BOK Financial Corporation — 2012 Form 10-K
Business context and reporting period. BOK Financial is a regional financial holding company operating across Oklahoma, Texas, New Mexico, Arkansas, Colorado, Arizona and Kansas/Missouri. Its main businesses are Commercial Banking, Consumer Banking—including mortgage banking—and Wealth Management. This 10-K reports the fiscal year ended December 31, 2012; fourth-quarter comparisons are also included.
Financial performance and condition
- Annual earnings: Net income attributable to BOK Financial shareholders was $351.2 million, or $5.13 diluted EPS, up 23% from $285.9 million, or $4.17, in 2011. Fourth-quarter shareholder net income was $82.6 million, or $1.21 diluted EPS, versus $67.0 million, or $0.98, a year earlier.
- Revenue and margin: Net interest revenue was $704.3 million, up from $691.5 million. Net interest margin fell to 3.14% from 3.34%. Fees and commissions rose 20% to $632.1 million; mortgage banking revenue increased 85% to $169.3 million. Fees and commissions represented approximately 47% of total revenue as defined by the company.
- Expenses and credit costs: Operating expense was $849.6 million, up 4%; excluding changes in mortgage servicing rights fair value, it increased 8%, largely due to personnel costs. The company recorded a $22.0 million negative provision for credit losses, compared with a $6.1 million negative provision in 2011. Net charge-offs were $23.3 million, or 0.20% of average loans, versus $38.5 million, or 0.35%.
- Asset quality: Nonperforming assets declined to $276.7 million, or 2.23% of loans and repossessed assets, from $356.9 million, or 3.13%. The combined allowance for credit losses was $217 million, or 1.77% of loans, versus $263 million, or 2.33%.
- Balance sheet and liquidity: Total assets were $28.15 billion; loans were $12.31 billion, up 9%, and deposits were $21.18 billion, up 13%. Cash and cash equivalents were $1.29 billion. Operating cash flow was $591.9 million; investing cash flow was negative $2.37 billion and financing cash flow was positive $2.08 billion. The bank reported approximately $8.7 billion of estimated unused collateralized credit availability.
- Capital and debt: Shareholders’ equity was $2.96 billion. Consolidated Tier 1 and total capital ratios were 12.78% and 15.13%; leverage ratio was 9.01%. Subordinated debentures were $347.6 million and other borrowings were approximately $3.05 billion. The bank was considered well capitalized under applicable regulatory standards.
- Shareholder returns: Dividends declared were $2.47 per share, including a $1.00 special dividend. The tangible common equity ratio was 9.25%, down from 9.56%, primarily reflecting the special dividend.
Material changes versus 2011
- Earnings improved, driven mainly by record mortgage banking revenue and better credit quality; net income rose 23%.
- Commercial loans grew 17%, led by energy and services, while total loans increased 9%. Deposits rose 13%, with demand deposits up substantially.
- Net interest margin compressed despite higher net interest revenue: asset growth and lower funding costs were outweighed in part by lower loan and securities yields.
- Mortgage banking revenue increased $77.7 million. Transaction card revenue declined $8.8 million, in part due to debit-card interchange fee limits; the company estimated the Durbin Amendment reduced annual noninterest income by approximately $19 million.
- Nonperforming assets and net charge-offs decreased. The allowance ratio also declined, reflecting improved credit indicators and lower estimated loss rates.
- The company paid a special dividend, increasing total declared dividends per share from $1.13 to $2.47.
Outlook, commentary, risks and unusual items
- Outlook: Management said net interest margin could continue to decline in 2013 as funding-cost reductions are limited and reinvestment yields remain low. The filing provides no specific earnings or revenue guidance. Management noted that demand-deposit balances had fallen approximately $1.2 billion through mid-February 2013 as customers redeployed funds accumulated late in 2012.
- Key risks: Low interest rates may pressure margins and create future rate risk; changes in rates also affect mortgage servicing rights and mortgage-backed securities. Credit exposure is concentrated in Oklahoma (44% of loans) and Texas (32%), and energy loans were 20% of the portfolio. Regional or energy-sector weakness, commercial real estate losses, competition, regulation, funding-market disruption and cybersecurity incidents could adversely affect results.
- Mortgage and securities exposure: Available-for-sale securities totaled $11.3 billion, primarily mortgage-backed securities; the company held $10.2 billion of residential mortgage-backed securities, including $325 million of privately issued securities. 2012 other-than-temporary impairment losses recognized in earnings were $7.4 million. Management’s stress analysis indicated possible additional losses of $3 million under one scenario and $10 million under a more severe scenario.
- Commitments and contingencies: Unfunded loan commitments were $6.64 billion and standby letters of credit were $466 million. Mortgage loans sold with recourse totaled $227 million; separate accruals covered recourse and representation-and-warranty exposures. The company paid a previously accrued $19 million overdraft-litigation settlement in 2012 and returned $7.1 million to Tulsa after a settlement was invalidated by the Oklahoma Supreme Court.
- Unusual compensation item: The 2011 True-Up Plan’s final amount was to be determined after 2013. Management estimated approximately $64 million payable; the notes reported $40 million accrued at year-end. The estimate may change with performance through 2013.
- Governance and reporting: George B. Kaiser owned approximately 62% of common shares at year-end. Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting.
Important facts for investors to verify
- Whether margin pressure and the early-2013 demand-deposit decline persist, and how they affect funding costs, liquidity and earnings.
- Whether credit quality continues to improve as the allowance ratio declines, particularly in energy, commercial real estate and the Oklahoma and Texas markets.
- The performance and valuation sensitivity of mortgage servicing rights, mortgage-backed securities and related economic hedges.
- The ultimate cost of the True-Up Plan and any changes to its estimated payout, alongside other compensation expense growth.
- Actual draws on loan commitments, mortgage repurchase claims, and potential liquidity or capital needs tied to customer derivative contracts.
- Regulatory implementation costs and impacts, including capital rules, stress testing and consumer-protection requirements.