DBRS Confirms BOK Financial Corporation at A (low); Trend Stable

DBRS has today confirmed the ratings of BOK Financial Corporation (BOKF or the Company) and its principal bank subsidiary, Bank of Oklahoma, including BOKF’s Issuer & Senior Debt rating of A (low). The Trend for all ratings remains Stable. The confirmation followed a review by DBRS of the Company’s operating performance, financial fundamentals and future prospects.

BOKF’s ratings are underpinned by a strong banking franchise, solid capital position, and diverse earnings. Earnings are driven by a relatively stable margin, low cost funding base and substantial fee revenues. Ratings also take into consideration elevated levels of non-performing assets (NPAs), which is the primary challenge for the Company.

BOKF’s regional franchise is centered in Oklahoma and extends out into contiguous states. The Company’s strong market presence in Oklahoma is punctuated by its number one deposit market share in Tulsa, where it is headquartered, and number two deposit market share in Oklahoma City. Meanwhile the Company has more moderate market shares within higher growth metropolitan regions in Texas, New Mexico, Arkansas, Colorado, Arizona, Kansas and Missouri.

The ratings confirmation follows BOKF’s Q3 2009 operating results, which reflected a decrease in net income to $50.7 million, from $52.1 million for Q2 2009. On a sequential quarter basis, Q3 2009 earnings were negatively impacted by a 17% increase in provisions for loan loss reserves, an increase in other than temporary impairment losses to $3.4 million, higher non-controlling net income expense and a modest increase in core non-interest expense. Conversely, Q3 2009 earnings were favorably impacted by a modest increase in recurrent revenues, higher one-time gains, an increase in fair value of mortgage servicing rights and the Company’s Q2 2009 $11.7 million FDIC special assessment fee. Although net interest income expanded by 3% during Q3 2009, and reflected the Company’s higher NIM which expanded by 8 basis points to 3.63%, somewhat offsetting was a 1.2% decrease in average earnings assets. DBRS notes that continued loan contraction will pressure future earnings.

An important strength of the Company is its significant level of fee income, which represented 40% of total revenues for Q3 2009. DBRS comments that fee-based revenues are generally more stable than net interest income and require minimal balance sheet usage and capital. BOKF’s solid deposit business, together with trust services, transaction card processing, brokerage and trading businesses complement its community-focused banking activities. Nonetheless, DBRS notes that if overdraft legislation currently being contemplated by Congress is enacted, BOKF’s deposit related revenues would be negatively impacted.

Elevated levels of NPAs driven by the difficult operating environment remain a challenge. BOKF’s NPAs rose to a relatively high 4.19% of loans, from 3.67% at June 30, 2009. However, the Company’s conservative risk management and solid income before provision and taxes, somewhat mitigate this concern. Meanwhile, Q3 2009 net charge-offs remained manageable, yet did increase to 1.21% of average loans, from 1.13% for the prior quarter. The bulk of the Company’s nonaccrual loans consist of commercial real estate, largely land development and construction loans and commercial and industrial loans, most of which are energy and services related. At the end of Q3 2009, BOKF’s loan loss reserves to NPAs were moderate at 57%.

BOKF’s liquidity position is represented by it ample core deposit base, which represents 106% of net loans, a solid securities portfolio, which represents 37% of total assets and ample unused secured borrowing capacity. Supporting BOKF’s securities portfolio is a relatively large level of wholesale funding, which exceeds the median for its similarly rated peers. DBRS comments that the risk for BOKF is a relatively high dependence on generally costlier, less stable wholesale borrowings could significantly raise the Company’s funding costs, compress margins and constrain profitability. Somewhat offsetting is BOKF’s solid interest rate risk management, which is evidenced by the Company’s fairly stable net interest margin over the years. The Company’s capital position remains adequate, as evidenced by it Tier 1 and Total risk based capital ratios of 10.56% and 14.10%, respectively. Moreover, BOKF’s tangible common equity ratio was 7.78%. DBRS notes that BOKF did not participate in the TARP CPP.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporation (Financial Institutions) rating.