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BOK Financial Corporation’s (BOKF - Analyst Report) second-quarter 2013 earnings of $1.16 per share lagged the Zacks Consensus Estimate by 6 cents. Moreover, results compared unfavorably with the prior-quarter earnings of $1.28.

Lower-than-expected results were aided by lower net interest revenues. However, reduced operating expenses reflect disciplined expense management. Further, reduced net charge-offs, fee revenue growth and increased loans were the tailwinds.

Net income attributable to the shareholders of BOK Financial in the reported quarter was $79.9 million, compared with $88 million in the prior quarter.

Quarter in Detail

BOK Financial’s net interest revenues totaled $167.2 million in the reported quarter, down 1.9% sequentially. Net interest margin fell 11 basis points from 2.92% in the prior quarter to 2.81% in the reported period.

With cash flows being reinvested at lower rates, the yield on its securities portfolio continued to decline. Yield on average earning assets also dipped 13 basis points sequentially. Moreover, loan yields decreased 8 basis points, partially mitigated by lower funding costs.

BOK Financial’s fees and commissions revenue amounted to $160.9 million, up 1.8% on a sequential basis. Reduced mortgage banking revenues were offset by elevated transaction card revenues and higher deposit service charges and fees.

Total operating expenses at BOK Financial were $196.6 million, down 2.3% sequentially. Excluding changes in the fair value of mortgage servicing rights, operating expenses totaled $210.9 million, up 3.4% sequentially. The company experienced a rise in both personnel costs and non-personnel expenses in the reported quarter compared with the prior quarter.

Credit Quality

The credit quality of BOK Financial’s loan portfolio improved in the quarter. Nonperforming assets totaled $281 million or 2.24% of outstanding loans and repossessed assets as of Jun 30, 2013, down from $283 million or 2.32% of outstanding loans and repossessed assets as of Mar 31, 2013.

Net charge-offs amounted to $2.3 million (or 0.08% of average loans on an annualized basis) in the reported quarter, down from net charge-offs of $2.4 million (or 0.08%) in the prior quarter.

Further, the combined allowance for credit losses amounted to $205 million or 1.65% of outstanding loans as of Jun 30, 2013, declining from $207 million or 1.71% of outstanding loans as of Mar 31, 2013.

As a result, BOK Financial recorded no provision for credit losses as against a negative provision for credit losses of $8 million in the prior quarter.

Capital Position

As of Jun 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 13.37% and 15.28%, respectively, compared with 13.35% and 15.68%, respectively as of Mar 31, 2013.

BOK Financial's Tier 1 common equity ratio under existing Basel I standards was 13.19% compared with 13.16% in the prior 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 12.20%, up 520 basis points from the 7% regulatory requirement.

Outstanding loans at BOK Financial as of Jun 30, 2013 were $12.4 billion, up $347 million from the prior quarter, mainly due to a rise in commercial loans. Further, elevated commercial real estate loans and residential mortgage loans increased while consumer loans remained stable.

Period end deposits amounted to $19.5 billion as of Jun 30, 2013, down from $19.9 billion as of Mar 31, 2013. Reduction in interest-bearing transaction accounts along with lower time deposits led to the decline.

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 a quarterly cash dividend of 38 cents per share. The dividend will be paid on or around Aug 30, 2013 to shareholders of record as of Aug 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 - Analyst Report), Metrocorp Bancshares Inc. and First Financial Bankshares Inc. (FFIN - Snapshot Report), 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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