US Bank 2013 Annual Report Download - page 133

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Mortgage Servicing Rights The significant unobservable
inputs used in the fair value measurement of the Company’s
MSRs are expected prepayments and the discount rate used
to calculate the present value of the projected cash flows.
Significant increases in either of these inputs in isolation
would result in a significantly lower fair value measurement.
Significant decreases in either of these inputs in isolation
would result in a significantly higher fair value measurement.
There is no direct interrelationship between prepayments
and discount rate. Prepayment rates generally move in the
opposite direction of market interest rates. Discount rates are
generally impacted by changes in market return
requirements.
The following table shows the significant valuation assumption ranges for MSRs at December 31, 2013:
Minimum Maximum Average
Expected prepayment .................................................................................... 10% 21% 11%
Discount rate ............................................................................................. 10 13 10
Derivatives The Company has two distinct Level 3
derivative portfolios: (i) the Company’s commitments to sell,
purchase and originate mortgage loans that meet the
requirements of a derivative, and (ii) the Company’s asset/
liability and customer-related derivatives that are Level 3 due
to unobservable inputs related to measurement of risk of
nonperformance by the counterparty.
The significant unobservable inputs used in the fair
value measurement of the Company’s derivative
commitments to sell, purchase and originate mortgage loans
are the percentage of commitments that actually become a
closed loan and the MSR value that is inherent in the
underlying loan value. A significant increase in the rate of
loans that close would result in a larger derivative asset or
liability. A significant increase in the inherent MSR value
would result in an increase in the derivative asset or a
reduction in the derivative liability. Expected loan close rates
and the inherent MSR values are directly impacted by
changes in market rates and will generally move in the same
direction as interest rates.
The following table shows the significant valuation assumption ranges for the Company’s derivative commitments to sell,
purchase and originate mortgage loans at December 31, 2013:
Minimum Maximum Average
Expected loan close rate ................................................................................. 43% 100% 80%
Inherent MSR value (basis points per loan) ............................................................... 48 221 124
The significant unobservable input used in the fair value
measurement of certain of the Company’s asset/liability and
customer-related derivatives is the credit valuation
adjustment related to the risk of counterparty
nonperformance. A significant increase in the credit
valuation adjustment would result in a lower fair value
measurement. A significant decrease in the credit valuation
adjustment would result in a higher fair value measurement.
The credit valuation adjustment is impacted by changes in
the Company’s assessment of the counterparty’s credit
position. At December 31, 2013, the minimum, maximum
and average credit valuation adjustment as a percentage of
the derivative contract fair value prior to adjustment was
0 percent, 100 percent and 7 percent, respectively.
U.S. BANCORP 131