BOK Financial Corporation — Q2 2013 Form 10-Q
Business context and reporting period
Regional financial holding company with commercial banking, consumer banking and wealth management operations. This unaudited quarterly report covers the three and six months ended June 30, 2013; comparisons are primarily with Q2 and first-half 2012, and with Q1 2013.
Financial and operating metrics
| Metric | Q2 2013 / June 30, 2013 | Comparison |
|---|---|---|
| Net income attributable to BOK Financial shareholders | $79.9 million; diluted EPS $1.16 | $97.6 million and $1.43 in Q2 2012; $88.0 million and $1.28 in Q1 2013 |
| First-half shareholder net income / diluted EPS | $167.9 million / $2.44 | $181.2 million / $2.65 in first-half 2012 |
| Net interest revenue / margin | $167.2 million / 2.81% | $181.4 million / 3.30% in Q2 2012; $170.4 million / 2.92% in Q1 2013 |
| Fees and commissions | $160.9 million | Up 3% year over year; mortgage banking fees declined while most other fee categories grew |
| Operating expenses | $196.6 million reported; $210.9 million excluding changes in mortgage servicing rights fair value | Excluding those fair-value changes, largely unchanged year over year and up $6.9 million sequentially |
| Credit losses and asset quality | No Q2 provision; net charge-offs $2.3 million, or 0.08% annualized; combined allowance $205 million, 1.65% of loans | Net charge-offs were $4.8 million in Q2 2012; allowance was $207 million, 1.71% of loans at Q1 end |
| Loans / deposits | Loans $12.4 billion; period-end deposits $19.5 billion | Loans up $347 million and deposits down $364 million from March 31, 2013 |
| Capital | Tangible common equity ratio 9.38%; Tier 1 capital ratio 13.37% | Tangible common equity was 9.70% at March 31; company and bank exceeded well-capitalized regulatory definitions |
| Cash flow and liquidity | First-half operating cash flow $272.8 million; cash and cash equivalents $1.08 billion at June 30 | Operating cash flow was $391.2 million in first-half 2012. Unused collateralized subsidiary-bank credit was about $8.0 billion |
Total assets were $27.8 billion and shareholders’ equity was $3.0 billion at June 30. Subordinated debentures totaled $347.7 million; no amount was outstanding under the parent company’s $100 million revolving credit facility. The company paid a $0.38-per-share quarterly dividend and approved the same amount for payment in August.
Material changes versus comparable periods
- Q2 shareholder earnings fell from the prior year, principally amid lower net interest revenue and a sharp decline in gains on securities and other assets. Q2 2012 included a $14.2 million gain on stock received in settlement of a defaulted loan, an $8.0 million negative credit provision, and other recoveries; comparisons therefore include unusual prior-year benefits.
- Net interest revenue declined $14.2 million year over year, reflecting lower asset yields as securities cash flows were reinvested at lower rates and loans repriced at lower yields. Average earning assets grew 8%, but this did not offset rate pressure. Management said further margin decline was possible.
- Fee and commission revenue increased, notably in trust and transaction-card fees. Mortgage originations funded for sale rose 42% to $1.2 billion, but narrower gain-on-sale margins and a product mix shift reduced mortgage revenue.
- Loan balances grew, led by commercial lending. Non-guaranteed nonperforming assets fell to $200 million from $207 million at March 31 and $232 million a year earlier, while total nonperforming assets including government-guaranteed assets were $281 million.
- Rising market rates drove a $114 million quarterly reduction in accumulated other comprehensive income, primarily from unrealized losses on available-for-sale securities. The gross unrealized loss on those securities rose to $99 million from $8.7 million at March 31.
Outlook, commentary, risks and unusual items
- No earnings or revenue guidance is provided. Management expects recent mortgage-rate increases to reduce future mortgage production and continue narrowing gain-on-sale margins. It also cautions that net interest margin may continue to decline and that securities growth is constrained by interest-rate risk policy.
- Interest-rate exposure is a material sensitivity: the model estimated a 2.27% reduction in next-12-month net interest revenue under a 200-basis-point increase, versus a 4.11% increase under that scenario in 2012. These are modeled estimates, not forecasts.
- Energy loans were $2.4 billion, or 19% of total loans, with $2.5 billion in unfunded energy commitments. The filing describes commodity-price and borrower repayment risks, alongside geographic and industry concentration risks.
- Customer derivatives create counterparty, collateral, liquidity and capital risks. A downgrade below investment grade would increase estimated cash-margin requirements by about $29 million. Total unfunded loan commitments were $7.0 billion and standby letters of credit were $454 million.
- Mortgage repurchase and recourse exposures include $212 million of loans sold with recourse and a $9.7 million related allowance; the separate accrual for representations-and-warranties repurchases was $6.2 million. The company reported 464 unresolved agency deficiency requests with $55.5 million principal subject to requests.
- The filing cites new regulatory capital rules effective for BOK Financial in 2015, with phase-in through 2019, and capital stress-test requirements beginning in Q4 2013. Management estimated the company’s Tier 1 common equity ratio under its interpretation of the new rule at approximately 12.20%, above the 7% threshold.
- Other notable items include a $57 million accrual under the executive 2011 True-Up Plan, with an estimated payable amount of about $72 million subject to final determination; $552,000 of impairment on private-label mortgage-backed securities; and no material expected impact from disclosed ordinary-course litigation or the remaining Oklahoma tax audit issue.
Important facts for investors to verify
- Reconcile Q2 earnings and EPS to the prior-year unusual gains, recoveries and negative provision, and assess the underlying earnings trend.
- Track net interest margin, deposit mix and funding costs, and sensitivity to further rate increases.
- Review mortgage production, gain-on-sale margins, servicing-rights valuations and repurchase/recourse reserves as rates and refinancing activity change.
- Monitor criticized and nonperforming credit, particularly the large New Mexico commercial charge-off, commercial real estate, energy exposures and unfunded commitments.
- Assess securities unrealized losses, liquidity and capital effects, including the impact of the new capital rules and stress testing.
- Confirm the final executive True-Up Plan obligation, outstanding mortgage claims and contingent commitments as updated in subsequent filings.