US Bank 2011 Annual Report Download - page 116

The table below shows the gains (losses) recognized in earnings for fair value hedges, other economic hedges and the customer-
related positions for the years ended December 31:
Location of Gains (Losses)
Recognized in Earnings
Gains (Losses) Recognized in
Earnings
(Dollars in Millions) 2011 2010 2009
Asset and Liability Management Positions
Fair value hedges (a)
Interest rate contracts ................................ Other noninterest income $ (36) $ (31) $ (27)
Foreign exchange cross-currency swaps ............ Other noninterest income (69) (193) 115
Other economic hedges
Interest rate contracts
Futures and forwards .............................. Mortgage banking revenue 23 831 184
Purchased and written options .................... Mortgage banking revenue 456 425 300
Receive fixed/pay floating swaps .................. Mortgage banking revenue 518 – –
Pay fixed/receive floating swaps ................... Mortgage banking revenue 1 – –
Foreign exchange forward contracts ................. Commercial products revenue (81) (16) (46)
Equity contracts ...................................... Compensation expense 1 1 (22)
Credit contracts ...................................... Other noninterest income/expense – (6) 29
Customer-Related Positions
Interest rate contracts
Receive fixed/pay floating swaps..................... Other noninterest income 302 201 (658)
Pay fixed/receive floating swaps ..................... Other noninterest income (317) (196) 696
Purchased and written options ....................... Other noninterest income – 1 (1)
Foreign exchange rate contracts
Forwards, spots and swaps .......................... Commercial products revenue 53 49 49
Purchased and written options ....................... Commercial products revenue – 1 1
(a) Gains (Losses) on items hedged by interest rate contracts and foreign exchange forward contracts, included in noninterest income (expense), were $29 million and $72 million for the year
ended December 31, 2011, respectively, $35 million and $193 million for the year ended December 31, 2010, respectively, and $25 million and $(114) million for the year ended December 31,
2009, respectively. The ineffective portion was immaterial for the years ended December 31, 2011, 2010 and 2009.
Derivatives are subject to credit risk associated with
counterparties to the derivative contracts. The Company
measures that credit risk based on its assessment of the
probability of counterparty default and includes that risk
within the fair value of the derivative. The Company manages
counterparty credit risk through diversification of its
derivative positions among various counterparties, by entering
into master netting agreements and, where possible, by
requiring collateral agreements. These collateral agreements
require the counterparty to post, on a daily basis, collateral
(typically cash) equal to the Company’s net derivative
receivable. For highly-rated counterparties, the agreements
may include minimum dollar posting thresholds, but allow for
the Company to call for immediate, full collateral coverage
when credit-rating thresholds are triggered by counterparties.
The Company’s collateral agreements are bilateral and,
therefore, contain provisions that require collateralization of
the Company’s net liability derivative positions. Required
collateral coverage is based on certain net liability thresholds
and contingent upon the Company’s credit rating from two of
the nationally recognized statistical rating organizations. If the
Company’s credit rating were to fall below credit ratings
thresholds established in the collateral agreements, the
counterparties to the derivatives could request immediate full
collateral coverage for derivatives in net liability positions.
The aggregate fair value of all derivatives under collateral
agreements that were in a net liability position at
December 31, 2011, was $1.9 billion. At December 31, 2011,
the Company had $1.7 billion of cash posted as collateral
against this net liability position.
NOTE 21 Fair Values of Assets and Liabilities
The Company uses fair value measurements for the initial
recording of certain assets and liabilities, periodic
remeasurement of certain assets and liabilities, and
disclosures. Derivatives, trading and available-for-sale
investment securities, certain mortgage loans held for sale
(“MLHFS”) and MSRs are recorded at fair value on a
recurring basis. Additionally, from time to time, the Company
may be required to record at fair value other assets on a
nonrecurring basis, such as loans held for sale, loans held for
investment and certain other assets. These nonrecurring fair
value adjustments typically involve application of
lower-of-cost-or-fair value accounting or impairment write-
downs of individual assets.
Fair value is defined as the exchange price that would be
received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date. A fair value
measurement reflects all of the assumptions that market
participants would use in pricing the asset or liability,
114 U.S. BANCORP