Bank of America 2007 Annual Report Download - page 93

Our core net interest income – managed basis, was liability sensitive
at both December 31, 2007 and 2006. At December 31, 2007, our core
net interest income – managed basis became more liability sensitive as
we positioned ourselves for greater downside risk than was reflected in
the forward curve. We evaluate our balance sheet position on an ongoing
basis. Since December 31, 2007, we have repositioned our balance sheet
to a more modest level given changes in forward rates and we will con-
tinue to evaluate our balance sheet positioning going forward. Over a
12-month horizon, we would benefit from falling rates or a steepening of
the yield curve beyond what is already implied in the forward market curve.
As part of our ALM activities, we use securities, residential mort-
gages, and interest rate and foreign exchange derivatives in managing
interest rate sensitivity.
Securities
The securities portfolio is an integral part of our ALM position. The secu-
rities portfolio is primarily comprised of debt securities and includes
mortgage-backed securities and to a lesser extent corporate, municipal
and other investment grade debt securities. During 2007 and 2006, we
purchased AFS debt securities of $28.0 billion and $40.9 billion, sold
$27.9 billion and $55.1 billion, and had maturities and received paydowns
of $19.2 billion and $22.4 billion. We realized $180 million in gains and
$443 million in losses on sales of debt securities during 2007 and 2006.
Additionally, during 2007, we acquired $32.4 billion of AFS debt securities
as part of the LaSalle and U.S. Trust Corporation acquisitions and con-
tinue to evaluate the appropriate holding levels.
The value of our accumulated OCI loss related to AFS debt securities
improved by a pre-tax amount of $2.0 billion during 2007, driven by a
decrease in interest rates. For those securities that are in an unrealized
loss position we have the intent and ability to hold these securities to
recovery.
Accumulated OCI includes $6.5 billion in after-tax gains at
December 31, 2007, related to unrealized gains associated with our AFS
securities portfolio, including $1.9 billion of unrealized losses related to
AFS debt securities and $8.4 billion of unrealized gains related to AFS
marketable equity securities. Total market value of the AFS debt securities
was $213.3 billion at December 31, 2007 with a weighted average dura-
tion of 4.3 years and primarily relates to our mortgage-backed securities
portfolio.
Prospective changes to the accumulated OCI amounts for the AFS
securities portfolio will be driven by further interest rate, credit or price
fluctuations (including market value fluctuations associated with our CCB
investment), the collection of cash flows including prepayment and
maturity activity, and the passage of time. During the fourth quarter of
2007, shares of the Corporation’s strategic investment in CCB are now
accounted for as AFS marketable equity securities and are carried at a fair
value of $16.2 billion. The unrealized gain on this investment of $8.4 bil-
lion net-of-tax is subject to currency and price fluctuation, and is recorded
in accumulated OCI.
In connection with adopting SFAS 159, the Corporation reclassified
approximately $3.7 billion from AFS debt securities to trading account
assets during the first quarter of 2007. There were no net unrealized gains
or losses associated with these securities recorded in accumulated OCI as
these securities were hedged using SFAS 133 hedge accounting. Accord-
ingly, there was no impact on the Corporation’s transition adjustment to
beginning retained earnings upon adoption of SFAS 159 on January 1,
2007.
Residential Mortgage Portfolio
During 2007 and 2006, we purchased $22.5 billion and $42.3 billion of
residential mortgages related to ALM activities, and added $66.3 billion
and $51.9 billion of originated residential mortgages. We sold $34.0 bil-
lion and $11.0 billion of residential mortgages during 2007 and 2006,
which included $23.7 billion and $9.2 billion of originated residential
mortgages, resulting in gains of $271 million and $98 million. Additionally,
we received paydowns of $28.2 billion and $24.7 billion during 2007 and
2006. The ending balance at December 31, 2007 was $274.9 billion
compared to $241.2 billion at December 31, 2006.
Interest Rate and Foreign Exchange Derivative
Contracts
Interest rate and foreign exchange derivative contracts are utilized in our
ALM activities and serve as an efficient tool to mitigate our interest rate
and foreign exchange risk. We use derivatives to hedge the variability in
cash flows or changes in fair value on our balance sheet due to interest
rate and foreign exchange components. For additional information on our
hedging activities, see Note 4 – Derivatives to the Consolidated Financial
Statements.
Our interest rate contracts are generally non-leveraged generic inter-
est rate and foreign exchange basis swaps, options, futures, and for-
wards. In addition, we use foreign exchange contracts, including cross-
currency interest rate swaps and foreign currency forward contracts, to
mitigate the foreign exchange risk associated with foreign currency-
denominated assets and liabilities, as well as certain equity investments
in foreign subsidiaries. Table 31 reflects the notional amounts, fair value,
weighted average receive fixed and pay fixed rates, expected maturity, and
estimated duration of our open ALM derivatives at December 31, 2007
and 2006.
Changes to the composition of our derivatives portfolio over the
course of 2007 reflect actions taken for interest rate and foreign exchange
rate risk management. The decisions to reposition our derivative portfolio
are based upon the current assessment of economic and financial con-
ditions including the interest rate environment, balance sheet composition
and trends, and the relative mix of our cash and derivative positions. Our
interest rate swap positions (including foreign exchange contracts)
changed to a net receive fixed position of $101.9 billion on December 31,
2007 compared to a net receive fixed position of $12.3 billion on
December 31, 2006. Changes in the notional levels of our interest rate
swap position were driven by the net termination of $88.9 billion in pay
fixed swaps, the net termination of $9.5 billion in U.S. dollar denominated
receive fixed swaps, and the addition of $10.2 billion in foreign denomi-
nated receive fixed swaps. The notional amount of our foreign exchange
basis swaps increased $22.6 billion to $54.5 billion at December 31,
2007 compared to $31.9 billion at December 31, 2006. The notional
amount of our option position decreased $103.2 billion to $140.1 billion
at December 31, 2007 compared to $243.3 billion at December 31,
2006. The decrease in the notional amount of options was due to the net
terminations and expirations of $85.0 billion in caps and floors and termi-
nations of $18.2 billion of swaptions.
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