BOK Financial Reports Record Quarterly Earnings of $117 million or $1.79 Per Share

Globe Newswire 24-Oct-2018 7:55 AM

TULSA, Okla., Oct. 24, 2018 (GLOBE NEWSWIRE) --

CEO Commentary

Steven G. Bradshaw, president, and chief executive officer, stated, "This is yet another record quarter for BOK Financial, with continued growth in both our loan portfolio and net interest revenue. We added $346 million in new loan production to last quarter's record loan growth. The competitive ability and scale of our wealth management business allowed us to earn a $15 million fee in client asset management. These factors, combined with a stable credit environment and diligent expense management, cause us to see earnings leverage continuing."

Bradshaw added, "We are proud to have closed our acquisition of CoBiz Financial on October 1st in record time, in part due to our strong community engagement track record and Outstanding CRA rating. We welcome CoBiz employees into our organization and look forward to many great things to come. The combination of CoBiz and BOK Financial creates the premier commercial bank in Colorado and Arizona, and we are excited to see how it helps drive earnings into 2019 and beyond."

Net interest revenue was $240.9 million for the third quarter of 2018, a $2.3 million increase over the second quarter of 2018. Recoveries of foregone interest on nonaccruing loans added $5.3 million to net interest revenue or 7 basis points to net interest margin in the previous quarter. Excluding this impact, net interest margin was 3.21 percent for the third quarter of 2018, up 11 basis points over the second quarter of 2018. The Company reduced excess cash balances held at the Federal Reserve funded by borrowings from the Federal Home Loan Banks. The spread narrowed at the end of the second quarter and was no longer contributing to net interest revenue, which resulted in a 10 basis point improvement to net interest margin in the third quarter of 2018.

Excluding the impact of interest recoveries, the yield on average earning assets was 4.04 percent, a 20 basis point increase, and the yield on the loan portfolio was 4.80 percent up 12 basis points. This increase is due primarily to an increase in short-term market interest rates related to the Federal Reserve's 25 basis point rate increase in June. The yield on the available for sale securities portfolio increased 7 basis points to 2.37 percent. The yield on the trading securities portfolio was up 35 basis points.

Funding costs were 1.25 percent, up 14 basis points. The cost of interest-bearing deposits increased 11 basis points to 0.77 percent. The cost of other borrowed funds was up 20 basis points to 2.04 percent. The benefit to net interest margin from assets funded by non-interest liabilities increased to 42 basis points from 37 basis points in the second quarter of 2018.

Average earning assets decreased $345 million compared to the second quarter of 2018. Average loan balances grew by $453 million. Trading securities balances increased $280 million. Average interest-bearing cash and cash equivalents balances decreased $985 million. Average available for sale securities decreased $34 million. Average interest-bearing deposit balances decreased $221 million compared to the second quarter of 2018. The average balance of borrowed funds decreased $131 million.

Fees and commissions revenue totaled $167.5 million for the third quarter of 2018, an increase of $9.7 million or 6 percent over the second quarter of 2018. A fee earned in the sale of client assets added $15.4 million to trust fees and commissions in the third quarter.

Rising interest rates have slowed the origination of mortgage loans and related investment products leading to compressed margins. This has adversely affected both our trading revenue as well as our mortgage banking revenue. Brokerage and trading revenue decreased $3.4 million and mortgage banking revenue decreased $2.8 million compared to the second quarter of 2018.

Total operating expense was $252.6 million for the third quarter of 2018, an increase of $6.1 million or 2 percent compared to the second quarter of 2018.

Personnel expense increased $4.6 million, primarily due to an increase in incentive compensation expense of $6.0 million. Share-based compensation expense was $3.9 million in the third quarter of 2018 and a negative $1.4 million in the previous quarter. Changes in assumptions for the number of performance-based awards that will ultimately vest reduced share-based compensation expense by $4.3 million in the second quarter of 2018. Employee benefits expense decreased $1.5 million compared to the second quarter of 2018, primarily due to a seasonal decrease in payroll taxes.

Non-personnel expense increased $1.6 million. Data processing and communications expense increased $3.9 million, primarily due to impairment of a software license. Net losses and operating expenses of repossessed assets increased $1.3 million as a result of a write down on a healthcare property.

Professional fees and services expense decreased $1.8 million, primarily due to seasonal wealth management tax service fees in the second quarter of 2018. Other expense and mortgage banking costs decreased due to lower loss contingency accruals.

Loans

Outstanding loans were $18.3 billion at September 30, 2018, up $346 million or 1.9 percent over June 30, 2018, primarily due to continued growth in commercial and commercial real estate loans.

Outstanding commercial loan balances grew by $227 million or 2 percent over June 30, 2018. Energy loan balances were up $148 million, consistent with our ongoing support and commitment to the oil and gas industry. Healthcare sector loans increased by $84 million. The healthcare lending group celebrated their 5 year anniversary as a distinct line of business and continues to be a driver of our core loan growth. Service sector loans increased $73 million. This growth was partially offset by a $49 million decrease in wholesale/retail sector loans and a $41 million decrease in other commercial and industrial loans.

Commercial real estate loan balances continued to grow, up $92 million or 2 percent over June 30, 2018. Multifamily residential loan balances were up $63 million. Loans secured by industrial properties grew by $43 million. Construction and land development loans decreased $17 million.

Deposits

Period-end deposits totaled $21.6 billion at September 30, 2018, a $537 million decrease compared to June 30, 2018. Demand deposit balances decreased $310 million, interest-bearing transaction account balances decreased $174 million and time deposit balances decreased by $52 million.

Capital

The company's common equity Tier 1 capital ratio was 12.07 percent at September 30, 2018. In addition, the company's Tier 1 capital ratio was 12.07 percent, total capital ratio was 13.37 percent, and leverage ratio was 9.90 percent at September 30, 2018. At June 30, 2018, the company's common equity Tier 1 capital ratio was 11.92 percent, Tier 1 capital ratio was 11.92 percent, total capital ratio was 13.26 percent, and leverage ratio was 9.57 percent.

The company's tangible common equity ratio, a non-GAAP measure, was 9.55 percent at September 30, 2018 and 9.21 percent at June 30, 2018. The tangible common equity ratio is primarily based on total shareholders' equity, which includes unrealized gains and losses on available for sale securities. The company has elected to exclude unrealized gains and losses from available for sale securities from its calculation of Tier 1 capital for regulatory capital purposes, consistent with the treatment under the previous capital rules.

Nonperforming assets totaled $261 million or 1.42 percent of outstanding loans and repossessed assets at September 30, 2018, compared to $269 million or 1.49 percent at June 30, 2018. Nonperforming assets that are not guaranteed by U.S. government agencies totaled $170 million or 0.93 percent of outstanding loans and repossessed assets (excluding those guaranteed by U.S. government agencies) at September 30, 2018, down from $186 million or 1.04 percent at June 30, 2018.

Nonaccruing loans were $153 million or 0.83 percent of outstanding loans at September 30, 2018, compared to $166 million or 0.92 percent of outstanding loans at June 30, 2018. The decrease in nonaccruing loans was primarily due to a $12 million decrease in energy loans and a $4.8 million decrease in wholesale/retail sector loans, partially offset by a $6.2 million increase in manufacturing sector loans. New nonaccruing loans identified in the third quarter totaled $20 million, offset by $20 million in payments received, $11 million in charge-offs, and $1.6 million in foreclosures and repossessions. At September 30, 2018, nonaccruing commercial loans totaled $109 million or 0.95 percent of outstanding commercial loans, nonaccruing commercial real estate loans totaled $1.3 million or 0.03 percent of outstanding commercial real estate loans, and nonaccruing residential mortgage loans totaled $42 million or 2.13 percent of outstanding residential mortgage loans.

Potential problem loans, which are defined as performing loans that, based on known information, cause management concern as to the borrowers' ability to continue to perform, totaled $176 million at September 30, compared to $140 million at June 30. The increase largely resulted from commercial real estate loans secured by retail facilities, energy sector and services sector loans.

The company had net charge-offs of $9.0 million or 0.20 percent of average loans on an annualized basis for third quarter of 2018, compared to net charge-offs of $10.5 million or 0.24 percent of average loans on an annualized basis for the second quarter of 2018. Net charge-offs were 0.18 percent of average loans over the last four quarters. Net charge-offs for the third quarter were primarily related to a single energy production borrower and single wholesale/retail sector borrower, both of which had previously been identified as impaired and appropriately reserved. Gross charge-offs were $11.1 million for the third quarter compared to $15.1 million for the previous quarter. Recoveries totaled $2.1 million for the third quarter of 2018 and $4.6 million for the second quarter of 2018.

Based on an evaluation of all credit factors, including overall loan portfolio growth, changes in nonaccruing and potential problem loans and net charge-offs, the company determined that a $4.0 million provision for credit losses was appropriate for the third quarter of 2018. The company recorded no provision for credit losses in the second quarter of 2018.

The combined allowance for credit losses totaled $213 million or 1.16 percent of outstanding loans and 146 percent of nonaccruing loans at September 30, 2018, excluding residential mortgage loans guaranteed by U.S. government agencies. The allowance for loan losses was $211 million and the accrual for off-balance sheet credit losses was $2.0 million. At June 30, 2018, the combined allowance for credit losses was $218 million or 1.21 percent of outstanding loans and 138 percent of nonaccruing loans, excluding loans guaranteed by U.S. government agencies. The allowance for loan losses was $215 million and the accrual for off-balance sheet credit losses was $2.4 million.

Net income for Commercial Banking was $85.0 million for the third quarter of 2018, a decrease of $2.6 million compared to the second quarter of 2018. Second quarter earnings included $5.3 million in interest recoveries on nonaccrual loans. Excluding the impact of interest recoveries, growth in net interest revenue was driven by strong growth in loan balances and improved loan yields. This growth was partially offset by a modest increase in our internal cost of funds allocation.

Average loan balances increased $421 million or 3 percent, largely impacted by energy, commercial real estate, service and other commercial and industrial loans. Average customer deposits were $8.6 billion, an increase of $254 million or 3 percent, mostly due to energy, real estate, and general commercial and industrial deposits.

Fees and commissions revenue decreased $3.5 million or 8 percent as a result of reduced customer hedging revenue and the timing of closing loan syndication transactions after an exceptionally strong second quarter. Expense growth outpaced revenue growth primarily due to an increase in incentive compensation as a result of continued loan growth as well as a $1.7 million write down of a repossessed property in the third quarter.

Net income from Consumer Banking was $9.2 million in the third quarter of 2018, an increase of $3.1 million or 50 percent. The net economic cost of the changes in fair value of mortgage servicing rights and related economic hedges was $156 thousand for the third quarter of 2018 compared to $3.5 million for the second quarter of 2018.

Revenues from mortgage banking activities decreased $2.8 million from the prior quarter. Continued rising interest rates and increased market competition slowed origination activity, which declined 16 percent compared to the prior quarter. Efforts to right size current capacity have resulted in personnel expense savings of $1.7 million from the previous quarter.

Net interest revenue from Consumer Banking activities increased $820 thousand while deposit service charges and fees increased $588 thousand over the second quarter of 2018. The introduction of a new time deposit product as well as interest rate increases on existing money market products have positively impacted runoff trends.

Average consumer loans and deposits remained relatively consistent compared to the prior quarter at $1.7 billion and $6.6 billion, respectively.

Net income for Wealth Management increased $9.0 million to $29.3 million during the third quarter of 2018. This increase included an after tax benefit of $11.5 million as a result of a fee earned on the sale of client assets. Excluding this fee, fiduciary and asset management fees produced relatively consistent results compared to the second quarter of 2018.

Average loans increased $27 million or 2 percent to $1.4 billion. Average deposits decreased $343 million or 6 percent, primarily due to client migrations to investments. Assets under management decreased $1.2 billion or 1.6 percent to $77.6 billion at September 30, 2018.

Brokerage and trading revenue decreased $1.7 million or 8 percent compared to the second quarter of 2018 due to a decreased demand in investment products related to rising interest rates and slowing mortgage production.

The company will hold a conference call at 9 a.m. Central time on Wednesday, October 24, 2018 to discuss the financial results with investors. The live audio webcast and presentation slides will be available on the company's website at www.bokf.com. The conference call can also be accessed by dialing 1-201-689-8471. A conference call and webcast replay will also be available shortly after conclusion of the live call at www.bokf.com or by dialing 1-412-317-6671 and referencing conference ID # 13683709.

BOK Financial Corporation is a $33 billion regional financial services company based in Tulsa, Oklahoma. The company's stock is publicly traded on NASDAQ under the Global Select market listings (symbol: BOKF). BOK Financial's holdings include BOKF, NA, BOK Financial Securities, Inc. and The Milestone Group, Inc. BOKF, NA operates TransFund, Cavanal Hill Investment Management, BOK Financial Asset Management, Inc. and seven banking divisions: Bank of Albuquerque, Bank of Arizona, Bank of Arkansas, Mobank, Bank of Oklahoma, Bank of Texas and Colorado State Bank and Trust. Through its subsidiaries, the company provides commercial and consumer banking, investment and trust services, mortgage origination and servicing, and an electronic funds transfer network. For more information, visit www.bokf.com.

The company will continue to evaluate critical assumptions and estimates, such as the appropriateness of the allowance for credit losses and asset impairment as of September 30, 2018 through the date its financial statements are filed with the Securities and Exchange Commission and will adjust amounts reported if necessary.

This news release contains forward-looking statements that are based on management's beliefs, assumptions, current expectations, estimates and projections about BOK Financial, the financial services industry and the economy generally. Words such as "anticipates," "believes," "estimates," "expects," "forecasts," "plans," "projects," "will,"  "intends," variations of such words and similar expressions are intended to identify such forward-looking statements. Management judgments relating to and discussion of the provision and allowance for credit losses, allowance for uncertain tax positions, accruals for loss contingencies and valuation of mortgage servicing rights involve judgments as to expected events and are inherently forward-looking statements. Assessments that BOK Financial's acquisitions, including its latest acquisition of CoBiz Financial, Inc., and other growth endeavors will be profitable are necessary statements of belief as to the outcome of future events based in part on information provided by others which BOK Financial has not independently verified. These statements are not guarantees of future performance and involve certain risks, uncertainties, and assumptions which are difficult to predict with regard to timing, extent, likelihood and degree of occurrence. Therefore, actual results and outcomes may materially differ from what is expected, implied or forecasted in such forward-looking statements. Internal and external factors that might cause such a difference include, but are not limited to changes in commodity prices, interest rates and interest rate relationships, inflation, demand for products and services, the degree of competition by traditional and nontraditional competitors, changes in banking regulations, tax laws, prices, levies and assessments, the impact of technological advances, and trends in customer behavior as well as their ability to repay loans. There may also be difficulties and delays in integrating CoBiz Financial Inc.'s business or fully realizing cost savings and other benefits including, but not limited to, business disruption and customer acceptance of BOK Financial Corporation's products and services. BOK Financial and its affiliates undertake no obligation to update, amend or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.

¹    Non-GAAP measure to net interchange charges for periods prior to 2018 between transaction card revenue and data processing and communications expense. This measure has no effect on net income or earnings per share.

²    Actual interest earned on fair value option securities less internal transfer-priced cost of funds.
³    Periods prior to 2018 are shown on a comparable basis to net interchange charges between transaction card revenue and data processing and communications expense.

¹    Non-GAAP measure to net interchange charges for periods prior to 2018 between transaction card revenue and data processing and communications expense. This measure has no effect on net income or earnings per share.

Loans attributed to a geographical region may not always represent the location of the borrower or the collateral.

Yield calculations are shown on a tax equivalent basis at the statutory federal and state rates for the periods presented. The yield calculations exclude security trades that have been recorded on trade date with no corresponding interest income and the unrealized gains and losses. The yield calculation also includes average loan balances for which the accrual of interest has been discontinued and are net of unearned income. Yield/rate calculations are generally based on the conventions that determine how interest income and expense is accrued.

¹   Excludes residential mortgage loans guaranteed by agencies of the U.S. government.