US Bank 2014 Annual Report Download - page 139

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The following table shows the significant valuation assumption ranges for Level 3 available-for-sale investment securities at
December 31, 2014:
Minimum Maximum Average
Residential Prime Non-Agency Mortgage-Backed Securities(a)
Estimated lifetime prepayment rates ................................................................... 6% 22% 14%
Lifetime probability of default rates .................................................................... –74
Lifetime loss severity rates ............................................................................. 15 60 34
Discount margin........................................................................................ 253
Residential Non-Prime Non-Agency Mortgage-Backed Securities(b)
Estimated lifetime prepayment rates ................................................................... 3% 10% 7%
Lifetime probability of default rates .................................................................... 4147
Lifetime loss severity rates ............................................................................. 20 70 53
Discount margin........................................................................................ 152
Other Asset-Backed Securities
Estimated lifetime prepayment rates ................................................................... 6% 6% 6%
Lifetime probability of default rates .................................................................... 555
Lifetime loss severity rates ............................................................................. 40 40 40
Discount margin........................................................................................ 666
(a) Prime securities are those designated as such by the issuer at origination. When an issuer designation is unavailable, the Company determines at acquisition date the categorization based on
asset pool characteristics (such as weighted-average credit score, loan-to-value, loan type, prevalence of low documentation loans) and deal performance (such as pool delinquencies and
security market spreads).
(b) Includes all securities not meeting the conditions to be designated as prime.
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, 2014:
Minimum Maximum Average
Expected prepayment .................................................................................. 11% 21% 12%
Discount rate ........................................................................................... 91310
Derivatives The Company has two distinct Level 3 derivative
portfolios: (i) the Company’s commitments to 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. In addition, the
Company’s Visa swaps are classified within Level 3.
The significant unobservable inputs used in the fair
value measurement of the Company’s derivative
commitments to 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.
U.S. BANCORP The power of potential
137