As filed with the Securities and Exchange Commission on November 16, 1998
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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 September 30, 1998
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 ($.00006 Par Value)
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding twelve months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
Indicate the number of shares outstanding of each of the Registrant's
classes of common stock, as of the latest practicable date: 21,845,241 shares of
common stock ($.00006 par value) as of October 31, 1998.
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BOK Financial Corporation
Form 10-Q
Quarter Ended September 30, 1998
Index
Part I. Financial Information
Management's Discussion and Analysis 2
Report of Management on Consolidated
Financial Statements 13
Consolidated Statements of Earnings 14
Consolidated Balance Sheets 15
Consolidated Statements of Changes
in Shareholders' Equity 16
Consolidated Statements of Cash Flows 17
Notes to Consolidated Financial Statements 18
Financial Summaries - Unaudited 20
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 23
Signature 23
MANAGEMENT'S DISCUSSION AND ANALYSIS
HIGHLIGHTS
BOK Financial Corporation ("BOK Financial") recorded net income of $18.8 million
or $0.75 per diluted common share for the third quarter of 1998 compared to
$16.4 million or $0.65 per diluted common share for the third quarter of 1997.
Returns on average assets and equity were 1.31% and 15.76%, respectively,
compared to returns on average assets and equity of 1.25% and 16.16%,
respectively, for the third quarter of 1997.
Year to date net income and earnings per diluted common share were $55.5 million
or $2.21, respectively for 1998 compared to $47.8 million or $1.91,
respectively, for the same period of 1997. Returns on average assets and equity
were 1.33% and 16.24%, respectively, for 1998 compared to returns on average
assets and equity of 1.27% and 16.75%, respectively, for 1997.
The increase in net income for the third quarter of 1998 was due to increases of
$8.8 million or 26.4% in fees and commissions revenue and $7.1 million or 18.0%
in net interest revenue. These increases were partially offset by increases of
$10.1 million or 21.7% in operating expenses and $1.0 million in provision for
loan losses.
RESULTS OF OPERATIONS
Net interest revenue on a tax-equivalent basis was $49.1 million for the third
quarter of 1998 compared to $42.1 million for the third quarter of 1997, an
increase of $7.0 million or 16.7%. Net interest revenue for third quarter of
1998 included $1.8 million from the non-recurring collection of foregone
interest. This amount has been excluded from the subsequent discussion of
changes in net interest revenue and net interest margin. Average earning assets
increased by $449 million, including increases in average loans of $302 million
and average securities of $156 million. Interest bearing liabilities increased
$291 million, primarily due to increases in time deposits of $110 million and
interest bearing transaction accounts of $120 million. Demand deposits and
shareholders' equity, which are additional sources of funding asset growth,
increased $143 million and $69 million, respectively. The growth in average
earning assets in excess of the growth in interest bearing liabilities
contributed $5.5 million to the increase in net interest revenue.
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TABLE 1 - VOLUME/RATE ANALYSIS
(In thousands)
Three months ended Nine months ended
September 30, 1998/1997 September 30, 1998/1997
---------------------------------------------------------------------------
Change Due To (1) Change Due To (1)
------------------------ ------------------------
Yield Yield
Change Volume /Rate Change Volume /Rate
---------------------------------------------------------------------------
Tax-equivalent interest revenue:
Securities $ 2,394 $ 2,316 $ 78 $ 5,807 $ 6,195 $ (388)
Trading securities 336 345 (9) 620 677 (57)
Loans 5,646 6,610 (964) 20,691 21,976 (1,285)
Funds sold (407) (342) (65) (673) (691) 18
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Total 7,969 8,929 (960) 26,445 28,157 (1,712)
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Interest expense:
Interest bearing transaction deposits 983 933 50 2,834 3,381 (547)
Savings deposits (56) 4 (60) (6) 47 (53)
Time deposits 966 1,528 (562) 5,412 5,865 (453)
Other borrowings (373) (96) (277) (3,377) (3,230) (147)
Subordinated debenture 1,224 1,108 116 5,633 5,470 163
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Total 2,744 3,477 (733) 10,496 11,533 (1,037)
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Tax-equivalent net interest revenue
before nonrecurring foregone interest 5,225 5,452 (227) 15,949 16,624 (675)
Non-recurring foregone interest 1,794 3,262
Change in tax-equivalent adjustment (100) (177)
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Net interest revenue $ 19,388
7,119
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(1) Changes attributable to both volume and yield are allocated to both volume and yield/rate on an equal basis.
Year to date, net interest revenue on a tax equivalent basis increased by $19.4
million compared to 1997. Excluding the non-recurring collection of foregone
interest in 1998, this represented a 14.2% increase in net interest revenue due
primarily to the growth of earning assets in excess of the growth in interest
bearing liabilities.
Since inception, BOK Financial has completed acquisitions which 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. This is in
contrast to the "pooling of interest" method, which is only applicable in
certain limited circumstances. The pooling of interests method does not result
in the recording of goodwill or other intangible assets. Since the amortization
of goodwill and other intangible assets does not result in a current period cash
expense, the economic value to shareholders under either accounting method is
essentially the same. Operating results excluding the impact of these intangible
assets are summarized below:
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TABLE 2 - TANGIBLE OPERATING RESULTS
-------------------------------
(Dollars in Thousands Except Share Data) Nine months ended
-------------------------------
Sept. 30, Sept. 30,
1998 1997
--------------- ---------------
Net income $ 55,501 $ 47,807
After-tax impact of amortization of intangible assets 6,173 5,920
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Tangible net income $ 61,674 $ 53,727
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Tangible net income per diluted share $ 2.45 $ 2.15
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Average tangible shareholders' equity $ 391,057 $ 316,646
Return on tangible shareholders' equity 21.09% 22.69%
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Average tangible assets $5,498,891 $4,960,512
Return on tangible assets 1.50% 1.45%
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Net interest margin, the ratio of net interest revenue to average earning
assets, was 3.72% for the third quarter of 1998 compared to 3.63% for the third
quarter of 1997. An increase in the total non-interest bearing funding sources,
primarily demand deposits and capital, contributed 8 basis points to the
increase in net interest margin while changes in the yield on earning assets and
the cost of interest bearing liabilities contributed 1 basis points. The yield
on earning assets decreased 7 basis points to 7.78% due primarily to a 13 basis
point decrease in loan yields. Average loans, which generally are the highest
yielding category of earning assets, increased to 57.8% of total earning assets
for the third quarter of 1998 compared to 57.1% in the third quarter of 1997.
This change in the composition of earning assets partially offset the decrease
in loan yield. At the same time, the cost of interest bearing liabilities
decreased 8 basis points to 4.83%. The cost of interest bearing deposits and
other borrowings decreased by 9 basis points and 10 basis points, respectively
while the cost of subordinated debt increased by 40 basis points. Average
deposits, which generally are the lowest costing category of interest bearing
liabilities increased to 69.3% of total interest bearing liabilities for the
third quarter of 1998 compared to 68.6% for the third quarter of 1997. This
shift in the mix of interest bearing liabilities also contributed to the
decrease in the cost of funds.
Since inception in 1990, BOK Financial has followed a strategy of fully
utilizing its capital resources by borrowing funds in the capital markets to
supplement deposit growth and to invest in securities. Although this strategy
frequently results in a net interest margin which falls below those normally
seen in the commercial banking industry, it provides positive net interest
revenue. Management estimates that for the third quarter of 1998, this strategy
resulted in a 63 basis point decrease in net interest margin. However, this
strategy contributed $1.8 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 increased $8.5 million or 24.9% compared to the same
quarter of 1997. Total fees and commissions, which are included in other
operating revenue, increased $8.8 million or 26.4%. All categories of fee income
showed increases over the third quarter of 1997. Most notably, mortgage banking
revenue increased $2.5 million due to a $2.2 million increase in secondary
marketing income. Secondary marketing revenue totaled $2.6 million for the third
quarter of 1998 compared to $417 thousand for the third quarter of 1997.
Servicing revenue was $8.3 million and $8.0 million, respectively, for the third
quarters of 1998 and 1997. Declining mortgage interest rates throughout 1998
have significantly increased the loan refinancing activities. This refinancing
activity has a positive effect on earnings through gains in secondary marketing
activities. However, the refinancing activity has a negative effect on earnings
from loan servicing through increased amortization expense and, potentially,
increased impairment risk on capitalized mortgage loan servicing rights.
Strategies used by BOK Financial to reduce this impairment risk are discussed in
the Market Risk section of this report. Loans serviced by BOK Mortgage, a
division of BOk, totaled $6.6 billion at September 30, 1998. In addition to the
increase in mortgage banking revenue, transaction card revenue and brokerage and
trading revenue each increased $1.5 million due to increased transaction
volumes.
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TABLE 3 - OTHER OPERATING REVENUE
(In thousands)
Three Months Ended
-------------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
1998 1998 1998 1997 1997
-------------------------------------------------------------------------------
Brokerage and trading revenue $ 4,109 $ 4,051 $ 3,131 $ 2,565 $ 2,522
Transaction card revenue 6,516 6,010 5,540 4,828 5,770
Trust fees and commissions 7,751 7,654 6,884 6,528 6,405
Service charges and fees
on deposit accounts 8,015 7,440 7,638 7,570 7,255
Mortgage banking revenue 10,929 10,940 9,321 9,411 8,416
Leasing revenue 1,749 1,804 1,661 1,522 1,566
Other revenue 3,239 3,017 2,685 3,198 1,546
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Total fees and commissions 42,308 40,916 36,860 35,622 33,480
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Gain on student loan sales 14 119 1,415 99 26
Gain (loss) on securities 538 3,320 2,512 (2,200) 809
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Total other operating revenue $ 42,860 $ 44,355 $ 40,787 $ 33,521 $ 34,315
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Year to date, other operating revenue increased $31.8 million or 33.1%. This
included an increase of $26.0 million or 27.6% in fee and commission revenue due
to increases in all categories of other operating revenue.
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TABLE 4 - OTHER OPERATING EXPENSE
(In thousands)
Three Months Ended
-----------------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
1998 1998 1998 1997 1997
-----------------------------------------------------------------------------------
Personnel $ 26,067 $ 25,715 $ 24,829 $ 24,811 $ 22,475
Business promotion 1,862 1,662 1,897 2,450 2,067
Contribution of stock to BOK
Charitable Foundation - - 2,257 3,638 -
Professional fees/services 2,622 2,308 1,596 2,123 1,579
Net occupancy, equipment
and data processing 10,574 10,594 9,214 10,426 8,618
FDIC and other insurance 270 345 310 258 374
Printing, postage and supplies 2,267 2,223 2,047 2,220 1,817
Net gains and operating
expenses on repossessed assets (19) (315) (55) (1,553) (1,662)
Amortization of intangible
assets 2,268 2,272 2,302 2,336 2,362
Mortgage banking costs 6,374 6,290 6,023 6,137 5,202
Provision for impairment of
mortgage servicing rights - (1,000) 3,000 4,100 -
Other expense 4,552 3,710 3,773 4,331 3,888
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Total $ 56,837 $ 53,804 $ 57,193 $ 61,277 $ 46,720
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Other operating expenses for the third quarter of 1998 increased $10.1 million
or 21.7% compared to the third quarter of 1997. Excluding the effects of
significant or non-recurring items as shown in Table 5, operating expenses
increased $8.5 million or 17.5%.
Personnel costs increased $3.6 million due to increased staffing, normal
compensation increases and increased incentive compensation. Staffing on a
full-time equivalent ("FTE") basis increased by 161 employees while average
compensation per FTE increased by 8.4%. These changes reflect the addition of
several senior level positions in both the lending and operations areas as well
as related support staff in the second half of 1997. Incentive compensation,
which varies directly with revenue increase of $531 thousand to $2.6 million for
the quarter. Occupancy, equipment and data processing costs increased $2.0
million or 22.7%, which included increases of $785 thousand in net occupancy
costs and $1.1 million in data processing costs. The increase in net occupancy
costs was due primarily to the conversion of BOK Financial's ownership in its
Oklahoma City headquarters building from a general interest to a limited
interest, which resulted in a decrease in rental income of $679 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. Mortgage banking costs increased $1.2 million or 22.5%
due to increased amortization of capitalized servicing rights and a greater
volume of loans originated.
The efficiency ratio, the ratio of other operating expenses, excluding net gains
on real estate sales and the previously discussed large or non-recurring
transactions, to tax-equivalent net interest revenue and other operating
revenue, excluding securities gains and losses was 62.2% for the third quarter
of 1998 compared to 64.0% for the third quarter of 1997.
Year to date, operating expenses increased $33.9 million or 25.4%. Excluding
significant or non-recurring items, operating expenses increased $27.8 million
or 20.4% due to the same factors which contributed to the quarterly increases.
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TABLE 5 - OTHER OPERATING EXPENSE, EXCLUDING SIGNIFICANT OR NONRECURRING ITEMS
(In thousands)
Three Months Ended
-------------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
1998 1998 1998 1997 1997
-------------------------------------------------------------------------------
Total other operating expense $ 56,837 $ 53,804 $ 57,193 $ 61,277 $ 46,720
Contribution of stock to BOk
Charitable Foundation - (2,257) (3,638) -
Provision for impairment of mortgage
Servicing rights - 1,000 (3,000) (4,100) -
Net gains and operating costs from
Repossessed assets 19 315 55 1,553 1,662
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Total $ 56,856 $ 55,119 $ 51,991 $ 55,092 $ 48,382
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RISK ELEMENTS
The aggregate loan portfolio at September 30, 1998 increased $186 million to
$3.1 billion during the third quarter of 1998. Commercial loans increased $92
million and commercial real estate loans increased $74 million, respectively,
while residential mortgage loans increased $35 million. The aggregate growth in
the loan portfolio during the third quarter of 1998 included increases for Bank
of Texas, N.A. of $38 million or 19% and for Bank of Arkansas, N.A. of $11
million or 15%.
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TABLE 6 - LOANS
(In thousands)
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
1998 1998 1998 1997 1997
---------------------------------------------------------------------------------
Commercial:
Energy $ 359,986 $ 315,051 $ 324,052 $ 332,770 $ 333,347
Manufacturing 229,495 223,540 222,385 201,918 185,795
Wholesale/retail 280,917 275,544 250,702 242,156 255,768
Agricultural 143,061 133,148 159,324 151,525 155,052
Services 533,550 496,347 473,684 465,317 416,871
Other commercial and industrial 127,017 138,278 139,516 105,714 168,028
Commercial real estate:
Construction and land development 149,679 139,323 123,412 102,800 79,275
Multifamily 150,150 115,821 95,335 100,422 110,340
Other real estate loans 339,314 310,417 283,329 274,579 258,280
Residential mortgage:
Secured by 1-4 family
Residential properties 442,443 390,765 404,481 419,139 414,050
Residential mortgages held for 82,200 98,912 118,777 78,669 103,300
sale
Consumer 230,702 245,722 241,299 290,084 289,892
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Total $ 3,068,514 $ 2,882,868 $ 2,836,296 $ 2,765,093 $ 2,769,998
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BOK Financial has achieved some geographic diversification through acquisitions
and expansion into Northwest Arkansas, North Texas and New Mexico. However, the
majority of commercial and consumer loans are to businesses and individuals in
Oklahoma. This 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 6.
Nonperforming assets totaled $34.0 million at September 30, 1998, a decrease of
$7.9 million from June 30, 1998. Nonaccrual loans decreased $722 thousand while
loans 90 days or more past due decreased $6.0 million.
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TABLE 7 - NONPERFORMING ASSETS
(In thousands)
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
1998 1998 1998 1997 1997
------------------------------------------------------------------------
Nonperforming assets:
Nonperforming loans:
Nonaccrual loans:
Commercial $ 8,430 $ 9,045 $ 12,556 $ 12,717 $ 16,103
Commercial real estate 2,105 2,473 2,824 2,960 3,854
Residential mortgage 2,410 2,072 2,243 2,441 2,512
Consumer 1,068 1,145 1,192 649 713
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Total nonaccrual loans 14,013 14,735 18,815 18,767 23,182
Loans past due (90 days) (1) 15,594 21,568 18,330 18,178 20,551
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Total nonperforming loans (1) 29,607 36,303 37,145 36,945 43,733
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Other nonperforming assets:
Commercial real estate 3,544 4,515 2,297 2,395 2,503
Other 809 1,075 3,069 2,863 2,684
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Total other nonperforming assets 4,353 5,590 5,366 5,258 5,187
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Total nonperforming assets $ 33,960 $ 41,893 $ 42,511 $ 42,203 $ 48,920
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Ratios:
Reserve for loan losses to
Nonperforming loans 209.85% 159.17% 147.63% 143.73% 119.80%
Nonperforming loans (1) to
Period-end loans (2) 0.99 1.30 1.37 1.38 1.64
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(1) Includes 1-4 family loans
Guaranteed by agencies of
The U.S. government $ 18,191 $ 17,387 $ 16,006 $ 14,468 $ 16,010
(2) Excludes residential mortgage loans held for sale
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BOK Financial monitors loan performance on a portfolio and individual loan
basis. Nonperforming loans are reviewed at least quarterly. The loan review
process involves evaluating the credit worthiness of customers and their
ability, based upon current and anticipated economic conditions, to meet future
principal and interest payments. Loans may be identified which 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
Nonperforming 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 September 30, 1998, loans totaling $70 million were assigned to the
substandard risk category and loans totaling $37 million were assigned to the
special mention risk category, compared to $76 million and $58 million,
respectively, at June 30, 1998.
The reserve for loan losses, which is available to absorb losses inherent in
the loan portfolio, totaled $62 million at September 30, 1998, compared to $58
million at June 30, 1998 and $53 million at December 31, 1997. This represented
2.08%, 2.08% and 1.98% of total loans, excluding loans held for sale, at
September 30, 1998, June 30, 1998 and December 31, 1997, 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 8 presents statistical information
regarding the reserve for loan losses.
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TABLE 8 - SUMMARY OF LOAN LOSS EXPERIENCE
(In thousands)
Three Months Ended
---------------------------------------------------------------------------------
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
1998 1998 1998 1997 1997
---------------------------------------------------------------------------------
Beginning balance $ 57,782 $ 54,839 $ 53,101 $ 52,393 $ 49,871
Loans charged-off:
Commercial 532 1,339 172 1,852 1,179
Commercial real estate 50 92 - 441 194
Residential mortgage 28 19 50 269 91
Consumer 888 845 1,305 1,464 1,051
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Total 1,498 2,295 1,527 4,026 2,515
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Recoveries of loans previously charged-off:
Commercial 796 534 120 611 1,004
Commercial real estate 551 170 161 69 393
Residential mortgage - 80 82 119 325
Consumer 499 501 432 435 315
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Total 1,846 1,285 795 1,234 2,037
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Net loans charged-off (348) 1,010 732 2,792 478
Provision for loan losses 4,001 3,953 2,470 3,500 3,000
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Ending balance $ 62,131 $ 57,782 $ 54,839 $ 53,101 $ 52,393
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Reserve to loans outstanding
at period-end(1) 2.08 2.08 2.02 1.98 1.96
Net loan losses (annualized)
to average loans (1) (0.05) 0.14 0.10 0.14 0.07
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(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 evaluation of the current risk characteristics of the loan portfolio
including current economic conditions, historical experience, collateral
valuation, changes in the composition of the portfolio and other relevant
factors. A provision for loan losses is charged against earnings in amounts
necessary to maintain the adequacy of the reserve for loan losses. These
provisions totaled $4.0 million for the third quarter of 1998 and $3.0 million
for the third quarter of 1997. The increased provision reflected management's
assessment of increased risk of loan losses due primarily to continued growth in
the loan portfolio, geographic expansion of BOK Financial's market area to
include North Texas and New Mexico, and an expectation that economic activities
will moderate in BOK Financial's primary market areas.
At September 30, 1998, other assets included $28.4 million of natural gas
compression and other equipment being leased to various customers by entities in
which a subsidiary of BOK Financial is a general partner. The terms of these
leases are generally much shorter than the estimated useful lives of the
equipment. Therefore, as each lease expires, there is a risk that the remaining
net book value of the equipment may not be recovered based upon market
conditions and re-leasing opportunities at that time.
Market Risk
Market risk is a broad term that relates to 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 its portfolio of assets held for purposes other than
trading. The effect of other changes, such as foreign exchange rates, commodity
prices or equity prices is not material to BOK Financial nor is the effect of
market risk on financial instruments held for trading purposes. The
responsibility for managing market risk rests with the Asset/Liability Committee
which operates under policy guidelines which have been established by the Board
of Directors. These guidelines limit 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 to +/- 10%, 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.
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
assuming expected interest rates over the next twelve months based upon both a
"most likely" rate scenario and on 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, and the 30-year mortgage rate which directly
affects 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. In addition, sensitivity of fee income to market interest rate
levels, such as those related to cash management services and mortgage
servicing, are 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 September 30, 1998, this modeling indicated
interest rate sensitivity as follows:
200 bp 200 bp Most
increase decrease Likely
Anticipated impact over the
next twelve months compared
to a constant interest rate
scenario
Net interest revenue $ 1,849 $ ( 2,818) $ (1,706)
0.9% (1.4%) (0.8%)
Net income $ 3,701 $ (12,717) $ (1,151)
4.2% (14.3%) (1.3%)
Economic value of equity $(55,913) $ 1,560 $ 8,151
(7.2%) (0.2%) (1.1%)
The estimated changes in interest rates on net interest revenue or economic
value of equity is not projected to be significant within the +/- 200 basis
point range of assumptions. However, this modeling indicated that under the 200
basis point decrease scenario, the after-tax value of BOK Financial's
capitalized mortgage loan servicing rights would decrease by $11.0 million,
excluding the effect of the mortgage servicing hedge program which is discussed
subsequently. While this decrease in value would largely be offset by an
increase in the value of the securities portfolio, current accounting principles
require that the decreased value of mortgage loan servicing rights be charged to
earnings while the increased value of available for sale securities be credited
to shareholders' equity. The result would be a decrease in net income of $12.7
million or 14.3% compared to projected net income assuming no changes in
interest rates, again excluding the effect of the hedge program.
During 1998, BOK Financial implemented a program which uses futures contracts
and call and put options (collectively "derivative instruments") to hedge
against the risk of loss on capitalized mortgage servicing rights. The intent of
this program is to reduce the pre-tax risk of loss which would result from a 50
basis point decrease in interest rates from approximately $14.0 million to an
insignificant amount through market value increases on the derivative
instruments. While this program is expected to significantly reduce the risk of
loss on capitalized mortgage servicing rights in a falling interest rate
environment, it limites the appreciation in value of mortgage servicing rights
which would otherwise occur in a rising rate environment. Management estimates
that a 50 basis point increase in interest rates would result a $13.1 million
decrease in the market value of the derivative instruments compared to a $17.3
million increase in the fair value of the capitalized mortgage servicing rights.
Management believes that an analysis of the effect of 50 basis point changes in
interest rates on the value of the mortgage servicing portfolio and related
derivative instruments is more useful in monitoring risk due to the dynamic
hedging strategy employed and the increased probability of interest rate changes
within this range. As of September 30, 1998, this hedging program resulted in
net realized gains of $10.9 million and net unrealized gains of $18.0 million
which are recorded as reductions to the carrying value of the hedged mortgage
servicing rights.
The simulation is 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.
- --------------------------------------------------------------------------------
TABLE 9 - INTEREST
RATE SWAPS
(In thousands)
Notional Pay Receive Fair
Amount Rate Rate Value
------------------------------------------------------------------
Expiration:
1998 20,000 6.35 - 6.83% (1) 7.96% 213
1999 22,000 5.24 - 7.30 (1) 6.80 - 7.68 240
2002 7,660 6.21 5.38 (1) (324)
2003 26,690 5.26 - 5.99 5.38 (1) (633)
2004 9,004 5.92 5.38 (1) (364)
2006 16,500 7.26 5.31 (1) (1,126)
2007 100,000 5.38 (1) 6.75 - 6.80 12,088
2007 10,000 7.47 5.31 (1) (884)
2008 1,650 5.59 5.31 (1) (64)
- --------------------------------------------------------------------------------
(1) Rates are variable based on LIBOR and reset monthly, quarterly or
semiannually.
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. During
the third quarter of 1998, income from these swaps exceeded the cost of the
swaps by $365 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.
- --------------------------------------------------------------------------------
TABLE 10 - CAPITAL RATIOS
Sept. 30, June 30, March 31, Dec. 31, Sept. 30,
1998 1998 1998 1997 1997
--------------------------------------------------
Average shareholders' equity
to average assets 8.29% 8.18% 8.00% 8.13% 7.76%
Risk-based capital:
Tier 1 capital 9.44 9.35 9.47 9.49 8.93
Total capital 14.11 14.15 14.47 14.69 14.08
Leverage 7.28 7.24 6.81 6.81 6.53
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.
The Federal Financial Institution Examination Council ("FFIEC") provides
regulatory guidance on BOK Financial's and other financial institutions' Year
2000 compliance and has outlined five phases to effectively manage the Year 2000
issues. The phases are: Awareness; Assessment; Renovation; Validation; and
Implementation. The FFIEC encouraged institutions to have all critical
applications identified and priorities set by September 30, 1997 and to have
renovation work largely completed and testing well underway by December 31,
1998. BOK Financial is currently within the FFIEC guidelines. BOK Financial, at
the present time, expects to have substantially all of its critical outsourced
systems renovated by December 31, 1998, with the remaining critical outsourced
systems renovated by February 28, 1999. Additionally, BOK Financial expects to
have all critical internal systems renovated by December 31, 1998.
Assisting in BOK Financial's Year 2000 effort are 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.
Substantially all critical applications are run by outsourced providers of data
processing services. These processors have been contacted and have provided
compliance status reports for their respective hardware and software systems.
BOK Financial's core processing systems are outsourced to FiServ Solutions, Inc.
("FiServ"), based in Pittsburgh, Pennsylvania. FiServ is an international data
processing company which specializes in financial institution data processing
and is subject to regulatory requirements imposed upon bank data processors. BOK
Financial currently receives monthly updates from FiServ to ensure progress
towards completion of the Year 2000 compliance process. Testing of these systems
began in August 1998 and is scheduled to run through December 1998 as
renovations are completed. BOK Financial personnel are members of FiServ's
customer advisory committee and will directly participate in the testing of
these applications. FiServ has stated that it will complete the renovation of
all of its systems and place the renovated systems into production by early
1999.
BOK Financial's trust accounting systems are outsourced to M&I Data Services
("M&I)", based in Milwaukee, Wisconsin. Proxy testing of the M&I trust
accounting system was conducted in June, 1998 by members of M&I's staff. The
test procedures and results were subject to review by the M&I Advisory Board,
which included a BOK Financial representative. The results of this testing have
been analyzed and accepted as satisfactory by BOK Financial's management.
BOK Financial is developing remediation contingency plans to address Year 2000
issues related to BOK Financial's internal systems and the systems of its
vendors. It has also initiated communication 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,
liquidity needs and other factors.
BOK Financial expects to invest approximately $12 million in computer systems
upgrades during 1998, including $2 million directly related to the Year 2000
issue. The majority of computer systems upgrades have been planned in the normal
course of business for competitive reasons, although compliance with Year 2000
issues is a factor in determining the timing of such upgrades. Substantially all
of the planned investments will be completed during 1998. These investments are
in addition to upgrades for Year 2000 compliance by outside processors which
provide services to BOK Financial. During 1997, BOK Financial invested $5.2
million in computer systems upgrades with minimal expenditures directly related
to the Year 2000 issue. Based upon the anticipated expenditures, management
believes that the costs of the Year 2000 compliance efforts will not materially
affect BOK Financial's results of operations, liquidity or capital resources.
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.
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 1997 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 Nine Months Ended
September 30, September 30,
------------------------ ----------------------
1998 1997 1998 1997
------------------------ ------- --------------
Interest Revenue
Loans $ 66,379 $ 59,023 $ 189,928 $ 166,222
Taxable securities 27,300 24,354 79,653 72,714
Tax-exempt securities 4,010 4,378 12,024 12,732
- -------------------------------------------- ----------------------------------- --------------
Total securities 31,310 28,732 91,677 85,446
- -------------------------------------------- ----------------------------------- --------------
Trading securities 389 53 813 193
Funds sold 333 740 1,595 2,268
- -------------------------------------------- ----------------------------------- --------------
Total interest revenue 98,411 88,548 284,013 254,129
- -------------------------------------------- ----------------------------------- --------------
Interest Expense
Deposits 32,275 30,382 99,183 90,943
Other borrowings 16,830 17,203 44,194 47,571
Subordinated debenture 2,529 1,305 7,360 1,727
- -------------------------------------------- ----------------------------------- --------------
Total interest expense 51,634 48,890 150,737 140,241
- -------------------------------------------- ----------------------------------- --------------
Net Interest Revenue 46,777 39,658 133,276 113,888
Provision for Loan Losses 4,001 3,000 10,424 5,526
- -------------------------------------------- ----------------------------------- --------------
Net Interest Revenue After
Provision for Loan Losses 42,776 36,658 122,852 108,362
- -------------------------------------------- ----------------------------------- --------------
Other Operating Revenue
Brokerage and trading revenue 4,109 2,522 11,291 6,991
Transaction card revenue 6,516 5,770 18,066 13,753
Trust fees and commissions 7,751 6,405 22,289 17,534
Service charges and fees on deposit 8,015 7,255 23,093 21,081
accounts
Mortgage banking revenue, net 10,929 8,416 31,190 22,824
Leasing revenue 1,749 1,566 5,214 4,339
Other revenue 3,239 1,546 8,941 7,574
- -------------------------------------------- ----------------------------------- --------------
Total fees and commissions revenue 42,308 33,480 120,084 94,096
- -------------------------------------------- ----------------------------------- --------------
Gain on sale of student loans 14 26 1,548 1,211
Securities gains (losses), net 538 809 6,370 871
- -------------------------------------------- ----------------------------------- --------------
Total other operating revenue 42,860 34,315 128,002 96,178
- -------------------------------------------- ----------------------------------- --------------
Other Operating Expense
Personnel 26,067 22,475 76,611 62,917
Business promotion 1,862 2,067 5,421 6,207
Contribution of stock to BOk
Charitable Foundation - - 2,257 -
Professional fees and services 2,622 1,579 6,526 4,646
Net occupancy, equipment & data processing 10,574 8,618 30,382 25,188
FDIC and other insurance 270 374 925 1,035
Printing, postage and supplies 2,267 1,817 6,537 5,563
Net(gains) losses, and operating
expenses of repossessed assets (19) (1,662) (389) (2,296)
Amortization of intangible assets 2,268 2,362 6,842 6,488
Mortgage banking costs 6,374 5,202 18,687 13,831
Provision for impairment of mortgage
servicing rights - - 2,000 -
Other expense 4,552 3,888 12,035 10,310
- -------------------------------------------- ----------------------------------- --------------
Total Other Operating Expense 56,837 46,720 167,834 133,889
- -------------------------------------------- ----------------------------------- --------------
Income Before Taxes 28,799 24,253 83,020 70,651
Federal and state income tax 10,049 7,857 27,519 22,844
- -------------------------------------------- ----------------------------------- --------------
Net Income $ 18,750 $ 16,396 $ 55,501 $ 47,807
- -------------------------------------------- ----------------------------------- --------------
Earnings Per Share:
Net Income
Basic $ .84 $ .73 $ 2.48 $ 2.13
- -------------------------------------------- ----------------------------------- --------------
Diluted $ .75 $ .65 $ 2.21 $ 1.91
- -------------------------------------------- ----------------------------------- --------------
Average Shares Used in Computation:
Basic 21,862,010 21,906,321 21,897,677 21,882,733
- -------------------------------------------- --------------------------------------------------
Diluted 25,090,677 25,099,709 25,150,794 25,032,857
- -------------------------------------------- --------------------------------------------------
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED BALANCE SHEETS
(In Thousands Except Share Data)
Sept. 30, December 31, Sept. 30,
1998 1997 1997
---------------------------------------------------
ASSETS
Cash and due from banks $ 346,183 $ 371,321 $ 340,735
Funds sold 35,936 18,005 37,850
Trading securities 22,730 4,999 2,555
Securities:
Available for sale 1,981,415 1,749,411 1,719,554
Investment (fair value: September 30, 1998 - $220,161;
December 31, 1997 -$214,125;
September 30, 1997 - $214,980 ) 221,329 213,111 214,703
- --------------------------------------------------------------------------------------------------------------------
Total securities 2,202,744 1,962,522 1,934,257
- --------------------------------------------------------------------------------------------------------------------
Loans 3,068,514 2,765,093 2,769,998
Less reserve for loan losses 62,131 53,101 52,393
- --------------------------------------------------------------------------------------------------------------------
Net loans 3,006,383 2,711,992 2,717,605
- --------------------------------------------------------------------------------------------------------------------
Premises and equipment, net 63,490 65,478 63,572
Accrued revenue receivable 60,455 50,754 52,738
Excess cost over fair value of net assets acquired
And core deposit premiums (net of accumulated
Amortization: September 30, 1998 - $46,424;
December 31, 1997 - $39,582;
September 30, 1997 - $37,246) 64,444 67,796 70,180
Mortgage servicing rights 52,233 83,890 82,868
Real estate and other repossessed assets 4,353 5,258 5,187
Other assets 76,050 57,627 70,605
- --------------------------------------------------------------------------------------------------------------------
Total assets $ 5,935,001 $ 5,399,642 $ 5,378,152
- --------------------------------------------------------------------------------------------------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY
Noninterest-bearing demand deposits $ 909,592 $ 881,029 $ 834,272
Interest-bearing deposits:
Transaction 1,165,398 1,124,288 1,098,404
Savings 108,003 106,900 106,536
Time 1,605,334 1,615,862 1,552,894
- --------------------------------------------------------------------------------------------------------------------
Total deposits 3,788,327 3,728,079 3,592,106
- --------------------------------------------------------------------------------------------------------------------
Funds purchased and repurchase
Agreements 817,840 631,815 735,868
Other borrowings 609,579 394,087 400,044
Subordinated debenture 148,415 148,356 63,336
Accrued interest, taxes and expense 51,742 39,998 22,249
Other liabilities 23,839 21,830 148,311
- --------------------------------------------------------------------------------------------------------------------
Total liabilities 5,439,742 4,964,165 4,961,914
- --------------------------------------------------------------------------------------------------------------------
Stockholders' equity:
Preferred stock 23 23 23
Common stock ($.00006 par value; 2,500,000,000
Shares authorized; shares issued and outstanding
September 30, 1998- 22,071,759; December 31, 1997
- 21,975,747; September 30, 1997 - 21,300,941) 1 1 1
Capital surplus 211,552 208,327 179,498
Retained earnings 273,004 218,629 229,574
Treasury stock (shares at cost: September 30, 1998 -
221,556;
December 31, 1997 - 66,377; September 30, 1997 - 58,614) (9,674) (2,190) (1,866)
Unrealized gain (loss) on securities available for sale 20,353 10,691 9,013
Less notes receivable from exercise of stock options - (4) (5)
- --------------------------------------------------------------------------------------------------------------------
Total shareholders' equity 495,259 435,477 416,238
- --------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders' equity $ 5,935,001 $ 5,399,642 $ 5,378,152
- --------------------------------------------------------------------------------------------------------------------
See accompanying notes to consolidated financial statements.
- ----------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CHANGES IN
SHAREHOLDERS EQUITY
(In
Thousands)
Accumulated
Other
Preferred Stock Common Stock Comprehensive Retained Treasury Stock Notes
Capital
------------------------------------ --------------------
Shares Amount Shares Amount Income Surplus Earnings Shares Amount Receivable Total
-----------------------------------------------------------------------------------------------------------------
Balances at
December 250,102 $ 23 21,149 $ 1 $1,472 $176,093 $ 182,892 17 $ (428) $ (87) $ 359,966
31, 1996
Comprehensive income:
Net income - - - - - - 47,807 - - - 47,807
Other Comprehensive
Income, net of tax:
Unrealized gains(loss)
on securities available
for sale (1)- - - - 7,541 - - - - - 7,541
-----------
Comprehensive income 55,348
-----------
Exercise of stock
options - - 90 - - 1,681 - 42 (1,438) - 243
Issuance of common stock
to Thrift Plan - - 11 - - 418 - - - - 418
Payments on stock
option Notes
receivable - - - - - - - - - 82 82
Preferred dividends
paid in shares of
common stock - - 45 - - 1,125 (1,125) - - - -
Director retainer
shares - - 6 - - 181 - - - - 181
- -----------------------------------------------------------------------------------------------------------------------------
Balance at September
30, 1997 250,102 $ 23 21,301 $ 1 $9,013 $179,498 $229,574 59 $(1,866) $ (5) $ 4162,238
- -----------------------------------------------------------------------------------------------------------------------------
Balances at December 31,
1997 250,000 $ 23 21,976 $ 1 $10,691 $208,327 $218,629 66 $(2,190) $ (4) $ 435,477
Comprehensive income:
Net income - - - - - - 55,501 - - - 55,501
Other Comprehensive
Income, net of tax:
Unrealized gains(loss)on
securities available
for sale(1) - - - - 9,662 - - - - - 9,662
-----------
Comprehensive income 65,163
-----------
Exercise of stock
options - - 64 - - 1,797 - 8 (346) - 1,451
Issuance of common stock
to Thrift Plan - - - - - 84 - (23) 998 - 1,082
Payments on stock option
Notes receivable - - - - - - - - - 4 4
Preferred dividends
paid in shares
of common stock - - 26 - - 1,125 (1,125) - - - -
Preferred stock
dividend - - - - - - (1) - - - (1)
Director retainer
shares - - 6 - - 219 - - - - 219
Treasury stock
purchase - - - - - - - 171 (8,136) - (8,136)
- -----------------------------------------------------------------------------------------------------------------------------
Balances at September
30, 1998 250,000 $ 23 22,072 $ 1 $ 20,353 $211,552 $273,004 222 $(9,674) $ - $ 495,259
- -----------------------------------------------------------------------------------------------------------------------------
(1) Sept. 30, 1998 Sept. 30, 1997
-------------- --------------
Reclassification adjustments:
Unrealized losses on available $ 13,924 $ 8,133
for sale securities
Less: reclassification
adjustment for gains realized 4,262 592
Included in net
income, net of tax
--------------------------------------
Net unrealized losses on securities $ 9,662 $ 7,541
--------------------------------------
See accompanying notes to consolidated financial statements.
- --------------------------------------------------------------------------------------------------------------------
CONSOLIDATED STATEMENTS OF CASH FLOWS
(In Thousands Except Share Data)
Nine Months Ended
September 30,
--------------------------------------
1998 1997
--------------------------------------
Cash Flow From Operating Activities:
Net income $ 55,501 $ 47,807
Adjustments to reconcile net income to net cash
Provided by operating activities:
Provision for loan and repossessed real estate losses 10,424 5,526
Depreciation and amortization 28,821 22,915
Provision for impairment of mortgage servicing rights 2,000 -
Net amortization of security discounts and premiums 323 2,471
Contribution of stock to Bank of Oklahoma Foundation 2,257 -
Net gain on sale of assets (16,637) (6,373)
Mortgage loans originated for resale (660,097) (629,515)
Proceeds from sale of mortgage loans held for resale 664,466 623,733
(Increase) decrease in trading securities (17,731) 3,899
Increase in accrued revenue receivable (9,700) (1,101)
Increase in other assets (4,674) (6,237)
Increase in accrued interest, taxes and expense 5,733 11,434
Increase in other liabilities 6,085 3,404
- ------------------------------------------------------------------------------------------------
Net cash provided by operating activities 66,771 77,963
- ------------------------------------------------------------------------------------------------
Cash Flow From Investing Activities:
Proceeds from maturities of investment securities 27,816 19,719
Proceeds from maturities of available for sale securities 375,108 175,812
Purchases of investment securities (36,941) (36,038)
Purchases of available for sale securities (1,822,456) (895,237)
Proceeds from sales of available for sale securities 1,235,152 623,003
Proceeds from hedging mortgage servicing rights 21,974 -
Loans originated or acquired net or principal collected (355,777) (233,098)
Proceeds from disposition of assets 61,821 9,943
Purchases of assets (42,523) (58,107)
Cash and cash equivalents of branches & subsidiaries
Acquired and sold, net 35,793 (1,240)
- ------------------------------------------------------------------------------------------------
Net cash used by investing activities (500,033) (395,243)
- ------------------------------------------------------------------------------------------------
Cash Flows From Financing Activities:
Net increase in demand deposits, transaction
Deposits, money market deposits, and savings accounts 61,309 53,321
Net decrease in certificates of deposit (31,390) (63,560)
Net increase in other borrowings 401,517 189,318
Issuance of subordinated debenture - 168,311
Payment on subordinated debenture - (20,000)
Purchase of treasury stock (8,482) -
Preferred stock dividend - -
Issuance of preferred, common and treasury stock, net 3,098 842
Payments on stock option notes receivable 4 82
- ------------------------------------------------------------------------------------------------
Net cash provided by financing activities 426,055 328,314
- ------------------------------------------------------------------------------------------------
Net increase (decrease) in cash and cash equivalents (7,207) 11,034
Cash and cash equivalents at beginning of period 389,326 367,551
- ------------------------------------------------------------------------------------------------
Cash and cash equivalents at end of period $ 382,119 $ 378,585
- ------------------------------------------------------------------------------------------------
Cash paid for interest $ 122,690 $ 136,631
- ------------------------------------------------------------------------------------------------
Cash paid for taxes $ 13,825 $ 14,988
- ------------------------------------------------------------------------------------------------
Net loans transferred to repossessed real estate
And other assets $ 2,141 $ 1,702
- ------------------------------------------------------------------------------------------------
Payment of preferred stock dividends in common stock $ 1,125 $ 1,125
- ------------------------------------------------------------------------------------------------
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., and Bank of Texas, N.A..
Certain prior period balances have been reclassified to conform with the current
period presentation.
Hedging of Mortgage Servicing Rights
BOK Financial enters into futures contracts and call and put options on futures
contracts to hedge against the risk of loss on mortgage servicing rights due to
accelerated loan prepayments during periods of falling interest rates. Contracts
on underlying securities which are expected to have a similar duration to the
mortgage servicing portfolio, such as 10-year U.S. Treasury notes, are used for
these hedges. The combination of contracts selected is based upon an analysis of
the expected range of market value changes over a probable range of interest
rates to achieve a high degree of correlation between changes in the fair value
of the mortgage servicing rights and changes in the market value of the
contracts. These contracts are designated as hedges on the trade date.
Transaction fees are charged to expense as mortgage banking costs when incurred.
Premiums paid or received on option contracts are deferred and amortized against
mortgage banking costs over the life of the options. Both unrealized and
realized gains and losses on futures contracts and option contracts are deferred
as part of the capitalized mortgage servicing rights. These deferred gains and
losses are amortized over the life of the loan servicing portfolio. These
unamortized deferred gains and losses are included with the cost of the
servicing rights when determining whether an allowance for impairment of the
servicing rights is required. Changes in the fair value of the contracts and
changes in the market value of the mortgage servicing rights is reviewed at
least monthly to determine whether a high degree of correlation exists on a
statistically value basis. If correlation criteria are not met, the contracts
are no longer accounted for a hedge. In such circumstances, any remaining
unamortized deferred gains or losses are recognized in current income.
During 1997, the Financial Accounting Standards Board issued Statement No. 131,
"Disclosures about Segments of an Enterprise and Related Information" ("FAS
131") which established standards for the way public businesses report
information about operating segments. It also established standards for related
disclosures about products and services, geographic areas and major customers.
FAS 131 is effective for financial statements for fiscal years beginning after
December 15, 1997 and BOK Financial will comply beginning with year-end 1998.
Disclosures of operating segment and related information for interim periods of
1998 will be required beginning with the first quarter of 1999. BOK Financial is
in the process of evaluating these disclosure requirements. However, the
adoption of FAS 131 will have no impact on the consolidated results of
operations, financial position or cash flows.
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) MORTGAGE BANKING ACTIVITIES
At September 30, 1998, BOk owned the rights to service 88,180 mortgage loans
with outstanding principal balances of $6.7 billion, including $146 million
serviced for BOk. The weighted average interest rate and remaining term was
7.62% and 281 months, respectively.
Activity in capitalized mortgage servicing rights and related valuation
allowance during the nine months ending September 30, 1998 is as follows:
Capitalized Mortgage Servicing Rights
-----------------------------------------------------
Valuation
Purchased Originated Total Allowance Net
---------------------- ---------- --------- ---------
Balance at
December 31, 1997 $ 78,961 $ 9,929 $ 88,890 $(5,000) $ 83,890
Additions 1,788 10,167 11,955 - 11,955
Amortization expense (10,756) (1,924) (12,680) - (12,680)
Deferred gain (loss) on MSR
hedging portfolio - - (28,932) - (28,932)
Provision for impairment - - (2,000) (2,000)
Impairment charge-off (2,710) - (2,710) 2,710 -
- ------------------------------------------------- ------------------- ----------
Balance at Sept. 30, 1998 $ 67,283 $ 18,172 $ 56,523 $(4,290) $ 52,233
- ------------------------------------------------- ------------------- ----------
Estimated fair value of
mortgage servicing
rights (1) $ 57,790 $ 19,875 $ 94,238 - $ 77,665
- ------------------------------------------------- ------------------- ----------
(1) Excludes approximately $8.3 million of loan servicing rights on mortgage
loans originated prior to the adoption of FAS 122.
(3) DISPOSAL OF AVAILABLE FOR SALE SECURITIES
Sales of available for sale securities for the nine months ending September 30,
1998 resulted in gains and losses as follows (in thousands):
Proceeds $1,235,152
Gross realized gains 7,350
Gross realized losses 980
Related federal and state
income tax expense 2,108
(4) EARNINGS PER SHARE
The following table presents the computation of basic and diluted earnings per
share (dollars in thousands except share data):
Three Months Ended Nine Months Ended
--------------------------- --------------------------
Sept. 30, Sept. 30, Sept. 30, Sept. 30,
1998 1997 1998 1997
--------------------------- --------------------------
Numerator:
Net income $ 18,750 $ 16,396 $ 55,501 $ 47,807
Preferred stock dividends (375) (375) (1,125) (1,125)
- -----------------------------------------------------------------------------------------------------------
Numerator for basic earnings per share - income
available to common stockholders 18,375 16,021 54,376 46,682
- -----------------------------------------------------------------------------------------------------------
Effect of dilutive securities:
Preferred stock dividends 375 375 1,125 1,125
- -----------------------------------------------------------------------------------------------------------
Numerator for diluted earnings per share - income
available
to common stockholders after assumed conversion $ 18,750 $ 16,396 $ 55,501 $ 47,807
- -----------------------------------------------------------------------------------------------------------
Denominator:
Denominator for basic earnings per share -weighted
average shares 21,862,010 21,906,321 21,897,677 21,882,733
Effect of dilutive securities:
Employee stock options 330,481 295,202 354,931 251,938
Convertible preferred stock 2,898,186 2,898,186 2,898,186 2,898,186
- -----------------------------------------------------------------------------------------------------------
Dilutive potential common shares 3,228,667 3,193,388 3,253,117 3,150,124
- -----------------------------------------------------------------------------------------------------------
Denominator for diluted earnings per share - adjusted
weighted average shares and assumed conversions 25,090,677 25,099,709 25,150,794 25,032,857
- -----------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.84 $ 0.73 $ 2.48 $ 2.13
- -----------------------------------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------
Diluted earnings per share $ 0.75 $ 0.65 $ 2.21 $ 1.91
- -----------------------------------------------------------------------------------------------------------
(5) COMPREHENSIVE INCOME
As of January 1, 1998, BOK Financial adopted Statement 130, Reporting
Comprehensive Income. Statement 130 establishes new rules for the reporting and
display of comprehensive income and its components; however, the adoption of
this Statement had no impact on the Company's net income or shareholders'
equity. Statement 130 requires unrealized gains or losses on available for sale
securities be included in other comprehensive income. Prior year financial
statements have been reclassified to conform to the requirements of Statement
130. The components of comprehensive income are disclosed in the Consolidated
Statement of Changes in Shareholders' Equity.
(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.
- ----------------------------------------------------------------------------------------------------------------------------------
NINE MONTH FINANCIAL SUMMARY - UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands Except Share Data)
For Nine months ended
-----------------------------------------------------------------------------------------
September 30, 1998 September 30, 1997
-------------------------------------------- ----------------------------------------
Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate
-----------------------------------------------------------------------------------------
Assets
Taxable securities $ 1,722,320 $ 79,653 6.18% $ 1,559,891 $ 72,714 6.23%
Tax-exempt securities(1) 324,668 18,634 7.67 348,264 19,766 7.59
- ----------------------------------------------------------------------------------------------------------------------------------
Total securities 2,046,988 98,287 6.42 1,908,155 92,480 6.48
- ----------------------------------------------------------------------------------------------------------------------------------
Trading securities 20,248 813 5.37 4,307 193 5.99
Funds sold 36,609 1,595 5.83 52,556 2,268 5.77
Loans(2)(3) 2,879,995 190,313 8.68 2,542,871 166,360 8.75
Less reserve for loan losses 56,823 49,049
- ----------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve(3) 2,823,172 190,313 8.86% 2,493,822 166,359 8.92
- ----------------------------------------------------------------------------------------------------------------------------------
Total earning assets(3) 4,927,017 291,008 7.81% 4,458,840 261,301 7.84
- ----------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 637,804 566,612
- ----------------------------------------------------------------------------------------------------------------------------------
Total assets $ 5,564,821 $ 5,025,452
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 1,172,736 $ 27,459 3.13% $ 1,029,834 24,625 3.20
Savings deposits 109,890 1,765 2.15 107,015 1,771 2.21
Other time deposits 1,700,116 69,959 5.50 1,558,068 64,547 5.54
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 2,982,742 99,183 4.45 2,694,917 90,943 4.51
- ----------------------------------------------------------------------------------------------------------------------------------
Other borrowings 1,026,317 44,194 5.76 1,101,228 47,571 5.78
Subordinated debenture 148,392 7,360 6.63 36,102 1,727 6.40
- ----------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4,157,451 150,737 4.85 3,832,247 140,241 4.89
- ----------------------------------------------------------------------------------------------------------------------------------
Demand deposits 886,129 742,409
Other liabilities 64,254 69,210
Shareholders' equity 456,987 381,586
- ----------------------------------------------------------------------------------------------------------------------------------
Total liabilities and $ 5,564,821 $ 5,025,452
shareholders' equity
- ----------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest 140,271 2.96 121,060 2.95
Revenue(1)(3)
Tax-Equivalent Net Interest Revenue (1)
To Earning Assets(3) 3.72 3.63
Less tax-equivalent adjustment(1) 6,995 7,172
- ----------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 133,276 113,888
Provision for loan losses 10,424 5,526
Other operating revenue 128,002 96,178
Other operating expense 167,834 133,889
- ----------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 83,020 70,651
Federal and state income tax 27,519 22,844
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income $ 55,501 $ 47,807
- ----------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share:
Net Income
Basic $ 2.48 $ 2.13
- ----------------------------------------------------------------------------------------------------------------------------------
Diluted $ 2.21 $ 1.91
- ----------------------------------------------------------------------------------------------------------------------------------
(1) Tax equivalent at the statutory federal and state rates for the periods
presented. The taxable equivalent adjustments shown are for Comparative
purposes.
(2) The loan averages included loans on which the accrual of interest has been
discontinued and are stated net of unearned income. (3) Yield/Rate excludes
$3.3 million of non-recurring collection of foregone interest in 1998.
- ------------------------------------------------------------------------------------------------------------------------------
QUARTERLY FINANCIAL SUMMARY - UNAUDITED
Consolidated Daily Average Balances, Average Yields and Rates
(In Thousands Except Share Data)
For Three months ended
--------------------------------------------------------------------------------------
September 30, 1998 June 30, 1998
------------------------------------------- --------------------------------------
Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate
--------------------------------------------------------------------------------------
Assets
Taxable securities $ 1,751,428 $ 27,300 6.18% $ 1,642,799 $ 25,119 6.13%
Tax-exempt securities(1) 325,413 6,212 7.57 321,703 6,173 7.70
- ------------------------------------------------------------------------------------------------------------------------------
Total securities 2,076,841 33,512 6.40 1,964,502 31,292 6.39
- ------------------------------------------------------------------------------------------------------------------------------
Trading securities 27,389 389 5.63 21,408 262 4.91
Funds sold 25,287 333 5.22 37,728 571 6.07
Loans(2)(3) 2,978,087 66,503 8.62 2,838,037 63,072 8.71
Less reserve for loan losses 59,821 56,423
- ------------------------------------------------------------------------------------------------------------------------------
Loans, net of reserve(3) 2,918,266 66,503 8.80 2,781,614 63,072 8.88
- ------------------------------------------------------------------------------------------------------------------------------
Total earning assets(3) 5,047,783 100,737 7.78 4,805,252 95,197 7.82
- ------------------------------------------------------------------------------------------------------------------------------
Cash and other assets 647,741 643,626
- ------------------------------------------------------------------------------------------------------------------------------
Total assets $ 5,695,524 $ 5,448,878
- ------------------------------------------------------------------------------------------------------------------------------
Liabilities And Shareholders' Equity
Transaction deposits $ 1,187,685 9,273 3.10% $ 1,184,835 9,268 3.14%
Savings deposits 108,911 547 1.99 111,207 617 2.23
Other time deposits 1,643,596 22,455 5.42 1,717,993 23,640 5.52
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing deposits 2,940,192 32,275 4.36 3,014,035 33,525 4.46
- ------------------------------------------------------------------------------------------------------------------------------
Other borrowings 1,152,503 16,830 5.79 873,616 12,406 5.70
Subordinated debenture 148,392 2,529 6.76 148,410 2,464 6.66
- ------------------------------------------------------------------------------------------------------------------------------
Total interest-bearing liabilities 4,241,087 51,634 4.83 4,036,061 48,395 4.81
- ------------------------------------------------------------------------------------------------------------------------------
Demand deposits 904,128 895,415
Other liabilities 78,383 61,814
Shareholders' equity 471,926 455,588
- ------------------------------------------------------------------------------------------------------------------------------
Total liabilities and shareholders'
Equity $ 5,695,524 $ 5,448,878
- ------------------------------------------------------------------------------------------------------------------------------
Tax-Equivalent Net Interest Revenue (1)(3) 49,103 2.95% 46,802 3.01
Tax-Equivalent Net Interest Revenue (1)
To Earning Assets 3.72 3.78
Less tax-equivalent adjustment (1)(3) 2,326 2,338
- ------------------------------------------------------------------------------------------------------------------------------
Net Interest Revenue 46,777 44,464
Provision for loan losses 4,001 3,953
Other operating revenue 42,860 44,355
Other operating expense 56,837 53,804
- ------------------------------------------------------------------------------------------------------------------------------
Income Before Taxes 28,799 31,062
Federal and state income tax 10,049 10,624
- ------------------------------------------------------------------------------------------------------------------------------
Net Income $ 18,750 $ 20,438
- ------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share:
Net Income
Basic $ 0.84 $ 0.92
- ------------------------------------------------------------------------------------------------------------------------------
Diluted $ 0.75 $ 0.81
- ------------------------------------------------------------------------------------------------------------------------------
(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) 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.
- ------------------------------------------------------------------------------------------------------------------------
For Three months ended
- ------------------------------------------------------------------------------------------------------------------------
March 31, 1998 December 31, 1997 September 30, 1997
- ------------------------------------------------------------------------------------------------------------------------
Average Revenue/ Yield Average Revenue/ Yield Average Revenue/ Yield
Balance Expense(1) /Rate Balance Expense(1) /Rate Balance Expense(1) /Rate
- ------------------------------------------------------------------------------------------------------------------------
$ 1,772,971$ 27,235 6.20% $ 1,562,445 $ 24,408 6.20% $ 1,560,418$ 24,354 6.19%
328,735 6,248 7.97 331,793 6,666 7.97 360,461 6,764 7.44
- ------------------------------------------------------------------------------------------------------------------------
2,101,706 33,483 6.51 1,894,238 31,074 6.51 1,920,879 31,118 6.43
- ------------------------------------------------------------------------------------------------------------------------
11,774 163 5.95 6,203 93 5.95 3,583 53 5.87
47,050 691 5.32 53,964 724 5.32 49,645 740 5.91
2,822,147 60,737 8.74 2,764,436 60,924 8.74 2,676,237 59,063 8.76
54,164 - 53,180 - 51,165 -
- - -
- ------------------------------------------------------------------------------------------------------------------------
2,767,983 60,737 8.92 2,711,256 60,924 8.92 2,625,072 59,063 8.93
- ------------------------------------------------------------------------------------------------------------------------
4,928,513 95,074 7.89 4,665,661 92,815 7.89 4,599,179 90,974 7.85
- ------------------------------------------------------------------------------------------------------------------------
625,863 618,039 590,260
- ------------------------------------------------------------------------------------------------------------------------
$ 5,554,376 $ 5,283,700 $ 5,189,439
- ------------------------------------------------------------------------------------------------------------------------
$ 1,145,221 8,917 3.05 $ 1,102,144 8,466 3.05 $ 1,067,895 8,290 3.08
109,560 602 2.23 106,207 596 2.23 108,104 603 2.21
1,739,816 23,864 5.52 1,582,538 22,037 5.52 1,533,191 21,489 5.56
- ------------------------------------------------------------------------------------------------------------------------
2,994,597 33,383 4.42 2,790,889 31,099 4.42 2,709,190 30,382 4.45
- ------------------------------------------------------------------------------------------------------------------------
1,051,724 14,958 5.73 1,050,545 15,169 5.73 1,159,005 17,203 5.89
148,374 2,367 6.52 148,334 2,439 6.52 81,395 1,305 6.36
- ------------------------------------------------------------------------------------------------------------------------
4,194,695 50,708 4.84 3,989,768 48,707 4.84 3,949,590 48,890 4.91
- ------------------------------------------------------------------------------------------------------------------------
858,340 783,508 761,578
57,095 80,763 75,732
444,246 429,661 402,539
- ------------------------------------------------------------------------------------------------------------------------
$ 5,554,376 $ 5,283,700 $ 5,189,439
- ------------------------------------------------------------------------------------------------------------------------
44,366 3.05 44,108 3.05 42,084 2.94
3.75 3.75 3.63
2,330 2,396 2,426
- ------------------------------------------------------------------------------------------------------------------------
42,036 41,712 39,658
2,470 3,500 3,000
40,787 33,521 34,315
57,193 61,277 46,720
- ------------------------------------------------------------------------------------------------------------------------
23,160 10,456 24,253
6,847 (6,362) 7,857
- ------------------------------------------------------------------------------------------------------------------------
$ 16,313 $ 16,818 $ 16,396
- ------------------------------------------------------------------------------------------------------------------------
$ 0.73 $ 0.75 $ 0.73
- ------------------------------------------------------------------------------------------------------------------------
$ 0.65 $ 0.67 $ 0.65
- ------------------------------------------------------------------------------------------------------------------------
PART II. Other Information
Item 6. Exhibits and Reports on Form 8-K (A) Exhibits:
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
September 30, 1998.
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: November 16, 1998 /s/ James A. White
----------------- ------------------
James A. White
Executive Vice President and
Chief Financial Officer