BOK Financial Corporation — Q1 2016 Form 10-Q
Business context and reporting period. This quarterly report covers the three months ended March 31, 2016. BOK Financial operates Commercial Banking, Consumer Banking and Wealth Management businesses, primarily across Oklahoma, Texas and other U.S. markets. Results are unaudited.
Financial performance and condition
| Metric | Q1 2016 | Comparable period / change |
|---|---|---|
| Net income attributable to BOK Financial shareholders | $42.6 million; diluted EPS $0.64 | $74.8 million and $1.08 in Q1 2015; $59.6 million and $0.89 in Q4 2015 |
| Net interest revenue | $182.6 million | Up $14.8 million year over year; $181.3 million in Q4 2015 |
| Net interest margin | 2.65% | 2.55% in Q1 2015; 2.64% in Q4 2015 |
| Other operating revenue | $159.7 million | Down $6.3 million year over year |
| Provision for credit losses | $35.0 million | None in Q1 2015; $22.5 million in Q4 2015 |
| Operating expenses | $244.9 million | Up $24.6 million, or 11%, year over year |
| Cash flow | $5.2 million operating; $30.9 million investing; $(367.1) million financing | Cash and cash equivalents decreased $330.9 million to $2.31 billion |
| Loans and deposits at period end | $16.0 billion loans; $20.4 billion deposits | Loans up $81 million and deposits down $670 million from Dec. 31, 2015 |
| Borrowed funds | $6.55 billion | Includes $5.60 billion of FHLB advances; total borrowed funds were $5.88 billion at year-end 2015 |
| Capital at March 31 | CET1 and Tier 1 12.00%; total capital 13.21%; leverage 9.12% | 12.13%, 12.13%, 13.30% and 9.25%, respectively, at Dec. 31, 2015 |
Average earning assets were $28.6 billion, up 5% year over year, supporting higher net interest revenue. Reported consolidated net income was $41.0 million; the $42.6 million shareholder-attributable figure reflects a $1.6 million loss attributable to non-controlling interests. The effective tax rate was 34.3%.
Liquidity included $267 million of parent-company cash and approximately $4.4 billion of estimated unused collateralized credit available to the subsidiary bank. Equity capital was $3.4 billion. The company paid a $0.43-per-share quarterly dividend and announced another $0.43 dividend for May 2016.
Material changes versus prior periods
- Shareholder-attributable earnings fell 43% year over year, principally reflecting the credit-loss provision, lower mortgage servicing rights value net of hedges, and higher expenses.
- Energy credit deterioration drove $24.0 million of gross charge-offs, $1.5 million of recoveries and $22.5 million of net charge-offs, versus net recoveries of $8.4 million in Q1 2015. The combined credit-loss allowance rose to $240 million, or 1.50% of loans, from $227 million, or 1.43%, at year-end.
- Nonperforming assets excluding U.S.-government-guaranteed assets rose to $252 million from $156 million at year-end. Nonperforming energy loans increased $98 million during the quarter; nonaccrual energy loans were $160 million, or 5.27% of energy loans.
- Mortgage banking revenue fell $4.9 million year over year as lower production revenue outweighed higher servicing revenue. Mortgage servicing rights changes, net of economic hedges, reduced pretax income by $11.4 million, compared with a $5.0 million reduction in Q1 2015.
- Operating expenses increased, including $4.1 million of additional litigation accruals and $2.7 million of post-acquisition valuation adjustments to a consolidated merchant banking investment. Deposit insurance expense also rose with criticized and classified assets.
- Available-for-sale securities’ gross unrealized losses declined to $5.9 million from $42 million at year-end. No other-than-temporary impairment charge was recorded in Q1 2016.
Outlook, commentary, risks and unusual items
- Management estimated the 2016 loan-loss provision could total $60 million to $80 million, with most expected in the first half of the year. It cautioned the amount could be modestly higher if borrowing-base redeterminations, energy markets or other factors worsen.
- Management cited persistently low energy prices and no meaningful near-term recovery as credit concerns. A revised risk-rating methodology and regulatory energy review may lead to further rating changes through the first half of 2016.
- Energy loans totaled $3.0 billion, or 19% of loans; potential problem loans were $460 million, including $403 million in energy. The company said its energy lending is predominantly senior secured and that it has no direct exposure to energy-company equity or deepwater offshore borrowers.
- Interest-rate and mortgage-servicing valuations remain sources of earnings variability. Management reported a 50-basis-point decline in mortgage rates could reduce mortgage servicing rights fair value by $36.4 million; a 50-basis-point increase could raise it by $27.4 million. Its modeled 12-month net interest revenue effect was a 3.14% decline for a 50-basis-point rate decrease and a 0.28% decline for a 200-basis-point increase.
- Off-balance-sheet exposure included $8.6 billion of loan commitments and $510 million of standby letters of credit; commitments do not necessarily represent future cash needs. Mortgage repurchase and recourse obligations remain additional contingencies.
- The company disclosed ongoing litigation, including consumer and small-business deposit posting claims, a municipal bond-related matter under SEC investigation, and a New Mexico municipal-bond dispute seeking $5.6 million. Management stated it had accrued for certain matters and expected no material loss based on information then available; outcomes remain uncertain.
- A proposed $102.5 million all-cash acquisition of MBT Bancshares was expected to close in Q3 2016, subject to regulatory approval and other customary conditions. Q1 acquisitions for $7.7 million were not material to consolidated results.
Most important facts for investors to verify
- Whether energy prices, borrower performance and regulatory reviews drive additional criticized loans, nonaccruals, charge-offs or provision above the $60 million–$80 million 2016 estimate.
- How the $252 million of non-government-guaranteed nonperforming assets and $403 million of potential problem energy loans evolve, and whether collateral values support expected recoveries.
- Whether expense growth, litigation accruals and merchant-investment valuation adjustments recur or materially affect future earnings.
- How mortgage rates and primary-to-secondary mortgage spreads affect mortgage servicing rights, hedging results and reported earnings.
- Deposit trends, FHLB funding levels, liquidity availability and capital ratios, particularly as period-end deposits declined and borrowings increased.
- Progress, regulatory approval and final terms of the proposed MBT acquisition, as well as developments in the disclosed legal matters.