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Aided by growth in mortgage banking revenue and commercial loan, BOK Financial Corporation (BOKF - Analyst Report) posted third-quarter 2012 earnings of $1.27 per share, well above the Zacks Consensus Estimate of $1.21.

Though BOK Financial’s results in the quarter under review were below the prior-quarter earnings of $1.43 per share, it surpassed the year-ago earnings of $1.24 per share.

Net income attributable to BOK Financial shareholders in the reported quarter was $87.4 million, compared with $97.6 million in the prior quarter and $85.1 million in the prior-year quarter.

Notably, in the prior quarter BOK Financial experienced a gain on the sale of common stock, obtained in settlement of a defaulted loan and a negative provision for credit losses. This led to an elevation in net income by $14 million or 21 cents per share in the prior quarter.

Quarter in Detail

BOK Financial’s net interest revenue totaled $176.0 million in the reported quarter, down 3% sequentially. Net interest margin fell 18 basis points (bps) from 3.30% in the prior quarter to 3.12% in the reported period. Notably, excluding the full recovery of a nonaccruing commercial loan, net interest margin for the second quarter was 3.25%.

With the cash flows being reinvested at lower rates, the yield on its securities portfolio continued to fall. Average earning assets also advanced $1.2 billion during the reported quarter.

BOK Financial’s fees and commissions revenue amounted to $166.3 million, escalating 8% sequentially. Results were aided by a 27% increase in mortgage banking revenue. The company experienced record mortgage loan production volumes and improved pricing of loans sold.

Total operating expenses at BOK Financial were $222.3 million, nearly flat sequentially. Excluding changes in the fair value of mortgage servicing rights, operating expenses totaled $212.8 million, up $1.2 million or less than 1% sequentially. The company experienced an elevation in both personnel costs as well as non-personnel expenses in the reported quarter from the prior quarter.

Credit Quality

The credit quality of BOK Financial’s loan portfolio produced improved results. Nonperforming assets totaled $264 million or 2.21% of outstanding loans and repossessed assets as of September 30, 2012, down from $279 million or 2.38% of outstanding loans and repossessed assets as of June 30, 2012.

Net charge-offs amounted to $5.7 million (or 0.19% of average loans on an annualized basis) in the reported quarter, slightly up from net charge-offs of $4.8 million (or 0.17%) in the prior quarter. Notably, third quarter recoveries were reduced by $7.1 million as a result of the refund of a settlement between BOK Financial and the City of Tulsa.

Further, the combined allowance for credit losses amounted to $236 million or 1.99% of outstanding loans as of September 30, 2012, declining from $241 million or 2.09% of outstanding loans as of June 30, 2012.

As a result, BOK Financial recorded no provision for credit losses in the reported quarter as against an $8.0 million negative provision for credit losses in the prior quarter.

Capital Position

As of September 30, 2012, armed with strong capital ratios, BOK Financial and its subsidiary banks exceeded the regulatory definition of well capitalized. However, as of the same date, Tier 1 and total capital ratios were 13.21% and 15.71%, respectively, down from 13.62% and 16.19%, respectively as of June 30, 2012.

Moreover, tangible common equity ratio slightly deteriorated to 9.67% as of September 30, 2012 from 10.07% as of June 30, 2012. Notably, the decline in Tier 1, total and tangible common equity ratios was mainly a result of asset growth.

Outstanding loans at BOK Financial as of June 30, 2012 were $11.6 billion, up $256 million from the prior quarter. Augmentation in commercial loans, commercial real estate and residential mortgage loans were partially offset by decrease in consumer loans.

Period end deposits amounted to $19.1 billion at September 30, 2012, up from $18.4 billion as of June 30, 2012. Elevation in interest-bearing transaction accounts and demand deposit accounts were partly offset by a fall in time deposits.

Dividend Update

During the reported quarter, the company paid a cash dividend of $26 million or 38 cents per share. On October 30, 2012, BOK Financial’s Board of Directors approved a quarterly cash dividend of 38 cents per share. The dividend will be paid on or about November 30, 2012 to shareholders of record as of November 16, 2012.

Moreover, on October 30, 2012, the Board of Directors approved a special cash dividend of $1.00 per common share.  The dividend would be paid on or about November 30, 2012 to shareholders of record as of November 16, 2012.

Our Viewpoint

The strategic expansions and local-leadership based business model of BOK Financial, with peers such as Texas Capital Bancshares Inc. (TCBI - Analyst Report) and First Financial Bankshares Inc. (FFIN - Snapshot Report), have aided its transformation into a leading financial service provider from a small bank in Oklahoma. Going forward, we believe BOK Financial’s diverse revenue mix and favorable geographic footprint would support its growth.

Moreover, in August, BOK Financial announced the acquisition of Denver-based The Milestone Group Inc., a wealth management firm. The acquisition by BOK Financial demonstrates its aim of diversifying its revenue opportunities by augmenting its fee-based business.

Having strengthened its foothold over the years through its local bank brand, Colorado State Bank and Trust, BOK Financial has a robust presence in Denver. Therefore, with the acquisition of Milestone Group, the company will further consolidate its foothold in Denver with the help of the acquired firm’s wealth management brand and proficiency.

Though regulatory issues and risks emanating from its private label mortgage backed securities portfolio remain a concern, we believe that its sturdy financial position and expense control initiatives and efficiency will help it to navigate through the current cycle.

The shares of BOK Financial currently retain a Zacks #2 Rank, which translates into a short-term Buy rating.

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