US Bank 2004 Annual Report Download - page 100
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Please find page 100 of the 2004 US Bank annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.related cash flows and hedged transactions remains $20.0 billion of aggregate customer derivative positions,
probable. The estimated amount of after-tax gain to be including $15.8 billion of interest rate swaps, caps, and
reclassified from accumulated other comprehensive income floors and $4.2 billion of foreign exchange rate contracts.
into earnings during 2005 is $65.8 million, which includes The Company minimizes its market and liquidity risks by
gains related to hedges that were terminated early when the taking similar offsetting positions. Gains or losses on
associated forecasted transactions were still probable. customer-related transactions were not significant for the
year ended December 31, 2004.
Fair Value Hedges The Company has $7.8 billion of
designated fair value hedges at December 31, 2004. These Fair Values of Financial Instruments
derivatives are primarily interest rate contracts that hedge
Due to the nature of its business and its customers’ needs,
the change in fair value related to interest rate changes of
the Company offers a large number of financial instruments,
underlying fixed-rate debt and trust preferred securities. In
most of which are not actively traded. When market quotes
addition, the Company uses forward commitments to sell
are unavailable, valuation techniques including discounted
residential mortgage loans to hedge its interest rate risk
cash flow calculations and pricing models or services are
related to residential mortgage loans held for sale. The
used. The Company also uses various aggregation methods
Company commits to sell the loans at specified prices in a
and assumptions, such as the discount rate and cash flow
future period, typically within 90 days. The Company is
timing and amounts. As a result, the fair value estimates
exposed to interest rate risk during the period between
can neither be substantiated by independent market
issuing a loan commitment and the sale of the loan into the
comparisons, nor realized by the immediate sale or
secondary market.
settlement of the financial instrument. Also, the estimates
All fair value hedges are considered highly effective for
reflect a point in time and could change significantly based
the year ended December 31, 2004. The change in fair
on changes in economic factors, such as interest rates.
value attributed to hedge ineffectiveness was a gain of
Furthermore, the disclosure of certain financial and
$.7 million, related to the Company’s mortgage loans held
nonfinancial assets and liabilities are not required. Finally,
for sale and its 2004 production volume of $17.4 billion.
the fair value disclosure is not intended to estimate a
Net Investment Hedges In 2004, the Company entered into market value of the Company as a whole. A summary of
derivatives to protect its net investment in certain foreign the Company’s valuation techniques and assumptions
operations. The Company uses forward commitments to sell follows.
specified amounts of certain foreign currencies to hedge its
Cash and Cash Equivalents The carrying value of cash,
capital volatility risk associated with fluctuations in foreign
amounts due from banks, federal funds sold and securities
currency exchange rates. The net amount of gains or losses
purchased under resale agreements was assumed to
included in the cumulative translation adjustment for 2004
approximate fair value.
was not significant.
Securities Investment securities were valued using available
Other Asset and Liability Management Derivative Positions
market quotes. In some instances, for securities that are not
The Company has derivative positions that are used for
widely traded, market quotes for comparable securities were
interest rate risk and other risk management purposes but
used.
are not designated as cash flow hedges or fair value hedges
in accordance with the provisions of Statement of Financial Loans The loan portfolio includes adjustable and fixed-rate
Accounting Standards No. 133, ‘‘Accounting for Derivative loans, the fair value of which was estimated using
Instruments and Hedging Activities.’’ At December 31, discounted cash flow analyses and other valuation
2004, the Company had $1.1 billion of forward techniques. To calculate discounted cash flows, the loans
commitments to sell residential mortgage loans to hedge the were aggregated into pools of similar types and expected
Company’s interest rate risk related to $1.0 billion of repayment terms. The expected cash flows of loans
unfunded residential loan commitments. Gains and losses considered historical prepayment experiences and estimated
on mortgage banking derivatives and the unfunded loan credit losses for nonperforming loans and were discounted
commitments are included in mortgage banking revenue on using current rates offered to borrowers of similar credit
the Consolidated Statement of Income. characteristics. The fair value of floating-rate loans are
assumed to be equal to their carrying value.
CUSTOMER-RELATED POSITIONS
Deposit Liabilities The fair value of demand deposits,
The Company acts as a seller and buyer of interest rate savings accounts and certain money market deposits is
contracts and foreign exchange rate contracts on behalf of equal to the amount payable on demand at year-end. The
customers. At December 31, 2004, the Company had fair value of fixed-rate certificates of deposit was estimated
98 U.S. BANCORP
Note 23