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.
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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
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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.”
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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
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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.
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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
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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.
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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
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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