BOK Financial Corporation — 2011 Form 10-K Summary
Business context and period. The filing, dated February 28, 2012, covers the fiscal year ended December 31, 2011; fourth-quarter comparisons are also reported. BOK Financial is an Oklahoma-based financial holding company operating across Oklahoma, Texas, New Mexico, Arkansas, Colorado, Arizona and the Kansas City market. Its principal businesses are commercial banking, consumer banking and wealth management.
Key financial results
| Metric | 2011 | 2010 |
|---|---|---|
| Net income attributable to BOK Financial | $285.9 million | $246.8 million |
| Diluted earnings per share | $4.17 | $3.61 |
| Net interest revenue | $691.5 million | $709.1 million |
| Net interest margin | 3.34% | 3.52% |
| Fees and commissions revenue | $528.6 million | $516.4 million |
| Provision for credit losses | $(6.1) million, a benefit | $105.1 million expense |
| Net charge-offs | $38.5 million; 0.35% of average loans | $104.4 million; 0.96% |
| Return on average assets / equity | 1.17% / 10.66% | 1.04% / 10.18% |
Fees and commissions represented approximately 43% of revenue, excluding provision and specified gains and losses. Fourth-quarter net income attributable to BOK Financial was $67.0 million, or $0.98 diluted EPS, versus $58.8 million, or $0.86, in fourth-quarter 2010.
Balance sheet, cash flow and liquidity
- Year-end assets were $25.5 billion, loans $11.3 billion, deposits $18.8 billion and shareholders’ equity $2.75 billion. Loans grew 6% and deposits increased $1.6 billion during 2011.
- Operating cash flow was $327.8 million; investing cash flow was $(1.56) billion and financing cash flow was $953.3 million. Cash and cash equivalents declined $283.0 million to $986.4 million.
- Year-end other borrowings were $2.77 billion and subordinated debentures were $398.9 million. Subordinated debentures were essentially unchanged year over year; other borrowings declined from $833.6 million to $74.5 million on the balance sheet, while funds purchased and repurchase agreements were $1.06 billion and $1.23 billion, respectively.
- Management reported approximately $7.3 billion of estimated unused collateralized borrowing capacity. The bank was well capitalized: consolidated Tier 1 and total capital ratios were 13.27% and 16.49%; leverage was 9.15%. Tangible common equity was 9.56% of tangible assets.
- The bank could pay up to $15 million in dividends to the parent without regulatory approval at year-end, subject to applicable limitations. A $100 million parent-company revolving credit facility had no balance outstanding at year-end.
Material changes versus 2010
- Net income rose 16%, primarily because credit costs improved: the credit-loss provision shifted from $105.1 million expense to a $6.1 million benefit.
- Net interest revenue declined $17.6 million and margin narrowed 18 basis points, as mortgage-security cash flows were reinvested at lower yields; lower funding costs partly offset weaker asset yields.
- Fees and commissions rose 2%, but deposit service charges fell 7%, chiefly reflecting overdraft rules. Debit interchange regulation took effect October 1, 2011; transaction-card revenue was $116.8 million for the year, and management expected an annual revenue reduction of $20–$25 million.
- Loans increased $627 million, including $637 million growth in commercial loans; deposits grew $1.6 billion, largely from commercial demand deposits. The allowance for loan losses fell to $253.5 million from $293.0 million.
- Nonperforming assets declined to $356.9 million from $394.5 million. However, nonaccruing commercial loans increased to $68.8 million from $38.5 million; commercial real estate nonaccruals declined to $99.2 million from $150.4 million.
Outlook, risks and unusual items
- No quantified earnings or revenue guidance is provided. Management said it expects to pursue fee growth through new products and expansion, while noting that economic conditions, regulation, competition and market saturation could constrain growth.
- Management identified persistently low rates as a margin headwind and a source of future interest-rate risk. Its sensitivity model estimated that a 200-basis-point rate increase would raise next-12-month net interest revenue by $37.0 million (5.39%); a 50-basis-point decrease would reduce it by $19.2 million (2.80%). These are model estimates, not forecasts.
- Credit exposure remains concentrated in the Southwest, energy lending and commercial real estate. Energy loans were $2.0 billion, or 18% of loans. The company also held $2.3 billion of commercial real estate loans; nonaccruing commercial real estate remained concentrated in Colorado and Arizona.
- Available-for-sale securities were heavily concentrated in residential mortgage-backed securities. Privately issued mortgage-backed securities had $503 million amortized cost and $419 million fair value; $460 million was rated below investment grade by at least one rating agency. 2011 impairment charges recognized in earnings totaled $23.5 million. Management sensitivity scenarios indicated possible additional credit losses of $9 million or $21 million under more severe assumptions.
- Mortgage-servicing-rights fair-value changes, net of economic hedges, reduced 2011 pretax income by $13.1 million. Their valuation is sensitive to interest rates and prepayment assumptions.
- The company accrued a $19 million settlement of consumer overdraft class actions, subject to court approval; it did not admit wrongdoing or agree to change its practices. An Oklahoma Supreme Court ruling invalidated a $7.1 million settlement with the City of Tulsa; the company expected to return the amount and pursue claims against the relevant trust.
- The 2011 executive True-Up Plan generated $9.5 million of additional compensation expense. Management said total incremental amounts could range from $0 to $34 million, with final determination in 2013 and distribution in 2014.
- Customer derivative programs produced $4.4 million of credit losses. The company wrote down its MF Global exposure to $6.8 million, based on expected recovery. It also warned that new derivatives regulation could increase compliance costs and affect some customer commodity hedging activity.
- Regulatory uncertainty includes interchange limits, capital and consumer-protection rules, and derivatives requirements under Dodd-Frank. The company estimated interchange limits could reduce annual noninterest revenue by $20–$25 million.
Most important facts for investors to verify
- Whether credit improvement continues and whether the lower allowance remains adequate against $161 million of potential problem loans and ongoing regional and industry risks.
- The durability of net interest margin amid low rates, securities reinvestment at lower yields and eventual rate changes.
- The actual revenue effect of interchange caps and other regulatory changes, compared with management’s $20–$25 million annual estimate.
- Performance and valuation of private-label mortgage securities, mortgage servicing rights and the related economic hedges.
- Final outcomes and cash costs of the overdraft settlement, Tulsa dispute, mortgage-loan repurchase claims and executive True-Up Plan.
- Funding and capital effects of customer derivatives, including the $6.8 million MF Global receivable and possible collateral needs.