Business Context and Reporting Period
Company: BOK Financial Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2007
Business Overview: BOK Financial is a regional bank holding company operating five principal lines of business: Oklahoma corporate banking, Oklahoma consumer banking, mortgage banking, wealth management, and regional banking (including Texas, Colorado, New Mexico, Arkansas, Arizona, and Kansas). The company completed two acquisitions during the quarter: Worth National Bank (Texas) and First United Bank (Colorado).
Key Financial Metrics
| Metric | Q2 2007 | Q2 2006 | YTD 2007 | YTD 2006 |
|---|---|---|---|---|
| Net Income | $53.9 million | $55.0 million | $106.7 million | $109.7 million |
| Earnings Per Share (Diluted) | $0.80 | $0.82 | $1.58 | $1.63 |
| Net Interest Revenue | $134.9 million | $121.1 million | $263.8 million | $238.4 million |
| Net Interest Margin | 3.31% | 3.40% | 3.31% | 3.40% |
| Provision for Credit Losses | $7.8 million | $3.8 million | $14.3 million | $7.2 million |
| Total Assets | $19.3 billion | $16.9 billion | N/A | N/A |
| Total Loans | $11.7 billion | $9.8 billion | N/A | N/A |
| Total Deposits | $13.2 billion | $11.3 billion | N/A | N/A |
| Return on Average Assets | 1.16% | 1.33% | N/A | N/A |
| Return on Average Equity | 12.06% | 14.03% | N/A | N/A |
Material Changes vs. Prior Period
- Acquisitions: Completed acquisitions of Worth National Bank and First United Bank, adding $375 million in net loans and $502 million in total deposits. These did not significantly impact Q2 net income.
- Asset Growth: Average earning assets increased $2.2 billion (15%) year-over-year. Average outstanding loans grew $1.9 billion (20%) to $11.3 billion.
- Interest Rates: The yield on average earning assets rose to 7.00% (up 29 basis points YoY), while the cost of interest-bearing funds increased to 4.12% (up 39 basis points YoY), compressing the net interest margin slightly.
- Non-Performing Assets: Increased to $60 million (0.52% of loans) from $39 million (0.40% of loans) in Q2 2006. Excluding acquisitions, non-performing assets were $50.7 million (0.44%).
- Provision for Credit Losses: Doubled to $7.8 million from $3.8 million in Q2 2006, driven by increases in net charge-offs and non-accruing loans.
- Operating Expenses: Increased $15.3 million (12%) excluding changes in mortgage servicing rights, primarily due to higher personnel expenses ($9.5 million increase).
Guidance, Outlook, and Risks
- Interest Rate Outlook: Management models suggest net interest revenue may decline slightly from rising rates over a one-year forward-looking period due to loan spread compression and deposit product mix shifts. The balance sheet is managed to be relatively neutral to interest rate changes.
- Capital Management: Issued $250 million of subordinated debt to fund acquisitions and asset growth. Standard & Poor's placed the debt rating on a positive outlook.
- Securities Portfolio: Gross unrealized losses on available-for-sale securities totaled $140 million at June 30, 2007, due to rising rates. Management believes these losses are temporary and the portfolio contains no sub-prime mortgage loans.
- 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.
- Dividends: Quarterly cash dividend of $0.20 per share was paid in Q2 and declared for Q3.
Investor Verification Checklist
- Asset Quality: Verify the trend in non-performing assets and the adequacy of the allowance for loan losses (1.20% of loans) given the increase in the provision for credit losses.
- Acquisition Integration: Monitor the integration progress and cost synergies from the Worth National Bank and First United Bank acquisitions.
- Interest Rate Sensitivity: Assess the impact of rising rates on the net interest margin, specifically the compression in commercial loan spreads and the migration of deposits to higher-cost products.
- Securities Valuation: Review the composition of the $140 million in unrealized losses on available-for-sale securities and management's assessment of their temporary nature.
- Regulatory Examination: Track the status of the SEC examination of AXIA Investment Management and potential financial implications.