BOK Financial Corporation — Q1 2018 Form 10-Q
Business context and period. This unaudited quarterly report covers the three months ended March 31, 2018. BOK Financial is a diversified regional financial services company operating through Commercial Banking, Consumer Banking and Wealth Management, with funding and risk management activities managed centrally.
Financial performance and condition
- Earnings: Net income attributable to BOK Financial shareholders was $105.6 million, or $1.61 per diluted share, versus $88.4 million, or $1.35 per share, in Q1 2017 and $72.5 million, or $1.11 per share, in Q4 2017. Pretax income was $136.3 million, compared with $126.8 million a year earlier.
- Interest income and margin: Net interest revenue increased to $219.7 million from $201.2 million in Q1 2017. Net interest margin was 2.99%, up from 2.81% a year earlier and 2.97% in Q4 2017. Growth reflected higher yields and average earning assets; rising deposit and borrowing costs partly offset the benefit.
- Noninterest revenue and expenses: Other operating revenue was $156.0 million, down from $170.3 million a year earlier, while fees and commissions were $159.0 million. On a comparable basis, fees and commissions rose $3.8 million year over year. Other operating expense was $244.4 million, up $8.9 million on a comparable basis; the increase included a $5.0 million write-down of repossessed oil and gas properties.
- Credit: The company recorded a $5.0 million negative provision for credit losses, citing improved credit trends. Net charge-offs were $1.3 million, or 0.03% of average loans annualized, versus $11.7 million and 0.27% in Q4 2017. The combined credit-loss allowance was $228 million, or 1.32% of loans, at March 31, 2018, compared with $234 million, or 1.37%, at year-end.
- Loans and deposits: Period-end loans were $17.3 billion, up $184 million from December 31, 2017; deposits were $22.2 billion, up $144 million. Average deposits were essentially unchanged sequentially.
- Credit quality: Nonperforming assets excluding U.S.-government-guaranteed assets were $194.8 million, or 1.13% of loans and repossessed assets, down from $207.1 million, or 1.22%, at year-end. Potential problem loans declined $19 million to $222 million. Energy loans totaled $3.0 billion, about 17% of loans.
- Liquidity, funding and capital: Total assets were $33.4 billion and total equity was $3.5 billion. Deposits were the principal funding source; other borrowed funds and subordinated debentures totaled approximately $6.4 billion. The company reported $5.6 billion of estimated unused collateralized credit capacity for its bank subsidiary and $165 million of parent-company cash and interest-bearing cash equivalents. Consolidated regulatory ratios were 12.06% common equity Tier 1, 13.49% total capital and 9.40% leverage.
- Cash flow: Net cash used in operating activities was $148.3 million and net cash used in investing activities was $180.9 million; financing activities provided $611.6 million. Cash and cash equivalents increased $282.4 million to $2.60 billion. These cash-flow figures reflect, among other items, securities and mortgage-loan activity.
Material changes and unusual items
- The Tax Cuts and Jobs Act reduced the federal corporate tax rate from 35% to 21% beginning January 1, 2018. Q1 income tax expense was $30.9 million, a 22.7% effective rate, versus $38.1 million and 30.1% in Q1 2017. Management estimated that the lower federal tax rate reduced Q1 tax expense by approximately $13.8 million and expected a 22%–23% effective tax rate for 2018.
- Adoption of the new revenue-recognition guidance changed presentation of interchange fees: approximately $9.5 million paid to issuing banks was netted against transaction-card revenue rather than reported in data-processing expense. The reclassification did not affect net income or earnings per share.
- Transaction-card revenue included a $1.4 million early-termination penalty. The $5.0 million oil and gas property write-down contributed to higher repossessed-asset expense.
- Mortgage servicing rights increased in fair value by $21.2 million, but the related economic hedges and interest income resulted in a net economic cost of $0.3 million for the quarter. Fair-value changes in these instruments can cause earnings volatility.
- Unrealized losses on available-for-sale securities were $177 million at March 31, 2018, compared with $89 million at December 31, 2017. The filing reported no other-than-temporary impairment charges in Q1.
Outlook, risks and contingencies
- Management expected low-to-mid single-digit net interest margin expansion for the remainder of 2018 for each 25-basis-point increase in the federal funds rate. This outlook is sensitive to deposit pricing, funding costs and customer behavior.
- Credit exposure includes energy lending, which represented 17% of loans, and geographic concentrations in Texas and Oklahoma. Management’s credit estimates depend on borrower performance, collateral values, commodity prices and economic conditions.
- Interest-rate, mortgage-servicing-rights, trading and derivative exposures may affect earnings, liquidity and regulatory capital. The company also disclosed that its trading assets and liabilities exceeded the $1 billion regulatory threshold, making additional market-risk requirements effective in Q2 2018.
- Off-balance-sheet commitments included $10.2 billion of loan commitments and $664 million of standby letters of credit; actual funding needs may be lower because some commitments expire unused.
- Legal matters include bondholder claims concerning the company’s role as indenture trustee. Management said losses were not probable for the matters discussed, but disclosed that a loss in one matter could be material if a court-ordered payment plan does not result in repayment; a reasonable estimate could not be made. The filing also describes an overdraft-fee class action for which management said loss was not probable and not reasonably estimable.
- The board approved a $0.45 per-share quarterly dividend payable in May 2018. The company repurchased 82,583 shares under its repurchase authorization during Q1.
Important facts for investors to verify
- Whether net interest margin and net interest revenue continue to benefit from rate increases after deposit and wholesale funding costs rise.
- Whether credit quality improves further, particularly in energy lending, and whether the allowance remains adequate as loan balances grow.
- The persistence of the $5.0 million repossessed-property write-down and other operating-cost increases, and the underlying trend in fee revenue excluding one-time items and presentation changes.
- The effect of higher interest rates on available-for-sale securities values, accumulated other comprehensive loss, liquidity and capital; verify the impact of the new market-risk requirements.
- Developments in the disclosed litigation and any changes to management’s assessments of loss probability or potential exposure.