(5) Mortgage Banking Activities

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 is the primary driver 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 rates 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):

	June 30, 2011					December 31, 2010				June 30, 2010
	Unpaid Principal Balance/ Notional		Fair Value			Unpaid Principal Balance/ Notional		Fair Value		Unpaid Principal Balance/ Notional		Fair Value

Residential mortgage loans held for sale	$	162,579	$	167,300		$	253,778	$	254,669	$	227,574	$	229,493
Residential mortgage loan commitments		156,209		2,793			138,870		2,251		189,029		5,538
Forward sales contracts		302,526		(484	)		396,422		6,493		407,457		(7,457	)
			$	169,609				$	263,413			$	227,574

No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of June 30, 2011, December 31, 2010 or June 30, 2010. No credit losses were recognized on residential mortgage loans held for sale for the three and six month periods ended June 30, 2011 and 2010.

BOK Financial transfers financial assets as part of its mortgage banking activities. Transfers are recorded as sales for financial reporting purposes when the criteria for surrender of control are met. BOK Financial retains certain obligations to residential mortgage loans transferred and may retain the right to service the assets. The Company may also retain a residual interest in excess cash flows generated by the assets. All assets obtained, including cash, servicing rights and residual interests, and all liabilities incurred, are initially recognized at fair value, all assets transferred are derecognized and any gain or loss on the sale is recognized in earnings as they occur.

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):

	June 30, 2011			December 31, 2010			June 30, 2010
Number of residential mortgage loans serviced		96,578			96,443			96,152
Outstanding principal balance of residential mortgage loans serviced for others	$	11,283,442		$	11,194,582		$	10,991,572
Weighted average interest rate		5.36	%		5.44	%		5.63	%
Remaining term (in months)		291			292			296

Servicing fee income and late charges on loans serviced for others is included Mortgage banking revenue along with revenue from originating and marketing residential mortgage loans, including gains (losses) on residential mortgage loans held for sale and changes in fair value of derivative contracts not designated as hedging instruments related to residential mortgage loan commitments and forward sales contracts, as follows (in thousands):

	Three months ended						Six months ended
	June 30, 2011			June 30, 2010			June 30, 2011			June 30, 2010
Originating and marketing revenue:
Residential mortgage loan held for sale	$	10,037		$	13,528		$	23,373		$	21,326
Residential mortgage loan commitments		(702	)		3,072			542			5,043
Forward sales contracts		74			(7,836	)		(6,977	)		(11,083	)
Total originating and marketing revenue		9,409			8,764			16,938			15,286
Servicing revenue		9,947			9,571			19,774			17,920
Total mortgage banking revenue	$	19,356		$	18,335		$	36,712		$	33,206

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

	Purchased			Originated			Total
Balance at March 31, 2011	$	38,343		$	82,002		$	120,345
Additions, net		–			5,798			5,798
Change in fair value due to loan runoff		(1,218	)		(2,240	)		(3,458	)
Change in fair value due to market changes		(4,259	)		(9,234	)		(13,493	)
Balance at June 30, 2011	$	32,866		$	76,326		$	109,192

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

	Purchased			Originated			Total
Balance at December 31, 2010	$	37,900		$	77,823		$	115,723
Additions, net		–			10,767			10,767
Change in fair value due to loan runoff		(2,551	)		(4,383	)		(6,934	)
Change in fair value due to market changes		(2,483	)		(7,881	)		(10,364	)
Balance at June 30, 2011	$	32,866		$	76,326		$	109,192

Activity in capitalized mortgage servicing rights during the three months ended June 30, 2010 is as follows (in thousands):

	Purchased			Originated			Total
Balance at March 31, 2010	$	51,919		$	67,147		$	119,066
Additions, net		–			5,161			5,161
Change in fair value due to loan runoff		(1,313	)		(4,514	)		(5,827	)
Change in fair value due to market changes		(13,160	)		(6,298	)		(19,458	)
Balance at June 30, 2010	$	37,446		$	61,496		$	98,942

Activity in capitalized mortgage servicing rights during the six months ended June 30, 2010 is as follows (in thousands):

	Purchased			Originated			Total
Balance at December 31, 2009	$	7,828		$	65,996		$	73,824
Additions, net		31,892			10,362			42,254
Change in fair value due to loan runoff		(2,641	)		(8,969	)		(11,610	)
Gain on purchase of mortgage servicing rights		11,832			–			11,832
Change in fair value due to market changes		(11,465	)		(5,893	)		(17,358	)
Balance at June 30, 2010	$	37,446		$	61,496		$	98,942

During the first quarter of 2010, the Company purchased the rights to service approximately 34 thousand residential mortgage loans with an outstanding principal balance of $4.2 billion. The loans to be serviced are primarily concentrated in New Mexico and predominantly held by Fannie Mae, Ginnie Mae and Freddie Mac. The cash purchase price was $32 million. The acquisition date fair value of the servicing rights was approximately $43.7 million based upon independent valuation analyses which were further supported by assumptions and models the Company regularly uses to value its existing portfolio of servicing rights. The $11.8 million difference between the purchase price and acquisition date fair value was directly attributable to the seller's distressed financial condition.

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 considered significant unobservable inputs used to determine fair value are:

	June 30, 2011			December 31, 2010			June 30, 2010
Discount rate – risk-free rate plus a market premium		10.36	%		10.36	%		10.38	%
Prepayment rate – based upon loan interest rate, original term and loan type		10.26% - 38.37	%		6.53% - 23.03	%		8.3% - 34.5	%
Loan servicing costs – annually per loan based upon loan type	$	55 - $105		$	35 - $60		$	35 - $60
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life		2.02	%		2.21	%		1.34	%

The Company is exposed to interest rate risk as benchmark 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. At least annually, the Company requests estimates of fair value from outside sources to corroborate the results of the valuation model. There have been no changes in the techniques used to value mortgage servicing rights.

Stratification of the mortgage loan servicing portfolio and outstanding principal of loans serviced by interest rate at June 30, 2011 follows (in thousands):

	< 4.50%				4.50% - 5.49	%		5.50% - 6.49	%	> 6.49%			Total

Fair value	$	10,120		$	62,499		$	31,015		$	5,558		$	109,192
Outstanding principal of loans serviced1	$	1,144,667		$	5,496,830		$	3,339,781		$	1,302,164		$	11,283,442
Weighted average prepayment rate2		11.16	%		10.26	%		17.27	%		38.37	%		15.67	%

1	Excludes outstanding principal of $833 million for loans serviced for affiliates

2	Annual prepayment estimates based upon loan interest rate, original term and loan type

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 June 30, 2011, 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 $0.7 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 $7.1 million. In our model, changes in the value of our servicing rights due to changes in interest rates assume stable relationships between 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 service for others by investor at June 30, 2011 follows (in thousands):

			Past Due
	Current		30 to 59 Days		60 to 89 Days		90 Days or More		Total
FHLMC	$	5,469,151	$	47,973	$	15,238	$	62,673	$	5,595,035
FNMA		1,333,645		23,490		5,728		26,039		1,388,902
GNMA		3,541,114		127,350		33,900		120,756		3,823,120
Other		447,872		9,991		3,077		15,445		476,385
Total	$	10,791,782	$	208,804	$	57,943	$	224,913	$	11,283,442

The Company has off-balance sheet credit risk related to residential mortgage loans sold with recourse prior to 2008 under various community development programs. These loans consist of first lien, fixed rate residential mortgage loans sold to U.S. government agencies and 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 representation 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 $274 million at June 30, 2011, $289 million at December 31, 2010 and $311 million at June 30, 2010. A separate accrual for these off-balance sheet commitments is included in Other liabilities in the Consolidated Balance Sheets totaling $18 million at June 30, 2011, $17 million at December 31, 2010 and $14 million at June 30, 2010. At June 30, 2011, approximately 6% of the loans sold with recourse with an outstanding principal balance of $16 million were either delinquent more than 90 days, in bankruptcy or in foreclosure and 5% with an outstanding balance of $14 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 June 30,						Six Months ended June 30,
	2011			2010			2011			2010
Beginning balance	$	16,487		$	13,781		$	16,667		$	13,781
Provision for recourse losses		2,532			1,568			3,326			2,867
Loans charged off, net		(1,479	)		(1,568	)		(2,453	)		(2,867	)
Ending balance	$	17,540		$	13,781		$	17,540		$	13,781

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. As of June 30, 2011, less than 10% of purchase requests made in 2010 and 2011 have resulted in actual repurchases or indemnification by the Company. For the six months ended June 30, 2011, we have repurchased 2 loans for $361 thousand from the agencies. No losses have been incurred on these loans as of June 30, 2011. At June 30, 2011, we have unresolved deficiency requests from the agencies on 166 loans with an aggregate outstanding principal balance of $27 million. During 2010, the Company established an accrual for credit losses related to potential loan repurchases under representations and warranties which is included in Other liabilities in the Consolidated Balance Sheets and in Mortgage banking costs in the Consolidated Statement of Earnings. This accrual totals $2.1 million at June 30, 2011. No amounts have been charged against this allowance as of June 30, 2011.