Business Context and Reporting Period
Company: BOK Financial Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: March 31, 2007
Business Overview: BOK Financial operates five principal lines of business: Oklahoma corporate banking, Oklahoma consumer banking, mortgage banking, wealth management, and regional banking (including Texas, Colorado, New Mexico, Arizona, Arkansas, and Kansas). The company focuses on commercial and consumer banking, wealth management, and mortgage origination and servicing.
Key Financial Metrics
- Net Income: $52.8 million ($0.78 per diluted share), down from $54.7 million ($0.81 per diluted share) in Q1 2006.
- Net Interest Revenue: $128.8 million (Tax-equivalent: $130.9 million), an increase of $11.5 million (10%) year-over-year.
- Net Interest Margin (NIM): 3.32%, up from 3.25% in Q4 2006 but down from 3.39% in Q1 2006.
- Provision for Credit Losses: $6.5 million, compared to $3.4 million in Q1 2006.
- Other Operating Revenue: $92.2 million, an increase of $2.8 million year-over-year.
- Other Operating Expenses: $132.5 million, up $15.1 million year-over-year (driven largely by a $1.2 million decrease in the fair value of mortgage servicing rights).
- Total Assets: $18.16 billion as of March 31, 2007.
- Total Loans: $11.14 billion, a 16% annualized increase from the prior quarter.
- Total Deposits: $12.21 billion.
- Shareholders' Equity: $1.79 billion.
- Capital Ratios: Tier 1 Capital Ratio of 9.97% and Total Capital Ratio of 11.76% (Risk-based); Leverage Ratio of 8.95%.
Material Changes vs. Prior Comparable Period
- Earnings Decline: Net income decreased primarily due to a $7.1 million gain on mortgage servicing rights in Q1 2006 that was not repeated in 2007. In Q1 2007, the fair value of mortgage servicing rights decreased by $1.2 million.
- Loan Growth: Average outstanding loans increased 19% ($1.7 billion) compared to Q1 2006. Commercial loans and commercial real estate loans were the primary drivers.
- Deposit Growth: Average deposits increased 8% ($931 million) compared to Q1 2006.
- Expense Increase: Personnel costs increased $7.5 million (10%) due to higher salaries and incentive compensation. Excluding mortgage servicing rights valuation changes, operating expenses rose 6%.
- Non-Performing Assets: Non-accruing loans totaled $31 million (0.28% of loans), slightly higher than the $26 million at year-end 2006 but lower than the $32 million in Q1 2006. Net charge-offs were $3.1 million.
Guidance, Outlook, and Risks
- Acquisition: Reached an agreement to acquire Worth Bancorporation, Inc. (Texas-based) for approximately $127 million in cash. The deal is expected to close around May 31, 2007.
- Dividends: Board approved a quarterly cash dividend of $0.20 per share, payable May 30, 2007 (up from $0.15 in the prior quarter).
- Capital Management: Board authorized the issuance of up to $250 million in subordinated debt to fund the Worth acquisition and asset growth.
- Interest Rate Risk: The company shifted from slightly asset-sensitive to slightly liability-sensitive. Rising rates are expected to modestly increase funding costs more than asset yields. The company uses interest rate swaps and mortgage-backed securities to manage this risk.
- Contingencies: The SEC is conducting a special examination of AXIA Investment Management (a subsidiary) regarding marketing assistance agreements. Management does not expect a material adverse effect, though a demand for $8.1 million in refunds has been made by the AP Funds.
- Credit Quality: Exposure to sub-prime mortgage loans is minimal. The increase in the provision for loan losses is attributed to loan growth rather than deteriorating credit quality.
Investor Verification Checklist
- Verify the impact of the $1.2 million decline in mortgage servicing rights fair value on Q1 2007 earnings versus the $7.1 million gain in Q1 2006.
- Confirm the closing timeline and integration costs for the $127 million acquisition of Worth Bancorporation.
- Monitor the outcome of the SEC examination of AXIA Investment Management and the $8.1 million refund demand.
- Review the trend in non-accruing loans and net charge-offs to ensure the provision for credit losses remains adequate given the 19% loan growth.
- Assess the effectiveness of the company's shift to a liability-sensitive balance sheet in a rising interest rate environment.