BOK Financial Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter ended September 30, 2023; filed November 1, 2023. BOK Financial is a diversified regional bank holding company operating Commercial Banking, Consumer Banking and Wealth Management businesses.
Financial performance
| Metric | Q3 2023 | Comparison |
|---|---|---|
| Net income attributable to shareholders | $134.5 million; $2.04 diluted EPS | Down from $151.3 million and $2.27 in Q2 2023; also below $156.5 million and $2.32 in Q3 2022. |
| Net interest revenue (GAAP) | $300.9 million | Down $21.4 million from Q2; up from $316.3 million in Q3 2022 only on neither basis—Q3 2023 was lower year over year. |
| Net interest margin | 2.69%; core margin excluding trading activities was 3.14% (non-GAAP) | Down from 3.00% and 3.36%, respectively, in Q2. Deposit repricing and liability mix shift, plus low-spread trading assets, pressured margin. |
| Fees and commissions | $197.9 million | Down $2.6 million from Q2; up from $192.6 million in Q3 2022. |
| Other operating expense | $324.3 million | Up $5.6 million from Q2 and $29.6 million from Q3 2022. Efficiency ratio was 64.01%, versus 58.75% in Q2. |
| Provision for credit losses | $7.0 million | Down from $17.0 million in Q2 and $15.0 million in Q3 2022. |
For the nine months ended September 30, 2023, net income attributable to shareholders was $448.2 million, versus $351.8 million a year earlier; diluted EPS was $6.74 versus $5.18. Net interest revenue was $975.5 million, fees and commissions were $584.3 million, and operating expense was $948.8 million. The filing reports tax-equivalent net interest revenue of $982.2 million for the nine-month period.
Balance sheet, liquidity and capital
- Total assets were $48.9 billion at September 30, 2023. Loans were $23.7 billion, up $486 million from June 30; commercial real estate loans were $5.2 billion, including $982 million secured by office properties.
- Period-end deposits were $33.7 billion, up $358 million quarter over quarter. The loan-to-deposit ratio was 70%. Average deposits rose $918 million, but demand deposits fell $840 million as interest-bearing deposits increased.
- Estimated uninsured deposits were $19.1 billion, or 53% of deposits; uninsured and uncollateralized deposits, excluding collateralized and certain subsidiary deposits, were $13.7 billion, or 41% of total deposits.
- Borrowed funds and subordinated debentures totaled approximately $9.1 billion at quarter-end. Management estimated $18.7 billion of currently available secured borrowing capacity and another $4.3 billion of potential capacity.
- Operating cash flow for the first nine months was $527.9 million, compared with $7.34 billion in the prior-year period; investing cash flow was negative $1.61 billion and financing cash flow was positive $1.05 billion. The prior-year operating cash flow was strongly affected by trading and fair-value-option securities movements, so the comparison is not a straightforward measure of underlying operating cash generation.
- Common equity Tier 1 capital ratio was 12.06%; total capital ratio was 13.16%; leverage ratio was 9.52%. Tangible common equity ratio was 7.74%, or 7.35% after adjustment for investment portfolio losses (both non-GAAP).
- Available-for-sale securities had $1.045 billion of gross unrealized losses at quarter-end; accumulated other comprehensive loss was $929.0 million. The company said it did not intend, and was not likely to be required, to sell impaired available-for-sale debt securities before recovery or maturity.
Material changes and credit quality
- Interest expense rose sharply year over year as rates and funding costs increased. In Q3, funding costs were 3.81%, up 54 basis points from Q2; interest-bearing deposit cost rose to 3.17%, up 61 basis points.
- For the first nine months, tax-equivalent net interest revenue increased versus 2022 as asset yields repriced, while deposit and borrowing costs also climbed. Average loan yield increased to 6.99% from 4.14%; average cost of interest-bearing liabilities increased to 3.21% from 0.42%.
- Q3 net charge-offs were $6.5 million, or 0.11% of average loans annualized. The combined allowance for loan losses and unfunded commitment credit risk was $325 million, or 1.37% of loans.
- Nonperforming assets excluding U.S.-government-guaranteed assets were $112.9 million, down $12.1 million from Q2. Potential problem loans increased $36 million; non-pass loans overall increased $23 million.
- Management cited loan growth and a more challenging commercial real estate environment, particularly office, as credit concerns. CRE commitments were near the upper end of the company’s internal concentration limit; management expected continued modest growth, mainly in multifamily and industrial lending.
Outlook, risks and unusual items
- The filing gives no company earnings or net-interest-margin guidance. Its economic scenarios are inputs to the credit-loss estimate, not management earnings guidance. The base case assumed 1.3% GDP growth over the following 12 months; the downside case assumed a 2.0% contraction. Scenario weights were 50% base, 35% downside and 15% upside.
- Management described the balance sheet as asset-sensitive, but its model estimated that an immediate 200-basis-point rate increase would reduce net interest revenue by 3.53% over the next 12 months. Results depend on assumptions about deposit pricing, customer behavior and market conditions.
- Q3 included $1.5 million of net other gains, versus $12.6 million in Q2, which included gains on alternative investments. Q3 non-personnel expense included an accrual for disputed matters; the filing does not provide a clear amount for that accrual.
- The company repurchased 700,500 shares at an average $84.17 in Q3 and paid a $0.54 per-share dividend. On October 31, the board approved a $0.55 quarterly dividend.
- A long-running bondholder litigation matter remains unresolved. Counsel advised that a loss was not probable and could not be reasonably estimated; the filing notes a potential loss could be material if circumstances change. Management recorded no provision for this matter.
- Risks highlighted include deposit competition and potential further funding-cost increases, unrealized securities losses and interest-rate exposure, CRE and office credit conditions, economic uncertainty, derivative counterparty and collateral risks, and possible higher FDIC assessments. Management reported disclosure controls were effective and no material change in internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether deposit pricing and mix continue to compress net interest margin, and how actual results compare with the company’s interest-rate sensitivity scenarios.
- Trends in CRE, especially office exposures, criticized and potential problem loans, charge-offs, and allowance coverage.
- Deposit stability, uninsured-deposit concentration, wholesale borrowing usage and remaining secured liquidity capacity.
- The size and duration of unrealized securities losses, capital impact, and whether securities might need to be sold before recovery.
- Future operating costs, including technology, FDIC insurance and disputed-matter accruals, as well as the sustainability of fee revenue and capital returns.
- Developments in the bondholder litigation and any changes to management’s assessment of loss probability or potential exposure.