As filed with the Securities and Exchange Commission on May 17, 1999
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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended March 31, 1999
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 ($.00006 Par Value)
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding twelve months (or for such shorter period that the Registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock, as of the latest practicable date: 45,148,328 shares of common
stock ($.00006 par value) as of April 30, 1999.
BOK Financial Corporation
Form 10-Q
Quarter Ended March 31, 1999
Index
Part I. Financial Information
Management's Discussion and Analysis 2
Report of Management on Consolidated
Financial Statements 15
Consolidated Statements of Earnings 16
Consolidated Balance Sheets 17
Consolidated Statements of Changes
in Shareholders' Equity 18
Consolidated Statements of Cash Flows 19
Notes to Consolidated Financial Statements 20
Financial Summaries - Unaudited 24
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 26
Signature 26
MANAGEMENT'S ASSESSMENT OF OPERATIONS AND FINANCIAL CONDITION
Assessment of Operations
Summary of Performance
BOK Financial Corporation ("BOK Financial") recorded net income of $19.8 million
or $0.38 per diluted common share for the first quarter of 1999 compared to
$16.3 million or $0.31 per diluted common share for the first quarter of 1998.
Returns on average assets were 1.19% for both the first quarters of 1999 and
1998. Returns on average equity were 15.75% and 14.89%, for the first quarter of
1999 and 1998, respectively
The increase in net income for the first quarter of 1999 was primarily due to
increases of $8.0 million or 22% in fees and commissions revenue and $7.9
million or 19% in net interest revenue. These increases were partially offset by
increases of $6.4 million or 11% in operating expenses.
Tangible Operating Results
Since inception, BOK Financial has completed several acquisitions that were
accounted for under the purchase method of accounting. The purchase method
results in the recording of goodwill and other identifiable intangible assets
that are amortized as non-cash charges in future years into operating expense.
Operating results excluding the impact of the amortization of these intangible
assets are summarized below:
- ------------------------------------------------------------- -------------------------------
TABLE 1 - TANGIBLE OPERATING RESULTS
-------------------------------
(Dollars in Thousands Except Share Data) Three months ended
-------------------------------
March 31, March 31,
1999 1998
--------------- ---------------
Net income $ 19,817 $ 16,313
After-tax impact of amortization of intangible assets 2,889 2,072
- ------------------------------------------------------------- --------------- ---------------
Tangible net income $ 22,706 $ 18,385
- ------------------------------------------------------------- --------------- ---------------
Tangible net income per diluted share $ 0.44 $ 0.35
- ------------------------------------------------------------- --------------- ---------------
Tangible return on average shareholders' equity 18.05% 16.78%
- ------------------------------------------------------------- --------------- ---------------
Tangible return on average assets 1.36% 1.34%
- ------------------------------------------------------------- --------------- ---------------
Net Interest Revenue
Net interest revenue on a tax-equivalent basis was $52.2 million for the first
quarter of 1999 compared to $44.4 million for the first quarter of 1998, an
increase of 18%. Average earning assets increased by $1.0 billion, including
increases in average loans of $701 million and average securities of $306
million. Interest bearing liabilities increased $950 million, primarily due to
increases in borrowed funds of $663 million. Interest bearing deposits increased
$286 million. The growth in average earning assets in excess of the growth in
interest bearing liabilities contributed $8.4 million to the increase in net
interest revenue.
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TABLE 2 - VOLUME/RATE ANALYSIS
(In thousands)
Three months ended
March 31, 1999/1998
-----------------------------------
Change Due To (1)
-----------------------
Yield
Change Volume /Rate
-----------------------------------
Tax-equivalent interest revenue:
Securities $ 3,833 $ 4,596 $ (763)
Trading securities 533 572 (39)
Loans 9,914 14,578 (4,664)
Funds sold (513) (443) (70)
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Total 13,767 19,303 (5,536)
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Interest expense:
Interest bearing transaction deposits 1,214 1,925 (711)
Savings deposits 86 197 (111)
Time deposits (2,183) (116) (2,067)
Other borrowings 6,804 8,922 (2,118)
Subordinated debenture (19) 2 (21)
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Total 5,902 10,930 (5,028)
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Tax-equivalent net interest revenue
before nonrecurring foregone interest 7,865 8,373 (508)
Non-recurring foregone interest -
Change in tax-equivalent adjustment (3)
- ------------------------------------------------------------------------------
Net interest revenue $ 7,862
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(1) Changes attributable to both volume and yield are allocated to both volume
and yield/rate on an equal basis.
Net interest margin, the ratio of net interest revenue to average earning
assets, was 3.57% for the first quarter of 1999 compared to 3.65% for the first
quarter of 1998 and 3.72% for the fourth quarter of 1998. The primary reason for
the decrease in the net interest margin was the securitization sale of
approximately $100 million of automobile loans in the first quarter of 1999.
These loans had an average yield to BOK Financial of 9.23%, which is greater
than the overall yield on average earning assets. Additionally, the sale was
structured so that BOK Financial was required to carry a non-earning asset on
its balance sheet for 36 days during the quarter. This caused approximately 14
basis points of the decrease in the net interest margin. The effect of the sale
of these loans was partially offset by a decrease in the cost of interest
bearing liabilities, primarily certificates of deposit and borrowed funds.
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. Although
this strategy frequently results 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 first quarter of 1999, this
strategy resulted in a 46 basis point decrease in net interest margin. However,
this strategy contributed $2.9 million to net interest revenue. As more fully
discussed in the Market Risk section, management employs various techniques to
control, within established parameters, the interest rate and liquidity risk
inherent in this strategy.
Other Operating Revenue
Other operating revenue increased $6.1 million or 15% compared to the same
quarter of 1998. Total fees and commissions, which are included in other
operating revenue, increased $8.0 million or 22%. All categories of fee income,
except mortgage banking revenue, showed increases over the first quarter of
1998. Most notably, other revenue increased $2.3 million due primarily to a $1.6
million increase in underwriting and advisory fees for BOSC, Inc. Other
increases reflected continued growth in BOK Financial's overall business
activity. The decrease in mortgage banking revenue was due to lower servicing
revenue. Servicing revenue was $7.9 million and $8.5 million, respectively, for
the first quarters of 1999 and 1998. Lower interest rates during most of 1998
and the first quarter of 1999 increased the number of borrowers that refinanced
their mortgage loans. This refinancing activity reduced the amount of loans
serviced by BOK Financial and the servicing revenue. Gain on the sale of other
assets included $752 thousand from the sale of an interest in a local bank.
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TABLE 3 - OTHER OPERATING REVENUE
(In thousands)
Three Months Ended
-------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
1999 1998 1998 1998 1998
-------------------------------------------------------------------
Brokerage and trading revenue $ 4,347 $ 4,010 $ 4,109 $ 4,051 $ 3,131
Transaction card revenue 7,555 6,360 6,516 6,010 5,540
Trust fees and commissions 7,762 7,650 7,751 7,654 6,884
Service charges and fees
on deposit accounts 9,159 9,094 8,015 7,440 7,638
Mortgage banking revenue 9,195 10,543 10,929 10,940 9,321
Leasing revenue 1,868 1,897 1,749 1,804 1,661
Other revenue 5,014 2,296 3,239 3,017 2,685
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Total fees and commissions 44,900 41,850 42,308 40,916 36,860
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Gain on student loan sales 529 - 14 119 1,415
Gain on loan securitization 270 - - - -
Gain on sale of other assets 892 - - - -
Gain on securities 274 2,967 538 3,320 2,512
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Total other operating revenue $ 46,865 $ 44,817 $ 42,860 $ 44,355 $ 40,787
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Other Operating Expenses
Operating expenses for the first quarter of 1999 increased $6.4 million or 11%
compared to the first quarter of 1998. The first quarter of 1999 includes
operating expenses of $6.1 million for the Bank of Albuquerque, which did not
exist in the first quarter of 1998. The first quarter of 1998 included charges
of $2.3 million for the cost of stock contributed to the BOk Charitable
Foundation and $3.0 million for a provision for the possible impairment of
mortgage servicing rights. The discussion following Table 4 of other operating
expenses excludes these charges for both 1999 and 1998 to improve comparability.
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TABLE 4 - OTHER OPERATING EXPENSE
(In thousands)
Three Months Ended
-----------------------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
1999 1998 1998 1998 1998
-----------------------------------------------------------------------------------
Personnel $ 31,106 $ 29,384 $ 26,067 $ 25,715 $ 24,829
Business promotion 2,459 2,619 1,862 1,662 1,897
Contribution of stock to BOK
Charitable Foundation - - - - 2,257
Professional fees/services 1,839 3,131 2,622 2,308 1,596
Net occupancy, equipment
and data processing 12,996 12,437 10,574 10,594 9,214
FDIC and other insurance 315 335 270 345 310
Printing, postage and supplies 2,751 2,659 2,267 2,223 2,047
Net gains and operating
expenses on repossessed assets (1,296) (91) (19) (315) (55)
Amortization of intangible
assets 3,245 2,529 2,268 2,272 2,302
Mortgage banking costs 5,304 7,262 6,374 6,290 6,023
Provision for impairment of
mortgage servicing rights - (4,290) - (1,000) 3,000
Other expense 4,874 4,846 4,552 3,710 3,773
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Total $ 63,593 $ 60,821 $ 56,837 $ 53,804 $ 57,193
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Personnel costs increased $4.3 million due to increased staffing, normal
compensation increases and increased incentive compensation. Staffing on a
full-time equivalent ("FTE") basis increased by 211 employees while average
compensation per FTE increased by 3.9%. Incentive compensation, which varies
directly with revenue increased $909 thousand to $3.6 million for the quarter.
The increase in incentive compensation was due to growth in revenue over
pre-determined targets and growth in the number of business units covered by
incentive plans. Occupancy, equipment and data processing costs increased $2.7
million or 29%, which included increases of $922 thousand in net occupancy costs
and $1.4 million in data processing costs. The increase in net occupancy costs
was due primarily to a decrease in rental income on bank premises of $574
thousand. A significant portion of BOK Financial's data processing is outsourced
to third parties. Therefore, data processing costs are directly related to the
volume of transactions processed.
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TABLE 5 - OTHER OPERATING EXPENSE, EXCLUDING SIGNIFICANT OR NONRECURRING ITEMS
(In thousands)
Three Months Ended
-------------------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
1999 1998 1998 1998 1998
-------------------------------------------------------------------------------
Total other operating expense $ 63,593 $ 60,821 $ 56,837 $ 53,804 $ 57,193
Contribution of stock to BOk
Charitable Foundation - - - - (2,257)
Provision for impairment of mortgage
servicing rights - 4,290 - 1,000 (3,000)
Net gains and operating costs from
repossessed assets 1,296 91 19 315 55
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Total $ 64,889 $ 65,202 $ 56,856 $ 55,119 $ 51,991
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LINES OF BUSINESS
BOK Financial operates four principal lines of business, corporate banking,
consumer banking, mortgage banking and trust services. Other lines of business
include the TransFund ATM system, BOSC, Inc., Bank of Arkansas, Bank of Texas
and Bank of Albuquerque.
CORPORATE BANKING
Corporate banking contributed $10.6 million or 53% of consolidated net income
for the first quarter of 1999 compared to $7.7 million or 47% of consolidated
net income for the first quarter of 1998. Revenue increased 15% due to increased
loan volumes while operating expenses decreased by $640 thousand.
Table 6 Corporate Banking
(In Thousands)
Three months ended March 31,
-----------------------------------
1999 1998
---------------- ----------------
Total revenue $ 26,475 $ 23,044
Operating expense 9,772 10,412
Net income 10,572 7,703
Average assets $2,598,249 $2,044,630
Average equity 293,600 247,068
Return on assets 1.65% 1.53%
Return on equity 14.60 12.64
Efficiency ratio 36.91 45.18
CONSUMER BANKING
Consumer banking contributed $3.1 million or 16% of consolidated net income for
the first quarter of 1999 compared to $2.1 million or 13% of consolidated net
income for the first quarter of 1998. Total revenue, which consists primarily of
intercompany credit for funds provided to other divisions of BOK Financial and
fees generated by various services, increased $1.1 million or 6% compared to the
first quarter of 1999. Operating expenses decreased $283 thousand for the same
period.
Table 7 Consumer Banking
(In Thousands)
Three months ended March 31,
-----------------------------------
1999 1998
---------------- ----------------
Total revenue $ 17,693 $ 16,625
Operating expense 11,975 12,258
Net income 3,112 2,143
Average assets $1,886,641 $1,932,739
Average equity 43,432 44,813
Return on assets 0.67% 0.45%
Return on equity 29.06 19.39
Efficiency ratio 67.68 73.73
MORTGAGE BANKING
Mortgage banking contributed $1.0 million or 5% of consolidated net income for
the first quarter of 1999 compared to a 901 thousand loss for the first quarter
of 1998. The loss in 1998 was primarily due to a $3.0 million provision for the
impairment of mortgage servicing rights. Total revenue decreased $160 thousand
due to a $644 thousand decrease in servicing revenue. The decrease in servicing
revenue was partially offset by an increase in gains of the sale of mortgage
loans.
Capitalized mortgage servicing rights totaled $92.3 million at March 31, 1999
compared to $69.2 million at December 31, 1998. The increase in capitalized
servicing rights was due to $15.3 million in hedging losses and $10.9 million in
costs of newly acquired servicing rights, less amortization. At March 31, 1999,
realized hedging gains totaled $9.6 million, net of accumulated amortization,
while unrealized losses on open hedging positions totaled $3.1 million.
Table 8 Mortgage Banking
(In Thousands)
Three months ended March 31,
-----------------------------------
1999 1998
---------------- ----------------
Total revenue $ 10,920 $ 11,080
Operating expense 9,261 9,501
Provision for impairment of
mortgage servicing assets - 3,000
Net income 1,013 (901)
Average assets $ 305,660 $ 378,799
Average equity 25,705 29,505
Return on assets 1.34% (0.96)%
Return on equity 15.98 (12.38)
Efficiency ratio 84.81 85.75
TRUST SERVICES
Trust services contributed $1.6 million or 8% of consolidated net income for the
first quarter of 1999 compared to $1.4 million or 8% of consolidated net income
for the first quarter of 1998. Revenue from trust services increased $1.6
million or 15% for the quarter while operating expenses increased $1.3 million
or 15%. Personnel expenses accounted for $1.0 million of the increase in
operating expenses.
Table 9 Trust Services
(In Thousands)
Three months ended March 31,
-----------------------------------
1999 1998
---------------- ----------------
Total revenue $ 12,472 $ 10,883
Operating expense 9,880 8,573
Net income 1,584 1,380
Average assets $ 306,223 $ 274,766
Average equity 33,542 27,657
Return on assets 2.10% 2.04%
Return on equity 19.15 20.24
Efficiency ratio 79.22 78.77
YEAR 2000 CONSIDERATIONS
The Year 2000 issue, in general, is the result of computer programs being
written using two digits rather than four to define the applicable year. Any
computer programs that have date sensitive software may recognize a date using
"00" as the year 1900 rather than the year 2000. This could result in a system
failure or miscalculations causing disruptions of operations, including among
other things, a temporary inability to process transactions or to engage in
similar normal business activities.
BOK Financial's Year 2000 efforts are under the direction of the Year 2000
Oversight Committee, comprised of various members of executive management, as
well as a Year 2000 Project Team, which includes representatives from BOK
Financial's major business units. Both groups meet on a regular basis to monitor
and discuss continuing Year 2000 developments. The Board of Directors recognizes
the importance of and supports these Year 2000 initiatives.
The Federal Financial Institution Examination Council ("FFIEC") provides
regulatory guidance on BOK Financial's and other financial institutions' Year
2000 compliance. In addition to other requirements, the FFIEC requires that
testing of mission-critical systems be substantially complete by June 30, 1999.
BOK Financial is well ahead of the FFIEC guidelines. Testing has been
successfully completed on all mission-critical, information technology systems.
For all mission-critical, non-information technology systems, we have either
completed testing, satisfactorily, or have received written representations as
to Year 2000.
FFIEC guidelines also require financial institutions to substantially complete
the four phases of the Year 2000 business resumption contingency planning
process no later than June 30, 1999. BOK Financial's Year 2000 Project Team is
focused on preparation for the Year 2000 event. Plans are being finalized to
address certain situations that may arise as a result of internal or external
disruptions. These plans will be completed by June 30, 1999, and will include a
definition of and a plan to address the most reasonably likely worst case
scenario. These plans will be simulated or otherwise validated during the third
quarter of 1999. System change control policies require that new enhancements or
initiatives within the company or at our outsourced providers be tested for Year
2000 compliance prior to introduction to our processing environment. This policy
includes severe limitations on all changes from October 1, 1999 through February
29, 2000. Finally, plans are being developed to have key resources available
throughout all high risk processing periods during December, 1999 and January
and February, 2000. Additional costs to prepare for Year 2000 are not expected
to be significant.
BOK Financial has also communicated with large customers to determine what
steps they have undertaken to ensure they are prepared for Year 2000. This
effort has enabled BOK Financial to adopt contingency plans related to the
possible effects of the Year 2000 issue on the credit risk of its borrowers,
cash flow disruptions of its funds providers, and its overall liquidity needs.
BOK Financial has included the potential effect of Year 2000 on the credit risk
of its borrowers in determining the adequacy of its loan loss reserve.
The foregoing forward-looking statements, including the costs of addressing the
Year 2000 issue and the dates upon which compliance will be attained, reflect
management's current assessment and estimates with respect to BOK Financial's
Year 2000 compliance effort. Various factors could cause actual plans and
results to differ materially from those contemplated by such assessments,
estimates and forward-looking statements, many of which are beyond the control
of BOK Financial. Some of these factors include, but are not limited to, third
party modification plans, availability of technological and monetary resources,
representations by vendors and counter parties, technological advances, economic
considerations and consumer perceptions. BOK Financial's Year 2000 compliance
program is an ongoing process involving continual evaluation and may be subject
to change in response to new developments.
Assessment of Financial Condition
The aggregate loan portfolio at March 31, 1999 increased $39 million to $3.6
billion during the first quarter of 1999. Approximately $100 million of
automobile loans and $52 million of student loans, both of which were reported
as consumer loans, were sold during the quarter. Commercial loans increased $148
million and commercial real estate loans increased $48 million, respectively.
While BOK Financial continues to increase geographic diversification through
expansion in the Dallas, Texas and Albuquerque, New Mexico areas, geographic
concentration subjects the loan portfolio to the general economic conditions in
Oklahoma. Notable loan concentrations by the primary industry of the borrowers
are presented in Table 10. Agriculture includes loans totaling $190 million to
the cattle industry and services includes loans totaling $113 million to the
hotel industry. Commercial real estate loans are secured primarily by properties
in the Tulsa or Oklahoma City metropolitan areas. The major components of other
real estate loans are office buildings, $167 million and retail facilities, $126
million.
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TABLE 10 - LOANS
(In thousands)
March 31, Dec 31, Sept. 30, June 30, March 31,
1999 1998 1998 1998 1998
------------------------------------------------------------------
Commercial:
Energy $ 483,460 $ 467,259 $ 359,986 $ 315,051 $ 324,052
Manufacturing 275,815 240,633 229,495 223,540 222,385
Wholesale/retail 305,897 264,691 280,917 275,544 250,702
Agricultural 207,502 155,103 143,061 133,148 159,324
Services 628,952 615,285 533,550 496,347 473,684
Other commercial and industrial 188,039 198,385 127,017 138,278 139,516
Commercial real estate:
Construction and land development 202,282 172,258 149,679 139,323 123,412
Multifamily 188,075 178,217 150,150 115,821 95,335
Other real estate loans 402,116 393,578 339,314 310,417 283,329
Residential mortgage:
Secured by 1-4 family
residential properties 464,722 482,097 442,443 390,765 404,481
Residential mortgages held for 80,176 98,616 82,200 98,912 118,777
sale
Consumer 164,362 285,819 230,702 245,722 241,299
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Total $ 3,591,398 $3,551,941 $ 3,068,514 $ 2,882,868 $ 2,836,296
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SUMMARY OF LOAN LOSS EXPERIENCE
The reserve for loans losses, which is available to absorb losses inherent in
the loan portfolio, totaled $68 million at March 31, 1999 and $65 million at
December 31, 1998. This represents 1.94% and 1.88% of total loans, excluding
loans held for sale, at March 31, 1999 and December 31, 1998, respectively.
Losses on loans held for sale, principally mortgage loans accumulated for
placement in securitized pools, 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 11 presents
statistical information regarding the reserve for loan losses for the past five
quarters.
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TABLE 11 - SUMMARY OF LOAN LOSS EXPERIENCE
(In thousands)
Three Months Ended
---------------------------------------------------------------------------------
March 31, Dec. 31, Sept. 30, June 30, March 31,
1999 1998 1998 1998 1998
---------------------------------------------------------------------------------
Beginning balance $ 64,931 $ 62,131 $ 57,782 $ 54,839 $ 53,101
Loans charged-off:
Commercial 2 - 532 1,339 172
Commercial real estate 35 1,132 50 92 -
Residential mortgage 1 33 28 19 50
Consumer 1,162 54 888 845 1,305
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Total 1,200 2,158 1,498 2,295 1,527
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Recoveries of loans previously charged-off:
Commercial 133 33 796 534 120
Commercial real estate 236 516 551 170 161
Residential mortgage - - - 80 82
Consumer 489 382 499 501 432
- -------------------------------------------------------------------------------------------------------------------
Total 858 931 1,846 1,285 795
- -------------------------------------------------------------------------------------------------------------------
Net loans charged-off 342 1,227 (348) 1,010 732
Provision for loan losses 3,370 4,027 4,001 3,953 2,470
- -------------------------------------------------------------------------------------------------------------------
Ending balance $ 67,959 $ 64,931 $ 62,131 $ 57,782 $ 54,839
- -------------------------------------------------------------------------------------------------------------------
Reserve to loans outstanding
at period-end(1) 1.94 1.88 2.08 2.08 2.02
Net loan losses (annualized)
to average loans (1) 0.04 0.09 (0.05) 0.14 0.10
- -------------------------------------------------------------------------------------------------------------------
(1) Excludes residential mortgage loans held for sale which are carried at the
lower of aggregate cost or market value.
The adequacy of the reserve for loan losses is assessed by management based upon
an ongoing quarterly evaluation of the probable estimated losses inherent in the
portfolio, and includes probable losses on both outstanding loans and unused
commitments to provide financing. A consistent methodology has been developed
that includes reserves assigned to specific criticized loans, general reserves
that are based upon a statistical migration analysis for each category of loans,
and unallocated reserves that are based upon an analysis of current economic
conditions, loan concentrations, portfolio growth, and other relevant factors.
An independent Credit Administration department is responsible for performing
this evaluation for all of BOK Financial's subsidiaries to ensure that the
methodology is applied consistently.
All significant criticized loans are reviewed quarterly with written
documentation. Specific reserves for impairment are determined in accordance
with generally accepted accounting principles and appropriate regulatory
standards. At March 31, 1999, specific impairment reserves totaled $1.5 million.
The adequacy of general loan loss reserves is determined primarily through an
internally developed migration analysis model. Management uses an eight-quarter
aggregate accumulation of net loan losses as the basis for this model. Greater
emphasis is placed on net loan losses in the more recent periods. This model is
used to assign general loan loss reserves to commercial loans and leases,
residential mortgage loans and consumer loans. All loans, leases and letters of
credit are allocated a migration factor by this model. Management can override
the general allocation only by utilizing a specific allocation that is greater
than the general allocation.
A nonspecific allowance 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 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,
overall growth in the loan portfolio, bank regulatory examination results, error
potential in either the migration analysis model or in the underlying data, and
other relevant factors. A range of potential losses is then determined for each
factor identified. At March 31, 1999, the loss potential ranges for the more
significant factors are:
Concentration of large loans - $2.1 million to $4.1 million General economic
conditions - $1.4 million to $2.8 million
Loan portfolio growth and expansion into new markets - $1.8 million to $3.5
million
A provision for loan losses is charged against earnings in amounts necessary to
maintain an adequate allowance for loan losses. These provisions were $3.4
million for the first quarter of 1999 compared to $2.5 million for the first
quarter of 1998.
NON-PERFORMING ASSETS
Information regarding non-performing assets, which were $20 million at March 31,
1999 and $18 million at December 31, 1998 is presented in Table 12.
Non-performing loans include non-accrual loans and renegotiated loans.
- ---------------------------------------------------------------------------------------------------------------------
TABLE 12 - NONPERFORMING ASSETS
(In thousands)
March 31, Dec. 31, Sept. 30, June 30, March 31,
1999 1998 1998 1998 1998
-----------------------------------------------------------------------
Nonperforming assets:
Nonperforming loans:
Nonaccrual loans:
Commercial $ 9,677 $ 8,386 $ 8,430 $ 9,045 $ 12,556
Commercial real estate 2,522 1,684 2,105 2,473 2,824
Residential mortgage 1,490 1,928 2,410 2,072 2,243
Consumer 1,318 1,118 1,068 1,145 1,192
- ---------------------------------------------------------------------------------------------------------------------
Total nonaccrual loans 15,007 13,116 14,013 14,735 18,815
Renegotiated loans - - - - -
- ---------------------------------------------------------------------------------------------------------------------
Total nonperforming loans 15,007 13,116 14,013 14,735 18,815
Other nonperforming assets 4,820 4,600 4,353 5,590 5,366
- ---------------------------------------------------------------------------------------------------------------------
Total nonperforming assets $ 19,827 $ 17,716 $ 18,366 $ 20,325 $ 24,181
- ---------------------------------------------------------------------------------------------------------------------
Ratios:
Reserve for loan losses to
Nonperforming loans 452.85% 495.05% 443.38% 392.14% 291.46%
Nonperforming loans to
Period-end loans (2) 0.43 0.38 0.47 0.53 0.69
- ---------------------------------------------------------------------------------------------------------------------
Loans past due (90 days) (1) $ 12,917 $ 9,414 $ 15,594 $ 21,568 $ 18,330
- ---------------------------------------------------------------------------------------------------------------------
(1) Includes residential mortgages guaranteed
by agencies of the U.S. Government $ 7,674 $ 8,122 $ 8,449 $ 7,569 $ 7,240
Excludes residential mortgages
guaranteed
by agencies of the U.S. Government in
foreclosure. 7,099 6,953 9,742 9,818 8,766
(2) Excludes residential mortgage loans held for sale
- ---------------------------------------------------------------------------------------------------------------------
The loan review process also identifies loans that possess more than the normal
amount of risk due to deterioration in the financial condition of the borrower
or the value of the collateral. Because the borrowers are performing in
accordance with the original terms of the loan agreements and no loss of
principal or interest is anticipated, such loans are not included in the
Non-performing Assets totals. These loans are assigned to various risk
categories in order to focus management's attention on the loans with higher
risk of loss. At March 31, 1999, loans totaling $71 million were assigned by
management to the substandard risk category and loans totaling $25 million were
assigned to the special mention risk category, compared to $60 million and $31
million, respectively, at December 31, 1998.
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 rates, commodity
prices, or equity prices. Additionally, the financial instruments 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 portfolio of assets held for purposes other than
trading and trading assets. The effect of other changes, such as foreign
exchange rates, commodity prices or equity prices, do not pose a material market
risk to BOK Financial. The responsibility for managing market risk rests with
the Asset/Liability Committee which operates under policy guidelines established
by the Board of Directors. The negative acceptable variation in net interest
revenue and 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 establish maximum levels for short-term borrowings,
short-term assets, and public and brokered deposits, and establish minimum
levels for unpledged assets, among other things. Compliance with these
guidelines is reviewed monthly.
Interest Rate Risk Management (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 three interest rate scenarios. These are a "most likely" rate scenario and
two "shock test" scenarios, the first assuming a sustained parallel 200 basis
point increase and the second a sustained parallel 200 basis point decrease in
interest rates. An independent source is used to determine the most likely
interest rates for the next year. BOK Financial's primary interest rate
exposures include the Federal Reserve Bank's discount rate which affects
short-term borrowings, the prime lending rate and the London InterBank Offering
Rate ("LIBOR") which are the basis for much of the variable-rate loan pricing,
the 30-year mortgage rate which directly affects the prepayment speeds for
mortgage-backed securities and mortgage servicing rights, and the 10-year U.S.
Treasury rate which affects the value of the mortgage servicing hedges.
Derivative financial instruments and other financial instruments used for
purposes other than trading are included in this simulation. In addition,
sensitivity of fee income to market interest rate levels, such as those related
to cash management services and mortgage servicing, is included. The model
incorporates management's assumptions regarding the level of interest rate or
balance changes on indeterminable maturity deposits (demand deposits,
interest-bearing transaction accounts and savings accounts) for a given level of
market rate changes. The assumptions have been developed through a combination
of historical analysis and future expected pricing behavior. Interest rate swaps
on all products are included to the extent that they are effective in the
12-month simulation period. Additionally, changes in prepayment behavior of
mortgage-backed securities, residential mortgage loans and mortgage servicing in
each rate environment are captured using industry estimates of prepayment speeds
for various coupon segments of the portfolio. Finally, the impact of planned
growth and new business activities is factored into the simulation model. At
March 31, 1999 and 1998, this modeling indicated interest rate sensitivity as
follows:
- --------------------------------------------------------------------------------------------------------------------
Table 13 - Interest Rate Sensitivity
(Dollars in Thousands)
200 bp Increase 200 bp Decrease Most Likely
------------------------- -------------------------- ------------------------
1999 1998 1999 1998 1999 1998
------------ ------------ ------------ ------------- ------------- ----------
Anticipated impact over the next twelve months:
Net interest revenue $ (1,394) $ 2,491 $ (477) $ (3,130) $ (69) $ (736)
(0.6)% 1.3% (0.2)% (1.6)% 0.0% (0.4)%
- ------------------------------- -------------- ------------- --- ----------- ------------- --- ----------- -----------
Net income $ (1,171) $ 5,075 $ (1,772) $ (26,987) $ (80) $ (410)
(1.3)% 6.7% (2.0)% (35.6)% 0.0% (0.5)%
- ------------------------------- -------------- ------------- --- ----------- ------------- --- ----------- -----------
Economic value of equity $ (86,488) $ (9,092) $ 4,251 $ (7,780) $ (11,192) $ 4,717
(10.0)% (1.3)% 0.5% (1.0)% (1.3)% 0.7%
- ------------------------------- -------------- ------------- --- ----------- ------------- --- ------------ ----------
The estimated changes in interest rates on net interest revenue or net income is
not projected to be significant within the +/- 200 basis point range of
assumptions. However, this modeling indicated that under the 200 basis point
increase scenario, BOK Financial's economic value of equity would decrease by
$86.5 million due primarily to the effect of rising interest rates on the value
of the securities portfolio.
BOK Financial hedges its loss exposure from the prepayment of mortgage loans
that it services through the use of futures contracts, call options and put
options. These derivatives are based upon 10-year U.S. Treasury securities. The
changes in value of these derivatives have a highly correlated, inverse relation
to changes in value of the mortgage servicing rights. The interest rate
sensitivity of the mortgage servicing portfolio and the related hedge is modeled
over a range of + or - 50 basis points. At March 31, 1999, the pre-tax results
of this modeling are as follows:
50 bp increase 50 bp decrease
----------------- ------------------
Anticipated change in:
Mortgage servicing rights $ 8,014 $ (12,437)
Hedging instruments (11,123) 9,770
================= ==================
Net $ ( 3,109) $ (2,667)
================= ==================
The simulations used to manage market risk are based on numerous assumptions
regarding the effect 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 and changes in market conditions and management strategies, among
other factors.
BOK Financial uses interest rate swaps, a form of off-balance sheet derivative
product, in managing its interest rate sensitivity. These products are generally
used to more closely match interest paid on certain long-term certificates of
deposit and subordinated debt with earning assets. BOK Financial accrues and
periodically receives a fixed amount from the counterparties to these swaps and
accrues and periodically makes a variable payment to the counterparties. For the
first quarter of 1999, income from these swaps exceeded the cost of the swaps by
$227 thousand. Credit risk from these swaps is closely monitored and
counterparties to these contracts are selected on the basis of their credit
worthiness, among other factors. Derivative products are not used for
speculative purposes.
- --------------------------------------------------------------------------------
TABLE 14 - INTEREST
RATE SWAPS
(In thousands)
Notional Pay Receive Fair
Amount Rate Rate Value
-------------------------------------------------------------
Expiration:
1999 7,000 5.06 %(1) 6.80% 59
2001 4,292 5.03 (1) 4.94 (1) 25
2002 7,660 6.21 4.94 (1) (156)
2003 41,053 4.82 - 5.99 4.94 (1) 360
2004 23,553 5.65 - 5.95 4.94 (1) (158)
2005 8,289 5.08 - 5.21 4.94 (1) 183
2006 16,500 7.26 (1) 5.00 (1) (826)
2007 100,000 4.94(1) 6.75 - 6.80 6,032
2007 14,372 5.23 - 7.47 4.94 - 5.00(1) (452)
2008 28,490 5.15 - 5.66 4.94 (1) 784
2009 32,011 5.22 - 5.88 4.94 (1) 798
- --------------------------------------------------------------------------------
(1) Rates are variable based on LIBOR and reset monthly, quarterly or
semiannually.
Trading Activities
BOK Financial enters into trading account 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 other
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 through BOk and BOSC. 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 positions. The Risk Management
Department monitors trading activity daily and reports to senior management and
the Risk Overssight and Audit Committee of the Board of Directors on any
exceptions to trading position limits and risk management policy.
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. 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
$360 million and the VAR to $6.5 million. At March 31, 1999, the nominal
aggregate trading positions was $30 million, the VAR was $1.2 million.
- --------------------------------------------------------------------------------
TABLE 15 - CAPITAL RATIOS
March 31, Dec.31, Sept. 30, June 30, March 31,
1999 1998 1998 1998 1998
---------------------------------------------------
Average shareholders' equity
to average assets 7.56% 8.09 8.29% 8.18% 8.00%
Risk-based capital:
Tier 1 capital 8.06 7.80 9.44 9.35 9.47
Total capital 12.15 11.96 14.11 14.15 14.47
Leverage 6.31 6.57 7.28 7.24 6.81
REPORT OF MANAGEMENT ON CONSOLIDATED FINANCIAL STATEMENTS
Management is responsible for the consolidated financial statements which have
been prepared in accordance with generally accepted accounting principles. 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 1998 Form 10-K to the Securities and Exchange
Commission which contains audited financial statements.
- -------------------------------------------- --- -------------- --- ------------
Consolidated Statement of Earnings
(In Thousands Except Share Data)
Three Months Ended
March 31
-------------------------------
1999 1998
-------------- --- ------------
Interest Revenue
Loans $ 70,500 $ 60,737
Taxable securities 31,212 27,235
Tax-exempt securities 3,922 3,918
- -------------------------------------------- --- -------------- --- ------------
Total securities 35,134 31,153
- -------------------------------------------- --- -------------- --- ------------
Trading securities 696 163
Funds sold 178 691
- -------------------------------------------- --- -------------- --- ------------
Total interest revenue 106,508 92,744
- -------------------------------------------- --- -------------- --- ------------
Interest Expense
Deposits 32,500 33,383
Other borrowings 21,762 14,958
Subordinated debenture 2,348 2,367
- -------------------------------------------- --- -------------- --- ------------
Total interest expense 56,610 50,708
- -------------------------------------------- --- -------------- --- ------------
Net Interest Revenue 49,898 42,036
Provision for Loan Losses 3,370 2,470
- -------------------------------------------- --- -------------- --- ------------
Net Interest Revenue After
Provision for Loan Losses 46,528 39,566
- -------------------------------------------- --- -------------- --- ------------
Other Operating Revenue
Brokerage and trading revenue 4,347 3,131
Transaction card revenue 7,555 5,540
Trust fees and commissions 7,762 6,884
Service charges and fees on deposit 9,159 7,638
accounts
Mortgage banking revenue, net 9,195 9,321
Leasing revenue 1,868 1,661
Other revenue 5,014 2,685
- -------------------------------------------- --- -------------- --- ------------
Total fees and commissions revenue 44,900 36,860
- -------------------------------------------- --- -------------- --- ------------
Gain on sale of student loans 529 1,415
Gain on loan securitization 270 -
Gain on sale of other assets 892 -
Securities gains, net 274 2,512
- -------------------------------------------- --- -------------- --- ------------
Total other operating revenue 46,865 40,787
- -------------------------------------------- --- -------------- --- ------------
Other Operating Expense
Personnel 31,106 24,829
Business promotion 2,459 1,897
Contribution of stock to BOk
Charitable Foundation - 2,257
Professional fees and services 1,839 1,596
Net occupancy, equipment & data processing 12,996 9,214
FDIC and other insurance 315 310
Printing, postage and supplies 2,751 2,047
Net(gains) losses, and operating
expenses of repossessed assets (1,296) (55)
Amortization of intangible assets 3,245 2,302
Mortgage banking costs 5,304 6,023
Provision for impairment of mortgage
servicing rights - 3,000
Other expense 4,874 3,773
- -------------------------------------------- --- -------------- --- ------------
Total other operating expense 63,593 57,193
- -------------------------------------------- --- -------------- --- ------------
Income Before Taxes 29,800 23,160
Federal and state income tax 9,983 6,847
- -------------------------------------------- --- -------------- --- ------------
Net Income $ 19,817 $ 16,313
================================================================================
Earnings Per Share:
Net Income
Basic $ 0.43 $ 0.35
- -------------------------------------------- --- -------------- --- ------------
Diluted $ 0.38 $ 0.31
- -------------------------------------------- --- -------------- --- ------------
Average Shares Used in Computation:
Basic 45,096,353 45,228,538
- -------------------------------------------- ------------------ ----------------
Diluted 51,747,293 51,933,968
- -------------------------------------------- ------------------ ----------------
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
March 31, December 31, March 31,
1999 1998 1998
---------------------------------------------------
ASSETS
Cash and due from banks $ 405,396 $ 426,265 $ 410,369
Funds sold 8,031 9,151 5,450
Trading securities 51,924 41,138 19,027
Securities:
Available for sale 2,375,630 2,219,636 1,873,390
Investment (fair value: March 31, 1999 - $229,719;
December 31, 1998 -$227,754;
March 31, 1998 - $222,545) 230,190 227,777 221,825
- --------------------------------------------------------------------------------------------------------------------
Total securities 2,605,820 2,447,413 2,095,215
- --------------------------------------------------------------------------------------------------------------------
Loans 3,591,398 3,551,941 2,836,296
Less reserve for loan losses 67,959 64,931 54,839
- --------------------------------------------------------------------------------------------------------------------
Net loans 3,523,439 3,487,010 2,781,457
- --------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 86,662 81,965 58,109
Accrued revenue receivable 70,293 62,630 53,019
Excess cost over fair value of net assets acquired
and core deposit premiums (net of accumulated
amortization: March 31, 1999 - $52,198;
December 31, 1998 - $48,953;
March 31, 1998 - $41,884) 93,933 95,935 65,494
Mortgage servicing rights 92,305 69,224 80,274
Real estate and other repossessed assets 4,820 4,600 5,366
Other assets 101,377 84,017 58,887
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 7,044,000 $ 6,809,348 $ 5,632,667
====================================================================================================================
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing demand deposits $ 1,082,443 $ 1,126,860 $ 978,490
Interest-bearing deposits:
Transaction 1,415,389 1,420,573 1,159,160
Savings 151,744 146,751 113,172
Time 1,693,359 1,685,046 1,768,552
- --------------------------------------------------------------------------------------------------------------------
Total deposits 4,342,935 4,379,230 4,019,374
- --------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
agreements 1,050,955 1,039,533 614,534
Other borrowings 893,819 660,347 345,602
Subordinated debenture 148,504 146,921 148,388
Accrued interest, taxes and expense 55,784 57,357 41,217
Other liabilities 32,796 20,846 14,917
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 6,524,793 6,304,234 5,184,032
- --------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock 25 25 23
Common stock ($.00006 par value; 2,500,000,000
Shares authorized; shares issued and outstanding
March 31, 1999 - 45,165,849; December 31, 1998
- 45,061,350; March 31, 1998 - 44,020,220) 3 3 3
Capital surplus 234,387 233,022 209,748
Retained earnings 281,264 261,822 234,567
Treasury stock (shares at cost: March 31, 1999 - 41,038;
December 31, 1998 - 23,792; March 31, 1998 - 222,818) (918) (565) (4,410)
Accumulated other comprehensive income 4,446 10,807 8,708
Less notes receivable from exercise of stock options - - (4)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 519,207 505,114 448,635
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 7,044,000 $ 6,809,348 $ 5,632,667
====================================================================================================================
See accompanying notes to consolidated financial statements.
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
(In Thousands)
Accumulated
Preferred Stock Common Stock Other Treasury Stock
------------------------------------Comprehensive Capital Retained -------------------- Notes
Shares Amount Shares Amount Income Surplus Earnings Shares Amount Receivable Total
----------------------------------------------------------------------------------------------------------------
December 31, 1997 250,000 $ 23 43,951 $ 3 $ 10,691 $ 208,325 $ 218,629 133 $ (2,190) $ (4) $ 435,477
Comprehensive income:
Net income - - - - - - 16,313 - - - 16,313
Other comprehensive
income, net of tax:
Unrealized gains
(loss)on securities
available for sale(1) - - - - (1,983) - - - - - (1,983)
-----------
Comprehensive income 14,330
-----------
Exercise of stock options - - 47 - - 973 - 16 (346) - 627
Preferred dividends paid
in shares of common stock - - 18 - - 375 (375) - - - -
Director retainer shares - - 4 - - 75 - - - - 75
Treasury stock purchase - - - - - - - 74 (1,874) - (1,874)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance at
March 31, 1998 250,000 $ 23 44,020 $ 3 $ 8,708 $ 209,748 $ 234,567 223 $ (4,410) $ (4) $ 448,635
====================================================================================================================================
Balances at
December 31, 1998 250,000 $ 25 45,061 $ 3 $ 10,807 $ 233,022 $ 261,822 24 $ (565) $ - $ 505,114
Comprehensive income:
Net income - - - - - - 19,817 - - - 19,817
Other Comprehensive
Income, net of tax:
Unrealized gains
(loss)on securities
available for sale(1) - - - - (6,361) - - - - - (6,361)
-----------
Comprehensive income 13,456
-----------
Exercise of stock options - - 71 - - 595 - 14 (285) - 310
Issuance of common
stock to Thrift Plan - - 14 - - 322 - (1) 33 - 355
Preferred dividends paid
in shares of common stock - - 17 - - 375 (375) - - - -
Director retainer shares - - 3 - - 73 - - - - 73
Treasury stock purchase - - - - - - - 1 (101) - (101)
- ------------------------------------------------------------------------------------------------------------------------------------
Balances at
March 31, 1999 250,000 $ 25 45,166 $ 3 $ 4,446 $ 234,387 281,264 41 $ (918) $ - $ 519,207
====================================================================================================================================
<FN>
(1) March 31, 1999 March 31, 1998
-------------- --------------
Reclassification adjustments:
Unrealized losses on available $ (6,449) $ (214)
for sale securities
Less: reclassification
adjustment for gains realized
Included in net income, net of tax 182 1,769
--------------------------------------
Net unrealized losses on securities $ (6,631) $ (1,983)
======================================
</FN>
See accompanying notes to consolidated financial statements.
- ----------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands Except Share Data)
Three Months Ended
March 31,
--------------------------------------
1999 1998
--------------------------------------
Cash Flow From Operating Activities:
Net income $ 19,817 $ 16,313
Adjustments to reconcile net income to net cash
provided (used) by operating activities:
Provision for loan losses 3,370 2,470
Depreciation and amortization 11,850 9,193
Provision for impairment of mortgage servicing rights - 3,000
Net amortization of security discounts and premiums 310 364
Contribution of stock to BOk Charitable Foundation - 2,257
Net gain on sale of assets (5,599) (5,590)
Mortgage loans originated for resale (198,720) (221,621)
Proceeds from sale of mortgage loans held for resale 219,513 183,078
Increase in trading securities (2,738) (14,028)
Increase in accrued revenue receivable (7,663) (2,264)
Increase in other assets (17,442) (1,142)
Increase in accrued interest, taxes and expense 5,273 1,401
Increase (decrease) in other liabilities 11,339 (2,302)
- ----------------------------------------------------------------------------------------------------
Net cash provided (used) by operating activities 39,310 (28,871)
- ----------------------------------------------------------------------------------------------------
Cash Flow From Investing Activities:
Proceeds from maturities of investment securities 19,375 7,364
Proceeds from maturities of available for sale securities 91,087 97,875
Purchases of investment securities (21,855) (16,894)
Purchases of available for sale securities (713,823) (690,995)
Proceeds from sales of available for sale securities 453,566 466,935
Loans originated or acquired net or principal collected (210,839) (85,115)
Proceeds from disposition of assets 151,278 63,737
Purchases of assets (37,985) (11,900)
Cash and cash equivalents of branches & subsidiaries
acquired and sold, net (1,339) -
- ----------------------------------------------------------------------------------------------------
Net cash used by investing activities (270,535) (168,993)
- ----------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net increase (decrease) in demand deposits, transaction
deposits, money market deposits, and savings accounts (44,608) 138,605
Net increase in certificates of deposit 8,313 152,690
Net increase (decrease) in other borrowings 244,894 (65,766)
Purchase of treasury stock (101) (1,874)
Issuance of preferred, common and treasury stock, net 738 702
- ----------------------------------------------------------------------------------------------------
Net cash provided by financing activities 209,236 224,357
- ----------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (21,989) 26,493
Cash and cash equivalents at beginning of period 435,416 389,326
- ----------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 413,427 $ 415,819
- ----------------------------------------------------------------------------------------------------
Cash paid for interest $ 57,447 $ 49,503
- ----------------------------------------------------------------------------------------------------
Cash paid for taxes $ 8,550 $ 353
- ----------------------------------------------------------------------------------------------------
Net loans transferred to repossessed real estate
and other assets $ 840 $ 701
- ----------------------------------------------------------------------------------------------------
Payment of preferred stock dividends in common stock $ 375 $ 375
- ----------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(1) ACCOUNTING POLICIES
Basis of Presentation
The accounting and reporting policies of BOK Financial Corporation conform to
generally accepted accounting principles and to 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 Albuquerque,
N.A., and Bank of Texas, N.A.. Certain prior period balances have been
reclassified to conform with the current period presentation.
Effect of Pending Statements of Financial Accounting Standards
During 1998, the Financial Accounting Standards Board issued Statement No. 133,
"Accounting for Derivative Instruments and Hedging Activities" ("FAS 133").
Among other things, FAS 133 requires that all derivative instruments be carried
on the statement of financial position at fair value. Changes in fair value of
the derivative instruments will either be reported in income or as a separate
component of other comprehensive income (shareholders' equity) depending on
whether the derivative instrument meets certain requirements for hedge
accounting. FAS 133 eliminates the current practice of deferral hedge accounting
where gains or losses on derivative instruments designated as hedges are
considered adjustments to the carrying value of the hedged asset or liability.
FAS 133 is effective for fiscal years beginning after June 15, 1999 and BOK
Financial expects to adopt the standard as of January 1, 2000. BOK Financial has
not yet determined what the effect of FAS 133 will be on its earnings or
financial position.
(2) ACQUISITIONS
BOK Financial's acquisition of First Muskogee Bancshares, Inc. is still pending
regulatory action. That action by the Federal Reserve Board on this application
is anticipated during the second quarter.
(3) MORTGAGE BANKING ACTIVITIES
At March 31, 1999, BOK Financial owned the rights to service 88,013 mortgage
loans with outstanding principal balances of $6.7 billion, including $73 million
serviced for BOk. The weighted average interest rate and remaining term was
7.49% and 278 months, respectively.
Activity in capitalized mortgage servicing rights and related valuation
allowance during the three months ending March 31, 1999 is as follows:
Capitalized Mortgage Servicing Rights
-----------------------------------------------------------------------------------------
Valuation Hedging
Purchased Originated Total Allowance (Gain)/Loss Net
--------------- ------------- --------------- ------------- ----------------- -----------
Balance at
December 31, 1998 $ 70,509 $ 21,199 $ 91,708 $ - $ (22,484) $ 69,224
Additions 7,871 2,981 10,852 - - 10,852
Amortization expense (2,783) (965) (3,748) - 692 (3,056)
Realized hedge losses - - - - 11,629 11,629
Unrealized hedge losses - - - - 3,656 3,656
- ----------------------------- -- ---------- --- ---------- - ----------- -- ------------- -- ----------- -- -----------
Balance at March 31, 1999 $ 75,597 $ 23,215 $ 98,812 $ - $ (6,507) $ 92,305
- ----------------------------- -- ---------- --- ---------- - ----------- -- ------------- -- ----------- -- -----------
Estimated fair value of
mortgage servicing
rights (1) $ 75,282 $ 27,529 102,811 $ 102,811
- ----------------------------- -- ---------- --- ---------- - ----------- -- ------------- -- ----------- -- -----------
(1) Excludes approximately $8.4 million of loan servicing rights on mortgage
loans originated prior to the adoption of FAS 122.
Stratification of the mortgage loan servicing portfolio, outstanding principal
of loans serviced, and related hedging information by interest rate at March 31,
1999 follows (in thousands):
< 6.50% 6.50% - 7.49% 7.50% - 8.49% => 8.50% Total
---------------------------- ---------------- ------------- --------------
Cost less accumulated amortization $ 3,139 $ 51,018 $ 39,789 $ 4,866 $ 98,812
Deferred hedge gains - (1,501) (5,005) - (6,507)
- --------------------------------------------------------------- ---------------- ------------- --------------
Adjusted cost 3,139 49,517 34,784 4,866 92,305
Fair value 3,565 53,900 38,592 6,753 102,811
- --------------------------------------------------------------- ---------------- ------------- --------------
Impairment $ - $ - $ - $ - $ -
- --------------------------------------------------------------- ---------------- ------------- --------------
Outstanding principal of loans
serviced $ 241,935 $ 2,818,880 $ 2,532,327 $ 494,703 $ 6,087,845(1)
- --------------------------------------------------------------- ---------------- ------------- --------------
(1) Excludes outstanding principal of $570,453 for loans serviced for which
there is no capitalized mortgage servicing rights.
(4) DISPOSAL OF AVAILABLE FOR SALE SECURITIES
Sales of available for sale securities for the three months ending March 31,
1999 and 1998 resulted in gains and losses as follows (in thousands):
Proceeds $ 453,566 $ 466,935
Gross realized gains 1,681 3,157
Gross realized losses 1,407 645
Related federal and state
income tax expense 92 743
(5) LOAN SECURITIZATION
BOK Financial securitized and sold approximately $100 million of automobile
loans during the first quarter of 1999. In conjunction with the sale, BOK
Financial retained the servicing rights associated with the loans and a residual
interest in cash flows in excess of set targets. These retained interests were
recorded at $1.0 million and $8.0 million, respectively, based upon their
relative fair values. The fair value of the servicing rights was based upon the
discounted cash flow of net servicing revenue and will be amortized over the
expected life of the loans serviced, adjusted for changes in prepayment
assumptions. The fair value of the residual interest in cash flows was based
upon the discounted cash flow from the securitization trust to BOK Financial and
will be carried at fair value with unrealized gains or losses recognized in
income. The significant assumptions used to determine the fair value of these
assets are:
Servicing Rights Residual Interest
Discount rate 10% 12%
Servicing revenue 1% -
Servicing cost $50/loan -
Term 45 months 45 months
Default rate - 0.9%
BOSC, Inc. received an underwriting fee of $1.0 million in conjunction with this
transaction.
(6) EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per
share (dollars in thousands except share data):
Three Months Ended
---------------------------
March 31, March 31,
1999 1998
---------------------------
Numerator:
Net income 19,817 $ 16,313
Preferred stock dividends (375) (375)
- --------------------------------------------------------------------------------
Numerator for basic earnings per share - income
Available to common stockholders 19,442 15,938
- --------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock dividends 375 375
- --------------------------------------------------------------------------------
Numerator for diluted earnings per share - income
available to common stockholders after assumed
conversion $ 19,817 $ 16,313
- --------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share -weighted
average shares 45,096,353 45,228,538
Effect of dilutive securities:
Employee stock options 680,676 735,166
Convertible preferred stock 5,970,264 5,970,264
- --------------------------------------------------------------------------------
Dilutive potential common shares 6,650,940 6,705,430
- --------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
Weighted average shares and assumed conversions 51,747,293 51,933,968
- --------------------------------------------------------------------------------
Basic earnings per share $ 0.43 $ 0.35
- --------------------------------------------------------------------------------
Diluted earnings per share $ 0.38 $ 0.31
- --------------------------------------------------------------------------------
(7) REPORTABLE SEGMENTS
Reportable segments reconciliation to the Consolidated Financial Statements at
March 31, 1999 is as follows:
Net Interest Other Operating Other Operating Average
Revenue Revenue Expense Assets
-------------------------------- ------------------ ------------
Total reportable lines of business $ 33,195 $ 34,365 $ 40,888 $ 5,096,773
Total non-reportable lines of business 11,041 11,834 18,803 1,283,014
Unallocated items:
Tax-equivalent adjustment (2,333) - - -
Funds management 8,007 305 2,570 136,512
Contribution to BOk Foundation - - - -
All others, net (12) 87 1,332 233,880
----------------------------------------------------------------
BOK Financial consolidated $ 49,898 $ 46,591 $ 63,593 $ 6,750,179
================================================================
Reportable segments reconciliation to the Consolidated Financial Statements at
March 31, 1998 is as follows:
Net Interest Other Operating Other Operating Average
Revenue Revenue Expense Assets
------------------------------- ------------------ ------------------
Total reportable lines of business $ 30,604 $ 31,028 $ 40,744 $ 4,630,934
Total non-reportable lines of business 6,327 6,828 9,612 577,376
Unallocated items:
Tax-equivalent adjustment (2,330) - - -
Funds management 7,383 1,994 8,227 (5,385)
Contribution to BOk Foundation - - 2,257 -
All others, net (52) (1,575) (6,647) 351,451
=============================== ================== ==================
BOK Financial consolidated $ 42,036 $ 46,591 $ 63,593 $ 6,750,179
=============================== ================== ==================
(8) 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.
- ------------------------------------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL SUMMARY - UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands Except Share Data)
For Three months ended
--------------------------------------------------------------------------------------
March 31, 1999 December 31,1998
-------------------------------------------- --------------------------------------
Average Revenue/ Yield Average Revenue/ Yield
Balance Expense /Rate Balance Expense /Rate
--------------------------------------------------------------------------------------
Assets
Taxable securities $ 2,088,998 $ 31,212 6.06% $ 1,902,736 $ 29,073 6.06%
Tax-exempt securities(1) 318,685 6,104 7.77 323,147 6,167 7.57
- ------------------------------------------------------------------------------------------------------------------------------
Total securities 2,407,683 37,316 6.29 2,225,883 35,240 6.28
- ------------------------------------------------------------------------------------------------------------------------------
Trading securities 54,907 696 5.14 19,415 232 4.74
Funds sold 14,365 178 5.03 16,539 242 5.81
Loans(2)(3) 3,523,454 70,651 8.13 3,270,560 69,158 8.39
Less reserve for loan losses 66,426 63,727 -
-
- ------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve(3) 3,457,028 70,651 8.29 3,206,833 69,158 8.56
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets(3) 5,933,983 108,841 7.44 5,468,670 104,872 7.61
- ------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 816,196 672,352
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 6,750,179 $ 6,141,022
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 1,401,655 10,131 2.93% $ 1,236,386 8,967 2.88%
Savings deposits 148,393 688 1.88 119,970 607 2.01
Other time deposits 1,730,964 21,681 5.08 1,601,350 21,264 5.27
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 3,281,012 32,500 4.02 2,957,706 30,838 4.14
- ------------------------------------------------------------------------------------------------------------------------------
Other borrowings 1,714,762 21,762 5.15 1,502,825 20,427 5.39
Subordinated debenture 148,482 2,348 6.41 147,418 2,333 6.28
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 5,144,256 56,610 4.46 4,607,949 53,598 4.61
- ------------------------------------------------------------------------------------------------------------------------------
Demand deposits 1,010,574 950,560
Other liabilities 85,070 85,721
Shareholders' equity 510,279 496,792
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' $ 6,750,179 $ 6,141,022
Equity
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (1)(3) 52,231 2.98% 51,274 2.99%
Tax-Equivalent Net Interest Revenue (1)
To Earning Assets 3.57 3.72
Less tax-equivalent adjustment 2,333 2,299
(1)(3)
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 49,898 48,975
Provision for loan losses 3,370 4,027
Other operating revenue 46,865 44,817
Other operating expense 63,593 60,821
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 29,800 28,944
Federal and state income tax 9,983 9,729
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 19,817 $ 19,215
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share:
Net Income
Basic $ 0.43 $ 0.42
- ------------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.38 $ 0.37
- ------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Tax equivalent at the statutory federal and state rates for the periods
presented. The taxable equivalent adjustments shown
shown are for comparitive purposes.
(2) The loan averages include loans on which the accrual of interest has been discontinued and are stated net of unearned
income.
(3) Yield/Rate excludes $1.8 million and $1.5 million of non-recurring collection of foregone interest in September 30,
1998 and June 30, 1998, respectively.
</FN>
- -------------------------------------------------------------------------------------------------------------------------
For Three months ended
- -------------------------------------------------------------------------------------------------------------------------
September 30, 1998 June 30, 1998 March 31, 1998
- -------------------------------------------------------------------------------------------------------------------------
Average Revenue/ Yield Average Revenue/ Yield Average Revenue/ Yield
Balance Expense /Rate Balance Expense /Rate Balance Expense /Rate
- -------------------------------------------------------------------------------------------------------------------------
$ 1,751,428$ 27,300 6.18% $ 1,642,799 $ 25,119 6.13% $ 1,772,971$ 27,235 6.23%
325,413 6,212 7.57 321,703 6,173 7.70 328,735 6,248 7.71
- -------------------------------------------------------------------------------------------------------------------------
2,076,841 33,512 6.40 1,964,502 31,292 6.39 2,101,706 33,483 6.46
- -------------------------------------------------------------------------------------------------------------------------
27,389 389 5.63 21,408 262 4.91 11,774 163 5.61
25,287 333 5.22 37,728 571 6.07 47,050 691 5.96
2,978,087 66,503 8.62 2,838,037 63,072 8.71 2,822,147 60,737 8.73
59,821 - 56,423 - 54,164 -
- - -
- -------------------------------------------------------------------------------------------------------------------------
2,918,266 66,503 8.80 2,781,614 63,072 8.88 2,767,983 60,737 8.90
- -------------------------------------------------------------------------------------------------------------------------
5,047,783 100,737 7.78 4,805,252 95,197 7.82 4,928,513 95,074 7.82
- -------------------------------------------------------------------------------------------------------------------------
6477413 643,626 625,863
- -------------------------------------------------------------------------------------------------------------------------
$ 5,695,524 $ 5,448,878 $ 5,554,376
- -------------------------------------------------------------------------------------------------------------------------
$ 1,187,685 92737 3.10% $ 1,184,835 9,268 3.14% $ 1,145,221$ 8,917 3.16%
108,911 547 1.99 111,207 617 2.23 109,560 602 2.23
1,643,596 22,455 5.42 1,717,993 23,640 5.52 1,739,816 23,864 5.56
- -------------------------------------------------------------------------------------------------------------------------
2,940,192 32,275 4.36 3,014,035 33,525 4.46 2,994,597 33,383 4.52
- -------------------------------------------------------------------------------------------------------------------------
1,152,503 16,830 5.79 873,616 12,406 5.70 1,051,724 14,958 5.77
148,392 2,529 6.76 148,410 2,464 6.66 148,374 2,367 6.47
- -------------------------------------------------------------------------------------------------------------------------
4,241,087 51,634 4.83 4,036,061 48,395 4.81 4,194,695 50,708 4.90
- -------------------------------------------------------------------------------------------------------------------------
904,128 895,415 858,340
78,383 61,814 57,095
471,926 455,588 444,246
- -------------------------------------------------------------------------------------------------------------------------
$ 5,695,524 $ 5,448,878 $ 5,554,376
- -------------------------------------------------------------------------------------------------------------------------
49,103 2.95% 46,802 3.01% 44,366 2.92%
3.05
3.72 3.78 3.65
2,326 2,338 2,330
- -------------------------------------------------------------------------------------------------------------------------
46,777 44,464 42,036
4,001 3,953 2,470
42,860 44,355 40,787
56,837 53,804 57,193
- -------------------------------------------------------------------------------------------------------------------------
28,799 10,624 23,160
10,049 10,624 6,847
- -------------------------------------------------------------------------------------------------------------------------
$ 18,750 $ 20,438 $ 16,313
- -------------------------------------------------------------------------------------------------------------------------
$ 0.41 $ 0.44 $ 0.35
- -------------------------------------------------------------------------------------------------------------------------
$ 0.36 $ 0.39 $ 0.31
- -------------------------------------------------------------------------------------------------------------------------
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K
(A) Exhibits:
No. 10.26 Merger agreement among BOK Financial Corporation,
BOKF Merger Corporation Number Nine, and
Chaparral Bancshares, Inc.dated February 19, 1999.
No. 10.27 Merger agreement among BOK Financial Corporation,
Park Cities Bancshares, Inc., Mid-Cities
Bancshares, Inc. and Mid-Cities National Bank
dated February 24, 1999.
No. 10.28 Merger agreement among BOK Financial Corporation,
Park Cities Bancshares, Inc., PC Interim State
Bank, Swiss Avenue State Bank and Certain
Shareholders of Swiss Avenue State Bank dated
March 4, 1999.
No. 27 Financial Data Schedule filed herewith
electronically.
(B) Reports on Form 8-K:
No reports on Form 8-K were filed during the three months ended
March 31, 1999.
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: May 17, 1999 /s/ James A. White
------------ -------------------------
James A. White
Executive Vice President and
Chief Financial Officer