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As of December 31, 20061
(Dollars in millions)
1 Year
or Less
1-2
Years
2-5
Years
5-10
Years
After 10
Years Total
Cash Flow Asset Hedges
Notional amount - swaps $4,900 $600 $1,500 $- $- $7,000
Net unrealized gain (loss) (30) (9) 24 - - (15)
Weighted average receive rate23.68% 3.95% 5.50% -% -% 4.09%
Weighted average pay rate25.35 5.35 5.35 - - 5.35
Fair Value Asset Hedges
Notional amount - forwards $6,787 $- $- $- $- $6,787
Net unrealized gain 3 - - - - 3
Cash Flow Liability Hedges
Notional amount - swaps and options3$- $1,115 $1,150 $- $- $2,265
Net unrealized gain - 21 21 - - 42
Weighted average receive rate2-% 5.37% 5.37% -% -% 5.37%
Weighted average pay rate2- 3.85 4.18 - - 3.98
Fair Value Liability Hedges
Notional amount - swaps $- $173 $1,950 $1,700 $- $3,823
Net unrealized loss - (5) (90) (71) - (166)
Weighted average receive rate2-% 2.48% 3.73% 4.10% -% 3.84%
Weighted average pay rate2- 5.37 5.37 5.37 - 5.37
1Includes only derivative financial instruments which are currently qualifying hedges under SFAS No. 133. Certain other derivatives that are effective for
risk management purposes, but which are not in designated hedging relationships under SFAS No. 133, are not incorporated in this table.
2All interest rate swaps have variable pay or receive rates with resets of six months or less, and are the pay or receive rates in effect at December 31, 2006.
3Includes interest rate swaptions with notional of $0.4 billion and the option to pay a fixed rate of 4.31% beginning May 2007. As the rates on the
swaptions were not applicable at December 31, 2006, they have been excluded from the weighted average pay and receive calculations.
Other Market Risk
Other sources of market risk include the risk associated with holding residential and commercial mortgage loans prior to
selling them into the secondary market, commitments to customers to make mortgage loans that will be sold to the secondary
market, and our investment in MSRs. We manage the risks associated with the residential and commercial mortgage loans
classified as held for sale (i.e., the warehouse) and our interest rate lock commitments (“IRLCs”) on residential loans
intended for sale. The warehouses and IRLCs consist primarily of fixed and adjustable-rate single family residential and
commercial real estate loans. The risk associated with the warehouses and IRLCs is the potential change in interest rates
between the time the customer locks in the rate on the anticipated loan and the time the loan is sold on the secondary market,
which is typically 90-150 days.
We manage interest rate risk predominantly with interest rate swaps, futures and forward sale agreements, where the changes
in value of the forward sale agreements substantially offset the changes in value of the warehouses and the IRLCs. IRLCs on
residential mortgage loans intended for sale are classified as free standing derivative financial instruments in accordance with
SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities,” and are not designated in
SFAS No. 133 hedge accounting relationships.
The most significant financial impact of adopting the provisions of SFAS No. 157 related to valuing mortgage loan
commitments. The valuation of these loan commitments includes assumptions related to the amount of commitments that
ultimately result in closed loans. Under SFAS No. 157, the full value of these loan commitments, excluding servicing value,
is recognized at the loan commitment date. Prior accounting requirements under EITF 02-03, precluded the recognition of a
portion of the loan commitment’s value, which was deferred until the loans underlying the commitments were ultimately
sold. The change in valuation methodology under SFAS No. 157 accelerates the recognition of certain components of the
commitment’s value.
MSRs are the discounted present value of future net cash flows that are expected to be received from the mortgage servicing
portfolio. The value of MSRs is highly dependent upon the assumed prepayment speed of the mortgage servicing portfolio.
Future expected net cash flows from servicing a loan in the mortgage servicing portfolio would not be realized if the loan
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