BOK Financial Corporation — Q2 2012 Form 10-Q
Business context and reporting period. This quarterly report covers the three and six months ended June 30, 2012. BOK Financial is a regional banking and financial services company with Commercial Banking, Consumer Banking and Wealth Management businesses, alongside funds management activities. Results are unaudited.
Financial performance and condition
- Earnings: Q2 net income attributable to BOK Financial shareholders was $97.6 million, or $1.43 per diluted share, versus $69.0 million and $1.00 a year earlier; Q1 2012 was $83.6 million and $1.22. For the first six months, attributable net income was $181.2 million, or $2.65 per diluted share, versus $133.8 million and $1.95 in 2011. Consolidated net income before non-controlling interests was $99.5 million for Q2.
- Revenue and margin: Q2 net interest revenue was $181.4 million, up from $174.0 million a year earlier and $173.6 million in Q1. Net interest margin was 3.30%, compared with 3.40% a year earlier and 3.19% in Q1; excluding a $2.9 million recovery of interest on a nonaccruing loan, Q2 margin was 3.25%. Other operating revenue was $187.0 million, up 31% year over year; fees and commissions rose 21% to $154.5 million, led by mortgage banking revenue, up 104% to $39.5 million.
- Expenses and profitability: Q2 operating expense was $223.8 million, up 10% year over year. Excluding the fair-value change in mortgage servicing rights, expenses were $212.3 million, up 12%, including a $16.7 million increase in personnel costs, largely incentive compensation. The disclosed consolidated efficiency ratio was 62.45%, versus 62.23% in Q2 2011.
- Credit: The company recorded an $8.0 million negative provision for credit losses in Q2, compared with a $2.7 million provision in Q2 2011. Net charge-offs were $4.8 million, or 0.17% of average loans on an annualized basis, versus $8.5 million and 0.32% a year earlier. Nonperforming assets fell to $278.6 million, or 2.38% of loans and repossessed assets, from $335.9 million at March 31. The combined credit-loss allowance was $241 million, or 2.09% of loans, versus $254 million and 2.20% at March 31.
- Loans and deposits: Period-end loans were $11.58 billion, essentially flat with March 31 and up from $10.74 billion a year earlier. Commercial loans increased $93 million during Q2, while commercial real estate loans declined $107 million. Period-end deposits were $18.36 billion, down from $18.52 billion at March 31 but above $17.59 billion a year earlier.
- Cash flow: For the six months, operating activities provided $391.2 million; investing activities used $542.0 million and financing activities used $196.2 million. Cash and cash equivalents declined $347.1 million to $639.3 million from $986.4 million at year-end 2011.
- Debt, liquidity and capital: At June 30, total liabilities were $22.65 billion. Balance-sheet funding included $1.45 billion of funds purchased, $1.14 billion of repurchase agreements, $58.1 million of other borrowings and $353.4 million of subordinated debentures. The company reported approximately $7.5 billion of unused collateralized borrowing capacity at its subsidiary bank and no borrowings on its $100 million parent-company revolving facility. Tangible common equity was 10.07%; consolidated Tier 1 and total risk-based capital ratios were 13.62% and 16.19%. The bank remained above the regulatory “well capitalized” thresholds.
- Capital returns: The company paid a $0.38 per-share dividend in Q2 and declared the same quarterly dividend for payment in August 2012. It repurchased 39,496 shares for $2.1 million under a newly authorized two-million-share program through June 30.
Material changes versus comparable periods
- Q2 shareholder-attributable net income increased about 42% year over year. Higher mortgage production, lower funding costs, improved credit metrics and gains on securities and other assets contributed; expenses also increased materially.
- The $14.2 million gain on sale of stock received in settlement of a defaulted loan and the $2.9 million interest recovery were notable contributors to Q2 results. Credit-quality improvement supported the negative provision.
- Mortgage loans funded for sale rose to $842 million from $484 million in Q2 2011. In contrast, transaction-card revenue declined 14%, primarily reflecting debit-card interchange fee regulation.
- Compared with Q1 2012, net income attributable to shareholders increased from $83.6 million to $97.6 million. Mortgage banking revenue and securities-related gains increased, while operating expenses rose $38.5 million and deposits declined $161 million.
Outlook, commentary, risks and unusual items
- The filing provides no quantified earnings or margin guidance. Management said it expects continued growth in other operating revenue through new products and expansion beyond Oklahoma, while noting that economic conditions, regulation, competition and market saturation could limit growth.
- Management cited persistently low interest rates as a pressure on reinvestment yields and loan pricing, while lower deposit and borrowing costs partly offset that pressure. The company’s rate-sensitivity model estimated a 4.11% increase in next-12-month net interest revenue under a 200-basis-point rate increase and a 2.50% decrease under a 50-basis-point decline; these are modeled estimates, not guidance.
- Energy loans were $2.3 billion, about 20% of loans, with $2.1 billion of unfunded energy commitments. Results remain exposed to energy-sector conditions, borrower performance and commodity markets. Commercial real estate exposure and regional economic conditions are also relevant credit risks.
- Privately issued residential mortgage-backed securities had $354 million amortized cost and $318 million fair value; the portfolio was rated below investment grade by at least one rating agency. The company recognized $858,000 of Q2 impairment in earnings. Mortgage-servicing-rights valuations and related hedges can create earnings volatility as mortgage rates and prepayment assumptions change.
- The accrual for potential mortgage-loan repurchases under standard representations and warranties increased to $5.0 million from $2.1 million at March 31, reflecting higher loss severity despite a low rate of requests resulting in repurchases or indemnification. Separate recourse exposure remained on $241 million of previously sold community-development mortgages.
- After quarter-end, the company paid $7.1 million to the City of Tulsa following an Oklahoma Supreme Court ruling invalidating a loan-settlement agreement; management said the refund will increase Q3 net charge-offs. The company is pursuing claims against the Tulsa Airports Improvement Trust.
- A $19 million settlement of consumer-deposit class actions had been paid and accrued, with court approval scheduled for August 29, 2012. In July, Visa announced an agreement in principle to resolve litigation covered by its retrospective responsibility plan; the company’s Visa Class B shares remain without an assigned value pending conversion.
- Other noted risks include possible effects of proposed Basel III capital rules and Dodd-Frank regulations, potential expiration of temporary unlimited insurance for noninterest-bearing transaction accounts at year-end 2012, and possible impairment of $16 million of Arizona goodwill if planned commercial-lending growth does not succeed.
Important facts for investors to verify
- How much of Q2 earnings growth is repeatable after separating the loan-settlement gain, interest recovery, negative credit provision and mortgage-related fair-value effects.
- Whether improving nonperforming-asset and charge-off trends persist, and whether the allowance remains adequate against potential problem loans and regional or industry concentrations.
- Whether mortgage production, margins and repurchase-related losses remain sustainable as rates, refinancing demand and agency claims change.
- Deposit trends and funding costs, including the impact of the scheduled year-end 2012 change in temporary deposit-insurance coverage.
- The timing and financial impact of the Tulsa settlement refund, the consumer class-action approval, and outstanding mortgage repurchase and indemnification requests.
- Actual capital requirements and liquidity effects as regulatory rules develop; the filing’s Basel III capital estimate is preliminary and subject to interpretation of rules not yet final.