DBRS Ratings on BOK Financial Corporation Unchanged at A (low) after 3Q12 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 3Q12 results. The trend on all ratings is Stable. As a result of a sizable QoQ decrease in securities gains and the non-recurrence of a 2Q12 reversal of provisions for loan loss reserves, BOKF reported net income of $87.4 million for 3Q12, down from $97.6 million for 2Q12. Specifically, lower sequential quarterly results were mostly attributable to a 3.2% decrease in total revenues and no provisions for loan loss reserves in 3Q12 as compared to an $8.0 million negative provision for loan loss reserves in the prior quarter.

Importantly, the Company reflected positive operating fundamentals during 3Q12. Period-end loans (gross) grew by $256 million linked-quarter, driven by a $221 million, or 13% (annualized) increase in commercial loan balances. Supporting loan and securities growth in the quarter, period-end deposits increased $781 million. Meanwhile, asset quality continued to improve, reflecting lower linked-quarter levels of non-performing assets (NPAs). Finally, DBRS notes that results were bolstered by very strong mortgage banking income, which continues to benefit from the low interest rate environment.

Reflecting some noise, the Company’s QoQ decline in total revenues was driven by a $6.3 million, or 3.4%, decrease in noninterest income and a $5.3 million, or 2.9%, decline in spread income. Lower noninterest income was mostly attributable to a $12.5 million decrease in securities gains from the non-recurrence of the Company’s 2Q12 $14.0 million gain on the sale of common stock received in a settlement of a defaulted loan. Positively, excluding various gains/losses related to derivatives and securities, core fee revenues increased $11.9 million, or 7.7%, to $166.3 million. Higher linked-quarter core fee revenues mostly reflected a $10.7 million, or 27.1% increase in mortgage banking income.

As with most banks, a narrower net interest margin (NIM) drove the Company’s lower linked-quarter spread income, despite a 5.1% increase in average earning assets. During 3Q12, BOKF’s NIM narrowed by 18 bps to 3.12%, mostly due to declining earning asset yields outpacing decreasing interest bearing liability costs. DBRS notes that during 2Q12, net interest income included $2.9 million from the full recovery of a nonaccruing loan. Excluding the 2Q12 recovery, BOKF’s NIM would have narrowed by 13 bps. Meanwhile, higher average earning assets were mostly driven by a $967 million, or 9.6% increase in available-for-sale securities; as BOKF increased its holdings of short-duration agencies during the quarter.

Expenses were well managed QoQ. Excluding the change in fair value of mortgage servicing rights, expenses totaled $212.8 million, up $1.2 million from the prior quarter. Higher expenses were primarily driven by a $725,000 increase in non-personnel expense.

BOKF’s asset quality remains sound and improved. Indeed, NPAs contracted to 2.21% of loans and OREO during the quarter, down from 2.38% at June 30, 2012. Lower nonperforming loans were attributable to declines across most loan categories. Meanwhile, net charge-off’s (NCOs) represented a very low 0.19% of average loans for 3Q12, up from 0.17% for 2Q12. DBRS notes that 3Q12 NCOs includes $7.1 million of negative recovery related to a refund of a settlement agreement between the Company and the City of Tulsa invalidated by the Oklahoma Supreme Court. Finally, the Company’s allowance for loan loss reserves remains adequate at 177.2% of nonaccruing loans and 2.0% of period-end loans.

BOKF’s funding profile is strong, including a large deposit base which fully funds loans. During 3Q12, average deposits increased 1.8% and the mix improved, as time deposits decreased by 2.0% and demand deposits increased by 7.0%. A large securities portfolio, which represents 44% (period-end) 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 $337 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 $5.3 million in aggregate net unrealized losses at September 30, 2012, down from $36.0 million at June 30, 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 September 30, 2012, BOKF’s tangible common equity ratio was a high 9.67%, its Tier 1 capital ratio was 13.21% and its Total capital ratio was 15.71%. DBRS notes that BOKF’s estimated Tier 1 common ratio under the fully phased in Basel III framework was 12.35%, which is well above the 7% regulatory threshold.

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: Alan G. Reid
Initial Rating Date: 5 July 2006
Most Recent Rating Update: 28 June 2012

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