Business Context and Reporting Period
Company: BOK Financial Corporation
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2007
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 five principal lines of business: Oklahoma corporate banking, Oklahoma consumer banking, mortgage banking, wealth management, and regional banking. Approximately 42% of revenue is derived from commissions and fees.
Key Financial Metrics
| Metric (in thousands, except per share) | 2007 | 2006 |
|---|---|---|
| Net Interest Revenue | $544,485 | $486,688 |
| Total Other Operating Revenue | $398,648 | $371,623 |
| Provision for Credit Losses | $34,721 | $18,402 |
| Net Income | $217,664 | $212,977 |
| Earnings Per Share (Diluted) | $3.22 | $3.16 |
| Total Assets | $20,839,864 | $18,059,624 |
| Total Loans (net of reserve) | $11,890,570 | $10,606,306 |
| Total Deposits | $13,459,291 | $12,386,705 |
| Shareholders' Equity | $1,935,384 | $1,721,022 |
| Return on Average Assets | 1.14% | 1.27% |
| Return on Average Equity | 12.01% | 13.23% |
| Net Interest Margin | 3.28% | 3.36% |
| Tier 1 Capital Ratio | 9.38% | 9.78% |
| Total Capital Ratio | 12.54% | 11.58% |
Material Changes vs. Prior Period
- Revenue Growth: Net interest revenue increased $57.8 million (12%) driven by a $2.2 billion increase in average earning assets. Fees and commissions revenue rose $33.9 million (9%), led by growth in brokerage, transaction card, and trust fees.
- Expense Increases: Total operating expenses increased $62.7 million (12%), primarily due to a $32.4 million rise in personnel costs (higher compensation and staffing) and a $5.9 million increase in operating expenses related to changes in the fair value of mortgage servicing rights.
- Asset Quality Deterioration: Nonperforming assets more than doubled to $104.2 million from $44.3 million. Net loan charge-offs increased to $21.1 million (0.19% of average loans) from $12.5 million (0.13%).
- Acquisitions: The company expanded its footprint through the acquisition of Worth National Bank (Texas) and First United Bank (Colorado), adding significant loans and deposits to the regional banking segment.
- Unusual Items: Net income was reduced by $7.5 million due to an $8.6 million other-than-temporary impairment charge on variable rate perpetual preferred stocks and a $2.8 million charge for the company's share of Visa's antitrust litigation costs.
Guidance, Outlook, and Risks
- Outlook: Management expects net interest revenue to increase slightly over a one-year forward-looking period, though loan spread compression and deposit product mix may affect this. The company aims to maintain a balance sheet neutral to interest rate changes.
- Capital Policy: Subsidiary banks could declare up to $75 million in dividends under the company's internal capital policy (more restrictive than regulatory requirements) without regulatory approval.
- Key Risks:
- Regional Economic Exposure: A substantial majority of loans are in Oklahoma and the Southwest; regional downturns could increase default rates.
- Industry Concentration: Significant exposure to the cyclical energy industry ($2.0 billion in loans) and commercial real estate.
- Interest Rate Sensitivity: Fluctuations in rates affect net interest margin and the value of mortgage servicing rights and mortgage-backed securities.
- Competition: Intense competition from national banks with greater capital and technology resources.
- Contingencies: The company has accrued $3.1 million for Visa litigation obligations. It also holds $393 million in mortgage loans sold with recourse, with a $3.5 million reserve.
Investor Verification Checklist
- Asset Quality Trends: Verify the trajectory of nonperforming assets and net charge-offs, which saw significant increases in 2007.
- Impairment Charges: Review the details of the $8.6 million impairment on preferred stocks and the $2.8 million Visa litigation charge to assess their impact on core earnings.
- Loan Concentrations: Assess the risk profile of the $2.0 billion energy loan portfolio and $2.8 billion commercial real estate portfolio given regional economic dependencies.
- Net Interest Margin Pressure: Monitor the impact of loan spread compression and rising deposit costs on future profitability.
- Acquisition Integration: Evaluate the performance and integration progress of the Worth National Bank and First United Bank acquisitions.