BOK Financial Corporation — Q3 2021 Form 10-Q
Business context and reporting period: BOK Financial is a regional financial services company operating Commercial Banking, Consumer Banking and Wealth Management businesses. This unaudited filing covers the quarter and nine months ended September 30, 2021.
Key financial results
- Earnings: Net income attributable to BOK Financial shareholders was $188.3 million, or $2.74 per diluted share, versus $154.0 million, or $2.19, in Q3 2020 and $166.4 million, or $2.40, in Q2 2021. Consolidated net income was $187.7 million; the difference reflects non-controlling interests.
- Revenue and expenses: Net interest revenue was $280.2 million, up $8.5 million year over year. Fees and commissions were $190.4 million, down $32.4 million (15%). Total other operating revenue was $229.8 million, essentially unchanged, as a $31.1 million gain on an alternative investment offset weaker fee businesses. Operating expense was $291.3 million, down $5.8 million (2%).
- Pre-provision net revenue: PPNR, a non-GAAP measure, was $219.4 million versus $204.6 million in Q3 2020 and $179.9 million in Q2 2021.
- Interest margin: Net interest margin was 2.66%, down from 2.81% a year earlier and up from 2.60% in Q2. Average earning assets rose 8% year over year to $43.0 billion; average loan balances declined.
- Credit: The company recorded a $23.0 million negative provision for credit losses, compared with no provision in Q3 2020 and a $35.0 million negative provision in Q2 2021. Net charge-offs were $7.8 million, or 0.16% of average loans annualized excluding PPP loans. The combined allowance for loan losses and unfunded commitments was $306 million, or 1.54% of loans excluding PPP.
- Loans and deposits: Period-end loans were $20.35 billion, down $1.1 billion from June 30, chiefly from PPP forgiveness/paydowns and energy and commercial real estate repayments. Deposits were $38.52 billion, up $1.1 billion from June 30. PPP loans outstanding were $536 million.
- Liquidity, debt and capital: Cash and cash equivalents totaled $1.89 billion at quarter-end; estimated unused collateralized credit availability was $17.4 billion. The company redeemed $150 million of subordinated notes, recognizing a $5.2 million extinguishment loss; it expects the redemption to reduce annual interest expense by about $8 million. CET1 was 12.26%, total capital 13.38%, and leverage 8.77%.
- Cash flow: For the nine months, operating cash flow was negative $83.3 million, investing cash flow was positive $2.15 billion and financing cash flow was negative $1.35 billion. Cash and cash equivalents increased by $711 million over the period.
Material changes versus comparable periods
- Shareholder net income increased 22% year over year; Q3 2021 earnings also improved from Q2.
- Mortgage banking revenue fell $25.7 million year over year as production volume and margins declined. Brokerage and trading revenue fell $21.6 million, partly reflecting a shift from fee revenue to interest income on trading securities.
- Credit indicators improved: nonperforming assets excluding U.S.-government-guaranteed assets fell $66 million from Q2, while the combined allowance ratio excluding PPP decreased from 1.66% to 1.54%.
- Loans continued to contract, while deposits grew. The company repurchased 478,141 shares for approximately $40.6 million during the quarter.
- Accumulated other comprehensive income declined $57.6 million during Q3, primarily reflecting changes in unrealized securities values.
Outlook, risks and unusual items
- The filing provides no formal earnings or revenue guidance. Management cited improving credit metrics, commodity prices and its economic outlook as drivers of the negative credit-loss provision. Its CECL base-case forecast assumed 4.1% GDP growth over the next 12 months and average WTI prices of $68.38 per barrel; these are allowance-model assumptions, not company guidance. Management also noted continuing COVID-19 uncertainty, including potential effects from variants.
- Results included the $31.1 million alternative-investment sale gain and $5.2 million debt-extinguishment loss. Mortgage servicing rights and related hedges, trading activity, interest rates and securities valuations can cause earnings volatility.
- Credit and concentration risks include $2.8 billion of energy loans (14% of loans), as well as healthcare and commercial real estate exposures. Management said energy pricing and recovery remain sensitive to economic conditions. Derivative programs also create counterparty, collateral, liquidity and regulatory-capital risks.
- Off-balance-sheet commitments included $12.0 billion of loan commitments and $638 million of standby letters of credit; amounts are not necessarily expected cash needs because commitments may expire undrawn.
- Legal matters include bondholder litigation relating to a trustee relationship and a Colorado fiduciary-duty case alleging damages in excess of $60 million. Management, based on counsel’s advice, said losses were not probable in the disclosed matters; it made no provision for the bondholder matter, whose potential loss could be material if a loss became probable. Other pending claims are described in the filing.
- The company was transitioning away from LIBOR and expected SOFR to be its primary replacement index. Management did not expect a material financial impact, but the transition remained subject to market and implementation developments.
- After quarter-end, the board approved increasing the quarterly dividend from $0.52 to $0.53 per share.
Important facts for investors to verify
- Whether the one-time investment gain materially overstates recurring earnings and how PPNR reconciles to GAAP results.
- Whether loan paydowns, PPP runoff and deposit balances persist, and how these trends affect net interest margin and future revenue.
- Whether improving credit metrics and the $306 million combined allowance remain appropriate under changing economic, energy-price and COVID-19 scenarios.
- The sensitivity of securities values, accumulated other comprehensive income, mortgage servicing rights and earnings to interest-rate changes.
- Potential liquidity, collateral and capital needs from energy-related derivatives, loan commitments and other off-balance-sheet exposures.
- Developments in disclosed litigation, the LIBOR transition, capital levels, share repurchases and the increased dividend.