Business Context and Reporting Period
Company: BOK Financial Corporation
Filing Type: Form 10-Q (Quarterly Report)
Period Ended: September 30, 2002
Filing Date: November 14, 2002
BOK Financial is a financial holding company operating primarily through its subsidiary, Bank of Oklahoma, N.A. The company operates four principal lines of business: corporate banking, consumer banking, mortgage banking, and trust services, along with regional banking operations in Texas, New Mexico, and Arkansas. The reporting period reflects the implementation of new accounting standards (FAS 142 and FAS 147) regarding goodwill and intangible assets, which eliminated the amortization of certain assets.
Key Financial Metrics
| Metric | Q3 2002 | Q3 2001 | YTD 9 Months 2002 | YTD 9 Months 2001 |
|---|---|---|---|---|
| Net Income | $44.1 million | $29.8 million | $111.6 million | $86.2 million |
| Diluted EPS | $0.73 | $0.50 | $1.85 | $1.45 |
| Net Interest Revenue | $92.1 million | $84.5 million | $271.7 million | $239.8 million |
| Net Interest Margin (TE) | 3.58% | 3.75% | 3.65% | 3.62% |
| Total Assets | $11.9 billion | $10.5 billion | N/A | N/A |
| Total Loans | $6.6 billion | $6.2 billion | N/A | N/A |
| Shareholders' Equity | $980.0 million | $820.6 million | N/A | N/A |
| Return on Average Assets | 1.55% | 1.16% | 1.34% | 1.14% |
| Return on Average Equity | 18.44% | 14.82% | 16.64% | 15.16% |
Material Changes vs. Prior Period
- Profitability Surge: Net income increased 48% year-over-year for the quarter and 30% year-over-year for the nine-month period. This growth was driven by higher net interest revenue and significant non-recurring gains.
- Securities Gains: Net gains on sales of securities totaled $34.3 million for the quarter, including $27.5 million from securities designated as an economic hedge for mortgage servicing rights. Year-to-date gains were $48.4 million.
- Fee Revenue Growth: Other operating revenue (excluding securities/derivatives) grew 16% in the quarter. Service charges on deposit accounts increased 42% due to a new overdraft privilege product, and transaction card revenue rose 17%.
- Expense Increases: Operating expenses increased 12% to $94.5 million (excluding non-recurring items). This was driven by a $29.0 million provision for impairment of mortgage servicing rights, increased personnel costs, and higher data processing fees.
- Loan Portfolio Expansion: Total loans grew 4% to $6.6 billion, with commercial loans increasing by $135 million. Energy loans represented 15% of the portfolio.
- Acquisition: On October 25, 2002, the company acquired Bank of Tanglewood, N.A. for approximately $64.5 million in stock, with a contingent obligation valued at $3.2 million.
Guidance, Outlook, Risks, and Unusual Items
Management Commentary and Outlook
Management expects continued growth in other operating revenue but notes that competition, market saturation, and economic activity could affect the rate of increase. The company utilizes a strategy of borrowing in capital markets to fund securities investments, which management estimates enhanced net interest revenue by $13.8 million in the quarter.
Unusual Items and Accounting Changes
- FAS 142 & FAS 147: Implementation of these standards eliminated the amortization of goodwill and certain intangible assets. Prior year results have been restated pro forma for comparison.
- Mortgage Servicing Impairment: A $29.0 million provision was recorded for the impairment of mortgage servicing rights due to market conditions. This was largely offset by $27.5 million in realized gains from the sale of hedging securities.
- Derivatives: Net gains on derivatives of $7.2 million were recorded, primarily from interest rate swaps used to manage interest rate risk.
Risks and Contingencies
- Interest Rate Risk: The company is exposed to interest rate risk through its loan and securities portfolios. Sensitivity analysis indicates a 200 basis point increase in rates would increase net interest revenue by approximately $10.4 million over the next 12 months.
- Nonperforming Assets: Nonperforming assets totaled $60 million (0.83% of loans), an increase from $45 million in the prior quarter. This included $14.7 million in cattle industry loans and $4.6 million in energy loans.
- Concentration Risk: Significant loan concentrations exist in the energy (15%), services (18%), and commercial real estate (21%) sectors. Geographic concentration remains high in Oklahoma.
Investor Verification Checklist
- Quality of Earnings: Verify the sustainability of net income given the $34.3 million gain on securities sales and the $29.0 million impairment charge, which are non-recurring items.
- Asset Quality Trends: Monitor the increase in nonperforming assets, specifically the $14.7 million in cattle industry loans and $4.6 million in energy loans, to assess credit risk in these volatile sectors.
- Fee Revenue Sustainability: Assess the long-term viability of the 42% increase in service charges driven by the new overdraft privilege product and associated charge-offs ($863,000 in the quarter).
- Acquisition Integration: Review the integration progress and financial impact of the Bank of Tanglewood acquisition, including the $3.2 million contingent price guarantee.
- Capital Adequacy: Confirm that the company maintains its "well capitalized" status under regulatory standards despite the volatility in mortgage servicing rights valuation.