BOK Financial Corporation — Q2 2020 Form 10-Q
Reporting period: Three and six months ended June 30, 2020. BOK Financial is a diversified regional bank with Commercial Banking, Consumer Banking and Wealth Management businesses. Unless otherwise stated, amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q2 2020 | Comparison |
|---|---|---|
| Net income attributable to shareholders | $64.7 million; diluted EPS $0.92 | $137.6 million and $1.93 in Q2 2019; $62.1 million and $0.88 in Q1 2020 |
| Net interest revenue | $278.1 million | Down $7.3 million year over year; up $16.7 million quarter over quarter |
| Net interest margin | 2.83% | 3.30% in Q2 2019; 2.80% in Q1 2020 |
| Fees and commissions revenue | $213.7 million | Up $37.6 million year over year, led by mortgage banking and trading |
| Total other operating revenue | $232.7 million | Up $60.6 million year over year |
| Other operating expense | $295.4 million | Up $18.3 million year over year, including higher incentive compensation |
| Provision for credit losses | $135.3 million | $5.0 million in Q2 2019 and $93.8 million in Q1 2020 |
| Loans, period end | $24.2 billion | Up $1.7 billion from March 31, mainly from $2.1 billion of PPP loans |
| Deposits, period end | $33.9 billion | Up $4.6 billion from March 31 |
| Allowance for loan losses | $435.6 million, or 1.80% of loans | 1.97% excluding PPP loans; combined loan and unfunded-commitment allowance was $468.5 million |
| Capital | Common equity Tier 1 11.44%; total capital 13.43%; leverage 7.74% | Common equity Tier 1 was 10.98% at March 31 |
Q2 net income fell 53% year over year, principally reflecting the much larger credit-loss provision. Mortgage and trading activity supported fee revenue, while lower rates compressed asset yields and net interest margin versus the prior year. The filing does not provide a clear conventional operating-margin measure.
Cash flow, six months ended June 30: Operating activities provided $786.5 million, versus $677.0 million used in the first half of 2019. Investing activities used $3.0 billion and financing activities provided $2.2 billion. Cash and cash equivalents decreased $11.0 million to $1.25 billion. These cash-flow figures reflect substantial banking balance-sheet movements.
Liquidity and debt: Period-end deposits were $33.9 billion; funds purchased and repurchase agreements were $1.36 billion, other borrowings $3.17 billion and subordinated debentures $276 million. The company reported approximately $14.6 billion of estimated unused collateralized credit availability at the bank. Parent-company cash and interest-bearing cash equivalents were $180 million.
Material changes versus comparable periods
- Compared with Q2 2019, shareholder net income declined $72.9 million. The credit-loss provision increased to $135.3 million from $5.0 million, while net interest revenue declined $7.3 million.
- Fees and commissions rose 21% year over year. Mortgage banking revenue increased 92% to $53.9 million, and brokerage and trading revenue increased 53% to $62.0 million. Lower mortgage rates drove refinancing, production and related securities trading.
- Mortgage production volume was $1.07 billion, up 32% year over year; the gain-on-sale margin increased to 3.65% from 1.46%.
- Period-end nonperforming assets excluding U.S.-government-guaranteed assets increased to $284.6 million from $194.9 million at March 31. Nonaccruing energy loans rose to $163.0 million from $96.4 million.
- The company adopted CECL on January 1, 2020 without restating prior periods. The adoption reduced retained earnings by $46.7 million after tax; the company elected regulatory-capital transition relief.
Outlook, commentary and risks
- Management gave no specific earnings or revenue guidance. Its CECL base-case assumptions—not formal guidance—weighted COVID-19 scenarios at 50% base, 25% downside and 25% upside. The base case assumed GDP would return to pre-pandemic levels by mid-2022 and WTI oil would average $39.58 per barrel over the following 12 months.
- Management said more than 60% of loans with payment deferrals were returning to regular payments as of mid-July. As of June 30, customer forbearance requests totaled $1.2 billion: $704 million commercial, $398 million commercial real estate and $143 million individual loans.
- Credit risk is heightened by pandemic-related disruption, uncertain recovery and government support, oil and gas price volatility, and exposures to affected businesses and real estate. Energy loans were $4.0 billion, or 16% of total loans; non-pass energy loans increased substantially following borrowing-base reviews. Management said further credit migration depends on the durability of the economic recovery and oil prices.
- Rate cuts may continue to pressure net interest income and margin and affect mortgage servicing rights. Management reported a modeled 3.47% increase in next-12-month net interest revenue under a 200-basis-point rate increase; a rate-decrease result was not meaningful in the low-rate environment.
- Q2 included a $3.0 million charitable contribution and lease impairment charges on two leases. The net economic benefit from mortgage-servicing-rights hedges was $9.3 million. The company sold servicing rights on $1.6 billion of unpaid principal balance during the quarter.
- In a municipal-bond trustee matter, management said a loss to the company was not probable and recorded no provision, while noting a potential bondholder loss could become material if the bond principals cannot pay. Other disclosed litigation was generally assessed as not probable or not reasonably estimable.
- The board approved a $0.51 per-share quarterly dividend on August 4, 2020. Share repurchases were paused during Q2. Management reported effective disclosure controls and no material quarterly change in internal controls over financial reporting.
Important facts for investors to verify
- Whether credit-loss provisions, nonaccruals and criticized energy exposures continue to rise, and how much of the allowance reflects changing economic forecasts versus borrower-specific risk.
- Repayment performance after deferrals expire, including the status of the $1.2 billion of customer forbearances and mortgage-servicing advances.
- Durability of PPP-related balances and stimulus-driven deposit growth, and how PPP forgiveness, fees and funding affect future revenue and liquidity.
- Whether strong mortgage and trading revenues persist as rates, production capacity and market activity change, and how incentive compensation and servicing costs evolve.
- Capital and liquidity trends, including use of CECL transition relief, collateral availability, dividend capacity and the timing of any resumption of share repurchases.
- Developments in the municipal-bond trustee litigation and any change in management’s assessment that a company loss is not probable.