BOK Financial Corporation - 10-Q Summary (Q3 2008)
Business Context and Reporting Period
This report covers the quarterly period ended September 30, 2008. BOK Financial Corporation is a large accelerated filer headquartered in Tulsa, Oklahoma, operating through five principal lines of business: Oklahoma corporate banking, Oklahoma consumer banking, mortgage banking, wealth management, and regional banking. The quarter was significantly impacted by the financial crisis, specifically regarding credit exposures to SemGroup LP and Lehman Brothers.
Key Financial Metrics
- Net Income: $56.7 million ($0.84 per diluted share) for Q3 2008, compared to a net loss of $1.2 million in Q2 2008 and net income of $59.8 million in Q3 2007.
- Net Interest Revenue: $164.3 million, up $5.4 million from Q2 2008 and $24.9 million from Q3 2007.
- Net Interest Margin: 3.48% for Q3 2008 (up from 3.44% in Q2 and 3.27% in Q3 2007).
- Provision for Credit Losses: $52.7 million for Q3 2008, down from $59.3 million in Q2 2008 (which included a $26.3 million SemGroup charge).
- Non-Performing Assets (NPA): $252 million (1.98% of outstanding loans and repossessed assets), up from $181 million in Q2 2008.
- Capital Ratios: Tier 1 capital ratio of 9.25% and tangible capital ratio of 7.16% as of September 30, 2008.
- Liquidity: Average deposits increased $967 million to $14.3 billion. The company entered a $188 million unsecured revolving credit agreement with its Chairman, with $50 million outstanding at quarter-end.
Material Changes vs. Prior Periods
- Recovery from Q2 Losses: The Q3 return to profitability was driven by a $19.4 million increase in the fair value of derivative contracts related to SemGroup LP, partially offset by a $12.7 million write-off of derivative contracts with Lehman Brothers. This resulted in a net positive impact of $4.5 million on Q3 income.
- Fee Revenue Growth: Fees and commissions totaled $126.7 million, a 16% increase over Q3 2007 (excluding SemGroup/Lehman items), driven by brokerage and trading revenue.
- Credit Quality Deterioration: Net loans charged off were $20.2 million in Q3, down from $39.0 million in Q2 (which included a $26.0 million SemGroup charge-off). However, non-performing assets rose significantly, including $36.0 million of unpaid amounts due from SemGroup.
- Regional Banking Strain: The Regional Banking Division saw a decrease in contribution to net income due to increased net loans charged off, primarily in the Arizona market ($10.8 million in charge-offs) and Colorado ($5.0 million).
Guidance, Outlook, and Risks
- Interest Rate Outlook: Management expects net interest revenue to decrease slightly over a one-year forward-looking period based on modeling, though this may be affected by loan spread compression and changes in the LIBOR/federal funds rate spread.
- Capital Strategy: The company is evaluating participation in the U.S. Treasury's TARP Capital Purchase Program. A dividend of $0.225 per share was declared for Q4 2008.
- Key Risks:
- Credit Risk: Continued weakness in commercial real estate and residential homebuilder loans, particularly in Arizona and Colorado.
- Derivative Exposure: Credit risk associated with customer and counterparty derivative contracts, specifically energy contracts.
- Legal Contingencies: A $1.7 million accrual for Visa's antitrust litigation settlement; ongoing SEC investigation regarding AXIA/BISYS marketing arrangements.
- Market Risk: Unrealized losses on available-for-sale securities totaled $199 million, though management deems them temporary.
Investor Verification Checklist
- Verify the sustainability of the $19.4 million derivative gain from SemGroup and the remaining exposure to that counterparty.
- Monitor the trajectory of non-performing assets in the Arizona and Colorado regional markets, which drove significant losses in those segments.
- Assess the adequacy of the $209 million combined reserve for credit losses given the rising trend in non-accruing loans.
- Review the company's decision regarding participation in the TARP program and its impact on capital structure.
- Track the resolution of the SEC investigation regarding AXIA and the potential financial impact of the Visa litigation settlement.