries to gross charge-offs Reserve as a multiple of net charge-offs Problem Loans: Loans past due (90 days) Nonaccrual2 Renegotiated Total Foregone interest on nonaccrual loans2 1 Excludes residential mortgage loans held for sale. 2 29 $116,070 $101,905 $ $ 82,655 $ $ 76,234 $ $ 65,922 16,331 88 1,721 13,335 31,475 887 53 83 5,102 6,125 25,350 35,636 2,283 $128,639 13,326 286 412 11,881 25,905 18,042 71 308 6,827 25,248 7,747 1,176 285 5,593 14,801 2,136 35 617 4,560 7,348 1,276 118 146 3,436 4,976 20,929 33,730 1,364 3,110 487 17 2,156 5,770 1,578 10,365 1,525 $116,070 $ $101,905 $ $ 82,655 $ $ 76,234 1,126 428 157 2,307 4,018 10,783 17,204 – 1,151 653 57 2,727 4,588 20,660 37,610 2,300 1.73% .36 .50 19.46 5.07x 1.72% .33 .54 19.21 5.55x 1.66% .35 .63 18.17 4.93x 1.51% .22 .35 27.15 7.67x 1.66% .04 .26 78.52 48.31x $ 14,944 52,681 – $ 67,625 $ 5,268 49,855 – $ 8,117 $ $ 8,108 $ $ 15,467 $ $ 11,336 19,465 – $ 57,972 $ $ 51,675 $ $ 55,215 $ $ 30,801 $ 4,770 $ $ 5,163 $ $ 3,803 $ $ 2,321 43,540 27 39,661 87 Interest collected and recognized on nonaccrual loans was not significant in 2003 and previous years disclosed. Specific impairment reserves are determined through evaluation of estimated future cash flows and collateral value. At December 31, 2003, specific impairment reserves totaled $6.4 million on total impaired loans of $47 million. Nonspecific reserves are maintained for risks beyond factors specific to an individual loan or those identified through migration analysis. A range of potential losses is determined for each risk factor identified. At December 31, 2003, the Table 18 Loan Loss Reserve Allocation (Dollars in Thousands) ranges of potential losses for the more significant factors were: General economic conditions – $8.0 million to $10.8 million. Concentration in large loans – $1.3 million to $2.5 million. Allocation of the loan loss reserve to the major loan categories is presented in Table 18. 2003 2002 December 31, 2001 2000 1999 Reserve3 % of Loans1 Reserve3 % of Loans1 Reserve3 % of Loans1 Reserve3 % of Loans1 Reserve3 % of Loans1 Loan category: Commercial2 Commercial real estate Residential mortgage Consumer Nonspecific allowance Total $ 69,594 58.39% $ 65,280 58.95% $ 61,164 59.95% $55,187 59.39% $47,261 58.10% 17,791 6,949 16,697 17,608 21.95 13.67 5.99 – 17,753 4,099 14,384 14,554 21.22 13.74 6.09 – 15,923 3,774 6,890 14,154 21.89 11.47 6.69 – $128,639 100.00% $ 116,070 100.00% $101,905 100.00% 12,393 2,019 6,407 6,649 $82,655 23.23 11.67 5.71 – 100.00% 11,216 2,137 6,721 8,899 $76,234 23.86 11.58 6.46 – 100.00% 1 Excludes residential mortgage loans held for sale. 2 Specific allocation for Year 2000 risks was $2.0 million in 1999. 3 Specific allocation for the loan concentration risks are included in the appropriate category. Nonperforming Assets Information regarding nonperforming assets, which totaled $60 million at December 31, 2003 and $57 million at December 31, 2002, is presented in Table 19. Nonperforming assets included nonaccrual and renegotiated loans and excluded loans 90 days or more past due but still accruing interest. Nonaccrual loans increased $2.8 million during 2003. Newly identified nonaccruing loans totaled $33 million during the year. Nonaccruing loans decreased $18 million for loans charged off and foreclosed and $11 million for cash payments received. Table 19 Nonperforming Assets (Dollars in Thousands) Nonperforming loans Nonaccrual loans: Commercial Commercial real estate Residential mortgage Consumer Total nonaccrual loans Renegotiated loans Total nonperforming loans Other nonperforming assets Total nonperforming assets Ratios: 2003 2002 December 31, 2001 2000 1999 $41,360 2,311 7,821 1,189 52,681 – 52,681 7,186 $59,867 $39,114 3,395 5,950 1,396 49,855 – 49,855 6,719 $56,574 $35,075 3,856 4,140 469 43,540 27 43,567 7,141 $50,708 $37,146 161 1,855 499 39,661 87 39,748 3,851 $43,599 $12,686 2,046 3,383 1,350 19,465 – 19,465 3,478 $22,943 Reserve for loan losses to nonperforming loans Nonperforming loans to period-end loans2 Loans past due (90 days)1 244.18% .71 $14,944 232.82% .74 $ 8,117 233.90% .71 $ 8,108 207.95% .73 $15,467 391.65% .42 $11,336 1 Includes residential mortgages guaranteed by agencies of the U.S. Government. 2 Excludes residential mortgage loans held for sale. $ 4,132 $ 4,956 $ 6,222 $ 7,616 $ 8,538 30 The loan review process also identified loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrowers or the value of the collateral. Because the borrowers are still performing in accordance with the original terms of the loan agreements, and no loss of principal or interest is anticipated, these loans were not included in Nonperforming Assets. Known information does, however, cause management concerns as to the borrowers’ ability to comply with current repayment terms. These potential problem loans totaled $56 million at December 31, 2003 and $75 million at December 31, 2002. The current composition of potential problem loans by primary industry included general services at $16 million, healthcare at $14 million and energy at $11 million. Deposits Deposit accounts, which are the primary funding source for our asset growth, increased 13% to $9.2 billion during 2003. Excluding deposits of $301 million acquired with CSBT, deposits grew by 10%. Interest-bearing transaction accounts, which are the largest category of our deposit accounts, increased 27% to $4.0 billion. Additionally, noninterest-bearing demand deposits increased 8%, while time deposits increased 3%. The strong growth in interest-bearing transaction accounts compared to time deposits reflected customer expectations regarding the current low interest rates. Average deposits increased $1.3 billion or 18% during 2003. Core deposits, which we define as deposits of less than $100,000, excluding public funds and brokered deposits, increased 15% to $4.6 billion. Average public funds and brokered deposits were $573 million and $394 million, respectively, for 2003. Public funds and brokered deposits averaged $488 million and $379 million, respectively, during 2002. The remaining average deposits, which were comprised of account balances in excess of $100,000, increased 27% to $2.9 billion. Table 20 Maturity of Domestic CDs and Public Funds in Amounts of $100,000 or More (In Thousands) Months to maturity: 3 or less Over 3 through 6 Over 6 through 12 Over 12 Total December 31, 2003 2002 $ 545,555 300,094 171,258 1,093,750 $2,110,657 $ 448,548 442,651 194,241 961,413 $2,046,853 BOK Financial competed for retail and commercial deposits by offering a broad range of products and services. Retail deposit growth was supported by customer convenience through Online Banking and free Billpay services. We also offered an extensive branch and ATM network, including 32 supermarket branches with extended service hours and a 24-hour Express Bank call center. Commercial deposit growth was supported by offering treasury management and lockbox products. The distribution of deposit accounts among our principal markets is shown in Table 21. We continued to see strong deposit growth in the Texas and Albuquerque markets. Deposit growth in Texas was evenly spread between Dallas and Houston, which demonstrated our ability to compete in these markets. 31 Table 21 Deposits by Principal Market Area (In Thousands) Oklahoma: Demand Interest-bearing: Transaction Savings Time Total interest-bearing Total Oklahoma Texas: Demand Interest-bearing: Transaction Savings Time Total interest-bearing Total Texas Colorado: Demand Interest-bearing: Transaction Savings Time Total interest-bearing Total Colorado December 31, 2003 2002 $1,025,483 $1,044,628 2,246,675 98,611 2,403,293 4,748,579 $5,774,062 1,897,353 103,749 2,334,949 4,336,051 $5,380,679 $ 421,292 $ 394,164 1,213,777 35,702 505,463 1,754,942 $2,176,234 953,550 33,071 510,512 1,497,133 $1,891,297 $ 79,424 $ 162,651 18,347 42,448 223,446 $ 302,870 $ – – – – – – Borrowings and Capital Parent Company BOK Financial (parent company) has a $125 million unsecured revolving line of credit with certain banks that matures in December 2006. The outstanding principal balance of this credit agreement was $95 million at December 31, 2003. Interest is based upon either a base rate or the British Bankers’ Association Eurodollar rate plus a defined margin that is determined by our credit rating. This margin ranges from 0.625% to 1.25%. The base rate is defined as the greater of the daily federal funds rate plus 0.5% or the prime rate. This credit agreement includes certain restrictive covenants that limit our ability to borrow additional funds and to pay cash dividends on common stock. These covenants also require BOK Financial and subsidiary banks to maintain minimum capital levels and to exceed minimum net worth ratios. BOK Financial met all of the restrictive covenants at December 31, 2003. The primary source of liquidity for BOK Financial is dividends from subsidiary banks, which are limited by various banking regulations to net profits, as defined, for the preceding two years. Dividends are further restricted by minimum capital requirements. Albuquerque: Demand Interest-bearing: Transaction Savings Time Total interest-bearing Total Albuquerque Northwest Arkansas: Demand Interest-bearing: Transaction Savings Time Total interest-bearing Total Northwest Arkansas December 31, 2003 2002 $ 106,050 $ 79,953 370,294 20,728 317,924 708,946 $814,996 295,174 26,704 287,607 609,485 $689,438 $ 16,351 $ 12,949 28,411 1,341 105,598 135,350 $151,701 18,025 1,214 134,923 154,162 $ 167,111 Based on the most restrictive limitations, the subsidiary banks could declare up to $121 million of dividends without regulatory approval. Management has developed and the Board of Directors has approved an internal capital policy that is more restrictive than the regulatory capital standards. The subsidiary banks could declare dividends of up to $71 million under this policy. Equity capital for BOK Financial increased $129 million to $1.2 billion during 2003. Net income provided $158 million to this increase, partially offset by a $35 million reduction in net unrealized gains on available for sale securities. The remaining increase in capital during 2003 resulted primarily from the exercise of employee stock options. During 2003 and 2002, 3% dividends payable in shares of BOK Financial’s common stock were declared and paid. The shares issued were valued at $58 million and $52 million, respectively, based on current stock prices when declared. No cash dividends were paid on common stock. Management plans to recommend continued payment of an annual dividend in shares of common stock. 32 BOK Financial and subsidiary banks are subject to various capital requirements administered by federal agencies. Failure to meet minimum capital requirements can result in certain mandatory and possibly additional discretionary actions by regulators that could have material impact on operations. These capital requirements Subsidiary Banks BOK Financial’s subsidiary banks use borrowings to supplement deposits as a source of funds for loans and securities growth. Sources of these borrowings include federal funds purchased, securities repurchase agreements, and advances from the Federal Home Loan Banks. Interest rates and maturity dates for the various borrowings are matched with specific asset types in the asset/liability management process. In 1997, BOk issued $150 million of 7.125% fixed rate subordinated debentures that mature in Off-Balance Sheet Arrangements BOK Financial enters into certain off-balance sheet arrangements in the normal course of business. These arrangements include standby letters of credit which totaled $497 million at December 31, 2003. Standby letters of credit are conditional commitments to guarantee the performance of our customer to a third party. Since credit risk is involved in issuing standby letters of credit, we use the same credit policies in evaluating the credit worthiness of the customer as are used for lending decisions. We also use the same evaluation process in obtaining collateral on standby letters of credit as is used for loan commitments. During 2002, BOK Financial issued shares of common stock and options to purchase additional shares with a fair value of $65 million for its purchase of Bank of Tanglewood. In addition, BOK Financial agreed to a limited price guarantee on a portion of the shares issued in this purchase. The fair value of this guarantee, estimated to be $3 million based upon the Black-Scholes Option Pricing Model, was included in the purchase price. Pursuant to this guarantee, any holder of BOK Financial common shares issued in this acquisition may annually make a claim for the excess of the guaranteed price and the actual sales price of any shares sold during a 60-day period after each of the first five anniversary dates after October 25, 2002. The maximum annual number of shares subject to this guarantee is 203,951. The price guarantee is non-transferable and non-cumulative. BOK Financial may elect, in its sole discretion, to issue additional shares of common stock to satisfy any obligation under the price guarantee or to pay 33 include quantitative measures of assets, liabilities, and off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulators. The capital ratios for BOK Financial and each subsidiary bank are presented in Note 15 to the Consolidated Financial Statements. 2007. Interest rate swaps were used as a fair value hedge to convert the fixed interest on these debentures to a LIBOR-based floating rate, which required an adjustment of the carrying value of this debt to fair value. In 2001, the interest rate swap was terminated. The related fair value adjustment of the debt of $8 million was fixed at that time and is being amortized over the remaining life of the debt. cash. The maximum remaining number of shares that may be issued to satisfy any price guarantee obligations is 10 million. If, as of any benchmark date, we have already issued 10 million shares, we are not obligated to make any further benchmark payments. Additionally, our ability to pay cash to satisfy any price guarantee obligation is limited by applicable banking capital and dividend regulations. The following table presents the estimated number of common shares that would be required to be issued and the cash equivalent value if the market value of our stock remained at $38.72, its closing price on December 31, 2003 and if all holders exercised their rights under the price guarantee agreement. The benchmark price and number of shares subject to protection have been restated to reflect the 3% stock dividend issued during the second quarter of 2003. Cash Equivalent of Benchmark Period Benchmark Price Number Of Shares Additional Additional Shares To Issue Shares (In Thousands) October 25, 2004 – December 24, 2004 October 25, 2005 – December 24, 2005 October 25, 2006 – December 24, 2006 October 25, 2007 – December 24, 2007 $36.30 203,951 – – $38.80 203,951 415 $ 16 $41.30 203,951 13,600 $ 527 $43.81 203,951 26,785 $1,037 Aggregate Contractual Obligations BOK Financial has numerous contractual obligations in the normal course of business. These obligations include time deposits and other borrowed funds, premises used under various operating leases, commitments to extend credit to borrowers and to purchase securities, derivative contracts and contracts for services such as data processing that are integral to our operations. The following table summarizes payments due per these contractual obligations at December 31, 2003. Table 22 Contractual Obligations as of December 31, 2003 (In Thousands) Time deposits Other borrowings Subordinated debenture Operating lease obligations Derivative contracts Loan commitments Securities commitments Data processing contracts Total Less Than 1 Year 1 to 3 Years 4 to 5 Years More Than 5 Years $ 987,230 488,931 10,688 12,389 104,258 1,414,931 243,492 12,486 $ 3,274,405 $ 790,867 532,360 21,375 22,931 39,994 815,603 – 23,091 $2,246,221 $ 717,306 $ 41,251 8,487 – 36,803 2,807 366,556 – 11,949 $467,853 3,325 156,234 18,018 2,267 281,349 – 19,509 $ 1,198,008 Total $2,536,654 1,033,103 188,297 90,141 149,326 2,878,439 243,492 67,035 $7,186,487 Payments on time deposits and other borrowed funds include interest that has been calculated from rates at December 31, 2003. Many of these obligations have variable interest rates, and actual payments will differ from the amounts shown on this table. Obligations under derivative contracts used for interest rate risk management purposes are included with projected payments from time deposits and other borrowed funds as appropriate. Only time deposits with an original term exceeding one year are presented in Table 22. Payments on time deposits are based on contractual maturity dates. These funds may be withdrawn prior to maturity. We may charge the customer a penalty for early withdrawal. Operating lease commitments generally represent real property we rent for branch offices, corporate offices and operations facilities. Payments presented represent the minimum lease payments and exclude related costs such as utilities and property taxes. Market Risk Obligations under derivative contracts are used in customer hedging programs. As previously discussed, we have entered into derivative contracts that are expected to substantially offset the cash payments due on these obligations. Loan commitments represent legally binding obligations to provide financing to our customers. Because some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Data processing and communications contracts represent the minimum obligations under these contracts. Additional payments that are based on the volume of transactions processed are excluded. The Company also has obligations with respect to its employee and executive benefit plans. See Notes 12 and 13 to the Consolidated Financial Statements. Market risk 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. 34 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 Interest Rate Risk Management (Other than Trading) 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. BOK Financial has a large portion of its earning assets in variable rate loans and a large portion of its liabilities in demand deposit accounts and interest bearing transaction accounts. Changes in interest rates affect earning assets more rapidly than interest bearing liabilities in the short term. Management has adopted several strategies to reduce this interest rate sensitivity. As previously noted in the Net Interest Revenue section of this report, management acquires securities that are funded by borrowings in the capital markets. These securities have an expected average duration of 3 years while the related funds borrowed have an average duration of 90 days. Securities purchased and funds borrowed under this strategy averaged $2.0 billion during 2003. BOK Financial uses interest rate swaps in managing its interest rate sensitivity. These products are generally used to more closely match interest on certain fixed-rate loans with funding sources and long-term certificates of deposit with earning assets. During 2003 and 2002, net interest revenue increased $14.0 million and $12.7 million, respectively, from periodic settlements of these contracts. Although the purpose of these derivative contracts is to manage interest rate risk, we have not designated them as hedges for accounting purposes. The contracts are carried on the balance sheet at fair value, and changes in fair value are reported in income as derivatives gains or losses. A net loss of $9.5 million was recognized in 2003 compared to a net gain of $4.7 million in 2002 from adjustments of these swaps to fair value. Credit risk from these swaps is closely monitored as part of our overall process of managing credit exposure to other financial institutions. Additional information regarding interest rate swap contracts is presented in Note 4 to the Consolidated Financial Statements. The effectiveness of these strategies in managing the overall interest rate risk is evaluated through the use of an asset/liability model. BOK Financial performs a sensitivity analysis to identify more dynamic interest rate 35 risk exposures, including embedded option positions, on net interest revenue, net income and the economic value of equity. A simulation model is used to estimate the effect of changes in interest rates over the next twelve months based on eight interest rate scenarios. Three specified interest rate scenarios are used to evaluate interest rate risk against policy guidelines. These are a “most likely” rate scenario and two “shock test” scenarios, first assuming a sustained parallel 200 basis point increase and second assuming a sustained parallel 100 basis point decrease in interest rates. Management historically evaluated interest rate sensitivity for a sustained 200 basis point decrease in rates. However, these results are not meaningful in the current low-rate environment. An independent source is used to determine the most likely interest rate scenario. Our primary interest rate exposures include the Federal Funds rate, which affects short-term borrowings, and the prime lending rate and LIBOR, which are the basis for much of the variable-rate loan pricing. Additionally, mortgage rates directly affect the prepayment speeds for mortgage-backed securities and mortgage servicing rights. Derivative financial instruments and other financial instruments used for purposes other than trading are included in this simulation. The model incorporates assumptions regarding the effects of changes in interest rates and account balances on indeterminable maturity deposits based on a combination of historical analysis and expected behavior. The impact of planned growth and new business activities is factored into the simulation model. The effects of changes in interest rates on the value of mortgage servicing rights are excluded from Table 23 due to the extreme volatility over such a large rate range. The effects of interest rate changes on the value of mortgage servicing rights and securities identified as economic hedges are presented in the Lines of Business – Mortgage Banking section of this report. Table 23 Interest Rate Sensitivity (Dollars in Thousands) 200 bp Increase 2003 2002 100 bp Decrease Most Likely 2003 2002 2003 2002 Anticipated impact over the next twelve months: Net interest revenue Net income $ 7,213 $ 12,354 $ (3,921) $ (7,456) $ 1,688 $ 7,983 1.6% 3.1% (.9)% (1.8)% .4% 2.0% $ 4,508 $ 7,722 $ (2,450) $ (4,660) $ 1,055 $ 4,990 2.4% 5.0% (1.3)% (3.0)% .6% 3.2% Economic value of equity $(71,325) $ 12,398 $ 10,893 $ (36,768) $ (41,388) $ 43,799 (4.6)% 0.9% .7% (2.6)% (2.7)% 3.1% The simulations used to manage market risk are based on numerous assumptions regarding the effects of changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, as a result, the model cannot precisely estimate net interest revenue, net income or the economic value of equity or Trading Activities precisely predict the impact of higher or lower interest rates on net interest revenue, net income or the economic value of equity. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes, market conditions and management strategies, among other factors. BOK Financial enters into trading activities both as an intermediary for customers and for its own account. As an intermediary, BOK Financial will take positions in securities, generally mortgage-backed securities, government agency securities and municipal bonds. These securities are purchased for resale to customers, which include individuals, corporations, foundations and financial institutions. BOK Financial will also take trading positions in U.S. Treasury securities, mortgage-backed securities, municipal bonds and financial futures for its own account. These positions are taken with the objective of generating trading profits. Both of these activities involve interest rate risk. A variety of methods are used to manage the interest rate risk of trading activities. These methods include daily marking of all positions to market value, independent verification of inventory pricing and position limits for each trading activity. Hedges in either the futures or cash markets may be used to reduce the risk associated with some trading programs. The Risk Management Department monitors trading activity daily and reports to senior management and the Risk Oversight and Audit Committee of the BOK Financial Board of Directors any exceptions to trading position limits and risk management policy exceptions. Management uses a Value at Risk (“VAR”) methodology to measure the market risk inherent in its trading activities. VAR is calculated based upon historical simulations over the past five years using a variance / covariance matrix of interest rate changes. It represents an amount of market loss that is likely to be exceeded only one out of every 100 two-week periods. Trading positions are managed within guidelines approved by the Board of Directors. These guidelines limit the VAR to $1.6 million. At December 31, 2003, the VAR was $135 thousand. The greatest VAR during 2003 was $1.4 million. New Accounting Standards In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation 46 “Consolidation of Variable Interest Entities” (“FIN 46”). FIN 46 clarified the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements” and provided a new framework for identifying variable interest entities (“VIEs”) and determining when a company should include the assets, liabilities, noncontrolling interests and results of operations of a VIE in its consolidated financial statements. VIEs are generally defined in FIN 46 as entities that either do not have sufficient equity to finance their activities without support from other parties or whose equity investors lack a controlling financial interest. Examples of such entities may include partnerships, joint ventures, securitization vehicles or similarly structured entities. FIN 46 was effective immediately for VIEs created after January 31, 2003 and at the beginning of the 36 fourth quarter of 2003 for VIEs created prior to February 1, 2003. FIN 46 was revised in December 2003. This revision addressed certain issues in the original interpretation, including the application of FIN 46 to trust relationships, mutual funds organized as trusts and troubled debt restructurings. BOK Financial has limited use of partnerships, joint ventures or securitization vehicles in its operations and the implementation of FIN 46, as revised, had no impact on the consolidated financial statements. In April 2003, the FASB issued Statement of Financial Accounting Standards No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amended and clarified financial accounting and reporting for derivative instruments, including certain derivatives embedded in other contracts, and hedging 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, activities. This statement was effective for contracts entered into or modified and for hedging relationships designated after June 30, 2003. This statement did not have a significant impact on the consolidated financial statements. In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” This statement, which established new standards for how an issuer classifies and measures certain financial instruments, was effective for financial instruments issued or modified after May 31, 2003. Other provisions of this statement were effective for fiscal periods beginning after June 15, 2003. This statement did not have a significant impact on the consolidated financial statements. 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. 37 Report of Management on Financial Statements Management is responsible for the consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States, and all related information appearing in this annual report. In management’s opinion, the accompanying consolidated financial statements contain all adjustments necessary to present fairly the financial conditions, results of operations and cash flows of BOK Financial and its subsidiaries at the dates and for the periods presented. As of December 31, 2003, an evaluation was performed under the supervision and with the participation of BOK Financial’s management, including the Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operations of our disclosure controls and procedures. Based on that evaluation, BOK Financial’s management, including the CEO and CFO, concluded that BOK Financial’s disclosure controls and procedures were effective as of December 31, 2003. There have been no significant changes in our internal controls or in other factors that could significantly affect internal controls subsequent to December 31, 2003. BOK Financial and its subsidiaries maintain a system of internal accounting controls designed to provide reasonable assurance that transactions are executed in accordance with management’s general or specific authorization and are recorded as necessary to maintain accountability for assets and to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States. This system includes written policies and procedures, a corporate code of conduct, an internal audit program and standards for the hiring and training of qualified personnel. The Board of Directors of BOK Financial maintains a Risk Oversight and Audit Committee consisting of outside directors that meet periodically with management and BOK Financial’s internal and independent auditors. The Committee considers the audit and nonaudit services to be performed by the independent auditors, makes arrangements for the internal and independent audits and recommends BOK Financial’s selection of independent auditors. The Committee also reviews the results of the internal and independent audits, critical accounting policies and practices and various shareholder reports and other reports and filings. Ernst & Young, LLP, certified public accountants, have been engaged to audit the consolidated financial statements of BOK Financial and its subsidiaries. Their audit is conducted in accordance with auditing standards generally accepted in the United States and their report on BOK Financial’s consolidated financial statements follows this page. 38 Report of Independent Auditors We have audited the accompanying consolidated balance sheets of BOK Financial Corporation as of December 31, 2003 and 2002, and the related consolidated statements of earnings, changes in shareholders’ equity, and cash flows for each of the three years in the period ended December 31, 2003. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the consolidated financial position of BOK Financial Corporation at December 31, 2003 and 2002, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2003, in conformity with accounting principles generally accepted in the United States. As discussed in Note 1 to the consolidated financial statements, in 2003, the Company retroactively changed its method of accounting for stock-based employee compensation, and effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, Goodwill and Other Intangible Assets. Ernst & Young LLP Tulsa, Oklahoma January 28, 2004 39 BOK FINANCIAL CORPORATION Consolidated Statements of Earnings (In Thousands Except Share And Per Share Data) 2003 2002 2001 Interest Revenue Loans Taxable securities Tax-exempt securities Total securities Trading securities Funds sold and resell agreements Total interest revenue Interest Expense Deposits Borrowed funds Subordinated debentures Total interest expense Net Interest Revenue Provision for Loan Losses Net Interest Revenue After Provision for Loan Losses Other Operating Revenue Brokerage and trading revenue Transaction card revenue Trust fees and commissions Service charges and fees on deposit accounts Mortgage banking revenue Leasing revenue Other revenue Total fees and commissions Gain on sale of assets Gain on sales of securities, net Gain (loss) on derivatives, net Total other operating revenue Other Operating Expense Personnel expense Business promotion Professional fees and services Net occupancy and equipment Data processing and communications FDIC and other insurance Printing, postage and supplies Net gains and operating expenses on repossessed assets Amortization of intangible assets Mortgage banking costs Provision (recovery) for impairment of mortgage servicing rights Other expense Total other operating expense Income Before Taxes Federal and state income tax Income Before Cumulative Effect of a Change in Accounting Principle, Net of Tax Transition adjustment of adoption of FAS 133 Net Income Earnings Per Share: Basic: Before cumulative effect of change in accounting principle Transition adjustment of adoption of FAS 133 Net Income Diluted: Before cumulative effect of change in accounting principle Transition adjustment of adoption of FAS 133 Net Income Average Shares Used in Computation: Basic Diluted See accompanying notes to consolidated financial statements. $375,788 180,581 7,898 188,479 625 281 565,173 131,929 33,738 9,477 175,144 390,029 35,636 354,393 38,681 55,491 45,763 82,042 52,336 3,508 25,969 303,790 822 7,188 (8,808) 302,992 222,922 12,937 17,935 45,967 51,537 2,267 13,930 271 8,101 40,296 (22,923) 16,871 410,111 247,274 88,914 158,360 – $158,360 $ $ $ $ 2.75 – 2.75 2.45 – 2.45 $ 377,708 186,902 9,359 196,261 653 291 574,913 145,466 50,495 10,751 206,712 368,201 33,730 334,471 24,450 50,385 40,092 67,632 48,910 3,330 20,276 255,075 1,157 58,704 5,894 320,830 187,439 11,367 12,987 42,347 44,084 1,903 12,665 1,014 7,638 42,271 45,923 16,957 426,595 228,706 80,835 147,871 – $ 147,871 $ $ $ $ 2.66 – 2.66 2.37 – 2.37 $455,332 184,464 12,979 197,443 1,029 829 654,633 206,209 108,549 10,923 325,681 328,952 37,610 291,342 19,644 42,471 40,567 51,284 50,155 3,745 20,087 227,953 557 30,640 (4,062) 255,088 166,864 10,658 13,391 42,764 38,003 1,717 12,329 1,401 20,113 30,261 15,551 16,729 369,781 176,649 62,446 114,203 236 $114,439 $ $ $ $ 2.09 – 2.09 1.86 – 1.86 56,990,244 64,571,962 54,964,747 62,479,183 54,150,255 61,539,309 40 BOK FINANCIAL CORPORATION Consolidated Balance Sheets (In Thousands Except Share Data) Assets Cash and due from banks Funds sold and resell agreements Trading securities Securities: Available for sale Available for sale securities pledged to creditors Investment (fair value: 2003 – $191,256; 2002 – $202,153) Total securities Loans Less reserve for loan losses Net loans Premises and equipment, net Accrued revenue receivable Intangible assets, net Mortgage servicing rights, net Real estate and other repossessed assets Bankers’ acceptances Receivable on unsettled security transactions Derivative contracts Other assets Total assets Liabilities and Shareholders’ Equity Noninterest-bearing demand deposits Interest-bearing deposits: Transaction Savings Time Total deposits Funds purchased and repurchase agreements Other borrowings Subordinated debenture Accrued interest, taxes and expense Bankers’ acceptances Due on unsettled security transactions Derivative contracts Other liabilities Total liabilities Shareholders’ equity: Preferred stock Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued: 2003 – 58,055,697; 2002 – 55,749,596) Capital surplus Retained earnings Treasury stock (shares at cost: 2003 – 848,892; 2002 – 682,967) Accumulated other comprehensive income Total shareholders’ equity Total liabilities and shareholders’ equity See accompanying notes to consolidated financial statements. 41 December 31, 2003 2002 $ 629,480 14,432 7,823 $ 604,680 19,535 5,110 3,833,449 685,419 187,951 4,706,819 7,483,889 (128,639) 7,355,250 175,901 74,980 250,686 48,550 7,186 30,884 – 149,100 130,652 $ 13,581,743 3,204,973 728,370 197,950 4,131,293 6,900,983 (116,070) 6,784,913 151,715 72,018 197,868 37,288 6,719 3,728 65,901 90,776 79,470 $12,251,014 $ 1,648,600 $ 1,531,694 4,021,808 174,729 3,374,726 9,219,863 1,609,668 1,016,650 154,332 85,409 30,884 8,259 149,326 78,722 12,353,113 3,164,102 164,738 3,267,991 8,128,525 1,567,686 1,088,022 155,419 74,043 3,728 – 80,079 53,986 11,151,488 12 25 4 546,594 698,052 (24,491) 8,459 1,228,630 $ 13,581,743 3 475,054 598,777 (17,421) 43,088 1,099,526 $12,251,014 BOK FINANCIAL CORPORATION Consolidated Statements of Cash Flows (In Thousands) Cash Flows From Operating Activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Provisions for loan losses Provision (recovery) for mortgage servicing rights impairment Transition adjustment of adoption of FAS 133 Unrealized (gains) losses from derivatives Depreciation and amortization Tax benefit on exercise of stock options Stock-based compensation Net amortization of securities discounts and premiums Net gain on sale of assets Mortgage loans originated for resale Proceeds from sale of mortgage loans held for resale Change in trading securities Change in accrued revenue receivable Change in other assets Change in accrued interest, taxes and expense Change in other liabilities Net cash provided by operating activities Cash Flows From Investing Activities: Proceeds from sales of available for sale securities Proceeds from maturities of investment securities Proceeds from maturities of available for sale securities Purchases of investment securities Purchases of available for sale securities Loans originated or acquired net of principal collected Payments on derivative asset contracts Net change in other investment assets Proceeds from disposition of assets Purchases of assets Cash and cash equivalents of subsidiaries and branches acquired and sold, net Net cash used by investing activities Cash Flows From Financing Activities: Net change in demand deposits, transaction deposits and savings accounts Net change in certificates of deposit Net change in other borrowings Change in amount receivable (due) on unsettled security transactions Pay down of other borrowings Issuance of subordinated debenture Issuance of preferred, common and treasury stock, net Pay down of subordinated debenture Net change in collateral on derivative accounts Proceeds from derivative liability contracts Dividends paid Net cash provided by financing activities Net increase (decrease) in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period Cash paid for interest Cash paid for taxes Net loans transferred to repossessed real estate Payment of dividends in common stock Common stock and price guarantee issued for acquisition See accompanying notes to consolidated financial statements. 2003 2002 2001 $ 158,360 $ 147,871 $ 114,439 35,636 (22,923) – 5,888 64,425 1,325 5,746 8,965 (44,426) (1,314,453) 1,420,475 (2,713) (2,962) (28,442) 11,366 (13,906) 282,361 5,089,734 65,504 2,410,213 (55,678) (8,145,655) (741,405) (41,226) (3,849) 65,989 (62,926) 33,730 45,923 – (5,112) 65,790 5,482 4,124 5,818 (83,501) (1,014,009) 1,073,044 5,217 (2,776) (12,452) 7,029 8,010 284,188 6,873,320 139,591 1,802,845 (96,627) (8,985,019) (586,281) (12,912) 43 58,390 (46,729) 37,610 15,551 (236) 12,082 69,165 3,408 3,029 (5,615) (47,954) (972,066) 1,008,073 29,538 6,253 1,715 (3,125) 9,599 281,466 9,142,248 80,273 930,494 (88,282) (10,496,575) (675,612) – – 68,088 (75,655) 2,123 (1,417,176) 46,295 (807,084) (72,990) (1,188,011) 984,603 107,522 65,610 74,160 (95,000) – 4,627 – (31,763) 45,538 (785) 1,154,512 19,697 624,215 $ 643,912 604,771 395,740 (165,744) (297,055) (10,095) – 4,172 (30,000) (5,148) 3,162 (30) 499,773 (23,123) 647,338 $ 624,215 346,034 146,075 141,660 231,660 (95,000) 30,000 2,745 – – – (20) 803,154 (103,391) 750,729 $ 647,338 $ 176,225 81,596 6,378 58,300 – $ 208,612 81,154 4,550 53,165 67,745 $ 334,103 70,699 7,228 36,371 – 42 BOK FINANCIAL CORPORATION Consolidated Statements of Changes in Shareholders’ Equity (In Thousands) December 31, 2000 Comprehensive income: Net income Other comprehensive loss, net of tax: Unrealized gain on securities available for sale Total comprehensive income Director retainer shares Exercise of stock options Tax benefit on exercise of stock options Stock-based compensation Preferred stock dividend Dividends paid in shares of common stock: Preferred stock Common stock December 31, 2001 Comprehensive income: Net income Other comprehensive loss, net of tax: Unrealized gain on securities available for sale Total comprehensive income Director retainer shares Exercise of stock options Tax benefit on exercise of stock options Stock-based compensation Preferred stock dividend Issue shares for acquisition Fair value of stock price guarantee Dividends paid in shares of common stock: Preferred stock Common stock December 31, 2002 Comprehensive income: Net income Other comprehensive loss, net of tax: Unrealized loss on securities available for sale Total comprehensive income Director retainer shares Exercise of stock options Tax benefit on exercise of stock options Stock-based compensation Cash dividends paid on preferred stock Redeem nonvoting preferred units Dividends paid in shares of common stock: Preferred stock Common stock December 31, 2003 1 Changes in other comprehensive income: Unrealized gains (losses) on available for sale securities Tax benefit (expense) on unrealized gains (losses) on available for sale securities Reclassification adjustment for (gains) losses realized and included in net income Reclassification adjustment for tax expense (benefit) Preferred Stock Shares 250,000 Amount $25 Common Stock Shares 49,706 Amount $3 – – – – – – – – 250,000 – – – – – – – – – – 250,000 – – – – – – – – – – – 250,000 – – – – – – – – 25 – – – – – – – – – – 25 – – – – – – – – (13) – – $12 – – 5 598 – – 51 1,377 51,737 – – 8 687 – – 1,711 – 48 1,559 55,750 – – – 8 595 – – – – – – – – – – – – 3 – – – – – – – – – – 3 – – – – – – – – – 23 1,680 58,056 – 1 $4 2003 December 31, 2002 2001 $ (46,884) $119,609 $34,800 16,858 (44,390) (12,412) (7,188) (58,704) (30,640) on realized (gains) losses Net change in unrealized gains (losses) on securities 2,585 $ (34,629) 20,781 $ 37,296 10,724 $ 2,472 See accompanying notes to consolidated financial statements. 43 Accumulated Other Comprehensive Income (Loss)1 $ 3,320 Capital Surplus $287,436 – 2,472 – – – – – – – 5,792 – 37,296 – – – – – – – – – 43,088 – (34,629) – – – – – – – – 165 7,551 3,408 3,029 – 1,114 32,740 335,443 – – 272 8,243 5,482 4,124 – 64,550 3,195 1,500 52,245 475,054 – – 276 10,677 1,325 219 – – Retained Earnings $426,053 114,439 – – – – – (1) (1,500) (34,890) 504,101 147,871 – – – – – (2) – – (1,500) (51,693) 598,777 158,360 – – – – – (750) – – – $ 8,459 750 58,293 $ 546,594 (750) (57,585) $ 698,052 Treasury Stock Shares 488 Amount $(10,044) Total $ 706,793 – – (7) 185 – – – (21) (104) 541 – – – 125 – – – – – – 17 683 – – – 145 – – – – – 21 849 – – 126 (5,097) – – – 386 2,131 (12,498) – – – (4,343) – – – – – – (580) (17,421) – – – (6,326) – – – – 114,439 2,472 116,911 291 2,454 3,408 3,029 (1) – (19) 832,866 147,871 37,296 185,167 272 3,900 5,482 4,124 (2) 64,550 3,195 – (28) 1,099,526 158,360 (34,629) 123,731 276 4,351 1,325 219 (750) (13) – (744) $ (24,491) – (35) $ 1,228,630 44 Notes to Consolidated Financial Statements (1) Significant Accounting Policies Basis of Presentation Intangible Assets The Consolidated Financial Statements of BOK Financial Corporation (“BOK Financial”) have been prepared in conformity with accounting principles generally accepted in the United States, including general practices of the banking industry. The consolidated financial statements include the accounts of BOK Financial and its subsidiaries, principally Bank of Oklahoma, N.A. and its subsidiaries (“BOk”), Bank of Texas, N.A., Bank of Arkansas, N.A., Bank of Albuquerque, N.A., Colorado State Bank and Trust, N.A. and BOSC, Inc. Certain prior year amounts have been reclassified to conform to current year classifications. Nature of Operations BOK Financial, through its subsidiaries, provides a wide range of financial services to commercial and industrial customers, other financial institutions and consumers throughout Oklahoma, Northwest Arkansas, Dallas and Houston, Texas metropolitan areas, Albuquerque, New Mexico, and Denver, Colorado. These services include depository and cash management; lending and lease financing; mortgage banking; securities brokerage, trading and underwriting; and personal and corporate trust. Use of Estimates Preparation of BOK Financial’s consolidated financial statements requires management to make estimates of future economic activities, including interest rates, loan collectibility and prepayments and cash flows from customer accounts. These estimates are based upon current conditions and information available to management. Actual results may differ significantly from these estimates. Acquisitions Assets and liabilities acquired by purchase, including identifiable intangible assets, are recorded at fair values on the acquisition dates. The Consolidated Statements of Earnings include the results of purchases from the dates of acquisition. BOK Financial adopted Statements of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets” (“FAS 142”), and No. 147, “Acquisitions of Certain Financial Institutions” (“FAS 147”), on January 1, 2002. The following table presents the impact on previously reported net income and earnings per share after application of FAS 142 and FAS 147: Net income as reported Pro forma net income Diluted earnings per share previously reported Pro forma diluted earnings per share 2001 $ 114,439 123,601 $ 1.86 2.01 Intangible assets with indefinite lives, such as goodwill, are evaluated for each of BOK Financial’s business units for impairment at least annually or more frequently if conditions indicate impairment. The evaluation of possible impairment of intangible assets involves significant judgment based upon short-term and long-term projections of future performance. The fair value of BOK Financial’s business units is estimated by the discounted future earnings method. Income growth is projected over a five-year period for each unit and a terminal value is computed. This projected income stream is converted to current fair value by using a discount rate that reflects a rate of return required by a willing buyer. Other identifiable intangible assets and core deposit intangibles are amortized using straight- line and accelerated methods over the estimated benefit periods. These periods generally range from 5 to 10 years for other intangible assets and core deposit intangibles. The net book value of these other intangibles and core deposit intangibles are evaluated for impairment when economic conditions indicate an impairment may exist. 45 Cash Equivalents Due from banks, funds sold (generally federal funds sold for one-day periods) and resell agreements (which generally mature within one to 30 days) are considered cash equivalents. Securities Securities are identified as trading, investment (held to maturity) or available for sale at the time of purchase based upon the intent of management, liquidity and capital requirements, regulatory limitations and other relevant factors. Trading securities, which are acquired for profit through resale, are carried at market value with unrealized gains and losses included in current period earnings. Investment securities are carried at amortized cost. Amortization is computed by methods that approximate level yield and is adjusted for changes in prepayment estimates. Investment securities may be sold or transferred to trading or available for sale classification in certain limited circumstances specified in generally accepted accounting principles. Securities identified as available for sale are carried at fair value. Unrealized gains and losses are recorded, net of deferred income taxes, as accumulated other comprehensive income (loss) in shareholders’ equity. Unrealized losses on securities are evaluated to determine if the losses are temporary based on various factors, including the cause of the loss and prospects for recovery. An impairment charge is recorded against earnings if the loss is determined to be other than temporary. Realized gains and losses on sales of securities are based upon the amortized cost of the specific security sold. Available for sale securities are separately identified as pledged to creditors if the creditor has the right to sell or repledge the collateral. The purchase or sale of securities is recognized on a trade date basis. A net receivable or payable is recognized for subsequent transaction settlement. BOK Financial will periodically commit to purchase to-be-announced (“TBA”) mortgage-backed securities. These commitments are carried at fair value if they are considered derivative contracts. These commitments are not reflected in BOK Financial’s balance sheet until settlement date if they meet specific criteria exempting them from the definition of derivative contracts. Derivative Instruments Derivative instruments, primarily interest rate swaps and forward sales contracts, are used as part of an interest rate risk management strategy. Interest rate swaps modify the interest income and expense on certain long-term, fixed rate assets and liabilities. Amounts payable to or receivable from the counterparties are reported in interest income and expense using the accrual method. Interest rate swaps are carried at fair value. Changes in the fair value of interest rate swaps are included in other operating revenue. In certain circumstances, interest rate swaps may be designated as fair value hedges and may qualify for hedge accounting. Changes in the fair value of the hedged asset or liability that are attributable to the hedged risk are reported in other operating revenue. These changes may partially or completely offset the mark-to-market adjustments of the interest rate swaps. Fair value hedges are considered to be effective if the cumulative fair value adjustments of the interest rate swaps are within a range of 80% to 125% of the cumulative fair value adjustment of the hedged assets or liabilities. Interest rate swaps may be designated as cash flow hedges of variable rate assets or liabilities or anticipated transactions. Changes in fair value of interest rate swaps are recorded in other comprehensive income to the extent they are effective. Amounts recorded as other comprehensive income are recognized in net income in the same periods as the cash flows from the hedged transactions. In conjunction with its mortgage banking activities, BOK Financial enters into mortgage loan commitments that are considered derivative instruments under Financial Accounting Standards Board Statement No. 133, “Accounting for Derivative Instruments and Hedging Activities.” Forward sales contracts are used to hedge these mortgage loan commitments and mortgage loans held for sale. Changes in the fair value of the mortgage loan commitments and forward sales contracts are recognized in other operating revenue. The Securities and Exchange Commission staff recently expressed an opinion that the fair value of certain mortgage loan commitments may result in an unrealized loss, but cannot result in an unrealized gain. This opinion, which is effective for commitments originated after March 15, 2004, may increase short-term earnings volatility. Derivative contracts are used to assist certain customers in hedging their risk of adverse changes in natural gas and oil prices, interest rates and foreign exchange rates. BOK Financial serves as an intermediary between its customers and the markets. Each contract between BOK Financial and its customer is offset by a contract between BOK Financial and various counterparties. These 46 includes reserves assigned to specific criticized loans, general reserves that are based upon statistical migration analyses for each category of loans, and a nonspecific allowance that is based upon an analysis of current economic conditions, loan concentrations, portfolio growth and other relevant factors. The reserve for loan losses related to loans that are identified for evaluation in accordance with Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (“FAS 114”), is based on discounted cash flows using the loan’s initial effective interest rate or the fair value of the collateral for certain collateral dependent loans. Loans are considered to be impaired when it becomes probable that BOK Financial will be unable to collect all amounts due according to the contractual terms of the loan agreement. This is substantially the same criteria used to determine when a loan should be placed on nonaccrual status. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In accordance with the provisions of FAS 114, management has excluded small balance, homogeneous loans from the impairment evaluation specified in FAS 114. Such loans include 1-4 family mortgage loans, consumer loans, and commercial loans with committed amounts less than $1 million. The adequacy of the reserve for loan losses applicable to these loans is evaluated in accordance with generally accepted accounting principles and standards established by the banking regulatory authorities and adopted as policy by BOK Financial. A provision for loan losses is charged against earnings in amounts necessary to maintain an adequate reserve for loan losses. Loans are charged off when the loan balance or a portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value. Loans are evaluated quarterly and charge-offs are taken in the quarter in which the loss is identified. Additionally, all unsecured or under-secured loans that are past due by 180 days or more are charged off within 30 days. Recoveries of loans previously charged off are added to the reserve. contracts are carried at fair value. Compensation for credit risk and reimbursement of administrative costs are recognized over the life of the contracts. Loans Loans are either secured or unsecured based on the type of loan and the financial condition of the borrower. Repayment is generally expected from cash flow or proceeds from the sale of selected assets of the borrower. BOK Financial is exposed to risk of loss on loans due to the borrower’s difficulties, which may arise from any number of factors, including problems within the respective industry or local economic conditions. Access to collateral, in the event of borrower default, is reasonably assured through adherence to applicable lending laws and through sound lending standards and credit review procedures. Interest is accrued at the applicable interest rate on the principal amount outstanding. Loans are placed on nonaccrual status when, in the opinion of management, full collection of principal or interest is uncertain, generally when the collection of principal or interest is 90 days or more past due. Interest previously accrued but not collected is charged against interest income when the loan is placed on nonaccrual status. Payments on nonaccrual loans are applied to principal or reported as interest income, according to management’s judgment as to the collectibility of principal. Loan origination and commitment fees and direct loan acquisition and origination costs, when significant, are deferred and amortized as an adjustment to yield over the life of the loan or over the commitment period, as applicable. Mortgage loans held for sale are carried at the lower of aggregate cost or market value. Mortgage loans held for sale that are designated as hedged assets are carried at fair value based on sales commitments or market quotes. Changes in fair value after the date of designation of an effective hedge are recorded in other operating revenue. Reserve for Loan Losses The adequacy of the reserve for loan losses is assessed by management, based upon an ongoing quarterly evaluation of the probable estimated losses inherent in the portfolio, and includes probable losses on both outstanding loans and unused commitments to provide financing. A consistent methodology has been developed that 47 Asset Securitization BOK Financial periodically securitizes and sells pools of assets. These transactions are recorded as sales for financial reporting purposes when the criteria for surrender of control specified in Statement of Financial Accounting Standards, No. 140 “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities” are met. BOK Financial may retain the right to service the assets and a residual interest in excess cash flows generated by the assets. The carrying value of the assets sold is allocated between the portion sold and the portion retained based on relative fair values. The fair value of these retained assets is determined by a discounting of expected future net cash to be received using assumed market interest rates for these instruments. Residual interests are carried at fair value. Changes in fair values are recorded in income. Servicing rights are carried at the lower of amortized cost or fair value. A valuation allowance is provided when amortized cost of servicing rights exceeds fair value. Real Estate and Other Repossessed Assets Real estate and other repossessed assets are assets acquired in partial or total forgiveness of debt. These assets are carried at the lower of cost, which is determined by fair value at date of foreclosure, or current fair value. Income generated by these assets is recognized as received, and operating expenses are recognized as incurred. Premises and Equipment Premises and equipment are carried at cost including capitalized interest, when appropriate, less accumulated depreciation and amortization. Depreciation and amortization are computed on a straight-line basis over the estimated useful lives of the assets or, for leasehold improvements, over the shorter of the estimated useful lives or remaining lease terms. Repair and maintenance costs are charged to expense as incurred. Mortgage Servicing Rights Capitalized mortgage servicing rights are carried at the lower of amortized cost, adjusted for the effect of hedging activities, or fair value. Amortization is determined in proportion to the projected cash flows over the estimated lives of the servicing portfolios. The actual cash flows are dependent upon the prepayment of the mortgage loans and may differ significantly from the estimates. Fair value is determined by discounting the estimated cash flows of servicing revenue, less projected servicing costs, using risk-adjusted rates, which is the assumed market rate for these instruments. Prepayment assumptions were based on industry consensus provided by independent reporting sources in 2001. During 2002, BOK Financial changed the source of prepayment assumptions used to value its mortgage servicing rights. Industry consensus prepayment speeds were not updated frequently enough to reflect rapidly changing market conditions that existed in 2002. A separate, third-party model that is generally accepted by the financial markets is now used to estimate prepayment speeds. This model is updated daily for changes in market conditions. Changes in current interest rates may significantly affect these assumptions by changing loan refinancing activity. Amortized cost and fair value are stratified by interest rate and loan type. A valuation allowance is provided when the net amortized cost of any strata exceeds the calculated fair value. Originated mortgage servicing rights are recognized when either mortgage loans are originated pursuant to an existing plan for sale or, if no such plan exists, when the mortgage loans are sold. Substantially all fixed rate mortgage loans originated by BOK Financial are sold under existing commitments. The right to service mortgage loans sold is generally retained. The fair value of the originated servicing rights is determined at closing based upon current market rates. Federal and State Income Taxes BOK Financial utilizes the liability method in accounting for income taxes. Under this method, deferred tax assets and liabilities are determined based upon the difference between the values of the assets and liabilities as reflected in the financial statement and their related tax basis using enacted tax rates in effect for the year in which the differences are expected to be recovered or settled. As changes in tax law or rates are enacted, deferred tax assets and liabilities are adjusted through the provision for income taxes. BOK Financial and its subsidiaries file consolidated tax returns. The subsidiaries provide for income taxes on a separate return basis and remit to BOK Financial amounts determined to be currently payable. 48 Employee Benefit Plans BOK Financial sponsors various plans, including a defined benefit pension plan (“Pension Plan”), qualified profit sharing plans (“Thrift Plans”), and employee healthcare plans. Employer contributions to the Thrift Plans, which match employee contributions subject to percentage and years of service limits, are expensed when incurred. Pension Plan costs, which are based upon actuarial computations of current costs, are expensed annually. Unrecognized prior service cost and net gains or losses are amortized on a straight-line basis over the estimated remaining lives of the participants. BOK Financial recognizes the expense of health care benefits on the accrual method. Employer contributions to the Pension Plan and various health care plans are in accordance with Federal income tax regulations. compensation was an increase of $3.2 million due primarily to recognition of deferred tax assets related to stock option expense. BOK Financial also permits certain executive officers to defer the recognition of income from the exercise of stock options for income tax purposes and to diversify the deferred income into alternative investments. Because the Company is expected to settle these amounts in cash, they are recognized as a liability. Changes in the liability are recognized as additional compensation expense. Fiduciary Services Fees and commissions on approximately $21 billion of assets managed by BOK Financial under various fiduciary arrangements are recognized on the accrual method. Executive Benefit Plans BOK Financial has various stock compensation plans for its employees. Historically, BOK Financial had accounted for those plans under the recognition and measurement provisions of Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations. Under APB 25, because the exercise price of employee stock options equaled the market price of the underlying stock on the date of grant, no significant stock-based employee compensation had been recognized. During 2003, BOK Financial adopted the expense recognition provisions of Financial Accounting Standards Board Statement No. 123, “Accounting for Stock-Based Compensation” (“FAS 123”), as amended by Statement of Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure” (“FAS 148”). Under FAS 123, compensation expense is recognized based on the fair value of stock options granted. BOK Financial chose to retroactively restate its results of operations for the accounting change, as provided by FAS 148. The years ended December 31, 2003, 2002 and 2001 include $5.7 million, $4.1 million and $3.0 million, respectively, of pretax stock option expense, which represents approximately $0.06, $0.04, and $0.03 per diluted share in each year, respectively. Adoption of the fair value method resulted in a reduction of retained earnings as of January 1, 2001 of $5.3 million, representing the cumulative stock option compensation expense recorded for the six years ended December 31, 2000, net of the tax effect. As of December 31, 2000, the net effect upon total shareholders’ equity from stock-based 49 Effect of Pending Statements of Financial Accounting Standards During 2003, the Financial Accounting Standards Board (“FASB”) issued several statements and interpretations that may have an effect on BOK Financial’s accounting policies and financial reporting in future periods. These included FASB Interpretation 46, “Consolidation of Variable Interest Entities” (“FIN 46”), FASB Statement No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities” (“FAS 149”), and FASB Statement No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity” (“FAS 150”). FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” and provides a new framework for identifying variable interest entities (“VIEs”) and determining when a company should include the assets, liabilities, noncontrolling interests and results of operations of a VIE in its consolidated financial statements. VIEs are generally defined in FIN 46 as entities that either do not have sufficient equity to finance their activities without support from other parties or whose equity investors lack a controlling financial interest. FIN 46 was effective immediately for VIEs created after January 31, 2003 and was effective beginning in the fourth quarter of 2003 for VIEs created prior to February 1, 2003. FIN 46 was revised in December 2003. This revision addressed the application of FIN 46 to trust relationships, mutual funds organized as trusts and troubled debt restructurings. BOK Financial has limited use of VIEs in its operations and the implementation of FIN 46, as revised, had no impact on the consolidated financial statements. FAS 149 amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts and hedging activities. This statement was effective for contracts entered into or modified and for hedging relationships designated after June 30, 2003. This statement did not have a significant impact on the consolidated financial statements. FAS 150 establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement was effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective for fiscal periods beginning after June 15, 2003. This statement did not have a significant impact on the consolidated financial statements. (2) Acquisitions On September 10, 2003, BOK Financial paid $77.9 million in cash for all outstanding stock of Colorado Funding Company and its Colorado State Bank and Trust subsidiary. On October 25, 2002, BOK Financial acquired Bank of Tanglewood, N.A. for 1,711,127 shares of common stock and 292,225 options to purchase shares, valued at approximately $65 million. The options to purchase shares expired February 25, 2003. BOK Financial agreed to a price guarantee on 50 percent of the stock issued, which resulted in a contingent obligation to issue additional shares or cash over the next five years based on certain predetermined market valuations. The value of the contingent price guarantee was $3 million, which was included in the total purchase price. More discussion of this contingency is at Note 15. These transactions were accounted for by the purchase method of accounting. Aggregate allocation of the purchase price to the net assets acquired was as follows (in thousands): Cash and cash equivalents Securities Loans Less reserve for loan losses Loans, net Identifiable intangible assets Other assets Total assets acquired Deposits: Noninterest-bearing Interest-bearing Total deposits Other borrowings Other liabilities Net assets acquired Less purchase price Goodwill 2003 2002 $ 80,051 $ 46,295 62,484 132,278 1,364 130,914 3,718 8,568 251,979 14,507 222,530 2,282 220,248 18,770 20,855 354,431 75,078 226,361 301,439 5,098 11,951 35,943 77,928 49,213 173,887 223,100 8,610 2,736 17,533 67,745 $ 41,985 $ 50,212 The following unaudited condensed consolidated pro forma statements of earnings for BOK Financial present the effects on income had the purchase acquisitions described above occurred at the beginning of 2001: Condensed Consolidated Pro Forma Statements of Earnings (In Thousands Except Per Share Data) (Unaudited) Net interest revenue Provision for loan losses Net interest revenue after provision for loan losses Other operating revenue Other operating expense Income before taxes Federal and state income tax Net effect of change in accounting principle Net income Earnings per share: Basic net income Diluted net income Average shares: Basic Diluted Year ended December 31, 2002 2003 $ 398,693 $ 388,517 $348,537 38,594 35,162 35,941 2001 362,752 309,512 425,163 247,101 353,355 309,943 330,224 264,134 449,695 388,889 233,884 185,188 88,914 80,825 63,367 – – $ 158,187 $153,059 236 $122,057 $ $ 2.75 2.45 $ 2.69 2.38 2.16 1.91 56,990 64,572 56,410 64,370 55,890 63,818 50 (3) Securities Investment Securities The amortized cost and fair values of investment securities are as follows (in thousands): 2003 2002 December 31, Amortized Cost Fair Value Gross Unrealized Loss Gain Amortized Cost Fair Value Gross Unrealized Loss Gain $ 184,192 $ 187,354 $ 4,049 $ (887) $ 191,305 $ 195,266 $ 4,837 $ (876) 2,296 1,463 122 21 $ 187,951 $ 191,256 $ 4,192 2,418 1,484 – – $ (887) 4,380 2,265 238 5 $ 197,950 $ 202,153 $ 5,080 4,618 2,269 – (1) $ (877) Municipal and other tax-exempt Mortgage-backed U.S. agency Securities Other debt securities Total The amortized cost and fair values of investment securities at December 31, 2003, by contractual maturity, are as shown in the following table (dollars in thousands): Less than One Year One to Five Years Five to Ten Years Over Ten Years Total Weighted Average Maturity4 Municipal and other tax-exempt: Amortized cost Fair value Nominal yield¹ Other debt securities: Amortized cost Fair value Nominal yield Total fixed maturity securities: Amortized cost Fair value Nominal yield Mortgage-backed securities: Amortized cost Fair value Nominal yield³ Total investment securities: Amortized cost Fair value Nominal yield $50,561 50,742 5.45 $ 442 443 1.25 $102,386 104,803 6.20 $ 296 304 6.83 $51,003 51,185 5.41 $102,682 105,107 6.20 $26,251 26,952 6.64 $ 725 737 5.43 $26,976 27,689 6.61 2.94 5.00 2.95 ² $4,994 4,857 5.83 $184,192 187,354 6.05 $ – – – $4,994 4,857 5.83 $ 1,463 1,484 4.45 $185,655 188,838 6.03 $ 2,296 2,418 6.53 $187,951 191,256 6.04 ¹ Calculated on a taxable equivalent basis using a 39% effective tax rate. ² The average expected lives of mortgage-backed securities were 4.96 years based upon current prepayment assumptions. 3 The nominal yield on mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. 4 Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty. 51 Available for Sale Securities The amortized cost and fair value of available for sale securities are as follows (in thousands): 2003 2002 December 31, Amortized Cost Fair Value Gross Unrealized Loss Gain Amortized Cost Fair Value Gross Unrealized Loss Gain U.S. Treasury Municipal and other tax-exempt Mortgage-backed securities: U. S. agencies Other Total mortgage-backed securities Other debt securities $ 44,679 $ 3,271 45,424 $ 3,257 746 $ 6 $ (1) (20) 31,013 $ 11,465 32,233 $ 1,220 $ 11,511 56 – (10) 3,514,158 845,430 4,359,588 1,140 3,518,926 848,911 4,367,837 1,177 28,962 5,996 34,958 37 (24,194) (2,515) (26,709) – 3,005,698 727,088 3,732,786 138 3,067,148 732,542 3,799,690 139 61,589 5,469 67,058 1 (139) (15) (154) – Equity securities and mutual funds Total 96,460 (737) $ 4,505,138 $ 4,518,868 $ 41,197 $ (27,467) 101,173 5,450 87,434 (312) $ 3,862,836 $ 3,933,343 $ 70,983 $(476) 89,770 2,648 The amortized cost and fair values of available for sale securities at December 31, 2003, by contractual maturity, are as shown in the following table (dollars in thousands): Less than One Year One to Five Years Five to Ten Years Over Ten Years Total Weighted Average Maturity5 U.S. Treasuries: Amortized cost Fair value Nominal yield Municipal and other tax-exempt: Amortized cost Fair value Nominal yield¹ Other debt securities: Amortized cost Fair value Nominal yield¹ Total fixed maturity securities: Amortized cost Fair value Nominal yield Mortgage-backed securities: Amortized cost Fair value Nominal yield4 Equity securities and mutual funds: Amortized cost Fair value Nominal yield Total available-for-sale securities: Amortized cost Fair value Nominal yield $ 29,338 29,894 3.50 $ $ 358 354 7.75 600 607 6.30 $ 15,341 15,530 2.34 $ 273 277 10.79 $ 456 485 6.04 $ – – – $ 1,125 1,112 8.89 $ 84 85 5.59 $ – – – $ 1,515 1,514 12.69 $ – – – $ 30,296 30,855 3.60 $ 16,070 16,292 2.59 $ 1,209 1,197 8.66 $ 1,515 1,514 12.69 .99 10.37 1.45 1.63 ² ³ $ $ $ $ 44,679 45,424 3.10 3,271 3,257 10.68 1,140 1,177 6.15 49,090 49,858 3.68 $ 4,359,588 4,367,837 4.28 $ 96,460 101,173 2.21 $ 4,505,138 4,518,868 4.23 ¹ Calculated on a taxable equivalent basis using a 39% effective tax rate. ² The average expected lives of mortgage-backed securities were 3.04 years based upon current prepayment assumptions. ³ Primarily common stock and preferred stock of U.S. Government agencies with no stated maturity. 4 The nominal yield on mortgage-backed securities is based upon prepayment assumptions at the purchase date. Actual yields earned may differ significantly based upon actual prepayments. 5 Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty. At December 31, 2003, there were outstanding commitments to buy $235 million of securities that have not yet been issued. These commitments are not reflected in BOK Financial’s balance sheet as of December 31, 2003, because they have not settled and meet specific criteria exempting them from the definition of derivative contracts. 52 Sales of available for sale securities resulted in In addition to securities that have been gains and losses as follows (in thousands): Proceeds Gross realized gains Gross realized losses Related federal and state income tax expense (benefit) 2003 2002 2001 $5,089,734 30,373 23,185 $6,873,320 85,346 26,642 $9,142,248 55,418 24,778 2,585 20,781 10,724 reclassified as pledged to creditors, securities with an amortized cost of $2.1 billion and $2.0 billion at December 31, 2003 and 2002 have been pledged as collateral for repurchase agreements, public and trust funds on deposit and for other purposes as required by law. The secured parties do not have the right to sell or repledge these securities. See information regarding temporarily impaired securities at Table 13. (4) Derivatives Interest Rate Risk Management Program Interest Rate Swaps BOK Financial uses interest rate swaps to manage its interest rate sensitivity. During 2003 and 2002, net interest revenue was increased by $14.7 million and $12.7 million, respectively, from the settlements of amounts receivable or Interest Rate Swaps (dollars in thousands): payable on interest rate swaps. A net loss of $9.5 million was recognized in 2003 compared to a net gain of $4.7 million in 2002 from adjustments of these swaps to fair value. Expiration: 2004 2006 2007 2011 Notional Amount $ 71,554 13,940 275,000 38,480 Pay Rate Receive Rate Positive Fair Value Negative Fair Value 1.12¹ – 4.22 5.43 1.15¹ 5.21 – 5.51 1.12¹ – 7.36 1.12¹ 4.09 – 4.51 1.12¹ $ 564 – 3,628 – $ 4,192 $ (118) (984) – (2,532) $ (3,634) ¹ Rates are variable based on LIBOR and reset monthly or quarterly. Scheduled repricing periods for the swaps are as follows (notional value in thousands): Pay floating Receive fixed Pay fixed Receive floating Total 31-90 Days 91-365 Days Over 1 Year Total $ (335,000) $ – – 63,974 $ (271,026) $ – – – – – $ – 335,000 (63,974) – $ 271,026 $ (335,000) 335,000 (63,974) 63,974 – $ Forward Sales Contracts BOK Financial uses mortgage-backed securities forward sales contracts to manage exposure to interest rate fluctuations on mortgage loans held for sale and mortgage loan commitments. At December 31, 2003, the Customer Risk Management Programs notional amount of forward sales contracts totaled $76 million, with a negative fair value of $340 thousand. Additional discussion of these contracts can be found in Note 8. BOK Financial offers programs that permit its customers to manage various risks. We have programs to assist energy producing customers to hedge against price fluctuations and to take positions through energy derivative contracts. In 2003, we have added or expanded programs to assist customers in managing their interest rate and foreign exchange risks. These programs work essentially the same way. Derivative contracts are executed between the customers and BOK Financial. Offsetting contracts are executed between BOK Financial and selected counterparties to minimize the risk of changes in energy prices, interest rates or foreign exchange 53 rates. The counterparty contracts are identical to the customer contracts, except for a fixed pricing spread or a fee paid to BOK Financial as compensation for administrative costs, credit risks and profit. Derivative contracts are carried at fair value. At December 31, 2003, the fair value of energy derivative contracts, interest rate swaps and foreign exchange contracts totaled $137 million, $3 million and $5 million, respectively. (5) Loans Significant components of the loan portfolio are as follows (in thousands): 2003 2002 December 31, Fixed Rate Variable Rate Non- accrual Total Fixed Rate Variable Rate Non- accrual Total Commercial Commercial real estate Residential mortgage Residential mortgage - held for sale Consumer Total $ 1,603,095 446,751` 522,240 56,543 298,465 $ 2,927,094 Loans past due (90 days) Foregone interest on nonaccrual loans $ 2,692,247 $ 41,360 2,311 7,821 – 1,189 $ 52,681 1,181,030 485,582 – 145,255 $ 4,504,114 $ 4,336,702 1,630,092 1,015,643 56,543 444,909 $ 7,483,889 $ $ 14,944 5,268 $ 531,456 306,796 749,573 133,421 276,278 $ 1,996,824 $ 3,419,228 1,126,347 174,236 – 134,493 $ 4,854,304 $ 39,114 $ 3,989,798 1,435,838 929,759 133,421 412,167 $ 49,855 $ 6,900,983 3,395 5,950 – 1,396 $ $ 8,117 4,770 Approximately 61% of the commercial and consumer loan portfolios and approximately 69% of the residential mortgage loan portfolio (excluding loans held for sale) are loans to businesses and individuals in Oklahoma. This geographic concentration subjects the loan portfolio to the general economic conditions within this area. Within the commercial loan classification, loans to energy-related businesses total $1.2 billion or 16% of total loans. Other notable segments include wholesale/retail, $668 million; manufacturing, $483 million; agriculture, $228 million, which includes $197 million of loans to the cattle industry; and services, $1.4 billion, which includes nursing homes of $256 million, hotels of $35 million and healthcare of $138 million. Approximately 39% of commercial real estate loans are secured by properties located in Oklahoma, primarily in the Tulsa or Oklahoma City metropolitan areas. An additional 28% of commercial real estate loans are secured by property located in Texas. The major components of these properties are multifamily residences, $271 million; construction and land development, $436 million; retail facilities, $313 million; and office buildings, $290 million. Related Party Included in loans at December 31 are loans to executive officers, directors or principal shareholders of BOK Financial, as defined in Regulation S-X of the Securities and Exchange Commission. Such loans have been made on substantially the same terms as those prevailing at the time for loans to other customers in comparable transactions. Information relating to loans to executive officers, directors or principal shareholders is summarized as follows (in thousands): Beginning balance Advances Payments Adjustments Ending balance 2003 2002 $ 124,568 57,487 (13,903) (1) $ 168,151 $ 90,712 35,992 (2,106) (30) $ 124,568 54 Reserve for Loan Loss Impaired Loans The activity in the reserve for loan losses is summarized as follows (in thousands): Investments in loans considered to be impaired under FAS 114 were as follows (in thousands): 2003 2002 2001 Beginning balance Provision for loan losses Loans charged off Recoveries Addition due to acquisitions Ending balance $ 116,070 $101,905 $ 82,655 37,610 (25,248) 4,588 2,300 $ 128,639 $116,070 $101,905 35,636 (31,475) 6,125 2,283 33,730 (25,905) 4,976 1,364 Investment in loans impaired under FAS 114 (all of which were on a nonaccrual basis) Loans with specific reserves for loss December 31, 2002 2001 2003 $ 46,990 $ 44,912 $ 39,848 Specific reserve balance No specific related reserve for loss Average recorded investment in impaired loans 18,947 6,377 4,685 2,269 10,723 2,509 28,043 40,227 29,125 47,415 41,828 44,474 Interest income recognized on impaired loans during 2003, 2002 and 2001 was not significant. Depreciation expense of premises and equipment was $22.4 million, $20.5 million and $21.0 million for the years ended December 31, 2003, 2002 and 2001, respectively. (6) Premises and Equipment Premises and equipment at December 31 are summarized as follows (in thousands): Land Buildings and improvements Software Furniture and equipment Subtotal Less accumulated depreciation Total December 31, 2003 2002 $ 40,098 126,665 26,338 95,833 288,934 113,033 $ 175,901 $ 32,381 115,399 13,702 84,578 246,060 94,345 $ 151,715 55 (7) Intangible Assets The following table presents the original cost and accumulated amortization of intangible assets (in thousands): The net amortized cost of intangible assets at December 31, 2003 is assigned to reporting units as follows (in thousands): Core deposit premiums: Bank of Albuquerque Bank of Texas Colorado State Bank and Trust Other identifiable intangible assets: Bank of Oklahoma Colorado State Bank and Trust Goodwill: Bank of Oklahoma Bank of Texas Bank of Albuquerque Colorado State Bank and Trust $ 1,718 10,752 9,775 $ 22,245 $ 367 7,902 $ 8,269 $ 8,173 154,741 15,273 41,985 $220,172 December 31, 2003 2002 Core deposit premiums Less accumulated amortization Net core deposit premiums $ 86,257 64,012 22,245 $ 75,668 56,555 19,113 Other identifiable intangible assets Less accumulated amortization Net other identifiable intangible assets 11,526 3,257 8,269 3,346 2,613 733 Goodwill Less accumulated amortization Net goodwill Total intangible assets, net 273,307 53,135 220,172 $ 250,686 231,157 53,135 178,022 $ 197,868 Expected amortization expense for intangible assets that will continue to be amortized under FAS 142, as amended by FAS 147, (in thousands): Core Deposit Premiums Other Identifiable Intangible Assets 2004 2005 2006 2007 2008 Thereafter $ 7,146 5,175 3,628 2,935 1,577 1,784 $ 22,245 $ 992 962 796 763 780 3,976 $ 8,269 Total $ 8,138 6,137 4,424 3,698 2,357 5,760 $ 30,514 56 (8) Mortgage Banking Activities BOK Financial engages in mortgage banking activities through the BOk Mortgage Division of BOk. Residential mortgage loans held for sale totaled $57 million and $133 million, and outstanding mortgage loan commitments totaled $208 million and $323 million at December 31, 2003 and 2002, respectively. Mortgage loan commitments are generally outstanding for 60 to 90 days and are subject to both credit and interest rate risk. Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Exposure to interest rate fluctuations is partially hedged through the use of mortgage-backed securities forward sales contracts. These contracts set the price for loans that will be delivered in the next 60 to 90 days. As of December 31, 2003, the unrealized loss on forward contracts used to hedge the mortgage pipeline was approximately $340,000. At December 31, 2003, BOK Financial owned the rights to service 61,254 mortgage loans with outstanding principal balances of $4.7 billion, including $357 million serviced for affiliates, and held related funds of $83 million for investors and borrowers. The weighted average interest rate and remaining term was 6.50% and 266 months, respectively. Mortgage loans sold with recourse totaled $103 million at December 31, 2003. At December 31, 2002, BOK Financial owned the rights to service 76,298 mortgage loans with outstanding principal balances of $5.8 billion and held related funds of $174 million for investors and borrowers. The weighted average interest rate and remaining term was 7.05% and 265 months, respectively. The portfolio of mortgage servicing rights exposes BOK Financial to interest rate risk. During periods of falling interest rates, mortgage loan prepayments increase, reducing the value of the mortgage servicing rights. See Note 1 for specific accounting policies for mortgage servicing rights and the related hedges. Activity in capitalized mortgage servicing rights and related valuation allowance during 2003, 2002 and 2001 are as follows (in thousands): Capitalized Mortgage Servicing Rights Valuation Purchased Originated Total Allowance (Gain)/Loss2 Hedging Net Balance at December 31, 2000 Additions Amortization expense Provision for impairment Balance at December 31, 2001 Additions Amortization expense Write-off Provision for impairment Balance at December 31, 2002 Additions, net Amortization expense Recovery of impairment Balance at December 31, 2003 $ 63,361 4,400 (12,705) – 55,056 (412) (17,421) – – 37,223 (3) (14,840) – $ 22,380 $ 40,325 22,695 (9,409) – 53,611 20,832 (17,159) (7,435) – 49,849 23,922 (19,315) – $ 54,456 $ 103,686 27,095 (22,114) – 108,667 20,420 (34,580) (7,435) – 87,072 23,919 (34,155) – $ 76,836 $ (2,900) – – (15,551) (18,451) – – 9,456 (45,923) (54,918) – – 22,923 $ (31,995) $ 10,005 – (1,425) – 8,580 – (1,425) (2,021) – 5,134 – (1,425) – $ 3,709 $ 110,791 27,095 (23,539) (15,551) 98,796 20,420 (36,005) – (45,923) 37,288 23,919 (35,580) 22,923 $ 48,550 Estimated fair value of mortgage servicing rights at: December 31, 20011 December 31, 20021 December 31, 20031 $ 53,174 $ 17,311 $ 12,625 $ 46,789 $ 20,477 $ 36,564 $ 99,963 $ 37,788 $ 49,189 $ 99,963 $ 37,788 $ 49,189 1 Excludes approximately $1.4 million, $2 million and $5 million at December 31, 2003, 2002 and 2001, respectively, of loan servicing rights on mortgage loans originated prior to the adoption of FAS 122. 2 Hedging (gain)/loss represents the deferred (gains)/losses on a derivatives-based hedging program prior to the adoption of FAS 133. 57 Fair value is determined by discounting the projected net cash flows. Significant assumptions are: Discount rate – Indexed to a risk-free rate commensurate with the average life of the servicing portfolio plus a market premium. The discount rate at December 31, 2003 was 8.9%. Prepayment rate – Annual prepayment estimates ranging from 9.45% to 36.34% based upon loan interest rate, original term and loan type. Loan servicing costs – $35 to $46 annually per loan based upon loan type. Escrow earnings rate – Indexed to rates paid on deposit accounts with a comparable average life. The escrow earnings rate at December 31, 2003 was 4.33%. Stratification of the mortgage loan-servicing portfolio, outstanding principal of loans serviced, and related hedging information by interest rate at December 31, 2003 follows (in thousands): => 7.50% < 5.51% 5.51% - 6.49% 6.50% - 7.49% Total Cost less accumulated amortization Deferred hedge losses Adjusted cost Fair value Impairment2 $ 12,491 – $ 12,491 $ $ 23,786 – 23,786 $ 10,489 $ 16,780 $ 2,233 $ 7,008 $ $ $ $ 29,758 3,246 33,004 $ 10,801 463 $ 11,264 $ $ 76,836 3,709 80,545 16,064 $ 5,856 $ 49,189 16,941 $ 5,813 $ 31,995 Outstanding principal of loans serviced1 $ 909,206 $ 1,333,210 $ 1,498,370 $ 523,371 $ 4,264,157 1 Excludes outstanding principal of $357 million for loans serviced for BOk and $125 million of mortgage loans originated prior to FAS 122, for which there are no capitalized mortgage servicing rights. 2 Impairment is determined by both an interest rate and loan type stratification. (9) Deposits Interest expense on deposits is summarized as follows (in thousands): 2003 2002 2001 Transaction deposits Savings Time: Certificates of deposits under $100,000 Certificates of deposits $100,000 and over Other time deposits Total time Total $ 31,346 $ 39,273 $ 49,893 2,281 1,976 944 39,098 50,036 61,626 48,181 12,360 99,639 81,524 42,291 10,885 11,890 154,035 104,217 $131,929 $145,466 $206,209 The aggregate amounts of time deposits in denominations of $100,000 or more at December 31, 2003 and 2002 were $2.1 billion and $2.0 billion, respectively. Time deposit maturities are as follows: 2004 – $1.4 billion, 2005 – $190 million, 2006 – $119 million, 2007 – $1.1 billion, 2008 – $211 million, and $359 million thereafter. Interest expense on time deposits during 2003 and 2002 was reduced by the net accrued settlement from interest rate swaps of $14.0 million and $11.9 million, respectively. 58 (10) Other Borrowings Information relating to other borrowings is summarized as follows (dollars in thousands): 2003 2002 December 31 Balance Rate Maximum Outstanding At Any Month End Balance Rate Maximum Outstanding At Any Month End Parent Company: Revolving, unsecured line Subordinated debenture Other Total parent company Subsidiary Banks: Funds purchased and repurchase agreements Federal Home Loan Bank advances Subordinated debenture Other Total subsidiary bank Total other borrowings $ 95,000 – – 95,000 1.75% – – 1.75 $ 95,000 – – $ 85,000 – – 85,000 2.17% – – 2.17 $ 95,000 30,000 95 1,609,668 899,426 154,332 22,224 2,685,650 $ 2,780,650 1.37 1.21 6.02 1.58 1.58 1.74 1,904,269 1,567,686 974,729 155,345 29,116 973,454 155,419 29,568 2,726,127 $ 2,811,127 1.67 1.48 6.19 1.49 1.86 1.93 1,895,315 1,036,387 156,229 29,853 Aggregate annual principal repayments of long-term debt at December 31, 2003 are as follows (in thousands): 2004 2005 2006 2007 2008 Thereafter Total Parent Company Subsidiary Banks $ – – 95,000 – – – $95,000 $ 2,089,707 425,994 3,805 2,128 1,197 162,819 $ 2,685,650 Borrowings from the Federal Home Loan Bank are used for funding purposes. In accordance with policies of the Federal Home Loan Bank, BOK Financial has granted a blanket pledge of eligible assets (generally unencumbered U.S. Treasury and mortgage-backed securities, 1-4 family loans and multifamily loans) as collateral for these advances. The unused credit available to BOK Financial at December 31, 2003 pursuant to the Federal Home Loan Bank’s collateral policies is $498 million. BOK Financial has a revolving, unsecured credit agreement from certain banks at December 31, 2003 of $125 million. Interest is based upon either a base rate or the British Bankers’ Association Eurodollar rate plus a defined margin that is determined by BOK Financial’s credit rating. This margin ranges from 0.625% to 1.25%. The base rate is defined as the greater of the daily federal funds rate plus 0.5% or the prime rate. Interest is generally paid quarterly. Facility fees are paid quarterly on the unused portion of the commitment at a rate of 0.20% to 0.25% as determined by BOK Financial’s current 59 debt rating. This credit agreement includes certain restrictive covenants that limit BOK Financial’s ability to borrow additional funds and to pay cash dividends on common stock. These covenants also require BOK Financial and its subsidiaries to maintain minimum capital levels and to exceed minimum net worth ratios. BOK Financial met all of the restrictive covenants at December 31, 2003. In 1997, BOk issued $150 million of 7.125% fixed rate subordinated debentures that mature in 2007. Interest rate swaps were used as a fair value hedge to convert the fixed interest on these debentures to a LIBOR-based floating rate. This required BOk to adjust the carrying value of the subordinated debentures to fair value. In 2001, the interest rate swaps were terminated. The related market value adjustment of the subordinated debenture of $8 million is being recognized over the remaining life of the debt. BOK Financial issued a $30 million, seven year subordinated debenture, bearing interest at LIBOR plus 1.75%, on March 23, 2001 to its principal shareholder, George B. Kaiser. This debt was paid off in its entirety in November 2002. Funds purchased generally mature within one to ninety days from the transaction date. At December 31, 2003, securities sold under agreements to repurchase totaled $1.0 billion with related accrued interest payable of $374 thousand. Additional information relating to repurchase agreements at December 31, 2003 is as follows (dollars in thousands): Security Sold/Maturity U.S. Agency Securities: Overnight Term of up to 30 days Term of 30 to 90 days Total Agency Securities Amortized Cost Market Value Repurchase Liability1 Average Rate $ 450,807 84,554 599,170 $1,134,531 $ 449,642 85,272 600,147 $ 1,135,061 $ 403,473 81,485 554,060 $1,039,018 0.93% 1.10 1.12 1.04% 1 BOK Financial maintains control over the securities underlying overnight repurchase agreements and generally transfers control over securities underlying longer-term dealer repurchase agreements to the respective counterparty. (11) Federal and State Income Taxes Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes. Significant components of deferred tax assets and liabilities are as follows (in thousands): Deferred tax liabilities: Available for sale securities mark-to-market Pension contributions in excess of book expense Valuation adjustments Mortgage servicing Lease financing Other Total deferred tax liabilities Deferred tax assets: Stock-based compensation Loan loss reserve Valuation adjustments Deferred book income Other Deferred compensation Total deferred tax assets Deferred tax assets in excess of deferred tax liabilities December 31, 2003 2002 $ 5,300 $ 27,400 10,800 24,900 25,900 14,600 6,400 87,900 6,900 13,800 21,100 12,800 9,800 91,800 3,500 48,900 20,800 19,700 14,800 4,300 112,000 2,100 44,100 29,900 15,400 14,300 1,800 107,600 $ 24,100 $ 15,800 The significant components of the provision for income taxes attributable to continuing operations for BOK Financial are shown below (in thousands): Current: Federal State Total current Deferred: Federal State Total deferred Total income tax Years ended December 31, 2002 2003 2001 $ 77,015 5,551 82,566 $ 89,879 6,011 95,890 $69,971 4,240 74,211 5,369 979 6,348 $ 88,914 (12,978) (2,077) (15,055) $ 80,835 (10,130) (1,635) (11,765) $62,446 The reconciliations of income attributable to continuing operations computed at the U.S. federal statutory tax rates to income tax expense are as follows (in thousands): Years ended December 31, 2001 2002 2003 Amount: Federal statutory tax Tax exempt revenue Effect of state income taxes, net of federal benefit Intangible amortization Utilization of tax credits Other, net Total Percent of pretax income: Federal statutory rate Tax-exempt revenue Effect of state income taxes, net of federal benefit Intangible amortization Utilization of tax credits Other, net Total $ 86,538 $ 79,903 $61,721 (3,600) (3,233) (2,815) 4,110 763 (794) 1,112 2,605 3,965 (800) (1,445) $ 88,914 $ 80,835 $62,446 2,482 914 (937) 1,706 Years ended December 31, 2001 2002 2003 35% (1) 2 – – – 36% 35% (1) 1 – – – 35% 35% (2) 2 2 (1) (1) 35% 60 (12) Employee Benefits BOK Financial sponsors a defined benefit Pension Plan for all employees who satisfy certain age and service requirements. The following table presents information regarding this plan (dollars in thousands): Change in projected benefit obligation: Projected benefit obligation, at beginning of year Service cost Interest cost Actuarial loss Benefits paid Projected benefit obligation at end of year1,2 Change in plan assets: Plan assets at fair value, at beginning of year Actual return on plan assets Company contributions Benefits paid Plan assets at fair value at end of year Reconciliation of prepaid (accrued) and total amount recognized: Benefit obligation Fair value of assets Funded status of the plan Unrecognized net loss Unrecognized prior service cost Prepaid pension costs Components of net periodic benefit costs: Service cost Interest cost Expected return on plan assets Amortization of unrecognized amounts: Net loss Prior service cost Net periodic pension cost 1 Projected benefit obligation equals accumulated benefit obligation. 2 Projected benefit obligation is based on a January 1 measurement date. Weighted-average assumptions as of December 31: Discount rate Expected return on plan assets Rate of compensation increase December 31, 2003 2002 $ 30,606 5,178 2,015 2,161 (2,187) $ 37,773 $ 24,141 4,016 1,768 1,995 (1,314) $ 30,606 $ 30,945 7,286 7,231 (2,187) $ 43,275 $ 27,307 (3,098) 8,050 (1,314) $ 30,945 $(37,773) 43,275 5,502 13,387 503 $ 19,392 $(30,606) 30,945 339 16,373 563 $ 17,275 $ 5,178 2,015 (2,957) $ 4,016 1,768 (2,384) 818 60 $ 5,114 251 60 $ 3,711 6.25% 7.50% 5.25% 6.75% 7.50% 5.25% Assets of the Pension Plan consist primarily of shares in the American Performance Balanced Fund. The stated objective of this fund is to provide an attractive total return through a broadly diversified mix of equities and bonds. The typical portfolio mix is approximately 60% equities and 40% bonds. The life-to-date return on the fund, which is used as an indicator when setting the expected return on plan assets, was 7.95%. The maximum and minimum required Pension Plan contributions for 2003 were $12.7 million and $0, respectively. Amounts contributed to the Pension Plan during 2003 included $5.0 million attributable to the current year and $2.2 million attributable to 2002. Employee contributions to the Thrift Plans are matched by BOK Financial up to 5% of base compensation, based upon years of service. Participants may direct the investments of their accounts in a variety of options, including BOK Financial Common Stock. Employer contributions vest over five years. Expenses incurred by BOK Financial for the Thrift Plans totaled $3.6 million, $3.1 million and $2.8 million for 2003, 2002 and 2001, respectively. BOK Financial also sponsors a defined benefit post-retirement employee medical plan, which pays 50 percent of annual medical insurance premiums for retirees who meet certain age and service requirements. Assets of the retiree medical plan consist primarily of shares in a cash manage- ment fund. Eligibility for the post-retirement plan is limited to current retirees and certain employees who were age 60 or older at the time the plan was frozen in 1993. The net obligation recognized under the plan was $2.4 million at December 31, 61 2003. A 1% change in medical expense trends would not significantly affect the net obligation or cost of this plan. Under various performance incentive plans, participating employees may be granted awards based on defined formulas or other criteria. Earnings were charged $52.0 million in 2003, $32.1 million in 2002 and $27.2 million in 2001 for such awards. (13) Executive Benefit Plans The shareholders and Board of Directors of BOK Financial have approved various stock-based compensation plans. The number of awards and the employees to receive awards are determined by an independent compensation committee of the Board of Directors for the Chief Executive Officer and other senior executives. Other stock-based compensation awards are determined by the Chairman of the Board and the Chief Executive Officer. These awards consist primarily of stock options that are subject to vesting requirements. Generally, one-seventh of the options awarded vest annually and expire three years after vesting. Additionally, stock options that vest in two years and expire 45 days after vesting have been awarded. The following table presents options outstanding during 2001, 2002 and 2003 under these plans: Options outstanding at December 31, 2000 Options awarded Options exercised Options forfeited Options expired Options outstanding at December 31, 2001 Options awarded Options exercised Options forfeited Options expired Options outstanding at December 31, 2002 Options awarded Options exercised Options forfeited Options expired Options outstanding at December 31, 2003 Options vested at December 31, 2003 Weighted- Average Exercise Price $15.38 28.68 11.79 16.06 16.70 18.74 32.22 13.71 20.49 7.91 20.29 33.64 17.24 23.76 19.29 Number 3,448,924 722,119 (640,234) (48,469) (1,057) 3,481,283 169,183 (477,623) (38,936) (4) 3,133,903 861,898 (652,871) (60,137) (51) 3,282,742 $24.34 1,010,099 $18.13 The following table summarizes information concerning currently outstanding and vested stock options: Options Outstanding Options Vested Weighted Weighted Average Average Remaining Exercise Range of Exercise Prices Number Contractual Outstanding Life (years) Price Weighted Average Number Exercise Vested Price $ 8.29 – $ 9.98 16.65 17.89 – 19.59 28.52 – 32.51 38.33 – 38.78 196,788 236,587 1,258,771 1,353,763 236,833 1.61 2.42 3.56 4.97 2.00 $ 9.25 16.65 18.62 30.70 38.55 196,788 $ 9.25 16.65 18.74 29.12 – 152,191 509,809 151,311 – Compensation expense for stock options is generally recognized based on the fair value of options granted over the options’ vesting period. No compensation expense is recognized for options that are forfeited before vesting. The fair value of options was determined as of the date of grant using a Black-Scholes option pricing model with the following weighted average assumptions: Average risk-free interest rate Dividend yield Volatility factors Weighted-average expected life Weighted-average fair value 2003 2002 2001 2.57% None .178 1.59% None .190 6.04% None .195 7 years $6.66 2 years $4.18 7 years $8.65 BOK Financial also may issue nonvested common shares under the various stock-based compensation plans. These shares, which generally are issued only to the Chief Executive Officer and selected senior executives, vest five years after the grant date. The holders of these shares may be required to retain the shares for a three-year period after vesting. At December 31, 2003, a total of 18,635 nonvested common shares have been awarded. 62 BOK Financial permits certain executive officers to defer recognition of taxable income from their stock-based compensation. These officers are also able to diversify their deferred compensation into investments other than BOK Financial common stock. Accordingly, stock-based compensation for these officers is recognized as liability awards rather than equity awards. Compensation expense is based on the intrinsic value of the award over the vesting period. Additional compensation expense is recognized based on changes in the fair value of the deferred compensation liability after the vesting period. At December 31, 2003, the total deferred compensation liability attributed to these arrangements was $6.8 million. During January 2004, BOK Financial awarded the following stock-based compensation: Exercise Fair Value/ Number Price Award Equity awards: Stock options 487,559 $38.87 $ 8.99 Liability awards: Stock options Nonvested stock Total Liability awards Total stock-based awards 125,756 24,800 150,556 638,115 38.87 – 8.99 38.87 (14) Commitments and Contingent Liabilities In the ordinary course of business, BOK Financial and its subsidiaries are subject to legal actions and complaints. Management believes, based upon the opinion of counsel, that the actions and liability or loss, if any, resulting from the final outcomes of the proceedings will not be material in the aggregate. BOk is obligated under a long-term lease for its bank premises located in downtown Tulsa. The lease term, which began November 1, 1976, is for fifty-seven years with options to terminate in 2013 and 2023. Annual base rent is $3.3 million. BOk subleases portions of its space for annual rents of $386 thousand in 2004, $370 thousand in 2005 and $213 thousand in years 2006 through 2008. Net rent expense on this lease was $2.9 million in years 2003, 2002 and 2001. Total rent expense for BOK Financial was $13.0 million in 2003, $12.4 million in 2002 and $11.8 million in 2001. At December 31, 2003, the future minimum lease payments for equipment and premises under operating leases were as follows: $12.4 million in 2004, $11.7 million in 2005, $11.2 million in 2006, $9.7 million in 2007, $8.3 million in 2008 and a total of $36.8 million thereafter. BOk and Williams Companies, Inc. severally guaranteed 30 percent and 70 percent, respectively, of the $13 million debt and operating deficit of two parking facilities operated by the Tulsa Parking Authority. The debt had a maturity date of May 15, 2007. In 2003, BOk funded the remaining amount of this commitment and paid $2.9 million to retire the Company’s obligation with respect to this debt. Total expenditures related to this guarantee were $3.2 million in 2003, $373 thousand in 2002 and $441 thousand in 2001. The Federal Reserve Bank requires member banks to maintain certain minimum average cash balances. These balances were approximately $303 million for 2003 and $283 million for 2002. 63 (15) Shareholders’ Equity Preferred Stock One billion shares of preferred stock with a par value of $0.00005 per share are authorized. A single series of 250,000,000 shares designated as Series A Preferred Stock (“Series A Preferred Stock”) is currently issued and outstanding. The Series A Preferred Stock has no voting rights except as otherwise provided by Oklahoma corporate law and may be converted into one share of Common Stock for each 37 shares of Series A Preferred Stock at the option of the holder. Dividends are cumulative at an annual rate of ten percent of the $0.06 per share liquidation preference value when declared and are payable in cash. Aggregate liquidation preference is $15 million. During 2003, 2002 and 2001, 23,214 shares, 47,961 shares, and 72,141 shares, respectively, of BOK Financial common stock were issued in payment of dividends on the Series A Preferred Stock in lieu of cash by mutual agreement of BOK Financial and the holders of the Series A Preferred Stock. These shares were valued at $750,000 in 2003, and $1.5 million in 2002 and 2001, based on average market price, as defined, for a 65 business day period preceding declaration. In 2003, cash dividends paid on preferred stock totaled $750,000. George B. Kaiser owns substantially all Series A Preferred Stock. Common Stock Common stock consists of 2.5 billion authorized shares with a $0.00006 par value. Holders of common shares are entitled to one vote per share at the election of the Board of Directors and on any question arising at any shareholders’ meeting and to receive dividends when and as declared. No common stock dividends can be paid unless all accrued dividends on the Series A Preferred Stock have been paid. The present policy of BOK Financial is to retain earnings for capital and future growth, and management has no current plans to recommend payment of cash dividends on common stock. Additionally, regulations restrict the ability of national banks and bank holding companies to pay dividends, and BOK Financial’s credit agreement restricts the payment of dividends by the holding company. During 2003, 2002 and 2001, 3% dividends payable in shares of BOK Financial common stock were declared and paid. The shares issued were valued at $58 million, $52 million and $35 million, respectively, based on the average closing bid/ask prices on the day preceding declaration. Per share data has been restated to reflect these stock dividends. Presently, management plans to recommend continued payment of an annual dividend in shares of common stock. On October 25, 2002, BOK Financial issued 1,711,127 shares of common stock and 292,225 options to purchase shares, with a fair value at the issuance date of $65 million for its purchase of Bank of Tanglewood. In addition, BOK Financial agreed to a limited price guarantee on a portion of the shares issued in this purchase. The fair value of this price guarantee, estimated to be $3 million based upon the Black-Scholes Option pricing model, was included in the purchase price of Bank of Tanglewood (see Note 2). Pursuant to this guarantee, any holder of BOK Financial common shares issued in this acquisition may annually make a claim for the excess of the guaranteed price and the actual sales price of any shares sold during a 60-day period after each of the first five anniversary dates after October 25, 2002. The maximum annual number of shares subject to this guarantee is 203,951. The guaranteed price for each anniversary period is $36.30 for 2004, $38.80 for 2005, $41.30 for 2006 and $43.81 for 2007. The price guarantee is nontransferable and noncumulative. BOK Financial may elect, in its sole discretion, to issue additional shares of common stock to satisfy any obligation under the price guarantee or to pay cash. The maximum aggregate number of common shares that may be issued to satisfy any price guarantee obligations is 10 million. If, as of any benchmark date, BOK Financial has already issued 10 million shares, BOK Financial is not obligated to make any further benchmark payments. BOK Financial’s ability to pay cash to satisfy any price guarantee obligations is limited by applicable bank holding company and bank capital and dividend regulations. 64 Subsidiary Banks Regulatory Capital The amounts of dividends that BOK Financial’s subsidiary banks can declare and the amounts of loans the subsidiary banks can extend to affiliates are limited by various federal and state banking regulations. Generally, dividends declared during a calendar year are limited to net profits, as defined, for the year plus retained profits for the preceding two years. The amounts of dividends are further restricted by minimum capital requirements. Pursuant to the most restrictive of the regulations at December 31, 2003, BOK Financial’s subsidiary banks could declare dividends up to $121 million without prior regulatory approval. The subsidiary banks declared and paid dividends of $60 million in 2003, $40 million in 2002 and $92 million in 2001. Loans to a single affiliate may not exceed 10% and loans to all affiliates may not exceed 20% of unimpaired capital and surplus, as defined. Additionally, loans to affiliates must be fully secured. As of December 31, 2003 and 2002, these loans totaled $10 million. None of the affiliate loans in 2002 were to consolidated entities. Total loan commitments to affiliates at December 31, 2003 were $95 million. BOK Financial and its banking subsidiaries are subject to various capital requirements administered by the federal banking agencies. Failure to meet minimum capital requirements can initiate certain mandatory and additional discretionary actions by regulators that could have a material effect on BOK Financial’s operations. These capital requirements include quantitative measures of assets, liabilities and certain off-balance sheet items. The capital standards are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. For a banking institution to qualify as well capitalized, its Tier I, Total and Leverage capital ratios must be at least 6%, 10% and 5%, respectively. Tier I capital consists primarily of common stockholders’ equity, excluding unrealized gains or losses on available for sale securities, less goodwill, core deposit premiums and certain other intangible assets. As directed by the Federal Reserve Bank, Tier I capital excludes $29 million, the combined value of common shares issued subject to the market value protection program and the value of the market value guarantee. These values will be restored to Tier I capital as the market price guarantee expires. Total capital consists primarily of Tier I capital plus preferred stock, subordinated debt and reserves for loan losses, subject to certain limitations. All of BOK Financial’s banking subsidiaries exceeded the regulatory definition of well capitalized. 65 December 31, 2003 2002 Amount Ratio Amount Ratio $ $ $ 1,157,782 900,888 201,984 91,412 15,218 26,222 935,932 718,538 179,256 84,811 14,328 22,997 935,932 718,538 179,256 84,811 14,328 22,997 $ $ $ 11.31% 11.06 11.13 17.35 21.56 10.19 9.15% 8.82 9.88 16.10 20.30 8.94 7.17% 6.69 7.22 6.37 7.82 6.86 1,083,244 864,519 199,659 81,458 14,079 – 813,845 624,968 178,832 75,310 13,099 – 813,845 624,968 178,832 75,310 13,099 – 11.95% 11.91 12.00 16.59 18.08 – 8.98% 8.61 10.75 15.34 16.82 – 6.88% 6.39 8.43 6.48 6.95 – (Dollars in thousands) Total Capital (to Risk Weighted Assets): Consolidated BOk Bank of Texas Bank of Albuquerque Bank of Arkansas Colorado State Bank and Trust Tier I Capital (to Risk Weighted Assets): Consolidated BOk Bank of Texas Bank of Albuquerque Bank of Arkansas Colorado State Bank and Trust Tier I Capital (to Average Assets): Consolidated BOk Bank of Texas Bank of Albuquerque Bank of Arkansas Colorado State Bank and Trust (16) Earnings Per Share The following table presents the computation of basic and diluted earnings per share (dollars in thousands except per share data): Years ended December 31, 2002 2001 2003 Numerator: Net income Preferred stock dividends Numerator for basic earnings per share – income available to common stockholders Effect of dilutive securities: Preferred stock dividends Numerator for diluted earnings per share – income available to common stockholders after assumed conversion Denominator: Denominator for basic earnings per share –weighted average shares Effect of dilutive securities: Employee stock compensation plans1 Convertible preferred stock Tanglewood market value guarantee (see Note 15) Dilutive potential common shares Denominator for diluted earnings per share – adjusted weighted average shares and assumed conversions Basic earnings per share Diluted earnings per share $ 158,360 (1,500) $ 147,871 $ 114,439 (1,500) (1,500) 156,860 146,371 112,939 1,500 1,500 1,500 $ 158,360 $ 147,871 $ 114,439 56,990,244 54,964,747 54,150,255 754,262 6,719,577 107,879 7,581,718 751,095 6,719,577 43,764 7,514,436 669,477 6,719,577 – 7,389,054 64,571,962 $2.75 $2.45 62,479,183 $2.66 $2.37 61,539,309 $2.09 $1.86 1 Excludes employee stock options with exercise prices greater than the 26,158 83,704 615,662 current market price. 66 (17) Reportable Segments BOK Financial operates four principal lines of business under its Bank of Oklahoma franchise: corporate banking, consumer banking, mortgage banking and wealth management. It also operates a fifth principal line of business, regional banks, which includes all banking functions for Bank of Albuquerque, N.A., Bank of Arkansas, N.A., Bank of Texas, N.A. and Colorado State Bank and Trust, N.A. These five principal lines of business combined account for approximately 94% of total revenue. In addition to its lines of business, BOK Financial has a funds management unit. The primary purpose of this unit is to manage the overall liquidity needs and interest rate risk of the company. Each line of business borrows funds from and provides funds to the funds management unit as needed to support their operations. The Corporate Banking segment provides loan and lease financing and treasury and cash management services to businesses throughout Oklahoma and surrounding states. Corporate Banking also includes our TransFund unit, which provides ATM and merchant deposit services. The Consumer Banking segment provides a full line of deposit, loan and fee-based services to customers throughout Oklahoma through four major distribution channels: traditional branches, supermarket branches, the 24-hour ExpressBank call center and the Internet. The Mortgage Banking segment consists of two operating sectors that originate a full range of mortgage products from federally sponsored programs to “jumbo loans” on higher priced homes in BOK Financial’s primary market areas. The Mortgage Banking segment also services mortgage loans acquired from throughout the United States. The Wealth Management segment provides a wide range of trust and private financial services, including institutional, investment and retirement products, loans and other services to affluent individuals, businesses, not-for-profit organizations, and governmental agencies. Trust services are primarily provided to clients in Oklahoma, Texas, Arkansas and New Mexico. Wealth Management includes a nationally competitive, self-directed 401-(k) program. Additionally, Wealth Management engages in securities brokerage and trading activities and investment banking. Wealth Management includes BOSC, Inc., a registered broker/dealer. Regional banks include Bank of Texas, Bank of Albuquerque, Bank of Arkansas, and Colorado State Bank and Trust. Each of these banks provides a full range of corporate and consumer 67 banking services in their respective markets. Trust Services provided through Colorado State Bank and Trust are included in the Regional Banks segment. BOK Financial identifies reportable segments by type of service provided for the Mortgage Banking and the Wealth Management segments and by type of customer for the Corporate Banking and Consumer Banking segments. Regional Banks are identified by legal entity. Operating results are adjusted for intercompany loan participations and allocated service costs and management fees. BOK Financial allocates resources and evaluates performance of its lines of business after allocation of funds, certain indirect expenses, taxes and capital costs. The cost of funds borrowed from the funds management unit by the operating lines of business is transfer priced at rates that approximate market for funds with similar duration. Market is generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of transfer-pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk. The value of funds provided by the operating lines of business to the funds management unit is based on applicable Federal Home Loan Bank advance rates. Deposit accounts with indeterminate maturities, such as demand deposit accounts and interest-bearing transaction accounts, are transfer-priced at a rolling average based on expected duration of the accounts. The expected duration ranges from 90 days for certain rate-sensitive deposits to five years. The accounting policies of the reportable segments generally follow those described in the summary of significant account policies except interest income is reported on a fully tax-equivalent basis, loan losses are based on actual net amounts charged off and the amortization of intangible assets is generally excluded. Economic capital is assigned to the business units based on an allocation method that reflects management’s assessment of risk. In the second quarter of 2003, management adopted a third- party developed capital allocation model. This model assigns capital based upon credit, operating, interest rate, liquidity and market risk inherent in BOK Financial’s business lines and recognizes the diversification benefits among the units. The level of assigned economic capital is a combination of the risk taken by each business line, based on its actual exposures and calibrated to its own loss history where possible. Previously, capital was assigned to the business units based on an internally developed model that focused primarily on credit risk as defined by regulatory standards. While adoption of this new model has not significantly affected management’s assessment of the overall capital levels required for the company, it has assigned more capital to business units with operating, interest rate and market risk and assigned less capital to business units with credit risk. Additional capital is assigned to the regional banks line of business based on BOK Financial’s investment in those entities. Capital assignments for prior periods have been restated to reflect this new allocation model. Substantially all revenue is from domestic customers. No single external customer accounts for more than 10% of total revenue. 68 (In Thousands) Corporate Banking Consumer Banking Mortgage Banking Management Wealth Regional Banks All Other/ Eliminations Total Year ended December 31, 2003 Net interest revenue/(expense) from external sources $ 144,791 $ (16,725) $ 27,770 $ 1,967 $ 164,755 $ 67,471 $ 390,029 Net interest revenue/(expense) from internal sources Total net interest revenue Provision for loan losses Other operating revenue Capitalized mortgage servicing rights Financial instruments gains/(losses) Operating expense Recovery for impairment of mortgage servicing rights Income taxes Net income Average assets Average equity Performance measurements: Return on assets Return on equity Efficiency ratio (28,218) 116,573 10,325 79,316 57,925 41,200 6,887 47,361 (9,415) 18,355 917 36,379 8,954 10,921 390 91,534 (12,151) 152,604 6,425 36,531 (17,095) 50,376 10,692 (10,431) – 390,029 35,636 280,690 – – 23,922 – – – 23,922 614 88,478 – 66,639 4,025 58,204 53 80,440 339 118,386 (6,651) 20,887 (1,620) 433,034 – 38,007 $ 59,693 $ – 5,849 9,186 (22,923) 18,082 $ 28,401 – 8,432 $ 13,246 $ – 23,606 41,057 $ – (5,062) 6,777 $ (22,923) 88,914 158,360 $4,362,396 $2,514,262 $ 623,823 $731,303 $ 4,899,360 $ (365,583) $ 12,765,561 311,140 58,000 69,100 69,690 360,220 291,406 1,159,556 1.37% 19.19 45.17 .37% 15.84 75.25 4.55% 41.10 74.00 1.81% 19.01 78.51 0.84% 11.40 62.59 – – – 1.24% 13.66 62.34 Reconciliation to Consolidated Financial Statements Net Interest Revenue Other Operating Revenue¹ Other Operating Expense Net Income Average Assets Total reportable segments Unallocated items: Tax-equivalent adjustment Funds management All others (including eliminations), net BOK Financial consolidated $339,653 $ 315,043 $ 389,224 $151,583 $13,131,144 5,170 59,520 – (6,520) – 13,926 5,170 4,972 – 1,379,319 (14,314) $390,029 (3,911) $ 304,612 6,961 (3,365) $410,111 $158,360 (1,744,902 ) $12,765,561 ¹Excluding financial instrument gains/(losses) 69 (In Thousands) Corporate Banking Consumer Banking Mortgage Banking Management Wealth Regional Banks All Other/ Eliminations Total Year ended December 31, 2002 Net interest revenue/(expense) from external sources $ 155,648 $ (17,875) $ 32,199 $ 1,958 $ 138,145 $ 58,126 $ 368,201 Net interest revenue/(expense) from internal sources Total net interest revenue Provision for loan losses Other operating revenue Capitalized mortgage servicing rights Financial instruments gains/(losses) Operating expense Provision for impairment of mortgage servicing rights Income taxes Net income (45,573) 110,075 6,475 72,234 61,301 43,426 7,829 38,862 (13,713) 18,486 252 37,845 8,162 10,120 363 69,932 (12,835) 125,310 2,658 60,784 6,161 26,876 12,650 (10,349) – 368,201 33,730 235,400 – – 20,832 – – – 20,832 658 81,434 – 63,401 26,345 54,795 68 69,709 4,205 94,383 33,322 16,950 64,598 380,672 – 36,977 $ 58,081 $ – 4,302 6,756 45,923 987 $ 1,551 – 3,966 $ 6,082 $ – 20,415 35,432 – 14,188 $ 39,969 $ 45,923 80,835 147,871 Average assets $4,038,353 $2,341,239 $ 671,798 $556,390 $ 3,915,411 $ (230,621) $ 11,292,570 Average equity 298,020 60,910 34,160 60,880 286,730 198,138 938,838 Performance measurements: Return on assets Return on equity Efficiency ratio 1.44% 19.49 44.67 .29% 11.09 77.05 .23% 4.54 71.01 1.09% 9.99 87.08 .90% 12.36 62.02 – – – 1.31% 15.75 60.96 Reconciliation to Consolidated Financial Statements Net Interest Revenue Other Operating Revenue¹ Other Operating Expense Net Income Average Assets Total reportable segments Unallocated items: Tax-equivalent adjustment Funds management All others (including eliminations), net BOK Financial consolidated $307,417 $ 266,581 $ 409,645 $107,902 $11,523,191 6,119 72,802 – (7,245) – 10,503 6,119 40,652 – 661,182 (18,137) $368,201 (3,104) $ 256,232 6,447 $ 426,595 (6,802) $147,871 (891,803) $11,292,570 ¹Excluding financial instrument gains/(losses) 70 (In Thousands) Corporate Banking Consumer Banking Mortgage Banking Management Wealth Regional Banks All Other/ Eliminations Total Year ended December 31, 2001 Net interest revenue/(expense) from external sources $ 199,727 $ (34,049) $ 32,545 $ 839 $ 138,846 $ (8,956) $ 328,952 Net interest revenue/(expense) from internal sources Total net interest revenue Provision for loan losses Other operating revenue Capitalized mortgage servicing rights Financial instruments gains/(losses) Operating expense Provision for impairment of mortgage servicing rights Income taxes Transition adjustment of adoption of FAS 133 Net income (86,150) 113,577 10,481 62,648 94,393 60,344 4,180 29,995 (20,867) 11,678 47 30,119 13,136 13,975 128 67,564 (11,689) 127,157 5,873 19,642 11,177 2,221 16,901 (4,153) – 328,952 37,610 205,815 – – 22,695 – – – 22,695 (250) 78,190 – 33,960 – 59,099 – 10,527 12,757 47,750 15,551 5,408 – 63,186 – 7,096 484 91,088 – 18,518 13,587 14,917 – (13,063) 26,578 354,230 15,551 62,446 – $ 53,344 – $ 16,533 – $ 8,493 – $ 11,129 – $ 31,804 236 236 $ (6,864) $ 114,439 Average assets $3,867,850 $2,192,698 $651,103 $492,811 $3,352,149 $(315,009) $10,241,602 Average equity 275,090 53,250 18,700 52,290 234,420 147,285 781,035 Performance measurements: Return on assets Return on equity Efficiency ratio 1.38% 19.39 44.37 0.75% 31.05 65.42 1.30% 45.42 74.04 2.26% 21.28 77.49 0.95% 13.57 62.05 – – – 1.12% 14.65 63.54 Reconciliation to Consolidated Financial Statements Net Interest Revenue Other Operating Revenue¹ Other Operating Expense Net Income Average Assets Total reportable segments Unallocated items: Tax-equivalent adjustment Funds management All others (including eliminations), net BOK Financial consolidated $326,731 $232,663 $354,864 $ 121,303 $10,556,611 8,045 15,177 – (408) – 7,946 8,045 (719) – 323,113 (21,001) $328,952 (3,745) $228,510 6,971 $369,781 (14,190) $ 114,439 (638,122) $10,241,602 ¹Excluding financial instrument gains/(losses) 71 (18) Fair Value of Financial Instruments The following table presents the carrying values and estimated fair values of financial instruments as of December 31, 2003 and 2002 (dollars in thousands): 2003: Cash and cash equivalents Securities Loans: Commercial Commercial real estate Residential mortgage Residential mortgage – held for sale Consumer Total loans Reserve for loan losses Net loans Derivative instruments with positive fair value Deposits with no stated maturity Time deposits Other borrowings Subordinated debt Derivative instruments with negative fair value 2002: Cash and cash equivalents Securities Loans: Commercial Commercial real estate Residential mortgage Residential mortgage – held for sale Consumer Total loans Reserve for loan losses Net loans Derivative instruments with positive fair value Deposits with no stated maturity Time deposits Other borrowings Subordinated debt Derivative instruments with negative fair value Carrying Value $ 643,912 4,714,642 4,336,702 1,630,092 1,015,643 56,543 444,909 7,483,889 (128,639) 7,355,250 149,100 5,845,137 3,374,726 2,626,318 154,332 149,326 $ 624,215 4,136,403 3,989,798 1,435,838 929,759 133,421 412,167 6,900,983 (116,070) 6,784,913 90,776 4,860,534 3,267,991 2,655,708 155,419 80,079 Range of Contractual Yields Average Repricing (in years) Discount Rate Estimated Fair Value $ 643,912 4,717,947 2.75 – 18.94% 2.45 – 11.50 2.75 – 7.96 – 1.11 – 18.69 0.38 1.26 2.55 – 2.63 1.20 – 5.43% 4,528,247 1,637,499 1,020,330 56,543 442,485 7,685,104 4.45 – 6.35 3.83 – 6.28 – 3.43 – 7.50 0.60 – 7.65 1.05 – 7.74 6.22 2.03 .05 3.60 1.05 – 2.27 1.00 – 3.29 5.01 1.78 – 12.25% 2.70 – 12.50 3.50 – 8.50 – 1.33 – 21.00 0.32 1.09 2.74 – 2.49 1.45 – 5.68% 4.70 – 6.60 3.92 – 6.67 – 3.64 – 7.75 0.90 – 7.65 3.29 – 5.84 6.45 1.54 0.05 4.60 1.26 – 2.34 1.13 – 3.29 4.50 – 7,685,104 149,100 5,845,137 3,413,556 2,626,136 170,612 149,326 $ 624,215 4,140,606 4,058,743 1,450,552 933,161 133,421 416,643 6,992,520 – 6,992,520 90,776 4,860,534 3,353,243 2,658,930 175,307 80,079 The preceding table presents the estimated fair values of financial instruments. The fair values of certain of these instruments were calculated by discounting expected cash flows, which involved significant judgments by management. Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale. Because no market exists for certain of these financial instruments and management does not intend to sell these financial instruments, BOK Financial does not know whether the fair values shown above represent values at which the respective financial instruments could be sold individually or in the aggregate. 72 Deposits The fair values of time deposits are based on discounted cash flow analyses using interest rates currently being offered on similar transactions. Statement of Financial Accounting Standard No. 107, “Disclosures about Fair Value of Financial Instruments,” (“FAS 107”) defines the estimated fair value of deposits with no stated maturity, which includes demand deposits, transaction deposits, money market deposits and savings accounts, to equal the amount payable on demand. Although market premiums paid reflect an additional value for these low cost deposits, FAS 107 prohibits adjusting fair value for the expected benefit of these deposits. Accordingly, the positive effect of such deposits is not included in this table. Other Borrowings and Subordinated Debenture The fair values of these instruments are based upon discounted cash flow analyses using interest rates currently being offered on similar instruments. Off-Balance Sheet Instruments The fair values of commercial loan commitments are based on fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements. The fair values of these off-balance sheet instruments were not significant at December 31, 2003 and 2002. The following methods and assumptions were used in estimating the fair value of these financial instruments: Cash and Cash Equivalents The book value reported in the consolidated balance sheet for cash and short-term instruments approximates those assets’ fair values. Securities The fair values of securities are based on quoted market prices or dealer quotes, when available. If quotes are not available, fair values are based on quoted prices of comparable instruments. Derivatives All derivative instruments are carried on the balance sheet at fair value. Fair values for exchange-traded contracts are based on quoted prices. Fair values for over-the-counter interest rate, energy and foreign exchange contracts are based on valuations provided either by third-party dealers in the contracts or by quotes provided by independent pricing services. Loans The fair value of loans, excluding loans held for sale, are based on discounted cash flow analyses using interest rates currently being offered for loans with similar remaining terms to maturity and credit risk, adjusted for the impact of interest rate floors and ceilings. The fair values of classified loans were estimated to approximate their carrying values less loan loss reserves allocated to these loans of $30 million and $29 million at December 31, 2003 and 2002, respectively. The fair values of residential mortgage loans held for sale are based upon quoted market prices of such loans sold in securitization transactions, including related unfunded loan commitments and hedging transactions. 73 (19) Financial Instruments with Off-Balance Sheet Risk BOK Financial is a party to financial instruments with off-balance sheet risk in the normal course of business to meet the financing needs of its customers and to manage interest rate risk. Those financial instruments involve, to varying degrees, elements of credit risk in excess of the amount recognized in BOK Financial’s Consolidated Balance Sheets. Exposure to credit loss in the event of nonperformance by the other party to the financial instrument for commitments to extend credit and standby letters of credit is represented by the notional amount of those instruments. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At December 31, 2003, outstanding commitments totaled $3 billion. Because some of the commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. BOK Financial uses the same credit policies in making commitments as it does loans. The amount of collateral obtained, if deemed necessary, is based on management’s credit evaluation of the borrower. Standby letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. Because the credit risk involved in issuing standby letters of credit is essentially the same as that involved in extending loan commitments, BOK Financial uses the same credit policies in evaluating the creditworthiness of the customer. Additionally, BOK Financial uses the same evaluation process in obtaining collateral on standby letters of credit as it does for loan commitments. The term of these standby letters of credit is defined in each commitment and typically corresponds with the underlying loan commitment. At December 31, 2003, outstanding standby letters of credit totaled $497 million. Commercial letters of credit are used to facilitate customer trade transactions with the drafts being drawn when the underlying transaction is consummated. At December 31, 2003, outstanding commercial letters of credit totaled $7 million. 74 (20) Parent Company Only Financial Statements Summarized financial information for BOK Financial – Parent Company Only follows: Balance Sheets (In Thousands) Assets Cash and cash equivalents Securities – available for sale Investment in subsidiaries Other assets Total assets Liabilities and Shareholders’ Equity Other borrowings Other liabilities Total liabilities Preferred stock Common stock Capital surplus Retained earnings Treasury stock Accumulated other comprehensive income Total shareholders’ equity Total liabilities and shareholders’ equity Statements of Earnings (In Thousands) December 31, 2003 2002 $ 10,881 16,657 1,296,749 1,750 $1,326,037 $ 16,466 14,253 1,146,915 8,102 $ 1,185,736 $ 95,000 2,407 97,407 12 4 546,594 698,052 (24,491) 8,459 1,228,630 $1,326,037 $ 85,000 1,210 86,210 25 3 475,054 598,777 (17,421) 43,088 1,099,526 $ 1,185,736 Dividends, interest and fees received from subsidiaries Other operating revenue Total revenue $ 66,165 431 66,596 $ 42,821 441 43,262 $ 91,960 425 92,385 2003 2002 2001 Interest expense Personnel expense Professional fees and services Other operating expense Total expense Income before taxes and equity in undistributed income of subsidiaries Federal and state income tax credit Income before equity in undistributed income of subsidiaries Equity in undistributed income of subsidiaries Net income 1,771 – 545 (4) 2,312 3,453 – 433 205 4,091 6,458 2 471 265 7,196 64,284 (678) 39,171 (1,879) 85,189 (3,092) 64,962 93,398 $ 158,360 41,050 106,821 $ 147,871 88,281 26,158 $ 114,439 75 Statements of Cash Flows (In Thousands) Cash flows from operating activities: Net income Adjustments to reconcile net income to net cash provided by operating activities: Equity in undistributed income of subsidiaries Tax benefit on exercise of stock options Change in other assets Change in other liabilities Net cash provided by operating activities Cash flows from investing activities: Purchases of available for sale securities Investment in subsidiaries Net cash used by investing activities 2003 2002 2001 $ 158,360 $ 147,871 $ 114,439 (93,398) 1,325 (944) 272 65,615 (27) (85,015) (85,042) (106,821) 5,482 (104) (930) 45,498 (26,158) 3,408 (57) 166 91,798 (568) (5,482) (6,050) (1,961) (119,309) (121,270) Cash flows from financing activities: Increase in other borrowings Pay down of other borrowings Issuance of preferred, common and treasury stock, net Cash dividends Net cash provided (used) by financing activities Net change in cash and cash equivalents Cash and cash equivalents at beginning of period Cash and cash equivalents at end of period 105,000 (95,000) 4,627 (785) 13,842 (5,585) 16,466 $ 10,881 – (40,095) 4,172 (30) (35,953) 3,495 12,971 $ 16,466 124,963 (95,000) 2,745 (20) 32,688 3,216 9,755 $ 12,971 Payment of dividends in common stock Cash paid for interest Common stock and price guarantee issued for acquisition $ 58,300 1,947 – $ 53,165 3,482 67,745 $ 36,371 6,726 – 76 BOK FINANCIAL CORPORATION Annual Financial Summary – Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands) Assets Taxable securities3 Tax-exempt securities3 Total securities3 Trading securities Funds sold and resell agreements Loans2 Less reserve for loan losses Loans, net of reserve Total earning assets3 Cash and other assets Total assets Liabilities and Shareholders’ Equity Transaction deposits Savings deposits Time deposits Total interest-bearing deposits Funds purchased and repurchase agreements Other borrowings Subordinated debentures Total interest-bearing liabilities Demand deposits Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity Tax-equivalent Net Interest Revenue3 Tax-equivalent Net Interest Revenue to Earning Assets 3 Less tax-equivalent adjustment1 Net Interest Revenue Provision for loan losses Other operating revenue Other operating expense Income before taxes Federal and state income tax Net Income Average Balance 2003 Revenue/ Expense1 Yield/ Rate 4.22% 6.59 4.32 4.09 1.07 5.30 – 5.39 4.96 0.87% 0.55 2.90 1.83 1.01 1.73 6.12 1.76 3.20% 3.43 $ 4,316,303 191,982 4,508,285 16,975 26,330 7,101,543 124,646 6,976,897 11,528,487 1,237,074 $12,765,561 $ 3,605,539 172,938 3,439,361 7,217,838 1,537,100 1,051,685 154,940 9,961,563 1,309,744 334,698 1,159,556 $12,765,561 $ 180,581 12,527 193,108 694 281 376,260 – 376,260 570,343 $ 31,346 944 99,639 131,929 15,590 18,148 9,477 175,144 $ 395,199 5,170 390,029 35,636 302,992 410,111 247,274 88,914 $ 158,360 1 Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments shown are for comparative purposes. 2 The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned income. See Note 1 of Notes to the Consolidated Financial Statements for a description of income recognition policy. 3 Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income. 77 Average Balance $ 3,756,666 208,503 3,965,169 14,215 16,024 6,401,510 109,985 6,291,525 10,286,933 1,005,637 $11,292,570 $ 2,798,639 165,988 3,057,645 6,022,272 1,549,021 1,058,717 181,911 8,811,921 1,185,891 355,920 938,838 $11,292,570 Yield/ Rate 5.22% 7.09 5.32 5.28 1.82 5.91 – 6.01 5.75 1.40% 1.19 3.41 2.42 1.63 2.39 5.91 2.35 3.40% 3.70 2002 Revenue/ Expense1 $ 186,902 14,789 201,691 750 291 378,300 – 378,300 581,032 $ 39,273 1,976 104,217 145,466 25,218 25,277 10,751 206,712 $374,320 6,119 368,201 33,730 320,830 426,595 228,706 80,835 $ 147,871 Average Balance 2001 Revenue/ Expense1 Yield/ Rate 6.17% 7.19 6.26 6.49 4.50 7.62 – 7.74 7.20 2.20% 1.47 5.20 3.83 3.89 4.53 6.06 3.98 3.22% 3.66 $2,989,967 277,309 3,267,276 18,504 18,419 5,989,224 92,392 5,896,832 9,201,031 1,040,571 $10,241,602 $ 2,267,032 154,934 2,960,170 5,382,136 1,652,467 974,907 180,211 8,189,721 1,102,958 167,888 781,035 $10,241,602 $184,464 19,935 204,399 1,200 829 456,250 – 456,250 662,678 $ 49,893 2,281 154,035 206,209 64,358 44,191 10,923 325,681 $336,997 8,045 328,952 37,610 255,452 369,781 177,013 62,574 $114,439 78 BOK FINANCIAL CORPORATION Quarterly Financial Summary – Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands Except Per Share Data) December 31, 2003 September 30, 2003 Three Months Ended Average Balance Revenue/ Yield/ Expense1 Rate Average Balance Revenue/ Yield/ Expense1 Rate Assets Taxable securities3 Tax-exempt securities3 Total securities3 Trading securities Funds sold and resell agreements Loans2 Less reserve for loan losses Loans, net of reserve Total earning assets3 Cash and other assets Total assets Liabilities and Shareholders’ Equity Transaction deposits Savings deposits Time deposits Total interest-bearing deposits Funds purchased and repurchase agreements Other borrowings Subordinated debentures Total interest-bearing liabilities Demand deposits Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity $ 4,421,278 $ 45,838 2,958 189,829 48,796 4,611,107 147 17,325 65 26,730 96,059 7,359,126 – 129,445 7,229,681 96,059 11,884,843 145,067 1,342,042 $13,226,885 $ 3,886,546 $ 7,377 255 25,094 32,726 3,921 4,240 2,216 43,103 179,867 3,442,358 7,508,771 1,679,540 1,031,414 154,524 10,374,249 1,370,088 284,432 1,198,116 $13,226,885 Tax-equivalent Net Interest Revenue3 Tax-equivalent Net Interest Revenue to Earning Assets 3 Less tax-equivalent adjustment1 Net Interest Revenue Provision for loan losses Other operating revenue Other operating expense Income before taxes Federal and state income tax Net Income Earnings Per Average Common Share Equivalent: Net income: Basic Diluted $101,964 1,184 100,780 8,001 71,051 108,321 55,509 20,207 $ 35,302 $0.61 $0.55 4.08% 6.19 4.17 3.37 0.96 5.18 – 5.27 4.83 0.75% 0.56 2.89 1.73 0.93 1.63 5.69 1.65 3.18% 3.39 3.86% 6.38 3.96 4.21 0.62 5.18 – 5.27 4.74 0.77% 0.46 2.77 1.70 0.92 1.64 6.20 1.64 3.10% 3.32 $ 4,360,340 $ 42,698 3,003 186,827 45,701 4,547,167 295 27,830 51 32,491 93,013 7,122,211 – 125,966 6,996,245 93,013 11,603,733 139,060 1,252,896 $12,856,629 $ 3,715,035 $ 7,200 200 23,863 31,263 3,566 4,383 2,421 41,633 170,796 3,423,920 7,309,751 1,529,721 1,062,734 154,865 10,057,071 1,323,641 314,583 1,161,334 $12,856,629 $ 97,427 1,256 96,171 8,220 63,428 90,771 60,608 21,792 $ 38,816 $0.67 $0.60 1 Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments shown are for comparative purposes. 2 The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned income. See Note 1 of Notes to the Consolidated Financial Statements for a description of income recognition policy. 3 Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income. 79 June 30, 2003 Three Months Ended March 31, 2003 December 31, 2002 Average Balance Revenue/ Yield/ Expense1 Rate Average Balance Revenue/ Yield/ Expense1 Rate Average Balance Revenue/ Yield/ Expense1 Rate 4.30% 6.86 4.41 4.47 1.42 5.33 – 5.42 5.01 0.91% 0.43 2.84 1.83 1.08 1.75 6.26 1.78 3.23% 3.47 185,908 4,574,641 12,207 16,669 6,970,905 123,095 6,847,810 $ 4,388,733 $ 46,911 3,179 50,090 136 59 92,576 – 92,576 11,451,327 142,861 1,207,690 $ 12,659,017 $ 3,523,932 $ 7,992 183 24,688 32,863 4,080 4,604 2,420 43,967 172,258 3,491,055 7,187,245 1,515,597 1,053,573 155,078 9,911,493 1,252,076 332,430 1,163,018 $ 12,659,017 $ 98,894 1,327 97,567 9,503 87,282 111,864 63,482 22,707 $ 40,775 $0.71 $0.63 ` $ 4,145,472 $ 45,134 3,387 197,902 48,521 4,343,374 116 10,342 106 29,392 94,612 6,949,113 – 119,959 94,612 6,829,154 11,212,262 143,355 1,154,403 $12,366,665 $ 3,288,874 $ 8,777 306 25,994 35,077 4,023 4,921 2,420 46,441 168,730 3,399,813 6,857,417 1,420,781 1,059,201 155,304 9,492,703 1,292,077 465,820 1,116,065 $12,366,665 $ 96,914 1,403 95,511 9,912 81,231 99,155 67,675 24,208 $ 43,467 $0.76 $0.67 4.64% 6.94 4.75 4.55 1.46 5.52 – 5.62 5.28 1.08% 0.74 3.10 2.07 1.15 1.88 6.32 1.98 3.30% 3.57 4.76% 6.95 4.87 4.00 1.47 5.62 – 5.72 5.39 1.28% 1.12 3.12 2.21 1.42 2.10 6.03 2.14 3.25% 3.55 $ 4,000,780 $ 45,710 3,407 194,586 49,117 4,195,366 87 8,639 92 24,856 95,864 6,761,498 – 114,711 6,646,787 95,864 10,875,648 145,160 1,057,625 $11,933,273 $ 2,988,986 $ 9,648 491 25,531 35,670 5,471 5,751 2,580 49,472 173,286 3,248,364 6,410,636 1,523,923 1,084,616 169,874 9,189,049 1,310,932 378,573 1,054,719 $11,933,273 $ 95,688 1,404 94,284 10,001 79,807 105,081 59,009 20,858 $ 38,151 $0.67 $0.60 80 BOK Financial Corporation Board of Directors C. Fred Ball, Jr. 3 Chairman & CEO Bank of Texas, N.A. Sharon J. Bell 1 Managing Partner Rogers & Bell Joseph E. Cappy 1 Retired Chairman & CEO Dollar Thrifty Automotive Group David F. Griffin 1 President & General Manager Griffin Communications, LLC V. Burns Hargis 1 Vice Chairman BOK Financial Corporation and Bank of Oklahoma, N.A. Eugene A. Harris 2 Executive Vice President BOK Financial Corporation and Bank of Oklahoma, N.A. Luke R. Corbett Chairman & CEO Kerr-McGee Corporation E. Carey Joullian, IV 1 President & CEO Mustang Fuel Corporation William E. Durrett Senior Chairman American Fidelity Corp. James O. Goodwin 1 Chief Executive Officer The Oklahoma Eagle Publishing Company, Inc. LLC Robert G. Greer 3 Vice Chairman Bank of Texas, N.A. George B. Kaiser 1 Chairman BOK Financial Corporation and Bank of Oklahoma, N.A. David L. Kyle 1 Chairman, President & CEO ONEOK, Inc. Robert J. LaFortune Personal Investments Philip C. Lauinger, Jr. Chairman & CEO Lauinger Publishing Co. Robert L. Parker, Sr. Chairman Parker Drilling Company John C. Lopez 1 Chairman & CEO Lopez Foods, Inc. James A. Robinson Personal Investments Stanley A. Lybarger 1,3 President & CEO BOK Financial Corporation and Bank of Oklahoma, N.A. L. Francis Rooney, III 1 Chairman and CEO Manhattan Construction Company Steven J. Malcolm 1 Chairman, President & CEO The Williams Companies, Inc. Scott F. Zarrow 1 President Foreman Investment Capital LLC Paula Marshall-Chapman 1 CEO Bama Companies Frank A. McPherson Retired Chairman & CEO Kerr-McGee Corporation Steven E. Moore Chairman, President & CEO OGE Energy Corp. 1 Director of BOK Financial Corporation and Bank of Oklahoma, N.A. 2 Director of Bank of Oklahoma, N.A. 3 Director of BOK Financial Corporation and Bank of Texas, N.A. David L. Sutter Senior Vice President Bank of Oklahoma, N.A. Jennifer S. Thomas Executive Vice President Bank of Albuquerque, N.A. James F. Ulrich Chairman & CEO Bank of Albuquerque, N.A. Bank of Albuquerque, N.A. Board of Directors Susan Barker-Kalangis, Esq. Partner, Modrall, Sperling, Roehl, Harris and Sisk P.A. Steven G. Bradshaw Sr. Executive Vice President Bank of Oklahoma, N.A. Rudy A. Davolos Athletic Director University of New Mexico William E. Garcia Retired Sr. Manager, Public Affairs Intel Corporation Robert M. Goodman Vice Chairman Bank of Albuquerque, N.A. Thomas D. Growney President Tom Growney Equipment, Inc. Eugene A. Harris Executive Vice President BOK Financial Corporation and Bank of Oklahoma, N.A. W. Jeffrey Pickryl Sr. Executive Vice President BOK Financial Corporation Mark E. Sauters Senior Vice President Bank of Albuquerque, N.A. Michael D. Sivage Chief Executive Officer STH Investments, Inc. Paul A. Sowards President Bank of Albuquerque, N.A. Bank of Arkansas, N.A. Board of Directors John W. Anderson Senior Vice President Bank of Oklahoma, N.A. Jeffrey R. Dunn Chairman, President & CEO Bank of Arkansas, N.A. George C. Faucette, Jr. President Coldwell Banker Faucette Real Estate Mark W. Funke President Bank of Oklahoma, N.A. Oklahoma City Gerald Jones President Jones Motorcars, Inc. Ronald E. Leffler Senior Vice President Bank of Oklahoma, N.A. Jerry D. Sweetser Sweetser Properties, Inc. Bank of Texas, N.A. Board of Directors C. Thomas Abbott Vice Chairman Bank of Texas, N.A. Charles A. Angel, Jr. Vice Chairman Bank of Texas, N.A. C. Fred Ball, Jr. 2 Chairman & CEO Bank of Texas, N.A. C. Huston Bell Retired President The Vantage Companies Edward O. Boshell, Jr. Columbia General Investments, LP R. Neal Bright Managing Partner Bright & Bright, LLP R. William Gribble, Jr. President Gribble Oil Company Robert G. Greer Vice Chairman Bank of Texas, N.A. J. T. Hairston, Jr. Investments Douglas D. Hawthorne President & CEO Texas Health Resources W. Jeffery Pickryl Sr. Executive Vice President BOK Financial Corporation Jeff Springmeyer President Geophysical Pursuit, Inc. Thomas S. Swiley President Bank of Texas, N.A. Mrs. Jere W. Thompson Community Leader Bill D. Henry Chairman & CEO McQuery Henry Bowles Troy, LLP Tom E. Turner 2 Retired Chairman Bank of Texas, N.A. Jerry Lastelick Attorney Lastelick, Anderson and Arneson John C. Vogt Investments Ralph Williams Chairman Bank of Texas, N.A. - Houston 1 Park Cities Bancshares, Inc. only 2 Park Cities Bancshares, Inc./ Bank of Texas, N.A. H. Lynn Craft President & CEO Baptist Foundation of Texas Stanley A. Lybarger 2 President & CEO BOK Financial Corporation Edward F. Doran, Sr. Charles W. Eisemann Investments James J. Ellis Managing Partner Ellis/Roiser Associates Steven E. Nell 1 Chief Financial Officer BOK Financial Corporation Albert W. Niemi, Jr. Dean, Cox School of Business Southern Methodist University Colorado State Bank and Trust, N.A. Board of Directors (CSBT) Aaron K. Azari Executive Vice President CSBT W. Jeffery Pickryl Sr. Executive Vice President BOK Financial Corporation John G. Wilkinson Chairman Emeritus CSBT Steven G. Bradshaw Sr. Executive Vice President Bank of Oklahoma, N.A. Eugene A. Harris Executive Vice President BOK Financial Corporation James D. Steeples President CSBT Gregory K. Symons Chairman & CEO CSBT Transfer Agent and Registrar SunTrust Bank • (800) 568-3476 Address Shareholder Inquiries Send certificates for transfer and address changes to: BY MAIL: SunTrust Bank P.O. Box 4625 Atlanta, GA 30303 BY HAND OR OVERNIGHT COURIER: SunTrust Bank Stock Transfer Department 58 Edgewood Avenue, Room 225 Atlanta, GA 30303 Copies of BOK Financial Corporation’s Annual Report to Shareholders, Quarterly Reports and Form 10-K to the Securities and Exchange Commission are available without charge upon written request. Analysts, shareholders and other investors seeking financial information about BOK Financial Corporation are invited to contact Steven E. Nell, Executive Vice President, Chief Financial Officer, (918) 588-6752. Information about BOK Financial is also readily available at our website: www.bokf.com Shareholder Information Corporate Headquarters: Bank of Oklahoma Tower P.O. Box 2300 Tulsa, Oklahoma 74192 (918) 588-6000 Independent Auditors: Ernst & Young LLP 3900 One Williams Center Tulsa, Oklahoma 74172 (918) 560-3600 Legal Counsel: Frederic Dorwart Lawyers Old City Hall 124 E. Fourth St. Tulsa, Oklahoma 74103-5010 (918) 583-9922 Common Shares: Traded NASDAQ National Market NASDAQ Symbol: BOKF Number of common shareholders of record at December 31, 2003: 1,205 Market Makers: Advest, Inc. Bernard L. Madoff Bloomberg Tradebook Brut Utility, LLC Brokerage America, Inc. CIBC World Markets Corp. Citigroup Global Markets, Inc. Credit Suisse First Boston Deutsche Bank Securities Inc. Goldman Sachs & Company Howe Barnes Investments, Inc. Instinet Corp. Investment Technology Group JP Morgan Securities Jefferies & Company, Inc. Legg Mason Wood Walker Inc. Lehman Bros. Inc. Lime Brokerage. LLP Liquidnet, Inc. Keefe, Bruyette & Woods, Inc. Knight Securities, L.P. Merrill Lynch, Pierce, Fenner & Smith, Inc. Morgan Stanley & Company, Inc. Mount Pleasant Brokerage Prudential Securities Robert W. Baird & Co, Inc Sandler O'Neill & Partners Schonfeld Securities, LLC Schwab Capital Markets Spear Leeds & Kellogg State Street Brokerage Service Stephens, Inc. Building On A Successful PAST Positioning For A Successful FUTURE 

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