Business Context and Reporting Period
Company: BOK Financial Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2008
Business Overview: BOK Financial operates five principal lines of business: Oklahoma corporate banking, Oklahoma consumer banking, mortgage banking, wealth management, and regional banking. The company provides a full range of financial services including lending, deposit services, wealth management, and brokerage activities.
Key Financial Metrics
| Metric | Q2 2008 | Q2 2007 | YTD 2008 | YTD 2007 |
|---|---|---|---|---|
| Net Income (Loss) | $(1.2) million | $53.9 million | $61.1 million | $106.7 million |
| Diluted EPS | $(0.02) | $0.80 | $0.90 | $1.58 |
| Net Interest Revenue | $158.9 million | $134.9 million | $306.1 million | $263.8 million |
| Net Interest Margin | 3.44% | 3.31% | 3.37% | 3.31% |
| Provision for Credit Losses | $59.3 million | $7.8 million | $76.9 million | $14.3 million |
| Total Assets | $22.4 billion | $19.3 billion | - | - |
| Total Loans | $12.6 billion | $11.7 billion | - | - |
| Non-Performing Assets | $181.5 million (1.45% of loans) | $69.8 million (0.60% of loans) | - | - |
| Shareholders' Equity | $1.9 billion | $1.8 billion | - | - |
Material Changes vs. Prior Period
- Net Loss Driven by SemGroup Charges: The company reported a net loss of $1.2 million for Q2 2008, a sharp reversal from the $53.9 million net income in Q2 2007. This was primarily due to $87.0 million in pre-tax charges related to credit exposure to SemGroup LP (a $26.0 million loan charge-off and a $60.7 million write-down of energy derivative contracts).
- Provision for Credit Losses: The provision for credit losses surged to $59.3 million in Q2 2008 compared to $7.8 million in Q2 2007, largely driven by the SemGroup exposure.
- Non-Performing Assets: Non-performing assets increased to $181.5 million (1.45% of loans) from $69.8 million (0.60% of loans) in the prior year, reflecting the deterioration of the SemGroup portfolio and other commercial loans.
- Fee Revenue Decline: Fees and commissions revenue dropped to $63.6 million from $97.0 million in Q2 2007, heavily impacted by the $60.7 million derivative charge.
- Net Interest Margin Expansion: Despite the loss, the net interest margin improved to 3.44% from 3.31% in Q2 2007, aided by a widening spread between LIBOR and the federal funds rate.
Guidance, Outlook, and Risks
- SemGroup Bankruptcy: On July 22, 2008, SemGroup LP filed for bankruptcy protection. BOK Financial recognized charges based on the lower end of a value range for SemGroup. The company estimates a remaining net credit exposure of approximately $60 million, which could increase if derivative settlements are not met or letters of credit are funded.
- Interest Rate Outlook: Management expects net interest revenue to decrease slightly over a one-year forward-looking period, though this may be offset by loan spread compression and deposit mix changes. The balance sheet is managed to be relatively neutral to interest rate changes.
- Market Risk: The company faces market risk primarily through interest rate changes. Value at Risk (VAR) for trading activities was $1.2 million at June 30, 2008, within the $1.8 million limit.
- Legal Proceedings: The company received a Wells notice from the SEC regarding potential violations related to marketing assistance agreements with mutual funds (AXIA/BISYS matter). Management disputes the SEC's position.
- Capital Position: All banking subsidiaries were "well capitalized" except Bank of Arizona, which subsequently received a $4 million capital contribution to meet regulatory standards.
Investor Verification Checklist
- SemGroup Exposure: Verify the final settlement value of the remaining $60 million credit exposure to SemGroup and the impact on Q3 2008 earnings.
- Non-Performing Asset Trends: Monitor the trajectory of non-performing assets, specifically in the energy and commercial real estate sectors, excluding the SemGroup impact.
- SEC Investigation: Track the status of the SEC Wells notice regarding AXIA and potential financial or reputational impact.
- Alt-A Securities: Review the valuation and unrealized losses on the $416 million portfolio of Alt-A mortgage-backed securities.
- Deposit Stability: Assess the stability of core deposits given the competitive environment and the shift in funding sources toward borrowed funds.