BOK Financial Corporation — Q3 2020 Form 10-Q
Business context and period. BOK Financial is a regional financial services company with Commercial Banking, Consumer Banking and Wealth Management businesses. This unaudited report covers the quarter and nine months ended September 30, 2020; prior-year comparisons are provided unless otherwise noted.
Key financial results
| Metric | Q3 2020 | Comparable period / change |
|---|---|---|
| Net income attributable to shareholders | $154.0 million; diluted EPS $2.19 | $142.2 million and $2.00 in Q3 2019; $64.7 million and $0.92 in Q2 2020 |
| Net interest revenue | $271.8 million | Down $7.3 million year over year and $6.4 million sequentially |
| Net interest margin | 2.81% | 3.01% in Q3 2019 and 2.83% in Q2 2020; excluding acquired-loan discount accretion, 2.67% versus 2.80% in Q2 |
| Other operating revenue | $234.2 million | Up $47.7 million year over year; fees and commissions were $222.9 million, up $36.7 million |
| Other operating expense | $301.3 million | Up $22.0 million year over year |
| Credit provision and charge-offs | No net provision for credit losses; net charge-offs $22.4 million, or 0.41% of average loans excluding PPP | Q2 2020 provision was $135.3 million; Q3 2019 provision was $12.0 million |
| Loans and deposits at period end | Loans $23.8 billion; deposits $35.0 billion | Loans down $353 million and deposits up $1.1 billion from June 30, 2020 |
| Capital | CET1 12.07%; total capital 14.05%; leverage 8.39% | CET1 was 11.44% at June 30, 2020 |
For the first nine months of 2020, net income attributable to shareholders was $280.8 million, down from $390.4 million in the prior-year period. Net interest revenue was $811.2 million, while the provision for credit losses totaled $229.1 million, compared with $25.0 million in the first nine months of 2019. The cash flow statement reports $360.5 million of operating cash provided, $2.9 billion used in investing activities and $2.3 billion provided by financing activities; these figures are for the nine-month period, not Q3 alone.
Material changes and operating trends
- Lower market rates compressed asset yields and net interest margin, despite lower funding costs. Management cited continued declines in LIBOR and reinvestment of securities cash flows at lower rates.
- Mortgage banking and trading benefited from low mortgage rates and increased mortgage production. Brokerage and trading revenue rose $25.7 million year over year, and mortgage banking revenue rose $21.8 million.
- Higher incentive compensation, including compensation tied to trading activity and share-based vesting assumptions, contributed to the expense increase. Repossessed-asset losses also rose, including write-downs on oil and gas and commercial real estate properties.
- Loan balances fell sequentially, largely from repayment of earlier defensive draws and customer deleveraging. PPP loans were $2.1 billion at September 30.
- Deposit growth continued as customers retained higher balances. The company said deposits may recede as economic conditions improve or higher short-term rates make other investments more attractive.
- Nonperforming assets excluding U.S.-government-guaranteed assets declined $17 million from June, to $267.6 million. The allowance for loan losses was $419.8 million, or 1.76% of loans; excluding PPP loans, it was 1.93%.
Outlook, risks and unusual items
- Credit outlook remains uncertain. The CECL estimate uses probability-weighted COVID-19 economic scenarios: 50% base, 25% downside and 25% upside. The base case assumed GDP growth over the next 12 months and recovery to pre-pandemic levels by year-end 2021; the downside case projected contraction and a later recovery. These are allowance assumptions, not company earnings guidance.
- Management provided no specific earnings or revenue guidance. It expects future results to remain exposed to the pandemic, government responses, borrower repayment capacity, commodity prices—particularly oil—and interest rates.
- Energy loans were $3.7 billion, 16% of total loans; the energy allowance was 4.30% of outstanding energy loans. Management described the pricing environment as fragile and linked performance to the pace of economic recovery.
- At quarter end, $264 million of loans remained in deferral status, down from a peak of $1.6 billion. Separately, 3,436 borrowers with $567 million of agency-serviced mortgage balances were in forbearance; related principal and interest advances were $5.8 million.
- CECL was adopted January 1, 2020, reducing retained earnings by $46.7 million after tax; prior periods were not restated. The company elected CARES Act regulatory-capital relief, which added 30 basis points to CET1 at September 30.
- Liquidity included approximately $15.3 billion of unused collateralized borrowing capacity at the bank. Parent-company cash and interest-bearing cash totaled $197 million. Share repurchases were paused through Q3; the board declared a $0.52 quarterly dividend on November 3, payable November 24.
- Legal proceedings include bondholder litigation related to municipal bond trustee services. Management, based on counsel’s advice, said a loss to the company was not probable and recorded no provision; a reasonable estimate was unavailable, and a loss could be material if it became probable. Other disclosed cases were also described as not probable or not reasonably estimable.
- Other notable exposures include sensitivity to mortgage-servicing-rights valuations, customer and counterparty derivative credit and collateral requirements, and the planned transition away from LIBOR. Management stated the effect of replacement benchmarks was not yet known.
Most important facts for investors to verify
- Whether net interest margin stabilizes as low-rate asset repricing, deposit costs and acquired-loan discount accretion evolve.
- Whether CECL assumptions remain appropriate and how provisions, charge-offs, criticized loans and deferrals change as pandemic relief measures expire.
- Credit performance in energy, commercial real estate, healthcare and businesses affected by restrictions or reduced activity.
- Durability of mortgage banking and trading gains, including the related incentive costs and volatility in mortgage servicing rights.
- Deposit retention, borrowing capacity, capital ratios and the effect of regulatory CECL relief as it phases out.
- Developments in the municipal bond litigation and any change in management’s assessment of potential loss.