BOK Financial Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015. BOK Financial is a regional bank holding company with Commercial Banking, Consumer Banking and Wealth Management businesses.
Key financial results
| Metric | Q1 2015 | Comparable period / change |
|---|---|---|
| Net income attributable to BOK Financial shareholders | $74.8 million | $76.6 million in Q1 2014; $64.3 million in Q4 2014 |
| Diluted earnings per share | $1.08 | $1.11 in Q1 2014; $0.93 in Q4 2014 |
| Net interest revenue | $167.7 million | Up $5.1 million year over year; down $2.0 million sequentially |
| Net interest margin | 2.55% | 2.71% in Q1 2014; 2.61% in Q4 2014 |
| Other operating revenue | $166.0 million | Up 19% year over year |
| Operating expenses | $220.3 million | Up 19% year over year; down $5.6 million sequentially |
| Efficiency ratio | 64.91% | 60.06% in Q1 2014 |
| Provision for credit losses | $0 | Also zero in Q1 2014 and Q4 2014 |
| Operating / investing / financing cash flow | $(174.8) million / $(635.3) million / $944.9 million | Cash and cash equivalents increased $134.8 million to $2.61 billion |
Balance sheet, funding and capital
- Total assets were $30.30 billion; total deposits were $21.15 billion; and total equity was $3.39 billion at March 31, 2015.
- Loans totaled $14.68 billion, up $476 million from year-end 2014. Commercial loans were $9.39 billion and commercial real estate loans were $2.94 billion. Deposits were broadly unchanged from year-end.
- Borrowed funds totaled approximately $5.04 billion, including $3.70 billion of Federal Home Loan Bank advances, compared with $2.13 billion of other borrowings at year-end. The bank reported approximately $6.1 billion of estimated unused collateralized credit availability.
- Consolidated capital ratios were 13.07% common equity Tier 1, 13.07% Tier 1, 14.39% total capital and 9.74% leverage. The tangible common equity ratio was 9.86%.
- The company held $424 million in parent-company cash and interest-bearing cash. Subsidiary-bank dividend capacity to the parent was zero at quarter-end under new capital rules and internal policy.
Material changes and operating drivers
- Shareholder-attributable earnings declined year over year, while fee income grew strongly. Mortgage banking revenue rose $16.5 million, principally on higher originations; funded mortgage loans for sale reached $1.6 billion.
- Higher expenses partly reflected the prior-year comparison: Q1 2014 included a $15.5 million reversal of accrued executive compensation, which provided a reported $10.2 million after-tax benefit. Q1 2015 personnel and non-personnel expenses also increased.
- Net interest margin compressed amid low rates, competitive loan pricing and increased Federal Reserve deposits funded partly by FHLB borrowings. The loan portfolio yield was 3.59%, down 14 basis points sequentially.
- Net loan recoveries were $8.4 million, including $8.8 million of commercial real estate recoveries. Nonperforming assets excluding U.S.-government-guaranteed assets declined to $123 million from $129 million at year-end.
- Potential problem loans rose to $118 million from $79 million at year-end. The allowance for loan losses was $197.7 million; the combined allowance including off-balance-sheet credit losses was approximately $199 million, or 1.35% of loans.
- Commercial Banking earnings rose to $46.0 million from $35.1 million year over year; Consumer Banking earnings fell to $3.9 million from $7.8 million; Wealth Management earnings rose to $4.5 million from $2.5 million.
Outlook, risks and unusual items
- No specific earnings or financial guidance was provided. Management said fee-revenue growth is expected to come from new products, services and market development, while noting economic, regulatory, competitive and market constraints.
- Energy exposure is material: energy loans were $2.90 billion, about 20% of total loans, and unfunded energy commitments were $2.7 billion. Management cited falling energy prices as a risk and said its stress test supported its view that the portfolio could withstand a short-term price correction.
- Mortgage servicing rights and related hedges caused a net $5.0 million pretax loss in Q1. Their fair values are sensitive to mortgage rates, prepayments and changing primary-secondary rate spreads.
- Two putative class actions concern consumer overdraft practices. Management said it could not reasonably estimate potential losses; the cases were in preliminary stages. Other ordinary-course litigation was not expected by management to materially affect results.
- Off-balance-sheet exposures included $8.1 billion of loan commitments, $394 million of standby letters of credit and $174 million of mortgage loans sold with recourse. These amounts are not necessarily future cash requirements.
- The company paid a $0.42-per-share quarterly dividend and repurchased 502,156 shares at an average $58.71 per share. The board approved another $0.42 dividend after quarter-end. Capital distributions remain subject to regulatory constraints.
- Management identified interest-rate, credit, liquidity, regulatory, competitive and operational risks. Its modeled next-12-month net interest revenue sensitivity was a 0.72% decline under a 200-basis-point rate increase and a 2.73% decline under a 50-basis-point decrease; management cautioned that models rely on uncertain assumptions.
Important facts for investors to verify
- Whether margin pressure and higher FHLB funding continue, and how they affect net interest revenue and liquidity.
- Developments in energy exposure, potential problem loans, commercial real estate recoveries and allowance adequacy.
- Whether elevated mortgage production and fee income persist, given rate-sensitive origination volumes and mortgage-servicing-rights volatility.
- The status and potential financial impact of overdraft-related litigation and mortgage repurchase or recourse obligations.
- How new capital requirements and zero bank dividend capacity affect parent liquidity, dividends and share repurchases.
- Underlying operating expense trends after accounting for the prior-year executive compensation reversal and branch-closure costs.