Business Context and Reporting Period
Company: BOK Financial Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 1999
Business Overview: BOK Financial operates four principal lines of business: corporate banking, consumer banking, mortgage banking, and trust services. The company has pursued an aggressive acquisition strategy, including the purchase of Bank of Albuquerque (Q4 1998) and three banks in Q2 1999 (Mid-Cities National Bank, Canyon Creek National Bank, and Swiss Avenue State Bank), contributing significantly to asset growth.
Key Financial Metrics
| Metric | Q3 1999 | Q3 1998 | YTD 1999 | YTD 1998 |
|---|---|---|---|---|
| Net Income | $22.7 million | $20.0 million | $66.0 million | $59.2 million |
| Diluted EPS | $0.41 | $0.36 | $1.18 | $1.06 |
| Net Interest Revenue | $62.4 million | $48.9 million | $171.0 million | $139.3 million |
| Net Interest Margin | 3.66% | 3.72% | 3.61% | 3.72% |
| Operating Expenses | $70.8 million | $58.2 million | $206.3 million | $171.7 million |
| Total Assets | $8.17 billion | $6.17 billion | N/A | N/A |
| Total Loans | $4.41 billion | $3.17 billion | N/A | N/A |
| Return on Average Assets | 1.15% | 1.34% | 1.19% | 1.37% |
| Return on Average Equity | 16.81% | 16.21% | 16.40% | 16.73% |
Capital Ratios (Sept 30, 1999): Tier 1 Capital: 7.09%; Total Capital: 10.67%; Leverage: 5.64%. The company remains "well capitalized" under regulatory standards.
Material Changes vs. Prior Period
- Revenue Growth: Net interest revenue increased 28% ($13.5 million) in Q3 1999 compared to Q3 1998, driven by a $1.7 billion increase in average earning assets. Fee and commission revenue grew 6% ($2.4 million).
- Expense Increase: Operating expenses rose 22% ($12.6 million) year-over-year. This includes a $2.2 million increase in amortization of intangible assets and $9.3 million in expenses from acquired banks not present in the prior year.
- Asset Expansion: Total assets grew to $8.17 billion, with the loan portfolio increasing $283 million in the quarter alone to $4.4 billion. Commercial loans and commercial real estate loans were the primary drivers.
- Margin Compression: Net interest margin decreased slightly to 3.66% from 3.72% in the prior year quarter. Management attributes a 71 basis point decrease in margin to a strategy of utilizing capital markets borrowings to fund asset growth.
- Stock Dividend: A 3% stock dividend was announced in September 1999 and paid in October 1999; all per-share data has been restated.
Outlook, Risks, and Management Commentary
- Acquisition Strategy: Management continues to utilize capital resources by borrowing in capital markets to supplement deposit growth. While this lowers net interest margin relative to industry norms, it generates positive net interest revenue.
- Year 2000 Compliance: The company has successfully completed all FFIEC requirements for Year 2000 compliance, including system testing and business resumption planning. Additional costs are not expected to be significant.
- Market Risk: Interest rate sensitivity modeling indicates that a 200 basis point increase in rates would decrease the economic value of equity by approximately $43.7 million, primarily due to the securities portfolio. The company uses interest rate swaps and derivatives to hedge mortgage servicing rights.
- Asset Quality: Non-performing assets totaled $22.3 million (0.41% of period-end loans). Specific impairment reserves were $1.9 million. Management expects risk categories to moderate as energy and cattle sectors improve.
- Capital Constraints: While capital ratios remain well above regulatory minimums, future asset growth and acquisitions may be constrained by capital limitations as the company expands.
Investor Verification Checklist
- Acquisition Integration: Verify the ongoing impact of recent acquisitions (Bank of Albuquerque, Mid-Cities, Canyon Creek, Swiss Avenue) on operating expenses and revenue synergies.
- Intangible Amortization: Review the $4.5 million quarterly amortization of intangible assets and its impact on "Tangible Net Income" ($26.8 million for Q3 1999).
- Loan Concentration: Assess exposure to specific industries, particularly Energy ($594 million), Services ($834 million), and Commercial Real Estate ($1.04 billion), given the geographic concentration in Oklahoma.
- Capital Adequacy: Monitor the trend of declining capital ratios (Tier 1 dropped from 9.51% in Q3 1998 to 7.09% in Q3 1999) relative to the aggressive asset growth strategy.
- Interest Rate Sensitivity: Evaluate the company's hedging strategy against the modeled $43.7 million potential loss in economic value of equity under a rising rate scenario.