US Bank 2014 Annual Report Download - page 59

substantially increased the importance of the Company’s
compliance risk management personnel and activities. For
example, the Consumer Financial Protection Bureau
(“CFPB”) has authority to prescribe rules, or issue orders or
guidelines pursuant to any federal consumer financial law.
The CFPB regulates and examines the Company, its banks
and other subsidiaries with respect to matters that relate to
these laws and consumer financial services and products.
The CFPB’s rulemaking, examination and enforcement
authority increases enforcement risk in this area including
the potential for fines and penalties. Refer to “Supervision
and Regulation” in the Company’s Annual Report on Form
10-K for further discussion of the regulatory framework
applicable to bank holding companies and their subsidiaries,
and the substantial changes to that regulation.
Interest Rate Risk Management In the banking industry,
changes in interest rates are a significant risk that can
impact earnings, market valuations and safety and
soundness of an entity. To manage the impact on net interest
income and the market value of assets and liabilities, the
Company manages its exposure to changes in interest rates
through asset and liability management activities within
guidelines established by its Asset Liability Committee
(“ALCO”) and approved by the Board of Directors. The ALCO
has the responsibility for approving and ensuring compliance
with the ALCO management policies, including interest rate
risk exposure. The Company uses net interest income
simulation analysis and market value of equity modeling for
measuring and analyzing consolidated interest rate risk.
Net Interest Income Simulation Analysis One of the primary
tools used to measure interest rate risk and the effect of
interest rate changes on net interest income is simulation
analysis. The monthly analysis incorporates substantially all of
the Company’s assets and liabilities and off-balance sheet
instruments, together with forecasted changes in the balance
sheet and assumptions that reflect the current interest rate
environment. Through this simulation, management estimates
the impact on net interest income of a 200 basis point (“bps”)
upward or downward gradual change of market interest rates
over a one-year period. The simulation also estimates the
effect of immediate and sustained parallel shifts in the yield
curve of 50 bps as well as the effect of immediate and
sustained flattening or steepening of the yield curve. This
simulation includes assumptions about how the balance sheet
is likely to be affected by changes in loan and deposit growth.
Assumptions are made to project interest rates for new loans
and deposits based on historical analysis, management’s
outlook and re-pricing strategies. These assumptions are
validated on a periodic basis. A sensitivity analysis is provided
for key variables of the simulation. The results are reviewed by
the ALCO monthly and are used to guide asset/liability
management strategies.
The table below summarizes the projected impact to net
interest income over the next 12 months of various potential
interest rate changes. The Company manages its interest rate
risk position by holding assets on the balance sheet with
desired interest rate risk characteristics, implementing certain
pricing strategies for loans and deposits and through the
selection of derivatives and various funding and investment
portfolio strategies. The Company manages the overall
interest rate risk profile within policy limits. The ALCO policy
limits the estimated change in net interest income in a gradual
200 bps rate change scenario to a 4.0 percent decline of
forecasted net interest income over the next 12 months. At
December 31, 2014 and 2013, the Company was within policy.
Market Value of Equity Modeling The Company also manages
interest rate sensitivity by utilizing market value of equity
modeling, which measures the degree to which the market
values of the Company’s assets and liabilities and off-balance
sheet instruments will change given a change in interest rates.
The valuation analysis is dependent upon certain key
assumptions about the nature of assets and liabilities with non-
contractual maturities. Management estimates the average life
and rate characteristics of asset and liability accounts based
upon historical analysis and management’s expectation of rate
behavior. Mortgage prepayment assumptions are based on
many key variables, including, but not limited to, current and
SENSITIVITY OF NET INTEREST INCOME
December 31, 2014 December 31, 2013
Down 50 bps
Immediate
Up 50 bps
Immediate
Down 200 bps
Gradual
Up 200 bps
Gradual
Down 50 bps
Immediate
Up 50 bps
Immediate
Down 200 bps
Gradual
Up 200 bps
Gradual
Net interest income ...... * 1.38% * 1.68% * 1.07% * 1.53%
* Given the current level of interest rates, a downward rate scenario can not be computed.
U.S. BANCORP The power of potential
57