BOK Financial Corporation — Q2 2014 Form 10-Q
Reporting period: Quarter ended June 30, 2014; comparisons are primarily with Q2 2013 and Q1 2014. BOK Financial is a diversified regional bank with Commercial Banking, Consumer Banking and Wealth Management businesses.
Financial performance and condition
- Earnings: Net income attributable to BOK Financial shareholders was $75.9 million, or $1.10 per diluted share, versus $79.9 million, or $1.16, in Q2 2013 and $76.6 million, or $1.11, in Q1 2014. For the first six months, attributable net income was $152.5 million versus $167.9 million a year earlier.
- Net interest: Net interest revenue was $166.1 million; net interest margin was 2.75%, compared with 2.80% in Q2 2013 and 2.71% in Q1 2014. Loan pricing pressure and narrower spreads weighed on year-over-year results.
- Fees and expenses: Fees and commissions were $164.1 million, up 3% year over year and $23.2 million sequentially. Total operating expenses were $214.7 million, up 2% year over year. The consolidated efficiency ratio was 63.62%, versus 63.11% in Q2 2013.
- Credit quality: No consolidated provision for credit losses was recorded in Q2. Gross charge-offs were $3.5 million and recoveries were $5.5 million, producing net recoveries of $2.0 million. The combined allowance for credit losses was $192 million, or 1.43% of loans. Nonperforming assets excluding U.S.-government-guaranteed balances were $145 million, down from $153 million at March 31.
- Balance sheet and funding: Total assets were $27.8 billion; loans were $13.4 billion and deposits were $20.6 billion at quarter-end. Deposits increased $182 million from March 31. Cash and cash equivalents were $1.35 billion. Borrowed funds, including subordinated debentures, totaled approximately $3.36 billion; the $100 million parent-company revolving facility was undrawn.
- Capital and shareholder returns: Shareholders’ equity was $3.21 billion. The Tier 1 common equity ratio was 13.46%, and the company reported that it and its bank subsidiary exceeded well-capitalized requirements. The quarterly dividend was $0.40 per share; the board approved another $0.40 dividend payable in August.
- Cash flow: For the six months ended June 30, operating cash flow was negative $16.3 million, investing cash flow was negative $172.1 million, and financing cash flow was positive $449.1 million. Cash and cash equivalents increased $260.7 million.
Material changes and notable items
- Year-over-year shareholder earnings declined about 5%. Higher fee income and lower credit losses were offset by lower net interest revenue, higher expenses and weaker mortgage production revenue.
- Mortgage banking revenue fell 20% year over year to $29.3 million, mainly as higher mortgage rates reduced production and refinancing and gain-on-sale margins narrowed. Mortgage loans funded for sale were $1.1 billion, down 9% year over year.
- Commercial Banking net income rose to $40.0 million from $36.0 million; Consumer Banking net income fell to $7.8 million from $17.8 million, primarily reflecting mortgage revenue weakness; Wealth Management net income increased to $5.2 million from $0.9 million.
- Loans grew $349 million during the quarter, principally in commercial lending. Energy loans were $2.4 billion, or 18% of total loans. The allowance ratio declined from 1.45% at March 31. Nonaccruing loans were $96.7 million, down from $104.7 million at March 31, while identified potential problem loans increased to $105 million from $74 million.
- Available-for-sale securities amortized cost declined $305 million from March 31. Unrealized losses were $55 million, down from $102 million; no other-than-temporary impairment charge was recognized in Q2.
- Q1 included a $17.2 million reversal of accrued executive compensation under the 2011 True-Up Plan, contributing to the sequential increase in Q2 personnel expense. Q1 also included a $2.4 million appreciated-stock charitable contribution and related $1.2 million income-tax benefit.
- The company acquired GTRUST Financial Corporation in February and MBM Advisors in April 2014 for approximately $27 million combined, including contingent consideration. Management said the pro forma impact was not material.
Outlook, risks and contingencies
- Management anticipated reducing the bond portfolio by about $600 million over the remainder of 2014, with quarterly loan growth in the low double digits, to reposition the balance sheet for a longer-term rising-rate environment. Management expected the asset mix shift to support net interest margin. No full-year earnings guidance is stated in the supplied filing text.
- Key sensitivities include loan spread compression, interest-rate changes, mortgage production and servicing-rights valuations, competition, regulation, and the economic conditions affecting customers. The filing’s model estimated a 1.18% decline in next-12-month net interest revenue under a 200-basis-point rate increase and a 2.23% decline under a 50-basis-point decrease; management cautioned that simulations are assumption-dependent.
- Energy lending is a material concentration, and the filing notes commodity-price and reserve-estimation risks. Commercial and commercial real estate credit quality, especially residential construction and land development, also warrants monitoring.
- Off-balance-sheet exposures included $7.5 billion of unfunded loan commitments, $469 million of standby letters of credit, and $181 million of residential mortgage loans sold with recourse. Mortgage repurchase and indemnification obligations, customer derivatives, and potential margin requirements are additional exposures.
- Management believed ordinary-course litigation would not materially affect results. The company disclosed its share of Visa covered litigation obligations and an ongoing Oklahoma tax audit, but did not expect a material adverse effect from the remaining tax issue.
Important facts for investors to verify
- Whether loan growth and the planned securities reduction improve net interest margin without increasing funding or credit risk.
- Whether energy exposure, rising potential problem loans, and the allowance remain appropriate as portfolio conditions change.
- Whether mortgage production, margins and servicing-rights valuations stabilize, and how much earnings volatility remains from related hedges.
- How the $17.2 million Q1 executive-compensation accrual reversal affects comparisons of recurring expense and earnings.
- Current liquidity and capital impacts of commitments, derivative collateral requirements, mortgage recourse and repurchase exposures.