Dominance In Oklahoma Housing Market To Benefit BOK Financial

| About: BOK Financial (BOKF)

BOK Financial Corporation (BOKF) has strong financial strength and sufficient capital to expand its regional footprint, and capitalize on the improving U.S. housing markets by improving its consumer banking segment performance. The Oklahoma housing markets are considered to be among the strongest 10 U.S. housing markets, and we believe the company is well positioned to benefit from its strong footprint there. The stock offers an added advantage of a 2.6% dividend yield backed with a history of dividend hikes. Therefore, we recommend our investors to take a long position in the stock. Given the current YTD performance of 3%, this is the right entry point for this stock.

Company Overview

BOK Financials, an Oklahoma-based bank, operates in the regional Banking Industry of the U.S. financial sector, and aims to provide a complete range of financial products to the southwestern population, including Oklahoma, New Mexico, Colorado and Texas. The bank holds a dominant market position in the Tulsa region and is the market leader in Oklahoma with a large proportion of deposits coming from the state (13% of total deposits). For the purpose of operations, the bank is organized into three segments, namely consumer banking, commercial banking and wealth management. The bank has diversified sources of revenues. Around 42% of the bank's revenues are depended on commission and fees.

1Q2012 Vs 1Q2011 Review

The bank is scheduled to release its earnings for the second quarter next week. A closer look at the bank's first quarter performance reveals that its bottom line witnessed a surge of 29% to reach $83.2 million or $1.22, compared to the prior year's quarter. The top line of $140 million was up by 20%, compared to the first quarter of the previous year. The top line was supported by an increase in the bank's non-interest revenues (fees and commissions) of 17%, partially offset by a decline of 2% in total interest revenues. The bank's interest expenses declined 22% largely due to a decline in its deposits. Non-interest revenues for the bank surged largely due to an improvement in mortgage banking revenues and brokerage & trading revenues. Interest revenues for the bank declined primarily due to a decline in revenues accruing from securities available for sale, partially offset by the bank's residential mortgage loans held for sale improving by 32%. Net interest margin remained at 3.19%, marginally below last year's 3.2%. Compared to this, Regions Financial (RF), another regional U.S. bank, earned a net interest margin of 3.16%.

Operating expenses for the bank advanced by 4% compared to the first quarter of 2011. The surge was largely associated to personnel cost and mortgage banking costs, both of which increased by 15% and 17%, respectively.

Deposits and Loans

Deposits for the bank totaled $18.5 billion, 2% below the deposit total for the prior quarter. The increase was associated to an increase in the bank's demand deposits.

Loans for the bank improved by $308 million when compared sequentially, and reached $11.6 billion. The significant improvement of 32% in revenues accruing from residential mortgage loans held for sale improved largely due to a material increase of 94% in the total residential mortgage loans, when compared to the first quarter of the prior year. This reflects the improvement in the U.S. housing sector due to record low mortgage rates. Rates have continued a declining trend and we expect the bank to increase its holdings of residential mortgages.

The bank's leverage ratio for the first quarter of the current year remained at 9.35%, up by 21bps compared to the previous year.

Segment-Wise Review

A segment-wise breakdown reveals that all three segments witnessed a surge in their earnings. However, the consumer banking segment experienced a tremendous surge of 200%, compared to the previous year. This improvement was due to a material growth in mortgage banking revenues. The Oklahoma geographical market accounted for 34% of the improvement in mortgage loans, followed by New Mexico.

Geographical Market-Wise Review

The Oklahoma geographical market, where BOKF is already the market leader, accounts for over 40% of the bank's entire earnings. Earnings associated to the Oklahoma markets surged by 34%. Earnings coming from the Arkansas markets surged 160%, the largest among all of the bank's geographical markets. However, Arkansas accounts for only 2.6% of the entire income for the bank. BOKF has accumulated losses from Arizona; therefore, we believe the bank should exit this market.

Capital and Liquidity Position

The bank has adequate capital as represented by its Tier 1 ratio and Tier 1 capital ratio. It maintains a Tier 1 ratio and Tier 1 capital ratio of 13.3% and 16.5%, respectively. This is compared to 12.3% for Fifth Third Bancorp's (FITB) Tier 1 capital ratio and is sufficiently above the regulatory requirement of 6% and 10% for Tier 1 ratio and Tier 1 capital ratio.

The bank has adequate liquidity to meets its requirements. As at March 31, 2012, around 73% of the liquidity requirements for the bank were covered by deposit accounts, while the rest is covered by borrowed funds and equity.


The bank offers a dividend yield of 2.6% combined with 7.5% operating cash flow yield. The company generated $22.3 million in dividends and generated $316.9 million of cash flow from its operations during its operations in the first quarter of the current year. The cash flow generation is sufficient to support the current shareholder distribution in the foreseeable future. The bank hiked its dividend distribution seven consecutive times, including the one made during the first quarter this year. Taking into account the prevailing 10-year treasury yield of 1.58%, the Fed's efforts to further decrease rates and the bank's history of dividend hikes, the dividend yield that this stock offers is sufficiently attractive for investors looking for regular income.


The stock is trading at a 36% premium to its book value. Compared to this, BBT's (BBT) shares are trading at a premium of 21%, while Regions Financial's and Fifth Third Bancorp's shares are trading at a discount of 31% and 5% to their book values, respectively.


Record low mortgage rates are helping U.S. housing markets recover. The housing market recovery represented by rise June U.S. single-family housing starts of 4.7% was the fastest in two years. We believe the bank will benefit in the coming quarters from this improvement.

However, headwinds from decreasing interest rates are a matter of concern for the bank. The rates have declined and the Fed is weighing the prospects of reducing interest rates further. In case the rates decline further by 50bps, the bank's net interest income will decrease by 3.5%.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.