Business Context and Reporting Period
Company: BOK Financial Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 1998
Business Overview: BOK Financial is a financial holding company primarily operating through its subsidiary, Bank of Oklahoma, N.A. The company focuses on commercial and consumer banking, mortgage banking, trust services, and brokerage activities, with a significant geographic concentration in Oklahoma, though it has expanded into Arkansas, Texas, and New Mexico.
Key Financial Metrics
| Metric | Q2 1998 | Q2 1997 | YTD 1998 | YTD 1997 |
|---|---|---|---|---|
| Net Income | $20.4 million | $16.1 million | $36.8 million | $31.4 million |
| Earnings Per Share (Diluted) | $0.81 | $0.64 | $1.46 | $1.26 |
| Net Interest Revenue | $44.5 million | $39.2 million | $86.5 million | $74.2 million |
| Other Operating Revenue | $44.4 million | $31.4 million | $85.1 million | $61.9 million |
| Operating Expenses | $53.8 million | $45.4 million | $111.0 million | $87.2 million |
| Provision for Loan Losses | $4.0 million | $1.5 million | $6.4 million | $2.5 million |
| Total Assets | $5.70 billion | $5.29 billion | - | - |
| Total Loans | $2.88 billion | $2.63 billion | - | - |
| Return on Average Assets | 1.50% | 1.26% | 1.35% | 1.28% |
| Return on Average Equity | 17.99% | 17.23% | 16.47% | 17.08% |
| Net Interest Margin | 3.78% | 3.68% | 3.72% | 3.63% |
Material Changes vs. Prior Period
- Revenue Growth: Net income increased 26.9% year-over-year for the quarter. This was driven by a 29.8% increase in fees and commissions ($9.4 million) and a 13.5% increase in net interest revenue ($5.3 million).
- Securities Gains: The company recorded $3.3 million in securities gains in Q2 1998, compared to a $200,000 loss in Q2 1997. These sales were strategic moves to position the portfolio for a declining rate environment.
- Expense Increases: Operating expenses rose 18.4% ($8.4 million), primarily due to increased personnel costs ($4.6 million) from hiring and incentive compensation, and higher occupancy and data processing costs ($2.3 million).
- Loan Portfolio: Total loans increased $47 million to $2.88 billion. Commercial real estate loans grew $63 million, while residential mortgage loans decreased $34 million due to refinancing activity.
- Nonperforming Assets: Nonperforming assets decreased slightly to $41.9 million. Nonaccrual loans dropped $4.1 million, offset by an increase in loans past due 90 days.
Guidance, Outlook, and Risks
Acquisition Activity
On July 27, 1998, BOK Financial announced an agreement to acquire 17 banking offices in New Mexico from Bank of America, N.A. The deal is expected to add approximately $500 million in deposits and $167 million in loans, with completion anticipated in Q4 1998 pending regulatory approval.
Market Risk and Interest Rate Sensitivity
The company utilizes a strategy of borrowing in capital markets to supplement deposits, which lowers net interest margin but increases net interest revenue. Management employs derivatives (futures, options, swaps) to hedge interest rate risk, specifically regarding mortgage servicing rights.
- Rate Sensitivity: A simulated 200 basis point decrease in interest rates could reduce net income by $24.7 million (30.2%) due to the impairment of mortgage servicing rights, though this would be partially offset by gains in the securities portfolio.
- Hedging Program: A new hedging program implemented in Q2 1998 aims to reduce the risk of loss on mortgage servicing rights in a falling rate environment.
Year 2000 Compliance
BOK Financial expects to invest approximately $12 million in computer system upgrades in 1998, with $2 million directly related to Year 2000 compliance. The company expects critical internal and outsourced systems to be renovated by December 31, 1998. Management believes these costs will not materially affect results of operations.
Contingencies
The company is subject to legal actions in the ordinary course of business, but management does not anticipate material liability. There is also risk associated with $28.2 million in natural gas compression equipment leases where lease terms are shorter than the equipment's useful life.
Investor Verification Checklist
- Acquisition Closing: Verify the regulatory approval and closing date of the New Mexico banking office acquisition.
- Mortgage Servicing Risk: Monitor the valuation of mortgage servicing rights and the effectiveness of the new hedging program in a declining interest rate environment.
- Expense Management: Track the trajectory of operating expenses, particularly personnel and data processing costs, to ensure they do not outpace revenue growth.
- Year 2000 Progress: Confirm the completion of system renovations and testing for both internal and outsourced vendors by the end of 1998.
- Loan Quality: Review the trend in nonperforming assets and the adequacy of the loan loss reserve, especially given the concentration in Oklahoma and the energy/agricultural sectors.