US Bank 2004 Annual Report Download - page 48
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Please find page 48 of the 2004 US Bank annual report below. You can navigate through the pages in the report by either clicking on the pages listed below, or by using the keyword search tool below to find specific information within the annual report.Sensitivity of Net Interest Income and Rate Sensitive Income
December 31, 2004 December 31, 2003
Down 50 Up 50 Down 300 Up 300 Down 50 Up 50 Down 300 Up 300
Immediate Immediate Gradual Gradual Immediate Immediate Gradual Gradual
Net interest income ****************** (.49)% .04% *% (.19)% 1.30% .19% *% (.02)%
Rate sensitive income **************** (.40)% (.13)% *% (.69)% .74% .01% *% (.54)%
* Given the current level of interest rates, a downward 300 basis point scenario can not be computed.
or steepening of the yield curve. These simulations include of interest rates, the down 200 basis point scenario was not
assumptions about how the balance sheet is likely to be computed for December 31, 2003. ALPC reviews other
affected by changes in loan and deposit growth. down rate scenarios to evaluate the impact of falling
Assumptions are made to project interest rates for new interest rates. The down 100 basis point scenario resulted in
loans and deposits based on historical analysis, a .7 percent decrease at December 31, 2004, and a
management’s outlook and repricing strategies. These 1.3 percent increase at December 31, 2003. At
assumptions are validated on a periodic basis. A sensitivity December 31, 2004 and 2003, the Company was within its
analysis is provided for key variables of the simulation. The policy guidelines.
results are reviewed by ALPC monthly and are used to The valuation analysis is dependent upon certain key
guide hedging strategies. ALPC policy guidelines limit the assumptions about the nature of indeterminate maturity of
estimated change in interest rate sensitive income to assets and liabilities. Management estimates the average life
5.0 percent of forecasted interest rate sensitive income over and rate characteristics of asset and liability accounts based
the succeeding 12 months. upon historical analysis and management’s expectation of
The table above summarizes the interest rate risk of net rate behavior. These assumptions are validated on a
interest income and rate sensitive income based on forecasts periodic basis. A sensitivity analysis of key variables of the
over the succeeding 12 months. At December 31, 2004, the valuation analysis is provided to ALPC monthly and is used
Company’s overall interest rate risk position was to guide hedging strategies. The results of the valuation
substantively neutral to changes in interest rates. Rate analysis as of December 31, 2004, were well within policy
sensitive income includes net interest income as well as guidelines. The Company also uses duration of equity as a
other income items that are sensitive to interest rates, measure of interest rate risk. The duration of equity is a
including asset management fees, mortgage banking and the measure of the net market value sensitivity of the assets,
impact from compensating deposit balances. The Company liabilities and derivative positions of the Company. The
manages its interest rate risk position by holding assets on duration of assets was 1.68 years at December 31, 2004,
the balance sheet with desired interest rate risk compared with 1.91 years at December 31, 2003. The
characteristics, implementing certain pricing strategies for duration of liabilities was 2.02 years at December 31, 2004,
loans and deposits and through the selection of derivatives compared with 2.18 years at December 31, 2003. After
and various funding and investment portfolio strategies. The giving effect to the Company’s derivative positions, the
Company manages the overall interest rate risk profile estimated duration of equity was .12 years at December 31,
within policy limits. At December 31, 2004 and 2003, the 2004, compared with 1.35 years at December 31, 2003.
Company was within its policy guidelines. The duration of equity measure shows that sensitivity of the
market value of equity of the Company was relatively
Market Value of Equity Modeling The Company also utilizes neutral to changes in interest rates.
the market value of equity as a measurement tool in
managing interest rate sensitivity. The market value of Use of Derivatives to Manage Interest Rate Risk In the
equity measures the degree to which the market values of ordinary course of business, the Company enters into
the Company’s assets and liabilities and off-balance sheet derivative transactions to manage its interest rate,
instruments will change given a change in interest rates. prepayment and foreign currency risks (‘‘asset and liability
ALPC guidelines limit the change in market value of equity management positions’’) and to accommodate the business
in a 200 basis point parallel rate shock to 15 percent of the requirements of its customers (‘‘customer-related
market value of equity assuming interest rates at positions’’). To manage its interest rate risk, the Company
December 31, 2004. The up 200 basis point scenario may enter into interest rate swap agreements and interest
resulted in a 2.7 percent decrease in the market value of rate options such as caps and floors. Interest rate swaps
equity at December 31, 2004, compared with a 3.1 percent involve the exchange of fixed-rate and variable-rate
decrease at December 31, 2003. The down 200 basis point payments without the exchange of the underlying notional
scenario resulted in a 4.2 percent decrease in the market amount on which the interest payments are calculated.
value of equity at December 31, 2004. Given the low level Interest rate caps protect against rising interest rates while
46 U.S. BANCORP