US Bank 2011 Annual Report Download - page 52

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,
2011 and 2010, 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. Management measures the impact of changes in
market interest rates under a number of scenarios, including
immediate and sustained parallel shifts, and flattening or
steepening of the yield curve. The ALCO policy limits the
change in the market value of equity in a 200 bps parallel rate
shock to a 15.0 percent decline. A 200 bps increase would
have resulted in a 2.0 percent decrease in the market value of
equity at December 31, 2011, compared with a 3.6 percent
decrease at December 31, 2010. A 200 bps decrease, where
possible given current rates, would have resulted in a 6.4
percent decrease in the market value of equity at
December 31, 2011, compared with a 5.2 percent decrease at
December 31, 2010.
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
current and projected interest rates compared with underlying
contractual rates, the time since origination and period to next
reset date if floating rate loans, and other factors including
housing price indices and geography, which are updated
regularly based on historical experience and forward market
expectations. The balance and pricing assumptions of deposits
that have no stated maturity are based on historical
performance, the competitive environment, customer
behavior, and product mix. These assumptions are validated
on a periodic basis. A sensitivity analysis of key variables of
the valuation analysis is provided to the ALCO monthly and
is used to guide asset/liability management strategies.
Sensitivity of Net Interest Income
December 31, 2011 December 31, 2010
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 . . . * 1.57% * 1.92% * 1.64% * 3.14%
* Given the current level of interest rates, a downward rate scenario can not be computed.
50 U.S. BANCORP