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Fair Value Hedges
Overview of Fair Value Hedges
The Company uses a combination of interest rate swaps, forward-starting swaps and purchased options on swaps,
interest rate caps and interest rate floors to offset its exposure to changes in value of certain fixed-rate assets and
liabilities. Changes in the fair value of the derivatives are recognized currently in earnings. Hedge ineffectiveness, if
any, is recognized currently in other expense excluding interest in the consolidated statement of income.
The following table summarizes information related to financial derivatives in fair value hedge relationships
(dollars in thousands):
Notional
Amount of
Derivatives
Fair Value of Derivatives
Weighted-Average
Pay
Rate
Receive
Rate
Strike
Rate
Remaining
Life (Years)Asset Liability Net
December 31, 2006:
Pay-fixed interest rate swaps:
Mortgage-backed securities $ 4,774,000 $ 22,399 $(25,894) $ (3,495) 5.12% 5.36% N/A 4.20
Recreational vehicle loans 2,030,000 — (8,046) (8,046) 5.46% 5.35% N/A 1.62
Home equity loans 490,000 — (2,625) (2,625) 5.40% 5.35% N/A 2.16
Investment securities 335,162 1,128 (2,887) (1,759) 5.07% 5.37% N/A 6.69
Asset backed securities 232,000 1,013 — 1,013 5.08% 5.37% N/A 6.52
Receive-fixed interest rate
swaps:
Brokered certificates of
deposit 127,138 — (3,392) (3,392) 5.31% 5.21% N/A 11.41
FHLB advances 100,000 — (3,534) (3,534) 5.35% 3.64% N/A 2.79
Purchased interest rate options(1):
Caps 6,720,000 38,237 — 38,237 N/A N/A 5.36% 2.18
Swaptions(2) 3,338,000 50,218 — 50,218 N/A N/A 5.37% 10.69
Floors 1,200,000 19,786 — 19,786 N/A N/A 4.74% 4.81
Total fair value hedges $19,346,300 $132,781 $(46,378) $86,403 5.22% 5.34% 5.30% 4.44
December 31, 2005:
Pay-fixed interest rate swaps:
Mortgage-backed securities $ 961,000 $ 12,485 $ (598) $11,887 4.50% 4.35% N/A 4.88
Investment securities 119,485 1,315 (1,750) (435) 4.62% 4.18% N/A 7.70
Receive-fixed interest rate
swaps:
Brokered certificates of
deposit 132,313 — (3,740) (3,740) 4.33% 5.22% N/A 12.50
FHLB advances 100,000 — (3,894) (3,894) 4.37% 3.64% N/A 3.79
Purchased interest rate forward-
starting swaps:
Mortgage-backed securities 70,000 — (470) (470) 5.03% N/A N/A 10.01
Purchased interest rate options(1):
Caps 770,000 21,324 — 21,324 N/A N/A 4.89% 4.82
Swaptions(2) 2,241,000 36,982 — 36,982 N/A N/A 4.93% 8.47
Floors 1,325,000 3,952 — 3,952 N/A N/A 3.82% 3.71
Total fair value hedges $ 5,718,798 $ 76,058 $(10,452) $65,606 4.51% 4.37% 4.59% 6.29
(1) Purchased interest rate options were used to hedge mortgage loans and mortgage-backed securities.
(2) Swaptions are options to enter swaps starting on a given day.
104