DBRS Comments on Q4 2008 Earnings of BOK Financial Corporation – Senior at A (low)

DBRS has today commented on the Q4 2008 earnings of BOK Financial Corporation (BOK or the Company). Notwithstanding the rapidly deteriorating economy, BOK reported earnings of $35.4 million for the quarter, down from $56.7 million for the prior quarter and $51.2 million for Q4 2007. On a sequential-quarter basis, net income was pressured by a 38% increase in provisions for loan loss reserves, of which 54% was for reserve build, and a 13% decrease in non-interest revenues (excluding gains and/or losses), partially offset by a nine basis point (bp) widening of net interest margin (NIM). Compared with a year ago, quarterly net income was negatively affected by a 4.5 times increase in provisions and an 18% increase in non-interest expense, somewhat offset by a 35 bp widening of NIM. The Company’s credit fundamentals continue to support the current rating levels – A (low) for senior obligations – and Stable trend.

With the rapidly declining economy and a housing market that has yet to stabilize, BOK continued to exhibit asset quality erosion. At December 31, 2008, the Company’s non-performing assets rose to 2.65% of total loans from 1.98% at September 30, 2008. During Q4 2008, net charge-offs (NCOs) increased to 1.05% of average loans from 0.64% for the prior quarter. The bulk of the increase in non-accruals was related to commercial real estate (CRE) and commercial loans. The heightened CRE non-accruals reflect increased levels of multi-family residential loans and loans secured by land, residential lots and residential construction properties. The increase in commercial non-accruals was related to exposures within the service and health-care sectors. For 2008, BOK’s loan loss provisions of $203 million exceeded NCOs by 2.0 times. The Company’s allowance for loan loss reserves-to-non-accruals was moderate at 78%. Given the deepening recession, DBRS anticipates continued asset quality erosion. DBRS notes that sustained steep asset quality deterioration may place pressure on ratings.

The Company’s NIM widened nine bps during Q4 2008 to 3.57%, due to the increase in spread between LIBOR and the federal funds rate, which continued into Q4 2008. The spread has since narrowed. The yield on a sizable component of BOK’s loan portfolio is based on LIBOR and the federal funds rate is the basis for interest paid on many of the Company’s interest-bearing liabilities. On a sequential-quarter basis, BOK’s non-interest income was pressured by lower brokerage and trading revenues and, to a lesser extent, lower trust fees.

Liquidity remains solid as core deposits account for approximately 93% of net loans (at September 30, 2008). BOK’s securities portfolio, which represents 31% of total assets, and access to the Federal Home Loan Bank and to the Federal Reserve discount window round out its liquidity profile. DBRS notes that BOK holds approximately $1.2 billion of privately issued mortgage-backed securities (MBS). Approximately $390 million are backed by Alt-A mortgages, the bulk of which are credit enhanced and supported by fixed-rate loans. Given the deteriorating economy and unstable markets, DBRS anticipates increased pressure on this portfolio, which may lead to future markdowns and possibly charges.

Unlike most banks, BOK did not seek funds from the U.S. Treasury’s Capital Purchase Program. At December 31, 2008, the Company’s capital position was solid, as exhibited by its Tier 1, total capital and tangible equity ratios of 9.42%, 12.84% and 6.64%, respectively.

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

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under methodologies.

This is a Corporate (Financial Institutions) rating.