The estimated changes in interest rates on net interest revenue, net income, and economic value of equity is within guidelines established by the Board of Directors for all interest rate scenarios. BOK Financial also has risk associated with its portfolio of mortgage servicing rights. The primary risk is due to loan prepayments. Generally, the value of mortgage servicing rights declines when interest rates fall due to an increase in loan prepayments. The decrease in value of the servicing rights is recorded as an impairment allowance. Both the amortized cost and the fair value of the servicing rights are stratified by interest rate and loan type. An impairment provision is charged against earnings whenever the amortized cost exceeds the fair value of each stratum. Generally, the value of mortgage servicing rights increases when interest rates rise due to a decrease in loan prepayments. However, this increase in value can only be recognized up to the amortized cost. Any increase in fair value beyond amortized cost is not recognized. There is no active market for trading servicing rights. Therefore, fair value is determined by using industry consensus prepayment speeds to project future cash flows. Additional assumptions are made regarding servicing costs, earnings on escrow deposits and ancillary income and discount rates. Management consistently uses independent sources to provide many of these assumptions. However, actual fair values may differ significantly from computed fair values due to assumption changes or modeling errors. BOK Financial designates:a portion of its securities portfolio as an economic hedge against the risk of loss on its mortgage servicing rights. Mortgage-backed and principal only securities are acquired and held as available for sale when the prepayment risk exceeds certain levels. The fair value of these securities is expected to vary inversely to the fair value of the mortgage servicing rights. Management may sell these securities and realize gains or losses when necessary to offset losses or gains on the mortgage servicing rights. However, this strategy presents certain risks. A well- developed market determines fair values for securities. As previously noted, there is no comparable market for mortgage servicing rights. Therefore, the computed change in value of the servicing rights for a specified change in interest rates may not correlate to the change in value of the sécurities. : The relationship between the fair value of mortgage servicing rights and mortgage-backed securities has become more volatile. Since September 30,2001, industry projections of prepayment speeds have changed significantly due to factors other than interest rates, including duration of the low interest rate environment and borrower prepayment behavior. As a result, the hedge program was less effective during the fourth quarter of 2001: At December 31, 2001, securities witha fair value of $340 million and an aggregate unrealized loss of $22 million were held for the hedge program. This unrealized loss, net of income taxes, is included in shareholders’ equity as part of other accumulated comprehensive income. The interest rate sensitivity of the mortgage servicing portfolio and securities held as a hedge is modeled over a range of + / - 50 basis points. At December 31, 2001, the pre-tax results on this modeling on reported earnings were: 26 Table 22 — Interest Rate Sensitivity - Mortgage Servicing (Dollars in Thousands) 2001 50 bp 50 bp Increase Decrease Anticipated change in: Mortgage servicing righis $10,670' $(18,001) Hedging instruments (12,135) = Net $ (1,465) $(18,001) Total anticipated increase in value is $12.3 million. However, only $10.7 million can be recognized due to risk strata limits. 2 Anticipated increase in value of hedging instrument totals $12.6 million, which would reduce the existing unrealized loss. However, gains would not be available to be realized. The simulations used to manage market risk are based on numerous assumptions regarding the effect of changes in interest rates on the timing and extent of repricing characteristics, future cash flows and customer behavior. These assumptions are inherently uncertain and, asa result, the model cannot precisely estimate net interest revenue, net income or economic value of equity or precisely predict the impact of higher or lower interest rates on net interest revenue, net income or economic value of equity. Actual results will differ from simulated results due to timing, magnitude and frequency of interest rate changes and changes in market conditions and management strategies, among other factors. BOK Financial uses interest rate swaps, a form of off- balance sheet derivative product, in managing its interest rate sensitivity. These products are generally used to more closely match interest paid on certain fixed rate loans with funding sources and long-term certificates of deposit with earning assets. During 2001 and 2000, net interest income increased $6.1 million and $2.2 million. Credit risk from these swaps is closely monitored and counterparties to these contracts are selected on the basis of their credit worthiness, among other factors. Derivative products are not used for speculative purposes. See Note 4 to the Consolidated Financial Statements for additional information. Trading Activities BOK Financial enters into trading account activities both as an intermediary for customers and for its own account. As an intermediary, BOK Financial will take positions in securities, generally mortgage-backed securities, government agency securities, and municipal bonds. These securities are purchased for resale to customers, which include individuals, corporations, foundations and financial institutions. BOK Financial will also take trading positions in U.S. Treasury securities mortgage-backed securities, municipal securities and financial futures for its own account through either BOk or BOSC, Inc. These positions are taken with the objective of generating trading profits. Both of these activities involve interest rate risk.