BOKF

Business Context and Reporting Period

Company: BOK Financial Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2000
Business Overview: BOK Financial operates primarily through its Bank of Oklahoma franchise, offering corporate banking, consumer banking, mortgage banking, and trust services. It also operates regional banks in Arkansas, Texas, and New Mexico. The company recently announced an agreement to acquire CNBT Bancshares, Inc. for $91 million, expected to close in Q1 2001.

Key Financial Metrics

Liquidity & Capital: The company maintains a Tier 1 risk-based capital ratio of 8.14% and a total risk-based capital ratio of 11.49%. Cash and cash equivalents totaled approximately $542 million at period end.

Material Changes vs. Prior Period

• Revenue Growth: Net interest revenue increased $5.8 million (Q3) and $28.7 million (YTD) driven by an $820 million increase in average earning assets, primarily loans. Non-interest income rose $5.0 million in Q3, led by a $2.4 million increase in transaction card revenue.
• Expense Increases: Operating expenses rose 5% in Q3 and 8% YTD. Personnel costs increased due to normal compensation adjustments and higher incentive pay. Equipment expenses rose 14% due to new investments at Bank of Texas.
• Loan Loss Provision: The provision for loan losses increased significantly to $5.0 million in Q3 (from $2.1 million in Q3 1999) due to higher net charge-offs and increased credit risk, particularly in the regional banks.
• Asset Quality: Nonperforming assets increased to $41 million (from $22 million in Q3 1999), driven by two specific borrowers facing financial distress. However, the reserve for loan losses remains adequate at 1.58% of total loans.
• Margin Compression: Net interest margin decreased to 3.57% from 3.66% as the cost of interest-bearing liabilities rose faster than the yield on earning assets in a rising rate environment.

Outlook, Risks, and Management Commentary

• Acquisition Strategy: Management expects the acquisition of CNBT Bancshares to close in Q1 2001, expanding the company's footprint in Houston, Texas.
• Interest Rate Risk: The company utilizes a strategy of borrowing in capital markets to fund securities, which can compress margins during rising rate periods. Sensitivity analysis indicates a 200 basis point rate increase would result in a $2.75 million increase in net interest revenue over the next 12 months.
• Market Saturation: Management notes that future growth in fee income may be constrained by market saturation and increased competition, potentially requiring new product introductions or market expansion.
• Accounting Changes: The company will adopt FAS 133 (Accounting for Derivative Instruments) effective January 1, 2001, which will require recognizing derivatives at fair value on the balance sheet.
• Forward-Looking Risks: Key risks include the ability to realize cost savings from mergers, changes in interest rates, credit quality deterioration in concentrated industries (energy, real estate), and regulatory changes.

Investor Verification Checklist

• Acquisition Integration: Verify the closing timeline and integration costs associated with the CNBT Bancshares acquisition.
• Nonperforming Assets: Monitor the specific borrowers contributing to the rise in nonperforming assets and the adequacy of the $8.7 million specific impairment reserve.
• Interest Rate Sensitivity: Review the impact of rising rates on the cost of funds versus loan yields, given the company's reliance on borrowed funds to fund securities.
• Regional Bank Performance: Assess the credit risk exposure at Bank of Texas, which contributed to the increased loan loss provision.
• FAS 133 Impact: Evaluate the potential volatility in earnings resulting from the fair value accounting of derivatives starting in 2001.