BOK Financial Corporation — 2014 Form 10-K
Business context and reporting period. This annual report covers the year ended December 31, 2014; references below to Q4 mean the three months ended that date. BOK Financial is a regional financial holding company operating in Oklahoma, Texas, New Mexico, Arkansas, Colorado, Arizona and Kansas/Missouri, with commercial banking, consumer banking and wealth management businesses. Total assets were $29.1 billion at year-end.
Key financial metrics
| Metric | 2014 | 2013 |
|---|---|---|
| Net interest revenue | $665.2 million | $674.5 million |
| Net interest margin | 2.68% | 2.80% |
| Fees and commissions revenue | $621.3 million | $603.8 million |
| Other operating revenue | $612.7 million | $614.5 million |
| Operating expenses | $847.5 million | $840.6 million |
| Provision for credit losses | $0 | $(27.9) million |
| Net income attributable to BOK Financial shareholders | $292.4 million | $316.6 million |
| Diluted earnings per share | $4.22 | $4.59 |
| Return on average assets | 1.04% | 1.16% |
| Return on average equity | 9.20% | 10.59% |
- Q4 performance: Shareholder net income was $64.3 million, or $0.93 diluted EPS, compared with $73.0 million, or $1.06, in Q4 2013. Net interest margin was 2.61%, versus 2.74%.
- Balance sheet: Loans rose 11% to $14.2 billion; deposits rose 4% to $21.1 billion; assets increased to $29.1 billion from $27.0 billion. Shareholders’ equity was $3.3 billion.
- Credit: The combined allowance for credit losses was $190 million, or 1.34% of loans, versus $187 million, or 1.47%, a year earlier. Nonperforming assets were $256.6 million, up from $247.7 million; excluding government-guaranteed assets, they declined to $129.0 million. Net recoveries were $2.8 million, compared with $2.0 million of net charge-offs in 2013.
- Cash flow and liquidity: Consolidated operating cash flow was $(36.6) million, investing cash flow $(434.0) million and financing cash flow $1.86 billion. Cash and cash equivalents increased $1.39 billion to $2.48 billion. Management reported approximately $6.9 billion of unused collateralized bank credit capacity.
- Debt and capital: Period-end subordinated debentures were $348.0 million. Other bank borrowings included $2.10 billion of FHLB advances, $1.19 billion of repurchase agreements and $57 million of funds purchased. Regulatory Tier 1, total capital and leverage ratios were 13.33%, 14.66% and 9.96%, respectively; the Bank was considered well capitalized.
- Shareholder returns: Regular cash dividends declared were $1.62 per share. The Company repurchased 200,000 shares under its announced plan during 2014.
Material changes versus the prior comparable period
- Shareholder net income declined 8% and diluted EPS declined 8%, primarily reflecting lower net interest revenue, the absence of the prior-year $27.9 million negative credit-loss provision, and higher expenses.
- Net interest revenue fell $9.3 million as loan-yield compression and a smaller securities portfolio outweighed growth in average earning assets. Management reduced available-for-sale securities by about $1.2 billion to prepare for higher longer-term rates.
- Fees and commissions increased 3%. Fiduciary and asset-management revenue grew 20%, supported by acquisitions and market-driven growth in administered assets; mortgage banking revenue fell 11% for the year, largely due to lower-margin production mix.
- Operating expenses increased 1%. Regulatory, risk-management and compliance investments contributed to higher professional-services and data-processing costs. Lower personnel expense included a reduction in the True-Up Plan accrual.
- Commercial Banking net income rose to $166.1 million from $149.6 million; Consumer Banking fell to $36.9 million from $64.6 million, largely due to weaker annual mortgage revenue; Wealth Management rose to $21.4 million from $17.1 million.
Outlook, risks and unusual items
- Management expected loan balances to continue growing at an annualized low-double-digit rate, partly offset by a shrinking securities portfolio. It expected a credit-loss provision in 2015 as loans grew.
- Management expected an additional $8–$10 million of 2015 costs for risk-management and regulatory-compliance enhancements. The Company also announced closures of in-store branches in Q1 2015; the filing cites 28 closures in one discussion and 29 in another, which investors should reconcile. Q4 included $4.9 million of closure costs and a $1.8 million real-estate contribution to the BOKF Foundation.
- Energy exposure is a key risk: energy loans were $2.9 billion, or 20% of loans, and unfunded energy commitments were also $2.9 billion. Oil prices fell sharply in the second half of 2014. Management’s stress review found no material near-term losses, but warned a downturn extending beyond 12 months could increase credit losses and weaken regional growth.
- Interest-rate pressure remains significant. Management cited competitive loan pricing, limited room to reduce deposit costs, and sensitivity of mortgage servicing rights and mortgage-backed securities to rate and prepayment changes.
- The Basel III capital framework took effect for the Company on January 1, 2015, with elements phasing in through 2019. Management estimated a fully phased-in Tier 1 common equity ratio of about 12.25%, above the 7% threshold, but said the Bank’s dividend capacity without regulatory approval would fall to zero upon adoption in Q1 2015.
- Other risks include concentrated lending in Texas and Oklahoma, mortgage-repurchase and representation-and-warranty obligations, regulatory changes, cybersecurity and third-party technology dependence. The filing reports no direct European sovereign-debt exposure and $3.8 million gross exposure to European financial institutions.
- Auditor Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. Management reported effective disclosure controls and internal controls.
Important facts for investors to verify
- Track energy portfolio performance, including borrower stress, unfunded commitments and credit losses as lower commodity prices affect customers and regional economies.
- Assess whether loan growth and deposit funding can offset margin compression and continued securities runoff.
- Review 2015 provision levels, nonperforming assets and allowance adequacy as credit conditions evolve.
- Confirm the impact of Basel III on subsidiary-bank dividends, capital distributions and reported capital ratios.
- Monitor mortgage production margins, servicing-rights valuation, interest-rate hedges and repurchase/indemnification claims.
- Reconcile the filing’s 28-versus-29 in-store branch-closure references and evaluate closure costs and projected savings.