In certain circumstances, interest rate swaps may be designated as fair value hedges and may qualify for hedge accounting. Changes in the fair value of the hedged-asset or liability that are attributable to the hedged risk are reported in other operating revenue. These changes may partially or completely offset the mark-to-market adjustments of the interest rate swaps. Fair value hedges are considered to be effective if the cumulative fair value adjustments of the interest rate swaps are within a range of 80% to 120% of the cumulative fair value adjustment of the hedged assets or liabilities. Interest rate swaps may be designated as cash flow hedges:of variable rate assets or liabilities or anticipated transactions. Changes in fair value of interest rate swaps are recorded in’other: comprehensive income to the extent they are effective. Amounts recorded as other comprehensive income are recognized in net income in the same periods as the cash flows from the hedged transactions. In conjunction with its mortgage banking activities, BOK Financial enters into mortgage loan commitments that are considered derivative instruments under FAS 133. Forward sales contracts are used to hedge these mortgage loan commitments and mortgage loans held for sale. Changes in the fair value of the mortgage loan commitments and forward sales contracts are recognized in other operating revenue: Energy swaps are used to assist certain customers in hedging their risk of adverse changes in natural gas and oil prices. BOK Financial serves as an intermediary between its energy customers and the commodities market by arranging fixed price / floating price swaps. Each swap between BOK Financial and its customer is offset by a swap between BOK Financial and dealers in the commodities market. The fair value of these swaps are carried in other assets and other liabilities. Compensation for credit risk and reimbursement of administrative costs are recognized over the life of the swaps. Loans are either secured or unsecured based on the type of loan and the financial condition of the borrower. Repayment is generally expected from cash flow or proceeds from the sale of selected assets of the borrower. BOK Financial is exposed to risk of loss on loans due to the borrower’s difficulties, which may arise from any number of factors, including problems within the respective industry or local economic conditions. Access to collateral, in the event of borrower default, is reasonably assured through adherence to applicable lending laws and through sound lending standards and credit review procedures. Interest is accrued at the applicable interest rate on the principal amount outstanding. Loans are placed on nonaccrual status when, in the opinion of management, ful] collection of principal or interest is uncertain, generally when the collection of principal or interest is 90 days or more past due. Interest previously accrued but not collected is charged against interest income when the loan is placed on nonaccrual status. Payments on nonaccrual loans are applied to principal or reported as interest income, according to management’s judgment as to the collectibility of principal. Loan origination and commitment fees and direct loan acquisition and origination costs, when significant, are deferred and amortized as an adjustment to yield over the life of the loan-or over the commitment period, as applicable. Mortgage loans held for sale are carried at the lower of aggregate cost or market value, including estimated losses on unfunded commitments and gains or losses on related forward sales contracts. Effective with the adoption of FAS 133, mortgage loans held for sale that are designated as hedged assets are carried at fair value based on sales BOK Financial periodically securitizes and sells pools of assets. These transactions are designed to comply. with the requirements of generally accepted accounting principles for treatment as a sale. BOK Financial may retain the right to service the assets and a residual interest in excess cash flows generated by the assets. The fair value of these retained assets is determined by a discounting of expected future net:cash to be received using assumed market interest rates for these instruments. Residual interests are carried ‘at fair value. Changes in fair values are recorded in income. Servicing rights are carried at the lower of amortized cost or fair value. A valuation allowance is provided when amortized cost of servicing rights exceeds fair value. A provision for loan losses is charged against earnings in amounts necessary to maintain an adequate reserve for loan losses. Loans are charged off when the loan balance ora portion of the loan balance is no longer covered by the paying capacity of the borrower based on an evaluation of available cash resources and collateral value. Loans are evaluated quarterly and charge-offs are taken in the quarter in which the loss is identified. Additionally, all unsecured or under-secured loans that are past due by 180 days or more are charged off within 30 days. Recoveries of loans previously charged off.are added to the reserve. commitments or market quotes, Changes in fair value after the date of designation of an effective hedge are recorded in other operating revenue. The adequacy of the reserve for loan losses:is assessed by management, based upon an ongoing quarterly evaluation of the probable estimated losses inherent in the portfolio, and includes probable losses on both outstanding loans and unused commitments to provide financing. A consistent methodology has been developed that includes reserves assigned to specific criticized loans, general reserves that are based upon a statistical migration analysis for each category of loans, and anonspecific allowance that is based upon an analysis of current economic conditions, Joan concentrations, portfolio growth and other relevant factors. The reserve for loan losses related to loans that are identified for evaluation in accordance with Statement of Financial Accounting Standards No. 114, “Accounting by Creditors for Impairment of a Loan” (“FAS 114”), is: based on discounted cash flows using the loan’s initial effective collateral dependent loans. Loans are considered to be impaired when it becomes probable that BOK Financial will be unable to collect all amounts due according to the contractual terms of the loan agreement. This is substantially the same criteria used to determine when a loan should be placed on nonaccrual status. This evaluation is inherently subjective as it requires material estimates including the amounts and timing of future cash flows expected to be received on impaired loans that may be susceptible to significant change. In accordance with the provisions of FAS 114, management has excluded small balance, homogeneous loans from the impairment evaluation specified in FAS 114. Such loans include 1-4 family mortgage loans, consumer loans, and commercial loans with committed amounts less than $1 million. The adequacy of the reserve for loan losses applicable to these loans is evaluated in accordance with generally accepted accounting principles and standards | established by the banking regulatory authorities and adopted as policy by BOK Financial. Loans Reserve for Loan Losses 35 Asset Securitization