BOK Financial Corporation — Q1 2013 Form 10-Q
Business context and reporting period. BOK Financial is a regional financial-services company with commercial banking, consumer banking and wealth-management businesses. This unaudited quarterly report covers the three months ended March 31, 2013; balance-sheet comparisons are principally to December 31, 2012 and earnings comparisons to Q1 2012.
Financial performance and condition
| Metric | Q1 2013 / March 31, 2013 | Comparable period / change |
|---|---|---|
| Net income attributable to BOK Financial | $88.0 million; diluted EPS $1.28 | $83.6 million and $1.22 in Q1 2012; income up about 5% |
| Net interest revenue / net interest margin | $170.4 million / 2.92% | $173.6 million / 3.19% in Q1 2012; $173.4 million / 2.95% in Q4 2012 |
| Other operating revenue | $159.1 million | $137.3 million in Q1 2012, up 16%; $162.6 million in Q4 2012 |
| Operating expenses | $201.3 million reported; $204.0 million excluding changes in mortgage servicing rights fair value | Reported expense up 11% year over year; adjusted expense up $14.7 million year over year and down $22.8 million sequentially |
| Credit costs and asset quality | $8.0 million negative provision; net charge-offs $2.4 million, or 0.08% annualized | No provision in Q1 2012; net charge-offs were $8.5 million, or 0.30% annualized |
| Loans and deposits | Loans $12.1 billion; deposits $19.9 billion | Loans down $218 million and deposits down $1.3 billion from year-end |
| Capital and liquidity | Equity $3.0 billion; tangible common equity ratio 9.70%; Tier 1 capital ratio 13.35%. Unused collateralized bank credit estimated at $7.9 billion | Tangible common equity ratio 9.25% and Tier 1 ratio 12.78% at year-end; company and bank exceeded “well capitalized” regulatory thresholds |
| Cash flow | Operating cash flow $239.4 million; cash and cash equivalents $945.6 million at quarter-end | Operating cash flow was $316.9 million in Q1 2012; cash and equivalents decreased $340.6 million during Q1 2013 |
| Borrowings | Total borrowed funds $3.74 billion, including $347.7 million subordinated debentures | Total borrowed funds were $2.91 billion at year-end; Federal Home Loan Bank advances increased during Q1 |
Material changes and management commentary
- Profit improved year over year despite lower net interest revenue, as higher fee revenue and lower credit costs more than offset increased operating expenses. Mortgage banking revenue rose $6.9 million year over year, reflecting higher production; it fell $6.4 million sequentially on lower volume and narrower loan-sale pricing.
- Net interest margin continued to compress as loan and securities yields declined. Management cited low reinvestment yields, loan repricing and narrower credit spreads, partly offset by lower funding costs. Management warned that margin may continue to decline and said further securities growth is constrained by interest-rate risk policy.
- The $8.0 million negative credit provision reflected lower estimated loss rates and a smaller loan balance. The combined allowance for credit losses was $207 million, or 1.71% of loans, versus $217 million, or 1.77%, at year-end. Nonperforming assets excluding U.S.-government-guaranteed assets were $207 million, down from $215 million.
- Average loans grew $236 million from Q4, while period-end loans declined. Commercial loans fell $224 million from year-end, partly offset by $56 million growth in commercial real estate loans. The $1.3 billion deposit decline was described as expected, largely reflecting the redeployment of large Q4 demand deposits.
- Fee growth included higher transaction-card revenue and trust fees; the Milestone Group acquisition contributed to trust revenue and fiduciary assets. Fiduciary assets administered totaled $27.6 billion at quarter-end.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management expects opportunities for fee-revenue growth through products and expansion beyond Oklahoma, but notes economic conditions, regulation, competition and market saturation could limit growth.
- Interest-rate exposure is material: the company reported modeled 12-month net interest revenue impacts of approximately negative $0.5 million under a 200-basis-point rise and negative $17.4 million under a 50-basis-point decline. Management cautions that actual results may differ from model estimates.
- Energy loans were $2.3 billion, or 19% of loans; unfunded energy commitments were $2.4 billion. Credit is also concentrated geographically, with about 42% of loans attributed to Oklahoma and 32% to Texas. A single Texas commercial real-estate relationship generated substantial Q1 charge-offs.
- Off-balance-sheet exposures included $6.9 billion of unfunded loan commitments, $491 million of standby letters of credit, and $220 million of residential mortgages sold with recourse. The accrual for potential repurchases under standard mortgage representations and warranties was $5.9 million.
- Q1 included a $9.5 million accrual for the 2011 executive True-Up Plan; estimated total amounts payable were approximately $70 million, with final determination at year-end 2013 and distribution in 2014. The filing notes possible future upward or downward compensation adjustments.
- Other notable items: $247,000 of impairment losses on private-label mortgage-backed securities; a $26 million cash dividend paid, or $0.38 per share; and a proposed $0.38 per-share dividend for May 2013. Management expected no material effect from ordinary-course legal matters. A Visa litigation settlement and an Oklahoma tax-credit audit were also discussed.
Important facts for investors to verify
- Whether net interest margin and loan yields continue to decline, and how deposit pricing and funding mix respond.
- Whether credit quality continues to improve, particularly commercial real estate, Texas exposures, energy lending and the potential problem-loan balance of $111 million.
- Whether deposits stabilize after the Q1 runoff and how increased FHLB borrowing affects liquidity and funding costs.
- The assumptions supporting the allowance, mortgage servicing rights valuations, private-label securities and mortgage repurchase reserves.
- The final True-Up Plan compensation amount and any effects of regulatory changes, including Basel III implementation and required capital stress testing.
- The cash-flow statement reports $239.4 million of operating cash flow, while quarterly earnings include substantial mortgage loan originations and sales; assess the timing and sustainability of these cash flows alongside deposit movements.