Annual Reports

 
Quarterly Reports

  • 10-Q (Oct 31, 2014)
  • 10-Q (Aug 1, 2014)
  • 10-Q (May 2, 2014)
  • 10-Q (Nov 1, 2013)
  • 10-Q (Aug 2, 2013)
  • 10-Q (May 3, 2013)

 
8-K

 
Other

BOK Financial 10-Q 2010

Documents found in this filing:

  1. 10-Q
  2. Ex-31.1
  3. Ex-31.2
  4. Ex-32.0
  5. Ex-32.0
form10q.htm

 
1

 

As filed with the Securities and Exchange Commission on April 29, 2010

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
[Missing Graphic Reference]

FORM 10-Q
(Mark One)
 
x
 
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended March 31, 2010
OR
 
¨
 
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the transition period from _____________ to ______________                 

Commission File No. 0-19341

BOK FINANCIAL CORPORATION
(Exact name of registrant as specified in its charter)
[Missing Graphic Reference]
Oklahoma
 
73-1373454
(State or other jurisdiction
of Incorporation or Organization)
 
(IRS Employer
Identification No.)
   
Bank of Oklahoma Tower
   
P.O. Box 2300
   
Tulsa, Oklahoma
 
74192
(Address of Principal Executive Offices)
 
(Zip Code)
 
(918) 588-6000
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.       Yes  x  No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).Yes  ¨  No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.  See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer  x                               Accelerated filer  ¨                                                                                                                                  Non-accelerated filer  ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).   Yes  ¨  No  x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: 68,042,918 shares of common stock ($.00006 par value) as of March 31, 2010.
 

 
2

 

BOK Financial Corporation
Form 10-Q
Quarter Ended March 31, 2010

Index

Part I.  Financial Information
 
Management’s Discussion and Analysis (Item 2)        
2
Market Risk (Item 3)                                                                                              
45
Controls and Procedures (Item 4)
47
Consolidated Financial Statements – Unaudited (Item 1)
48
Quarterly Financial Summary – Unaudited (Item 2)
78
   
Part II.  Other Information
 
Item 1.  Legal Proceedings
81
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
81
Item 6.  Exhibits
81
Signatures
82

 
Management’s Discussion and Analysis of Financial Condition and Results of Operations
 

Performance Summary

BOK Financial Corporation (“the Company”) reported net income of $60.1 million or $0.88 per diluted share for the first quarter of 2010 compared to $55.0 million or $0.81 per diluted share for the first quarter of 2009 and $42.8 million or $0.63 per diluted share for the fourth quarter of 2009.  Net income for the first quarter of 2010 included $6.5 million or $0.10 per diluted share from the purchase of the rights to service $4.2 billion of residential mortgage loans on favorable terms.

Highlights of the first quarter of 2010 included:

·  
Net interest revenue totaled $182.6 million compared to $169.8 million for the first quarter of 2009 and $184.5 million for the fourth quarter of 2009.  Net interest margin was 3.68% for the first quarter of 2010, 3.47% for the first quarter of 2009 and 3.64% for the fourth quarter of 2009.  Average earning assets increased $394 million compared to the first quarter of 2009 and decreased $23 million compared to the fourth quarter of 2009.

·  
Fees and commission revenue totaled $115.3 million for the first quarter of 2010, down $6.2 million from the first quarter of 2009 and down $634 thousand from the previous quarter.  Brokerage and trading revenue declined $3.7 million and mortgage banking revenue declined $3.6 million compared to the first quarter of 2009.  Deposit service charges decreased $2.7 million and mortgage banking revenue increased $1.5 million over the prior quarter.

·  
Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $177.6 million, up $9.9 million over the first quarter of the prior year and down $4.1 million from the prior quarter.  Higher personnel expenses and net losses and operating expenses on repossessed assets partially offset decreases in most other operating expense categories in the first quarter of 2010 compared to both the first and fourth quarter of 2009.  Mortgage banking expenses increased $1.8 million over the prior year and decreased $2.2 million compared to the prior quarter.

 
3

 

·  
Combined reserve for credit losses totaled $314 million or 2.86% of outstanding loans, up from $306 million or 2.72% of outstanding loans at December 31, 2009.  Net loans charged off and provision for credit losses were $34.5 million and $42.1 million, respectively, for the first quarter of 2010 compared to $31.9 million and $45.0 million, respectively for the first quarter of 2009 and $35.0 million and $48.6 million for the fourth quarter of 2009.

·  
Nonperforming assets totaled $483 million or 4.36% of outstanding loans and repossessed assets at March 31, 2010, down from $484 million or 4.24% of outstanding loans and repossessed assets at December 31, 2009.  Nonaccruing loans increased $4.2 million and real estate and other repossessed assets decreased $7.1 million during the first quarter.

·  
Available for sale securities totaled $8.9 billion at March 31, 2010, up $32 million since December 31 due primarily to an increase in the fair value of the portfolio.  Other-than-temporary impairment charges on certain privately-issued residential mortgage backed securities reduced pre-tax income by $4.2 million during the first quarter of 2010, $15.0 million during the first quarter of 2009 and $14.5 million during the fourth quarter of 2009.

·  
Outstanding loan balances were $11.0 billion at March 31, 2010, down $308 million since December 31, 2009 largely due to reduced customer demand and normal repayment trends.  Unfunded loan commitments totaled $4.9 billion at March 31, 2010 and $5.0 billion at December 31, 2009.

·  
Total period-end deposits increased $9.3 million during the first quarter of 2010 to $15.5 billion.  Growth in interest-bearing transaction deposits was offset by a decrease in higher-costing time deposits and a seasonal decrease in demand deposits.

·  
Tangible common equity ratio increased to 8.46% at March 31, 2010 from 7.99% at December 31, 2009 largely due to retained earnings growth.  The tangible common equity ratio is a non-GAAP measure of capital strength used by the Company and investors based on shareholders’ equity as defined by generally accepted accounting principles in the United States of America minus intangible assets and equity that does not benefit common shareholders such as preferred equity and equity provided by the U.S. Treasury’s Troubled Asset Relief Program (“TARP”) Capital Purchase Program.  BOK Financial chose not to participate in the TARP Capital Purchase Program.  The Company’s Tier 1 capital ratios as defined by banking regulations were 11.45% at March 31, 2010 and 10.86% at December 31, 2009.

·  
The Company paid a cash dividend of $16.3 million or $0.24 per common share during the first quarter of 2010.  On April 27, 2010, the board of directors increased the quarterly cash dividend to $0.25 per common share payable on or about May 28, 2010 to shareholders of record as of May 14, 2010.


Results of Operations

Net Interest Revenue and Net Interest Margin

Net interest revenue totaled $182.6 million for the first quarter of 2010, up $12.7 million or 7% over the first quarter of 2009 and down $1.9 million compared to the fourth quarter of 2009.  The increase in net interest revenue over the first quarter of 2009 was due primarily to growth in average earning assets and a 21 basis point improvement in net interest margin.  The decrease in net interest revenue from the fourth quarter of 2009 was due to lower average earning assets.

Average earning assets for the first quarter of 2010 increased $394 million or 2% compared to the first quarter of 2009.  Average available for sale securities, which consist largely of U.S. government agency issued residential mortgage-backed securities, increased $2.2 billion.  We purchased these securities to supplement earnings, especially in a period of declining loan demand, and to manage interest rate risk.  Average loans, net of allowances for loan losses, decreased $1.6 billion compared to the first quarter of 2009.   All major loan categories decreased largely due to reduced customer demand and normal repayment trends.  In addition, average balances of trading securities and residential mortgage loans held for sale were lower in the first quarter of 2010.


 
4

 

Growth in average earning assets was funded by a $542 million increase in average deposits and a $104 million increase in average borrowed funds.  Average demand deposits for the first quarter of 2010 were up $621 million over the first quarter of 2009.  In addition, average interest-bearing transaction accounts increased $1.4 billion over the first quarter of 2009.  Average time deposits decreased $1.4 billion compared with the first quarter of 2009 as we continued to decrease brokered deposits and other higher costing time deposits.

Average earning assets for the first quarter of 2010 decreased $23 million compared to the fourth quarter of 2009.  Average securities increased $346 million.  Growth in average securities was due to purchases of additional U.S. government agency issued residential mortgage-backed securities in the fourth quarter of 2009 as well as increases in the fair value of securities held by the Company in the first quarter of 2010.   Average loans, net of allowance for loan losses, decreased $316 million.  Commercial, commercial real estate and consumer loan categories decreased in the first quarter of 2010.  Residential mortgage loans increased slightly over the fourth quarter of 2009.  Average deposits decreased $179 million compared with the fourth quarter of 2009, including a $230 million decrease in average time deposits and a $181 million decrease in average demand deposits offset by a $229 million increase in average interest-bearing transaction accounts.  Average borrowed funds increased $270 million from the fourth quarter of 2009.

Net interest margin was 3.68% for the first quarter of 2010, 3.47% for the first quarter of 2009 and 3.64% for the fourth quarter of 2009.

The cost of interest-bearing liabilities was 0.87% for the first quarter of 2010, down 63 basis points from the first quarter of 2009.  The cost of interest bearing deposits decreased 82 basis points to 0.94% and the cost of funds purchased and other borrowings decreased 19 basis points to 0.71%. The cost of interest-bearing liabilities for the first quarter of 2010 was also down 7 basis points from the fourth quarter of 2009.  The cost of interest-bearing deposits decreased 9 basis points and the cost of funds purchased and other borrowings decreased 1 basis point.

The tax-equivalent yield on earning assets was 4.41% for the first quarter of 2010, down 34 basis points from the first quarter of 2009.  Loan yields increased 25 basis points from the first quarter of 2009 to 4.81%.  Loan spreads continue to improve.  Growth in loan yields was offset by a 118 basis point decrease in securities portfolio yield.  Our securities re-price as cash flow received is reinvested at current market rates.  The resulting change in yield on the securities portfolio occurs more slowly and may not immediately move in the same direction as changes in market rates.  The tax-equivalent yield on earning assets for the first quarter of 2010 was down 1 basis point from the fourth quarter of 2009.  Yield on the securities portfolio dropped by 9 basis points while the yield on the loan portfolio increased by 7 basis points.  The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 14 basis points in the first quarter of 2010 compared with 22 basis points in the first quarter of 2009 and 16 basis points in the preceding quarter.

Our overall objective is to manage the Company’s balance sheet to be relatively neutral to changes in interest rates as is further described in the Market Risk section of this report.  Approximately two-thirds of our commercial and commercial real estate loan portfolios are either variable rate or fixed rate that will re-price within one year.  These loans are funded primarily by deposit accounts that are either non-interest bearing, or that re-price more slowly than the loans.  The result is a balance sheet that would be asset sensitive, which means that assets generally re-price more quickly than liabilities.  Among the strategies that we use to manage toward a relatively rate-neutral position, we purchase fixed-rate, residential mortgage-backed securities and fund them with market rate sensitive liabilities.  The liability-sensitive nature of this strategy provides an offset to the asset-sensitive characteristics of our loan portfolio.  We also use derivative instruments to manage our interest rate risk.  Interest rate swaps with a combined notional amount of $35 million convert fixed rate liabilities to floating rate based on LIBOR.  Net interest revenue increased $658 thousand in the first quarter of 2010, $584 thousand in the fourth quarter of 2009 and $4.7 million in the first quarter of 2009 from periodic settlements of these contracts.  This increase in net interest revenue contributed 1 basis point to net interest margin in the first quarter of 2010, 1 basis point in the fourth quarter of 2009 and 9 basis points in the first quarter of 2009.  Derivative contracts are carried on the balance sheet at fair value.  Changes in fair value of these contracts are reported in income as derivatives gains or losses in the Consolidated Statements of Earnings.


 
5

 

The effectiveness of these strategies is reflected in the overall change in net interest revenue due to changes in interest rates as shown in Table 1 and in the interest rate sensitivity projections as shown in the Market Risk section of this report.

Table 1 – Volume / Rate Analysis
     
(In thousands)
     
   
Three Months Ended
 
   
March 31, 2010 / 2009
 
 
       
Change Due To (1)
 
               
Yield /
 
   
Change
   
Volume
   
Rate
 
Tax-equivalent interest revenue:
                 
  Securities
  $ (1,693 )   $ 22,264     $ (23,957 )
  Trading securities
    (227 )     (415 )     188  
  Loans
    (11,604 )     (19,216 )     7,612  
  Funds sold and resell agreements
    (22 )     (8 )     (14 )
Total
    (13,546 )     2,625       (16,171 )
Interest expense:
                       
  Transaction deposits
    (5,282 )     2,439       (7,721 )
  Savings deposits
    69       10       59  
  Time deposits
    (19,097 )     (8,345 )     (10,752 )
  Federal funds purchased and repurchase agreements
    (803 )     12       (815 )
  Other borrowings
    (1,473 )     96       (1,569 )
  Subordinated debentures
          2       (2 )
Total
    (26,586 )     (5,786 )     (20,800 )
  Tax-equivalent net interest revenue
    13,040     $ 8,411     $ 4,629  
Change in tax-equivalent adjustment
    (311 )                
Net interest revenue
  $ 12,729                  
(1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.


 
6

 

Other Operating Revenue

Other operating revenue was $113.9 million for the first quarter of 2010 compared to $125.1 million for the first quarter of 2009.   Fees and commissions revenue decreased $6.2 million or 5% compared with the first quarter of 2009.  Net gains on securities, derivatives and other assets decreased $18.4 million.  Other-than-temporary impairment charges recognized in earnings were $10.8 million lower in the first quarter of 2010.

Other operating revenue increased $5.7 million compared to the fourth quarter of 2009.  Other-than-temporary impairment charges recognized in earnings were $10.3 million lower compared with the fourth quarter of 2009.  Fees and commissions revenue decreased $634 thousand and net gains on securities, derivatives and other assets decreased $3.9 million.

Table 2 – Other Operating Revenue 
                                   
(In thousands)
                                   
   
Three Months Ended
March 31,
   
Increase
   
% Increase
   
Three Months Ended
   
Increase
   
% Increase
 
   
2010
   
2009
   
(Decrease)
   
(Decrease)
   
Dec. 31, 2009
   
(Decrease)
   
(Decrease)
 
                                           
 Brokerage and trading revenue
  $ 21,035     $ 24,699     $ (3,664 )     (15 %)   $ 20,240     $ 795       4 %
 Transaction card revenue
    25,687       25,428       259       1 %     26,292       (605 )     (2 %)
 Trust fees and commissions
    16,320       16,510       (190 )     (1 %)     16,492       (172 )     (1 %)
 Deposit service charges and fees
    26,792       27,405       (613 )     (2 %)     29,501       (2,709 )     (9 %)
 Mortgage banking revenue
    14,871       18,498       (3,627 )     (20 %)     13,403       1,468       11 %
 Bank-owned life insurance
    2,972       2,317       655       28 %     2,870       102       4 %
 Margin asset fees
    36       67       (31 )     (46 %)     50       (14 )     (28 %)
 Other revenue
    7,602       6,583       1,019       15 %     7,101       501       7 %
   Total fees and commissions revenue
    115,315       121,507       (6,192 )     (5 %)     115,949       (634 )     (1 %)
Gain (loss) on other assets
    (1,390 )     143       (1,533 )     N/A       (205 )     (1,185 )     N/A  
Gain (loss) on derivatives, net
    (341 )     (1,664 )     (1,323 )     N/A       (370 )     29       N/A  
Gain on available for sale securities
    4,076       22,226       (18,150 )     N/A       11,717       (7,641 )     N/A  
Gain (loss) on mortgage hedge securities
    448       (2,118 )     2,566       N/A       (4,440 )     4,888       N/A  
Gain (loss) on securities, net
    4,524       20,108       (15,584 )     N/A       7,277       (2,753 )     N/A  
Total other-than-temporary impairment
    (9,708 )     (54,368 )     44,660       N/A       (67,390 )     57,682       N/A  
Portion of loss recognized in other
   comprehensive income
    (5,483 )     (39,366 )     33,883       N/A       (52,902 )     47,419       N/A  
Net impairment losses recognized in earnings
    (4,225 )     (15,002 )     10,777       N/A       (14,488 )     10,263       N/A  
     Total other operating revenue
  $ 113,883     $ 125,092     $ (11,209 )     (9 %)   $ 108,163     $ 5,720       5 %
                                                         
Gain (loss) on change in fair value
   of mortgage servicing rights
  $ 2,100 (1)   $ 1,955     $ 145       N/A     $ 5,285     $ (3,185 )     N/A  
(1)  Excludes $11.8 million of initial pretax gain on the purchase of mortgage servicing rights.

Certain percentage increases (decreases) in non-fees and commissions revenue are not meaningful for comparison purposes based on the nature of the item.

Fees and commissions revenue

Diversified sources of fees and commission revenue are a significant part of our business strategy and represented 39% of total revenue for the first quarter of 2010, excluding provision for credit losses and gains and losses on asset sales, securities and derivatives.  We believe that a variety of fee revenue sources provide an offset to changes in interest rates, values in the equity markets, commodity prices and consumer spending, all of which can be volatile.  We expect continued growth in other operating revenue through offering new products and services and by expanding into markets outside of Oklahoma.  However, current and future economic conditions, regulatory constraints, increased competition and saturation in our existing markets could affect the rate of future increases.

 
7

 


Brokerage and trading revenue decreased $3.7 million or 15% compared to the first quarter of 2009.  Securities trading revenue totaled $11.0 million for the first quarter of 2010, down $5.9 million or 35% compared to the first quarter of 2009.  Higher mortgage lending activity by our mortgage banking customers increased the level of our securities transactions in the first quarter 2009.  Customer activity was down in the first quarter of 2010.  Customer hedging revenue, totaled $3.3 million for the first quarter of 2010, up $2.2 million from the first quarter of 2009 on higher energy prices and interest rate volatility.  Retail brokerage revenue increased $843 thousand over the first quarter of 2009 to $5.7 million and investment banking revenue decreased $899 thousand compared to the first quarter of 2010 to $1.0 million.

Brokerage and trading revenue increased $795 thousand from the fourth quarter of 2009.  Increases in retail brokerage fees, derivative fee income and securities trading revenue were partially offset by a decrease in investment banking revenue.

Transaction card revenue depends largely on the volume and amount of transactions processed, the number of ATM locations and the number of merchants served.  Transaction card revenue totaled $25.7 million for the first quarter of 2010, up $259 thousand or 1% over the first quarter of 2009.  Check card revenue increased $768 thousand or 11%, partially offset by a decline in ATM network revenue of $588 thousand or 5% below the first quarter of 2009.  Merchant discounts also increased slightly over the prior year.  Transaction card revenue decreased $605 thousand compared with the fourth quarter of 2009, primarily due to lower ATM network revenue and merchant fees offset by higher check card revenue.

Trust fees and commissions decreased to $16.3 million in the first quarter of 2010 from $16.5 million in the first quarter of 2009.  The revenue decrease was due to lower balances in our proprietary mutual funds and the timing of tax service fees.  We continue to voluntarily waive administration fees on the Cavanal Hill money market funds in order to maintain positive yields on these funds in the current low short-term interest rate environment.  Waived fees total $951 thousand for the first quarter of 2010 and $926 thousand for the first quarter of 2009.  The fair value of trust assets administered by the Company totaled $30.7 billion compared to $30.4 billion at December 31, 2009 and $28.7 billion at March 31, 2009.  Trust fees and commissions also decreased $172 thousand from the fourth quarter of 2009.

Deposit service charges and fees decreased $613 thousand or 2% compared the first quarter of 2009.  Commercial account service charge revenue decreased $1.4 million or 15% to $7.7 million.  Overdraft fees increased $678 thousand or 4% to $17.1 million compared to the first quarter of 2009.  Customers kept greater commercial account balances which increased the earnings credit, a non-cash method for commercial customers to avoid incurring charges for deposit services based on account balances.  The increase in overdraft fees was primarily due to an 8% increase in the average per item fee charged which was implemented in the third quarter of 2009.  The per item charge increase was partially offset by a 1% decrease in transaction volumes.

Deposit service charges and fees decreased $2.7 million compared with the fourth quarter of 2009.  The decrease was primarily due to a $2.5 million seasonal decrease in overdraft fees and a $388 thousand decrease in commercial service charges.  Overdraft volumes historically are lower in the first quarter of each year.

Changes in Federal banking regulations which become effective July 1, 2010 are expected to significantly reduce overdraft fee revenue.  We currently project overdraft fees to decrease by $15 million to $20 million over the second half of 2010.  Management is exploring options to mitigate the anticipated revenue decrease.  However, the success of any option is uncertain.
 
 
Mortgage banking revenue decreased $3.6 million or 20% compared with the first quarter of 2009 and increased $1.5 million over the fourth quarter of 2009.  Revenue from originating and marketing mortgage loans decreased $7.4 million compared to the first quarter of 2009 and $1.5 million compared to the fourth quarter of 2009.  Mortgage loans originated for sale in the secondary market totaled $382 million for the first quarter of 2010, $560 million in the fourth quarter of 2009 and $709 million for the first quarter of 2009.  Mortgage servicing revenue totaled $8.3 million, up $3.8 million or 82% over the first quarter of 2009 and $2.9 million over the fourth quarter of 2009.  The outstanding principal balance of mortgage loans serviced for others totaled $10.9 billion at March 31, 2010, $6.6 billion at December 31, 2009 and $5.5 billion at March 31, 2009.  Mortgage servicing revenue for the first quarter of 2010 included $2.0 million from the purchase of the rights to service approximately $4.2 billion of residential mortgage loans on January 22, 2010.

 
8

 

Net gains on securities, derivatives and other assets

Mortgage hedge securities held as an economic hedge of the changes in fair value of mortgage servicing rights are carried at fair value.  Changes in fair value of these securities are recognized in earnings as they occur.  For the first quarter of 2010 our mortgage hedge securities experienced gains of $448 thousand.  The fair value of our mortgage servicing rights experienced a gain of $2.1 million, excluding the impact of the $11.8 million initial gain on the purchase of mortgage servicing rights during the first quarter of 2010.

We recognized $4.1 million of gains on sales of $286 million of available for sale securities in the first quarter of 2010.  Securities were sold either because they had reached their expected maximum potential return or to mitigate exposure from rising interest rates.

As more fully discussed in Note 2 to the Consolidated Financial Statements, we recognized an other-than-temporary impairment loss on certain private-label residential mortgage-backed securities of $4.2 million in earnings during the first quarter of 2010 related to additional declines in projected cash flows as a result of worsening trends in delinquencies and foreclosures.

Net gains or losses on derivatives consist of fair value adjustments of all derivatives used to manage interest rate risk and certain liabilities we have elected to carry at fair value.  Derivative instruments generally consist of interest rate swaps where we pay a variable rate based on LIBOR and receive a fixed rate.  The fair value of these swaps generally decrease in value resulting in a loss to the Company as interest rate rise and increase in value resulting in a gain to the Company as interest rates fall.  Certain certificates of deposit have been designated as reported at fair value.  This determination is made when the certificates of deposit are issued based on our intent to swap the interest rate on the certificates from a fixed rate to a LIBOR-based variable rate.  As interest rates fall, the fair value of these fixed-rate certificates of deposit generally increases and we recognize a loss.  Conversely, as interest rates rise, the fair value of these fixed-rate certificates of deposit generally decreases and we recognize a gain.

Other Operating Expense

Other operating expense for the first quarter of 2010 totaled $163.7 million, down $2.1 million or 1% compared to the first quarter of 2009.  Personnel expenses increased $4.2 million or 5% compared with the first quarter of 2009 and non-personnel expenses, excluding the changes in the fair value of mortgage servicing rights, increased $5.7 million or 8% over the first quarter of 2009 primarily due to higher net losses and operating expenses related to repossessed assets and mortgage banking expenses, partially offset by decreases in most other operating expense categories.

Other operating expenses decreased $12.7 million compared to the fourth quarter of 2009.  Personnel expenses increased $3.1 million primarily due to seasonal increases in payroll taxes.  Non-personnel expenses, excluding the changes in the fair value of mortgage servicing rights, decreased $7.2 million.  Most operating expense categories were down from the previous quarter, partially offset by a $2.1 million increase in net losses and operating expenses of repossessed assets over the fourth quarter of 2009.

During the first quarter of 2010, the Company purchased the rights to service more than 34 thousand residential mortgage loans with unpaid principal balances of $4.2 billion.  The loans to be serviced are primarily concentrated in the New Mexico market and predominately held by Fannie Mae, Freddie Mac and Ginnie Mae.  The cash purchase price for these servicing rights was approximately $32 million.  The day-one fair value of the servicing rights purchased, based on independent valuation analyses, which were further supported by assumptions and models we regularly use to value our portfolio of servicing rights, was $11.8 million higher than the purchase price.  This amount is included in the change in fair value of mortgage servicing rights for the first quarter of 2010.  The discounted purchase price can be directly attributed to the distressed financial condition of the seller, which was subsequently closed by federal banking regulators.

 
9

 


Table 3 – Other Operating Expense
                                     
(In thousands)
                                         
   
Three Months
         
%
               
%
 
   
Ended March 31,
   
Increase
   
Increase
   
Dec. 31,
   
Increase
   
Increase
 
   
2010
   
2009
   
(Decrease)
   
(Decrease)
   
2009
   
(Decrease)
   
(Decrease)
 
                                           
 Regular compensation
  $ 57,760     $ 54,976     $ 2,784       5 %   $ 59,122     $ (1,362 )     (2 %)
 Incentive compensation:
                                                       
 Cash-based
    18,677       20,586       (1,909 )     (9 )%     18,734       (57 )  
%
 
 Stock-based
    4,484       1,409       3,075       N/A       2,912       1,572       N/A  
 Total incentive compensation
    23,161       21,995       1,166       5 %     21,646       1,515       7 %
 Employee benefits
    15,903       15,656       247       2 %     12,919       2,984       23 %
 Total personnel expense
    96,824       92,627       4,197       5 %     93,687       3,137       3 %
 Business promotion
    3,978       4,428       (450 )     (10 %)     5,758       (1,780 )     (31 %)
 Professional fees and services
    6,401       6,512       (111 )     (2 %)     8,813       (2,412 )     (27 %)
 Net occupancy and equipment
    15,511       16,258       (747 )     (5 %)     17,600       (2,089 )     (12 %)
 Insurance
    6,533       5,638       895       16 %     6,412       121       2 %
 Data processing & communications
    20,309       19,306       1,003       5 %     21,121       (812 )     (4 )%
 Printing, postage and supplies
    3,322       4,571       (1,249 )     (27 %)     3,601       (279 )     (8 %)
 Net losses & operating expenses
                                                       
    of repossessed assets
    7,220       1,806       5,414       N/A       5,101       2,119       N/A  
 Amortization of intangible assets
    1,324       1,686       (362 )     (21 %)     1,912       (588 )     (31 %)
 Mortgage banking costs
    9,267       7,467       1,800       24 %     11,436       (2,169 )     (19 %)
 Change in fair value of
                                                       
    mortgage servicing rights
    (13,932 )     (1,955 )     (11,977 )     N/A       (5,285 )     (8,647 )     N/A  
 Other expense
    6,975       7,450       (475 )     (7 %)     6,281       694       11 %
 Total other operating expense
  $ 163,732     $ 165,794     $ (2,062 )     (1 %)   $ 176,437     $ (12,705 )     (7 %)
                                                         
 Number of employees
                                                       
 (full-time equivalent)
    4,425       4,458       (33 )     (1 %)     4,355       70       2 %
Certain percentage increases (decreases) are not meaningful for comparison purposes.

 
10

 


Personnel expense

Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs increased $2.8 million or 5% over the first quarter of 2009 primarily due to head count and standard annual merit increases which were effective in the second quarter of 2009.  The Company generally awards annual merit increases effective April 1st for a majority of its staff.

Incentive compensation increased $1.2 million or 5% compared to the first quarter of 2009.  Cash-based incentive compensation plans are either intended to provide current rewards to employees who generate long-term business opportunities to the Company based on growth in loans, deposits, customer relationships and other measurable metrics or intended to compensate employees with commissions on completed transactions.  The $1.9 million decrease in cash-based incentive compensation from the first quarter of 2009 included a $1.1 million decrease in commissions related to brokerage and trading revenue.

The Company also provides stock-based incentive compensation plans.  Stock-based compensation plans include both equity and liability awards.  Compensation expense related to liability awards increased $2.5 million compared with the first quarter of 2009 due to changes in the market value of BOK Financial common stock and other investments.  The market value of BOK Financial common stock increased $4.91 per share in the first quarter of 2010 and decreased $5.90 per share in the first quarter of 2009.  Compensation expense for equity awards increased $574 thousand compared with the first quarter of 2009.  Expense for equity awards is based on the grant-date fair value of the awards and is unaffected by subsequent changes in fair value.

Employee benefit expense increased $247 thousand or 2% over the first quarter of 2009 primarily due to increased expenses related to medical insurance costs and employee retirement plans, partially offset by decreased employee training expenses and other benefits costs.  Medical insurance costs were up $632 thousand or 14%.  The Company self-insures a portion of its employee health care coverage and these costs may be volatile.

Personnel expense increased $3.1 million compared with the fourth quarter of 2009 primarily due to increased employee benefit expenses related to a seasonal increase in payroll taxes.  Incentive compensation increased $1.5 million, mostly offset by a $1.4 million decrease in regular compensation.  Stock-based compensation increased in the first quarter primarily due to changes in the market value of BOK Financial common stock and other investments during the first quarter of 2010.

Non-personnel operating expenses

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, increased $5.7 million compared to the first quarter of 2009 primarily due to higher net losses and operating expenses related to repossessed assets and mortgage banking costs, partially offset by decreases in most other operating expense categories.  Net losses and operating expenses of repossessed assets increased $5.4 million over the prior year and mortgage banking costs increased $1.8 million over the prior.  Net losses from sales and write-downs of repossessed property increased $3.8 million compared to the first quarter of 2009.  Operating expenses on repossessed assets increased $1.7 million over the prior year.

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, decreased $7.2 million compared to the fourth quarter of 2009.  Reduced operating expenses in most categories were partially offset by higher net losses and operating expense related to repossessed assets.  Net losses from sales and write-downs of repossessed property increased $2.6 million during the first quarter of 2010.  Operating expenses on repossessed assets were down $439 thousand from the prior quarter.

Income Taxes

Income tax expense was $30.3 million or 33% of book taxable income for the first quarter of 2010 compared with $28.8 million or 34% of book taxable income for the first quarter of 2009 and $24.8 million or 37% of book taxable income for the fourth quarter of 2009.

 
11

 


BOK Financial operates in numerous jurisdictions, which requires judgment regarding the allocation of income, expense and earnings under various laws and regulations of each of these taxing jurisdictions.  Each jurisdiction may audit our tax returns and may take different positions with respect to these allocations.  The reserve for uncertain tax positions was approximately $12 million at March 31, 2010 and was largely unchanged from December 31, 2009.
 
 

Lines of Business

We operate three principal lines of business: commercial banking, consumer banking and wealth management.  Commercial banking includes lending, treasury and cash management services and customer risk management products to small businesses, middle market and larger commercial customers.  Commercial banking also includes the TransFund network.  Consumer banking includes retail lending and deposit services and all mortgage banking activities. Wealth management provides fiduciary services, brokerage and trading, private bank services and investment advisory services in all markets.  Wealth management also originates loans for high net worth clients.

In addition to our lines of business, we have a funds management unit.  The primary purpose of this unit is to manage our overall liquidity needs and interest rate risk. Each line of business borrows funds from and provides funds to the funds management unit as needed to support their operations.  Operating results for funds management and other include the effect of interest rate risk positions and risk management activities, securities gains and losses including impairment charges, the provision for credit losses in excess of net loans charged off, tax planning strategies and certain executive compensation costs that are not attributed to the lines of business.

We allocate resources and evaluate the performance of our lines of business after allocation of funds, certain indirect expenses, taxes based on statutory rates, actual net credit losses and capital costs. The cost of funds borrowed from the funds management unit by the operating lines of business is transfer priced at rates that approximate market for funds with similar duration.  Market is generally based on the applicable LIBOR or interest rate swap rates, adjusted for prepayment risk.  This method of transfer-pricing funds that support assets of the operating lines of business tends to insulate them from interest rate risk.

The value of funds provided by the operating lines of business to the funds management unit is based on applicable Federal Home Loan Bank advance rates.  Deposit accounts with indeterminate maturities, such as demand deposit accounts and interest-bearing transaction accounts, are transfer-priced at a rolling average based on expected duration of the accounts.  The expected duration ranges from 30 days for certain rate-sensitive deposits to five years.

Economic capital is assigned to the business units by a capital allocation model that reflects management’s assessment of risk.  This model assigns capital based upon credit, operating, interest rate and market risk inherent in our business lines and recognizes the diversification benefits among the units.  The level of assigned economic capital is a combination of the risk taken by each business line, based on its actual exposures and calibrated to its own loss history where possible.  Average invested capital includes economic capital and amounts we have invested in the lines of business.

As shown in Table 4, net income attributable to our lines of business decreased $812 thousand from compared with the first quarter of 2009.  Excluding the day-one gain from the purchase of mortgage servicing rights on favorable terms, net income attributed to our lines of business was down $4.7 million or 9% compared to the first quarter of 2009.  The gain on mortgage servicing rights was attributed to the consumer banking line of business in the Oklahoma geographic market.    The decrease in net income attributed to our lines of business was due primarily to credit losses attributed to the business units and decreased transfer pricing credit provided to business units in the first quarter of 2010 compared to the first quarter of 2009.  Lower interest rates decrease the transfer pricing credit provided to business units that generate lower-costing funds for the Company.  In addition, net interest revenue in the business units was reduced by a decrease in average loan balances.  The increase in net income attributed to funds management and other was primarily due to growth in the securities portfolio, lower other-than-temporary impairment charges against earnings and a decrease in loan loss provision.


 
12

 


Table 4 – Net Income by Line of Business
     
(In thousands)
     
   
Three Months Ended March 31,
 
   
2010
   
2009
 
Commercial banking
  $ 11,436     $ 16,612  
Consumer banking
    16,155       9,397  
Wealth management
    3,118       5,512  
Subtotal
    30,709       31,521  
Funds management and other
    29,424       23,511  
Total
  $ 60,133     $ 55,032  


Commercial Banking

Commercial banking contributed $11.4 million to consolidated net income in the first quarter of 2010, down from $16.6 million in the first quarter of 2009.  The decrease in commercial banking net income was primarily due to a $4.0 million increase in net loans charged off and a $3.8 million increase in losses on repossessed assets.  Operating revenues decreased $3.6 million compared to the prior year, offset by a $3.6 million decrease in operating expenses.


Table 5 – Commercial Banking
           
(Dollars in thousands)
           
   
Three Months Ended
March 31,
   
Increase
 
   
2010
   
2009
   
(Decrease)
 
                   
NIR (expense) from external sources
  $ 84,795     $ 85,599     $ (804 )
NIR (expense) from internal sources
    (12,461 )     (12,699 )     238  
                         
Total net interest revenue
    72,334       72,900       (566 )
                         
Other operating revenue
    29,819       33,424       (3,605 )
Operating expense
    50,034       53,593       (3,559 )
Net loans charged off
    28,379       24,359       4,020  
Gain on financial instruments, net
    -       -       -  
Gain (loss) on repossessed
                       
   assets, net
    (5,023 )     (1,184 )     (3,839 )
Income before taxes
    18,717       27,188       (8,471 )
Federal and state income tax
    7,281       10,576       (3,295 )
                         
Net income
  $ 11,436     $ 16,612     $ (5,176 )
                         
Average assets
  $ 9,183,180     $ 10,753,951     $ (1,570,771 )
Average loans
    8,374,205       9,801,898       (1,427,693 )
Average deposits
    5,689,176       4,749,073       940,103  
Average invested capital
    997,066       1,052,766       (55,700 )
Return on average assets
    0.51 %     0.63 %  
(12) b.p.
 
Return on invested capital
    4.65 %     6.40 %  
(175) b.p.
 
Efficiency ratio
    48.98 %     50.41 %  
(143) b.p.
 
Net charge-offs (annualized) to average loans
    1.37 %     1.01 %  
 36 b.p.
 



 
13

 

Net interest revenue decreased $566 thousand or 1% compared to the first quarter of 2009.  Average loan balances attributed to commercial banking decreased $1.4 billion due to reduced customer demand and normal repayment trends, which decreased net interest revenue by $8.0 million.  This was offset by an $8.9 million improvement in loan spreads on loans attributable to commercial banking.  The decreased internal transfer pricing credit provided to the commercial banking unit on $5.7 billion of average deposits sold to the funds management unit reduced net interest revenue by approximately $1.9 million as deposit spreads compressed due to lower interest rates in the first quarter of 2010 compared to the first quarter of 2009.

Other operating revenue declined $3.6 million compared to first quarter of 2009.  Service charges on commercial deposit accounts were down $1.4 million compared to the first quarter of 2009 as customers kept greater commercial deposit balances to offset the decrease in the earnings credit, which provides a non-cash method for commercial customers to avoid incurring charges for deposit services based on account balance.  During the first quarter of 2010, the Company recognized a $1.6 million loss on the sale of an alternative investment.

Operating expenses were down $3.6 million or 7% compared to the first quarter of 2009.  Costs allocated to the commercial banking segment were down $5.8 million primarily on reduced lending activities.   This was partially offset by a $1.5 million increase in repossession expenses and $807 thousand of increased data processing costs.  Average repossessed asset balances increased $87 million over the first quarter of 2009.

The average outstanding balance of loans attributed to commercial banking was $8.4 billion for the first quarter of 2010, down $1.4 billion or 15% compared to the first quarter of 2009.  See Loan section following for additional discussion of changes in commercial and commercial real estate loans which are primarily attributed to the commercial banking segment.  Net commercial banking loans charged off increased $4.0 million over the first quarter of 2009 to $28 million or 1.37% of average loans attributed to this line of business on an annualized basis.  The increase in net loans charged off was primarily due to increased losses on commercial real estate loans.
 
 
Average deposits attributed to commercial banking were $5.7 billion for the first quarter of 2010, up $940 million or 20% over the first quarter of 2009.  Average deposit balances attributed to our commercial & industrial customers increased $477 million or 50% and average balances attributed to our energy customers increased $232 million or 57%.  Average treasury services deposit balances increased $103 million or 8%.  Average deposits attributable to our commercial real estate customers increased $54 million or 25% and average deposit balances attributable to our small business customers increased $36 million or 2% over the first quarter of 2009.

Consumer Banking

Consumer banking services are provided through four primary distribution channels:  traditional branches, supermarket branches, the 24-hour ExpressBank call center and online internet banking.

Consumer banking contributed $16.2 million to consolidated net income for the first quarter of 2010, up $6.8 million compared to the first quarter of 2009 largely due to the $6.5 million day-one gain from the purchase of rights to service $4.2 billion of residential mortgage loans on favorable terms.


 
14

 


Table 6 – Consumer Banking
           
(Dollars in thousands)
           
   
Three Months Ended
March 31,
   
Increase
 
 
 
2010
   
2009
   
(Decrease)
 
NIR (expense) from external sources
  $ 19,589     $ 12,322     $ 7,267  
NIR (expense) from internal sources
    11,860       24,962       (13,102 )
                         
Total net interest revenue
    31,449       37,284       (5,835 )
                         
Other operating revenue
    43,243       45,286       (2,043 )
Operating expense
    58,663       61,629       (2,966 )
Net loans charged off
    3,333       5,584       (2,251 )
Increase in fair value of mortgage service
                       
   rights
    13,932       1,955       11,977  
Gain (loss) on financial instruments, net
    (211 )     (2,118 )     1,907  
Gain on repossessed assets, net
    24       186       (162 )
Income before taxes
    26,441       15,380       11,061  
Federal and state income tax
    10,286       5,983       4,303  
                         
Net income
  $ 16,155     $ 9,397     $ 6,758  
                         
Average assets
  $ 6,159,497     $ 6,042,031     $ 117,466  
Average loans
    2,145,468       2,636,415       (490,947 )
Average deposits
    6,064,778       5,945,973       118,805  
Average invested capital
    224,935       242,102       (17,167 )
Return on average assets
    1.06 %     0.63 %  
43 b.p.
 
Return on invested capital
    29.13 %     15.74 %  
1,339 b.p.
 

Efficiency ratio
    78.54 %     74.64 %  
390 b.p.
 
Net charge-offs (annualized) to average loans
    0.63 %     0.86 %  
(23) b.p.
 
Mortgage loans funded for resale
  $ 382,028     $ 708,561     $ (326,533 )


   
March 31, 2010
   
March 31, 2009
   
Increase
(Decrease)
 
Branch locations
    198       197       1  
Mortgage loan serviced for others
  $ 10,895,182     $ 5,515,893     $ 5,379,289  

Net interest revenue from consumer banking activities decreased $5.8 million or 16% from the first quarter of 2009.  Average earning assets were flat compared to the first quarter of 2009, decreasing only $23 million.  Net interest revenue decreased $3.3 million related to lower internal transfer pricing credit provided to the consumer banking segment for deposits sold to our funds management unit and $1.9 million due to a $491 million decrease in average loan balances attributed to the consumer banking division.

Other operating revenue decreased $2.0 million or 5% compared to the first quarter of 2009 primarily due a decrease in mortgage banking revenue of $3.6 million.  Mortgage lending volumes have declined from their historic highs in the first quarter of 2009.  Transaction card revenue increased $808 thousand or 5% over the first quarter of 2009 and deposit service charges were up $701 thousand or 9% over the first quarter of 2009.

Operating expenses decreased $3.0 million or 5% compared to the first quarter of 2009, primarily due to a $4.5 million decrease in corporate expenses allocated to the consumer banking division, partially offset by a $1.6 million increase in mortgage banking expenses due to the acquisition of mortgage servicing rights during the first quarter of 2010.


 
15

 

Net loans charged off by the consumer banking unit totaled $3.3 million in the first quarter of 2010 down from $5.3 million in the first quarter of 2009.  Net consumer banking charge-offs include residential mortgage loans, indirect automobile loans, overdrawn deposit accounts and other direct consumer loans.

Average consumer deposits increased $119 million or 2% over the first quarter of 2009.  Average interest-bearing transaction accounts were up $425 million or 19% and average demand deposit accounts increased $14 million or 2% over the first quarter of 2009.  Average time deposits decreased $331 million or 12% compared to the first quarter of 2009.  Movement of funds among the various types of consumer deposits was largely based on interest rates and product features offered.

Our Consumer Banking division originates, markets and services conventional and government-sponsored mortgage loans for all of our geographical markets.  During the first quarter of 2010, $382 million of mortgage loans were funded compared with $709 million funded in the first quarter of 2009.  Approximately 48% of our mortgage loans funded were in the Oklahoma market, 15% in the Texas market and 14% in the Colorado market.  In addition to the $10.9 billion of mortgage loans serviced for others, the Consumer banking division also services $783 million of loans for affiliated entities.  Approximately 96% of the mortgage loans serviced were to borrowers in our primary geographical market areas.  Mortgage servicing revenue increased to $8.3 million in the first quarter of 2010 from $4.6 million in the first quarter of 2009, primarily due to mortgage servicing rights purchased in the first quarter of 2010.

Excluding the $11.8 million pre-tax day-one gain on the purchase of mortgage servicing rights during the first quarter, changes in fair value of our mortgage loan servicing rights, net of economic hedge, increased consumer banking net income by $1.2 million in the first quarter of 2010 compared with a decrease in net income of $100 thousand in the first quarter of 2009.  Changes in the fair value of mortgage servicing rights and securities held as an economic hedge are due to movements in interest rates, actual and anticipated loan prepayment speeds and related factors.

Wealth Management

Wealth Management contributed consolidated net income of $3.1 million in the first quarter of 2010 compared to $5.5 million in the first quarter of 2009. The decrease in net income was primarily due a market driven decline in brokerage and trading revenue.


 
16

 


Table 7 – Wealth Management
           
(Dollars in thousands)
           
   
Three Months Ended
March 31,
   
Increase
 
   
2010
   
2009
   
(Decrease)
 
NIR (expense) from external sources
  $ 8,600     $ 3,856     $ 4,744  
NIR (expense) from internal sources
    3,021       7,602       (4,581 )
                         
Total net interest revenue
    11,620       11,458       162  
                         
Other operating revenue
    37,320       41,273       (3,953 )
Operating expense
    41,072       41,781       (709 )
Net loans charged off
    2,765       1,929       836  
Loss on financial instruments, net
    -       -       -  
Income before taxes
    5,103       9,021       (3,918 )
Federal and state income tax
    1,985       3,509       (1,524 )
                         
Net income
  $ 3,118     $ 5,512     $ (2,394 )
                         
Average assets
  $ 3,288,173     $ 3,006,169     $ 282,004  
Average loans
    1,085,092       1,027,529       57,563  
Average deposits
    3,209,866       2,929,117       280,749  
Average invested capital
    202,330       192,700       9,630  
Return on assets
    0.38 %     0.74 %  
(36) b.p.
 
Return on invested capital
    6.25 %     11.60 %  
(535) b.p.
 
Efficiency ratio
    83.92 %     79.23 %  
469 b.p.
 
Net charge-offs (annualized) to average loans
    1.03 %     0.76 %  
27 b.p.
 

   
March 31, 2010
   
March 31, 2009
   
Increase
(Decrease)
 
Trust assets
  $ 30,739,254     $ 28,700,791     $ 2,038,463  

Net interest revenue for the first quarter of 2010 was up $162 thousand or 1% compared to the first quarter of 2009.  Net interest revenue decreased $1.5 million due to lower internal transfer pricing credit provided to the wealth management segment for deposits sold to our funds management unit, partially offset by an $840 thousand increase in net interest revenue due to a $281 million increase in average deposits.  In addition, net interest revenue increased due to increases in average loans attributable to the wealth management division and improved loan spreads and fees.

Other operating revenue decreased $4.0 million compared to the first quarter of 2009 primarily due to decreased trading and brokerage fees.

Operating expenses decreased $709 thousand compared to the first quarter of 2009 primarily due to a $1.1 million decrease in commissions related to brokerage and trading revenue.  All other operating expenses were flat compared to the first quarter of 2009.

Growth in average assets was largely due to funds sold to the funds management unit.  Funds provided by wealth management deposits, which are largely sold to the funds management unit, increased primarily due to an increase in interest bearing transaction accounts and demand deposits, offset by a decrease in higher costing time deposits.    The continued growth in wealth management deposits reflect continued movement of customer funds from managed money market products that were not on the Company’s balance sheet to deposits as well as high net worth customer relationship growth.  Average deposits provided by the wealth management division in the first quarter of 2010 increased $281 million compared with the first quarter of 2009.  Interest-bearing transaction accounts averaged $2.2 billion for the first quarter of 2010, an increase of $385 million or 21% over the first quarter of 2009.  Average time deposits were $704 million, down $153 million or 18% compared to last year.


 
17

 

At March 31, 2010 and 2009, the Wealth Management line of business was responsible for trust assets with aggregate market values of $30.7 billion and $28.7 billion, respectively, under various fiduciary arrangements.  We have sole or joint discretionary authority over $10.7 billion of trust assets at March 31, 2010 compared to $11.0 billion of trust assets at March 31, 2009.  The fair value of non-managed assets totaled $12.7 billion at March 31, 2010 and $10.2 billion at March 31, 2009.  The fair value of assets held in safekeeping totaled $7.3 billion at March 31, 2010 and $7.6 billion at March 31, 2009.


Geographical Market Distribution

The Company also secondarily evaluates performance by primary geographical market.  Loans are generally attributed to geographical markets based on the location of the customer and may not reflect the location of the underlying collateral.  Brokered deposits and other wholesale funds are not attributed to a geographical market.  Funds management and other also includes insignificant results of operations in locations outside our primary geographic regions.


Table 8 – Net Income by Geographic Region
     
(In thousands)
     
   
Three Months Ended March 31,
 
   
2010
   
2009
 
Oklahoma
  $ 31,357     $ 24,868  
Texas
    5,484       6,888  
New Mexico
    277       2,606  
Arkansas
    318       3,705  
Colorado
    1,103       (1,884 )
Arizona
    (8,277 )     (6,455 )
Kansas / Missouri
    715       1,736  
Subtotal
    30,977       31,464  
Funds management and other
    29,156       23,568  
Total
  $ 60,133     $ 55,032  

 
18

 

Oklahoma Market

Oklahoma is a significant market to the Company.  Our Oklahoma offices are located primarily in the Tulsa and Oklahoma City metropolitan areas.  Approximately 50% of our average loans, 54% of our average deposits and 52% of our consolidated net income is attributed to the Oklahoma market.  In addition, all of our mortgage servicing activity and 76% of our trust assets are attributed to the Oklahoma market.


Table 9 – Oklahoma
           
(Dollars in thousands)
           
   
Three Months Ended
March 31,
   
Increase
 
 
 
2010
   
2009
   
(Decrease)
 
                   
Net interest revenue
  $ 58,777     $ 61,746     $ (2,969 )
                         
Other operating revenue
    70,753       75,994       (5,241 )
Operating expense
    81,917       90,740       (8,823 )
Net loans charged off
    10,583       6,323       4,260  
Increase (decrease) in fair value of
                       
   mortgage service rights
    13,932       1,955       11,977  
Gain (loss) on financial instruments, net
    (211 )     (2,118 )     1,907  
Gain on repossessed assets, net
    570       186       384  
Income before taxes
    51,321       40,700       10,621  
Federal and state income tax
    19,964       15,832       4,132  
                         
Net income
  $ 31,357     $ 24,868     $ 6,489  
                         
Average assets
  $ 9,252,626     $ 8,785,895     $ 466,731  
Average loans
    5,546,203       6,479,048       (932,845 )
Average deposits
    8,323,646       7,565,817       757,829  
Average invested capital
    706,225       769,642       (63,417 )
Return on average assets
    1.37 %     1.15 %  
22 b.p.
 
Return on invested capital
    18.01 %     13.10 %  
491 b.p.
 
Efficiency ratio
    63.24 %     65.88 %  
(264) b.p.
 
Net charge-offs (annualized) to average loans
    0.77 %     0.40 %  
37 b.p
 

Net income generated in the Oklahoma market in the first quarter of 2010 increased $6.5 million or 26% over the first quarter of 2009.   Excluding the $11.8 million pre-tax day-one gain on the purchase of mortgage servicing rights during the first quarter, net income generated in the Oklahoma market would have been flat with the first quarter of 2009.

Net interest revenue decreased $3.0 million or 5% compared to the first quarter of 2009 due to a $933 million decrease in average loans, offset by improving interest spreads on loans.  The benefit to net interest revenue from average deposit growth of $758 million over the first quarter of 2009 was offset by lower internal funds transfer credit provided for deposits sold to the funds management unit.
 
Other operating revenue decreased $5.2 million or 7% compared to the first quarter of 2009.  Brokerage and trading revenue decreased $3.0 million from the first quarter of 2009.  Transaction card revenue decreased $1.9 million partially offset by a $1.8 million increase in deposit service charges and fees.

Net loans charged off totaled $10.6 million or 0.77% of average loans on an annualized basis for first quarter of 2010 compared with $6.3 million or 0.40% of average loans on an annualized basis for the first quarter of 2009.

 
 

19
 

Average deposits in the Oklahoma market for the first quarter of 2010 increased $758 million over the first quarter of 2009.  The increase came primarily from the commercial and wealth management units, including trust, broker/dealer and private banking.  The increase was partially offset by a decrease in deposits attributable to consumer banking.

Texas Market

Texas is our second largest market.  Our Texas offices are located primarily in the Dallas, Fort Worth and Houston metropolitan areas.  Approximately 30% of our average loans, 24% of our average deposits and 9% of our consolidated net income is attributed to the Texas market.


Table 10 – Texas
           
(Dollars in thousands)
           
   
Three Months Ended
March 31,
   
Increase
 
 
 
2010
   
2009
   
(Decrease)
 
                   
Net interest revenue
  $ 32,802     $ 34,822     $ (2,020 )
                         
Other operating revenue
    14,585       13,328       1,257  
Operating expense
    31,970       31,951       19  
Net loans charged off
    6,424       5,444       980  
Gain (loss) on repossessed assets, net
    (425 )     7       (432 )
Income before taxes
    8,568       10,762       (2,194 )
Federal and state income tax
    3,084       3,874       (790 )
                         
Net income
  $ 5,484     $ 6,888     $ (1,404 )
                         
Average assets
  $ 4,328,279     $ 4,130,024     $ 198,255  
Average loans
    3,334,355       3,841,867       (507,512 )
Average deposits
    3,747,669       3,392,970       354,699  
Average invested capital
    534,353       535,051       (698 )
Return on average assets
    0.51 %     0.68 %  
(17) b.p.
 
Return on invested capital
    4.16 %     5.22 %  
(106) b.p.
 
Efficiency ratio
    67.47 %     66.36 %  
111 b.p.
 
Net charge-offs (annualized) to average loans
    0.78 %     0.57 %  
21 b.p.
 

Net income in the Texas market decreased $1.4 million compared to the first quarter of 2009 primarily due to decreased net interest revenue and increased net loans charged off.

Net interest revenue decreased $2.0 million or 6% compared to the first quarter of 2009.  Average outstanding loans decreased $508 million or 13% compared to the first quarter of 2009.  Average deposits increased $355 million or 10%.  The benefit of an increase in average deposits was offset by the average decrease in loans and reduced the benefit from funds sold to the funds management unit.

Other operating revenue increased $1.3 million or 9% over the first quarter of 2009 primarily due to an increase in trading and brokerage fees, transaction card revenue and trust fees, partially offset by a decrease in mortgage banking revenue.  Operating expenses were flat with the first quarter of 2009.  Higher personnel costs were offset with a decrease in corporate expenses allocated to the Texas market.

Net loans charged off totaled $6.4 million or 0.78% of average loans for the first quarter of 2010 on an annualized basis and $5.4 million or 0.57% of average loans for the first quarter of 2009 on an annualized basis.


 
20

 

Other Markets

For the first quarter of 2010, net income attributable to our New Mexico market decreased $2.3 million compared to the first quarter of 2009 to $277 thousand or less than 1% of consolidated net income.  The decrease in net income attributed to New Mexico resulted primarily from a $2.3 million increase in net loan charged off.  Although we attribute all mortgage servicing to the Oklahoma market, the purchase of the rights to service $4.2 billion of residential mortgage loans in the first quarter of 2010 give us the ability to further develop relationships with approximately 34 thousand additional customers, primarily located in the New Mexico market.

For the first quarter of 2010, net income in the Arkansas market decreased to $3.4 million from $3.7 million in the first quarter of 2009 primarily due to a decrease in brokerage and trading revenue and an increase in net loans charged off.  Average deposits in our Arkansas market were up $40 million or 29% over the first quarter of 2009 due primarily to commercial banking deposits.  Wealth management and consumer deposits also increased over the first quarter of 2009.

For the first quarter of 2010, net income in the Colorado market increased $3.0 million from a net loss of in the first quarter of 2009.  Net loans charged off decreased $5.4 million from the first quarter of 2009 to $2.6 million or 1.32% of average loan on an annualized basis.  Approximately $6.7 million of loans charged off in the first quarter of 2009 were to two borrowers, one in the communications media industry and one in financial services.  Average outstanding loan balances were down $161 million or 16% due primarily to commercial loans.

We incurred a net loss of $8.3 million in the Arizona market in the first quarter of 2010 compared with a net loss of $6.5 million in the first quarter of 2009.  The loss was largely due to a $3.0 million increase in losses on repossessed assets, primarily composed of commercial real estate.  Net loans charged off were flat with the prior year at $10.1 million or 7.98% of average loans on an annualized basis compared with $10.1 million or 6.96% of average loans on an annualized basis in the first quarter of 2009.   Average deposits increased $53 million over the first quarter of 2009 and average loans decreased $74 million compared to the prior year.

Consistent with plans when we first acquired Valley Commerce Bank in Phoenix in 2005, our objective is to focus on growth in commercial and small business lending in the Arizona market.  We expanded our commercial lending staff in this market and opened three new banking locations during 2009.  We have significantly scaled back commercial real estate lending activities which were not contemplated in our initial expansion into this market and exited the Tucson market in the first quarter of 2009 which we first entered in 2006.  Losses incurred during the first quarter of 2010 and all of 2009 are largely due to commercial real estate lending.  Commercial loans attributed to the Arizona market increased $9.9 million from December 31, 2009 and commercial real estate loans were down $26 million from December 31, 2009.  Assets attributable to the Arizona market included $16 million of goodwill that may be impaired in future periods if these commercial and small business lending growth plans are unsuccessful.

Net income attributed to the Kansas/Missouri market decreased $1.0 million compared to the first quarter of 2009.   Operating revenue decreased $1.8 million primarily due to a decrease in mortgage banking revenue on lower mortgage origination volume, partially offset by an $830 thousand increase in other operating expenses.  Total average deposits increased $56 million over the first quarter of 2009 and average loans decreased $23 million compared to the prior year.


 
21

 



Table 11 – New Mexico
           
(Dollars in thousands)
           
   
Three Months Ended
March 31,
   
Increase
 
 
 
2010
   
2009
   
(Decrease)
 
                   
Net interest revenue
  $ 7,743     $ 8,461     $ (718 )
                         
Other operating revenue
    5,823       6,370       (547 )
Operating expense
    8,255       9,136       (881 )
Net loans charged off
    2,777       505       2,272  
Loss on repossessed assets, net
    (2,081 )     (925 )     (1,156 )
Income before taxes
    453       4,265       (3,812 )
Federal and state income tax
    176       1,659       (1,483 )
                         
Net income
  $ 277     $ 2,606     $ (2,329 )
                         
Average assets
  $ 1,273,185     $ 1,215,379     $ 57,806  
Average loans
    741,006       827,389       (86,383 )
Average deposits
    1,198,249       1,114,123       84,126  
Average invested capital
    90,087       102,685       (12,598 )
Return on average assets
    0.09 %     0.87 %  
(78) b.p.
 
Return on invested capital
    1.25 %     10.29 %  
(904) b.p.
 
Efficiency ratio
    60.85 %     61.60 %  
(75) b.p.
 
Net charge-offs (annualized) to average loans
    1.52 %     0.25 %  
127 b.p.
 

 
 

Table 12 – Arkansas
           
(Dollars in thousands)
           
   
Three Months Ended
March 31,
   
Increase
 
 
 
2010
   
2009
   
(Decrease)
 
                   
Net interest revenue
  $ 2,916     $ 2,949     $ (33 )
                         
Other operating revenue
    8,613       11,040       (2,427 )
Operating expense
    8,907       6,938       1,969  
Net loans charged off
    1,999       986       1,013  
Loss on repossessed assets, net
    (102 )     (1 )     (101 )
Income before taxes
    521       6,064       (5,543 )
Federal and state income tax
    203       2,359       (2,156 )
                         
Net income
  $ 318     $ 3,705     $ (3,387 )
                         
Average assets
  $ 383,514     $ 445,893     $ (62,379 )
Average loans
    365,272       435,327       (70,055 )
Average deposits
    180,185       139,981       40,204  
Average invested capital
    31,292       34,656       (3,364 )
Return on average assets
    0.34 %     3.37 %  
(303) b.p.
 
Return on invested capital
    4.12 %     43.36 %  
(3,924) b.p.
 
Efficiency ratio
    77.26 %     49.60 %  
2,766 b.p.
 
Net charge-offs (annualized) to average loans
    2.22 %     0.92 %  
130 b.p.
 


 
22

 



Table 13 – Colorado
           
(Dollars in thousands)
           
   
Three Months Ended
March 31,
   
Increase
 
 
 
2010
   
2009
   
(Decrease)
 
                   
Net interest revenue
  $ 8,454     $ 9,060     $ (606 )
                         
Other operating revenue
    5,193       5,169