DBRS Confirms BOK Financial Corporation at A (Low); Maintains Positive Trend Then Withdraws Ratings

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 maintained the Positive trend on most of the Company’s ratings, as well as the Stable trend for its Short-Term Instruments rating. Subsequent to the confirmation, DBRS withdrew the ratings of BOKF. The decision to withdraw the ratings was made at DBRS’s discretion.

The Positive trend reflects the incremental strengthening of the Company’s non-Oklahoma-based franchise, which reflected 12.4% loan growth over the last four quarters, as compared to 1.9% growth in the Oklahoma markets. The positive trend also considers sustained improvement in asset quality. Overall, BOKF’s ratings are underpinned by its solid balance sheet fundamentals, including strong capital and funding profiles, resilient and diverse earnings generation that benefits from a high level of fee income, and its sound asset quality.

Ratings reflect a solid banking franchise that is headquartered in Tulsa Oklahoma and extends across eight contiguous southwestern/western states. The Company has the dominant deposit market share in Oklahoma, including the number one market position in Tulsa and the number three market share in Oklahoma City. Elsewhere, BOKF maintains more moderate 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 has remained profitable throughout the business cycle. As with most banks, revenues remain pressured by a narrow net interest margin and lower mortgage banking income. Offsetting these headwinds, loan growth has been solid, led by a broad-based increase in commercial & industrial loans, mostly generated within its non-Oklahoma based banking entities.

For 1H14, BOKF reported $152.5 million in earnings available to common shareholders, down 9.2% over the same period last year, reflecting a 32% decline in mortgage banking revenue and a 3.4% decline in spread income. Partially offsetting, 1H14 non-interest expenses declined 3.6% YoY. A strength of the franchise is its diversified revenue streams, which provide some stability to earnings. Excluding gains and losses on securities/other assets, BOKF’s fee income represented a high 48% of total revenues in 1H14. Overall, expenses are well managed, yet the Company’s efficiency ratio of 63.6% signals some room for improvement.

BOKF’s asset quality remains sound, reflecting net recoveries over the last three quarters and lower tracking non-accruing loans. Overall, non-performing assets as a percent of loans and other real estate owned decreased to 1.88% at June 30, 2014, from 2.24% at June 30, 2013. Notwithstanding negative or no provisions over the last four quarters, BOKF’s allowance for loan loss reserves remains adequate at 197% of nonaccrual loans and 1.42% of period-end loans.

Importantly, credit quality within BOKF’s $2.4 billion energy sector portfolio, which represents the largest industry concentration within its $8.4 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.

Finally, BOKF’s funding and liquidity profiles remain strong, as core deposits easily fund loans. For 2Q14, average deposits were up 5.0%, YoY, and the mix improved, as average time deposits decreased by 6.5%. To prepare for the eventual increase in interest rates, BOKF has made some headway in reducing its high level of securities, which consist primarily of good quality government agencies. Additionally, the Company expects to reduce the securities book by $1.2 billion in 2014. DBRS notes that with the Company’s large RMBS portfolio (agency and private label), there is an element of extension risk.

The Company’s capital position remains robust in DBRS’s opinion, with tangible common equity representing a high 10.20% of tangible assets. Moreover, BOKF has a strong Tier 1 common equity ratio (Basel III) of approximately 12.35%, well above the required minimum.

BOKF, a financial holding company headquartered in Tulsa, Oklahoma, reported $27.8 billion in assets as of June 30, 2014.

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 (June 2014). Other applicable methodologies include the DBRS Criteria: Support Assessments for Banks and Banking Organisations (January 2014) and DBRS Criteria: Rating Bank Capital Securities – Subordinated, Hybrid, Preferred & Contingent Capital Securities (December 2013). These can be found at: http://www.dbrs.com/about/methodologies

The primary sources of information used for this rating include company documents 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
Rating Committee Chair: William Schwartz
Initial Rating Date: July 5, 2006
Most Recent Rating Update: November 27, 2013

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