US Bank 2003 Annual Report Download - page 50

third-parties with risk participation agreements, for a fee, as analysis, was $1.5 million at December 31, 2003, and
part of a loan syndication transaction. $8.8 million at December 31, 2002.
At December 31, 2003, the Company had Liquidity Risk Management ALPC establishes policies, as
$174.9 million in accumulated other comprehensive income well as analyzes and manages liquidity, to ensure that
related to unrealized gains on derivatives classified as cash adequate funds are available to meet normal operating
flow hedges. The unrealized gains will be reflected in requirements in addition to unexpected customer demands
earnings when the related cash flows or hedged transactions for funds, such as high levels of deposit withdrawals or
occur and will offset the related performance of the hedged loan demand, in a timely and cost-effective manner. The
items. The estimated amount of gain to be reclassified from most important factor in the preservation of liquidity is
accumulated other comprehensive income into earnings maintaining public confidence that facilitates the retention
during the next 12 months is $53.1 million. and growth of a large, stable supply of core deposits and
Gains or losses on customer-related derivative positions wholesale funds. Ultimately, public confidence is generated
were not material in 2003. The change in fair value of through profitable operations, sound credit quality and a
forward commitments attributed to hedge ineffectiveness strong capital position. The Company’s performance in
recorded in noninterest income was a decrease of these areas has enabled it to develop a large and reliable
$6.8 million in 2003. The change in the fair value of all base of core funding within its market areas and in
other asset and liability management derivative positions domestic and global capital markets. Liquidity management
attributed to hedge ineffectiveness was not material in 2003. is viewed from long-term and short-term perspectives, as
Table 17 summarizes information on the Company’s well as from an asset and liability perspective. Management
derivative positions at December 31, 2003. Refer to Notes 1 monitors liquidity through a regular review of maturity
and 21 of the Notes to Consolidated Financial Statements profiles, funding sources, and loan and deposit forecasts to
for significant accounting policies and additional minimize funding risk.
information regarding the Company’s use of derivatives. The Company maintains strategic liquidity and
Market Risk Management In addition to interest rate risk, contingency plans that are subject to the availability of asset
the Company is exposed to other forms of market risk as a liquidity in the balance sheet. Monthly, ALPC reviews the
consequence of conducting normal trading activities. Company’s ability to meet funding requirements due to
Business activities that contribute to market risk include, adverse business events. These funding needs are then
among other things, proprietary trading and foreign matched with specific asset-based sources to ensure
exchange positions. Value at Risk (‘‘VaR’’) is a key measure sufficient funds are available. Also, strategic liquidity
of market risk for the Company. Theoretically, VaR policies require diversification of wholesale funding sources
represents the maximum amount that the Company has to avoid concentrations in any one market source.
placed at risk of loss, with a ninety-ninth percentile degree Subsidiary banks are members of various Federal Home
of confidence, to adverse market movements in the course Loan Banks (‘‘FHLB’’) that provide a source of funding
of its risk taking activities. through FHLB advances. The Company maintains a Grand
VaR modeling of trading activities is subject to certain Cayman branch for issuing eurodollar time deposits. The
limitations. Additionally, it should be recognized that there Company also establishes relationships with dealers to issue
are assumptions and estimates associated with VaR national market retail and institutional savings certificates
modeling and actual results could differ from those and short- and medium-term bank notes. Also, the
assumptions and estimates. The Company mitigates these Company’s subsidiary banks have significant correspondent
uncertainties through regular monitoring of trading banking networks and corporate accounts. Accordingly, it
activities by management and other risk management has access to national fed funds, funding through
practices, including stop-loss and position limits related to repurchase agreements and sources of more stable,
its trading activities. Stress-test models are used to provide regionally based certificates of deposit.
management with perspectives on market events that VaR The Company’s ability to raise negotiated funding at
models do not capture. competitive prices is influenced by rating agencies’ views of
The Company establishes market risk limits, subject to the Company’s credit quality, liquidity, capital and
approval by the Company’s Board of Directors. The earnings. The debt ratings noted in Table 18 reflect the
Company’s VaR limit was $40 million at December 31, rating agencies’ recognition of the strong, consistent
2003 and 2002. The market valuation risk inherent in its financial performance of the Company and the quality of
customer-based derivative trading, mortgage banking the balance sheet. At December 31, 2003, the credit ratings
pipeline and foreign exchange, as estimated by the VaR outlook for the Company was considered ‘‘Positive’’ by
48 U.S. Bancorp