BOK Financial Corporation — Q2 2021 Form 10-Q
Business context and reporting period. This quarterly report covers the three and six months ended June 30, 2021. BOK Financial operates Commercial Banking, Consumer Banking and Wealth Management businesses, principally across the central and southwestern United States.
Key financial and operating metrics
| Metric | Q2 2021 | Comparison / context |
|---|---|---|
| Net income attributable to shareholders | $166.4 million; $2.40 diluted EPS | $64.7 million and $0.92 in Q2 2020; $146.1 million and $2.10 in Q1 2021 |
| Net interest revenue | $280.3 million | Up $2.2 million year over year; approximately unchanged quarter over quarter |
| Net interest margin | 2.60% | 2.83% in Q2 2020 and 2.62% in Q1 2021 |
| Fees and commissions revenue | $169.4 million | Down $44.3 million year over year; up $7.3 million sequentially |
| Other operating revenue | $191.4 million | Down $41.8 million year over year; up $14.4 million sequentially |
| Other operating expense | $291.2 million | Down $4.8 million year over year and $4.6 million sequentially |
| Pre-provision net revenue (non-GAAP) | $179.9 million | Down from $215.8 million in Q2 2020; up from $163.4 million in Q1 2021 |
| Provision for credit losses | Negative $35.0 million | Negative $25.0 million in Q1 2021; provision expense of $135.3 million in Q2 2020 |
| Loans and deposits at period end | Loans: $21.4 billion; deposits: $37.4 billion | Loans down $1.1 billion and deposits down $413 million from March 31, 2021 |
| Credit quality | Combined allowance: $336 million, or 1.66% of loans excluding PPP | 1.86% at March 31, 2021. Net charge-offs were $15.4 million, or 0.30% of average loans excluding PPP, annualized |
| Capital | CET1 11.95%; Tier 1 12.01%; total capital 13.61%; leverage 8.58% | CET1 was 12.14% at March 31, 2021 |
Material changes and drivers
- Q2 earnings increased substantially year over year, primarily reflecting a $170.3 million swing in the provision for credit losses, from expense in 2020 to a release in 2021. The release reflected improving economic forecasts and credit metrics.
- Net interest margin remained under pressure from the low-rate environment. Average earning assets grew to $43.9 billion from $40.3 billion year over year, largely because of higher trading securities, while average loans fell by $1.9 billion.
- Mortgage banking revenue declined $32.7 million year over year amid lower production and compressed margins. Brokerage and trading revenue fell $32.6 million, largely reflecting a shift of trading-related returns from fee revenue to interest income. Fee revenue recovered sequentially, led by trading and fiduciary and asset management activity.
- Loans declined during the quarter as PPP balances fell $727 million to $1.1 billion, alongside energy and commercial real estate paydowns. Healthcare and personal lending partly offset the decrease.
- Nonperforming assets excluding U.S.-government-guaranteed assets declined $51 million from the prior quarter to $227.8 million. Non-pass-grade loans decreased $208 million to $652 million.
Cash flow, liquidity, debt and capital actions
- For the six months ended June 30, operating cash flow was negative $487.8 million, investing cash flow was positive $978.9 million and financing cash flow was negative $412.2 million; cash and cash equivalents increased $78.9 million. The filing attributes cash flow movements in part to securities, loan and deposit activity.
- Average Q2 deposits were $37.5 billion, up $968 million sequentially, including $877 million of demand deposit growth. The company reported approximately $16.9 billion of unused collateralized borrowing capacity at the bank.
- At June 30, balance-sheet borrowings included $730 million of funds purchased and repurchase agreements, $1.55 billion of other borrowings and $276 million of subordinated debentures. Parent-company cash and interest-bearing cash totaled $168 million.
- The company repurchased 492,994 shares in Q2 for approximately $43.8 million and paid $35.9 million in common dividends. The board subsequently approved a quarterly dividend of $0.52 per share.
Outlook, risks and unusual items
- The filing provides no specific earnings or revenue guidance. Management’s credit-loss estimates incorporate a probability-weighted outlook for COVID-19 and the economy; the base case assumes continued recovery, while the downside case includes worsening pandemic conditions and a mild recession.
- Credit and concentration risks include energy lending, which was $3.0 billion, or 14% of loans, and commercial real estate. Management said energy prices had improved but remained fragile; Q2 net charge-offs were primarily tied to three energy production borrowers.
- Interest-rate, mortgage servicing rights, securities and customer-derivative exposures can affect earnings, liquidity and capital. A deterioration in counterparties’ creditworthiness or adverse commodity-price movements could also create losses or collateral needs.
- Management was transitioning away from LIBOR and planned to stop originating LIBOR-indexed loans by December 31, 2021; it did not expect the replacement index selection to have a material financial impact.
- On July 23, 2021, the company announced redemption of all $150 million of its 5.375% subordinated notes on August 23, 2021, using existing capital. It expects to recognize a $4.0 million unamortized discount at redemption and reduce annual interest expense by approximately $8.0 million.
- Several lawsuits remain pending. Most notably, a bondholder-related matter could involve a material loss if recovery from the bond principals and collateral proves insufficient; management said a loss to BOKF was not probable and no provision was recorded, but the potential loss could not be reasonably estimated. Other disclosed litigation was also assessed by management as not probable of loss.
Important facts for investors to verify
- Whether subsequent credit performance supports the $35.0 million Q2 provision release, particularly in energy and commercial real estate.
- Whether loan paydowns, PPP forgiveness and deposit balances continue to affect earning-asset growth and net interest margin.
- Whether mortgage production, gain-on-sale margins and brokerage/trading revenue stabilize after the reported declines.
- The status and potential financial exposure of the bondholder litigation, and the completed redemption of the subordinated notes.
- How liquidity, collateral requirements and regulatory capital respond to changes in customer derivatives, interest rates and commodity prices.