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 retained for investment. 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 for accounting purposes. 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, 2017					Dec. 31, 2016				March 31, 2016
	Unpaid Principal Balance/ Notional		Fair Value			Unpaid Principal Balance/ Notional		Fair Value		Unpaid Principal Balance/ Notional		Fair Value
Residential mortgage loans held for sale	$	237,811	$	237,695		$	286,414	$	286,971	$	309,040	$	318,191
Residential mortgage loan commitments	381,732		14,267			318,359		9,733		902,986		20,170
Forward sales contracts	586,517		(3,255		)	569,543		5,193		1,012,041		(6,321		)
			$	248,707				$	301,897			$	332,040

No residential mortgage loans held for sale were 90 days or more past due or considered impaired as of March 31, 2017, December 31, 2016 or March 31, 2016. No credit losses were recognized on residential mortgage loans held for sale for the three month periods ended March 31, 2017 and 2016.

Mortgage banking revenue was as follows (in thousands):



	Three Months Ended March 31,
	2017			2016
Production revenue:
Net realized gains on sale of mortgage loans	$	12,703		$	8,449
Net change in unrealized gain on mortgage loans held for sale	(246		)	3,283
Net change in the fair value of mortgage loan commitments	4,534			12,036
Net change in the fair value of forward sales contracts	(8,448		)	(7,121		)
Total production revenue	8,543			16,647
Servicing revenue	16,648			15,453
Total mortgage banking revenue	$	25,191		$	32,100

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 for accounting purposes 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 originated or 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, 2017			Dec. 31, 2016			March 31, 2016
Number of residential mortgage loans serviced for others	138,778			139,340			134,040
Outstanding principal balance of residential mortgage loans serviced for others	$	22,015,021		$	21,997,568		$	20,294,662
Weighted average interest rate	3.96		%	3.97		%	4.10		%
Remaining term (in months)	300			301			300

Activity in capitalized mortgage servicing rights during the three months ended March 31, 2017 was as follows (in thousands):



	Purchased			Originated			Total
Balance, Dec. 31, 2016	$	8,909		$	238,164		$	247,073
Additions, net	—			8,436			8,436
Change in fair value due to scheduled payments and full-balance payoffs	(509		)	(7,453		)	(7,962		)
Change in fair value due to market assumption changes	(84		)	1,940			1,856
Balance, March 31, 2017	$	8,316		$	241,087		$	249,403

Activity in capitalized mortgage servicing rights during the three months ended March 31, 2016 was as follows (in thousands):



	Purchased			Originated			Total
Balance, Dec. 31, 2015	$	9,911		$	208,694		$	218,605
Additions, net	—			13,582			13,582
Change in fair value due to scheduled payments and full-balance payoffs	(626		)	(7,518		)	(8,144		)
Change in fair value due to market assumption changes	(3,336		)	(24,652		)	(27,988		)
Balance, March 31, 2016	$	5,949		$	190,106		$	196,055

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 actual loan payments are included in Mortgage banking costs. Changes in fair value due to market assumption changes are reported separately. Changes in fair value due to market assumption 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, 2017	Dec. 31, 2016	March 31, 2016
Discount rate – risk-free rate plus a market premium	10.08%	10.08%	10.11%
Prepayment rate - based upon loan interest rate, original term and loan type	8.66%-18.17%	8.98%-16.91%	8.88%-35.21%
Loan servicing costs – annually per loan based upon loan type:
Performing loans	$63-$120	$63 - $120	$63 - $120
Delinquent loans	$150-$500	$150 - $500	$150 - $500
Loans in foreclosure	$650-$4250	$650 - $4,250	$650 - $4,250
Escrow earnings rate – indexed to rates paid on deposit accounts with comparable average life	2.06%	1.98%	1.19%
Primary/secondary mortgage rate spread	105 bps	105 bps	120 bps

Changes in primary residential mortgage interest rates directly affect the prepayment speeds used in valuing our mortgage servicing rights. 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 periodically for changes in market conditions and adjusted to better correlate with actual performance of BOK Financial’s servicing portfolio.

The interest rate sensitivity of our mortgage servicing rights is modeled over a range of +/- 50 basis points. At March 31, 2017, a 50 basis point decrease in mortgage interest rates is expected to decrease the fair value of our mortgage servicing rights by $30 million. A 50 basis point increase in mortgage interest rates is expected to increase the fair value of our mortgage servicing rights by $25 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, 2017 follows (in thousands):



			Past Due
	Current		30 to 59 Days		60 to 89 Days		90 Days or More		Total
FHLMC	$	8,052,339	$	48,670	$	12,098	$	24,705	$	8,137,812
FNMA	6,848,773		43,151		9,914		20,839		6,922,677
GNMA	6,253,924		156,821		43,016		15,492		6,469,253
Other	478,594		4,171		646		1,868		485,279
Total	$	21,633,630	$	252,813	$	65,674	$	62,904	$	22,015,021

The Company has obligations to repurchase or provide indemnification for residential mortgage loans sold to government sponsored entities due to standard representations and warranties made under contractual agreements and to service loans in accordance with investor guidelines. The Company has established accruals for losses related to these obligations that are included in Other liabilities in the Consolidated Balance Sheets and in Mortgage banking costs in the Consolidated Statements of Earnings.

The Company repurchased 5 loans from the agencies for $598 thousand during the first quarter of 2017. There were three indemnifications on loans paid during the first quarter of 2017. Losses recognized on repurchases were insignificant.

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



	March 31,
	2017		2016
Number of unresolved deficiency requests	185		220
Aggregate outstanding principal balance subject to unresolved deficiency requests	$	9,622	$	20,292
Unpaid principal balance subject to indemnification by the Company	5,249		4,668

The activity in the accruals for mortgage losses related to repurchases is summarized as follows (in thousands).



	Three Months Ended March 31,
	2017			2016
Beginning balance	$	2,788		$	3,359
Provision for losses	(199		)	(118		)
Charge-offs, net	(2		)	(267		)
Ending balance	$	2,587		$	2,974