BOK Financial Corporation — Q1 2014 Form 10-Q
Reporting period: Three months ended March 31, 2014. BOK Financial is a diversified regional financial services company, with Commercial Banking, Consumer Banking and Wealth Management businesses. Unless otherwise noted, financial results are compared with Q1 2013; balance-sheet comparisons are generally with December 31, 2013.
Financial performance and condition
- Earnings: Net income attributable to BOK Financial shareholders was $76.6 million, or $1.11 per diluted share, down from $88.0 million, or $1.28 per share, a year earlier. Net income was $73.0 million, or $1.06 per share, in Q4 2013. Pretax income was $114.5 million, versus $136.2 million in Q1 2013.
- Revenue and margin: Net interest revenue was $162.6 million, down $8.8 million year over year; net interest margin was 2.71%, down 19 basis points. Total other operating revenue was $137.0 million, down $23.7 million. Fees and commissions were $140.9 million, down 10%; mortgage banking revenue fell 43% to $22.8 million. Lower mortgage production and narrower sale margins were key factors.
- Expenses and credit: Operating expenses were $185.1 million, down $18.9 million year over year. No net provision for credit losses was recorded; gross charge-offs were $2.8 million and recoveries were $5.4 million. The combined allowance for credit losses was $190 million, or 1.45% of loans.
- Asset quality: Nonperforming assets were $255.7 million, including $153.0 million excluding assets guaranteed by U.S. government agencies. Nonaccruing loans were $104.7 million, or 0.80% of loans. Potential problem loans were $74 million.
- Balance sheet and funding: Loans totaled $13.1 billion, up $286 million from year-end; deposits were $20.4 billion, up $120 million. Total assets were $27.4 billion. Cash and cash equivalents ended the quarter at $1.35 billion. The bank reported approximately $8.8 billion of estimated unused collateralized borrowing capacity.
- Cash flow: Operating activities provided $60.4 million; investing activities provided $17.1 million; financing activities provided $189.3 million. Cash and cash equivalents increased $266.8 million during the quarter.
- Debt, liquidity and capital: Period-end funds purchased, repurchase agreements, other borrowings and subordinated debentures totaled approximately $3.32 billion. The company reported $3.1 billion of shareholders’ equity. Tier 1 common equity was 13.59%, Tier 1 capital 13.77%, total capital 15.55%, and leverage 10.17%; the company and bank exceeded well-capitalized regulatory thresholds. No amounts were outstanding on the company’s $100 million revolving credit facility at quarter-end.
- Dividends: The company paid $0.40 per share during the quarter and announced a further $0.40 quarterly dividend, payable on or about May 30, 2014.
Material changes and notable items
- Compared with Q1 2013, shareholder net income declined about 13%, with lower net interest revenue and reduced mortgage banking activity outweighing lower expenses and improved credit performance.
- Personnel expense declined $21.2 million, largely reflecting a $15.5 million reduction in the accrued liability under the 2011 True-Up Plan. The remaining accrual was $54 million and was expected to be paid in May 2014.
- Mortgage production revenue fell $18.5 million year over year. Mortgage loans funded for sale declined 24% to $727.5 million, as higher mortgage rates reduced production volume. Servicing revenue increased, supported by a larger servicing portfolio.
- Commercial and commercial real estate lending drove quarterly loan growth, increasing $108 million and $216 million, respectively. Residential mortgage and consumer loan balances decreased.
- Available-for-sale securities’ amortized cost declined $267 million from year-end. Gross unrealized losses on these securities fell to $102 million from $158 million; no other-than-temporary impairment charge was recorded in Q1.
- GTRUST Financial was acquired on February 28, adding $631 million of fiduciary assets. The company also acquired MBM Advisors on April 30, after quarter-end. The filing reports a combined approximate purchase price of $27 million for the acquisitions and says their pro forma impact was not material.
Outlook, commentary and risks
- Management anticipated reducing the bond portfolio by approximately $1 billion over 2014, with loan growth in the mid-to-high single digits expected to partly offset the resulting reduction in earning assets. Management said the shift in asset mix should support net interest margin; this is a projection, not formal earnings guidance.
- Management described the balance sheet as asset-sensitive, while seeking to manage interest-rate exposure. The model projected net interest revenue declines of 1.66% under a 200-basis-point rate increase and 1.88% under a 50-basis-point decrease over the next 12 months. Results depend on assumptions about repricing, deposits, customer behavior and market conditions.
- Key business risks include continued loan pricing pressure, changing interest rates, mortgage market volatility, competition, regulation and borrower repayment capacity. Energy loans were $2.3 billion, or 18% of loans; management cited commodity-price and reserve-estimation risks. Texas and Oklahoma accounted for significant loan concentrations.
- Mortgage servicing rights and their economic hedges can create quarterly earnings volatility as mortgage rates, prepayments and valuation assumptions change. A 50-basis-point rate move was estimated to change the value of servicing rights, net of hedges, by several million dollars.
- Customer derivative programs create counterparty, collateral, liquidity and regulatory-capital risks. A downgrade below investment grade was estimated to increase required cash margin by approximately $26 million.
- Off-balance-sheet exposures included $7.1 billion of unfunded loan commitments, $440 million of standby letters of credit, $187 million of mortgage loans sold with recourse, and an $8 million accrual for potential mortgage repurchases and indemnifications.
- Other unusual or contingent matters include a $1.5 million charge on a merchant-banking investment, a $1.7 million decline in certain deferred-compensation hedge assets, potential Volcker Rule-driven divestiture of private-equity investments, and Visa-related litigation obligations. Management did not expect ordinary-course litigation or the disclosed Oklahoma tax audit to have a material adverse effect.
Important facts for investors to verify
- Whether loan growth and asset-mix changes can offset ongoing net interest margin and net interest revenue pressure.
- Whether mortgage banking revenue stabilizes as rates, originations and gain-on-sale margins change.
- Credit quality trends, especially nonaccrual commercial real estate and residential mortgage loans, potential problem loans, and the adequacy of the allowance as loan balances grow.
- The assumptions and sensitivity of mortgage servicing rights, securities values and customer derivative exposures to market movements.
- Whether the $54 million True-Up Plan accrual was paid as expected and whether the expense reduction is nonrecurring.
- Integration, purchase accounting and returns from GTRUST and MBM Advisors, including the post-quarter-end MBM acquisition.
- Capital and liquidity implications of regulatory changes, dividend plans, off-balance-sheet commitments and any material developments in contingencies.