US Bank 2009 Annual Report Download - page 113

2009, the Company had $691 million of cash posted as
collateral against this net liability position.
Note 21 Fair Values of Assets And
Liabilities
The Company uses fair value measurements for the initial
recording of certain assets and liabilities, periodic
remeasurement of certain assets and liabilities, and
disclosures. Derivatives, investment securities, certain
mortgage loans held for sale (“MLHFS”) and MSRs are
recorded at fair value on a recurring basis. Additionally,
from time to time, the Company may be required to record
at fair value other assets on a nonrecurring basis, such as
loans held for sale, loans held for investment and certain
other assets. These nonrecurring fair value adjustments
typically involve application of lower-of-cost-or-fair value
accounting or impairment write-downs of individual assets.
Fair value is defined as the exchange price that would
be received for an asset or paid to transfer a liability (an exit
price) in the principal or most advantageous market for the
asset or liability in an orderly transaction between market
participants on the measurement date. A fair value
measurement reflects all of the assumptions that market
participants would use in pricing the asset or liability,
including assumptions about the risk inherent in a particular
valuation technique, the effect of a restriction on the sale or
use of an asset, and the risk of nonperformance.
The Company groups its assets and liabilities measured
at fair value into a three-level hierarchy for valuation
techniques used to measure assets and liabilities at fair value.
This hierarchy is based on whether the valuation inputs are
observable or unobservable. These levels are:
• Level 1 — Quoted prices in active markets for identical
assets or liabilities. Level 1 includes U.S. Treasury and
exchange-traded instruments.
• Level 2 — Observable inputs other than Level 1 prices,
such as quoted prices for similar assets or liabilities;
quoted prices in markets that are not active; or other
inputs that are observable or can be corroborated by
observable market data for substantially the full term of
the assets or liabilities. Level 2 includes debt securities
that are traded less frequently than exchange-traded
instruments and which are valued using third party
pricing services; derivative contracts whose value is
determined using a pricing model with inputs that are
observable in the market or can be derived principally
from or corroborated by observable market data; and
MLHFS whose values are determined using quoted prices
for similar assets or pricing models with inputs that are
observable in the market or can be corroborated by
observable market data.
• Level 3 — Unobservable inputs that are supported by
little or no market activity and that are significant to the
fair value of the assets or liabilities. Level 3 assets and
liabilities include financial instruments whose values are
determined using pricing models, discounted cash flow
methodologies, or similar techniques, as well as
instruments for which the determination of fair value
requires significant management judgment or estimation.
This category includes residential MSRs, certain debt
securities, including the Company’s SIV-related
investments and non-agency mortgaged-backed securities,
and certain derivative contracts.
The following section describes the valuation
methodologies used by the Company to measure financial
assets and liabilities at fair value and for estimating fair
value for financial instruments not recorded at fair value as
required under disclosure guidance related to the fair value
of financial instruments. In addition, for financial assets and
liabilities measured at fair value, the following section
includes an indication of the level of the fair value hierarchy
in which the assets or liabilities are classified. Where
appropriate, the description includes information about the
valuation models and key inputs to those models.
Cash and Cash Equivalents The carrying value of cash,
amounts due from banks, federal funds sold and securities
purchased under resale agreements was assumed to
approximate fair value.
Investment Securities When available, quoted market prices
are used to determine the fair value of investment securities
and such items are classified within Level 1 of the fair value
hierarchy.
For other securities, the Company determines fair value
based on various sources and may apply matrix pricing with
observable prices for similar securities where a price for the
identical security is not observable. Prices are verified, where
possible, to prices of observable market trades as obtained
from independent sources. Securities measured at fair value
by such methods are classified as Level 2.
The fair value of securities for which there are no
market trades, or where trading is inactive as compared to
normal market activity, are categorized as Level 3. Securities
classified as Level 3 include non-agency mortgage-backed
securities, SIVs, commercial mortgage-backed and asset-
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