BOK Financial Corporation — Q1 2011 Form 10-Q
Reporting period: Three months ended March 31, 2011; filed May 10, 2011. BOK Financial is a regional financial-services company operating commercial banking, consumer banking and wealth-management businesses across Oklahoma and several surrounding markets.
Financial performance and condition
| Metric | Q1 2011 | Comparison |
|---|---|---|
| Net income attributable to BOK Financial | $64.8 million; $0.94 diluted EPS | $60.1 million and $0.88 in Q1 2010; $58.8 million and $0.86 in Q4 2010 |
| Net interest revenue / margin | $170.6 million / 3.46% | $182.6 million / 3.68% in Q1 2010; $163.7 million / 3.19% in Q4 2010 |
| Other operating revenue | $117.6 million | $113.9 million in Q1 2010; $111.9 million in Q4 2010 |
| Provision for credit losses | $6.3 million | $42.1 million in Q1 2010; $7.0 million in Q4 2010 |
| Operating expenses | $178.4 million reported; $181.6 million excluding mortgage-servicing-rights fair-value changes | Excluding those changes, up $3.9 million year over year and down $21.9 million sequentially |
| Net cash from operating activities | $358.3 million | Cash used of $26.5 million in Q1 2010 |
| Period-end assets, loans and deposits | $23.7 billion; $10.6 billion; $17.9 billion | Deposits rose $694 million from year-end 2010; loans declined $53 million |
Net income grew 8% year over year and 10% sequentially. The prior-year comparison included a $6.5 million after-tax gain, or $0.10 per diluted share, from purchasing mortgage-servicing rights on favorable terms. Net interest revenue declined year over year mainly because securities cash flows were reinvested at lower yields; it improved sequentially as mortgage-backed securities premium amortization slowed.
Operating cash flow was $358.3 million; investing activities used $555.3 million, including substantial available-for-sale securities purchases, and financing activities used $264.1 million, primarily reflecting lower borrowings. Cash and cash equivalents decreased $461.0 million to $808.4 million. The filing’s cash-flow figures reflect significant mortgage-loan sale activity and securities transactions.
Total borrowings shown on the balance sheet, including funds purchased, repurchase agreements, other borrowings and subordinated debentures, were approximately $1.91 billion, down from approximately $3.52 billion at December 31, 2010. The company reported $7.4 billion of estimated unused collateralized borrowing capacity. Equity was $2.6 billion; tangible common equity was 9.54%, and the consolidated Tier 1 capital ratio was 12.97%. The subsidiary bank exceeded regulatory “well capitalized” thresholds.
Material changes and asset quality
- Fees and commissions increased 7% year over year to $123.3 million, with growth in brokerage and trading, transaction cards, trust and mortgage servicing. Deposit service charges fell $4.3 million, primarily because of overdraft regulation changes.
- Mortgage banking revenue was $17.4 million, up 17% year over year but down $7.8 million sequentially as mortgage origination volumes declined. Loans funded for sale were $452 million versus $822 million in Q4 2010.
- Net charge-offs fell to $10.3 million from $34.5 million in Q1 2010 and $14.2 million in Q4 2010. The combined allowance for loan and off-balance-sheet credit losses was $303 million, or 2.86% of loans, versus $307 million, or 2.89%, at year-end.
- Nonperforming assets declined to $379 million, or 3.54% of loans and repossessed assets, from $394 million, or 3.66%, at year-end. Nonaccrual loans were $226 million. However, nonaccruing commercial loans increased $19 million, including a large Arkansas customer relationship; potential problem loans were $183 million.
- Commercial loans grew $114 million during the quarter, while construction and land-development, residential mortgage and consumer balances declined. Commercial real estate nonaccruals remained concentrated in Arizona and Colorado; Arizona continued to report a net loss and $16 million of goodwill that could be impaired if growth plans fail.
Outlook, risks and unusual items
- Management expects to pursue fee-revenue growth through products and expansion into markets outside Oklahoma, while noting that economic conditions, regulation, competition and market saturation could constrain growth. No earnings or full-year financial guidance is provided.
- Proposed interchange-fee limits could reduce 2011 transaction-card revenue by an estimated $12 million to $15 million. The timing and final effect were uncertain, with potential legislation to delay or repeal the limits also under consideration.
- The securities portfolio included $9.5 billion of available-for-sale securities, 98% residential mortgage-backed securities. Approximately $630 million of amortized cost was privately issued mortgage-backed securities; the company recorded $4.6 million of additional impairment in Q1. Mortgage prepayments, interest-rate changes and housing-credit deterioration remain material sensitivities.
- A $2.6 million credit loss arose on mortgage-banking customer derivative contracts after two customers could not meet margin requirements; the positions were closed after quarter-end. Derivative exposure also carries liquidity and regulatory-capital risks. A downgrade below investment grade could increase required cash margin by about $55 million.
- Mortgage-servicing-rights fair value, net of its economic hedge, reduced Q1 pre-tax income by $2.8 million. The 2010 comparison included a $11.8 million pre-tax day-one servicing-rights gain.
- Three putative class actions concerning consumer-account transaction posting remain pending; the claimed amount has not been determined and could be material. Management says an accrual has been established and anticipates resolution without material loss. A separate SemGroup-related settlement in principle was described as involving no material loss to the company.
- The board raised the quarterly dividend from $0.25 to $0.275 per share, payable in May 2011. Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether credit-quality improvement continues, particularly in commercial real estate and in markets with elevated nonaccruals; monitor the Arkansas commercial exposure and the $183 million of potential problem loans.
- How the proposed interchange-fee rules ultimately affect transaction-card revenue and whether offsetting actions or legislation change the estimated 2011 impact.
- Performance and valuation assumptions for the large mortgage-backed securities portfolio, especially privately issued securities, and the sensitivity of servicing rights to rates and prepayments.
- Whether deposit growth can continue to replace borrowings while maintaining liquidity, and whether capital ratios remain strong as assets, credit costs and regulatory requirements change.
- Developments in the consumer deposit-account litigation, mortgage-loan repurchase requests and customer derivative exposures, including any material change in reserves or cash-collateral needs.