BOK Financial Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. BOK Financial is a regional financial services company operating in commercial banking, consumer banking and wealth management. Comparisons with 2019 are affected by CoBiz segment allocations and the January 1, 2020 adoption of CECL; prior periods were not restated.
Financial performance and position
- Earnings: Net income attributable to BOK Financial shareholders was $62.1 million, or $0.88 per diluted share, versus $110.6 million, or $1.54, in Q1 2019 and $110.4 million, or $1.56, in Q4 2019. The year-over-year decline primarily reflects a much higher credit-loss provision.
- Net interest: Net interest revenue was $261.4 million, down $16.7 million year over year. Net interest margin was 2.80%, versus 3.30% a year earlier and 2.88% in Q4 2019. Management cited Federal Reserve rate cuts; the full effect of March’s emergency cuts was expected to be felt in Q2.
- Noninterest revenue and costs: Fees and commissions were $192.7 million, up $32.2 million year over year, led by brokerage/trading and mortgage banking. Total other operating revenue was $180.3 million, including significant fair-value movements in mortgage servicing rights and related hedges. Operating expense was $268.6 million, down $18.5 million year over year; Q1 2019 included $12.7 million of CoBiz integration costs.
- Credit costs: The provision for credit losses was $93.8 million, versus $8.0 million in Q1 2019 and $19.0 million in Q4 2019. The loan-loss allowance was $315.3 million, or 1.40% of loans, at March 31; the combined loan and unfunded-commitment allowance was $343.8 million, or 1.53% of loans. Net charge-offs were $17.2 million, an annualized 0.31% of average loans.
- Loans and deposits: Period-end loans were $22.5 billion, up $713 million from year-end; period-end deposits were $29.2 billion, up $1.6 billion. Commercial line advances accounted for $751 million of Q1 loan growth, reflecting seasonality and customer responses to COVID-19.
- Liquidity and funding: Average Q1 deposits were $28.2 billion. Estimated unused collateralized credit availability at BOKF, NA was approximately $11.4 billion. At quarter-end, cash and cash equivalents were $973 million. Borrowings included $4.6 billion of federal funds purchased and repurchase agreements, $5.5 billion of other borrowings, and $276 million of parent-company subordinated debentures.
- Capital: Consolidated CET1 and Tier 1 ratios were 10.98%, total capital 12.65%, and leverage 8.15%, compared with 11.39%, 12.94%, and 8.40%, respectively, at year-end. The company elected CARES Act relief to defer part of CECL’s regulatory-capital impact. Shareholders’ equity was $5.0 billion.
- Cash flow: Operating cash flow was negative $1.7 billion and investing cash flow negative $1.9 billion; financing cash flow was positive $3.4 billion, including deposit and borrowing growth. Cash and cash equivalents decreased $286 million during the quarter. These flows were affected by securities activity and unsettled securities transactions.
Material changes versus comparable periods
- Shareholder net income fell 44% year over year. The $93.8 million credit-loss provision was a central driver, reflecting CECL adoption and sharply deteriorating economic assumptions.
- Mortgage banking revenue rose 56% year over year to $37.2 million as production volume increased 71%; brokerage and trading revenue rose 61% to $50.8 million. These gains partly offset lower net interest revenue.
- The loan allowance rose from $210.8 million at year-end 2019 to $315.3 million at March 31, 2020. The CECL transition reduced retained earnings by $46.7 million after tax.
- Mortgage servicing rights declined to $110.8 million from $201.9 million at year-end, largely due to lower mortgage rates and higher prepayment assumptions. Economic hedges partly offset the earnings impact.
- Regulatory capital ratios declined from year-end, while the tangible common equity ratio was 8.39%, versus 8.98% at year-end.
Outlook, risks and unusual items
- COVID-19: Management warned the pandemic could adversely affect borrowers, deposits, loan demand, markets, liquidity, earnings and operations. Particularly exposed loan industries included energy (18% of loans), senior housing (11%), and entertainment and leisure (approximately 8%). The filing notes additional vulnerabilities in retail, hotels, travel, recreation and other businesses affected by restrictions.
- Credit outlook assumptions: The CECL base case assumed a 20% GDP decline and 8.3% unemployment in Q2 2020, with WTI at $25.10 per barrel for Q2. The downside case assumed a 30% GDP decline and 9.5% unemployment in Q2. Management emphasized that the duration of the energy downturn would be important to credit performance.
- Government programs: As of April 17, 2020, after quarter-end, BOK Financial had processed approximately 4,700 PPP applications and received SBA approval for $1.8 billion. The company said it could fund PPP loans through the Federal Reserve facility and was evaluating the Main Street Lending Program.
- Capital returns: The company repurchased 442,000 shares at an average $75.52 in Q1 and paid a $0.51 per-share dividend. The board approved another $0.51 quarterly dividend on April 28, 2020. Buybacks were described as opportunistic and subject to maintaining capital strength.
- Unusual items and contingencies: Q1 included a $3.1 million energy-fund impairment. A municipal-bond trustee litigation remains pending; management said no loss was probable and recorded no provision, but stated a loss could be material if its assessment changes. The filing also describes a 401(k)-plan putative class action and other litigation for which management did not consider a loss probable.
- Other risks: The filing highlights interest-rate sensitivity, volatile mortgage servicing rights valuations, oil and gas prices, collateral values, derivative counterparty and margin requirements, and the uncertain transition from LIBOR to an alternative benchmark. No formal earnings or financial guidance was provided.
Important facts for investors to verify
- How CECL assumptions, COVID-19 impacts and energy prices affect future provisions, charge-offs and allowance adequacy.
- Credit quality and borrower performance in energy, senior housing, retail, hospitality and entertainment/leisure, including trends in criticized and potential problem loans.
- Whether strong deposit growth persists, and how funding costs, borrowing levels and the reported $11.4 billion of available collateralized capacity evolve.
- Whether mortgage-related fee gains and trading results are sustainable, and how mortgage servicing rights and hedge valuations affect earnings.
- Capital ratios and shareholder distributions after application of CECL transition relief, including any change to repurchases or dividends.
- Developments in the municipal-bond and other legal matters, and the timing and terms of the LIBOR transition.