As filed with the Securities and Exchange Commission on May 17, 1999 - -------------------------------------------------------------------------------- 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> - ------------------------------------------------------------- ------------------------------- TABLE 1 - TANGIBLE OPERATING RESULTS ------------------------------- (Dollars in Thousands Except Share Data) Three months ended ------------------------------- March 31, March 31, 1999 1998 --------------- --------------- <S> <C> <C> 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% - ------------------------------------------------------------- --------------- --------------- </TABLE> 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.
- ------------------------------------------------------------------------------ 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) - ------------------------------------------------------------------------------ Total 13,767 19,303 (5,536) - ------------------------------------------------------------------------------ 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) - ------------------------------------------------------------------------------ Total 5,902 10,930 (5,028) - ------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------ (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. <TABLE> - ------------------------------------------------------------------------------------------------------- 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 ------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 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 - ------------------------------------------------------------------------------------------------------ Total fees and commissions 44,900 41,850 42,308 40,916 36,860 - ------------------------------------------------------------------------------------------------------ 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 - ------------------------------------------------------------------------------------------------------ Total other operating revenue $ 46,865 $ 44,817 $ 42,860 $ 44,355 $ 40,787 - ------------------------------------------------------------------------------------------------------ </TABLE>
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. <TABLE> - --------------------------------------------------------------------------------------------------------------------- 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 ----------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 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 - --------------------------------------------------------------------------------------------------------------------- Total $ 63,593 $ 60,821 $ 56,837 $ 53,804 $ 57,193 - --------------------------------------------------------------------------------------------------------------------- </TABLE> 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.
<TABLE> - --------------------------------------------------------------------------------------------------------------------- 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 ------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 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 - --------------------------------------------------------------------------------------------------------------------- Total $ 64,889 $ 65,202 $ 56,856 $ 55,119 $ 51,991 - --------------------------------------------------------------------------------------------------------------------- </TABLE> 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. <TABLE> - ------------------------------------------------------------------------------------------------------ TABLE 10 - LOANS (In thousands) March 31, Dec 31, Sept. 30, June 30, March 31, 1999 1998 1998 1998 1998 ------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> 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 - ------------------------------------------------------------------------------------------------------ Total $ 3,591,398 $3,551,941 $ 3,068,514 $ 2,882,868 $ 2,836,296 - ------------------------------------------------------------------------------------------------------ </TABLE> 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. <TABLE> - ------------------------------------------------------------------------------------------------------------------- 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 --------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 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 - ------------------------------------------------------------------------------------------------------------------- Total 1,200 2,158 1,498 2,295 1,527 - ------------------------------------------------------------------------------------------------------------------- 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. </TABLE>
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> - --------------------------------------------------------------------------------------------------------------------- TABLE 12 - NONPERFORMING ASSETS (In thousands) March 31, Dec. 31, Sept. 30, June 30, March 31, 1999 1998 1998 1998 1998 ----------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> 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 - --------------------------------------------------------------------------------------------------------------------- </TABLE> The loan review process also identifies loans that possess more than the normal amount of risk due to deterioration in the financial condition of the borrower or the value of the collateral. 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> - -------------------------------------------------------------------------------------------------------------------- Table 13 - Interest Rate Sensitivity (Dollars in Thousands) 200 bp Increase 200 bp Decrease Most Likely ------------------------- -------------------------- ------------------------ 1999 1998 1999 1998 1999 1998 ------------ ------------ ------------ ------------- ------------- ---------- <S> <C> <C> <C> <C> <C> <C> 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% - ------------------------------- -------------- ------------- --- ----------- ------------- --- ------------ ---------- </TABLE> 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.
<TABLE> - -------------------------------------------------------------------------------------------------------------------- CONSOLIDATED BALANCE SHEETS (In Thousands Except Share Data) March 31, December 31, March 31, 1999 1998 1998 --------------------------------------------------- <S> <C> <C> <C> 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. </TABLE>
<TABLE> - ---------------------------------------------------------------------------------------------------------------------- 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 ---------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> 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. </TABLE>
<TABLE> - ---------------------------------------------------------------------------------------------------- CONSOLIDATED STATEMENTS OF CASH FLOWS (In Thousands Except Share Data) Three Months Ended March 31, -------------------------------------- 1999 1998 -------------------------------------- <S> <C> <C> 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 </TABLE>
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: <TABLE> Capitalized Mortgage Servicing Rights ----------------------------------------------------------------------------------------- Valuation Hedging Purchased Originated Total Allowance (Gain)/Loss Net --------------- ------------- --------------- ------------- ----------------- ----------- <S> <C> <C> <C> <C> <C> <C> 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. </TABLE>
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): <TABLE> < 6.50% 6.50% - 7.49% 7.50% - 8.49% => 8.50% Total ---------------------------- ---------------- ------------- -------------- <S> <C> <C> <C> <C> <C> 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. </TABLE> (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: <TABLE> Net Interest Other Operating Other Operating Average Revenue Revenue Expense Assets -------------------------------- ------------------ ------------ <S> <C> <C> <C> <C> 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 ================================================================ </TABLE>
Reportable segments reconciliation to the Consolidated Financial Statements at March 31, 1998 is as follows: <TABLE> Net Interest Other Operating Other Operating Average Revenue Revenue Expense Assets ------------------------------- ------------------ ------------------ <S> <C> <C> <C> <C> 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 =============================== ================== ================== </TABLE> (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.
<TABLE> - ------------------------------------------------------------------------------------------------------------------------------ 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 -------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> 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> </TABLE>
<TABLE> - ------------------------------------------------------------------------------------------------------------------------- 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 - ------------------------------------------------------------------------------------------------------------------------- <C> <C> <C> <C> <C> <C> <C> <C> <C> $ 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 - ------------------------------------------------------------------------------------------------------------------------- </TABLE>
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