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 loan 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):



	March 31, 2014				December 31, 2013				March 31, 2013
	Unpaid Principal Balance/ Notional		Fair Value		Unpaid Principal Balance/ Notional		Fair Value		Unpaid Principal Balance/ Notional		Fair Value
Residential mortgage loans held for sale	$	215,959	$	220,074	$	192,266	$	193,584	$	264,608	$	274,710
Residential mortgage loan commitments	387,755		6,035		258,873		2,656		466,571		13,343
Forward sales contracts	571,458		403		435,867		4,306		712,144		(1,842		)
			$	226,512			$	200,546			$	286,211

No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of March 31, 2014, December 31, 2013 or March 31, 2013. No credit losses were recognized on residential mortgage loans held for sale for the three month periods ended March 31, 2014 and 2013.

Mortgage banking revenue was as follows (in thousands):



	Three Months Ended
	March 31, 2014			March 31, 2013
Production revenue:
Residential mortgages loan held for sale	$	11,968		$	30,235
Residential mortgage loan commitments	3,387			610
Forward sales contracts	(3,903		)	(935		)
Total production revenue	11,452			29,910
Servicing revenue	11,392			10,066
Total mortgage banking revenue	$	22,844		$	39,976

Production 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 and 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):



	March 31, 2014			December 31, 2013			March 31, 2013
Number of residential mortgage loans serviced for others	107,660			106,137			99,438
Outstanding principal balance of residential mortgage loans serviced for others	$	14,045,642		$	13,718,942		$	12,272,691
Weighted average interest rate	4.38		%	4.40		%	4.59		%
Remaining term (in months)	292			292			290

Activity in capitalized mortgage servicing rights during the three months ended March 31, 2014 was as follows (in thousands):



	Purchased			Originated			Total
Balance, December 31, 2013	$	15,935		$	137,398		$	153,333
Additions, net	—			8,644			8,644
Change in fair value due to loan runoff	(515		)	(3,227		)	(3,742		)
Change in fair value due to market changes	(630		)	(3,831		)	(4,461		)
Balance, March 31, 2014	$	14,790		$	138,984		$	153,774

Activity in capitalized mortgage servicing rights during the three months ended March 31, 2013 was as follows (in thousands):



	Purchased			Originated			Total
Balance, December 31, 2012	$	12,976		$	87,836		$	100,812
Additions, net	—			11,433			11,433
Change in fair value due to loan runoff	(871		)	(4,192		)	(5,063		)
Change in fair value due to market changes	1,098			1,560			2,658
Balance, March 31, 2013	$	13,203		$	96,637		$	109,840

Changes in the fair value of mortgage servicing rights are included in Other operating revenue 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 based on significant unobservable inputs were as follows:



	March 31, 2014	December 31, 2013	March 31, 2013
Discount rate – risk-free rate plus a market premium	10.21%	10.21%	10.27%
Loan servicing costs – annually per loan based upon loan type:
Performing loans	$60 - $105	$60 - $105	$55 - $105
Delinquent loans	$150 - $500	$150 - $500	$135 - $500
Loans in foreclosure	$1,000 - $4,250	$1,000 - $4,250	$875 - $4,250
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life	1.81%	1.80%	0.97%

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 March 31, 2014 follows (in thousands):



	< 4.00%			4.00% - 4.99%			5.00% - 5.99%			> 5.99%			Total
Fair value	$	62,501		$	59,449		$	25,394		$	6,430		$	153,774
Outstanding principal of loans serviced for others	$	5,536,840		$	5,101,982		$	2,272,475		$	1,134,345		$	14,045,642
Weighted average prepayment rate¹	6.85		%	7.98		%	10.55		%	26.17		%	9.42		%


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 March 31, 2014, 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 $3.3 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 $3.6 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 March 31, 2014 follows (in thousands):



			Past Due
	Current		30 to 59 Days		60 to 89 Days		90 Days or More		Total
FHLMC	$	4,572,606	$	30,870	$	11,860	$	31,729	$	4,647,065
FNMA	4,338,847		19,954		6,469		21,933		4,387,203
GNMA	4,475,395		99,668		26,366		12,616		4,614,045
Other	384,507		5,849		1,877		5,096		397,329
Total	$	13,771,355	$	156,341	$	46,572	$	71,374	$	14,045,642

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 $187 million at March 31, 2014, $191 million at December 31, 2013 and $220 million at March 31, 2013. A separate accrual for these off-balance sheet commitments is included in Other liabilities in the Consolidated Balance Sheets totaling $8.8 million at March 31, 2014, $9 million at December 31, 2013 and $10 million at March 31, 2013. At March 31, 2014, approximately 3% of the loans sold with recourse with an outstanding principal balance of $5.9 million were either delinquent more than 90 days, in bankruptcy or in foreclosure and 4% with an outstanding balance of $7.7 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
	March 31,
	2014			2013
Beginning balance	$	9,041		$	11,359
Provision for recourse losses	(14		)	(761		)
Loans charged off, net	(224		)	(523		)
Ending balance	$	8,803		$	10,075

The Company also has an off-balance sheet obligation to repurchase or provide indemnification for residential mortgage loans sold to government sponsored entities due to standard representations and warranties made under contractual agreements. 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. The level of repurchases and indemnifications related to standard representations and warranties has remained low. The Company repurchased 11 loans from the agencies for $1.3 million during the first quarter of 2014 and had no related losses. There were seven indemnifications on loans paid during the first quarter of 2014. Losses recognized on indemnifications were insignificant.

A summary of unresolved deficiency requests from the agencies follows (in thousands, except for number of unresolved deficiency requests):



	March 31, 2014		March 31, 2013
Number of unresolved deficiency requests	647		430
Aggregate outstanding principal balance subject to unresolved deficiency requests	$	81,909	$	50,861
Unpaid principal balance subject to indemnification by the Company	1,561		1,414

The activity in the accrual for credit losses related to potential loan repurchases and indemnifications under representations and warranties is summarized as follows (in thousands).



	Three Months Ended
	March 31,
	2014			2013
Beginning balance	$	8,845		$	5,291
Provision for repurchase losses	(842		)	976
Losses on repurchases and indemnifications, net	(126		)	(390		)
Ending balance	$	7,877		$	5,877