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