DBRS Comments on BOK Financial Corporation’s 3Q13 Results - Sr. at A (low): Stable Trend

DBRS, Inc. (DBRS) has today commented on BOK Financial Corporation’s (BOKF or the Company) 3Q13 financial results. BOKF has an Issuer & Senior Debt rating of A (low) with a Stable trend. The Company reported net income of $75.7 million for the quarter, down from $79.9 million for 2Q13 and $87.4 million for 3Q12. Specifically, lower sequential earnings reflected a 2.0% decrease in total revenues and a 7.1% increase in non-interest expense, partially offset by an $8.5 million negative provision for loan loss reserves. Importantly, BOKF’s balance sheet fundamentals for the quarter remained sound, and included improved asset quality and the maintenance of a strong liquidity and capital profile. As with most banks, loan growth remains pressured, as period-end loans were down QoQ, but up on an average basis.

Similar to many banks, BOKF’s 3Q13 bottom line was negatively impacted by lower mortgage banking income, pressured margin and modest average loan growth. Specifically, lower QoQ revenues were driven by a 3.6% decline in non-interest income and a 0.5% decrease in net interest income. Excluding some of the more volatile components of non-interest income, including net gains/losses on derivatives, securities, and other assets, the Company’s total fees and commissions declined by 8.8% QoQ, primarily reflecting a 35.8% decrease in mortgage banking revenue. Lower mortgage banking income reflected narrower gains on sale margins and lower production volumes.

Despite a resilient net interest margin, which narrowed by only one basis point to 2.80% in 3Q13, moderately lower QoQ spread income mostly reflected a 2% decline in average earning assets, driven by a 4.5% decrease in average available for sale securities, due to sales and run-off. Partially offsetting lower sequential average securities the Company’s average loans were up 1%, driven by higher levels of average commercial real estate exposure, average residential mortgages and average consumer loans. That said, towards the end of the quarter, loans contracted somewhat, which resulted in a 0.7% decline in period-end loans, QoQ.

Higher non-interest expenses were mostly attributed to a $14.7 million swing in change in fair value of mortgage servicing rights along with a $2.1 million contribution to the BOKF Charitable Foundation. Excluding these two items, expenses were well managed and moderately down QoQ.

BOKF’s asset quality remains sound and continues to stabilize; reflecting lower levels of non-performing assets (NPAs) and net charge-off (NCOs). Specifically, NPAs represented a manageable 2.18% of loans and OREO, at September 30, 2013, down from 2.24% at June 30, 2013. Meanwhile, NCOs remained minimal, representing a very low 0.01% (annualized) of average loans for 3Q13, down from 0.08% for 2Q13. Finally, despite the negative provisions for loan loss reserves in the quarter, BOKF’s allowance for loan losses remains adequate at 172% 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 63.4%. A large AFS securities portfolio, which represents 38.2% 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 9.73%, and estimated Tier 1 common ratio of 13.33%. Based on the Basel III rules, BOKF estimates its Tier 1 common ratio to be 12.35%, which is comfortably above the minimum threshold. 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 sequentially.

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

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