BOK Financial Corporation — 2013 Form 10-K
Business and reporting period. BOK Financial is a regional financial holding company operating in Oklahoma, Texas, New Mexico, Arkansas, Colorado, Arizona and Kansas/Missouri. Its principal businesses are Commercial Banking, Consumer Banking and Wealth Management. This 10-K covers the year ended December 31, 2013; fourth-quarter results are also summarized below.
Financial performance and condition
- Profit: Net income attributable to BOK Financial shareholders was $316.6 million, or $4.59 diluted EPS, versus $351.2 million, or $5.13, in 2012. Fourth-quarter shareholder net income was $73.0 million, or $1.06 diluted EPS, versus $82.6 million, or $1.21, a year earlier.
- Interest income and margin: Net interest revenue was $674.5 million, down from $707.5 million. Net interest margin fell to 2.80% from 3.15%; management attributed the decline chiefly to lower reinvestment yields and loan yields. Fees and commissions were $603.8 million, down 4%, while total other operating revenue was $614.5 million.
- Expenses and credit costs: Operating expenses were essentially unchanged at $840.6 million. The company recorded a $27.9 million negative provision for credit losses, compared with a $22.0 million negative provision in 2012. Net charge-offs declined to $2.0 million, or 0.02% of average loans, from $23.3 million, or 0.20%.
- Asset quality: Loans grew 4% to $12.8 billion. Nonperforming assets fell to $247.7 million from $276.7 million; nonaccruing loans were $101.1 million. The combined allowance for credit losses was $187 million, or 1.47% of loans, compared with $217 million, or 1.77%.
- Balance sheet and funding: Total assets were $27.0 billion, down from $28.1 billion; deposits were $20.3 billion, down from $21.2 billion. Period-end available-for-sale securities declined to $10.1 billion from $11.3 billion. Funds purchased, repurchase agreements, other borrowings and subordinated debentures totaled approximately $3.07 billion. The bank reported $8.6 billion of estimated unused collateralized borrowing capacity; the parent’s $100 million revolving facility was undrawn.
- Cash flow: Operating activities provided $736.3 million, investing activities provided $437.0 million, and financing activities used $1.37 billion. Cash and cash equivalents decreased $199.0 million to $1.09 billion.
- Capital and returns: Consolidated Tier 1 and total capital ratios were 13.77% and 15.56%; the leverage ratio was 10.05%. Return on average assets was 1.16% and return on average equity was 10.51%. Regular dividends declared totaled $1.54 per share; 2012 included a $1.00 special dividend.
Changes versus 2012
- Shareholder net income declined 10%, primarily amid lower net interest revenue and reduced mortgage banking revenue.
- Mortgage banking revenue fell to $121.9 million from $169.3 million as gain-on-sale margins narrowed and refinancing activity slowed, despite record annual residential mortgage originations.
- Trust fees increased 20% to $96.1 million, and transaction card revenue increased to $116.8 million. Commercial and commercial real estate lending supported loan growth.
- Credit indicators improved materially, including lower charge-offs, nonaccruing loans and nonperforming assets. The company reduced its securities portfolio during the year, citing positioning for a longer-term rising-rate environment.
- Unrealized losses on available-for-sale securities contributed to a $175.5 million decline in other comprehensive income, reducing accumulated other comprehensive income from $149.9 million to a $25.6 million deficit.
Outlook, risks and unusual items
- Management outlook: The company expected continued securities portfolio contraction to be partly offset by loan growth, with an annualized loan growth rate in the mid-to-high single digits. Management said the resulting asset mix should support net interest margin. It did not expect significant negative credit-loss provisions in future years. These are forward-looking expectations, not guarantees; the filing gives no formal earnings guidance.
- Interest-rate and mortgage exposure: Management cited low rates and reinvestment pressure as risks to margins. Its sensitivity analysis estimated that a 200-basis-point rate increase would reduce next-12-month net interest revenue by $16.6 million (2.38%); a 50-basis-point decline would reduce it by $11.4 million (1.63%). Mortgage servicing rights and mortgage-backed securities are sensitive to rates and prepayments.
- Credit concentrations: Loans collateralized primarily in Texas and Oklahoma represented approximately 34% and 26% of the loan portfolio, respectively. Energy loans were 18% of loans, exposing results to commodity-price and regional economic changes. Commercial real estate, particularly construction and land development, remains a credit risk area.
- Commitments and contingencies: Off-balance-sheet commitments included $7.1 billion of loan commitments, $444 million of standby letters of credit and $191 million of mortgage loans sold with recourse. The company reported $8.8 million accrued for potential mortgage repurchases under representations and warranties, in addition to a separate $9.0 million accrual for loans sold with recourse. Management said ordinary-course litigation was not expected to materially affect the company.
- Unusual items and governance: A $1.4 million impairment was recognized for private-equity investments in connection with the Volcker Rule. Approximately $69 million was accrued for the 2011 executive True-Up Plan, with distribution expected in May 2014; a separate $32 million former-CEO deferred compensation liability was fully vested and expected to be distributed in 2014. A new CEO became effective January 1, 2014, alongside executive leadership changes.
- Regulatory and operational risks: Basel III capital rules were scheduled to begin phasing in from 2015; the company estimated its Tier 1 common equity ratio under the new rule at approximately 12.60%, versus a 7% threshold. Other stated risks include increased regulation, competition, cybersecurity and third-party service-provider disruption.
Investor verification priorities
- Confirm the trajectory of net interest margin and loan yields, and whether the stated mid-to-high-single-digit loan growth outlook is being achieved.
- Assess mortgage banking margins, mortgage servicing rights valuation and the sensitivity of securities and capital to changing interest rates.
- Review energy and geographic concentrations, commercial real estate credit trends, and whether lower loss provisions remain appropriate.
- Track deposit stability, borrowing mix and availability, the securities portfolio’s size and unrealized losses, and liquidity needs under stress.
- Verify final True-Up Plan payments and former-CEO compensation distributions, and monitor any effects of Volcker Rule compliance and other regulatory changes.
- Note that the filing reports unqualified audit opinions and effective internal control over financial reporting as of December 31, 2013.