US Bank 2012 Annual Report Download - page 128

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
typically valued using third party pricing services; derivative
contracts and other assets and liabilities, including
securities, 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 MSRs,
certain debt 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. During the years
ended December 31, 2012, 2011 and 2010, there were no
transfers of financial assets or financial liabilities between the
hierarchy levels.
The Company has processes and controls in place to
increase the reliability of estimates it makes in determining
fair value measurements. Items quoted on an exchange are
verified to the quoted price. Items provided by a third party
pricing service are subject to price verification procedures as
discussed in more detail in the specific valuation discussions
provided in the section that follows. For fair value
measurements modeled internally, the Company’s valuation
models are subject to the Company’s Model Risk Governance
Policy and Program, as maintained by the Company’s credit
administration department. The purpose of model validation
is to assess the accuracy of the models’ input, processing, and
reporting components. All models are required to be
independently reviewed and approved prior to being placed in
use, and are subject to formal change control procedures.
Under the Company’s Model Risk Governance Policy, models
are required to be reviewed at least annually to ensure they
are operating as intended. Inputs into the models are market
observable inputs whenever available. When market
observable inputs are not available, the inputs are developed
based upon analysis of historical experience and evaluation of
other relevant market data. Significant unobservable model
inputs are subject to review by senior management in
corporate functions, who are independent from the modeling.
Significant unobservable model inputs are also compared to
actual results, typically on a quarterly basis. Significant Level
3 fair value measurements are also subject to corporate-level
review and are benchmarked to market transactions or other
market data, when available. Additional discussion of
processes and controls are provided in the valuation
methodologies section that follows.
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, 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. During 2012, 2011 and 2010,
there were no significant changes to the valuation techniques
used by the Company to measure fair value.
Cash and Due From Banks The carrying value of cash and due
from banks approximate fair value and are classified within
Level 1. Fair value is provided for disclosure purposes only.
Federal Funds Sold and Securities Purchased Under Resale
Agreements The carrying value of federal funds sold and
securities purchased under resale agreements approximate fair
value because of the relatively short time between the
origination of the instrument and its expected realization and
are classified within Level 2. Fair value is provided for
disclosure purposes only.
124 U.S. BANCORP