Business Context and Reporting Period
Company: BOK Financial Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2008
Business Overview: BOK Financial is a financial holding company headquartered in Tulsa, Oklahoma, operating full-service banking across Oklahoma, Texas, New Mexico, Colorado, Arizona, Arkansas, and Missouri/Kansas. The company operates three principal lines of business: Commercial Banking, Consumer Banking, and Wealth Management. It is the largest financial institution in Oklahoma by deposit market share.
Key Financial Metrics
| Metric | 2008 | 2007 |
|---|---|---|
| Net Income | $153.2 million | $217.7 million |
| Earnings Per Share (Diluted) | $2.27 | $3.22 |
| Total Assets | $22.73 billion | $20.67 billion |
| Total Loans | $12.88 billion | $11.94 billion |
| Total Deposits | $14.98 billion | $13.46 billion |
| Net Interest Revenue | $646.9 million | $544.5 million |
| Net Interest Margin | 3.45% | 3.28% |
| Provision for Credit Losses | $202.6 million | $34.7 million |
| Net Charge-offs | $101.7 million | $21.1 million |
| Nonperforming Assets | $342.3 million | $104.2 million |
| Shareholders' Equity | $1.85 billion | $1.94 billion |
| Tier 1 Capital Ratio | 9.40% | 9.38% |
| Total Capital Ratio | 12.81% | 12.54% |
| Tangible Common Equity Ratio | 6.64% | 7.72% |
Material Changes vs. Prior Period
- Profitability Decline: Net income decreased 30% to $153.2 million, driven primarily by a significant increase in the provision for credit losses and net charge-offs.
- Credit Quality Deterioration: The provision for credit losses surged to $202.6 million (up from $34.7 million in 2007). Net charge-offs increased to $101.7 million. Nonperforming assets tripled to $342.3 million, representing 2.65% of outstanding loans and repossessed assets.
- Specific Credit Events: The company recognized $54 million in net credit losses on derivative contracts related to two bankrupt counterparties (including SemGroup, L.P.), which reduced brokerage and trading revenue. Additionally, a $26 million energy loan was charged off.
- Asset Growth: Despite the recession, total assets grew 10% and loans grew 8%, funded by increases in interest-bearing deposits and borrowed funds.
- Securities Portfolio: Unrealized losses on available-for-sale securities increased significantly, contributing to a $192 million increase in accumulated other comprehensive losses and a reduction in the tangible common equity ratio.
- Net Interest Margin: NIM improved by 17 basis points to 3.45%, aided by a widening spread between LIBOR and federal funds rates in the second half of 2008.
Guidance, Outlook, Risks, and Unusual Items
- TARP Decision: BOK Financial elected not to participate in the U.S. Treasury's TARP Capital Purchase Program, citing sufficient capital sources to support organic growth and acquisitions.
- Liquidity Programs: The company elected to participate in the FDIC's Temporary Liquidity Guarantee Program (TLGP) for deposit insurance and debt guarantees but has not issued any guaranteed debt under the program.
- Outlook: Management expects net interest revenue to increase slightly over a one-year forward-looking period. However, they anticipate continued pressure from the recession, rising credit losses, and potential increases in deposit insurance costs in 2009.
- Key Risks:
- Regional Economy: Significant exposure to Oklahoma and Southwest markets; a regional downturn could increase default rates.
- Energy Sector: 18% of the loan portfolio is in the energy sector, which is cyclical and sensitive to commodity price volatility.
- Commercial Real Estate: Concentrations in Arizona and other markets show rising nonaccruals, particularly in land development and construction.
- Interest Rate Risk: While the balance sheet is managed to be relatively neutral, falling rates reduce the value of mortgage servicing rights (MSR). The fair value of MSRs decreased $34.5 million in 2008.
- Unusual Items:
- Net credit losses of $54 million on customer derivative contracts.
- Other-than-temporary impairment charges of $5.3 million on preferred stocks.
- Visa retrospective responsibility obligation adjustments reduced expenses by $2.8 million in 2008.
Investor Verification Checklist
- Credit Loss Trajectory: Verify the adequacy of the $248 million combined reserve for credit losses (1.93% of loans) given the rapid increase in nonperforming assets and the specific exposure to the energy sector and Arizona commercial real estate.
- Derivative Exposure: Confirm the status of remaining exposure to the bankrupt counterparties and the potential for further losses on customer hedging programs.
- Securities Valuation: Review the $418 million in gross unrealized losses on available-for-sale securities to assess the risk of future other-than-temporary impairment (OTTI) charges, particularly on privately issued mortgage-backed securities.
- Capital Adequacy: Monitor the tangible common equity ratio (6.64%) and the company's ability to maintain capital levels without TARP support as credit losses potentially continue to rise.
- Dividend Capacity: Note that while regulatory limits allow for $171 million in dividends, the company's internal policy restricts this to $119 million; verify if future earnings can support the current dividend rate of $0.875 per share.