BOK Financial Corporation — Q3 2010 Form 10-Q
Reporting period: Three and nine months ended September 30, 2010; filed November 1, 2010. BOK Financial is a regional bank holding company with commercial banking, consumer banking and wealth management businesses.
Financial performance and condition
| Metric | Q3 2010 | Comparable period |
|---|---|---|
| Net income attributable to BOK Financial | $64.3 million; $0.94 diluted EPS | $50.7 million; $0.75 in Q3 2009; $63.5 million; $0.93 in Q2 2010 |
| Net interest revenue | $180.7 million | $180.5 million in Q3 2009; $182.1 million in Q2 2010 |
| Net interest margin | 3.50% | 3.63% in Q3 2009 and Q2 2010 |
| Other operating revenue | $137.7 million | $131.8 million in Q3 2009; $157.4 million in Q2 2010 |
| Operating expense | $205.2 million | $178.7 million in Q3 2009; $205.9 million in Q2 2010 |
| Provision for credit losses | $20.0 million | $55.1 million in Q3 2009; $36.0 million in Q2 2010 |
- For the first nine months, net income attributable to BOK Financial was $187.9 million, or $2.75 diluted EPS, versus $157.8 million, or $2.33, in 2009. Net interest revenue was $545.4 million; provision for credit losses was $98.1 million.
- Q3 fee and commission revenue grew 14% year over year to $136.9 million. Mortgage banking revenue more than doubled to $29.2 million, supported by higher production and servicing income. Deposit service charges fell 20% to $24.3 million, principally due to overdraft rule changes.
- Q3 net interest margin declined as securities cash flows were reinvested at lower yields. About $600 million of securities yielding 3.80% was reinvested at 2.30%; management expected this trend to continue.
- At September 30, loans were $10.8 billion, down $77 million from June 30; deposits were $16.8 billion, up $735 million. Available-for-sale securities were $9.6 billion.
- Cash and cash equivalents were $1.196 billion at quarter-end. For the nine months, operating cash flow was $130.7 million, investing cash flow was negative $270.2 million and financing cash flow was positive $414.2 million.
- Quarter-end balances included $2.05 billion of federal funds purchased and repurchase agreements, $1.30 billion of other borrowings and $398.7 million of subordinated debentures. Unused collateralized borrowing capacity within internal limits was approximately $5.9 billion.
- Shareholders’ equity was $2.50 billion; tangible common equity ratio was 8.96%, Tier 1 capital ratio 12.30% and total capital ratio 15.79%. The company and subsidiary banks exceeded regulatory “well capitalized” standards.
Material changes and credit quality
- Net income increased 27% year over year, with lower credit costs and stronger fee income helping offset weaker margin and higher operating expenses. Relative to Q2 2010, net income rose modestly, while other operating revenue fell largely because of lower gains and higher impairment charges.
- Q3 net charge-offs were $20.1 million, down from $36.0 million a year earlier and $35.6 million in Q2. The annualized net charge-off ratio was 0.74%.
- Combined loan-loss and off-balance-sheet credit reserves were $314 million, or 2.91% of loans, versus $315 million, or 2.89%, at June 30. Nonperforming assets declined to $420.9 million, or 3.85% of loans and repossessed assets, from $460.9 million, or 4.19%, at June 30.
- Nonaccrual loans were $268.8 million; commercial real estate nonaccruals were $177.7 million. Management identified $143 million of potential problem loans, down from $194 million at June 30. Arizona and Colorado commercial real estate remained areas of elevated stress.
Outlook, risks and unusual items
- Management did not provide quantitative earnings guidance. It anticipated continued pressure on securities yields and net interest margin if low rates sustain accelerated mortgage-backed-security prepayments. It also noted the expected $10 million to $15 million reduction in overdraft fee income over the second half of 2010.
- Q3 other-than-temporary impairment charges reduced pretax income by $14.3 million, principally on privately issued residential mortgage-backed securities and municipal debt. Management cited expectations of prolonged high unemployment and increased loss severity. The private-label mortgage securities had $554 million amortized cost and $72 million aggregate unrealized losses; related assumptions include unemployment, home prices and liquidation costs.
- Faster mortgage prepayments reduced the value of mortgage servicing rights; the net change after economic hedges reduced Q3 pretax income by $7.9 million. Servicing rights were valued using assumptions including discount rates and prepayment speeds.
- Q3 expenses included a $1.1 million Visa litigation obligation, which the company expected to be offset in Q4 following Visa’s escrow funding. The filing separately reports a $3.3 million Visa contingent liability and $2.2 million receivable at quarter-end.
- A tax statute-of-limitations expiration reduced Q3 tax expense by $2.2 million; excluding the adjustment, management said the effective tax rate would have been 34%, rather than 32%.
- Three putative class actions challenged the bank’s overdraft posting practices. Management, citing counsel, expected resolution without material loss, but plaintiffs had not quantified claims, which could be material. The filing also discusses a SemGroup-related securities class action and an Oklahoma tax-credit audit; management did not anticipate material losses from either.
- The Dodd-Frank Act may affect fee income and expenses, but the company said the impact could not yet be quantified. Basel capital and liquidity standards were scheduled for phased implementation beginning in 2013; management said current capital appeared well above preliminary standards.
- OCC approval was obtained for an affiliated-bank merger planned for January 1, 2011, intended to improve capital utilization. The company declared a $0.25-per-share dividend payable December 1, 2010.
Most important facts for investors to verify
- Whether margin pressure continues as securities cash flows reprice at lower yields, and how that affects net interest revenue.
- Whether credit quality improves further, especially in commercial real estate and the Arizona and Colorado portfolios; monitor nonaccruals, potential problem loans, charge-offs and reserve coverage.
- Whether mortgage banking gains persist and whether mortgage-servicing-rights valuation losses worsen with prepayment changes.
- The realized effect of overdraft regulation and Dodd-Frank on fee revenue and expenses.
- Developments in private-label mortgage-security impairment estimates, Visa litigation obligations and overdraft-related lawsuits.
- Deposit growth, borrowing capacity and capital ratios, including the effects of the planned bank merger and future regulatory requirements.