Mortgage Banking Activities

Residential Mortgage Loan Production

The Company originates, markets and services conventional and government-sponsored residential mortgage loans. Generally, conforming fixed rate residential mortgage loans are held for sale in the secondary market and non-conforming and adjustable-rate residential mortgage loans are held for investment. All residential mortgage loans originated for sale by the Company are carried at fair value based on sales commitments and market quotes. Changes in the fair value of mortgage loans held for sale are included in Other operating revenue – Mortgage banking revenue. Residential mortgage loans held for sale also includes the fair value of residential mortgage loan commitments and forward sale commitments which are considered derivative contracts that have not been designated as hedging instruments. The volume of mortgage loans originated for sale and secondary market prices are the primary drivers of originating and marketing revenue.

Residential mortgage loan commitments are generally outstanding for 60 to 90 days, which represents the typical period from commitment to originate a residential mortgage loan to when the closed loan is sold to an investor. Residential mortgage loan commitments are subject to both credit and interest rate risk. Credit risk is managed through underwriting policies and procedures, including collateral requirements, which are generally accepted by the secondary loan markets. Exposure to interest rate fluctuations is partially managed through forward sales of residential mortgage-backed securities and forward sales contracts. These latter contracts set the price for loans that will be delivered in the next 60 to 90 days.

The unpaid principal balance of residential mortgage loans held for sale, notional amounts of derivative contracts related to residential mortgage loans commitments and forward contract sales and their related fair values included in Mortgage loans held for sale on the Consolidated Balance Sheets were (in thousands):

	September 30, 2012					December 31, 2011					September 30, 2011
	Unpaid Principal Balance/ Notional		Fair Value			Unpaid Principal Balance/ Notional		Fair Value			Unpaid Principal Balance/ Notional		Fair Value
Residential mortgage loans held for sale	$	294,794	$	313,927		$	177,319	$	184,816		$	239,439	$	250,527
Residential mortgage loan commitments	452,129		22,319			189,770		6,597			313,574		11,176
Forward sales contracts	722,043		(11,144		)	349,447		(3,288		)	541,764		(5,306		)
			$	325,102				$	188,125				$	256,397

No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of September 30, 2012, December 31, 2011 or September 30, 2011. No credit losses were recognized on residential mortgage loans held for sale for the three and nine month periods ended September 30, 2012 and 2011.

Mortgage banking revenue was follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30, 2012			September 30, 2011			September 30, 2012			September 30, 2011
Originating and marketing revenue:
Residential mortgages loan held for sale	$	40,463		$	16,142		$	85,261		$	39,515
Residential mortgage loan commitments	6,512			8,383			15,722			8,925
Forward sales contracts	(6,618		)	(4,822		)	(7,856		)	(11,799		)
Total originating and marketing revenue	40,357			19,703			93,127			36,641
Servicing revenue	9,909			9,790			29,765			29,564
Total mortgage banking revenue	$	50,266		$	29,493		$	122,892		$	66,205

Originating and marketing revenue includes gain (loss) on residential mortgage loans held for sale and changes in the fair value of derivative contracts not designated as hedging instruments related to residential mortgage loan commitments and forward sales contracts. Servicing revenue includes servicing fee income and late charges on loans serviced for others.

Residential Mortgage Servicing

Mortgage servicing rights may be recognized when mortgage loans are originated pursuant to an existing plan for sale or, if no such plan exists, when the mortgage loans are sold. Mortgage servicing rights may also be purchased. Both originated or purchased mortgage servicing rights are initially recognized at fair value. The Company has elected to carry all mortgage servicing rights at fair value. Changes in the fair value are recognized in earnings as they occur. The unpaid principal balance of loans serviced for others is the primary driver of servicing revenue.

The following represents a summary of mortgage servicing rights (Dollars in thousands):

	September 30, 2012			December 31, 2011			September 30, 2011
Number of residential mortgage loans serviced for others	97,465			95,841			95,831
Outstanding principal balance of residential mortgage loans serviced for others	$	11,756,350		$	11,300,986		$	11,249,503
Weighted average interest rate	4.85		%	5.19		%	5.29		%
Remaining term (in months)	289			290			286

Activity in capitalized mortgage servicing rights during the three months ended September 30, 2012 is as follows

(in thousands):



	Purchased			Originated			Total
Balance at June 30, 2012	$	16,361		$	75,422		$	91,783
Additions, net	—			12,107			12,107
Change in fair value due to loan runoff	(998		)	(3,663		)	(4,661		)
Change in fair value due to market changes	(2,648		)	(6,928		)	(9,576		)
Balance, September 30, 2012	$	12,715		$	76,938		$	89,653

Activity in capitalized mortgage servicing rights during the nine months ended September 30, 2012 is as follows (in thousands):



	Purchased			Originated			Total
Balance, December 31, 2011	$	18,903		$	67,880		$	86,783
Additions, net	—			29,754			29,754
Change in fair value due to loan runoff	(2,958		)	(10,027		)	(12,985		)
Change in fair value due to market changes	(3,230		)	(10,669		)	(13,899		)
Balance, September 30, 2012	$	12,715		$	76,938		$	89,653

Activity in capitalized mortgage servicing rights during the three months ended September 30, 2011 is as follows (in thousands):



	Purchased			Originated			Total
Balance at June 30, 2011	$	32,866		$	76,326		$	109,192
Additions, net	—			7,199			7,199
Change in fair value due to loan runoff	(1,034		)	(2,587		)	(3,621		)
Change in fair value due to market changes	(10,395		)	(14,427		)	(24,822		)
Balance, September 30, 2011	$	21,437		$	66,511		$	87,948

Activity in capitalized mortgage servicing rights during the nine months ended September 30, 2011 is as follows (in thousands):



	Purchased			Originated			Total
Balance, December 31, 2010	$	37,900		$	77,823		$	115,723
Additions, net	—			17,966			17,966
Change in fair value due to loan runoff	(3,585		)	(6,970		)	(10,555		)
Change in fair value due to market changes	(12,878		)	(22,308		)	(35,186		)
Balance, September 30, 2011	$	21,437		$	66,511		$	87,948

Changes in the fair value of mortgage servicing rights are included in Other operating expense in the Consolidated Statements of Earnings. Changes in fair value due to loan runoff are included in Mortgage banking costs. Changes in fair value due to market changes are reported separately. Changes in fair value due to market changes during the period relate to assets held at the reporting date.

There is no active market for trading in mortgage servicing rights after origination. Fair value is determined by discounting the projected net cash flows. Significant assumptions used to determine fair value considered to be significant unobservable input were as follows:



	September 30, 2012	December 31, 2011	September 30, 2011
Discount rate – risk-free rate plus a market premium	10.32%	10.34%	10.3%
Prepayment rate – based upon loan interest rate, original term and loan type	9.14% - 46.42%	10.88% - 49.68%	11.33% - 47.70%
Loan servicing costs – annually per loan based upon loan type	$55 - $105	$55 - $105	$55 - $105
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life	0.77%	1.21%	1.26%

The Company is exposed to interest rate risk as benchmark residential mortgage interest rates directly affect the prepayment speeds used in valuing our mortgage servicing rights, which is partially managed through forward sales of residential mortgage-backed securities and forward sales contracts. A separate third party model is used to estimate prepayment speeds based on interest rates, housing turnover rates, estimated loan curtailment, anticipated defaults and other relevant factors. The prepayment model is updated daily for changes in market conditions and adjusted to better correlate with actual performance of BOK Financial’s servicing portfolio.

Stratification of the residential mortgage loan servicing portfolio and outstanding principal of loans serviced for others by interest rate at September 30, 2012 follows (in thousands):



	< 4.00%			4.00% - 4.99%			5.00% - 5.99%			> 5.99%			Total
Fair value	$	22,949		$	40,754		$	20,473		$	5,477		$	89,653
Outstanding principal of loans serviced for others	$	2,418,398		$	4,250,803		$	3,329,014		$	1,758,135		$	11,756,350
Weighted average prepayment rate¹	9.14		%	12.02		%	28.94		%	46.42		%	21.36		%


¹	Annual prepayment estimates based upon loan interest rate, original term and loan type. Weighted average prepayment rate is determined by weighting the prepayment speed for each loan by its unpaid principal balance.

The interest rate sensitivity of our mortgage servicing rights and securities and derivative contracts held as an economic hedge is modeled over a range of +/- 50 basis points. At September 30, 2012, a 50 basis point increase in mortgage interest rates is expected to increase the fair value of our mortgage servicing rights, net of economic hedge by $2.2 million. A 50 basis point decrease in mortgage interest rates is expected to decrease the fair value of our mortgage servicing rights, net of economic hedge by $3.9 million. In the model, changes in the value of servicing rights due to changes in interest rates assume stable relationships between residential mortgage rates and prepayment speeds. Changes in market conditions can cause variations from these assumptions. These factors and others may cause changes in the value of our mortgage servicing rights to differ from our expectations.

The aging status of our mortgage loans serviced for others by investor at September 30, 2012 follows (in thousands):



			Past Due
	Current		30 to 59 Days		60 to 89 Days		90 Days or More		Total
FHLMC	$	4,783,550	$	56,493	$	12,786	$	42,081	$	4,894,910
FNMA	2,301,369		26,034		6,524		20,044		2,353,971
GNMA	3,774,396		155,146		35,604		19,349		3,984,495
Other	457,172		9,839		2,611		53,352		522,974
Total	$	11,316,487	$	247,512	$	57,525	$	134,826	$	11,756,350

The Company has off-balance sheet credit risk related to residential mortgage loans sold to U.S. government agencies with recourse prior to 2008 under various community development programs. These loans consist of first lien, fixed-rate residential mortgage loans underwritten to standards approved by the agencies including full documentation and originated under programs available only for owner-occupied properties. However, these loans have a higher risk of delinquency and loss given default than traditional residential mortgage loans. The Company no longer sells residential mortgage loans with recourse other than obligations under standard representations and warranties. The recourse obligation relates to loan performance for the life of the loan and the Company is obligated to repurchase the loan at the time of foreclosure for the unpaid principal balance plus unpaid interest. The principal balance of residential mortgage loans sold subject to recourse obligations totaled $238 million at September 30, 2012, $259 million at December 31, 2011 and $262 million at September 30, 2011. A separate accrual for these off-balance sheet commitments is included in Other liabilities in the Consolidated Balance Sheets totaling $18 million at September 30, 2012, $19 million at December 31, 2011 and $19 million at September 30, 2011. At September 30, 2012, approximately 5% of the loans sold with recourse with an outstanding principal balance of $12 million were either delinquent more than 90 days, in bankruptcy or in foreclosure and 6% with an outstanding balance of $15 million were past due 30 to 89 days. The provision for credit losses on loans sold with recourse is included in Mortgage banking costs in the Consolidated Statements of Earnings.

The activity in the allowance for losses on loans sold with recourse included in Other liabilities in the Consolidated Balance Sheets is summarized as follows (in thousands):

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2012			2011			2012			2011
Beginning balance	$	17,832		$	17,540		$	18,683		$	16,667
Provision for recourse losses	1,055			3,246			3,495			6,572
Loans charged off, net	(1,255		)	(2,264		)	(4,546		)	(4,717		)
Ending balance	$	17,632		$	18,522		$	17,632		$	18,522

The Company also has off-balance sheet credit risk for residential mortgage loans sold to government sponsored entities due to standard representations and warranties made under contractual agreements. At September 30, 2012, we have unresolved deficiency requests from the agencies on 344 loans with an aggregate outstanding principal balance of $42 million. At December 31, 2011, the Company had unresolved deficiency requests from the agencies on 247 loans with an aggregate principal balance of $37 million. For the nine months ended September 30, 2012, the Company has repurchased 41 loans for $4.7 million from the agencies and provided indemnification for 3 loans for $270 thousand. Losses incurred on these loans as of September 30, 2012 totaled $1.5 million. The Company has established an accrual for credit losses related to potential loan repurchases under representations and warranties that is included in Other liabilities in the Consolidated Balance Sheets and in Mortgage banking costs in the Consolidated Statements of Earnings. While the level of repurchases and indemnifications related to standard representations and warranties has remained low, the severity of the losses have trended higher. Accordingly, the Company increased its accrual for credit losses related to potential loan repurchases under representations and warranties to $4.8 million at September 30, 2012. The accrual was $2.2 million at December 31, 2011.