US Bank 2013 Annual Report Download - page 129

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, 2013, 2012 and 2011, 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 the
years ended December 31, 2013, 2012 and 2011, 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.
Investment Securities When quoted market prices for
identical securities are available in an active market, these
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