BOK Financial Corporation — Q2 2019 Form 10-Q
Business context and period. Quarterly report for the three and six months ended June 30, 2019. BOK Financial is a regional bank holding company with Commercial Banking, Consumer Banking and Wealth Management businesses. Results include CoBiz Financial, acquired October 1, 2018, making year-over-year comparisons partly acquisition-driven.
Key financial metrics
| Metric | Q2 2019 | Comparison |
|---|---|---|
| Net income attributable to BOK Financial shareholders | $137.6 million | Up 20% from $114.4 million in Q2 2018; up from $110.6 million in Q1 2019 |
| Diluted earnings per share | $1.93 | Compared with $1.75 in Q2 2018 and $1.54 in Q1 2019 |
| Net interest revenue | $285.4 million | Up $46.9 million year over year; CoBiz contributed $44.8 million |
| Net interest margin | 3.30% | 3.17% in Q2 2018; unchanged from Q1 2019. Purchase-accounting accretion and recoveries of foregone interest added 19 basis points |
| Fees and commissions revenue | $176.1 million | Up 12% year over year, led by brokerage and trading |
| Total other operating revenue | $172.1 million | Included a $29.6 million decrease in mortgage servicing rights fair value |
| Other operating expense | $277.1 million | Up 12% year over year; included $23.0 million of CoBiz operating expenses |
| Provision for credit losses | $5.0 million | No provision in Q2 2018; $8.0 million in Q1 2019 |
| Loans / deposits at period end | $22.3 billion / $25.3 billion | Loans increased $497 million and deposits decreased $27 million from March 31, 2019 |
Six-month cash flow and balance sheet. For the six months ended June 30, operating cash flow was negative $677 million, investing cash flow was negative $2.16 billion and financing cash flow was positive $3.02 billion. Cash and cash equivalents increased $192 million to $1.34 billion. Total assets were $41.9 billion, shareholders’ equity was $4.71 billion and total equity was $4.72 billion.
Debt, liquidity and capital. Period-end funds purchased and repurchase agreements were $2.33 billion, other borrowings $7.82 billion and subordinated debentures $276 million. The company reported approximately $7.8 billion of estimated unused collateralized credit availability. Regulatory capital ratios were 10.84% common equity Tier 1, 12.34% total capital and 8.75% leverage. The board authorized repurchases of up to five million shares; 250,000 shares were repurchased in Q2 at an average $80.50. The quarterly dividend was $0.50 per share.
Material changes versus comparable periods
- Year-over-year growth in net interest revenue and average earning assets reflects both CoBiz and legacy portfolio growth. Average earning assets were $35.4 billion, versus $30.3 billion a year earlier.
- Fee growth was concentrated in brokerage and trading, up $14.0 million year over year, and fiduciary and asset management, up $3.3 million. Lower mortgage rates also supported mortgage production.
- Expenses rose with the acquired business and higher compensation. Q2 expenses were $10.0 million lower than Q1; management attributed lower personnel expense partly to CoBiz integration efficiencies.
- Credit indicators were mixed: Q2 net charge-offs declined to $7.7 million, or 0.14% of average loans, but nonperforming assets excluding U.S.-guaranteed balances rose $31 million from Q1, principally due to nonaccruing energy loans.
- Available-for-sale securities increased about $1.4 billion in Q2 as management sought protection in a falling-rate environment. AOCI moved from a $3.5 million loss at March 31 to a $98.6 million gain at June 30.
Outlook, commentary, risks and unusual items
- No specific earnings or revenue guidance is provided. Management expects fee-revenue growth from new products and services and expansion in other markets, while noting competition, regulation and market saturation could constrain growth.
- Management described the balance sheet as asset-sensitive: approximately 78% of commercial and commercial real estate loans are variable-rate or reprice within one year. Its model estimated a 1.38% reduction in next-12-month net interest revenue from a 200-basis-point rate increase and a 2.93% reduction from a 100-basis-point decrease. These are model estimates, not forecasts.
- Energy exposure is significant: $3.9 billion, or 18% of loans, at June 30. Nonaccruing energy loans increased during Q2. Commodity prices, borrower cash flows and collateral values remain important credit risks.
- Mortgage servicing rights and related hedges generated volatile results. MSR fair value decreased $29.6 million in Q2; the net economic cost of MSR fair-value changes, after hedges and related portfolio income, was $7.3 million.
- CoBiz integration benefits are not assured. Management cites possible integration delays, business disruption and customer acceptance risks. Q1 included $12.7 million in integration costs; no meaningful integration costs were incurred in Q2.
- The company expects to adopt CECL on January 1, 2020. Management did not expect a significant change in the existing allowance or a material effect on regulatory capital or liquidity, but the ultimate impact depends on portfolio composition and economic forecasts.
- LIBOR transition could affect contracts, valuations and operations; management was assessing direct and indirect exposures and developing fallback provisions for new and renewed loans.
- Bondholder litigation involving BOKF, NA’s role as trustee remains a contingency. After a court action affecting the repayment plan, management could no longer conclude repayment would be successful in full, but said a loss to the company was not probable and recorded no provision. A reasonable estimate of any potential loss was unavailable.
Most important facts for investors to verify
- How much of earnings and net interest margin growth is recurring versus attributable to CoBiz, purchase-accounting accretion and foregone-interest recoveries.
- Whether the rise in nonaccruing energy loans and nonperforming assets continues, and whether allowance coverage remains adequate.
- The sensitivity of earnings to rates, deposit pricing and the sizable securities and mortgage-servicing-rights positions.
- Progress on CoBiz integration, expense efficiencies and the remaining authorized share repurchases.
- Developments in the bondholder litigation and the potential exposure if the principals cannot repay the bonds.