RELATIONSHIPS DRIVE RESULTS BOK FINANCIAL CORPORATION | 2005 ANNUAL REPORT COLORADO Since BOKF acquired Colorado State Bank & Trust, N.A. in 2003, average assets have more than doubled to $874 million. The newly opened Orchard Falls branch makes five full service locations in the Denver area, including two in Douglas County - one of the top 20 fastest growing counties in the U.S. KANSAS/MISSOURI The Kansas City loan produc loan commitments exceeding $3 December 31, 2005. We've been serving r in the Kansas City market since 1999 thr investment center and our tw offices, with one on either side o ARIZONA After entering the dynamic Phoenix market in 2004 with a successful loan production office, BOKF acquired a bank in 2005 which it subsequently renamed Bank of Arizona, N.A. The two full service branches are located in the Phoenix/Scottsdale area. Already one of the top ten largest cities, Phoenix is the fastest growing city in the U.S. NEW MEXICO Beginning as a consumer branch network acquired in 1998, Bank of Albuquerque, N.A. has grown to the fourth largest bank in Albuquerque as measured by deposit market share. Our 19 convenient locations in Albuquerque are complemented by one full service location in Santa Fe. uction office has outstanding ng $300 million at e been serving retail clients since 1999 through our two mortgage origination side of the state line. OKLAHOMA With 74 full-service banking locations statewide complemented by an extensive ATM network, Bank of Oklahoma, N.A. is the state's leading bank with twice the deposit market share of our closest competitor. We also are the leader in trust, commercial and consumer lending, transaction card services and public finance. ARKANSAS Bank of Arkansas, N.A.'s two full service branches are located in the northwest region of the state where the economy is flourishing. Our third branch is scheduled to open in Bentonville in the third quarter of 2006. Our largest institutional investments sales office is located in the state’s capital of Little Rock. TEXAS Since BOKF's entry in the Texas market in 1997, average assets have grown to $3.4 billion. With 23 banking locations in the Dallas/Fort Worth area and another 14 locations in the Houston area, Bank of Texas, N.A. is now the ninth largest bank headquartered in the state and contributes 25% of BOKF earnings. Financial Highlights (Dollars In Thousands Except Per Share Data) For the year: Net income Period-end: Loans Assets Deposits Shareholders’ equity Nonperforming assets1 Profitability Statistics Earnings per share (based on average equivalent shares): Basic Diluted Percentages (based on daily averages): Return on average assets Return on average shareholders’ equity Common Stock Performance Per Share: Book value per common share Market price: December 31 close Selected Balance Sheet Statistics Period-end: Tier 1 capital ratio Total capital ratio Leverage ratio Reserve for loan losses to non performing loans Combined reserves for credit losses to loans2, 3 Miscellaneous (at December 31) Number of banking locations Number of TransFund locations 2005 2004 2003 $ 201,505 $ 179,023 $ 158,360 7,483,889 13,595,598 9,219,863 1,228,630 59,867 $ 2.67 2.38 1.24 % 13.66 9,139,978 16,252,907 11,375,318 1,539,154 33,638 $ $ 3.14 3.01 1.29 % 13.78 23.07 45.43 7,928,967 14,145,660 9,674,398 1,398,494 56,423 3.00 2.68 1.28 % 13.80 $ $ 23.28 48.76 $ 20.60 38.72 9.84 % 10.02 % 9.15 % 12.10 8.30 412.83 1.37 150 1,421 11.67 7.94 206.26 1.61 149 1,389 11.31 7.17 217.89 1.73 142 1,442 1 2 3 Includes nonaccrual loans, renegotiated loans and assets acquired in satisfaction of loans. Excludes loans past due 90 days or more and still accruing. Excludes residential mortgage loans held for sale. Includes reserve for loan losses and reserve for off-balance sheet credit losses. Relationships Drive Results Our continued investment in building deeper, more complete relationships with our clients provided the foundation for the strong results for BOK Financial Corporation (BOKF) in 2005. Our 15th consecutive year of record earnings included net income of $201.5 million and earnings per share of $3.01 - a 12% increase over 2004. Loan growth of 15% was very strong and well-balanced, geographically and by industry. All of the BOKF subsidiary banks experienced solid growth. The banks outside Oklahoma produced over half of our growth in earnings and now represent close to 40% of BOKF's total income. Our core strategy for many years has been to provide nationally competitive products delivered with local community bank service, but others share a similar strategy. In an increasingly commoditized business, BOKF has been successful by being more creative, flexible, and responsive than the competition. BOKF's greatest strength is the ability to attract and retain top talent and create an environment which helps talented and entrepreneurial people excel. It is the interplay of these factors and strong relationships with our customers that has significantly enhanced shareholder value over the past 15 years. In addition to the robust financial accomplishments in 2005, we continued to build the foundation for future growth. In April, we completed our first acquisition in Phoenix, Arizona which we subsequently renamed Bank of Arizona. We added significantly to our talent in Houston in the first half of the year, and benefited from accelerated growth in the second half, increasing loans at a 30% annualized rate. In the fourth quarter, we added a team of talented local bankers in Kansas City to provide agribusiness and middle market lending services to continue to increase our presence in a market where, despite no full-service banking locations, we have enjoyed solid growth. We also laid the groundwork for successful expansion into the Tucson, Arizona and Boulder, Colorado markets in 2006. Another notable achievement in 2005 was the addition of two key members to the management team. Don Parker joined BOKF to lead our Operations and Technology Division. Don is committed to ensuring that the quality of our service and support provides a competitive edge for BOKF as we continue to grow. We also named Jean-Claude Gruet to lead our equity investment management group. Jean-Claude is charged with substantially expanding our offering and delivering top tier performance to our clients. As we look forward to 2006, we remain focused on building on the strong record of earnings growth that has been the hallmark of BOKF. Our diverse sources of non-interest revenue, which in total comprised 44% of total revenue in 2005, provide stability and growth during periods when the interest rate or credit environments are less favorable. The outstanding growth, potential of our regional markets should yield continued strong loan and deposit growth as well as expansion opportunities for our fee-based lines of business. Our success, past and future, is dependent upon people. The faces you see in this year's annual report represent the thousands of talented BOKF team members who continue to work hard for our clients. Their efforts enable us to be a provider of choice in the markets we serve. We want to express our appreciation to all the members of the BOKF team and the many thousands of loyal customers they serve. Chairman President and Chief Executive Officer Commercial BOKF remains steadfastly focused on developing long term banking relationships by partnering with our commercial clients to provide the financing and services they need to grow and prosper. Our experienced, knowledgeable bankers work closely with each client to determine their specific needs and offer innovative solutions. We offer a wide range of financial products and services including loan and lease financing, treasury and cash management, international trade services and even financial risk management, including interest rate, energy, foreign exchange and cattle hedging products. Growth in the commercial loan portfolio is evidence of our forte in middle market and small business lending. While our five year compound average growth rate is a strong 10%, the commercial loan portfolio grew 18% in 2005. In 2005, we made an investment in technology to enhance our client service capabilities to allow us to more efficiently offer our full range of financial products and services. With our new sales force automation initiative, our bankers are in a better position to evaluate a client's financial needs, opportunities and profitability. This integrated system facilitates cross selling and enables predictive selling. Another important benefit of this initiative is that our bankers are spending less time in their offices at their computers and more time with existing and potential clients. Though we are just beginning to reap the benefits, the payoff is clear. In Oklahoma in 2005, commercial lending relationships with new clients were up 35% compared to the prior year. As we have sought out new business, we have continued to uphold our conservative underwriting standards. Our centralized credit oversight is efficient and our well defined and consistently applied standards ensure the quality of the portfolio. While our five year average is more indicative of our long term commercial credit losses, in 2005, net chargeoffs decreased to 12 basis points while nonperforming assets decreased from 70 basis points in 2004 to 23 basis points. BOK FINANCIAL CORPORATION | 2005 ANNUAL REPORT Regional The core strategies for Regional Banking focus on developing and enhancing client relationships by providing highly qualified, empowered relationship managers that take a personal interest in their clients. While we centralize administrative and back office functions, we place a premium on maintaining local independence in client service areas. To execute our strategy for local growth, we seek out proven talent with tenure and influence. With the right people in the right markets, the results are outstanding - our five year compound annual growth rate is 19% for loans and 25% for deposits. Our well established local management enables us to be responsive; our growing scale enables us to be increasingly efficient while offering a complete range of services. By delivering sophisticated products with a highly responsive personal touch, Regional Banking fueled over half of BOKF's growth in loans, deposits and earnings since 2001. Beginning with our entry in Dallas, Texas in 1997, BOKF has carefully chosen dynamic new markets for expansion. Our loan and deposit portfolios are increasingly reflecting our geographic diversity. Markets outside Oklahoma fueled 60% of the growth in loans and deposits in 2005 and accounted for 41% of the portfolios at year end. Regional Banking's contribution to net income has grown from 28% in 2001 to 38% in 2005. During this period, gross revenue has grown at a compound annual rate of 21%. There are opportunities for significant growth in fee revenue as we continue to export our services in our newer markets. Though organic growth continues to be our primary focus, we will continue to pursue acquisition opportunities in our footprint that would benefit our clients and shareholders. Of the $6.4 billion in average assets outside Oklahoma, $2.4 billion were acquired. Our disciplined acquisition approach and effective integration yield impressive returns. Bank of Albuquerque, N.A., acquired in 1998, generated a 21% return on invested capital in 2005, while Bank of Texas, N.A., which is far from maturity, generated 14%. BOK FINANCIAL CORPORATION | 2005 ANNUAL REPORT Consumer We value our clients and strive to deliver the best advice and service for each client's unique situation. The core of our Perfect Banking strategy, launched in 2001, is to create an exceptional client experience during each and every contact. The process includes a continuous training program centered on improvement and features a client profile designed to help identify needs that can be satisfied through an expanded relationship with our bank. The success of this program is demonstrated by the 26% compound annual growth rate over the last five years in sales points, which measure the profit contribution of new business. Helping our clients make the best possible financial decisions sets us apart from other transaction- focused retail banks. Consumer Banking's vision strives to benefit each of our primary constituents; our clients receive quality assistance, our employees experience career growth and job satisfaction, and our shareholders gain from the ultimate result of increased profit. The results are exceptional. Since 2001, consumer deposits and fee income have grown at annual compound rates of 10% and 23%, respectively. Our footprint provides ample opportunity for this impressive growth to continue. Ten of the 28 counties we serve are among the 100 fastest growing counties in the United States as measured by numerical increase in population. We understand that time and value are paramount to today's consumers so we offer more conveniences and benefits. In addition to free checking, our clients enjoy free online bill pay. Nearly 30% of our clients utilize our free online banking service while the number of bill pay users has increased five-fold since late 2003. Forty eight of our 137 branches are instore locations which are open extended hours. A client service representative is available 24 hours a day, 7 days a week at ExpressBank, our contact center. In 2005, ExpressBank celebrated its 10th year of continuous service, averaging 790,000 phone calls each month, 124,000 of which are handled by a live ExpressBanker located in one of our domestic offices. BOK FINANCIAL CORPORATION | 2005 ANNUAL REPORT Transaction Card Transaction cards are a fundamental part of our client relationships. For over 25 years, TransFund, our electronic funds transfer network, has been offering integrated payment solutions to merchants and financial institutions. Merchant services, which includes revenue from processing card transactions for over 7,000 merchant locations, represents 35% of TransFund's 2005 revenue. Network revenue, which includes debit card support and processing for more than 360 financial institutions in 12 states, represents 43% of revenue while check card transaction revenue represents the remaining 22%. As the 10th largest ATM network, TransFund has over 1,400 ATMs conveniently located in financial institutions, grocery stores and convenience stores. While TransFund's 16% five year compound annualized growth rate in transaction volume is partially attributed to the impressive growth in BOKF's deposit client base, much of it is due to our sales efforts to other financial institutions. The number of clients outside Oklahoma has increased 50% in the last five years. TransFund's 1.5 million cardholders throughout a 12 state area have come to rely on the red and white TransFund logo. TransFund's 13% compound annualized revenue growth rate over the last five years is a direct result of our focus on client relationships. Though we do offer a cost advantage over the competition with our surcharge- free zones, it is our unparalleled reputation for quality service that attracts and maintains business. From the first contact to the on-site personalized training, our dedicated, knowledgeable EFT professionals, many of whom have more than 20 years of service with the company, guide financial institutions through the process of implementation and growth. BOK FINANCIAL CORPORATION | 2005 ANNUAL REPORT Wealth Management BOKF's wealth management group provides a wide range of trust and private financial services to affluent individuals, businesses and non-profit agencies. Trust services include personal trust, estate and retirement planning, investment management, retirement and institutional benefits, and corporate trust as well as mineral and real estate management. Total trust assets grew 16% in 2005, totaling $28 billion at year end, while discretionary assets grew 22% to $11 billion. Our talented team of employees value the relationships we have with our clients and work very hard to find solutions to client needs instead of forcing a one-size-fits- all product. During 2005, this was best illustrated through the introduction of our wealth management investment team. The team is comprised of talented and experienced professionals from our brokerage, trust, investment management, and private financial services units. Their focus is to provide a broad and detailed set of unique solutions to ensure that each client has a financial advisory strategy that will achieve their stated goals and objectives. Our bankers strive to earn the role of “trusted advisor” to our clients by gaining their trust, providing useful, personalized advice and building relationships. Our success is reflected in the 13% increase in fee revenue. BOKF's proprietary mutual fund family, the American Performance Funds, includes money market, equity and fixed income investment options. Four of our 13 funds rank in the top 10% of their Lipper peer groups for the calendar year 2005. The American Performance Intermediate Bond Fund was ranked #1 for the calendar year 2005 according to Lipper. During 2005, we began an initiative to expand our equity product offerings. We recently implemented a strategic effort to expand our distribution capabilities and increase assets under management in our mutual funds which grew 24% in 2005 to $3.2 billion. BOK FINANCIAL CORPORATION | 2005 ANNUAL REPORT Investment Services With 165 registered representatives in offices in 10 states, our tenured investment professionals provide institutional and retail sales, investment banking and financial risk management services with an unusually high degree of personal attention and industry knowledge. Our financial consultants average over 15 years of professional experience in the industry, which is more than 5 times the industry average. As a result, we are uniquely qualified to assist individual and corporate clients in reaching their financial goals. By knowing our clients and their financial needs, we are able to provide a level of professional advice and counsel not found in other banks. Our investment professionals take a consultative approach, helping clients to select, preserve and grow assets according to their investment objectives. In 2005, we handled more than 240,000 transactions and traded in excess of $145 billion in securities for more than 25,000 institutional and individual investors. Our institutional sales professionals work closely with our commercial banking division to identify our clients' investment needs. We offer a complete line of investment products and services including bonds, commercial paper, bankers acceptances, portfolio accounting and pricing, safekeeping, analysis and educational workshops to our institutional clients which include corporations, insurance companies, foundations, pension funds, mutual funds, universities and investment advisors. Over the last five years, brokerage and trading revenue has grown at a compound annual rate of 24%. While always seeking to attract new clients, we value our existing relationships. In 2005, we created a team of three professionals who devote their efforts entirely to working with clients exiting benefit plans. Though an individual's employment with our client may end, his relationship with BOKF can continue. BOK FINANCIAL CORPORATION | 2005 ANNUAL REPORT Mortgage Mortgage Servicing Portfolio Northeast Midwest West Oklahoma Other VA Conventional 15 Years and Less South Texas FHA Conventional Over 15 Years Loan Originations in Millions $1,600 $1,400 $1,200 $1,000 $800 $600 $400 $200 $0 01 02 03 04 05 BOK FINANCIAL CORPORATION | 2005 ANNUAL REPORT Our clients will make hundreds of important decisions during their lives, but few as significant as the purchase of a new home. With 15 mortgage offices in seven states, BOKF stands ready to guide buyers through the sometimes stressful and confusing process of financing a home. From the application through the servicing of the monthly payments, BOKF's focus is on client satisfaction. BOKF's relationships continue after funding as we retain servicing rights on traditional mortgage products. We service traditional mortgage loans exceeding $4 billion for over 50,000 very satisfied families. In 2005, BOKF's mortgage unit earned FHLMC's prestigious Tier 1 designation. The ranking is based on servicing efficiency and assistance provided to homeowners, including those struggling to avoid foreclosure. For the last five years, BOKF's annual delinquency rates have averaged over 100 basis points below the national delinquency rate reported by the Mortgage Bankers' Association. As with every product and service BOKF offers, the mortgage unit serves not only our clients, but our shareholders. Though the earnings volatility introduced by the mortgage unit presents short term challenges, BOKF manages for the long term return. The mortgage business is a significant contributor to fee income and because of its counter-cyclical nature, typically enjoys strong returns when other fee business slows. From a client service perspective, by retaining servicing rights we are able to ensure our clients will continue to receive the outstanding service they have come to expect from BOKF. BOKF mortgage clients will be even better served in 2006 as we implement an initiative to integrate the mortgage unit into the Consumer Division's “Perfect Banking” experience. Our goal is to improve client service and increase bank-referred business. Community Development BOKF's dedication to the communities we serve is defined in our mission statement and is demonstrated in several ways in each of our markets. BOKF and its employees supported non-profit organizations with over $2.7 million in charitable grants and donations. Our employees provide leadership on boards and committees of 250 non-profit agencies and community organizations and volunteer their time for over 1,000 events and programs. In 2005, bank employees contributed more than 24,000 hours of community service. We read to inner-city school children in Oklahoma City; painted, mowed and trimmed trees for United Way agencies in Tulsa; and committed time and money to directly assist Hurricane Katrina victims taking shelter in Houston. Arkansas employees collected care package supplies for U.S. troops. In Albuquerque, our staff hosted a Spanish language call-in program for residents in need of financial services advice. Throughout our markets, employees conducted a literacy drive that collected more than 18,000 books for agencies that care for homeless and abused children and families. Through the course of these outreaches and our support of public and private endeavors, we will continue to carry on our mission of improving the quality of life in all our markets. Through our innovative Adopt-An-Agency program, BOKF has partnered with key community-based organizations in all of our markets to drive product, investment and service alternatives that provide wealth creation and asset building opportunities for low-to-moderate income families and individuals. Our work with agencies such as Mercy Housing, Community Action Project of Tulsa County and Mosaic Family Services, has a direct and lasting impact on the communities where we live and work. At BOKF, we aim to do well and do good, all at the same time. BOK FINANCIAL CORPORATION | 2005 ANNUAL REPORT Positioned for a Successful Future The depth and breadth of client relationships determine the growth and profitability of our company. BOKF's goal is to be our clients' lifelong financial resource fulfilling every need from consumer and commercial loans and deposit accounts to mortgage loans. As our clients’ needs change, we stand ready to help them select, preserve and grow their assets. Our proven methods for generating new business and expanding services to existing clients produced solid results in 2005. For the 15th consecutive year, BOKF produced record earnings fueled by a combination of superior loan, deposit and fee revenue growth. As we reflect on the past year, we must once again thank our dedicated employees whose unwavering support for BOKF's values and implementation of our strategies is the core of our success story. Relationships drive results and our investment in people is critical to meeting our long term objectives. As we look toward the future, our focus will remain on our relationships with our employees, our clients and the communities we serve, with the ultimate goal of all of our endeavors to build long term value for our shareholders. We'll continue to foster a working environment that promotes career development and rewards initiative, innovation, enthusiasm, team work and performance. We will continue to provide our clients with the highest quality products and services, keeping in mind their need for timeliness, convenience and flexibility. We will provide leadership in all of our communities for local and regional causes, encourage and support volunteerism among our employees and financially support key civic activities that are critical to the vitality of the community. By maintaining excellence in relationship banking, we will continue to create value for our shareholders. BOK FINANCIAL CORPORATION | 2005 ANNUAL REPORT Financials_v5.qxd 2/24/06 3:46 PM Page 1 Management’s Discussion and Analysis Table 1 Consolidated Selected Financial Data (Dollars In Thousands Except Per Share Data) December 31, Selected Financial Data For the year: Interest revenue Interest expense Net interest revenue Provision for credit losses Net income Period-end: Loans, net of reserve Assets Deposits Subordinated debentures Shareholders’ equity Nonperforming assets2 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 Common Stock Performance Per Share: Book value per common share5 Market price: December 31 close Market range – High close – Low close Selected Balance Sheet Statistics Period-end: 2005 2004 2003 2002 2001 $ 769,934 320,593 449,341 12,441 201,505 9,036,102 16,252,907 11,375,318 295,964 1,539,154 33,638 $ 614,284 191,041 423,243 20,439 179,023 7,820,349 14,145,660 9,674,398 151,594 1,398,494 56,423 $ 565,173 173,678 391,495 35,636 158,360 7,369,105 13,595,598 9,219,863 154,332 1,228,630 59,867 $ 574,913 205,581 369,332 33,730 147,871 6,797,132 12,263,233 8,128,525 155,419 1,099,526 56,574 $ 654,633 325,159 329,474 37,610 114,439 6,206,190 11,158,701 6,905,744 186,302 832,866 50,708 $ $ $ $ 3.14 3.01 3.01 1.29% 13.78 9.39 23.07 45.43 49.31 39.79 3.00 2.68 2.68 1.28% 13.80 9.25 23.28 48.76 49.18 37.29 10.02% 11.67 7.94 206.26 1.38 1.61 $ $ 2.67 2.38 2.38 1.24% 13.66 9.07 20.60 38.72 41.02 31.00 9.15% 11.31 7.17 217.89 1.55 1.73 $ $ 2.59 2.30 2.30 1.31% 15.75 8.30 18.56 32.39 36.52 26.80 8.98% 11.95 6.88 208.31 1.53 1.72 $ $ 2.02 1.81 1.95 1.12% 14.65 7.62 14.62 31.51 32.75 21.31 8.08% 11.56 6.38 204.71 1.46 1.66 Tier 1 capital ratio Total capital ratio Leverage ratio Reserve for loan losses to nonperforming loans Reserve for loan losses to loans1 Combined reserves for credit losses to loans1, 4 9.84% 12.10 8.30 412.83 1.14 1.37 Miscellaneous (at December 31) Number of employees (full-time equivalent) Number of banking locations Number of TransFund locations Mortgage loan servicing portfolio3 3,825 150 1,421 $ 4,492,524 3,548 149 1,389 $ 4,486,513 3,449 142 1,442 $ 4,746,279 3,402 130 1,390 $ 5,754,548 3,392 114 1,325 $ 6,645,868 1 Excludes residential mortgage loans held for sale. 2 Includes nonaccrual loans, renegotiated loans and assets acquired in satisfaction of loans. Excludes loans past due 90 days or more and still accruing. 3 Includes outstanding principal for loans serviced for affiliates. 4 Includes reserve for loan losses and reserve for off-balance sheet credit losses. 5 Conversion of Series A preferred stock added 6.9 million common shares outstanding in 2005. 1 Financials_v5.qxd 2/24/06 3:46 PM Page 2 Management’s Discussion and Analysis Management’s Assessment of Operations and Financial Condition Overview BOK Financial Corporation (“BOK Financial” or “the Company”) is a Our acquisition strategy targets quality organizations that have demonstrated solid growth in their business lines. We provide addi- tional growth opportunities by hiring talent to enhance competitive- ness, adding locations, and broadening product offerings. Our oper- ating philosophy embraces local decision-making through the boards of directors for each of our bank subsidiaries. financial holding company that offers full service banking in Oklahoma, BOK Financial operates five principal lines of business: Oklahoma cor- Northwest Arkansas, Dallas and Houston, Texas, Albuquerque, New porate banking, Oklahoma consumer banking, mortgage banking, Mexico, Denver, Colorado, and Phoenix, Arizona. The Company also wealth management, and regional banking. Mortgage banking activi- has commercial loan production, mortgage banking and institutional ties include loan origination and servicing across all markets served by sales offices in the Kansas City market. BOK Financial was incorpo- the Company. Wealth management provides brokerage and trading, rated in 1990 in Oklahoma and is headquartered in Tulsa, Oklahoma. private financial services and investment advisory services in all mar- Activities are governed by the Bank Holding Company Act of 1956, as kets. Wealth management also provides fiduciary services in all mar- amended by the Financial Services Modernization Act or Gramm- kets except Colorado. Fiduciary services in Colorado are included in Leach-Bliley Act. Principal subsidiaries are Bank of Oklahoma, N.A., regional banking. Regional banking consists primarily of corporate and Bank of Albuquerque, N.A., Bank of Arkansas, N.A., Bank of Texas, N.A, consumer banking activities in the respective local markets. Colorado State Bank and Trust, N.A. and Bank of Arizona, N.A. Other subsidiaries include BOSC, Inc., a broker/dealer that engages in retail and institutional securities sales and municipal bond underwriting. Our overall strategic objective is to emphasize growth in long-term value by building on our leadership position in Oklahoma and expanding into high-growth markets in contiguous states. We have a solid position in Oklahoma and are the state’s largest financial insti- tution as measured by deposit market share. Since 1997, we have Performance Summary BOK Financial’s net income for 2005 totaled $201.5 million or $3.01 per diluted share compared with $179.0 million or $2.68 per diluted share in 2004. Returns on average assets and shareholders’ equity were 1.29% and 13.78%, respectively, for 2005 compared with 1.28% and 13.80%, respectively, for 2004. expanded into Dallas and Houston, Texas, Albuquerque, New Mexico, Net income growth for 2005 was attributed primarily to increases in and Denver, Colorado. During 2005, we acquired Valley Commerce both net interest revenue and fees and commissions revenue, and a Bank (subsequently renamed Bank of Arizona, N.A.) in Phoenix, Ari- decrease in the provision for credit losses. Net interest revenue grew zona. We are currently exploring opportunities for further growth in $26.1 million or 6% during 2005 while fees and commissions revenue our regional markets and expansion into the Kansas City market increased $33.0 million or 11%. The provision for credit losses through acquisition or de novo banking operations. decreased $8.0 million compared to the previous year. Our primary focus is to provide a broad range of financial products Average earning assets increased $1.0 billion for 2005, including an and services, including loans and deposits, cash management serv- $846 million increase in average outstanding loans. Outstanding ices, fiduciary services, mortgage banking and brokerage and trad- loans increased in all of our primary markets. Much of the loan growth ing services to middle-market businesses, financial institutions and was focused in the commercial and commercial real estate portfolios. consumers. Our revenue sources are diversified. Approximately 43% Growth in average earning assets was funded by a $1.2 billion of our revenue comes from commissions and fees. Commercial banking is a significant part of our business. Our credit culture emphasizes building relationships by making high quality loans and providing a full range of financial products and services to our customers. increase in interest-bearing liabilities. Average interest-bearing deposits increased $839 million while short-term borrowings increased $325 million. Growth in average deposits came primarily in the Texas, Oklahoma and Colorado markets. Consumer banking and personal financial services provided much of the increases. Growth in average interest-bearing liabilities also funded a $198 million decrease in average demand deposits. Net interest margin was 3.39% for 2005, down 6 basis points from the previous year. 2 Financials_v5.qxd 2/24/06 3:46 PM Page 3 Management’s Discussion and Analysis Fees and commissions totaled $345.6 million, which represented 43% of total revenue, excluding net securities and derivatives losses. Rev- Reserves for Loan Losses and Off-Balance Sheet Credit Losses enue grew in all business lines. Trust fees increased $7.7 million or 13% due primarily to growth in the fair value of assets and new business generated. Transaction card revenue grew $7.2 million or 11% due to transaction volumes. Other revenue increased $7.9 million due largely to fees earned on margin assets carried in support of the Company’s derivatives business. Operating expenses increased $27.9 million or 6% compared with 2004 due primarily to increased personnel and data processing Reserves for loan losses and off-balance sheet credit losses are assessed by management based on an ongoing evaluation of the probable estimated losses inherent in the portfolio and probable esti- mated losses on unused commitments to provide financing. A consis- tent, well-documented methodology has been developed that includes reserves assigned to specific loans and commitments, general reserves that are based on a statistical migration analysis and nonspecific reserves that are based on analysis of current economic conditions, costs. Personnel costs increased $18.3 million as both total employ- loan concentrations, portfolio growth and other relevant factors. ment and average compensation per employee grew. Data process- ing expenses increased $7.0 million, including $3.5 million directly related to higher transaction card processing volumes. Net income for the fourth quarter of 2005 totaled $48.2 million or 72 cents per diluted share compared with $46.6 million or 70 cents per diluted share for the fourth quarter of 2004. Net interest revenue grew $9.9 million or 9% due to earning asset growth, partially offset by a 4 basis point reduction in net interest margin. Fees and commis- sions revenue increased $11.1 million or 14% due primarily to trust fees, transaction card revenue and fees earned on margin assets. Operat- 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 and commitments 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”, regulatory accounting standards and ing expenses increased $12.3 million or 11% due to higher personnel other authoritative literature. and data processing costs. Earnings for the fourth quarter of 2004 included an after-tax gain of $2.5 million or 4 cents per diluted share from the sale of equity securities that had been acquired in prior years from a sale of a problem loan. 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 General reserves for commercial and commercial real estate loan losses, and related commitments, are determined primarily through an internally developed migration analysis model. The purpose of this model is to determine the probability that each credit relationship 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. A minimum reserve level is established for each loan grade based on long-term loss history. 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. to make significant assumptions and estimates. The following discus- Separate models are used to determine the general reserve for resi- sion addresses the most critical areas where these assumptions and dential mortgage loans, excluding residential mortgage loans held estimates could affect financial condition and results of operations. for sale, and consumer loans. General reserves for residential mort- Application of these critical accounting policies and estimates has gage loans and consumer loans are based on a percent of loss expe- been discussed with the appropriate committees of the Board of rience for the preceding eight quarters. Separate migration factors Directors. No accounting standards with significant effects on our are determined by major product line, such as indirect automobile financial condition or results of operations were initially adopted in loans and direct consumer loans. 2005. 3 Financials_v5.qxd 2/24/06 3:46 PM Page 4 Management’s Discussion and Analysis Nonspecific reserves are maintained for risks beyond those factors example, an increase in mortgage interest rates may decrease loan specific to a particular loan or those identified by the migration mod- prepayment speeds, but may increase discount rates and escrow els. These factors include trends in the general economy in our pri- earnings rates. Considering the effects on all related assumptions, a mary lending areas, conditions in specific industries where we have a 50 basis point increase in mortgage interest rates is expected to concentration, such as energy, real estate and agriculture, and over- increase the fair value of our servicing rights by $3.1 million. A 50 all growth in the loan portfolio. Evaluation of the nonspecific reserves basis point decrease in mortgage interest rates is expected to also considers duration of the business cycle, regulatory examination decrease the fair value of our servicing rights by $4.8 million. 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. Permanent impairment of mortgage servicing rights is evaluated quarterly. A strata is considered to be permanently impaired if the net amortized cost exceeds the calculated fair value assuming a 300 A separate reserve for off-balance sheet credit risk is maintained. The basis point increase in the applicable interest rates. We believe that provision for credit losses includes the combined charge to expense a 300 basis point increase in mortgage interest rates reasonably for both the reserve for loan losses and the reserve for off-balance represents changes that may occur under normal market conditions. sheet credit losses. All losses incurred from lending activities will ulti- The net amortized cost of the asset is reduced to the calculated fair mately be reflected in charge-offs against the reserve for loan losses value through a charge against the valuation allowance. after funds are advanced against outstanding commitments and after the exhaustion of collection efforts. 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 Prepayment assumptions also affect the amortization of mortgage servicing rights. Amortization is determined in proportion to the pro- jected cash flows over the estimated life of each loan serviced. The same third party model that estimates prepayment speeds for deter- mining the fair value of mortgage servicing rights determines the esti- mated life of each loan serviced. of loans we have originated. Mortgage servicing rights are carried at Intangible Assets the lower of amortized cost 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. Intangible assets, which consist primarily of goodwill, core deposit in- tangible assets and other acquired intangibles, for each business unit are evaluated for impairment annually or more frequently if conditions indicate that impairment may have occurred. The evaluation of possible There is no active market for trading in mortgage servicing rights. We impairment of intangible assets involves significant judgment based use a cash flow model to determine fair value. Key assumptions and upon short-term and long-term projections of future performance. estimates including projected prepayment speeds and assumed serv- icing costs, earnings on escrow deposits, ancillary income and dis- count rates, used by this model are based on current market sources. A separate third-party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan cur- tailment, anticipated defaults and other relevant factors. The pre- payment model is updated daily for changes in market conditions. At least annually, we request estimates of fair value from outside sources to corroborate the results of the valuation model. The assumptions used in this model are primarily based on mortgage interest rates. Evaluation of the effect of a change in one assumption must consider the effect on related assumptions to be meaningful. For The fair value of each of our business units is estimated by the dis- counted future earnings method. Income growth is projected over a five-year period 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, 2005, Bank of Texas had $155 million or 66% of total goodwill and Colorado State Bank & Trust had $42 million or 18% of total goodwill. Because of the large concentration of goodwill in these business units, 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. 4 Financials_v5.qxd 2/24/06 3:46 PM Page 5 Management’s Discussion and Analysis Intangible assets with finite lives, such as core deposit intangible nation by the taxing authorities, expiration of a statute of limitations assets, are amortized over their estimated useful lives. Such assets or changes in facts and circumstances. Additional income tax are reviewed for impairment whenever events indicate that the expense would be recognized from the adverse resolution of an remaining carrying amount may not be recoverable. uncertain tax position. Valuation of Derivative Instruments Pensions We use interest rate derivative instruments to manage our interest rate risk. We also offer interest rate, commodity and foreign exchange derivative contracts to our customers. All derivative instruments are carried on the balance sheet at fair value. Fair values for exchange- traded contracts are based on quoted prices. Fair values for over-the- counter interest rate contracts used to manage our interest rate risk are provided either by third-party dealers in the contracts or by quotes provided by independent pricing services. Interest rate, com- modity and foreign exchange contracts used in our customer hedging programs are based on valuations generated internally by a third- party provided pricing model. This model uses market inputs to esti- mate fair values. Changes in assumptions used in this pricing model could significantly affect the reported fair values of derivative assets and liabilities, though the net effect of these changes should not sig- nificantly affect earnings. Fair values determined by the internal model are corroborated by comparison against third-party dealer provided values. Credit risk is considered in determining the fair value of derivative instruments. Deterioration in the credit rating of customers or dealers reduces the fair value of asset contracts. The reduction in fair value is recognized in earnings during the current period. Income Taxes Determination of income tax expense and related assets and liabilities is complex and requires estimates and judgments when applying tax laws, rules, regulations and interpretations. It also requires judgments as to future earnings and the timing of future events. Accrued income taxes represent an estimate of net amounts due to or from taxing juris- dictions based upon these estimates, interpretations and judgments. We recognize the benefit of uncertain tax positions when, based upon all relevant evidence, it is more likely than not that our position would prevail upon audit. A reserve for the uncertain portion of the tax ben- efit is included in current accrued income taxes. This tax contingency The Company offers a defined-benefit, cash-balance pension plan to all employees who satisfy certain age and length of service require- ments. Accounting for this plan requires management to make assumptions regarding the expected long-term rate of return on plan assets, the discount rate and the rate of future compensation increases. Changes in these assumptions affect pension liability and pension expense. Management, in consultation with independent actuaries, bases its assumptions on currently available information. All plan assets are invested in the American Performance Balanced Fund. The expected long-term return on plan assets is based on this fund’s life-to-date performance, adjusted for any known or expected changes in the fund’s composition or objectives. The discount rate is based on current yields of high quality fixed income securities such as AA rated industrial and utility bonds. A 25 basis point decrease in the discount rate increases the pension liability by approximately $1.4 million or 3% and pension expense by approximately $300 thousand or 5%. Stock-Based Compensation Stock-based compensation consists of stock options and non-vested shares awarded to officers and employees of the Company. Awards may be granted on a discretionary basis as described in the employee stock option plan or as required by employment agreements and incentive compensation plans with certain executive officers. Account- ing for stock-based compensation requires management to make assumptions regarding the valuation of financial instruments for which there are no readily available market values, achievement of specified performance conditions and expected forfeiture rates. The majority of our stock options have graded vesting. One-seventh of the options awarded vest annually starting one year after the grant date. Options expire three years after vesting. Each tranche of these options is considered a separate award when determining fair value. reserve may reduce income tax expense in future periods if the uncer- We use the Black-Scholes option pricing model. This model requires tainty is favorably resolved, generally upon completion of an exami- assumptions of expected volatility of our stock price and expected 5 Financials_v5.qxd 2/24/06 3:46 PM Page 6 Management’s Discussion and Analysis term between grant date and exercise date, along with other input to determine fair value. Expected volatility is based on historical changes in our stock price measured over a period that approximates the expected term of our stock options. Expected term and forfeitures are also based on historical trends. Information about assumptions used to value stock options can be found in Note 13 to the Consoli- dated Financial Statements. Non-vested shares, which cliff-vest five years after the grant date, are valued at the grant date market price for BOK Financial common stock. Executive incentive plans and individual employment agreements include performance conditions that may increase or decrease the number of awards based on future events. Unrecognized compensa- tion cost, which generally will be recognized as expense over the serv- ice period, based on the probable outcome of these conditions is $12.7 million. Future compensation cost ranges from approximately $7.4 million, if none of the performance conditions are met, to $16.3 million if all of the performance conditions are met. Assessment of Operations Net Interest Revenue Tax-equivalent net interest revenue totaled $454.5 million for 2005 compared with $428.3 million for 2004. Net interest revenue growth was driven primarily by a $1.0 billion increase in average earning assets. Average outstanding loans increased $846 million while aver- age securities increased $133 million. Growth in average earning assets was funded primarily by a $1.2 billion increase in interest-bear- ing liabilities, partially offset by a $198 million decrease in average demand deposit accounts. 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 increased during 2005 due primarily to rising short-term interest rates. Net interest margin, the ratio of tax-equiva- lent net interest revenue to average earning assets, decreased to 3.39% in 2005 compared with 3.45% in 2004. The decrease in net interest margin reflected a flattened yield curve, the reduction in the difference between short-term and long-term interest rates, and asset spread compression. 6 Financials_v5.qxd 2/24/06 3:46 PM Page 7 Management’s Discussion and Analysis Table 2 Volume/Rate Analysis (In Thousands) 2005/2004 Change Due To1 2004/2003 Change Due To1 Change Volume Yield/Rate Change Volume Yield/Rate 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 $ 7,983 141 146,735 934 155,793 37,204 131 28,632 40,466 16,513 6,606 129,552 26,241 (143) $ 26,098 $ 5,232 (6) 50,282 475 55,983 6,936 (64) 10,101 7,301 (285) 4,659 28,648 $ 27,335 $ 2,751 147 96,453 459 99,810 30,268 195 18,531 33,165 16,798 1,947 100,904 $ (1,094) $ 16,607 (38) 28,878 (91) 45,356 2,305 (19) 4,288 868 (743) (110) 6,589 $ 38,767 $ $ (159) (27) 3,647 163 3,624 1,866 50 4,014 4,682 1,768 (1,606) 10,774 (7,150) $ 16,448 (65) 32,525 72 48,980 4,171 31 8,302 5,550 1,025 (1,716) 17,363 31,617 131 $ 31,748 4th Qtr 2005/4th Qtr 2004 Change Due To1 Change Volume Yield/Rate 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 Increase in tax-equivalent adjustment $ 3,270 136 47,095 411 50,912 13,296 61 10,497 9,517 5,104 2,754 41,229 9,683 241 $ 9,924 $ 992 116 18,137 198 19,443 3,847 (10) 4,920 504 365 2,044 11,670 $ 7,773 $ 2,278 20 28,958 213 31,469 9,449 71 5,577 9,013 4,739 710 29,559 $ 1,910 Net interest revenue 1 Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis. 7 Financials_v5.qxd 2/24/06 3:46 PM Page 8 Management’s Discussion and Analysis Management regularly models the effects of changes in interest rates The effectiveness of these strategies is reflected in the overall change on net interest revenue. Based on this modeling, we expect the effect in net interest revenue due to changes in interest rates as shown in of changes in interest rates on the Company’s earnings to be neutral Table 2 and in the interest rate sensitivity projections as shown in the over a one-year forward-looking period. However, other factors may Market Risk section of this report. affect this general expectation. For example, throughout 2005 the spread between rates charged on loans and related funding sources narrowed due to competitive pressures. The result was that the loan Fourth Quarter 2005 Net Interest Revenue portfolio’s yield increased less than the increase in market interest Tax-equivalent net interest revenue for the fourth quarter of 2005 rates. Additionally, we have a large portion of our securities portfolio totaled $117.8 million compared with $108.1 million for the fourth quar- in mortgage-backed securities. These securities reprice as cash flow ter of 2004. Average earning assets increased $1.3 billion or 10%, received is reinvested at current market rates. The resulting change including a $1.1 billion increase in average loans outstanding. Growth in yield of the securities portfolio occurs more slowly than changes in in average earning assets was funded by a $1.8 billion increase in market rates. The tax-equivalent yield on the securities portfolio interest-bearing liabilities, including a $1.5 billion increase in average increased 6 basis points over 2004. Our overall objective is to manage the Company’s balance sheet to be essentially neutral to changes in interest rates. Approximately 71% of our commercial loan portfolio is either variable rate or fixed rate interest-bearing deposits. The increase in interest-bearing liabilities also funded a decrease in average demand deposits. Net interest margin was 3.34%, down 4 basis points from the fourth quarter of 2004 due to changes in the funding mix and spread compression. that will reprice within one year. These loans are funded primarily by Net interest margin for the fourth quarter of 2005 was reduced 3 deposit accounts that are either non-interest bearing, or that reprice basis points by $299 million of average margin assets carried in sup- more slowly than the loans. The result is a balance sheet that is asset port of our derivatives business. We were required to place margin sensitive, which means that assets generally reprice more quickly collateral with counterparties as the fair value of our derivative liabil- than liabilities. Among the strategies that we use to achieve a rate- ities increased due to volatile energy prices. Fees earned on these neutral position, we purchase fixed rate, mortgage-backed securities margin assets, which totaled $3.4 million, are included in non-interest and fund them with short-term borrowings. The average life of these revenue while the related cost of funds is included in interest expense. securities is expected to be approximately 3.4 years based on a Margin assets averaged $126 million for the fourth quarter of 2004. range of interest rate and prepayment assumptions. The funds bor- Fees earned on these assets totaled $756 thousand. rowed to purchase these securities generally reprice within 90 days. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also use derivative instruments to manage our interest rate risk. Interest rate swaps with a combined notional amount of $684 million convert fixed rate liabilities to floating rate based on LIBOR. The pur- pose of these derivatives, which generally have been designated as fair value hedges, is to reduce the asset-sensitive nature of the bal- ance sheet. Interest rate swaps with a notional amount of $100 mil- lion convert prime-based loans to fixed rate. The purpose of these derivatives, which have been designated as cash flow hedges, also is 2004 Net Interest Revenue Tax-equivalent net interest revenue for 2004 was $428.3 million, a $31.6 million or 8% increase from 2003. Average earning assets increased $885 million or 8%, including a $542 million increase in average outstanding loans. As shown in Table 2, net interest revenue increased $38.8 million due to changes in earning assets and inter- est-bearing liabilities. Net interest revenue growth due to earning assets was partially offset by a $7.2 million decrease due to changes in interest yields and rates. Changes in interest rates and yields include the narrowing of spreads due to competitive pressures and to reduce the asset-sensitive nature of our balance sheet. other market conditions. 8 Financials_v5.qxd 2/24/06 3:46 PM Page 9 Management’s Discussion and Analysis Other Operating Revenue Other operating revenue increased $38.1 million compared with last year due primarily to a $33.0 million increase in fees and commission revenue. Other operating revenue for 2005 also included $7.1 million of gains on asset sales. Diversified sources of fees and commission rev- enue are a significant part of our business strategy and represented 43% of total revenue, excluding gains and losses on asset sales, secu- rities and derivatives. We believe that a variety of fee revenue sources provide an offset to changes in interest rates, values in the equity mar- kets, commodity prices and consumer spending, all of which can be volatile. 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. 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 Other revenue Total fees and commissions Gain on sales of assets Gain (loss) on securities, net Gain (loss) on derivatives, net Total other operating revenue 2005 $ 44,222 72,036 65,187 98,361 30,681 35,114 345,601 7,061 (6,895) 1,179 $346,946 2004 $ 41,107 64,816 57,532 93,712 28,189 27,209 312,565 887 (3,088) (1,474) $308,890 Years ended December 31, 2003 $ 41,152 57,352 45,763 82,042 52,336 27,573 306,218 822 7,188 (9,375) $304,853 2002 $ 26,290 52,213 40,092 67,632 48,910 22,424 257,561 1,157 58,704 5,236 $322,658 2001 $ 19,974 44,231 40,567 51,284 50,155 23,252 229,463 557 30,640 (3,812) $256,848 Fees and Commissions Revenue Trust fees increased $7.7 million or 13%. The fair value of all trust rela- tionships overseen by the Company, which is the basis for a signifi- cant portion of trust fees, increased to $28.5 billion at December 31, 2005 compared with $24.6 billion at December 31, 2004. Approxi- mately 31% of trust fees are earned on personal trust relationships. Additionally, 21% of trust fees are earned by providing employee ben- efit plan services and 20% are based on mutual fund activities. Transaction card revenue increased $7.2 million or 11%. Merchant discount fees and check card revenue increased 11% and 32%, respectively. Revenue growth from each of these activities was due to growth in transaction volume. Merchant locations serviced increased by 485 or 7%, including 179 new merchant locations in Ari- zona and Colorado. The number of check card transactions processed during 2005 increased 17% over 2004. ATM fees grew at 3% compared to 2004. As previously disclosed, the growth rate in ATM fees was expected to slow for 2005. One of our customers Service charges on deposit accounts increased $4.6 million or 5% compared with 2004. Overdraft fees increased 16% to $62.7 million while account service charge revenue decreased 12% to $28.6 million. The volume of overdraft items processed increased in 2005. Addi- tionally, the per item overdraft charge was increased in the second quarter of 2005. The decrease in service charge revenue reflected an increase in the earnings credit available to commercial deposit customers. The earnings credit, which provides a non-cash method for commercial customers to avoid incurring charges for deposit serv- ices, increases when interest rates rise. Brokerage and trading revenue grew $3.1 million or 8% compared with 2004. Revenue from customer hedging activities increased $2.4 million, including $2.1 million from energy hedging activities. Volatility in the energy markets during 2005 prompted our energy customers to more actively hedge their gas and oil production. Retail brokerage revenue increased $742 thousand or 6% over 2004. Securities trad- ing revenue was $23.5 million, unchanged from the previous year. was purchased by another financial institution in 2004. Volatility in the energy markets increased the fair value of derivative assets and liabilities and required the Company to pledge margin 9 Financials_v5.qxd 2/24/06 3:46 PM Page 10 Management’s Discussion and Analysis assets to secure obligations. Fees earned on margin assets, which are Fourth Quarter 2005 Other Operating Revenue recognized in other revenue, totaled $7.1 million in 2005, compared with $686 thousand in 2004. Gains on Sales of Assets The Company recognized net gains on asset sales of $7.1 million in 2005, including $4.8 million from the sale of its interest in an Okla- homa City office building and $1.2 million from the sale of loans from the community development mortgage loan portfolio. In addition to a Other operating revenue for the fourth quarter of 2005 totaled $87.3 million, an $8.6 million or 11% increase from 2004. Fees and commissions revenue increased $11.1 million or 14%. All business lines contributed to this increase. Transaction card revenue, deposit fees and trust fees increased $2.4 million, $1.9 million and $1.7 million, respectively. Other operating revenue included $3.4 million of fees earned on margin assets. cash premium received on the loan sale, we retained both the right to 2004 Other Operating Revenue service the loans and a recourse obligation to the purchaser for bor- rower defaults. A servicing asset of $1.6 million and a recourse liabil- ity of $888 thousand were recognized in conjunction with this sale. Securities and Derivatives Aggregate net losses on securities and derivatives totaled $5.7 mil- lion in 2005 and $4.6 million in 2004. Net losses on securities totaled $6.9 million in 2005, consisting of losses of $5.2 million on securities held as economic hedges of mortgage servicing rights and $1.7 million on other securities. Net losses on securities held as an eco- Other operating revenue totaled $308.9 million for 2004, up $4.0 million from 2003. Fees and commissions revenue increased $6.3 mil- lion or 2%. Strong growth in trust fees, transaction card revenue and deposit fees was partially offset by lower mortgage banking revenue. Mortgage banking revenue decreased $24.1 million due primarily to reduced loan refinancing activity. Net losses on securities totaled $3.1 million, including losses of $4.9 million on securities held as economic hedges of mortgage servicing rights and gains of $1.8 million on sales of other securities. nomic hedge included $420 thousand of other-than-temporary During 2004, the Company recognized net losses of $1.3 million on impairment at December 31, 2005. The Company’s use of securities derivatives used to manage interest rate risk and $208 thousand on as an economic hedge of mortgage servicing rights is more fully dis- derivatives used as economic hedges of mortgage servicing rights. cussed in the Line of Business — Mortgage Banking section of this The Company designated derivatives as fair value hedges of certain report. Other securities are bought and sold as necessary to maxi- brokered certificates of deposit and subordinated debt in 2004. Net mize the portfolio’s total return and to manage prepayment or exten- losses recognized included fair value adjustments for both the deriv- sion risk. atives and the hedged liabilities. Net gains on derivatives totaled $1.2 million in 2005, including net gains of $1.1 million from fair value adjustments of derivatives used to manage interest rate risk and related hedge liabilities. Additionally, net gains on derivatives included $108 thousand of gains realized on derivatives used as an economic hedge of mortgage servicing rights. The Company’s use of derivatives to manage interest rate risk is more fully discussed in the Deposits and Borrowings and Capital sections of this report. Other Operating Expense Other operating expense for 2005 totaled $469.1 million, a 6% increase from 2004. This increase resulted primarily from personnel and data processing expenses. Growth in personnel expenses was driven largely by employment growth and an increase in average compensation per employee. The increase in data processing expenses included both transaction volume and system maintenance costs. 10 Financials_v5.qxd 2/24/06 3:46 PM Page 11 Management’s Discussion and Analysis Table 4 Other Operating Expense (In Thousands) Personnel expense Business promotion Contribution of stock to BOK Charitable Foundation Professional fees and services Net occupancy and equipment Data processing and communications Printing, postage and supplies Net (gain) loss and operating expenses on repossessed assets Amortization of intangible assets Mortgage banking costs Provision (recovery) for impairment of mortgage servicing rights Other expense Total 2005 $258,971 17,964 — 16,596 50,195 67,026 15,066 572 6,943 14,562 (3,915) 25,126 $469,106 2004 $240,661 15,618 5,561 15,487 47,289 60,025 14,034 (4,016) 8,138 18,167 (1,567) 21,827 $441,224 Years ended December 31, 2003 $222,922 12,937 — 17,935 45,967 53,398 13,930 271 8,101 40,296 (22,923) 20,604 $413,438 2002 $187,439 11,367 — 12,987 42,347 45,912 12,665 1,014 7,638 42,271 45,923 19,991 $429,554 2001 $166,864 10,658 — 13,391 42,764 39,763 12,329 1,401 20,113 30,261 15,551 18,968 $372,063 Personnel Expense to participate in liability award plans. Additional information about our stock-based compensation plans is provided in Note 13 to the Personnel expense increased $18.3 million or 8% to $259.0 million. Regular compensation expense totaled $162.7 million, a $16.0 million Consolidated Financial Statements. or 11% increase over 2004. The increase in regular compensation Employee benefit expenses increased $5.8 million or 15% to $43.6 mil- expense was due to a 6% increase in average regular compensation lion. Employee insurance costs increased $2.6 million or 20% due pri- per full-time equivalent employee and a 5% increase in average marily to growth in medical claims. The Company self-insures a por- staffing. tion of its employee health care coverage. Retirement benefit costs, which include both thrift and pension plan expenses, increased $1.7 Incentive compensation, which includes both cash-based and stock- based plans, decreased $4.6 million or 8% to $49.8 million. The Com- million or 16%. pany offers numerous incentive compensation plans that are aligned During the fourth quarter of 2005, our Board of Directors approved with the Company’s growth strategy. Cash settlements paid under modifications to both the thrift and pension plans. These modifica- these plans may be based on defined formulas, other performance tions will become effective April 1, 2006. The purpose of these modi- criteria or discretionary. Incentive compensation is designed to moti- fications is to provide retirement benefits that align with the Com- vate and reinforce sales and customer service behavior in all of our pany’s strategy of rewarding long-term, superior performance, that markets. Variations of the plans are used in targeted geographic are easily understood and that increase employee ownership and markets and lines of business where exceptional growth potential is control over their retirement. These modifications consist primarily of expected. The effectiveness of all plans and their alignment with the enhanced Company contributions to the thrift plans and curtailed Company’s objectives are reviewed annually with executive manage- benefit accruals to the pension plan. A charge of $384 thousand was ment. Incentive compensation expenses related to these cash-based recognized in 2005 for the curtailment of the pension plan. The com- plans increased $2.0 million or 5%. bined effects of these modifications are not expected to have a sig- Stock-based compensation expense decreased $6.6 million or 56%. nificant impact on future earnings or liquidity. The Company’s stock-based compensation plans include both equity The Company will continue to have a funding obligation to the pension awards and liability awards. Compensation expense associated with plan and will continue to recognize pension expense based on plan liability award plans decreased $8.4 million. This decrease reflected asset performance, discount rates and other factors. At December 31, a decrease in the market value of BOK Financial common stock at 2005, prepaid pension expense totaled $21.9 million, consisting of $1.3 December 31, 2005 compared with December 31, 2004, and a million of net plan assets in excess of liabilities and $20.6 million of reduction in the number of executive officers of the Company eligible unrecognized actuarial losses. These losses will be recognized in future 11 Financials_v5.qxd 2/24/06 3:46 PM Page 12 Management’s Discussion and Analysis years based on the lesser of the average remaining service periods or Personnel costs increased $17.7 million or 8%. Regular compensation 10 years. These unrecognized losses may also be increased or reduced increased $8.0 million or 6% due primarily to a 5% increase in aver- by plan asset performance and discount rate changes. age regular compensation per employee and a 1% increase in aver- Data Processing and Communications Expense lion, including a $5.9 million increase in stock-based compensation. age staffing. Additionally, incentive compensation increased $8.6 mil- Data processing and communication expenses increased $7.0 million or 12% compared to 2004. This expense consists of two broad cate- gories, data processing systems and transaction card processing. Data processing systems costs increased $3.5 million or 10% due pri- Much of this expense is related to stock-based compensation that is recognized as liability awards. Compensation expense for these awards is based on the excess of the fair value of BOK Financial com- mon stock over a set exercise price. marily to increased maintenance and communications costs. Trans- Data processing and communication expenses increased $6.6 million action card processing costs increased $3.5 million or 15% due to or 12%. Transaction card processing costs increased $4.6 million or growth in processing volumes. The number of transactions processed 25% due to processing volumes. Data processing systems costs during 2005 increased 17% over 2004. increased $2.0 million or 6% due primarily to maintenance costs. Other Operating Expenses BOK Financial contributed appreciated securities to the BOk Chari- table Foundation during 2004. The Foundation supports communi- Business promotion expense increased $2.3 million or 15% compared ties in the markets served by the Company. The cost basis in these with last year. Promotional activities in support of consumer banking securities of $5.6 million was charged to operating expense. The initiatives accounted for $1.5 million of the increase. after-tax cost of these contributions reduced net income by $1.1 mil- Mortgage banking expenses, including provision for impairment of lion, or 2 cents per diluted share. mortgage servicing rights, decreased $6.0 million. These expenses Business promotion expense increased $2.7 million or 21% compared are discussed more fully in the Line of Business — Mortgage Banking with last year. Promotional activities in support of consumer banking section of this report. initiatives accounted for $1.5 million of the increase. Much of the growth in promotional expenses was targeted at demand deposit Fourth Quarter 2005 Operating Expenses growth through our consumer banking network. Operating expenses for the fourth quarter of 2005 totaled $123.9 Net gains from the sale of repossessed assets totaled $4.0 million million, up 11% over the same period in 2004. Personnel costs including $3.8 million from the sale of stock acquired several years increased $6.5 million or 11%. Regular compensation expense ago as partial proceeds of the sale of a troubled loan. increased $4.7 million or 12% due to a 5% increase in average com- pensation per employee and a 7% increase in staffing. Data process- ing and communication expense grew $2.9 million or 19% due to Income Taxes increases of $1.5 million in data processing costs and $1.4 million in Income tax expense was $113.2 million for 2005, $91.4 million for transaction card processing costs. Both increases reflect growth in 2004 and $88.9 million for 2003. This represented 36%, 34% and processing volumes. 2004 Operating Expenses 36%, respectively, of book taxable income. Tax expense currently payable totaled $112.7 million in 2005 compared with $91.3 million in 2004 and $82.6 million in 2003. Operating expenses for 2004 totaled $441.2 million, a 7% increase Income tax expense for 2004 was reduced by $3.0 million due to the from 2003. This increase resulted primarily from personnel and data favorable resolution of state income tax issues and by $2.4 million processing costs. Growth in personnel costs were driven largely by from the contribution of appreciated securities to the BOk Charitable the Colorado State Bank & Trust acquisition and stock-based com- Foundation. Excluding these items, income tax expense would have pensation costs. The increase in data processing costs included both been $96.9 million or 36% of book taxable income. transaction volume and system maintenance costs. 12 Financials_v5.qxd 2/24/06 3:46 PM Page 13 Management’s Discussion and Analysis Table 5 Selected Quarterly Financial Data (In Thousands Except Per Share Data) Interest revenue Interest expense Net interest revenue Provision for credit losses Net interest revenue after provision for credit losses Other operating revenue Gain (loss) on 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 credit losses Net interest revenue after provision for credit losses Other operating revenue Gain (loss) on 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 Fourth Third Second First 2005 $214,240 97,854 116,386 4,450 111,936 89,018 (1,780) 106 124,611 (708) 75,377 27,219 $ 48,158 $199,056 86,228 112,828 3,976 108,852 90,993 (4,744) 606 121,705 (4,671) 78,673 27,846 $ 50,827 $186,334 73,801 112,533 2,015 110,518 92,636 2,266 (311) 118,922 7,088 79,099 28,634 $ 50,465 $170,304 62,710 107,594 2,000 105,594 80,015 (2,637) 778 107,783 (5,624) 81,591 29,536 $ 52,055 $ $ 0.72 0.72 $ $ 0.77 0.76 $ $ 0.79 0.75 $ $ 0.87 0.78 66,527 67,147 66,427 67,106 63,779 66,986 59,433 66,947 $163,087 56,625 106,462 4,439 102,023 77,921 967 (174) 111,887 (305) 69,155 22,599 $ 46,556 $157,027 48,642 108,385 4,986 103,399 78,919 2,673 (506) 108,302 5,900 70,283 22,501 $ 47,782 2004 $147,833 42,644 105,189 3,987 101,202 80,074 (11,005) 201 109,857 (10,865) 71,480 25,947 $ 45,533 $146,337 43,130 103,207 7,027 96,180 76,538 4,277 (995) 112,745 3,703 59,552 20,400 $ 39,152 $ $ 0.78 0.70 $ $ 0.79 0.72 $ $ 0.76 0.68 $ $ 0.66 0.59 59,251 66,895 59,198 66,803 59,147 66,720 59,051 66,672 13 Financials_v5.qxd 2/24/06 3:46 PM Page 14 Management’s Discussion and Analysis Lines of Business As shown in Table 6, regional banking continued to increase its con- tribution to consolidated net income. The growth of the regional BOK Financial operates five principal lines of business: Oklahoma banking segment is consistent with our corporate strategy of expan- corporate banking, Oklahoma consumer banking, mortgage banking, sion into high growth markets outside of Oklahoma. The Oklahoma wealth management and regional banking. Mortgage banking activ- consumer banking unit’s contribution to consolidated earnings ities include loan origination and servicing across all markets served increased significantly in 2005. Rising short-term interest rates by the Company. Wealth management provides brokerage and trad- increased the internal transfer pricing credit provided to units that ing, private financial services and investment advisory services in all generate lower-costing funds for the Company. markets. It also provides fiduciary services in all markets except Col- orado. Fiduciary services in Colorado are included in regional bank- ing. Regional banking consists primarily of corporate and consumer banking activities in the respective local markets. In addition to its lines of business, BOK Financial has a funds management unit. The primary purpose of this unit is to manage the overall liquidity needs and interest rate risk of the Company. Each line of business borrows funds from and provides funds to the funds management unit as needed to support their operations. BOK Financial allocates resources and evaluates performance of its lines of business after allocation of funds, certain indirect expenses, taxes and capital costs. The cost of funds borrowed from the funds management unit by the operating lines of business is transfer priced at rates that approximate market for funds with similar duration. Market is generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of transfer- pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk. The value of funds provided by the operating lines of business to the funds management unit is based on applicable Federal Home Loan Bank advance rates. Deposit accounts with indeterminate maturities, such as demand deposit accounts and interest-bearing transaction accounts, are transfer-priced at a rolling average based on expected duration of the accounts. The expected duration ranges from 90 days for certain rate-sensitive deposits to five years. Table 6 Net Income by Line of Business (In Thousands) Oklahoma corporate banking Oklahoma consumer banking Mortgage banking Wealth management Regional banking Subtotal Funds management and all other Total Years ended December 31, 2004 $ 61,956 11,854 2,681 13,587 57,706 147,784 31,239 $179,023 2003 $ 57,631 8,928 28,401 14,517 41,673 151,150 7,210 $158,360 2005 $ 73,625 24,183 2,182 17,890 77,344 195,224 6,281 $201,505 Oklahoma Corporate Banking The Oklahoma Corporate Banking Division provides loan and lease financing and treasury and cash management services to businesses throughout Oklahoma and certain relationships in surrounding states. In addition to serving the banking needs of small businesses, middle market and larger customers, this division has specialized groups that serve customers in the energy, agriculture, healthcare and banking/finance industries, and includes TransFund, our elec- tronic funds transfer network. The Oklahoma Corporate Banking Division contributed $73.6 million or 37% to consolidated net income for 2005, including an after-tax gain of $2.9 million from the sale of the Company’s interest in an Oklahoma City office building. This compares to $62.0 million or 35% of consolidated net income for Economic capital is assigned to the business units by a capital allo- 2004. Net interest revenue increased $7.4 million or 6% due prima- cation model that reflects management’s assessment of risk. This rily to asset growth. Average assets attributed to this division, which model assigns capital based upon credit, operating, interest rate consist primarily of commercial loans, increased $249 million or 6% and market risk inherent in our business lines and recognizes the over 2004. Operating revenue grew $6.2 million or 7%. TransFund diversification benefits among the units. The level of assigned eco- provided $3.1 million of the increase in operating revenue. Operating nomic capital is a combination of the risk taken by each business expenses, which consist primarily of personnel and data processing line, based on its actual exposures and calibrated to its own loss his- costs, increased 4%. Growth in net income also reflected a $4.2 mil- tory where possible. Additional capital is assigned to the regional lion decrease in net loan charge-offs. banking line of business based on our investment in those entities. 14 Financials_v5.qxd 2/24/06 3:46 PM Page 15 Management’s Discussion and Analysis Table 7 Oklahoma Corporate Banking Table 8 Oklahoma Consumer Banking (Dollars in Thousands) (Dollars in Thousands) NIR (expense) from external sources NIR (expense) from internal sources Total net interest revenue Other operating revenue Gain on sale of assets Operating expense Net loans charged off Net income Years ended December 31, 2004 2003 2005 $ 191,040 $ 148,919 $ 140,818 (60,735) (26,049) (25,924) 130,305 122,870 114,894 92,707 4,758 102,513 86,493 — 99,007 77,332 — 87,585 4,757 73,625 $ 8,956 61,956 $ 10,318 57,631 $ Average assets Average economic capital $4,629,400 322,440 $4,380,491 $4,106,441 311,140 312,530 Return on assets Return on economic capital Efficiency ratio 1.59% 22.83 45.01 1.41% 19.82 47.29 1.40% 18.52 45.56 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 Years ended December 31, 2004 2003 2005 $ (25,140) $ (19,061) $ (17,188) 87,421 64,873 58,261 62,281 45,812 41,073 66,266 84,336 56,611 76,057 47,229 66,798 4,632 24,183 $ 6,964 11,854 $ $ 6,892 8,928 Average assets Average economic capital $2,988,218 69,810 $2,746,279 $2,525,060 58,000 64,390 Return on assets Return on economic capital Efficiency ratio 0.81% 34.64 65.61 0.43% 18.41 74.26 0.35% 15.39 75.65 Oklahoma Consumer Banking Mortgage Banking The Oklahoma Consumer Banking Division provides a full line of BOK Financial engages in mortgage banking activities through the deposit, loan and fee-based services to customers throughout Okla- BOk Mortgage Division of Bank of Oklahoma. These activities homa through four major distribution channels: traditional branches, include the origination, marketing and servicing of conventional and supermarket branches, the 24-hour ExpressBank call center and the government-sponsored mortgage loans. Mortgage banking activities Internet. Additionally, the division is a significant referral source for contributed $2.2 million to consolidated net income in 2005 com- the Bank of Oklahoma Mortgage Division (“BOk Mortgage”) and pared to $2.7 million in 2004. Net income for 2005 included $753 BOSC’s retail brokerage division. This division contributed $24.2 mil- thousand from the sale of mortgage loans from the Company’s com- lion or 12% to consolidated net income for 2005. This compares to munity development loan portfolio. Mortgage banking activities consist of two sectors, loan production and loan servicing. The loan production sector generally performs best when mortgage rates are relatively low and loan origination vol- umes are high. Conversely, the loan servicing sector generally per- forms best when mortgage rates are relatively high and prepayments are low. $11.9 million or 7% of consolidated net income for 2004. Net interest revenue grew $16.5 million or 36% compared with 2004 due prima- rily to an increase in the internal transfer pricing credit. Additionally, average deposits provided by the Oklahoma Consumer Banking Division grew $158 million or 6%. Other operating revenue growth from 2004 resulted largely from check card revenue and overdraft fees. During 2005, growth initiatives focused on building customer rela- tionships through sales promotions, Perfect Banking sales and serv- ice standards and free on-line BillPay services. These initiatives resulted in a 6% increase in average consumer deposits, a 10% increase in checking accounts and a 54% increase in the number of on-line BillPay users. Oklahoma Consumer Banking Division also added one new supermarket location. 15 Financials_v5.qxd 2/24/06 3:46 PM Page 16 Management’s Discussion and Analysis NIR (expense) from external sources NIR (expense) from internal sources Total net interest revenue Capitalized mortgage servicing rights Other operating revenue Gain on sale of assets Operating expense Recovery for impairment of mortgage servicing rights Gain (loss) on financial instruments, net Net income Table 9 Mortgage Banking (Dollars in Thousands) Years ended December 31, 2004 2003 2005 $ 20,392 $ 21,647 $ 27,770 2004. Operating results of the loan servicing sector are greatly affected by the effect of changes in interest rates on prepayment speeds and the value of mortgage servicing rights. Mortgage interest rates changed little during 2005. In this rate environment, the fair value of our mortgage servicing rights appreciated modestly. The resulting recovery of provision for mortgage servicing rights was $3.9 (14,979) (11,423) (9,415) million in 2005, compared with a provision recovery of $1.6 million in 5,413 10,224 18,355 2004. 17,402 11,365 23,922 Servicing revenue totaled $16.3 million in 2005 compared to $17.8 16,427 1,232 35,315 22,055 — 35,415 36,379 — 58,204 million in 2004. The decrease in servicing revenue was due primarily to a lower outstanding principal balance of loans serviced. The aver- age outstanding balance of loans serviced for others was $3.6 billion during 2005 compared to $3.9 billion during 2004. The decrease in (3,915) (1,567) (22,923) loans serviced reflected our decision to curtail purchases of mort- (5,087) $ 2,182 (5,068) $ 2,681 4,025 $ 28,401 Average assets Average economic capital $526,224 24,210 $559,034 27,270 $623,823 34,120 Return on assets Return on economic capital Efficiency ratio 0.41% 9.01 87.25 0.48% 9.83 81.15 4.55% 83.24 74.00 Loan Production Sector gage loan servicing outside our market area. Servicing revenue per outstanding loan principal was 42 basis points in 2005 compared with 45 basis points in 2004. Approximately 80% of loans serviced was in our primary market areas at December 31, 2005 and Decem- ber 31, 2004. Subsequent to December 31, 2005, we agreed to purchase a $480 million mortgage loan servicing package for approximately $7 million. Substantially all of the loans are within our primary market area. This purchase is expected to close by the end of the first quarter of 2006. Loan production revenue totaled $17.6 million in 2005, including $17.4 million of capitalized mortgage servicing rights, compared to loan production revenue of $20.9 million in 2004, including $11.4 million of capitalized mortgage servicing rights. Mortgage loans funded totaled $910 million in 2005, including $664 million for home pur- Amortization of mortgage servicing rights, which is included in oper- ating expense, was $12.9 million in 2005 compared to $15.8 million in 2004. Amortization expense is determined in proportion to the esti- mated future cash flows that will be generated by the mortgage serv- icing rights. The decrease in amortization expense in 2005 reflected chases and $246 million of refinanced loans. Mortgage loans funded an expectation of slower loan prepayment speeds. in 2004 totaled $893 million, including $587 million for home pur- chases and $306 million of refinanced loans. Approximately 69% of the loans funded during 2005 were in Oklahoma. Growth initiatives for the loan production sector include a program to hire experienced originators in markets outside of Oklahoma to boost production. Pre- tax income from loan production totaled $5.6 million for 2005 com- pared with $6.7 million for the previous year end. The pipeline of mort- gage loan applications totaled $233 million at December 31, 2005, compared to $189 million at December 31, 2004. Loan Servicing Sector The valuation allowance for impairment of mortgage servicing rights totaled $7 million at December 31, 2005 compared to $14 million at December 31, 2004. Increased fair value of our servicing rights was the primary reason for the reduction in the valuation allowance. The valuation allowance was also reduced by $2.4 million from the charge-off of servicing rights determined to be permanently impaired. As discussed in the Critical Accounting Policies section of this report, servicing rights are considered to be permanently impaired if the fair value does not exceed amortized costs after assuming a 300 basis point increase in mortgage interest rates. Note 8 to the Consolidated Financial Statements presents additional information about the fair The loan servicing sector had a pre-tax loss of $3.2 million for 2005 value and amortized costs of servicing rights and valuation compared to a pre-tax loss of $4.3 million for the same period of allowance. 16 Financials_v5.qxd 2/24/06 3:46 PM Page 17 Management’s Discussion and Analysis BOK Financial designates a portion of its securities portfolio as an point increase in rates is expected to increase value by $3.1 million economic hedge against the risk of loss on its mortgage servicing while a 50 basis point decrease is expected to reduce value by $4.8 rights. Mortgage-backed securities and U.S. government agency million. This considers that there is an upper limit to appreciation in debentures are acquired and held as available for sale when pre- the value of servicing rights as rates rise due to the contractual repay- payment risks exceed certain levels. Additionally, mortgage-related ment terms of the loans and other factors. There is much less of a limit derivative contracts may also be designated as an economic hedge on the speed at which mortgage loans may prepay in a declining rate of the risk of loss on mortgage servicing rights. Because the fair val- environment. ues of these instruments are expected to vary inversely to the fair value of the servicing rights, they are expected to partially offset risk. However, no special hedge accounting treatment is applicable to Wealth Management either the mortgage servicing rights or the financial instruments des- BOK Financial provides a wide range of financial services through its ignated as an economic hedge. Derivative contracts used to hedge wealth management line of business, including trust and private mortgage servicing rights are carried at fair value with changes in fair financial services, and brokerage and trading activities. This line of value recognized in earnings. We recognized net losses of $1.2 million business includes the activities of BOSC, Inc., a registered broker / in 2005 and $3.5 million in 2004 from changes in the value of mort- dealer. Trust and private financial services includes sales of institu- gage servicing rights and economic hedging activities. tional, investment and retirement products, loans and other services This hedging strategy presents certain risks. A well-developed market determines the fair value for the securities and derivatives. However, there is no comparable market for mortgage servicing rights. There- fore, the computed change in value of the servicing rights for a spec- ified change in interest rates may not correlate to the change in value of the securities. At December 31, 2005, financial instruments with a fair value of $49 million and an unrealized gain of $52 thousand were held for the eco- nomic hedge program. This unrealized gain, net of income taxes, is included in shareholders’ equity as part of other comprehensive income. The interest rate sensitivity of the mortgage servicing rights and securities held as a hedge is modeled over a range of +/– 50 basis points. At December 31, 2005, the pre-tax results of this mod- eling on reported earnings are shown in Table 10: Table 10 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 $3,113 (1,915) $1,198 $(4,763) 2,112 $(2,651) Table 10 shows the non-linear effect of changes in mortgage com- mitment rates on the value of mortgage servicing rights. A 50 basis 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 and administrative and advisory services to the American Performance family of mutual funds. Brokerage and trading activities within the wealth management line of business consist of retail sales of mutual funds, securities, and annuities, institutional sales of securi- ties and derivatives, bond underwriting and other financial advisory services. Customer hedging programs were combined into the Wealth Management Division in 2005. Prior years’ results have been reclassified for consistency. Wealth Management contributed $17.9 million or 9% to consolidated net income for 2005. This compared to $13.6 million or 8% of con- solidated net income for 2004. Trust and private financial services provided $15.6 million of net income in 2005, a $4.9 million or 46% increase over 2004. The increased contribution by trust and private financial services is attributable primarily to trust fees. At December 31, 2005 and 2004, the wealth management line of business was responsible for trust assets with aggregate market values of $26.0 billion and $22.6 billion, respectively, under various fiduciary arrange- ments. 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 $10.0 billion of trust assets at December 31, 2005 compared to $8.2 billion of trust assets at December 31, 2004. The fair value of assets held in custody 17 Financials_v5.qxd 2/24/06 3:46 PM Page 18 Management’s Discussion and Analysis by the Wealth Management Division increased $1.6 billion or 33% Texas growth resulted from an increase in net interest revenue. Net while the fair value of non-managed assets remained unchanged at interest revenue increased $21.6 million or 19%. Average earning $9.4 billion. Brokerage and trading activities provided $2.3 million of net income in 2005 compared to $2.9 million in the previous year. Operating rev- enue increased $1.5 million or 4% due primarily to customer hedging programs. Operating expenses, which consisted primarily of compen- sation expense, increased $2.1 million or 5%. Table 11 Wealth Management (Dollars in Thousands) assets increased $274 million, including $293 million of loans partially offset by a reduction in securities and funds sold to the funds man- agement unit. The growth in average earning assets was funded by a $115 million increase in interest-bearing deposits and a $77 million increase in demand deposits. Company initiatives to support loan growth included hiring additional middle market lending talent in Houston and expanding the energy lending staff in both Houston and Dallas. Operating expenses increased $8.6 million or 12% due prima- rily to a $6.5 million increase in personnel costs. Years ended December 31, 2004 2003 2005 Net income growth from our New Mexico operations was also based largely on an increase in net interest revenue, combined with an $ 5,651 $ 4,001 $ 1,966 increase in operating revenue. Average loans increased $62 million 11,208 8,888 8,939 compared with 2004 while average funds sold to the funds man- agement unit decreased $82 million. Average deposits in the New 16,859 12,889 10,905 Mexico market grew $74 million, including $59 million of interest-bear- NIR (expense) from external sources NIR (expense) from internal sources Total net interest revenue Other operating revenue Operating expense Net income 100,647 88,001 17,890 $ 93,757 93,193 80,512 83,784 13,587 $ 14,517 $ Average assets Average economic capital $1,503,886 106,040 $1,122,147 $875,661 69,690 84,820 Return on assets Return on economic capital Efficiency ratio 1.19% 16.87 74.89 1.21% 16.02 78.98 1.66% 20.83 76.93 Regional Banking Regional banking consists primarily of the corporate and commercial banking services provided by Bank of Texas, Bank of Albuquerque, Bank of Arkansas, Colorado State Bank and Trust and Bank of Ari- zona in their respective markets. It also includes fiduciary services provided by Colorado State Bank and Trust. Small businesses and middle-market corporations are the regional banks’ primary customer focus. Regional banking contributed $77.3 million or 38% to consoli- dated net income during 2005. This compares with $57.7 million or 32% of consolidated net income in 2004. Growth in net income con- tributed by regional banking came primarily from operations in Texas and New Mexico. Net income for 2005 in Texas and New Mexico increased $10.6 million and $6.0 million, respectively, from the previ- ous year. Net income from our Colorado operations grew $2.5 million or 152% over 2004. ing deposits and $16 million of demand deposits. Over 15 thousand new consumer checking accounts were opened during 2005. Funds provided by the growth in deposits reduced average external bor- rowings. The increase in operating revenue was due primarily to growth in deposit fees and check card revenue. Expansion efforts in the Colorado region continued during 2005. Commercial lending staff was added throughout the year. Addition- ally, a new office which offers trust products in Salt Lake City, Utah, was opened during the second quarter. The result of these efforts was net income from our Colorado operations of $4.1 million, a 152% increase in its second full year of operations as a BOK Financial unit. Average earning assets attributed to our Colorado operations increased 36% due primarily to loan growth. Average deposits increased $128 million or 40%. These factors combined to increase net interest revenue $6.5 million or 39%. Other operating revenue increased $1.6 million or 19% due primarily to growth in trust fees. The fair value of trust assets managed by Colorado State Bank and Trust was $2.4 billion at December 31, 2005, a 20% increase from Decem- ber 31, 2004. Net loans charged-off increased to $2.5 million in 2005 from the resolution of several commercial lending relationships that pre-dated our acquisition of Colorado State Bank and Trust. Bank of Arizona incurred a net loss of $524 thousand since its acqui- sition in April, 2005. Operating expense included $778 thousand of core deposit premium amortization expense. Our policy is to amortize core deposit premiums over the expected lives of the acquired 18 Financials_v5.qxd 2/24/06 3:46 PM Page 19 Management’s Discussion and Analysis deposits using an accelerated amortization method. The weighted systems which increased the scope of products and services offered average life of the acquired deposits is approximately five years. in the Phoenix market. Outstanding loans increased $70 million or Operating expense also included $380 thousand of recruiting 55%. We recently opened a loan production office in Tucson to further expenses as we add professional staff. In the nine months since acqui- expand our Arizona operations. sition, Bank of Arizona has been converted to our data processing Table 12 Bank of Texas (Dollars in Thousands) NIR (expense) from external sources NIR (expense) from internal sources Total net interest revenue Years ended December 31, 2004 2003 2005 $ 148,021 $ 120,813 $ 106,617 (10,809) (5,206) (5,068) 137,212 115,607 101,549 Other operating revenue Operating expense Net loans charged off Net income 24,053 82,189 2,727 49,946 $ 22,406 73,548 3,928 39,388 $ 21,951 78,152 4,301 26,601 $ Average assets Average economic capital Average invested capital $3,417,995 182,640 349,720 $3,143,625 $2,859,069 166,870 333,960 168,430 335,520 Return on assets Return on economic capital Return on average invested capital Efficiency ratio 1.46% 27.35 14.28 50.97 1.25% 23.39 11.74 53.29 0.93% 15.94 7.97 63.28 Table 13 Bank of Albuquerque (Dollars in Thousands) Table 14 Bank of Arkansas (Dollars in Thousands) Years ended December 31, 2004 2003 2005 NIR (expense) from external sources NIR (expense) from internal sources Total net interest revenue $ 12,055 $ 9,046 $ 8,700 (3,918) 8,137 (2,170) 6,876 (2,148) 6,552 Other operating revenue Operating expense Net loans charged off Net income 2,063 4,018 52 $ 3,745 Average assets Average economic capital Average invested capital $268,307 11,900 11,900 1,394 4,115 (26) $ 2,555 $273,700 11,450 11,450 1,205 3,894 661 $ 1,957 $288,030 10,720 10,720 Return on assets Return on economic capital Return on average invested capital Efficiency ratio 1.40% 31.47 31.47 39.39 0.93% 22.31 22.31 49.76 0.68% 18.26 18.26 50.20 Table 15 Colorado State Bank and Trust (Dollars in Thousands) Years ended December 31, 2004 2003 2005 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 $ Years ended December 31, 2004 2003 2005 $ 58,208 $ 46,888 $ 42,128 (10,560) 47,648 17,367 31,195 930 20,096 (5,065) 41,823 14,701 31,904 1,471 14,144 $ $ (4,362) 37,766 11,533 30,385 1,326 10,919 Average assets Average economic capital Average invested capital $1,633,310 76,560 95,650 $1,652,557 $1,551,192 66,070 85,160 73,270 92,360 Return on assets Return on economic capital Return on average invested capital Efficiency ratio 1.23% 26.25 21.01 47.98 0.86% 19.30 15.31 56.44 0.70% 16.53 12.82 61.63 NIR (expense) from external sources NIR (expense) from internal sources Total net interest revenue $ 35,299 $ 24,034 (12,059) 23,240 (7,312) 16,722 Other operating revenue Operating expense Net loans charged off Net income 10,136 24,179 2,517 $ 4,081 Average assets Average economic capital Average invested capital $873,805 47,070 89,050 8,516 22,455 134 $ 1,619 $684,329 27,560 69,550 *** *** *** *** *** *** *** *** *** *** *** *** Return on assets Return on economic capital Return on average invested capital 0.47% 8.67 0.24% 5.87 4.58 72.44 Efficiency ratio *** Data not meaningful due to acquisition of Colorado State Bank and 2.33 88.97 *** *** Trust in September 2003. 19 Financials_v5.qxd 2/24/06 3:46 PM Page 20 Management’s Discussion and Analysis Table 16 Bank of Arizona (Dollars in Thousands) Years ended December 31, 2004 2003 2005 NIR (expense) from external sources NIR (expense) from internal sources Total net interest revenue Other operating revenue Operating expense Net loans charged off Net loss $ $ 10,690 (3,992) 6,698 1,100 8,828 (31) (524) Average assets Average economic capital Average invested capital $227,081 6,830 23,480 Return on assets Return on economic capital Return on average invested capital (0.23)% (7.67) *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** *** (2.23) 113.21 Efficiency ratio *** Data not applicable due to acquisition of Bank of Arizona in April *** *** *** *** 2005. Assessment of Financial Condition Securities BOK Financial maintains a securities portfolio to support its interest rate risk management strategies, provide liquidity and profitability and comply with regulatory requirements. Securities are classified as either held for investment or available for sale. Investment securities, which consist primarily of Oklahoma municipal bonds, are carried at cost and adjusted for amortization of premiums or accretion of dis- counts. Management has the ability and intent to hold these securi- ties 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 comprehen- sive income in shareholders’ equity. The amortized cost of available for sale securities at December 31, 2005 increased $317 million compared with the previous year-end. Mortgage-backed securities increased $293 million and represented 97% of total available for sale securities. The increase in securities reflected an increase in available funds due to strong deposit growth during 2005. As previously discussed in the Net Interest Revenue sec- tion of this report, we hold mortgage-backed securities as part of our overall interest rate risk management strategy. The primary risk of holding mortgage-backed securities comes from extension during periods of rising interest rates or prepayment during periods of falling interest rates. We evaluate this risk through exten- sive modeling of risk both before making an investment and through- out the life of the security. The expected duration of the mortgage- backed securities portfolio was 2.8 years at December 31, 2005. Management estimates that the expected duration would extend to 3.3 years assuming a 300 basis point immediate rate shock. Table 17 Securities (Dollars in Thousands) 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 2005 Amortized Cost Fair Value $ 1,994 240,359 — 2,772 $ 245,125 $ 1,976 238,649 — 2,781 $ 243,406 December 31, 2004 2003 Amortized Cost Fair Value Amortized Cost Fair Value $ — $ — $ — $ 216,986 1,287 2,821 $ 221,094 218,465 1,336 2,835 $ 222,636 184,192 2,296 1,463 $ 187,951 — 187,354 2,418 1,484 $ 191,256 $ 16,037 17,153 $ 15,827 17,078 $ 27,119 414 $ 27,062 404 $ 44,679 3,271 $ 45,424 3,257 3,507,047 1,277,161 4,784,208 124 108,914 $4,926,436 3,424,356 1,250,701 4,675,057 124 113,489 $4,821,575 3,067,611 1,423,613 4,491,224 515 90,343 $4,609,615 3,052,375 1,418,770 4,471,145 528 94,051 $4,593,190 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 20 Financials_v5.qxd 2/24/06 3:46 PM Page 21 Management’s Discussion and Analysis Net unrealized losses on available for sale securities totaled $105 mil- The commercial loan portfolio increased $724 million during 2005. lion at December 31, 2005 compared with net unrealized losses of Much of this increase was focused in the services portion of the port- $16 million at December 31, 2004 due primarily to rising interest rates. folio, which increased $235 million or 20%. Services, which consist of None of the unrealized losses resulted from credit quality concerns. loans to a variety of businesses, comprised 16% of the total loan port- The aggregate gross amount of unrealized losses at December 31, folio. Approximately $1.1 billion of the services category is made up of 2005 totaled $114 million. Management evaluated the securities with loans with outstanding balances of less than $10 million. Energy loans unrealized losses to determine if we believe that the losses were tem- totaled $1.4 billion or 15% of total loans. Outstanding energy loans porary. This evaluation considered factors such as causes of the increased $176 million or 14% during 2005. Approximately $1.1 billion unrealized losses and prospects for recovery over various interest of the outstanding balance of energy loans was to oil and gas pro- rate scenarios and time periods. We also considered our intent and ducers. The amount of credit available to these customers generally ability to either hold or sell the securities. It is our belief, based on cur- depends on a percentage of the value of their proven energy rently available information and our evaluation, that the unrealized reserves based on anticipated prices. The energy category also losses in these securities were temporary. included loans to borrowers involved in the transportation and sale of Loans The aggregate loan portfolio before allowance for loan losses totaled $9.1 billion at December 31, 2005, a $1.2 billion or 15% increase since last year. Loan growth was broadly distributed among the various seg- ments of the portfolio and across all geographic markets. oil and gas and to borrowers that manufacture equipment or provide other services to the energy industry. Notable loan concentrations by primary industry of the borrowers are presented in Table 18. Table 18 Loans (In Thousands) Commercial: Energy Services Wholesale/retail Manufacturing Healthcare Agriculture 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 2005 2004 $1,399,417 1,425,821 793,032 514,792 520,309 291,858 354,706 5,299,935 638,366 204,620 1,146,916 1,989,902 1,169,331 51,666 1,220,997 629,144 $9,139,978 $1,223,195 1,190,814 699,318 484,423 424,257 262,436 291,393 4,575,836 457,399 231,985 931,726 1,621,110 1,198,918 40,262 1,239,180 492,841 $7,928,967 21 December 31, 2003 $1,231,599 989,906 668,202 482,657 393,929 228,222 342,187 4,336,702 436,087 271,119 922,886 1,630,092 1,015,643 56,543 1,072,186 444,909 $7,483,889 2002 2001 $1,132,178 917,263 627,422 501,506 332,359 186,976 292,094 3,989,798 356,227 307,119 772,492 1,435,838 929,759 133,421 1,063,180 412,167 $6,900,983 $ 987,556 807,691 600,470 467,260 276,789 170,861 364,123 3,674,750 327,455 291,687 722,633 1,341,775 703,080 166,093 869,173 409,680 $6,295,378 Financials_v5.qxd 2/24/06 3:46 PM Page 22 Management’s Discussion and Analysis BOK Financial participates in shared national credits when appro- estate loans were retail facilities — $305 million and office buildings priate to obtain or maintain business relationships with local cus- — $499 million. Commercial real estate loans secured by office build- tomers. Shared national credits are defined by banking regulators as ings increased $156 million or 46% during the past year. credits of more than $20 million and with three or more non-affiliated banks as participants. At December 31, 2005, the outstanding prin- cipal balance of these loans totaled $1.1 billion. Substantially all of these loans are to borrowers with local market relationships. BOK Financial serves as the agent lender in approximately 30% of its shared national credits, based on dollars committed. The Company’s lending policies generally avoid loans in which we do not have the opportunity to maintain or achieve other business relationships with the customer. Commercial real estate loans totaled $2.0 billion or 22% of the loan portfolio at December 31, 2005. Commercial real estate loans grew $369 million or 23% from the previous year end. Growth in commer- cial real estate loans was distributed across all of our markets. Con- struction and land development included $494 million for single family residential lots and premises, up $144 million or 41% since De- cember 31, 2004. The major components of other commercial real Residential mortgage loans, excluding loans held for sale, included $350 million of home equity loans, $346 million of loans held for busi- ness relationship purposes, $232 million of adjustable rate mortgages and $182 million of loans held for community development. Consumer loans included $357 million of indirect automobile loans. Indirect automobile loans grew $123 million during 2005 due to increased demand. Substantially all of these loans were purchased from deal- ers in Oklahoma, although the Company began indirect automobile lending in Arkansas during 2005. The Company continued to increase geographic diversification through expansion into Texas, New Mexico, Colorado and Arizona. The percent of the loan portfolio attributed to Oklahoma was 59% at December 31, 2005 and 62% at December 31, 2004. Table 20 pres- ents the distribution of the major loan categories among our primary market areas. Table 19 Loan Maturity and Interest Rate Sensitivity at December 31, 2005 (In Thousands) Loan maturity: Commercial Commercial real estate Total Interest rate sensitivity for selected loans with: Predetermined interest rates Floating or adjustable interest rates Total Total $5,299,935 1,989,902 $7,289,837 $2,630,474 4,659,363 $7,289,837 Remaining Maturities of Selected Loans Within 1 Year 1-5 Years After 5 Years $1,915,030 827,606 $2,742,636 $ 487,157 2,255,479 $2,742,636 $2,683,475 920,674 $3,604,149 $1,684,373 1,919,776 $3,604,149 $701,430 241,622 $943,052 $458,944 484,108 $943,052 22 Financials_v5.qxd 2/24/06 3:46 PM Page 23 Management’s Discussion and Analysis Table 20 Loans by Principal Market Area (In Thousands) 2005 2004 December 31, 2003 2002 2001 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 Arizona: Commercial Commercial real estate Residential mortgage Consumer Total Arizona Total BOK Financial loans 1Includes Denver loan production office $3,159,683 862,700 842,757 51,666 466,180 $5,382,986 $1,356,611 569,921 199,726 89,017 $2,215,275 $ 383,325 232,564 65,784 15,137 $ 696,810 $ 79,719 75,483 13,044 25,659 $ 193,905 $ 270,108 133,537 21,918 27,871 $ 453,434 $ 50,489 115,697 26,102 5,280 $ 197,568 $9,139,978 $2,802,852 789,868 699,274 56,543 324,305 $4,672,842 $ 963,340 477,561 204,481 101,269 $1,746,651 $ 297,896 175,745 66,179 11,070 $ 550,890 $ 63,480 75,452 6,245 2,671 $ 147,848 $ 209,134 111,466 39,464 5,594 $ 365,658 $ — — — — $ — $7,483,889 $2,677,616 763,469 656,391 133,421 294,404 $4,525,301 $ 866,905 455,364 192,575 104,353 $1,619,197 $ 286,622 150,293 76,020 11,399 $ 524,334 $ 63,113 66,712 4,773 2,011 $ 136,609 $ $ 95,542 — — — 95,542 $ — — — — $ — $6,900,983 $2,576,808 739,419 476,023 166,093 314,060 $4,272,403 $ 775,788 380,602 136,181 85,347 $1,377,918 $ 219,257 136,425 85,309 8,200 $ 449,191 $ 72,728 85,329 5,567 2,073 $ 165,697 $ $ 30,169 — — — 30,169 $ — — — — $ — $6,295,378 $2,847,470 744,724 901,648 40,262 367,947 $4,902,051 $1,120,069 459,067 191,296 86,732 $1,857,164 $ 354,904 196,832 63,043 13,260 $ 628,039 $ 61,934 74,478 11,238 3,858 $ 151,508 $ 191,459 118,134 31,693 21,044 $ 362,330 $ — 27,875 — — $ 27,875 $7,928,967 23 Financials_v5.qxd 2/24/06 3:46 PM Page 24 Management’s Discussion and Analysis Loan Commitments BOK Financial enters into off-balance sheet arrangements in the nor- mal course of business. These arrangements included loan commit- ments which totaled $4.3 billion and standby letters of credit which totaled $559 million at December 31, 2005. Loan commitments may be unconditional obligations to provide financing or conditional obli- gations that depend on the borrower’s financial condition, collateral value or other factors. Standby letters of credit are unconditional commitments to guarantee the performance of our customer to a third party. Since some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not nec- essarily represent future cash requirements. Table 21 Off-Balance Sheet Credit Commitments as of December 31, 2005 (In Thousands) Loan commitments Standby letters of credit Total 2005 $4,349,114 558,907 $4,908,021 2004 $3,459,425 414,228 $3,873,653 2003 $2,964,694 374,550 $3,339,244 2002 $2,884,011 290,069 $3,174,080 2001 $2,461,141 248,960 $2,710,101 Derivatives with Credit Risk BOK Financial offers programs that permit its customers to hedge various risks, including fluctuations in energy and cattle prices, inter- est rates and foreign exchange rates, or to take positions in derivative contracts. Each of these programs work essentially the same way. Derivative contracts are executed between the customers and BOK Financial. Offsetting contracts are executed between the Company and selected counterparties to minimize the risk to us of changes in A deterioration of the credit standing of one or more of the customers or counterparties to these contracts may result in BOK Financial’s 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 customer or counterparty deteriorated such that either the fair value of underlying collateral no longer sup- ported the contract or the customer or counterparty’s ability to pro- vide margin collateral was impaired. commodity prices, interest rates or foreign exchange rates. The coun- Derivative contracts are carried at fair value. At December 31, 2005, terparty contracts are identical to the customer contracts, except for the fair values of derivative contracts reported as assets under these a fixed pricing spread or a fee paid to us as compensation for admin- programs totaled $453 million. This included energy contracts with istrative costs, credit risk and profit. These programs create credit risk for potential amounts due to the Company from its customers and from the counterparties. Customer credit risk is monitored through existing credit policies and proce- dures. The effects of changes in commodity prices, interest rates or foreign exchange rates are evaluated across a range of possible options to determine the maximum exposure we are willing to have individually to any customer. Customers may also be required to pro- vide margin collateral to further limit our credit risk. Counterparty credit risk is evaluated through existing policies and procedures. This evaluation considers the total relationship between BOK Financial and each of the counterparties. Individual limits are established by management, approved by Credit Administration and reviewed by the Asset / Liability Committee. Margin collateral is required if the exposure between the Company and any counter- party exceeds established limits. Based on declines in the counter- parties’ credit ratings, these limits are reduced and additional margin collateral is required. fair values of $418 million, interest rate contracts with fair values of $19 million and foreign exchange contracts with fair values of $15 mil- lion. The aggregate fair values of derivative contracts reported as lia- bilities totaled $452 million. Approximately 94% of the fair value of asset contracts was with customers. The credit risk of these contracts is generally backed by energy production. The remaining 6% was with counterparties, consisting primarily of highly-rated financial institu- tions and energy companies. The maximum net exposure to any sin- gle customer or counterparty totaled $85 million. The Company’s policy had been to carry all derivative contracts at fair value on a gross asset / gross liability basis. Changes in energy prices during the third quarter of 2005 caused significant increases in the fair values of both derivative assets and liabilities. The potential impact of these increases on regulatory capital ratios caused the Company to adopt FASB Interpretation No. 39, “Offsetting Amounts Related to Certain Contracts” (“FIN 39”). FIN 39 permits, but does not require, reporting derivative assets and liabilities on a net by coun- terparty basis provided certain specified criteria are met. These cri- teria require written bilateral netting agreements between the Com- 24 Financials_v5.qxd 2/24/06 3:46 PM Page 25 Management’s Discussion and Analysis pany and each of its counterparties that create a single legal claim held for sale, principally mortgage loans accumulated for placement or obligation to pay or receive the net amount in settlement of the into security pools, are charged to earnings through adjustment in the individual derivative contracts. Amounts reported for derivative carrying value. The reserve for loan losses also represented 413% of assets and liabilities in prior periods have been reclassified for con- the outstanding balance of nonperforming loans at year-end 2005 sistent presentation. Summary of Loan Loss Experience The reserve for loan losses, which is available to absorb losses inher- ent in the loan portfolio, totaled $104 million at December 31, 2005 compared to $109 million at December 31, 2004. These amounts rep- resented 1.14% and 1.38% of outstanding loans, excluding loans held for sale, at December 31, 2005 and 2004, respectively. Losses on loans Table 22 Summary of Loan Loss Experience (Dollars in Thousands) compared to 206% at year-end 2004. Nonperforming loans at December 31, 2005 decreased to $25 million compared with $53 mil- lion at the previous year-end. Net loans charged off during 2005 decreased to $16 million in 2005 compared to $22 million in the pre- vious year. Net commercial loans charged-off during 2005 totaled $5.6 million, a $6.0 million decrease from 2004. Net consumer loan charge-offs, which include deposit account overdraft losses, were $7.1 million in 2005 and $8.2 million in 2004. Table 22 provides statistical information regarding the reserve for loan losses for the past five years. Reserve for loan losses: 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 off-balance sheet credit losses: Beginning balance Provision for off-balance sheet credit losses Additions due to acquisitions Ending balance Total provision for credit losses Reserve for loan losses to loans outstanding at year-end1 Net charge-offs to average loans1 Total provision for credit losses to average loans1 Recoveries to gross charge-offs Reserve for loan losses as a multiple of net charge-offs Reserve for off-balance sheet credit losses to off-balance sheet credit commitments Combined reserves for credit losses to loans outstanding at year-end1 Problem Loans: Loans past due (90 days) Nonaccrual2 Renegotiated Total Foregone interest on nonaccrual loans2 2005 $108,618 9,670 2,619 1,212 12,257 25,758 4,071 117 180 5,176 9,544 16,214 10,401 1,071 $103,876 $ 18,502 2,040 32 $ 20,574 $ 12,441 1.14% 0.19 0.15 37.05 6.41x 0.42% 1.37% 2004 $114,784 Years ended December 31, 2003 $103,851 2002 $ 89,188 13,921 971 1,465 13,328 29,685 2,283 30 243 5,171 7,727 21,958 15,792 — $108,618 $ 13,855 4,647 — $ 18,502 $ 20,439 1.38% 0.29 0.27 26.03 4.95x 0.48% 1.61% 16,331 88 1,721 13,335 31,475 887 53 83 5,102 6,125 25,350 34,000 2,283 $114,784 $ 12,219 1,636 — $ 13,855 $ 35,636 1.55% 0.36 0.50 19.46 4.53x 0.41% 1.73% 13,326 286 412 11,881 25,905 1,276 118 146 3,436 4,976 20,929 34,228 1,364 $103,851 $ 12,717 (498) — $ 12,219 $ 33,730 1.53% 0.33 0.54 19.21 4.96x 0.38% 1.72% 2001 $ 72,183 18,042 71 308 6,827 25,248 1,151 653 57 2,727 4,588 20,660 35,365 2,300 $ 89,188 $ 10,472 2,245 — $ 12,717 $ 37,610 1.46% 0.35 0.63 18.17 4.32x 0.47% 1.66% $ 8,708 25,162 — $ 33,870 $ 2,515 $ 7,649 52,660 — $ 60,309 $ 4,617 $ 14,944 52,681 — $ 67,625 $ 4,821 $ 8,117 49,855 — $ 57,972 $ 4,770 $ 8,108 43,540 27 $ 51,675 $ 5,163 1 Excludes residential mortgage loans held for sale. 2 Interest collected and recognized on nonaccrual loans was not significant in 2005 and previous years disclosed. 25 Financials_v5.qxd 2/24/06 3:46 PM Page 26 Management’s Discussion and Analysis The Company considers the credit risk from loan commitments and Nonspecific reserves are maintained for risks beyond factors specific letters of credit in its evaluation of the adequacy of the reserve for to an individual loan or those identified through migration analysis. A loan losses. During 2004, we adopted the preferred presentation range of potential losses is determined for each risk factor identified. method and separated the reserve for off-balance sheet credit risk At December 31, 2005, the ranges of potential losses for the more from the reserve for loan losses. Table 22 presents the trend of re- significant factors were: serves for off-balance sheet credit losses and the relationship between the reserve and loan commitments. It also presents the rela- tionship between the combined reserve for credit losses and out- standing loans for comparison with peer banks and others who have not adopted the preferred presentation. The provision for credit losses included the combined charge to expense for both the reserve General economic conditions — $6 million to $11 million Concentration in large loans — $2 million to $3 million Allocation of the loan loss reserve to the major loan categories is pre- sented in Table 23. for loan losses and the reserve for off-balance sheet credit losses. All The provision for credit losses totaled $12.4 million, an $8.0 million losses incurred from lending activities will ultimately be reflected in decrease from 2004. Factors considered in determining the provi- charge-offs against the reserve for loan losses following funds sion for credit losses included reductions in the outstanding balances advanced against outstanding commitments and after the exhaus- of criticized and classified loans, nonperforming loans and potential tion of collection efforts. The reserve for off-balance sheet credit problem loans. Factors that reduce the required provision were par- losses would decrease and the reserve for loan losses would increase tially offset by concerns about the effect of changes in interest rates as outstanding commitments are funded. and energy prices on the commercial real estate and commercial loan portfolios. Specific impairment reserves are determined through evaluation of estimated future cash flows and collateral value. At December 31, 2005, specific impairment reserves totaled $2.6 million on total impaired loans of $20 million. Table 23 Loan Loss Reserve Allocation (Dollars in Thousands) 2005 2004 Loan category: Commercial Commercial real estate Residential mortgage Consumer Nonspecific allowance Total Reserve2 $ 43,915 25,529 5,302 10,929 18,201 $103,876 % of Loans1 58.32% 21.89 12.87 6.92 — Reserve2 $ 52,325 21,317 5,904 12,034 17,038 December 31, 2003 % of Loans1 Reserve2 % of Loans1 58.00% $ 58,993 16,395 20.55 6,797 15.20 16,132 6.25 16,467 — 58.39% 21.95 13.67 5.99 — 2002 2001 Reserve2 $ 56,474 16,037 3,956 13,922 13,462 $103,851 % of Loans1 Reserve2 % of Loans1 58.95% $ 51,803 14,000 21.22 3,612 13.74 6,318 6.09 13,455 — 100.00% $ 89,188 59.95% 21.89 11.47 6.69 — 100.00% 100.00% 1 Excludes residential mortgage loans held for sale. 2 Specific allocation for the loan concentration risks are included in the appropriate category. $108,618 100.00% $114,784 100.00% 26 Financials_v5.qxd 2/24/06 3:46 PM Page 27 Management’s Discussion and Analysis Nonperforming Assets Information regarding nonperforming assets, which totaled $34 mil- lion at December 31, 2005 and $56 million at December 31, 2004 is presented in Table 24. Nonperforming assets included nonaccrual and renegotiated loans and excluded loans 90 days or more past due but still accruing interest. Nonaccrual loans decreased to $25 million at December 31, 2005 from $53 million at December 31, 2004. Newly identified nonaccruing loans totaled $17 million during the year. Nonaccruing loans decreased $17 million for loans charged off and foreclosed and $16 million for cash payments received. Nonaccruing loans also decreased $10 million from loans returned to accruing status after a period of satisfactory performance. Table 24 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: Reserve for loan losses to nonperforming loans Nonperforming loans to period-end loans2 Loans past due (90 days)1 1 Includes residential mortgages guaranteed by agencies of the U.S. Government. 2 Excludes residential mortgage loans held for sale. 2005 2004 December 31, 2003 2002 2001 $11,673 5,370 7,347 772 25,162 — 25,162 8,476 $33,638 412.83% 0.28 $ 8,708 $33,195 10,144 8,612 709 52,660 — 52,660 3,763 $56,423 206.26% 0.67 $ 7,649 $41,360 2,311 7,821 1,189 52,681 — 52,681 7,186 $59,867 217.89% 0.71 $14,944 $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 $50,708 208.31% 0.74 $ 8,117 204.71% 0.71 $ 8,108 $ 2,021 $ 2,308 $ 4,132 $ 4,956 $ 6,222 The loan review process also identified loans that possess more than deposit growth is supported through our Perfect Banking program, the normal amount of risk due to deterioration in the financial condi- free checking and on-line billpay services, an extensive network of tion of the borrower or the value of the collateral. Because the bor- branch locations and ATMs and a 24-hour ExpressBank call center. rowers are still performing in accordance with the original terms of Commercial deposit growth is supported by offering treasury man- the loan agreements, and no loss of principal or interest is antici- agement and lockbox services. pated, 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 $28 million at December 31, 2005 and $49 million at December 31, 2004. The current composi- tion of potential problem loans by primary industry included health- care — $12 million, real estate — $6 million and services — $5 million. Deposits Deposit accounts represent our primary funding source. We compete for retail and commercial deposits by offering a broad range of prod- ucts and services and focusing on customer convenience. Retail Total deposits averaged $10.1 billion for 2005, a $641 million or 7% increase over 2004. Growth in average deposits came primarily in the Texas, Oklahoma and Colorado markets. Average deposits increased $192 million or 8% in Texas, $179 million or 3% in Oklahoma and $128 million or 40% in Colorado. Consumer banking and per- sonal financial services provided much of the deposit growth in each of these markets. Additionally, average deposits increased $90 mil- lion from the Bank of Arizona acquisition. Across all markets, average core deposits, which we define as deposits of less than $100,000, excluding public funds and brokered deposits, increased 4% to $5.2 billion. Growth in average core 27 Financials_v5.qxd 2/24/06 3:46 PM Page 28 Management’s Discussion and Analysis deposits resulted from initiatives such as free on-line billpay, free At December 31, 2005, the Company had $442 million in fixed rate, checking and Perfect Banking. The remaining average deposits brokered certificates of deposits. The weighted-average interest rate included accounts with balances in excess of $100,000, which paid on these certificates is 3.64%. Interest rate swaps have been totaled $3.9 billion, and brokered deposits and public funds, which designated as hedges of each of these certificates. The purpose of totaled $987 million. Table 25 Maturity of Domestic CDs and Public Funds in Amounts of $100,000 or More (In Thousands) December 31, these swaps is to hedge against changes in fair value due to changes in interest rates by modifying the certificates from fixed rate to float- ing rates based on changes in LIBOR. We receive a weighted aver- age fixed rate of 3.81% on these swaps and currently pay a floating rate of 4.39%. The distribution of deposit accounts among our principal markets is 2005 2004 shown in Table 26. Months to maturity: 3 or less Over 3 through 6 Over 6 through 12 Over 12 Total $ 354,724 256,919 631,691 1,226,823 $2,470,157 $ 412,455 183,723 264,101 1,388,014 $2,248,293 28 Financials_v5.qxd 2/24/06 3:46 PM Page 29 Management’s Discussion and Analysis Table 26 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 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 Colorado: Demand Interest-bearing: Transaction Savings Time Total interest-bearing Total Colorado Arizona: Demand Interest-bearing: Transaction Savings Time Total interest-bearing Total Arizona 2005 2004 December 31, 2003 2002 2001 $ 1,003,284 $ 1,095,228 $ 1,025,483 $ 1,044,628 $ 992,663 3,002,609 85,837 2,564,338 5,652,784 $ 6,656,068 2,291,089 87,597 2,505,849 4,884,535 $ 5,979,763 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 1,650,269 101,433 2,041,025 3,792,727 $ 4,785,390 $ 615,732 $ 617,808 $ 421,292 $ 394,164 $ 305,745 1,535,570 27,398 735,731 2,298,699 $ 2,914,431 1,119,893 30,331 571,993 1,722,217 $ 2,340,025 1,213,777 35,702 505,463 1,754,942 $ 2,176,234 953,550 33,071 510,512 1,497,133 $ 1,891,297 670,728 28,918 451,031 1,150,677 $ 1,456,422 $ 129,289 $ 136,599 $ 106,050 $ 79,953 $ 57,648 381,099 17,839 453,314 852,252 981,541 10,429 22,354 1,058 75,034 98,446 108,875 61,647 258,668 17,772 264,020 540,460 602,107 45,567 56,994 4,111 5,624 66,729 112,296 $ $ $ $ $ $ $ 320,118 17,885 411,939 749,942 886,541 14,489 26,882 1,434 99,677 127,993 142,482 62,995 189,106 19,092 54,394 262,592 325,587 — — — — — — $ $ $ $ $ $ $ 370,294 20,728 317,924 708,946 814,996 16,351 28,411 1,341 105,598 135,350 151,701 79,424 162,651 18,347 42,448 223,446 302,870 — — — — — — $ $ $ $ $ $ $ 295,174 26,704 287,607 609,485 689,438 12,949 18,025 1,214 134,923 154,162 167,111 — — — — — — — — — — — — $ $ $ $ $ $ $ 224,265 26,848 241,549 492,662 550,310 10,634 14,452 1,035 87,501 102,988 113,622 — — — — — — — — — — — — $ $ $ $ $ $ $ Total BOK Financial deposits $11,375,318 $ 9,674,398 $ 9,219,863 $ 8,128,525 $ 6,905,744 29 Financials_v5.qxd 2/24/06 3:46 PM Page 30 Management’s Discussion and Analysis Borrowings and Capital debt covenant requirements. Capital management may include sub- ordinated debt issuance, share repurchase and stock and cash divi- Parent Company dends. BOK Financial (parent company) has a $100 million unsecured On April 26, 2005, the Board of Directors authorized a share repur- revolving line of credit with certain commercial banks that expires in chase program which replaced a previously authorized program. A December 2010. There was no outstanding principal balance of this maximum of two million common shares may be repurchased. The credit agreement at December 31, 2005. Interest is based upon a specific timing and amount of shares repurchased will vary based on base rate or LIBOR plus a defined margin that is determined by the market conditions, securities law limitations and other factors. Repur- Company’s credit rating. This margin ranges from 0.375% to 1.125%. chases may be made over time in open market or privately negoti- The margin currently applicable to borrowings against this line is ated transactions. The repurchase program may be suspended or 0.500%. The base rate is defined as the greater of the daily federal discontinued at any time without prior notice. Since this program funds rate plus 0.500% or the SunTrust Bank prime rate. Interest is began, 30,000 shares have been repurchased by the Company for generally paid monthly. Facility fees are paid quarterly on the unused $1.3 million. portion of the commitment at rates that range from 0.100% to 0.250% based on the Company’s credit rating. During the second quarter of 2005, the Board of Directors approved the Company’s first quarterly cash dividend of $0.10 per common This credit agreement includes certain restrictive covenants that limit share. The quarterly cash dividend replaced the annual dividend his- the Company’s ability to borrow additional funds, to make invest- torically paid in shares of common stock. Concurrent with the first ments and to pay cash dividends on common stock. These covenants quarterly cash dividend, holders of the Company’s convertible pre- also require BOK Financial and subsidiary banks to maintain mini- ferred stock exercised their conversion rights. All of the Series A Pre- mum capital levels. BOK Financial met all of the restrictive covenants ferred Stock was converted into 6,920,666 common shares. at December 31, 2005. BOK Financial and subsidiary banks are subject to various capital The primary source of liquidity for BOK Financial is dividends from requirements administered by federal agencies. Failure to meet mini- subsidiary banks, which are limited by various banking regulations to mum capital requirements can result in certain mandatory and possi- net profits, as defined, for the preceding two years. Dividends are fur- bly additional discretionary actions by regulators that could have a ther restricted by minimum capital requirements. Based on the most material impact on operations. These capital requirements include restrictive limitations, the subsidiary banks could declare up to $158 quantitative measures of assets, liabilities and off-balance sheet million of dividends without regulatory approval. Management has items. The capital standards are also subject to qualitative judgments developed and the Board of Directors has approved an internal cap- by the regulators. The capital ratios for BOK Financial and each sub- ital policy that is more restrictive than the regulatory capital stan- sidiary bank are presented in Note 16 to the Consolidated Financial dards. The subsidiary banks could declare dividends of up to $86 mil- Statements. lion under this policy. Equity capital for BOK Financial increased $141 million to $1.5 billion during 2005. Retained earnings, net income less cash dividends paid, provided $181 million to this increase. Growth in retained earn- ings was partially offset by a $56 million increase in accumulated other comprehensive losses due primarily to net unrealized losses on available for sale securities. The remaining increase in capital during 2005 resulted primarily from employee stock option transactions. Capital is managed to maximize long-term value to the shareholders. Factors considered in managing capital include projections of future earnings, asset growth and acquisition strategies, and regulatory and 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 included 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 manage- ment process. Note 10 to the Consolidated Financial Statements pro- vides additional information about the subsidiary banks’ borrowings, including maturity and repricing periods and collateral requirements. 30 Financials_v5.qxd 2/24/06 3:46 PM Page 31 Management’s Discussion and Analysis During 2005, Bank of Oklahoma issued $150 million of 10-year, fixed ject to this guarantee is 210,069. The price guarantee is non-trans- rate subordinated debt. The cost of this subordinated debt, including ferable and non-cumulative. BOK Financial may elect, in its sole dis- issuance discounts and hedge loss is 5.43%. The proceeds of this debt cretion, to issue additional shares of common stock or to pay cash to were used to repay $95 million of BOK Financial’s unsecured revolv- satisfy any obligation under the price guarantee. The maximum ing line of credit and to provide additional capital to support asset remaining number of shares that may be issued to satisfy any price growth. In 1997, Bank of Oklahoma issued $150 million of 10-year, 7.125% fixed rate subordinated debt. During 2004, a $150 million notional amount interest rate swap was designated as a hedge of changes in fair value of the subordinated debt due to changes in interest rates. 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, the Company’s ability to pay cash to satisfy any price guarantee obligations is limited by applicable banking capital and dividend regulations. The Company receives a fixed rate of 3.165% and pays a variable The Company will have no obligation to issue additional common rate based on 1-month LIBOR. Semi-annual swap settlements coin- shares or pay cash to satisfy any benchmark price protection obliga- cide with interest payments on the subordinated debenture. The tion if the market value per share of BOK Financial common stock interest rate swap terminates on August 15, 2007, the maturity date remains above the highest benchmark price of $42.53. The closing of the subordinated debt. price of the Company’s common stock on December 31, 2005 was $45.43. Off-Balance Sheet Arrangements During 2002, BOK Financial agreed to a limited price guarantee on Aggregate Contractual Obligations a portion of the common shares issued to purchase Bank of Tangle- BOK Financial has numerous contractual obligations in the normal wood. The fair value of this guarantee, estimated to be $3 million course of business. These obligations include time deposits and other based upon the Black-Scholes option pricing model, was included in borrowed funds, premises used under various operating leases, com- the purchase price. Any holder of BOK Financial common shares mitments to extend credit to borrowers and to purchase securities, issued in this acquisition may annually make a claim for the excess of derivative contracts and contracts for services such as data process- the guaranteed price and the actual sales price of any shares sold ing that are integral to our operations. The following table summa- during a 60-day period after each of the first five anniversary dates rizes payments due per these contractual obligations at December after October 25, 2002. The maximum annual number of shares sub- 31, 2005. Table 27 Contractual Obligations as of December 31, 2005 (In Thousands) 4 to 5 Years $ 690,977 14,526 15,000 22,090 13,975 13,868 $ 770,436 More Than 5 Years $ 446,834 11,910 183,125 29,883 805 — $ 672,557 Total $3,477,149 1,078,606 398,680 93,264 452,014 51,379 $5,551,092 Time deposits Other borrowings Subordinated debentures Operating lease obligations Derivative contracts Data processing contracts Total Less Than 1 Year $1,010,487 1,046,357 18,188 14,963 308,823 13,967 $2,412,785 Loan commitments Standby letters of credit Unfunded third-party private equity investments Deferred compensation and stock-based compensation obligations 1 to 3 Years $1,328,851 5,813 182,367 26,328 128,411 23,544 $1,695,314 $4,349,114 558,907 16,438 18,278 31 Financials_v5.qxd 2/24/06 3:46 PM Page 32 Management’s Discussion and Analysis Payments on time deposits and other borrowed funds include inter- Market Risk est, which has been calculated from rates at December 31, 2005. Many of these obligations have variable interest rates, and actual payments will differ from the amounts shown on this table. Obliga- tions under derivative contracts used for interest rate risk manage- ment purposes are included with projected payments from time deposits and other borrowed funds as appropriate. Only time deposits with original terms exceeding one year are pre- sented in Table 27. Payments on time deposits are based on contrac- tual 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. Data processing contracts represent the minimum obligations under the contracts. Additional payments that are based on the volume of transactions processed are excluded. Loan commitments represent legally binding obligations to provide financing to our customers. Since some of these commitments are expected to expire before being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. Market risk is a broad term for the risk of economic loss due to adverse changes in the fair value of a financial instrument. These changes may be the result of various factors, including interest rates, foreign exchange prices, commodity prices or equity prices. Financial instruments that are subject to market risk can be classified either as held for trading or held for purposes other than trading. BOK Financial is subject to market risk primarily through the effect of changes in interest rates on both its assets held for purposes other than trading and trading assets. The effects of other changes, such as foreign exchange rates, commodity prices or equity prices, do not pose significant market risk to BOK Financial. BOK Financial has no material investments in assets that are affected by changes in foreign exchange rates or equity prices. Energy derivative contracts, which are affected by changes in commodity prices, are matched against offsetting contracts as previously discussed. Responsibility for managing market risk rests with the Asset / Liabil- ity Committee that operates under policy guidelines established by the Board of Directors. The acceptable negative variation in net inter- est revenue, net income or economic value of equity due to a speci- fied basis point increase or decrease in interest rates is generally lim- ited by these guidelines to +/– 10%. These guidelines also set maximum levels for short-term borrowings, short-term assets, public Obligations under derivative contracts relate to customer hedging funds and brokered deposits, and establish minimum levels for un- programs. As previously discussed, we have entered into derivative pledged assets, among other things. Compliance with these guide- contracts that are expected to substantially offset the cash payments lines is reviewed monthly. due on these obligations. The Company has commitments to make investments through its Interest Rate Risk — Other than Trading BOK Financial Private Equity Fund. These commitments generally reflect customer investment obligations. BOK Financial has a large portion of its earning assets in variable rate loans and a large portion of its liabilities in demand deposit The Company has compensation and employment agreements with accounts and interest-bearing transaction accounts. Changes in its President and Chief Executive Officer. Collectively, these agree- interest rates affect earning assets more rapidly than interest-bearing ments provide, among other things, that all unvested stock-based liabilities in the short-term. Management has adopted several strate- compensation shall fully vest upon his termination, subject to certain gies to reduce this interest rate sensitivity. As previously noted in the conditions. These agreements also provide for settlement in cash or Net Interest Revenue section of this report, management acquires other assets. We currently have recognized an $11.7 million liability for securities that are funded by borrowings in the capital markets. These these plans. This liability would increase to $13.0 million if all awards securities have an expected average duration of 2.8 years while the were fully vested. We also have obligations with respect to employee related funds borrowed have an average duration of 90 days. and executive benefit plans. See Notes 12 and 13 to the Consolidated Financial Statements. 32 Financials_v5.qxd 2/24/06 3:46 PM Page 33 Management’s Discussion and Analysis BOK Financial also uses interest rate swaps to manage its interest rate The Company’s primary interest rate exposures include the Federal sensitivity. These products are generally used to more closely match Funds rate, which affects short-term borrowings, and the prime lending interest on certain fixed rate loans with funding sources and long-term rate and LIBOR, which are the basis for much of the variable rate loan certificates of deposit with earning assets. Net interest revenue pricing. Additionally, mortgage rates directly affect the prepayment decreased $1.4 million in 2005 and increased $9.9 million in 2004 speeds for mortgage-backed securities and mortgage servicing rights. from periodic settlements of these contracts. These contracts are car- Derivative financial instruments and other financial instruments used ried on the balance sheet at fair value and changes in fair value are for purposes other than trading are included in this simulation. The reported in income as derivatives gains or losses. A net gain of $1.1 mil- model incorporates assumptions regarding the effects of changes in lion was recognized in 2005 compared with a net loss of $1.3 million interest rates and account balances on indeterminable maturity in 2004 from adjustments of these swaps and hedged liabilities to fair deposits based on a combination of historical analysis and expected value. Credit risk from these swaps is closely monitored as part of our behavior. The impact of planned growth and new business activities is overall process of managing credit exposure to other financial institu- factored into the simulation model. The effects of changes in interest tions. Additional information regarding interest rate swap contracts is rates on the value of mortgage servicing rights are excluded from presented in Note 4 to the Consolidated Financial Statements. Table 28 due to the extreme volatility over such a large rate range. The 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 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. interest rate risk exposures, including embedded option positions, on The simulations used to manage market risk are based on numerous net interest revenue, net income and economic value of equity. A sim- assumptions regarding the effects of changes in interest rates on the ulation model is used to estimate the effect of changes in interest timing and extent of repricing characteristics, future cash flows and rates over the next 12 and 24 months based on eight interest rate sce- customer behavior. These assumptions are inherently uncertain, and, narios. Two specified interest rate scenarios are used to evaluate as a result, the model cannot precisely estimate net interest revenue, interest rate risk against policy guidelines. The first assumes a sus- net income or economic value of equity or precisely predict the tained parallel 200 basis point increase and the second assumes a impact of higher or lower interest rates on net interest revenue, net sustained parallel 200 basis point decrease in interest rates. The income or economic value of equity. Actual results will differ from sim- Company also performs a sensitivity analysis based on a “most likely” ulated results due to timing, magnitude and frequency of interest rate interest rate scenario, which includes non-parallel shifts in interest changes, market conditions and management strategies, among rates. An independent source is used to determine the most likely other factors. interest rate scenario. Table 28 Interest Rate Sensitivity (Dollars in Thousands) Anticipated impact over the next twelve months on net interest revenue 200 bp Increase 2004 2005 200 bp Decrease 2005 2004 Most Likely 2005 2004 $ 7,334 $ 7,969 1.5% 1.8% $ (7,295) (1.5)% *** *** $ 5,675 $ 5,893 1.2% 1.3% *** A 200 basis point decrease was not computed in 2004 due to low market interest rates. 33 Financials_v5.qxd 2/24/06 3:46 PM Page 34 Management’s Discussion and Analysis Trading Activities BOK Financial enters into trading activities both as an intermediary for customers and for its own account. As an intermediary, BOK Financial will take positions in securities, generally mortgage- backed securities, government agency securities and municipal bonds. These securities are purchased for resale to customers, which include individuals, corporations, foundations and financial institutions. BOK Financial will also take trading positions in U.S. Treasury securities, mortgage-backed securities, municipal bonds pensation issued to employees. Previously, FAS 123 recommended, but did not require income statement recognition of the fair value of equity-based compensation. FAS 123R also requires that share-based payments that meet specified criteria be classified as liability awards and carried at current fair value. Fair value is determined at each bal- ance sheet date until the award is settled. Share-payments that will be settled in equity instruments are measured at grant-date fair value and not re-measured for subsequent changes in fair value. FAS 123R was effective for annual periods beginning on or after June 15, 2005. and financial futures for its own account. These positions are taken We previously adopted the preferred income statement recognition with the objective of generating trading profits. Both of these activ- methods of the original FAS 123. Management does not expect FAS ities involve interest rate risk. 123R to have a significant effect on its financial statements. A variety of methods are used to manage the interest rate risk of FSP 115-1 and FAS 124-1 The Meaning of Other-Than-Temporary trading activities. These methods include daily marking of all positions Impairment and its Application to Certain Investments (“FSP 115-1”) 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. FSP 115-1 addressed the determination as to when an investment is considered impaired, whether that impairment is other-than-tempo- rary and the measurement of an impairment loss. It also addressed accounting considerations subsequent to the recognition of an other- Management uses a Value at Risk (“VAR”) methodology to measure than-temporary impairment and disclosures about unrealized losses the market risk inherent in its trading activities. VAR is calculated that have not been recognized. based upon historical simulations over the past five years using a vari- ance / 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 $1.8 million. At December 31, 2005, the VAR was $241 thousand. The greatest value at risk during 2005 was $1.8 million. Recently Issued Accounting Standards Financial Accounting Standards Board Statement of Financial Accounting Standards 123R, “Share-Based Payments” (“FAS 123R”) FAS 123R requires companies to recognize in income statements the grant-date fair value of stock options and other equity-based com- An investment is considered impaired when its fair value is less than cost. Determination of when an unrealized loss must be recognized as an other-than-temporary impairment is based on an assessment of factors, including the nature of the asset, the financial condition and near-term prospects of the issuer, whether the asset can be prepaid by the issuer in a manner that the investor will not recover its invest- ment, the severity and duration of the impairment and the investor’s ability and intent to hold the asset until the fair value recovers. FSP 115-1 was effective for reporting periods beginning after Decem- ber 15, 2005. Guidance provided by FSP 115-1 had previously been issued in other authoritative literature, including SEC Staff Account- ing Bulletin No. 59, and we do not expect a significant impact on future financial statements. 34 Financials_v5.qxd 2/24/06 3:46 PM Page 35 Management’s Discussion and Analysis 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 discus- sion 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 ference 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 technolog- ical 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. Legal Notice statements are not guarantees of future performance and involve As used in this report, the term “BOK Financial” and such terms as certain risks, uncertainties and assumptions that are difficult to pre- “the Company,” “the Corporation,” “our,” “we” and “us” may refer to dict with regard to timing, extent, likelihood and degree of occur- one or more of the consolidated subsidiaries or all of them taken as rence. Therefore, actual results and outcomes may materially differ a whole. All these terms are used for convenience only and are not from what is expressed, implied or forecasted in such forward-looking intended as a precise description of any of the separate companies, statements. Internal and external factors that might cause such a dif- each of which manages its own affairs. 35 Financials_v5.qxd 2/24/06 3:46 PM Page 36 Report of Management on Financial Statements Management of BOK Financial is responsible for the preparation, Management’s Report on Internal Control over Financial Reporting integrity and fair presentation of the consolidated financial state- Management is responsible for establishing and maintaining ade- ments included in this annual report. The consolidated financial quate internal control over financial reporting and for assessing the statements have been prepared in accordance with accounting prin- effectiveness of internal control over financial reporting, as such term ciples generally accepted in the United States and necessarily is defined in Exchange Act Rules 13a-15(f) and 15d-15(f). Management include some amounts that are based on our best estimates and has assessed the effectiveness of the Company’s internal control over judgments. Management, under the supervision of the Chief Executive Officer and the Chief Financial Officer, conducted an assessment of inter- nal control over financial reporting as of December 31, 2005. Inter- nal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting financial reporting based on the criteria established in “Internal Con- trol — Integrated Framework,” issued by the Committee of Sponsor- ing Organizations (“COSO”) of the Treadway Commission. Based on that assessment and criteria, management has determined that the Company maintained effective internal control over financial report- ing as of December 31, 2005. and the preparation of the Company’s consolidated financial state- Ernst & Young LLP, the independent registered public accounting firm ments for external purposes in accordance with accounting princi- that audited the consolidated financial statements of the Company ples generally accepted in the United States. In establishing internal included in this annual report, has issued an audit report on man- control over financial reporting, management assesses risk and agement’s assessment of the effectiveness of the Company’s internal designs controls to prevent or detect financial reporting misstate- control over financial reporting as of December 31, 2005. Their ments that may be consequential to a reader. Management also report, which expresses unqualified opinions on management’s assesses the impact of any internal control deficiencies and over- assessment and on the effectiveness of the Company’s internal con- sees efforts to continuously improve internal control over financial trol over financial reporting as of December 31, 2005, is included in reporting. Because of inherent limitations, it is possible that internal this annual report. controls may not prevent or detect misstatements, and it is possible that internal controls may vary over time based on changing condi- tions. There have been no material changes in internal controls sub- sequent to December 31, 2005. The Risk Oversight and Audit Committee, consisting entirely of inde- pendent directors, meets regularly with management, internal audi- tors and the independent registered public accounting firm, Ernst & Young LLP, regarding management’s assessment of internal control over financial reporting. 36 Financials_v5.qxd 2/24/06 3:46 PM Page 37 Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm Report on Consolidated Financial Statements 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, 2005 and 2004, and the consolidated results of its operations and its cash flows for each of the three years in the period ended December 31, 2005, in con- The Board of Directors and Shareholders of BOK Financial formity with U.S. generally accepted accounting principles. Corporation We also have audited, in accordance with the standards of the Pub- We have audited the accompanying consolidated balance sheets of lic Company Accounting Oversight Board (United States), the effec- BOK Financial Corporation as of December 31, 2005 and 2004, tiveness of BOK Financial Corporation’s internal control over finan- and the related consolidated statements of earnings, shareholders’ cial reporting as of December 31, 2005, based on criteria established equity, and cash flows for each of the three years in the period ended in Internal Control — Integrated Framework issued by the Committee December 31, 2005. These financial statements are the responsibil- ity of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits. of Sponsoring Organizations of the Treadway Commission and our report dated March 10, 2006 expressed an unqualified opinion thereon. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain rea- sonable 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 princi- ples 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. Ernst & Young LLP Tulsa, Oklahoma March 10, 2006 37 Financials_v5.qxd 2/24/06 3:46 PM Page 38 Reports of Ernst & Young LLP, Independent Registered Public Accounting Firm Report on Effectiveness of Internal Control over Financial Reporting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the mainte- nance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accor- The Board of Directors and Shareholders of BOK Financial dance with generally accepted accounting principles, and that Corporation We have audited management’s assessment, included in the accom- panying Management’s Report on Internal Control over Financial Reporting, that BOK Financial Corporation maintained effective internal control over financial reporting as of December 31, 2005, based on criteria established in Internal Control—Integrated Frame- receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding preven- tion or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. work issued by the Committee of Sponsoring Organizations of the Because of its inherent limitations, internal control over financial Treadway Commission (the COSO criteria). BOK Financial Corpora- reporting may not prevent or detect misstatements. Also, projections tion’s management is responsible for maintaining effective internal of any evaluation of effectiveness to future periods are subject to the control over financial reporting and for its assessment of the effec- risk that controls may become inadequate because of changes in tiveness of internal control over financial reporting. Our responsibility conditions, or that the degree of compliance with the policies or pro- is to express an opinion on management’s assessment and an opin- cedures may deteriorate. ion on the effectiveness of the company’s internal control over finan- cial reporting based on our audit. In our opinion, management’s assessment that BOK Financial Cor- poration maintained effective internal control over financial reporting We conducted our audit in accordance with the standards of the as of December 31, 2005, is fairly stated, in all material respects, Public Company Accounting Oversight Board (United States). Those based on the COSO criteria. Also, in our opinion, BOK Financial Cor- standards require that we plan and perform the audit to obtain rea- poration maintained, in all material respects, effective internal control sonable assurance about whether effective internal control over over financial reporting as of December 31, 2005, based on the financial reporting was maintained in all material respects. Our audit COSO criteria. included obtaining an understanding of internal control over financial reporting, evaluating management’s assessment, testing and evalu- ating the design and operating effectiveness of internal control, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting We also have audited, in accordance with the standards of the Pub- lic Company Accounting Oversight Board (United States), the 2005 consolidated financial statements of BOK Financial Corporation and our report dated March 10, 2006 expressed an unqualified opinion thereon. Ernst & Young LLP Tulsa, Oklahoma March 10, 2006 38 Financials_v5.qxd 2/24/06 3:46 PM Page 39 Consolidated Financial Statements Consolidated Statements of Earnings (In Thousands Except Share And Per Share Data) 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 Credit Losses Net Interest Revenue After Provision for Credit 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 Other revenue Total fees and commissions Gain on sales of assets Gain (loss) on securities, net Gain (loss) on derivatives, net Total other operating revenue Other Operating Expense Personnel Business promotion Contribution of stock to BOK Charitable Foundation Professional fees and services Net occupancy and equipment Data processing and communications Printing, postage and supplies Net (gains) losses and operating expenses on repossessed assets Amortization of intangible assets Mortgage banking costs Recovery for impairment of mortgage servicing rights Other expense Total other operating expense Income Before Taxes Federal and state income tax Net Income Earnings Per Share: Basic Diluted Average Shares Used in Computation: Basic Diluted 2005 554,691 205,952 7,329 213,281 675 1,287 769,934 210,400 95,826 14,367 320,593 449,341 12,441 436,900 44,222 72,036 65,187 98,361 30,681 35,114 345,601 7,061 (6,895) 1,179 346,946 258,971 17,964 — 16,596 50,195 67,026 15,066 572 6,943 14,562 (3,915) 25,126 469,106 314,740 113,235 201,505 3.14 3.01 $ $ $ $ 2004 2003 $ $ $ $ 408,115 197,884 7,359 205,243 573 353 614,284 144,433 38,847 7,761 191,041 423,243 20,439 402,804 41,107 64,816 57,532 93,712 28,189 27,209 312,565 887 (3,088) (1,474) 308,890 240,661 15,618 5,561 15,487 47,289 60,025 14,034 (4,016) 8,138 18,167 (1,567) 21,827 441,224 270,470 91,447 179,023 3.00 2.68 $ $ $ $ 375,788 180,581 7,898 188,479 625 281 565,173 131,929 32,272 9,477 173,678 391,495 35,636 355,859 41,152 57,352 45,763 82,042 52,336 27,573 306,218 822 7,188 (9,375) 304,853 222,922 12,937 — 17,935 45,967 53,398 13,930 271 8,101 40,296 (22,923) 20,604 413,438 247,274 88,914 158,360 2.67 2.38 64,067,873 67,047,064 59,128,395 66,732,496 58,699,951 66,509,121 See accompanying notes to consolidated financial statements. 39 Financials_v5.qxd 2/24/06 3:46 PM Page 40 Consolidated Financial Statements 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: 2005 — $243,406; 2004 — $222,636) Total securities Loans Less reserve for loan losses Loans, net of reserve 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 debentures Accrued interest, taxes and expense Bankers’ acceptances Due on unsettled security transactions Derivative contracts Other liabilities Total liabilities December 31, 2005 2004 $ 684,857 14,465 18,633 4,821,575 — 245,125 5,066,700 9,139,978 (103,876) 9,036,102 179,627 99,874 263,022 54,097 8,476 33,001 — 452,878 341,175 $16,252,907 $ 503,715 27,376 9,692 4,080,696 512,494 221,094 4,814,284 7,928,967 (108,618) 7,820,349 172,643 79,644 242,594 45,678 3,763 31,799 56,873 130,297 206,953 $14,145,660 $ 1,865,948 $ 1,927,119 5,257,295 154,015 4,098,060 11,375,318 1,337,911 1,054,298 295,964 18,057 33,001 8,429 466,669 124,106 14,713,753 3,947,088 156,339 3,643,852 9,674,398 1,555,507 1,015,000 151,594 71,062 31,799 — 137,538 110,268 12,747,166 Shareholders’ equity: Preferred stock Common stock ($.00006 par value; 2,500,000,000 shares authorized; shares issued and outstanding: 2005 — 67,904,533; 2004 — 60,420,811) Capital surplus Retained earnings Treasury stock (shares at cost: 2005 — 1,202,125; 2004 — 998,393) Accumulated other comprehensive loss Total shareholders’ equity Total liabilities and shareholders’ equity See accompanying notes to consolidated financial statements. — 12 4 656,579 990,422 (40,040) (67,811) 1,539,154 $16,252,907 4 631,747 809,261 (30,905) (11,625) 1,398,494 $14,145,660 40 Financials_v5.qxd 2/24/06 3:46 PM Page 41 Consolidated Financial Statements 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: Provision for credit losses Recovery for mortgage servicing rights impairment Unrealized losses from derivatives Depreciation and amortization Tax benefit on exercise of stock options Stock-based compensation Net (accretion) amortization of securities discounts and premiums Net gain on sale of assets Contribution of stock to BOK Charitable Foundation 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 Net payments or proceeds 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 revolving line of credit Issuance of preferred, common and treasury stock, net Issuance of subordinated debenture Net change in derivative margin accounts Net payments or proceeds on derivative liability contracts Repurchase of common stock 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 See accompanying notes to consolidated financial statements. 41 2005 2004 2003 $ 201,505 $ 179,023 $ 158,360 12,441 (3,915) 8,463 44,860 3,583 4,848 (1,159) (15,230) — (783,498) 770,115 (8,941) (20,230) 17,592 (53,005) 33,102 210,531 1,537,628 54,336 868,401 (78,675) (2,731,763) (1,287,158) 4,290 33,718 88,527 (49,199) (29,093) (1,588,988) 1,246,713 457,412 (83,299) 65,302 (95,000) 7,032 147,855 (167,137) (9,407) (2,439) (20,344) 1,546,688 168,231 531,091 699,322 312,200 104,543 11,633 — $ $ 20,439 (1,567) 6,124 47,298 4,609 11,306 (3,116) (11,678) 5,561 (635,624) 666,549 (1,869) (4,664) (48,766) (14,722) 39,218 258,121 2,652,554 61,583 1,036,014 (94,947) (3,800,015) (554,128) (9,368) 3,208 69,320 (34,404) 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) — (670,183) 2,123 (1,417,176) 185,409 269,126 (55,811) (65,132) — 7,132 — (50,202) 10,259 — (1,540) 299,241 (112,821) 643,912 531,091 192,187 95,282 6,013 65,899 984,603 107,522 65,610 74,160 (95,000) 4,627 — (31,763) 45,538 — (785) 1,154,512 19,697 624,215 643,912 176,225 81,596 6,378 58,300 $ $ $ $ Financials_v5.qxd 2/24/06 3:46 PM Page 42 Consolidated Financial Statements Consolidated Statements of Changes in Shareholders’ Equity (In Thousands) December 31, 2002 Comprehensive income: Net income Other comprehensive loss, net of tax Comprehensive income Exercise of stock options Tax benefit on exercise of stock options Stock-based compensation Cash dividends on preferred stock Redeem nonvoting preferred units Dividends paid in shares of common stock: Preferred stock Common stock December 31, 2003 Comprehensive income: Net income Other comprehensive loss, net of tax Comprehensive income Exercise of stock options Conversion of preferred stock to common Tax benefit on exercise of stock options Stock-based compensation Cash dividends on preferred stock Dividends paid in shares of common stock December 31, 2004 Comprehensive income: Net income Other comprehensive loss, net of tax Comprehensive income Treasury stock purchase Exercise of stock options Conversion of preferred stock to common Tax benefit on exercise of stock options Stock-based compensation Cash dividends on: Preferred stock Common stock December 31, 2005 See accompanying notes to consolidated financial statements. Preferred Stock Shares 250,000 Amount $25 Common Stock Shares 55,750 Amount $ 3 — — 603 — — — — 23 1,680 58,056 — — 616 — — — — 1,749 60,421 — — — 563 6,921 — — — — — — — — — — 1 4 — — — — — — — — 4 — — — — — — — — — 67,905 — — $ 4 — — — — — — — — — 250,000 — — — (25) — — — — 249,975 — — — — (249,975) — — — — — — — — — — — (13) — — 12 — — — — — — — — 12 — — — — (12) — — — — $ — 42 Financials_v5.qxd 2/24/06 3:46 PM Page 43 Consolidated Financial Statements Accumulated Other Comprehensive Income (Loss) $ 43,088 — (34,629) — — — — — — — 8,459 — (20,084) — — — — — — (11,625) — (56,186) — — — — — Capital Surplus $475,054 — — 10,953 1,325 219 — — 750 58,293 546,594 — — 12,507 — 4,609 1,099 — 66,938 631,747 — — — 13,728 12 3,583 7,509 Retained Earnings $598,777 158,360 — — — — (750) — (750) (57,585) 698,052 179,023 — — — — — (1,875) (65,939) 809,261 201,505 — — — — — — Treasury Stock Shares 683 Amount $(17,421) Total $1,099,526 — — 145 — — — — — 21 849 — — 122 — — — — 27 998 — — 60 144 — — — — — (6,326) — — — — — (744) (24,491) — — (5,375) — — — — (1,039) (30,905) — — (2,439) (6,696) — — — 158,360 (34,629) 123,731 4,627 1,325 219 (750) (13) — (35) 1,228,630 179,023 (20,084) 158,939 7,132 — 4,609 1,099 (1,875) (40) 1,398,494 201,505 (56,186) 145,319 (2,439) 7,032 — 3,583 7,509 — — $(67,811) — — $656,579 (375) (19,969) $990,422 — — 1,202 — — $ (40,040) (375) (19,969) $1,539,154 43 Financials_v5.qxd 2/24/06 3:46 PM Page 44 Notes to Consolidated Financial Statements (1) Significant Accounting Policies Use of Estimates Basis of Presentation The Consolidated Financial Statements of BOK Financial Corpora- tion (“BOK Financial” or “the Company”) have been prepared in con- formity with accounting principles generally accepted in the United States, including general practices of the banking industry. The con- Preparation of BOK Financial’s consolidated financial statements requires management to make estimates of future economic activi- ties, including loan collectibility, prepayments and cash flows from customer accounts. These estimates are based upon current condi- tions and information available to management. Actual results may differ significantly from these estimates. solidated financial statements include the accounts of BOK Financial and its subsidiaries, principally Bank of Oklahoma, N.A. and its sub- Acquisitions sidiaries (“BOk”), Bank of Texas, N.A., Bank of Arkansas, N.A., Bank of Albuquerque, N.A., Colorado State Bank and Trust, N.A., Bank of Ari- zona, N.A. and BOSC, Inc. Assets and liabilities acquired, including identifiable intangible assets, are recorded at fair values on the acquisition dates. The Consoli- dated Statements of Earnings include the results of operations from During 2005, the Company adopted FASB Interpretation No. 39, the dates of acquisition. “Offsetting Amounts Related to Certain Contracts” (“FIN 39”). FIN 39 permits, but does not require, reporting derivative assets and liabili- Intangible Assets ties on a net by counterparty basis provided certain specified criteria are met. These criteria require written bilateral netting agreements between the Company and each of its counterparties that create a single legal claim or obligation to pay or receive the net amount in settlement of the individual derivative contracts. Amounts reported for derivative assets and liabilities in prior periods have been reclas- sified for consistent presentation. The consolidated financial statements would also include the assets, liabilities, non-controlling interests and results of operations of variable interest entities (“VIEs”) when BOK Financial is determined to be the primary beneficiary. Variable interest entities are generally defined in FASB Interpretation No. 46R, “Consolidation of Variable Interest Enti- ties,” 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. BOK Financial is not the primary beneficiary in any VIE that would be significant to its operations. Nature of Operations Intangible assets, which generally result from business combinations, are accounted for under the provisions of Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets,” and No. 147, “Acquisitions of Certain Financial Institutions.” Intangible assets with indefinite lives, such as goodwill, are evaluated for each of BOK Financial’s business units for impairment 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. Core deposit intangible assets are amortized using accelerated methods over the estimated lives of the acquired deposits. These assets generally have a weighted average life of 5 years. Other intan- BOK Financial, through its subsidiaries, provides a wide range of gible assets are amortized using accelerated or straight-line methods, financial services to commercial and industrial customers, other finan- as appropriate, over the estimated benefit periods. These periods cial institutions and consumers throughout Oklahoma; Northwest range from 5 years to 20 years. The net book values of core deposit Arkansas; Dallas and Houston, Texas; Albuquerque, New Mexico; intangible assets are evaluated for impairment when economic con- Denver, Colorado, and Phoenix, Arizona. These services include ditions indicate impairment may exist. depository and cash management; lending and lease financing; mortgage banking; securities brokerage, trading and underwriting; and personal and corporate trust. 44 Financials_v5.qxd 2/24/06 3:46 PM Page 45 Notes to Consolidated Financial Statements Cash Equivalents Derivative Instruments Due from banks, funds sold (generally federal funds sold for one-day Derivative instruments may be used by the Company as part of its periods) and resell agreements (which generally mature within one to interest rate risk management programs or may be offered to cus- 30 days) are considered cash equivalents. tomers. All derivative instruments are carried at fair value. The deter- Securities mination of fair value of derivative instruments considers changes in interest rates, commodity prices, foreign exchange rates and coun- terparty credit ratings, when appropriate. Changes in fair value are Securities are identified as trading, investment (held to maturity) or generally reported in income as they occur. available for sale at the time of purchase based upon the intent of management, liquidity and capital requirements, regulatory limita- tions 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 cer- tain 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, prospects for recovery and manage- ment’s intent and ability to hold the security until the fair value exceeds amortized cost. An impairment charge is recorded against Derivative instruments used to manage interest rate risk consist pri- marily of interest rate swaps. These contracts modify the interest income or expense of certain assets or liabilities. Amounts receivable from or payable to counterparties are reported in interest income or expense using the accrual method. Changes in fair value of interest rate swaps are reported in other operating revenue — gains or losses on derivatives. In certain circumstances, interest rate swaps may be designated as fair value hedges and may qualify for hedge accounting. In these circum- stances, changes in the fair value of the hedged asset or liability that are attributable to the hedged risk are also reported in other operat- ing revenue — gains or losses on derivatives, and may partially or com- pletely offset the change in fair value of the interest rate swap. Fair value hedges are considered to be effective if the cumulative fair value adjustment of the interest rate swap is within a range of 80% to 120% of the change in fair value of the hedged asset or liability. earnings if the loss is determined to be other than temporary. Real- Interest rate swaps may be designated as cash flow hedges of vari- ized gains and losses on sales of securities are based upon the amor- able rate assets or liabilities, or of anticipated transactions. Changes tized cost of the specific security sold. Available for sale securities are in the fair value of interest rate swaps designated as cash flow separately identified as pledged to creditors if the creditor has the hedges are recorded in accumulated other comprehensive income to right to sell or repledge the collateral. the extent they are effective. The amount recorded in other compre- 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- hensive income is reclassified to earnings in the same periods as the hedged cash flows impact earnings. The ineffective portion of changes in fair value is reported in current earnings. announced mortgage-backed securities. These commitments are car- If a derivative instrument that had been designated as a fair value ried at fair value if they are considered derivative contracts. These hedge is terminated or if the hedge designation is removed or commitments are not reflected in BOK Financial’s balance sheet until deemed to no longer be effective, the difference between the hedged settlement date if they meet specific criteria exempting them from the item’s carrying value and its face amount is recognized into income definition of derivative contracts. over the remaining original hedge period. Similarly, if a derivative instrument that had been designated as a cash flow hedge is termi- nated or if the hedge designation is removed or deemed to no longer 45 Financials_v5.qxd 2/24/06 3:46 PM Page 46 Notes to Consolidated Financial Statements be effective, the amount remaining in accumulated other compre- Loan origination and commitment fees and direct loan acquisition hensive income is reclassified to earnings in the same period as the and origination costs, when significant, are deferred and amortized hedged item. as an adjustment to yield over the life of the loan or over the commit- BOK Financial also enters into mortgage loan commitments that are ment period, as applicable. considered derivative instruments. Forward sales contracts are used Mortgage loans held for sale are carried at the lower of aggregate to hedge these mortgage loan commitments as well as mortgage cost or market value. Mortgage loans held for sale that are desig- loans held for sale. Mortgage loan commitments are carried at fair nated as hedged assets are carried at fair value based on sales com- value based upon quoted prices, excluding the value of loan servicing mitments or market quotes. Changes in fair value after the date of rights or other ancillary values. Changes in fair value of the mortgage designation of an effective hedge are recorded in other operating loan commitments and forward sales contracts are reported in other revenue — mortgage banking revenue. operating revenue — mortgage banking revenue. Derivative contracts are also offered to customers to assist in hedging their risks of adverse changes in commodity 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 customers is offset by a contract between BOK Finan- cial and various counterparties. These contracts are carried at fair value. Compensation for credit risk and reimbursement of administra- tive costs are recognized over the life of the contracts and included in other operating revenue — brokerage and trading revenue. 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 nonac- crual 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. Reserve for Loan Losses and Off-Balance Sheet Credit Losses Reserves for loan losses and off-balance sheet credit losses are assessed by management, based upon an ongoing quarterly evalu- ation of the probable estimated losses inherent in the portfolio, and includes probable losses on both outstanding loans and unused commitments to provide financing. A consistent methodology has been developed that includes reserves assigned to specific criticized loans, general reserves that are based upon statistical migration analyses for each category of loans, and a nonspecific allowance that is based upon an analysis of current economic conditions, loan concentrations, portfolio growth and other relevant factors. The reserve for loan losses related to loans that are identified for evalu- ation in accordance with Statement of Financial Accounting Stan- dards 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 col- lect 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 mort- gage 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 gen- 46 Financials_v5.qxd 2/24/06 3:46 PM Page 47 Notes to Consolidated Financial Statements erally accepted accounting principles and standards established by Premises and Equipment the banking regulatory authorities and adopted as policy by BOK Financial. A provision for credit losses is charged against earnings in amounts necessary to maintain adequate reserves for loan and off-balance sheet credit 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 Premises and equipment are carried at cost including capitalized interest, when appropriate, less accumulated depreciation and amor- tization. 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. Useful lives range from 5 years to 40 years for buildings and improvements, 3 years to 7 years for software and 3 years to 10 years for furniture and equipment. Repair and mainte- charge-offs are taken in the quarter in which the loss is identified. nance costs are charged to expense as incurred. 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. Rent expense for leased premises is recognized as incurred over the lease term. The effects of rent holidays, significant rent escalations and other adjustments to rent payments are recognized over the Transfers of Financial Assets lease term. BOK Financial transfers pools of financial assets as part of its mort- Mortgage Servicing Rights gage banking activities and periodically may transfer other financial assets. These transfers are recorded as sales for financial reporting purposes when the criteria for surrender of control specified in State- ment 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 and may incur a recourse obligation. The carrying value of the assets sold is allocated between the financial components sold and retained based on relative fair values. The fair value of the retained assets is determined by a discounting of expected future net cash to be received using assumed market interest rates for these instru- ments. Residual interests are carried at fair value. Changes in fair val- ues 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 par- tial or total forgiveness of loans. These assets are carried at the lower of cost, which is determined by fair value at date of foreclosure, or cur- rent fair value. Income generated by these assets is recognized as Capitalized mortgage servicing rights are carried at the lower of amortized cost 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. There is no active market for trading in mortgage servicing rights. A cash flow model is used to determine fair value. Key assumptions and estimates including projected prepayment speeds and assumed serv- icing costs, earnings on escrow deposits, ancillary income and dis- count rates used by this model are based on current market sources. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan cur- tailment, anticipated defaults and other relevant factors. The pre- payment model is updated daily for changes in market conditions. At least annually, we request estimates of fair value from outside sources to corroborate the results of the valuation model. Permanent impairment of mortgage servicing rights is evaluated quarterly. A strata is considered to be permanently impaired if the fair value does not exceed amortized cost after assuming a 300 basis point increase in mortgage interest rates. The amortized cost of the asset is reduced to the calculated fair value through a charge against received, and operating expenses are recognized as incurred. the valuation allowance. 47 Financials_v5.qxd 2/24/06 3:46 PM Page 48 Notes to Consolidated Financial Statements Originated mortgage servicing rights are recognized when either annually. Unrecognized prior service cost and net gains or losses are mortgage loans are originated pursuant to an existing plan for sale amortized on a straight-line basis over the lesser of the average or, if no such plan exists, when the mortgage loans are sold. The fair remaining service periods of the participants or 10 years. Employer value of the originated servicing rights is determined at closing based contributions to the Pension Plan are in accordance with Federal upon relative fair value. Purchased mortgage servicing rights are income tax regulations. recorded at cost. Federal and State Income Taxes BOK Financial and its subsidiaries file consolidated tax returns. The subsidiaries provide for income taxes on a separate return basis and Employer contributions to the Thrift Plans, which match employee contributions subject to percentage and years of service limits, are expensed when incurred. BOK Financial recognizes the expense of health care benefits on the accrual method. remit to BOK Financial amounts determined to be currently payable. Stock Compensation Plans Current income tax expense is based on an effective tax rate that BOK Financial has adopted the expense recognition provisions of considers statutory federal and state income tax rates and perma- Financial Accounting Standards Board Statement No. 123, “Accounting nent differences between income and expense recognition for finan- for Stock-Based Compensation” (“FAS 123”), as amended by Statement cial reporting and income tax purposes. The amount of current of Financial Accounting Standards No. 148, “Accounting for Stock- income tax expense recognized in any period may differ from Based Compensation — Transition and Disclosure” (“FAS 148”). amounts reported to taxing authorities. Grant date fair value of stock options is based on the Black-Scholes BOK Financial has a tax contingency reserve, which is included in option pricing model. Stock options generally have graded vesting accrued current income taxes payable, for the uncertain portion of over 7 years. Each tranche is considered a separate award for valu- recorded tax benefits and related interest. These uncertainties result ation and compensation cost recognition. Grant date fair value of from the application of complex tax laws, rules, regulations and inter- non-vested shares is based on the current market value of BOK pretations, primarily in state taxing jurisdictions. The adequacy of this Financial common stock. Non-vested shares cliff vest in 5 years. reserve is assessed quarterly and may be adjusted through current income tax expense in future periods based on changing facts and circumstances, completion of examinations by taxing authorities or expiration of a statute of limitations. Compensation cost is recognized as expense over the vesting period. Expense is adjusted for forfeitures as they occur. Stock- based compensation awarded to certain officers has performance conditions that affect the number of awards granted. Compensation Deferred tax assets and liabilities are determined based upon the dif- cost is adjusted based on the probable outcome of the performance ference between the values of the assets and liabilities as reflected in conditions. the financial statements 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. A valuation allowance is provided when it is more likely than not that some portion or the entire deferred tax asset will not be realized. Certain executive officers may defer the recognition of income from stock-based compensation for income tax purposes and to diversify the deferred income into alternative investments. Stock-based com- pensation granted to these officers is considered liability awards. Changes in the fair value of liability awards are recognized as com- pensation expense in the period of the change. Employee Benefit Plans Other Operating Revenue BOK Financial sponsors a defined benefit cash balance pension plan (“Pension Plan”), qualified profit sharing plans (“Thrift Plans”) and employee healthcare plans. Pension Plan costs, which are based upon actuarial computations of current costs, are expensed Fees and commissions revenue is recognized at the time the related services are provided or products are sold and may be accrued when necessary. Accrued fees and commissions are reversed against rev- enue if amounts are subsequently deemed to be uncollectible. 48 Financials_v5.qxd 2/24/06 3:46 PM Page 49 Notes to Consolidated Financial Statements Effect of Pending Statements of Financial Accounting Standards Financial Accounting Standards Board Statement of Financial Accounting Standards 123R, “Share-Based Payments” (“FAS 123R”) FAS 123R requires companies to recognize in income statements the grant-date fair value of stock options and other equity-based com- pensation issued to employees. Previously, FAS 123 recommended, but did not require income statement recognition of the fair value of equity-based compensation. FAS 123R also requires that share- based payments that meet specified criteria be classified as liability awards and carried at current fair value. Fair value is determined at each balance sheet date until the award is settled. Share-payments that will be settled in equity instruments are measured at grant-date fair value and not re-measured for subsequent changes in fair value. FSP 115-1 was effective for reporting periods beginning after Decem- ber 15, 2005. Guidance provided by FSP 115-1 had previously been issued in other authoritative literature, including SEC Staff Account- ing Bulletin No. 59, and we do not expect a significant impact on future financial statements. (2) Acquisitions Effective April 6, 2005, BOK Financial acquired all of the outstand- ing common stock of Valley Commerce Bancorp, Ltd. (“VCB”) for $32.0 million in cash. VCB and its wholly-owned subsidiary, Valley Commerce Bank, had total assets of $143 million, including loans of $93 million, total deposits of $110 million and total shareholders’ equity of $12.7 million. As of August 15, 2005, Valley Commerce Bank was renamed Bank of Arizona, N.A. The VCB acquisition is consistent with the Company’s strategy to expand into high-growth markets. FAS 123R was effective for annual periods beginning on or after On September 10, 2003, BOK Financial paid $77.9 million in cash for June 15, 2005. We previously adopted the preferred income statement recognition all the outstanding stock of Colorado Funding Company and its Col- orado State Bank and Trust subsidiary. methods of the original FAS 123. Management does not expect FAS These transactions were accounted for by the purchase method of 123R to have a significant effect on its financial statements. accounting. Aggregate allocation of the purchase price to the net FSP 115-1 and FAS 124-1 The Meaning of Other-Than-Temporary Impairment and its Application to Certain Investments (“FSP 115-1”) FSP 115-1 addressed the determination as to when an investment is considered impaired, whether that impairment is other-than-tempo- rary and the measurement of an impairment loss. It also addressed accounting considerations subsequent to the recognition of an other- than-temporary impairment and disclosures about unrealized losses that have not been recognized. An investment is considered impaired when its fair value is less than cost. Determination of when an unrealized loss must be recognized as an other-than-temporary impairment is based on an assessment of factors, including the nature of the asset, the financial condition and near-term prospects of the issuer, whether the asset can be prepaid by the issuer in a manner that the investor will not recover its invest- ment, the severity and duration of the impairment and the investor’s ability and intent to hold the asset until the fair value recovers. 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 Other borrowings Other liabilities Net assets acquired Less purchase price Goodwill 2005 $ 2,921 35,355 92,821 1,072 91,749 4,380 11,334 145,739 110,217 18,155 2,003 15,364 32,014 $ 16,650 2003 $ 80,051 14,507 222,530 2,282 220,248 18,770 20,809 354,385 301,439 5,098 11,951 35,897 77,928 $ 42,031 The results of operations of these acquisitions would not have been significant to the Company’s consolidated results during the pre- acquisition periods of 2005, 2004 and 2003. None of the intangi- ble assets acquired are deductible for tax purposes. 49 Financials_v5.qxd 2/24/06 3:46 PM Page 50 Notes to Consolidated Financial Statements (3) Securities Investment Securities The amortized cost and fair values of investment securities are as follows (in thousands): 2005 December 31, U.S. Treasury Municipal and other tax-exempt Mortgage-backed U.S. agency securities Other debt securities Total Amortized Cost $ 1,994 240,359 Fair Value $ 1,976 238,649 Gross Unrealized Loss Gain $ — 903 (18) (2,613) $ Amortized Cost Fair Value $ — $ 216,986 — 218,465 2004 Gross Unrealized Loss Gain $ — $ 2,501 — (1,022) — 2,772 $245,125 — 2,781 $243,406 — 9 $ 912 — — $ (2,631) 1,287 2,821 1,336 2,835 $221,094 $222,636 49 14 $ 2,564 — — $ (1,022) The amortized cost and fair values of investment securities at December 31, 2005, by contractual maturity, are as shown in the following table (dollars in thousands): U.S. Treasury: 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 yield Total fixed maturity securities: Amortized cost Fair value Nominal yield Total investment securities: Amortized cost Fair value Nominal yield Less than One Year One to Five Years Five to Ten Years Over Ten Years $ — — — $ 57,284 57,223 4.79 $ 1,985 1,985 4.15 $ 59,269 59,208 4.77 $ 1,994 1,976 3.64 $146,544 145,303 5.03 $ 99 103 7.00 $148,637 147,382 5.01 $ — — — $ 26,900 26,647 5.61 $ 675 680 5.31 $ 27,575 27,327 5.60 $ — — — $ 9,631 9,476 6.26 $ 13 13 — $ 9,644 9,489 6.26 Weighted Average Maturity2 1.17 3.07 2.34 3,05 Total $ 1,994 1,976 3.64 $240,359 238,649 5.11 $ 2,772 2,781 4.51 $245,125 243,406 5.09 $245,125 243,406 5.09 1 Calculated on a taxable equivalent basis using a 39% effective tax rate. 2 Expected maturities may differ from contractual maturities, because borrowers may have the right to call or prepay obligations with or without penalty. 50 Financials_v5.qxd 2/24/06 3:46 PM Page 51 Notes to Consolidated Financial Statements Available for Sale Securities The amortized cost and fair value of available for sale securities are as follows (in thousands): December 31, 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 Amortized Cost 16,037 17,153 $ $ Fair Value 15,827 17,078 2005 $ Gross Unrealized Gain Loss — 3 $ (210) (78) 2004 Amortized Cost $ 27,119 $ 414 Fair Value 27,062 404 Gross Unrealized Loss Gain $ $ 31 1 (88) (11) 3,507,047 1,277,161 4,784,208 124 108,914 $4,926,436 3,424,356 1,250,701 4,675,057 124 113,489 $4,821,575 1,416 201 1,617 1 4,575 $ 6,196 (84,107) (26,661) (110,768) (1) — $(111,057) 3,067,611 1,423,613 4,491,224 515 90,343 3,052,375 1,418,770 4,471,145 528 94,051 $4,609,615 $4,593,190 8,079 2,378 10,457 13 3,708 $ 14,210 (23,315) (7,221) (30,536) — — $ (30,635) The amortized cost and fair values of available for sale securities at December 31, 2005, by contractual maturity, are as shown in the following table (dollars in thousands): One to Five Years Five to Ten Years Over Ten Years Total Weighted Average Maturity5 Less than One Year $ 9,987 9,847 2.78 $ $ 100 100 4.67 65 66 6.26 $ 6,050 5,980 3.50 $ $ — — — 26 25 6.18 $ 10,152 10,013 2.80 $ 6,076 6,005 3.51 U.S. Treasury: 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 $ — — — $ 12,005 11,960 3.80 $ 33 33 7.60 $ 12,038 11,993 3.81 $ — — — $ 5,048 5,018 3.17 $ — — — $ 5,048 5,018 3.17 1.08 9.40 2.91 5.37 2 3 $ $ $ $ 16,037 15,827 3.05 17,153 17,078 3.80 124 124 6.60 33,314 33,029 3.45 $4,784,208 4,675,057 4.45 $ 108,914 113,489 2.99 $4,926,436 4,821,575 4.41 1 Calculated on a taxable equivalent basis using a 39% effective tax rate. 2 The average expected lives of mortgage-backed securities were 3.4 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. 51 Financials_v5.qxd 2/24/06 3:46 PM Page 52 Notes to Consolidated Financial Statements Sales of available for sale securities resulted in gains and losses as Net unrealized losses on securities totaled $107 million at December follows (in thousands): Proceeds Gross realized gains Gross realized losses Related federal and state income tax expense (benefit) 2005 $1,537,628 5,145 12,040 2004 2003 $2,652,554 $5,089,734 30,373 23,185 10,452 13,540 (2,480) (1,044) 2,585 In addition to securities that have been reclassified as pledged to cred- itors, securities with an amortized cost of $2.7 billion and $2.6 billion at December 31, 2005 and 2004, respectively, have been pledged as collateral for repurchase agreements, public and trust funds on de- posit and for other purposes, as required by law. The secured parties do not have the right to sell or repledge these securities. Temporarily Impaired Securities (In Thousands) Less Than 12 Months Unrealized Loss Fair Value 31, 2005 compared with net unrealized losses of $15 million at December 31, 2004 due primarily to rising interest rates. The aggre- gate gross amount of unrealized losses at December 31, 2005 totaled $114 million. Unrealized losses were due primarily to rising interest rates. None of the unrealized losses resulted from credit quality concerns. Management evaluated the securities with unreal- ized losses to determine if we believe that the losses were tempo- rary. This evaluation considered factors such as causes of the unre- alized losses and prospects for recovery over various interest rate scenarios and time periods. The Company also considered the abil- ity and intent to hold the securities until the fair values exceed amor- tized cost. It is our belief, based on currently available information and our evaluation, that the unrealized losses in these securities were temporary. 12 Months or Longer Total Investment: U.S. Treasury Municipal and other tax exempt $ 1,976 110,872 $ 18 1,464 $ — 47,765 Fair Value Unrealized Loss $ — 1,149 Fair Value Unrealized Loss $ 1,976 158,637 $ 18 2,613 Available for sale: U. S. Treasury Other debt securities Municipal and other tax-exempt Mortgage-backed securities: 4,950 — 8,093 45 — 59 10,877 34 296 165 1 19 15,827 34 8,389 210 1 78 U. S. agencies Other Total 1,188,731 299,168 $1,613,790 20,262 4,399 $26,247 2,027,695 901,533 $2,988,200 63,845 22,262 $87,441 3,216,426 1,200,701 $4,601,990 84,107 26,661 $113,688 52 Financials_v5.qxd 2/24/06 3:46 PM Page 53 Notes to Consolidated Financial Statements (4) Derivatives counterparties to minimize the risk of changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts The fair values of derivative contracts at December 31, 2005 were (in are identical to the customer contracts, except for a fixed pricing thousands): spread or a fee paid to BOK Financial as compensation for adminis- trative costs, credit risks and profit. Customer Risk Management Programs: Interest rate contracts Energy contracts Cattle contracts Foreign exchange contracts Total Customer Derivatives Assets Liabilities $ 18,741 418,494 1,014 14,629 452,878 $ 20,309 416,106 970 14,629 452,014 Interest Rate Risk Management Programs Total Derivative Contracts — $ 452,878 14,655 $ 466,669 Customer Risk Management Programs Interest Rate Risk Management Programs BOK Financial uses interest rate swaps in managing its interest rate sensitivity. Interest rate swaps are generally used to reduce overall asset sensitivity by converting specific fixed rate liabilities to floating rate based on LIBOR, or specific prime-based loans to fixed rate. Interest rate swaps are designated as fair value or cash flow hedges when the specific criteria required by generally accepted accounting principles are met. These criteria include requirements that deriva- tives are highly effective in offsetting changes in fair value or cash BOK Financial offers programs that permit its customers to manage flow of the hedged assets or liabilities. various risks, including fluctuations in energy and cattle prices, inter- est rates and foreign exchange rates. Derivative contracts are exe- cuted between the customers and BOK Financial. Offsetting con- tracts are executed between BOK Financial and selected The following table details interest rate swaps and, when applicable, the associated hedged assets or liabilities at December 31, 2005 (dollars in thousands): Hedged Asset / Liability Maturity Fair value hedges: Description Subordinated debt 2006 Certificates of deposit 2007 Certificates of deposit 2007 2008 Certificates of deposit 2009 Certificates of deposit 2010 Certificates of deposit 2011 Certificates of deposit Total fair value hedges Amount $186,937 139,875 150,000 21,920 54,544 9,564 29,435 592,275 Cash flow hedges: 2008 Prime rate loans Total cash flow hedges 100,000 100,000 Not designated as hedges: 2006 2006 2009 2011 Total — — — — $692,275 Weighted Average Fixed Rate (Paid) Floating Rate Received2 (3.590) % (3.634) (7.125) (3.000) (3.945) (3.626) (3.983) — — — — — —% — — — — — — 7.250 — — — — 1 Floating rates are based on 30-day LIBOR, unless otherwise noted. 2 Floating rate based on prime. Interest Rate Swap Weighted Average Notional Amount Fixed Rate Received (Paid) Floating Rate Received (Paid)1 Positive Fair Value Negative Fair Value $187,000 140,000 150,000 22,000 55,000 10,000 30,000 594,000 100,000 100,000 12,497 33,000 15,000 29,311 $783,808 3.818% 3.795 3.165 3.093 4.052 3.657 4.013 (4.390)% (4.390) (4.390) (4.390) (4.390) (4.390) (4.390) $ — — — — — — — — $ 847 1,995 3,947 811 1,293 456 1,128 10,477 5.926 (7.250)2 — — 3,441 3,441 (5.425) 2.699 4.432 (5.358) 4.390 (4.390) (4.390) 4.390 — — — — $ — 48 255 175 259 $14,655 During 2005 and 2004, net interest revenue was decreased by $1.4 million and increased by $9.9 million, respectively, from the settlement of amounts receivable or payable on interest rate swaps. 53 Financials_v5.qxd 2/24/06 3:46 PM Page 54 Notes to Consolidated Financial Statements (5) Loans Significant components of the loan portfolio are as follows (in thousands): December 31, Commercial Commercial real estate Residential mortgage Residential mortgage held for sale Consumer Total Loans past due (90 days) Foregone interest on nonaccrual loans 2005 Fixed Rate $2,040,799 588,128 624,685 51,666 422,799 $3,728,077 Variable Rate $3,247,463 1,396,404 537,299 — 205,573 $5,386,739 Non- accrual $11,673 5,370 7,347 — 772 $25,162 Total $5,299,935 1,989,902 1,169,331 51,666 629,144 $9,139,978 8,708 $ 2,515 $ 2004 Fixed Rate Variable Rate Non- accrual $1,580,239 $2,962,402 $33,195 10,144 8,612 — 709 $2,993,826 $4,882,481 $52,660 1,234,676 502,732 — 182,671 376,290 687,574 40,262 309,461 Total $4,575,836 1,621,110 1,198,918 40,262 492,841 $7,928,967 7,649 $ 4,617 $ Approximately 57% of the commercial and consumer loan portfolios related to these swaps was included in accumulated other compre- and approximately 72% of the residential mortgage loan portfolio hensive income and expected to be reclassified into earnings based (excluding loans held for sale) are loans to businesses and individuals on the current interest rate environment. in Oklahoma. This geographic concentration subjects the loan port- folio to the general economic conditions within this area. Credit Commitments Within the commercial loan classification, loans to energy-related businesses totaled $1.4 billion or 15% of total loans as of December 31, 2005. Other notable segments include wholesale/retail, $793 million; healthcare, $520 million; manufacturing, $515 million; agriculture, $292 million, which includes $228 million of loans to the cattle indus- try; and services, $1.4 billion. Approximately $1.1 billion of the services category is made up of loans with outstanding balances of less than $10 million. Approximately 33% of commercial real estate loans are secured by properties located in Oklahoma, primarily in the Tulsa and Oklahoma City metropolitan areas. An additional 30% of commercial real estate loans are secured by property located in Texas. The major Commitments to extend credit are agreements to lend to a customer as long as there is no violation of conditions established in the con- tract. Commitments generally have fixed expiration dates or other termination clauses and may require payment of a fee. At Decem- ber 31, 2005, outstanding commitments totaled $4.3 billion. Because some 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 upon management’s credit evaluation of the borrower. components of these properties are multifamily residences, $205 mil- Standby letters of credit are conditional commitments issued to lion; construction and land development, $638 million; retail facilities, guarantee the performance of a customer to a third party. Because $305 million; and office buildings, $499 million. During 2004, interest rate swaps with $100 million notional amounts were designated cash flow hedges of prime-based loans and they remained outstanding through 2005. The objective of the hedge is to protect against the variability of interest cash flows on the first $100 million of then existing prime-based loans. The Company receives settlements based on a fixed rate of 5.93% and pays settle- ments based on the U.S. prime rate. Amounts due are settled monthly. As of December 31, 2005, a net loss of approximately $2.1 million 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 creditworthi- ness of the customer. Additionally, BOK Financial uses the same eval- uation 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, 2005, outstanding standby letters of credit totaled $559 million. 54 Financials_v5.qxd 2/24/06 3:46 PM Page 55 Notes to Consolidated Financial Statements Commercial letters of credit are used to facilitate customer trade transactions with the drafts being drawn when the underlying trans- (6) Premises and Equipment action is consummated. At December 31, 2005, outstanding com- Premises and equipment at December 31 are summarized as follows mercial letters of credit totaled $6 million. (in thousands): Reserves for Credit Losses The activity in the reserve for loan losses is summarized as follows (in thousands): Beginning balance Provision for loan losses Loans charged off Recoveries Addition due to acquisitions Ending balance 2005 $108,618 10,401 (25,758) 9,544 1,071 $103,876 2004 $114,784 15,792 (29,685) 7,727 — $108,618 2003 $103,851 34,000 (31,475) 6,125 2,283 $114,784 The activity in the reserve for off-balance sheet credit losses is sum- marized as follows (in thousands): Beginning balance Provision for off-balance sheet credit losses Additions due to acquisitions 2005 $ 18,502 2004 $ 13,855 2003 $ 12,219 2,040 32 4,647 — 1,636 — Ending balance $ 20,574 $ 18,502 $ 13,855 Provision for credit losses $ 12,441 $ 20,439 $ 35,636 Impaired Loans Investments in loans considered to be impaired under FAS 114 were as follows (in thousands): 2005 December 31, 2004 2003 Land Buildings and improvements Software Furniture and equipment Subtotal Less accumulated depreciation Total December 31, 2005 2004 $ 43,875 143,051 31,250 107,675 325,851 146,224 $ 179,627 $ 40,479 135,932 27,515 100,447 304,373 131,730 $172,643 Depreciation expense of premises and equipment was $24.0 million, $23.4 million and $22.4 million for the years ended December 31, 2005, 2004 and 2003, respectively. (7) Intangible Assets The following table presents the original cost and accumulated amor- tization of intangible assets (in thousands): Core deposit premiums Less accumulated amortization Net core deposit premiums Other identifiable intangible assets Less accumulated amortization Net other identifiable intangible assets Goodwill Less accumulated amortization Net goodwill Total intangible assets, net December 31, 2005 $ 90,637 77,111 13,526 17,866 5,238 12,628 290,003 53,135 236,868 $263,022 2004 $ 86,257 71,158 15,099 11,526 4,249 7,277 273,353 53,135 220,218 $242,594 $ 19,857 $ 45,424 $ 46,990 Expected amortization expense for intangible assets that will con- tinue to be amortized under FAS 142, as amended by FAS 147, (in 5,686 2,632 14,881 6,994 18,947 6,377 thousands): Investment in loans impaired under FAS 114 (all of which were on a nonaccrual basis) Loans with specific reserves for loss Specific reserve balance No specific related reserve for loss 14,171 30,543 28,043 Average recorded investment in impaired loans 32,722 46,386 47,415 Interest income recognized on impaired loans during 2005, 2004 and 2003 was not significant. Core Deposit Premiums $ 4,563 3,777 2,314 1,871 846 155 $13,526 Other Identifiable Intangible Assets $ 769 763 780 1,137 1,163 8,016 $12,628 Total $ 5,332 4,540 3,094 3,008 2,009 8,171 $26,154 2006 2007 2008 2009 2010 Thereafter 55 Financials_v5.qxd 2/24/06 3:46 PM Page 56 Notes to Consolidated Financial Statements The net amortized cost of intangible assets at December 31, 2005 is are generally outstanding for 60 to 90 days and are subject to both assigned to reporting units as follows (in thousands): credit and interest rate risk. Credit risk is managed through under- Core deposit premiums: Bank of Texas Colorado State Bank and Trust Bank of Arizona 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 Bank of Arizona $ 4,143 5,781 3,602 $ 13,526 $ 6,341 6,287 $ 12,628 $ 8,173 154,741 15,273 42,031 16,650 $236,868 writing policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Expo- sure to interest rate fluctuations is partially hedged through forward sales of mortgage-backed securities and forward sales contracts. These latter contracts set the price for loans that will be delivered in the next 60 to 90 days. As of December 31, 2005, the unrealized loss on forward sales of mortgage-backed securities and forward sales contracts used to hedge the mortgage pipeline was approximately $217 thousand. Gains on mortgage loans sold, including capitalized mortgage servicing rights, totaled $16.0 million in 2005, $10.4 million in 2004 and $30.5 million in 2003. At December 31, 2005, BOK Financial owned the rights to service 53,897 mortgage loans with outstanding principal balances of $4.5 billion, including $462 million serviced for affiliates, and held related funds of $56 million for investors and borrowers. The During 2005, the Company acquired the naming rights to the BOk weighted average interest rate and remaining term was 6.13% and Center, a new arena to be built in Tulsa, Oklahoma, and other related 275 months, respectively. Mortgage loans sold with recourse totaled intangible rights. Under an agreement with the City of Tulsa, the $248 million at December 31, 2005. At December 31, 2004, BOK Company will pay $11.0 million over 20 years. One or more install- Financial owned the rights to service 56,062 mortgage loans with ment payments may be accelerated by paying a discounted amount outstanding principal balances of $4.5 billion, including $655 million based on the average yield of 20-year U.S. Treasury bonds. The serviced for affiliates, and held related funds of $67 million for Company recognized a $6.3 million intangible asset and an interest- investors and borrowers. The weighted average interest rate and bearing liability from this transaction. The intangible asset will be remaining term was 6.27% and 270 months, respectively. Mortgage amortized over the life of the agreement. loans sold with recourse totaled $32 million at December 31, 2004. (8) Mortgage Banking Activities BOK Financial engages in mortgage banking activities through the 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 serv- icing rights. See Note 1 for specific accounting policies for mortgage BOk Mortgage Division of BOk. Residential mortgage loans held for servicing rights. sale totaled $52 million and $40 million, and outstanding mortgage loan commitments totaled $233 million and $189 million at Decem- ber 31, 2005 and 2004, respectively. Mortgage loan commitments Activity in capitalized mortgage servicing rights and related valua- tion allowance during 2003, 2004 and 2005 are as follows (in thousands): 56 Financials_v5.qxd 2/24/06 3:46 PM Page 57 Notes to Consolidated Financial Statements Balance at December 31, 2002 Additions, net Amortization expense Recovery of impairment Balance at December 31, 2003 Additions, net Amortization expense Write-off Recovery of impairment Balance at December 31, 2004 Additions, net Amortization expense Write-off Recovery of impairment $ Balance at December 31, 2005 Estimated fair value of mortgage servicing rights at: December 31, 20031 December 31, 20041 December 31, 20051,3 $ 12,625 $ 9,338 8,489 $ Capitalized Mortgage Servicing Rights Purchased 37,223 (3) (14,840) — 22,380 — (4,695) (6,291) — $ 11,394 — (2,788) — — 8,606 Originated 49,849 23,922 (19,315) — 54,456 11,365 (10,753) (7,012) — $ 48,056 17,402 (10,110) (2,443) — $ 52,905 $ 36,564 $ 36,985 $ 46,158 Total 87,072 23,919 (34,155) — 76,836 11,365 (15,448) (13,303) — $ 59,450 17,402 (12,898) (2,443) — $ 61,511 $ 49,189 $ 46,323 $ 54,647 Valuation Allowance (54,918) — — 22,923 (31,995) — — 16,656 1,567 $ (13,772) — — 2,443 3,915 $ (7,414) Hedging Loss2 5,134 — (1,425) — 3,709 — (356) (3,353) — $ — — — — — $ — Net 37,288 23,919 (35,580) 22,923 48,550 11,365 (15,804) — 1,567 $ 45,678 17,402 (12,898) — 3,915 $ 54,097 $ 49,189 $ 46,323 $ 54,647 1 Excludes approximately $1.0 million, $1.1 million and $1.4 million at December 31, 2005, 2004 and 2003, respectively, of loan servicing rights on mortgage loans originated prior to the adoption of FAS 122. 2 Hedging loss represents the deferred loss on a derivatives-based hedging program prior to the adoption of FAS 133. 3 Fair value of mortgage servicing rights is based on numerous assumptions primarily related to mortgage interest rates. At December 31, 2005, management estimates that a 50 basis point increase in mortgage interest rates will increase the fair value of mortgage servicing rights by $3.1 million and a 50 basis point decrease in mortgage interest rates will reduce the fair value of mortgage servicing rights by $4.8 million. Fair value is determined by discounting the projected net cash flows. Loan servicing costs — $35 to $46 annually per loan based upon Significant assumptions are: loan type. Discount rate — Indexed to a risk-free rate commensurate with the Escrow earnings rate — Indexed to rates paid on deposit accounts average life of the servicing portfolio plus a market premium. The dis- with a comparable average life. The escrow earnings rate at Decem- count rate at December 31, 2005 was 10.85%. ber 31, 2005 was 5.21%. Prepayment rate — Annual prepayment estimates ranging from Stratification of the mortgage loan-servicing portfolio, outstanding 10.42% to 20.38% based upon loan interest rate, original term and principal of loans serviced, and related hedging information by inter- loan type. est rate at December 31, 2005 follows (in thousands): Cost less accumulated amortization Fair value Impairment2 Outstanding principal of loans serviced1 < 5.51% $ 14,506 $ 13,366 $ 1,267 $998,200 5.51% - 6.50% 29,294 $ 25,337 $ $ 3,959 $1,864,300 6.51% - 7.50% $ 13,715 $ 11,958 $ 1,759 $835,500 => 7.51% $ 3,996 $ 3,986 $ 429 $267,000 Total 61,511 $ 54,647 $ $ 7,414 $3,965,000 1 Excludes outstanding principal of $462 million for loans serviced for affiliates and $66 million of mortgage loans for which there are no capitalized mort- gage servicing rights. 2 Impairment is determined by both an interest rate and loan type stratification. 57 Financials_v5.qxd 2/24/06 3:46 PM Page 58 Notes to Consolidated Financial Statements (9) Deposits Time deposit maturities are as follows: 2006 — $1.9 billion, 2007 — $1.0 billion, 2008 — $232 million, 2009 — $303 million, 2010 — $298 Interest expense on deposits is summarized as follows (in thousands): million, and $374 million thereafter. Transaction deposits Savings Time: Certificates of deposits under $100,000 Certificates of deposits $100,000 and over Other time deposits Total time Total 2005 $ 72,721 1,106 2004 $ 35,517 975 2003 $ 31,346 944 50,129 41,978 39,098 73,248 13,196 136,573 $210,400 53,918 12,045 107,941 $144,433 48,181 12,360 99,639 $131,929 At December 31, 2005, the Company had $442 million in fixed rate, brokered certificates of deposits. The weighted-average interest rate paid on these certificates is 3.64%. Interest rate swaps have been designated as hedges of each of these certificates. The purpose of these swaps is to hedge against changes in fair value due to changes in interest rates by modifying the certificates from fixed rate to float- ing rates based on changes in LIBOR. We receive a weighted aver- age fixed rate of 3.81% on these swaps and currently pay a floating rate of 4.39%. The aggregate amounts of time deposits in denominations of Interest expense on time deposits during 2005 and 2004 was $100,000 or more at December 31, 2005 and 2004 were $2.5 bil- reduced by the net accrued settlement from interest rate swaps of lion and $2.2 billion, respectively. $700 thousand and $7.9 million, respectively. (10) Other Borrowings Information relating to other borrowings is summarized as follows (dollars in thousands): 2005 December 31, 2004 2003 Parent Company: Balance Rate Maximum Outstanding At Any Month End Balance Rate Maximum Outstanding At Any Month End Balance Rate Maximum Outstanding At Any Month End Revolving, unsecured line $ — —% $ 95,000 $ 95,000 2.91% $ 95,000 $ 95,000 1.75% $ 95,000 Subsidiary Banks: Funds purchased and repurchase agreements Federal Home Loan Bank advances Subordinated debenture Other Total subsidiary banks Total other borrowings 1,337,911 4.53 2,291,509 1,555,507 2.18 1,900,810 1,609,668 1.37 1,904,269 1,020,871 295,964 33,427 2,688,173 $2,688,173 4.26 6.30 3.13 4.61 4.61 1,031,821 297,980 33,427 894,354 151,594 25,646 2,627,101 $2,722,101 2.31 5.18 0.98 2.39 2.41 899,350 154,230 28,748 899,426 154,332 22,224 2,685,650 $2,780,650 1.21 6.02 1.58 1.58 1.74 974,729 155,345 29,116 Aggregate annual principal repayments of long-term debt at Decem- ber 31, 2005 are as follows (in thousands): Parent Company $ $ — — — — — — — Subsidiary Banks $2,364,738 152,779 1,824 8,524 475 159,833 $2,688,173 2006 2007 2008 2009 2010 Thereafter Total 58 Financials_v5.qxd 2/24/06 3:46 PM Page 59 Notes to Consolidated Financial Statements Funds purchased generally mature within one to ninety days from the transaction date. At December 31, 2005, securities sold under agree- ments to repurchase totaled $661 million with related accrued interest payable of $75 thousand. Additional information relating to repurchase agreements at December 31, 2005 is as follows (dollars in thousands): Security Sold/Maturity Overnight U.S. Agency Securities Amortized Cost $806,679 Market Value $781,589 Repurchase Liability1 $661,192 Average Rate 4.14% 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. Borrowings from the Federal Home Loan Bank are used for funding In 1997, BOk issued a $150 million 7.125% fixed rate subordinated purposes. In accordance with policies of the Federal Home Loan debenture that matures in 2007. During 2004, a $150 million Bank, BOK Financial has granted a blanket pledge of eligible assets notional amount interest rate swap was designated as a hedge of (generally unencumbered U.S. Treasury and mortgage-backed secu- changes in fair value of the subordinated debt due to changes in rities, 1-4 family loans and multifamily loans) as collateral for these interest rates. The Company receives a fixed rate of 3.165% and pays advances. The Federal Home Loan Bank has issued letters of credit a variable rate based on 1-month LIBOR, or 4.39% at December 31, totaling $308 million to secure BOK Financial’s obligations to depos- 2005. Semi-annual swap settlements coincide with interest pay- itors of public funds. The unused credit available to BOK Financial at ments on the subordinated debenture. The interest rate swap termi- December 31, 2005 pursuant to the Federal Home Loan Bank’s col- nates on August 15, 2007, the maturity date of the subordinated lateral policies is $314 million. debenture. BOK Financial has a $100 million unsecured revolving line of credit with certain commercial banks that expires in December 2010. There was no outstanding principal balance of this credit agreement at December 31, 2005. Interest is based upon a base rate or LIBOR plus a defined margin that is determined by the Company’s credit rating. This margin ranges from 0.375% to 1.125%. The margin currently appli- cable to borrowings against this line is 0.500%. The base rate is (11) Federal and State Income Taxes Deferred income taxes reflect the net tax effects of temporary differ- ences between the carrying amounts of assets and liabilities for finan- cial reporting purposes and the amounts used for income tax pur- poses. Significant components of deferred tax assets and liabilities defined as the greater of the daily federal funds rate plus 0.5% or the are as follows (in thousands): SunTrust Bank prime rate. Interest is generally paid monthly. Facility fees are paid quarterly on the unused portion of the commitment at rates that range from 0.100% to 0.250% based on the Company’s Deferred tax liabilities: December 31, 2005 2004 credit rating. This credit agreement includes certain restrictive covenants that limit the Company’s ability to borrow additional funds, to make investments and to pay cash dividends on common stock. These covenants also require BOK Financial and subsidiary banks to maintain minimum capital levels. BOK Financial met all of the restric- tive covenants at December 31, 2005. In 2005, BOk issued $150 million of 10-year, fixed rate subordinated debt. The cost of this subordinated debt, including issuance discounts and hedge loss is 5.43%. The proceeds of this debt were used to repay $95 million of BOK Financial’s unsecured revolving line of credit and to provide additional capital to support asset growth. Pension contributions in excess of book expense Valuation adjustments Mortgage servicing rights Lease financing Other Total deferred tax liabilities Deferred tax assets: Available for sale securities mark-to-market Stock-based compensation Credit loss reserves Valuation adjustments Deferred book income Deferred compensation Other Total deferred tax assets Deferred tax assets in excess of deferred tax liabilities $ 9,900 27,600 22,000 15,500 3,300 78,300 40,700 4,700 48,000 7,700 26,000 6,900 12,500 146,500 $ 9,400 29,300 20,200 15,800 4,500 79,200 6,400 3,900 48,500 13,200 22,400 8,300 12,100 114,800 $ 68,200 $ 35,600 59 Financials_v5.qxd 2/24/06 3:46 PM Page 60 Notes to Consolidated Financial Statements The significant components of the provision for income taxes attrib- Due to the favorable resolution of certain state tax issues for the tax utable to continuing operations for BOK Financial are shown below period ended December 31, 2000, BOK Financial reduced its tax (in thousands): accrual by $3 million, which was credited against current federal income tax expense in 2004. Current: Federal State Total current Deferred: Federal State Total deferred Total income tax Years ended December 31, 2004 2005 2003 $105,403 7,341 112,744 415 76 491 $113,235 $ 84,514 6,743 91,257 $ 77,015 5,551 82,566 161 29 190 $ 91,447 5,369 979 6,348 $ 88,914 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, 2004 2003 2005 Percent of pretax income: Federal statutory rate Tax-exempt revenue Effect of state income taxes, net of federal benefit Intangible amortization Charitable contribution Utilization of tax credits Reduction of tax accrual Other, net Total 35% (1) 1 — — — — 1 36% 35% (1) 2 — (1) — (1) — 34% 35% (1) 2 — — — — — 36% Years ended December 31, 2004 2003 2005 Amount: Federal statutory tax Tax exempt revenue Effect of state income taxes, net of federal benefit Intangible amortization Charitable contribution Utilization of tax credits Reduction of tax accrual Other, net Total $110,158 (2,592) $ 94,671 (2,705) $ 86,538 (2,815) 4,729 216 — (929) — 1,653 $113,235 4,220 397 (2,446) (784) (3,000) 1,094 $ 91,447 4,110 763 — (794) — 1,112 $ 88,914 60 Financials_v5.qxd 2/24/06 3:46 PM Page 61 Notes to Consolidated Financial Statements (12) Employee Benefits BOK Financial sponsors a defined benefit cash balance Pension Plan for all employees who satisfy certain age and service requirements. The following table presents information regarding this plan (dollars in thousands): December 31, 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 2005 $ 44,688 6,766 2,488 6,599 (2,884) $ 57,657 $ 52,246 3,298 6,329 (2,884) $ 58,989 $(57,657) 58,989 1,332 20,555 — $ 21,887 $ 6,766 2,488 (4,122) 1,094 60 $ 6,286 5.50% 8.00% 5.25% 2004 $ 37,773 6,096 2,314 2,262 (3,757) $ 44,688 $ 43,275 4,002 8,726 (3,757) $ 52,246 $ (44,688) 52,246 7,558 14,226 443 $ 22,227 $ 6,096 2,314 (3,639) 1,060 60 $ 5,891 5.75% 8.00% 5.25% As of December 31, 2005, expected future benefit payments related to the Pension Plan were as follows (in thousands): 2006 2007 2008 2009 2010 2011 through 2015 $ 2,734 3,307 3,038 3,310 3,297 18,272 $33,958 61 Financials_v5.qxd 2/24/06 3:46 PM Page 62 Notes to Consolidated Financial Statements Assets of the Pension Plan consist primarily of shares in the American Accruals for future service under the pension plan will be curtailed. Performance Balanced Fund. The stated objective of this fund is to Interest will continue to accrue on employees’ account balances at provide an attractive total return through a broadly diversified mix of 5.25%. A charge of $384 thousand was recognized in 2005 for the equities and bonds. The typical portfolio mix is approximately 60% curtailment of the pension plan. equities and 40% bonds. The inception-to-date return on the fund, which is used as an indicator when setting the expected return on plan assets, was 8.40%. The maximum allowed and minimum required Pension Plan contributions for 2005 were $7.5 million and $0, respectively. Amounts contributed to the Pension Plan during 2005 included $5.0 million attributable to the current year and $1.3 million attributable to 2004. The combined effects of these modifications are not expected to have a significant impact on future earnings or liquidity. The Com- pany will continue to have a funding obligation to the pension plan and will continue to recognize pension expense based on plan asset performance, discount rates and other factors. At December 31, 2005, prepaid pension expense totaled $21.9 million, consisting of $1.3 million of net plan assets in excess of liabilities and $20.6 million Employee contributions to the Thrift Plans are matched by BOK of unrecognized actuarial losses. These losses will be recognized in Financial up to 5% of base compensation, based upon years of serv- future years. These unrecognized losses may also be increased or ice. Participants may direct the investments of their accounts in a reduced by plan asset performance and discount rate changes. variety of options, including a BOK Financial Common Stock fund. Employer contributions vest over five years. Expenses incurred by BOK Financial for the Thrift Plans totaled $4.6 million, $3.9 million and $3.6 million for 2005, 2004 and 2003, respectively. BOK Financial offers numerous incentive compensation plans that are aligned with the Company’s growth strategy. Cash settlements paid under these plans may be based on defined formulas, other per- formance criteria or discretionary. Incentive compensation is BOK Financial also sponsors a defined benefit post-retirement designed to motivate and reinforce sales and customer service employee medical plan, which pays 50 percent of annual medical behavior in all markets. Earnings were charged $48.7 million in 2005, insurance premiums for retirees who meet certain age and service $46.4 million in 2004 and $46.2 million in 2003 for incentive com- requirements. Assets of the retiree medical plan consist primarily of pensation plans. shares in a cash management fund. Eligibility for the post-retirement plan is limited to current retirees and certain employees who were age 60 or older at the time the plan was frozen in 1993. The net obli- gation recognized under the plan was $2.2 million at December 31, 2005. A 1% change in medical expense trends would not significantly affect the net obligation or cost of this plan. During the fourth quarter of 2005, modifications to both the thrift and pension plans were approved. These modifications will become effective April 1, 2006 and consist primarily of enhanced Company contributions to the thrift plans and curtailed benefit accruals to the pension plan. (13) Stock Compensation Plans The shareholders and Board of Directors of BOK Financial have approved various stock-based compensation plans. An independent compensation committee of the Board of Directors determines the number of awards granted to the Chief Executive Officer and other senior executives. Stock-based compensation granted to other offi- cers and employees is approved by the independent compensation committee upon recommendation of the Chairman of the Board and the Chief Executive Officer. Employee contributions to the thrift plans eligible for Company matching will increase from 5% of base compensation to 6% of base compensation, as defined in the plans. The Company-provided matching contribution rates will range from 50% for employees with less than four years of service to 200% for employees with 15 or more years of service. Additionally, a maximum Company-provided, non- elective annual contribution of $750 will be made for employees whose annual base compensation is less than $30,000. 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. Non-vested shares may be granted to the Chief Executive Officer and other senior executives of the Company. These shares 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. 62 Financials_v5.qxd 2/24/06 3:46 PM Page 63 Notes to Consolidated Financial Statements The Chief Executive Officer and other senior executives participate in Compensation expense for stock options is generally recognized an Executive Incentive Plan. The number of options and non-vested based on the fair value of options granted over the options’ vesting shares may increase or decrease based upon the Company’s growth period. No compensation expense is recognized for options that are in earnings per share over a three-year period compared to the forfeited before vesting. The fair value of options was determined as median growth in earnings per share for a designated peer group of of the date of grant using a Black-Scholes option pricing model with financial institutions and other individual performance factors. the following weighted average assumptions: The following table presents options outstanding during 2003, 2004 and 2005 under these plans: Options outstanding at December 31, 2002 Options awarded Options exercised Options forfeited Options expired Options outstanding at December 31, 2003 Options awarded Options exercised Options forfeited Options expired Options outstanding at December 31, 2004 Options awarded Options exercised Options forfeited Options expired Options outstanding at December 31, 2005 Options vested at December 31, 2005 Weighted- Average Exercise Price 19.66 32.60 16.74 23.07 18.73 23.58 40.37 19.65 27.15 14.94 $28.53 47.02 24.10 33.67 30.11 $ 34.03 $ 24.12 Number 3,233,570 889,343 (672,457) (61,941) (53) 3,388,462 857,951 (693,199) (212,844) (2,322) 3,338,048 900,126 (668,990) (82,505) (616) 3,486,063 1,004,508 Average risk-free interest rate Dividend yield Volatility factors Weighted-average expected life Weighted-average fair value 2005 3.69% 0.90% .161 2004 3.27% None .168 2003 2.57% None .178 4.9 years $10.01 4.9 years $ 8.53 7 years $ 6.66 Compensation cost of stock options granted that may be recognized as compensation expense in future years totaled $10.5 million at December 31, 2005. Subject to adjustments for forfeitures, we expect to recognize compensation expense for current outstanding options of $4.5 million in 2006, $2.9 million in 2007, $1.5 million in 2008, $930 thousand in 2009 and $661 thousand thereafter. Stock option expense for the years ended December 31, 2005, 2004 and 2003 was $5.5 million, $3.7 million and $3.6 million, respectively. BOK Financial also issues non-vested common shares under the var- ious stock-based compensation plans. At December 31, 2005, a total of 57,706 non-vested common shares have been awarded, including 15,028 awarded in 2005. The weighted average grant date fair value of non-vested shares awarded in 2005 was $46.76 per share. Unrecognized compensation cost of non-vested shares totaled $904 thousand at December 31, 2005. Subject to adjustment for forfei- tures, we expect to recognize compensation expense of $250 thou- The following table summarizes information concerning currently out- sand in 2006 and 2007, $246 thousand in 2008 and $158 thou- standing and vested stock options: sand thereafter. Options Outstanding Options Vested BOK Financial permits certain executive officers to defer recognition Range of Exercise Prices $ 9.69 16.17 17.37 — 19.02 28.27 — 30.87 37.43 — 37.65 37.74 45.43 — 49.09 45.15 — 47.34 44.00 — 47.99 Weighted Weighted Average Average Exercise Remaining Contractual Price Outstanding Life (years) Number 20,100 80,911 694,430 914,335 92,490 577,442 218,204 674,467 213,684 0.83 1.42 2.61 3.80 0.12 5.00 1.00 6.00 2.00 $ 9.69 16.17 18.00 29.74 37.53 37.74 47.79 47.32 46.04 Weighted Average Exercise Number Price Vested 20,100 $ 9.69 16.17 80,911 18.18 460,356 29.34 279,537 37.53 92,490 37.74 71,114 — — — — — — of taxable income from their stock-based compensation. Deferred compensation may also be diversified into investments other than BOK Financial common stock. Stock-based compensation subject to these deferral plans is recog- nized as a liability award rather than as an equity award. Compen- sation expense is based on the fair value of the award recognized over the vesting period. At December 31, 2005, the recorded obliga- tion for liability awards was $4.0 million. Compensation expense for liability awards was a credit of $632 thousand in 2005 and expense of $7.6 million in 2004 and $2.2 million in 2003. The reduction in 63 Financials_v5.qxd 2/24/06 3:47 PM Page 64 Notes to Consolidated Financial Statements 2005 expense resulted from the termination of future deferral rights of 1940. BOk serves as custodian for AP Funds. Effective July 1, 2004, for all executive officers except the President and Chief Executive BOKIA began serving as the AP Funds administrator. BOK Financial Officer and a decrease in the period end market value of BOK Finan- offers the AP Funds, products to customers and employees, in the ordi- cial common stock. During January 2006, BOK Financial awarded the following stock- based compensation: Equity awards: Stock options Nonvested stock Total Equity awards Liability awards: Stock options Nonvested stock Total Liability awards Total stock-based awards Number 632,776 20,495 653,271 52,246 12,803 65,049 718,320 Exercise Price Fair Value / Award $47.05 — $ 9.86 47.05 47.05 — 9.86 47.05 The aggregate compensation cost of these awards totaled approxi- mately $8.5 million. This cost will be recognized over the vesting peri- ods, subject to adjustments for forfeitures and changes in the fair value of liability awards. (14) Related Parties In compliance with applicable regulations, the Company may extend credit to certain executive officers, directors, principal shareholders and their affiliates (collectively referred to as “related parties”) in the ordinary course of business under substantially the same terms as comparable third-party lending arrangements. The Company’s loans to related parties do not involve more than the normal credit risk and there are no non-accrual or impaired related party loans outstanding at December 31, 2005 or 2004. Activity in loans to related parties is summarized as follows (in thou- sands): Beginning balance Advances Payments Adjustments1 Ending balance 2005 $104,845 691,848 (678,098) 11,769 $130,364 2004 $119,873 434,242 (442,834) (6,436) $104,845 1 Adjustments generally consist of changes in status as a related party. BOK Investment Advisors, Inc. (“BOKIA”), a wholly-owned subsidiary of BOk, serves as investment advisor to American Performance Funds (“AP Funds”). AP Funds is a diversified, open-ended, investment com- pany established in 1987 as a business trust under the Investment Act nary course of business, through its brokerage and trading, employee benefit plan and trust services as well as to the general public. Certain related parties are customers of the Company for services other than loans, including consumer banking, corporate banking, risk management, wealth management, brokerage and trading, or fiduci- ary/trust services. The Company engages in transactions with related parties in the ordinary course of business in compliance with applica- ble regulations. There are no other material related party transac- tions that require disclosure. (15) 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 2014 and 2024. Annual base rent is $3.3 million. BOk subleases portions of its space for annual rents of $213 thousand in years 2006 through 2009 and $195 thousand in 2010. Net rent expense on this lease was $2.9 million in years 2005, 2004 and 2003. Total rent expense for BOK Financial was $15.3 million in 2005, $14.3 million in 2004 and $13.0 million in 2003. At December 31, 2005, future minimum lease payments for equip- ment and premises under operating leases were as follows: $14.9 mil- lion in 2006, $13.6 million in 2007, $12.5 million in 2008, $11.5 million in 2009, $10.6 million in 2010, and a total of $94.4 million thereafter. Premises leases may include options to renew at then current market rates and may include escalation provisions based upon changes in the consumer price index or similar benchmarks. The Federal Reserve Bank requires member banks to maintain cer- tain minimum average cash balances. These balances were approxi- mately $316 million and $334 million at December 31, 2005 and 2004, respectively. 64 Financials_v5.qxd 2/24/06 3:47 PM Page 65 Notes to Consolidated Financial Statements BOSC, Inc., a wholly-owned subsidiary of BOK Financial, is an intro- Common Stock ducing broker to Pershing, LLC for retail equity investment transac- tions. As such, it has indemnified Pershing, LLC against losses due to a customer’s failure to settle a transaction or to repay a margin loan. All unsettled transactions and margin loans are secured as required by applicable regulation. The amount of customer balances subject to indemnification totaled $1.5 million at December 31, 2005. BOK Private Equity, LLC, indirectly a wholly-owned subsidiary of BOK Financial, is the general partner in BOK Private Equity Fund, LP (“the Fund”). The Fund provides alternative investment opportunities to 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 divi- dends when and as declared. No common stock dividends can be paid unless all accrued dividends on the Series A Preferred Stock have been paid. 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 certain customers, some of which are related parties, through limited by the holding company. partnerships. The Fund generally invests in distressed assets, asset buy-out or venture capital limited partnerships or limited liability com- panies. The general partner has contingent obligations through the Fund to make additional investments totaling $16.4 million as of December 31, 2005. (16) Shareholders’ Equity Preferred Stock One billion shares of preferred stock with a par value of $0.00005 per share are authorized. 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 36 shares of Series A Preferred Stock at the option of the holder. Divi- dends 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. Dur- ing the second quarter of 2005, holders of the Company’s convert- ible preferred stock exercised their conversion rights. All of the Series A Preferred Stock was converted into 6,920,666 common shares. In 2004 and 2003, cash dividends declared on preferred stock totaled $1.9 million and $750 thousand, respectively. During 2003, 23,214 shares 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 Pre- ferred Stock. These shares were valued at $750,000 based on average market price, as defined, for a 65 business day period pre- ceding declaration. George B. Kaiser owned substantially all Series A Preferred Stock. During the second quarter of 2005, the Board of Directors approved the Company’s first quarterly cash dividend of $0.10 per common share. The quarterly cash dividend replaced the annual dividend his- torically paid in shares of common stock. Cash dividends paid on common stock totaled $20 million. During 2004 and 2003, 3% div- idends payable in shares of BOK Financial common stock were declared and paid. The shares issued were valued at $66 million and $58 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. During 2002, BOK Financial agreed to a limited price guarantee on a portion of the shares issued to purchase Bank of Tanglewood. The fair value of this price guarantee, estimated to be $3 million based upon the Black-Scholes option pricing model, was included in the pur- chase price. Any holder of BOK Financial common shares issued in this acquisition may annually make a claim for the excess of the guar- anteed price and the actual sales price of any shares sold during a 60-day period after each of the first five anniversary dates after October 25, 2002. The maximum annual number of shares subject to this guarantee is 210,069. The guaranteed price for each anniversary period is $40.10 for 2006 and $42.53 for 2007. The price guaran- tee 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 pay- ments. BOK Financial’s ability to pay cash to satisfy any price guar- antee obligations is limited by applicable bank holding company and bank capital and dividend regulations. 65 Financials_v5.qxd 2/24/06 3:47 PM Page 66 Notes to Consolidated Financial Statements Subsidiary Banks Regulatory Capital The amounts of dividends that BOK Financial’s subsidiary banks can BOK Financial and its banking subsidiaries are subject to various declare and the amounts of loans the subsidiary banks can extend to capital requirements administered by the federal banking agencies. affiliates are limited by various federal banking regulations and state Failure to meet minimum capital requirements can initiate certain corporate law. Generally, dividends declared during a calendar year mandatory and additional discretionary actions by regulators that are limited to net profits, as defined, for the year plus retained profits could have a material effect on BOK Financial’s operations. These for the preceding two years. The amounts of dividends are further capital requirements include quantitative measures of assets, liabili- restricted by minimum capital requirements. Pursuant to the most ties and certain off-balance sheet items. The capital standards are restrictive of the regulations at December 31, 2005, BOK Financial’s also subject to qualitative judgments by the regulators about compo- subsidiary banks could declare dividends up to $158 million without nents, risk weightings and other factors. prior 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. As of Decem- ber 31, 2005, the subsidiary banks could declare dividends of up to $86 million under this policy. The subsidiary banks declared and paid dividends of $151 million in 2005 and $66 million in 2003. During 2004, the subsidiary banks did not declare any dividends. 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%, respec- tively. 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 $16 million, the combined value of common shares issued subject to the Loans to a single affiliate may not exceed 10% and loans to all affili- market value protection program and the value of the market value ates may not exceed 20% of unimpaired capital and surplus, as guarantee. These values will be restored to Tier I capital as the market defined. Additionally, loans to affiliates must be fully secured. As of price guarantee expires. Total capital consists primarily of Tier I capital December 31, 2005 and 2004, these loans had no outstanding bal- plus preferred stock, subordinated debt and reserves for credit losses, ance. Total loan commitments to affiliates at December 31, 2005 subject to certain limitations. All of BOK Financial’s banking sub- were $128 million. sidiaries exceeded the regulatory definition of well capitalized. (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 Bank of Arizona Tier I Capital (to Risk Weighted Assets): Consolidated BOk Bank of Texas Bank of Albuquerque Bank of Arkansas Colorado State Bank and Trust Bank of Arizona Tier I Capital (to Average Assets): Consolidated BOk Bank of Texas Bank of Albuquerque Bank of Arkansas Colorado State Bank and Trust Bank of Arizona 2005 Amount Ratio 2004 Amount Ratio December 31, 12.10% 10.91 11.29 16.47 19.53 13.17 18.44 9.84% 8.41 10.34 15.31 18.27 12.09 17.35 8.30% 6.88 8.09 6.76 10.98 6.10 11.67 $ 1,625,832 1,162,091 275,507 95,134 18,372 40,249 18,194 $ 1,322,570 895,653 252,316 88,439 17,194 36,935 17,113 $ 1,322,570 895,653 252,316 88,439 17,194 36,935 17,113 66 $ 1,329,431 1,016,351 235,921 103,573 16,162 36,015 N/A $ 1,140,654 867,335 211,641 95,443 15,164 32,891 N/A $ 1,140,654 867,335 211,641 95,443 15,164 32,891 N/A 11.67% 11.13 11.41 15.34 20.37 14.50 N/A 10.02% 9.50 10.24 14.14 19.11 13.24 N/A 7.94% 7.29 7.62 6.69 8.97 8.73 N/A Financials_v5.qxd 2/24/06 3:47 PM Page 67 Notes to Consolidated Financial Statements Accumulated Other Comprehensive Income (Loss) of deferred income taxes. Accumulated losses on cash flow hedges of Accumulated other comprehensive income (loss) (“AOCI”) includes unrealized gains and losses on available for sale securities and accu- mulated gains or losses on effective cash flow hedges, including hedges of anticipated transactions. Gains and losses in AOCI are net prime-based loans of $2.1 million will be reclassified into income over two years. Accumulated losses on the rate lock hedge of the 2005 subordinated debenture issuance will be reclassified into income over the ten-year life of the debt. Balance at December 31, 2002 Unrealized losses on securities Tax benefit on unrealized losses Reclassification adjustment for gains realized and included in net income Reclassification adjustment for tax expense on realized gains Balance at December 31, 2003 Unrealized losses on securities Unrealized losses on cash flow hedges Tax benefit on unrealized losses Reclassification adjustment for losses realized and included in net income Reclassification adjustment for tax benefit on realized losses Balance at December 31, 2004 Unrealized losses on securities Unrealized gains on cash flow hedges Loss on rate lock hedge of subordinated debt issuance Tax benefit (expense) on unrealized gains (losses) Reclassification adjustment for losses realized and included in net income Reclassification adjustment for tax benefit on realized losses Balance at December 31, 2005 (17) Earnings Per Share Unrealized Gain (Loss) On Available For Sale Securities $ 43,088 (46,884) 16,858 (7,188) 2,585 8,459 (31,806) — 11,303 3,088 (1,044) (10,000) (92,551) — — 34,129 6,772 (2,432) $ (64,082) $ Accumulated Loss on Effective Cash Flow Hedges — — — — — — — (2,664) 1,039 — — (1,625) — 684 (2,788) (75) 123 (48) (3,729) $ Total $ 43,088 (46,884) 16,858 (7,188) 2,585 8,459 (31,806) (2,664) 12,342 3,088 (1,044) (11,625) (92,551) 684 (2,788) 34,054 6,895 (2,480) $ (67,811) The following table presents the computation of basic and diluted earnings per share (dollars in thousands except per share data): 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 16) 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 1 Excludes employee stock options with exercise prices greater than the current market price. 67 Years ended December 31, 2005 2004 2003 $ 201,505 (375) $ 179,023 (1,875) $ 158,360 (1,500) 201,130 375 177,148 156,860 1,875 1,500 $ 201,505 $ 179,023 $ 158,360 64,067,873 59,128,395 58,699,951 628,060 2,351,131 — 2,979,191 67,047,064 $3.14 $3.01 669,857 6,921,083 13,161 7,604,101 66,732,496 $3.00 $2.68 776,891 6,921,164 111,115 7,809,170 66,509,121 $2.67 $2.38 855,326 31,970 26,943 Financials_v5.qxd 2/24/06 3:47 PM Page 68 Notes to Consolidated Financial Statements (18) Reportable Segments BOK Financial identifies reportable segments by type of service pro- vided for the Mortgage Banking and the Wealth Management seg- BOK Financial operates five principal lines of business: Oklahoma ments and by type of customer for the Oklahoma Corporate Bank- corporate banking, Oklahoma consumer banking, mortgage banking, ing and Oklahoma Consumer Banking segments. Regional Banking wealth management, and regional banking. Mortgage banking activ- is identified by legal entity. Operating results are adjusted for inter- ities include loan origination and servicing across all markets served company loan participations and allocated service costs and man- by the Company. Wealth management provides brokerage and trad- agement fees. ing, private financial services and investment advisory services in all markets. It also provides fiduciary services in all markets except Col- orado. Fiduciary services in Colorado are included in regional bank- ing. Regional banking consists primarily of corporate and consumer banking activities in the respective local markets. 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 Oklahoma Corporate Banking segment provides loan and lease financing and treasury and cash management services to businesses throughout Oklahoma and certain relationships in surrounding states. Oklahoma Corporate Banking also includes our TransFund unit, which provides ATM and merchant deposit services. The Oklahoma Con- sumer 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 mar- ket areas. The Mortgage Banking segment also services mortgage loans acquired from throughout the United States. The Wealth Man- agement segment provides a wide range of financial services, includ- ing trust and private financial services and brokerage and trading services. This segment includes the activities of BOSC, Inc., a regis- tered broker/dealer. Trust and private financial services include sales of institutional, investment and retirement products, loans and other serv- ices to affluent individuals, businesses, not-for-profit organizations, and governmental agencies. Trust services are primarily provided to clients in Oklahoma, Texas and New Mexico. Regional banking includes Bank of Texas, Bank of Albuquerque, Bank of Arkansas, Colorado State 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. Mar- ket rates are generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk. This method of trans- fer 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 accounting policies, except that 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 by a third-party developed capital allocation model that reflects management’s assessment of risk. This model assigns capital based upon credit, operating, interest rate and market risk inherent in the business lines and recognizes the diversification benefits among the units. The level of assigned economic capital is a combination of the risk taken by each business line, based on its actual exposures and calibrated to its own loss history where possible. Additional capital is assigned to the regional banking line of business based on BOK Financial’s invest- ment in those entities. Bank and Trust and Bank of Arizona. Each of these banks provides a Substantially all revenue is from domestic customers. No single exter- full range of corporate and consumer banking services in their respec- nal customer accounts for more than 10% of total revenue. tive markets. Fiduciary services provided through Colorado State Bank and Trust are included in the Regional Banking segment. 68 Financials_v5.qxd 2/24/06 3:47 PM Page 69 Notes to Consolidated Financial Statements (In Thousands) Year ended December 31, 2005 Net interest revenue/(expense) from external sources Net interest revenue/(expense) from internal sources Total net interest revenue Provision for credit losses Other operating revenue Gain on sales of assets Capitalized mortgage servicing rights Financial instruments gains (losses) Operating expense Recovery for impairment of mortgage servicing rights Income taxes Net income Average assets Oklahoma Corporate Banking Oklahoma Consumer Banking Mortgage Banking Wealth Management Regional Banking All Other/ Eliminations Total $ 191,040 $ (25,140) $ 20,392 $ 5,651 $ 264,273 $ (6,875) $ 449,341 (60,735) 130,305 4,757 92,707 4,758 87,421 62,281 4,632 66,266 — (14,979) 5,413 416 16,427 1,232 11,208 16,859 218 100,647 — (41,338) 222,935 6,195 54,719 — 18,423 11,548 (3,777) (1,496) — — 449,341 12,441 329,270 5,990 — — 17,402 — — — 17,402 — 102,513 — 46,875 73,625 $ $ — 84,336 — 15,396 24,183 (5,087) 35,315 (3,915) 1,389 $ 2,182 — 88,001 — 11,397 17,890 $ 503 150,409 — 44,209 77,344 $ $ (1,132) 12,447 — (6,031) 6,281 (5,716) 473,021 (3,915) 113,235 201,505 $ $4,629,400 $2,988,218 $526,224 $1,503,886 $6,420,498 $ (499,371) $15,568,855 Average economic capital Average invested capital 322,440 — 69,810 — 24,210 — 106,040 — 325,000 569,800 614,346 — 1,461,846 — Performance measurements: Return on assets Return on economic capital Return on invested capital Efficiency ratio 1.59% 22.83 — 45.01 0.81% 34.64 — 65.61 0.41% 9.01 — 87.25 1.19% 16.87 — 74.89 1.20% 23.80 13.57 54.17 — — — — 1.29% 13.78 — 58.98 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 $437,793 $354,158 $456,659 $195,224 $16,068,226 5,182 18,543 — (709) — 7,778 5,182 (1,789) — 1,688,973 (12,177) $449,341 (787) $352,662 4,669 $469,106 2,888 $201,505 (2,188,344) $15,568,855 1Excluding financial instrument gains/(losses) 69 Financials_v5.qxd 2/24/06 3:47 PM Page 70 Notes to Consolidated Financial Statements (In Thousands) Year ended December 31, 2004 Net interest revenue/(expense) from external sources Net interest revenue/(expense) from internal sources Total net interest revenue Provision for credit 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 Oklahoma Corporate Banking Oklahoma Consumer Banking Mortgage Banking Wealth Management Regional Banking All Other/ Eliminations Total $ 148,919 $ (19,061) $ 21,647 $ 4,001 $ 200,781 $ 66,956 $ 423,243 (26,049) 122,870 8,956 86,493 64,873 45,812 6,964 56,611 (11,423) 10,224 340 22,055 8,888 12,889 23 93,193 (19,753) 181,028 5,507 47,017 (16,536) 50,420 (1,351) (3,282) — 423,243 20,439 302,087 — — 11,365 — — — 11,365 — 99,007 — 39,444 61,956 $ — 76,057 — 7,548 11,854 $ (5,068) 35,415 (1,567) 1,707 $ 2,681 $ — 83,784 — 8,688 13,587 — 132,022 — 32,810 57,706 $ $ 506 16,506 — 1,250 31,239 $ (4,562) 442,791 (1,567) 91,447 179,023 $4,380,491 $2,746,279 $559,034 $1,122,147 $5,754,211 $ (535,275) $14,026,887 Average economic capital Average invested capital 312,530 — 64,390 — 27,270 — 84,820 — 280,710 508,880 527,837 — 1,297,557 — Performance measurements: Return on assets Return on economic capital Return on invested capital Efficiency ratio 1.41% 19.82 — 47.29 0.43% 18.41 — 74.26 0.48% 9.83 — 81.15 1.21% 16.02 — 78.98 1.00% 20.56 11.34 57.89 — — — — 1.28% 13.80 — 60.11 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 $372,823 $316,734 $424,718 $147,784 $14,562,162 5,039 56,432 — (3,465) — 12,073 5,039 19,066 — 1,590,820 (11,051) $423,243 183 $313,452 4,433 $441,224 7,134 $179,023 (2,126,095) $14,026,887 1Excluding financial instrument gains/(losses) 70 Financials_v5.qxd 2/24/06 3:47 PM Page 71 Notes to Consolidated Financial Statements (In Thousands) Year ended December 31, 2003 Net interest revenue/(expense) from external sources Net interest revenue/(expense) from internal sources Total net interest revenue Provision for credit 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 Oklahoma Corporate Banking Oklahoma Consumer Banking Mortgage Banking Wealth Management Regional Banking All Other/ Eliminations Total $ 140,818 $ (17,188) $ 27,770 $ 1,966 $ 168,995 $ 69,134 $ 391,495 (25,924) 114,894 10,318 77,332 58,261 41,073 6,892 47,229 (9,415) 18,355 917 36,379 8,939 10,905 390 93,757 (14,801) 154,194 6,425 37,106 (17,060) 52,074 10,694 (8,685) — 391,495 35,636 283,118 — — 23,922 — — — 23,922 — 87,585 — 36,692 57,631 $ — 66,798 4,205 58,204 — 5,684 8,928 (22,923) 18,082 $ 28,401 $ $ — 80,512 — 9,243 14,517 339 119,567 (6,551) 23,695 (2,187) 436,361 — 23,974 41,673 $ — (4,761) 7,210 $ (22,923) 88,914 158,360 $ $4,106,441 $2,525,060 $623,823 $ 875,661 $5,000,039 $ (351,608) $12,779,416 Average economic capital Average invested capital 311,140 — 58,000 — 34,120 — 69,690 — 273,600 459,780 413,006 — 1,159,556 — Performance measurements: Return on assets Return on economic capital Return on invested capital Efficiency ratio 1.40% 18.52 — 45.56 0.35% 15.39 — 75.65 4.55% 83.24 — 74.00 1.66% 20.83 — 76.93 0.83% 15.23 9.06 62.50 — — — — 1.24% 13.66 — 62.47 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 $339,421 $315,725 $389,743 $151,150 $13,131,024 5,170 59,519 — (6,520) — 13,946 5,170 4,959 — 1,379,342 (12,615) $391,495 (2,165) $307,040 9,749 $413,438 (2,919) $158,360 (1,730,950) $12,779,416 1Excluding financial instrument gains/(losses) 71 Financials_v5.qxd 2/24/06 3:47 PM Page 72 Notes to Consolidated Financial Statements (19) Fair Value of Financial Instruments The following table presents the carrying values and estimated fair values of financial instruments as of December 31, 2005 and 2004 (dollars in thousands): 2005: 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 debentures Derivative instruments with negative fair value 2004: 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 debentures Derivative instruments with negative fair value Carrying Value $ 699,322 5,085,333 5,299,935 1,989,902 1,169,331 51,666 629,144 9,139,978 (103,876) 9,036,102 452,878 7,277,258 4,098,060 2,392,209 295,964 466,669 $ 531,091 4,823,976 4,575,836 1,621,110 1,198,918 40,262 492,841 7,928,967 (108,618) 7,820,349 130,297 6,030,546 3,643,852 2,570,507 151,594 137,538 Range of Contractual Yields Average Repricing (in years) Discount Rate 2.75 – 18.00% 4.00 – 12.00 2.82 – 12.13 — 3.04 – 18.90 0.33 1.21 3.29 — 2.38 4.61 – 7.25% 7.25 4.60 – 6.17 — 7.25 0.70 – 7.25 2.01 – 4.48 6.71 1.70 1.54 8.09 4.25 – 4.90 4.37 – 4.61 4.48 2.71 – 15.00% 3.50 – 15.00 2.82 – 7.96 — 2.65 – 21.00 0.41 1.08 4.17 — 2.29 2.45 – 6.68% 5.65 – 7.60 5.36 – 6.44 — 4.83 – 8.75 0.55 – 7.33 2.26 – 5.51 5.25 2.34 0.05 2.60 2.40 – 3.75 1.43 – 4.38 5.14 Estimated Fair Value $ 699,322 5,083,614 5,411,035 1,977,936 1,146,072 51,666 623,265 9,209,974 — 9,209,974 452,878 7,277,258 4,056,480 2,392,255 317,779 466,669 $ 531,091 4,825,518 4,778,495 1,606,153 1,154,226 40,262 471,863 8,050,999 — 8,050,999 130,297 6,030,546 3,639,345 2,571,259 153,565 137,538 The preceding table presents the estimated fair values of financial tion sale. Because no market exists for certain of these financial instruments. The fair values of certain of these instruments were cal- instruments and management does not intend to sell these financial culated by discounting expected cash flows, which involved signifi- instruments, BOK Financial does not know whether the fair values cant judgments by management. Fair value is the estimated amount shown above represent values at which the respective financial at which financial assets or liabilities could be exchanged in a current instruments could be sold individually or in the aggregate. transaction between willing parties, other than in a forced or liquida- 72 Financials_v5.qxd 2/24/06 3:47 PM Page 73 Notes to Consolidated Financial Statements The following methods and assumptions were used in estimating the The fair values of residential mortgage loans held for sale are based fair value of these financial instruments: upon quoted market prices of such loans sold in securitization trans- actions, including related unfunded loan commitments and hedging Cash and Cash Equivalents The book value reported in the consolidated balance sheet for cash and short-term instruments approximates those assets’ fair values. transactions. Deposits Securities The fair values of time deposits are based on discounted cash flow analyses using interest rates currently being offered on similar trans- actions. Statement of Financial Accounting Standards No. 107, “Dis- The fair values of securities are based on quoted market prices or closures about Fair Value of Financial Instruments,” (“FAS 107”) dealer quotes, when available. If quotes are not available, fair values defines the estimated fair value of deposits with no stated maturity, are based on quoted prices of comparable instruments. which includes demand deposits, transaction deposits, money market Derivatives 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 All derivative instruments are carried on the balance sheet at fair the expected benefit of these deposits. Accordingly, the positive value. Fair values for exchange-traded contracts are based on effect of such deposits is not included in this table. quoted prices. Fair values for over-the-counter interest rate, com- modity and foreign exchange contracts are based on valuations pro- vided either by third-party dealers in the contracts, quotes provided Other Borrowings and Subordinated Debentures by independent pricing services, or a third-party provided pricing The fair values of these instruments are based upon discounted cash model. Loans flow analyses using interest rates currently being offered on similar instruments. The fair value of loans, excluding loans held for sale, are based on dis- Off-Balance Sheet Instruments counted cash flow analyses using interest rates currently being offered The fair values of commercial loan commitments are based on fees for loans with similar remaining terms to maturity and credit risk, currently charged to enter into similar agreements, taking into adjusted for the impact of interest rate floors and ceilings. The fair val- account the remaining terms of the agreements. The fair values of ues of classified loans were estimated to approximate their carrying these off-balance sheet instruments were not significant at Decem- values less loan loss reserves allocated to these loans of $15 million ber 31, 2005 and 2004. and $28 million at December 31, 2005 and 2004, respectively. 73 Financials_v5.qxd 2/24/06 3:47 PM Page 74 Notes to Consolidated Financial Statements (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 loss Total shareholders’ equity Total liabilities and shareholders’ equity Statements of Earnings (In Thousands) Dividends, interest and fees received from subsidiaries Other operating revenue Total revenue Interest expense Professional fees and services Contribution of stock to BOK Charitable Foundation Other operating expense Total expense Income (loss) before taxes and equity in undistributed income of subsidiaries Federal and state income tax credit Income (loss) before equity in undistributed income of subsidiaries Equity in undistributed income of subsidiaries Net income December 31, 2005 2004 $ 11,074 11,910 1,517,047 1,729 $1,541,760 $ — 2,606 2,606 — 4 656,579 990,422 (40,040) (67,811) 1,539,154 $1,541,760 $ 2004 127 35 162 2,185 486 4,125 2 6,798 (6,636) (3,953) $ 13,230 11,170 1,470,405 2,184 $1,496,989 $ 95,000 3,495 98,495 12 4 631,747 809,261 (30,905) (11,625) 1,398,494 $1,496,989 2003 $ 66,165 431 66,596 1,771 545 — (4) 2,312 64,284 (678) (2,683) 181,706 $179,023 64,962 93,398 $158,360 2005 $153,462 468 153,930 1,500 589 — 22 2,111 151,819 (682) 152,501 49,004 $201,505 74 Financials_v5.qxd 2/24/06 3:47 PM Page 75 Notes to Consolidated Financial Statements 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 Contribution of stock to BOK Charitable Foundation Write down of equity securities 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 Cash flows from financing activities: Increase in other borrowings Pay down of other borrowings Issuance of preferred, common and treasury stock, net Cash dividends Other 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 Payment of dividends in common stock Cash paid for interest 2005 2004 2003 $ 201,505 $ 179,023 $ 158,360 (49,004) 3,583 — — (12,337) (889) 142,858 — (34,264) (34,264) — (95,000) 7,032 (20,343) (2,439) (110,750) (2,156) 13,230 11,074 — 1,698 $ $ (181,706) 4,609 4,125 410 (5,138) 713 2,036 (53) (5,250) (5,303) — — 7,132 (1,540) 24 5,616 2,349 10,881 13,230 65,899 1,882 $ $ (93,398) 1,325 — — (944) 272 65,615 (27) (85,015) (85,042) 105,000 (95,000) 4,627 (785) — 13,842 (5,585) 16,466 10,881 58,300 1,947 $ $ 75 Financials_v5.qxd 2/24/06 3:47 PM Page 76 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 debenture 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 Assets3 Less tax-equivalent adjustment1 Net Interest Revenue Provision for credit losses Other operating revenue Other operating expense Income before taxes Federal and state income tax Net Income Average Balance $ 4,769,666 226,961 4,996,627 15,892 38,521 8,489,751 110,158 8,379,593 13,430,633 2,138,222 $15,568,855 $ 4,402,810 159,429 3,894,429 8,456,668 1,936,792 996,266 236,589 11,626,315 1,607,702 872,992 1,461,846 $15,568,855 2005 Revenue/ Expense1 $ $ 205,952 11,587 217,539 770 1,287 555,520 — 555,520 775,116 72,721 1,106 136,573 210,400 61,606 34,220 14,367 320,593 Yield/ Rate 4.34% 5.13 4.38 4.85 3.34 6.54 — 6.63 5.78 1.65% 0.69 3.51 2.49 3.18 3.43 6.07 2.76 $ 454,523 3.02% 3.39 5,182 449,341 12,441 346,946 469,106 314,740 113,235 201,505 $ 1 2 Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments shown are for comparative purposes. 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. 76 Financials_v5.qxd 2/24/06 3:47 PM Page 77 Yield/ Rate 4.26% 5.64 4.32 3.93 1.77 5.35 — 5.43 4.99 0.92% 0.58 3.01 1.90 1.31 1.76 5.07 1.84 3.15% 3.45 Average Balance $ 4,656,108 207,376 4,863,484 16,025 19,944 7,644,049 116,076 7,527,973 12,427,426 1,599,461 $14,026,887 $ 3,863,276 169,556 3,584,496 7,617,328 1,611,771 1,007,237 152,983 10,389,319 1,805,558 534,453 1,297,557 $14,026,887 2004 Revenue/ Expense1 $197,884 11,672 209,556 629 353 408,785 — 408,785 619,323 $ 35,517 975 107,941 144,433 21,140 17,707 7,761 191,041 $428,282 5,039 423,243 20,439 308,890 441,224 270,470 91,447 $179,023 Average Balance $ 4,316,303 191,982 4,508,285 16,975 26,330 7,101,543 110,791 6,990,752 11,542,342 1,237,074 $12,779,416 $ 3,605,539 172,938 3,439,361 7,217,838 1,537,100 1,051,685 154,940 9,961,563 1,309,744 348,553 1,159,556 $12,779,416 Yield/ Rate 4.22% 6.59 4.32 4.09 1.07 5.30 — 5.38 4.96 0.87% 0.55 2.90 1.83 1.01 1.59 6.12 1.74 3.22% 3.44 2003 Revenue/ Expense1 $180,581 12,527 193,108 694 281 376,260 — 376,260 570,343 $ 31,346 944 99,639 131,929 15,590 16,682 9,477 173,678 $396,665 5,170 391,495 35,636 304,853 413,438 247,274 88,914 $158,360 77 Financials_v5.qxd 2/24/06 3:47 PM Page 78 Quarterly Financial Summary — Unaudited Consolidated Daily Average Balances, Average Yields and Rates (Dollars in Thousands Except Per Share Data) Three Months Ended December 31, 2005 September 30, 2005 Average Balance Revenue/ Expense1 Yield/ Rate Average Balance Revenue/ Expense1 Yield/ Rate 4.44% 5.05 4.47 4.68 4.00 6.98 — 7.06 6.12 1.98% 0.75 3.77 2.78 3.92 4.08 6.28 3.14 2.98% 3.34 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 debenture Total interest-bearing liabilities Demand deposits Other liabilities Shareholders’ equity Total liabilities and shareholders’ equity $ 4,816,263 243,521 5,059,784 20,595 57,656 9,005,546 108,998 8,896,548 14,034,583 2,131,047 $16,165,630 $ 4,821,627 154,316 4,216,625 9,192,568 1,812,752 1,049,635 296,021 12,350,976 1,530,504 777,111 1,507,039 $16,165,630 Tax-equivalent Net Interest Revenue3 Tax-equivalent Net Interest Revenue to Earning Assets3 Less tax-equivalent adjustment1 Net Interest Revenue Provision for credit 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 $ 53,375 3,046 56,421 243 581 158,387 — 158,387 215,632 $ 24,075 292 40,083 64,450 17,914 10,807 4,683 97,854 $117,778 1,392 116,386 4,450 87,344 123,903 75,377 27,219 $ 48,158 $0.72 $0.72 $ 4,800,698 231,097 5,031,795 14,560 44,882 8,635,732 109,840 8,525,892 13,617,129 1,970,746 $15,587,875 $ 4,533,912 157,772 3,958,948 8,650,632 2,067,432 1,047,423 297,284 12,062,771 1,424,102 613,667 1,487,335 $15,587,875 4.28% 4.96 4.31 4.66 3.41 6.66 — 6.75 5.83 1.66% 0.70 3.53 2.50 3.40 3.60 5.97 2.84 2.99% 3.32 $ 51,946 2,888 54,834 171 386 144,954 — 144,954 200,345 $ 18,968 280 35,255 54,503 17,738 9,510 4,477 86,228 $114,117 1,289 112,828 3,976 86,855 117,034 78,673 27,846 $ 50,827 $0.77 $0.76 1 Tax equivalent at the statutory federal and state rates for the periods presented. The taxable equivalent adjustments shown are for comparative purposes. 2 The loan averages included loans on which the accrual of interest has been discontinued and are stated net of unearned income. See Note 1 of Notes to the Consolidated Financial Statements for a description of income recognition policy. 3 Yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income. 78 Financials_v5.qxd 2/24/06 3:47 PM Page 79 June 30, 2005 Average Balance Revenue/ Yield/ Expense1 Rate Three Months Ended March 31, 2005 December 31, 2004 Average Balance Revenue/ Expense1 Yield/ Rate Average Balance Revenue/ Expense1 Yield/ Rate 4.32% 5.23 4.36 5.69 2.96 6.40 — 6.49 5.68 1.49% 0.69 3.41 2.34 2.93 3.17 5.98 2.58 3.10% 3.45 $ 4,831,186 $ 51,275 2,810 54,085 165 156 133,173 — 133,173 187,579 215,360 5,046,546 11,639 21,170 8,341,490 111,056 8,230,434 13,309,789 1,750,686 $15,060,475 $ 4,323,513 $ 16,049 285 31,499 47,833 15,764 7,224 2,980 73,801 166,426 3,710,338 8,200,277 2,160,031 914,968 200,038 11,475,314 1,586,248 558,655 1,440,258 $15,060,475 $113,778 1,245 112,533 2,015 94,591 126,010 79,099 28,634 $ 50,465 $0.79 $0.75 ` $ 4,709,193 219,873 4,929,066 10,208 31,994 7,873,974 114,106 7,759,868 12,731,136 1,598,935 $14,330,071 $ 3,841,742 160,404 3,662,455 7,664,601 1,747,391 1,005,679 152,634 10,570,305 1,938,205 453,571 1,367,990 $14,330,071 4.25% 5.37 4.30 4.17 2.11 5.62 — 5.71 5.15 1.12% 0.57 3.21 2.11 1.91 2.26 5.03 2.13 3.02% 3.38 $ 50,200 2,951 53,151 107 170 111,292 — 111,292 164,720 $ 10,779 231 29,586 40,596 8,397 5,703 1,929 56,625 $108,095 1,633 106,462 4,439 78,714 111,582 69,155 22,599 $ 46,556 $0.78 $0.70 $ 4,628,233 217,571 4,845,804 17,205 30,003 7,963,177 111,955 7,851,222 12,744,234 1,474,621 $14,218,855 $ 3,920,844 159,276 3,685,257 7,765,377 1,704,327 971,616 150,752 10,592,072 1,895,989 319,375 1,411,419 $14,218,855 4.32% 5.30 4.36 4.50 2.22 6.06 — 6.15 5.46 1.41% 0.63 3.27 2.28 2.42 2.79 5.99 2.40 3.06% 3.46 $ 49,356 2,843 52,199 191 164 119,006 — 119,006 171,560 $ 13,629 249 29,736 43,614 10,190 6,679 2,227 62,710 $108,850 1,256 107,594 2,000 78,156 102,159 81,591 29,536 $ 52,055 $0.87 $0.78 79 Financials_v5.qxd 2/24/06 3:47 PM Page 80 BOK Financial Corporation Board of Directors Gregory S. Allen1 President & CEO Advance Food Co., Inc. Joseph E. Cappy 1 Retired Chairman & CEO Dollar Thrifty Automotive Group C. Fred Ball, Jr. 2 Chairman & CEO Bank of Texas, N.A. Sharon J. Bell 1 Managing Partner Rogers & Bell William E. Durrett Senior Chairman American Fidelity Corp. Robert G. Greer 2 Vice Chairman Bank of Texas, N.A. Peter C. Boylan, III 1 CEO Boylan Partners, LLC David F. Griffin 1 President & General Manager Griffin Communications, L.L.C. Chester Cadieux, III 1 President & CEO QuikTrip Corporation V. Burns Hargis 1 Vice Chairman BOK Financial Corporation and Bank of Oklahoma, N.A. E. Carey Joullian, IV 1 President & CEO Mustang Fuel Corporation Steven J. Malcolm 1 Chairman, President & CEO The Williams Companies, Inc. George B. Kaiser 1 Chairman BOK Financial Corporation and Bank of Oklahoma, N.A. Paula Marshall-Chapman 1 CEO Bama Companies Judith Z. Kishner 1 Manager Zarrow Family Office, L.L.C. James A. Robinson Personal Investments David L. Kyle 1 Chairman, President & CEO ONEOK, Inc. Robert J. LaFortune Personal Investments Stanley A. Lybarger 1,2 President & CEO BOK Financial Corporation and Bank of Oklahoma, N.A. 1 Director of BOK Financial Corporation and Bank of Oklahoma, N.A. 2 Director of BOK Financial Corporation and Bank of Texas, N.A. Bank of Albuquerque, N.A. Board of Directors Adelmo Archuleta Owner, Professional Engineer Molzen-Corbin & Associates William E. Garcia Retired Sr. Manager, Public Affairs Intel Corporation Mark E. Sauters Senior Vice President Bank of Albuquerque, N.A. Suzanne Barker-Kalangis, Esq. Partner, Modrall, Sperling, Roehl, Harris and Sisk P.A. Robert M. Goodman Vice Chairman Bank of Albuquerque, N.A. Steven G. Bradshaw Sr. Executive Vice President BOK Financial Corporation Charles E. Cotter Executive Vice President BOK Financial Corporation Rudy A. Davalos Athletic Director University of New Mexico Thomas D. Growney President Tom Growney Equipment, Inc. Larry F. Levy Senior Vice President Bank of Albuquerque, N.A. W. Jeffrey Pickryl Sr. Executive Vice President BOK Financial Corporation Michael D. Sivage Chief Executive Officer STH Investments, Inc. Paul A. Sowards President Bank of Albuquerque, 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 Arkansas, N.A. Board of Directors John W. Anderson Senior Vice President Bank of Oklahoma, N.A. Jett C. Cato Executive Vice President Bank of Arkansas, N.A. Jeff D. Cude Senior Vice President Bank of Arkansas, N.A. Jeffrey R. Dunn Chairman, President & CEO Bank of Arkansas, N.A. Mark W. Funke President Bank of Oklahoma, N.A. Oklahoma City Ronald E. Leffler Senior Vice President Bank of Oklahoma, N.A. Bank of Arizona, N.A. Board of Directors Gregory S. Anderson Vice Chairman Bank of Arizona, N.A. Charles E. Cotter Executive Vice President BOK Financial Corporation Scott D. LeMarr President Polo Cristi Companies Steven E. Nell EVP, Chief Financial Officer BOK Financial Corporation W. Jeffrey Pickryl Sr. Executive Vice President BOK Financial Corporation David Ralston Chairman Bank of Arizona, N.A. Dr. David Righi Physician Valley Anesthesiology Consultants James A. Sharp, Jr. Owner Oval Transportation Services Dr. Anthony T. Yeung Surgeon Arizona Institute for Minimally Invasive Spine Care Bank of Texas, N.A. Board of Directors C. Thomas Abbott Vice Chairman Bank of Texas, N.A. - Dallas C. Fred Ball, Jr. Chairman & CEO Bank of Texas, N.A. - Dallas C. Huston Bell Retired President The Vantage Companies Edward O. Boshell, Jr. Retired, Columbia General Investments, LP Steven G. Bradshaw Sr. Executive Vice President BOK Financial Corporation R. Neal Bright Managing Partner Bright & Bright, LLP H. Lynn Craft President & CEO Baptist Foundation of Texas Charles W. Eisemann Personal Investments James J. Ellis Managing Partner Ellis/Roiser Associates Robert G. Greer Vice Chairman Bank of Texas, N.A. - Houston Thomas S. Swiley President & COO Bank of Texas, N.A. - Dallas Mrs. Jere W. Thompson Community Leader Tom E. Turner Retired Chairman Bank of Texas, N.A. - Dallas John C. Vogt Personal Investments Randall Walker Chairman Bank of Texas, N.A. - Houston R. William Gribble, Jr. President Gribble Oil Company J. T. Hairston, Jr. Personal Investments Douglas D. Hawthorne President & CEO Texas Health Resources Bill D. Henry Chairman & CEO McQuery Henry Bowles Troy, LLP Richard W. Jochetz President Bank of Texas, N.A. - Houston Stanley A. Lybarger President & CEO BOK Financial Corporation Albert W. Niemi, Jr. Dean, Cox School of Business Southern Methodist University W. Jeffrey Pickryl Sr. Executive Vice President BOK Financial Corporation Colorado State Bank and Trust, N.A. Board of Directors (CSBT) Aaron K. Azari Executive Vice President CSBT Steven Caulkins, III Principal Greendeck Capital Joel H. Farkas Chairman JF Companies Thomas M. Foncannon Senior Vice President CSBT H. James Holloman Executive Vice President Bank of Oklahoma, N.A. Richard H. Lewis Personal Investments Kirk McDonald CEO, President Denver Newspaper Corp. W. Jeffrey Pickryl Sr. Executive Vice President BOK Financial Corporation 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 Stacy C. Kymes, Senior Vice President, (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 1700 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, 2005: 1,199 Market Makers: Archipelago Exchange (The) Boston Stock Exchange Citadel Derivatives Group LLC Citigroup Global Markets Inc. Credit Research & Trading Credit Suisse First Boston Friedman Billings Ramsey & Co Goldman, Sachs & Co. GVR Company LLC Harris Nesbitt Corp. Howe Barnes Investments, Inc. Jefferies & Company, Inc. Keefe, Bruyette & Woods, Inc. Knight Equity Markets, L.P. Lehman Brothers Inc. Merrill Lynch, Pierce, Fenner Morgan Stanley & Co., Inc. National Stock Exchange Piper Jaffray Companies Inc. Sandler O'Neill & Partners Schwab Capital Markets Stephens Inc. SunTrust Robinson Humphrey Capital Markets Susquehanna Capital Group The Robinson Humphrey Co. UBS Securities LLC RELATIONSHIPS DRIVE RESULTS