US Bank 2014 Annual Report Download - page 136

valuation models and key inputs to those models. During the
years ended December 31, 2014, 2013 and 2012, 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
prices are used to determine fair value and these securities
are classified within Level 1 of the fair value hierarchy.
Level 1 investment securities include U.S. Treasury and
exchange-traded securities.
For other securities, quoted market prices may not be
readily available for the specific securities. When possible,
the Company determines fair value based on market
observable information, including quoted market prices for
similar securities, inactive transaction prices, and broker
quotes. These securities are classified within Level 2 of the
fair value hierarchy. Level 2 valuations are generally provided
by a third party pricing service. The Company reviews the
valuation methodologies utilized by the pricing service and,
on a quarterly basis, reviews the security level prices
provided by the pricing service against management’s
expectation of fair value, based on changes in various
benchmarks and market knowledge from recent trading
activity. Additionally, each quarter, the Company validates the
fair value provided by the pricing services by comparing them
to recent observable market trades (where available), broker
provided quotes, or other independent secondary pricing
sources. Prices obtained from the pricing service are
adjusted if they are found to be inconsistent with observable
market data. Level 2 investment securities are predominantly
agency mortgage-backed securities, certain other asset-
backed securities, municipal securities, corporate debt
securities, agency debt securities and certain perpetual
preferred securities.
The fair value of securities for which there are no
market trades, or where trading is inactive as compared to
normal market activity, are classified within Level 3 of the
fair value hierarchy. The Company determines the fair value
of these securities by using a discounted cash flow
methodology and incorporating observable market
information, where available. These valuations are modeled
by a unit within the Company’s treasury department. The
valuations use assumptions regarding housing prices,
interest rates and borrower performance. Inputs are refined
and updated at least quarterly to reflect market
developments and actual performance. The primary
valuation drivers of these securities are the prepayment
rates, default rates and default severities associated with the
underlying collateral, as well as the discount rate used to
calculate the present value of the projected cash flows. Level
3 fair values, including the assumptions used, are subject to
review by senior management in corporate functions, who
are independent from the modeling. The fair value
measurements are also compared to fair values provided by
third party pricing services, where available. Securities
classified within Level 3 include non-agency mortgage-
backed securities, non-agency commercial mortgage-
backed securities, certain asset-backed securities, certain
collateralized debt obligations and collateralized loan
obligations and certain corporate debt securities.
Mortgage Loans Held For Sale MLHFS measured at fair
value, for which an active secondary market and readily
available market prices exist, are initially valued at the
transaction price and are subsequently valued by comparison
to instruments with similar collateral and risk profiles.
MLHFSareclassifiedwithinLevel2.Includedinmortgage
banking revenue was a $185 million net gain, a $335 million
net loss and a $287 million net gain for the years ended
December 31, 2014, 2013 and 2012, respectively, from the
changes to fair value of these MLHFS under fair value option
accounting guidance. Changes in fair value due to instrument
specific credit risk were immaterial. Interest income for
MLHFS is measured based on contractual interest rates and
reported as interest income on the Consolidated Statement
of Income. Electing to measure MLHFS at fair value reduces
certain timing differences and better matches changes in fair
value of these assets with changes in the value of the
derivative instruments used to economically hedge them
without the burden of complying with the requirements for
hedge accounting.
Loans The loan portfolio includes adjustable and fixed-rate
loans, the fair value of which is estimated using discounted
cash flow analyses and other valuation techniques. The
expected cash flows of loans consider historical prepayment
experiences and estimated credit losses and are discounted
using current rates offered to borrowers with similar credit
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