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BOK Financial 10-Q 2011

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 8, 2011

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, 2011
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: 68,462,869 shares of common stock ($.00006 par value) as of June 30, 2011.
 

 
 

 

BOK Financial Corporation
Form 10-Q
Quarter Ended June 30, 2011

Index

Part I.  Financial Information
 
Management’s Discussion and Analysis (Item 2)        
1
Market Risk (Item 3)                                                                                              
44
Controls and Procedures (Item 4)
46
Consolidated Financial Statements – Unaudited (Item 1)
47
Six Month Financial Summary – Unaudited (Item 2)
97
Quarterly Financial Summary – Unaudited (Item 2)
98
Quarterly Earnings Trend – Unaudited   
100
   
Part II.  Other Information
 
Item 1.  Legal Proceedings
101
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
101
Item 6.  Exhibits
101
Signatures
102


 
 

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

Performance Summary

BOK Financial Corporation (“the Company”) reported net income of $69.0 million or $1.00 per diluted share for the second quarter of 2011, compared to $63.5 million or $0.93 per diluted share for the second quarter of 2010 and $64.8 million or $0.94 per diluted share for the first quarter of 2011.  Net income for the six months ended June 30, 2011 totaled $133.8 million or $1.95 per diluted share compared with net income of $123.7 million or $1.81 per diluted share for the six months ended June 30, 2010.

Highlights of the second quarter of 2011 included:

·  
Net interest revenue totaled $174.0 million for the second quarter of 2011 compared to $182.1 million for the second quarter of 2010 and $170.6 million for the first quarter of 2011.  Net interest margin was 3.40% for the second quarter of 2011, 3.65% for the second quarter of 2010 and 3.47% for the first quarter of 2011.  The decrease in net interest revenue compared with the second quarter of 2010 was due primarily to the reinvestment of cash flows from the securities portfolio at lower rates.

·  
Fees and commissions revenue totaled $127.8 million for the second quarter of 2011 compared to $128.2 million for the second quarter of 2010 and $123.3 million for the first quarter of 2011.  Revenue growth distributed among most fee-generating activities was offset by decreased deposit service charges and fees due primarily to changes in overdraft fee regulations which became effective in the second half of 2010.  Revenue growth over the first quarter of 2011 was distributed amongst most of our fee generating businesses, partially offset by a decrease in brokerage and trading revenue.

·  
Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $189.7 million, up $3.3 million over the second quarter of 2010 and up $8.1 million over the previous quarter.  Personnel costs were up $8.5 million over the second quarter of 2010.  Non-personnel expenses were down $5.3 million due primarily to a decrease in net losses of repossessed assets.  Operating expenses increased over the first quarter of 2011 primarily due to higher personnel costs and mortgage banking expenses.

·  
Provision for credit losses totaled $2.7 million for the second quarter of 2011 compared to $36.0 million for the second quarter of 2010 and $6.3 million for the first quarter of 2011.  Net loans charged off decreased to $8.5 million in the second quarter of 2011 from $35.6 million in the second quarter of 2010 and $10.3 million in the first quarter of 2011.

·  
The combined allowance for credit losses totaled $297 million or 2.77% of outstanding loans at June 30, 2011, down from $303 million or 2.86% of outstanding loans at March 31, 2011.  Nonperforming assets totaled $351 million or 3.23% of outstanding loans and repossessed assets at June 30, 2011, down from $379 million or 3.54% of outstanding loans and repossessed assets at March 31, 2011.

·  
Outstanding loan balances were $10.7 billion at June 30, 2011, up $148 million over March 31, 2011.  Commercial loans balances continued to grow in the second quarter of 2011, increasing $130 million over March 31, 2011.  Commercial real estate loans decreased $39 million.  Residential mortgage loans increased $91 million and consumer loans decreased $34 million.

·  
Period-end deposits totaled $17.6 billion at June 30, 2011 compared to $17.9 billion at March 31, 2011.  Interest-bearing transaction accounts decreased $516 million and time deposits decreased $43 million.  Demand deposits increased $269 million.

·  
Tangible common equity ratio increased to 9.71% at June 30, 2011 from 9.54% at March 31, 2011.  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.

 
- 1 -

 

The Company and its subsidiary bank exceeded the regulatory definition of well capitalized.  The Company’s Tier 1 capital ratios as defined by banking regulations were 13.30% at June 30, 2011 and 12.97% at March 31, 2011.

·  
The Company paid a cash dividend of $19 million or $0.275 per common share during the second quarter of 2011.  On July 26, 2011, the board of directors declared a cash dividend of $0.275 per common share payable on or about August 26, 2011 to shareholders of record as of August 12, 2011.


Results of Operations

Net Interest Revenue and Net Interest Margin

Net interest revenue is the interest earned on debt securities, loans and other interest-earning assets less interest paid for interest-bearing deposits and other borrowings.  The net interest margin is calculated by dividing net interest revenue by average interest-earning assets.  Net interest spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities.  Net interest margin is typically greater than net interest spread due to interest income earned on assets funded by non-interest bearing liabilities such as demand deposits and equity.

Net interest revenue totaled $174.0 million for the second quarter of 2011, compared to $182.1 million for the second quarter of 2010 and $170.6 million for the first quarter of 2011.  The decrease in net interest revenue from the second quarter of 2010 was due primarily to lower yield on our available for sale securities portfolio, partially offset by lower funding costs and an increase in interest earning assets.  The increase in net interest revenue over the first quarter of 2011 results from an increase in interest earning assets.

Net interest margin was 3.40% for the second quarter of 2011, 3.65% for the second quarter of 2010 and 3.47% for the first quarter of 2011.

The tax-equivalent yield on earning assets was 4.01% for the second quarter of 2011, down 24 basis points from the second quarter of 2010.  The available for sale securities portfolio yield decreased 51 basis points to 3.04%.  Cash flows from our available for sale securities portfolio were reinvested at lower current rates.  Loan yields decreased 14 basis points to 4.69%.  Funding costs were down 4 basis points from the second quarter of 2010.  The cost of interest-bearing deposits decreased 16 basis points and the cost of other borrowed funds increased 42 basis points.  The increased cost of other borrowed funds was due to a $115 million increase in our obligation to fund scheduled payments to investors for loans sold into Government National Mortgage Association (“GNMA”) mortgage pools as discussed more fully in the Loans section of Management’s Analysis & Discussion of Financial Condition following.  The weighted average interest rate on this obligation was 5.93%.  We expect to reduce our ongoing interest costs by repurchasing a significant portion of these loans.

Net interest margin decreased 7 basis points from the first quarter of 2011.  Yield on average earning assets decreased 9 basis points to 4.01%.  Yield on the available for sale securities portfolio decreased 13 basis points.  Yield on the loan portfolio decreased 6 basis points.  The cost of interest-bearing liabilities increased 1 basis point from the previous quarter.

Average earning assets for the second quarter of 2011 increased $564 thousand or 3% over second quarter of 2010.  The average balance of available for sale securities, which consist largely of U.S. government agency issued residential mortgage-backed securities, increased $769 million.  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 allowance for loan losses, decreased $269 million.   All major loan categories decreased largely due to reduced customer demand and normal repayment trends.

Average deposits increased $1.7 billion over the second quarter of 2010, including an $897 million increase in average interest-bearing transaction accounts and an $893 million increase in average demand deposit balances.   Average time deposits decreased $69 million compared to the second quarter of 2010.  Average borrowed funds decreased $1.8 billion compared to the second quarter of 2010.


 
- 2 -

 

Average earning assets for the second quarter of 2011 increased $354 million over the first quarter of 2011.  Average available for sale securities increased $167 million and mortgage trading securities increased $121 million.  Average outstanding loans, net of allowance for loan losses, increased $31 million.  Average commercial and residential mortgage loan balances increased in second quarter of 2011, offset by a decrease in commercial real estate and consumer loans.  Average deposits decreased by $138 million during the second quarter of 2011, including a $448 million decrease in interest-bearing transaction accounts, partially offset by a $288 million increase in demand deposits and a $15 million increase in time deposits.  Average balances of borrowed funds increased $332 million.

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 may use derivative instruments to manage our interest rate risk.  Derivative contracts are carried on the balance sheet at fair value.  Changes in fair value of these contracts are included in 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
   
Six Months Ended
 
   
June 30, 2011 / 2010
   
June 30, 2011 / 2010
 
 
       
Change Due To1
         
Change Due To1
 
               
Yield /
               
Yield
 
   
Change
   
Volume
   
Rate
   
Change
   
Volume
   
/Rate
 
Tax-equivalent interest revenue:
                                   
  Funds sold and resell agreements
  $ (5 )   $ (5 )   $     $ (9 )   $ (7 )   $ (2 )
  Trading securities
    (77 )     198       (275 )     (294 )     242       (536 )
  Investment securities:
                                               
Taxable securities
    1,016       1,298       (282 )     2,359       1,883       476  
Tax-exempt securities
    (700 )     (641 )     (59 )     (1,333 )     (1,173 )     (160 )
Total investment securities
    316       657       (341 )     1,026       710       316  
  Available for sale securities:
                                               
Taxable securities
    (5,250 )     6,158       (11,408 )     (13,811 )     9,298       (23,109 )
Tax-exempt securities
    80       71       9       (1 )     80       (81 )
Total available for sale securities
    (5,170 )     6,229       (11,399 )     (13,812 )     9,378       (23,190 )
  Mortgage trading securities
    795       752       43       (10 )     124       (134 )
  Residential mortgage loans held for sale
    (672 )     (560 )     (112 )     (1,080 )     (1,152 )     72  
  Loans
    (7,133 )     (3,448 )     (3,685 )     (15,144 )     (7,229 )     (7,915 )
Total tax-equivalent interest revenue
    (11,946 )     3,823       (15,769 )     (29,323 )     2,066       (31,389 )
Interest expense:
                                               
  Transaction deposits
    (3,914 )     843       (4,757 )     (6,465 )     2,180       (8,645 )
  Savings deposits
    18       26       (8 )     27       44       (17 )
  Time deposits
    764       (310 )     1,074       (270 )     (695 )     425  
  Funds purchased
    (398 )     (70 )     (328 )     (617 )     (271 )     (346 )
  Repurchase agreements
    (1,067 )     (121 )     (946 )     (1,509 )     (206 )     (1,303 )
  Other borrowings
    823       (9,125 )     9,948       (298 )     (13,122 )     12,824  
  Subordinated debentures
    6       2       4       17       4       13  
Total interest expense
    (3,768 )     (8,755 )     4,987       (9,115 )     (12,066 )     2,951  
  Tax-equivalent net interest revenue
    (8,178 )     12,578       (20,756 )     (20,208 )     14,132       (34,340 )
Change in tax-equivalent adjustment
    (66 )                     (161 )                
Net interest revenue
  $ (8,112 )                   $ (20,047 )                
1 Changes attributable to both volume and yield/rate are allocated to both volume and yield/rate on an equal basis.

 
- 3 -

 

Other Operating Revenue

Other operating revenue was $143.0 million for the second quarter of 2011 compared to $157.4 million for the second quarter of 2010 and $117.6 million for the first quarter of 2011.  Fees and commissions revenue was flat with the second quarter of 2010.  Net gains on securities, derivatives and other assets decreased $12.0 million.  Other-than-temporary impairment charges recognized in earnings in the second quarter of 2011 were $2.2 million greater than charges recognized in the second quarter of 2010.

Other operating revenue increased $25.4 million over the first quarter of 2011.  Fees and commissions revenue increased $4.6 million.  Net gains on securities, derivatives and other assets increased $21.1 million.  Other-than-temporary impairment charges recognized in earnings were $225 thousand less than charges recognized in the first quarter of 2011.
 
 
Table 2 – Other Operating Revenue 
(In thousands)
   
Three Months Ended
June 30,
   
Increase
   
% Increase
   
Three Months Ended
   
Increase
   
% Increase
 
   
2011
   
2010
   
(Decrease)
   
(Decrease)
   
March 31, 2011
   
(Decrease)
   
(Decrease)
 
                                           
 Brokerage and trading revenue
  $ 23,725     $ 24,754     $ (1,029 )     (4 %)   $ 25,376     $ (1,651 )     (7 %)
 Transaction card revenue
    31,024       28,263       2,761       10 %     28,445       2,579       9 %
 Trust fees and commissions
    19,150       17,737       1,413       8 %     18,422       728       4 %
 Deposit service charges and fees
    23,857       28,797       (4.940 )     (17 %)     22,480       1,377       6 %
 Mortgage banking revenue
    19,356       18,335       1,021       6 %     17,356       2,000       12 %
 Bank-owned life insurance
    2,872       2,908       (36 )     (1 %)     2,863       9       %
 Other revenue
    7,842       7,374       468       6 %     8,332       (490 )     (6 %)
   Total fees and commissions revenue
    127,826       128,168       (342 )     %     123,274       4,552       4 %
Gain (loss) on other assets, net
    3,344       1,545       1,799       N/A       (68 )     3,412       N/A  
Gain (loss) on derivatives, net
    1,225       7,272       (6,047 )     N/A       (2,413 )     3,638       N/A  
Gain on available for sale securities
    5,468       8,469       (3,001 )     N/A       4,902       566       N/A  
Gain (loss) on mortgage trading securities, net
    9,921       14,631       (4,710 )      N/A       (3,518 )     13,439        N/A  
Total other-than-temporary impairment
    (74 )     (10,959 )     10,885       N/A             (74 )     N/A  
Portion of loss recognized in (reclassified from) other comprehensive income
    (4,750 )     8,313       (13,063 )     N/A       (4,599 )     (151 )     N/A  
Net impairment losses recognized in earnings
    (4,824 )     (2,646 )     (2,178 )     N/A       (4,599 )     (225 )     N/A  
     Total other operating revenue
  $ 142,960     $ 157,439     $ (14,479 )     (9 %)   $ 117,578     $ 25,382       22 %

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 commissions revenue are a significant part of our business strategy and represented 42% of total revenue for the second quarter of 2011, 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, which includes revenues from securities trading, retail brokerage, customer derivative and investment banking, decreased $1.0 million or 4­­% compared to the second quarter of 2010.  Securities trading revenue totaled $13.3 million for the second quarter of 2011 compared to $14.3 million for the second quarter of 2010, down $1.0 million or 7%.   Securities trading revenue represents net realized and unrealized gains

 
- 4 -

 

primarily related to U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities sold to institutional customers.  The revenue decrease was largely due to lower residential mortgage-backed securities transaction volume.

Revenue earned from retail brokerage transactions increased $1.8 million or 33% over the second quarter of 2010 to $7.4 million.  Retail brokerage revenue is primarily based on fees and commissions earned on sales of fixed income securities, annuities and mutual funds to retail customers.  Revenue growth was primarily due to increased market volatility which increased customer demand.

Customer hedging revenue is based primarily on realized and unrealized changes in the fair value of derivative contracts held for customer risk management programs.  As more fully discussed under Customer Derivative Programs in Note 3 of the Consolidated Financial Statements, we offer commodity, interest rate, foreign exchange and equity derivatives to our customers.  Customer hedging revenue totaled $1.1 million for the second quarter of 2011, down $933 thousand or 46% compared to the second quarter of 2010.  Energy derivative volume declined due primarily to relatively stable commodity pricing, partially offset by an increase in interest rate derivative transactions.

Investment banking includes fees earned upon completion of underwriting and financial advisory service which totaled $1.9 million for the second quarter of 2011, an $886 thousand decrease compared to the second quarter of 2010 related to the timing and volume of completed transactions.

Brokerage and trading revenue decreased $1.7 million from the first quarter of 2011 due primarily to a decrease in securities trading revenue.  The volume of residential mortgage-backed securities sold to institutional customers decreased, partially offset by increases in municipal securities sales.  Decreases in energy derivative revenues were fully offset by increases in interest rate derivatives revenue.  Investment banking fees decreased compared to the previous quarter, partially offset by an increase in retail brokerage.

We continue to monitor the on-going development of rules to implement the Volcker Rule of the Dodd-Frank Act which prohibits banking entities from engaging in proprietary trading as defined by the Dodd-Frank Act and restricts sponsorship of or investment in private equity funds and hedge funds, subject to limited exceptions.  Regulations implementing the Volcker Rule are scheduled to take effect by the earlier of 12 months after such rules are final or July 21, 2012.  The ultimate impact of the implementation of the Volcker Rule remains uncertain and final regulations possibly could impose additional operational or compliance costs or prohibit certain trading activities on behalf of our customers.

Title VII of the Dodd-Frank Act subjects nearly all derivative transaction to Commodity Futures Trading Commission (“CFTC”) or Securities and Exchange Commission (“SEC”) regulations.  Title VII, among other things, imposes registration, recordkeeping, reporting, capital and margin, as well as business conduction requirements on major swap dealers and major swap participants.  The CFTC and SEC have recently delayed the effectiveness of a large portion of the proposed regulations that would implement Title VII until the earlier of 60 days following the adoption of final rules or December 31, 2011.  The Company currently anticipates that one or more of its subsidiaries may be required to register as a “swap dealer” with the CFTC.  The ultimate impact of Title VII is uncertain, but may pose higher operational and compliance costs on the Company.

Transaction card revenue depends largely on the volume and amount of transactions processed, the number of TransFund automated teller machine (“ATM”) locations and the number of merchants served.  Transaction card revenue increased $2.8 million or 10% over the second quarter of 2010.  Revenues from the processing of transactions on behalf of the members of our TransFund ATM network totaled $12.5 million, an increase of $359 thousand or 3% over the second quarter of 2010, due primarily to increased ATM transaction volumes.  Merchant services fees paid by customers for account management and electronic processing of transactions totaled $9.2 million, a $1.4 million or 18% increase over the prior year primarily as a result of cross-selling opportunities throughout our geographical footprint.  Check card revenue from interchange fees paid by merchant banks for transactions processed from cards issued by the Company increased $976 thousand or 12% to $9.3 million due primarily to an increase in the number of transactions processed.

Transaction card revenue increased $2.6 million over the first quarter of 2011.  Merchant services fees increased by $1.3 million on increased market penetration and growth in number of transactions processed.   Check card and ATM network revenue also increased over the prior quarter.

 
- 5 -

 

On June 29, 2011, the Federal Reserve Board issued a final rule establishing standards for debit card interchange fees and prohibiting network exclusivity arrangements and routing restrictions as required by the Dodd-Frank Act.  Under the final rule, the maximum permissible interchange fee that an issuer may receive for an electronic debit transaction will be the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction.  The rule is effective on October 1, 2011.  In addition, the Board approved an interim rule that allows for an upward adjustment of no more than 1 cent to an issuer’s debit card interchange fee if the issuer develops and implements policies and procedures reasonably designed to achieve the fraud-prevention standards outlined in the interim final rule.  Issuers meeting these standards must certify as to their eligibility to receive this adjustment.  We would expect a decline of $20 million to $24 million in our transaction card revenue annually based on the final rule.

Trust fees and commissions increased $1.4 million or 8% over the second quarter of 2010 primarily due to an increase in the fair value of trust assets, partially offset by lower balances in our proprietary mutual funds.  In addition, 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 $1.6 million for the second quarter of 2011, $1.2 million for the first quarter of 2011 and $816 thousand for the second quarter of 2010.  The fair value of trust assets administered by the Company totaled $33.1 billion at June 30, 2011 compared to $32.0 billion at March 31, 2011 and $29.8 billion at June 30, 2010.  Trust fees and commissions also increased $728 thousand over the first quarter of 2011.

Deposit service charges and fees decreased $4.9 million or 17% compared to the second quarter of 2010.  Overdraft fees decreased $4.5 million or 24% to $14.7 million.  The decrease in overdraft fees was primarily due to changes in federal regulations concerning certain overdraft charges which were effective July 1, 2010.  Commercial account service charge revenue totaled $7.3 million, down 1% from the prior year.  Customers continue to maintain high commercial account balances to maximize the earnings credit, a non-cash method for commercial customers to avoid incurring charges for deposit services based on account balances.  Service charges on retail deposit accounts decreased modestly to $1.4 million for the second quarter of 2011.

Deposit service charges and fees increased $1.4 million over the prior quarter primarily due a seasonal increase in overdraft charges of $1.6 million over the first quarter of 2011.  Overdraft volumes historically are lower in the first quarter of the year.

Mortgage banking revenue increased $1.0 million or 6% over the second quarter of 2010.  Revenue from originating and marketing mortgage loans increased $645 thousand or 7% over the second quarter of 2010 primarily due to increased gains on sales of mortgages in the secondary market.  Mortgage servicing revenue increased $376 thousand or 4% over the second quarter of 2010.  The outstanding principal balance of mortgage loans serviced for others increased $226 million to $11.3 billion.  Mortgage banking revenue increased $2.0 million over the first quarter of 2011 primarily due to a $1.9 million increase in revenue from originating and marketing residential mortgage loans.  Residential mortgage loans funded for sale increased $77 million over the previous quarter.

Table 3 – Mortgage Banking Revenue 
(In thousands)
   
Three Months Ended
June 30,
         
%
   
Three Months Ended
             
   
2011
   
2010
   
Increase
(Decrease)
   
Increase
(Decrease)
   
March 31, 2011
   
Increase
   
% Increase
 
                                           
 Originating and marketing revenue
  $ 9,409     $ 8,764     $ 645       7 %   $ 7,529     $ 1,880       25 %
 Servicing revenue
    9,947       9,571       376       4 %     9,827       120       1 %
     Total mortgage revenue
  $ 19,356     $ 18,335     $ 1,021       6 %   $ 17,356     $ 2,000       12 %
                                                         
Mortgage loans funded for sale
  $ 528,749     $ 540,835     $ (12,086 )     (2 %)   $ 451,821     $ 76,928       17 %
Mortgage loan refinances to total funded
    36 %     34 %                     50 %                
                                                         
   
June 30,
                                         
      2011       2010    
Increase
   
% Increase
   
March 31, 2011
   
Increase
   
% Increase
 
Outstanding principal balance of mortgage loans serviced for others
  $ 11,283,442     $ 11,057,385     $ 226,057       2 %   $ 11,202,626     $ 80,816       1 %


 
- 6 -

 

Net gains on securities, derivatives and other assets

We recognized $5.5 million of net gains on sales of $654 million of available for sale securities in the second quarter of 2011.  Securities were sold either because they had reached their expected maximum potential return or to mitigate exposure from rising interest rates.  We recognized $8.5 million of gains on sales of $595 million of available for sale securities in the second quarter of 2010 and $4.9 million of net gains on sales of $793 million of available for sale securities in the first quarter of 2011.

We also maintain a portfolio of residential mortgage backed securities issued by U.S. government agencies and interest rate derivative contracts designated as an economic hedge of the changes in the fair value of our mortgage servicing rights.  The fair value of our mortgage servicing rights fluctuate due to changes in prepayment speeds and other assumptions as more fully described in Note 5 to the Consolidated Financial Statements.  As benchmark mortgage rates increase, prepayment speeds slow and the value of our mortgage servicing rights increase.  As benchmark mortgage rates fall, prepayment speeds increase and the value of our mortgage servicing rights decrease.

Table 4 – Gain (Loss) on Mortgage Servicing Rights
(In thousands)
   
Three Months Ended
 
   
June 30, 2011
   
March 31, 2011
   
June 30, 2010
 
                   
Gain (loss) on mortgage hedge derivative contracts
  $ 1,224     $ (2,419 )   $ 7,800  
Gain (loss) on mortgage trading securities
    9,921       (3,518 )     14,631  
Gain (loss) on economic hedge of mortgage servicing rights
    11,145       (5,937 )     22,431  
Gain (loss) on change in fair value of mortgage servicing rights
    (13,493 )     3,129       (19,458 )
Gain (loss) on changes in fair value of mortgage servicing rights, net of economic hedges
    (2,348 )   $ (2,808 )   $  2,973  
                         
Net interest revenue on mortgage trading securities
  $ 5,121     $ 3,058     $ 4,880  

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 $4.3 million in earnings during the second quarter of 2011.  These losses primarily related to additional declines in projected cash flows of private-label mortgage backed securities as a result of increased home price depreciation.  We also recognized a $521 thousand other-than-temporary impairment on certain below investment grade municipal securities based on our assessment of the issuer’s on-going financial difficulties.  We recognized other-than-temporary impairment losses in earnings of $2.6 million in the second quarter of 2010 and $4.6 million in the first quarter of 2011.



 
- 7 -

 

Other Operating Expense

Other operating expense for the second quarter of 2011 totaled $203.2 million, down $2.7 million or 1% compared to the second quarter of 2010.  Changes in the fair value of mortgage servicing rights increased operating expense $13.5 million in the second quarter of 2011 and $19.5 million in the second quarter of 2010.  Excluding changes in the fair value of mortgage servicing rights, operating expenses were up $3.3 million or 2% over the second quarter of 2010.  Personnel expenses increased $8.5 million or 9%.  Non-personnel expenses decreased $5.3 million or 6%.

Excluding changes in the fair value of mortgage servicing rights, operating expenses were up $8.1 million over the previous quarter.  Personnel expenses increased $5.6 million and non-personnel expenses increased $2.5 million.

Table 5 – Other Operating Expense
(In thousands)
   
Three Months
         
%
   
Three Months Ended
         
%
 
   
Ended June 30,
   
Increase
   
Increase
   
March 31,
   
Increase
   
Increase
 
   
2011
   
2010
   
(Decrease)
   
(Decrease)
   
2011
   
(Decrease)
   
(Decrease)
 
                                           
 Regular compensation
  $ 61,380     $ 58,932     $ 2,448       4 %   $ 60,804     $ 576       1 %
 Incentive compensation:
                                                       
 Cash-based
    23,530       22,148       1,382       6 %     19,555       3,975       20 %
 Stock-based
    3,122       390       2,732       701 %     3,431       (309 )     (9 %)
 Total incentive compensation
    26,652       22,538       4,114       18 %     22,986       3,666       16 %
 Employee benefits
    17,571       15,584       1,987       13 %     16,204       1,367       8 %
 Total personnel expense
    105,603       97,054       8,549       9 %     99,994       5,609       6 %
 Business promotion
    4,777       4,945       (168 )     (3 %)     4,624       153       3 %
 Professional fees and services
    6,258       6,668       (410 )     (6 %)     7,458       (1,200 )     (16 %)
 Net occupancy and equipment
    15,554       15,691       (137 )     (1 %)     15,604       (50 )     %
 Insurance
    4,771       5,596       (825 )     (15 %)     6,186       (1,415 )     (23 %)
 Data processing & communications
    24,428       21,940       2,488       11 %     22,503       1,925       9 %
 Printing, postage and supplies
    3,586       3,525       61       2 %     3,082       504       16 %
 Net losses & operating expenses of repossessed assets
    5,859       13,067       (7,208 )     N/A       6,015       (156 )     N/A  
 Amortization of intangible assets
    896       1,323       (427 )     (32 %)     896             %
 Mortgage banking costs
    8,968       10,380       (1,412 )     (14 %)     6,471       2,497       39 %
 Change in fair value of mortgage servicing rights
    13,493       19,458       (5,965 )     N/A       (3,129 )     16,622       N/A  
 Other expense
    9,016       6,265       2,751       44 %     8,745       271       3 %
 Total other operating expense
  $ 203,209     $ 205,912     $ (2,703 )     (1 %)   $ 178,449     $ 24,760       14 %
                                                         
 Number of employees (full-time equivalent)
    4,530       4,428       102       2 %     4,533       (3 )     %
Certain percentage increases (decreases) are not meaningful for comparison purposes.

Personnel expense

Regular compensation, which consists of salaries and wages, overtime pay and temporary personnel costs increased $2.4 million or 4% over the second quarter of 2010 primarily due to standard annual merit increases which were effective in the second quarter of 2011.  The Company generally awards annual merit increases effective April 1st for a majority of its staff.

Incentive compensation increased $4.1 million over the second quarter of 2010.  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.  Total cash-based incentive compensation increased $1.4 million over the second quarter of 2010.  Cash-based incentive compensation related to brokerage and

 
- 8 -

 

trading revenue was flat with the prior year.  The increase in cash-based incentive compensation was primarily for other business lines.

The Company also provides stock-based incentive compensation plans.  Stock-based compensation plans include both equity and liability awards.  Compensation expense related to liability awards increased $2.4 million over the second quarter of 2010 due to changes in the market value of BOK Financial common stock and other investments.  The market value of BOK Financial common stock increased $3.09 per share in the second quarter of 2011 and decreased $4.97 per share in the second quarter of 2010.  Compensation expense for equity awards increased $288 thousand compared with the second quarter of 2010.  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 $2.0 million or 13% over the second quarter of 2010 primarily due to increased expenses related to employee medical insurance costs, employee retirement plans and payroll taxes.  Medical insurance costs were $1.0 million or 23% higher than the second quarter of 2010.  The Company self-insures a portion of its employee health care coverage and these costs may be volatile.

Personnel expense increased $5.6 million over the first quarter of 2011 primarily due to higher incentive compensation expense and employee benefits expense.  Incentive compensation increased $3.7 million over the first quarter of 2011, including a $4.0 million increase in cash-based incentive compensation, partially offset by a $309 thousand decrease in stock-based compensation.  Employee benefit expenses increased $1.4 million over the first quarter of 2011.  Increased expenses related to employee medical insurance costs and retirement plans in the second quarter of 2011 were partially offset by the impact of a seasonal increase in payroll taxes in the first quarter of 2011.  Regular compensation expense increased $576 thousand over the first quarter of 2011.

Non-personnel operating expenses

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, decreased $5.3 million or 6% compared to the second quarter of 2010.  Net losses and operating expenses on repossessed assets decreased $7.2 million primarily due to a decrease in net writedowns of repossessed assets.  Mortgage banking costs decreased $1.4 million.  Expense related to actual prepayments of mortgage loans serviced for others decreased $2.4 million.  Provisions for foreclosure costs and losses on loan sold with recourse increased $959 thousand.  Data processing and communication expenses increased $2.5 million due primarily to increased transaction card activity.

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, increased $2.5 million over the first quarter of 2011.  Mortgage banking costs increased $2.5 million over the first quarter of 2011.  Mortgage banking expenses increased $2.5 million primarily due to a $2.7 million increase in the provisions for losses on loans sold with recourse and foreclosure costs on loans serviced for others.  Data processing and communications expense increased $2.0 million primarily due to increased transaction card activity.  FDIC insurance expense decreased $1.5 million based on the estimated impact of a change from an assessment based on deposit balances to an assessment based on consolidated assets minus average tangible equity.
 
 
Income Taxes

Income tax expense was $39.4 million or 36% of book taxable income for the second quarter of 2011 compared to $32.0 million or 33% of book taxable income for the second quarter of 2010 and $38.8 million or 37% of book taxable income for the first quarter of 2011.  The increase in the effective tax rate over the second quarter of 2010 was due to higher state income taxes and reduced utilization of income tax credits.

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 $13 million at June 30, 2011, $12 million at December 31, 2010 and $13 million at June 30, 2010.


 
- 9 -

 

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 rates 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 also based on rates which approximate wholesale market rates for funds with similar duration and re-pricing characteristics.  Market rates are generally based on LIBOR or interest rate swap rates.  The funds credit formula applied to deposit products with indeterminate maturities is established based on their re-pricing characteristics reflected in a combination of the short-term LIBOR rate and a moving average of an intermediate term swap rate, with an appropriate spread applied to both.  Shorter duration products are weighted towards the short term LIBOR rate and longer duration products are weighted towards the intermediate swap rates.  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 $16 million over the second quarter of 2010.   The increase in net income attributed to our lines of business was due primarily to a decrease in net loans charged off compared to the second quarter of 2010.  Net income attributed to funds management and other decreased compared to the second quarter of 2010 primarily due to a decrease in net interest revenue earned by and operating expenses attributed to the funds management unit, partially offset by a decrease in the loan loss provision in excess of charge-offs to the business lines.

Table 6 – Net Income by Line of Business
(In thousands)
   
Three Months Ended June 30,
   
Six Months Ended June 30,
 
   
2011
   
2010
   
2011
   
2010
 
Commercial banking
  $ 32,105     $ 13,583     $ 61,149     $ 25,175  
Consumer banking
    6,814       8,878       12,560       26,274  
Wealth management
    3,436       3,556       7,419       6,693  
Subtotal
    42,355       26,017       81,128       58,142  
Funds management and other
    26,652       37,505       52,653       65,513  
Total
  $ 69,007     $ 63,522     $ 133,781     $ 123,655  


 
- 10 -

 

Commercial Banking

Commercial banking contributed $32 million to consolidated net income in the second quarter of 2011, up $19 million over the second quarter of 2010.  Net loans charged-off decreased $18 million.  In addition, losses on repossessed assets decreased and net interest revenue increased.

The Company has focused on development of banking services for small business.  As part of this initiative, small business banking activities were transferred to the Commercial Banking segment from the Consumer Banking segment in the second quarter of 2011.  This transfer increased Commercial Banking net income by $2.5 million.    Net interest revenue increased $4.0 million.  Average deposits increased $672 million and average loans increased $21 million primarily due to the transfer of these balances from the Consumer Banking segment.  Other operating revenue increased $2.0 million mostly offset by increased operating expenses.

Table 7 – Commercial Banking
(Dollars in thousands)
   
Three Months Ended
June 30,
   
Increase
   
Six Months Ended
June 30,
   
Increase
 
   
2011
   
2010
   
(Decrease)
   
2011
   
2010
   
(Decrease)
 
                                     
NIR (expense) from external sources
  $ 86,067     $ 85,129     $ 938     $ 170,020     $ 170,027     $ (7 )
NIR (expense) from internal sources
    (7,225 )     (12,633 )     5,408       (16,270 )     (25,016 )     8,746  
Total net interest revenue
    78,842       72,496       6,346       153,750       145,011       8,739  
                                                 
Other operating revenue
    36,104       33,531       2,573       71,610       63,213       8,397  
Operating expense
    54,594       50,578       4,016       107,112       100,401       6,711  
Net loans charged off
    4,660       22,477       (17,817 )     11,437       50,856       (39,419 )
Loss on repossessed assets, net
    (3,147 )     (10,741 )     7,594       (6,731 )     (15,764 )     9,033  
Income before taxes
    52,545       22,231       30,314       100,080       41,203       58,877  
Federal and state income tax
    20,440       8,648       11,792       38,931       16,028       22,903  
                                                 
Net income
  $ 32,105     $ 13,583     $ 18,522     $ 61,149     $ 25,175     $ 35,974  
                                                 
Average assets
  $ 9,393,935     $ 8,982,359     $ 411,576     $ 9,283,264     $ 9,078,390     $ 204,874  
Average loans
    8,243,381       8,237,283       6,098       8,192,255       8,305,366       (113,111 )
Average deposits
    7,834,294       5,941,488       1,892,806       7,750,931       5,816,030       1,934,901  
Average invested capital
    867,491       909,930       (42,439 )     865,439       920,056       (54,617 )
Return on average assets
    1.37 %     0.61 %     76 bp     1.33 %     0.56 %     77 bp
Return on invested capital
    14.84 %     5.99 %     886 bp     14.25 %     5.52 %     873 bp
Efficiency ratio
    47.50 %     47.70 %     (21 ) bp     47.53 %     48.22 %     (69 ) bp
Net charge-offs (annualized) to average loans
    0.23 %     1.09 %     (87 ) bp     0.28 %     1.23 %     (95 ) bp

Net interest revenue increased $6.4 million or 9% over the second quarter of 2010 primarily due to a $1.9 billion increase in average deposits attributed to commercial banking, including small business banking deposits transferred from the Consumer Banking segment.  Additionally, loan yields improved over the second quarter of 2010.

Other operating revenue increased $2.6 million or 8% over the second quarter of 2010 primarily related to additional service charge revenue from the transfer of the small business banking activities.  Transaction card revenue also increased due to increased customer activity.  Energy derivative trading revenue and loan syndication fees decreased on lower transaction volume.

Operating expenses increased $4.0 million or 8% over the second quarter of 2010 primarily due to increased data processing costs related to higher transaction card volumes, increased personnel costs as a result of annual merit increases and higher corporate expense allocations related to the transfer of small business banking operations.

The average outstanding balance of loans attributed to commercial banking was $8.2 billion for the second quarter of 2011, largely unchanged from the second quarter of 2010.  See the Loans section of Management’s Analysis and Discussion of Financial Condition following for additional discussion of changes in commercial and commercial real

 
- 11 -

 

estate loans which are primarily attributed to the commercial banking segment.  Net commercial banking loans charged off decreased $17.8 million compared to the second quarter of 2010 to $4.7 million or 0.23% of average loans attributed to this line of business on an annualized basis.  The decrease in net loans charged off was primarily due to a decrease in losses on commercial real estate loans.
 
 
Average deposits attributed to commercial banking were $7.8 billion for the second quarter of 2011, up $1.9 billion or 32% over the second quarter of 2010, including $672 million related to the transfer of small business banking activities.  Average balances attributed to our commercial & industrial loan customers increased $657 million or 32%, average treasury services deposit balances increased $364 million or 23% and average balances attributed to our energy customers increased $154 million or 23%.  We believe that commercial customers continue to retain large cash reserves primarily due to continued economic uncertainty.

Consumer Banking

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

Consumer banking contributed $6.8 million to consolidated net income for the second quarter of 2011, a decrease of $2.1 million compared to the second quarter of 2010.  The change in fair value of our mortgage servicing rights, net of economic hedge decreased net income attributed to consumer banking by $2.3 million in the second quarter of 2011 and increased net income attributed to consumer banking by $3.0 million in the second quarter of 2010.  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.  Decreased net charge-offs and lower operating expenses were partially offset by a decrease in other operating revenue and net interest revenue, primarily due to the transfer of small business banking activities to the Commercial Banking segment.

Table 8 – Consumer Banking
(Dollars in thousands)
   
Three Months Ended
June 30,
   
Increase
   
Six Months Ended
June 30,
   
Increase
 
 
 
2011
   
2010
   
(Decrease)
   
2011
   
2010
   
(Decrease)
 
NIR (expense) from external sources
  $ 21,357     $ 21,498     $ (141 )   $ 40,022     $ 40,993     $ (971 )
NIR (expense) from internal sources
    7,597       11,444       (3,847 )     16,655       23,323       (6,668 )
Total net interest revenue
    28,954       32,942       (3,988 )     56,677       64,316       (7,639 )
                                                 
Other operating revenue
    46,340       50,439       (4,099 )     89,760       93,661       (3,901 )
Operating expense
    58,130       61,613       (3,483 )     113,269       117,782       (4,513 )
Net loans charged off
    3,435       10,300       (6,865 )     7,035       14,008       (6,973 )
Decrease in fair value of mortgage servicing rights
    (13,493 )     (19,458 )     5,965       (10,364 )     (5,526 )     (4,838 )
Gain on financial instruments, net
    11,145       22,431       (11,286 )     5,208       22,220       (17,012 )
Gain (loss) on repossessed assets, net
    (229 )     90       (319 )     (421 )     121       (542 )
Income before taxes
    11,152       14,531       (3,379 )     20,556       43,002       (22,446 )
Federal and state income tax
    4,338       5,653       (1,315 )     7,996       16,728       (8,732 )
                                                 
Net income
  $ 6,814     $ 8,878     $ (2,064 )   $ 12,560     $ 26,274     $ (13,714 )
                                                 
Average assets
  $ 5,819,151     $ 6,197,861     $ (378,710 )   $ 5,940,101     $ 6,178,632     $ (238,531 )
Average loans
    2,038,930       2,134,666       (95,736 )     2,017,161       2,134,307       (117,146 )
Average deposits
    5,640,794       6,094,679       (453,885 )     5,788,920       6,079,766       (290,846 )
Average invested capital
    271,353       312,192       (40,839 )     272,301       290,796       (18,495 )
Return on average assets
    0.47 %     0.57 %     (10 ) bp     0.43 %     0.86 %     (43 ) bp
Return on invested capital
    10.07 %     11.41 %     (134 ) bp     9.30 %     18.22 %     (892 ) bp
Efficiency ratio
    77.20 %     73.89 %     331 bp     77.35 %     74.56 %     279 bp
Net charge-offs (annualized) to
   average loans
    0.68 %     1.94 %     (126 ) bp     0.70 %     1.32 %     (62 ) bp
Mortgage loans funded for resale
  $ 528,749     $ 540,835     $ (12,086 )   $ 980,570     $ 924,128     $ 56,442  


 
- 12 -

 
   
June 30, 2011
   
June 30, 2010
   
Increase
(Decrease)
 
Banking locations
    207       198       9  
Mortgage loans servicing portfolio1
  $ 12,177,661     $ 11,863,233     $ 314,428  
1  
Includes outstanding principal for loans serviced for affiliates

Net interest revenue from consumer banking activities decreased $4.0 million or 12% compared to the second quarter of 2010 primarily due to the transfer of certain small business demand deposit balances to the Commercial Banking segment.  Average loans balances also decreased $96 million primarily due to the continued paydown of indirect automobile loans.  The Company previously disclosed its decision to exit the indirect automobile loan business in the first quarter of 2009.

Other operating revenue was down $4.1 million compared to the second quarter of 2010.  Deposit service charges decreased $6.8 million primarily due to lower overdraft fees as a result of changes in banking regulations that became effective in the third quarter of 2010.  Transaction card revenues increased $1.0 million on higher transaction volume.  Mortgage banking revenue increased $1.0 million on increased gains on mortgage loans sold in the secondary market.

Operating expenses decreased $3.5 million or 6% compared to the second quarter of 2010.  Mortgage banking expenses decreased due to lower provision for foreclosure costs on loans serviced for others.  Decreased corporate expense allocations related to the transfer of small business banking operations to the commercial banking segment were partially offset by increased personnel costs related to increased mortgage activity.

Net loans charged off by the consumer banking unit decreased $6.9 million compared to the second quarter of 2010.  Net consumer banking charge-offs include residential mortgage loans, indirect automobile loans, overdrawn deposit accounts and other direct consumer loans.

Average consumer deposits decreased $454 million or 7% compared to the second quarter of 2010 primarily due to the transfer of small business banking to the Commercial Banking segment.  Average demand deposits decreased $276 million or 32%, average time deposits decreased $149 million or 6% and average interest-bearing transaction accounts decreased $52 million or 4%.

Our Consumer Banking division originates, markets and services conventional and government-sponsored mortgage loans for all of our geographical markets.  We funded $533 million of mortgage loans in the second quarter of 2011 and $541 million in the second quarter of 2010.  Approximately 45% of our mortgage loans funded were in the Oklahoma market, 14% in the Colorado market, and 12% in the Texas market.  In addition to the $11.3 billion of mortgage loans serviced for others, the Consumer Banking division also services $833 million of loans for affiliated entities.  Approximately 93% of the mortgage loans serviced were to borrowers in our primary geographical market areas.  Mortgage servicing revenue increased $382 thousand or 4% over the second quarter of 2010 to $10.0 million.



 
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Wealth Management

Wealth Management contributed consolidated net income of $3.4 million in second quarter of 2011 compared to $3.6 million in second quarter of 2010.

Table 9 – Wealth Management
(Dollars in thousands)
   
Three Months Ended
June 30,
   
Increase
   
Six Months Ended
June 30,
   
Increase
 
   
2011
   
2010
   
(Decrease)
   
2011
   
2010
   
(Decrease)
 
NIR (expense) from external sources
  $ 7,184     $ 8,358     $ (1,174 )   $ 14,713     $ 16,987     $ (2,274 )
NIR (expense) from internal sources
    3,476       2,391       1,085       6,219       5,412       807  
Total net interest revenue
    10,660       10,749       (89 )     20,932       22,399       (1,467 )
                                                 
Other operating revenue
    42,699       42,020       679       82,558       79,340       3,218  
Operating expense
    46,899       43,829       3,070       90,086       84,901       5,185  
Net loans charged off
    836       3,135       (2,299 )     1,280       5,900       (4,620 )
Gain on financial instruments, net
          15       (15 )     18       16       2  
Income before taxes
    5,624       5,820       (196 )     12,142       10,954       1,188  
Federal and state income tax
    2,188       2,264       (76 )     4,723       4,261       462  
                                                 
Net income
  $ 3,436     $ 3,556     $ (120 )   $ 7,419     $ 6,693     $ 726  
                                                 
Average assets
  $ 3,659,617     $ 3,355,079     $ 304,538     $ 3,643,497     $ 3,321,811     $ 321,686  
Average loans
    945,825       1,084,581       (138,756 )     965,662       1,084,835       (119,173 )
Average deposits
    3,570,378       3,273,332       297,046       3,554,206       3,241,774