News Details

Non-interest Revenue Growth and Continued Credit Improvement Drive Results

TULSA, Okla.--(BUSINESS WIRE)-- BOK Financial Corporation reported net income of $97.6 million or $1.43 per diluted share for the second quarter of 2012, up $14.0 million or 17% over the prior quarter. Net income was $83.6 million or $1.22 per diluted share for the first quarter of 2012 and $69.0 million or $1.00 per diluted share for the second quarter of 2011. Net income for the six months ended June 30, 2012 totaled $181.2 million or $2.65 per diluted share compared to $133.8 million or $1.95 per diluted share for the six months ended June 30, 2011.

“BOK Financial is pleased to announce solid performance for the second quarter of 2012,” said President and CEO Stan Lybarger. “All of our non-interest revenue sources increased over the previous quarter, led by a 20% increase in mortgage banking revenue. Our mortgage banking efforts produced outstanding results as the current low interest rate environment continues to drive demand. In addition, improvements in credit quality increased net income by more than $14 million or $0.21 per diluted share during the second quarter. We recognized a $14 million pretax gain on the sale of common stock received in settlement of a defaulted loan and recorded an $8 million negative provision for credit losses."

Highlights of second quarter of 2012 included:

• Net interest revenue increased to $181.4 million for the second quarter of 2012 compared to $173.6 million for the first quarter of 2012. Net interest margin was 3.30% for the second quarter of 2012 and 3.19% for the first quarter of 2012. 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 was 3.25% for the second quarter of 2012.
• Fees and commissions revenue totaled $154.5 million, up $10.1 million or 7% over the first quarter of 2012. Mortgage banking revenue increased $6.5 million. All other fee-based revenue sources also increased over the prior quarter.
• Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $212.3 million, up $20.0 million over the previous quarter. Personnel expenses were up $7.5 million due largely to incentive compensation. Non-personnel expenses increased $12.4 million due primarily to higher mortgage banking, repossessed assets, and data processing expenses.
• An $8.0 million negative provision for credit losses was recorded in the second quarter of 2012. No provision for credit losses was recorded in the first quarter of 2012. Net charge-offs continued to decrease and other credit quality indicators continue to improve. Net charge-offs totaled $4.8 million or 0.17% of average loans on an annualized basis in the second quarter of 2012 compared to $8.5 million or 0.30% of average loans on an annualized basis in the first quarter of 2012. Net charge-offs for the second quarter were reduced by $2.1 million from the full recovery of a nonaccruing commercial loan.
• The combined allowance for credit losses totaled $241 million or 2.09% of outstanding loans at June 30, 2012 compared to $254 million or 2.20% of outstanding loans at March 31, 2012. Nonperforming assets totaled $279 million or 2.38% of outstanding loans and repossessed assets at June 30, 2012 and $336 million or 2.87% of outstanding loans and repossessed assets at March 31, 2012.
• Outstanding loan balances were $11.6 billion at June 30, 2012, flat compared to the prior quarter. Commercial loan balances increased $93 million and residential mortgage loans increased $37 million over March 31, 2012. Commercial real estate loans decreased $107 million and consumer loans decreased $24 million.
• Period end deposits totaled $18.4 billion at June 30, 2012 compared to $18.5 billion at March 31, 2012. Demand deposit accounts were up $251 million, offset by a $357 million decrease in interest-bearing transaction accounts and a $58 million decrease in time deposits.
• Tangible common equity ratio was 10.07% at June 30, 2012 and 9.75% at March 31, 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 13.62% at June 30, 2012 and 13.03% at March 31, 2012.
• The Company paid a cash dividend of $26 million or $0.38 per common share during the second quarter of 2012. On July 31, 2012, the board of directors approved a quarterly cash dividend of $0.38 per common share payable on or about August 31, 2012 to shareholders of record as of August 17, 2012.

Net Interest Revenue

Net interest revenue increased $7.8 million over the first quarter of 2012, including $2.9 million from the full recovery of a nonaccruing commercial loan during the second quarter. Excluding this interest recovery, net interest margin increased 6 basis points over the prior quarter to 3.25%.

The yield on average earning assets was flat compared to the prior quarter and the yield on the loan portfolio decreased by 2 basis point to 4.48%, excluding the impact of the interest recovery. The available for sale securities portfolio yield increased 4 basis points to 2.54% primarily due to efforts to reduce our exposure to prepayment risk on our mortgage-back securities portfolio. The cost of interest-bearing liabilities decreased 7 basis points from the previous quarter to 0.56%. The average rate of interest paid on subordinated debentures decreased 167 basis points compared to the first quarter of 2012 to 3.95%. 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 $163 million during the second quarter of 2012. Average outstanding loans increased $178 million due primarily to a $194 million increase in commercial loan balances. The average balance of the available for sale securities portfolio increased $144 million over the first quarter of 2012. The average balance of residential mortgage-backed securities we have elected to carry at fair value decreased $219 million compared to the first quarter of 2012. These securities are generally used as an economic hedge against changes in the value of mortgage servicing rights and the average outstanding balance can change significantly.

Average interest-bearing deposits decreased $637 million compared to the previous quarter. Average demand deposits balances were up $431 million over the prior quarter. Average interest-bearing transaction account balances decreased $540 million and average time deposit account balances decreased $114 million. Average balances of borrowed funds increased $328 million over the first quarter of 2012.

Fees and Commissions Revenue

Fees and commissions revenue totaled $154.5 million, up $10.1 million over the first quarter of 2012 due primarily to a $6.5 million increase in mortgage banking revenue. All other significant sources of fee revenue also increased over the previous quarter.

Growth in mortgage banking revenue was due to increased mortgage loan production volumes and improved pricing of loans sold which resulted from continued low interest rates. Residential mortgage loans funded for sale totaled $842 million for the second quarter of 2012, up $96 million or 13% over the previous quarter. Refinanced mortgage loans were 51% of loans originated for sale in the second quarter of 2012 compared to 67% of the loans originated for sale in the first quarter of 2012. The unpaid principal balance of residential mortgage loans held for sale was up $5.9 million or 3% and outstanding mortgage loan commitments were up $90 million or 30% over March 31, 2012. Expansion of our mortgage banking division in the Texas, Colorado and Kansas markets positioned us to benefit from increased demand as the result of continued low mortgage interest rates.

Trust fees and commissions revenue increased $1.5 million over the first quarter of 2012 primarily due to the seasonal timing of tax-service fees. Brokerage and trading revenue was up $1.5 million. Investment banking revenues increased $1.2 million primarily due to the expansion of our municipal financial advisory services, particularly in the Texas market. Retail brokerage fees were up $512 thousand due to increased market volatility and customer transactions. Securities trading and customer hedging revenue were flat compared to the prior quarter. The Company received a $2.9 million recovery of derivative contract losses from the 2008 Lehman Brothers bankruptcy. This recovery was offset by a decrease in revenue from energy derivative contracts due to a decline in contract volumes. Transaction card revenue increased $1.3 million due primarily to an increase in the volume of card transactions processed on behalf of merchant services customers. Deposits service charges and fees increased $837 thousand due primarily to an increased volume of overdraft charges compared to the first quarter of 2012.

Operating Expenses

Total operating expenses were $223.8 million for the second quarter of 2012 compared to $185.2 million for the first quarter of 2012. Excluding changes in the fair value of mortgage servicing rights, operating expenses totaled $212.3 million, up $20.0 million over the first quarter of 2012.

Personnel costs increased $7.5 million due primarily to increased incentive compensation expense. Stock-based incentive compensation expense increased $4.7 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 $1.7 million. Regular compensation expense was up $2.1 million primarily due to standard annual merit increases which were fully effective in the second quarter of 2012.

Non-personnel expense increased $12.4 million over the first quarter of 2012. Net losses and operating expenses on repossessed properties were up $3.7 million over the first quarter of 2012. Losses on sales and write-downs of repossessed assets increased by $2.7 million. Write-downs of repossessed assets were up primarily due regularly scheduled appraisal updates, partially offset by decreased losses on sales of repossessed assets. Operating expenses of repossessed assets were up $945 thousand over the first quarter. Mortgage banking costs were up $3.6 million due to increased provision for potential losses on loans sold to government sponsored entities under standard representation and warranties. While the number of actual repurchases has remained low, the loss severity has trended higher. At June 30, 2012, we have unresolved deficiency requests from the agencies on 303 loans with an aggregate outstanding principal balance of $40 million from our $11.6 billion mortgage servicing portfolio. Data processing and communications expense increased $3.1 million. Data processing and communications expense in the first quarter was lower due to the favorable resolution of a dispute with a service provider. Business promotion expense was up $2.4 million due primarily to timing of marketing expenses.

Loans, Deposits and Capital

Loans

Outstanding loans at June 30, 2012 were $11.6 billion, flat compared to March 31, 2012. Growth in commercial and residential mortgage loans was offset by decreases in commercial real estate and consumer loans.

Outstanding commercial loan balances increased $93 million over March 31, 2012 due primarily to a $69 million increase in loans attributed to Colorado and a $60 million increase in loans attributed to Texas, partially offset by a $15 million decrease in loans attributed to the Arkansas market. Energy sector loans increased $112 million, growing in the Colorado, Oklahoma and Texas markets. Service sector loans increased $19 million. Growth in the Texas, Colorado and Arizona markets was partially offset by decreased loan balances in the Oklahoma market. Wholesale/retail sector loans decreased $67 million primarily in the Texas and Oklahoma markets. Other commercial and industrial sector loans increased $5 million primarily due to a decrease in the Arkansas market, partially offset by an increase in the Texas market. Unfunded energy loan commitments increased $220 million during the second quarter to $2.1 billion. All other unfunded commercial loan commitments totaled $3.1 billion at June 30, 2012.

Commercial real estate loans decreased $107 million compared to March 31, 2012 due to improved market conditions for permanent financing. Loans secured by multifamily residential properties decreased $74 million primarily related to loans in the Texas market. Loans secured by industrial properties decreased $58 million primarily in the Texas market. Construction and land development loan balances continued to decline, down $31 million, primarily in the Oklahoma, Texas and Colorado markets. Unfunded commercial real estate loan commitments totaled $535 million at June 30, 2012, up $85 million over March 31, 2012.

Residential mortgage loans increased $37 million over March 31, 2012. Home equity loans increased $48 million. Non-guaranteed permanent mortgage loans increased $6.4 million and permanent mortgage loans guaranteed by U.S. government agencies decreased $18 million.

Consumer loans decreased $24 million from March 31, 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 $63 million of indirect automobile loans remain outstanding at June 30, 2012.

Deposits

Deposits totaled $18.4 billion at June 30, 2012 compared to $18.5 billion at March 31, 2012. Demand deposit balances increased $251 million. Interest-bearing transaction account balances decreased $357 million and time deposits decreased $58 million. Among the lines of business, commercial deposits increased $35 million, wealth management deposits decreased $120 million and consumer deposits decreased $107 million. Increased commercial and industrial and energy account balances were partially offset by decreased treasury services customer balances. Commercial customers continue to maintain high account balances due to continued economic uncertainty and persistently low yields available on high quality investment alternatives.

Capital

The Company and its subsidiary bank exceeded the regulatory definition of well capitalized at June 30, 2012. The Company's Tier 1 capital ratio was 13.62% at June 30, 2012 and 13.03% at March 31, 2012. The total capital ratio was 16.19% at June 30, 2012 and 16.16% at March 31, 2012. In addition, the Company's tangible common equity ratio, a non-GAAP measure, was 10.07% at June 30, 2012 and 9.75% at March 31, 2012. Unrealized securities gains added 49 basis points to the tangible common equity ratio at June 30, 2012. The Company repurchased 39,496 common shares at an average price of $53.81 per share during the second quarter through a previously-announced share repurchase program.

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 13.41% as of June 30, 2012. Our estimated Tier 1 common equity ratio under a fully phased in Basel III framework is approximately 12.75%, nearly 575 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.

Credit Quality

Nonperforming assets decreased $57 million during the second quarter of 2012 to $279 million or 2.38% of outstanding loans and repossessed assets at June 30, 2012. Nonaccruing loans decreased $39 million and real estate and other repossessed assets decreased $10 million. Renegotiated loans, largely consisting of residential mortgage loans guaranteed by U.S. government agencies, decreased $8 million due primarily to loans sold to government agencies.

Nonaccruing loans totaled $144 million or 1.25% of outstanding loans at June 30, 2012 and $183 million or 1.58% of outstanding loans at March 31, 2012. During the second quarter of 2012, $18 million of new nonaccruing loans were identified, offset by $38 million in payments received, $12 million in charge-offs and $6.2 million in foreclosures and repossessions.

Nonaccruing commercial loans decreased to $35 million or 0.49% of outstanding commercial loans at June 30, 2012 from $62 million or 0.89% of outstanding commercial loans at March 31, 2012. Significant decreases included the full recovery of an $11 million wholesale/retail sector loan in the Arkansas market, plus recovery of $2.1 million previously charged off and $2.9 million of foregone interest and fees. In addition, a partial payment of $12 million was received during the second quarter on a nonaccruing manufacturing sector loan in the Oklahoma market. Nonaccruing commercial real estate loans decreased to $80 million or 3.77% of outstanding commercial real estate loans at June 30, 2012 from $86 million or 3.87% of outstanding commercial real estate loans at March 31, 2012. Nonaccruing commercial real estate loans consist primarily of land development and residential construction loans. Nonaccruing land development and residential construction loans decreased $6.4 million to $46 million or 16.04% of all land development and construction loans nonaccruing at June 30, 2012.

Nonaccruing residential mortgage loans decreased $4.7 million during the second quarter of 2012 to $23 million or 1.13% 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 $17 million at June 30, 2012 and $15 million at March 31, 2012.

The combined allowance for credit losses totaled $241 million or 2.09% of outstanding loans and 166.75% of nonaccruing loans at June 30, 2012. The allowance for loan losses was $232 million and the accrual for off-balance sheet credit losses was $9.7 million. Quarterly net charge-offs continued to decline. Net loans charged-off against the allowance for loan loss totaled $4.8 million or 0.17% on an annualized basis for the second quarter of 2012 compared to $8.5 million or 0.30% on an annualized basis for the first quarter of 2012. Gross charge-offs continue to decrease, down $2.1 million from the previous quarter. Other credit factors also continue to improve. Most economic indicators are stable or improving in our primary markets. After evaluating all credit factors, the Company recorded an $8.0 million negative provision for credit losses during the second quarter of 2012.

Subsequent to June 30, 2012, BOK Financial refunded $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 had been invalidated by the Oklahoma Supreme Court and the refund amount was fully accrued in 2011. The refund of this settlement will increase third quarter net charge-offs.

Real estate and other repossessed assets totaled $106 million at June 30, 2012, primarily consisting of $40 million of 1-4 family residential properties (including $21 million guaranteed by U.S. government agencies), $32 million of developed commercial real estate properties, $17 million of undeveloped land and $14 million of residential land and land development properties. The distribution of real estate owned and other repossessed assets among various markets included $28 million attributed to Arizona, $22 million attributed to Texas, $19 million attributed to New Mexico and $15 million attributed to Oklahoma. Real estate and other repossessed assets decreased by $10 million during the second quarter of 2012. Sales of $37 million were partially offset by $30 million of additions. Additions included $21 million and sales included $20 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 $3.2 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 $241 million at June 30, 2012 from $248 million at March 31, 2012. The loans are primarily to borrowers in our market areas, including $170 million in Oklahoma. At June 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 $10.4 billion at June 30, 2012 and $10.2 billion at March 31, 2012. The available for sale portfolio consisted primarily of residential mortgage-backed securities, including $9.9 billion fully backed by U.S. government agencies and $318 million privately issued by publicly owned financial institutions. Privately issued mortgage-backed securities included $199 million backed by Jumbo-A residential mortgage loans and $118 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 $242 million at June 30, 2012 and $277 million at March 31, 2012. Net unrealized gains on residential mortgage-backed securities issued by U.S. government agencies decreased $27 million during the second quarter to $272 million at June 30, 2012. Net unrealized losses on privately issued residential mortgage-backed securities totaled $36 million at June 30, 2012 and $45 million at March 31, 2012.

The amortized cost of privately issued residential mortgage-backed securities totaled $354 million at June 30, 2012, down $17 million since March 31, 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 second quarter of 2012 by $16 million of cash payments received and $858 thousand of credit-related impairment charges during the quarter.

In the second quarter of 2012, the Company recognized net gains of $20.5 million from sales of available for sale securities, including a gain of $14.2 million from the sale of $26 million of stock received in settlement of a defaulted loan. The Company also recognized $6.1 million of gains on sales of $433 million of residential mortgage-backed securities guaranteed by U.S. government agencies held in 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 $4.3 million in the first quarter of 2012.

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 second quarter of 2012, causing prepayment speeds to increase and the value of our mortgage servicing rights to decrease by $11.5 million. This decrease was partially offset by a $9.5 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 $26 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 June 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.

Loans attributed to a geographical region may not always represent the location of the borrower or the collateral. The previous periods have been reclassified to conform to the current period loan classification and market attribution.