BOK Financial Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. BOK Financial is a regional financial services company with Commercial Banking, Consumer Banking and Wealth Management businesses.
Financial performance and condition
- Quarterly earnings: Net income attributable to shareholders was $156.5 million, or $2.32 per diluted share, versus $132.8 million, or $1.96, in Q2 2022 and $188.3 million, or $2.74, in Q3 2021. PPNR, a non-GAAP measure, was $211.2 million, up $42.2 million quarter over quarter.
- Interest income and margin: GAAP net interest revenue was $316.3 million, up $42.3 million from Q2. Net interest margin increased to 3.24% from 2.76%, as higher rates repriced variable-rate loans faster than funding costs. Tax-equivalent net interest revenue was $318.5 million. About 79% of commercial and commercial real estate loans were variable-rate or due to reprice within one year.
- Fees and expenses: Fees and commissions revenue was $192.6 million, up $19.3 million quarter over quarter, led by brokerage and trading activity and investment banking. Total other operating revenue was $189.7 million. Operating expense was $294.8 million, up $21.1 million, largely from incentive compensation and seasonal and project-related costs.
- Year-to-date comparison: For the first nine months, net income attributable to shareholders was $351.8 million versus $500.8 million in 2021. Net interest revenue rose to $858.8 million from $841.0 million, while fees and commissions fell 11% to $463.6 million. Mortgage banking revenue declined to $39.3 million from $84.6 million amid higher mortgage rates and lower production. Other gains and losses also compared unfavorably with 2021.
- Loans and credit: Period-end loans were $21.8 billion, up $499 million from June 30; unfunded loan commitments rose $1.1 billion. The company recorded a $15.0 million provision for credit losses, versus none in Q2. The combined loan-loss allowance and unfunded-commitment accrual was $298.1 million, or 1.37% of loans. Annualized net charge-offs were 0.01% of average loans. Nonperforming assets excluding U.S.-government-guaranteed amounts increased $25 million quarter over quarter to $143.5 million.
- Deposits and liquidity: Period-end deposits were $36.4 billion, down $2.2 billion from June 30; average deposits fell $1.5 billion to $37.0 billion. Cash and cash equivalents were $1.61 billion at quarter-end. Management reported approximately $14 billion of estimated unused collateralized borrowing capacity.
- Capital and securities: CET1 capital ratio was 11.80%, versus 11.61% at June 30; total capital ratio was 12.81%. Shareholders’ equity declined $227 million quarter over quarter to $4.51 billion, mainly reflecting a $302 million after-tax decline in other comprehensive income, including securities valuation effects. The tangible common equity ratio was 7.96%, down from 8.16% at June 30. The company repurchased 548,034 shares for about $50 million during Q3.
- Cash flow: Nine-month operating cash flow was $7.34 billion, investing cash flow was negative $2.33 billion and financing cash flow was negative $6.25 billion; cash and cash equivalents declined $1.23 billion. Operating cash flow was heavily affected by changes in trading and fair-value-option securities, so it should not be read as a recurring earnings proxy.
Material changes, outlook and risks
- The Federal Reserve raised rates by 150 basis points in Q3 and 300 basis points year to date. Management’s rate-sensitivity model estimated that a parallel 200-basis-point increase would raise net interest revenue by 1.65% over the next 12 months; results depend on assumptions about deposit pricing and customer behavior.
- Management described continued deposit runoff as customers move funds to higher-yielding alternatives. Mortgage production faces pressure from higher rates, limited housing inventory and affordability; Q3 mortgage production volume fell to $230 million, and production revenue was negative $2.4 million.
- Management increased the downside economic-scenario weighting in its credit-loss analysis amid greater uncertainty. A 100% downside scenario would have increased the quantitative reserve by $135 million compared with a 100% base-case scenario; this sensitivity is not a forecast of a future reserve change.
- Available-for-sale securities had $946.5 million of gross unrealized losses at September 30. In Q2, the company transferred $2.4 billion fair value of agency mortgage-backed securities to the held-to-maturity portfolio; the related unrealized loss remains reflected in accumulated other comprehensive income and is amortized over time.
- Management expects planned changes eliminating consumer non-sufficient-funds fees and reducing overdraft fees to lower deposit service charges by approximately $2.5 million per quarter beginning in Q4. The board also authorized repurchases of up to five million additional shares and approved a quarterly dividend of $0.54 per share after quarter-end. The filing provides no broader earnings guidance.
- Risks include economic deterioration, higher funding costs or deposit migration, loan and commitment growth, energy and other industry exposures, interest-rate and securities valuation changes, mortgage-market weakness, and liquidity or collateral demands from customer derivatives. The filing describes ongoing bondholder litigation and a separate fiduciary-duty case; management stated losses were not probable in the cited matters, while some potential losses could be material if circumstances change. Management reported effective disclosure controls and no material change in internal control over financial reporting.
Important facts for investors to verify
- Whether loan repricing continues to outpace deposit-cost increases as rates rise and deposits decline.
- Whether loan growth, higher downside economic-risk weighting and the $14.1 million quarterly increase in the unfunded-commitment allowance result in further credit provisions.
- Trends in nonperforming healthcare and services loans, energy exposures and the $1.1 billion increase in unfunded commitments.
- The effects of unrealized securities losses, including the transferred securities, on tangible common equity and capital as rates and liquidity conditions change.
- Whether mortgage banking weakness, lower fee income from overdraft changes and trading-revenue volatility offset continued net interest margin gains.
- Developments in the disclosed litigation, derivative collateral requirements and the company’s ability to maintain capital and liquidity while repurchasing shares and paying dividends.