BOK Financial Corporation — 2021 Form 10-K
Reporting period: Fiscal year ended December 31, 2021; filed February 23, 2022. BOK Financial is a regional financial holding company operating across eight states, with commercial banking, consumer banking and wealth management businesses. It reported $50.2 billion in consolidated assets.
Financial performance and condition
| Metric | 2021 | 2020 |
|---|---|---|
| Net income attributable to BOK Financial shareholders | $618.1 million | $435.0 million |
| Diluted earnings per share | $8.95 | $6.19 |
| Return on average assets | 1.23% | 0.89% |
| Return on average shareholders’ equity | 11.59% | 8.55% |
| Net interest revenue | $1.118 billion | $1.108 billion |
| Net interest margin | 2.60% | 2.83% |
| Fees and commissions revenue | $668.3 million | $810.3 million |
| Other operating expense | $1.178 billion | $1.164 billion |
| Cash dividends per common share | $2.09 | $2.05 |
The consolidated income statement reports net income of $616.3 million before non-controlling interests; $618.1 million is attributable to BOK Financial shareholders. Earnings improved substantially year over year, principally as the company recorded a $100 million negative provision (reserve release) for credit losses, compared with a $222.6 million provision in 2020. Pre-provision net revenue, a non-GAAP measure, fell to $697.9 million from $786.4 million.
- Fourth quarter: Shareholder-attributable net income was $117.3 million, or $1.71 per diluted share, versus $188.3 million, or $2.74, in the third quarter. Net interest margin was 2.52%, down from 2.66%. Other operating revenue was $157.4 million, down $72.4 million quarter over quarter; the third quarter included a $31.1 million gain on an alternative investment sale.
- Credit quality: Net charge-offs were $37 million, or 0.17% of average loans excluding PPP loans, versus $70 million, or 0.32%, in 2020. Nonperforming assets excluding U.S. government-guaranteed assets declined to $144.8 million from $317.5 million. The combined allowance for credit losses was $289 million, or 1.45% of loans excluding PPP loans, compared with $426 million, or 2.00%, a year earlier.
- Loans and deposits: Period-end loans declined $2.8 billion to $20.2 billion, including a $1.4 billion decrease in PPP loans. Period-end deposits increased $5.1 billion to $41.2 billion; average deposits rose $5.2 billion to $37.9 billion. The loan-to-deposit ratio fell to 49% from 64%.
- Liquidity and capital: Cash and cash equivalents were $2.84 billion at year-end; the company cited $18.1 billion of estimated unused collateralized credit availability at BOKF, NA. Consolidated CET1 was 12.24%, total capital 13.29%, and leverage 8.55%. Shareholders’ equity was $5.36 billion. Year-end subordinated debentures were $131.2 million; funds purchased and repurchase agreements were $2.33 billion.
- Cash flow: Operating activities used $3.69 billion, while investing activities provided $2.60 billion and financing activities provided $2.75 billion. Operating cash flow included a $4.36 billion use associated with changes in trading and fair-value-option securities; banking balance-sheet movements make this figure less comparable to cash generation at a nonfinancial company.
Material changes and unusual items
- Interest income and expense dynamics compressed margin: lower short-term rates reduced yields on floating-rate assets more than funding costs could fall. Average earning assets rose 8%, largely from increased trading securities, while average loans declined.
- Fees and commissions fell 18%. Brokerage and trading revenue declined 49% to $113.0 million, and mortgage banking revenue declined 42% to $105.9 million amid lower production and narrower margins. Fiduciary and asset management revenue increased 6% to $178.3 million.
- Other gains, net increased to $63.7 million, including a $31.1 million gain on an alternative investment sale and a $14.1 million gain on an equity interest received in an energy-loan workout. The company also recorded a $5.2 million loss on extinguishment of subordinated debt.
- The available-for-sale securities portfolio had $114.0 million of gross unrealized losses at year-end, compared with $8.8 million in 2020. Management attributed the losses to interest rates, reported no credit impairment, and stated it did not intend or expect to be required to sell the impaired securities before recovery.
- The company redeemed $150 million of subordinated debt in August 2021 and paid off its PPP Liquidity Facility during the third quarter. It repurchased 1.36 million common shares at an average $86.74 per share during the year.
Outlook, commentary and principal risks
The filing does not provide formal company earnings or revenue guidance. Management’s base economic outlook used in its credit-loss estimate assumed 2.9% GDP growth over the following 12 months, unemployment improving from 4.0% to 3.7%, one Federal Reserve rate increase in 2022, and average WTI oil prices of $68.75 per barrel. The filing also describes a downside scenario involving contraction in parts of 2022. These are economic assumptions for credit-loss estimation, not company guidance.
- Management cited recovery in economic conditions, stronger commodity prices and improved credit metrics as drivers of reserve releases. The CECL allowance remains sensitive to economic forecasts and scenario weights; management estimated a downside-only scenario would increase the quantitative reserve by $85 million versus the base-only case.
- Credit exposures include energy loans of $3.0 billion, or 15% of the loan portfolio, and substantial regional concentrations: Texas represented approximately 34% of loans, Oklahoma 16%, and Colorado 12%. Energy prices, regional downturns and commercial real estate conditions could affect credit performance.
- Interest-rate, mortgage-prepayment and securities-market risks may affect margins, mortgage servicing rights, securities values and trading revenue. The company also identified COVID-19 developments, inflation, competition, cybersecurity and third-party technology providers, climate-related risks, and regulatory changes as potential risks.
- The company ceased originating new LIBOR-based exposures by December 31, 2021 and was transitioning contracts and systems to alternative reference rates, predominantly SOFR.
- Legal matters include a Colorado fiduciary-duty suit claiming more than $60 million in damages and bondholder litigation related to a municipal-bond trustee matter. Management, based on counsel’s advice, said losses were not probable for these matters; the filing states a potential bondholder loss could be material if it became probable, but could not be reasonably estimated. Other described litigation likewise had no provision where management concluded a loss was not probable or estimable.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded disclosure controls were effective.
Investor verification priorities
- Assess how much of the earnings increase came from the credit-reserve release, and whether credit quality and loan growth support earnings without further releases.
- Track net interest margin, deposit mix and pricing, and the earnings and liquidity effects of rising rates and elevated deposit balances.
- Review the sustainability of mortgage, trading and fiduciary revenues, including the enlarged trading-securities portfolio and mortgage servicing rights valuations.
- Monitor energy and regional credit exposures, nonperforming assets, reserve coverage, and the status and potential exposure of significant legal matters.
- Confirm capital, dividend capacity and share-repurchase activity against regulatory requirements and the parent company’s reliance on subsidiary-bank dividends.