BOK Financial Corporation — Q3 2018 Form 10-Q
Reporting period: Quarter ended September 30, 2018. BOK Financial is a regional bank holding company operating Commercial Banking, Consumer Banking and Wealth Management businesses. Unless noted otherwise, financial amounts below are in U.S. dollars.
Financial performance and condition
| Metric | Q3 2018 | Comparison / context |
|---|---|---|
| Net income attributable to BOK Financial shareholders | $117.3 million; $1.79 diluted EPS | Up 37% from $85.6 million and $1.31 per diluted share in Q3 2017; up from $114.4 million and $1.75 in Q2 2018. |
| Net interest revenue | $240.9 million | Up $22.4 million year over year. Net interest margin was 3.21%, versus 3.01% in Q3 2017; excluding prior-year interest recoveries, the increase was 26 basis points. |
| Other operating revenue | $167.9 million | Reported fees and commissions were $167.5 million. On a comparable basis, fees rose $4.0 million year over year; adoption of revenue-recognition guidance changed the presentation of interchange fees. |
| Operating expense | $252.6 million | Down $3.4 million year over year on a comparable basis; up $6.1 million from Q2. |
| Credit costs | $4.0 million provision; $9.0 million net charge-offs | Annualized net charge-offs were 0.20% of average loans, compared with 0.24% in Q2 and 0.08% in Q3 2017. |
| Income tax | $34.7 million; 22.8% effective rate | Q3 2017 rate was 33.1%; the lower 2018 rate primarily reflects federal tax reform. |
| Loans and deposits at quarter-end | Loans $18.35 billion; deposits $21.63 billion | Loans increased $346 million from Q2; deposits decreased $537 million. |
| Capital | CET1 12.05%; total capital 13.35%; leverage 9.90% | All exceeded the regulatory minimums including the capital conservation buffer. |
Q3 fiduciary and asset-management revenue included a $15.4 million fee from a client asset sale, adding approximately $11.5 million after tax, or $0.18 per diluted share. Excluding this unusual benefit, reported earnings were materially lower.
For the first nine months of 2018, net income attributable to shareholders was $337.2 million, or $5.15 diluted EPS, versus $262.2 million, or $4.00, in the comparable 2017 period. Net interest revenue was $699.2 million; other operating revenue was $480.3 million.
Liquidity, funding and cash flow
- At September 30, total assets were $33.29 billion and shareholders’ equity was $3.62 billion. Period-end cash and cash equivalents were $1.25 billion, down from $2.32 billion at year-end 2017.
- Borrowings included $6.03 billion of other borrowings, $791 million of funds purchased and repurchase agreements, and $145 million of subordinated debentures. The company reported approximately $6.3 billion of unused collateralized credit capacity at the bank.
- For the first nine months, net cash used in operating activities was $389.4 million, net cash used in investing activities was $1.04 billion, and net cash provided by financing activities was $354.8 million. Cash and cash equivalents declined by $1.07 billion. These cash-flow figures reflect banking and securities activity and should be interpreted in that context.
- The bank could pay up to $79 million in dividends to the parent without regulatory approval under the most restrictive stated limits. The company paid $0.50 per common share in Q3 and declared another $0.50 dividend payable in November 2018.
Material changes versus comparable periods
- Higher short-term rates, loan growth and a shift away from excess Federal Reserve cash supported net interest revenue and margin. Funding costs also rose: the cost of interest-bearing deposits increased year over year, and borrowed-fund costs rose 81 basis points.
- Commercial and commercial real estate lending drove loan growth. Energy loans were $3.3 billion, or 18% of total loans; commercial real estate loans were $3.8 billion.
- Wealth Management earnings rose to $29.3 million from $15.5 million, principally due to the one-time client-asset-sale fee. Commercial Banking earned $85.0 million, up 24%; Consumer Banking earned $9.2 million, up 91%.
- Mortgage production volume fell 26% year over year to $598 million, as higher mortgage rates weighed on origination. Brokerage and trading revenue declined 30% to $23.1 million.
- Unrealized losses on available-for-sale securities increased: gross losses were $241 million at September 30, compared with $205 million at June 30, primarily reflecting higher longer-term rates. No other-than-temporary impairment charge was recorded in Q3.
Acquisition, outlook, risks and contingencies
- CoBiz acquisition: Completed October 1, 2018, after the reporting date. Consideration was $944 million, comprising $242 million cash and 7.2 million BOK Financial shares valued at $702 million. CoBiz had $3.9 billion of assets, $3.1 billion of loans and $3.3 billion of deposits at September 30. Management expected approximately $45 million of closing and integration costs in Q4 2018 and Q1 2019, with bank consolidation anticipated in Q1 2019. The filing gives illustrative combined capital ratios, including CET1 of 10.92% at September 30.
- Management said further Federal Funds rate increases were expected to benefit net interest revenue, but at a diminishing rate as competition for deposits intensifies. Approximately 82% of commercial and commercial real estate loans were variable-rate or set to reprice within a year.
- Credit indicators were mixed: nonperforming assets excluding U.S.-government-guaranteed assets fell to $170 million from $186 million in Q2, while potential problem loans increased $36 million to $176 million. Q3 commercial net charge-offs included losses on one energy borrower and one wholesale/retail borrower.
- Interest-rate, mortgage-market and securities valuation exposures remain important. A 200-basis-point rate increase was estimated to raise next-12-month net interest revenue by $1.0 million; a 50-basis-point decrease was estimated to reduce it by $17.8 million. Models rely on assumptions about rates, prepayments and customer behavior.
- Off-balance-sheet commitments included $10.72 billion of loan commitments and $672 million of standby letters of credit; amounts do not necessarily represent future cash requirements because some commitments expire unused.
- The filing describes bondholder and other litigation, including claims related to the bank’s trustee role in municipal bond matters. Management, based on counsel’s advice, said losses were not probable in the described actions; in one matter a loss could become probable if a court-ordered payment plan fails, and the amount could be material but was not reasonably estimable. The filing also reports overdraft-related putative class actions.
- Management identified merger integration, credit quality, interest-rate and market changes, competition, economic conditions, and regulatory or technological changes as risks to forward-looking expectations. No quantified full-year earnings guidance is provided.
Most important facts for investors to verify
- How much of Q3 earnings growth persists after excluding the $15.4 million client-asset-sale fee and the benefit of lower tax rates.
- CoBiz integration costs, expected savings, consolidation timing, share issuance impact and post-acquisition capital levels.
- Whether rising deposit costs and competition offset loan-yield gains as rates change.
- Trends in potential problem loans, energy and commercial credit exposures, charge-offs and allowance adequacy.
- Available-for-sale securities losses, mortgage servicing rights valuation and sensitivity to interest-rate and prepayment assumptions.
- Liquidity and funding trends, including deposit runoff, wholesale borrowing levels and the substantial off-balance-sheet commitments.
- Developments in the disclosed litigation and any change in management’s assessment of potential loss.