US Bank 2008 Annual Report Download - page 103

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 had $12.0 billion
notional amount of derivatives designated as cash flow
hedges at December 31, 2008. These derivatives are interest
rate swaps that are hedges of the forecasted cash flows from
the underlying variable-rate debt. All cash flow hedges were
highly effective for the year ended December 31, 2008, and
the change in fair value attributed to hedge ineffectiveness
was not material.
At December 31, 2008 and 2007, accumulated other
comprehensive income (loss) included a deferred after-tax
net loss of $650 million and $219 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 the forecasted cash
flows and hedged transactions remains probable. The
estimated amount of after-tax loss to be reclassified from
accumulated other comprehensive income (loss) into
earnings during 2009 is $200 million. This includes gains
and losses related to hedges that were terminated early and
the forecasted transactions are still probable.
Fair Value Hedges The Company had $4.5 billion notional
amount of derivatives designated as fair value hedges at
December 31, 2008. These derivatives 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. All fair
value hedges were highly effective for the year ended
December 31, 2008. The change in fair value attributed to
hedge ineffectiveness was a loss of $3 million for the year
ended December 31, 2008.
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 Company had $878 million notional amount of
derivatives designated as net investment hedges at
December 31, 2008. The net amount of gains or losses
included in the cumulative translation adjustment for 2008
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, 2008, the Company had forward
commitments to sell $8.4 billion of residential mortgage
loans, intended to hedge the Company’s interest rate risk
related to $9.2 billion of unfunded residential mortgage loan
commitments and $2.7 billion of MLHFS. Gains and losses
on forward sale commitments and the unfunded loan
commitments are included in mortgage banking revenue. At
December 31, 2008, the Company also held $20.8 billion
notional amount of U.S. Treasury futures, options on U.S.
Treasury futures contracts and forward commitments to buy
residential mortgage loans 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, 2008, the Company had
$56.8 billion notional amount of aggregate customer
derivative positions, including offsetting positions taken by
the Company to minimize its market and liquidity risks. The
positions include $48.4 billion of interest rate swaps, caps,
and floors and $8.4 billion of foreign exchange rate
contracts. Gains or losses on customer-related transactions
were not significant for the year ended December 31, 2008.
Note 21 FAIR VALUES OF ASSETS AND
LIABILITIES
The Company uses fair value measurements for the initial
recording of certain assets and liabilities, periodic
remeasurement of certain assets and liabilities, and
disclosures. Derivatives, investment securities, certain
MLHFS and MSRs are recorded at fair value on a recurring
basis. Additionally, from time to time, the Company may be
required to record at fair value other assets on a
nonrecurring basis, such as loans held for sale, loans held for
investment and certain other assets. These nonrecurring fair
value adjustments typically involve application of lower-of-
cost-or-fair value accounting or impairment write-downs of
individual assets.
Effective January 1, 2008, the Company adopted
SFAS 157 which defines fair value, establishes a framework
for measuring fair value and expands disclosures about fair
value measurements. Fair value is defined under SFAS 157 as
the exchange price that would be received for an asset or
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