US Bank 2001 Annual Report Download - page 79

At December 31, 2001, for income tax purposes, the The Company enters into forward commitments to sell
Company had federal net operating loss carryforwards of groups of residential mortgage loans that it originates or
$1.2 million available, which expire in years 2002 through purchases as part of its mortgage banking activities. The
2009. A valuation allowance has been established to oÅset Company commits to sell the loans at speciÑed prices in a
deferred tax assets related to state net operating loss future period, typically within 90 days. The Company is
carryforwards totaling approximately $437 million, which exposed to interest rate risk during the period between
expire at various times within the next 15 years. issuing a loan commitment and the sale of the loan into the
Certain events covered by Internal Revenue Code secondary market. SpeciÑc forward commitments are
section 593(e), which was not repealed, will trigger a designated as a hedge against changes in the fair value of
recapture of base year reserves of acquired thrift Ñxed-rate mortgage loans held for sale attributed to changes
institutions. The base year reserves of acquired thrift in interest rates. The fair value of these forward
institutions would be recaptured if an entity ceases to commitments was $52.5 million at December 31, 2001. The
qualify as a bank for federal income tax purposes. The base change in fair value of the forward commitments attributed
year reserves of thrift institutions also remain subject to to hedge ineÅectiveness recorded in noninterest income was
income tax penalty provisions that, in general, require $17.9 million for the year ended December 31, 2001.
recapture upon certain stock redemptions of, and excess Cash Flow Hedges The Company has interest rate swaps
distributions to, stockholders. At December 31, 2001, designated as cash Öow hedges linked to the cash Öows of
retained earnings included approximately $101.8 million of variable rate LIBOR loans and Öoating rate debt. The swaps
base year reserves for which no deferred federal income tax have a fair value of $106 million at December 31, 2001.
liability has been recognized. The gain will be reclassiÑed from other comprehensive
income into earnings during the same period the forecasted
Derivative and Other OÅ-Balance transactions occur. The estimated amount of the gain to be
Sheet Instruments reclassiÑed into earnings within the next 12 months is
In the normal course of business, the Company uses various $64.4 million, which includes cash Öow hedges terminated
derivative and other oÅ-balance sheet instruments to early where the forecasted transaction is still probable. The
manage its interest rate risk and market risks and Company has determined that the occurrence of the hedged
accommodate the business requirements of its customers. forecasted transactions remains probable. The change in fair
These instruments carry varying degrees of credit, interest value of the swaps attributed to hedge ineÅectiveness was
rate, and market or liquidity risks. not material for the year ended December 31, 2001.
DERIVATIVES Other Derivative Activity The Company acts as an
intermediary for interest rate swaps, caps, Öoors and foreign
The Company requires the recognition of derivative exchange contracts on behalf of its customers. The
instruments as either assets or liabilities and the Company minimizes its market and liquidity risks by taking
measurement of those instruments at fair value. Subsequent oÅsetting positions. The Company manages its credit risk,
changes in the derivatives' fair values are recognized or potential risk of loss from default by counterparties,
currently in earnings unless speciÑc hedge accounting through credit limit approval and monitoring procedures.
criteria are met. Market value changes on intermediated swaps and other
Fair Value Hedges The Company's interest rate swaps derivatives are recognized in income in the period of
designated as fair value hedges of underlying Ñxed-rate debt change. Gains or losses on intermediated transactions were
and deposit obligations have a fair value of $276.5 million not signiÑcant for the year ended December 31, 2001.
and fair value hedges of Trust Preferred Securities have a In addition, the Company enters into interest rate
fair value of $(43.5) million at December 31, 2001. Each swaps and other derivative contracts to protect against
period the changes in fair value of both the hedge interest rate risk and credit risk that do not meet the
instruments and the underlying debt obligations are criteria to receive hedge accounting treatment. These
recorded as gains or losses in trading account proÑts and derivatives are recorded at fair value on the balance sheet as
commissions. All fair value hedges are intended to reduce trading account assets or liabilities and any changes in fair
the interest rate risk associated with the underlying hedged value are recorded in trading proÑts/losses and
item. The fair value hedge transactions were considered commissions.
highly eÅective for the year ended December 31, 2001, and The Company also enters into forward commitments to
the change in fair value of the swaps attributed to hedge sell groups of residential mortgage loans to protect against
ineÅectiveness was not material. changes in the fair value of Ñxed-rate mortgage loan
commitments not yet funded. These forward commitment
U.S. Bancorp
Note 20
77