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BOK Financial says 'little spillover' from oil; investors dubious

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BOK Financial says 'little spillover' from oil; investors dubious

, the largest bankbased in energy-centric Oklahoma, remains optimistic on its loan growth potential,but it endured notable setbacks during the first quarter on the oil-and-gas front,reporting substantial increases in charge-offs and related provision levels.

"Itwas obviously a very challenging quarter," President and CEO Steven Bradshaw told analysts during an earnings call afterposting results April 27. BOK Financial reportedfirst-quarter net incomeattributable to shareholders of $42.6 million, or 64 cents per share, down from$74.8 million, or $1.08, a year earlier.

The Tulsa,Okla.-based bank said first-quarter net loans chargedoff rose to $22.5 million from $3.0 million at the end of 2015. Its provision for credit losses totaled $35.0 million, upfrom $22.5 million for the previous quarter. Executives blamed energy-related challengestied to a prolonged slump in oil prices that dates to 2014. Natural gas prices alsohave been persistently low.

BOK Financial's nonperforming energy loans increased $98 million during the first quarter.

Additionally, a significant decrease in primary mortgage interest ratesduring the first quarter dragged down the fair value of BOK Financial's mortgageservicing right asset. Net of hedges, this decreased pre-tax net income in the firstquarter by $11.4million, the company said.

And expense levels were elevated in the quarter, owing in part to accrualsfor legal matters and higher deposit insurance costs that accompanied higher levels of criticized loans. Operating expensesof $244.9 million were up $12.3 million fromthe previous quarter.

"It was a rough quarter for them," KeefeBruyette & Woods analyst Brady Gaileysaid in an interview. "They got hit on a number of fronts."

But energy remains the front-and-center issue. Analysts and investorsare closely watching BOK Financial's energy performance because, with nearly 19% of its total loans consisting of oil-and-gascredits, it has the greatest direct exposure to energy of any bank based in . It also operates in oil-heavyTexas.

BOK Financial had previously predicted a total loan-loss provisionfor all of 2016 to be in the range of $60 million to $80 million. Bradshaw saidon the earnings call that the bank now expects the provision to be on the "high end"of that range.

Energy loanbalances decreased by $68 million during the firstquarter and at March 31 totaled about $3 billion. Total criticized energyloans increased to 27.5% of energy loans compared to about 17% at the end of lastyear, according to Sterne Agee CRT analyst PeterWinter's analysis.

Nonaccrualloans increased more than 60% to $241.8 million on energy weakness.

With such metrics deteriorating, Gailey said it would not surprise him to see BOK Financial'sprovision exceed $80 million this year. "It would seem they would almost haveto continue to build that up," he said.

Asidefrom hints of commercial real estate weakness in Houston, however, Bradshaw said BOK Financial has seen "little spillover"from the energy downturn into the broader economies of Oklahoma and Texas. And hesaid credit quality challenges within the bank's energy book are expected to provemanageable.

Bradshaw said that while growthof the loan portfolio was fairly muted in the first quarter less than 1% during the quarter to about $16 billion — BOK Financial expects percentage loan growth in 2016 in themid-single digits. The company said its commercialpipeline looks favorable and that the bank remains committed to the energy sectorand views it as a long-term source of growth.

Aside from energy, "the core business continues to performvery well," Bradshaw said. "We remain very confident in our business model."He emphasized that over the course of 2016, the bank expects to grow revenue morethan expenses.

While per-barrel crude oil prices have come off their lows ofthis year and now hover in the $40s, providing energy companies some breathing room,investors generally are concerned that banks will face more credit quality problemsas the year wears on. Analysts also note that interest rates remain historicallylow, making it difficult to boost interest income and revenue to offset higher creditcosts.

Hovde Group analyst Joseph Fenech said in an interview that managementcommentary from BOK Financial and several other banks operating in Texas and Oklahoma"has been more positive than expected." He said that investors are worriedthat trouble in energy will gradually weaken overall economies and begin to hurtother areas of banks' loan books.

"But the banks say they aren't seeing it yet," Fenech said."The commentary, in aggregate, suggests that things are holding up to thispoint in terms of any contagion effect."

KBW'sGailey agreedwith that interpretation but said investors have doubts. "They are verycautious," he said. "They expect it to get worse before it gets better.So there is a disconnect."

Sharesof BOK Financial fell in morning trading after the company released its first-quarterresults.