BOK Financial Corporation — 2018 Form 10-K
Reporting period: Year ended December 31, 2018, including fourth-quarter results. BOK Financial is a regional financial holding company operating across seven states, with commercial banking, consumer banking and wealth management businesses. Consolidated assets were $38.0 billion at year-end.
Key financial results and position
- Profit: Net income attributable to shareholders was $445.6 million, or $6.63 per diluted share, compared with $334.6 million, or $5.11, in 2017. Fourth-quarter attributable net income was $108.5 million, or $1.50 per diluted share, versus $72.5 million, or $1.11, in fourth-quarter 2017.
- Revenue and margins: Net interest revenue rose to $984.9 million from $841.7 million; net interest margin increased to 3.20% from 2.92%. Fees and commissions were $643.6 million. The filing’s year-over-year comparison is affected by adoption of a revenue standard that changed interchange-fee presentation; management’s comparable presentation showed 2017 fees of $642.4 million.
- Expenses and taxes: Other operating expense was $1.028 billion. Income tax expense was $119.1 million, a 21.1% effective rate, compared with $182.6 million and 35.2% in 2017; the lower federal tax rate materially benefited 2018 results.
- Credit: Provision for credit losses was $8.0 million, versus a $7.0 million provision credit in 2017. Net charge-offs increased to $33 million, or 0.18% of average loans, from $16 million, or 0.09%. Nonperforming assets declined to $267 million from $290 million; nonaccruing loans were $163 million.
- Balance sheet and capital: Loans were $21.7 billion, deposits $25.3 billion and shareholders’ equity $4.4 billion. Common equity Tier 1 was 10.92%, total capital 12.50% and leverage 8.96%, all lower than in 2017 but above stated minimum requirements.
- Funding and cash flow: Period-end borrowed funds included $6.1 billion of Federal Home Loan Bank advances. The company reported $7.1 billion of estimated unused collateralized credit available to BOKF, NA. Consolidated cash and cash equivalents ended at $1.14 billion, down from $2.32 billion. Operating cash flow was negative $552 million, investing cash flow negative $1.81 billion and financing cash flow positive $1.19 billion; cash flows reflect substantial banking balance-sheet activity.
- Shareholder returns: Dividends declared were $1.90 per share, up from $1.77. The company repurchased 615,840 shares during 2018.
Material changes versus 2017
- On October 1, BOK Financial acquired CoBiz Financial for approximately $944 million: $243 million cash and 7.2 million BOK Financial shares valued at $701 million. CoBiz contributed approximately $2.9 billion of loans and $3.3 billion of deposits; preliminary goodwill was $602 million. The bank merger was expected in the first quarter of 2019.
- Year-end loans increased $4.5 billion and deposits $3.2 billion, substantially reflecting the CoBiz acquisition. Excluding acquired loans, loans grew $1.6 billion, or 9%.
- Net interest margin expanded as higher rates and earning-asset growth outweighed higher funding costs. In contrast, fees and commissions were broadly flat on management’s comparable basis, while mortgage and brokerage/trading revenues faced pressure.
- Net income growth also reflected the 2018 tax rate benefit. CoBiz closing and integration costs of $16.6 million reduced annual earnings by about $0.18 per share; fourth-quarter CoBiz costs reduced earnings by about $0.15 per share.
Outlook, risks and unusual items
- Management expected continued rate increases in 2019, but at a slower pace than in 2018, and forecast U.S. GDP growth of about 2% in 2019. These are economic expectations, not company earnings guidance; no specific earnings forecast is provided.
- Management cited CoBiz integration, customer and employee retention, expense control and realization of expected cost savings as key execution risks. CoBiz’s operations were not allocated to the reporting segments in 2018.
- Credit exposures warrant attention: energy loans were $3.6 billion, or 17% of loans; Texas represented about 30% of the total loan portfolio. Other loans especially mentioned rose to $182 million from $118 million, despite declines in nonaccruing loans and potential problem loans.
- Mortgage servicing rights were exposed to interest-rate volatility and unhedgeable factors. The net economic cost of MSR value changes and related hedges was $15.6 million in 2018, compared with a $6.6 million benefit in 2017. Management estimated that a 50-basis-point mortgage-rate decrease would reduce MSR fair value by $27 million before considering related hedges.
- Interest-rate sensitivity modeling estimated that a 200-basis-point increase would reduce next-12-month net interest revenue by 0.36%; a 100-basis-point decrease would reduce it by 3.57%. The filing cautions that model outcomes depend on assumptions and may differ from actual results.
- The company has significant LIBOR-linked instruments and stated that the impact of transition to SOFR or another replacement was not yet known. CECL was scheduled for adoption January 1, 2020; the filing does not provide a clear estimate of its financial impact.
- Municipal-bond trustee litigation remains a contingency. The bank paid $1.07 million in disgorgement and a $600,000 civil penalty under a 2016 SEC consent order. Related bondholder claims remained outstanding; management said a loss was not probable, but a loss could become probable and potentially material if the court-ordered payment plan fails. The amount could not be reasonably estimated.
- Ernst & Young issued unqualified opinions on the financial statements and internal control over financial reporting. The CoBiz operations were excluded from management’s and the auditor’s internal-control assessment, although they represented 12% of consolidated assets and 20% of net assets at year-end.
Important facts for investors to verify
- Progress on CoBiz integration, bank consolidation, acquired-loan performance and expected cost savings.
- Credit trends in energy and commercial real estate, particularly the increase in other loans especially mentioned and retail-property nonaccruals.
- Capital, liquidity and funding costs as acquired balances are integrated and deposit competition evolves.
- Mortgage-servicing-rights valuation, hedge effectiveness and sensitivity to changing mortgage rates.
- Developments in municipal-bond litigation and the court-ordered repayment plan, plus any eventual CECL impact.
- How reported fee and expense comparisons are affected by revenue-presentation changes and acquisition-related costs.