As filed with the Securities and Exchange Commission on August 14, 2002
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2002
Commission File No. 0-19341
BOK FINANCIAL CORPORATION
Incorporated in the State of Oklahoma
I.R.S. Employer Identification No. 73-1373454
Bank of Oklahoma Tower
P.O. Box 2300
Tulsa, Oklahoma 74192
Registrant's Telephone Number,
Including Area Code (918) 588-6000
SECURITIES REGISTERED PURSUANT TO SECTION 12(b)
OF THE ACT: (NONE)
SECURITIES REGISTERED PURSUANT TO SECTION 12(g)
OF THE ACT:
COMMON STOCK ($.00006 Par Value)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: 52,999,702 shares of
common stock ($.00006 par value) as of July 31, 2002.
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BOK Financial Corporation
Form 10-Q
Quarter Ended June 30, 2002
Index
Part I. Financial Information
Management's Discussion and Analysis 2
Report of Management on Consolidated
Financial Statements 18
Unaudited Consolidated Statements of Earnings 19
Unaudited Consolidated Balance Sheets 21
Unaudited Consolidated Statements of Changes
in Shareholders' Equity 22
Unaudited Consolidated Statements of Cash Flows 23
Unaudited Notes to Consolidated Financial Statements 24
Financial Summaries - Unaudited 27
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 30
Signature 30
MANAGEMENT'S ASSESSMENT OF OPERATIONS AND FINANCIAL CONDITION
ASSESSMENT OF OPERATIONS
SUMMARY OF PERFORMANCE
BOK Financial Corporation ("BOK Financial") recorded net income of $34.1 million
or $0.57 per diluted common share of the second quarter of 2002 compared to
$29.0 million or $0.49 per diluted common share for the second quarter of 2001.
Prior year's earnings per share have been restated for a 3% dividend paid in
common shares in May 2002. The returns on average assets and equity were 1.23%
and 15.40%, respectively for the quarter ended June 30, 2002 compared to 1.13%
and 15.33% for the same period of 2001.
Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (FAS 142), was implemented in the current year. Accordingly,
certain intangible assets are no longer amortized. This statement is applied to
all periods after adoption on January 1, 2002 and not retroactively. If these
rules had been applied retroactively the proforma net income and earning per
diluted share for the second quarter of 2001 would have been $30.7 million and
$0.51.BOK Financial has completed its first required goodwill impairment test
according to FAS 142, no impairment was indicated.
Net interest revenue for the second quarter of 2002 grew $9.9 million over same
period in 2001 due $12.6 million to increase in average earning assets, offset
$2.3 million from declining yields. Fees and commissions revenue grew $5.9
million during the second quarter of 2002 with increases in brokerage and
trading, transaction card revenue and service charges on deposit accounts. Net
gains on sales of securities totaled $21.6 million for the quarter ending June
30, 2002, which included net gains from sales of securities held as an economic
hedge of the mortgage servicing rights portfolio of $11.5 million. Net losses on
sales of derivatives of $1.5 million for the quarter ended June 30, 2002
included net losses of $1.9 million on derivatives used to manage interest rate
risk, partially offset by a net gain from sales of derivative used to hedge the
mortgage servicing rights portfolio of $519 thousand. The net impact of the
hedge gains and losses from sales and the provision for impairment of the
mortgage servicing portfolio was a loss of $11.8 million during the second
quarter of 2002. Operating expense, excluding the provision for impairment of
mortgage servicing rights increased $3.7 million during the second quarter 2002
compared to the same period 2001. The provision for loan loss decreased $1.7
million or 20% due to improved credit quality indicators.
Net income for the six months ending June 30, 2002 totaled $66.5 million, an
increase of 18% over the same period of 2001. Diluted earnings per share were
$1.10 compared to $0.95 in 2001. Proforma results of FAS 142 on the six months
ending June 30, 2001 were net income $59.9 million net income and $1.01 per
diluted share. The returns on average assets and equity were 1.22% and 15.40%,
respectively for the six months ended June 30, 2002 compared to 1.13% and 15.35%
for the same period of 2001.
On May 15, 2002, BOK Financial announced an agreement to acquire Bank of
Tanglewood, National Association, Houston, Texas for stock valued at
approximately $68.0 million. Bank of Tanglewood has total assets, deposits and
equity of approximately $234 million, $205 million, and $17 million,
respectively. The acquisition, which is subject to regulatory approval, is
expected to be completed during the fourth quarter of 2002.
NET INTEREST REVENUE
Net interest revenue on a tax-equivalent basis was $91.2 million for the second
quarter of 2002 compared to $81.9 million for the second quarter of 2001. The
growth in net interest revenue was due primarily to an $857 million increase in
average earning assets. The increase in earning assets included an increase in
securities of $593 million and an increase in loans of $281 million. Average
interest bearing liabilities increased $353 million or 4% over same quarter
2001. Yields on earning assets and liabilities have continued to decrease from
first quarter 2002 with an overall decrease of 18 basis points in net interest
margin. BOK Financial's interest bearing liabilities react more quickly to
changes in interest rates than its earning assets. This has caused a rising net
interest margin over the past year during a time of significantly declining
market rates. Yields paid on interest bearing liabilities have moderated, only
decreasing 3 basis points since March 31, 2002 while interest earning assets
have continued to "catch-up" and have declined 28 basis points during the second
quarter 2002. Table 1 shows how net interest revenue was affected by changes in
average balances and interest rates for the various types of earning assets and
liabilities.
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TABLE 1 - VOLUME/RATE ANALYSIS
(In thousands)
Three months ended Six months ended
June 30, 2002/2001 June 30, 2002/2001
------------------------------------------------------------------------
Change Due To (1) Change Due To (1)
-------------------------------------------------------------
Yield Yield
Change Volume /Rate Change Volume /Rate
------------------------------------------------------------------------
Tax-equivalent interest revenue:
Securities $ (2,409) $ 7,871 $ (10,280) $ (2,322) $ 16,824 $(19,146)
Trading securities (94) 54 (148) (291) - (291)
Loans (23,293) 4,698 (27,991) (55,737) 12,662 (68,399)
Funds sold (99) (1) (98) (472) (162) (310)
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Total (25,895) 12,622 (38,517) (58,822) 29,324 (88,146)
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Interest expense:
Interest bearing transaction deposits (2,980) 2,367 (5,347) (8,300) 5,324 (13,624)
Savings deposits (66) 37 (103) (233) 71 (304)
Time deposits (14,632) (540) (14,092) (32,911) (977) (31,934)
Federal funds purchased and repurchase
agreements (12,984) (2,168) (10,816) (29,457) (3,427) (26,030)
Other borrowings (4,490) 1,356 (5,846) (11,808) 2,355 (14,163)
Subordinated debentures (70) (21) (49) 509 355 154
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Total (35,222) 1,031 (36,253) (82,200) 3,701 (85,901)
- -------------------------------------------------------------------------------------------------------------------
Tax-equivalent net interest revenue 9,327 11,591 (2,264) 23,378 25,623 (2,245)
Decrease in tax-equivalent adjustment 622 1,001
- ------------------------------------------------------ -----------
Net interest revenue $ 9,949 $ 24,379
- ------------------------------------------------------ -----------
(1) Changes attributable to both volume and yield/rate are allocated to both
volume and yield/rate on an equal basis.
Since inception, BOK Financial has followed a strategy of fully utilizing its
capital resources by borrowing funds in the capital markets to supplement
deposit growth in order to fund increased investments in securities. The primary
objective of this strategy is to reduce total interest rate risk. The interest
rate on these borrowed funds, which generally reacts quickly to changes in
market interest rates, tends to match the effect of changes in interest rates on
the loan portfolio. Interest rates earned on the securities purchased with the
proceeds of these borrowed funds are affected less quickly by changes in market
interest rates. The timing of changes in interest rates earned on securities
more closely matches the timing of changes in interest rates paid on deposit
accounts. Although this strategy may result in a net interest margin that falls
below those normally seen in the commercial banking industry, it provides
positive net interest revenue. Management estimates that for the second quarter
of 2002, this strategy contributed $17.3 million to net interest revenue.
Year-to-date 2002 this strategy contributed $35.2 million to net interest
revenue. There was nominal impact on net interest margin during quarter to date
and year to date 2002 due to the continued decline of yields on securities in
relation to moderating cost of short-term borrowed funds. Management employs
various techniques to control, within established parameters, the interest rate
and liquidity risk inherent in this strategy, the results of which are presented
in the Market Risk section.
OTHER OPERATING REVENUE
Other operating revenue increased $5.9 million or 10%, excluding net gains on
sales of securities and derivatives, over the same period in 2001. Service
charges and fees on deposit accounts grew 28% or $3.6 million during the second
quarter of 2002 over the same period in 2001, due to increases in insufficient
fund charges. Transaction card revenues have increased $2.0 million or 18% due
to growth in merchant fees, which are directly related to the level of activity,
growth in ATM network fees (TransFund) and growth in check card fees. Brokerage
and trading revenue increased $1.2 million or 20% to $7.0 million for quarter
ending June 30, 2002 compared to same period in 2001 mostly due to institutional
sales. Mortgage banking revenue has declined $1.1 million or 10% due to lower
servicing fees, see mortgage banking discussion in the Lines of Business section
of this report.
Net gain on sales of securities of $21.6 million included net gains from the
general securities portfolio of $10.1 million and $11.5 million from the
securities portfolio that management has designated as an economic hedge against
the risk of loss on mortgage servicing rights. Mortgage-backed securities were
sold from the general portfolio to reduce the level of prepayment risk in a
continuing low interest rate environment. Net losses on sales of derivatives
included $519 thousand realized gains from sales of options designated as an
economic hedge against the risk of loss on mortgage servicing rights and
realized losses of $1.9 million on derivatives used for interest rate risk
management. Additional discussion about the mortgage servicing rights and
related hedge portfolio and BOK Financial's use of derivative instruments is
located in the Market Risk section of this report.
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TABLE 2 - OTHER OPERATING REVENUE
(In thousands)
Three Months Ended
-------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
2002 2002 2001 2001 2001
-------------------------------------------------------------------------------
Brokerage and trading revenue $ 7,014 $ 7,092 $ 5,926 $ 4,938 $ 5,858
Transaction card revenue 13,439 12,486 11,489 11,679 11,411
Trust fees and commissions 10,300 10,374 9,740 10,211 10,679
Service charges and fees
on deposit accounts 16,391 13,855 13,741 12,961 12,793
Mortgage banking revenue, net 10,759 10,652 14,923 12,499 11,900
Leasing revenue 822 892 915 810 901
Other revenue 5,698 5,042 5,578 4,341 4,947
- --------------------------------------------------------------------------------------------------------------------------
Total fees and commissions 64,423 60,393 62,312 57,439 58,489
- --------------------------------------------------------------------------------------------------------------------------
Gain on student loan sales 7 676 18 11 7
Gain (loss) on sales of securities, net 21,602 (7,581) (3,770) 19,746 2,030
Gain (loss) on derivatives, net (1,453) (536) (3,300) (1,105) (303)
- --------------------------------------------------------------------------------------------------------------------------
Total other operating revenue $ 84,579 $ 52,952 $ 55,260 $ 76,091 $ 60,223
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Year-to-date other operating revenue increased $12.6 million or 11%, excluding
net gains on sales of securities and derivatives. Service charges on deposits
increased $5.7 million or 23% during the first half of 2002 compared to same
period 2001 due to increases in growth in insufficient fund charges and growth
of treasury services revenue. Transaction card revenue increased 22% to $25.9
million for the six months ending June 30, 2002 as compared to same period 2001
due to increases in merchant fees and ATM network fees. Brokerage and trading
revenue has increased $3.1 million or 29% to $14.1 million for the period ending
June 30, 2002. These increases have been offset by declines in mortgage banking
of $1.3 million or 6%.
Year-to-date net gain on sales of securities of $14.0 million included net gains
from the general securities portfolio of $22.4 million and losses of $8.4
million from the securities portfolio that management has designated as an
economic hedge against the risk of loss on mortgage servicing rights. Net losses
on sales of derivatives included $519 thousand realized gains from sale of
options designated as an economic hedge against the risk of loss on mortgage
servicing rights, $2.9 million net losses on interest rate risk management
instruments, $343 thousand net gains on energy trading contracts and $56
thousand gain on other trading instruments
Management expects continued growth in other operating revenue. However,
increased competition, market saturation and the level of economic activity
could affect the future rate of increase. Additionally, BOK Financial's ability
to generate fee revenue is affected by interest rates, values in the equity
market and consumer spending, all of which can be volatile.
OTHER OPERATING EXPENSE
Operating expense increased $1.7 million or 6% to $90.2 million, excluding all
significant or nonrecurring items as presented in Table 4. Personnel costs
increased $4.1 million or 10%, primarily increases in salaries and incentive
compensation. During the second quarter of 2002 a provision of impairment of
mortgage servicing rights of $23.8 million was recognized due to market
conditions existing at that time. These market conditions are discussed more
thoroughly in the Lines of Business - Mortgage Banking section of this report.
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TABLE 3 - OTHER OPERATING EXPENSE
(In thousands)
Three Months Ended
-------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
2002 2002 2001 2001 2001
-------------------------------------------------------------------------------
Personnel $ 44,885 $ 43,332 $ 42,575 $ 40,491 $ 40,833
Business promotion 3,208 2,878 2,798 2,560 2,428
Professional fees and services 3,732 2,908 4,189 2,983 3,162
Occupancy & equipment 10,299 10,340 10,637 11,017 10,767
Data processing & communications 11,216 10,438 10,486 10,173 9,981
FDIC and other insurance 483 439 388 443 443
Printing, postage and supplies 3,018 3,057 3,132 3,141 3,065
Net gains and operating
expenses on repossessed assets 656 47 239 1,189 (56)
Amortization of intangible assets 2,679 2,685 5,014 5,015 5,057
Mortgage banking costs 7,791 8,357 9,512 7,191 7,140
Provision for impairment
of mortgage servicing rights 23,774 (5,278) (8,861) 15,224 (535)
Other expense 2,854 4,746 4,692 4,164 4,299
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Total $ 114,595 $ 83,949 $ 84,801 $ 103,591 $ 86,584
- ------------------------------------------------------------------------------------------------------------------
Amortization of intangible assets decreased $2.4 million for the quarter ending
June 30, 2002 and $4.7 million for the first half of 2002, of which $1.8 million
and $3.7 million, respectively, was related to the implementation of FAS 142,
which established new rules of accounting for intangible assets. Under these new
rules, intangible assets with indefinite lives such as goodwill will no longer
be amortized but will be subject to impairment testing. Other intangible assets
will continue to be amortized over their useful lives. These new rules are
applied to periods after adoption on January 1, 2002; prior periods are not
restated for this change in accounting. If these rules had been applied
retroactively operating expense would have decreased $1.8 million for the
quarter ended June 30, 2001 and $3.7 million for the six months ended June 30,
2001.
Subsequent to the issuance of FAS 142, the FASB issued an interpretation that
the unidentifiable intangible asset that results from certain business
combinations, such as branch acquisitions, must continue to be amortized over
periods determined by the expected lives of the acquired assets and deposits.
The FASB has agreed to reconsider this interpretation and tentatively agreed
that under certain circumstances, amortization of this goodwill would also be
discontinued. Goodwill amortization expense related to branch acquisitions would
have decreased by an additional $1.6 million if this interpretation was
implemented for the first half of 2002.
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TABLE 4 - OTHER OPERATING EXPENSE, EXCLUDING SIGNIFICANT OR NONRECURRING ITEMS
(In thousands)
Three Months Ended
----------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
2002 2002 2001 2001 2001
----------------------------------------------------------------------------
Total other operating expense $ 114,595 $ 83,949 $ 84,801 $ 103,591 $ 86,584
Net gains and operating costs from
repossessed assets (656) (47) (239) (1,189) 56
Proforma effect of FAS 142 - - (1,778) (1,778) (1,750)
Provision for impairment of mortgage
servicing rights (23,774) 5,278 8,861 (15,224) 535
- ------------------------------------------------------------------------------------------------------------------
Total $ 90,165 $ 89,180 $ 91,645 $ 85,400 $ 85,425
- ------------------------------------------------------------------------------------------------------------------
Year-to-date other operating expense increased $11.8 million or 7%, excluding
significant or nonrecurring items. This increase was due primarily to personnel
expense, data processing and mortgage banking.
LINES OF BUSINESS
BOK Financial operates four principal lines of business under its Bank of
Oklahoma ("BOk") franchise: corporate banking, consumer banking, mortgage
banking and trust services. It also operates a fifth line of business, regional
banks, which includes all banking functions for Bank of Albuquerque, N.A., Bank
of Arkansas, N.A., and Bank of Texas, N.A. Other lines of business include the
TransFund ATM network and BOSC, Inc., a securities broker-dealer.
BOK Financial allocates resources and evaluates performance of its lines of
business after the allocation of funds, certain indirect expenses, taxes and
capital costs. The cost of funds provided from one segment to another is
transfer-priced at rates that approximate market for funds with similar
duration. Deposit accounts with indeterminate maturities are transfer-priced at
a rolling average rate based on expected duration of the accounts. Over the past
year, the average transfer-pricing rate for these deposit accounts decreased by
approximately 275 basis points. The impact of this significant decline in
interest rates shifted net interest revenue from the providers of funds,
primarily consumer banking, trust services and regional banks, to funds
management. This is reflected in net interest revenue in the funds management
department of $17.3 million for the quarter ended June 30, 2002 compared to
$$926 thousand for the second quarter of 2001.
Corporate Banking
The Corporate Banking division provides loan and lease financing and treasury
and cash management services to businesses throughout Oklahoma and seven
surrounding states. In addition to serving the banking needs of small
businesses, middle market and larger customers, the Corporate Banking Division
has specialized groups that serve customers in the energy, agriculture,
healthcare and banking/finance industries. The Corporate Banking Division
contributed $12.0 million or 35% to consolidated net income for the second
quarter of 2002. This compares to $11.5 million or 40% of consolidated net
income for the second quarter of 2001. The decrease in net interest revenue from
external sources was due to lower loan yields. . The provision for loan loss
represents net loans charged off or recovered for the Corporate Banking
Division.
Table 5 Corporate Banking
(In thousands)
Three months ended June 30, Six months ended June 30,
------------------------------ ----------------------------
2002 2001 2002 2001
------------- --------------- -----------------------------
NIR (expense) from external sources $ 39,508 $ 50,654 $ 78,144 $ 108,998
NIR (expense) from internal sources (11,923) (22,623) (24,129) (51,911)
------------- ------------- ------------- ------------
Total net interest revenue 27,585 28,031 54,015 57,087
Other operating revenue 8,368 7,391 16,599 14,618
Operating expense 14,916 14,043 28,883 28,394
Provision for loan loss 1,316 2,620 3,530 6,745
Net income 11,976 11,461 23,549 22,342
Average assets $ 3,932,104 $ 3,832,429 $ 3,933,341 $ 3,818,034
Average equity 444,469 435,382 444,454 435,312
Return on assets 1.22% 1.20% 1.21% 1.18%
Return on equity 10.81% 10.56% 10.68% 10.35%
Efficiency ratio 41.49% 39.64% 40.90% 39.60%
Consumer Banking
The Consumer Banking Division, which provides a full line of deposit, loan and
fee-based services to customers throughout Oklahoma, contributed $2.2 million or
7% to consolidated net income for the second quarter of 2002. This compares to
$5.0 million or 17% of consolidated net income for the second quarter of 2001.
Revenue from internal sources, primarily funds provided to other business lines,
decreased $9.4 million due to lower transfer pricing rates. At the same time,
revenue from external sources increased $4.6 million due to lower interest paid
on deposit accounts. Other operating revenue increased $1.9 million or 25% over
second quarter of 2001 due to increases in insufficient fund charges.
Table 6 Consumer Banking
(In thousands)
Three months ended June 30, Six months ended June 30,
----------------------------- ---------------------------
2002 2001 2002 2001
------------ --------------- ----------------------------
NIR (expense) from external sources $ (4,652) $ (9,287) $ (8,736) $ (21,372)
NIR (expense) from internal sources 15,808 25,196 31,417 53,002
------------ ------------- ------------ ------------
Total net interest revenue 11,156 15,909 22,681 31,630
Other operating revenue 9,295 7,431 17,169 14,670
Operating expense 15,842 14,465 31,291 29,368
Provision for loan loss 946 710 2,386 1,936
Net income 2,237 4,989 3,771 9,162
Average assets $ 2,282,477 $ 2,182,712 $ 2,300,335 $ 2,179,714
Average equity 72,512 69,955 72,894 67,208
Return on assets 0.39% 0.92% 0.33% 0.85%
Return on equity 12.37% 28.61% 10.43% 27.49%
Efficiency ratio 77.46% 61.98% 78.52% 63.43%
Mortgage Banking
The Mortgage Banking Division incurred a loss of $5.3 million for the second
quarter of 2002 compared to income of $1.9 million for the second quarter of
2001. The loss was due to a provision for impairment of mortgage servicing
rights that was only partially offset by hedging activities.
Mortgage banking revenue, which is included in other operating revenue, totaled
$10.8 million, a decrease of $1.1 million from the same period of 2001. Mortgage
loans originated totaled $254 million compared to $293 million for the second
quarter of 2001. Revenue from loan production activities was $3.6 million for
both quarters. Pre-tax income from loan origination activities totaled $2.4
million in 2002 compared to $2.3 million in 2001. Approximately 72% of the loans
originated during the second quarter of 2002 were in Oklahoma.
Mortgage servicing revenue totaled $7.2 million for the second quarter of 2002
compared to $8.2 million in 2001. The decrease in mortgage servicing revenue was
due primarily to a lower outstanding principal balance of loans serviced.
Amortization of mortgage servicing rights, which is included in operating
expenses, totaled $6.3 million in 2002 compared to $6.2 million in 2001. The
valuation allowance from impairment of mortgage servicing rights totaled $36.9
million, an increase of $23.8 million during the quarter. Anticipated loan
prepayments increased during the second quarter due to falling interest rates.
Net realized gains from sales of securities and derivatives designated as an
economic hedge of the mortgage servicing portfolio totaled $12.0 million. These
factors combined for a pre-tax loss on mortgage servicing activities of $11.4
million for the second quarter of 2002 compared to pre-tax income of $394
thousand for 2001. See the Market Risk section of this report for additional
discussion of the prepayment risk of the mortgage servicing portfolio and
related hedging strategies.
Table 7 Mortgage Banking
(In thousands)
Three months ended June 30, Six months ended June 30,
--------------------------------------------------------
2002 2001 2002 2001
----------- -------------- --------------------------
NIR (expense) from external sources $ 6,838 $ 9,343 $ 15,783 $ 16,924
NIR (expense) from internal sources (3,725) (6,064) (7,964) (12,594)
----------- ------------- ----------- -----------
Total net interest revenue 3,113 3,279 7,819 4,330
Capitalized mortgage servicing rights 4,556 4,615 8,778 7,700
Other operating revenue 6,865 7,863 14,351 16,200
Operating expense 11,468 11,287 23,472 22,246
Provision (recovery) for impairment of
mortgage servicing rights 23,774 (535) 18,496 9,188
Gains (losses) on sales of financial 12,019 (1,922) (7,903) 9,387
instruments
Net income (loss) (5,315) 1,884 (11,607) 3,763
Average assets $ 686,222 $ 687,089 $ 661,391 $ 638,590
Average equity 47,219 45,433 46,247 41,358
Return on assets (3.11)% 1.10% (3.54)% 1.19%
Return on equity (45.15)% 16.63% (50.61)% 18.35%
Efficiency ratio 78.90% 71.63% 75.84% 78.80%
Trust Services
Trust Services, which includes institutional, investment and retirement products
and services to affluent individuals, businesses, not-for-profit organizations,
and governmental agencies, contributed $1.9 million or 6% of consolidated net
income for the second quarter 2002. This compared to $2.9 million or 10% of
consolidated net income for the second quarter of 2001. Other operating revenue
declined $517 thousand compared to the second quarter 2001 due declines in the
stock market on which many fees are based. At June 30, 2002 trust assets with an
aggregate market value of $17.9 billion were subject to various fiduciary
arrangements compared to $17.6 billion at June 30, 2001.
Table 8 Trust Services
(In thousands)
Three months ended June 30, Six months ended June 30,
------------------------- --------------------------
2002 2001 2002 2001
---------- ------------- ---------------------------
NIR (expense) from external sources $ 326 $ (126) $ 799 $ (433)
NIR (expense) from internal sources 2,131 3,795 4,005 7,433
---------- ------------ ------------ -----------
Total net interest revenue 2,457 3,669 4,804 7,000
Other operating revenue 10,248 10,765 20,608 20,806
Operating expense 9,540 9,623 19,353 19,384
Net income 1,934 2,940 3,671 5,146
Average assets $ 508,361 $ 481,683 $ 517,499 $ 465,344
Average equity 43,901 40,931 43,847 40,310
Return on assets 1.53% 2.45% 1.43% 2.23%
Return on equity 17.67% 28.81% 16.88% 25.74%
Efficiency ratio 75.09% 66.67% 76.16% 69.71%
Regional Banking
Regional banks include Bank of Texas, Bank of Albuquerque, and Bank of Arkansas.
Each of these banks provides a full range of corporate and consumer banking,
trust services and retail investments in their respective markets. Small
businesses and middle-market corporations are the regional banks' primary
customer focus. Regional banks contributed $8.3 million or 24% to consolidated
net income for the second quarter 2002. This compared to $7.7 million or 27% of
consolidated net income for the second quarter of 2001. BOK Financial's
operations in Texas, New Mexico and Arkansas contributed $5.8 million, $2.6
million, and a $97 thousand loss, respectively, to consolidated net income for
the second quarter of 2002. The $97 thousand loss in Arkansas was attributable
to an increase in loan charge-offs during the current quarter. This compared to
net income of $5.3 million, $1.7 million, and $732 thousand for the second
quarter 2001.
Implementation of FAS 142 resulted in amortization of goodwill at Bank of Texas
decreasing $1.6 million for the second quarter of 2002 and $3.3 million for the
six months ending June 30, 2002. Bank of Albuquerque is still amortizing
goodwill, $300 thousand for the second quarter and $600 thousand for the six
months ending June 30, 2002, based on the interpretation regarding
unidentifiable intangible assets that result from branch acquisitions as
discussed in the Other Operating Expense section of this report.
Average equity assigned to regional banks included both an amount based on
management's assessment of risk and an additional amount based on BOK
Financial's investment in these entities. Management measures performance for
regional banks based on tangible net income, return on assets and return on
equity. Tangible net income is defined as net income excluding the after-tax
effect of goodwill and core deposit intangible asset amortization.
Table 9 Regional Banking
(In thousands)
Three months ended June 30, Six months ended June 30,
--------------------------------- ------------------------------
2002 2001 2002 2001
------------- -- ------------- ------------------- ------------
NIR (expense) from external sources $ 36,719 $ 34,426 $ 72,156 $ 66,668
NIR (expense) from internal sources (5,657) (2,943) (11,974) (4,891)
------------- ------------- ------------ ------------
Total net interest revenue 31,062 31,483 60,182 61,777
Other operating revenue 6,545 4,877 11,952 9,446
Operating expense 22,795 22,602 44,647 43,807
Provision for loan loss 2,420 1,696 3,536 2,185
Gains (losses) on sales of financial 2,134 202 2,961 (349)
instruments
Net income 8,272 7,745 16,106 15,751
Tangible net income 10,045 11,558 19,651 23,408
Average assets $ 3,716,658 $ 3,287,845 $ 3,739,332 $ 3,221,469
Average equity 435,684 408,522 438,706 392,625
Tangible return on assets 1.08% 1.41% 1.06% 1.47%
Tangible return on equity 9.25% 11.35% 9.03% 12.02%
Efficiency ratio 60.61% 62.16% 61.89% 61.51%
ASSESSMENT OF FINANCIAL CONDITION
The aggregate loan portfolio at June 30, 2002 totaled $6.3 billion compared to
$6.2 billion at March 31, 2002. Total loans increased by $71 million, excluding
a $7 million decrease in residential mortgage loans held for sale. The increase
in loans was due primarily to a $70 million increase in 1-4 family residential
mortgage loans. An overall slow down in the economy resulted in a net $5 million
decrease in BOK Financial's portfolio of commercial and commercial real estate
loans.
Outstanding loans to the services industry totaled $1.1 billion or 18% of total
loans at June 30, 2002. Services included loans of $109 million to the
healthcare industry, $210 million to nursing homes and $67 million to the hotel
industry. Loans to nursing homes increased $33 million during the quarter.
Energy loans represent 15% of the total loan portfolio. This category included
loans to oil and gas producers that totaled $759 million, a decrease of $20
million during the quarter. Agriculture included $119 million of loans to the
cattle industry, a decrease of $24 million. Other notable loan concentrations by
primary industry of the borrowers are presented in Table 10.
- ---------------------------------------------------------------------------------------------------------------------
TABLE 10 - LOANS
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2002 2002 2001 2001 2001
---------------------------------------------------------------------------------
Commercial:
Energy $ 936,381 $ 970,234 $ 987,556 $ 942,381 $ 885,546
Manufacturing 513,019 499,870 467,260 490,839 510,421
Wholesale/retail 655,081 613,612 600,470 585,351 580,421
Agricultural 134,612 156,334 170,861 199,155 202,041
Services 1,118,239 1,075,852 1,084,480 1,087,329 1,059,779
Other commercial and industrial 300,239 339,355 364,123 313,801 307,062
- ---------------------------------------------------------------------------------------------------------------------
Total commercial 3,657,571 3,655,257 3,674,750 3,618,856 3,545,270
- ---------------------------------------------------------------------------------------------------------------------
Commercial real estate:
Construction and land development 320,730 329,335 327,455 330,964 313,453
Multifamily 297,576 301,402 291,687 252,093 257,489
Other real estate loans 744,391 739,646 722,633 767,012 712,043
- ---------------------------------------------------------------------------------------------------------------------
Total commercial real estate 1,362,697 1,370,383 1,341,775 1,350,069 1,282,985
- ---------------------------------------------------------------------------------------------------------------------
Residential mortgage:
Secured by 1-4 family
residential properties 795,834 726,228 703,080 753,153 727,579
Residential mortgages held for 82,714 89,439 166,093 94,219 107,627
sale
- ---------------------------------------------------------------------------------------------------------------------
Total residential mortgage 878,548 815,667 869,173 847,372 835,206
- ---------------------------------------------------------------------------------------------------------------------
Consumer 414,571 407,909 409,680 402,117 394,583
- ---------------------------------------------------------------------------------------------------------------------
Total $ 6,313,387 $ 6,249,216 $ 6,295,378 $ 6,218,414 $ 6,058,044
- ---------------------------------------------------------------------------------------------------------------------
Commercial real estate loans totaled $1.4 billion or 22% of total loans at June
30, 2002. Construction and land development loans included $254 million for
single-family residential lots and premises. The major components of other
commercial real estate loans were office buildings, $272 million and retail
facilities, $200 million. Loans secured by office buildings increased $6 million
during the quarter while loans secured by retail facilities decreased $17
million.
Residential mortgage loans included $308 million of home equity loans, $264
million of mortgage loans held for business relationship and community
investment purposes, and $177 million of adjustable rate mortgage loans. The
increase in residential mortgage loans during the second quarter included $40
million of loans held for business relationship and community investment
purposes and $15 million of adjustable rate mortgages. Consumer loans included
$182 million of indirect automobile loans, management considers $48 million of
these loans to be sub-prime.
While BOK Financial continues to increase geographic diversification through
expansion into Texas and New Mexico, geographic concentration subjects the loan
portfolio to the general economic conditions in Oklahoma. Commercial loan growth
in Albuquerque totaled $47 million, which offset a $47 million decrease in
commercial loans in Oklahoma. Table 11 reflects the distribution of the major
loan categories among BOK Financial's principal market areas.
- ---------------------------------------------------------------------------------------------------------------------
TABLE 11 - LOANS BY PRINCIPAL MARKET AREA
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2002 2002 2001 2001 2001
---------------------------------------------------------------------------------
Oklahoma:
Commercial $ 2,547,218 $ 2,594,237 $ 2,606,977 $ 2,610,357 $ 2,571,565
Commercial real estate 752,757 743,728 739,419 741,978 710,098
Residential mortgage 642,080 588,329 642,116 613,565 596,651
Consumer 314,061 312,505 314,060 300,193 285,951
---------------------------------------------------------------------------------
Total Oklahoma $ 4,256,116 $ 4,238,799 $ 4,302,572 $ 4,266,093 $ 4,164,265
---------------------------------------------------------------------------------
Texas:
Commercial $ 773,649 $ 771,167 $ 775,788 $ 760,686 $ 722,403
Commercial real estate 381,068 400,350 380,602 378,364 350,881
Residential mortgage 148,463 138,987 136,181 137,482 140,176
Consumer 88,783 83,985 85,347 91,513 98,341
---------------------------------------------------------------------------------
Total Texas $ 1,391,963 $ 1,394,489 $ 1,377,918 $ 1,368,045 $ 1,311,801
---------------------------------------------------------------------------------
Albuquerque:
Commercial $ 270,278 $ 222,960 $ 219,257 $ 195,054 $ 201,713
Commercial real estate 142,829 139,044 136,425 146,512 133,159
Residential mortgage 82,926 83,310 85,309 90,864 93,608
Consumer 9,711 9,245 8,200 8,109 7,810
---------------------------------------------------------------------------------
Total Albuquerque $ 505,744 $ 454,559 $ 449,191 $ 440,539 $ 436,290
---------------------------------------------------------------------------------
Northwest Arkansas:
Commercial $ 66,426 $ 66,893 $ 72,728 $ 52,759 $ 49,589
Commercial real estate 86,043 87,260 85,329 83,215 88,847
Residential mortgage 5,079 5,042 5,567 5,461 4,771
Consumer 2,016 2,174 2,073 2,302 2,481
---------------------------------------------------------------------------------
Total Northwest Arkansas $ 159,564 $ 161,369 $ 165,697 $ 143,737 $ 145,688
---------------------------------------------------------------------------------
OTHER DERIVATIVES WITH CREDIT RISK
During 2001, BOK Financial developed a program that permits its
energy-producing customers to hedge against price fluctuations through energy
option and swap contracts. These contracts are executed between BOk and its
customers. Offsetting contracts are executed between BOk and selected energy
dealers to minimize the risk of changes in energy prices. The dealer contracts
are identical to the customer contracts, except for a fixed pricing spread paid
to BOk as compensation for administrative costs, credit risk and profit.
The fair values of energy derivative contracts included in other assets and
other liabilities each totaled $43 million at June 30, 2002. The primary dealer
counterparties on asset contracts were Bank of Montreal, $6 million; JP Morgan
Chase, $10 million; and Morgan Stanley, $3 million. A deterioration of the
credit standing of one or more of the counterparties may result in BOK Financial
recognizing a loss as the fair value of the affected contracts may no longer
move in tandem with the offsetting contract.
SUMMARY OF LOAN LOSS EXPERIENCE
The reserve for loan losses, which is available to absorb losses inherent in the
loan portfolio, totaled $108 million at June 30, 2002, compared to $106 million
at March 31, 2002 and $90 million at June 30, 2001. This represented 1.73%,
1.72% and 1.51% of total loans, excluding loans held for sale, at June 30, 2002,
March 31, 2002 and June 30, 2001, respectively. Losses on loans held for sale,
principally residential mortgage loans, are charged to earnings through
adjustments in carrying value to the lower of cost or market value in accordance
with accounting standards applicable to mortgage banking. Table 12 presents
statistical information regarding the reserve for loan losses for the past five
quarters.
- -------------------------------------------------------------------------------------------------------------------
TABLE 12 - SUMMARY OF LOAN LOSS EXPERIENCE
(In thousands)
Three Months Ended
--------------------------------------------------------------------------------
June 30, March 31, Dec. 31, Sept. 30, June 30,
2002 2002 2001 2001 2001
--------------------------------------------------------------------------------
Beginning balance $ 105,900 $ 101,905 $ 96,051 $ 90,036 $ 86,535
Loans charged-off:
Commercial 3,378 3,525 3,803 4,241 4,514
Commercial real estate - 123 62 - -
Residential mortgage 11 94 102 37 68
Consumer 2,258 2,514 1,993 1,561 1,575
- -------------------------------------------------------------------------------------------------------------------
Total 5,647 6,256 5,960 5,839 6,157
- -------------------------------------------------------------------------------------------------------------------
Recoveries of loans previously charged-off:
Commercial 169 334 196 285 391
Commercial real estate 45 49 139 5 150
Residential mortgage 6 20 25 7 13
Consumer 777 982 937 534 607
- -------------------------------------------------------------------------------------------------------------------
Total 997 1,385 1,297 831 1,161
- -------------------------------------------------------------------------------------------------------------------
Net loans charged-off 4,650 4,871 4,663 5,008 4,996
Provision for loan losses 6,834 8,866 10,517 11,023 8,497
- -------------------------------------------------------------------------------------------------------------------
Ending balance $ 108,084 $ 105,900 $ 101,905 $ 96,051 $ 90,036
- -------------------------------------------------------------------------------------------------------------------
Reserve to loans outstanding
at period-end (1) 1.73% 1.72% 1.66% 1.57% 1.51%
Net loan losses (annualized)
to average loans (1) 0.30 0.32 0.30 0.33 0.34
- -------------------------------------------------------------------------------------------------------------------
(1) Excludes residential mortgage loans held for sale which are carried at the
lower of aggregate cost or market value.
The reserve for loan losses is assessed by management based upon an ongoing
evaluation of the probable estimated losses inherent in the portfolio, including
probable losses on both outstanding loans and unused commitments to provide
financing. A consistent, well-documented methodology has been developed that
includes reserves assigned to specific criticized loans, general reserves that
are based on statistical migration analysis and nonspecific reserves that are
based on current economic conditions, loan concentrations, portfolio growth and
other relevant factors. An independent Credit Administration department is
responsible for performing this evaluation for all of BOK Financial's
subsidiaries to ensure that the methodology is applied consistently.
All significant criticized loans are reviewed quarterly. Specific reserves for
impairment are determined through evaluation of future cash flow and collateral
value in accordance with generally accepted accounting principles and regulatory
standards. At June 30, 2002, specific impairment reserves totaled $3.3 million
on total impaired loans of $36 million.
The adequacy of the general loan loss reserve is determined primarily through an
internally developed migration analysis model. The purpose of this model is to
determine the probability that each loan in the portfolio has an inherent loss
based on historic trends. Management uses an eight-quarter aggregate
accumulation of net loan losses as the basis for this model. Greater emphasis is
placed on loan losses in more recent periods. This model assigns a general
allowance to commercial loans and leases, excluding loans that have a specific
impairment reserve, residential mortgage loans and consumer loans.
A nonspecific reserve for loan losses is maintained for risks beyond those
factors specific to a particular loan or those identified by the migration
analysis. These factors include trends in the general economic conditions in BOK
Financial's primary lending areas, duration of the business cycle, specific
conditions in industries where BOK Financial has a concentration of loans and
overall growth in the loan portfolio. Additional factors considered are bank
regulatory examination results, error potential in the migration analysis model
or the underlying data and other relevant factors. A range of potential losses
is determined for each factor identified. At June 30, 2002, the ranges of
potential losses for the more significant factors were:
General economic conditions - $4.3 million to $5.3 million
Concentration of large loans - $1.3 million to $2.5 million
Loan portfolio growth - $1.6 million to $3.2 million
Evaluation of the loan loss reserve requires a significant level of assumptions
by management including estimation of future cash flows, collateral values,
relevance of historic loss trends to the loan portfolio and assessment of
current economic conditions on the borrowers' ability to repay. The required
loan loss reserve could be materially affected by changes in these assumptions.
The loan loss reserve is adequate to absorb losses inherent in the loan
portfolio based upon current conditions and information available to management.
However, actual losses may differ significantly due to changing conditions or
information that is currently not available.
NONPERFORMING ASSETS
Information regarding nonperforming assets, which totaled $45 million at June
30, 2002, $50 million at March 31, 2002 and $56 million at June 30, 2001 is
presented in Table 13. Nonperforming assets included nonaccrual and renegotiated
loans and excluded loans 90 days or more past due but still accruing interest.
Newly identified nonaccruing loans totaled $5.1 million during the second
quarter of 2002. Total nonaccuring loans decreased by $1.1 million from cash
payments received and $2.1 million from losses charged against the loan loss
reserve. Two loans with a combined outstanding balance of $4.6 million were
returned to accruing status based on a satisfactory payment history and improved
outlook.
- ---------------------------------------------------------------------------------------------------------------------
TABLE 13 - NONPERFORMING ASSETS
(In thousands)
June 30, March 31, Dec. 31, Sept. 30, June 30,
2002 2002 2001 2001 2001
----------------------------------------------------------------------
Nonperforming assets:
Nonperforming loans:
Nonaccrual loans:
Commercial $ 28,803 $ 33,784 $ 35,075 $ 39,377 $ 41,752
Commercial real estate 4,388 3,360 3,856 4,338 2,899
Residential mortgage 4,486 4,182 4,140 4,060 3,362
Consumer 605 555 469 333 217
- ---------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 38,282 41,881 43,540 48,108 48,230
Renegotiated loans - - 27 618 85
- ---------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 38,282 41,881 43,567 48,726 48,315
Other nonperforming assets 6,630 7,655 7,141 6,522 7,305
- ---------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 44,912 $ 49,536 $ 50,708 $ 55,248 $ 55,620
- ---------------------------------------------------------------------------------------------------------------------
Ratios:
Reserve for loan losses to
nonperforming loans 282.34% 252.86% 233.90% 197.12% 186.35%
Nonperforming loans to
period-end loans (2) 0.72 0.68 0.71 0.80 0.82
- ---------------------------------------------------------------------------------------------------------------------
Loans past due (90 days) (1) $ 12,215 $ 13,023 $ 8,108 $ 16,143 $ 10,040
- ---------------------------------------------------------------------------------------------------------------------
(1) Includes residential mortgages guaranteed
by agencies of the U.S. Government
$ 6,764 $ 6,314 $ 6,222 $ 6,200 $ 6,649
Excludes residential mortgages guaranteed
by agencies of the U.S. Government in
foreclosure. 4,853 4,044 4,396 4,925 5,509
(2) Excludes residential mortgage loans held for sale
- ---------------------------------------------------------------------------------------------------------------------
The loan review process also identifies loans that possess more than the normal
amount of risk due to deterioration in the financial condition of the borrower
or the value of the collateral. These loans are not included in nonperforming
assets because the borrowers are still performing in accordance with the
original terms of the loan agreements and no loss of principal or interest is
anticipated. However, known information causes management to have concerns as to
the borrower's ability to comply with the current repayment terms. Potential
problem loans totaled $68 million at June 30, 2002 compared to $60 million at
March 31, 2002 and $52 million at June 30, 2001. At June 30, 2002, the
composition of potential problem loans by primary industry categories included
management of recreation properties, $17 million; manufacturing, $11 million;
healthcare, $11 million; and telecommunications, $8 million.
CAPITAL
Shareholders' equity totaled $924 million at June 30, 2002 compared to $855
million at March 31, 2002. The increase in equity was due primarily to net
income of $34 million and a $36 million increase in unrealized gains on
available for sale securities.
BOK Financial and its subsidiary banks are subject to various capital
requirements administered by the federal banking agencies. Failure to meet
minimum capital requirements can result in certain mandatory and additional
discretionary actions by regulators that could have a material effect on
operations. These capital requirements include quantitative measures of assets,
liabilities and certain off-balance sheet items. The capital standards are also
subject to qualitative judgments by the regulatory agencies about components,
risk weightings and other factors. Management has developed and the Board of
Directors has approved an internal capital policy that is more restrictive than
the regulatory capital standards. At June 30, 2002, BOK Financial and each of
its subsidiary banks exceeded the regulatory definition of well capitalized.
- -------------------------------------------------------------------------------------------------------
TABLE 14 - CAPITAL RATIOS
June 30, March 31, Dec. 31, Sept. 31, June 30,
2002 2002 2001 2001 2001
-------------------------------------------------------------------------
Average shareholders' equity
to average assets 8.01% 7.93% 7.91% 7.86% 7.42%
Risk-based capital:
Tier 1 capital 8.69 8.49 8.08 7.83 7.59
Total capital 12.11 11.99 11.56 11.35 11.02
Leverage 6.78 6.63 6.38 6.27 5.85
MARKET RISK
Market risk is a broad term for the risk of economic loss due to adverse changes
in the fair value of a financial instrument. These changes may be the result of
various factors, including interest rates, foreign exchange prices, commodity
prices or equity prices. Financial instruments that are subject to market risk
can be classified either as held for trading or held for purposes other than
trading.
BOK Financial is subject to market risk primarily through the effect of changes
in interest rates on both its assets held for trading and held for purposes
other than trading. The effects of other changes, such as foreign exchange
rates, commodity prices or equity prices do not pose significant market risk to
BOK Financial.
Responsibility for managing market risk rests with the Asset / Liability
Committee that operates under policy guidelines established by the Board of
Directors. The acceptable negative variation in net interest revenue, net income
or economic value of equity due to a 200 basis point increase or decrease in
interest rates is generally limited by these guidelines to +/- 10%. These
guidelines also set maximum levels for short-term borrowings, short-term assets,
public funds, and brokered deposits, and establish minimum levels for unpledged
assets, among other things. Compliance with these guidelines is reviewed
monthly.
Interest Rate Risk - Other than Trading
BOK Financial performs a sensitivity analysis to identify more dynamic interest
rate risk exposures, including embedded option positions, on net interest
revenue, net income and economic value of equity. A simulation model is used to
estimate the effect of changes in interest rates over the next twelve months
based on three interest rate scenarios. These are a "most likely" rate scenario
and two "shock test" scenarios, first assuming a sustained parallel 200 basis
point increase and second assuming a sustained parallel 100 basis point decrease
in interest rates. Management historically evaluated interest rate sensitivity
for a sustained 200 basis point decrease in rates. However, these results are
not meaningful in the current low-rate environment. An independent source is
used to determine the most likely interest rate scenario.
BOK Financial's primary interest rate exposures included the Federal Reserve
Bank's discount rate, which affects short-term borrowings, and the prime lending
rate and the London Interbank Offering Rate, which are the basis for much of the
variable-rate loan pricing. Additionally, mortgage rates directly affect the
prepayment speeds for mortgage-backed securities and mortgage servicing rights.
Derivative financial instruments and other financial instruments used for
purposes other than trading are included in this simulation. The sensitivity of
fee income to interest rates, such as fees related to cash management services
and mortgage servicing, is also included. The model incorporates assumptions
regarding the effects of changes in interest rates and account balances on
indeterminable maturity deposits based on a combination of historical analysis
and expected behavior. The impact of planned growth and new business activities
is factored into the simulation model. The effects of changes in interest rates
on the value of mortgage servicing rights are excluded from Table 15 due to the
extreme volatility over such a large rate range. The effects of interest rate
changes on the value of mortgage servicing rights and securities identified as
economic hedges are shown in Table 16.
Table 15 - INTEREST RATE SENSITIVITY
(Dollars in Thousands)
Increase Decrease
-------------------------- ------------------------- -----------------------
200 bp 100 bp 200 bp Most Likely
-------------------------- ------------------------- -----------------------
2002 2001 2002 2001 2002 2001
------------- ------------ ---------- -------------- ----------- -----------
Anticipated impact over the next twelve months:
Net interest revenue $ 9,362 $ 5,998 $(5,463) $(7,379) $ 7,452 $ (2,197)
2.5% 1.7% (1.5)% (2.1)% 2.0% (0.6)%
- -------------------------------- --------------- ------------ ----------- -------------- ----------- -----------
Net income $ 5,851 $ 3,749 $(3,414) $(4,612) $ 4,658 $ (1,373)
4.0% 2.8% (2.3)% (3.4)% 3.2% (1.0)%
- -------------------------------- --------------- ------------ ----------- -------------- ----------- -----------
Economic value of equity $ 81,747 $(22,319) $(93,169) $(59,828) $107,751 $3,690
6.4% (1.7)% (7.3)% (4.5)% 8.4% 0.3%
- -------------------------------- --------------- ------------ ----------- -------------- ----------- -----------
BOK Financial has market risk associated with its portfolio of mortgage
servicing rights. The primary risk is due to loan prepayments. Generally, the
value of mortgage servicing rights declines when interest rates fall due to an
increase in loan prepayments. The decrease in value of the servicing rights is
recorded as an impairment allowance. Both the amortized cost and the fair value
of the servicing rights are stratified by interest rate and loan type. An
impairment provision is charged against earnings whenever the amortized cost
exceeds the fair value of each stratum. Generally, the value of mortgage
servicing rights increases when interest rates rise due to a decrease in loan
prepayments. This increase in value can only be recognized up to the amortized
cost. Any increase in fair value beyond amortized cost is not recognized.
There is no active market for trading servicing rights. Fair value is determined
by using projected prepayment speeds and assumed servicing costs, earnings on
escrow deposits, ancillary income and discount rates. Management uses
independent sources for many of these assumptions. However, actual fair values
may differ significantly from computed fair values due to assumption changes or
modeling error.
BOK Financial designates a portion of its securities portfolio as an economic
hedge against the risk of loss on its mortgage servicing rights. Mortgage-backed
and principal only securities are acquired and held as available for sale when
prepayment risk exceeds certain levels. The fair value of these securities is
expected to vary inversely to the fair value of the mortgage servicing rights.
Management may sell these securities and realize gains or losses when necessary
to offset losses or gains on the mortgage servicing rights. However, this
strategy presents certain risks. A well-developed market determines the fair
value for securities. As previously noted, there is no comparable market for
mortgage servicing rights. Therefore, the computed change in value of the
servicing rights for a specified change in interest rates may not correlate to
the change in value of the securities.
At June 30, 2002, securities with a fair value of $505 million and an unrealized
loss of $2.6 million were held for the hedge program. This unrealized loss, net
of income taxes, is included in shareholders' equity as part of other
comprehensive income. The interest rate sensitivity of the mortgage servicing
rights and securities held as a hedge is modeled over a range of +/- 50 basis
points. At June 30, 2002, the pre-tax results of this modeling on reported
earnings were:
TABLE 16 - INTEREST RATE SENSITIVITY - MORTGAGE SERVICING
(Dollars in Thousands)
50 bp increase 50 bp decrease
-------------- ---------------
Anticipated change in:
Mortgage servicing rights $ 19,839 $(24,093)
Hedging securities (19,164) 18,738 (1)
----------------- ----------------
Net $ 675 $ (5,355)
----------------- ----------------
(1) Anticipated increase in value of hedging instruments totals $21.4 million,
which would reduce the existing unrealized loss before any gains could be
realized.
The simulations used to manage market risk are based on numerous assumptions
regarding the effects of changes in interest rates on the timing and extent of
repricing characteristics, future cash flows and customer behavior. These
assumptions are inherently uncertain and, as a result, the model cannot
precisely estimate net interest revenue, net income or economic value of equity
or precisely predict the impact of higher or lower interest rates on net
interest revenue, net income or economic value of equity. Actual results will
differ from simulated results due to timing, magnitude and frequency of interest
rate changes, market conditions and management strategies, among other factors.
BOK Financial uses interest rate swaps, a derivative product, in managing its
interest rate sensitivity. These products are generally used to more closely
match interest paid on certain fixed rate loans with funding sources and
long-term certificates of deposits with earning assets. Credit risk from these
swaps is closely monitored and counterparties to these contracts are factors.
Derivative products are not used for speculative purposes.
- --------------------------------------------------------------------------------
TABLE 17 - INTEREST RATE SWAPS
Notional Pay Receive Positive Negative
Amount Rate Rate Fair Value Fair Value
-------------------------------------------------------------------
Expiration:
2004 $147,210 1.86% - 4.22% 1.84% - 7.36% $ 4,429 $ (258)
2006 218,420 1.86% - 5.85% 1.84% - 5.47% 1,164 (1,023)
2009 5,656 1.84% - 4.75% 1.84% - 4.75% 237 (237)
2011 49,059 5.21% - 5.51% 1.84% - (1,836)
- --------------------------------------------------------------------------------
$ 5,830 $ (3,354)
-------------------------
(1) Rates are variable based on LIBOR and reset monthly, quarterly or
semiannually.
TRADING ACTIVITIES
BOK Financial enters into trading activities both as an intermediary for
customers and for its own account. As an intermediary, BOK Financial will take
positions in securities, generally mortgage-backed securities, government agency
securities, and municipal bonds. These securities are purchased for resale to
customers, which include individuals, corporations, foundations and financial
institutions. BOK Financial will also take trading positions in U.S. Treasury
securities, mortgage-backed securities, municipal bonds and financial futures
for its own account. These positions are taken with the objective of generating
trading profits. Both of these activities involve interest rate risk.
A variety of methods are used to manage the interest rate risk of trading
activities. These methods include daily marking of all positions to market
value, independent verification of inventory pricing, and position limits for
each trading activity. Hedges in either the futures or cash markets may be used
to reduce the risk associated with some trading programs. The Risk Management
Department monitors trading activity daily and reports to senior management and
the Risk Oversight and Audit Committee of the BOK Financial Board of Directors
any exceptions to trading position limits and risk management policy exceptions.
BOK Financial uses a Value at Risk ("VAR") methodology to measure the market
risk inherent in its trading activities. VAR is calculated based upon historical
simulations over the past five years using a variance / covariance matrix of
interest rate changes. It represents an amount of market loss that is likely to
be exceeded only one out of every 100 two-week periods. Trading positions are
managed within guidelines approved by the Board of Directors. These guidelines
limit the nominal aggregate trading positions to $100 million and the VAR to
$6.5 million. At June 30, 2002, the nominal aggregate trading positions were
$38.8 million and the VAR was $879 thousand. The greatest value at risk during
the second quarter of 2002 was $1.7 million.
FORWARD-LOOKING STATEMENTS
This report contains forward-looking statements that are based on management's
beliefs, assumptions, current expectations, estimates, and projections about BOK
Financial, the financial services industry, and the economy in general. Words
such as "anticipates", "believes", "estimates", "expects", "forecasts", "plans",
"projects", variations of such words, and similar expressions are intended to
identify such forward-looking statements. Management judgments relating to, and
discussion of the provision and reserve for loan losses involve judgments as to
future 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 which BOK Financial has not independently
verified. These statements are not guarantees of future performance and involve
risks, uncertainties, and assumptions that are difficult to predict with regard
to timing, extent, likelihood, and degree of occurrence. Therefore, actual
results and outcomes may materially differ from what is expressed, implied, or
forecasted in such forward-looking statements. Internal and external factors
that might cause such a difference include, but are not limited to, (1) the
ability to fully realize expected cost savings from mergers with the expected
time frames, (2) the ability of other companies on which BOK Financial relies to
provide goods and services in a timely and accurate manner, (3) changes in
interest rates and interest rate relationships, (4) demand for products and
services, (5) the degree of competition by traditional and nontraditional
competitors, (6) changes in banking regulations, tax laws, prices, levies, and
assessments, (7) the impact of technological advances, and (8) trends in
customer behavior as well as their ability to repay loans. BOK Financial and its
affiliates undertake no obligation to update, amend, or clarify forward-looking
statements, whether as a result of new information, future events, or otherwise.
REPORT OF MANAGEMENT ON CONSOLIDATED FINANCIAL STATEMENTS
Management is responsible for the consolidated financial statements which have
been prepared in accordance with accounting principles generally accepted in the
United States. In management's opinion, the accompanying unaudited consolidated
financial statements contain all adjustments (consisting of normal recurring
accruals) necessary to present fairly the financial condition, results of
operations and cash flows of BOK Financial and its subsidiaries at the dates and
for the periods presented.
The financial information included in this interim report has been prepared by
management without audit by independent public accountants and should be read in
conjunction with BOK Financial's 2001 Form 10-K filed with the Securities and
Exchange Commission which contains audited financial statements.
- ---------------------------------------------------------------- --- ------------- -- ------------- --- ------------
UNAUDITED Consolidated Statement of Earnings
(In Thousands Except Share Data)
Three Months Ended Six Months Ended
June 30, June 30,
------------------------- -- ------------------
2002 2001 2002 2001
----------- --- --------- -- -------- --- -----
Interest Revenue
Loans $ 93,635 $ 116,835 $ 186,390 $ 241,939
Taxable securities 46,564 47,078 94,719 93,982
Tax-exempt securities 2,503 3,866 5,103 7,372
- ------------------------------------------------------- ------------- ------------ -----------
Total securities 49,067 50,944 99,822 101,354
- ------------------------------------------------------- ------------- ------------ -----------
Trading securities 203 300 373 641
Funds sold 92 191 142 614
- ------------------------------------------------------- ------------- ------------ -----------
Total interest revenue 142,997 168,270 286,727 344,548
- ------------------------------------------------------- ------------- ------------ -----------
Interest Expense
Deposits 37,873 55,551 74,999 116,443
Other borrowings 12,834 30,308 26,674 67,939
Subordinated debenture 2,724 2,794 5,446 4,937
- ------------------------------------------------------- ------------- ------------ -----------
Total interest expense 53,431 88,653 107,119 189,319
- ------------------------------------------------------- ------------- ------------ -----------
Net Interest Revenue 89,566 79,617 179,608 155,229
Provision for Loan Losses 6,834 8,497 15,700 16,070
- ------------------------------------------------------- ------------- ------------ -----------
Net Interest Revenue After Provision for Loa
Losses 82,732 71,120 163,908 139,159
- ------------------------------------------------------- ------------- ------------ -----------
Other Operating Revenue
Brokerage and trading revenue 7,014 5,858 14,106 10,958
Transaction card revenue 13,439 11,411 25,925 21,313
Trust fees and commissions 10,300 10,679 20,674 20,616
Service charges and fees on deposit accounts 16,391 12,793 30,246 24,582
Mortgage banking revenue, net 10,759 11,900 21,411 22,733
Leasing revenue 822 901 1,714 2,020
Other revenue 5,698 4,947 10,740 10,168
- ------------------------------------------------------- ------------- ------------ -----------
Total fees and commissions revenue 64,423 58,489 124,816 112,390
- ------------------------------------------------------- ------------- ------------ -----------
Gain on sale of student loans 7 7 683 528
Gain (loss) on sales of securities, net 21,602 2,030 14,021 14,664
Gain (loss) on derivatives (1,453) (303) (1,989) 343
- ------------------------------------------------------- ------------- ------------ -----------
Total other operating revenue 84,579 60,223 137,531 127,925
- ------------------------------------------------------- ------------- ------------ -----------
Other Operating Expense
Personnel 44,885 40,833 88,217 80,769
Business promotion 3,208 2,428 6,086 5,300
Professional fees and services 3,732 3,162 6,640 6,219
Occupancy & equipment 10,299 10,767 20,639 21,110
Data processing & communications 11,216 9,981 21,654 19,354
FDIC and other insurance 483 443 922 886
Printing, postage and supplies 3,018 3,065 6,075 6,056
Net gains and operating expenses on
repossessed assets 656 (56) 703 (27)
Amortization of intangible assets 2,679 5,057 5,364 10,084
Mortgage banking costs 7,791 7,140 16,148 13,558
Provision (recovery) for impairment of
mortgage servicing rights 23,774 (535) 18,496 9,188
Other expense 2,854 4,299 7,600 7,873
- ------------------------------------------------------- ------------- ------------ -----------
Total other operating expense 114,595 86,584 198,544 180,370
- ------------------------------------------------------- ------------- ------------ -----------
Income Before Taxes 52,716 44,759 102,895 86,714
Federal and state income tax 18,662 15,778 36,425 30,567
- ------------------------------------------------------- ------------- ------------ -----------
Income before cumulative effect of a change
in accounting principle, net of tax 34,054 28,981 66,470 56,147
Transition adjustment of adoption of FAS 133 - - - 236
- ------------------------------------------------------- ------------- ------------ -----------
Net Income $ 34,054 $ 28,981 $ 66,470 $ 56,383
- ------------------------------------------------------- ------------- ------------ -----------
Earnings Per Share:
Basic:
Before cumulative effect of change in
accounting principle $ 0.64 $ 0.55 $ 1.24 $ 1.06
Transition adjustment of adoption of FAS 133 - - - -
- ---------------------------------------------- ------------ ------------ ------------- ------
Net Income $ 0.64 $ 0.55 $ 1.24 $ 1.06
- ---------------------------------------------- ------------ ------------ ------------- ------
Diluted:
Before cumulative effect of change in
accounting principle $ 0.57 $ 0.49 $ 1.10 $ 0.95
Transition adjustment of adoption of FAS 133 - - - -
- ---------------------------------------------- ------------ ------------ ------------- ------
Net Income $ 0.57 $ 0.49 $ 1.10 $ 0.95
- ---------------------------------------------- ------------ ------------ ------------- ------
Average Shares Used in Computation:
Basic 52,937,833 52,458,740 52,888,836 52,418,790
- ------------------------------------------------------------ ----------------- ---------------
Diluted 60,257,055 59,597,982 60,164,825 59,482,370
- ------------------------------------------------------------ ----------------- ---------------
- ---------------------------------------------------------------------------------------------------------
UNAUDITED CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
June 30, December 31, June 30,
2002 2001 2001
---------------------------------------------
ASSETS
Cash and due from banks $ 495,186 $ 643,938 $ 527,547
Funds sold 39,750 3,400 4,900
Trading securities 35,648 10,327 20,719
Securities:
Available for sale 2,929,979 2,815,070 2,040,405
Available for sale securities pledged to creditors 716,729 634,479 918,795
Investment (fair value: June 30, 2002 - $200,180;
December 31, 2001 -$242,628;
June 30, 2001 - $237,839) 197,324 241,113 236,706
- ---------------------------------------------------------------------------------------------------------
Total securities 3,844,032 3,690,662 3,195,906
- ---------------------------------------------------------------------------------------------------------
Loans 6,313,387 6,295,378 6,058,044
Less reserve for loan losses (108,084) (101,905) (90,036)
- ---------------------------------------------------------------------------------------------------------
Net loans 6,205,303 6,193,473 5,968,008
- ---------------------------------------------------------------------------------------------------------
Premises and equipment, net 139,187 141,425 142,682
Accrued revenue receivable 60,139 68,728 64,874
Intangible assets, net 146,212 152,076 162,105
Mortgage servicing rights, net 77,202 98,796 101,439
Real estate and other repossessed assets 6,630 7,141 7,305
Bankers' acceptances 23,431 15,393 27,722
Other assets 118,002 116,243 82,948
- ---------------------------------------------------------------------------------------------------------
Total assets $ 11,190,722 $ 11,141,602 $ 10,306,155
- ---------------------------------------------------------------------------------------------------------
Noninterest-bearing demand deposits $ 1,236,014 $ 1,366,690 $ 1,230,814
Interest-bearing deposits:
Transaction 2,704,482 2,559,714 2,212,888
Savings 164,119 158,234 155,872
Time 3,077,631 2,821,106 2,981,414
- ---------------------------------------------------------------------------------------------------------
Total deposits 7,182,246 6,905,744 6,580,988
- ---------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 1,355,477 1,601,989 1,558,822
Other borrowings 890,370 1,220,948 1,037,455
Subordinated debentures 185,860 186,302 186,744
Accrued interest, taxes and expense 71,109 67,014 76,153
Amount due on unsettled security transactions 469,423 231,660 -
Bankers' acceptances 23,431 15,393 27,722
Other liabilities 88,392 84,069 62,951
- ---------------------------------------------------------------------------------------------------------
Total liabilities 10,266,308 10,313,119 9,530,835
- ---------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock 25 25 25
Common stock ($.00006 par value; 2,500,000,000
shares authorized; shares issued and outstanding
June 30, 2002 -52,977,340; December 31, 2001
- 51,737,154; June 30, 2001 - 51,339,485) 3 3 3
Capital surplus 381,264 323,860 314,525
Retained earnings 525,329 511,301 452,133
Treasury stock (shares at cost: June 30, 2002 - 644,740;
December 31, 2001 - 541,240; June 30, 2001 - 435,027) (16,067) (12,498) (9,233)
Accumulated other comprehensive income (loss) 33,860 5,792 17,867
- -----------------------------------------------------------------------------------------------------------
Total shareholders' equity 924,414 828,483 775,320
- -----------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 11,190,722 $ 11,141,602 $ 10,306,155
- -----------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS' EQUITY
(In Thousands)
Accumulated
Preferred Stock Common Stock Other
------------------------------------ Comprehensive Capital Retained Treasury Stock
Shares Amount Shares Amount Income(loss) Surplus Earnings Shares Amount Total
----------------------------------------------------------------------------------------------------
Balances at
December 31, 2000 250,000 $ 25 49,706 $ 3 $ 3,320 $278,882 $431,390 488 $ (10,044) $703,576
Comprehensive income:
Net income - - - - - - 56,383 - - 56,383
Other
Comprehensive
income, net of tax:
Unrealized gains(loss)
on securities available
for sale (1) - - - - 14,547 - - - - 14,547
----------
Comprehensive income 70,930
----------
Exercise of stock - - 237 - - 2,513 - 79 (1,832) 681
options
Director retainer - - - - - 26 - (7) 126 152
shares
Dividends paid in - - - - - - - - - -
shares of common
stock:
Common stock - - 1,515 - - 32,740 (34,890) 15 2,131 (19)
Preferred stock - - - - - 364 (750) (21) 386 -
- ---------------------------------------------------------------------------------------------------------------------------
Balance at
June 30, 2001 250,000 $ 25 51,458 $ 3 $17,867 $314,525 $452,133 554 $(9,233) $775,320
- ---------------------------------------------------------------------------------------------------------------------------
Balances at
December 31, 2001 250,000 $ 25 51,737 $ 3 $ 5,792 $323,860 $511,301 541 $(12,498) $828,483
Comprehensive income:
Net income - - - - - - 66,470 - - 66,470
Other
Comprehensive income,
net of tax:
Unrealized gains(loss)
on securities available
for sale(1) - - - - 28,068 - - - - 28,068
----------
Comprehensive income 94,538
----------
Exercise of stock options - - 315 - - 4,275 - 86 (2,989) 1,286
Director retainer shares - - 4 - - 135 - - - 135
Dividends paid in
shares of common stock:
Common stock - - 1,542 - - 52,244 (51,692) 18 (580) (28)
Preferred stock - - 24 - - 750 (750) - - -
- ---------------------------------------------------------------------------------------------------------------------------
Balance at
June 30, 2002 250,000 $ 25 53,622 $ 3 $33,860 $381,264 $ 525,329 645 $(16,067) $924,414
- ---------------------------------------------------------------------------------------------------------------------------
(1) June 30, 2002 June 30, 2001
------------- -------------
Other comprehensive income:
Unrealized (gains) losses on available for
sale securities $ 57,468 $ 37,045
Tax (expense) benefit on unrealized gains
(losses) on available for sale securities (20,342) (12,966)
Reclassification adjustment for (gains)
losses realized included in net income (14,021) (14,664)
Reclassification adjustment for tax
expense (benefit) on realized (gains)losses 4,963 5,132
-------------------------------
Net unrealized gains (losses) on securities $ 28,068 $ 14,547
-------------------------------
- --------------------------------------------------------------------------------------------------------------------
UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands)
Six Months Ended
June 30,
-------------------------------------
2002 2001
-------------------------------------
Cash Flow From Operating Activities:
Net income $ 66,470 $ 56,383
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 15,700 16,070
Provision (recovery) for mortgage servicing rights 18,496 9,188
Transition adjustment of adoption of FAS 133 - (236)
Unrealized (gains) losses from derivatives 2,564 7,677
Depreciation and amortization 34,302 33,579
Net amortization of financial instrument discounts and premiums 2,306 (2,320)
Net gain on sale of assets (23,096) (23,917)
Mortgage loans originated for resale (392,972) (479,645)
Proceeds from sale of mortgage loans held for resale 494,052 428,283
Change in trading securities (25,321) 19,146
Change in accrued revenue receivable 8,589 10,107
Change in other assets (29,710) 27,398
Change in accrued interest, taxes and expense 4,095 (1,835)
Change in other liabilities 11,243 2,304
- -------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 186,718 102,182
- -------------------------------------------------------------------------------------------------------
Cash Flow From Investing Activities:
Proceeds from maturities of investment securities 56,029 37,331
Proceeds from maturities of available for sale securities 831,443 668,447
Purchases of investment securities (12,353) (42,829)
Purchases of available for sale securities (5,038,167) (2,651,451)
Proceeds from sales of available for sale securities 4,066,423 2,055,505
Proceeds from sales of investment securities - 2,040
Loans originated or acquired net of principal collected (173,727) (352,552)
Proceeds from disposition of assets 55,055 63,692
Purchases of assets (22,823) (45,114)
Cash and cash equivalents of branches & subsidiaries
acquired and sold, net - (73,475)
- -------------------------------------------------------------------------------------------------------
Net cash used by investing activities (238,120) (338,406)
- -------------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net change in demand deposits, transaction
deposits, money market deposits, and savings accounts 19,977 (139,030)
Net change in certificates of deposit 256,957 306,158
Net change in other borrowings (577,090) (180,000)
Change in amount due on unsettled security transactions 237,763 -
Issuance of subordinated debenture - 30,000
Issuance of preferred, common and treasury stock, net 1,421 833
Payment of dividends (28) (19)
- -------------------------------------------------------------------------------------------------------
Net cash provided (used) by financing activities (61,000) 17,942
- -------------------------------------------------------------------------------------------------------
Net change in cash and cash equivalents (112,402) (218,282)
Cash and cash equivalents at beginning of period 647,338 750,729
- -------------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 534,936 $ 532,447
- -------------------------------------------------------------------------------------------------------
Cash paid for interest $ 109,973 $ 183,316
- -------------------------------------------------------------------------------------------------------
Cash paid for taxes $ 15,536 $ 21,086
- -------------------------------------------------------------------------------------------------------
Net loans transferred to repossessed real estate
and other assets $ 1,181 $ 4,639
- -------------------------------------------------------------------------------------------------------
Payment of dividends in common stock $ 52,442 $ 35,640
- -------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
UNAUDITED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ACCOUNTING POLICIES
Basis of Presentation
The accounting and reporting policies of BOK Financial Corporation ("BOK
Financial") conform to accounting principles generally accepted in the United
States and generally accepted practices within the banking industry. The
Consolidated Financial Statements of BOK Financial include the accounts of BOK
Financial and its subsidiaries, primarily Bank of Oklahoma, N.A. ("BOk"), Bank
of Arkansas N.A., Bank of Texas, N.A., Bank of Albuquerque, N.A., and BOSC, Inc.
Certain prior period balances have been reclassified to conform with the current
period presentation.
(2) MORTGAGE BANKING ACTIVITIES
At June 30, 2002, BOk owned the rights to service 84,076 mortgage loans with
outstanding principal balances of $6.3 billion, including $279 million serviced
for BOk. The weighted average interest rate and remaining term was 7.23% and 266
months, respectively.
Activity in capitalized mortgage servicing rights and related valuation
allowance during the three months ending June 30, 2002 is as follows (in
thousands):
Capitalized Mortgage Servicing Rights
---------------------------------------------------------------------------
Valuation Hedging
Purchased Originated Total Allowance (Gain)/Loss Net
---------------- ------------ --------------- -------------- --------------
Balance at
December 31, 2001 $ 55,056 $ 53,611 $ 108,667 $ (18,451) $ 8,580 $ 98,796
Additions 986 8,778 9,764 - - 9,764
Amortization expense (7,485) (4,665) (12,150) - (712) (12,862)
Provision for impairment - - - (18,496) - (18,496)
- --------------------------- ------------ -- -------- -- --------- -- --------- -- -------- -- ---------
Balance at June 30, 2002 $ 48,557 $ 57,724 $ 106,281 $ (36,947) $ 7,868 $ 77,202
- --------------------------- ------------ -- -------- -- --------- -- --------- -- -------- -- ---------
Estimated fair value of
mortgage servicing
rights (1) $ 37,030 $ 40,805 $ 77,835 - - $ 77,835
- --------------------------- ------------ -- -------- -- --------- -- --------- -- -------- -- ---------
(1) Excludes approximately $3.7 million of loan servicing rights on mortgage
loans originated prior to the adoption of FAS 122.
Stratification of the mortgage loan servicing portfolio, outstanding principal
of loans serviced, and related hedging information by interest rate at June 30,
2002 follows (in thousands):
< 6.50% 6.50% - 7.49% 7.50% - 8.49% => 8.50% Total
----------------------------- ---------------- ----------- -------------
Cost less accumulated amortization $ 19,675 $ 62,215 $ 22,403 $ 1,988 $ 106,281
Deferred hedge losses - 7,302 566 - 7,868
- ------------------------------------------ ----------------------------- ---------------- ----------- -------------
Adjusted cost $ 19,675 $ 69,517 $ 22,969 $ 1,988 $ 114,149
- ------------------------------------------ ----------------------------- ---------------- ----------- -------------
Fair value $ 16,300 $ 46,284 $ 13,058 $ 2,193 $ 77,835
- ------------------------------------------ ----------------------------- ---------------- ----------- -------------
Impairment $ 3,587 $ 23,259 $ 9,910 $ 191 $ 36,947
- ------------------------------------------ ----------------------------- ---------------- ----------- -------------
Outstanding principal of loans serviced(1) $957,100 $3,684,000 $1,207,000 $ 162,700 $6,010,800
- ------------------------------------------ ----------------------------- ---------------- ----------- -------------
(1) Excludes outstanding principal of $288.6 million for loans serviced for
which there is no capitalized mortgage servicing rights.
(3) DISPOSAL OF AVAILABLE FOR SALE SECURITIES
Sales of available for sale securities resulted in gains and losses as follows
(in thousands):
Six Months Ended June 30,
----------------------------------
2002 2001
-------------- ---------------
Proceeds $ 4,066,423 $ 2,055,505
Gross realized gains 38,982 20,396
Gross realized losses 24,961 5,732
Related federal and state income
tax expense (benefit) 4,963 5,132
(4) EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per
share (dollars in thousands except share data):
Three Months Ended Six Months Ended
-----------------------------------------------------
June 30, June 30, June 30, June 30,
2002 2001 (2) 2002 2001 (2)
-----------------------------------------------------
Numerator:
Net income $ 34,054 $ 28,981 $ 66,470 $ 56,383
Preferred stock dividends 375 375 750 750
- -----------------------------------------------------------------------------------------------------------
Numerator for basic earnings per share - income
available to common stockholders 33,679 28,606 65,720 55,633
- -----------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock dividends 375 375 750 750
- -----------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share - income
available to common stockholders after assumed
conversion $ 34,054 $ 28,981 $ 66,470 $ 56,383
- -----------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share -weighted
average shares 52,937,833 52,458,740 52,888,836 52,418,790
Effect of dilutive securities:
Employee stock options (1) 795,361 615,381 752,128 539,719
Convertible preferred stock 6,523,861 6,523,861 6,523,861 6,523,861
- -----------------------------------------------------------------------------------------------------------
Dilutive potential common shares 7,319,222 7,139,242 7,275,989 7,063,580
- -----------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 60,257,055 59,597,982 60,164,825 59,482,370
- -----------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.64 $ 0.55 $ 1.24 $ 1.06
- -----------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.57 $ 0.49 $ 1.10 $ 0.95
- -----------------------------------------------------------------------------------------------------------
(1) Current market price was greater than exercise price on all employee stock
options (2) Restated for 3% dividend paid in common shares in May 2002.
(5) REPORTABLE SEGMENTS
Reportable segments reconciliation to the Consolidated Financial Statements for
the six months ended June 30, 2002 is as follows (in thousands):
Other Other
Net Interest Operating Operating Average
Revenue Revenue(1) Expense Assets
-------------- -------------- -------------- --------------
Total reportable lines of business $ 149,501 $ 89,457 $ 166,142 $11,151,898
Total non-reportable lines of business 359 35,093 27,460 40,632
Unallocated items:
Tax-equivalent adjustment 3,328 - - -
Funds management 35,889 801 4,254 476,268
Eliminations and all others, net (9,469) 148 688 (687,137)
-------------- -------------- -------------- --------------
BOK Financial consolidated $ 179,608 $ 125,499 $ 198,544 $10,981,661
============== ============== ============== ==============
(1) Excludes securities and derivatives gains/losses.
Reportable segments reconciliation to the Consolidated Financial Statements for
the six months ended June 30, 2001 is as follows (in thousands):
Other Other
Net Interest Operating Operating Average
Revenue Revenue(1) Expense Assets
-------------- -------------- -------------- --------------
Total reportable lines of business $ 161,824 $ 83,440 $ 152,387 $ 10,323,151
Total non-reportable lines of business 438 29,383 21,079 29,859
Unallocated items:
Tax-equivalent adjustment 4,329 - - -
Funds management 589 (220) 3,949 243,035
Eliminations and all others, net (11,951) 315 2,955 (537,869)
-------------- -------------- -------------- --------------
BOK Financial consolidated $ 155,229 $ 112,918 $ 180,370 $ 10,058,176
============== ============== ============== ==============
(1) Excludes securities and derivatives gains/losses.
(6) 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.
- -----------------------------------------------------------------------------------------------------------------------------
SIX MONTH FINANCIAL SUMMARY - UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands Except Share Data)
For Six months ended
------------------------------------------------------------------------------------
June 30, 2002 June 30, 2001
----------------------------------------- -----------------------------------
Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate
------------------------------------------------------------------------------------
Assets
Taxable securities $ 3,638,681 $ 94,719 5.25% $ 2,955,669 $ 93,982 6.41%
Tax-exempt securities 223,128 8,048 7.27 302,915 11,107 7.39
- ------------------------------------------------------------------------------------------------------------------------------
Total securities 3,861,809 102,767 5.37 3,258,584 105,089 6.50
- ------------------------------------------------------------------------------------------------------------------------------
Trading securities 17,494 441 5.08 17,488 732 8.44
Funds sold 13,920 142 2.06 22,612 614 5.48
Loans(2) 6,194,769 186,705 6.08 5,841,522 242,442 8.37
Less reserve for loan losses 107,277 88,000
- ------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 6,087,492 186,705 6.18 5,753,522 242,442 8.50
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets(2) 9,980,715 290,055 5.86 9,052,206 348,877 7.77
- ------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 1,000,948 1,032,374
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 10,981,661 $ 10,084,580
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 2,703,509 19,743 1.47% $ 2,178,434 28,043 2.60%
Savings deposits 162,804 984 1.22 152,860 1,217 1.61
Other time deposits 2,944,122 54,272 3.72 2,985,489 87,183 5.89
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 5,810,435 74,999 2.60 5,316,783 116,443 4.42
- ------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and repurchase
agreements 1,528,204 13,112 1.73 1,735,177 42,569 4.95
Other borrowings 1,075,836 13,562 2.54 894,545 25,370 5.72
Subordinated debenture 186,078 5,446 5.90 173,797 4,937 5.73
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing 8,600,553 107,119 2.51 8,120,302 189,319 4.70
liabilities(2)
- ------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,121,038 1,083,632
Other liabilities 389,951 139,828
Shareholders' equity 870,119 740,818
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' $ 10,981,661 $ 10,084,580
equity
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue(1) 182,936 3.35% 159,558 3.07%
Tax-Equivalent Net Interest Revenue(1)
to Earning Assets 3.70 3.55
Less tax-equivalent adjustment 3,328 4,329
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 179,608 155,229
Provision for loan losses 15,700 16,070
Other operating revenue (3) 137,531 128,289
Other operating expense 198,544 180,370
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 102,895 87,078
Federal and state income tax (3) 36,425 30,695
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 66,470 $ 56,383
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share:
Net Income
Basic $ 1.24 $ 1.06
- ------------------------------------------------------------------------------------------------------------------------------
Diluted $ 1.10 $ 0.95
- ------------------------------------------------------------------------------------------------------------------------------
(1) Tax equivalent at the statutory federal and state rates for the periods
presented. The taxable equivalent adjustments shown are for comparative
purposes.
(2) The loan averages included loans on which the accrual of interest has been
discontinued and are stated net of unearned income. (3) Includes cumulative
effect of transition adjustment in adopting FAS 133 in first quarter 2001.
(3) Yield/Rate excludes $1,468 million of non-recurring collection of
foregone interest in June 30, 1998.
- ------------------------------------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL SUMMARY - UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands Except Share Data)
For Three months ended
-------------------------------------------------------------------------------------
June 30, 2002 March 31, 2002
------------------------------------------ -------------------------------------
Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate
-------------------------------------------------------------------------------------
Assets
Taxable securities $ 3,696,603 $ 46,564 5.05% $ 3,442,504 $ 48,153 5.67%
Tax-exempt securities 218,747 3,948 7.24 230,755 4,101 7.21
- ------------------------------------------------------------------------------------------------------------------------------
Total securities 3,915,350 50,512 5.17 3,673,259 52,254 5.77
- ------------------------------------------------------------------------------------------------------------------------------
Trading securities 19,989 238 4.78 14,971 204 5.53
Funds sold 17,148 92 2.15 10,656 50 1.90
Loans(2) 6,225,134 93,787 6.04 6,164,060 92,918 6.11
Less reserve for loan losses 109,366 105,166
- ------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve 6,115,768 93,787 6.15 6,058,894 92,918 6.22
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets 10,068,255 144,629 5.76 9,757,780 145,426 6.04
- ------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 1,005,122 999,738
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 11,073,377 $ 10,757,518
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 2,740,454 9,841 1.44% $ 2,666,154 9,902 1.51%
Savings deposits 165,496 503 1.22 160,082 481 1.22
Other time deposits 2,969,488 27,529 3.72 2,918,473 26,743 3.72
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 5,875,438 37,873 2.59 5,744,709 37,126 2.62
- ------------------------------------------------------------------------------------------------------------------------------
Federal funds purchased and repurchase
agreements 1,485,816 6,197 1.67 1,571,063 6,915 1.79
Other borrowings 1,032,685 6,637 2.58 1,119,466 6,931 2.51
Subordinated debenture 185,968 2,724 5.88 186,189 2,716 5.92
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 8,579,907 53,431 2.50 8,621,427 53,688 2.53
- ------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,129,412 1,112,571
Other liabilities 476,886 170,643
Shareholders' equity 887,172 852,877
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and
shareholders' Equity $ 11,073,377 $ 10,757,518
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (1) 91,198 3.26% 91,738 3.52%
Tax-Equivalent Net Interest Revenue (1)
To Earning Assets 3.63 3.81
Less tax-equivalent adjustment 1,632 1,696
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 89,566 90,042
Provision for loan losses 6,834 8,866
Other operating revenue (3) 84,579 52,952
Other operating expense 114,595 83,949
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 52,716 50,179
Federal and state income tax (3) 18,662 17,763
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 34,054 $ 32,416
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share:
Net Income
Basic $ 0.64 $ 0.61
- ------------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.57 $ 0.54
- ------------------------------------------------------------------------------------------------------------------------------
(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 include loans on which the accrual of interest has been
discontinued and are stated net of unearned income. (3) Includes cumulative
effect of transition adjustment in adopting FAS 133 in first quarter 2001.
(3) Yield/Rate excludes $1,468 million of non-recurring collection of
foregone interest in June 30, 1998.
- -------------------------------------------------------------------------------------------------------------------------
For Three months ended
- -------------------------------------------------------------------------------------------------------------------------
December 31, 2001 September 30, 2001 June 30, 2001
- -------------------------------------------------------------------------------------------------------------------------
Average Revenue/ Yield Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate Balance Expense(1) /Rate
- -------------------------------------------------------------------------------------------------------------------------
$ 3,177,731 $ 45,777 5.72% $ 2,869,680 $ 44,705 6.18% $ 3,012,148 $ 47,080 6.27%
238,634 4,274 7.11 265,608 4,554 6.80 310,517 5,841 7.54
- -------------------------------------------------------------------------------------------------------------------------
3,416,365 50,051 5.81 3,135,288 49,259 6.23 3,322,665 52,921 6.39
- -------------------------------------------------------------------------------------------------------------------------
22,508 245 4.32 16,498 223 5.36 16,566 332 8.04
14,362 85 2.35 14,229 130 3.62 17,221 191 4.45
6,203,512 99,643 6.37 6,065,512 114,165 7.47 5,944,358 117,080 7.90
99,541 93,884 89,824
- -------------------------------------------------------------------------------------------------------------------------
6,103,971 99,643 6.48 5,971,628 114,165 7.58 5,854,534 117,080 8.02
- -------------------------------------------------------------------------------------------------------------------------
9,557,206 150,024 6.23 9,137,643 163,777 7.11 9,210,986 170,524 7.43
- -------------------------------------------------------------------------------------------------------------------------
1,024,243 1,028,385 1,035,241
- -------------------------------------------------------------------------------------------------------------------------
$ 10,581,449 $ 10,166,028 $ 10,246,227
- -------------------------------------------------------------------------------------------------------------------------
$ 2,429,978 9,933 1.62% $ 2,278,393 11,917 2.08% $ 2,222,838 12,821 2.31%
158,040 489 1.23 155,908 575 1.46 154,312 569 1.48
2,839,770 30,744 4.30 3,030,759 38,287 5.01 3,009,880 42,161 5.62
- -------------------------------------------------------------------------------------------------------------------------
5,427,788 41,166 3.01 5,465,060 50,779 3.69 5,387,030 55,551 4.14
- -------------------------------------------------------------------------------------------------------------------------
1,701,655 8,813 2.05 1,440,556 12,976 3.57 1,767,086 19,181 4.35
1,088,792 8,460 3.08 1,019,123 10,711 4.17 885,922 11,127 5.04
186,409 2,764 5.88 186,631 2,871 6.10 187,299 2,794 5.98
- -------------------------------------------------------------------------------------------------------------------------
8,404,644 61,203 2.89 8,111,370 77,337 3.78 8,227,337 88,653 4.32
- -------------------------------------------------------------------------------------------------------------------------
1,150,498 1,093,442 1,119,597
191,023 163,999 141,037
835,284 797,217 758,256
- -------------------------------------------------------------------------------------------------------------------------
$ 10,581,449 $ 10,166,028 $ 10,246,227
- -------------------------------------------------------------------------------------------------------------------------
88,821 3.34% 86,440 3.33% 81,871 3.11%
3.05
3.69 3.75 3.57
1,802 1,914 2,254
- -------------------------------------------------------------------------------------------------------------------------
87,019 84,526 79,617
10,517 11,023 8,497
55,260 76,091 60,223
84,801 103,591 86,584
- -------------------------------------------------------------------------------------------------------------------------
46,961 46,003 44,759
16,829 16,216 15,778
- -------------------------------------------------------------------------------------------------------------------------
$ 30,132 $ 29,787 $ 28,981
- -------------------------------------------------------------------------------------------------------------------------
$ 0.56 $ 0.56 $ 0.55
- -------------------------------------------------------------------------------------------------------------------------
$ 0.50 $ 0.50 $ 0.49
- -------------------------------------------------------------------------------------------------------------------------
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits: None
(B) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended
June 30, 2002.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
BOK FINANCIAL CORPORATION
-------------------------
(Registrant)
Date: August 14, 2002 /s/ Steven E. Nell
--------------- ------------------
Steven E. Nell
Executive Vice President and
Chief Financial Officer
/s/ John C. Morrow
John C. Morrow
Senior Vice President and Director
of Financial Accounting & Reporting