UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One) 

OR

 

Commission File No. 0-19341001-37811

BOK FINANCIAL CORP

 

(Registrant’s telephone number, including area code)

BOK Financial Corporation

Form 10-Q

Quarter Ended June 30, 20212022

Management’s Discussion and Analysis of Financial Condition and Results of Operations

Performance Summary

BOK Financial Corporation (“the Company”) reported net income of $166.4$132.8 million or $2.40$1.96 per diluted share for the second quarter of 2021. Net income was $64.72022 compared to $62.5 million or $0.92 per diluted share for the second quarter of 2020 and $146.1 million or $2.10$0.91 per diluted share for the first quarter of 2021. Forecasts for improving macroeconomic factors, including stabilizing energy prices,2022. Increased fee income led by revenue growth from trading activities combined with higher net interest revenue and improving credit quality metrics resulted in a negative provision for expected credit losses of $35.0 million and $25.0 milliondecreased operating expenses to grow net income in the second quarter. First quarter of 2021trading revenue was negatively affected by interest rate volatility and first quarter of 2021, respectively. A provision for expected credit losses of $135.3 million was recorded in the second quarter of 2020.concern over rising inflation.

Pre-provision net revenue ("PPNR"), a non-GAAP measure, was $179.9$169.0 million for the second quarter of 20212022 compared to $215.8$78.7 million for the second quarter of 2020. The decrease in PPNR was due to lower combined net interest revenue and fees and commission revenue. This was largely driven by lower average loan balances due to customer deleveraging during the current economic uncertainty, narrowing net interest margin and compressed margins from our mortgage banking activities. PPNR improved $16.5 million over the first quarter of 2021. Growth in much of our fee-based business, led by brokerage and trading and fiduciary and asset management revenues, was partially offset by lower mortgage banking revenue.2022.

Highlights of the second quarter of 20212022 included:

Results of Operations

Net interest revenue is the interest earned on debt securities, loans and other interest-earning assets less interest paid for interest-bearing deposits and other borrowings. The net interest margin is calculated by dividing tax-equivalent net interest revenue by average interest-earning assets. Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin is typically greater than net interest spread due to interest income earned on assets funded by non-interest bearing liabilities such as demand deposits and equity.

Tax-equivalent net interest revenue totaled $282.6$276.1 million for the second quarter of 20212022 and $280.7$270.4 million for the secondfirst quarter of 2020. Net2022. Compared to the first quarter of 2022, net interest revenue increased $13.9$18.3 million from growth in average earning assets and decreased $12.0 million due to changes in interest rates. An increaserates and decreased $12.6 million from changes in trading securities balances was partially offset by a decrease in loan balances.earning assets. Table 1 shows the effect on net interest revenue from changes in average balances and interest rates for various types of earning assets and interest-bearing liabilities.

Net interest margin was 2.60 percent for the second quarter of 2021, compared to 2.83 percent for the second quarter of 2020. In response to the anticipated impact to the economy from the COVID-19 pandemic, the Federal Reserve reduced the federal funds rate to near zero in March, 2020. Other short-term market interest rates followed, reducing the yield on floating-rate assets by more than the amount by which funding costs could be reduced, compressing the margin. The tax-equivalent yield onAverage earning assets was 2.75 percent, a decrease of 37 basis pointsdecreased $4.4 billion compared to the secondfirst quarter of 2020. The available for sale securities portfolio yield decreased 44 basis points to 1.85 percent as principal cash flows received from maturities of the available for sale securities portfolio continue to be reinvested at lower rates. Loan yields decreased 9 basis points to 3.54 percent, largely due to the decrease in short-term interest rates partially offset by the addition of PPP loan fees. PPP loan fees of $11.1 million were recognized in the second quarter of 2021. As discussed in the Management's Discussion and Analysis - Loan section following, $27.8 million of deferred loans fees remain to be recognized in future periods, including $3.8 million related to loans originated in 2020 that mature in 2022. The yield onAverage trading securities decreased 51 basis pointswere reduced by $4.4 billion as we reduced our inventory of low-coupon residential mortgage-backed securities and repositioned the trading portfolio in response to 1.95 percent.

AverageTotal average deposits increased $4.8were reduced by $1.8 billion compared to the second quarter of 2020. Deposit growth is largely due to customers retaining elevated balances in the current economic environment, supplemented by the most recent government stimulus payments. Interest-bearing deposits increased $3.1 billion while demand deposit balances increased $1.7 billion. Other borrowed funds decreased $3.9 billion.

Net interest margin was 2.602.76 percent compared to 2.622.44 percent in the first quarter of 2021.

The effectiveness of these strategies is reflected in the overall change in net interest revenue due to changes in interest rates as shown in Table 1 and in the interest rate sensitivity projections as shown in the Market Risk section of this report.

(In thousands)

Other operating revenue was $191.4$168.6 million for the second quarter of 2021, a decrease of $41.82022 and $87.9 million compared tofor the secondfirst quarter of 2020. Mortgage production revenue was negatively impacted by a decline in mortgage production volumes and margin compression.2022. Brokerage and trading revenue, decreased largelywhich was negatively impacted in the prior quarter by market volatility due to a shift of trading revenue touncertainty surrounding rising inflation and interest income from trading securities.

(In thousands)

Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 3839 percent of total revenue for the second quarter of 2021,2022, excluding provision for credit losses and gains and losses on other assets, securities and derivatives and the change in the fair value of mortgage servicing rights. We believe that a variety of fee revenue sources provides an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. As an example of this strength, manyMany of the economic factors such as rising interest rates resultingthat we expect will result in growth in net interest revenue or fiduciary and asset management revenue may also decrease mortgage banking production volumes and related trading. WeThe velocity of changes in market conditions and interest rates may result in timing differences between when offsetting impacts and benefits are realized. As interest rates are expected to move higher, we expect growthto experience increased benefits to our net interest margin, which provides an offset to reduced mortgage-related fee income. Generally, for operating revenues not as directly related to movement in other operating revenueinterest rates, we expect growth to come through offering new products and services and by further development of our presence in other markets. However, current and future economic conditions, including the recent impact of the COVID-19 pandemic, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

Brokerage and trading revenue, which includes revenues from trading, customer hedging, retail brokerage and investment banking, decreased $32.6increased $71.1 million or 53263 percent compared to the secondfirst quarter of 2020.2022.

Customer hedging revenue is based primarily on realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs. As more fully discussed under Customer Derivative Programs in Note 3 of the Consolidated Financial Statements, we offer commodity, interest rate, foreign exchange and equity derivatives to our customers. Customer hedging revenue totaled $1.8$13.1 million for the second quarter of 2021, a $4.42022, up $2.2 million or 71 percent decrease compared toover the second quarter of 2020, primarily attributed to energy customers.prior quarter. Customer hedging revenue includes credit valuation adjustments of the fair value of derivatives to reflect the risk of counterparty default.

Fiduciary and asset management revenue is earned through managing or holding of assets for customers and executing transactions or providing related services. Approximately 90 percent of fiduciary and asset management revenue is primarily based on the fair value of assets. Rates applied to asset values vary based on the nature of the relationship. Fiduciary relationships and managed asset relationships generally have higher fee rates than non-fiduciary and/or managed relationships. Fiduciary and asset management revenue increased $3.6$3.4 million or 9 percent compared toover the first quarter of 2022. Money market fund revenue share grew $3.0 million. The second quarter of 2020. Analso included an increase in trustseasonal tax preparation fees of $1.8 million and managed account fees from higher client asset balances was partially offset by a decrease in mutual fund fees as the low rate environment has put pressure on our mutual fund revenue streams. We had approximately $2.9 million inreduction of fee waivers during the second quarter of 2021 compared to approximately $1.1 million in the second quarter of 2020.$2.1 million. We have voluntarily waived certain administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds induring the current short-term interest rate environment. As of June 30, 2022, we are no longer waiving those fees. These increases were partially offset by a $3.2 million reduction in trust business line fees related to decreased asset under management billable fees, consistent with market driven declines in equities, which account for a third of the assets under management or administration.

Fiduciary and asset management revenue increased $3.5 million or 8 percent compared to the first quarter of 2021 due to seasonal tax preparation fees collected in the second quarter and higher client asset balances. A distribution of assets under management or administration and related fiduciary and asset management revenue follows:

(In thousands)

A summary of changes in assets under management or administration for the three and six months ended June 30, 20212022 and 20202021 follows:

Deposit service charges and fees increased $3.8$1.5 million compared todriven largely by commercial customer activity. Overdraft and non-sufficient funds fees earned primarily on consumer deposit accounts totaled $6.6 million for the second quarter of 2020 and $1.7 million over2022, largely unchanged from the first quarter of 2021. This increase was primarily due to commercial accounts where lower earnings credit rates caused by the low interest rate environment have resulted in higher service charges.prior quarter.

Mortgage banking revenue decreased $32.7$5.3 million or 61 percent compared to the second quarter of 2020 and $15.9 million or 4332 percent compared to the first quarter of 2021.2022 due to lower production volume combined with narrowing margins. Rapidly rising interest rates and continued inventory shortages have resulted in fewer refinance opportunities and heightened competitive pricing pressure. Mortgage loan production volume decreased $429$102 million or 40 percent compared to second quarter$306 million. Production revenue as a percentage of 2020 and decreased $206 million or 24 percent compared to first quarter of 2021. The decline in mortgage production volume, was largely due to industry-wide housing inventory constraints, changes to government-sponsored entity delivery limits on second homes and investment properties, and overall market conditions. The realized margin on funded mortgage loans decreased 35 basis points to 2.75 percent compared to first quarter of 2021 while the gain on sale margin, which includes unrealized gains and losses on our mortgage commitment pipeline and related hedges, decreased 143140 basis points to 1.55 percent. Margins were compressed largely due to competitive pricing pressure(0.16) percent, affected by increased market competition and timingour securitization of settlements.loans previously repurchased from GNMA pools.

(In thousands)

Other gains and losses, net gains totaled $16.4decreased $6.0 million in the second quarter of 2021 compared to $7.3 million in the second quarter of 2020. The fluctuation is related to increased gains on alternative investments and sales of repossessed assets. Other net gains totaled $10.1 million in the first quarter of 2021. Increases2022 primarily related to a write-down of a repossessed equity interest in gains on alternative investments and the sale of fixed assets were partially offset by a decrease in gains on sales of repossessed assets.midstream entity.

As discussed in the Market Risk section following, the fair value of our mortgage servicing rights ("MSRs") changes in response to changes in primary mortgage loan rates and other assumptions. We attempt to mitigate the earnings volatility caused by changes in the fair value of MSRs by designating certain financial instruments as an economic hedge. Changes in the fair value of these instruments are generally expected to partially offset changes in the fair value of MSRs.

(In thousands)

Other operating expense for the second quarter of 20212022 totaled $291.2$273.7 million, a decrease of $4.8 million compared to the second quarter of 2020 and a decrease of $4.6$4.0 million compared to the first quarter of 2021.2022.

(In thousands)