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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 November 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 September 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: 68,006,390 shares of common stock ($.00006 par value) as of September 30, 2011.
 

 
 

 

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

Index

Part I.  Financial Information
 
Management’s Discussion and Analysis (Item 2)        
1
Market Risk (Item 3)                                                                                              
 50
Controls and Procedures (Item 4)
 52
Consolidated Financial Statements – Unaudited (Item 1)
 53
Nine Month Financial Summary – Unaudited (Item 2)
  105
Quarterly Financial Summary – Unaudited (Item 2)
  106
Quarterly Earnings Trend – Unaudited
  108
   
Part II.  Other Information
 
Item 1.  Legal Proceedings
  109
Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds
  109
Item 6.  Exhibits
  109
Signatures
  110


 
 

 

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

Performance Summary

BOK Financial Corporation (“the Company”) reported net income of $85.1 million or $1.24 per diluted share for the third quarter of 2011, compared to $64.3 million or $0.94 per diluted share for the third quarter of 2010 and $69.0 million or $1.00 per diluted share for the second quarter of 2011.  Net income for the nine months ended September 30, 2011 totaled $218.9 million or $3.19 per diluted share compared with net income of $187.9 million or $2.75 per diluted share for the nine months ended September 30, 2010.

Highlights of the third quarter of 2011 included:

·  
Net interest revenue totaled $175.4 million for the third quarter of 2011, compared to $180.7 million for the third quarter of 2010 and $174.0 million for the second quarter of 2011.  Net interest margin was 3.34% for the third quarter of 2011, 3.52% for the third quarter of 2010 and 3.40% for the second quarter of 2011.  The decrease in net interest revenue compared with the third quarter of 2010 was due primarily to the reinvestment of cash flows from the securities portfolio at lower rates.

·  
Fees and commissions revenue totaled $146.0 million for the third quarter of 2011 compared to $136.9 million for the third quarter of 2010 and $127.8 million for the second quarter of 2011.  Mortgage-banking revenue was strong in both the third quarters of 2011 and 2010.  Low interest rates increased mortgage loan origination activity in both quarters.

·  
Operating expenses, excluding changes in the fair value of mortgage servicing rights, totaled $196.1 million, up $6.8 million over the third quarter of 2010 and up $6.4 million over the previous quarter.  Personnel costs were up $2.0 million over the third quarter of 2010.  Non-personnel expenses were up $4.8 million over the third quarter of 2010 and up $8.7 million over the prior quarter.  The Company accrued $5.0 million for exposure to on-going litigation and made a $4.0 million discretionary contribution to the BOKF Charitable Foundation during the third quarter of 2011.

·  
No provision for credit losses was recorded in the third quarter of 2011, compared to a provision for credit losses of $20.0 million for the third quarter of 2010 and $2.7 million for the second quarter of 2011.  Net loans charged off totaled $10.2 million or 0.37% of average loans on an annualized basis for the third quarter of 2011 compared to $20.1 million or 0.74% of average loans on an annualized basis in the third quarter of 2010 and $8.5 million or 0.32% on an annualized basis in the second quarter of 2011.

·  
The combined allowance for credit losses totaled $287 million or 2.58% of outstanding loans at September 30, 2011, down from $297 million or 2.77% of outstanding loans at June 30, 2011.  Nonperforming assets totaled $388 million or 3.45% of outstanding loans and repossessed assets at September 30, 2011 compared to $351 million or 3.23% of outstanding loans and repossessed assets at June 30, 2011.

·  
Outstanding loan balances were $11.1 billion at September 30, 2011, up $387 million over June 30, 2011.  Commercial loan balances continued to grow in the third quarter of 2011, increasing $297 million over June 30, 2011.  Commercial real estate loans increased $76 million and residential mortgage loans increased $44 million.  Consumer loans decreased $30 million.

·  
Period-end deposits totaled $18.4 billion at September 30, 2011 compared to $17.6 billion at June 30, 2011.  Demand deposit accounts increased $688 million and interest-bearing transaction accounts increased $240 million.  Time deposits decreased $80 million.

·  
The tangible common equity ratio was 9.65% at September 30, 2011 and 9.71% at June 30, 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 continue to exceed the regulatory definition of well capitalized.  The Company’s Tier 1 capital ratios as defined by banking regulations were 13.14% at September 30, 2011 and 13.30% at June 30, 2011.

·  
The Company paid a cash dividend of $19 million or $0.275 per common share during the third quarter of 2011.  On October 25, 2011, the board of directors declared an increase in the cash dividend to $0.33 per common share payable on or about November 30, 2011 to shareholders of record as of November 16, 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 $175.4 million for the third quarter of 2011 compared to $180.7 million for the third quarter of 2010 and $174.0 million for the second quarter of 2011.  Net interest margin was 3.34% for the third quarter of 2011, 3.52% for the third quarter of 2010 and 3.40% for the second quarter of 2011.  The decrease in net interest revenue and net interest margin from the third quarter of 2010 was due primarily to lower yield on our available for sale securities portfolio.

The tax-equivalent yield on earning assets was 3.91% for the third quarter of 2011, down 31 basis points from the third quarter of 2010.  The available for sale securities portfolio yield decreased 44 basis points to 2.83%.  Mortgage interest rates decreased during the third quarter of 2011, increasing prepayment speeds on our residential mortgage-backed securities portfolio.  Cash flows from these securities were then reinvested at lower current rates.  In addition, loan yields decreased 16 basis points to 4.71% due to lower interest rate indices.  Loan spreads have generally remained stable.  Funding costs were down 10 basis points from the third quarter of 2010.  The cost of interest-bearing deposits decreased 17 basis points and the cost of other borrowed funds increased 32 basis points.  The increased cost of other borrowed funds was due to an $87 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.  We repurchased a substantial amount of these loans during the third quarter of 2011 which will reduce future funding costs by over 5.00%.

Net interest margin decreased 6 basis points from the second quarter of 2011.  Yield on average earning assets decreased 10 basis points to 3.91%.  Yield on the available for sale securities portfolio decreased 21 basis points.  Yield on the loan portfolio increased 2 basis points.  The cost of interest-bearing liabilities decreased 5 basis points compared to the previous quarter.

Average earning assets for the third quarter of 2011 increased $451 million or 2% over third 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 $504 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, increased $34 million.   Average commercial loans increased over the third quarter of 2010, partially offset by decreases in commercial real estate, residential mortgage and consumer loans.

Average deposits increased $1.7 billion over the third quarter of 2010, including a $1.3 billion increase in average demand deposit balances and a $611 million increase in average interest-bearing transaction accounts.   Average time deposits decreased $156 million compared to the third quarter of 2010.  Average borrowed funds decreased $1.4 billion compared to the third quarter of 2010.


 
- 2 -

 

Average earning assets for the third quarter of 2011 increased $393 million over the second quarter of 2011.  Average outstanding loans, net of allowance for loan losses, increased $198 million.  Commercial, commercial real estate and residential mortgage loan balances increased in third quarter of 2011, partially offset by a decrease in consumer loans.  Average available for sale securities increased $113 million and mortgage trading securities increased $77 million.  Average deposits increased by $648 million during the third quarter of 2011, including a $533 million increase in demand deposits and a $126 million increase in interest-bearing transaction accounts, partially offset by a $14 million decrease in time deposits.  The average balances of borrowed funds decreased $110 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
   
Nine Months Ended
 
   
Sept. 30, 2011 / 2010
   
Sept. 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
  $ 1     $ (2 )   $ 3     $ (8 )   $ (9 )   $ 1  
  Trading securities
    67       148       (81 )     (226 )     277       (503 )
  Investment securities:
                                               
Taxable securities
    622       661       (39 )     2,979       4,172       (1,193 )
Tax-exempt securities
    (585 )     (648 )     63       (1,916 )     (1,846 )     (70 )
Total investment securities
    37       13       24       1,063       2,326       (1,263 )
  Available for sale securities:
                                               
Taxable securities
    (6,064 )     3,893       (9,957 )     (19,872 )     10,727       (30,599 )
Tax-exempt securities
    (7 )     30       (37 )     (12 )     132       (144 )
Total available for sale securities
    (6,071 )     3,923       (9,994 )     (19,884 )     10,859       (30,743 )
  Mortgage trading securities
    68       717       (649 )     57       1,268       (1,211 )
  Residential mortgage loans held for sale
    (976 )     (903 )     (73 )     (2,056 )     (1,724 )     (332 )
  Loans
    (4,263 )     136       (4,399 )     (19,405 )     (9,502 )     (9,903 )
Total tax-equivalent interest revenue
    (11,137 )     4,032       (15,169 )     (40,459 )     3,495       (43,954 )
Interest expense:
                                               
  Transaction deposits
    (4,447 )     529       (4,976 )     (10,912 )     2,990       (13,902 )
  Savings deposits
    (2 )     23       (25 )     25       81       (56 )
  Time deposits
    (410 )     (717 )     307       (679 )     (1,728 )     1,049  
  Funds purchased
    (404 )     (32 )     (372 )     (1,021 )     (338 )     (683 )
  Repurchase agreements
    (974 )     (2 )     (972 )     (2,483 )     (123 )     (2,360 )
  Other borrowings
    387       (9,465 )     9,852       89       (25,195 )     25,284  
  Subordinated debentures
    (37 )     2       (39 )     (20 )     7       (27 )
Total interest expense
    (5,887 )     (9,662 )     3,775       (15,001 )     (24,306 )     9,305  
  Tax-equivalent net interest revenue
    (5,250 )     13,694       (18,944 )     (25,458 )     27,801       (53,259 )
Change in tax-equivalent adjustment
    81                       (80 )                
Net interest revenue
  $ (5,331 )                   $ (25,378 )                
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 $174.0 million for the third quarter of 2011 compared to $137.7 million for the third quarter of 2010 and $143.0 million for the second quarter of 2011.  Fees and commissions revenue increased $9.1 million over the third quarter of 2010.  Net gains on securities, derivatives and other assets increased $24.2 million.  Other-than-temporary impairment charges recognized in earnings in the third quarter of 2011 were $3.0 million less than charges recognized in the third quarter of 2010.

Other operating revenue increased $31.0 million over the second quarter of 2011.  Fees and commissions revenue increased $18.2 million.  Net gains on securities, derivatives and other assets increased $19.3 million.  Other-than-temporary impairment charges recognized in earnings were $6.5 million greater than charges recognized in the second quarter of 2011.
 
 
Table 2 – Other Operating Revenue 
(In thousands)
   
Three Months Ended
Sept. 30,
   
Increase
   
% Increase
   
Three Months Ended
   
Increase
   
% Increase
 
   
2011
   
2010
   
(Decrease)
   
(Decrease)
   
June 30, 2011
   
(Decrease)
   
(Decrease)
 
                                           
 Brokerage and trading revenue
  $ 29,451     $ 27,072     $ 2,379       9 %   $ 23,725     $ 5,726       24 %
 Transaction card revenue
    31,328       28,852       2,476       9 %     31,024       304       1 %
 Trust fees and commissions
    17,853       16,774       1,079       6 %     19,150       (1,297 )     (7 %)
 Deposit service charges and fees
    24,614       24,290       324       1 %     23,857       757       3 %
 Mortgage banking revenue
    29,493       29,236       257       1 %     19,356       10,137       52 %
 Bank-owned life insurance
    2,761       3,004       (243 )     (8 %)     2,872       (111 )     (4 %)
 Other revenue
    10,535       7,708       2,827       37 %     7,842       2,693       35 %
   Total fees and commissions revenue
    146,035       136,936       9,099       7 %     127,826       18,209       14 %
Gain (loss) on other assets, net
    712       (1,331 )     2,043       N/A       3,344       (2,632 )     N/A  
Gain on derivatives, net
    4,048       4,626       (578 )     N/A       1,225       2,823       N/A  
Gain on mortgage trading securities, net
    17,788       3,369       14,419       N/A       9,921       7,867       N/A  
Gain on available for sale securities
    16,694       8,384       8,310       N/A       5,468       11,226       N/A  
Total other-than-temporary impairment
    (9,467 )     (4,525 )     (4,942 )     N/A       (74 )     (9,393 )     N/A  
Portion of loss recognized in (reclassified from) other comprehensive income
    (1,833 )     (9,786 )     7,953       N/A       (4,750 )     2,917       N/A  
Net impairment losses recognized in earnings
    (11,300 )     (14,311 )     3,011       N/A       (4,824 )     (6,476 )     N/A  
     Total other operating revenue
  $ 173,977     $ 137,673     $ 36,304       26 %   $ 142,960     $ 31,017       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 45% of total revenue for the third 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.


 
- 4 -

 

Brokerage and trading revenue, which includes revenues from securities trading, retail brokerage, customer derivative and investment banking increased $2.4 million or 9­­% over the third quarter of 2010.  Securities trading revenue totaled $15.7 million for the third quarter of 2011, flat with the third quarter of 2010.  Securities trading revenue represents net realized and unrealized gains primarily related to sales of U.S. government securities, residential mortgage-backed securities guaranteed by U.S. government agencies and municipal securities to institutional customers.  As we understand the proposal to implement the Volcker Rule of the Dodd-Frank Act, we believe this activity is primarily market making rather than proprietary trading.  Increased gains from municipal and corporate securities were largely offset by decreased gains on U.S. government securities and residential mortgage-backed securities guaranteed by U.S. government agencies.

Revenue earned from retail brokerage transactions increased $1.8 million or 31% over the third 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 $3.3 million for the third quarter of 2011, down $393 thousand or 11% compared to the third quarter of 2010.  The volume of energy derivative contracts declined primarily due to relatively stable commodity pricing, partially offset by an increase in revenue from to be announced (“TBA”) residential mortgage backed securities which are classified as interest rate derivative contracts sold to our mortgage banking customers.

Investment banking includes fees earned upon completion of underwriting and financial advisory service which totaled $3.0 million for the third quarter of 2011, a $931 thousand increase over the third quarter of 2010 related to the timing and volume of completed transactions.

Brokerage and trading revenue increased $5.7 million over the second quarter of 2011.   Securities trading revenue increased $2.4 million over the second quarter of 2011.  Greater market volatility in the third quarter of 2011 and historically low interest rates increased volumes of U.S. Treasury, residential mortgage-backed securities, corporate debt securities and municipal securities.  Derivative revenue increased $2.2 million primarily due to increased revenue from TBA securities sold to our mortgage banking customers.  Investment banking fees were up $1.0 million over the second quarter of 2011.  Retail brokerage fees were flat compared to the second quarter of 2011.

We continue to monitor the on-going development of rules to implement the Volcker Rule in Title VI 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.  On October 11, 2011 regulators of financial institutions released a proposal for implementation of the Volcker Rule scheduled to take effect by July 21, 2012, subject in some cases to phase-in over time thereafter.  The ultimate impact of the implementation of the Volcker Rule remains uncertain.  Final regulations possibly could impose additional operational or compliance costs or restrict certain trading activities on behalf of our customers.

Title VII of the Dodd-Frank Act subjects nearly all derivative transactions 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 effective dates of a large portion of the proposed regulations under Title VII until December 31, 2012.  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.


 
- 5 -

 

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 for the third quarter of 2011 increased $2.5 million or 9% over the third quarter of 2010.  Revenues from the processing of transactions on behalf of the members of our TransFund ATM network totaled $12.9 million, up $532 thousand or 4% over the third 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 $1.1 million or 13% 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 $865 thousand or 10% to $9.3 million due primarily to an increase in the number of transactions processed.

Transaction card revenue increased $304 thousand over the second quarter of 2011.  ATM network revenue increased $381 thousand.  Merchant services fees and check card revenue were flat compared to the prior quarter.

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 was effective on October 1, 2011.  In addition, the Federal Reserve Board approved an interim rule that allows for an upward adjustment up to 1 cent to an issuer’s debit card interchange fee for fraud prevention as 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 $25 million in our transaction card revenue annually based on the final rule.

Trust fees and commissions increased $1.1 million or 6% over the third quarter of 2010 primarily due to an increase in the fair value of trust assets.  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 $2.1 million for the third quarter of 2011, $858 thousand for the third quarter of 2010 and $1.6 million for the second quarter of 2011.   The fair value of trust assets administered by the Company totaled $31.8 billion at September 30, 2011, $31.5 billion at September 30, 2010 and $33.1 billion at June 30, 2011.  Trust fees and commissions decreased $1.3 million compared to the second quarter of 2011 primarily due to a decrease in the fair value of trust assets and the timing of fees.

Deposit service charges and fees increased modestly over the third quarter of 2010.  Overdraft fees totaled $15.2 million for the third quarter, up $287 thousand or 2% over the third quarter of 2010.  Commercial account service charge revenue totaled $7.4 million, up $193 thousand or 3% over the prior year.  Customers continue to maintain high commercial account balances resulting in a high level of 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 also increased, totaling $1.4 million for the third quarter of 2011.

Deposit service charges and fees increased $757 thousand over the prior quarter.  Overdraft fees increased $578 thousand and commercial account service charges increased $140 thousand.

Mortgage banking revenue was notably strong for both the third quarter of 2011 and 2010.  Low interest rates increased mortgage loan origination activity in both quarters.  Revenue from originating and marketing mortgage loans totaled $19.7 million, up $633 thousand or 3% over the third quarter of 2010.  Mortgage loans funded for sale totaled $637 million in the third quarter of 2011 and $756 million in the third quarter of 2010.  Mortgage servicing revenue decreased $375 thousand or 4% compared to the third quarter of 2010.  The outstanding principal balance of mortgage loans serviced for others decreased $34 million during the third quarter of 2011 to $11.2 billion.

Mortgage banking revenue increased $10.1 million over the second quarter of 2011 primarily due to a $10.3 million increase in revenue from originating and marketing residential mortgage loans.  Residential mortgage loans funded for sale increased $153 million over the previous quarter.


 
- 6 -

 

Table 3 – Mortgage Banking Revenue 
(In thousands)
   
Three Months Ended
Sept. 30,
         
%
   
Three Months
         
%
 
   
2011
   
2010
   
Increase
(Decrease)
   
Increase
(Decrease)
   
Ended
June 30, 2011
   
Increase
(Decrease)
   
Increase
(Decrease)
 
                                           
 Originating and marketing revenue
  $ 19,703     $ 19,069     $ 634       3 %   $ 9,409     $ 10,294       109 %
 Servicing revenue
    9,790       10,167       (377 )     (4 %)     9,947       (157 )     (2 %)
     Total mortgage revenue
  $ 29,493     $ 29,236     $ 257       1 %   $ 19,356     $ 10,137       52 %
                                                         
Mortgage loans funded for sale
  $ 637,127     $ 756,060     $ (118,933 )     (16 %)   $ 483,808     $ 153,319       32 %
Mortgage loan refinances to total funded
    54 %     64 %                     36 %                


   
Sept. 30,
                               
   
2011
   
2010
   
Increase
   
% Increase
   
June 30, 2011
   
Increase
   
% Increase
 
Outstanding principal balance of mortgage loans serviced for others
  $ 11,249,503     $ 11,190,802     $ 58,701       1 %   $ 11,283,442     $ (33,939 )     %

Net gains on securities, derivatives and other assets

We recognized $16.7 million of net gains on sales of $715 million of available for sale securities in the third quarter of 2011.  Securities were sold either because they had reached their expected maximum potential return or to mitigate exposure to prepayment risk.  We recognized $8.4 million of gains on sales of $596 million of available for sale securities in the third quarter of 2010 and $5.5 million of net gains on sales of $654 million of available for sale securities in the second 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.

Lower mortgage interest rates which increased loan origination volumes also increased prepayment speeds which decreased the value of our mortgage servicing rights.  Table 4 shows the relationship between changes in the fair value of mortgage servicing rights and financial instruments designated as an economic hedge.

Table 4 – Gain (Loss) on Mortgage Servicing Rights
(In thousands)
   
Three Months Ended
 
   
Sept. 30, 2011
   
June 30, 2011
   
Sept. 30, 2010
 
                   
Gain on mortgage hedge derivative contracts, net
  $ 4,048     $ 1,224     $ 4,676  
Gain on mortgage trading securities, net
    17,788       9,921       3,369  
Gain on economic hedge of mortgage servicing rights
    21,836       11,145       8,045  
Loss on change in fair value of mortgage servicing rights
    (24,822 )     (13,493 )     (15,924 )
Loss on changes in fair value of mortgage servicing rights, net of economic hedges
  $ (2,986 )   $ (2,348 )   $ (7,879 )
                         
Net interest revenue on mortgage trading securities
  $ 5,036     $ 5,121     $ 5,710  

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 $11.3 million in earnings during the third 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 recognized other-than-temporary impairment losses in earnings of $14.3 million in the third quarter of 2010 and $4.8 million in the second quarter of 2011.

 
- 7 -

 

Other Operating Expense

Other operating expense for the third quarter of 2011 totaled $220.9 million, up $15.7 million or 8% over the third quarter of 2010.  Changes in the fair value of mortgage servicing rights increased operating expense $24.8 million in the third quarter of 2011 and $15.9 million in the third quarter of 2010.  Excluding changes in the fair value of mortgage servicing rights, operating expenses were up $6.8 million or 4% over the third quarter of 2010.  Personnel expenses increased $2.0 million or 2%.  Non-personnel expenses increased $4.8 million or 5%.

Excluding changes in the fair value of mortgage servicing rights, operating expenses were up $6.4 million over the previous quarter.  Personnel expenses decreased $2.3 million and non-personnel expenses increased $8.7 million.

Table 5 – Other Operating Expense
(In thousands)
   
Three Months
         
%
   
Three Months Ended
         
%
 
   
Ended Sept. 30,
   
Increase
   
Increase
   
June 30,
   
Increase
   
Increase
 
   
2011
   
2010
   
(Decrease)
   
(Decrease)
   
2011
   
(Decrease)
   
(Decrease)
 
                                           
 Regular compensation
  $ 62,002     $ 60,339     $ 1,663       3 %   $ 61,380     $ 622       1 %
 Incentive compensation:
                                                       
 Cash-based
    26,256       23,910       2,346       10 %     23,530       2,726       12 %
 Stock-based
    (594 )     2,927       (3,521 )     (120 %)     3,122       (3,716 )     (119 %)
 Total incentive compensation
    25,662       26,837       (1,175 )     (4 %)     26,652       (990 )     (4 %)
 Employee benefits
    15,596       14,040       1,556       11 %     17,571       (1,975 )     (11 %)
 Total personnel expense
    103,260       101,216       2,044       2 %     105,603       (2,343 )     (2 %)
 Business promotion
    5,280       4,426       854       19 %     4,777       503       11 %
 Contribution to BOKF Charitable Foundation
    4,000             4,000       N/A               4,000       N/A  
 Professional fees and services
    7,418       7,621       (203 )     (3 %)     6,258       1,160       19 %
 Net occupancy and equipment
    16,627       16,436       191       1 %     15,554       1,073       7 %
 Insurance
    2,206       6,052       (3,846 )     (64 %)     4,771       (2,565 )     (54 %)
 Data processing & communications
    24,446       21,601       2,845       13 %     24,428       18       %
 Printing, postage and supplies
    3,780       3,648       132       4 %     3,586       194       5 %
 Net losses & operating expenses of repossessed assets
    5,939       7,230       (1,291 )     N/A       5,859       80       N/A  
 Amortization of intangible assets
    896       1,324       (428 )     (32 %)     896             %
 Mortgage banking costs
    9,349       9,093       256       3 %     8,968       381       4 %
 Change in fair value of mortgage servicing rights
    24,822       15,924       8,898       N/A       13,493       11,329       N/A  
Visa retrospective responsibility obligation
          1,103       (1,103 )     N/A                   N/A  
 Other expense
    12,873       9,491       3,382       36 %     9,016       3,857       43 %
 Total other operating expense
  $ 220,896     $ 205,165     $ 15,731       8 %   $ 203,209     $ 17,687       9 %
                                                         
 Number of employees (full-time equivalent)
    4,454       4,516       (62 )     (1 %)     4,530       (76 )     (2 %)
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 $1.7 million or 3% over the third 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.


 
- 8 -

 

Incentive compensation decreased $1.2 million or 4% compared to the third quarter of 2010.  Cash-based incentive compensation plans are either intended to provide current rewards to employees who generate long-term business opportunities for 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 $2.3 million or 10% over the third quarter of 2010.  Cash-based incentive compensation related to brokerage and trading revenue was up $1.0 million over the third quarter of 2010 and cash-based incentive compensation for other business lines increased $1.3 million, primarily related to increased mortgage 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 $4.0 million compared to the third 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 decreased $7.88 per share in the third quarter of 2011 and decreased $2.34 per share in the third quarter of 2010.  Compensation expense for equity awards increased $442 thousand compared with the third 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 $1.6 million or 11% over the third quarter of 2010 primarily due to increased expenses related to employee medical insurance costs, employee retirement plans and payroll taxes.

Personnel expense decreased $2.3 million compared to the second quarter of 2011.  Employee benefit expenses decreased $2.0 million compared to the second quarter of 2011 due to seasonal decreases in payroll tax expense.  Employee medical insurance costs and retirement plan expenses were also down compared to the second quarter of 2011.  Incentive compensation decreased $990 thousand compared to the second quarter of 2011.  Stock-based compensation decreased $3.7 million partially offset by a $2.7 million increase in cash-based incentive compensation.  Regular compensation expense increased $622 thousand over the second quarter of 2011.

Non-personnel operating expenses

Non-personnel operating expenses, excluding changes in the fair value of mortgage servicing rights, increased $4.8 million over the third quarter of 2010.  During the third quarter of 2011, the Company accrued $5.0 million for exposure to on-going litigation and made a $4.0 million discretionary contribution to the BOKF Charitable Foundation.  The BOKF Charitable Foundation partners with charitable organizations to support needs within our communities.  Data processing and communication expenses increased $2.8 million due primarily to increased transaction card activity.  FDIC insurance expense decreased $3.8 million due to the impact of a change to a risk-sensitive assessment based on assets rather than deposits.  Net losses and operating expenses of repossessed assets decreased $1.3 million compared to the third quarter of 2010.

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 was offset in the fourth quarter of 2010 when Visa deposited $800 million into the litigation escrow account for payment of this liability, further diluting the Company’s Class B shares.

Excluding changes in the fair value of mortgage servicing rights, non-personnel operating expenses increased $8.7 million over the second quarter of 2011.  The litigation accrual and discretionary contribution to the BOKF Charitable Foundation was partially offset by decreased FDIC expense due to the change to a risk-sensitive assessment based on assets.


 
- 9 -

 

Income Taxes

Income tax expense was $43.0 million or 33% of book taxable income for the third quarter of 2011 compared to $29.9 million or 32% of book taxable income for the third quarter of 2010 and $39.4 million or 36% of book taxable income for the second quarter of 2011.  The increase in the effective tax rate over the third quarter of 2010 was due to higher book taxable income, state income taxes, and reduced utilization of income tax credits.  The statute of limitations expired on uncertain income tax positions and the Company adjusted its current income tax liability to amounts on filed tax returns for 2010 during the third quarter of 2011.  These adjustments reduced income tax expense by $1.8 million in the third quarter of 2011 and $2.2 million in the third quarter of 2010.  Excluding these adjustments, income tax expense would have been 35% of book taxable income for both the third quarter of 2011 and 2010.

BOK Financial operates in numerous jurisdictions, which requires judgment regarding the allocation of income, expense and earnings under various laws and regulations of each of these taxing jurisdictions.  Each jurisdiction may audit our tax returns and may take different positions with respect to these allocations.  The reserve for uncertain tax positions was $12 million at September 30, 2011, $12 million at December 31, 2010 and $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 for small businesses, middle market and larger commercial customers.  Commercial banking also includes the TransFund ATM 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.

 
- 10 -

 


As shown in Table 6, net income attributable to our lines of business increased $12.0 million over the third 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 third quarter of 2010.  Net loans charged off totaled $10.2 million for the third quarter of 2011 and $20.1 million for the third quarter of 2010.  Net income attributed to funds management and other increased compared to the third quarter of 2010 primarily due increased gains on securities in excess of other-than-temporary charges and a decrease in operating expenses attributed to the funds management unit.  Decreased provision for credit losses in excess of net charge-offs was partially offset by a decline in net interest revenue due to lower interest rates.

Table 6 – Net Income by Line of Business
(In thousands)
   
Three Months Ended
Sept. 30,
   
Nine Months Ended
Sept. 30,
 
   
2011
   
2010
   
2011
   
2010
 
Commercial banking
  $ 33,648     $ 27,990     $ 94,826     $ 53,441  
Consumer banking
    14,707       10,281       28,322       35,128  
Wealth management
    3,711       1,786       11,131       8,267  
Subtotal
    52,066       40,057       134,279       96,836  
Funds management and other
    33,035       24,210       84,603       91,086  
Total
  $ 85,101     $ 64,267     $ 218,882     $ 187,922  

Commercial Banking

Commercial banking contributed $33.6 million to consolidated net income in the third quarter of 2011, up $5.7 million over the third quarter of 2010.  Net interest revenue increased $4.6 million primarily due to a $1.9 billion increase in average deposits sold to the funds management unit.  Net loans charged-off decreased by $4.4 million.  Fees and commissions revenue increased $7.2 million mostly offset by a $3.6 million increase in non-personnel  operating expenses and $3.1 million increase in net losses and operating expenses on repossessed assets.


 
- 11 -

 

Table 7 – Commercial Banking
(Dollars in thousands)
   
Three Months Ended
Sept. 30,
   
Increase
   
Nine Months Ended
Sept. 30,
   
Increase
 
   
2011
   
2010
   
(Decrease)
   
2011
   
2010
   
(Decrease)
 
                                     
Net interest revenue from external sources
  $ 86,513     $ 87,492     $ (979 )   $ 257,152     $ 258,211     $ (1,059 )
Net interest expense from internal sources
    (6,467 )     (11,997 )     5,530       (22,922 )     (37,215 )     14,293  
Total net interest revenue
    80,046       75,495       4,551       234,230       220,996       13,234  
Net loans charged off
    5,141       9,508       (4,367 )     16,746       60,361       (43,615 )
Net interest revenue after net loans charged off
    74,905       65,987       8,918       217,484       160,635       56,849  
                                                 
Fees and commissions revenue
    40,108       32,917       7,191       111,717       97,780       13,937  
Gain (loss) on financial instruments and other assets, net
                      9       (1,638 )     1,647  
Other operating revenue
    40,108       32,917       7,191       111,726       96,142       15,584  
                                                 
Personnel expense
    23,615       23,447       168       70,618       68,821       1,797  
Net losses and expenses of repossessed assets
    5,165       2,070       3,095       14,354       21,042       (6,688 )
Other non-personnel expense
    31,162       27,577       3,585       89,040       79,449       9,591  
Total other operating expense
    59,942       53,094       6,848       174,012       169,312       4,700  
                                                 
Income before taxes
    55,071       45,810       9,261       155,198       87,465       67,733  
Federal and state income tax
    21,423       17,820       3,603       60,372       34,024       26,348  
                                                 
Net income
  $ 33,648     $ 27,990     $ 5,658     $ 94,826     $ 53,441     $ 41,385  
                                                 
Average assets
  $ 9,788,982     $ 8,940,812     $ 848,170     $ 9,459,367     $ 9,053,645     $ 405,722  
Average loans
    8,431,218       8,241,212       190,006       8,291,631       8,305,288       (13,657 )
Average deposits
    8,089,497       6,211,258       1,878,239       7,870,715       5,955,547       1,915,168  
Average invested capital
    886,538       889,282       (2,744 )     874,259       908,618       (34,359 )
Return on average assets
    1.36 %     1.24 %     12 bp     1.34 %     0.79 %     55 bp
Return on invested capital
    15.06 %     12.49 %     257 bp     14.50 %     7.86 %     664 bp
Efficiency ratio
    49.89 %     48.97 %     92 bp     50.30 %     53.11 %     (281 ) bp
Net charge-offs (annualized) to average loans
    0.24 %     0.46 %     (22 ) bp     0.27 %     0.97 %     (70 ) bp

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 $2.4 million in the third quarter of 2011 compared to the third quarter of 2010.    Net interest revenue increased $4.2 million.  Average deposits increased $708 million and average loans increased $21 million primarily due to the transfer of these balances from the Consumer Banking segment.  Other operating revenue increased $2.1 million fully offset by increased operating expenses.

Net interest revenue increased $4.6 million or 6% over the third 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 third quarter of 2010.

Other operating revenue increased $7.2 million or 22% over the third quarter of 2010 primarily related to additional service charge revenue from the transfer of the small business banking activities.  Transaction card revenue increased due to increased customer activity.  Interest rate derivative revenue, loan syndication fees and other revenue also increased over the third quarter of 2010.


 
- 12 -

 

Operating expenses increased $6.8 million or 13% over the third quarter of 2010.   Personnel cost were essentially flat compared to the third quarter of 2010.  Net losses and operating expenses on repossessed assets increased $3.1 million over the third quarter of 2010, primarily due to increased operating expenses on repossessed assets.  Losses on repossessed assets were flat compared to the third quarter of 2010.  Other non-personnel expenses increased $3.6 million primarily due to increased data processing costs related to higher transaction card volumes 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 $8.4 billion for the third quarter of 2011, up $190 million over the third 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 estate loans which are primarily attributed to the commercial banking segment.  Net commercial banking loans charged off decreased $4.4 million compared to the third quarter of 2010 to $5.1 million or 0.24% 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 $8.1 billion for the third quarter of 2011, up $1.9 billion or 30% over the third quarter of 2010, including $425 million related to the transfer of small business banking activities.  Average balances attributed to our commercial & industrial loan customers increased $690 million or 32%, and average balances attributed to our energy customers increased $218 million or 30%.  We believe that commercial customers continue to retain large cash reserves primarily due to continued economic uncertainty.  Small business banking also grew an additional $690 million, primarily related to the transfer of small business banking activities.  Average balances held by states and local municipalities also increased $323 million over the third quarter of 2010.

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 $14.7 million to consolidated net income for the third quarter of 2011, up $4.4 million over the third quarter of 2010.  Changes in fair value of our mortgage servicing rights, net of economic hedge decreased net income attributed to consumer banking by $1.8 million in the third quarter of 2011 and $4.8 million in the third quarter of 2010.  Excluding changes in the net fair value of mortgage servicing rights, net income provided by consumer banking services grew by $1.4 million or 9% over the third quarter of 2010.  Decreased net loan charge-offs were partially offset by a decrease in net interest revenue, primarily due to the transfer of small business banking activities to the Commercial Banking segment.  Fees and commissions revenue and other operating expense were largely flat compared to the third quarter of 2010.


 
- 13 -

 

Table 8 – Consumer Banking
(Dollars in thousands)
   
Three Months Ended
Sept. 30,
   
Increase
   
Nine Months Ended
Sept. 30,
   
Increase
 
   
2011
   
2010
   
(Decrease)
   
2011
   
2010
   
(Decrease)
 
                                     
Net interest revenue from external sources
  $ 24,553     $ 22,816     $ 1,737     $ 64,574     $ 63,809     $ 765  
Net interest revenue from internal sources
    8,108       12,044       (3,936 )     25,188       35,367       (10,179 )
Total net interest revenue
    32,661       34,860       (2,199 )     89,762       99,176       (9,414 )
Net loans charged off
    3,837       6,967       (3,130 )     9,568       20,975       (11,407 )
Net interest revenue after net loans charged off
    28,824       27,893       931       80,194       78,201       1,993  
                                                 
Fees and commissions revenue
    58,605       57,315       1,290       148,322       151,264       (2,942 )
Gain on financial instruments and other assets, net
    21,836       8,051       13,785       27,086       29,983       (2,897 )
Other operating revenue
    80,441       65,366       15,075       175,408       181,247       (5,839 )
                                                 
Personnel expense
    22,166       20,522       1,644       64,101       59,276       4,825  
Net losses and expenses of repossessed assets
    524       1,375       (851 )     2,181       2,537       (356 )
Change in fair value of mortgage servicing rights
    24,822       15,924       8,898       35,186       21,450       13,736  
Other non-personnel expense
    37,683       38,612       (929 )     107,781       118,693       (10,912 )
Total other operating expense
    85,195       76,433       8,762       209,249       201,956       7,293  
                                                 
Income before taxes
    24,070       16,826       7,244       46,353       57,492       (11,139 )
Federal and state income tax
    9,363       6,545       2,818       18,031       22,364       (4,333 )
                                                 
Net income
  $ 14,707     $ 10,281     $ 4,426     $ 28,322     $ 35,128     $ (6,806 )
                                                 
Average assets
  $ 5,914,337     $ 6,302,934     $ (388,597 )   $ 5,965,955     $ 6,220,522     $ (254,567 )
Average loans
    2,086,135       2,106,254       (20,119 )     2,040,375       2,124,853       (84,478 )
Average deposits
    5,706,676       6,177,587       (470,911 )     5,761,204       6,112,731       (351,527 )
Average invested capital
    273,143       243,059       30,084       272,167       278,626       (6,459 )
Return on average assets
    0.99 %     0.65 %     34 bp     0.63 %     0.76 %     (13 ) bp
Return on invested capital
    21.36 %     16.78 %     458 bp     13.91 %     16.86 %     (295 ) bp
Efficiency ratio
    66.15 %     65.65 %     50 bp     73.11 %     72.08 %     103 bp
Net charge-offs (annualized) to average loans
    0.73 %     1.31 %     (58 ) bp     0.63 %     1.32 %     (69 ) bp
Mortgage loans funded for sale
  $ 637,127     $ 756,060     $ (118,933 )   $ 1,540,619     $ 1,680,369     $ (139,750 )

   
Sept. 30, 2011
   
Sept. 30, 2010
   
Increase
(Decrease)
 
Banking locations
    209       198       11  
Mortgage loans servicing portfolio1
  $ 12,281,346     $ 12,003,326     $ 278,020  
1  
Includes outstanding principal for loans serviced for affiliates

Net interest revenue from consumer banking activities decreased $2.2 million or 6% compared to the third quarter of 2010 primarily due to the transfer of certain small business demand deposit balances to the Commercial Banking segment.  Average loan balances also decreased $20 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.


 
- 14 -

 

Fees and commissions revenue increased $1.3 million over the third quarter of 2010.  Deposit service charges decreased $1.7 million primarily related to service fees on small business deposits transferred to the Commercial Banking segment.  This decrease was largely offset by a $914 thousand increase in transaction card revenues on higher transaction volume and increased other revenues.  Mortgage loan origination volume was high in both the third quarter of 2011 and 2010 due to low interest rates.  As such, mortgage banking revenue was even compared to the third quarter of 2010.

Excluding the change in the fair value of mortgage servicing rights, operating expenses were flat compared to the third quarter of 2010.  Decreased corporate expense allocations related to the transfer of small business banking operations to the commercial banking segment were mostly offset by increased personnel costs related to increased mortgage activity.

Net loans charged off by the consumer banking unit decreased $3.1 million compared to the third 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 $471 million or 8% compared to the third quarter of 2010 primarily due to the transfer of small business banking to the Commercial Banking segment, offset by some growth in consumer banking deposits.  Average demand deposits decreased $265 million or 29%, average time deposits decreased $160 million or 7% and average interest-bearing transaction accounts decreased $68 million or 2%.

Our Consumer Banking division originates, markets and services conventional and government-sponsored mortgage loans for all of our geographical markets.  We funded $722 million of mortgage loans in the third quarter of 2011 and $830 million in the third quarter of 2010.  Approximately 40% of our mortgage loans funded were in the Oklahoma market, 15% in the Colorado market, 13% in the New Mexico market and 12% in the Texas market

Mortgage loans fundings included $637 million of mortgage loans funded for sale in the secondary market and $85 million funded for retention within the consolidated group.  At September 30, 2011, the Consumer Banking division services $11.2 billion of mortgage loans serviced for others and $1.0 billion of loans retained within the consolidated group.  Approximately 97% of the mortgage loans serviced was to borrowers in our primary geographical market areas.  Mortgage servicing revenue decreased $375 thousand or 4% compared to the third quarter of 2010 to $9.8 million.



 
- 15 -

 

Wealth Management

Wealth Management contributed $3.7 million to consolidated net income in third quarter of 2011 compared to $1.8 million in third quarter of 2010.

Table 9 – Wealth Management
(Dollars in thousands)
   
Three Months Ended
Sept. 30,
   
Increase
   
Nine Months Ended
Sept. 30,
   
Increase
 
   
2011
   
2010
   
(Decrease)
   
2011
   
2010
   
(Decrease)
 
                                     
Net interest revenue from external sources
  $ 6159     $ 7,154     $ (995 )   $ 20,254     $ 23,448     $ (3,194 )
Net interest revenue from internal sources
    4,447       3,310       1,137       10,850       8,925       1,925  
Total net interest revenue
    10,606       10,464       142       31,104       32,373       (1,269 )
Net loans charged off
    1,147       4,042       (2,895 )     2,208       9,945       (7,737 )