US Bank 2006 Annual Report Download - page 47

Modeling for measuring and analyzing consolidated interest Market Value of Equity Modeling The Company also utilizes
rate risk. the market value of equity as a measurement tool in
managing interest rate sensitivity. The market value of
Net Interest Income Simulation Analysis One of the equity measures the degree to which the market values of
primary tools used to measure interest rate risk and the the Company’s assets and liabilities and off-balance sheet
effect of interest rate changes on net interest income is instruments will change given a change in interest rates.
simulation analysis. The monthly analysis incorporates ALPC guidelines limit the change in market value of equity
substantially all of the Company’s assets and liabilities and in a 200 basis point parallel rate shock to 15 percent of the
off-balance sheet instruments, together with forecasted market value of equity assuming interest rates at
changes in the balance sheet and assumptions that reflect December 31, 2006. The up 200 basis point scenario
the current interest rate environment. Through this resulted in a 6.7 percent decrease in the market value of
simulation, management estimates the impact on net interest equity at December 31, 2006, compared with a 6.8 percent
income of a 200 basis point upward or downward gradual decrease at December 31, 2005. The down 200 basis point
change of market interest rates over a one-year period. This scenario resulted in a 1.8 percent decrease in the market
represents a change, effective in the first quarter of 2006, value of equity at December 31, 2006, compared with a
from a previous policy of estimating the effect of a 4.1 percent decrease at December 31, 2005. At
300 basis point upward or downward gradual change in net December 31, 2006 and 2005, the Company was within its
interest income. The simulation also estimates the effect of policy guidelines.
immediate and sustained parallel shifts in the yield curve of The valuation analysis is dependent upon certain key
50 basis points as well as the effect of immediate and assumptions about the nature of assets and liabilities with
sustained flattening or steepening of the yield curve. This non-contractual maturities. Management estimates the
simulation includes assumptions about how the balance average life and rate characteristics of asset and liability
sheet is likely to be affected by changes in loan and deposit accounts based upon historical analysis and management’s
growth. Assumptions are made to project interest rates for expectation of rate behavior. These assumptions are
new loans and deposits based on historical analysis, validated on a periodic basis. A sensitivity analysis of key
management’s outlook and repricing strategies. These variables of the valuation analysis is provided to ALPC
assumptions are validated on a periodic basis. A sensitivity monthly and is used to guide asset/liability management
analysis is provided for key variables of the simulation. The strategies. The Company also uses duration of equity as a
results are reviewed by ALPC monthly and are used to measure of interest rate risk. The duration of equity is a
guide asset/liability management strategies. measure of the net market value sensitivity of the assets,
The table below summarizes the interest rate risk of net liabilities and derivative positions of the Company. The
interest income based on forecasts over the succeeding duration of assets was 1.8 years at December 31, 2006,
12 months. At December 31, 2006, the Company’s overall compared with 1.6 years at December 31, 2005. The
interest rate risk position was liability sensitive to changes duration of liabilities was 1.9 years at December 31, 2006,
in interest rates. The Company manages its interest rate risk compared with 1.6 years at December 31, 2005. At
position by holding assets on the balance sheet with desired December 31, 2006, the duration of equity was 1.6 years,
interest rate risk characteristics, implementing certain compared with 1.8 years at December 31, 2005. The
pricing strategies for loans and deposits and through the duration of equity measure shows that sensitivity of the
selection of derivatives and various funding and investment market value of equity of the Company was liability
portfolio strategies. The Company manages the overall sensitive to changes in interest rates.
interest rate risk profile within policy limits. ALPC policy
guidelines limit the estimated change in net interest income Use of Derivatives to Manage Interest Rate and Other
to 3.0 percent of forecasted net interest income over the Risks In the ordinary course of business, the Company
succeeding 12 months. At December 31, 2006 and 2005 the enters into derivative transactions to manage its interest
Company was within its policy guidelines. rate, prepayment, credit and foreign currency risks (‘‘asset
and liability management positions’’) and to accommodate
the business requirements of its customers (‘‘customer-
SENSITIVITY OF NET INTEREST INCOME
December 31, 2006 December 31, 2005
Down 50 Up 50 Down 200 Up 200 Down 50 Up 50 Down 200 Up 200
Immediate Immediate Gradual Gradual Immediate Immediate Gradual* Gradual*
Net interest income************************ .42% (1.43)% .92% (2.95)% .66% (.73)% 1.19% (2.60)%
* As of January 31, 2006, due to the change to a 200 basis point gradual change policy during the first quarter of 2006.
U.S. BANCORP 45