US Bank 2014 Annual Report Download - page 135

Fair value is defined as the exchange price that would
bereceivedforanassetorpaidtotransferaliability(anexit
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
securities, as well as exchange-traded instruments,
including certain perpetual preferred and corporate debt
securities.
– 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 in which the transfers occur.
During the years ended December 31, 2014, 2013 and 2012,
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
described in more detail in the specific valuation discussions
below. 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 risk management 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
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