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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 November 1, 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 September 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)
[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  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: 68,091,126 shares of common stock ($.00006 par value) as of September 30, 2010.
 

 
 

 
 

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

Index

Part I.  Financial Information
 
Management’s Discussion and Analysis (Item 2)        
1
Market Risk (Item 3)                                                                                              
46
Controls and Procedures (Item 4)
48
Consolidated Financial Statements – Unaudited (Item 1)
49
Nine Month Financial Summary – Unaudited (Item 2)
85
Quarterly Financial Summary – Unaudited (Item 2)
86
Quarterly Earnings Trend – Unaudited
88
   
Part II.  Other Information
 
Item 1.  Legal Proceedings
89
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
89
Item 6.  Exhibits
89
Signatures
90


 
 

 

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

BOK Financial Corporation (“the Company”) reported net income of $64.3 million or $0.94 per diluted share for the third quarter of 2010, compared to $63.5 million or $0.93 per diluted share for the second quarter of 2010 and $50.7 million or $0.75 per share for the third quarter of 2009.  Net income for the nine months ended September 30, 2010 totaled $187.9 million or $2.75 per diluted share compared with net income of $157.8 million or $2.33 per diluted share for the nine months ended September 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 third quarter of 2010 included:

·  
Net interest revenue totaled $180.7 million for the third quarter of 2010 compared to $180.5 million for the third quarter of 2009 and $182.1 million for the second quarter of 2010.  Net interest margin was 3.50% for the third quarter of 2010, 3.63% for the third quarter of 2009 and 3.63% for the second quarter of 2010.  Net interest margin narrowed during the third quarter of 2010 as cash flows from our securities portfolio are reinvested at lower rates.

·  
Fees and commissions revenue totaled $136.9 million for the third quarter of 2010, up $17.0 million over the third quarter of 2009 and up $8.8 million over the previous quarter.  Mortgage banking increased $16.0 million over the third quarter of 2009 and $10.9 million over the second quarter of 2010 due to increased loan production volume.  Deposit service charges decreased by $6.2 million compared to the third quarter of 2009 and $4.5 million compared to the second quarter of 2010 primarily as a result of changes in federal regulations concerning overdraft fees.

·  
Increased prepayment speeds adversely affected the value of our mortgage servicing rights in the third quarter of 2010.  Changes in the fair value of mortgage servicing rights, net of economic hedge, decreased pre-tax net income for the third quarter of 2010 by $7.9 million, compared to an increase in pre-tax net income for the third quarter of 2009 of $579 thousand and an increase in pre-tax net income of $3.0 million in the second quarter of 2010.

·  
Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $189.2 million, up $13.5 million over the third quarter of 2009 and up $2.8 million from the previous quarter.  Net losses and operating expenses on repossessed assets increased $3.7 million over the third quarter of 2009 and decreased $5.8 million compared to the prior quarter.  Personnel expenses increased $3.2 million over the third quarter of 2009 and $4.2 million over the second quarter 2010, primarily due to higher incentive compensation expense.

·  
Combined reserves for credit losses totaled $314 million or 2.91% of outstanding loans at September 30, 2010 and $315 million or 2.89% of outstanding loans at June 30, 2010.  Net loans charged off and provision for credit losses were $20.1 million and $20.0 million, respectively, for the third quarter of 2010 compared to $36.0 million and $55.1 million, respectively for the third quarter of 2009 and $35.6 million and $36.0 million, respectively, for the second quarter of 2010.

·  
Nonperforming assets totaled $421 million or 3.85% of outstanding loans and repossessed assets at September 30, 2010, down from $461 million or 4.19% of outstanding loans and repossessed assets at June 30, 2010.  Newly identified nonaccruing loans totaled $30 million for the third quarter of 2010 and $58 million for the second quarter of 2010.
 
 
- 1 -

 
 
·  
Available for sale securities totaled $9.6 billion at September 30, 2010, up $333 million since June 30, 2010.  Other-than-temporary impairment charges on certain privately-issued residential mortgage-backed and municipal debt securities reduced pre-tax income by $14.3 million in the third quarter of 2010, $3.4 million during the third quarter of 2009 and $2.6 million during the second quarter of 2010.  Our loss estimates on these securities were adversely affected by an expectation of a more prolonged period of relatively high unemployment and increased loss severity.

·  
Outstanding loan balances were $10.8 billion at September 30, 2010, down $77 million since June 30, 2010.  Commercial loans decreased $40 million, commercial real estate loans decreased $18 million and consumer loans decreased $69 million, partially offset by a $50 million increase in residential mortgage loans.  Unfunded commercial loan commitments were largely unchanged for the quarter.

·  
Total period-end deposits increased $735 million during the third quarter of 2010 to $16.8 billion due primarily to growth in interest-bearing transaction and demand deposits.

·  
Tangible common equity ratio increased to 8.96% at September 30, 2010 from 8.88% at June 30, 2010 due to an increase in the fair value of the securities portfolio and 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 (“GAAP”) 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 12.30% at September 30, 2010 and 11.90% at June 30, 2010.

·  
The Company paid a cash dividend of $16.9 million or $0.25 per common share during the third quarter of 2010.  On October 26, 2010, the board of directors declared a cash dividend of $0.25 per common share payable on or about December 1, 2010 to shareholders of record as of November 17, 2010.

On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“the Dodd-Frank Act” or “the Act”) was signed into law, giving 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.   In addition, the Act makes permanent the $250,000 limit for federal deposit insurance and provides unlimited federal deposit insurance until January 1, 2013 for non-interest bearing demand deposit accounts.  It also repeals prohibitions on payment of interest on demand deposits, which could impact how interest is paid on business transactions and other accounts.  We continue to assess the impact of the complex provisions of the Dodd-Frank Act and will work with our applicable regulatory agencies as they undertake the extensive process of developing detailed regulation to implement the Act in the coming months or years.  The effect of this legislation on fee income and operating expenses could be significant but cannot be accurately quantified at this time.

On September 12, 2010 the Group of Governors and Head of Supervision (“GHOS”), the oversight body of the Basel Committee on Banking Supervision announced changes to strengthen existing capital and liquidity requirements of internationally active banking organizations.  The Basel Committee on Banking Supervision provides an international forum for regular cooperation on banking supervisory matters by its members, including the United States and other large developed countries and the GHOS is composed of central bank governors and heads of supervision from its member countries.  The GHOS agreement calls for national jurisdictions to implement the new requirements beginning January 1, 2013.  The timing and extent to which these changes will be effective for banking organizations that are not internationally active, like BOK Financial Corporation, has not been determined.  Our current capital appears to be well in excess of the preliminary standards.


Results of Operations

Net Interest Revenue and Net Interest Margin

Net interest revenue totaled $180.7 million for the third quarter of 2010, compared to $180.5 million for the third quarter of 2009 and $182.1 million for the second quarter of 2010.  The increase in net interest revenue compared to
 
 
- 2 -

 
 
the third quarter of 2009 was due primarily to growth in average earning assets largely offset by a decrease in net interest margin.  The decrease in net interest revenue from the second quarter of 2010 was due primarily to a decrease in net interest margin primarily due to lower securities portfolio yield.

Average earning assets for the third quarter of 2010 increased $893 million or 4% compared to the third quarter of 2009.  Available for sale securities, which consist largely of U.S. government agency issued residential mortgage-backed securities, increased $1.5 billion.  We purchased these securities to supplement earnings, especially in a period of declining loan demand, and to manage interest rate risk.  Loans, net of allowances for loan losses, decreased $1.1 billion compared to the third quarter of 2009.   With exception of residential mortgage loans, all other major loan categories decreased largely due to reduced customer demand and normal repayment trends.

Growth in average earning assets was funded by a $1.4 billion increase in average deposits.  Interest-bearing transaction accounts increased $1.5 billion and demand deposits were up $439 million over the third quarter of 2009.  Time deposits decreased $631 million as we continued to decrease brokered deposits and other higher costing time deposits.  Borrowed funds decreased $765 million.

Average earning assets increased $507 million compared to the previous quarter.  Average securities increased $546 million due to a $379 million increase in available for sale securities and a $166 million increase in mortgage trading securities which we use as an economic hedge of our mortgage servicing rights.  Average outstanding loans, net of allowance for loan losses, decreased $105 million.  Commercial, commercial real estate and consumer loan categories each decreased in the third quarter of 2010.  Residential mortgage loans increased $44 million over the second quarter of 2010.  Average deposits increased $661 million, including a $412 million increase in interest-bearing transaction accounts, a $171 million increase in demand deposits and a $73 million increase in time deposits.  Average balances of borrowed funds decreased $415 million.

Net interest margin was 3.50% for the third quarter of 2010 and 3.63% for both the third quarter of 2009 and second quarter of 2010.  The decrease in net interest margin was due largely to lower yield on our securities portfolio.  The securities portfolio yield was 3.32% for the third quarter of 2010, 4.21% for the third quarter of 2009 and 3.60% for the second quarter of 2010.  Current low interest rates have increased the prepayment speed of our mortgage-backed securities.  Cash flows from this portfolio are reinvested at lower rates.  During the third quarter of 2010, approximately $600 million previously invested in securities that yielded 3.80% were reinvested in securities that yield 2.30%.  We expect this trend to continue.

The tax-equivalent yield on earning assets was 4.19% for the third quarter of 2010, down 35 basis points from the third quarter of 2009.  Securities portfolio yields were down 89 basis points.  Loan yields increased 23 basis points to 5.01%.  Funding costs were down 23 basis points from the third quarter of 2009.  The cost of interest-bearing deposits decreased 23 basis points and the cost of other borrowed funds increased 1 basis point.

The tax-equivalent yield on earning assets for the third quarter of 2010 was down 14 basis points from the second quarter of 2010.  Yield on the securities portfolio dropped by 28 basis points.  Loan portfolio yields were up 4 basis points.  The cost of interest-bearing liabilities was down 1 basis point from the previous quarter.

The benefit to net interest margin from earning assets funded by non-interest bearing liabilities was 17 basis points for the third quarter of 2010 compared with 18 basis points for the third quarter of 2009 and 15 basis points for the preceding quarter of 2010.

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 as discussed above.  We also use derivative instruments to manage our interest rate risk.  Interest rate swaps with a combined notional amount of $30 million
 
 
- 3 -

 
 
convert fixed rate liabilities to floating rate based on LIBOR.  Net interest revenue increased $1.1 million for the third quarter of 2010, $2.7 million for the third quarter of 2009 and $1.0 million for the second 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 third quarter of 2010, 5 basis points in the third quarter of 2009 and 2 basis points in the second 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.

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
   
Nine Months Ended
 
   
September 30, 2010 / 2009
   
September 30, 2010 / 2009
 
 
       
Change Due To (1)
         
Change Due To (1)
 
               
Yield /
               
Yield
 
   
Change
   
Volume
   
Rate
   
Change
   
Volume
   
/Rate
 
Tax-equivalent interest revenue:
                                   
  Securities
  $ (2,741 )   $ 17,093     $ (19,834 )   $ (4,115 )   $ 107,007     $ (111,122 )
  Trading securities
    (201 )     46       (247 )     (750 )     (1,297 )     547  
  Loans
    (6,153 )     (11,526 )     5,373       (30,301 )     (75,468 )     45,167  
  Funds sold and resell agreements
    (14 )     (12 )     (2 )     (42 )     (29 )     (13 )
Total
    (9,109 )     5,601       (14,710 )     (35,208 )     30,213       (65,421 )
Interest expense:
                                               
  Transaction deposits
    (1,801 )     2,137       (3,938 )     (10,401 )     16,351       (26,752 )
  Savings deposits
    (18 )     24       (42 )     133       30       103  
  Time deposits
    (7,255 )     (3,180 )     (4,075 )     (41,927 )     (17,042 )     (24,885 )
  Federal funds purchased and repurchase    agreements
    191       (49 )     240       (413 )     369       (782 )
  Other borrowings
    (756 )     (654 )     (102 )     (3,141 )     (470 )     (2,671 )
  Subordinated debentures
    106       2       104       9       7       2  
Total
    (9,533 )     (1,720 )     (7,813 )     (55,740 )     (755 )     (54,985 )
  Tax-equivalent net interest revenue
    424       7,321       (6,897 )     20,532       30,968       (10,436 )
Change in tax-equivalent adjustment
    (170 )                     (1,016 )                
Net interest revenue
  $ 254                     $ 19,516                  
 (1) Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.

 
- 4 -

 
 
 
Other Operating Revenue

Other operating revenue was $137.7 million for the third quarter of 2010 compared to $131.8 million for the third quarter of 2009 and $157.4 million for the second quarter of 2010.

Fees and commissions revenue increased $17.0 million or 14% compared with the third quarter of 2009.  Net gains on securities, derivatives and other assets decreased $147 thousand.  Other-than-temporary impairment charges recognized in earnings were $10.9 million greater compared to the third quarter of 2009.

Other operating revenue decreased $19.8 million compared to the second quarter of 2010.  Fees and commissions revenue increased $8.8 million.  Net gains on securities, derivatives and other assets decreased $16.9 million compared to the second quarter of 2010, including $14.4 million decrease on net gain (loss) on securities and derivatives held as an economic hedge of mortgage servicing rights.  Other-than-temporary impairment charges recognized in earnings were $11.7 million greater compared to the second quarter of 2010.
 
 
Table 2 – Other Operating Revenue 
                                   
(In thousands)
                                   
   
Three Months Ended
September 30,
   
Increase
   
% Increase
   
Three Months Ended
   
Increase
   
% Increase
 
   
2010
   
2009
   
(Decrease)
   
(Decrease)
   
June 30, 2010
   
(Decrease)
   
(Decrease)
 
                                           
 Brokerage and trading revenue
  $ 27,072     $ 24,944     $ 2,128       9 %   $ 24,754     $ 2,318       9 %
 Transaction card revenue
    28,852       26,264       2,588       10 %     28,263       589       2 %
 Trust fees and commissions
    16,774       16,315       459       3 %     17,737       (963 )     (5 %)
 Deposit service charges and fees
    24,290       30,464       (6,174 )     (20 %)     28,797       (4,507 )     (16 %)
 Mortgage banking revenue
    29,236       13,197       16,039       122 %     18,335       10,901       59 %
 Bank-owned life insurance
    3,004       2,634       370       14 %     2,908       96       3 %
 Other revenue
    7,708       6,138       1,570       26 %     7,374       334       5 %
   Total fees and commissions revenue
    136,936       119,956       16,980       14 %     128,168       8,768       7 %
Gain (loss) on other assets, net
    (1,331 )     3,223       (4,554 )     N/A       1,545       (2,876 )     N/A  
Gain (loss) on derivatives, net
    4,626       (294 )     4,920       N/A       7,272       (2,646 )     N/A  
Gain on available for sale securities
    8,384       8,706       (322 )     N/A       8,469       (85 )     N/A  
Gain on mortgage trading securities, net
    3,369       3,560       (191 )      N/A       14,631       (11,262 )     N/A  
Gain on securities, net
    11,753       12,266       (513 )     N/A       23,100       (11,347 )     N/A  
Total other-than-temporary impairment
    (4,525 )     (6,133 )     1,608        N/A       (10,959 )     6,434       N/A  
Portion of loss recognized in other comprehensive income
    9,786       (2,752 )     12,538       N/A       (8,313 )     18,099       N/A  
Net impairment losses recognized in earnings
    (14,311 )     (3,381 )     (10,930 )     N/A       (2,646 )     (11,665 )     N/A  
     Total other operating revenue
  $ 137,673     $ 131,770     $ 5,903       4 %   $ 157,439     $ (19,766 )     (13 %)

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 43% of total revenue for the third 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.

Brokerage and trading revenue increased $2.1 million or 9­­% compared to the third quarter of 2009.  Securities trading revenue totaled $15.7 million for the third quarter of 2010, up $620 thousand or 4%.   Higher lending activity
 
 
- 5 -

 
 
by our mortgage banking customers increased securities transaction volume in the third quarter of 2010.  Customer hedging revenue totaled $3.7 million for the third quarter of 2010, up $2.2 million or 148% over the third quarter of 2009 on greater energy price and interest rate volatility.  Retail brokerage revenue increased $72 thousand or 1% over the third quarter of 2009 to $5.6 million.  Investment banking revenue was $2.1 million for the third quarter of 2010, a $786 thousand decrease due to a decrease in the timing of investment banking activity compared to the third quarter of 2009.

Brokerage and trading revenue increased $2.3 million over the second quarter 2010 primarily on higher securities trading revenue and derivative fee income partially offset by decreased investment banking activity.  Interest rate volatility during the third quarter of 2010 increased trading volumes in mortgage-backed securities and interest rate derivative activities.  Retail brokerage fees also increased over the prior quarter.

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 $28.9 million for the third quarter of 2010, up $2.6 million or 10% over the third quarter of 2009.  Check card revenue increased $1.0 million or 14% to $8.4 million and merchant discounts increased $1.0 million or 15% to $8.1 million on higher transaction volumes.  ATM network revenue increased $551 thousand or 5% over the third quarter of 2009.  Increased ATM transaction volumes were partially offset by a decrease in the average rate charged per transaction.  Transaction card revenue increased $589 thousand over the second 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 $459 thousand or 3% over the third quarter of 2009 to $16.8 million.  The revenue increase was due to increases in the fair value of trust assets and timing of fees related to our oil & gas property services, 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 $858 thousand for the third quarter of 2010, $816 thousand for the second quarter of 2010 and $876 thousand for the third quarter of 2009.  The fair value of trust assets administered by the Company totaled $31.4 billion at September 30, 2010 compared to $29.9 billion at September 30, 2009 and $29.8 billion at June 30, 2010.  Trust fees and commissions decreased $963 thousand compared to the second quarter of 2010 due primarily to the seasonal nature of tax service fees.

Deposit service charges and fees decreased $6.2 million or 20% compared to the third quarter of 2009.  Overdraft fees decreased $4.9 million or 25% to $14.9 million.  The decrease in overdraft fees was primarily due to changes in federal regulations concerning overdraft charges which were effective July 1, 2010.  Commercial account service charge revenue also decreased $1.4 million or 16% to $7.2 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.  Deposit service charges and fees decreased $4.5 million compared to the prior quarter primarily due to federal regulations concerning overdraft charges.  This performance is consistent with our previously disclosed expectation that changes in overdraft regulations would decrease fee income by $10 million to $15 million over the second half of 2010.

Mortgage banking revenue more than doubled compared to the third quarter of 2009, increasing to $29.2 million for the third quarter of 2010 from $13.2 million for the third quarter of 2009.  Mortgage origination and marketing revenue increased $11.1 million or 139% over the third quarter of 2009.    Mortgage loans funded increased $341 million and net gains on mortgages sold in the secondary market increased.  Mortgage servicing revenue increased $5.0 million or 95% over the third quarter of 2009.  The outstanding principal balance of mortgage loans serviced for others increased $4.9 million primarily due to the purchase of the rights to service $4.2 billion of residential mortgage loans in the first quarter of 2010.  This purchase added servicing fee revenue of $3.5 million to both the second and third quarters of 2010.

Mortgage banking revenue was up $10.9 million or 59% over the second quarter of 2010 based on a $9.5 million increase in revenue from originating and marketing mortgage loans and a $1.4 million increase in mortgage servicing revenue.  Mortgage loans funding increased $337 million over the second quarter of 2010 and the outstanding principle balance of mortgage loans serviced for others increased $133 million.

 
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Table 3 – Mortgage Banking Revenue 
                                   
(In thousands)
                                   
   
Three Months Ended
September 30,
               
Three Months Ended
             
   
2010
   
2009
   
Increase
   
% Increase
   
June 30, 2010
   
Increase
   
% Increase
 
                                           
 Originating and marketing revenue
  $ 19,070     $ 7,985     $ 11,085       139 %   $ 8,764     $ 10,306       118 %
 Servicing revenue
    10,166       5,213       4,953       95 %     9,571       595       6 %
     Total mortgage revenue
  $ 29,236     $ 13,198     $ 16,038       122 %   $ 18,335     $ 10,901       59 %
                                                         
Mortgage loans funded during the quarter
  $ 877,371     $ 536,173     $ 341,198       64 %   $ 540,741     $ 336,630       62 %
Mortgage loan refinances to total funded
    64 %     49 %     N/A       N/A       34 %     N/A       N/A  
                                                         
   
September 30,
                                         
      2010       2009    
Increase
   
% Increase
   
June 30, 2010
   
Increase
   
% Increase
 
Outstanding principal balance of mortgage loans serviced for other
  $ 11,190,802     $ 6,339,764     $ 4,851,038       77 %   $ 11,057,385     $ 133,417       12 %

Net gains on securities, derivatives and other assets

We recognized $8.4 million of gains on sales of $596 million of available for sale securities in the third 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.  We recognized $8.7 million of gains on sales of $377 million of available for sale securities in the third quarter of 2009 and $8.5 million of gains on sales of $595 million of available for sale securities in the second quarter of 2010.

As more fully discussed in Note 2 to the Consolidated Financial Statements, we recognized other-than-temporary impairment losses on certain private-label residential mortgage-backed securities of $13.4 million in earnings during the third quarter of 2010 related to additional declines in projected cash flows as a result of expectations of a more prolonged period of relatively high unemployment and increased loss severity.

Mortgage trading 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.  Increased prepayment speeds as a result of the benchmark mortgage rate falling 40 basis points during the quarter, decreased the value of our mortgage servicing rights in the third quarter of 2010.

Table 4 – Gain (Loss) on Mortgage Servicing Rights
     
(In thousands)
     
   
Three Months Ended
 
   
Sept. 30,
2010
   
June 30,
2010
   
Sept. 30,
2009
 
                   
Gain on mortgage hedge derivative contracts
  $ 4,676     $ 7,800     $  
Gain on mortgage trading securities
    3,369       14,631       3,560  
Total gain on financial instruments held as an economic hedge of mortgage servicing rights
    8,045       22,431       3,560  
Loss on change in fair value of mortgage servicing rights
    (15,924 )     (19,458 )     (2,981 )
Gain (loss) on changes in fair value of mortgage servicing rights, net of gain on financial instruments held as an economic hedge
  $ (7,879 )   $ 2,973     $ 579  
                         
Net interest revenue on mortgage trading securities
  $ 5,710     $ 4,880     $ 2,695  

In addition to the gain on mortgage hedge derivative contracts, net gains 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
 
 
- 7 -

 
 
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 third quarter of 2010 totaled $205.2 million, up $26.4 million or 15% over the third quarter of 2009.  Changes in the fair value of mortgage servicing rights increased operating expense $15.9 million in the third quarter of 2010 and $3.0 million in the third quarter of 2009.  Excluding changes in the fair value of mortgage servicing rights, operating expenses were up $13.5 million or 8%.  Personnel expenses increased $3.2 million or 3%.   Net losses and operating expenses related to repossessed assets were up $3.7 million over the third quarter of 2009.  Remaining non-personnel operating expenses increased $6.6 million over the prior year.

Other operating expenses decreased $747 thousand compared to the second quarter of 2010.  Changes in the fair value of mortgage servicing rights increased operating expense $15.9 million in the third quarter of 2010 compared to $19.5 million in the second quarter of 2010.  Excluding changes in the fair value of mortgage servicing rights, operating expenses were up $2.8 million or 1% over the previous quarter.  Personnel expenses increased $4.2 million over the second quarter of 2010 primarily due to higher incentive compensation expense.  Non-personnel expenses decreased $1.4 million compared to the previous quarter.


Table 5 – Other Operating Expense
                                     
(In thousands)
                                         
   
Three Months
         
%
   
Three Months Ended
         
%
 
   
Ended September 30,
   
Increase
   
Increase
   
June 30,
   
Increase
   
Increase
 
   
2010
   
2009
   
(Decrease)
   
(Decrease)
   
2010
   
(Decrease)
   
(Decrease)
 
                                           
 Regular compensation
  $ 60,339     $ 59,227       1,112       2 %   $ 58,932     $ 1,407       2 %
 Incentive compensation:
                                                       
 Cash-based
    23,910       20,835       3,075       15 %     22,148       1,762       8 %
 Stock-based
    2,927       3,808       (881 )     (23 %)     390       2,537       N/A  
 Total incentive compensation
    26,837       24,643       2,194       9 %     22,538       4,299       19 %
 Employee benefits
    14,040       14,142       (102 )     (1 %)     15,584       (1,544 )     (10 %)
 Total personnel expense
    101,216       98,012       3,204       3 %     97,054       4,162       4 %
 Business promotion
    4,426       4,827       (401 )     (8 %)     4,945       (519 )     (10 %)
 Professional fees and services
    7,621       7,555       66       1 %     6,668       953       14 %
 Net occupancy and equipment
    16,436       15,884       552       3 %     15,691       745       5 %
 Insurance
    6,052       6,092       (40 )     (1 %)     5,596       456       8 %
 Data processing & communications
    21,601       20,413       1,188       6 %     21,940       (339 )     (2 %)
 Printing, postage and supplies
    3,648       3,716       (68 )     (2 %)     3,525       123       3 %
 Net losses & operating expenses of repossessed assets
    7,230       3,497       3,733       N/A       13,067       (5,837 )     N/A  
 Amortization of intangible assets
    1,324       1,686       (362 )     (21 %)     1,323       1       %
 Mortgage banking costs
    9,093       8,065       1,028       13 %     10,380       (1,287 )     (12 %)
 Change in fair value of mortgage servicing rights
    15,924       2,981       12,943       N/A       19,458       (3,534 )     N/A  
Visa retrospective responsibility obligation
    1,103             1,103       N/A             1,103       N/A  
 Other expense
    9,491       6,004       3,487       58 %     6,265       3,226       51 %
 Total other operating expense
  $ 205,165     $ 178,732       26,433       15 %   $ 205,912     $ (747 )     %
                                                         
 Number of employees (full-time equivalent)
    4,516       4,422       94       2 %     4,428       88       2 %
Certain percentage increases (decreases) are not meaningful for comparison purposes.
 
 
- 8 -

 
 
Personnel expense

Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs increased $1.1 million or 2% over the third 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 increased $2.2 million or 9% compared to the third 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 $3.1 million increase in cash-based incentive compensation from the third quarter of 2009 included a $1.6 million 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 $1.4 million compared with the third 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 $2.34 per share in the third quarter of 2010 and increased $8.83 per share in the third quarter of 2009.  Compensation expense for equity awards increased $524 thousand compared with the third 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 decreased $102 thousand or 1% compared to the third quarter of 2009 primarily due to decreased expenses related to employee retirement plans, payroll taxes and other benefits costs, mostly offset by an increase in medical insurance costs.  The Company self-insures a portion of its employee health care coverage and these costs may be volatile.

Personnel expense increased $4.2 million over the second quarter of 2010 primarily due to higher incentive compensation expense.  Regular compensation expense increased $1.4 million offset by a $1.5 million decrease in employee benefits expense.  Incentive compensation increased $4.3 million over the second quarter of 2010.  Stock-based compensation increased $2.5 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 $1.8 million, including $610 thousand from commissions related to brokerage and trading revenue.

Non-personnel operating expenses

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, increased $10.3 million over the third quarter of 2009.  Net losses and operating expenses of repossessed assets increased $3.7 million.  Net losses from sales and write-downs of repossessed property increased $3.3 million based on our quarterly review of carrying values.  Operating expenses on repossessed assets increased $445 thousand.  Net losses on repossessed assets in the third quarter of 2010 included $3.6 million to write down properties in Texas and Colorado previously held for branch expansion.  Data processing and communications expense and mortgage banking costs increased on higher transaction volume. All other operating expenses increased $3.2 million.

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, decreased $1.4 million over the second quarter of 2010.  Net losses from sales and write-downs of repossessed property decreased $5.8 million based on our quarterly review of carrying values and operating expenses on repossessed assets decreased $728 thousand.  All other non-personnel operating expenses increased $4.4 million over the prior quarter.

The Company recorded a $1.1 million contingent liability in the third quarter of 2010 for the Company’s share of Visa’s covered litigation liabilities as a member of Visa.  This charge is expected to be offset in the fourth quarter of 2010.  On October 8, 2010, Visa deposited $800 million into the litigation escrow account for payment of this liability, further diluting the Company’s Class B shares.

 
- 9 -

 
 

Income Taxes

Income tax expense was $29.9 million or 32% of book taxable income for the third quarter of 2010 compared to $24.8 million or 32% of book taxable income for the third quarter of 2009 and $32.0 million or 33% of book taxable income for the second quarter of 2010.  During the third quarter of 2010, the statute of limitations expired on an uncertain income tax position and the Company adjusted its current income tax liability to amounts on filed tax returns for 2009.  Excluding these adjustments, income tax expense for the third quarter of 2010 would have been $32.2 million or 34% of book taxable income.

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 $11 million at September 30, 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 6, net income attributable to our lines of business increased $24 million over the third quarter of 2009.   The increase in net income attributed to our lines of business was due primarily to a decrease in net loans charged off and an increase in other operating revenue compared to the third quarter of 2010, partially offset by an increase in operating expenses attributed to the lines of business.   Net interest revenue attributed to our lines of business improved due to continued growth in average deposits generated by our lines of business and sold to our funds management unit.  Net income attributed to funds management and other decreased compared to the third quarter of 2009 due to a decrease in the allocation of operating expenses to our lines of business as a result of a decline in transaction volumes and an increase in other-than-temporary impairment charges, partially offset by a decrease in the loan loss provision.
 
 
- 10 -

 
 
Table 6 – Net Income by Line of Business
           
(In thousands)
           
   
Three Months Ended Sept. 30,
   
Nine Month Ended Sept. 30,
 
   
2010
   
2009
   
2010
   
2009
 
Commercial banking
  $ 27,484     $ 10,449     $ 52,272     $ 43,295  
Consumer banking
    10,441       2,427       37,037       18,476  
Wealth management
    2,018       3,047       8,702       10,266  
Subtotal
    39,943       15,923       98,011       72,037  
Funds management and other
    24,324       34,737       89,911       85,770  
Total
  $ 64,267     $ 50,660     $ 187,922     $ 157,807  


Commercial Banking

Commercial banking contributed $27.5 million to consolidated net income in the third quarter of 2010, up $17.0 million from the third quarter of 2009.  The increase in commercial banking net income was primarily due to an $18.1 decrease in net loans charged off and lower operating expenses.


Table 7 – Commercial Banking
                             
(Dollars in thousands)
                             
   
Three Months Ended
September 30,
   
Increase
   
Nine Months Ended
September 30,
   
Increase
 
   
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
                                     
NIR (expense) from external sources
  $ 87,094     $ 87,067     $ 27     $ 257,120     $ 259,682     $ (2,562 )
NIR (expense) from internal sources
    (11,942 )     (15,219 )     3,277       (37,110 )     (41,169 )     4,059  
Total net interest revenue
    75,152       71,848       3,304       220,010       218,513       1,497  
                                                 
Other operating revenue
    32,999       32,789       210       96,461       100,051       (3,590 )
Operating expense
    52,170       56,697       (4,526 )     153,301       166,728       (13,427 )
Net loans charged off
    9,716       27,819       (18,103 )     60,572       76,832       (16,260 )
Loss on repossessed assets, net
    (1,283 )     (3,020 )     1,737       (17,046 )     (4,145 )     (12,901 )
Income before taxes
    44,982       17,101       27,880       85,552       70,859       14,693  
Federal and state income tax
    17,498       6,652       10,845       33,280       27,564       5,716  
                                                 
Net income
  $ 27,484     $ 10,449     $ 17,035     $ 52,272     $ 43,295     $ 8,977  
                                                 
Average assets
  $ 8,912,840     $ 9,847,655     $ (934,815 )   $ 9,027,723     $ 10,324,426     $ (1,296,703 )
Average loans
    8,205,542       8,932,705       (727,163 )     8,271,726       9,387,126       (1,115,400 )
Average deposits
    6,201,764       5,663,757       538,006       5,946,021       5,219,096       726,925  
Average invested capital
    1,048,239       1,075,226       (26,987 )     1,010,839       1,063,994       (53,155 )
Return on average assets
    1.22 %     0.42 %     80 bp     0.77 %     0.56 %     21 bp
Return on invested capital
    10.40 %     3.86 %     654 bp     6.91 %     5.44 %     147 bp
Efficiency ratio
    48.24 %     54.18 %     (594 ) bp     48.44 %     52.34 %     (390 ) bp
Net charge-offs (annualized) to average loans
    0.47 %     1.24 %     (77 ) bp     0.98 %     1.09 %     (11 ) bp

Net interest revenue increased $3.3 million or 5% over the third quarter of 2009, primarily on increased average deposit balances attributed to our commercial banking unit.  Average loan balances attributed to commercial banking decreased $727 million due to reduced customer demand and normal repayment trends, which decreased net interest revenue by $1.6 million.  This was offset by an improvement in loan spreads on loans attributable to commercial banking.

Other operating revenue was largely unchanged increasing 1% over the third quarter of 2009.  Transaction card revenue increased $1.7 million.  Service charges on commercial deposit accounts were down $1.5 million compared to the third quarter of 2009 as customers kept greater commercial deposit balances to increase their earnings credit,
 
 
- 11 -

 
 
which provides a non-cash method for commercial customers to avoid incurring charges for deposit services based on account balance.

Operating expenses were down $4.5 million or 8% compared to the third quarter of 2009.  The decrease was primarily due to a $7.2 million decrease in costs allocated to the commercial banking segment primarily as a result of reduced lending activities, partially offset by $1.5 million of increased data processing costs related to higher transaction card volumes.

The average outstanding balance of loans attributed to commercial banking was $8.2 billion for the third quarter of 2010, down $727 million or 8% compared to the third quarter of 2009.  See Loans 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 $18.1 million compared to the third quarter of 2009 to $9.7 million or 0.47% of average loans attributed to this line of business on an annualized basis.
 
 
Average deposits attributed to commercial banking were $6.2 billion for the third quarter of 2010, up $538 million or 9% over the third quarter of 2009.  Average balances attributed to our energy customers increased $255 million or 54%,  average treasury services deposit balances increased $179 million or 13%, average deposit balances attributable to our small business customers increased $151 million or 13% over the third quarter of 2009.


 
- 12 -

 
 
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 $10.4 million to consolidated net income for the third quarter of 2010, up $8.0 million compared to the third quarter of 2009.  Growth in net income was largely due to mortgage banking performance.  Net income from mortgage banking grew $4.9 million due to increased production and servicing revenue, partially offset by a decrease in the fair value of the mortgage servicing rights, net of economic hedge.   Net income from all other consumer banking activities increased $3.1 million.  Reduced operating expenses attributed to consumer banking offset a decrease in service charge income.

Table 8 – Consumer Banking
                             
(Dollars in thousands)
                             
   
Three Months Ended
September 30,
   
Increase
   
Nine Months Ended
September 30,
   
Increase
 
 
 
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
NIR (expense) from external sources
  $ 22,887     $ 15,064     $ 7,823     $ 64,058     $ 40,263     $ 23,795  
NIR (expense) from internal sources
    12,097       14,892       (2,795 )     35,409       61,000       (25,591 )
Total net interest revenue
    34,984       29,956       5,028       99,467       101,263       (1,796 )
                                                 
Other operating revenue
    57,342       43,578       13,764       151,051       138,495       12,556  
Operating expense
    60,012       63,755       (3,743 )     178,215       190,143       (11,928 )
Net loans charged off
    6,583       7,079       (496 )     19,859       18,316       1,543  
Increase (decrease) in fair value of mortgage servicing rights
    (15,924 )     (2,981 )     (12,943 )     (21,450 )     6,839       (28,289 )
Gain (loss) on financial instruments, net
    8,045       3,560       4,485       30,265       (8,758 )     39,023  
Gain (loss) on repossessed assets, net
    (763 )     693       (1,456 )     (642 )     859       (1,501 )
Income before taxes
    17,089       3,972       13,117       60,617       30,239       30,378  
Federal and state income tax
    6,648       1,545       5,103       23,580       11,763       11,817  
                                                 
Net income
  $ 10,441     $ 2,427     $ 8,014     $ 37,037     $ 18,476     $ 18,561  
                                                 
Average assets
  $ 6,304,499     $ 6,190,573     $ 113,926     $ 6,221,464     $ 6,164,170     $ 57,294  
Average loans
    2,114,019       2,303,654       (189,635 )     2,133,966       2,524,782       (390,816 )
Average deposits
    6,177,740       6,089,389       88,352       6,112,910       6,064,533       48,377  
Average invested capital
    179,182       237,477       (58,295 )     199,448       239,790       (40,342 )
Return on average assets
    0.66 %     0.16 %     50 bp     0.80 %     0.40 %     40 bp
Return on invested capital
    23.12 %     4.05 %     1,907 bp     24.83 %     10.30 %     1,453 bp
Efficiency ratio
    65.00 %     86.70 %     (2,170 ) bp     71.14 %     79.31 %     (817 ) bp
Net charge-offs (annualized) to
   average loans
    1.24 %     1.22 %     2 bp     1.24 %     0.97 %     27 bp
Mortgage loans funded for resale
  $ 830,050     $ 536,173       293,877     $ 1,752,819     $ 2,268,006     $ (515,187 )

   
September 30, 2010
   
September 30, 2009
   
Increase
(Decrease)
 
Branch locations
    198       195       3  
Mortgage loans serviced for others
  $ 11,190,802     $ 6,339,764     $ 4,851,038  

Net interest revenue from consumer banking activities increased $5.0 million or 17% over the third quarter of 2009 primarily due to an $88 million increase in average deposit balances.  Average earning assets were up 2% over the third quarter of 2009, including a $334 million increase in the mortgage trading securities portfolio which increased net interest revenue by $3.0 million.  Net interest revenue decreased $1.2 million related primarily to a $190 million decrease in average loan balances attributed to the consumer banking division due to continued pay-downs of indirect automobile loans.  The Company previously disclosed its decision to exit the indirect automobile loan business in the first quarter of 2009.
 
 
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Other operating revenue increased $13.8 million or 32% over the third quarter of 2009 primarily due to a $16 million increase in mortgage banking revenue.  Revenue from originating and marketing mortgage loans increased $11 million on increased lending volumes and mortgage servicing revenue increased $5 million primarily due to the purchase of $4.2 billion of residential mortgage loan servicing rights in the first quarter of 2010.  Deposit service charges decreased $4.6 million primarily due to lower overdraft fees as a result of changes in banking regulations that became effective in the third quarter.

Operating expenses decreased $3.7 million or 6% compared to the third quarter of 2009, primarily due to a $5.5 million decrease in corporate expenses allocated to the consumer banking division, offset by increases in other operating expenses.

Net loans charged off by the consumer banking unit totaled $6.6 million in the third quarter of 2010 down from $7.1 million in the third 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 $88 million or 1% over the third quarter of 2009.  Average interest-bearing transaction accounts were up $318 million or 13% and average demand deposit accounts increased $111 million or 14% over the third quarter of 2009.  Higher-costing average time deposits decreased $357 million or 13% compared to the third 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 third quarter of 2010, $831 million of mortgage loans were funded compared with $536 million funded in the third quarter of 2009.  Approximately 42% of our mortgage loans funded was in the Oklahoma market, 14% in the Colorado market, 14% in the New Mexico market and 13% in the Texas market.  In addition to the $11 billion of mortgage loans serviced for others, the Consumer banking division also services $813 million of loans for affiliated entities.  Approximately 95% of the mortgage loans serviced was to borrowers in our primary geographical market areas.  Mortgage servicing revenue increased to $10.2 million in the third quarter of 2010 from $5.2 million in the third 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, decreased consumer banking pre-tax net income by $7.9 million in the third quarter of 2010 compared to an increase in pre-tax net income of $579 thousand in the third 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.  Net interest revenue on mortgage trading securities totaled $5.7 million for the third quarter of 2010 and $2.7 million for the third quarter of 2009.


 
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Wealth Management

Wealth Management contributed consolidated net income of $2.0 million, down $1.0 million or 34% compared to the third quarter 2009. The decrease in net income was primarily due to an increase in net loans charged off and increased operating expenses, partially offset by an increase in retail brokerage fees.

Table 9 – Wealth Management
                             
(Dollars in thousands)
                             
   
Three Months Ended
September 30,
   
Increase
   
Nine Months Ended
September 30,
   
Increase
 
   
2010
   
2009
   
(Decrease)
   
2010
   
2009
   
(Decrease)
 
NIR (expense) from external sources
  $ 7,533     $ 7,774     $ (241 )   $ 24,505     $ 17,319     $ 7,186  
NIR (expense) from internal sources
    3,178       2,026       1,152       8,590       15,352       (6,762 )
Total net interest revenue
    10,711       9,800       911       33,095       32,671       424  
                                                 
Other operating revenue
    42,145       40,847       1,298       121,485       120,676       809  
Operating expense
    45,985       44,571       1,414       130,886       128,898       1,988  
Net loans charged off
    3,834       1,089       2,745       9,734       7,647       2,087  
Gain on financial instruments, net
    266             266       282             282  
Income before taxes
    3,303       4,987       (1,684 )     14,242       16,802       (2,560 )
Federal and state income tax
    1,285       1,940       (655 )     5,540       6,536       (996 )
                                                 
Net income
  $ 2,018     $ 3,047     $ (1,029 )   $ 8,702     $ 10,266     $ (1,564 )
                                                 
Average assets
  $ 3,593,863     $ 2,833,228     $ 760,635     $ 3,413,492     $ 2,976,690     $ 436,802  
Average loans
    1,066,361       1,067,375       (1,014 )     1,078,609       1,048,421       30,188  
Average deposits
    3,458,296       2,717,049       741,247       3,331,613       2,906,428       425,185  
Average invested capital
    173,870       200,015       (26,145 )     183,351       196,358       (13,007 )
Return on assets
    0.22 %     0.43 %     (21 ) bp     0.34 %     0.46 %     (12 ) bp
Return on invested capital
    4.60 %     6.04 %     (144 ) bp     6.35 %     6.99 %     (64 ) bp
Efficiency ratio
    87.00 %     88.00 %     (100 ) bp     84.67 %     84.06 %     61 bp
Net charge-offs (annualized) to average loans
    1.43 %     0.40 %     103 bp     1.21