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BOK Financial Earnings Miss, Ups Div

Zacks Equity Research

BOK Financial Corporation’s (BOKF) third-quarter 2013 earnings of $1.10 per share lagged the Zacks Consensus Estimate by a nickel. Moreover, results compared unfavorably with the prior-year quarter earnings of $1.27.

Lower-than-expected results came on the back of lower net interest revenues and reduced fees and commissions. However, reduced operating expenses reflect disciplined expense management. Further, reduced net charge-offs, surge in deposits and increased loans were the tailwinds.

Net income attributable to the shareholders of BOK Financial in the reported quarter was $75.7 million, compared with $87.4 million in the prior-year quarter.

Quarter in Detail

BOK Financial’s net interest revenues totaled $166.4 million in the reported quarter, down 5.5% year over year. Net interest margin fell 32 basis points from 3.12% in the prior-year quarter to 2.80% in the reported period.

Yield on average earning assets also declined 38 basis points year over year. Moreover, loan yields decreased 27 basis points, partially mitigated by lower funding costs.

BOK Financial’s fees and commissions revenue amounted to $146.8 million, down 11.6% on a year-over-year basis. Reduced mortgage banking revenues and lower deposit service charges and fees were partially offset by elevated transaction card revenues and higher brokerage and trading revenue.

Total operating expenses at BOK Financial were $210.6 million, down 5.3% year over year. Excluding changes in the fair value of mortgage servicing rights, operating expenses totaled $210.3 million, down 1.1% year over year. The company experienced a rise in personnel costs in the reported quarter compared with the prior-year quarter.

Credit Quality

The credit metrics of BOK Financial’s loan portfolio was a mixed bag in the reported quarter. Net charge-offs amounted to $0.3 million (or 0.01% of average loans on an annualized basis) in the reported quarter, down from net charge-offs of $5.7 million (or 0.19%) in the prior-year quarter.

Further, the combined allowance for credit losses was 1.59% of outstanding loans as of Sep 30, 2013, declining from 1.99% of outstanding loans as of Sep 30, 2012. As a result, BOK Financial recorded negative provision for credit losses of $8.5 million as against no provision for credit losses in the prior-year quarter.

However, nonperforming assets totaled $271.1 million or 2.18% of outstanding loans and repossessed assets as of Sep 30, 2013, up from $264.0 million or 2.21% of outstanding loans and repossessed assets as of Sep 30, 2012.

Capital Position

As of Sep 30, 2013, armed with strong capital ratios, BOK Financial and its subsidiary banks exceeded the regulatory definition of well capitalized. As of the same date, Tier 1 and total capital ratios were 13.51% and 15.35%, respectively, compared with 13.21% and 15.71%, respectively as of Sep 30, 2012.

BOK Financial's Tier 1 common equity ratio under existing Basel I standards was 13.33% compared with 13.01% in the prior-year quarter.

Notably in Jul 2013, the final revision of regulatory capital rules for substantially all U.S. banking organizations were released, effective from Jan 1, 2015. Therefore, based on the new capital rule, the company’s estimated Tier 1 common equity ratio stood at 12.35%, up 535 basis points from the 7% regulatory requirement.

Outstanding loans at BOK Financial as of Sep 30, 2013 were $12.4 billion, up 5.1% year over year, mainly due to a rise in commercial loans. Further, commercial real estate loans, consumer loans and residential mortgage loans increased.

Period end deposits amounted to $19.5 billion as of Sep 30, 2013, up from $19.1 billion as of Sep 30, 2012. Increase in interest-bearing transaction accounts along with higher demand deposits mainly led to the rise.

Dividend Update

During the reported quarter, the company paid cash dividend of $26 million or 38 cents per share.

Concurrent with the press release, BOK Financial’s board of directors approved an increase in the quarterly cash dividend to 40 cents per share. This reflects a 5% increase in dividend over the last dividend paid. The hiked dividend will be paid on or around Nov 29, 2013 to shareholders of record as of Nov 16, 2013.

Our Viewpoint

The strategic expansions and local-leadership based business model of BOK Financial, with peers such as Texas Capital Bancshares Inc. (TCBI), Metrocorp Bancshares Inc. (MCBI) and First Financial Bankshares Inc. (FFIN), helped it transform into a leading financial service provider from a small bank in Oklahoma. Going forward, we believe BOK Financial’s diverse revenue mix and favorable geographic footprint would support its growth.

Though regulatory issues and risks emanating from its private label mortgage backed securities portfolio remain concerns, we believe that its sturdy financial position and expense control initiatives and efficiency will help it navigate through the current cycle.

BOK Financial currently carries a Zacks Rank #3 (Hold).

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