US Bank 2006 Annual Report Download - page 98

terminated early and the forecasted transactions are still The Company minimizes its market and liquidity risks by
probable. taking similar offsetting positions. Gains or losses on
customer-related transactions were not significant for the
Fair Value Hedges The Company may use derivatives that year ended December 31, 2006.
are primarily interest rate swaps that hedge the change in
fair value related to interest rate changes of underlying FAIR VALUES OF FINANCIAL
fixed-rate debt, junior subordinated debentures and deposit INSTRUMENTS
obligations. In addition, the Company may use forward
commitments to sell residential mortgage loans to hedge its Due to the nature of its business and its customers’ needs,
interest rate risk related to residential mortgage loans held the Company offers a large number of financial instruments,
for sale. The Company commits to sell the loans at specified most of which are not actively traded. When market quotes
prices in a future period, typically within 90 days, and is are unavailable, valuation techniques including discounted
exposed to interest rate risk during the period between cash flow calculations and pricing models or services are
issuing a loan commitment and the sale of the loan into the used. The Company also uses various aggregation methods
secondary market. and assumptions, such as the discount rate and cash flow
The Company has $5.7 billion of designated fair value timing and amounts. As a result, the fair value estimates
hedges at December 31, 2006. All fair value hedges are can neither be substantiated by independent market
considered highly effective for the year ended December 31, comparisons, nor realized by the immediate sale or
2006. The change in fair value attributed to hedge settlement of the financial instrument. Also, the estimates
ineffectiveness was a loss of $3 million for the year ended reflect a point in time and could change significantly based
December 31, 2006. on changes in economic factors, such as interest rates.
Furthermore, the disclosure of certain financial and
Net Investment Hedges The Company enters into nonfinancial assets and liabilities is not required. Finally, the
derivatives to protect its net investment in certain foreign fair value disclosure is not intended to estimate a market
operations. The Company uses forward commitments to sell value of the Company as a whole. A summary of the
specified amounts of certain foreign currencies and foreign Company’s valuation techniques and assumptions follows.
denominated debt to hedge its capital volatility risk
associated with fluctuations in foreign currency exchange Cash and Cash Equivalents The carrying value of cash,
rates. The net amount of gains or losses included in the amounts due from banks, federal funds sold and securities
cumulative translation adjustment for 2006 was not purchased under resale agreements was assumed to
significant. approximate fair value.
Other Derivative Positions The Company has derivative Securities Investment securities were valued using available
positions that are used for interest rate risk and other risk market quotes. In some instances, for securities that are not
management purposes but are not designated as cash flow widely traded, market quotes for comparable securities were
hedges or fair value hedges in accordance with the used.
provisions of Statement of Financial Accounting Standards Loans The loan portfolio includes adjustable and fixed-rate
No. 133, ‘‘Accounting for Derivative Instruments and loans, the fair value of which was estimated using
Hedging Activities.’’ discounted cash flow analyses and other valuation
At December 31, 2006, the Company had $2.8 billion techniques. To calculate discounted cash flows, the loans
of forward commitments to sell residential mortgage loans were aggregated into pools of similar types and expected
to economically hedge the Company’s interest rate risk repayment terms. The expected cash flows of loans
related to $1.3 billion of unfunded residential loan considered historical prepayment experiences and estimated
commitments and $1.8 billion of residential mortgage loans credit losses for nonperforming loans and were discounted
held for sale. Gains and losses on mortgage banking using current rates offered to borrowers of similar credit
derivatives and the unfunded loan commitments are characteristics. The fair value of adjustable rate loans is
included in mortgage banking revenue on the statement of assumed to be equal to their par value.
income.
Deposit Liabilities The fair value of demand deposits,
savings accounts and certain money market deposits is
CUSTOMER-RELATED POSITIONS
equal to the amount payable on demand at year-end. The
The Company acts as a seller and buyer of interest rate fair value of fixed-rate certificates of deposit was estimated
contracts and foreign exchange rate contracts on behalf of by discounting the contractual cash flow using the discount
customers. At December 31, 2006, the Company had rates implied by high-grade corporate bond yield curves.
$30.0 billion of aggregate customer derivative positions,
Short-Term Borrowings Federal funds purchased, securities
including $25.1 billion of interest rate swaps, caps, and
sold under agreements to repurchase, commercial paper and
floors and $4.9 billion of foreign exchange rate contracts.
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