BOK Financial Corporation — Q2 2022 Form 10-Q
Business context and reporting period. BOK Financial is a diversified regional financial services company operating Commercial Banking, Consumer Banking and Wealth Management businesses. This unaudited report covers the quarter and six months ended June 30, 2022; amounts below are in U.S. dollars.
Key financial metrics
| Metric | Q2 2022 | Comparison |
|---|---|---|
| Net income attributable to shareholders | $132.8 million; diluted EPS $1.96 | Up from $62.5 million and $0.91 in Q1 2022; below $166.4 million and $2.40 in Q2 2021 |
| Net interest revenue | $274.0 million | Up $5.6 million from Q1 2022; below $280.3 million in Q2 2021 |
| Net interest margin | 2.76% | Up from 2.44% in Q1; 2.60% for the first six months versus 2.61% in 2021 |
| Other operating revenue | $168.6 million | Up $80.8 million from Q1, largely as brokerage and trading recovered from prior-quarter losses; down from $191.4 million in Q2 2021 |
| Fees and commissions | $173.4 million | Up $75.7 million from Q1; first-half fees of $271.0 million fell 18% year over year |
| Operating expense | $273.7 million | Down $4.0 million from Q1; first-half expense fell 6% year over year to $551.3 million |
| Pre-provision net revenue | $169.0 million | Non-GAAP measure; compared with $78.7 million in Q1 |
| Loans and deposits at period end | Loans $21.3 billion; deposits $38.6 billion | Loans grew $617 million from March 31; deposits declined $807 million |
| Credit quality | No consolidated provision for credit losses; $0.8 million net recoveries | Combined allowance for loan losses and unfunded commitments was $283 million, or 1.33% of loans excluding PPP |
| Capital | CET1 11.61%; total capital 12.59%; leverage 9.12% | CET1 was 11.30% at March 31 |
Material changes and balance sheet
- Q2 earnings improved substantially from Q1, chiefly because brokerage and trading revenue rebounded by $71.1 million, net interest revenue increased, and operating expense declined. Q1 trading results had been hurt by interest-rate volatility and inflation concerns.
- Mortgage banking revenue was $11.4 million, down $5.3 million from Q1. Mortgage production volume fell 25% to $306 million, amid higher mortgage rates, fewer refinance opportunities and competitive pricing pressure.
- Core loans, excluding PPP, increased $711 million during Q2, primarily from commercial lending. Unfunded loan commitments increased $979 million. Energy loans totaled $3.4 billion, or 16% of loans.
- Customer cash redeployment and increased spending reduced average deposits by $1.8 billion from Q1. Management said customers were moving cash into higher-yielding alternatives.
- The company transferred $2.4 billion of agency mortgage-backed securities from available-for-sale to held-to-maturity securities. The transfer involved a $268 million pretax unrealized loss retained in accumulated other comprehensive income (AOCI), rather than recognized immediately in earnings. AOCI was negative $603 million at quarter end, and shareholders’ equity was $4.7 billion.
- Cash and cash equivalents ended the six-month period at $2.0 billion, down $800 million. Operating cash flow was positive $6.4 billion, largely reflecting a $6.3 billion decrease in trading and fair-value-option securities; financing cash flow was negative $5.9 billion. These movements reflect balance-sheet activity and should not be read as ordinary operating cash generation alone.
- Period-end funds purchased and repurchase agreements were $677 million; other borrowings were $35.5 million and subordinated debentures were $131.2 million. The filing reports approximately $15 billion of estimated unused collateralized credit availability at the bank. Parent-company cash and interest-bearing cash totaled $162 million.
Outlook, risks and unusual items
- The filing gives no specific earnings or revenue guidance. Management expected higher rates to benefit net interest margin, potentially offsetting reduced mortgage-related fee income, and described the company’s balance sheet as asset-sensitive.
- At June 30, the company’s modeled 12-month net interest revenue sensitivity was positive 5.19% under a 200-basis-point rate increase and negative 4.83% under a 100-basis-point decrease. These are estimates dependent on assumptions about deposit repricing, customer behavior and market conditions.
- Credit-loss scenario assumptions reflected heightened economic uncertainty, inflation and Federal Reserve tightening. The downside scenario contemplated a U.S. recession; management estimated that a 100% downside weighting, rather than a 100% base case, would add $118 million to the quantitative reserve.
- Material exposures include interest-rate and mortgage-market volatility, valuation changes in securities and mortgage servicing rights, deposit outflows, and credit risk. Loan concentrations include energy, healthcare and commercial real estate; energy lending and unfunded energy commitments were each approximately $3.4 billion.
- Derivative customer programs can create collateral, liquidity and capital demands. A below-investment-grade rating downgrade would increase estimated cash-margin obligations by about $10 million. Management also disclosed commodity-price sensitivity in derivative assets.
- Legal matters include bondholder litigation related to a municipal bond trustee relationship, a putative 401(k) plan class action and a Colorado fiduciary-duty action. Management stated that losses were not probable in the described matters; some potential losses could not be reasonably estimated. No provision was recorded for the bondholder matters.
- Unusual items include a $5.8 million write-down of a repossessed midstream energy equity interest in Q2, and three bulk mortgage servicing rights acquisitions that added $3.5 billion in unpaid principal balance. The board approved a $0.53 quarterly dividend on August 2, payable on or about August 25, 2022.
Important facts for investors to verify
- Whether trading revenue remains closer to Q2’s recovery or is again affected by market volatility; Q2’s rebound followed Q1 losses.
- Whether loan growth, deposit attrition and funding costs support the expected benefit from higher interest rates.
- How the $2.4 billion securities transfer, unrealized losses and negative AOCI affect tangible capital and future reported earnings.
- Whether credit quality continues to improve and whether reserves remain adequate if the economic outlook worsens, particularly in energy and commercial real estate.
- How mortgage banking volumes, margins and servicing-rights valuations respond to further rate changes.
- The progress and potential financial exposure of the disclosed legal proceedings and off-balance-sheet commitments.