DBRS Comments on BOK Financial Corporation’s 2Q13 Results - Sr. at A (low): Stable Trend

DBRS, Inc. (DBRS) has today commented on BOK Financial Corporation’s (BOKF or the Company) 2Q13 financial results. BOKF has an Issuer & Senior Debt rating of A (low) with a Stable trend. The Company reported net income of $79.9 million for the quarter, down from $88.0 million for 1Q13, and $97.6 million for 2Q12. Earnings for 2Q13 equated to a 1.16% return on average assets and a 10.59% return on average equity, down moderately from last quarter’s results.

Balance sheet fundamentals for the quarter remained solid, and included improved asset quality, some loan growth, and the maintenance of a strong liquidity and capital profile. Overall, lower earnings reflected the non-recurrence of a 1Q13 negative provision for loan loss reserves, pressured net interest margin (NIM) and a decline in mortgage banking income.

Reflecting some noise from net gains/losses on derivatives, securities (including fair value option securities), and other assets, BOKFs non-interest income declined 5.2% sequentially to $150.8 million. Excluding these volatile components, core fee income improved 1.8% to $160.9 million, driven by higher levels of trust fees and commissions (up 11.2%), transaction card revenue (up 8.1%), brokerage and trading revenue (up 3.5%) and deposit service charges (up 4.3%). Higher trust fees and commissions were attributed to seasonal timing of tax service fees. Meanwhile, improved transaction card revenue was positively impacted by higher merchant service fees. Finally, BOKF’s largest fee component, mortgage banking income, decreased 8.4% sequentially, due to lower gain on sale margins and a shift in product mix to loans with narrower margins.

Spread income declined 1.9%, sequentially, to $167.2 million, due to an 11 basis point (bps) narrowing of NIM to 2.81%, and a 0.2% decrease in average earning assets. The narrower NIM was driven by declining earning asset yields outpacing decreasing funding costs. Meanwhile, the slight decline in average earning assets was mostly due to a 2.0% decrease in average available-for-sale (AFS) securities, partially offset by a 0.4% increase in average loans. Higher loans were driven by a 1.4% increase in commercial exposures.

Non-interest expense decreased 2.3%, sequentially, to $196.6 million, but was favorably impacted by a sizable swing in change in fair value of mortgage servicing rights. Excluding this component, operating expenses increased 3.4% to $210.9 million, reflecting higher levels of personnel cost (up 2.0%), and professional fees and services (up 20.0%). The increase in personnel costs was due to higher incentive compensation.

BOKF’s asset quality remains sound and improved, reflecting lower levels of non-performing assets (NPAs) and net charge-off (NCOs). Specifically, NPAs represented a manageable 2.24% of loans and OREO, at June 30, 2013, down from 2.32% at March 31, 2013. Meanwhile, NCOs remained minimal, representing a very low 0.08% of average loans for 2Q13. Continued sound asset quality and low NCOs supported the need for no provision for loan loss reserves in 2Q13 and an $8 million negative provision in 1Q13. Finally, DBRS views BOKF’s allowance for loan losses to be adequate at 166% of non-accruing loans and 1.6% of period-end loans.

The Company’s liquidity and capital profile remain strong. BOKF’s deposit base easily funds loans, as exhibited by its gross loans to deposit ratio of 63.8%. A large AFS securities portfolio, which represents 38.5% of total assets, along with access to the Federal Home Loan Bank and the Federal Reserve round out the Company’s liquidity profile. Finally, BOKF’s capital position remains ample reflecting a high tangible common equity (TCE) ratio of 9.38%, and estimated Tier 1 common ratio of 13.19%. DBRS notes that BOKF’s securities book was negatively impacted by higher interest rates in the quarter, and the contribution of unrealized securities gains to the TCE ratio declined by 36 bps sequentially.

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

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]