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162 the Company Uses Interest Rate Cap Agreements and Reciprocal The Company uses interest rate cap agreements and reciprocal basis swap agreements in conjunction with the securitization of certain payment option mortgage loans. The interest rate cap agreements limit the Company’s exposure to interest rate risk by providing for payments to be made to the Company by third parties when the one-month LIBOR rate exceeds the applicable strike rate. These agreements have individual predetermined notional schedules and stated expiration dates, and relate to both currently outstanding and previously called securitization transactions. The reciprocal basis swap agreements are held with external counterparties and are structured to mirror the basis swap agreements within securitization programs. The basis swaps in the securitization structures fund the payment of uncapped floating rate interest to note holders in the trust. While payments on the basis swaps and the reciprocal basis swaps may be similar in amounts, the Company is not a party to any of the derivative contracts between the derivative providers and the securitization trusts. Upon consolidation of certain of the payment option mortgage loan securitization trusts due to the adoption of ASU 2009-17 (ASC 810/SFAS 167) on January 1, 2010, applicable basis swap agreements will be included on the Company’s consolidated balance sheet at their estimated fair values and will largely be offset by the fair values of the related reciprocal basis swaps. See “Note 1- Significant Accounting Policies” for additional information. The Company uses interest rate swaps in conjunction with its auto securitizations. These swaps have zero balance notional amounts unless the pay down of auto securitizations differs from its scheduled amortization. The Company enters into commitments to originate loans whereby the interest rate of the loan is determined prior to funding (“interest rate lock commitment”). Interest rate lock commitments on mortgage loans that the Company intends to sell in the secondary market as well as corresponding commitments to sell if any are considered freestanding derivatives. These derivatives are carried at fair value with changes in fair value reported as a component of other non-interest income. Interest rate lock commitments are initially valued at zero. Changes in fair value subsequent to inception are determined based on current secondary market prices for underlying loans with similar coupons, maturity and credit quality, subject to the anticipated probability that the loans will fund within the terms of the commitment. The initial value inherent in the loan commitments at origination is recognized through gain on sale of loans when the underlying loan is sold. The interest rate lock commitments along with the related commitments to sell, if any are recorded at fair value with changes in fair value recorded in current earnings as a component of gain on sale of loans. As of December 31, 2009, the Company has $215.1 million in loan commitments. The Company did not have any loan commitments as of December 31, 2008. These derivatives do not qualify as accounting hedges and are recorded on the balance sheet at fair value with changes in value included in current earnings in non-interest income. Non-Trading Other Contracts The Company uses interest rate swaps, To Be Announced (“TBA”) forward contracts and futures contracts in conjunction with hedging the economic risk associated with its mortgage servicing rights portfolio. These derivatives are designed to offset changes in the fair value of mortgage servicing rights attributable to interest rate fluctuations. Changes in the fair value of mortgage servicing rights and changes in the fair value of related derivatives are both recognized in mortgage servicing and other income. The Company uses TBA forward contracts and whole loan commitments in conjunction with its interest rate locks and held-for-sale fixed rate mortgages (collectively “mortgage commitments”). These derivatives are designed to provide a known future price for these mortgage commitments. The following table shows the effect of the Company’s derivative instruments, by category, on the income statement for the year ended December 31, 2009: Derivatives in Fair Value Hedging Relationships Location of Gain/(Loss) Hedged Items in Gain/(Loss) Recognized in Location of Gain/(Loss) in Fair Value Recognized in Income on Gain/(Loss) in Income on Hedge Income on Related Related Hedged Income on Derivative Derivative Relationship Hedged Item Items Net Gain/(Loss) For Year Ended December 31, 2009 Interest rate Other non- Available for Other non- contracts ............. interest income $ 2,493 sale securities interest income $ (2,493 ) $ — Interest rate Other non- Other non- contracts ............. interest income (268,231) Fixed-rate debt interest income $ 294,118 $ 25,887 $ (265,738) $ 291,625 $ 25,887 162 .
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