(3) Derivatives

The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at September 30, 2011 (in thousands):

	Gross Basis								Net Basis²
	Assets				Liabilities				Assets			Liabilities
	Notional¹		Fair Value		Notional¹		Fair Value		Fair Value			Fair Value
Customer risk management programs:
Interest rate contracts3	$	13,576,276	$	281,479	$	13,441,006	$	278,936	$	219,951		$	217,408
Energy contracts		1,726,402		200,142		1,965,233		198,725		102,938			101,521
Agricultural contracts		190,100		8,100		190,700		8,012		2,373			2,285
Foreign exchange contracts		65,747		65,747		65,787		65,787		65,747			65,787
CD options		198,518		10,645		186,192		10,645		10,645			10,645
Total customer derivative before cash collateral		15,757,043		566,113		15,848,918		562,105		401,654			397,646
Less: cash collateral		–		–		–		–		(37,298	)		(55,824	)
Total customer derivatives		15,757,043		566,113		15,848,918		562,105		364,356			341,822

Interest rate risk management programs		44,000		6,260		–		–		6,260			–
Total derivative contracts	$	15,801,043	$	572,373	$	15,848,918	$	562,105	$	370,616		$	341,822

Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.

Derivative contracts are recorded on a net basis in the balance sheet in recognition of master netting agreements that enable the Company to settle all derivative positions with a given counterparty in total and to offset the net derivative position with the related cash collateral.

3 Includes interest rate swaps used by borrowers to modify interest rate terms of their loans and to be announced securities used by mortgage banking customers to hedge their loan production.

When bilateral netting agreements exist between the Company and its counterparties that create a single legal claim or obligation to pay or receive the net amount in settlement of the individual derivative contracts, the Company reports derivative assets and liabilities on a net by counterparty basis.

Derivative contracts may also require the Company to provide or receive cash margin as collateral for derivative assets and liabilities. Derivative assets and liabilities are reported net of cash margin when certain conditions are met. As of September 30, 2011, a decrease in credit rating from A1 to below investment grade would increase our obligation to post cash margin on existing contracts by approximately $41 million.

The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at December 31, 2010 (in thousands):

	Gross Basis								Net Basis²
	Assets				Liabilities				Assets			Liabilities
	Notional¹		Fair Value		Notional¹		Fair Value		Fair Value			Fair Value
Customer risk management programs:
Interest rate contracts3	$	11,664,409	$	235,961	$	11,524,077	$	233,421	$	141,279		$	138,739
Energy contracts		1,914,519		188,655		2,103,923		191,075		76,746			79,166
Agricultural contracts		183,250		10,616		186,709		10,534		4,226			4,144
Foreign exchange contracts		45,014		45,014		45,014		45,014		45,014			45,014
CD options		160,535		16,247		160,535		16,247		16,247			16,247
Total customer derivative before cash collateral		13,967,727		496,493		14,020,258		496,291		283,512			283,310
Less: cash collateral		–		–		–		–		(15,017	)		(68,987	)
Total customer derivatives		13,967,727		496,493		14,020,258		496,291		268,495			214,323

Interest rate risk management programs		124,000		1,950		17,977		1,097		1,950			1,097
Total derivative contracts	$	14,091,727	$	498,443	$	14,038,235	$	497,388	$	270,445		$	215,420

Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.

Includes interest rate swaps used by borrowers to modify interest rate terms of their loans and to be announced securities used by mortgage banking customers to hedge their loan production.

The following table summarizes the fair values of derivative contracts recorded as “derivative contracts” assets and liabilities in the balance sheet at September 30, 2010 (in thousands):

	Gross Basis								Net Basis2
	Assets				Liabilities				Assets			Liabilities
	Notional¹		Fair Value		Notional¹		Fair Value		Fair Value			Fair Value
Customer risk management programs:
Interest rate contracts3	$	12,922,733	$	162,377	$	12,358,978	$	159,901	$	116,257		$	113,781
Energy contracts		2,120,942		280,623		2,377,861		280,138		101,636			101,151
Agricultural contracts		153,551		5,609		162,927		5,500		1,715			1,606
Foreign exchange contracts		48,707		48,707		48,707		48,707		48,707			48,707
CD options		144,289		9,151		144,289		9,151		9,151			9,151
Total customer derivative before cash collateral		15,390,222		506,467		15,092,762		503,397		277,466			274,396
Less: cash collateral		–		–		–		–		(19,907	)		(56,157	)
Total customer derivatives		15,390,222		506,467		15,092,762		503,397		257,559			218,239

Interest rate risk management programs		124,000		8,545		2,977		57		8,545			57
Total derivative contracts	$	15,514,222	$	515,012	$	15,095,739	$	503,454	$	266,104		$	218,296

Notional amounts for commodity contracts are converted into dollar-equivalent amounts based on dollar prices at the inception of the contract.

2	Derivative contracts are recorded on a net basis in the balance sheet in recognition of master netting agreements that enable the Company to settle all derivative positions with a given counterparty in total and to offset the net derivative position with the related cash collateral.

Includes interest rate swaps used by borrowers to modify interest rate terms of their loans and to be announced securities used by mortgage banking customers to hedge their loan production.

The following summarizes the pre-tax net gains (losses) on derivative instruments and where they are recorded in the income statement (in thousands):

	Three Months Ended September 30, 2011				Three Months Ended September 30, 2010
	Brokerage and Trading Revenue		Gain (Loss) on Derivatives, Net		Brokerage and Trading Revenue		Gain (Loss) on Derivatives, Net
Customer Risk Management Programs:
Interest rate contracts	$	1,709	$	–	$	1,152	$	–
Energy contracts		1,360		–		2,335		–
Agricultural contracts		103		–		133		–
Foreign exchange contracts		155		–		100		–
CD options		–		–		–		–
Total Customer Derivatives		3,327		–		3,720		–

Interest Rate Risk Management Programs		–		4,048		–		4,472
Total Derivative Contracts	$	3,327	$	4,048	$	3,720	$	4,472

	Nine Months Ended September 30, 2011					Nine Months Ended September 30, 2010
	Brokerage and Trading Revenue			Gain (Loss) on Derivatives, Net		Brokerage and Trading Revenue		Gain (Loss) on Derivatives, Net
Customer Risk Management Programs:
Interest rate contracts	$	(803	)	$	–	$	1,915	$	–
Energy contracts		5,759			–		6,332		–
Agricultural contracts		263			–		529		–
Foreign exchange contracts		381			–		274		–
CD options		–			–		–		–
Total Customer Derivatives		5,600			–		9,050		–

Interest Rate Risk Management Programs		–			2,700		–		11,148
Total Derivative Contracts	$	5,600		$	2,700	$	9,050	$	11,148

Customer Risk Management Programs

BOK Financial offers programs to permit its customers to manage various risks, including fluctuations in energy, cattle and other agricultural products, interest rates and foreign exchange rates, or to take positions in derivative contracts. Derivative contracts are executed between the customers and BOK Financial. Offsetting contracts are executed between BOK Financial and other selected counterparties to minimize its risk of changes in commodity prices, interest rates or foreign exchange rates. The counterparty contracts are identical to customer contracts, except for a fixed pricing spread or fee paid to BOK Financial as profit and compensation for administrative costs and credit risk which is recognized over the life of the contracts and included in other operating revenue – brokerage and trading revenue in the Consolidated Statements of Earnings.

Interest Rate Risk Management Programs

BOK Financial may use interest rate swaps in managing its interest rate sensitivity and as part of its economic hedge of the change in the fair value of mortgage servicing rights. Interest rate swaps are generally used to reduce overall asset sensitivity by converting specific fixed rate liabilities to floating rate based on LIBOR. Net interest revenue was not significantly impacted by the settlement of amounts receivable or payable on interest rate swaps for the three and nine months ended September 30, 2011 and 2010, respectively. As of September 30, 2011, BOK Financial had interest rate swaps with a notional value of $44 million used as part of the economic hedge of the change in the fair value of the mortgage servicing rights.

As discussed in Note 5, certain derivative contracts not designated as hedging instruments related to mortgage loan commitments and forward sales contracts are included in Residential mortgage loans held for sale on the Consolidated Balance Sheets. See Note 5, for additional discussion of notional, fair value and impact on earnings of these contracts.

None of these derivative contracts have been designated as hedging instruments.