US Bank 2005 Annual Report Download - page 47

Sensitivity of Net Interest Income and Rate Sensitive Income:
December 31, 2005 December 31, 2004
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 ****************** .66% (.73)% (.30)% (2.58)% (.49)% .04% *% (.19)%
Rate sensitive income **************** .73% (.89)% (.21)% (3.03)% (.40)% (.13)% *% (.69)%
* Due to the level of interest rates at December 31, 2004, a downward 300 basis point scenario could not be computed.
deposits and through the selection of derivatives and increased duration of equity measure shows that sensitivity
various funding and investment portfolio strategies. The of the market value of equity of the Company was liability
Company manages the overall interest rate risk profile sensitive to changes in interest rates.
within policy limits. ALPC policy guidelines limit the Use of Derivatives to Manage Interest Rate Risk In the
estimated change in interest rate sensitive income to ordinary course of business, the Company enters into
5.0 percent of forecasted interest rate sensitive income over derivative transactions to manage its interest rate,
the succeeding 12 months. At December 31, 2005 and prepayment and foreign currency risks (‘‘asset and liability
2004, the Company was within its policy guidelines. management positions’’) and to accommodate the business
Market Value of Equity Modeling The Company also utilizes requirements of its customers (‘‘customer-related
the market value of equity as a measurement tool in positions’’). To manage its interest rate risk, the Company
managing interest rate sensitivity. The market value of may enter into interest rate swap agreements and interest
equity measures the degree to which the market values of rate options such as caps and floors. Interest rate swaps
the Company’s assets and liabilities and off-balance sheet involve the exchange of fixed-rate and variable-rate
instruments will change given a change in interest rates. payments without the exchange of the underlying notional
ALPC guidelines limit the change in market value of equity amount on which the interest payments are calculated.
in a 200 basis point parallel rate shock to 15 percent of the Interest rate caps protect against rising interest rates while
market value of equity assuming interest rates at interest rate floors protect against declining interest rates. In
December 31, 2005. The up 200 basis point scenario connection with its mortgage banking operations, the
resulted in a 6.8 percent decrease in the market value of Company enters into forward commitments to sell mortgage
equity at December 31, 2005, compared with a 2.7 percent loans related to fixed-rate mortgage loans held for sale and
decrease at December 31, 2004. The down 200 basis point fixed-rate mortgage loan commitments. The Company also
scenario resulted in a 4.1 percent decrease in the market acts as a seller and buyer of interest rate contracts and
value of equity at December 31, 2005, compared with a foreign exchange rate contracts on behalf of customers. The
4.2 percent decrease at December 31, 2004. At Company minimizes its market and liquidity risks by taking
December 31, 2005 and 2004, the Company was within its similar offsetting positions.
policy guidelines. All interest rate derivatives that qualify for hedge
The valuation analysis is dependent upon certain key accounting are recorded at fair value as other assets or
assumptions about the nature of assets and liabilities with liabilities on the balance sheet and are designated as either
non-contractual maturities. Management estimates the ‘‘fair value’’ or ‘‘cash flow’’ hedges. The Company performs
average life and rate characteristics of asset and liability an assessment, both at inception and quarterly thereafter,
accounts based upon historical analysis and management’s when required, to determine whether these derivatives are
expectation of rate behavior. These assumptions are highly effective in offsetting changes in the value of the
validated on a periodic basis. A sensitivity analysis of key hedged items. Hedge ineffectiveness for both cash flow and
variables of the valuation analysis is provided to ALPC fair value hedges is recorded in noninterest income. Changes
monthly and is used to guide asset/liability management in the fair value of derivatives designated as fair value
strategies. The Company also uses duration of equity as a hedges, and changes in the fair value of the hedged items,
measure of interest rate risk. The duration of equity is a are recorded in earnings. Changes in the fair value of
measure of the net market value sensitivity of the assets, derivatives designated as cash flow hedges are recorded in
liabilities and derivative positions of the Company. The other comprehensive income until income from the cash
duration of assets was 1.61 years at December 31, 2005, flows of the hedged items is realized. Customer-related
compared with 1.63 years at December 31, 2004. The interest rate swaps, foreign exchange rate contracts, and all
duration of liabilities was 1.57 years at December 31, 2005, other derivative contracts that do not qualify for hedge
compared with 1.89 years at December 31, 2004. At accounting are recorded at fair value and resulting gains or
December 31, 2005, the duration of equity was 1.84 years, losses are recorded in trading account gains or losses or
compared with .12 years at December 31, 2004. The mortgage banking revenue.
U.S. BANCORP 45