BOK Financial Corporation — Q2 2018 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2018. BOK Financial operates Commercial Banking, Consumer Banking and Wealth Management businesses, principally across Oklahoma, Texas and surrounding markets.
Financial performance
- Earnings: Net income attributable to BOK Financial shareholders was $114.4 million, or $1.75 diluted EPS, versus $88.1 million and $1.35 in Q2 2017; Q1 2018 was $105.6 million and $1.61. Consolidated net income, including non-controlling interests, was $115.2 million.
- Revenue and margin: Net interest revenue rose 16% year over year to $238.6 million. Net interest margin was 3.17%, compared with 2.89% in Q2 2017 and 2.99% in Q1 2018. Other operating revenue was $156.4 million, down 9% year over year; fees and commissions were $157.9 million in management’s adjusted comparison.
- Profitability and expenses: Pretax income was $148.5 million versus $136.6 million. Other operating expense was $246.5 million, up 2% on a comparable basis. The effective tax rate fell to 22.4% from 34.9%, reflecting the federal corporate tax-rate reduction.
- Credit: No provision for credit losses was recorded in Q2 (Q1 included a $5.0 million benefit). Net charge-offs were $10.5 million, or 0.24% of average loans annualized, versus $1.3 million in Q1. Combined credit-loss allowance was $218 million, or 1.21% of loans. Nonperforming assets excluding U.S.-government-guaranteed assets were $186 million, or 1.04% of loans and repossessed assets; potential problem loans fell to $140 million from $222 million at March 31.
- Balance sheet and liquidity: Period-end loans were $18.0 billion, up more than $665 million from March 31; deposits were $22.2 billion, down $36 million quarter over quarter. Cash and cash equivalents totaled $1.46 billion. Unused collateralized credit availability was approximately $6.5 billion.
- Borrowing and capital: Period-end funds purchased and repurchase agreements were $880 million, other borrowings $5.93 billion and subordinated debentures $145 million. Common equity Tier 1 was 11.92%, total capital 13.26%, leverage 9.57%, and tangible common equity 9.21%. Shareholders’ equity was $3.55 billion.
- Cash flow: For the six months, operating cash flow was negative $936.5 million, investing cash flow negative $864.1 million and financing cash flow positive $942.4 million; cash and cash equivalents declined $858.3 million. The filing attributes substantial cash-flow movements to trading securities, loan growth, borrowings and related balance-sheet activity.
Material changes and notable items
- Higher rates and loan growth lifted net interest revenue; average earning assets increased to $30.3 billion from $29.2 billion a year earlier. Rising funding costs partly offset asset-yield improvement.
- Fees were pressured by lower brokerage and trading revenue and mortgage production. Mortgage production volume fell 18% year over year; the company cited higher mortgage rates. New revenue-accounting rules shifted interchange fees from expense to netted transaction-card revenue, without affecting net income or EPS.
- On June 18, BOK Financial agreed to acquire CoBiz Financial, which had approximately $3.8 billion in assets. CoBiz shareholders are to receive 0.17 BOK Financial shares and $5.70 cash per share, subject to customary closing conditions, including regulatory approval. Acquisition costs were included in Q2 expenses.
- On May 1, BOK Financial acquired a majority voting interest in Switchgrass Holdings for $14 million; preliminary goodwill was $6.1 million.
- The board approved a quarterly dividend increase to $0.50 per share on July 24, from the $0.45 paid in Q2. The company repurchased 8,257 shares in Q2 at an average $99.84.
Outlook, risks and contingencies
- Management expected low-to-mid single-digit net interest margin expansion for the remainder of 2018 for each 25-basis-point increase in the federal funds rate. This is rate-sensitive and not a full-year earnings forecast.
- Key risks include merger approval, timing and integration; interest-rate and capital-market changes; credit quality and energy-sector exposures; deposit behavior and funding costs; competition; and regulatory or legislative changes. Energy loans were $3.1 billion, 17% of total loans.
- The mortgage-servicing-rights valuation was reduced by $3.7 million in Q2 following an update to prepayment assumptions; the net economic cost of MSR fair-value changes and hedges was $3.5 million. Available-for-sale securities had $205 million of gross unrealized losses; no other-than-temporary impairment charge was recorded in Q2.
- Legal matters include bondholder litigation relating to the bank’s former indenture-trustee conduct and overdraft-fee class actions. Management stated losses were not probable in the described matters; for certain claims, a reasonable loss estimate was unavailable. The filing also describes Visa-related contingent exposure and mortgage repurchase and representation-and-warranty obligations.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter.
Key facts for investors to verify
- Track whether CoBiz receives required approvals and closes on the announced terms, and assess integration costs and expected benefits.
- Reconcile reported earnings and revenue comparisons, including the distinction between consolidated net income and income attributable to BOK Financial shareholders, and the interchange-fee presentation change.
- Monitor net interest margin, deposit pricing and balances, borrowing costs, and sensitivity to changing rates.
- Review energy-sector credit performance, charge-offs, problem loans, allowance coverage and the effect of loan growth on capital and liquidity.
- Assess the valuation and interest-rate exposure of mortgage servicing rights and securities, including unrealized losses and hedge effectiveness.
- Follow litigation, contingent liabilities, off-balance-sheet commitments and the adoption impact of the expected credit-loss standard (CECL).