BOK Financial Corporation — Q2 2017 Form 10-Q
Business context and period. BOK Financial is a regional banking and financial services company with Commercial Banking, Consumer Banking and Wealth Management businesses. This filing reports the quarter and six months ended June 30, 2017; financial statements are unaudited. Comparisons below are with Q2 2016 unless otherwise noted.
Financial performance and condition
| Metric | Q2 2017 / June 30, 2017 | Comparison and context |
|---|---|---|
| Net income attributable to BOK Financial shareholders | $88.1 million; diluted EPS $1.35 | $65.8 million and $1.00 per diluted share in Q2 2016; $88.4 million and $1.35 in Q1 2017. |
| Net interest revenue; net interest margin | $205.2 million; 2.89% | Revenue was $182.6 million and margin 2.63% in Q2 2016; Q1 2017 margin was 2.81%. Growth reflected higher yields and average earning assets. |
| Other operating revenue | $182.3 million | Down $3.3 million year over year. Fees and commissions were $177.5 million, down $2.7 million. |
| Operating expense; income tax | $250.9 million; $47.7 million | Expense was essentially flat year over year. Effective tax rate was 34.9%, versus 31.5% in Q2 2016; excluding the new equity-compensation accounting treatment, the Q2 rate would have been 33.7%. |
| Credit costs and asset quality | No combined provision for credit losses; gross charge-offs $2.9 million and recoveries $1.2 million | Q2 2016 included a $20.0 million provision. Combined allowance for credit losses was $256 million, or 1.49% of loans, versus $258 million, or 1.52%, at March 31, 2017. |
| Loans and deposits | Loans $17.2 billion; period-end deposits $22.3 billion | Loans increased $192 million and deposits decreased $259 million versus March 31, 2017. Average deposits fell $277 million quarter over quarter. |
| Nonperforming assets | $365.5 million including government-guaranteed assets; $275.8 million excluding them, or 1.62% of loans and repossessed assets | Excluding government-guaranteed assets, the amount was $240.2 million, or 1.43%, at March 31, 2017. The increase primarily reflected nonaccruing healthcare and energy loans. |
| Capital and liquidity | CET1 11.76%; total capital 13.36%; leverage 9.27%. Parent-company cash and interest-bearing cash: $187 million. | At March 31, 2017, CET1 was 11.59%, total capital 13.25% and leverage 8.89%. Estimated unused collateralized credit availability was $6.1 billion. |
| Debt and equity | Other borrowings $5.23 billion; subordinated debentures $144.7 million; shareholders’ equity $3.42 billion | Deposits were the company’s largest funding source. The reported debt components are balance-sheet amounts; funds purchased and repurchase agreements were additional funding liabilities. |
Cash flow, six months ended June 30: operating cash flow was $228.4 million, investing cash flow was $666.7 million and financing cash flow was negative $792.2 million. Cash and cash equivalents increased $102.9 million to $2.64 billion. Financing outflows included deposit reductions, derivative-related cash flows and $57.4 million of dividends paid.
Material changes versus comparable periods
- Shareholder net income rose about 34% year over year, supported by $22.6 million higher net interest revenue and the absence of the $20 million credit-loss provision recorded in Q2 2016.
- Average earning assets were $29.2 billion, up $424 million year over year; average loans grew $860 million, including $495 million associated with the Mobank acquisition. Higher short-term rates lifted loan yields, while funding costs also increased.
- Fee revenue was mixed: fiduciary and asset management revenue grew 20% to $41.8 million, while brokerage and trading fell 20% to $31.8 million and mortgage banking declined 13% to $30.3 million.
- Mortgage production volume fell 53% year over year, partly reflecting the exit from correspondent lending in 2016 and lower production in online and retail channels. Higher gains-on-sale margins partly offset lower volumes.
- Wealth Management deposits and loans increased substantially year over year; the filing attributes some balance-sheet growth to the Mobank acquisition completed in December 2016.
Outlook, management commentary, risks and unusual items
- Management’s 2017 credit-loss provision expectation was $0–$10 million, based on observed conditions and an energy-portfolio stress test. The company recorded no combined provision in either Q1 or Q2 2017.
- Credit risks include energy and healthcare exposures. Energy loans were $2.8 billion, or 17% of loans; nonaccruing energy loans were $124 million. Management cited stable energy prices but noted prolonged low prices could affect the portfolio and regional economies.
- Management reported an increase in nonaccruing healthcare and energy loans. Potential problem loans were $327 million at June 30, down from $413 million at March 31. Changes in regulatory energy-loan grading practices can also affect criticized and nonaccrual classifications.
- Interest-rate, mortgage-prepayment and mortgage-servicing-rights valuation changes may affect earnings. The company’s model estimated that a 50-basis-point rate decrease would reduce next-12-month net interest revenue by 2.07%; management cautions that modeled results depend on assumptions and may differ from actual outcomes.
- Unusual favorable items included $5.1 million in deposit-insurance assessment credits and $6.1 million in other gains, principally from a merchant banking investment sale. Share-based compensation expense increased, partly because of revised vesting assumptions for performance awards.
- Contingencies include litigation related to municipal-bond trustee activities, a Texas deposit-account dispute and an overdraft-fee class action. Management said losses were not probable for the specified unresolved matters; in one bond case, a material loss could become probable if the court-ordered payment plan fails, and an estimate could not be made.
- The board approved a regular quarterly dividend of $0.44 per share, payable in August 2017. No shares were repurchased in Q2; 2.12 million shares remained available under the repurchase authorization.
- Management concluded disclosure controls were effective and reported no material change in internal control over financial reporting during the quarter. Forward-looking statements are subject to economic, credit, interest-rate, competition, regulatory and other risks.
Important facts for investors to verify
- Track whether nonperforming assets—especially nonaccruing healthcare and energy loans—and the allowance remain consistent with underlying credit performance.
- Assess whether net interest margin gains persist as deposit and wholesale funding costs rise, and as deposits and loan balances change.
- Evaluate the sustainability of fee income, including fiduciary growth, lower brokerage activity and mortgage production trends.
- Review the assumptions behind management’s $0–$10 million 2017 provision expectation and the potential effects of energy prices and CECL adoption.
- Monitor the outcome and potential exposure of the disclosed litigation and mortgage repurchase or indemnification obligations.
- Confirm capital, liquidity and dividend capacity, including the bank’s ability to upstream dividends to the parent under regulatory limits.