BOK Financial Corporation — 2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016, with fourth-quarter results also discussed. The company provides commercial and consumer banking, mortgage banking, payments, brokerage, fiduciary and investment services across Oklahoma and neighboring states. It acquired Mobank on December 1, 2016.
Financial performance and condition
- Earnings: Net income attributable to BOK Financial shareholders was $232.7 million, or $3.53 per diluted share, versus $288.6 million, or $4.21, in 2015. Return on average assets was 0.72% and return on average equity was 7.02%.
- Revenue and margins: Net interest revenue was $747.2 million, up from $703.4 million; net interest margin rose to 2.66% from 2.60%. Other operating revenue was $674.0 million, including $686.7 million of fees and commissions, which management said represented 48% of total revenue under its stated calculation.
- Credit costs: The provision for credit losses increased to $65.0 million from $34.0 million. Net charge-offs were $34.8 million, or 0.21% of average loans, compared with net recoveries of $2.9 million in 2015.
- Expenses: Operating expenses rose 14% to $1.018 billion. The year included $9.1 million of litigation and settlement expense, $7.5 million of Mobank integration costs and $5.0 million of severance costs.
- Balance sheet and liquidity: Year-end assets were $32.77 billion; loans were $16.99 billion and deposits were $22.75 billion. Cash and cash equivalents totaled $2.54 billion. The company reported $5.1 billion of estimated unused collateralized credit availability and $4.8 billion of Federal Home Loan Bank advances at year-end.
- Capital and debt: Common equity Tier 1 and Tier 1 capital ratios were each 11.21%; total capital was 12.81% and leverage was 8.72%. These ratios were lower than in 2015. Subordinated debentures were $144.6 million at year-end; the company issued $150 million of 5.375% subordinated notes due 2056 and called $226 million of bank subordinated debt during 2016.
- Cash flow: Operating activities used $93.5 million, investing activities used $286.0 million and financing activities provided $273.4 million. Cash and cash equivalents declined $106.1 million during the year.
Material changes versus 2015
- Shareholder net income declined about 19%, despite higher net interest revenue and fee income; increased credit provision, expenses and mortgage-servicing-hedge effects weighed on results.
- Loans increased to $16.99 billion, including $485 million added through Mobank; deposits rose to $22.75 billion, including $624 million associated with the acquisition. Commercial real estate loans grew 17%, while energy loans declined to $2.50 billion from $3.10 billion.
- Nonperforming assets rose to $356.6 million from $251.9 million. Excluding U.S.-government-guaranteed assets, they increased to $263.4 million from $156.0 million. Nonaccruing energy loans were $132.5 million, versus $61.2 million.
- Fees and commissions increased 6%, while operating expenses increased 14%. The company’s mortgage servicing portfolio grew, with loans serviced for others reaching $22.0 billion.
Outlook, risks and unusual items
- Management expected mid-single-digit annualized loan growth in 2017, stable-to-rising net interest margin and increasing net interest revenue. It estimated a 2017 credit-loss provision range of $20 million to $30 million; this is an estimate, not earnings guidance.
- Management expected interest rates to continue rising and the yield curve to steepen, while describing energy-sector conditions as cautious but potentially improving. It noted uncertainty around economic reforms, trade, the dollar and deficits.
- Energy exposure remained material: energy loans were 15% of total loans, and the company cited prolonged low oil and gas prices as a risk. Texas and Oklahoma represented approximately 32% and 21% of loans, respectively. Commercial real estate loans were approaching the company’s internal concentration limit.
- Mortgage-servicing-rights values and hedges were sensitive to rate movements. In the fourth quarter, the unexpected rise in long-term rates contributed to a $56.8 million decline in economic hedge fair value, partly offset by a $39.8 million increase in servicing-rights value.
- Mobank was acquired for $102.5 million in cash; its operations were not yet allocated to operating segments at year-end and were included in Funds Management and Other. Mobank was merged into BOKF, NA in February 2017.
- In a municipal-bond trustee matter, the bank paid $1.07 million in disgorgement and a $600,000 civil penalty under an SEC consent order. Bondholder lawsuits remained outstanding; management said no loss was probable at the time, but a loss could become probable and potentially material if the court-ordered payment plan failed. A separate consumer and small-business deposit-posting class-action settlement was $7.8 million and had been funded, subject to court approval.
- Other notable risks include interest-rate and funding sensitivity, cybersecurity and third-party technology dependence, regulatory and tax changes, and the controlling shareholder’s approximately 61% ownership of common shares.
Important facts for investors to verify
- Whether energy-credit migration and the rise in nonperforming assets stabilize, and whether the 2017 provision estimate proves sufficient.
- Mobank integration progress, realized synergies and its effect on segment results and credit quality.
- Underlying expense trends after litigation, integration and severance items, alongside mortgage-servicing-rights and hedge volatility.
- Funding mix and costs, including Federal Home Loan Bank borrowing, brokered deposits and the effect of further rate changes on margin and liquidity.
- Developments in the bondholder litigation and settlement approval, and any resulting change in the company’s loss assessment.
- Capital headroom and capacity for dividends or repurchases; the filing states subsidiary-bank dividends are subject to regulatory and internal limits.
The filing reports unqualified audit opinions on the financial statements and internal controls. Management excluded Mobank from its internal-control assessment because of its recent acquisition.