US Bank 2014 Annual Report Download - page 129

Fair Value Hedges These derivatives are interest rate swaps
the Company uses to hedge the change in fair value related
to interest rate changes of its underlying fixed-rate debt.
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, 2014, and
the change in fair value attributed to hedge ineffectiveness
was not material.
Cash Flow Hedges These derivatives are interest rate swaps
the Company uses to hedge the forecasted cash flows from
its 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
remain within other comprehensive income (loss). At
December 31, 2014, the Company had $172 million (net-of-
tax) of realized and unrealized losses on derivatives classified
as cash flow hedges recorded in other comprehensive
income (loss), compared with $261 million (net-of-tax) at
December 31, 2013. The estimated amount to be reclassified
from other comprehensive income (loss) into earnings during
the next 12 months is a loss of $115 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, 2014, 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,
2014. There were no non-derivative debt instruments
designated as net investment hedges at December 31, 2014
or 2013.
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 (“MLHFS”) 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 historically has entered into similar offsetting
positions with broker-dealers. In 2014, the Company began to
actively manage the risks from its exposure to customer-
related interest rate positions on a portfolio basis by entering
into other derivative or non-derivative financial instruments
that partially or fully offset the exposure from these
customer-related positions. The Company’s customer
derivatives and related hedges are monitored and reviewed
by the Company’s Market Risk Committee, which establishes
policies for market risk management, including exposure
limits for each portfolio. The Company also has derivative
contracts that are created through its operations, including
commitments to originate MLHFS and swap agreements
related to the sale of a portion of its Class B common shares
of Visa Inc. Refer to Note 23 for further information on the
Visa restructuring and related card association litigation.
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.
U.S. BANCORP The power of potential
127