BOK Financial Corporation — Q3 2019 Form 10-Q
Reporting period: Three and nine months ended September 30, 2019. BOK Financial is a diversified regional financial services company operating in commercial banking, consumer banking and wealth management. Results include CoBiz Financial, acquired in Q4 2018.
Financial performance
| Metric | Q3 2019 | Comparable period |
|---|---|---|
| Net income attributable to BOK Financial shareholders | $142.2 million; $2.00 diluted EPS | Q3 2018: $117.3 million; $1.79 diluted EPS |
| Net interest revenue | $279.1 million | Q3 2018: $240.9 million; Q2 2019: $285.4 million |
| Net interest margin | 3.01% | Q3 2018: 3.21%; Q2 2019: 3.30% |
| Fees and commissions revenue | $186.1 million | Q3 2018: $166.2 million reported |
| Other operating expense | $279.3 million | Q3 2018: $252.6 million |
| Provision for credit losses | $12.0 million | Q3 2018: $4.0 million; Q2 2019: $5.0 million |
The quarter’s $142.2 million shareholder-attributable income differs from consolidated net income of $141.9 million because of a loss attributable to non-controlling interests. Q3 2018 fiduciary revenue included a $15.4 million fee from a client asset sale (about $11.5 million after tax); comparisons excluding that unusual fee are more informative. Lower mortgage rates boosted brokerage and trading and mortgage banking activity. CoBiz contributed $40.6 million to Q3 net interest revenue and $20.8 million to operating expenses.
Balance sheet and liquidity at September 30: Loans were $22.3 billion, up $30 million from June 30; deposits were $26.2 billion, up $862 million. Total assets were $43.1 billion and shareholders’ equity was $4.8 billion. The combined allowance for credit losses was $206 million, or 0.92% of loans. Net charge-offs were $10.6 million, or 0.19% of average loans. Nonperforming assets excluding U.S.-government-guaranteed balances were $187 million, down $6.8 million from June.
Borrowed funds and subordinated debentures totaled approximately $10.5 billion at quarter-end. Management reported about $10.1 billion of estimated unused collateralized credit capacity. The common equity Tier 1 ratio was 11.06%, total capital ratio 12.56%, and leverage ratio 8.41%.
Cash flow for the first nine months: Operating activities used $1.06 billion, investing activities used $2.56 billion, and financing activities provided $3.70 billion. Cash and cash equivalents increased $83 million to $1.23 billion. These flows reflect, among other items, securities activity and mortgage-loan originations and sales; operating cash flow should not be read as a simple proxy for bank earnings.
Material changes and management commentary
- Year-over-year net interest revenue rose $38.2 million, with CoBiz and loan growth contributing, but margin declined 20 basis points. Compared with Q2, net interest revenue fell $6.3 million and margin fell 29 basis points; management attributed 9 basis points of the quarterly margin decline to falling rates.
- Fees and commissions rose $19.9 million year over year as reported, led by a $20.8 million increase in brokerage and trading and a $6.6 million increase in mortgage banking. The prior-year client asset-sale fee partly offsets this comparison.
- The credit-loss provision increased to $12 million. Potential problem loans decreased $18 million from Q2 to $143 million, while “other loans especially mentioned” increased $38 million to $179 million. Energy lending was $4.1 billion, or 18% of loans; energy nonaccruals were $88.9 million.
- Available-for-sale securities had an amortized cost of $10.8 billion and fair value of $11.0 billion. Management expanded the securities portfolio to reduce exposure to falling short-term rates. The portfolio is principally agency mortgage-backed securities and remains exposed to interest-rate, prepayment and extension risk.
- Mortgage production volume increased 53% year over year to $913 million. Mortgage servicing rights fell to $193.7 million from $259.3 million at year-end, including a $62.8 million nine-month loss from market-assumption changes.
Outlook, risks and contingencies
- The filing provides no specific earnings or revenue guidance. Management described a goal of managing the balance sheet toward relative interest-rate neutrality. Its model estimated that a 200-basis-point rate increase would reduce next-12-month net interest revenue by $20.9 million (1.89%); a 100-basis-point decrease would reduce it by $28.5 million (2.57%). Management cautions that model results depend on assumptions and actual outcomes may differ.
- CECL adoption was scheduled for January 1, 2020. Management estimated a pretax transition adjustment of $50 million to $75 million, subject to portfolio composition and economic forecasts. The estimate includes potential duplicate expected-loss recognition on about $2.0 billion of acquired loans and expected credit losses on certain transferred mortgage loans.
- Legal matters include bondholder litigation related to a prior municipal-bond trustee relationship. Management said a loss was not probable and recorded no provision, but could not reasonably estimate a potential loss; it warned a loss could be material if it became probable. Other disclosed class actions concern overdraft fees; management likewise assessed losses as not probable and not reasonably estimable.
- Other risks include energy-sector and borrower credit quality, interest-rate and mortgage-servicing-right valuation volatility, customer and counterparty exposure in derivatives, CoBiz integration and benefit realization, and the transition away from LIBOR. Management identified no material change in internal control over financial reporting and concluded disclosure controls were effective.
Investor verification priorities
- Reconcile reported earnings and year-over-year comparisons for the 2018 client asset-sale fee, including its effect on fiduciary revenue and EPS.
- Track margin, funding costs, securities growth and the assumptions behind management’s interest-rate sensitivity estimates.
- Monitor energy and healthcare credit exposures, charge-offs, nonaccrual loans, problem-loan classifications and the adequacy of the allowance.
- Verify the final CECL adoption adjustment against the disclosed $50–$75 million pretax estimate.
- Follow the bondholder litigation and any change in management’s assessment of probability or estimable exposure.
- Assess liquidity and funding dependence on borrowings, pledged securities, brokered deposits and collateral availability.