BOK Financial Corporation — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Unaudited results. BOK Financial operates Commercial Banking, Consumer Banking and Wealth Management businesses.
Financial performance and condition
- Q2 earnings: Net income attributable to BOK Financial shareholders was $151.3 million, or $2.27 diluted EPS, versus $162.4 million and $2.43 in Q1 2023. Net income was $132.8 million in Q2 2022, or $1.96 per diluted share.
- Six-month earnings: Net income attributable to shareholders was $313.7 million, or $4.70 per diluted share, versus $195.3 million and $2.87 in first-half 2022.
- Revenue and margin: Q2 GAAP net interest revenue was $322.3 million, down $30.1 million sequentially; tax-equivalent net interest margin fell to 3.00% from 3.45%. Deposit repricing and liability-mix changes drove most of the compression. Q2 fees and commissions were $200.5 million, up $14.5 million sequentially; total other operating revenue was $209.0 million. Fees and commissions represented 38% of defined total revenue.
- Costs and operating leverage: Q2 operating expense was $318.7 million, up $12.9 million sequentially; the efficiency ratio increased to 58.75% from 56.79%. Pre-provision net revenue, a non-GAAP measure, was $212.3 million versus $224.3 million in Q1.
- Credit: Q2 provision for credit losses was $17.0 million versus $16.0 million in Q1. Net charge-offs were $6.7 million, or 0.12% of average loans annualized, compared with $0.8 million and 0.01% in Q1. Nonperforming assets excluding U.S.-government-guaranteed assets were $125.0 million, up from $118.6 million at March 31.
- Loans and deposits: Loans totaled $23.2 billion at quarter-end, up $488 million from March 31. Period-end deposits were $33.3 billion, up $714 million sequentially, although average deposits declined $1.1 billion to $32.4 billion. The loan-to-deposit ratio was 70%.
- Liquidity and funding: Estimated uninsured deposits were $19.0 billion, or 57% of deposits; after collateralized deposits and deposits of consolidated subsidiaries, uninsured and uncollateralized deposits were $13.4 billion, or 40%. Estimated potential secured borrowing capacity was $23.5 billion, including $19.2 billion currently available through Federal Reserve and Federal Home Loan Bank programs. Cash and cash equivalents were $1.45 billion at June 30.
- Borrowings: Funds purchased and repurchase agreements were $5.45 billion at June 30, versus $2.27 billion at year-end 2022; other borrowings were $3.78 billion versus $4.74 billion. Subordinated debentures were $131 million.
- Capital and shareholder returns: Common Equity Tier 1 was 12.13%, total capital 13.24%, and leverage 9.75%. Tangible common equity ratio was 7.79% (7.49% adjusted for securities portfolio losses), down from 8.46% (8.22% adjusted) at March 31. The company repurchased 266,000 shares for an average $84.08 and paid a $0.54-per-share dividend in Q2. A further $0.54 dividend was approved August 1.
- Cash flow: For the six months, operating cash flow was negative $559.8 million, investing cash flow negative $969.3 million, and financing cash flow positive $1.57 billion. Financing included a $2.21 billion net increase in other borrowed funds; cash and cash equivalents increased $45.6 million. Trading and fair-value-option securities activity materially affected operating cash flows.
Changes versus comparable periods
- Q2 net interest margin and net interest revenue contracted sequentially as deposit costs rose: interest-bearing deposit cost increased 73 basis points to 2.56%, while total funding cost rose 84 basis points to 3.27%.
- For the first six months versus 2022, tax-equivalent net interest revenue increased to $679.1 million from $546.4 million and margin rose to 3.22% from 2.60%. The company attributed the improvement mainly to higher rates and faster repricing of variable-rate loans; the benefit is now being offset by deposit competition and funding mix.
- First-half fees and commissions rose $115.5 million to $386.5 million, led by a $100.4 million increase in brokerage and trading revenue, reflecting market disruption in early 2022 and higher current-period activity.
- First-half operating expense increased $73.2 million to $624.5 million, including higher compensation, technology/data-processing and FDIC insurance costs. A $33.0 million credit-loss provision was recorded in first-half 2023 versus none in first-half 2022.
- Available-for-sale securities had $910.8 million of gross unrealized losses at June 30; held-to-maturity securities had $194.4 million of gross unrealized losses. Management said it did not intend, and was not more likely than not required, to sell impaired available-for-sale securities before recovery, potentially at maturity.
Outlook, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Its CECL base-case economic assumptions—not company guidance—assign 50% probability to a forecast of 1.0% GDP growth over 12 months, unemployment rising to 4.2%, and WTI averaging $69.39 per barrel. A 40%-weighted downside case assumes a 2.0% GDP contraction; management estimated that a 100% downside weighting would add $157 million to the quantitative reserve versus a 100% base case.
- Management describes the balance sheet as asset-sensitive, but deposit price competition and shifts from noninterest-bearing deposits are compressing margins. Rate-sensitivity modeling estimates a 1.64% decline in next-12-month net interest revenue under a 200-basis-point rate increase; model results depend on uncertain deposit behavior and other assumptions.
- Commercial real estate exposure merits monitoring: CRE loans were $5.0 billion, including $1.0 billion in office loans; unfunded CRE commitments were $2.4 billion and described as at the upper concentration limit. The Q2 reserve increase partly reflected higher assumed CRE vacancy rates. Loans are also concentrated in energy, which represented $3.5 billion, or 15% of loans.
- Other material risks include higher funding costs, deposit outflows and reliance on wholesale funding; interest-rate-driven securities valuation and tangible-equity changes; market and counterparty exposure from trading and customer derivatives; and potential higher FDIC assessments. The filing added that recent regional-bank events could affect the company’s stock, regulatory scrutiny and costs.
- Unusual items included an $8.1 million gain on alternative investments, largely merchant banking activity, and a $3.0 million loss on sale of available-for-sale securities. The net cost of changes in mortgage servicing rights and related economic hedges was $1.2 million in Q2, versus $10.5 million in Q1.
- A long-running bondholder litigation matter remains unresolved. Management, based on counsel, said a loss was not probable and could not be reasonably estimated; no provision was recorded. The filing notes a potential bondholder loss could be material if a loss to the company became probable. Management reported effective disclosure controls and no material quarterly change in internal controls.
Most important facts for investors to verify
- Whether deposit levels, uninsured and uncollateralized balances, and wholesale funding needs remain stable—and how continued repricing affects net interest margin.
- Credit trends by CRE property type, especially office and multifamily, alongside energy exposures, nonaccruals, charge-offs and reserve assumptions.
- The scale and timing of unrealized securities losses, their effect on tangible common equity, and the company’s capacity to avoid forced sales.
- Whether fee income, particularly trading and alternative-investment gains, is repeatable, and whether expense growth and efficiency improve.
- Developments in the bondholder litigation, the proposed FDIC special assessment, and any regulatory or capital-distribution constraints.
- Reconcile non-GAAP measures and cash-flow drivers to the audited annual report and subsequent filings; the filing’s interim results are not necessarily indicative of full-year results.