BOK Financial Corporation — Q3 2017 Form 10-Q
Business context and period. This quarterly report covers the three and nine months ended September 30, 2017. BOK Financial is a regional banking and financial-services company operating through Commercial Banking, Consumer Banking and Wealth Management. The December 2016 Mobank acquisition contributed to year-over-year balance-sheet and earnings growth.
Financial performance and position
- Q3 earnings: Net income attributable to BOK Financial shareholders was $85.6 million, or $1.31 diluted EPS, versus $74.3 million, or $1.13, in Q3 2016; it was down from $88.1 million, or $1.35, in Q2 2017. Consolidated net income, including non-controlling interests, was $85.8 million.
- Revenue and margins: Net interest revenue was $218.5 million, up from $187.8 million year over year and $205.2 million sequentially. Net interest margin was 3.01%, compared with 2.64% a year earlier and 2.89% in Q2; approximately $4.7 million of recoveries on previously foregone interest added 6 basis points to Q3 margin. Other operating revenue was $175.7 million, down 6% year over year, including fees and commissions of $173.5 million, down 4%.
- Expenses and taxes: Operating expense was $265.9 million, up $7.8 million year over year and $15.0 million sequentially. The effective tax rate was 33.1%; a $3.1 million tax adjustment from expired statutes of limitation reduced Q3 tax expense.
- Credit: No combined provision for credit losses was recorded in Q3, versus a $10.0 million provision in Q3 2016. Net charge-offs were $3.4 million, or 0.08% of average loans annualized. The combined allowance was $253 million, 1.47% of loans. Nonperforming assets excluding U.S.-government-guaranteed amounts were $249 million, or 1.46% of loans and repossessed assets, down from $276 million, or 1.62%, at June 30.
- Balance sheet and liquidity: Period-end loans were $17.2 billion and deposits $21.8 billion; deposits declined $468 million from June 30. Average earning assets were $29.6 billion. The bank reported approximately $6.1 billion of estimated unused collateralized credit capacity. Parent-company cash and interest-bearing cash equivalents were $162 million.
- Debt and capital: Period-end other borrowings were $6.24 billion and subordinated debentures $144.7 million. Shareholders’ equity was $3.49 billion. Regulatory ratios were 11.90% common equity Tier 1, 13.47% total capital and 9.30% leverage; tangible common equity ratio was 9.23%.
- Cash flow: For the nine months ended September 30, operating cash flow was negative $177.2 million, investing cash flow positive $333.0 million and financing cash flow negative $219.3 million. Cash and cash equivalents decreased $63.5 million to $2.47 billion.
- Dividends: The company paid $0.44 per common share in Q3. On October 31, the board approved a regular quarterly dividend of $0.45 per share, payable in November.
Changes versus comparable periods
- Year-over-year earnings improved as higher net interest revenue and lower credit costs more than offset weaker fee revenue and higher expenses. For the first nine months, shareholder-attributable net income was $262.2 million versus $182.6 million in 2016; the prior-year period included $65 million of credit-loss provision.
- Mortgage banking revenue fell $13.6 million year over year to $24.9 million, reflecting lower production volume and gain-on-sale margins. The company cited its earlier exit from correspondent lending, higher mortgage rates and market pricing pressure.
- Fiduciary and asset management revenue increased 19% year over year, while brokerage and trading revenue declined 13%. Transaction card revenue included a $2.1 million customer early-termination fee.
- Loans were nearly unchanged sequentially: commercial loans rose $158 million while commercial real estate loans fell $170 million. Nonperforming assets excluding government-guaranteed balances declined, primarily due to nonaccruing energy loans.
Outlook, commentary, risks and unusual items
- No specific earnings or financial guidance was provided. Management said it expects fee-revenue growth through new products, services and market development, while noting economic conditions, regulation, competition and market saturation could constrain growth.
- Interest-rate risk is material: management describes the balance sheet as asset-sensitive, and estimates a 2.10% reduction in next-twelve-month net interest revenue under a 50-basis-point rate decrease. The filing cautions that these simulations rely on uncertain assumptions.
- Energy lending remains a significant concentration: $2.9 billion, or 17% of loans, was energy-related; unfunded energy commitments were $2.7 billion. Management identifies commodity prices and the regional economy as risks. Potential problem loans totaled $285 million, primarily including $207 million of energy loans.
- Q3 unusual costs included equity-compensation charges of $5.9 million tied to vesting assumptions and the company’s stock price, $1.1 million of tornado-related write-downs, and $1.3 million of additional tornado and hurricane operating expense. A $4.7 million write-down of repossessed oil and gas properties contributed to higher sequential repossession expense.
- Legal matters include bondholder claims related to municipal securities for which the bank acted as trustee. Management said loss was not probable at the reporting date, but noted a loss could become probable if a court-ordered payment plan does not result in repayment; a reasonable estimate could not be made and the amount could be material. Other disclosed litigation was assessed by management as not probable or not reasonably estimable, as applicable.
- Management reported effective disclosure controls and no material change in internal control over financial reporting during the quarter. The filing also identifies upcoming accounting standards, including expected adoption of revenue-recognition guidance in 2018 and CECL in 2020; the impact of certain standards remained under evaluation.
Key facts for investors to verify
- Whether higher net interest revenue and the 3.01% margin are sustainable, excluding the 6-basis-point benefit from interest recoveries, and how rate changes affect results.
- Mortgage-banking trends, including production volumes and gain-on-sale margins, and whether the fee-revenue decline persists.
- Energy exposure, borrower grades, charge-offs, nonperforming assets and allowance adequacy under the company’s commodity-price stress assumptions.
- Deposit stability, reliance on Federal Home Loan Bank advances, available collateralized liquidity and the drivers of negative operating cash flow.
- Developments in the municipal-bond litigation and any change to management’s assessment of potential loss.
- The effect of the tax adjustment, stock-based compensation charges and other unusual items on the comparability of reported earnings.