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BOKF > SEC Filings for BOKF > Form 10-Q on 8-Nov-2011All Recent SEC Filings

Show all filings for BOK FINANCIAL CORP ET AL

Form 10-Q for BOK FINANCIAL CORP ET AL


8-Nov-2011

Quarterly Report

Management's Discussion and Analysis of Financial Condition and Results of Operations

Performance Summary

BOK Financial Corporation ("the Company") reported net income of $85.1 million or $1.24 per diluted share for the third quarter of 2011, compared to $64.3 million or $0.94 per diluted share for the third quarter of 2010 and $69.0 million or $1.00 per diluted share for the second quarter of 2011. Net income for the nine months ended September 30, 2011 totaled $218.9 million or $3.19 per diluted share compared with net income of $187.9 million or $2.75 per diluted share for the nine months ended September 30, 2010.

Highlights of the third quarter of 2011 included:

Net interest revenue totaled $175.4 million for the third quarter of 2011, compared to $180.7 million for the third quarter of 2010 and $174.0 million for the second quarter of 2011. Net interest margin was 3.34% for the third quarter of 2011, 3.52% for the third quarter of 2010 and 3.40% for the second quarter of 2011. The decrease in net interest revenue compared with the third quarter of 2010 was due primarily to the reinvestment of cash flows from the securities portfolio at lower rates.

Fees and commissions revenue totaled $146.0 million for the third quarter of 2011 compared to $136.9 million for the third quarter of 2010 and $127.8 million for the second quarter of 2011. Mortgage-banking revenue was strong in both the third quarters of 2011 and 2010. Low interest rates increased mortgage loan origination activity in both quarters.

Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $196.1 million, up $6.8 million over the third quarter of 2010 and up $6.4 million over the previous quarter. Personnel costs were up $2.0 million over the third quarter of 2010. Non-personnel expenses were up $4.8 million over the third quarter of 2010 and up $8.7 million over the prior quarter. The Company accrued $5.0 million for exposure to on-going litigation and made a $4.0 million discretionary contribution to the BOKF Charitable Foundation during the third quarter of 2011.

No provision for credit losses was recorded in the third quarter of 2011, compared to a provision for credit losses of $20.0 million for the third quarter of 2010 and $2.7 million for the second quarter of 2011. Net loans charged off totaled $10.2 million or 0.37% of average loans on an annualized basis for the third quarter of 2011 compared to $20.1 million or 0.74% of average loans on an annualized basis in the third quarter of 2010 and $8.5 million or 0.32% on an annualized basis in the second quarter of 2011.

The combined allowance for credit losses totaled $287 million or 2.58% of outstanding loans at September 30, 2011, down from $297 million or 2.77% of outstanding loans at June 30, 2011. Nonperforming assets totaled $388 million or 3.45% of outstanding loans and repossessed assets at September 30, 2011 compared to $351 million or 3.23% of outstanding loans and repossessed assets at June 30, 2011.

Outstanding loan balances were $11.1 billion at September 30, 2011, up $387 million over June 30, 2011. Commercial loan balances continued to grow in the third quarter of 2011, increasing $297 million over June 30, 2011. Commercial real estate loans increased $76 million and residential mortgage loans increased $44 million. Consumer loans decreased $30 million.

Period-end deposits totaled $18.4 billion at September 30, 2011 compared to $17.6 billion at June 30, 2011. Demand deposit accounts increased $688 million and interest-bearing transaction accounts increased $240 million. Time deposits decreased $80 million.

The tangible common equity ratio was 9.65% at September 30, 2011 and 9.71% at June 30, 2011. The tangible common equity ratio is a non-GAAP measure of capital strength used by the Company and investors based on shareholders' equity as defined by generally accepted accounting principles in the United States of America ("GAAP") minus intangible assets and equity that does not benefit common shareholders.

- 1 -

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 13.14% at September 30, 2011 and 13.30% at June 30, 2011.

The Company paid a cash dividend of $19 million or $0.275 per common share during the third quarter of 2011. On October 25, 2011, the board of directors declared an increase in the cash dividend to $0.33 per common share payable on or about November 30, 2011 to shareholders of record as of November 16, 2011.

Results of Operations

Net Interest Revenue and Net Interest Margin

Net interest revenue is the interest earned on debt securities, loans and other interest-earning assets less interest paid for interest-bearing deposits and other borrowings. The net interest margin is calculated by dividing net interest revenue by average interest-earning assets. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin is typically greater than net interest spread due to interest income earned on assets funded by non-interest bearing liabilities such as demand deposits and equity.

Net interest revenue totaled $175.4 million for the third quarter of 2011 compared to $180.7 million for the third quarter of 2010 and $174.0 million for the second quarter of 2011. Net interest margin was 3.34% for the third quarter of 2011, 3.52% for the third quarter of 2010 and 3.40% for the second quarter of 2011. The decrease in net interest revenue and net interest margin from the third quarter of 2010 was due primarily to lower yield on our available for sale securities portfolio.

The tax-equivalent yield on earning assets was 3.91% for the third quarter of 2011, down 31 basis points from the third quarter of 2010. The available for sale securities portfolio yield decreased 44 basis points to 2.83%. Mortgage interest rates decreased during the third quarter of 2011, increasing prepayment speeds on our residential mortgage-backed securities portfolio. Cash flows from these securities were then reinvested at lower current rates. In addition, loan yields decreased 16 basis points to 4.71% due to lower interest rate indices. Loan spreads have generally remained stable. Funding costs were down 10 basis points from the third quarter of 2010. The cost of interest-bearing deposits decreased 17 basis points and the cost of other borrowed funds increased 32 basis points. The increased cost of other borrowed funds was due to an $87 million increase in our obligation to fund scheduled payments to investors for loans sold into Government National Mortgage Association ("GNMA") mortgage pools as discussed more fully in the Loans section of Management's Analysis & Discussion of Financial Condition following. We repurchased a substantial amount of these loans during the third quarter of 2011 which will reduce future funding costs by over 5.00%.

Net interest margin decreased 6 basis points from the second quarter of 2011. Yield on average earning assets decreased 10 basis points to 3.91%. Yield on the available for sale securities portfolio decreased 21 basis points. Yield on the loan portfolio increased 2 basis points. The cost of interest-bearing liabilities decreased 5 basis points compared to the previous quarter.

Average earning assets for the third quarter of 2011 increased $451 million or 2% over third quarter of 2010. The average balance of available for sale securities, which consist largely of U.S. government agency issued residential mortgage-backed securities, increased $504 million. We purchased these securities to supplement earnings, especially in a period of declining loan demand, and to manage interest rate risk. Average loans, net of allowance for loan losses, increased $34 million. Average commercial loans increased over the third quarter of 2010, partially offset by decreases in commercial real estate, residential mortgage and consumer loans.

Average deposits increased $1.7 billion over the third quarter of 2010, including a $1.3 billion increase in average demand deposit balances and a $611 million increase in average interest-bearing transaction accounts. Average time deposits decreased $156 million compared to the third quarter of 2010. Average borrowed funds decreased $1.4 billion compared to the third quarter of 2010.

- 2 -

Average earning assets for the third quarter of 2011 increased $393 million over the second quarter of 2011. Average outstanding loans, net of allowance for loan losses, increased $198 million. Commercial, commercial real estate and residential mortgage loan balances increased in third quarter of 2011, partially offset by a decrease in consumer loans. Average available for sale securities increased $113 million and mortgage trading securities increased $77 million. Average deposits increased by $648 million during the third quarter of 2011, including a $533 million increase in demand deposits and a $126 million increase in interest-bearing transaction accounts, partially offset by a $14 million decrease in time deposits. The average balances of borrowed funds decreased $110 million.

Our overall objective is to manage the Company's balance sheet to be relatively neutral to changes in interest rates as is further described in the Market Risk section of this report. Approximately two-thirds of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will re-price within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that re-price more slowly than the loans. The result is a balance sheet that would be asset sensitive, which means that assets generally re-price more quickly than liabilities. Among the strategies that we use to manage toward a relatively rate-neutral position, we purchase fixed-rate residential mortgage-backed securities issued primarily by U.S. government agencies and fund them with market rate sensitive liabilities. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. To the extent that intermediate and longer term interest rates remain at extremely low levels, mortgage-related security prepayments may accelerate putting additional downward pressure on the securities portfolio yield and on net interest margin as discussed above. We also may use derivative instruments to manage our interest rate risk. Derivative contracts are carried on the balance sheet at fair value. Changes in fair value of these contracts are included in derivatives gains or losses in the Consolidated Statements of Earnings.

The effectiveness of these strategies is reflected in the overall change in net interest revenue due to changes in interest rates as shown in Table 1 and in the interest rate sensitivity projections as shown in the Market Risk section of this report.

Table 1 - Volume / Rate Analysis
(In thousands)
                                 Three Months Ended                         Nine Months Ended
                                Sept. 30, 2011 / 2010                     Sept. 30, 2011 / 2010
                                          Change Due To1                            Change Due To1
                                                     Yield /                                    Yield
                         Change        Volume         Rate         Change        Volume         /Rate
Tax-equivalent
interest revenue:
 Funds sold and
resell agreements       $       1     $      (2 )   $       3     $      (8 )   $      (9 )   $       1
 Trading securities            67           148           (81 )        (226 )         277          (503 )
 Investment
securities:
Taxable securities            622           661           (39 )       2,979         4,172        (1,193 )
Tax-exempt securities        (585 )        (648 )          63        (1,916 )      (1,846 )         (70 )
Total investment
securities                     37            13            24         1,063         2,326        (1,263 )
 Available for sale
securities:
Taxable securities         (6,064 )       3,893        (9,957 )     (19,872 )      10,727       (30,599 )
Tax-exempt securities          (7 )          30           (37 )         (12 )         132          (144 )
Total available for
sale securities            (6,071 )       3,923        (9,994 )     (19,884 )      10,859       (30,743 )
 Mortgage trading
securities                     68           717          (649 )          57         1,268        (1,211 )
 Residential mortgage
loans held for sale          (976 )        (903 )         (73 )      (2,056 )      (1,724 )        (332 )
 Loans                     (4,263 )         136        (4,399 )     (19,405 )      (9,502 )      (9,903 )
Total tax-equivalent
interest revenue          (11,137 )       4,032       (15,169 )     (40,459 )       3,495       (43,954 )
Interest expense:
 Transaction deposits      (4,447 )         529        (4,976 )     (10,912 )       2,990       (13,902 )
 Savings deposits              (2 )          23           (25 )          25            81           (56 )
 Time deposits               (410 )        (717 )         307          (679 )      (1,728 )       1,049
 Funds purchased             (404 )         (32 )        (372 )      (1,021 )        (338 )        (683 )
 Repurchase
agreements                   (974 )          (2 )        (972 )      (2,483 )        (123 )      (2,360 )
 Other borrowings             387        (9,465 )       9,852            89       (25,195 )      25,284
 Subordinated
debentures                    (37 )           2           (39 )         (20 )           7           (27 )
Total interest
expense                    (5,887 )      (9,662 )       3,775       (15,001 )     (24,306 )       9,305
 Tax-equivalent net
interest revenue           (5,250 )      13,694       (18,944 )     (25,458 )      27,801       (53,259 )
Change in
tax-equivalent
adjustment                     81                                       (80 )
Net interest revenue    $  (5,331 )                               $ (25,378 )

1 Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.

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Other Operating Revenue

Other operating revenue was $174.0 million for the third quarter of 2011 compared to $137.7 million for the third quarter of 2010 and $143.0 million for the second quarter of 2011. Fees and commissions revenue increased $9.1 million over the third quarter of 2010. Net gains on securities, derivatives and other assets increased $24.2 million. Other-than-temporary impairment charges recognized in earnings in the third quarter of 2011 were $3.0 million less than charges recognized in the third quarter of 2010.

Other operating revenue increased $31.0 million over the second quarter of 2011. Fees and commissions revenue increased $18.2 million. Net gains on securities, derivatives and other assets increased $19.3 million. Other-than-temporary impairment charges recognized in earnings were $6.5 million greater than charges recognized in the second quarter of 2011.

Table 2 - Other Operating Revenue
(In thousands)
                           Three Months Ended                                               Three Months
                                Sept. 30,                Increase         % Increase            Ended           Increase         % Increase
                          2011            2010          (Decrease)        (Decrease)        June 30, 2011      (Decrease)        (Decrease)

 Brokerage and
trading revenue        $    29,451     $    27,072     $       2,379                 9 %    $      23,725     $       5,726                24 %
 Transaction card
revenue                     31,328          28,852             2,476                 9 %           31,024               304                 1 %
 Trust fees and
commissions                 17,853          16,774             1,079                 6 %           19,150            (1,297 )              (7 %)
 Deposit service
charges and fees            24,614          24,290               324                 1 %           23,857               757                 3 %
 Mortgage banking
revenue                     29,493          29,236               257                 1 %           19,356            10,137                52 %
 Bank-owned life
insurance                    2,761           3,004              (243 )              (8 %)           2,872              (111 )              (4 %)
 Other revenue              10,535           7,708             2,827                37 %            7,842             2,693                35 %
  Total fees and
commissions revenue        146,035         136,936             9,099                 7 %          127,826            18,209                14 %
Gain (loss) on other
assets, net                    712          (1,331 )           2,043               N/A              3,344            (2,632 )             N/A
Gain on derivatives,
net                          4,048           4,626              (578 )             N/A              1,225             2,823               N/A
Gain on mortgage
trading securities,
net                         17,788           3,369            14,419               N/A              9,921             7,867               N/A
Gain on available
for sale securities         16,694           8,384             8,310               N/A              5,468            11,226               N/A
Total
other-than-temporary
impairment                  (9,467 )        (4,525 )          (4,942 )             N/A                (74 )          (9,393 )             N/A
Portion of loss
recognized in
(reclassified from)
other comprehensive
income                      (1,833 )        (9,786 )           7,953               N/A             (4,750 )           2,917               N/A
Net impairment
losses recognized in
earnings                   (11,300 )       (14,311 )           3,011               N/A             (4,824 )          (6,476 )             N/A
   Total other
operating revenue      $   173,977     $   137,673     $      36,304                26 %    $     142,960     $      31,017                22 %

Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Fees and commissions revenue

Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 45% of total revenue for the third quarter of 2011, excluding provision for credit losses and gains and losses on asset sales, securities and derivatives. We believe that a variety of fee revenue sources provide an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. We expect continued growth in other operating revenue through offering new products and services and by expanding into markets outside of Oklahoma. However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

- 4 -

Brokerage and trading revenue, which includes revenues from securities trading, retail brokerage, customer derivative and investment banking increased $2.4 million or 9% over the third quarter of 2010. Securities trading revenue totaled $15.7 million for the third quarter of 2011, flat with the third quarter of 2010. Securities trading revenue represents net realized and unrealized gains primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers. As we understand the proposal to implement the Volcker Rule of the Dodd-Frank Act, we believe this activity is primarily market making rather than proprietary trading. Increased gains from municipal and corporate securities were largely offset by decreased gains on U.S. government securities and residential mortgage-backed securities guaranteed by U.S. government agencies.

Revenue earned from retail brokerage transactions increased $1.8 million or 31% over the third quarter of 2010 to $7.4 million. Retail brokerage revenue is primarily based on fees and commissions earned on sales of fixed income securities, annuities and mutual funds to retail customers. Revenue growth was primarily due to increased market volatility which increased customer demand.

Customer hedging revenue is based primarily on realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs. As more fully discussed under Customer Derivative Programs in Note 3 of the Consolidated Financial Statements, we offer commodity, interest rate, foreign exchange and equity derivatives to our customers. Customer hedging revenue totaled $3.3 million for the third quarter of 2011, down $393 thousand or 11% compared to the third quarter of 2010. The volume of energy derivative contracts declined primarily due to relatively stable commodity pricing, partially offset by an increase in revenue from to be announced ("TBA") residential mortgage backed securities which are classified as interest rate derivative contracts sold to our mortgage banking customers.

Investment banking includes fees earned upon completion of underwriting and financial advisory service which totaled $3.0 million for the third quarter of 2011, a $931 thousand increase over the third quarter of 2010 related to the timing and volume of completed transactions.

Brokerage and trading revenue increased $5.7 million over the second quarter of 2011. Securities trading revenue increased $2.4 million over the second quarter of 2011. Greater market volatility in the third quarter of 2011 and historically low interest rates increased volumes of U.S. Treasury, residential mortgage-backed securities, corporate debt securities and municipal securities. Derivative revenue increased $2.2 million primarily due to increased revenue from TBA securities sold to our mortgage banking customers. Investment banking fees were up $1.0 million over the second quarter of 2011. Retail brokerage fees were flat compared to the second quarter of 2011.

We continue to monitor the on-going development of rules to implement the Volcker Rule in Title VI of the Dodd-Frank Act which prohibits banking entities from engaging in proprietary trading as defined by the Dodd-Frank Act and restricts sponsorship of or investment in private equity funds and hedge funds, subject to limited exceptions. On October 11, 2011 regulators of financial institutions released a proposal for implementation of the Volcker Rule scheduled to take effect by July 21, 2012, subject in some cases to phase-in over time thereafter. The ultimate impact of the implementation of the Volcker Rule remains uncertain. Final regulations possibly could impose additional operational or compliance costs or restrict certain trading activities on behalf of our customers.

Title VII of the Dodd-Frank Act subjects nearly all derivative transactions to Commodity Futures Trading Commission ("CFTC") or Securities and Exchange Commission ("SEC") regulations. Title VII, among other things, imposes registration, recordkeeping, reporting, capital and margin, as well as business conduction requirements on major swap dealers and major swap participants. The CFTC and SEC have recently delayed the effective dates of a large portion of the proposed regulations under Title VII until December 31, 2012. The Company currently anticipates that one or more of its subsidiaries may be required to register as a "swap dealer" with the CFTC. The ultimate impact of Title VII is uncertain, but may pose higher operational and compliance costs on the Company.

- 5 -

Transaction card revenue depends largely on the volume and amount of transactions processed, the number of TransFund automated teller machine ("ATM") locations and the number of merchants served. Transaction card revenue for the third quarter of 2011 increased $2.5 million or 9% over the third quarter of 2010. Revenues from the processing of transactions on behalf of the members of our TransFund ATM network totaled $12.9 million, up $532 thousand or 4% over the third quarter of 2010, due primarily to increased ATM transaction volumes. Merchant services fees paid by customers for account management and electronic processing of transactions totaled $9.2 million, a $1.1 million or 13% increase over the prior year primarily as a result of cross-selling opportunities throughout our geographical footprint. Check card revenue from interchange fees paid by merchant banks for transactions processed from cards issued by the Company increased $865 thousand or 10% to $9.3 million due primarily to an increase in the number of transactions processed.

Transaction card revenue increased $304 thousand over the second quarter of 2011. ATM network revenue increased $381 thousand. Merchant services fees and check card revenue were flat compared to the prior quarter.

On June 29, 2011, the Federal Reserve Board issued a final rule establishing standards for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions as required by the Dodd-Frank Act. Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction will be the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction. The rule was effective on October 1, 2011. In addition, the Federal Reserve Board approved an interim rule that allows for an upward adjustment up to 1 cent to an issuer's debit card interchange fee for fraud prevention as outlined in the interim final rule. Issuers meeting these standards must certify as to their eligibility to receive this adjustment. We would expect a decline of $20 million to $25 million in our transaction card revenue annually based on the final rule.

Trust fees and commissions increased $1.1 million or 6% over the third quarter of 2010 primarily due to an increase in the fair value of trust assets. In addition, we continue to voluntarily waive administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds in the current low short-term interest rate environment. Waived fees totaled $2.1 million for the third quarter of 2011, $858 thousand for the third quarter of 2010 and $1.6 million for the second quarter of 2011. The fair value of trust assets administered by the Company totaled $31.8 billion at September 30, 2011, $31.5 billion at September 30, 2010 and $33.1 billion at June 30, 2011. Trust fees and commissions decreased $1.3 million compared to the second quarter of 2011 primarily due to a decrease in the fair value of trust assets and the timing of fees.

Deposit service charges and fees increased modestly over the third quarter of 2010. Overdraft fees totaled $15.2 million for the third quarter, up $287 thousand or 2% over the third quarter of 2010. Commercial account service charge revenue totaled $7.4 million, up $193 thousand or 3% over the prior year. Customers continue to maintain high commercial account balances resulting in a high level of earnings credit, a non-cash method for commercial customers to avoid incurring charges for deposit services based on account balances. Service charges on retail deposit accounts also increased, totaling $1.4 million for the third quarter of 2011.

Deposit service charges and fees increased $757 thousand over the prior quarter. Overdraft fees increased $578 thousand and commercial account service charges increased $140 thousand.

Mortgage banking revenue was notably strong for both the third quarter of 2011 . . .

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