BOK Financial Corporation — Q1 2022 Form 10-Q
Reporting period: Three months ended March 31, 2022. BOK Financial is a diversified regional bank operating through Commercial Banking, Consumer Banking and Wealth Management.
Financial performance
| Metric | Q1 2022 | Comparison |
|---|---|---|
| Net income attributable to shareholders | $62.5 million; diluted EPS $0.91 | $117.3 million and $1.71 in Q4 2021; $146.1 million and $2.10 in Q1 2021 |
| Net interest revenue | $268.4 million | Down $8.7 million sequentially and $12.0 million year over year |
| Net interest margin | 2.44% | 2.52% in Q4 2021; 2.62% in Q1 2021 |
| Other operating revenue | $87.9 million | Down 44% sequentially and 50% year over year |
| Other operating expense | $277.6 million | Down $21.9 million sequentially and $18.2 million year over year |
| Pre-provision net revenue (non-GAAP) | $78.7 million | $135.2 million in Q4 2021; $163.4 million in Q1 2021 |
| Net cash from operating activities | $3.93 billion | $(218.9) million in Q1 2021; heavily affected by changes in trading and fair-value-option securities |
Balance sheet, credit and capital
- Total assets were $46.8 billion at March 31, down from $50.2 billion at year-end 2021. Period-end deposits were $39.4 billion, down $1.8 billion sequentially, which management attributed primarily to expected seasonal outflows; average deposits rose $560 million to $40.4 billion.
- Loans totaled $20.7 billion, up $469 million from year-end; excluding declining Paycheck Protection Program balances, loans grew $608 million. Commercial loans rose $377 million and commercial real estate loans rose $270 million.
- No total provision for credit losses was recorded in Q1. Net charge-offs were $6.0 million, or 0.12% of average loans on an annualized basis, excluding PPP loans. The combined allowance for loan losses and unfunded commitments was $283 million, or 1.38% of loans excluding PPP.
- Nonperforming assets excluding U.S.-government-guaranteed assets declined $13 million to $131.7 million. Non-pass-grade loans decreased $67 million to $389 million.
- Common equity Tier 1 was 11.30%, compared with 12.24% at year-end; total capital was 12.25%. Shareholders’ equity declined $515 million to $4.85 billion, chiefly reflecting a $490 million after-tax reduction in accumulated other comprehensive income, largely associated with securities valuation changes as rates rose.
- Management reported $16.4 billion of estimated unused collateralized credit availability at the bank. Parent-company cash and interest-bearing cash totaled $233 million; the bank could declare up to $18 million in dividends under the most restrictive limits described.
- The company repurchased 475,877 shares for $48 million and paid a $0.53-per-share quarterly dividend. The board approved another $0.53 dividend in May 2022.
Material changes and management commentary
- Interest-rate volatility, inflation concerns and the conflict in Ukraine sharply reduced trading revenue, mortgage production and the net value contribution from mortgage servicing rights and related hedges. Brokerage and trading revenue was a $27.1 million loss, versus revenue of $14.9 million in Q4 2021 and $20.8 million in Q1 2021.
- Mortgage banking revenue fell to $16.7 million, down 22% sequentially and 55% year over year. Mortgage production volume was $408 million, down 52% year over year. The net cost of mortgage servicing rights valuation changes and related economic hedges was $8.4 million, versus a net benefit of $4.7 million in each comparison quarter.
- Segment results diverged: Commercial Banking earned $82.3 million; Consumer Banking recorded a $7.3 million loss; and Wealth Management recorded a $4.4 million loss, primarily reflecting trading losses. Funds Management and other recorded an $8.1 million loss.
- Trading securities fell $4.2 billion to $4.9 billion during the quarter; the company said it reduced exposure to the relevant agency mortgage-backed securities by about 70% from year-end. Available-for-sale securities had $577.6 million of gross unrealized losses at quarter-end; management said it did not intend, and was not more likely than not required, to sell impaired securities before recovery.
- About 77% of commercial and commercial real estate loans are variable-rate or scheduled to reprice within one year. Management’s model estimated a 7.53% increase in next-12-month net interest revenue under an immediate 200-basis-point rate increase, subject to model assumptions and deposit behavior.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Its credit-loss forecast scenarios assumed a base case with 60% weighting, a downside case with 30%, and an upside case with 10%; the base case forecast 2.2% GDP growth over the next 12 months, while the downside case forecast a 1.3% contraction. These are credit-model assumptions, not company guidance.
- Key risks include interest-rate and securities valuation movements, deposit repricing or outflows, mortgage-market volatility, energy and commodity exposure, borrower credit deterioration, and liquidity or regulatory-capital demands from customer derivatives. Energy loans were $3.2 billion, or 15% of total loans; unfunded energy commitments were $3.0 billion.
- Customer derivative fair values and collateral flows increased substantially amid market movements. Management noted that a sharp commodity-price decline could reduce derivative asset fair value by an estimated $529 million; a downgrade below investment grade could add about $10 million to cash-margin requirements.
- Legal matters include stayed and pending bondholder litigation related to a municipal bond trustee matter and other pending claims. Management said losses were not probable for the matters discussed; the potential bondholder loss could be material if that assessment changes, and a reasonable estimate was not available.
- Disclosure controls were reported effective, with no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether severe trading and mortgage-related revenue pressure persists, and how effectively hedges offset mortgage servicing rights valuation changes.
- Deposit trends, funding costs and realized net interest revenue as rates rise, including the sensitivity of customer deposits to repricing.
- Credit quality and allowance adequacy, particularly across energy, commercial real estate and other commercial lending, as economic forecasts evolve.
- The impact of unrealized securities losses on tangible equity and regulatory capital, and any actual or potential need to sell securities.
- Derivative collateral, counterparty concentration and liquidity requirements under volatile commodity and interest-rate conditions.
- Developments in disclosed litigation and any change in management’s assessment of probability or potential loss.