BOK Financial Corporation — Q3 2013 Form 10-Q
Business context and reporting period
BOK Financial is a regional banking and financial-services company with commercial banking, consumer banking and wealth management businesses. This unaudited 10-Q covers the quarter and nine months ended September 30, 2013; comparisons are primarily with Q3 and the first nine months of 2012.
Financial performance and position
| Metric | Q3 2013 / September 30, 2013 | Comparison |
|---|---|---|
| Net income attributable to BOK Financial shareholders | $75.7 million; diluted EPS $1.10 | Q3 2012: $87.4 million; $1.27 diluted EPS |
| Nine-month net income attributable to shareholders | $243.6 million; diluted EPS $3.54 | Nine months 2012: $268.6 million; $3.92 diluted EPS |
| Net interest revenue / margin | $166.4 million / 2.80% | Q3 2012: $176.0 million / 3.12%; Q2 2013 margin: 2.81% |
| Fees and commissions | $146.8 million | Down 12% year over year, principally from lower mortgage banking revenue |
| Operating expenses | $210.6 million reported; $210.3 million excluding mortgage-servicing-rights fair-value changes | Excluding those changes, down $2.5 million year over year |
| Provision for credit losses | Negative $8.5 million (provision release) | No provision in Q3 2012 or Q2 2013 |
| Loans / deposits | $12.35 billion / $19.49 billion at period end | Loans down $91 million and deposits essentially unchanged from June 30, 2013 |
| Credit quality | Combined allowance $196 million, or 1.59% of loans; nonperforming assets $271 million, including $183 million not guaranteed by U.S. agencies | Allowance was 1.65% and nonguaranteed nonperforming assets were $200 million at June 30, 2013 |
| Capital | Tangible common equity ratio 9.73%; Tier 1 capital ratio 13.51% | Tangible common equity ratio 9.38% and Tier 1 ratio 13.37% at June 30, 2013; company and bank reported well-capitalized |
| Cash flow, nine months | Operating +$569.0 million; investing +$465.0 million; financing −$1.159 billion; cash and equivalents ended at $1.161 billion | Cash and equivalents decreased $125.3 million during the period |
Total assets were $27.17 billion and total equity was $3.03 billion. Borrowed funds were $3.96 billion, including $347.8 million of subordinated debentures. The company reported $8.3 billion of estimated unused collateralized credit capacity at its bank; its $100 million parent-company revolving facility had no balance outstanding.
Material changes versus comparable periods
- Lower interest rates and narrowing loan spreads reduced year-over-year net interest revenue by $9.7 million and compressed net interest margin by 32 basis points.
- Mortgage banking revenue fell to $23.5 million from $50.3 million in Q3 2012. Management cited narrower gain-on-sale margins, a less favorable product mix and lower production; mortgage loans funded for sale were $1.08 billion.
- Lower mortgage banking revenue was partly offset by growth in trust fees, transaction-card revenue and brokerage and trading revenue. Trust fees rose 22% year over year.
- Credit indicators improved sequentially: net charge-offs were $0.3 million, versus $2.3 million in Q2 2013 and $5.7 million in Q3 2012; nonguaranteed nonperforming assets also declined from June.
- Available-for-sale securities were $10.37 billion, down from $11.29 billion at year-end 2012. Nine-month other comprehensive income was a loss of $152.5 million, principally reflecting unrealized securities losses as market rates rose; AOCI moved from positive $149.9 million at year-end to negative $2.6 million.
Outlook, commentary, risks and unusual items
- Management said net interest margin may continue to decline, with limited room to reduce funding costs and constraints on expanding securities holdings because of interest-rate risk.
- Management expected higher mortgage rates to reduce future mortgage production and continue to pressure gain-on-sale margins. No specific consolidated earnings guidance was provided.
- Credit concentration merits attention: energy loans were $2.3 billion, or 19% of total loans, with $2.6 billion in unfunded energy commitments. The filing also identifies commercial real estate and geographic concentrations, particularly Oklahoma and Texas.
- Interest-rate sensitivity modeling estimated a 2.38% reduction in next-twelve-month net interest revenue under an immediate, sustained 200-basis-point increase, and a 1.93% reduction under a 50-basis-point decrease. Actual outcomes may differ from modeled results.
- The $8.5 million provision release reflected lower estimated gross loss rates. The allowance still totaled 1.59% of loans; management noted $75 million of potential problem loans and identified economic, borrower, collateral and rising-rate risks.
- Unusual or potentially volatile items included $1.5 million of securities impairment losses, including a $1.4 million charge on municipal securities the company intended to sell; a $2.1 million discretionary foundation contribution; and tax benefits from a $1.4 million reduction in uncertain-tax-position accruals and other items.
- A $64 million accrual was recorded under the 2011 executive compensation True-Up Plan; management estimated approximately $72 million may be payable, with the final amount to be determined at year-end 2013 and distributed in 2014.
- Off-balance-sheet exposures included $7.2 billion of unfunded loan commitments, $440 million of standby letters of credit, and mortgage repurchase/recourse obligations. The accrual for potential repurchases under standard representations and warranties was $7.9 million. Management stated ordinary-course litigation was not expected to have a material effect.
- The board approved raising the quarterly dividend from $0.38 to $0.40 per share after quarter-end. New regulatory capital rules were scheduled to take effect for the company in 2015; management estimated its Tier 1 common equity ratio under the new rules at approximately 12.35%, above the stated 7% threshold.
Most important facts for investors to verify
- Whether mortgage banking production and gain-on-sale margins continued to weaken after Q3, and how that affected earnings.
- Whether net interest margin and net interest revenue stabilized or declined further as rates and asset yields changed.
- Whether improving credit trends persisted, including nonperforming assets, problem loans, charge-offs and allowance adequacy—especially in energy and commercial real estate.
- How securities valuation changes, AOCI, and the portfolio’s interest-rate and duration exposure affected capital and earnings.
- The final True-Up Plan compensation amount, mortgage repurchase/recourse losses, and any material developments in litigation or regulatory requirements.
- Whether capital, liquidity, dividend policy and the reported unused borrowing capacity remained consistent with management’s assessment.