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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
As filed with the Securities and Exchange Commission on August 2, 2010

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
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 June 30, 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)
 
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  x  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: 68,080,797 shares of common stock ($.00006 par value) as of June 30, 2010.
 

 
 

 

BOK Financial Corporation
Form 10-Q
Quarter Ended June 30, 2010

Index

Part I.  Financial Information
 
Management’s Discussion and Analysis (Item 2)        
3
Market Risk (Item 3)                                                                                              
47
Controls and Procedures (Item 4)
48
Consolidated Financial Statements – Unaudited (Item 1)
50
Six Month Financial Summary – Unaudited (Item 2)
82
Quarterly Financial Summary – Unaudited (Item 2)
83
Quarterly Earnings Trend – Unaudited
85
   
Part II.  Other Information
 
Item 1.  Legal Proceedings
86
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
86
Item 6.  Exhibits
86
Signatures
87


 
 

 

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

Performance Summary

BOK Financial Corporation (“the Company”) reported net income of $63.5 million or $0.93 per diluted share for the second quarter of 2010, compared to $60.1 million or $0.88 per diluted share for the first quarter of 2010 and $52.1 million or $0.77 per share for the second quarter of 2009.  Net income for the six months ended June 30, 2010 totaled $123.7 million or $1.81 per diluted share compared with net income of $107.1 million or $1.58 per diluted share for the six months ended June 30, 2009.

Net income for the first quarter of 2010 included a $6.5 million or $0.10 per diluted share day-one gain from the purchase of the rights to service $4.2 billion of residential mortgage loans on favorable terms.  Net income for the second quarter of 2009, included a $7.7 million or $0.11 per share special assessment by the Federal Deposit Insurance Corporation (“FDIC”).

Highlights of the second quarter of 2010 included:

·  
Net interest revenue totaled $182.1 million compared to $175.6 million for the second quarter of 2009 and $182.6 million for the first quarter of 2010.  Net interest margin was 3.63% for the second quarter of 2010, 3.55% for the second quarter of 2009 and 3.68% for the first quarter of 2010.  Average earning assets increased $149 million compared to the second quarter of 2009 and decreased $40 million compared to the first quarter of 2010.

·  
Fees and commissions revenue totaled $128.2 million for the second quarter of 2010, up $5.1 million over the second quarter of 2009 and up $12.9 million over the previous quarter.  Brokerage and trading revenue increased $3.0 million over the second quarter of 2009, partially offset by a decline of $1.5 million in mortgage banking revenue.  Trust fees and commissions, transaction card revenue and deposit service charges and fees all increased over the second quarter of 2009.  Brokerage and trading revenue increased $3.7 million, mortgage banking revenue increased $3.5 million and transaction card revenue increased $2.6 million over the prior quarter.  Deposit service charges and trust fees and commissions also increased over the prior quarter.

·  
Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $186.5 million, up $2.8 million over the second quarter of the prior year and up $8.8 million from the prior quarter.  Net losses and operating expenses on repossessed assets increased $12.1 million over the second quarter of 2009, partially offset by the impact of the FDIC special assessment of $11.8 million.  Net losses and operating expenses of repossessed assets increased $5.8 million over the prior quarter.

·  
Combined reserves for credit losses totaled $315 million or 2.89% of outstanding loans at June 30, 2010 and $314 million or 2.86% of outstanding loans at March 31, 2010.  Net loans charged off and provision for credit losses were $35.6 million and $36.0 million, respectively, for the second quarter of 2010 compared to $34.9 million and $47.1 million, respectively for the second quarter of 2009 and $34.5 million and $42.1 million, respectively, for the first quarter of 2010.

·  
Nonperforming assets totaled $461 million or 4.19% of outstanding loans and repossessed assets at June 30, 2010, down from $483 million or 4.36% of outstanding loans and repossessed assets at March 31, 2010.  Newly identified nonaccruing loans totaled $58 million for the second quarter of 2010 and $81 million for the first quarter of 2010.

·  
Available for sale securities totaled $9.2 billion at June 30, 2010, up $322 million since March 31, 2010.  Other-than-temporary impairment charges on certain privately-issued residential mortgage backed securities reduced pre-tax income by $2.6 million during the second quarter of 2010, $279 thousand in the second quarter of 2009 and $4.2 million during the first quarter of 2010.


 
- 3 -

 

·  
Outstanding loan balances were $10.9 billion at June 30, 2010, down $89 million since March 31, 2010.  Commercial real estate loans decreased $103 million.  The outstanding balance of commercial loans and unfunded commercial loan commitments were largely unchanged for the quarter.

·  
Total period-end deposits increased $560 million during the second quarter of 2010 to $16.1 billion.  Growth in interest-bearing transaction and demand deposits were offset by a decrease in higher-costing time deposits.

·  
Tangible common equity ratio increased to 8.88% at June 30, 2010 from 8.46% at March 31, 2010 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 and each of its subsidiary banks exceeded the regulatory definition of well capitalized.  The Company’s Tier 1 capital ratios as defined by banking regulations were 11.90% at June 30, 2010 and 11.45% at March 31, 2010.

·  
The Company paid a cash dividend of $16.8 million or $0.25 per common share during the second quarter of 2010.  On July 27, 2010, the board of directors declared a cash dividend of $0.25 per common share payable on or about August 27, 2010 to shareholders of record as of August 13, 2010.


Results of Operations

Net Interest Revenue and Net Interest Margin

Net interest revenue totaled $182.1 million for the second quarter of 2010, up $6.5 million or 4% over the second quarter of 2009 and down $461 thousand compared to the first quarter of 2010.  The increase in net interest revenue compared to the second quarter of 2009 was due primarily to an 8 basis point improvement in net interest margin.  The decrease in net interest revenue from the first quarter of 2010 was due primarily to a 5 basis point decrease in net interest margin.  In addition, average earning assets were up over the second quarter of 2009, but down from the first quarter of 2010.

Average earning assets for the second quarter of 2010 increased $149 million or 1% compared to the second quarter of 2009.  Average available for sale securities, which consist largely of U.S. government agency issued residential mortgage-backed securities, increased $1.8 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 $1.5 billion compared to the second 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 second quarter of 2010.

Growth in average earning assets was funded by a $505 million increase in average deposits.  Demand deposits for the second quarter of 2010 were up $478 million over the second quarter of 2009.  In addition, interest-bearing transaction accounts increased $1.4 billion over the second quarter of 2009.  Time deposits decreased $1.4 billion compared with the second quarter of 2009 as we continued to decrease brokered deposits and other higher costing time deposits.  Borrowed funds decreased $158 million compared to the second quarter of 2009.

Average earning assets decreased $40 million compared to the previous quarter.  Securities increased $155 million.  Growth in securities was due to a $79 million increase in investment securities and a $69 million increase in mortgage trading securities.  Residential mortgage loans held for sale increased $46 million.  Outstanding loans, net of allowance for loan losses, decreased $219 million.  Commercial, commercial real estate and consumer loan categories decreased in the second quarter of 2010.  Residential mortgage loans increased $15 million over the first quarter of 2010.  Deposits increased $441 million compared with the previous quarter, including a $324 million increase in interest-bearing transaction accounts and  a $175 million increase in demand deposits, partially offset by a $71 million decrease in higher-costing time deposits.  Borrowed funds decreased $714 million compared to the previous quarter.


 
- 4 -

 

Net interest margin was 3.63% for the second quarter of 2010, 3.55% for the second quarter of 2009 and 3.68% for the first quarter of 2010.

The increase in net interest margin over the second quarter of 2009 was due primarily to lower funding costs.  The cost of interest-bearing liabilities was 0.85% for the second quarter of 2010, down 46 basis points from the second quarter of 2009.  The yield on earning assets dropped 32 basis points over these same periods.

The tax-equivalent yield on earning assets was 4.33% for the second quarter of 2010, down 32 basis points from the second quarter of 2009.  Securities portfolio yields were down 94 basis points.  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 decrease in securities portfolio yields was partially offset by growth in loan yields.  Loan yields increased 19 basis points to 4.83%.  Funding costs were down 46 basis points from the second quarter of 2009.  The cost of interest-bearing deposits decreased 62 basis points and the cost of other borrowed funds decreased 4 basis points.

The tax-equivalent yield on earning assets for the second quarter of 2010 was down 8 basis points from the first quarter of 2010.  Yield on the securities portfolio dropped by 18 basis points due primarily to reinvestment of cash flows at current rates. Loan portfolio yields were up 2 basis points.  The cost of interest-bearing liabilities was down 2 basis points from the previous quarter.

The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 15 basis points for the second quarter of 2010 compared with 21 basis points in the second quarter of 2009 and 14 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 issued primarily by U.S. government agencies 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.  To the extent that intermediate and longer term interest rates remain at extremely low levels, mortgage-related security prepayments may accelerate putting additional downward pressure on the securities portfolio yield and on net interest margin.  We also use derivative instruments to manage our interest rate risk.  Interest rate swaps with a combined notional amount of $30 million convert fixed rate liabilities to floating rate based on LIBOR.  Net interest revenue increased $1.0 million for the second quarter of 2010, $4.6 million in the second quarter of 2009 and $658 thousand in the first quarter of 2010 from periodic settlements of these contracts.  This increase in net interest revenue contributed 2 basis points to net interest margin in the second quarter of 2010, 9 basis points in the second quarter of 2009 and 1 basis point in the first quarter of 2010.  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
   
Six Months Ended
 
   
June 30, 2010 / 2009
   
June 30, 2010 / 2009
 
 
       
Change Due To (1)
         
Change Due To (1)
 
               
Yield /
               
Yield
 
   
Change
   
Volume
   
Rate
   
Change
   
Volume
   
/Rate
 
Tax-equivalent interest revenue:
                                   
  Securities
  $ 319     $ 19,946     $ (19,627 )   $ (1,375 )   $ 173,475     $ (174,850 )
  Trading securities
    (322 )     (541 )     219       (549 )     (3,055 )     2,506  
  Loans
    (12,544 )     (14,889 )     2,345       (24,147 )     (114,725 )     90,578  
  Funds sold and resell agreements
    (6 )     (3 )     (3 )     (28 )     1       (29 )
Total
    (12,553 )     4,513       (17,066 )     (26,099 )     55,696       (81,795 )
Interest expense:
                                               
  Transaction deposits
    (3,318 )     2,265       (5,583 )     (8,600 )     32,330       (40,930 )
  Savings deposits
    81       13       68       150       (135 )     285  
  Time deposits
    (15,574 )     (7,478 )     (8,096 )     (34,671 )     (11,198 )     (23,473 )
  Federal funds purchased and repurchase    agreements
    259       154       105       (544 )     1,535       (2,079 )
  Other borrowings
    (972 )     (346 )     (626 )     (2,445 )     2,710       (5,155 )
  Subordinated debentures
    (97 )     1       (98 )     (97 )     164       (261 )
Total
    (19,621 )     (5,391 )     (14,230 )     (46,207 )     25,406       (71,613 )
  Tax-equivalent net interest revenue
    7,068       9,904       (2,836 )     20,108       30,290       (10,182 )
Change in tax-equivalent adjustment
    (535 )                     (846 )                
Net interest revenue
  $ 6,533                     $ 19,262                  
 (1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.


 
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Other Operating Revenue

Other operating revenue was $157.4 million for the second quarter of 2010 compared to $128.0 million for the second quarter of 2009 and $113.9 million for the first quarter of 2010.   Fees and commissions revenue increased $5.1 million or 4% compared with the second quarter of 2009.  Net gains on securities, derivatives and other assets increased $25.5 million, including an increase of $32.6 million on securities and derivatives held as an economic hedge of mortgage servicing rights.   Other-than-temporary impairment charges recognized in earnings were $1.1 million greater compared to the second quarter of 2009.

Other operating revenue increased $43.6 million compared to the first quarter of 2010.  Fees and commissions revenue increased $12.9 million.  Net gains on securities, derivatives and other assets increased $29.1 million over the first quarter of 2010, including $22.6 million on securities and derivatives held as an economic hedge of mortgage servicing rights.  Other-than-temporary impairment charges recognized in earnings were $1.6 million lower compared with the first quarter of 2010.
 
 
Table 2 – Other Operating Revenue 
                                   
(In thousands)
                                   
   
Three Months Ended
June 30,
   
Increase
   
% Increase
   
Three Months Ended
   
Increase
   
% Increase
 
   
2010
   
2009
   
(Decrease)
   
(Decrease)
   
March 31, 2010
   
(Decrease)
   
(Decrease)
 
                                           
 Brokerage and trading revenue
  $ 24,754     $ 21,794     $ 2,960       14 %   $ 21,035     $ 3,719       18 %
 Transaction card revenue
    28,263       27,533       730       3 %     25,687       2,576       10 %
 Trust fees and commissions
    17,737       16,860       877       5 %     16,320       1,417       9 %
 Deposit service charges and fees
    28,797       28,421       376       1 %     26,792       2,005       7 %
 Mortgage banking revenue
    18,335       19,882       (1,547 )     (8 )%     14,871       3,464       23 %
 Bank-owned life insurance
    2,908       2,418       490       20 %     2,972       (64 )     (2 )%
 Margin asset fees
    69       68       1       1 %     36       33       92 %
 Other revenue
    7,305       6,124       1,181       19 %     7,602       (297 )     (4 )%
   Total fees and commissions revenue
    128,168       123,100       5,068       4 %     115,315       12,853       11 %
Gain (loss) on other assets
    1,545       973       572       N/A       (1,390 )     2,935       N/A  
Gain (loss) on derivatives, net
    7,272       (1,037 )     8,309       N/A       (341 )     7,613       N/A  
Gain on available for sale securities
    8,469       16,670       (8,201 )     N/A       4,076       4,393       N/A  
Gain (loss) on mortgage hedge securities
    14,631       (10,199 )     24,830       N/A       448       14,183       N/A  
Gain on securities, net
    23,100       6,471       16,629       N/A       4,524       18,576       N/A  
Total other-than-temporary impairment
    (10,959 )     (1,263 )     (9,696 )     N/A       (9,708 )     (1,251 )     N/A  
Portion of loss recognized in other comprehensive income
    (8,313 )     279       (8,592 )     N/A       (5,483 )     (2,830 )     N/A  
Net impairment losses recognized in earnings
    (2,646 )     (1,542 )     (1,104 )     N/A       (4,225 )     1,579       N/A  
     Total other operating revenue
  $ 157,439     $ 127,965     $ 29,474       23 %   $ 113,883     $ 43,556       38 %
                                                         
Gain (loss) on change in fair value  of mortgage servicing rights
  $ (19,458 )   $ 7,865     $ (27,323 )     N/A     $ 2,100 (1)   $ (21,558 )     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 41% of total revenue for the second 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.


 
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Changes in Federal banking regulations that became effective on July 1, 2010 are expected to reduce overdraft fee revenue by $10 million to $15 million over the second half of 2010.  We continue to explore options to mitigate the potential revenue decrease.  In addition, the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act gave federal banking agencies authority to increase the minimum deposit insurance fund ratio, increase regulatory capital requirements, impose additional rules and regulations over consumer financial products and services and limit the amount of interchange fee that may be charged in an electronic debit transaction.   The effect of this legislation on fee income and operating expenses cannot be accurately quantified at this time.

Brokerage and trading revenue increased $3.0 million or 14­­% compared to the second quarter of 2009.  Securities trading revenue totaled $14.2 million for the second quarter of 2010, up $180 thousand or 1% compared to the second quarter of 2009.  Higher mortgage lending activity by our mortgage banking customers increased the level of our mortgage securities transactions in both the second quarter of 2010 and 2009.  Customer hedging revenue, totaled $2.0 million for the second quarter of 2010, up $422 thousand or 26% over the second quarter of 2009 on higher energy prices and interest rate volatility.  Retail brokerage revenue increased $191 thousand or 4% over the second quarter of 2009 to $5.5 million and investment banking revenue increased $2.2 million over the second quarter of 2009 due to increased investment banking activity to $2.8 million.

Brokerage and trading revenue increased $3.7 million over the first quarter 2010 on higher securities trading revenue and investment banking activity.  Interest rate volatility during the second quarter of 2010 increased trading volumes in mortgage-backed securities.  Increases in securities trading revenue and investment banking revenue were partially offset by a decrease in derivative fee income and retail brokerage fees.

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 $28.2 million for the second quarter of 2010, up $730 thousand or 3% over the second quarter of 2009.  Check card revenue increased $906 thousand or 12% to $8.4 million and merchant discounts increased $829 thousand or 12% to $7.7 million on both on higher transaction volumes, partially offset by a decline in ATM network revenue of $1.0 million or 8% below the second quarter of 2009.  Increased ATM transaction volumes were offset by a decrease in the average rate charged per transaction.  Transaction card revenue increased $2.6 million over the first quarter of 2010 primarily due to a higher volume of merchant discount fees and ATM network revenue.  Check card fees were also up.

Trust fees and commissions increased $877 thousand or 5% over the second quarter of 2009 to $17.7 million.  The revenue increase was due to the timing of tax service fees and an increase in the fair value of trust assets, partially offset by lower balances in our proprietary mutual funds.  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 totaled $816 thousand for the second quarter of 2010 and $876 thousand for the second quarter of 2009.  The fair value of trust assets administered by the Company totaled $29.8 billion at June 30, 2010 compared to $30.7 billion at March 31, 2010 and $29.3 billion at June 30, 2009.  Trust fees and commissions also increased $1.4 million over the first quarter of 2010 due primarily to the timing of tax service fees.

Deposit service charges and fees increased $376 thousand or 1% compared to the second quarter of 2009.  Commercial account service charge revenue decreased $1.0 million or 12% to $7.4 million.  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.  Overdraft fees increased $1.1 million or 6% to $19.3 million.  The increase in overdraft fees was primarily due to a new service charge imposed in the second quarter of 2010 on accounts that remain overdrawn for more than five days.  A 10% decrease in transaction volumes from the second quarter of 2009 was mostly offset by an 8% increase in the average per item overdraft fee charged which was implemented in the third quarter of 2009.

Deposit service charges and fees were up $2.0 million over the prior quarter largely due to a new service charge imposed on accounts that remain overdrawn more than five days partially offset by a decrease in commercial account service charge revenue in the second quarter of 2010.

Mortgage banking revenue decreased $1.5 million or 8% compared with the second quarter.  Revenue from originating and marketing mortgage loans totaled $8.8 million, a $6.3 million decrease compared to the second quarter of 2009.  Mortgage loans originated for sale in the secondary market totaled $541 million for the second quarter of 2010 and $1.0 billion for the second quarter of 2009.  Mortgage servicing revenue totaled $9.6 million, up $4.8 million or 99% over the second quarter of.  The outstanding principal balance of mortgage loans serviced for

 
- 8 -

 

others totaled $11.1 billion at June 30, 2010 and $6.1 billion at June 30, 2009.  We purchased the rights to service approximately $4.2 billion of residential mortgage loans in the first quarter of 2010.  This purchase added servicing fee revenue of $2.0 million to the first quarter of 2010 and $3.5 million to the second quarter of 2010.

Mortgage banking revenue was up $3.5 million over the first quarter of 2010 on a $2.3 million increase in revenue from originating and marketing mortgage loans and a $1.2 million increase in mortgage servicing revenue.  Mortgage loans originated for sale in the secondary market totaled $382 million for the first quarter of 2010.  The outstanding principle balance of mortgage loans serviced for others totaled $10.9 billion at March 31, 2010.

Net gains on securities, derivatives and other assets

We recognized $8.5 million of gains on sales of $595 million of available for sale securities in the second quarter of 2010, excluding securities held as an economic hedge of mortgage servicing rights.  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 $2.6 million in earnings during the second quarter of 2010 related to additional declines in projected cash flows as a result of worsening trends in delinquencies and foreclosures.

Mortgage hedge securities and derivative contracts are held as an economic hedge of the changes in fair value of mortgage servicing rights that fluctuates due to changes in prepayment speeds and other assumptions as more fully described in Note 6 to the Consolidated Financial Statements.

Table 3 – Gain (Loss) on Mortgage Servicing Rights
     
(In thousands)
     
   
Three Months Ended
 
   
June 30, 2010
   
March 31, 2010
   
June 30,
2009
 
                   
Gain (loss) on mortgage hedge derivative contracts
  $ 7,800     $ (659 )   $  
Gain (loss) on mortgage hedge securities
    14,631       448       (10,199 )
Total gain (loss) on financial instruments held as an economic hedge of mortgage servicing rights
     22,431       (211 )     (10,199 )
Gain (loss) on change in fair value of mortgage servicing rights
    (19,458 )     2,100 (1)     7,865  
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges
  $  2,973     $  1,889     $ (2,334 )
(1)  Excluding $11.8 million day-one gain on the purchase of mortgage servicing rights.

In addition to the gain (loss) on mortgage hedge derivative contracts, net gains or losses on derivatives includes fair value adjustments of 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 rates 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 second quarter of 2010 totaled $205.9 million, up $30.1 million or 17% compared to the second quarter of 2009.  Changes in the fair value of mortgage servicing rights increased operating expense $27.3 million.  In addition, operating expenses for the second quarter of 2009 included an $11.8 million FDIC special assessment.  Excluding changes in the fair value of mortgage servicing rights and the FDIC special assessment, operating expenses were up $14.6 million or 8%.  Personnel expenses increased $863 thousand or 1%.

 
- 9 -

 

Net losses and operating expenses related to repossessed assets were up $12.1 million over the second quarter of 2009.  Remaining non-personnel operating expenses increased $1.7 million or 2% over the prior year.

Other operating expenses increased $42.2 million compared to the first quarter of 2010.  Changes in the fair value of mortgage servicing rights increased operating expense $33.4 million.  Personnel expenses were largely unchanged compared to the first quarter of 2010  Non-personnel expenses, excluding the changes in the fair value of mortgage servicing rights, increased $8.6 million, primarily composed of a $5.8 million increase in net losses and operating expenses of repossessed assets.

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.

Table 4 – Other Operating Expense
                                     
(In thousands)
                                         
   
Three Months
         
%
               
%
 
   
Ended June 30,
   
Increase
   
Increase
   
Mar. 31,
   
Increase
   
Increase
 
   
2010
   
2009
   
(Decrease)
   
(Decrease)
   
2010
   
(Decrease)
   
(Decrease)
 
                                           
 Regular compensation
  $ 58,932     $ 58,573     $ 359       1 %   $ 57,760     $ 1,172       2 %
 Incentive compensation:
                                                       
 Cash-based
    22,148       20,427       1,721       8 %     18,677       3,471       19 %
 Stock-based
    390       2,443       (2,053 )     (84 )%     4,484       (4,094 )     (91 )%
 Total incentive compensation
    22,538       22,870       (332 )     (1 )%     23,161       (623 )     (3 )%
 Employee benefits
    15,584       14,748       836       6 %     15,903       (319 )     (2 )%
 Total personnel expense
    97,054       96,191       863       1 %     96,824       230        
 Business promotion
    4,945       4,569       376       8 %     3,978       967       24 %
 Professional fees and services
    6,668       7,363       (695 )     (9 )%     6,401       267       4 %
 Net occupancy and equipment
    15,691       15,973       (282 )     (2 )%     15,511       180       1 %
 Insurance
    5,596       5,898       (302 )     (5 )%     6,533       (937 )     (14 )%
 FDIC special assessment
          11,773       (11,773 )     (100 )%                  
 Data processing & communications
    21,940       20,452       1,488       7 %     20,309       1,631       8 %
 Printing, postage and supplies
    3,525       4,072       (547 )     (13 )%     3,322       203       6 %
 Net losses & operating expenses of repossessed assets
    13,067       996       12,071       N/A       7,220       5,847       81 %
 Amortization of intangible assets
    1,323       1,686       (363 )     (22 )%     1,324       (1 )      
 Mortgage banking costs
    10,380       9,336       1,044       11 %     9,267       1,113       12 %
 Change in fair value of mortgage servicing rights
    19,458       (7,865 )     27,323       N/A       (13,932 )     33,390       N/A  
 Other expense
    6,265       5,326       939       18 %     6,975       (710 )     (10 )%
 Total other operating expense
  $ 205,912     $ 175,770     $ 30,142       17 %   $ 163,732     $ 42,180       26 %
                                                         
 Number of employees (full-time equivalent)
    4,428       4,434       (6 )           4,425       3        
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 $359 thousand or 1% over the second quarter of 2009 primarily due to standard annual merit increases which were effective in the second quarter of 2010.  The Company generally awards annual merit increases effective April 1st for a majority of its staff.

Incentive compensation decreased $332 thousand or 1% compared to the second 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 $1.7 million increase in cash-based incentive compensation from the second quarter of 2009 included a $545 thousand increase 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 decreased $3.0 million compared with the second 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 decreased $4.97 per share in the second quarter of 2010 and increased $3.17 per share in the second quarter of 2009.  Compensation expense for equity awards increased $882 thousand compared with the second 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 $836 thousand or 6% compared to the second quarter of 2009 primarily due to increased expenses related to employee retirement plans, payroll taxes and other benefits costs, partially offset by a decrease in employee training and development costs.  Medical insurance costs were largely unchanged, down 1% from the prior year.  The Company self-insures a portion of its employee health care coverage and these costs may be volatile.

Personnel expense increased $230 thousand compared with the first quarter of 2010 primarily due to annual merit increases in regular compensation.  Incentive compensation decreased $623 thousand and employee benefits expense decreased $319 thousand.  Stock-based compensation decreased $4.1 million in the second quarter primarily due to changes in the market value of BOK Financial common stock and other investments.  Cash-based incentive compensation increased $3.5 million, including $1.8 million from commissions related to brokerage and trading revenue.  Employee benefit expenses for the first quarter of 2010 include a seasonal increase in payroll taxes.

Non-personnel operating expenses

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights and an FDIC special assessment, increased $13.7 million over the second quarter of 2009.  Higher net losses and operating expenses related to repossessed assets and mortgage banking costs was offset by decreases in most other operating expense categories.  Net losses and operating expenses of repossessed assets increased $12.1 million, data processing and communications expense increased $1.5 million on higher transaction volumes and mortgage banking costs increased $1.0 million.  Net losses from sales and write-downs of repossessed property increased $10.7 million based on our quarterly review of carrying values.  Operating expenses on repossessed assets increased $1.4 million.

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, increased $8.6 million compared to the first quarter of 2010 primarily due to a $5.8 million increase in net losses and operating expenses of repossessed assets.  Net losses from sales and write-downs of repossessed property increased $5.6 million based on our quarterly review of carrying values.  Operating expenses on repossessed assets were up $202 thousand.  In addition, data processing expense increased $1.7 million driven primarily by increased transaction card volumes.


 
- 11 -

 

Income Taxes

Income tax expense was $32.0 million or 33% of book taxable income for the second quarter of 2010 compared to $28.3 million or 35% of book taxable income for the second quarter of 2009 and $30.3 million or 33% of book taxable income for the first quarter of 2010.

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 $13 million at June 30, 2010 and was largely unchanged from March 31, 2010.
 
 

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 5, net income attributable to our lines of business increased $1.2 million over the second quarter of 2009.   The increase in net income attributed to our lines of business was due primarily decreased operating expenses attributed to the lines of business and an increase in the gain on the changes in the fair value of the mortgage servicing rights, net of economic hedges, offset by increased net losses on repossessed assets.  The increase in net income attributed to funds management and other was primarily due to growth in the securities portfolio and a decrease in loan loss provision.


 
- 12 -

 


Table 5 – Net Income by Line of Business
           
(In thousands)
           
   
Three Months Ended June 30,
   
Six Month Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Commercial banking
  $ 13,353     $ 16,326     $ 24,777     $ 32,845  
Consumer banking
    9,018       6,653       25,596       16,050  
Wealth management
    3,535       1,707       6,657       7,219  
Subtotal
    25,906       24,686       57,030       56,114  
Funds management and other
    37,616       27,429       66,625       51,033  
Total
  $ 63,522     $ 52,115     $ 123,655     $ 107,147  

Commercial Banking

Commercial banking contributed $13.4 million to consolidated net income in the second quarter of 2010, down from $16.3 million in the second quarter of 2009.  The decrease in commercial banking net income was primarily due to a $10.8 million increase in losses on repossessed assets, partially offset by a $5.3 million decrease in operating expenses compared to the prior year.  Operating revenues were flat compared to the prior year.  Net interest revenue and charge-offs decreased from the second quarter of 2009.


Table 6 – Commercial Banking
                             
(Dollars in thousands)
                             
   
Three Months Ended
June 30,
   
Increase
   
Six Months Ended
June 30,
   
Increase
 
   
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
                                     
NIR (expense) from external sources
  $ 85,116     $ 87,016     $ (1,900 )   $ 170,014     $ 172,615     $ (2,601 )
NIR (expense) from internal sources
    (12,712 )     (13,251 )     539       (25,173 )     (25,950 )     777  
                                                 
Total net interest revenue
    72,404       73,765       (1,361 )     144,841       146,665       (1,824 )
                                                 
Other operating revenue
    33,642       33,837       (195 )     63,461       67,261       (3,800 )
Operating expense
    50,973       56,286       (5,313 )     101,131       110,032       (8,901 )
Net loans charged off
    22,477       24,655       (2,178 )     50,856       49,013       1,843  
Gain (loss) on repossessed assets, net
    (10,742 )     59       (10,801 )     (15,764 )     (1,125 )     (14,639 )
Income before taxes
    21,854       26,720       (4,866 )     40,551       53,756       (13,205 )
Federal and state income tax
    8,501       10,394       (1,893 )     15,774       20,911       (5,137 )
                                                 
Net income
  $ 13,353     $ 16,326     $ (2,973 )   $ 24,777     $ 32,845     $ (8,068 )
                                                 
Average assets
  $ 8,990,120     $ 10,381,632     $ (1,391,512 )   $ 9,086,117     $ 10,566,763     $ (1,480,646 )
Average loans
    8,237,283       9,436,325       (1,199,042 )     8,305,366       9,618,102       (1,312,736 )
Average deposits
    5,941,486       5,234,401       707,085       5,816,028       4,993,078       822,950  
Average invested capital
    990,239       1,067,061       (76,822 )     1,005,051       1,086,626       (81,575 )
Return on average assets
    0.60 %     0.63 %  
(3) b.p.
      0.55 %     0.63 %  
(8) b.p.
 
Return on invested capital
    5.41 %     6.14 %  
(73) b.p.
      4.97 %     6.10 %  
(113) b.p.
 
Efficiency ratio
    48.07 %     52.31 %  
(424) b.p.
      48.55 %     51.43 %  
(288) b.p.
 
Net charge-offs (annualized) to average loans
    1.09 %     1.05 %  
4 b.p.
      1.23 %     1.03 %  
20 b.p.
 

Net interest revenue decreased $1.4 million or 2% from the second quarter of 2009.  Average loan balances attributed to commercial banking decreased $1.2 billion due to reduced customer demand and normal repayment trends, which decreased net interest revenue by $6.6 million.  This was offset by a $4.2 million improvement in loan spreads on loans attributable to commercial banking.  The decreased internal transfer pricing credit provided to the commercial banking unit on $5.2 billion of average deposits sold to the funds management unit reduced net interest revenue by approximately $1.1 million as deposit spreads compressed due to lower interest rates in the second

 
- 13 -

 

quarter of 2010 compared to the second quarter of 2009.  This decrease was partially offset by a $384 thousand increase in net interest revenue related to a $707 million increase in average deposits compared to the second quarter of 2009.

Other operating revenue was largely unchanged from the second quarter of 2009.  Service charges on commercial deposit accounts were down $1.0 million compared to the second 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.  This was mostly offset by a $505 thousand increase in brokerage and trading revenue.

Operating expenses were down $5.3 million or 9% compared to the second quarter of 2009.  Costs allocated to the commercial banking segment were down $7.0 million primarily on reduced lending activities.   This was partially offset by $1.4 million of increased data processing costs related to higher transaction card volumes and a $1.1 million increase in repossession expenses.  Average repossessed asset balances increased $51 million over the second quarter of 2009.

The average outstanding balance of loans attributed to commercial banking was $9.0 billion for the second quarter of 2010, down $1.4 billion or 13% compared to the second 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 decreased $2.2 million compared to the second quarter of 2009 to $22.5 million or 1.09% of average loans attributed to this line of business on an annualized basis.
 
 
Average deposits attributed to commercial banking were $5.9 billion for the second quarter of 2010, up $707 million or 14% over the second quarter of 2009.  Average balances attributed to our energy customers increased $238 million or 56% and average deposit balances attributed to our commercial & industrial customers increased $175 million or 9%.  Average deposit balances attributable to our small business customers increased $139 million or 14% over the second quarter of 2009.  Average treasury services deposit balances increased $109 million or 7% and average deposits attributable to our commercial real estate customers increased $25 million or 11%.



 
- 14 -

 

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 $9.0 million to consolidated net income for the second quarter of 2010, up $2.4 million compared to the second quarter of 2009.  The change in the fair value of the mortgage servicing rights, net of economic hedge contributed $3.0 million to net income for the second quarter of 2010, up $5.3 million compared to the second quarter of 2009.  Net charge-offs of loans attributed to the consumer banking unit increased $4.3 million over the second quarter of 2009, partially offset by a $2.9 million decrease in operating expenses compared to the second quarter of 2009.

Table 7 – Consumer Banking
                             
(Dollars in thousands)
                             
   
Three Months Ended
June 30,
   
Increase
   
Six Months Ended
June 30,
   
Increase
 
 
 
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
NIR (expense) from external sources
  $ 21,587     $ 12,877     $ 8,710     $ 41,171     $ 25,199     $ 15,972  
NIR (expense) from internal sources
    11,452       21,146       (9,694 )     23,312       46,108       (22,796 )
                                                 
Total net interest revenue
    33,039       34,023       (984 )     64,483       71,307       (6,824 )
                                                 
Other operating revenue
    50,466       49,632       834       93,709       94,917       (1,208 )
Operating expense
    61,874       64,759       (2,885 )     118,203       126,388       (8,185 )
Net loans charged off
    9,943       5,653       4,290       13,276       11,236       2,040  
Increase (decrease) in fair value of mortgage service rights
    (19,458 )     7,865       (27,323 )     (5,526 )     9,820       (15,346 )
Gain (loss) on financial instruments,
   net
    22,431       (10,199 )     32,630       22,220       (12,317 )     34,537  
Gain (loss) on repossessed assets, net
    98       (20 )     118       121       166       (45 )
Income before taxes
    14,759       10,889       3,870       43,528       26,269       17,259  
Federal and state income tax
    5,741       4,236       1,505       16,932       10,219       6,713  
                                                 
Net income
  $ 9,018     $ 6,653     $ 2,365     $ 26,596     $ 16,050     $ 10,546  
                                                 
Average assets
  $ 6,198,808     $ 6,258,278     $ (59,470 )   $ 6,179,261     $ 6,150,752     $ 28,509  
Average loans
    2,142,757       2,637,934       (495,177 )     2,144,105       2,637,179       (493,074 )
Average deposits
    6,094,975       6,156,665       (61,690 )     6,079,960       6,051,901       28,059  
Average invested capital
    208,648       246,247       (37,599 )     204,723       233,987       (29,264 )
Return on average assets
    0.58 %     0.43 %  
15 b.p.
      0.87 %     0.53 %  
34 b.p.
 
Return on invested capital
    17.34 %     10.84 %  
650 b.p.
      26.20 %     13.83 %  
1,237 b.p.
 
Efficiency ratio
    74.10 %     77.41 %  
(331) b.p.
      74.72 %     76.03 %  
(131) b.p.
 
Net charge-offs (annualized) to
   average loans
    1.86 %     0.86 %  
100 b.p.
      1.25 %     0.86 %  
39 b.p.
 
Mortgage loans funded for resale
  $ 540,741     $ 1,023,272     $ (482,531 )   $ 922,769     $ 1,731,833     $ (809,064 )

   
June 30, 2010
   
June 30, 2009
   
Increase
(Decrease)
 
Branch locations
    198       197       1  
Mortgage loans serviced for others
  $ 11,057,385     $ 6,082,501     $ 4,974,884  

Net interest revenue from consumer banking activities decreased $984 thousand or 3% from the second quarter of 2009.  Average earning assets were flat compared to the second quarter of 2009, decreasing only $59 million.  Net interest revenue decreased $1.4 million related to a $495 million decrease in average loan balances attributed to the consumer banking division and $946 thousand due to a decrease in loan margins.  Average loans decreased $250 million from the second quarter of 2009, due to the previously disclosed decision by the Company to exit the indirect automobile loan business in the first quarter of 2009.

 
- 15 -

 

Other operating revenue increased $834 thousand or 2% over the second quarter of 2009 primarily due to a $1.4 million increase in deposits service charges due to a new service charge imposed on accounts that remain overdrawn for more than five days, offset by a $1.5 million decrease in mortgage banking revenue as mortgage lending volumes have declined from their historic highs in the second quarter of 2009.  Transaction card revenue increased $891 thousand or 11% over the second quarter of 2009.

Operating expenses decreased $2.9 million or 4% compared to the second quarter of 2009, primarily due to a $5.8 million decrease in corporate expenses allocated to the consumer banking division, partially offset by a $2.4 million increase in repossession expenses.

Net loans charged off by the consumer banking unit totaled $9.9 million in the second quarter of 2010 up from $5.7 million in the second quarter of 2009.  Net consumer banking charge-offs include residential mortgage loans, indirect automobile loans, overdrawn deposit accounts and other direct consumer loans.  The increase in net loans charged-off was due primarily to residential mortgage loans.

Average consumer deposits decreased $62 million or 1% compared to the second quarter of 2009.  Average interest-bearing transaction accounts were up $391 million or 17% and average demand deposit accounts increased $42 million or 5% over the second quarter of 2009.  Average time deposits decreased $507 million or 18% compared to the second 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 second quarter of 2010, $604 million of mortgage loans were funded compared with $1.0 billion funded in the second quarter of 2009.  Approximately 47% of our mortgage loans funded was in the Oklahoma market, 15% in the Texas market and 12% in the Colorado market.  In addition to the $11 billion of mortgage loans serviced for others, the Consumer banking division also services $806 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 $9.6 million in the second quarter of 2010 from $8.4 million in the second quarter of 2009, primarily due to mortgage servicing rights purchased in the first quarter of 2010.

Changes in fair value of our mortgage loan servicing rights, net of economic hedge, increased consumer banking net income by $3.0 million in the second quarter of 2010 compared with a decrease in net income of $2.3 million in the second 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.


 
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Wealth Management

Wealth Management contributed consolidated net income of $3.5 million, up $1.8 million or 107% over the second quarter 2009. The increase in net income was primarily due to an increase in investment banking and trust fees.

Table 8 – Wealth Management
                             
(Dollars in thousands)
                             
   
Three Months Ended
June 30,
   
Increase
   
Six Months Ended
June 30,
   
Increase
 
   
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
NIR (expense) from external sources
  $ 8,324     $ 5,690     $ 2,634     $ 16,928     $ 9,545     $ 7,383  
NIR (expense) from internal sources
    2,391       5,723       (3,332 )     5,412       13,326       (7,914 )
                                                 
Total net interest revenue
    10,715       11,413       (698 )     22,340       22,871       (531 )
                                                 
Other operating revenue
    42,020       38,556       3,464       79,340       79,829       (489 )
Operating expense
    43,829       42,546       1,283       84,901       84,327       574  
Net loans charged off
    3,135       4,629       (1,494 )     5,900       6,558       (658 )
Gain on financial instruments, net
    15             15       16             16  
Income before taxes
    5,786       2,794       2,992       10,895       11,815       (920 )
Federal and state income tax
    2,251       1,087       1,164       4,238       4,596       (358 )
                                                 
Net income
  $ 3,535     $ 1,707     $ 1,828     $ 6,657     $ 7,219     $ (562 )
                                                 
Average assets
  $ 3,355,079     $ 3,092,574     $ 262,505     $ 3,321,811     $ 3,049,610     $ 272,201  
Average loans
    1,084,581       1,049,921       34,660       1,084,835       1,038,787       46,048  
Average deposits
    3,273,332       3,024,808       248,524       3,241,774       2,977,227       264,547  
Average invested capital
    170,086       201,630       (31,544 )     171,271       194,880       (23,609 )
Return on assets
    0.42 %     0.22 %  
20 b.p.
      0.40 %     0.48 %  
(8) b.p.
 
Return on invested capital
    8.34 %     3.40 %  
494 b.p.
      7.84 %     7.47 %  
37 b.p.
 
Efficiency ratio
    83.11 %     85.14 %  
(203) b.p.
      83.50 %     82.11 %  
139 b.p.
 
Net charge-offs (annualized) to average loans
    1.16 %     1.77 %  
(61) b.p.
      1.10 %     1.27 %  
(17) b.p.
 

   
June 30,
2010
   
June 30, 2009
   
Increase
(Decrease)
 
Trust assets
  $ 29,825,608     $ 29,288,041     $ 537,567  

Net interest revenue for the second quarter of 2010 was down $698 thousand or 6% compared to the second quarter of 2009.  Net interest revenue decreased $1.2 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 a $624 thousand increase in net interest revenue due to a $249 million increase in average deposits.

Other operating revenue increased $3.5 million or 9% over the second quarter of 2009.  Investment banking revenue increased $1.9 million on increased activity.  Trust fees and commissions were up $884 thousand or 5% primarily due to the timing of tax service fees and an increase in the fair value of trust assets.

Operating expenses increased $1.3 million over the second quarter of 2009 primarily due to a $1.9 million increase in commissions related to brokerage and trading revenue.

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 second quarter of 2010.

 
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increased $249 million compared over the second quarter of 2009.  Interest-bearing transaction accounts averaged $2.3 billion for the second quarter of 2010, an increase of $351 million or 25% over the second quarter of 2009.  Average time deposits were $694 million, down $262 million or 27% compared to last year.

At June 30, 2010 and  2009, the Wealth Management line of business was responsible for trust assets with aggregate market values of $29.8 billion and $29.3 billion, respectively, under various fiduciary arrangements.  We have sole or joint discretionary authority over $10.3 billion of trust assets at June 30, 2010 compared to $11.0 billion of trust assets at June 30, 2009.  The fair value of non-managed assets totaled $19.5 billion at June 30, 2010 and $18.2 billion at June 30, 2009.  The fair value of assets held in safekeeping totaled $7.4 billion at June 30, 2010 and $7.9 billion at June 30, 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 9 – Net Income by Geographic Region
           
(In thousands)
           
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2010
   
2009
   
2010
   
2009
 
Oklahoma
  $ 24,528     $ 27,210     $ 57,308     $ 52,077  
Texas
    6,570       2,490