US Bank 2007 Annual Report Download - page 102

recapture of base year reserves of acquired thrift institutions.
The base year reserves of acquired thrift institutions would
be recaptured if an entity ceases to qualify as a bank for
federal income tax purposes. The base year reserves of thrift
institutions also remain subject to income tax penalty
provisions that, in general, require recapture upon certain
stock redemptions of, and excess distributions to,
stockholders. At December 31, 2007, retained earnings
included approximately $102 million of base year reserves
for which no deferred federal income tax liability has been
recognized.
Note 19 DERIVATIVE INSTRUMENTS
In the ordinary course of business, the Company enters into
derivative transactions to manage its interest rate,
prepayment, credit, price and foreign currency risks and to
accommodate the business requirements of its customers.
The Company does not enter into derivative transactions for
speculative purposes. Refer to Note 1 “Significant
Accounting Policies” in the Notes to Consolidated Financial
Statements for a discussion of the Company’s accounting
policies for derivative instruments. For information related
to derivative positions held for asset and liability
management purposes and customer-related derivative
positions, see Table 18 “Derivative Positions,” included in
Management’s Discussion and Analysis, which is
incorporated by reference in these Notes to Consolidated
Financial Statements.
ASSET AND LIABILITY MANAGEMENT
POSITIONS
Cash Flow Hedges The Company has $16.0 billion of
designated cash flow hedges at December 31, 2007. These
derivatives are interest rate swaps that are hedges of the
forecasted cash flows from the underlying variable-rate debt.
All cash flow hedges are highly effective for the year ended
December 31, 2007, and the change in fair value attributed
to hedge ineffectiveness was not material.
At December 31, 2007 and 2006, accumulated other
comprehensive income included a deferred after-tax net loss
of $219 million and $83 million, respectively, related to cash
flow hedges. The unrealized loss will be reflected in earnings
when the related cash flows or hedged transactions occur
and will offset the related performance of the hedged items.
The occurrence of these related cash flows and hedged
transactions remains probable. The estimated amount of
after-tax loss to be reclassified from accumulated other
comprehensive income into earnings during 2008 is
$106 million. This includes gains related to hedges that were
terminated early and the forecasted transactions are still
probable.
Fair Value Hedges The Company may use derivatives that
are primarily interest rate swaps that hedge the change in
fair value related to interest rate changes of underlying
fixed-rate debt, junior subordinated debentures and deposit
obligations. In addition, the Company may use forward
commitments to sell residential mortgage loans to hedge its
interest rate risk related to residential mortgage loans held
for sale. The Company commits to sell the loans at specified
prices in a future period, typically within 90 days, and is
exposed to interest rate risk during the period between
issuing a loan commitment and the sale of the loan into the
secondary market.
The Company has $7.3 billion of designated fair value
hedges at December 31, 2007. All fair value hedges are
considered highly effective for the year ended December 31,
2007. The change in fair value attributed to hedge
ineffectiveness was a loss of $7 million for the year ended
December 31, 2007.
Net Investment Hedges The Company enters into derivatives
to protect its net investment in certain foreign operations. The
Company uses forward commitments to sell specified amounts
of certain foreign currencies and foreign denominated debt to
hedge its capital volatility risk associated with fluctuations in
foreign currency exchange rates. The net amount of gains or
losses included in the cumulative translation adjustment for
2007 was not significant.
Other Derivative Positions The Company has derivative
positions that are used for interest rate risk and other risk
management purposes but are not designated as cash flow
hedges or fair value hedges in accordance with the
provisions of Statement of Financial Accounting Standards
No. 133, “Accounting for Derivative Instruments and
Hedging Activities.”
At December 31, 2007, the Company had $2.8 billion of
forward commitments to sell residential mortgage loans to
hedge the Company’s interest rate risk related to $3.7 billion of
unfunded residential mortgage loan commitments. Gains and
losses on mortgage banking derivatives and the unfunded loan
commitments are included in mortgage banking revenue on the
statement of income. At December 31, 2007, the Company
also held U.S. Treasury futures, options on U.S. Treasury
futures contracts, forward commitments to buy residential
mortgage loans and interest rate swaps to economically hedge
the change in fair value of its residential MSRs.
CUSTOMER-RELATED POSITIONS
The Company acts as a seller and buyer of interest rate
contracts and foreign exchange rate contracts on behalf of
customers. At December 31, 2007, the Company had
$40.9 billion of aggregate customer derivative positions,
including $33.4 billion of interest rate swaps, caps and
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