US Bank 2010 Annual Report Download - page 115

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, trading and available-for-sale
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 financial assets and financial
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 securities
and non-agency mortgaged-backed securities, and certain
derivative contracts.
When the Company changes its valuation inputs for
measuring financial assets and financial liabilities at fair
value, either due to changes in current market conditions or
other factors, it may need to transfer those assets or
liabilities to another level in the hierarchy based on the new
inputs used. The Company recognizes these transfers at the
end of the reporting period that the transfers occur. For the
years ended December 31, 2010 and 2009, there were no
significant transfers of financial assets or financial liabilities
between the hierarchy levels, except for the transfer of non-
agency mortgage-backed securities from Level 2 to Level 3
in the first quarter of 2009, as discussed below.
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.
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