BOK Financial Corporation — 2010 Form 10-K
Reporting period: Fiscal year ended December 31, 2010; filed February 28, 2011. The filing also reports fourth-quarter results. BOK Financial provides commercial banking, consumer banking and wealth management services across Oklahoma and several neighboring states. Its subsidiary-bank charter consolidation took effect January 1, 2011, after year-end.
Financial performance and position
| Metric | 2010 | 2009 |
|---|---|---|
| Net income | $246.8 million | $200.6 million |
| Diluted earnings per share | $3.61 | $2.96 |
| Net interest revenue | $709.1 million | $710.4 million |
| Net interest margin | 3.50% | 3.57% |
| Fees and commissions | $516.4 million | $480.5 million |
| Provision for credit losses | $105.1 million | $195.9 million |
| Net charge-offs | $104.4 million | $137.8 million |
| Period-end loans | $10.64 billion | $11.28 billion |
| Period-end deposits | $17.18 billion | $15.52 billion |
- Net income rose 23% year over year; management said growth reflected higher diversified fee income and improving credit quality. Excluding a $6.5 million after-tax-equivalent day-one servicing-rights gain in 2010 and a $7.7 million FDIC special assessment in 2009, management reported net income growth of 15%.
- Fee growth was led by mortgage banking revenue, up $22.6 million, and brokerage and trading revenue, up $9.8 million. Deposit service charges fell $12.2 million, principally following overdraft-rule changes effective in 2010.
- Net interest margin narrowed as securities cash flows were reinvested at lower rates and faster mortgage prepayments accelerated premium amortization. Fourth-quarter net interest revenue was $163.7 million, down $20.8 million year over year; quarterly margin was 3.19% versus 3.64%.
- Credit indicators improved overall: nonperforming assets declined to $394 million from $484 million, or 3.66% of loans and repossessed assets versus 4.24%. The combined credit-loss allowance was $307 million, 2.89% of loans, compared with $306 million and 2.72% a year earlier.
- Cash and cash equivalents ended 2010 at $1.27 billion. Cash flow from operations was $365.2 million, investing activities provided $42.7 million, and financing activities used $59.7 million; cash increased $348.2 million during the year.
- At year-end, shareholders’ equity was $2.52 billion and total assets were $23.94 billion. Deposits were $17.18 billion; funds purchased and repurchase agreements were $2.28 billion, other borrowings $833.6 million, and subordinated debentures $398.7 million.
- Capital ratios were strong: Tier 1 capital 12.69%, total capital 16.20%, leverage 8.74%, and tangible common equity 9.21%. All subsidiary banks were reported as well capitalized.
Material changes and notable items
- Loans contracted $637 million, or 6%, while deposits increased $1.66 billion. Declines were concentrated in energy, construction and land development, and indirect auto lending; the company had previously decided to exit indirect auto lending.
- Operating expenses were $753.2 million, up $56.4 million. Excluding mortgage-servicing-right fair-value changes and the 2009 FDIC assessment, expenses increased $59.7 million, driven in part by higher repossessed-asset costs and personnel expense.
- The company purchased servicing rights on $4.2 billion of residential mortgages for $32 million; acquisition-date fair value was approximately $43.7 million, producing an $11.8 million pretax day-one gain. The servicing portfolio grew to $12.1 billion from $7.4 billion.
- Other-than-temporary impairment losses recognized in earnings were $27.8 million in 2010, versus $34.4 million in 2009. Management’s stress analysis indicated a possible additional $29 million to $36 million of credit losses on privately issued mortgage-backed securities under specified adverse assumptions.
- Net income for fourth-quarter 2010 was $58.8 million versus $42.8 million a year earlier. The filing’s quarterly narrative reports diluted EPS of $0.86, while its quarterly table reports $0.87.
Outlook, risks and contingencies
- No formal earnings or revenue guidance is provided. Management expected higher late-2010 mortgage rates to slow securities premium amortization and improve reinvestment yields in 2011, while noting that the increase could support only a partial recovery in portfolio yield.
- The company estimated that the proposed debit interchange cap could reduce interchange revenue by $12 million to $15 million in 2011. Management also warned that Dodd-Frank implementation could affect fee income, mortgage banking, consumer products, customer hedging and regulatory costs; the overall impact was not yet quantifiable.
- Key exposures include continued weakness in regional economies and commercial real estate, energy-sector and commodity-price volatility, interest-rate and mortgage-prepayment sensitivity, competition, and dependence on external funding markets. The company’s customer-derivative activity creates potential liquidity and capital exposure; a credit-rating downgrade below investment grade was estimated to increase required cash margin by about $54 million.
- Potential problem loans not classified as nonperforming totaled $176 million. Nonaccruing commercial real estate loans remained concentrated in Arizona and Colorado.
- Three putative class actions challenged the bank’s consumer overdraft posting practices; plaintiffs had not quantified damages. Management reported an accrual within a reasonable range and anticipated resolution without material loss, while counsel cited substantial defenses. The filing also disclosed a SemGroup-related settlement in principle at no material loss to the broker-dealer subsidiary, subject to court approval.
- Available secured borrowing capacity was estimated at $7.3 billion. A $100 million revolving credit agreement with the company’s chairman and principal shareholder had no year-end balance. Bank dividend capacity is subject to regulatory limits; up to $82 million could be declared without regulatory approval at year-end under the stated limitations and internal policy.
Most important facts for investors to verify
- Whether credit quality continues to improve, particularly in commercial real estate and the Arizona and Colorado markets, and whether repossessed-asset losses decline.
- Actual interchange-fee rule implementation and the resulting 2011 revenue impact, alongside overdraft-fee trends.
- Net interest margin and securities portfolio yields as rates, prepayments and premium amortization change.
- Realized credit losses and valuation assumptions for private-label mortgage-backed securities, mortgage servicing rights and collateral-dependent loans.
- Progress and realized cost savings from the January 2011 bank charter consolidation, plus the effect on capital flexibility and dividends.
- Developments in overdraft litigation, mortgage repurchase requests and other disclosed contingencies.
Audit and controls: Ernst & Young issued unqualified opinions on the consolidated financial statements and internal control over financial reporting. Management also concluded that disclosure controls were effective.