US Bank 2002 Annual Report Download - page 82

Servicing Asset Position
customer demands for variable rate tax-free investments.
SBA Loans
Income and cash flows from these structures were not Year Ended December 31 (Dollars in Millions) 2002 2001
significant in 2002. Servicing assets at beginning of year ****** $ 7.5 $ 6.9
Assets recognized during the year ******** — 2.8
Small Business Administration Programs For the year Amortization **************************** (2.3) (2.2)
ended December 31, 2002, the Company did not sell any
Servicing assets at end of year *********** $ 5.2 $ 7.5
U.S. government guaranteed portions of loans originated
under Small Business Administration (‘‘SBA’’) programs. For No valuation allowances were required during 2002 or
the year ended December 31, 2001, the Company sold 2001 on servicing assets. Servicing assets are reported in
$147.5 million of these loans recognizing a pre-tax gain on aggregate but measured on a transaction specific basis.
sale of $6.3 million. Generally, these loans are sold with Market values were determined using discounted cash flows,
recourse; however, the SBA guaranty substantially utilizing the assumptions noted in the table below.
eliminates the Company’s risk. The Company continues to Key economic assumptions used in measuring servicing
own the non-guaranteed portion of these loans. The assets at the date of securitization resulting from
Company continues to service the loans and is required securitizations completed during the year were as follows:
under the SBA programs to retain specified yield amounts. SBA Loans
Year Ended December 31 (Dollars in Millions) 2002 2001
A portion of the yield is recognized as servicing fee income
as it occurs and the remainder is capitalized as an excess Fair value of assets recognized ********** $ 8.9 $ 9.1
Prepayment speed (a) ****************** 17 CPR 21 CPR
servicing asset and is included in the gain on sale
Weighted average life (years) ************ 4.4 3.7
calculation. Expected credit losses ****************** NA NA
Discount rate ************************** 12% 12%
(a) The Company uses a prepayment vector based on loan seasoning for valuation. The
given speed is the effective prepayment speed that yields the same weighted
average life calculated using the prepayment vector.
Sensitivity Analysis At December 31, 2002, key economic assumptions and the sensitivity of the current fair value of
residual cash flows to immediate 10 percent and 20 percent adverse changes in those assumptions were as follows:
Unsecured
Indirect Small
Commercial Automobile SBA Business Investment
December 31, 2002 (Dollars in Millions) Loans Loans (i) Loans Receivables Securities
Current Economic Assumptions Sensitivity Analysis
Carrying value (fair value) of retained interests ************* $28.6 $22.9 $2.8 $203.4 $ 98.4
Weighted average life (in years) ************************** .5 NA 4.4 .8 2.3
Expected remaining life(a)(b)**************************** 2.0 NA 17 CPR 2.5 4.5
Impact of 10% adverse change *************************** $ (2.7) $ — $(.2) $(2.2) $ (8.5)
Impact of 20% adverse change *************************** (5.0) — (.3) (4.9) (17.7)
Expected credit losses
(annual)(c)(d)(e) *************************************** — NA NA 8.4%-9.6% —
Impact of 10% adverse change *************************** — — — $(5.1) —
Impact of 20% adverse change *************************** — — — (16.4) —
Residual cash flow discount rate *********************** 6.0% NA 12.0% 11.0% 6.6%
Impact of 10% adverse change *************************** $ (.1) $ — $(.1) $(2.0) $ (1.1)
Impact of 20% adverse change *************************** (.2) — (.2) (4.0) (2.2)
1M LIBOR+ 1M LIBOR+
avg spread Prime/ avg spread
Interest rate on variable rate loans and bonds(f)(g)(h) 157 bps NA NA 1M LIBOR 69 bps
Impact of 10% adverse change *************************** $ — $ — $— $(1.6) $ (.4)
Impact of 20% adverse change *************************** — — — (3.2) (.9)
(a) For the SBA loans, the Company uses prepayment vectors based on loan seasoning for valuation. The given speed is the effective prepayment speed that yields the same
weighted average life calculated using the prepayment vector.
(b) For the small business receivables a monthly principal payment rate assumption is used to value the residual interests.
(c) Credit losses are zero for the commercial loan conduit as removal of assets provisions are designed to cause the removal of assets from the conduit prior to losses being incurred.
(d) Credit losses are zero for the investment securities conduit as the investments are all AAA rated or insured investments.
(e) SBA loan credit losses are covered by the appropriate SBA loan program and are not included in retained interests. Principal reductions caused by defaults are included in the
prepayment assumption.
(f) The commercial loan conduit is match funded. Therefore, interest rate movements create no material impact to the value of the residual interest.
(g) For the small business receivables interest income is based on Prime+ contractual spread. Obligations are based on LIBOR.
(h) The investment securities conduit is mostly match funded. Therefore, interest rate movements create no material impact to the value of the residual interest.
(i) The Company exercised a cleanup call option on the indirect automobile securitization in January 2003.
These sensitivities are hypothetical and should be used change in the assumptions to the change in fair value may
with caution. As the figures indicate, changes in fair value not be linear. Also, in this table the effect of a variation in
based on a 10 percent variation in assumptions generally a particular assumption on the fair value of the retained
cannot be extrapolated because the relationship of the interest is calculated without changing any other
80 U.S. Bancorp