BOK Financial Corporation — Q1 2021 Form 10-Q
Business context and reporting period. The filing covers the three months ended March 31, 2021. BOK Financial is a regional financial services company with Commercial Banking, Consumer Banking, and Wealth Management businesses. Results reflect the COVID-19 recovery outlook, very low interest rates, elevated customer deposits, and continued customer loan paydowns.
Financial performance and position
- Earnings: Net income attributable to BOK Financial shareholders was $146.1 million, or $2.10 per diluted share, versus $62.1 million and $0.88 in Q1 2020; Q4 2020 was $154.2 million and $2.21. The year-over-year increase was substantially affected by the change from a $93.8 million credit-loss provision to a $25.0 million negative provision.
- Revenue and operating performance: Net interest revenue was $280.4 million, up $19.1 million year over year and down $16.8 million sequentially. Other operating revenue was $163.9 million, down 9% year over year. Pre-provision net revenue, a non-GAAP measure, was $163.4 million, versus $173.2 million in Q1 2020 and $192.9 million in Q4 2020. Operating expense was $282.6 million, up $14.0 million year over year.
- Margins: Net interest margin was 2.62%, down from 2.80% a year earlier and 2.72% in Q4 2020. Average earning assets were $44.2 billion, up from $38.4 billion a year earlier, largely due to growth in trading securities.
- Credit: The allowance for loan losses was $352 million, or 1.70% of loans excluding PPP loans, compared with $389 million and 1.82% at year-end 2020. Net charge-offs excluding PPP loans were $14.5 million, or 0.28% annualized. Nonperforming assets excluding U.S.-government-guaranteed assets were $278 million, down $39 million from year-end.
- Loans and deposits: Period-end loans were $22.5 billion, down $474 million from December 31, 2020; PPP loans increased $166 million to $1.85 billion. Deposits were $37.9 billion, up $1.7 billion during the quarter, with management citing commercial growth and stimulus-related inflows.
- Cash flow and liquidity: Operating cash flow was $(218.9) million, investing cash flow $(22.1) million, and financing cash flow $479.6 million. Cash and cash equivalents ended the quarter at $1.42 billion. The bank had an estimated $17.6 billion of unused collateralized credit capacity. Management said funding sources were adequate for operating needs.
- Debt and capital: At quarter-end, funds purchased and repurchase agreements were $795 million, other borrowings $1.71 billion, and subordinated debentures $276 million. Consolidated common equity Tier 1 capital was 12.14%; total capital was 13.98% and the leverage ratio was 8.42%. Shareholders’ equity was $5.24 billion.
Material changes and notable items
- Compared with Q1 2020, net interest revenue rose as earning assets expanded, while fee and commission revenue fell $30.6 million, primarily because trading revenue shifted into interest income on trading securities. Compared with Q4 2020, both net interest revenue and fees declined.
- The allowance release reflected improved macroeconomic forecasts, including expected vaccination progress and stabilizing energy prices. The filing notes substantial uncertainty around the pandemic, government stimulus, and economic forecasts.
- Trading and mortgage-related fair-value changes were significant: the quarter included a $27.7 million net loss on derivatives and a $33.9 million gain from changes in mortgage servicing rights. Management reported a $4.7 million total economic benefit from MSR fair-value changes, related hedges, and hedge securities’ net interest revenue.
- Operating expense included a $14.1 million gain on the sale of an equity interest received in an energy-loan workout, which reduced repossessed-asset expense, and a $4.0 million charitable contribution. A $3.6 million merchant-banking investment impairment was recorded.
- Interest-rate movements reduced accumulated other comprehensive income by $114.5 million during the quarter. The company repurchased 260,000 shares for $20.1 million and paid $36.2 million in dividends. The board approved a subsequent quarterly dividend of $0.52 per share.
Outlook, risks, and contingencies
- The filing provides no formal earnings or financial guidance. Management described expectations for economic recovery but emphasized uncertainty from COVID-19 developments, vaccination progress, fiscal policy, and energy prices.
- Key sensitivities include compressed net interest margins, rising-rate effects on securities and mortgage servicing rights, mortgage-market margin and volume changes, customer loan paydowns, and credit exposure in energy lending. Energy loans were $3.2 billion, or 14% of total loans; the allowance attributed to energy was 3.29% of energy loans.
- Customer derivatives create counterparty, collateral, liquidity, and regulatory-capital risks. The filing estimates that a decline in oil prices of $47.17 per barrel could reduce derivative assets’ fair value by $230 million. A downgrade below investment grade could increase cash-margin obligations by approximately $10 million.
- The company was managing its transition away from LIBOR and planned to cease originating LIBOR-indexed loans by December 31, 2021. Management did not expect a material financial impact from the replacement benchmark, but acknowledged the transition and contract-remediation work.
- Litigation includes bondholder-related claims concerning a trust relationship and a Colorado fiduciary-duty action alleging damages in excess of $60 million. Management, based on counsel’s advice, stated that losses were not probable; for certain matters, a loss could not be reasonably estimated. No provision was recorded for these claims.
Important facts for investors to verify
- Whether the negative credit-loss provision remains appropriate as economic forecasts, energy prices, and borrower performance evolve.
- Whether the $352 million loan-loss allowance adequately reflects energy, commercial real estate, and other portfolio risks, and how nonperforming assets and charge-offs trend.
- Whether deposit balances remain elevated and loan paydowns continue, and the resulting effects on net interest revenue and margin.
- How trading revenue, mortgage production margins, MSR valuations, and related hedges perform as interest rates and mortgage volumes change.
- Updates on the disclosed litigation, LIBOR transition, and derivative-related collateral and liquidity exposures.