US Bank 2012 Annual Report Download - page 124

The following table provides information on the fair value of the Company’s derivative positions as of December 31:
2012 2011
(Dollars in Millions)
Asset
Derivatives
Liability
Derivatives
Asset
Derivatives
Liability
Derivatives
Total fair value of derivative positions............................................ $1,806 $ 2,183 $1,913 $ 2,554
Netting (a) ........................................................................ (418) (1,549) (294) (1,889)
Total ........................................................................... $1,388 $ 634 $1,619 $ 665
(a) Represents netting of derivative asset and liability balances, and related collateral, with the same counterparty subject to master netting agreements. At December 31, 2012, the amount of
collateral posted by counterparties, consisting primarily of cash and money market investments, that was netted against derivative assets was $84 million and the amount of cash collateral
posted by the Company that was netted against derivative liabilities was $1.2 billion, compared with $88 million and $1.7 billion, respectively, at December 31, 2011.
Of the Company’s $62.0 billion of total notional amount
of asset and liability management positions at December 31,
2012, $12.8 billion was designated as a fair value, cash flow
or net investment hedge. When a derivative is designated as a
fair value, cash flow or net investment hedge, the Company
performs an assessment, at inception and, at a minimum,
quarterly thereafter, to determine the effectiveness of the
derivative in offsetting changes in the value or cash flows of
the hedged item(s).
Fair Value Hedges These derivatives are primarily interest rate
swaps that hedge the change in fair value related to interest
rate changes of underlying fixed-rate debt and junior
subordinated debentures. Changes in the fair value of
derivatives designated as fair value hedges, and changes in the
fair value of the hedged items, are recorded in earnings. All
fair value hedges were highly effective for the year ended
December 31, 2012, and the change in fair value attributed to
hedge ineffectiveness was not material.
Cash Flow Hedges These derivatives are interest rate swaps that
are hedges of the forecasted cash flows from the underlying
variable-rate loans and debt. Changes in the fair value of
derivatives designated as cash flow hedges are recorded in
other comprehensive income (loss) until the cash flows of the
hedged items are realized. If a derivative designated as a cash
flow hedge is terminated or ceases to be highly effective, the
gain or loss in other comprehensive income (loss) is amortized
to earnings over the period the forecasted hedged transactions
impact earnings. If a hedged forecasted transaction is no longer
probable, hedge accounting is ceased and any gain or loss
included in other comprehensive income (loss) is reported in
earnings immediately, unless the forecasted transaction is at
least reasonably possible of occurring, whereby the amounts
within other comprehensive income (loss) remain. At
December 31, 2012, the Company had $404 million (net-of-
tax) of realized and unrealized losses on derivatives classified
as cash flow hedges recorded in other comprehensive income
(loss), compared with $489 million (net-of-tax) at
December 31, 2011. The estimated amount to be reclassified
from other comprehensive income (loss) into earnings during
the next 12 months is a loss of $133 million (net-of-tax). This
amount includes gains and losses related to hedges that were
terminated early for which the forecasted transactions are still
probable. All cash flow hedges were highly effective for the
year ended December 31, 2012, and the change in fair value
attributed to hedge ineffectiveness was not material.
Net Investment Hedges The Company uses forward
commitments to sell specified amounts of certain foreign
currencies, and occasionally non-derivative debt instruments,
to hedge the volatility of its investment in foreign operations
driven by fluctuations in foreign currency exchange rates. The
ineffectiveness on all net investment hedges was not material
for the year ended December 31, 2012. There were no non-
derivative debt instruments designated as net investment
hedges at December 31, 2012 or 2011.
Other Derivative Positions The Company enters into free-
standing derivatives to mitigate interest rate risk and for other
risk management purposes. These derivatives include forward
commitments to sell to-be-announced securities (“TBAs”) and
other commitments to sell residential mortgage loans, which
are used to economically hedge the interest rate risk related to
residential mortgage loans held for sale and unfunded
mortgage loan commitments. The Company also enters into
interest rate swaps, forward commitments to buy TBAs,
U.S. Treasury futures and options on U.S. Treasury futures to
economically hedge the change in the fair value of the
Company’s MSRs. The Company also enters into foreign
currency forwards to economically hedge remeasurement
gains and losses the Company recognizes on foreign currency
denominated assets and liabilities. In addition, the Company
acts as a seller and buyer of interest rate derivatives and
foreign exchange contracts for its customers. To mitigate the
market and liquidity risk associated with these customer
derivatives, the Company enters into similar offsetting
positions with broker-dealers. The Company also has
derivative contracts that are created through its operations,
including commitments to originate mortgage loans held for
sale and certain derivative financial guarantee contracts.
For additional information on the Company’s purpose
for entering into derivative transactions and its overall risk
management strategies, refer to “Management Discussion and
Analysis — Use of Derivatives to Manage Interest Rate and
Other Risks” which is incorporated by reference into these
Notes to Consolidated Financial Statements.
120 U.S. BANCORP