BOK FINANCIAL CORP annual report, FY2020

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BOK Financial Corporation — FY2020 Form 10-K

Business context and reporting period. BOK Financial is a regional financial holding company operating primarily across Oklahoma, Texas, New Mexico, Arkansas, Colorado, Arizona and Kansas/Missouri. Its principal businesses are Commercial Banking, Consumer Banking and Wealth Management. This annual report covers the fiscal year ended December 31, 2020; fourth-quarter results are also noted below. The year’s results reflect the COVID-19 shock, near-zero interest rates, government stimulus and the adoption of CECL.

Key financial metrics

  • Earnings: Net income attributable to BOK Financial shareholders was $435.0 million, or $6.19 per diluted share, versus $500.8 million, or $7.03, in 2019. Return on average assets was 0.89% and return on average equity was 8.55%, compared with 1.19% and 10.73%, respectively.
  • Fourth quarter: Shareholder-attributable net income was $154.2 million, or $2.21 per diluted share, compared with $110.4 million, or $1.56, in fourth-quarter 2019. The quarter included a $6.5 million negative provision for credit losses.
  • Revenue and margin: Net interest revenue was $1.108 billion, down slightly from $1.113 billion. Net interest margin declined to 2.83% from 3.11%. Fees and commissions rose to $810.3 million from $702.2 million; mortgage banking and brokerage/trading were the main growth drivers. Fee and commission revenue represented approximately 42% of total revenue, as defined by the company.
  • Credit costs and asset quality: Provision for credit losses was $222.6 million, versus $44.0 million in 2019. Net charge-offs were $70.4 million, or 0.30% of average loans; excluding PPP loans, the reported ratio was 0.32%. Nonperforming assets rose to $477.0 million from $293.8 million, and non-pass loans increased to $1.0 billion from $551 million.
  • Loans and reserves: Period-end loans increased 5.8% to $23.0 billion, including $1.7 billion of PPP loans. The allowance for loan losses was $388.6 million, or 1.69% of loans; the combined allowance and unfunded-commitment accrual was $425.6 million, or 1.85% of loans. Excluding PPP loans, the combined ratio was 2.00%.
  • Liquidity and funding: Deposits grew to $36.1 billion from $27.6 billion, largely reflecting stimulus-related inflows and customers holding larger balances. The company reported $16.5 billion of estimated unused collateralized borrowing capacity at the subsidiary bank. Cash and cash equivalents were $1.18 billion at year-end.
  • Debt and capital: Total equity was $5.29 billion, including $5.27 billion of shareholders’ equity. Consolidated CET1 and total capital ratios were 11.95% and 13.82%, respectively; the leverage ratio was 8.28%. Borrowed funds, including subordinated debentures, totaled approximately $3.82 billion, down from $8.62 billion in 2019. The filing reports $276.0 million of subordinated debentures.
  • Cash flow: Net cash used in operating activities was $416.3 million; investing activities used $2.46 billion; financing activities provided $2.80 billion. Cash and cash equivalents declined $78.2 million during the year. Operating cash flow reflects, among other things, the company’s trading and mortgage activities and should be interpreted in that context.
  • Shareholder returns: Cash dividends declared were $2.05 per share, up from $2.01. The company repurchased 1.107 million shares during 2020.

Material changes versus 2019

  • Net income declined 13%, primarily as the provision for credit losses increased sharply during the pandemic and CECL transition, despite higher fee revenue and lower funding costs.
  • Net interest margin contracted 28 basis points as market rates fell, while average earning assets rose 12% to $40.7 billion. Net interest revenue remained broadly stable.
  • Fees and commissions increased 15%; mortgage banking revenue rose 70% to $182.4 million and brokerage and trading revenue rose 39% to $221.8 million. Fiduciary and asset management revenue and deposit service charges declined.
  • Period-end deposits increased $8.5 billion and loans increased $1.3 billion. The loan increase was principally attributable to PPP lending.
  • Nonperforming assets increased 62%, with higher nonaccruing commercial loans and repossessed assets. Energy loans declined to $3.5 billion, or 15% of total loans, from $4.0 billion, or 18%.
  • Adoption of CECL on January 1, 2020 resulted in a $61.4 million pre-tax cumulative-effect decrease to equity; prior periods were not restated. The year-end allowance is therefore not directly comparable with the prior-year incurred-loss allowance.

Outlook, commentary, risks and unusual items

  • Management’s credit-loss forecast assumed a 60% base, 30% downside and 10% upside scenario. The base case anticipated GDP growth and a broad vaccine rollout in 2021; management emphasized substantial uncertainty around the pandemic, stimulus and economic recovery. These are assumptions used in credit estimates, not earnings guidance.
  • The filing gives no specific earnings or revenue guidance. Management expects the low-rate environment to pressure net interest margin; future performance also depends on loan demand, deposit behavior, credit quality and market conditions.
  • Key exposures include energy lending (15% of loans), regional concentration (31% Texas, 17% Oklahoma and 12% Colorado), commercial real estate, and pandemic-sensitive businesses. The company also identifies interest-rate, mortgage-servicing-rights, cybersecurity, third-party service-provider, regulatory and LIBOR-transition risks.
  • At year-end, 3,258 agency-serviced mortgage borrowers with $511 million of unpaid principal were in forbearance; related principal and interest advances were $5.4 million. More than 90% of commercial deferral requests had returned to payment status, and loans still in deferral were below 1% of total loans.
  • A pending bondholder dispute tied to a former corporate-trust relationship could become material if losses to the bank become probable. Management, based on counsel’s advice, stated that a loss was not probable and recorded no provision; the amount of any potential loss could not be reasonably estimated.
  • Other notable items include a $24.9 million net economic benefit from mortgage-servicing-rights hedges and related activity, and a $70 million increase in repossessed assets, primarily oil and gas properties. The annual goodwill assessment indicated no impairment.

Important facts for investors to verify

  • Whether credit quality, nonperforming assets and charge-offs stabilize, particularly in energy, commercial services and repossessed oil and gas assets.
  • How CECL assumptions and economic scenario weights affect future provisions and reserve adequacy as pandemic conditions and stimulus evolve.
  • Whether deposit balances remain elevated and how further low rates, deposit repricing and asset reinvestment affect net interest margin.
  • The sustainability of unusually strong mortgage production and trading revenue, and the sensitivity of mortgage servicing rights to rates and prepayments.
  • Progress on PPP forgiveness, mortgage forbearance and advances, and the outcome of the disclosed bondholder litigation and other contingencies.
  • Capital and liquidity resilience, including regulatory limits on subsidiary-bank dividends, planned repurchases and the company’s reliance on collateralized funding capacity.