Fair Value Measurement and Fair Value of Financial Instruments

6 Months Ended

Jun. 30, 2013

Fair Value Disclosures [Abstract]

Fair Value Measurement and Fair Value of Financial Instruments

Note 9—Fair Value Measurement and Fair Value of Financial Instruments

• Valuation Methodologies

        Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between willing market participants at the measurement date. The Company has an established and documented process for determining fair value for financial assets and financial liabilities that are measured at fair value on either a recurring or nonrecurring basis. When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair value is based upon valuation techniques that use, where possible, current market-based or independently sourced parameters, such as yield curves, foreign exchange rates, credit spreads, commodity prices, and implied volatilities. Valuation adjustments may be made to ensure the financial instruments are recorded at fair value. These adjustments include amounts that reflect counterparty credit quality and that consider the Company's creditworthiness in determining the fair value of its trading liabilities. For further information related to the valuation methodologies used for certain financial assets and financial liabilities measured at fair value, see Note 16 to the consolidated financial statements in the Company's 2012 Form 10-K.

• Fair Value Hierarchy

        In determining fair value, the Company maximizes the use of observable market inputs and minimizes the use of unobservable inputs. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect the Company's estimate about market data. Based on the observability of the significant inputs used, the Company classifies its fair value measurements in accordance with the three-level hierarchy as defined by U.S. GAAP. This hierarchy is based on the quality, observability, and reliability of the information used to determine fair value. For further information related to the fair value hierarchy, see Note 16 to the consolidated financial statements in the Company's 2012 Form 10-K.

• Valuation Processes

        The Company has established a Valuation Committee (VC) to oversee its valuation framework for measuring fair value and to establish valuation policies and procedures. The VC's responsibilities include reviewing and approving all fair value measurements and categorizations within the fair value hierarchy and monitoring the use of pricing sources, mark-to-model valuations, dealer quotes, and other valuation processes. The VC reports to the Company's Risk & Capital Committee and meets at least quarterly.

        Independent price verification (IPV) is performed periodically by the Company to test the market data and valuations of substantially all instruments measured at fair value on a recurring basis. As part of its IPV procedures, the Company utilizes third party valuations and both internal and external models to compare pricing sources and perform analysis. Results are formally reported on a quarterly basis to the VC. For further information related to valuation processes, see Note 16 to the consolidated financial statements in the Company's 2012 Form 10-K.

• Fair Value Measurements on a Recurring Basis

        The following tables present financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2013 and December 31, 2012, by major category and by valuation hierarchy level:

	June 30, 2013
(Dollars in millions)	Level 1			Level 2			Level 3			Netting Adjustment(1)			Fair Value
Assets
Trading account assets:
U.S. Treasury	$	—		$	4		$	—		$	—		$	4
U.S. government sponsored agencies		—			100			—			—			100
State and municipal		—			23			—			—			23
Commercial paper		—			20			—			—			20
Interest rate derivative contracts		3			790			—			(167	)		626
Commodity derivative contracts		—			106			12			(112	)		6
Foreign exchange derivative contracts		1			59			3			(23	)		40
Equity derivative contracts		—			—			167			(142	)		25
Total trading account assets		4			1,102			182			(444	)		844
Securities available for sale:
U.S. government sponsored agencies		—			364			—			—			364
Residential mortgage-backed securities:
U.S. government and government sponsored agencies		—			14,673			—			—			14,673
Privately issued		—			328			—			—			328
Commercial mortgage-backed securities		—			3,750			—			—			3,750
CLOs		—			2,445			—			—			2,445
Asset-backed and other		—			80			—			—			80
Other debt securities:
Direct bank purchase bonds		—			—			1,703			—			1,703
Other		—			93			59			—			152
Equity securities		15			—			—			—			15
Total securities available for sale		15			21,733			1,762			—			23,510
Other assets:
Interest rate hedging contracts		—			1			—			—			1
Other derivative contracts		—			—			2			—			2
Total other assets		—			1			2			—			3
Total assets	$	19		$	22,836		$	1,946		$	(444	)	$	24,357
Percentage of Total		—	%		94	%		8	%		(2	)%		100	%
Percentage of Total Company Assets		—	%		22	%		2	%		—	%		24	%
Liabilities
Trading account liabilities:
Interest rate derivative contracts	$	3		$	694		$	—		$	(404	)	$	293
Commodity derivative contracts		—			94			12			(39	)		67
Foreign exchange derivative contracts		1			24			3			(5	)		23
Equity derivative contracts		—			—			168			—			168
Securities sold, not yet purchased		—			15			—			—			15
Total trading account liabilities		4			827			183			(448	)		566
Other liabilities:
FDIC clawback liability		—			—			90			—			90
Interest rate hedging contracts		—			7			—			—			7
Other derivative contracts		—			1			4			—			5
Total other liabilities		—			8			94			—			102
Total liabilities	$	4		$	835		$	277		$	(448	)	$	668
Percentage of Total		1	%		125	%		42	%		(67	)%		100	%
Percentage of Total Company Liabilities		—	%		1	%		—	%		(1	)%		1	%

(1)

Amounts represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net settle all contracts.

	December 31, 2012
(Dollars in millions)	Level 1			Level 2			Level 3			Netting Adjustment(1)			Fair Value
Assets
Trading account assets:
U.S. Treasury	$	—		$	1		$	—		$	—		$	1
U.S. government sponsored agencies		—			113			—			—			113
State and municipal		—			15			—			—			15
Commercial paper		—			10			—			—			10
Interest rate derivative contracts		—			1,075			—			(87	)		988
Commodity derivative contracts		—			137			30			(127	)		40
Foreign exchange derivative contracts		1			65			3			(28	)		41
Equity derivative contracts		—			—			103			(103	)		—
Total trading account assets		1			1,416			136			(345	)		1,208
Securities available for sale:
U.S. government sponsored agencies		—			885			—			—			885
Residential mortgage-backed securities:
U.S government and government sponsored agencies		—			13,333			—			—			13,333
Privately issued		—			443			—			—			443
Commercial mortgage-backed securities		—			2,971			—			—			2,971
CLOs		—			1,959			—			—			1,959
Asset-backed and other					146									146
Other debt securities:
Direct bank purchase bonds		—			—			1,438			—			1,438
Other		—			97			61			—			158
Equity securities		19			—			—			—			19
Total securities available for sale		19			19,834			1,499			—			21,352
Other assets:
Interest rate hedging contracts		—			28			—			(24	)		4
Other derivative contracts		—			1			—			(1	)		—
Total other assets		—			29			—			(25	)		4
Total assets	$	20		$	21,279		$	1,635		$	(370	)	$	22,564
Percentage of Total		—	%		94	%		7	%		(1	)%		100	%
Percentage of Total Company Assets		—	%		22	%		1	%		—	%		23	%
Liabilities
Trading account liabilities:
Interest rate derivative contracts	$	5		$	1,004		$	—		$	(407	)	$	602
Commodity derivative contracts		—			110			30			(42	)		98
Foreign exchange derivative contracts		1			61			3			—			65
Equity derivative contracts		—			—			103			—			103
Securities sold, not yet purchased		—			27			—			—			27
Total trading account liabilities		6			1,202			136			(449	)		895
Other liabilities:
FDIC clawback liability		—			—			92			—			92
Other derivative contracts		—			—			3			—			3
Total other liabilities		—			—			95			—			95
Total liabilities	$	6		$	1,202		$	231		$	(449	)	$	990
Percentage of Total		1	%		121	%		23	%		(45	)%		100	%
Percentage of Total Company Liabilities		—	%		2	%		—	%		(1	)%		1	%

(1)

Amounts represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net settle all contracts.

        The following tables present a reconciliation of the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2013 and 2012. Level 3 available for sale securities at June 30, 2013 and 2012 primarily consisted of direct bank purchase bonds. The Company's policy is to recognize transfers in and out of Level 1, 2 and 3 as of the end of a reporting period.

	For the Three Months Ended
	June 30, 2013														June 30, 2012
(Dollars in millions)	Trading Assets			Securities Available for Sale			Other Assets		Trading Liabilities			Other Liabilities			Trading Assets			Securities Available for Sale		Trading Liabilities			Other Liabilities
Asset (liability) balance, beginning of period	$	186		$	1,592		$	1	$	(187	)	$	(96	)	$	153		$	43	$	(153	)	$	(63	)
Total gains (losses) (realized/unrealized):
Included in income before taxes		(5	)		—			1		5			2			(34	)		—		34			(9	)
Included in other comprehensive income		—			18			—		—			—			—			1		—			—
Purchases/additions		1			192			—		—			—			2			1,090		(2	)		—
Sales		—			—			—		(1	)		—			(3	)		—		3			—
Settlements		—			(40	)		—		—			—			—			—		—			—
Asset (liability) balance, end of period	$	182		$	1,762		$	2	$	(183	)	$	(94	)	$	118		$	1,134	$	(118	)	$	(72	)
Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period	$	(5	)	$	—		$	1	$	5		$	2		$	(34	)	$	—	$	34		$	(9	)

	For the Six Months Ended
	June 30, 2013													June 30, 2012
(Dollars in millions)	Trading Assets		Securities Available for Sale			Other Assets		Trading Liabilities			Other Liabilities			Trading Assets			Securities Available for Sale			Trading Liabilities			Other Liabilities
Asset (liability) balance, beginning of period	$	136	$	1,499		$	—	$	(136	)	$	(95	)	$	—		$	48		$	—		$	(51	)
Total gains (losses) (realized/unrealized):
Included in income before taxes		42		—			1		(43	)		1			(34	)		—			34			(21	)
Included in other comprehensive income		—		37			—		—			—			—			(4	)		—			—
Purchases/additions		4		329			1		—			—			2			1,090			(2	)		—
Sales		—		(14	)		—		(4	)		—			(3	)		—			3			—
Settlements		—		(89	)		—		—			—			—			—			—			—
Transfers into Level 3		—		—			—		—			—			153			—			(153	)		—
Asset (liability) balance, end of period	$	182	$	1,762		$	2	$	(183	)	$	(94	)	$	118		$	1,134		$	(118	)	$	(72	)
Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period	$	42	$	—		$	1	$	(43	)	$	1		$	(34	)	$	—		$	34		$	(21	)

        The following table presents information about significant unobservable inputs related to the Company's significant Level 3 assets and liabilities at June 30, 2013.

	June 30, 2013
(Dollars in millions)	Level 3 Fair Value		Valuation Technique(s)	Significant Unobservable Input(s)	Range of Inputs			Weighted Average
Securities available for sale:
Direct bank purchase bonds	$	1,703	Return on equity	Market-required return on capital		8.0 - 10.0	%		10.0	%
				Probability of default		0.0 - 8.0	%		0.6	%
				Loss severity		10.0 - 75.0	%		34.7	%
Other liabilities:
FDIC clawback liability	$	90	Discounted cash flow	Probability of default		0.1 - 100.0	%		55.5	%
				Loss severity		20.0 - 100.0	%		43.3	%

        The direct bank purchase bonds use a return on equity valuation technique. This technique uses significant unobservable inputs such as market-required return on capital, probability of default, and loss severity. Increases (decreases) in any of these inputs in isolation would result in a lower (higher) fair value measurement.

        The FDIC clawback liability uses a discounted cash flow valuation technique. This technique uses significant unobservable inputs such as probability of default and loss severity. Increases (decreases) in probability of default and loss severity would result in a lower (higher) liability.

• Fair Value Measurement on a Nonrecurring Basis

        Certain assets may be measured at fair value on a nonrecurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis during the second quarters of 2013 and 2012 that were still held on the consolidated balance sheet as of the respective periods ended, the following tables present the fair value of such financial instruments by the level of valuation assumptions used to determine each fair value adjustment:

	June 30, 2013
(Dollars in millions)	Fair Value		Level 1		Level 2		Level 3		Loss for the Three Months Ended June 30, 2013			Loss for the Six Months Ended June 30, 2013
Loans:
Impaired loans	$	91	$	—	$	—	$	91	$	(11	)	$	(23	)
Other assets:
OREO		37		—		—		37		(3	)		(6	)
Total	$	128	$	—	$	—	$	128	$	(14	)	$	(29	)

	June 30, 2012
(Dollars in millions)	Fair Value		Level 1		Level 2		Level 3		Loss for the Three Months Ended June 30, 2012			Loss for the Six Months Ended June 30, 2012
Loans:
Impaired loans	$	114	$	—	$	—	$	114	$	(33	)	$	(36	)
Other assets:
OREO		66		—		—		66		(9	)		(17	)
Private equity investments		—		—		—		—		—			(2	)
Total	$	180	$	—	$	—	$	180	$	(42	)	$	(55	)

        Loans include individually impaired loans that are measured at fair value based on appraised values of the underlying collateral or market pricing for the loan, adjusted for management judgment, as of the measurement date. The fair value of OREO was primarily based on independent appraisals.

• Fair Value of Financial Instruments Disclosures

        The tables below present the carrying amount and estimated fair value of financial assets and liabilities not measured at fair value in the balance sheet but for which fair value is required to be disclosed by the level of valuation assumptions held by the Company as of June 30, 2013 and as of December 31, 2012:

	June 30, 2013
(Dollars in millions)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	3,354	$	3,354	$	3,354	$	—	$	—
Securities held to maturity		905		891		—		891		—
Loans held for investment, net of allowance for loan losses(1)		64,243		65,964		—		—		65,964
FDIC indemnification asset		233		131		—		—		131
Other assets		2		2		—		—		2
Liabilities
Deposits	$	77,310	$	77,512	$	—	$	77,512	$	—
Commercial paper and other short-term borrowings		3,792		3,792		—		3,792		—
Long-term debt		6,058		6,184		—		6,184		—
Off-Balance Sheet Instruments
Commitments to extend credit and standby and commercial letters of credit	$	277	$	277	$	—	$	—	$	277

(1)

Excludes lease financing, net of related allowance.

	December 31, 2012
(Dollars in millions)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	5,491	$	5,491	$	5,491	$	—	$	—
Securities held to maturity		1,103		1,135		—		1,135		—
Loans held for investment, net of allowance for loan losses(1)		58,284		59,613		—		—		59,613
FDIC indemnification asset		338		151		—		—		151
Other assets		3		3		—		—		3
Liabilities
Deposits	$	74,255	$	74,524	$	—	$	74,524	$	—
Commercial paper and other short-term borrowings		1,363		1,363		—		1,363		—
Long-term debt		5,622		5,861		—		5,861		—
Off-Balance Sheet Instruments
Commitments to extend credit and standby and commercial letters of credit	$	262	$	262	$	—	$	—	$	262

(1)

Excludes lease financing, net of related allowance.

        For further information on methodologies for approximating fair values, see Note 16 to the consolidated financial statements in the Company's 2012 Form 10-K.