DBRS Ratings on BOK Financial Corporation Unchanged at A (low) after 4Q12 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 4Q12 results. The trend on all ratings is Stable. BOKF reported net income of $82.6 million for the quarter, moderately down from $87.4 million for 3Q12. Specifically, lower sequential quarterly results were mostly attributable to a 5.6% decrease in revenues, partially offset by a negative provision for loan loss reserves.

Despite the difficult business environment, BOKF’s fundamentals remain solid, as the Company continued to reflect healthy earnings, sound asset quality and ample capital. Highlights for the quarter included sustained loan and deposit growth and stabilizing credit quality. Specifically, period-end loans grew by $479 million, or 4.3%, linked-quarter, mostly driven by a $351 million, or 4.8% increase in commercial loan balances and a $68 million, or 3.1%, increase in commercial real estate loans. Supporting loan and securities growth in the quarter, period-end deposits increased a sizable $2.0 billion. Moreover, the deposit mix improved, as non-time deposits increased by a robust 13.0%, while time deposits declined by 1.8%, sequentially. Meanwhile, asset quality continued to improve, reflecting lower linked-quarter net charge-offs (NCOs). Although non-performing assets (NPAs) increased modestly, QoQ, the increase reflected the new regulatory guidance pertaining to customers who have gone through Chapter 7 bankruptcy. Excluding this impact, NPAs were down sequentially. Finally, DBRS notes that the Company’s sustained earnings generation continues to bolster its ample capital position.

Overall, the Company’s QoQ decline in total revenues was driven by a $17.3 million, or 9.6%, decrease in noninterest income and a $2.7 million, or 1.5%, decline in spread income. Lower noninterest income was mostly attributable to an $8.3 million negative swing to a loss on fair value option securities and a $6.9 million decrease in securities gains. On an adjusted basis, excluding various gains/losses related to derivatives and securities, core fee revenues were relatively stable, down a modest $165,000, sequentially. Lower fee revenues mostly reflected a $3.9 million decrease in mortgage banking revenues, which remain strong. Positively, most other fee line items increased, QoQ, including trust fees and commissions revenues, which were up $2.4 million, primarily reflecting contributions from the recently acquired The Milestone Group, Inc.

As with most banks, a narrower net interest margin (NIM) drove the Company’s lower linked-quarter spread income, despite a 3.1% increase in average earning assets. During 4Q12, BOKF’s NIM narrowed by 17 basis points (bps) to 2.95%, mostly due to declining earning asset yields, which were pressured by a 28 bps decrease in yield on available for sale securities. Meanwhile, higher average earning assets were mostly attributable to a $424 million, or 3.8%, increase in average available for sale securities and a $252 million, or 2.2%, increase in average loans.

Expenses were $222.1 million for 4Q12, relatively flat with $222.3 million for the prior quarter. Excluding changes on the fair value of mortgage servicing rights, operating expenses increased $14.0 million, or 6.6%, sequentially, driven by higher personnel costs (up $8.4 million, or 6.9%), professional fees and services (up $2.1 million, or 26.2%) and a $2.1 million contribution to the BOKF Charitable Foundation. Higher personnel expenses primarily resulted from increased incentive compensation and health care costs.

BOKF’s asset quality remains sound. NPAs increased modestly to 2.23% of loans and OREO, at December 31, 2012, from 2.21% at September 30, 2012. Meanwhile, NCOs represented a very low 0.14% of average loans for 4Q12, down from 0.19% for 3Q12. Continued sound asset quality and low NCOs supported a negative provision for loan loss reserves of $14 million in 4Q12, compared to a $0 provision in 3Q12. At current loss rates, BOKF’s allowance for loan losses remains adequate, in DBRS’s view, at 160.3% of nonaccruing loans and 1.8% of period-end loans.

BOKF’s funding profile is strong, as exhibited by its gross loans to deposit ratio of 58%. A large available for sale securities portfolio, which represents 40% (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 $325 million (amortized cost) of somewhat riskier private label RMBS. DBRS notes that 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. During the quarter, the Company paid a special dividend of $1/share to its shareholders, which modestly reduced capital. Specifically, at December 31 2012, BOKF’s tangible common equity ratio was a high 9.25% (9.67% at September 30, 2012), and its Tier 1 capital ratio was 12.78% (13.21% at September 30, 2012). Finally, DBRS notes that BOKF’s estimated Tier 1 common ratio under the fully phased in Basel III framework was a strong 12.59%, which is well above the 7% regulatory threshold.

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

[Amended on June 25, 2014 to remove unnecessary disclosures.]