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Table of Contents
Index to Financial Statements
NOTE 27—ACCOUNTING FOR DERIVATIVE FINANCIAL INSTRUMENTS AND HEDGING ACTIVITIES
The Company enters into derivative transactions to protect against the risk of market price or interest rate movements on the value of
certain assets and future cash flows. The Company is also required to recognize certain contracts and commitments as derivatives when the
characteristics of those contracts and commitments meet the definition of a derivative as promulgated by SFAS No. 133.
Fair Value Hedges
Overview of Fair Value Hedges
The Company uses a combination of interest rate swaps, purchased options on caps, floors and forward-starting swaps to offset its
exposure to a change in value of certain fixed rate assets. In calculating the effective portion of the fair value hedges under SFAS No. 133, the
change in the fair value of the derivative is recognized currently in earnings, as is the change in value of the hedged asset attributable to the risk
being hedged. Accordingly, the net difference or hedge ineffectiveness, if any, is recognized currently in fair value adjustments of financial
derivatives in the consolidated statements of operations.
The following table summarizes information related to financial derivatives in fair value hedge relationships (dollars in thousands):
116
Notional
Amount of
Derivative
Fair Value of Derivatives
Weighted-Average
Asset
Liability
Net
Pay
Rate
Receive
Rate
Strike
Rate
Remaining
Life (Years)
At December 31, 2004
Pay fixed
-
interest rate swaps:
Mortgage
-
backed securities
$
1,045,000
$
3,157
$
(5,099
)
$
(1,942
)
4.42
%
2.23
%
—
%
6.06
Investment securities
160,885
—
(
3,747
)
(3,747
)
4.63
%
2.09
%
—
%
8.83
Receive
-
fixed interest rate swaps:
Certificates of deposit
315,000
—
(
1,901
)
(1,901
)
2.26
%
3.39
%
—
%
2.90
Federal Home Loan Bank advances
100,000
—
(
1,159
)
(1,159
)
2.40
%
3.64
%
—
%
4.80
Brokered certificates of deposit
10,000
—
(
160
)
(160
)
2.50
%
5.00
%
—
%
10.01
Senior Notes
50,000
452
—
452
5.98
%
8.00
%
—
%
6.46
Receive
-
fixed interest rate forward
-
starting swaps:
Brokered certificates of deposit
20,000
12
(60
)
(48
)
5.25
%
N/A
—
%
12.55
Mortgage
-
backed securities
209,000
978
—
978
3.60
%
N/A
—
%
3.43
Purchased interest rate options:
Caps
(1)
485,000
7,221
—
7,221
N/A
N/A
6.09
%
5.01
Floors
(1)
100,000
352
—
352
N/A
N/A
4.25
%
2.75
Forward-starting swaps
(1)
335,000
9,065
—
9,065
N/A
N/A
5.98
%
13.30
Total fair value hedges
$
2,829,885
$
21,237
$
(12,126
)
$
9,111
3.93
%
2.71
%
5.85
%
6.25
At December 31, 2003
Pay fixed
-
interest rate swaps:
Loans
$
656,000
$
—
$
(
3,000
)
$
(3,000
)
2.74
%
1.16
%
—
%
2.63
Mortgage
-
backed securities
182,000
—
(
1,672
)
(1,672
)
4.21
%
1.16
%
—
%
7.16
Investment securities
54,000
—
(
1,049
)
(1,049
)
4.58
%
1.15
%
—
%
9.38
Purchased interest rate options:
Caps
(1)
100,000
4,948
—
4,948
N/A
N/A
5.87
%
6.95
Forward-starting swaps
(1)
82,000
3,191
—
3,191
N/A
N/A
7.05
%
14.81
Total fair value hedges
$
1,074,000
$
8,139
$
(5,721
)
$
2,418
3.15
%
1.16
%
6.40
%
5.07
(1)
Purchased interest rate options were used to hedge the Bank’s mortgage-backed securities.