US Bank 2005 Annual Report Download - page 96

occurrence of these related cash flows and hedged floors and $4.2 billion of foreign exchange rate contracts.
The Company minimizes its market and liquidity risks by
transactions remains probable. The estimated amount of
taking similar offsetting positions. Gains or losses on
after-tax gain to be reclassified from accumulated other
customer-related transactions were not significant for the
comprehensive income into earnings during 2006 is $26 year ended December 31, 2005.
million. This includes gains related to hedges that were
terminated early and the forecasted transactions are still FAIR VALUES OF FINANCIAL
probable. INSTRUMENTS
Fair Value Hedges The Company has $10.1 billion of Due to the nature of its business and its customers’ needs,
designated fair value hedges at December 31, 2005. These the Company offers a large number of financial instruments,
derivatives are primarily interest rate swaps that hedge the most of which are not actively traded. When market quotes
change in fair value related to interest rate changes of are unavailable, valuation techniques including discounted
underlying fixed-rate debt, trust preferred securities and cash flow calculations and pricing models or services are
deposit obligations. In addition, the Company uses forward used. The Company also uses various aggregation methods
commitments to sell residential mortgage loans to hedge its and assumptions, such as the discount rate and cash flow
interest rate risk related to residential mortgage loans held timing and amounts. As a result, the fair value estimates
for sale. The Company commits to sell the loans at specified can neither be substantiated by independent market
prices in a future period, typically within 90 days. The comparisons, nor realized by the immediate sale or
Company is exposed to interest rate risk during the period settlement of the financial instrument. Also, the estimates
between issuing a loan commitment and the sale of the loan reflect a point in time and could change significantly based
into the secondary market. on changes in economic factors, such as interest rates.
All fair value hedges are considered highly effective for Furthermore, the disclosure of certain financial and
the year ended December 31, 2005. The change in fair nonfinancial assets and liabilities is not required. Finally, the
value attributed to hedge ineffectiveness was a loss of $4 fair value disclosure is not intended to estimate a market
million, related to the Company’s mortgage loans held for value of the Company as a whole. A summary of the
sale and its 2005 production volume of $23.0 billion. Company’s valuation techniques and assumptions follows.
Net Investment Hedges The Company enters into Cash and Cash Equivalents The carrying value of cash,
derivatives to protect its net investment in certain foreign amounts due from banks, federal funds sold and securities
operations. The Company uses forward commitments to sell purchased under resale agreements was assumed to
specified amounts of certain foreign currencies to hedge its approximate fair value.
capital volatility risk associated with fluctuations in foreign
currency exchange rates. The net amount of gains or losses Securities Investment securities were valued using available
included in the cumulative translation adjustment for 2005 market quotes. In some instances, for securities that are not
was not significant. widely traded, market quotes for comparable securities were
used.
Other Asset and Liability Management Derivative Positions
The Company has derivative positions that are used for Loans The loan portfolio includes adjustable and fixed-rate
interest rate risk and other risk management purposes but loans, the fair value of which was estimated using
are not designated as cash flow hedges or fair value hedges discounted cash flow analyses and other valuation
in accordance with the provisions of Statement of Financial techniques. To calculate discounted cash flows, the loans
Accounting Standards No. 133, ‘‘Accounting for Derivative were aggregated into pools of similar types and expected
Instruments and Hedging Activities.’’ At December 31, repayment terms. The expected cash flows of loans
2005, the Company had $1.1 billion of forward considered historical prepayment experiences and estimated
credit losses for nonperforming loans and were discounted
commitments to sell residential mortgage loans to hedge the
using current rates offered to borrowers of similar credit
Company’s interest rate risk related to $1.1 billion of
characteristics. The fair value of adjustable rate loans is
unfunded residential loan commitments. Gains and losses
assumed to be equal to their par value.
on mortgage banking derivatives and the unfunded loan
commitments are included in mortgage banking revenue on Deposit Liabilities The fair value of demand deposits,
the income statement. savings accounts and certain money market deposits is
equal to the amount payable on demand at year-end. The
CUSTOMER-RELATED POSITIONS fair value of fixed-rate certificates of deposit was estimated
by discounting the contractual cash flow using the discount
The Company acts as a seller and buyer of interest rate
rates implied by high-grade corporate bond yield curves.
contracts and foreign exchange rate contracts on behalf of
customers. At December 31, 2005, the Company had Short-term Borrowings Federal funds purchased, securities
$26.9 billion of aggregate customer derivative positions, sold under agreements to repurchase, commercial paper and
including $22.7 billion of interest rate swaps, caps, and
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