MANAGEMENT’S DISCUSSION & ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTEREST SENSITIVITY AND DISCLOSURES ABOUT MARKET RISK continued The Corporation places its greatest credence in net interest income simulation modeling. The above GAP/Interest Rate Sensitivity Report is believed by the Corporation's management to have two major shortfalls. The GAP/Interest Rate Sensitivity Report fails to precisely gauge how often an interest rate sensitive product reprices  nor is it able to measure the magnitude of potential future rate movements. Net interest income simulation modeling  or earnings-at-risk  measures the sensitivity of net interest income to various interest rate movements. The Corporation's asset liability process monitors simulated net interest income under three separate interest rate scenarios; base  rising and falling. Estimated net interest income for each scenario is calculated over a 12-month horizon. The immediate and parallel changes to the base case scenario used in the model are presented below. The interest rate scenarios are used for analytical purposes and do not necessarily represent management's view of future market movements. Rather  these are intended to provide a measure of the degree of volatility interest rate movements may introduce into the earnings of the Corporation. The base scenario is highly dependent on numerous assumptions embedded in the model  including assumptions related to future interest rates. While the base sensitivity analysis incorporates management's best estimate of interest rate and balance sheet dynamics under various market rate movements  the actual behavior and resulting earnings impact will likely differ from that projected. For mortgage-related assets  the base simulation model captures the expected prepayment behavior under changing interest rate environments. Assumptions and methodologies regarding the interest rate or balance behavior of indeterminate (dollars in thousands) At December 31  2003 ----------------------------------------------------------------------------------------------------------------------------------- 1-180 DAYS 181-365 DAYS 1-5 YEARS BEYOND 5 YEARS TOTAL =================================================================================================================================== Rate-Sensitive Assets: Federal funds sold and interest-bearing deposits ........ $ 40 556 $ 40 556 Investment securities ................................... 36 876 $ 24 045 $ 136 084 $ 159 792 356 797 Loans ................................................... 1 012 808 326 043 870 082 147 613 2 356 546 Federal Reserve and Federal Home Loan Bank stock ........ 15 502 15 502 ---------- ---------- ---------- ---------- ---------- Total rate-sensitive assets ........................ 1 105 742 350 088 1 006 166 307 405 2 769 401 ---------- ---------- ---------- ---------- ---------- Rate-Sensitive Liabilities: Interest-bearing deposits ............................... 1 411 925 224 461 383 135 4 379 2 023 900 Securities sold under repurchase agreements ............. 71 095 71 095 Federal Home Loan Bank advances ......................... 7 750 15 000 80 341 109 688 212 779 Trust preferred securities .............................. 57 188 57 188 Other short-term borrowings ............................. 1 514 1 514 Other borrowed funds .................................... 10 594 30 000 40 594 ---------- ---------- ---------- ---------- ---------- Total rate-sensitive liabilities ................... 1 502 878 239 461 463 476 201 255 2 407 070 ---------- ---------- ---------- ---------- ---------- Interest rate sensitivity gap by period .................... $ (397 136) $ 110 627 $ 542 690 $ 106 150 Cumulative rate sensitivity gap ............................ (397 136) (286 509) 256 181 362 331 Cumulative rate sensitivity gap ratio at December 31  2003 .................................... 73.6% 83.6% 111.6% 115.1% at December 31  2002 .................................... 111.8% 85.2% 98.2% 113.8% The Corporation had a cumulative negative gap of $286 509 000 in the one-year horizon at December 31  2003  just over 9.3 percent of total assets. 13