Business Context and Reporting Period
Company: BOK Financial Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2009
Business Overview: BOK Financial is a diversified financial services company operating primarily in Oklahoma, Texas, and other regional markets. Its principal lines of business include commercial banking, consumer banking, and wealth management. The company elected not to participate in the U.S. Treasury's Troubled Asset Relief Program (TARP).
Key Financial Metrics
| Metric | Q2 2009 | Q2 2008 | YTD 2009 | YTD 2008 |
|---|---|---|---|---|
| Net Income (Attributable to BOK) | $52.1 million | ($1.2 million) Loss | $107.1 million | $61.1 million |
| Earnings Per Share (Diluted) | $0.77 | ($0.02) | $1.58 | $0.90 |
| Net Interest Revenue | $175.6 million | $158.9 million | $345.4 million | $306.1 million |
| Net Interest Margin | 3.55% | 3.44% | 3.51% | 3.37% |
| Provision for Credit Losses | $47.1 million | $59.3 million | $92.2 million | $76.9 million |
| Total Assets | $22.77 billion | $22.44 billion | $22.77 billion | $22.44 billion |
| Total Loans | $12.07 billion | $12.52 billion | $12.07 billion | $12.52 billion |
| Total Deposits | $14.66 billion | $14.13 billion | $14.66 billion | $14.13 billion |
| Shareholders' Equity | $2.05 billion | $1.94 billion | $2.05 billion | $1.94 billion |
Capital Ratios (June 30, 2009):
- Tier 1 Capital Ratio: 9.86%
- Total Capital Ratio: 13.34%
- Tangible Common Equity Ratio: 7.55%
Material Changes vs. Prior Period
- Profitability Turnaround: The company reported a net income of $52.1 million in Q2 2009, a significant improvement from a net loss of $1.2 million in Q2 2008. The Q2 2008 loss was heavily impacted by an $87.0 million pre-tax charge related to SemGroup LP bankruptcy.
- Net Interest Revenue Growth: Net interest revenue increased 10% year-over-year to $175.6 million, driven by a 10 basis point increase in net interest margin to 3.55% and growth in average earning assets.
- Fee Revenue Surge: Total fees and commissions rose 93% to $123.1 million compared to Q2 2008. This increase was largely due to a reversal of the SemGroup derivative write-down in the prior year and strong mortgage banking revenue driven by government initiatives to lower interest rates.
- FDIC Special Assessment: Operating expenses increased by $16.5 million year-over-year, primarily due to an $11.8 million pre-tax FDIC special assessment charge recognized in Q2 2009.
- Loan Portfolio Contraction: Total outstanding loans decreased by $570 million from the previous quarter to $12.1 billion, reflecting reduced customer demand and management decisions to mitigate credit risk.
Guidance, Outlook, Risks, and Unusual Items
- Outlook: Management expects net interest revenue to increase slightly over a one-year forward-looking period, though this is subject to loan spread compression and changes in deposit product mix. The company aims to maintain a balance sheet relatively neutral to interest rate changes.
- Unusual Items:
- FDIC Assessment: An $11.8 million special assessment was recorded in Q2 2009.
- OTTI Charges: The company recognized $1.5 million in other-than-temporary impairment (OTTI) losses in Q2 2009, primarily on debt securities intended for sale and certain mortgage-backed securities.
- Derivative Gains/Losses: Net gains on available-for-sale securities were $15.2 million in Q2 2009, offset by losses on mortgage hedge securities.
- Risks and Contingencies:
- Credit Quality: Non-performing assets totaled $446 million (3.67% of loans and repossessed assets), an increase from the prior quarter. Significant concentrations of non-accrual loans exist in the Arizona market (commercial real estate) and Oklahoma market (energy sector, specifically SemGroup).
- Legal Proceedings: The company is a defendant in a class action lawsuit regarding SemGroup Energy Partners, LP, though management anticipates no material loss. A Wells notice from the SEC regarding AXIA was resolved with no action recommended.
- Market Risk: The company faces interest rate risk, managed through derivatives and asset/liability modeling. Value at Risk (VAR) for trading activities was $2.1 million at period end.
Investor Verification Checklist
- Non-Performing Assets Trend: Verify the trajectory of non-accrual loans, particularly in the Arizona commercial real estate sector and Oklahoma energy sector, as these represent significant credit concentrations.
- FDIC Assessment Impact: Confirm the one-time nature of the $11.8 million FDIC special assessment and its effect on future liquidity and expense ratios.
- Securities Portfolio Quality: Review the composition of the $7.2 billion available-for-sale securities portfolio, specifically the $1.4 billion in privately issued mortgage-backed securities and the adequacy of OTTI provisions.
- Mortgage Banking Volatility: Assess the sustainability of mortgage banking revenue, which is currently elevated due to government stimulus and refinancing activity, and its sensitivity to interest rate changes.
- Capital Adequacy: Monitor the tangible common equity ratio (7.55%) and tier 1 capital ratio (9.86%) to ensure they remain well above regulatory "well-capitalized" thresholds despite potential future credit losses.