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