DBRS Confirms BOK Financial Corporation at A (low); Changes Trend to Positive

DBRS, Inc. (DBRS) has today confirmed the ratings of BOK Financial Corporation (BOKF or the Company) and its principal bank subsidiary, BOKF, N.A., including the Company’s Issuer & Senior Debt rating of A (low). At the same time, DBRS placed most of the Company’s ratings on Positive trend. The trend for the Short-Term Instruments rating for the Company remains Stable. The ratings action followed a detailed review of BOKF’s operating performance, financial fundamentals and future prospects.

The ratings and change in trend to Positive from Stable considers the Company’s incremental strengthening of its non-Oklahoma-based franchise, improved contribution from several of its fee-based businesses, and sustained improvement in its asset quality. These trends, if sustained, would be more commensurate to those of banks in the next higher rating category.

Importantly, BOKF’s non-Oklahoma-based markets drove overall loan growth on a year-over-year basis. Balance sheet fundamentals remain solid, reflecting strong capital and funding positions, which provide a high degree of financial flexibility. Also supporting the Company’s ratings is its resilient and diverse earnings capacity, which benefits from a high level of fee income generation. DBRS notes that the maintenance of the non-performing assets (NPAs) trajectory and further strengthening of the franchise, especially outside of Oklahoma, could lead to positive ratings implications. Conversely, stagnant growth in newer markets, asset quality deterioration, and/or a material decline in capital could revert the Company’s ratings back to Stable.

Ratings are also underpinned by BOKF’s solid banking franchise that is centered in Oklahoma and extends into geographically contiguous states. The Company has the leading deposit market share in the state of Oklahoma, including the number one market share in Tulsa, where it is headquartered, and the number three market share in Oklahoma City. Elsewhere, BOKF maintains more moderate, but growing, market shares, mostly within the geographically appealing metropolitan regions of Texas, New Mexico, Arkansas, Colorado, Arizona, and Kansas/Missouri.

Despite the difficult operating environment, the Company’s earnings generation remains resilient. Indeed, except for a loss in 2Q08, BOKF remained profitable through the business cycle. Above peer median earnings remain pressured, by a narrowing net interest margin, and recently, by a decline in mortgage banking revenues. Positively, BOKF continues to report average loan growth, led by higher levels of commercial real estate loans and commercial & industrial exposure. Despite the decrease in mortgage banking revenues, adjusted fee income (excludes gains/losses on assets, derivatives, and securities) for 9M2013 was relatively stable year-over-year, and represented a high 48.0% of total adjusted revenues.

BOKF’s asset quality is sound and improved, reflecting low loss rates and stabilizing NPAs. Specifically, annualized net charge-offs represented a very low 0.01% of average loans for 3Q13, down from 0.08% for 2Q13 and 0.19% for 3Q12. Meanwhile, NPAs as a percent of loans and other real estate owned decreased to 2.18% at September 30, 2013, from 2.24% at December 31, 2012 and 2.21% at September 30, 2012. Notwithstanding negative or no provisions over the last four quarters, BOKF’s allowance for loan loss reserves remains adequate at 172% of nonaccrual loans and 1.57% of period-end loans.

Importantly, credit quality within BOKF’s $2.3 billion energy sector portfolio, which represents the largest industry concentration within its $7.6 billion commercial loan portfolio, remains sound. DBRS notes that the risk associated with the energy exposure is substantially mitigated by the secured nature and conservative underwriting criteria of these loans, and by the Company’s extensive experience financing this industry.

BOKF’s funding and liquidity profile remains strong, in DBRS’s view, as core deposits easily fund loans. For 9M2013, average deposits increased 5.6%, year-over-year, and the mix improved, as average transaction deposits and average non-interest bearing demand deposits increased by 6.7% and 11.4%, respectively. Meanwhile average time deposits declined by 10.3%. BOKF’s large securities portfolio, which represents a high 41% of total assets along with access to the Federal Home Loan Bank and Federal Reserve, round out the Company’s liquidity. DBRS notes that the securities portfolio consists mostly of high quality government agencies. Nonetheless, BOKF does hold $231 million (amortized cost) of somewhat riskier private label available for sale residential mortgage-backed securities (RMBS). Finally, given the Company’s large RMBS portfolio (agency and private label), there is an element of extension risk, which DBRS will continue to monitor.

The Company’s capital position is ample in DBRS’s opinion, with tangible common equity representing a high 9.73% of tangible assets. Moreover, regulatory capital measures are comfortably above “well capitalized” levels, as defined by the regulators, including a Tier 1 capital ratio of 13.51% and a Total capital ratio of 15.35%, at September 30, 2013. The Company’s Tier 1 common ratio under Basel III rules was estimated at 12.35%, which reflects a solid cushion above the minimum requirement. DBRS notes that BOKF’s tangible common equity position is sensitive to securities valuation changes, especially in a rising rate environment.

The Company continues to employ its excess capital to grow and deepen its product offerings. In October 2013, BOKF announced its intent to acquire GTRUST Financial Corporation a Topeka, Kansas headquartered trust and asset management company. Additionally, in 2012, the Company acquired the Milestone Group, Inc. a Denver, Colorado based wealth management firm. DBRS anticipates that BOKF will continue utilizing its excess capital to acquire bank and non-bank companies.

BOKF, a financial holding company headquartered in Tulsa, Oklahoma reported $27.2 billion in assets as of September 30, 2013.

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 applicable methodologies include the DBRS Criteria: Intrinsic and Support Assessments and DBRS Criteria: Rating Bank Subordinated Debt & Hybrid Instruments with Discretionary Payments. These can be found at: http://www.dbrs.com/about/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.

[Amended on August 27, 2014, to reflect actual methodologies used.]

Lead Analyst: Mark Nolan
Rating Committee Chair: William Schwartz
Initial Rating Date: July 5, 2006
Most Recent Rating Update: June 28, 2012

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