BOK Financial Corporation — Q3 2015 Form 10-Q
Reporting period: Three and nine months ended September 30, 2015. BOK Financial is a regional financial services company operating in Commercial Banking, Consumer Banking and Wealth Management. Comparisons below are to Q3 2014 unless stated otherwise.
Financial performance and condition
| Metric | Q3 2015 / Sept. 30, 2015 | Comparison |
|---|---|---|
| Net income attributable to BOK Financial shareholders | $74.9 million; diluted EPS $1.09 | $75.6 million and $1.09 in Q3 2014; $79.2 million and $1.15 in Q2 2015 |
| Net interest revenue | $178.6 million | Up $11.8 million year over year; $175.7 million in Q2 2015 |
| Net interest margin | 2.61% | 2.67% in Q3 2014; unchanged from Q2 2015 |
| Other operating revenue | $163.4 million | Down $1.5 million year over year and $12.8 million sequentially |
| Operating expenses | $224.6 million | Up $2.8 million year over year; down $2.5 million sequentially |
| Provision for credit losses | $7.5 million | No provision in Q3 2014; $4.0 million in Q2 2015 |
| Loans and deposits | Loans $15.37 billion; deposits $20.62 billion | Loans up $243 million and deposits down $440 million from June 30, 2015 |
| Allowance for credit losses | $208 million, or 1.35% of loans | $202 million, or 1.34%, at June 30, 2015 |
| Nonperforming assets | $204 million; $118.6 million excluding assets guaranteed by U.S. agencies | Excluding guaranteed assets, down from $122.7 million at June 30; ratio was 0.78% of relevant loans and repossessed assets |
| Regulatory capital | CET1 12.78%; Tier 1 12.78%; total capital 13.89%; leverage 9.55% | All exceeded stated minimums including the applicable capital conservation buffer |
| Balance sheet and liquidity | Total assets $30.57 billion; total equity $3.42 billion; cash and cash equivalents $2.32 billion | Unused collateralized subsidiary-bank credit availability was approximately $5.2 billion |
For the first nine months, net income attributable to shareholders was $229.0 million versus $228.1 million in 2014. Net cash from operating activities was $171.7 million, compared with cash used of $20.8 million in the prior-year period; investing activities used $1.22 billion and financing activities provided $895.4 million. Cash and cash equivalents decreased $156.5 million over the nine-month period.
Period-end borrowed funds totaled approximately $5.48 billion, including $4.60 billion of Federal Home Loan Bank advances and $226 million of subordinated debentures. The $122 million subordinated debt that matured in June 2015 reduced funding costs; FHLB borrowing increased. The company’s $100 million revolving credit facility matured in June and was not renewed.
Material changes versus comparable periods
- Net interest revenue grew with average earning-asset and loan growth, but loan yield pressure reduced the margin year over year. Loan yield was 3.54% in Q3, down 24 basis points year over year.
- Fees and commissions rose 4% to $164.7 million year over year, mainly on higher mortgage banking revenue. Mortgage revenue increased $6.4 million year over year but fell $3.7 million sequentially as production slowed.
- The net fair-value change in mortgage servicing rights, after economic hedges, reduced Q3 2015 pre-tax income by $4.4 million, versus a $4.8 million increase in Q3 2014. This contributed to quarterly revenue volatility.
- Loan growth was led by commercial real estate, up $202 million during the quarter. Average loans increased $287 million sequentially. Average deposits declined $401 million sequentially.
- The company repurchased 1.26 million shares for approximately $80 million during Q3, completing its existing authorization. It paid a $0.42-per-share quarterly dividend.
Outlook, commentary, risks and unusual items
- Outlook: The filing provides no specific earnings or revenue guidance. Management expects revenue growth over time from new products and market development, while noting competition, regulatory constraints and market saturation could limit growth. Management seeks to manage the balance sheet toward relative interest-rate neutrality.
- Credit and energy exposure: Energy loans were $2.84 billion, or 18% of total loans, with $2.7 billion of unfunded energy commitments. The allowance attributed to energy loans rose to 2.05% from 1.74% at June 30. Energy nonaccrual loans increased to $17.9 million from $6.8 million; potential problem energy loans were $96 million. Management said its updated stress test supported its view that the portfolio was well positioned, but energy prices and borrower conditions remain significant risks.
- Interest-rate sensitivity: Model projections estimate next-12-month net interest revenue would decline 0.70% under an immediate 200-basis-point increase and 2.62% under a 50-basis-point decrease. The filing cautions that simulations rely on uncertain assumptions and actual results may differ.
- Off-balance-sheet exposure: Loan commitments were $8.33 billion and standby letters of credit $480 million. Such commitments may expire undrawn. Mortgage loans sold with recourse totaled $162 million; separate accruals also cover potential repurchases or indemnification under representations and warranties.
- Legal and other contingencies: A consumer deposit-account posting class action and a complaint concerning an employee’s conduct as trustee of municipal bonds remained unresolved; management could not estimate potential losses for either matter. A separate extended-overdraft-fee case was dismissed on the merits. The filing also reports litigation-related accruals in operating expenses, without clearly specifying their amount.
- Other notable items: A $2.0 million reduction in tax expense resulted from expiration of the statute of limitations on uncertain tax positions. The company acquired a majority interest in Heartland Food Products for $18 million; the pro forma impact was described as immaterial. On October 27, the board approved a $0.43 quarterly dividend and authorized repurchases of up to five million additional shares.
Important facts for investors to verify
- Whether energy-sector credit migration, criticized loans and unfunded commitments lead to further provisions, charge-offs or deterioration in collateral values.
- Whether loan growth can offset competitive pricing pressure and continued declines in loan yields and net interest margin.
- Whether deposit levels and the increased reliance on FHLB advances remain stable, and how funding costs respond to market-rate changes.
- How mortgage origination-system implementation, production volumes and mortgage servicing-rights valuation affect fee income and earnings volatility.
- Developments in the unresolved legal matters and potential mortgage repurchase, recourse and indemnification obligations.
- Whether planned dividends and newly authorized share repurchases remain consistent with capital requirements and future liquidity needs.