10-Q: BOK Financial Reports Strong Second Quarter Earnings Driven by Visa Share Conversion

BOK Financial's second quarter net income more than doubled compared to the first quarter, boosted by a significant gain from the conversion of Visa shares.

Summary

• BOK Financial reported a net income of $163.7 million, or $2.54 per diluted share, for the second quarter of 2024, a significant increase from $83.7 million, or $1.29 per diluted share, in the first quarter.
• Excluding a gain on the conversion of Visa shares, an additional FDIC special assessment expense, and a contribution of Visa shares to the BOKF Foundation, net income would have been $131.1 million, or $2.02 per share.
• Pre-Provision Net Revenue (PPNR) increased by $104.1 million to $219.0 million compared to the first quarter of 2024.
• Net interest income totaled $296.0 million, an increase of $2.4 million over the prior quarter, while the net interest margin was 2.56%, slightly down from 2.61% in the previous quarter.
• Fees and commissions revenue remained consistent with the prior quarter at $200.0 million, with higher fiduciary and asset management revenue and transaction card revenue offset by lower brokerage and trading revenue.
• Other operating expenses decreased by $3.7 million to $336.7 million, with personnel expenses decreasing by $11.6 million and non-personnel expenses increasing by $7.9 million, largely due to a $10 million contribution of Visa shares to the BOKF Foundation.
• Other gains and losses, net, increased by $53.1 million to $57.4 million, including a $53.8 million pre-tax gain on the conversion of Visa B shares.
• Outstanding loan balances grew by $381 million to $24.6 billion, primarily due to growth in commercial loans, partially offset by a reduction in commercial real estate loans.
• The provision for credit losses was $8.0 million, reflecting continued loan growth and a stable economic forecast, with net charge-offs at $6.9 million, or 0.11% of average loans on an annualized basis.
• Nonperforming assets not guaranteed by U.S. government agencies decreased by $27 million to $86 million.
• Period-end deposits increased by $858 million to $36.2 billion, with average deposits increasing by $627 million.
• Assets under management or administration totaled $107.5 billion, an increase of $1.9 billion compared to the previous quarter.
• The tangible common equity ratio was 8.38% at June 30, 2024, and 8.21% at March 31, 2024, and adjusted for all securities portfolio losses, the tangible common equity ratio would be 8.06% at June 30, 2024 and 7.92% at March 31, 2024.
• The common equity Tier 1 capital ratio was 12.10% at June 30, 2024.
• The company repurchased 412,176 shares of common stock at an average price of $90.38 per share in the second quarter of 2024.
• The company paid a regular cash dividend of $35.3 million or $0.55 per common share during the second quarter of 2024.

Sentiment

Score: 8

Explanation: The document presents a positive outlook with strong earnings growth and improved asset quality. The Visa share conversion is a one-off event, but the underlying business performance is solid. The company is managing its risks effectively and is well-capitalized.

Positives

• The company experienced a significant increase in net income, driven by the Visa share conversion.
• PPNR showed substantial growth, indicating improved operational profitability.
• Loan balances increased, reflecting growth in the company's lending activities.
• Nonperforming assets decreased, suggesting improved asset quality.
• Deposit balances increased, indicating strong customer confidence.
• The company's capital ratios remain strong.
• The company repurchased shares, indicating confidence in its value.

Negatives

• Net interest margin decreased slightly from 2.61% to 2.56%.
• Brokerage and trading revenue decreased, offsetting gains in other fee categories.
• Non-personnel expenses increased due to a $10 million contribution of Visa shares to the BOKF Foundation.

Risks

• The company is exposed to interest rate risk, which could impact net interest income.
• The company is exposed to credit risk, which could impact the allowance for credit losses.
• The company is exposed to market risk, which could impact the value of its trading portfolio.
• The company is exposed to liquidity risk, which could impact its ability to meet its obligations.
• The company is exposed to operational risk, which could impact its ability to operate effectively.

Future Outlook

The company expects that decreasing interest rates may result in a decline in net interest income or fiduciary and asset management revenue, but may also increase mortgage banking production volumes and related trading. The velocity of changes in market conditions and interest rates may result in timing differences between when offsetting impacts and benefits are realized. Generally, for operating revenues not as directly related to movement in interest rates, the company expects growth to come through offering new products and services and by further development of its presence in other markets.

Management Comments

• We view share buybacks opportunistically, but within the context of maintaining our strong capital position.

Industry Context

The report reflects the impact of the Federal Reserve's interest rate hikes on the banking sector, with margin compression due to deposit repricing and demand deposit migration. The company's strategies to manage interest rate risk, including purchasing fixed-rate mortgage-backed securities and using derivative instruments, are also highlighted.

Comparison to Industry Standards

• The company's net interest margin of 2.56% is below the average for large US banks, which is around 3.0% to 3.5% in the current environment. However, the company's core net interest margin excluding trading activities of 2.94% is closer to the industry average.
• The company's tangible common equity ratio of 8.38% is within the range of other large regional banks, which typically range from 7% to 10%.
• The company's common equity Tier 1 capital ratio of 12.10% is above the regulatory minimum and is comparable to other well-capitalized banks.
• The company's loan growth of $381 million is moderate compared to some other banks that have experienced more rapid growth, but is consistent with the company's focus on maintaining a strong capital position.
• The company's decrease in nonperforming assets is a positive sign, indicating improved asset quality compared to some peers that have seen increases in nonperforming assets.

Legal Proceedings

• BOKF, NA is subject to litigation related to its role as Indenture Trustee for multiple municipal bonds to which Christopher Brogdon acted as borrower.
• In the New Jersey Class Action and the Tulsa County Burn Rose action, the claimants allege that BOKF, NA was complicit in the fraud committed by Mr. Brogdon.
• Management is advised that a loss on the claims in both the Class Action and the Burn Rose action is not probable.

Stakeholder Impact

• Shareholders will benefit from the increased net income and the share repurchase program.
• Employees will benefit from the company's continued growth and profitability.
• Customers will benefit from the company's strong financial position and its ability to provide a wide range of financial services.
• The communities served by the company will benefit from the company's charitable contributions to the BOKF Foundation.

Next Steps

• The board of directors approved a quarterly cash dividend of $0.55 per common share payable on or about August 30, 2024 to shareholders of record as of August 15, 2024.

Key Dates

Keywords

BOK Financial, Net Income, Visa Shares, Loan Growth, Deposit Growth, Capital Ratios, Mortgage Banking, Asset Management, Credit Quality, Interest Rate Risk