BOK Financial Reports Quarterly Earnings of $87 Million
Mortgage Banking Revenue Drives Results; Company Declares Special Dividend
TULSA, Okla.--(BUSINESS WIRE)-- BOK Financial Corporation reported net income of $87.4 million or $1.27 per diluted share for the third quarter of 2012, compared to net income of $97.6 million or $1.43 per diluted share for the second quarter of 2012 and net income of $85.1 million or $1.24 per diluted share for the third quarter of 2011. A gain on the sale of common stock received in settlement of a defaulted loan and a negative provision for credit losses increased net income by $14 million or $0.21 per diluted share in the second quarter of 2012.
Net income for the nine months ended September 30, 2012 totaled $268.6 million or $3.92 per diluted share compared to $218.9 million or $3.19 per diluted share for the nine months ended September 30, 2011.
"BOK Financial's strong financial results for the third quarter continue to reflect the strength of our diversified revenue business model," said President and CEO Stan Lybarger. "The prolonged low interest rate environment has enabled our mortgage banking professionals to assist a record number of customers in the purchase or refinance of their home. We experienced strong commercial loan growth and continued growth in our deposit base. We are also very pleased to welcome The Milestone Group to BOK Financial. The Milestone Group is a Denver-based registered investment adviser which provides wealth management services to high net worth clients in Colorado and Nebraska."
Highlights of third quarter of 2012 included:
Net interest revenue totaled $176.0 million for the third quarter of 2012 compared to $181.4 million for the second quarter of 2012. Net interest margin was 3.12% for the third quarter of 2012 and 3.30% for the second quarter of 2012. The yield on our securities portfolio continued to decline as cash flows are reinvested at lower rates. In addition, net interest revenue for the second quarter of 2012 included $2.9 million from the full recovery of a nonaccruing commercial loan. Excluding this recovery, net interest margin for the second quarter was 3.25%.
Fees and commissions revenue totaled $166.3 million, up $11.9 million or 8% over the second quarter of 2012. Mortgage banking revenue increased $10.7 million due to record mortgage loan production volumes and improved pricing of loans sold.
Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $212.8 million, up $1.2 million or less than 1% over the previous quarter. Personnel expense increased $478 thousand. Non-personnel expense increased $725 thousand.
No provision for credit losses was recorded in the third quarter of 2012 compared to an $8.0 million negative provision for credit losses in the second quarter of 2012. Net charge-offs totaled $5.7 million or 0.19% of average loans on an annualized basis in the third quarter of 2012 compared to net charge-offs of $4.8 million or 0.17% of average loans on an annualized basis in the second quarter of 2012. Gross charge-offs continue to decline, down $2.6 million from the previous quarter. Third quarter recoveries were reduced by $7.1 million due to the refund of a settlement between BOK Financial and the City of Tulsa.
The combined allowance for credit losses totaled $236 million or 1.99% of outstanding loans at September 30, 2012 compared to $241 million or 2.09% of outstanding loans at June 30, 2012. Nonperforming assets totaled $264 million or 2.21% of outstanding loans and repossessed assets at September 30, 2012 and $279 million or 2.38% of outstanding loans and repossessed assets at June 30, 2012.
Outstanding loan balances were $11.8 billion at September 30, 2012, up $256 million over the prior quarter. Commercial loan balances grew by $221 million or 13% on an annualized basis over June 30, 2012. Commercial real estate loans grew by $39 million and residential mortgage loans grew by $14 million, partially offset by an $18 million decrease in consumer loans.
Available for sale securities grew by $1.1 billion during the third quarter to $11.5 billion at September 30, 2012. The Company increased its holdings of short-duration U.S. government guaranteed residential mortgage-backed securities during the third quarter.
Period end deposits totaled $19.1 billion at September 30, 2012 compared to $18.4 billion at June 30, 2012. Interest-bearing transaction accounts increased $451 million and demand deposit accounts increased $408 million, partially offset by an $86 million decrease in time deposits.
Tangible common equity ratio was 9.67% at September 30, 2012 and 10.07% at June 30, 2012. The tangible common equity ratio is a non-GAAP measure of capital strength used by the Company and investors based on shareholders' equity minus intangible assets and equity that does not benefit common shareholders. The Company and its subsidiary bank continue to exceed the regulatory definition of well capitalized. The Company's Tier 1 capital ratios, as defined by banking regulations, were 13.21% at September 30, 2012 and 13.62% at June 30, 2012.
The Company paid a cash dividend of $26 million or $0.38 per common share during the third quarter of 2012. On October 30, 2012, the board of directors approved a quarterly cash dividend of $0.38 per common share payable on or about November 30, 2012 to shareholders of record as of November 16, 2012.
On October 30, 2012, the board of directors also approved a special cash dividend of $1.00 per common share payable on or about November 30, 2012 to shareholders of record as of November 16, 2012.
Net Interest Revenue
Net interest revenue decreased $5.3 million compared to the second quarter of 2012. Net interest margin was 3.12% for the third quarter of 2012 compared to 3.30% for the second quarter of 2012. Net interest revenue for the second quarter included $2.9 million from the full recovery of a nonaccruing commercial loan. Excluding this interest recovery, net interest margin was 3.25% for the second quarter of 2012.
The yield on average earning assets decreased 22 basis points compared to the prior quarter. The available for sale securities portfolio yield decreased 16 basis points to 2.38% due primarily to the continued reinvestment of cash flows from the portfolio at lower current rates. The loan portfolio yield decreased by 15 basis points to 4.33%, excluding the impact of the previously noted interest recovery in the second quarter. The loan yield decrease was largely due to renewals of maturing fixed-rate loans at current lower rates and narrowing credit spreads in this prolonged low interest rate environment, and a reduction in fees recognized when loans prepay. The cost of interest-bearing liabilities decreased 4 basis points from the previous quarter to 0.52%. The average rate of interest paid on subordinated debentures decreased to 2.79% in the third quarter of 2012 compared to 3.95% in the second quarter of 2012. The interest rate on $233 million of these subordinated debentures converted from a fixed interest rate of 5.75% to a floating interest rate based on LIBOR plus 0.69% during the second quarter.
Average earning assets increased $1.2 billion during the third quarter of 2012. The average balance of the available for sale securities portfolio increased $967 million over the second quarter of 2012 due primarily to growth in residential and commercial mortgage-backed securities issued by U.S. government agencies. Average outstanding loans increased $125 million due primarily to a $140 million increase in commercial loan balances. The average balance of residential mortgage loans held for sale increased $73 million over the second quarter of 2012 due to increased origination volumes.
Average deposits increased $325 million over the previous quarter. Demand deposit balances were up $440 million. Time deposit account balances decreased $63 million and interest-bearing transaction account balances decreased $60 million. In addition, average balances of borrowed funds decreased $34 million compared to the second quarter of 2012.
Fees and Commissions Revenue
Fees and commissions revenue totaled $166.3 million, up $11.9 million over the second quarter of 2012 due primarily to a $10.7 million increase in mortgage banking revenue.
Growth in mortgage banking revenue was due to record mortgage loan production volumes and improved pricing of loans sold. Residential mortgage loans funded for sale totaled $1.0 billion for the third quarter of 2012, up $205 million or 24% over the previous quarter. Refinanced mortgage loans were 61% of loans originated for sale in the third quarter of 2012 compared to 51% of the loans originated for sale in the second quarter of 2012. Growth in mortgage loan production volume was stimulated by continued low primary mortgage interest rates and government programs that encourage refinancing. In addition to growth in loans funded, outstanding mortgage loan commitments at September 30, 2012 were up $60 million or 15% over June 30, 2012. Mortgage banking revenue also increased due to improved pricing of loans sold which resulted from government actions to reduce secondary market interest rates. Average secondary market rates for the third quarter of 2012 decreased nearly 50 basis points compared to the previous quarter.
Other sources of fees and commissions revenue were up modestly over the previous quarter. Transaction card revenue increased $1.0 million due primarily to an increase in the number of transactions processed by our TransFund electronic funds transfer network and for merchant services clients. Brokerage and trading revenue was down $1.3 million. Growth in securities trading and customer hedging revenue was partially offset by decreased retail brokerage and investment banking fees. Securities trading revenue increased $2.9 million. Excluding the impact of a $2.9 million recovery of derivative contract losses from the 2008 Lehman Brothers bankruptcy during the second quarter of 2012, customer hedging revenue increased $673 thousand. Retail brokerage revenue decreased $1.4 million and investment banking revenues decreased $577 thousand. Trust fees and commissions revenue and deposit service charges and fees were largely unchanged compared to the second quarter of 2012.
Total operating expenses were $222.3 million for the third quarter of 2012 compared to $223.0 million for the second quarter of 2012. Excluding changes in the fair value of mortgage servicing rights, operating expenses totaled $212.8 million, up $1.2 million over the second quarter of 2012.
Personnel costs increased $478 thousand over the second quarter of 2012. Regular compensation expense was up $1.5 million primarily due to increases in personnel headcount. Incentive compensation expense decreased $1.3 million. Stock-based incentive compensation expense decreased $4.1 million primarily due to the timing of accruals for the BOK Financial Corporation True-Up Plan, which provides incentive compensation for certain senior executives based on earnings per share performance and compensation of comparable senior executives at peer banks. Cash-based incentive compensation, which rewards employees as they generate business opportunities for the Company by growing loans, deposits, customer relationships or other measurable metrics, increased $2.8 million.
Non-personnel expense increased $725 thousand over the second quarter of 2012. Data processing and communications expense increased $1.2 million primarily due to impairment charges on two discontinued software projects. Net losses and operating expenses on repossessed properties were down $206 thousand compared to the second quarter of 2012. All other expenses were down $291 thousand from the second quarter of 2012.
Loans, Deposits and Capital
Outstanding loans at September 30, 2012 were $11.8 billion, up $256 million over June 30, 2012. Growth in commercial, commercial real estate and residential mortgage loans was partially offset by a decrease in consumer loans.
Outstanding commercial loan balances grew by $221 million or 13% on an annualized basis over June 30, 2012. Outstanding balances were up in most geographic markets, including $115 million in Texas, $43 million in Oklahoma, $31 million in Kansas/Missouri and $22 million in Arizona. Energy sector loans increased $155 million, growing primarily in the Texas and Colorado markets. Wholesale/retail sector loans increased $119 million primarily in the Oklahoma and Texas markets. Service sector loans were down $40 million compared to June 30, 2012 primarily in the Oklahoma market and other commercial and industrial sector loans decreased $39 million primarily in the Texas market. Unfunded energy loan commitments increased $76 million during the third quarter to $2.2 billion. All other unfunded commercial loan commitments totaled $3.2 billion at September 30, 2012, up slightly from June 30, 2012.
Commercial real estate loans were up $39 million over June 30, 2012. Loans secured by multifamily residential properties increased $36 million primarily related to loans in the Texas market. Loans secured by retail facilities grew by $33 million primarily related to loans in the Oklahoma market. Loans secured by office buildings were up $22 million primarily in the Oklahoma and Texas markets. Growth in these loan classes was partially offset by a $44 million decrease in loans secured by industrial properties, primarily in the Texas and Oklahoma markets. Unfunded commercial real estate loan commitments totaled $574 million at September 30, 2012, up $40 million over June 30, 2012.
Residential mortgage loans increased $14 million over June 30, 2012. Home equity loans increased $19 million. Growth was primarily in first-lien, fully amortizing home equity loans. Non-guaranteed permanent mortgage loans decreased $6.9 million and permanent mortgage loans guaranteed by U.S. government agencies increased $1.3 million.
Consumer loans decreased $18 million from June 30, 2012, primarily due to continued runoff of indirect automobile loans related to the previously announced decision to curtail that business in favor of a customer-focused direct approach to consumer lending. Approximately $47 million of indirect automobile loans remain outstanding at September 30, 2012.
Deposits totaled $19.1 billion at September 30, 2012 compared to $18.4 billion at June 30, 2012. Demand deposit balances increased $408 million. Interest-bearing transaction account balances increased $451 million and time deposits decreased $86 million. Among the lines of business, commercial deposits increased $623 million, wealth management deposits increased $210 million and consumer deposits increased $17 million. Commercial and industrial, treasury services, commercial real estate, energy and small business customer account balances all increased over the prior quarter. Commercial customers continue to maintain high account balances due to continued economic uncertainty and persistently low yields available on high quality investment alternatives.
The Dodd-Frank Wall Street Reform and Consumer Protection Act temporarily provided unlimited deposit insurance coverage for noninterest-bearing transaction accounts at all FDIC-insured institutions. Although an extension is currently being considered, this temporary program is set to expire on December 31, 2012. Upon expiration, noninterest-bearing transaction accounts will be insured only up to $250,000. The impact of the expiration of this temporary program is uncertain, but could result in a decrease in average demand deposit balances held by customers.
The Company and its subsidiary bank exceeded the regulatory definition of well capitalized at September 30, 2012. The Company's Tier 1 capital ratio was 13.21% at September 30, 2012 and 13.62% at June 30, 2012. The total capital ratio was 15.71% at September 30, 2012 and 16.19% at June 30, 2012. In addition, the Company's tangible common equity ratio, a non-GAAP measure, was 9.67% at September 30, 2012 and 10.07% at June 30, 2012. Unrealized securities gains added 54 basis points to the tangible common equity ratio at September 30, 2012. The decrease in Tier 1, total and tangible common equity ratios was largely due to asset growth. In each case, capital used to calculate these ratios at September 30 exceeded June 30.
In June, banking regulators issued a Notice of Proposed Rulemaking that will incorporate Basel III capital changes for substantially all U.S. banking organizations. If adopted as proposed, these changes will establish a 7% threshold for the Tier 1 common equity ratio consisting of a minimum level plus a capital conservation buffer. BOK Financial's Tier 1 common equity ratio based on the existing Basel I standards was 13.01% as of September 30, 2012. Our estimated Tier 1 common equity ratio under a fully phased in Basel III framework is approximately 12.35%, nearly 535 basis points above the 7% regulatory threshold. This estimate is subject to interpretation of rules that are not yet final. Additionally, the proposed definition of Tier 1 common equity includes unrealized gains and losses on available for sale securities which will vary based on market conditions.
Nonperforming assets decreased $15 million during the third quarter of 2012 to $264 million or 2.21% of outstanding loans and repossessed assets at September 30, 2012. Nonaccruing loans decreased $13 million and real estate and other repossessed assets decreased $1.6 million. Accruing renegotiated loans, largely consisting of residential mortgage loans guaranteed by U.S. government agencies, decreased $423 thousand.
During the third quarter of 2012, the Office of the Comptroller of the Currency issued interpretive guidance regarding accounting for and classification of retail loans to borrowers who have filed for Chapter 7 bankruptcy. This guidance states that these loans should be charged-down to collateral value and classified as nonaccruing and troubled debt restructurings, regardless of current payment status. Generally, we have been complying with this guidance by charging down such loans to collateral value within 60 days of being notified of the borrower's bankruptcy filing. Based on available information we do not expect implementation to significantly affect charge-offs or provision for credit losses. We estimate that nonaccruing loans and troubled debt restructuring may increase by $10 million to $15 million. At September 30, 2012, payments on approximately 89% of loans that may be classified as nonaccruing are current. We expect to implement this guidance in the fourth quarter.
Nonaccruing loans totaled $132 million or 1.11% of outstanding loans at September 30, 2012 and $144 million or 1.25% of outstanding loans at June 30, 2012. During the third quarter of 2012, $20 million of new nonaccruing loans were identified, offset by $18 million in payments received, $8.9 million in charge-offs and $7.0 million in foreclosures and repossessions.
Nonaccruing commercial loans decreased to $22 million or 0.30% of outstanding commercial loans at September 30, 2012 from $35 million or 0.49% of outstanding commercial loans at June 30, 2012. The decrease was due primarily to the repayment of a $9.5 million manufacturing sector loan in the Oklahoma market. The Company also received a $1.8 million partial recovery of amounts previously charged off on this loan. Nonaccruing commercial real estate loans decreased to $76 million or 3.50% of outstanding commercial real estate loans at September 30, 2012 from $80 million or 3.77% of outstanding commercial real estate loans at June 30, 2012. Nonaccruing commercial real estate loans consist primarily of land development and residential construction loans. Nonaccruing land development and residential construction loans totaled $38 million or 13.17% of all land development and construction loans at September 30, 2012, a decrease of $7.9 million from June 30, 2012.
Nonaccruing residential mortgage loans increased $6.5 million during the third quarter of 2012 to $29 million or 1.45% of outstanding residential mortgage loans. Principally all non-guaranteed residential mortgage loans past due 90 days or more are nonaccruing. Residential mortgage loans past due 30 to 89 days and still accruing interest, excluding loans guaranteed by U.S. government agencies, totaled $21 million at September 30, 2012 and $17 million at June 30, 2012.
The combined allowance for credit losses totaled $236 million or 1.99% of outstanding loans and 178.70% of nonaccruing loans at September 30, 2012. The allowance for loan losses was $234 million and the accrual for off-balance sheet credit losses was $1.9 million. Gross charge-offs continue to decrease, totaling $8.9 million for the third quarter, compared to $11.5 million for the previous quarter. Recoveries of $10.3 million during the third quarter were partially offset by the return of $7.1 million received from the City of Tulsa in 2008 to settle claims related to a defaulted loan. The settlement agreement between BOK Financial and the City of Tulsa was invalidated by the Oklahoma Supreme Court in 2011. Recoveries totaled $6.7 million for the second quarter of 2012. Net charge-offs totaled $5.7 million or 0.19% on an annualized basis for the third quarter of 2012 compared with net charge-offs of $4.8 million or 0.17% on an annualized basis for the second quarter of 2012.
After evaluating all credit factors, no provision for credit losses was necessary during the third quarter of 2012. The previously noted recovery refund was expected and had been accrued in prior periods. Net recoveries recorded during the quarter offset an increase in required reserves due to loan portfolio growth. Credit quality indicators and most economic factors are stable or improving in our primary markets.
Real estate and other repossessed assets totaled $104 million at September 30, 2012, primarily consisting of $40 million of 1-4 family residential properties (including $23 million guaranteed by U.S. government agencies), $29 million of developed commercial real estate properties, $21 million of undeveloped land and $12 million of residential land and land development properties. The distribution of real estate owned and other repossessed assets among various markets included $29 million attributed to Arizona, $20 million attributed to New Mexico, $19 million attributed to Texas and $14 million attributed to Oklahoma. Real estate and other repossessed assets decreased by $1.6 million during the third quarter of 2012. Additions of $41 million were partially offset by $38 million of sales. Additions included $23 million and sales included $21 million of 1-4 family residential properties guaranteed by U.S. government agencies. Write-downs and net losses on sales of real estate and other repossessed assets totaled $3.6 million.
The Company also has off-balance sheet credit risk related to residential mortgage loans sold prior to 2008 to U.S. government agencies under various community development programs with full recourse for the life of the loans. The outstanding principal balance of these loans decreased to $238 million at September 30, 2012 from $241 million at June 30, 2012. The loans are primarily to borrowers in our market areas, including $167 million in Oklahoma. At September 30, 2012, approximately 5% of these loans are nonperforming and 6% were past due 30 to 89 days. A separate accrual for credit risk of $18 million is available to absorb losses on these loans.
Securities and Derivatives
The fair value of the available for sale securities portfolio totaled $11.5 billion at September 30, 2012 and $10.4 billion at June 30, 2012. The increase came primarily in short-duration U.S. government agency residential mortgage-backed securities and U.S. government agency commercial mortgage-backed securities. At September 30, 2012, the available for sale portfolio consisted primarily of $10.7 billion of residential mortgage-backed securities fully backed by U.S. government agencies, $339 million of commercial mortgage-backed securities fully backed by U.S. government agencies, and $332 million privately issued by publicly owned financial institutions. Privately issued mortgage-backed securities included $208 million backed by Jumbo-A residential mortgage loans and $124 million backed by Alt-A residential mortgage loans. Net unamortized premiums are less than 1% of the securities portfolio amortized cost.
Net unrealized gains on available for sale securities totaled $281 million at September 30, 2012 and $242 million at June 30, 2012. Net unrealized gains on residential mortgage-backed securities issued by U.S. government agencies increased $2.0 million during the second quarter to $274 million at September 30, 2012. Net unrealized losses on privately issued residential mortgage-backed securities totaled $5.3 million at September 30, 2012 and $36 million at June 30, 2012.
The amortized cost of privately issued residential mortgage-backed securities totaled $337 million at September 30, 2012, down $17 million since June 30, 2012. All of these securities are rated below investment grade by at least one nationally-recognized rating agency. The amortized cost of these securities was reduced during the third quarter of 2012 by $16 million of cash payments received and $1.1 million of credit-related impairment charges during the quarter.
In the third quarter of 2012, the Company recognized net gains of $8.0 million from sales of $209 million of available for sale securities. These securities were sold either because they had reached their expected maximum potential total return or to mitigate exposure to prepayment risk. Net gains from sales of available for sale securities totaled $20.5 million in the second quarter of 2012 and included a gain of $14.2 million from the sale of $26 million of stock received in settlement of a defaulted loan.
The Company also maintains a portfolio of residential mortgage-backed securities issued by U.S. government agencies and interest rate derivative contracts designated as an economic hedge of the changes in the fair value of our mortgage servicing rights. Residential mortgage interest rates decreased during the third quarter of 2012, causing prepayment speeds to increase and the value of our mortgage servicing rights to decrease by $9.6 million. This decrease was partially offset by a $6.1 million increase in the value of securities and interest rate derivative contracts held as an economic hedge.
About BOK Financial Corporation
BOK Financial is a $27 billion regional financial services company based in Tulsa, Oklahoma. The Company's stock is publicly traded on NASDAQ under the Global Select market listings (symbol: BOKF). BOK Financial's holdings include BOKF, NA, BOSC, Inc. and Cavanal Hill Investment Management, Inc. BOKF, NA operates the TransFund electronic funds network and seven banking divisions: Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Bank of Kansas City, Bank of Oklahoma, Bank of Texas and Colorado State Bank and Trust. Through its subsidiaries, the Company provides commercial and consumer banking, investment and trust services, mortgage origination and servicing, and an electronic funds transfer network. For more information, visit www.bokf.com.
The Company will continue to evaluate critical assumptions and estimates, such as the adequacy of the allowance for credit losses and asset impairment as of September 30, 2012 through the date its financial statements are filed with the Securities and Exchange Commission and will adjust amounts reported if necessary.
This news release contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about BOK Financial, the financial services industry and the economy generally. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans," "projects," variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the provision and allowance for credit losses involve judgments as to future events and are inherently forward-looking statements. Assessments that BOK Financial's acquisitions and other growth endeavors will be profitable are necessary statements of belief as to the outcome of future events based in part on information provided by others which BOK Financial has not independently verified. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions which are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expected, implied or forecasted in such forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to (1) the ability to fully realize expected cost savings from mergers within the expected time frames, (2) the ability of other companies on which BOK Financial relies to provide goods and services in a timely and accurate manner, (3) changes in interest rates and interest rate relationships, (4) demand for products and services, (5) the degree of competition by traditional and nontraditional competitors, (6) changes in banking regulations, tax laws, prices, levies and assessments, (7) the impact of technological advances and (8) trends in consumer behavior as well as their ability to repay loans. BOK Financial and its affiliates undertake no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
BALANCE SHEETS -- UNAUDITED
BOK FINANCIAL CORPORATION
Cash and due from banks
Funds sold and resell agreements
Available for sale securities
Fair value option securities
Residential mortgage loans held for sale
Commercial real estate
Less allowance for loan losses
Loans, net of allowance
Premises and equipment, net
Intangible assets, net
Mortgage servicing rights, net
Real estate and other repossessed assets
Cash surrender value of bank-owned life insurance
Receivable on unsettled securities sales
LIABILITIES AND EQUITY
Accrued interest, taxes, and expense
Due on unsettled securities purchases
Capital, surplus and retained earnings
Accumulated other comprehensive income
TOTAL SHAREHOLDERS' EQUITY