BOK Financial Corporation — Q1 2012 Form 10-Q
Business context and reporting period. This quarterly report covers the three months ended March 31, 2012, and was filed May 8, 2012. BOK Financial is a regional banking and financial-services company operating across Oklahoma, Texas, New Mexico, Arkansas, Colorado, Arizona, and Kansas/Missouri. Its principal businesses are commercial banking, consumer banking, and wealth management.
Financial performance and condition
| Metric | Q1 2012 | Comparable / reference period |
|---|---|---|
| Net income attributable to BOK Financial shareholders | $83.6 million | $64.8 million in Q1 2011; $67.0 million in Q4 2011 |
| Diluted earnings per share | $1.22 | $0.94 in Q1 2011; $0.98 in Q4 2011 |
| Net interest revenue | $173.6 million | $170.6 million in Q1 2011; $171.5 million in Q4 2011 |
| Net interest margin | 3.19% | 3.47% in Q1 2011; 3.20% in Q4 2011 |
| Fees and commissions revenue | $144.3 million | $123.3 million in Q1 2011; $131.8 million in Q4 2011 |
| Other operating revenue | $140.4 million | $117.6 million in Q1 2011 |
| Other operating expense | $185.2 million | $178.4 million in Q1 2011; $219.2 million in Q4 2011 |
| Net loans charged off | $8.5 million; 0.30% annualized | $10.3 million; 0.39% in Q1 2011 |
| Operating cash flow | $316.9 million | $358.3 million in Q1 2011 |
| Total assets / shareholders’ equity | $25.9 billion / $2.8 billion | At March 31, 2012 |
Mortgage banking drove much of the increase in noninterest revenue: mortgage banking revenue reached $33.1 million, up 91% year over year, while mortgage loans funded for sale rose 78% to $746 million. Brokerage and trading revenue increased 23% to $31.1 million. Transaction card revenue fell 11% to $25.4 million, principally reflecting lower debit-card interchange fees after the Durbin Amendment took effect.
Average earning assets increased 8% year over year, but lower yields—particularly on available-for-sale securities—reduced net interest margin. Average loan yield fell 25 basis points to 4.50%; the yield on available-for-sale securities fell 67 basis points to 2.50%. Funding costs also declined, partly offsetting asset-yield pressure.
Operating cash flow was $316.9 million; investing activities used $833.1 million and financing activities provided $236.1 million. Cash and cash equivalents declined $280.1 million during the quarter to $706.3 million. Period-end loans were $11.6 billion, up $308 million from year-end, led by $371 million of commercial-loan growth. Deposits were $18.5 billion, down $239 million from December 31, 2011.
Combined loan-loss and off-balance-sheet credit allowances were $254 million, or 2.20% of loans, versus $263 million, or 2.33%, at year-end. Nonperforming assets were $335.9 million, or 2.87% of loans and repossessed assets, down from $356.9 million, or 3.13%. Potential problem loans increased to $173 million from $161 million at year-end.
Capital remained strong: the tangible common equity ratio was 9.75%, the consolidated Tier 1 capital ratio 13.03%, total risk-based capital 16.16%, and leverage ratio 9.35%. The company and its subsidiary bank reported capital above regulatory “well-capitalized” thresholds. The bank had approximately $7.7 billion of estimated unused collateralized borrowing capacity. A $100 million parent-company revolver had no outstanding balance at quarter-end.
Material changes versus prior periods
- Shareholder net income rose 29% year over year, supported by higher mortgage production, brokerage/trading revenue, loan growth, and the absence of a credit-loss provision. No provision for credit losses was recorded, compared with $6.3 million in Q1 2011.
- Margin declined 28 basis points year over year to 3.19%, as asset yields fell faster than funding costs.
- Expenses excluding changes in mortgage servicing-rights fair value increased $10.8 million, or 6%, year over year. Personnel expense rose $14.8 million, partly offset by lower non-personnel costs.
- Mortgage banking gains were partly offset by the regulated debit-interchange revenue decline. Management had previously estimated that the interchange rules could reduce annual transaction-card revenue by $20 million to $25 million.
- Credit indicators improved overall: nonaccrual loans fell to $183 million from $201 million at year-end, and annualized net charge-offs declined from 0.39% in Q1 2011 to 0.30%. However, Arizona charge-offs remained elevated at 2.62% of average loans annualized.
Outlook, risks, contingencies, and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management expects continued fee-revenue growth from new offerings and expansion beyond Oklahoma, but cites economic conditions, regulation, competition, and market saturation as constraints. Mortgage production benefited from lower rates and HARP II; the durability of that activity is uncertain.
- Interest-rate and securities exposure: Management seeks a relatively rate-neutral balance sheet. Its model estimated that a sustained 200-basis-point rate increase would add $23.6 million to 12-month net interest revenue, while a 50-basis-point decrease would reduce it by $24.4 million. These are model estimates subject to assumptions and actual outcomes may differ. Agency mortgage-backed securities represented 98% of available-for-sale securities; their estimated duration was 1.6 years, extending to about 3.5 years under an immediate 200-basis-point increase.
- Mortgage securities: The company sold $892 million of agency mortgage-backed securities and recognized an $11.7 million gain. It also sold $107 million of privately issued mortgage-backed securities at a $7.4 million loss and recognized $3.7 million of impairment charges. Remaining privately issued securities had $371 million amortized cost and $327 million fair value; management said it did not intend to sell them.
- Credit concentrations: Energy loans were $2.2 billion, or 19% of loans; commercial real estate was $2.3 billion, or 20%. Management said a modeled decline in natural-gas prices to $2 per MMBtu and oil to $55 per barrel would not significantly affect energy-loan credit quality. Commercial real estate problems remained concentrated in Arizona and Colorado. Arizona also carried $16 million of goodwill that could be impaired if planned commercial and small-business growth is unsuccessful.
- Derivatives and counterparties: Customer derivative assets had a net fair value of $379 million and liabilities $280 million. The company reported $7.4 million of gross exposure to European banks and $8.5 million due from MF Global, of which $6.8 million had been recorded as expected recovery. A downgrade from A1 to below investment grade could increase required cash margin by about $42 million.
- Legal and contractual matters: A $19 million settlement of consumer overdraft class actions was fully accrued, subject to court approval. A $7.1 million Tulsa loan-settlement refund may be required following an Oklahoma Supreme Court ruling; the amount was included in the credit-risk accrual, and the company intends to pursue claims against the relevant trust. The company also had $248 million of residential mortgage loans sold with recourse, supported by a separate $18.7 million accrual, and unresolved agency deficiency requests involving 280 loans with $36 million outstanding.
- Capital actions and regulation: The board authorized purchases of up to two million common shares on April 24, 2012; the company also declared a $0.38 per-share dividend payable in May. Management noted that future Dodd-Frank requirements could require limited-purpose swap-dealer registration and additional compliance costs. Annual capital stress-test rules for bank holding companies of this size were expected once finalized.
- Other items: A previously approved $100 million 364-day revolving facility was undrawn at quarter-end; amounts remaining at its June 7, 2012 term end could convert to a term loan under specified terms. The IRS completed its 2008 federal tax audit with no changes. 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 mortgage origination revenue and volumes remain strong as rates, refinance demand, and HARP II activity change.
- How continued low asset yields affect net interest margin and whether deposit-cost reductions can offset that pressure.
- Whether credit quality continues to improve, particularly in Arizona and Colorado commercial real estate, and how the $173 million of potential problem loans develops.
- The valuation and credit performance of the remaining $371 million amortized-cost privately issued mortgage-backed securities portfolio.
- The eventual cash and earnings effects of the overdraft settlement, Tulsa loan dispute, mortgage recourse obligations, and agency repurchase requests.
- Changes in borrowing levels, deposit mix, liquidity capacity, capital ratios, and share repurchases, including the status of the expiring revolver.