BOK Financial Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019. BOK Financial is a regional banking and financial services company operating through Commercial Banking, Consumer Banking and Wealth Management. The period includes CoBiz Financial, acquired October 1, 2018; CoBiz operations had not yet been allocated to operating segments.
Financial performance and condition
| Metric | Q1 2019 | Comparison |
|---|---|---|
| Net income attributable to BOK Financial shareholders | $110.6 million; $1.54 diluted EPS | Net income was $105.6 million and EPS $1.61 in Q1 2018; $108.5 million and $1.50 in Q4 2018 |
| Net interest revenue | $278.1 million | Up $58.4 million year over year; down $7.6 million sequentially |
| Net interest margin | 3.30% | 2.99% in Q1 2018; 3.40% in Q4 2018 |
| Fees and commissions | $160.6 million | Up $0.9 million year over year; broadly flat sequentially |
| Total other operating revenue | $157.3 million | Up $1.3 million year over year and $20.8 million sequentially; includes volatile fair-value and derivative items |
| Other operating expense | $287.2 million | Up $42.7 million year over year and $2.5 million sequentially |
| Provision for credit losses | $8.0 million | $5.0 million benefit in Q1 2018; $9.0 million expense in Q4 2018 |
| Period-end loans / deposits | $21.8 billion / $25.3 billion | Loans up $102 million and deposits up $68 million from year-end 2018 |
| Capital | CET1 10.71%; total capital 12.24%; leverage 8.76% | CET1 was 10.92% at year-end 2018 |
Average earning assets were $34.4 billion, up 15% year over year, with acquired loans and legacy portfolio growth contributing to higher net interest revenue. The quarterly average yield on earning assets was 4.46%; funding costs were 1.66%. Q1 net income increased about 5% year over year, while diluted EPS fell as average diluted shares rose to 71.4 million from 64.9 million.
Operating cash flow was negative $1.106 billion, investing cash flow negative $203 million and financing cash flow positive $1.448 billion; cash and cash equivalents increased $139 million to $1.283 billion. The filing attributes much of the operating cash outflow to changes in trading and fair-value-option securities and unsettled securities receivables. At March 31, total assets were $39.9 billion, shareholders’ equity $4.5 billion, and unused collateralized credit availability approximately $7.1 billion. Period-end borrowed funds and subordinated debentures totaled approximately $9.1 billion.
Material changes and notable items
- CoBiz contributed $42.8 million to net interest revenue, including $7.8 million of net purchase-accounting discount accretion. Q1 included $12.7 million of CoBiz integration costs, reducing EPS by an estimated $0.13; management cautioned that integration or realization of expected benefits may be delayed or disrupted.
- Net charge-offs were $10.1 million, or 0.19% of average loans, versus $1.3 million, or 0.03%, in Q1 2018. The quarter’s commercial charge-offs were primarily associated with one energy borrower and one healthcare borrower. The combined allowance for credit losses was $207 million, or 0.95% of loans.
- Nonperforming assets excluding U.S.-government-guaranteed assets declined $10.8 million from year-end to $162.8 million. Potential problem loans fell to $169 million from $215 million, while “other loans especially mentioned” rose to $196 million from $182 million.
- Energy loans were $3.7 billion, 17% of total loans; unfunded energy commitments were $3.4 billion. Management describes reserve-based lending as a significant part of this exposure and identifies commodity prices and borrower repayment capacity as risks.
- Share repurchases totaled 705,609 shares at an average $85.85. The company paid a $0.50-per-share quarterly dividend; the board approved another $0.50 dividend payable in May 2019.
- Adoption of the lease standard increased reported right-of-use assets and lease liabilities by $137 million, with an immaterial retained-earnings effect. BOK Financial expected to adopt CECL on January 1, 2020; the effect had not yet been quantified.
Outlook, risks and contingencies
The filing provides no quantified earnings or revenue guidance. Management expects fee-revenue growth from new products and further market development, but notes economic conditions, regulation, competition and market saturation could constrain growth. Management’s interest-rate strategy targets relative balance-sheet neutrality; its model estimated that a 200-basis-point rate increase would reduce next-12-month net interest revenue by $4.5 million (0.38%). Results may differ because interest-rate and customer-behavior models rely on assumptions.
Material exposures include interest-rate changes, mortgage servicing rights valuation and prepayment assumptions, trading activity, energy and other commercial credit concentrations, and potential integration challenges. Mortgage servicing rights and related economic hedges together reduced Q1 pretax income by $5.4 million. The filing also describes litigation related to municipal bond trustee services; management said no loss was probable at filing, but noted a loss could become probable if the bond principals’ court-ordered payment plan fails, and the amount could be material but was not reasonably estimable. Other disclosed lawsuits were assessed by management as not probable of loss. Disclosure controls were reported effective, with no material change to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Reconcile the filing’s differing expense figures: the performance highlights refer to $274.4 million of expense, while the income statement and detailed expense table report $287.2 million.
- Track CoBiz integration costs, expense trends and evidence that expected acquisition benefits are being realized.
- Monitor credit quality, especially energy and healthcare exposures, charge-offs, nonperforming assets and allowance coverage.
- Assess deposit mix, wholesale borrowing reliance, funding costs and capital ratios as the balance sheet grows.
- Follow the municipal bond litigation and the status of the principals’ court-ordered repayment plan; the potential loss was not estimable.