BOK Financial Corporation — Q3 2011 Form 10-Q
Business context and reporting period. BOK Financial is a regional financial services company operating through commercial banking, consumer banking and wealth management, with a major presence in Oklahoma, Texas and surrounding states. This unaudited filing covers the quarter and nine months ended September 30, 2011; filed November 8, 2011.
Financial performance and condition
| Metric | Q3 2011 | Comparison |
|---|---|---|
| Net income attributable to BOK Financial | $85.1 million; $1.24 diluted EPS | $64.3 million and $0.94 EPS in Q3 2010; $69.0 million and $1.00 EPS in Q2 2011 |
| Net interest revenue / margin | $175.4 million / 3.34% | $180.7 million / 3.52% in Q3 2010; $174.0 million / 3.40% in Q2 2011 |
| Fees and commissions | $146.0 million | Up 7% year over year and 14% sequentially |
| Total other operating revenue | $174.0 million | Up 26% year over year, including higher securities and mortgage-trading gains |
| Operating expense | $220.9 million | Up 8% year over year; excluding mortgage-servicing-rights fair-value changes, $196.1 million, up 4% |
| Credit provision and charge-offs | No provision; net charge-offs of $10.2 million, or 0.37% annualized | Q3 2010 provision was $20.0 million and charge-offs were $20.1 million; Q2 2011 provision was $2.7 million |
For the first nine months, net income attributable to BOK Financial was $218.9 million, or $3.19 diluted EPS, versus $187.9 million, or $2.75, in 2010. Net interest revenue was $520.0 million versus $545.4 million; other operating revenue was $434.5 million versus $409.0 million. Net income benefited from lower credit provisions and charge-offs, while lower asset yields weighed on interest revenue.
At September 30, total assets were $25.1 billion, loans were $11.1 billion and deposits were $18.4 billion. Loans grew $387 million and deposits grew $853 million from June 30. Cash and cash equivalents were $972.9 million. The bank reported approximately $7.7 billion of estimated unused collateralized borrowing capacity. Period-end total equity was $2.77 billion; the tangible common equity ratio was 9.65%, and the consolidated Tier 1 capital ratio was 13.14%. Management said the Company and its bank exceeded regulatory “well capitalized” definitions.
Nine-month cash flows were $152.5 million provided by operations, $966.3 million used in investing and $517.3 million provided by financing; cash and cash equivalents decreased $296.5 million. Funding included $1.21 billion in net growth of demand, transaction and savings deposits, partly offset by a $670.8 million net reduction in other borrowings. The balance sheet showed $1.32 billion of funds purchased, $1.21 billion of repurchase agreements and $398.8 million of subordinated debentures.
Material changes and notable items
- Net interest margin declined year over year as mortgage-backed securities prepaid faster and proceeds were reinvested at lower rates; loan yields also fell. Securities portfolio yield was 2.83%, down 44 basis points year over year.
- Fee growth and higher net gains supported revenue: Q3 gains included $16.7 million on available-for-sale securities and $17.8 million on mortgage-trading securities. The Company also recognized $11.3 million of impairment losses on private-label mortgage-backed securities.
- Credit trends were mixed: net charge-offs were below the prior-year quarter but increased from Q2, while nonperforming assets rose to $387.9 million, or 3.45% of loans and repossessed assets, from $351.5 million at June 30. Nonaccrual loans increased to $229.5 million, principally reflecting a new manufacturing credit in Oklahoma. The combined credit allowance was $287 million, or 2.58% of loans, down from $297 million, or 2.77%, at June 30.
- Quarterly expenses included a $5.0 million accrual for ongoing litigation and a discretionary $4.0 million charitable foundation contribution. Mortgage servicing rights fair-value changes added $24.8 million of expense, partly offset by $21.8 million of gains on related economic hedges and mortgage-trading securities.
- The Company repurchased 492,444 shares for approximately $23 million in Q3 and paid a $0.275 per-share dividend. On October 25, the board declared a higher $0.33 quarterly dividend, payable on or about November 30.
Outlook, risks and contingencies
- No specific earnings or financial guidance was provided. Management described expectations for continued fee-revenue growth through product and geographic expansion, while noting economic conditions, competition, regulation and market saturation could constrain growth.
- The debit-card interchange rule took effect October 1, 2011. Management expected an annual transaction-card revenue decline of $20 million to $25 million.
- Persistently low rates could accelerate mortgage-security prepayments and further pressure securities yields and net interest margin. The filing’s rate model estimated a 7.34% increase in next-12-month net interest revenue under an immediate, sustained 200-basis-point increase, and a 2.38% decrease under a 50-basis-point decline; management cautioned that model results depend on uncertain assumptions.
- Private-label mortgage-backed securities remain a material valuation and credit risk: $481 million amortized cost was rated below investment grade by at least one rating agency, with $64 million of net unrealized losses. Q3 impairment reflected further projected cash-flow deterioration associated with home-price declines.
- Legal matters include consumer overdraft class actions, for which the claimed amount is undetermined and could be material; management reported an accrual and expects resolution without material loss. Separately, an October 11 Oklahoma Supreme Court ruling invalidated a $7.1 million settlement with the City of Tulsa; the Company said it would return the settlement if a mandate issues and pursue claims against the Tulsa Airports Improvement Trust. A $5 million Q3 accrual for ongoing litigation was recorded.
- Other risks include $5.7 billion of unfunded loan commitments, $509 million of standby letters of credit, mortgage repurchase and recourse obligations, and derivatives-related counterparty, margin and liquidity exposure. The filing cited a possible $41 million increase in margin posting if the Company were downgraded from A1 to below investment grade.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Most important facts for investors to verify
- Whether the rise in nonaccrual loans and nonperforming assets persists, particularly the new Oklahoma manufacturing exposure and commercial real estate concentrations in Arizona and Colorado.
- Whether reserve adequacy remains appropriate as the combined allowance-to-loans ratio declined while nonperforming assets increased.
- How quickly lower reinvestment yields and the debit interchange rule affect net interest margin and fee income.
- Actual performance and valuation of private-label mortgage-backed securities, including assumptions for home prices, unemployment and expected cash flows.
- Developments in the Tulsa settlement appeal and consumer overdraft litigation, and any resulting cash, earnings or reserve impact.