BOK Financial Corporation — Second-Quarter 2015 Form 10-Q
Business context and reporting period. BOK Financial is a regional financial services company headquartered in Tulsa, Oklahoma, with Commercial Banking, Consumer Banking and Wealth Management businesses. This filing covers the quarter and six months ended June 30, 2015. Comparisons below are primarily with second-quarter 2014; sequential comparisons are identified where relevant.
Financial performance and condition
| Metric | Q2 2015 | Comparison |
|---|---|---|
| Net income attributable to BOK Financial shareholders | $79.2 million | $75.9 million in Q2 2014; $74.8 million in Q1 2015 |
| Diluted EPS | $1.15 | $1.10 in Q2 2014; $1.08 in Q1 2015 |
| Net interest revenue | $175.7 million | $166.1 million in Q2 2014; $167.7 million in Q1 2015 |
| Net interest margin | 2.61% | 2.75% in Q2 2014; 2.55% in Q1 2015 |
| Fees and commissions | $172.5 million | Up 5% year over year |
| Total other operating revenue | $176.3 million | $166.1 million in Q2 2014 |
| Operating expenses | $227.1 million | Up $12.4 million, or 6%, year over year |
| Provision for credit losses | $4.0 million | None in Q2 2014 or Q1 2015 |
| Income tax expense / effective tax rate | $40.6 million / 33.6% | $40.8 million / 34.7% in Q2 2014 |
Net income before taxes was $120.9 million, compared with $117.5 million in Q2 2014. For the six months ended June 30, shareholder-attributable net income was $154.1 million versus $152.5 million, and diluted EPS was $2.23 versus $2.20.
- Revenue and margins: Mortgage banking revenue rose $7.5 million year over year on higher production, while fiduciary and asset management revenue also increased. Net interest margin remained pressured by competitive loan pricing, low rates, and added Federal Home Loan Bank (FHLB) funding used to place deposits at the Federal Reserve.
- Credit and lending: Loans totaled $15.12 billion at quarter-end, up $440 million from March 31, led by commercial and commercial real estate lending. The combined credit-loss allowance was $202 million, or 1.34% of loans. Net charge-offs were $0.7 million; gross charge-offs were $2.9 million and recoveries were $2.2 million.
- Asset quality: Nonperforming assets were $208.8 million, including $122.7 million excluding U.S.-government-guaranteed assets; the latter were broadly unchanged from March. Nonaccruing loans increased to $90.9 million from $80.7 million at March 31. Potential problem loans rose to $181 million from $118 million, including $124 million in energy loans. Management said its updated energy stress test continued to indicate the portfolio was well positioned; a $34 million potential problem energy loan was paid in full after quarter-end.
- Deposits, liquidity and funding: Period-end deposits were $21.06 billion, largely unchanged from March. Average deposits fell $155 million sequentially. Average FHLB advances were $4.0 billion, versus $3.1 billion in Q1; estimated unused collateralized borrowing capacity was $5.6 billion. Parent-company cash and cash equivalents were $393 million. The subsidiary bank could declare up to $220 million in dividends without regulatory approval, subject to stated limitations.
- Debt and capital: Total liabilities were $27.31 billion and total equity was $3.41 billion at June 30. The company repaid $121.8 million of subordinated debt that matured June 1; subordinated debentures ended at $226.3 million. Consolidated common equity Tier 1 and Tier 1 ratios were each 13.01%, total capital was 14.11%, and leverage was 9.75%. The tangible common equity ratio was 9.72%.
- Cash flow: For the six months, operating cash flow was negative $89.0 million, investing cash flow was negative $1.08 billion, and financing cash flow was positive $1.25 billion. Cash and cash equivalents increased $86.8 million to $2.56 billion. The filing’s cash-flow statement is for the six-month period, not the quarter alone.
Material changes and notable items
- Compared with Q2 2014, shareholder-attributable net income increased about 4%, while net interest revenue rose about 6%. Higher loan balances and fee revenue supported results; expenses also increased 6%.
- Mortgage banking revenue grew 26% year over year, but fell $2.5 million sequentially as production margins compressed and mortgage rates rose. Mortgage loans serviced for others reached $18.0 billion, up 23% year over year.
- Mortgage servicing rights, net of economic hedges, reduced pretax income by $1.1 million in Q2 2015, versus reductions of $1.5 million in Q2 2014 and $5.0 million in Q1 2015. The filing cites increased servicing-cost assumptions as a factor.
- Accumulated other comprehensive income fell $39 million sequentially, primarily from changes in unrealized gains on available-for-sale securities. Gross unrealized losses on that securities portfolio were $26 million at June 30, versus $14 million at March 31; no other-than-temporary impairment charge was recorded in Q2.
- The company acquired a majority interest in Heartland Food Products, LLC, for $18 million in May. The preliminary allocation included $7.7 million goodwill; management said the pro forma impact was not material.
- Adoption of the affordable-housing investment accounting update reclassified amounts between pretax earnings and income tax expense in prior periods, increasing the prior-year effective tax rate, but did not affect net income. A new government-guaranteed mortgage accounting rule also reclassified approximately $50 million of assets at January 1, 2015.
Outlook, risks and contingencies
- No quantitative earnings or full-year financial guidance is provided. Management said it expects fee-revenue growth from new products and services and further development in other markets, while noting economic conditions, regulation, competition and market saturation could constrain growth.
- Key exposures include interest-rate and mortgage-prepayment risk, competitive loan pricing, and the effect of low rates on margins. The company estimated a 200-basis-point rate increase would reduce next-12-month net interest revenue by 0.88%; a 50-basis-point decrease would reduce it by 2.49%. Management cautioned that these model-based estimates depend on assumptions and actual results may differ.
- Energy loans were $2.9 billion, or 19% of total loans, and the company cited falling energy prices and regional economic effects as risks. Commercial lending and Texas/Oklahoma market concentrations are also material.
- Off-balance-sheet exposures included $8.1 billion of loan commitments and $445 million of standby letters of credit; commitment totals do not necessarily represent future cash needs. Mortgage repurchase and indemnification obligations also remain.
- Two putative class actions filed in 2015 allege improper consumer overdraft posting practices and unlawful extended overdraft fees. Management said it has meritorious defenses; a reasonable estimate of any loss could not be made.
- The company reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. Its annual regulatory stress-test scenario left capital ratios comfortably above minimum thresholds, according to management.
Important facts for investors to verify
- Whether commercial and energy-related credit quality stabilizes, especially the increase in potential problem loans and nonaccruing commercial loans.
- Whether loan growth can continue without further margin compression or a larger credit-loss provision.
- How mortgage production volumes, margins, servicing costs and mortgage-servicing-rights valuation changes affect recurring earnings.
- How much of the elevated FHLB borrowing and Federal Reserve cash positioning persists, and the resulting funding cost and liquidity implications.
- Developments in the overdraft-related class actions, mortgage repurchase exposures and other contingencies.
- Capital and dividend capacity under the phased-in regulatory rules; the board approved a subsequent $0.42-per-share quarterly dividend for payment in August 2015.