US Bank 2004 Annual Report Download - page 50
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Please find page 50 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.losses are recorded in trading account gains or losses or accumulated other comprehensive income into earnings
mortgage banking revenue. during the next 12 months is $65.8 million.
By their nature, derivative instruments are subject to Gains or losses on customer-related derivative positions
market risk. The Company does not utilize derivative were not material in 2004. The change in fair value of
instruments for speculative purposes. Of the Company’s forward commitments attributed to hedge ineffectiveness
$34.5 billion of total notional amount of asset and liability recorded in noninterest income was an increase of
management derivative positions at December 31, 2004, $.7 million in 2004. The change in the fair value of all
$32.1 billion was designated as either fair value or cash other asset and liability management derivative positions
flow hedges. The cash flow hedge positions are interest rate attributed to hedge ineffectiveness was not material in 2004.
swaps that hedge the forecasted cash flows from the Beginning in the second quarter of 2004, the Company
underlying variable-rate LIBOR loans and floating-rate debt. entered into derivatives to protect its net investment in
The fair value hedges are primarily interest rate contracts certain foreign operations. The Company uses forward
that hedge the change in fair value related to interest rate commitments to sell specified amounts of certain foreign
changes of underlying fixed-rate debt and subordinated currencies to hedge its capital volatility risk associated with
obligations. In addition, the Company uses forward fluctuations in foreign currency exchange rates. The net
commitments to sell residential mortgage loans to hedge its amount of gains or losses included in the cumulative
interest rate risk related to residential mortgage loans held translation adjustment for 2004 was not material.
for sale. The Company commits to sell the loans at specified Table 17 summarizes information on the Company’s
prices in a future period, typically within 90 days. The derivative positions at December 31, 2004. Refer to Notes 1
Company is exposed to interest rate risk during the period and 22 of the Notes to Consolidated Financial Statements
between issuing a loan commitment and the sale of the loan for significant accounting policies and additional
into the secondary market. Related to its mortgage banking information regarding the Company’s use of derivatives.
operations, the Company held $1.1 billion of forward Market Risk Management In addition to interest rate risk,
commitments to sell mortgage loans and $1.0 billion of the Company is exposed to other forms of market risk as a
unfunded mortgage loan commitments that were derivatives consequence of conducting normal trading activities.
in accordance with the provisions of the Statement of Business activities that contribute to market risk include,
Financial Accounting Standards No. 133, ‘‘Accounting for among other things, proprietary trading and foreign
Derivative Instruments and Hedge Activities.’’ The unfunded exchange positions. Value at Risk (‘‘VaR’’) is a key measure
mortgage loan commitments are reported at fair value as of market risk for the Company. Theoretically, VaR
options in Table 17. represents the maximum amount that the Company has
Derivative instruments are also subject to credit risk placed at risk of loss, with a ninety-ninth percentile degree
associated with counterparties to the derivative contracts. of confidence, to adverse market movements in the course
Credit risk associated with derivatives is measured based on of its risk taking activities.
the replacement cost should the counterparties with VaR modeling of trading activities is subject to certain
contracts in a gain position to the Company fail to perform limitations. Additionally, it should be recognized that there
under the terms of the contract. The Company manages this are assumptions and estimates associated with VaR
risk through diversification of its derivative positions among modeling, and actual results could differ from those
various counterparties, requiring collateral agreements with assumptions and estimates. The Company mitigates these
credit-rating thresholds, entering into master netting uncertainties through regular monitoring of trading
agreements in certain cases and entering into interest rate activities by management and other risk management
swap risk participation agreements. These agreements are practices, including stop-loss and position limits related to
credit derivatives that transfer the credit risk related to its trading activities. Stress-test models are used to provide
interest rate swaps from the Company to an unaffiliated management with perspectives on market events that VaR
third-party. The Company also provides credit protection to models do not capture.
third-parties with risk participation agreements, for a fee, as The Company establishes market risk limits, subject to
part of a loan syndication transaction. approval by the Company’s Board of Directors. The
At December 31, 2004, the Company had Company’s VaR limit was $20 million at December 31,
$113.4 million in accumulated other comprehensive income 2004 and $40 million at December 31, 2003. The market
related to unrealized gains on derivatives classified as cash valuation risk inherent in its customer-based derivative
flow hedges. The unrealized gains will be reflected in trading, mortgage banking pipeline and foreign exchange, as
earnings when the related cash flows or hedged transactions estimated by the VaR analysis, was $1.8 million at
occur and will offset the related performance of the hedged
items. The estimated amount of gain to be reclassified from
48 U.S. BANCORP