BOK Financial Corporation — 2017 Form 10-K
Business context and period. BOK Financial is a regional financial holding company operating across Oklahoma, Texas, New Mexico, Arkansas, Colorado, Arizona and Kansas/Missouri. Its principal businesses are Commercial Banking, Consumer Banking and Wealth Management. This annual filing covers the year ended December 31, 2017; fourth-quarter comparisons are noted separately.
Financial performance and condition
- Earnings: Net income attributable to shareholders was $334.6 million, or $5.11 diluted EPS, versus $232.7 million, or $3.53, in 2016. Return on average assets was 1.02% (0.72% in 2016); return on average equity was 9.82% (7.02%). Fourth-quarter shareholder income was $72.5 million, or $1.11 per diluted share, versus $50.0 million, or $0.76.
- Interest income and margin: Net interest revenue was $841.7 million, up from $747.2 million. Tax-equivalent net interest margin rose to 2.92% from 2.66%, reflecting higher rates and asset growth. Fourth-quarter margin was 2.97%, versus 2.69% a year earlier.
- Fees and expenses: Fees and commissions were $683.4 million, broadly unchanged from $686.7 million. Other operating revenue was $695.1 million. Operating expenses increased 1% to $1.026 billion; personnel costs rose while non-personnel costs declined.
- Credit: The company recorded a $7.0 million negative provision for credit losses, compared with a $65.0 million provision in 2016. Net charge-offs were $16.0 million, or 0.09% of average loans, down from $34.8 million, or 0.21%. Nonperforming assets fell to $290.3 million from $356.6 million. The combined allowance for credit losses was $234 million, or 1.37% of loans.
- Balance sheet: Total assets were $32.27 billion, down from $32.77 billion; loans were $17.15 billion, up 1%; deposits were $22.06 billion, down 3%; and shareholders’ equity was $3.50 billion, up from $3.27 billion. Commercial loans grew 3%, while commercial real estate loans declined 9%.
- Cash flow: Operating activities provided $214.9 million (versus $91.9 million used in 2016); investing activities provided $739.6 million (versus $286.0 million used); financing activities used $1.175 billion. Cash and cash equivalents declined $220.4 million to $2.317 billion.
- Capital, funding and debt: Consolidated CET1 was 12.05%, total capital 13.54%, and leverage 9.31%; all exceeded stated minimums. Period-end deposits funded most operations; the bank reported $5.1 billion in FHLB advances and $144.7 million in subordinated debentures. The bank had an estimated $5.7 billion of unused collateralized credit availability. The parent could declare up to $321 million in bank dividends without regulatory approval, subject to internal policy and applicable limits.
Material changes, outlook and risks
- Profit increased substantially, supported by higher net interest revenue, improved credit quality and lower credit-loss expense. Wealth Management income rose to $60.3 million from $32.2 million; Commercial Banking income increased to $265.1 million from $210.9 million. Consumer Banking income was $24.4 million versus near breakeven in 2016.
- Mortgage banking revenue declined 22% to $104.7 million, primarily reflecting lower production and the strategic exit from correspondent lending. Fiduciary and asset-management revenue rose 20% to $162.9 million, supported by asset growth, pricing discipline and reduced fee waivers.
- The Tax Cuts and Jobs Act produced an $11.7 million reduction in fourth-quarter net income, including provisional deferred-tax revaluation and executive-compensation adjustments. Management said the accounting remained in process and adjustments could change.
- Management expected mid-single-digit loan growth, flat to slightly lower securities balances, stable-to-rising net interest margin and higher net interest revenue in 2018. It anticipated further credit-quality improvement in the first half of 2018 and gradual rate increases; these are expectations, not guarantees.
- Key exposures include energy (17% of loans), Texas (34% of loans) and Oklahoma (19%). Energy prices, regional economic conditions, commercial real estate, interest-rate movements, mortgage prepayments and the value of mortgage servicing rights could affect results. The company also cited cybersecurity, third-party technology, competition, regulation and LIBOR transition risks.
- Unfunded loan commitments were $10.0 billion and standby letters of credit $647.7 million; expected draws may be lower. Bondholder litigation relating to trustee activities remained outstanding; management said losses were not probable, but a material loss could arise if the related court-ordered payment plan fails. Other disclosed legal matters were not expected by management to materially affect results.
- Cash dividends declared were $1.77 per share. The company repurchased 80,000 shares during 2017. George B. Kaiser owned approximately 60% of the common shares, giving him effective voting control. The independent auditor issued unqualified opinions on the financial statements and internal controls.
Most important facts for investors to verify
- Whether provisional tax-reform accounting adjustments, including the reported $11.7 million earnings impact, were finalized or revised.
- Whether energy and regional credit trends continue to improve, and how nonaccruals, problem loans and the allowance perform against the $2.9 billion energy portfolio.
- Whether deposit declines, brokered-deposit usage and reliance on FHLB funding affect funding costs and liquidity as rates rise.
- Whether expected loan growth and margin trends materialize, and how mortgage production, servicing-right valuations and interest-rate hedges perform.
- Developments in the bondholder litigation and the potential exposure if the court-ordered repayment plan does not deliver payment.
- Implementation effects of expected accounting changes, particularly CECL, and the consequences of the LIBOR transition.