BOK FINANCIAL CORP annual report, FY2019

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BOK Financial Corporation — 2019 Form 10-K

Reporting period: Fiscal year ended December 31, 2019; comparisons are primarily with 2018. BOK Financial is a regional financial holding company operating across several southwestern and central U.S. states, with commercial banking, consumer banking and wealth management businesses. It reported $42.2 billion in year-end assets. The 2018 CoBiz acquisition affects year-over-year comparisons.

Financial performance and condition

  • Earnings: Net income attributable to shareholders was $500.8 million, or $7.03 per diluted share, versus $445.6 million, or $6.63 per share, in 2018. Return on average assets was 1.19% (1.28% in 2018); return on average equity was 10.73% (11.98%).
  • Revenue and costs: Net interest revenue was $1.113 billion, up from $984.9 million. Fees and commissions were $702.2 million, up from $643.2 million; management said fees represented approximately 39% of revenue. Other operating expense was $1.132 billion, up from $1.028 billion, including CoBiz operating and integration costs.
  • Margins: Net interest margin declined to 3.11% from 3.20%. Fourth-quarter margin was 2.88%, compared with 3.40% in fourth-quarter 2018.
  • Cash flow: Operating activities used $473.7 million, investing activities used $2.324 billion and financing activities provided $2.913 billion. Cash and cash equivalents increased $115.4 million to $1.259 billion. The operating cash outflow reflected, among other items, securities and working-capital movements.
  • Balance sheet and funding: Loans were $21.75 billion, up modestly from $21.66 billion; deposits were $27.62 billion, up from $25.26 billion. Shareholders’ equity was $4.86 billion. Period-end funds purchased and repurchase agreements were $3.82 billion, other borrowings $4.53 billion and subordinated debentures $276 million. The company reported approximately $10.6 billion of estimated unused collateralized credit capacity for BOKF, NA.
  • Capital and credit: Common equity Tier 1 ratio was 11.39%, total capital ratio 12.94% and leverage ratio 8.40%. The combined credit-loss allowance and off-balance-sheet accrual was $212 million, or 0.98% of loans. Net charge-offs were $41 million, or 0.19% of average loans. Nonperforming assets were $294 million, up from $267 million.
  • Shareholder returns: Dividends declared were $2.01 per share, up from $1.90. The company repurchased 1.57 million shares during the year.

Material changes versus 2018

  • Shareholder net income rose about 12%, while net interest margin narrowed as funding costs rose and Federal Reserve rate cuts weighed on quarterly results.
  • Fees and commissions increased, led by brokerage and trading activity and mortgage banking as lower mortgage rates boosted production and trading. Mortgage production volume rose to approximately $3.0 billion.
  • The credit-loss provision increased to $44 million from $8 million. Management cited two impaired shared-national-credit energy loans, credit trends and loan growth. Energy-related net charge-offs were a significant component of commercial losses.
  • Loans increased only slightly overall: commercial growth was largely offset by lower commercial real estate balances. Deposits grew, particularly interest-bearing transaction deposits.
  • Available-for-sale securities expanded substantially as the company repositioned its balance sheet for a lower-rate environment. Mortgage servicing rights fell to $202 million from $259 million, including a $53.5 million fair-value decline, partly offset by related hedges.
  • CoBiz-related costs included $17.2 million of closing and integration costs in 2019; 2018 included $16.6 million. The 2018 results also included a $15.4 million fiduciary fee from a client-asset sale.

Outlook, risks and unusual items

  • Outlook: The filing gives no company earnings or revenue guidance. Management described expectations for U.S. GDP growth near 2% in 2020, unemployment below 4% and inflation near 2%, while noting uncertainty from trade tensions, political developments and volatile energy prices.
  • Key exposures: Energy loans were $4.0 billion, or 18% of loans; Texas, Oklahoma and Colorado represented approximately 31%, 16% and 13% of the portfolio, respectively. Prolonged weakness in energy prices or regional economies could increase credit losses.
  • Interest-rate and mortgage risk: Rate changes can affect loan margins, deposit costs, mortgage production, mortgage-backed securities and servicing-rights valuations. Management estimated that a 100-basis-point rate decline would reduce projected 12-month net interest revenue by 2.91%; it also disclosed uncertainty from the planned transition away from LIBOR.
  • CECL: The company adopted the expected-credit-loss standard on January 1, 2020, with an estimated $61.4 million pre-tax cumulative-effect adjustment to retained earnings. Management did not expect a material capital impact.
  • Litigation: Bondholder litigation related to municipal bonds for which BOKF, NA served as trustee remained unresolved. Management said a loss to the company was not probable and recorded no provision, but stated a loss could be material if that assessment changes. Other disclosed litigation includes overdraft-fee claims; management likewise said losses were not probable, with amounts not reasonably estimable.
  • Other risks: The filing highlights competition, cybersecurity and third-party technology risk, regulation, liquidity and deposit behavior, and concentration risks. The company reported effective internal control over financial reporting and received unqualified audit opinions.

Investor verification priorities

  1. Track energy-credit performance, nonaccruals, charge-offs and allowance coverage, particularly the shared-national-credit exposures and energy concentrations.
  2. Assess whether deposit growth and funding costs support margins after 2019 rate cuts, and review sensitivity under further rate changes.
  3. Review the CECL transition adjustment and subsequent allowance trends against actual credit performance.
  4. Monitor the trustee-related bondholder litigation, related collateral recoveries and any change in management’s loss assessment.
  5. Separate ongoing performance from CoBiz acquisition effects, integration expenses, purchase-accounting accretion and mortgage-servicing-rights valuation changes.