UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One) 

OR

 

Commission File No. 001-37811

BOK FINANCIAL CORP

 

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of "large accelerated filer," "accelerated filer," "smaller reporting company," and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 66,369,20864,515,035 shares of common stock ($.00006 par value) as of June 30, 2023.March 31, 2024.

BOK Financial Corporation

Form 10-Q

Quarter Ended June 30, 2023March 31, 2024

BOK Financial Corporation ("the Company") reported net income of $151.3$83.7 million or $2.27 per diluted share for the second quarter of 2023 compared to $162.4 million or $2.43$1.29 per diluted share for the first quarter of 2024 compared to $82.6 million or $1.26 per diluted share for the fourth quarter of 2023. Pre-provisionExcluding the loss from repositioning of the available for sale securities portfolio and the additional FDIC special assessment expense, net revenue ("PPNR"),income would have been $123.2 million or $1.91 per share for the first quarter of 2024, both of which are non-GAAP measures. PPNR, also a non-GAAP measure, decreased $12.0$2.6 million to $212.3$114.9 million compared to the firstfourth quarter of 2023.

Highlights of the secondfirst quarter of 20232024 compared to the firstfourth quarter of 2023 included:

Highlights of the sixthree months ended June 30, 2023March 31, 2024 compared to the sixthree months ended June 30, 2022March 31, 2023 included:

Net Interest Revenue and Net Interest Margin

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 $324.5$295.7 million for the secondfirst quarter of 2023,2024, compared to $354.6$298.8 million for the prior quarter. Compared to the firstfourth quarter of 2023, net interest revenue decreased $24.4$3.4 million from changes in interest rates and $5.8 millionincreased $308 thousand from changes in 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.

Average earning assets increased $2.0 billion$520 million compared to the firstfourth quarter of 2023. The average balance of trading securities increased $1.2 billion due to favorable market opportunities. Average loan balances increased $413$243 million, largely due to growth in commercial andloans, partially offset by a reduction in commercial real estate loans. The average balance of available for sale securities, which consists largely of residential and commercial mortgage-backed securities guaranteed by U.S. government agencies, increased $295 million. Average interest-bearing cash and cash equivalents grew $92$475 million while the average balance of trading securities decreased $77 million.

Total average deposits declined by $1.1increased $1.3 billion compared toover the firstfourth quarter of 2023, including a $1.4$2.1 billion decreaseincrease in demandinterest-bearing deposits, partially offset by a $295$747 million increasedecrease in interest-bearingdemand deposits. Funds purchased and repurchase agreements grew $1.9declined $1.2 billion while other borrowings increased $763decreased $276 million.

Net interest margin was 3.00 percent2.61% compared to 3.45 percent2.64% in the fourth quarter of 2023 driven by continued demand deposit migration and deposit repricing. For the first quarter of 2023. Growth in2024, our trading assets drove a 9 basis point decline incore net interest margin with deposit repricing activity primarily driving the remaining 36 basis point reduction. In recent prior quarters, the rapid pace of market interest rate increases grew net interest margin as our earning assets, led by our significant percentage of variable-rate loans, repriced atexcluding trading activities, a higher rate and faster pace than our interest-bearing liabilities. In the past two quarters, deposit price competition and liability mix shift have driven compressionnon-GAAP measure, was 2.97% compared to 3.03% in the net interest margin.prior quarter. The tax-equivalent yield on earning assets was 5.29 percent,5.73%, an increase of 239 basis points. Loan yields grew 364 basis points to 7.03 percent.7.40%. The available for sale securities portfolio yield increased 1321 basis points to 3.00 percent.3.48%. The yield on trading securities grew 7 basis points to 5.12% and the yield on interest-bearing cash and cash equivalents increased 113decreased 34 basis points to 5.41 percent.4.96%.

Funding costs were 3.27 percent, an 844.08%, a 10 basis point increase over the prior quarter. The cost of interest-bearing deposits increased 7326 basis points to 2.56 percent.3.69%. The cost of funds purchased and repurchase agreements increased 125decreased 74 basis points to 4.58 percent4.05% while the cost of other borrowings increased 391 basis pointspoint to 5.12 percent.5.56%. This beneficial mix shift was enabled by the growth of interest-bearing deposits. The benefit to net interest margin from assets funded by non-interest liabilities was 9896 basis points, an increasea decrease of 162 basis points.

Our overall objective is to manage the Company's balance sheet for changes in interest rates as is further described in the Market Risk section of this report. Approximately 80 percent81% of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will reprice within one year. These loans are funded primarily by deposit accounts that are either non-interest bearing, or that reprice more slowly than the loans. The result is a balance sheet that is asset sensitive, which means that assets generally reprice more quickly than the liabilities. One of the strategies that we use to manage toward a relative rate-neutral position is to purchase fixed ratefixed-rate residential mortgage-backed securities issued primarily by U.S. government agencies and fund them with market-rate-sensitivemarket rate-sensitive liabilities. The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio. We also may use derivative instruments to manage our interest rate risk. 

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 $209.0$161.7 million for the secondfirst quarter of 2023, an increase2024, a decrease of $31.2$43.2 million compared to the fourth quarter of 2023. The first quarter of 2024 included $45.2 million of losses from repositioning the available for sale securities portfolio. The prior quarter included a $31.0 million pre-tax gain on the sale of BOKFI and $1.8 million of insurance brokerage revenue recognized prior to the sale. We also recognized a $27.6 million loss on the sale of available for sale securities in the fourth quarter of 2023.

(Dollars in thousands)

Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Diversified sources of fees and commissions revenue are a significant part of our business strategy and represented 38 percent41% of totalcombined net interest revenue for the second quarter of 2023, excludingbefore provision for credit losses and gainsfees and losses on other assets, securities and derivatives andcommissions revenue for the change in the fair valuefirst quarter of mortgage servicing rights.2024. We believe that a variety of fee revenue sources provides diversification to changes resulting from market or economic conditions such as interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile. Many of the economic factors, such as risingdecreasing interest rates, that we expect will result in growtha decline in net interest revenue or fiduciary and asset management revenue may also affectincrease 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, 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, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

Brokerage and Trading Revenue

Brokerage and trading revenue, which includes revenues from trading, customer hedging, retail brokerage, insurance brokerage and investment banking, increased $12.6decreased $1.7 million or 24 percent3% compared to the firstfourth quarter of 2023.

Trading revenue includes net realized and unrealized gains and losses primarily related to residential mortgage-backed securities guaranteed by U.S. government agencies and related derivative instruments that enable our mortgage banking customers to manage their production risk. Trading revenue also includes net realized and unrealized gains and losses on municipal securities and other financial instruments that we sell to institutional customers, along with changes in the fair value of financial instruments we hold as economic hedges against market risk of our trading securities. Trading revenue was $36.9$37.5 million, a $9.3$1.9 million increase over the prior quarter, primarily related to increased trading activity largely due to a higher volume ofin U.S. government agency residential mortgage-backed securities and related derivative contracts trading volumes.securities.

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 Risk Management 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 $13.6$6.3 million, an increasea decrease of $5.3$1.3 million, driven by less energy customer activity. Customer hedging revenue includes credit valuation adjustments of the fair value of derivatives to reflect the risk of counterparty default.

Investment banking, which includes fees earned upon completion of underwriting, financial advisory services and loan syndication fees, totaled $8.3$10.7 million for the second quarter of 2023, a decrease of $1.0 million compared to the first quarter of 2023, primarily related to2024 and was relatively consistent with the timing and volume of transactions. A reduction in syndication activity was partially offset by higher underwriting fees.prior quarter.

Transaction Card Revenue

Transaction card revenue includes revenues from processing transactions on behalf of members of our TransFund electronic fund transfer network, merchant services fees paid by customers for account management and electronic processing of card transactions and interchange fees from our corporate card program. Transaction card revenue totaled $26.0$25.5 million for the secondfirst quarter of 2023, relatively consistent with2024, a $3.4 million decrease, primarily due to seasonally elevated fourth quarter activity and one less day in the prior quarter.

Fiduciary and Asset Management Revenue

Fiduciary and asset management revenue is earned through managing or holding of assets for customers and executing transactions or providing related services. Fiduciary and asset management revenue is largely 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 grew $2.3was $55.3 million overfor the first quarter of 2024, a $3.9 million increase over the fourth quarter of 2023, led by higher seasonal tax preparation fee income.largely related to movement in the equity markets.

A distribution of assets under management or administration and related fiduciary and asset management revenue follows:

(Dollars in thousands)

A summary of changes in assets under management or administration for the three and six months ended June 30,March 31, 2024 and 2023 and 2022 follows:

Assets under management as of June 30, 2023March 31, 2024 consist of 43 percent42% fixed income, 33 percent34% equities, 15 percent15% cash, and 9 percent9% alternative investments.

Deposit Service Charges

Deposit service charges and fees increased $1.1 million$915 thousand or 3% over the firstfourth quarter of 2023, primarily due to growth in commercial customers holding lower compensating non-interest deposit balancesservice charges of $1.2 million, partially offset by a decrease in check card fees due to cover fees. Overdraft and non-sufficient funds fees earned primarily on consumer deposit accounts totaled $5.1 million, largely unchanged compared to the prior quarter.seasonality.

Mortgage Banking Revenue

(Dollars in thousands)

Primary rates disclosed in Table 5 above represent rates generally available to borrowers on 30 year conforming mortgage loans.

Net gains on other assets, securities and derivatives

NetOther gains, on other assetsnet, were $12.6$4.3 million for the secondfirst quarter of 20232024 compared to net gains$40.5 million in the fourth quarter of $2.32023. The prior quarter included a $31.0 million pre-tax gain, before related professional fees, on the sale of BOKFI.

Losses on available for sale securities were $45.2 million in the first quarter of 2023. The current quarter included a gain on alternative investments of $8.1 million, largely attributable to merchant banking activity. Changes in fair value related to deferred compensation investments increased $2.7 million. We also recognized a $3.0 million loss on2024 as we repositioned the sale of available for sale securities portfolio by selling approximately $783 million of lower-yielding debt securities. We expect the gain on conversion of our Visa B shares under the Exchange Offer will offset the realized losses on the repositioning. The Exchange Offer opened on April 8, 2024 and is scheduled to expire at end of day on May 3, 2024. Losses on available for sale securities were $27.6 million in the secondfourth quarter of 2023 related to improve the overall economicsrepositioning of the securities portfolio, going forward.offsetting the gain from the sale of BOKFI.

As discussed in the Market Risk section following, the fair value of our mortgage servicing rights ("MSRs")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)

(Dollars in thousands)

Certain percentage increases (decreases) are not meaningful for comparison purposes.

Personnel expense

Personnel expense increased $8.5 millionwas largely unchanged compared to the firstfourth quarter of 2023. Cash-based incentive compensation increased $6.6decreased $5.2 million, driven by sales activities.seasonally elevated incentive compensation in the fourth quarter. Share-based compensation was up $1.3 million reflecting changes in assumptions of certain performance-based equity awards. Regular compensation increased $4.1 million, representingand deferred compensation, which is offset by changes in the full quarter impactfair value of our annual merit increases in March.deferred compensation investments, both remained relatively unchanged compared to the prior quarter. Employee benefits expense decreased $2.5increased $5.0 million, primarily due to a seasonal decrease inseasonally higher payroll taxes, partially offset by higher healthcare costs.taxes.

Non-personnel operating expense

Non-personnelExcluding the FDIC special assessment, non-personnel expense totaled $128.0was $131.3 million, for the seconda decrease of $6.0 million. Professional fees and services expense decreased $4.3 million. The previous quarter of 2023, an increase of $4.4included $2.2 million comparedin expenses related to the first quartersale of 2023.BOKFI. Mortgage banking costs increased $2.5 million, largely from higher seasonal prepayments. Occupancy and equipment costs grew $1.6decreased $1.7 million, primarily due to seasonal increases in general building operating costs. The second quarter of 2023accruals related to default servicing and loss mitigation costs on loans serviced for others. We also includedmade a $1.1$1.5 million charitable donationcontribution to the BOKF Foundation.Foundation in the fourth quarter, which did not reoccur in the first quarter. Other expense increased $2.4 million, primarily due to increased operational losses.

Income Taxes

Lines of Business

We operate three principal lines of business: Commercial Banking, Consumer Banking and Wealth Management. Commercial Banking includes lending, treasury and cash management services and customer risk management products for small businesses, middle market and larger commercial customers. Commercial Banking also includes the TransFund EFT network. Consumer Banking includes retail lending and deposit services, lending and deposit services to small business customers served through our consumer branch network and all mortgage banking activities. Wealth Management provides fiduciary services, private banking services, insurance and investment advisory services in all markets. Wealth Management also underwrites state and municipal securities and engages in brokerage and trading activities.

In addition to our lines of business, we have a Funds Management unit. The primary purpose of this unit is to manage our overall liquidity needs and interest rate risk. Each line of business borrows funds from and provides funds to the Funds Management unit as needed to support their operations. Operating results for Funds Management and other include the effect of interest rate risk positions and risk management activities, securities gains and losses including impairment charges, the provision for credit losses in excess of net loans charged off, tax planning strategies and certain executive compensation costs that are not attributed to the lines of business. The Funds Management unit also initially recognizes accruals for loss contingencies when losses become probable. Actual losses are recognized by the lines of business if the accruals are settled.

We allocate resources and evaluate the performance of our lines of business using the net direct contribution, which includes the allocation of funds and capital costs. Credit costs are attributed to the lines of business based on net loans charged off or recovered. The difference between credit costs attributed to the lines of business and the consolidated provision for credit losses is attributed to Funds Management. In addition, we measure the performance of our business lines after allocations of certain indirect expenses and taxes based on statutory rates.

The cost of funds borrowed from the Funds Management unit by the operatingNet interest income in our lines of business reflects our internal funds transfer pricing methodology. The funds transfer pricing methodology is transfer priced at rates that approximate market rates for funds with similar repricingthe process by which the Company allocates interest income and cash flow characteristics. Market rates are generally based onexpense to the applicable wholesale borrowing rates orlines of business and transfers the primary interest rate swap rates, adjusted for prepayment risk and liquidity risk. This method of transfer-pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk.

Economic capital is assigned to the business units by a capital allocation model that reflects management's assessment of risk. This model assigns capital based upon credit, operating, interest rate and other market risk inherent in our business lines and recognizes the diversification benefits among the units. The level of assigned economic capital is a combination of the risk taken by each business line based on its actual exposures and calibrated to its own loss history where possible. Average invested capital includes economic capital and amounts we have invested in the lines of business.

As shown in Table 8, net income attributable to our lines of business increased $7.4decreased $46.2 million or 9% compared to the firstfourth quarter of 2023. Net interest revenue decreased $7.8$36.5 million primarily duelargely as a result of deposit repricing activity. Operating revenue decreased $37.4 million as the prior quarter included a pre-tax gain of $31.0 million, before related professional fees, on the sale of BOKFI. Operating expense decreased $10.2 million compared to a decline in deposit balances. Net charge-offs increased $5.8 million to $7.1 million in the second quarter of 2023. Other operating revenue increased $27.8 million. Brokerage and trading revenue increased $13.4 million, with a $9.3 million increase in trading revenue, largely due to a higher volume of U.S. agency residential mortgage-backed securities trading activity. Customer hedging revenue grew $6.1 million, primarily driven by energy customer activity. The secondfourth quarter of 2023 includedwith a gain on alternative investments of $8.1$7.9 million resulting from merchant banking activities. Fiduciarydecrease in personnel expense and asset management revenue increased $2.3 million, largely due to seasonal tax preparation fees. Operating expense increased $9.3 million over the first quarter of 2023. Personnel expense increased $7.2 million due to a combination of higher incentive compensation costs reflecting sales activity and growth in regular compensation related to our annual merit increases. Non-personnel expense increased $2.2 million led by higher mortgage banking costs. The decrease in net income attributed to Funds Management and other is largely due to adjustments made that attribute more deposit credit value to the business lines, with the offset to Funds Management and other.non-personnel expense.

(Dollars in thousands)