BOK Financial Corporation — Q2 2016 Form 10-Q
Reporting period: Quarter ended June 30, 2016; comparisons are primarily with Q2 2015 and Q1 2016. BOK Financial operates Commercial Banking, Consumer Banking and Wealth Management, with a centralized Funds Management function.
Financial performance and condition
- Profit: Net income attributable to BOK Financial shareholders was $65.8 million, or $1.00 per diluted share, versus $79.2 million, or $1.15, in Q2 2015 and $42.6 million, or $0.64, in Q1 2016. Pretax income was $96.8 million; income tax expense was $30.5 million, an effective rate of 31.5%.
- Revenue and margin: Net interest revenue was $182.6 million, essentially flat sequentially and up from $175.7 million a year earlier. Net interest margin was 2.63%, versus 2.65% in Q1 2016 and 2.61% in Q2 2015. Other operating revenue was $188.9 million, including $183.5 million in fees and commissions. Average earning assets were $28.8 billion.
- Expenses and credit costs: Operating expenses were $254.7 million, up $27.6 million year over year, with higher personnel, professional-fee and mortgage-banking costs. The provision for credit losses was $20.0 million, compared with $4.0 million a year earlier and $35.0 million in Q1 2016.
- Loans and asset quality: Period-end loans were $16.41 billion, up $384 million from March 31; commercial real estate and personal loans drove much of the increase. Energy loans were $2.82 billion, or 17% of loans. The combined credit-loss allowance was $252 million, or 1.54% of loans. Nonperforming assets excluding U.S.-government-guaranteed assets were $251 million, or 1.55% of loans and repossessed assets; nonperforming energy loans increased $8.6 million sequentially.
- Funding, liquidity and capital: Period-end deposits were $20.76 billion. The company reported $2.41 billion in cash and cash equivalents and approximately $4.5 billion of estimated unused collateralized borrowing capacity at the subsidiary bank. Total assets were $31.97 billion and shareholders’ equity was $3.37 billion. Common equity Tier 1 was 11.86%, total capital 13.51%, and leverage 9.06%. Total capital benefited from a $150 million subordinated-debt issuance in June.
- Debt and shareholder returns: Period-end other borrowings were $5.83 billion and subordinated debentures were $371.8 million. The parent issued $150 million of 40-year subordinated debt at 5.375%. The company paid a $0.43-per-share quarterly dividend and repurchased 305,169 shares at an average $58.23 per share.
- Cash flow, six months: Operating activities provided $185.1 million, compared with cash used of $89.0 million in the first half of 2015. Investing activities used $428.9 million; financing activities provided $6.8 million. Cash and cash equivalents decreased $237.0 million during the half-year.
Material changes versus comparable periods
- Q2 shareholder net income declined about 17% year over year, despite higher net interest revenue and fee revenue. The larger credit provision and higher operating expenses weighed on earnings.
- For the first six months, shareholder net income was $108.4 million versus $154.1 million in 2015. Net interest revenue rose to $365.2 million from $343.5 million, while the credit provision increased to $55.0 million from $4.0 million and operating expenses increased to $499.6 million from $447.4 million.
- Year-over-year fee growth was broad-based. Sequentially, fees and commissions increased $17.9 million, helped by brokerage and trading and mortgage banking revenue. Mortgage servicing fair-value changes, net of economic hedges, reduced Q2 pretax income by $1.2 million, versus an $11.4 million reduction in Q1.
- Energy credit deterioration remained a significant change from 2015: nonaccruing commercial loans rose to $182 million from $24 million at June 30, 2015, primarily reflecting energy loans. Potential problem loans totaled $501 million, including $421 million in energy.
Outlook, risks and unusual items
- Management estimated the 2016 loan-loss provision could range from $71 million to $80 million, based on conditions then observed and a stress scenario involving prolonged low oil and gas prices. This is an estimate, not a guarantee.
- Management described the balance sheet as managed toward relative interest-rate neutrality. Its sensitivity analysis estimated a 3.18% decline in next-12-month net interest revenue under a 50-basis-point rate decrease; results depend on assumptions about rates, repricing and customer behavior.
- Mortgage servicing rights are exposed to prepayment and rate movements. A 50-basis-point decline in mortgage rates was estimated to reduce their fair value by $53.6 million; a 50-basis-point increase was estimated to raise it by $31.0 million. The filing notes that changes in the primary/secondary mortgage-rate spread can be difficult to hedge.
- Energy remains a concentration and credit risk. The company reported that its stress scenario would produce losses above its 15-year historical energy-loan loss rate. It also noted that updated regulatory risk-grading guidance contributed to increases in criticized, potential-problem and nonaccrual energy loans.
- The company had $8.51 billion of loan commitments and $491 million of standby letters of credit. These are contingent exposures; stated commitments do not necessarily represent future cash needs. Mortgage repurchase and indemnification obligations and related accruals also remain.
- The proposed $102.5 million all-cash mobank acquisition was expected to close by year-end 2016, subject to regulatory approval and other conditions. Weaver Wealth Management and E-Spectrum Advisors were acquired in Q1 2016 for $7.7 million combined.
- Legal matters include a consumer deposit-account class action, an SEC investigation concerning conduct in a corporate-trust relationship, and a New Mexico municipal-bond suitability matter with a related $5.6 million arbitration claim. Management reported accruals or assessed recovery as remote where described; outcomes remain uncertain.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. No subsequent event requiring recognition or disclosure was identified through issuance.
Important facts for investors to verify
- Whether energy prices and borrower performance support the stated $71–$80 million full-year credit-provision estimate; track energy nonaccruals, potential problem loans, charge-offs and allowance coverage.
- Whether the growth in loans and fee revenue can offset rising funding costs and operating expenses, and whether margin remains near the reported 2.63%.
- How mortgage rates, prepayments and primary/secondary spreads affect mortgage servicing rights, mortgage banking earnings and liquidity.
- Progress and final terms of the pending mobank acquisition, including regulatory approval and integration costs.
- Developments, potential costs and reserve adequacy relating to the disclosed litigation, SEC investigation, mortgage repurchase obligations and off-balance-sheet commitments.
- Changes in deposit mix, FHLB borrowing reliance, unused borrowing capacity, capital ratios, dividends and share repurchases.