Business Context and Reporting Period
Company: BOK Financial Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: June 30, 2003
Business Overview: BOK Financial operates through five principal lines of business: corporate banking, consumer banking, mortgage banking, trust services, and regional banks (Bank of Texas, Bank of Albuquerque, Bank of Arkansas). The company is headquartered in Tulsa, Oklahoma, and serves customers primarily in Oklahoma, Texas, New Mexico, and Arkansas.
Key Financial Metrics
| Metric | Q2 2003 | Q2 2002 | YTD 2003 | YTD 2002 |
|---|---|---|---|---|
| Net Income | $41.5 million | $34.6 million | $85.7 million | $67.5 million |
| Diluted EPS | $0.64 | $0.56 | $1.33 | $1.09 |
| Net Interest Revenue (Tax-Equiv) | $98.9 million | $91.9 million | $195.8 million | $184.7 million |
| Net Interest Margin | 3.47% | 3.77% | 3.52% | 3.82% |
| Total Assets | $13.63 billion | $11.19 billion | N/A | N/A |
| Total Loans | $7.04 billion | $6.31 billion | N/A | N/A |
| Total Deposits | $8.69 billion | $7.18 billion | N/A | N/A |
| Shareholders' Equity | $1.18 billion | $0.93 billion | N/A | N/A |
| Return on Average Assets | 1.31% | 1.25% | 1.39% | 1.24% |
| Return on Average Equity | 14.31% | 15.62% | 15.16% | 15.63% |
Material Changes vs. Prior Period
- Profitability Growth: Net income increased 20% ($6.9 million) in Q2 2003 compared to Q2 2002, driven primarily by a 24% increase in fees and commissions revenue. Year-to-date net income rose 27%.
- Revenue Drivers: Mortgage banking revenue grew 54%, brokerage and trading revenue grew 59%, and service charges on deposit accounts grew 20%. These gains were partially offset by a decrease in net gains on sales of securities ($10.5 million in Q2 2003 vs. $21.6 million in Q2 2002).
- Expense Management: Total operating expenses decreased $2.0 million in Q2 2003. This was due to a $16.7 million reduction in the provision for mortgage servicing rights, which offset a $14.7 million increase in other operating expenses (primarily personnel costs).
- Net Interest Margin Compression: The net interest margin declined 30 basis points to 3.47% in Q2 2003. This was caused by yields on earning assets falling more rapidly than rates paid on interest-bearing liabilities in a declining interest rate environment.
- Asset Growth: Average earning assets increased $1.4 billion, funded by a $1.3 billion increase in interest-bearing liabilities. Loans increased $66 million during the quarter.
Guidance, Outlook, Risks, and Unusual Items
- Acquisition Activity: In July 2003, BOK Financial entered a definitive agreement to acquire Colorado Funding Company and Colorado State Bank and Trust for $81.7 million in cash. The acquisition is expected to close in Q3 2003, establishing a full-service banking presence in Denver.
- Capital Strategy: The company employs a strategy of borrowing funds in capital markets to invest in securities to enhance revenue and manage interest rate risk. This strategy enhanced net interest revenue by $15.1 million in Q2 2003.
- Market Risk: The company faces interest rate risk, particularly regarding mortgage servicing rights and securities portfolios. A 200 basis point increase in interest rates is projected to result in a $51 million loss in economic value of equity, a shift from a gain in the prior year due to portfolio adjustments.
- Accounting Standards: The company is evaluating the impact of FASB Interpretation 46 (FIN 46) regarding the consolidation of variable interest entities, which may require consolidating certain lending and trust relationships in the future.
- Loan Quality: Nonperforming assets totaled $61 million (0.81% of loans). The reserve for loan losses was 221% of nonperforming loans. Potential problem loans totaled $57 million.
Investor Verification Checklist
- Acquisition Integration: Verify the closing timeline and integration costs associated with the $81.7 million Colorado State Bank acquisition.
- Interest Rate Sensitivity: Monitor the impact of rising interest rates on the economic value of equity, given the shift from a gain to a projected loss in the 200 bp shock scenario.
- Mortgage Servicing Rights: Review the valuation allowance for mortgage servicing rights ($50 million) and the effectiveness of the hedging strategy against prepayment risks.
- Fee Revenue Sustainability: Assess the sustainability of the 24% growth in fees and commissions, particularly in mortgage banking and brokerage, given market volatility.
- FIN 46 Impact: Confirm if the adoption of FIN 46 results in the consolidation of any variable interest entities that could materially alter the balance sheet.