US Bank 2013 Annual Report Download - page 123

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Cash Flow Hedges These derivatives are interest rate
swaps the Company uses to hedge the forecasted cash
flows from its underlying variable-rate loans and debt.
Changes in the fair value of derivatives designated as cash
flow hedges are recorded in other comprehensive income
(loss) until the cash flows of the hedged items are realized. If
a derivative designated as a cash flow hedge is terminated
or ceases to be highly effective, the gain or loss in other
comprehensive income (loss) is amortized to earnings over
the period the forecasted hedged transactions impact
earnings. If a hedged forecasted transaction is no longer
probable, hedge accounting is ceased and any gain or loss
included in other comprehensive income (loss) is reported in
earnings immediately, unless the forecasted transaction is at
least reasonably possible of occurring, whereby the amounts
remain within other comprehensive income (loss). At
December 31, 2013, the Company had $261 million (net-of-
tax) of realized and unrealized losses on derivatives
classified as cash flow hedges recorded in other
comprehensive income (loss), compared with $404 million
(net-of-tax) at December 31, 2012. The estimated amount to
be reclassified from other comprehensive income (loss) into
earnings during the next 12 months is a loss of $117 million
(net-of-tax). This amount includes gains and losses related to
hedges that were terminated early for which the forecasted
transactions are still probable. All cash flow hedges were
highly effective for the year ended December 31, 2013, and
the change in fair value attributed to hedge ineffectiveness
was not material.
Net Investment Hedges The Company uses forward
commitments to sell specified amounts of certain foreign
currencies, and occasionally non-derivative debt
instruments, to hedge the volatility of its investment in foreign
operations driven by fluctuations in foreign currency
exchange rates. The ineffectiveness on all net investment
hedges was not material for the year ended December 31,
2013. There were no non-derivative debt instruments
designated as net investment hedges at December 31, 2013
or 2012.
Other Derivative Positions The Company enters into
free-standing derivatives to mitigate interest rate risk and for
other risk management purposes. These derivatives include
forward commitments to sell to-be-announced securities
(“TBAs”) and other commitments to sell residential mortgage
loans, which are used to economically hedge the interest
rate risk related to residential mortgage loans held for sale
(“MLHFS”) and unfunded mortgage loan commitments. The
Company also enters into interest rate swaps, forward
commitments to buy TBAs, U.S. Treasury futures and options
on U.S. Treasury futures to economically hedge the change
in the fair value of the Company’s MSRs. The Company also
enters into foreign currency forwards to economically hedge
remeasurement gains and losses the Company recognizes
on foreign currency denominated assets and liabilities. In
addition, the Company acts as a seller and buyer of interest
rate derivatives and foreign exchange contracts for its
customers. To mitigate the market and liquidity risk
associated with these customer derivatives, the Company
historically has entered into similar offsetting positions with
broker-dealers. In 2014, the Company began to instead
actively manage the risks from its exposure to these
customer-related positions on a portfolio basis by entering
into other derivative or non-derivative financial instruments
that partially or fully offset the exposure from these customer-
related positions. The Company also has derivative contracts
that are created through its operations, including
commitments to originate MLHFS.
For additional information on the Company’s purpose for
entering into derivative transactions and its overall risk
management strategies, refer to “Management Discussion
and Analysis — Use of Derivatives to Manage Interest Rate
and Other Risks” which is incorporated by reference into
these Notes to Consolidated Financial Statements.
U.S. BANCORP 121