BOK Financial Corporation — Q3 2014 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2014. BOK Financial is a diversified regional banking company operating Commercial Banking, Consumer Banking and Wealth Management, with a Funds Management unit.
Key financial metrics
- Profit: Net income attributable to BOK Financial shareholders was $75.6 million, or $1.09 diluted EPS, versus $75.7 million and $1.10 in Q3 2013. Nine-month shareholder net income was $228.1 million, down from $243.6 million.
- Revenue and margin: Net interest revenue was $166.8 million, down $1.1 million year over year; net interest margin was 2.67%, versus 2.75%. Other operating revenue was $163.0 million, up 14%, including $158.5 million of fees and commissions.
- Expenses and taxes: Operating expenses were $221.8 million, up 5% year over year. Income tax expense was $31.9 million, a 30% effective rate; a $2.3 million reduction from the expiration of tax statutes lowered the quarter’s tax expense.
- Credit: No net provision for credit losses was recorded. Gross charge-offs were $2.6 million and recoveries were $3.1 million. Combined credit allowance was $192 million, or 1.41% of loans. Nonperforming assets excluding U.S.-government-guaranteed assets were $143.8 million.
- Balance sheet and liquidity: Total assets were $29.1 billion; loans were $13.7 billion and deposits $20.3 billion at quarter-end. Cash and cash equivalents were $2.6 billion. Estimated unused collateralized borrowing capacity was $6.4 billion.
- Debt and capital: Other borrowings were $3.48 billion, including $3.45 billion of FHLB advances; subordinated debentures were $348 million. Tier 1 common equity ratio was 13.54%, total capital ratio 15.09%, and leverage ratio 10.22%. Management said the Company and subsidiary bank exceeded well-capitalized requirements.
- Cash flow: For the first nine months, operating cash flow was negative $23.2 million, investing cash flow negative $242.3 million, and financing cash flow positive $1.74 billion. Financing included a $1.77 billion net increase in other borrowed funds; cash and cash equivalents increased $1.48 billion.
Material changes versus comparable periods
- Year-over-year earnings were essentially flat for Q3, while nine-month shareholder earnings fell 6%. Lower net interest revenue and higher operating expenses weighed on results; fee revenue growth and the absence of a credit-loss provision helped offset pressure.
- Fees and commissions rose 9% year over year, led by fiduciary and asset management, mortgage banking, and brokerage and trading. Compared with Q2 2014, fee revenue fell $5.5 million, primarily from lower brokerage and trading and mortgage banking revenue.
- Loans grew $257 million from June 30, led by commercial and commercial real estate lending. Deposits declined $283 million, mainly from interest-bearing transaction accounts.
- Nonperforming assets excluding government-guaranteed assets were down from $182.5 million a year earlier, though total nonperforming assets increased from $254.6 million at June 30 to $264.9 million.
- Available-for-sale securities were $9.3 billion, down from $10.1 billion at December 31, 2013. Accumulated other comprehensive income improved to $23.3 million from a $25.6 million loss at year-end, but fell $26 million during Q3, primarily due to securities valuation changes.
Outlook, commentary, risks and unusual items
- Management anticipated about $300 million of additional bond-portfolio runoff during the rest of 2014 and quarterly loan growth in the low double digits, expecting the asset-mix shift to support net interest margin. These are management expectations, not formal earnings guidance.
- At the end of August, the Company increased FHLB borrowings by about $1.5 billion and deposited the proceeds at the Federal Reserve. Management estimated a full-quarter pretax income benefit of about $800,000, alongside a 15-basis-point NIM reduction and a 50-basis-point reduction in the Tier 1 leverage ratio.
- Loan pricing pressure and a low-rate environment continued to constrain yields. Energy loans were $2.6 billion, or 19% of loans; management identified commodity prices and energy collateral valuations as credit risks. Residential construction and land development loans had an 8.35% nonaccrual rate within that category.
- Mortgage servicing rights and their economic hedges create earnings volatility: net fair-value changes added $4.8 million pretax in Q3, versus a $404,000 reduction a year earlier. Changes in mortgage rates, prepayments and valuation assumptions can materially affect results.
- Other notable items included $14.3 million higher non-personnel expense year over year, including increased regulatory, compliance and professional costs and repossessed-asset losses. Two 2014 acquisitions added fiduciary revenue and assets; their pro forma impact was described as not material.
- The board approved a quarterly dividend increase to $0.42 per share on October 28, payable around December 1, 2014. The filing cited regulatory, competition, interest-rate, economic, customer-credit and operational risks. Management reported effective disclosure controls and no material quarterly change in internal controls.
Important facts for investors to verify
- Whether loan growth and commercial loan quality remain sound, particularly in energy and commercial real estate, and whether potential problem loans (reported at $108 million) migrate to nonaccrual status.
- Whether net interest margin stabilizes despite loan-pricing pressure, securities runoff and FHLB-funded cash positions; confirm the continuing earnings and capital effects of the borrowing strategy.
- Whether elevated professional, compliance, data-processing and repossessed-asset expenses persist, and how much fee growth is repeatable versus acquisition- or market-dependent.
- How mortgage production margins, servicing-rights valuations and mortgage repurchase or recourse exposures evolve; the filing reported $175 million of loans sold with recourse and related accruals.
- Reconcile the reported cash-flow movements and rising borrowings with ongoing liquidity needs, and monitor capital ratios as revised regulatory capital rules begin taking effect in 2015.