US Bank 2015 Annual Report Download - page 137

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 valuation models
and key inputs to those models. During the years ended
December 31, 2015, 2014 and 2013, 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 service 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 relevant 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
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