DBRS Ratings on BOK Financial Corporation Unchanged at A (low) after 2Q12 Results; Stable Trend

DBRS, Inc. (DBRS) has today commented that its ratings for BOK Financial Corporation (BOKF or the Company), including its A (low) Issuer & Senior Debt rating, are unchanged following the release of 2Q12 results. The trend on all ratings is Stable. Reflecting a sizable securities gain, higher mortgage banking income and improved asset quality, BOKF reported net income of $97.6 million for 2Q12, up from $83.6 million for 1Q12. Specifically, improved sequential quarterly results were attributable to a 17.3% increase in total revenues and an $8 million reduction in provisions for loan loss reserves, partially offset by a 20.8% increase in noninterest expense.

Higher QoQ revenues were driven by a $46.6 million increase in noninterest income to $187.0 million and a $7.8 million increase in net interest income to $181.4 million. Excluding various gains/losses related to derivatives and securities, which include a $14 million pre-tax gain related to the sale of common stock received in a settlement of a defaulted loan, fee revenues increased $10.1 million, or 7.0%, to $154.4 million. Although broad-based, higher fee income mostly reflected a 19.5% increase in mortgage banking revenue, which continues to benefit from the low interest rate environment.

Although period-end loans were relatively flat, QoQ, average loan growth of 1.5% along with an 11 bps widening of net interest margin (NIM) to 3.30%, helped drive higher net interest income. During 2Q12, BOKF’s spread income benefitted from a $2.9 million recovery of a nonaccruing commercial loan. Excluding the recovery, BOKF’s NIM widened by 6 bps, mostly reflecting higher securities yields and lower funding costs. DBRS notes that BOKF’s improved funding costs, in part, reflected the conversion of $233 million of subordinated debentures from a fixed to a floating interest rate, based on LIBOR.

Excluding the change in fair value of mortgage servicing rights, expenses totaled $212.3 million, up 10.4% from $192.4 million, sequentially. The bulk of the increase reflected a $7.5 million increase in personnel costs, due to increased incentive compensation cost. Meanwhile, non-personnel expense was up $12.4 million, as most of these expense categories increased during the quarter.

BOKF’s asset quality remains sound and continues to trend positively. Nonperforming assets contracted to 2.38% of loans and OREO at June 30, 2012, down from 2.87% at March 31, 2012. Lower nonperforming loans were attributable to declines across all loan categories, especially, in commercial loans, which reflected the full recovery of an $11 million loan in the Arkansas market. Meanwhile, net charge off’s represented a very low 0.17% of average loans for 2Q12, down from 0.30% for 1Q12. Finally, the Company’s allowance for loan loss reserves remains adequate at 160% of nonaccruing loans and 2.0% of period-end loans.

BOKF’s funding profile is strong, including a large deposit base that fully funds loans. Nonetheless, during 2Q12, average deposits decreased 1.1%, but the mix improved, as time deposits decreased by 3.5% and demand deposits increased by 7.4%. A large securities portfolio, which represents 44% of total assets along with access to the Federal Home Loan Bank and the Federal Reserve, round out the Company’s liquidity profile. The securities portfolio consists mostly of good quality government agencies. However, the Company does hold $354 million (amortized cost) of somewhat riskier private label RMBS, all of which are rated below investment grade by at least one rating agency. Within this portfolio there was $36 million in aggregate net unrealized losses at June 30, 2012, down from $45 million at March 31, 2012. It is DBRS’s view that any future charge related to this portfolio will be manageable. Finally, the Company has extension risk, given its large residential mortgage backed securities portfolio, which DBRS will continue to monitor.

BOKF’s capital position remains ample and provides significant loss absorption capacity as well as the potential to support future growth opportunities, both organically and through acquisitions. At June 30, 2012, BOKF’s tangible common equity ratio was a high 10.07%, its Tier 1 capital ratio was 13.62% and its Total capital ratio was 16.19%. DBRS notes that BOKF’s estimated Tier 1 common ratio under the fully phased in Basel III framework was 12.75%, which is well above the 7% regulatory threshold. Finally, BOKF repurchased 39,496 common shares during 2Q12.

Notes:
All figures are in U.S. dollars unless otherwise noted.

The principal applicable methodology is the Global Methodology for Rating Banks and Banking Organisations. Other methodologies used include the DBRS Criteria – Intrinsic and Support Assessments. Both can be found on our website under Methodologies.

The sources of information used for this rating includes company documents, the Federal Deposit Insurance Corporation and SNL Financial. DBRS considers the information available to it for the purposes of providing this rating was of satisfactory quality.

This rating is endorsed by DBRS Ratings Limited for use in the European Union

Lead Analyst: Mark Nolan
Approver: Roger Lister
Initial Rating Date: 5 July 2006
Most Recent Rating Update: 16 June 2011

For additional information on this rating, please refer to the linking document under Related Research.