BOK Financial Corporation — Q3 2016 Form 10-Q
Business context and reporting period
Quarter ended September 30, 2016. BOK Financial is a regional financial services company with Commercial Banking, Consumer Banking and Wealth Management businesses. Results below distinguish the quarter from the nine months ended September 30, where relevant.
Key financial metrics
| Metric | Q3 2016 | Comparable period / context |
|---|---|---|
| Net income attributable to BOK Financial shareholders | $74.3 million | $74.9 million Q3 2015; $65.8 million Q2 2016 |
| Diluted earnings per share | $1.13 | $1.09 Q3 2015; $1.00 Q2 2016 |
| Net interest revenue | $187.8 million | $178.6 million Q3 2015; $182.6 million Q2 2016 |
| Net interest margin | 2.64% | 2.61% Q3 2015; 2.63% Q2 2016 |
| Other operating revenue | $191.3 million | Up $27.9 million year over year |
| Operating expenses | $262.1 million | Up $37.5 million year over year |
| Provision for credit losses | $10.0 million | $7.5 million Q3 2015; $20.0 million Q2 2016 |
| Period-end loans / deposits | $16.5 billion / $21.1 billion | Loans up $58 million and deposits up $336 million from June 30, 2016 |
| Credit allowance | $256 million; 1.56% of loans | $252 million; 1.54% at June 30, 2016 |
| Capital ratios | CET1 11.99%; Tier 1 11.99%; total capital 13.65%; leverage 9.06% | All above stated regulatory minimums including the capital conservation buffer |
For the first nine months, shareholder-attributable net income was $182.6 million versus $229.0 million in 2015; diluted EPS was $2.76 versus $3.32. The provision for credit losses was $65.0 million versus $11.5 million. Total assets were $32.8 billion and shareholders’ equity was $3.4 billion at quarter end.
Material changes versus prior periods
- Quarterly net interest revenue grew year over year primarily with higher average earning assets and loan growth. Average earning assets were $29.1 billion, up $1.2 billion year over year.
- Fees and commissions reached $185.3 million, up 13% year over year. Mortgage banking revenue rose 28% to $42.5 million; brokerage and trading revenue rose 20% to $38.0 million.
- Expenses rose 17% year over year, including higher personnel and mortgage banking costs, deposit insurance expense, professional fees and legal accruals. The company cited a $5.0 million legal settlement accrual.
- Energy exposure contracted: energy loans were $2.5 billion, down $298 million from June 30. Nonperforming energy loans declined $25 million during the quarter, although energy remained a material credit concentration.
- Commercial real estate loans grew $212 million from June 30, while commercial loans declined $236 million, partly due to repayment of a single energy credit.
- Q3 diluted EPS increased despite slightly lower shareholder-attributable net income than a year earlier; average diluted shares fell to 65.2 million from 67.8 million.
Cash flow, funding and liquidity
For the first nine months, operating cash flow was negative $491.8 million, compared with positive $171.7 million in 2015. Investing cash flow was negative $311.0 million and financing cash flow positive $776.1 million; cash and cash equivalents declined $26.7 million to $2.62 billion. The filing attributes much of the operating cash-flow movement to mortgage-loan production and sales, changes in receivables, and trading and fair-value-option securities.
Period-end deposits were $21.1 billion. Borrowed funding included $6.53 billion of other borrowings, $504.6 million of repurchase agreements, $109.0 million of funds purchased and $144.6 million of subordinated debentures. The company reported approximately $4.3 billion of estimated unused collateralized credit capacity. The parent held $336 million in cash and interest-bearing cash equivalents. The filing does not provide a single consolidated current-ratio-style liquidity measure.
Outlook, commentary, risks and unusual items
- Management estimated the 2016 loan-loss provision could range from $70 million to $85 million, based on then-current conditions and its energy stress testing. The nine-month provision was $65 million.
- Management cited energy-price stability and fewer newly identified problem loans as reasons the Q3 provision declined from Q2. It also warned that a prolonged low-price energy scenario could produce losses above the portfolio’s historical loss rate.
- Energy loans were 15% of total loans; unfunded energy commitments increased $326 million to $2.3 billion. Potential problem loans totaled $478 million, including $361 million in energy.
- Nonperforming assets excluding U.S.-government-guaranteed assets were $253 million, or 1.55% of relevant loans and repossessed assets, versus $251 million and 1.55% at June 30. This level was substantially higher than a year earlier.
- Interest-rate, mortgage-prepayment and mortgage-servicing-rights valuation changes may create earnings volatility. A 50-basis-point mortgage-rate decline was estimated to reduce mortgage servicing rights fair value by $52.6 million; a 50-basis-point increase was estimated to raise it by $30.6 million.
- The company exited correspondent mortgage lending during Q3, citing margin pressure, competition and regulatory costs. It expected growth in other operating revenue from new offerings and market development, while noting competition, regulation and market saturation could constrain growth.
- The company agreed to acquire MBT Bancshares for $102.5 million in cash, subject to regulatory approval and customary closing conditions; closing was expected by year-end 2016. It also acquired Weaver Wealth Management and E-Spectrum Advisors in Q1 2016 for $7.7 million.
- The board approved raising the regular quarterly dividend to $0.44 per share, payable in November 2016, from $0.43 paid in Q3. No shares were repurchased under the announced buyback program during Q3.
- Legal matters include a $7.8 million proposed settlement of deposit-account posting claims, subject to court approval; the filing separately describes a $5.0 million accrual. In a municipal-bond matter, the bank paid $1.07 million in disgorgement and a $600,000 civil penalty; related bondholder lawsuits remain, and management said a loss was not probable at the filing date, though it could become material if the bond payment plan fails.
Most important facts for investors to verify
- Track energy prices, energy-loan balances, nonaccruals, criticized loans, charge-offs and whether the 2016 provision lands within management’s $70–$85 million estimate.
- Assess whether fee-revenue gains, especially mortgage banking and trading, are sustainable and sufficient to offset higher operating costs.
- Monitor deposit mix, wholesale borrowing reliance, available collateralized capacity and the cost of the new subordinated debt.
- Review progress and final terms of the MBT acquisition, including regulatory approval, closing timing and integration costs.
- Verify the final court-approved amount and timing of the deposit-account settlement, and developments in the municipal-bond litigation and repayment plan.
- Reconcile cash-flow volatility with mortgage production and sales, and assess sensitivity of earnings and capital to interest rates and mortgage prepayments.