US Bank 2002 Annual Report Download - page 97

The Company has established a valuation allowance to qualify as a bank for federal income tax purposes. The base
offset deferred tax assets related to state net operating loss year reserves of thrift institutions also remain subject to
carryforwards of approximately $553 million, which expire income tax penalty provisions that, in general, require
at various times through 2016. recapture upon certain stock redemptions of, and excess
Certain events covered by Internal Revenue Code distributions to, stockholders. At December 31, 2002,
section 593(e), which was not repealed, will trigger a retained earnings included approximately $101.8 million of
recapture of base year reserves of acquired thrift base year reserves for which no deferred federal income tax
institutions. The base year reserves of acquired thrift liability has been recognized.
institutions would be recaptured if an entity ceases to
the change in fair value related to interest rate changes of
Derivative Instruments
underlying fixed-rate debt, trust preferred stock, and deposit
In the ordinary course of business, the Company enters into obligations. In addition, the Company uses forward
derivative transactions to manage its interest rate and commitments to sell residential mortgages loans to hedge its
prepayment risk and to accommodate the business interest rate risk related to residential mortgage loans held
requirements of its customers. The Company does not enter for sale. The Company commits to sell the loans at specified
into derivative transactions for speculative purposes. Refer prices in a future period, typically within 90 days. The
to Note 1 ‘‘Significant Accounting Policies’’ in the Notes to Company is exposed to interest rate risk during the period
Consolidated Financial Statements for a discussion of the between issuing a loan commitment and the sale of the loan
Company’s accounting policies for derivative instruments. into the secondary market.
For information related to derivative positions held for asset All fair value hedges are considered highly effective for
and liability management purposes and customer-related the year ended December 31, 2002. The change in fair
derivative positions, see Table 17 ‘‘Derivative Positions,’’ value attributed to hedge ineffectiveness was a gain of
included in Management’s Discussion and Analysis, which $39.4 million related to the Company’s mortgage loans held
is incorporated by reference in these Notes to Consolidated for sale and its 2002 production volume of $23.2 billion.
Financial Statements.
Other Asset and Liability Management Derivative Positions
ASSET AND LIABILITY MANAGEMENT POSITIONS The Company has derivative positions that are used for
interest rate risk and other risk management purposes but
Cash Flow Hedges The Company has $15.9 billion of are not designated as cash flow hedges or fair value hedges
designated cash flow hedges at December 31, 2002. These in accordance with the provisions of Statement of Financial
derivatives are interest rate swaps that are hedges of the Accounting Standards No. 133, ‘‘Accounting for Derivative
forecasted cash flows from the underlying variable-rate Instruments and Hedge Activities.’’ At December 31, 2002,
LIBOR loans and floating-rate debt. All cash flow hedges the Company had $3.0 billion forward commitments to sell
are highly effective for the year ended December 31, 2002, residential mortgage loans to hedge the Company’s interest
and the change in fair value attributed to hedge rate risk related to $2.9 billion of unfunded residential
ineffectiveness was not material. mortgage loan commitments. Gains and losses on mortgage
At December 31, 2002 and 2001, accumulated other banking derivatives and the unfunded loan commitments
comprehensive income included a deferred after-tax net gain are included in mortgage banking revenue on the income
of $309.9 million and $98.3 million, respectively, related to statement.
derivatives used to hedge cash flows. The unrealized gain
will be reflected in earnings when the related cash flows or CUSTOMER-RELATED POSITIONS
hedged transactions occur and will offset the related
The Company acts as a seller and buyer of interest rate
performance of the hedged items. The occurrence of these
contracts and foreign exchange rate contracts on behalf of
related cash flows and hedged transactions remains
customers. At December 31, 2002, the Company had
probable. The estimated amount of after-tax gain to be
$15.9 billion of aggregate customer derivative positions,
reclassified from accumulated other comprehensive income
including $8.9 billion of interest rate swaps, caps and floors
into earnings during 2003 is $61.0 million, which includes
and $7.0 billion of foreign exchange rate contracts. The
gains related to hedges that were terminated early when the
Company minimizes its market and liquidity risks by taking
forecasted transactions are still probable.
substantially similar offsetting positions. Gains or losses on
Fair Value Hedges The Company has $12.3 billion of customer-related transactions were not significant for the
designated fair value hedges at December 31, 2002. These year ended December 31, 2002.
derivatives are primarily interest rate contracts that hedge
U.S. Bancorp 95
Note 21