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Fair Value Disclosures
12 Months Ended
Dec. 31, 2017
Fair Value Disclosures [Abstract]  
FAIR VALUE DISCLOSURES
NOTE 4—FAIR VALUE DISCLOSURES
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company may use various valuation approaches, including market, income and/or cost approaches. The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is a market-based measure considered from the perspective of a market participant. Accordingly, even when market assumptions are not readily available, the Company’s own assumptions reflect those that market participants would use in pricing the asset or liability at the measurement date. The fair value measurement accounting guidance describes the following three levels used to classify fair value measurements:
Level 1 - unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company
Level 2 - quoted prices for similar assets and liabilities in an active market, quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly
Level 3 - unobservable inputs that are significant to the fair value of the assets or liabilities
The availability of observable inputs can vary and in certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to a fair value measurement requires judgment and consideration of factors specific to the asset or liability.
Recurring Fair Value Measurement Techniques
Mortgage-backed Securities
The Company’s mortgage-backed securities portfolio is comprised of agency mortgage-backed securities which are guaranteed by US government sponsored enterprises and federal agencies. The fair value of agency mortgage-backed securities was determined using a market approach with quoted market prices, recent transactions and spread data for identical or similar instruments. Agency mortgage-backed securities were categorized in Level 2 of the fair value hierarchy.
Other Debt Securities
The Company's fair value level classification of US Treasuries is based on the original maturity dates of the securities and whether the securities are the most recent issuances of a given maturity. US Treasuries with original maturities less than one year are classified as Level 1. US Treasuries with original maturities longer than one year are classified as Level 1 if they represent the most recent issuance of a given maturity; otherwise, these securities are classified as Level 2.
The fair value measurements of agency debentures and agency debt securities were determined using market and income approaches along with the Company’s own trading activities for identical or similar instruments and were categorized in Level 2 of the fair value hierarchy.
All of the Company’s municipal bonds were rated investment grade at December 31, 2017. These securities were valued using a market approach with pricing service valuations corroborated by recent market transactions for identical or similar bonds. Municipal bonds and corporate bonds were categorized in Level 2 of the fair value hierarchy.
Publicly Traded Equity Securities
The fair value measurements of the Company's publicly traded equity securities were classified as Level 1 of the fair value hierarchy as they were based on quoted prices in active markets.
Derivative Instruments
Interest rate swaps were valued with an income approach using pricing models that are commonly used by the financial services industry. The market observable inputs used in the pricing models include the swap curve, the volatility surface, and prime or overnight indexed swap basis from a financial data provider. The Company does not consider these models to involve significant judgment on the part of management, and the Company corroborated the fair value measurements with counterparty valuations. The Company’s derivative instruments were categorized in Level 2 of the fair value hierarchy. The consideration of credit risk, the Company’s or the counterparty’s, did not result in an adjustment to the valuation of its derivative instruments in the periods presented.
Nonrecurring Fair Value Measurement Techniques
Certain other assets are recorded at fair value on a nonrecurring basis: 1) one- to four-family and home equity loans in which the amount of the loan balance in excess of the estimated current value of the underlying property less estimated selling costs has been charged-off; and 2) real estate owned that is carried at the lower of the property’s carrying value or fair value less estimated selling costs.
The Company evaluates and reviews assets that have been subject to fair value measurement requirements on a quarterly basis in accordance with policies and procedures that were designed to be in compliance with guidance from the Company’s regulators. These policies and procedures govern the frequency of the review, the use of acceptable valuation methods, and the consideration of estimated selling costs.
Loans Receivable
Loans that have been delinquent for 180 days or that are in bankruptcy and certain TDR loan modifications are charged-off based on the estimated current value of the underlying property less estimated selling costs. Property valuations for these one- to four-family and home equity loans are based on the most recent "as is" property valuation data available, which may include appraisals, broker price opinions, automated valuation models or updated values using home price indices. These property valuations are updated on a monthly, quarterly or semi-annual basis depending on the type of valuation initially used. If the valuation data obtained is significantly different from the valuation previously received, the Company reviews additional property valuation data to corroborate or update the valuation. If the value of the underlying property has declined, an additional charge-off is recorded. If the value of the underlying property has increased, previously charged-off amounts are not reversed. Recoveries of previously charged-off amounts are recognized within the allowance for loan losses when received.
Real Estate Owned
Property valuations for real estate owned are based on the lowest value of the most recent property valuation data available, which may include appraisals, listing prices or approved offer prices.
Nonrecurring fair value measurements on one- to four-family loans, home equity loans and real estate owned were classified as Level 3 of the fair value hierarchy as the valuations included unobservable inputs that were significant to the fair value. The following table presents additional information about significant unobservable inputs used in the valuation of assets measured at fair value on a nonrecurring basis that were categorized in Level 3 of the fair value hierarchy at December 31, 2017 and 2016:
 
Unobservable Inputs
 
Average
 
Range
December 31, 2017
 
 
 
 
 
Loans receivable:
 
 
 
 
 
One- to four-family
Appraised value
 
$
520,700

 
$60,000 - $1,200,000
Home equity
Appraised value
 
$
317,300

 
$38,000 - $2,066,000
Real estate owned
Appraised value
 
$
355,200

 
$4,500 - $2,000,000
 
 
 
 
 
 
December 31, 2016
 
 
 
 
 
Loans receivable:
 
 
 
 
 
One- to four-family
Appraised value
 
$
408,100

 
$50,000 - $1,490,000
Home equity
Appraised value
 
$
312,000

 
$6,000 - $2,500,000
Real estate owned
Appraised value
 
$
342,300

 
$21,500 - $1,800,000
Recurring and Nonrecurring Fair Value Measurements
Assets and liabilities measured at fair value at December 31, 2017 and 2016 are summarized in the following tables (dollars in millions):
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
December 31, 2017:
 
 
 
 
 
 
 
Recurring fair value measurements:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Agency mortgage-backed securities
$

 
$
19,195

 
$

 
$
19,195

Agency debentures

 
966

 

 
966

US Treasuries

 
458

 

 
458

Agency debt securities

 
33

 

 
33

Municipal bonds

 
20

 

 
20

Total debt securities

 
20,672

 

 
20,672

Publicly traded equity securities
7

 

 

 
7

Total available-for-sale securities
7

 
20,672

 

 
20,679

Receivables from brokers, dealers and clearing organizations:
 
 
 
 
 
 
 
US Treasuries
300

 

 

 
300

Other assets:
 
 
 
 
 
 
 
Derivative assets(1)

 
131

 

 
131

Total assets measured at fair value on a recurring basis(2)
$
307

 
$
20,803

 
$

 
$
21,110

Liabilities
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
Derivative liabilities(1)
$

 
$
14

 
$

 
$
14

Total liabilities measured at fair value on a recurring basis(2)
$

 
$
14

 
$

 
$
14

Nonrecurring fair value measurements:
 
 
 
 
 
 
 
Loans receivable, net:
 
 
 
 
 
 
 
One- to four-family
$

 
$

 
$
22

 
$
22

Home equity

 

 
13

 
13

Total loans receivable

 

 
35

 
35

Other assets:
 
 
 
 
 
 
 
Loans held-for-sale

 
17

 

 
17

Real estate owned

 

 
26

 
26

Total assets measured at fair value on a nonrecurring basis(3)
$

 
$
17

 
$
61

 
$
78

 
(1)
All derivative assets and liabilities were interest rate contracts at December 31, 2017. Information related to derivative instruments is detailed in Note 8—Derivative Instruments and Hedging Activities.
(2)
Assets and liabilities measured at fair value on a recurring basis represented 33% and less than 1% of the Company’s total assets and total liabilities, respectively, at December 31, 2017.
(3)
Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheet at December 31, 2017, and for which a fair value measurement was recorded during the period.
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
December 31, 2016:
 
 
 
 
 
 
 
Recurring fair value measurements:
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Available-for-sale securities:
 
 
 
 
 
 
 
Debt securities:
 
 
 
 
 
 
 
Agency mortgage-backed securities
$

 
$
12,634

 
$

 
$
12,634

Agency debentures

 
788

 

 
788

US Treasuries

 
407

 

 
407

Agency debt securities

 
24

 

 
24

Municipal bonds

 
32

 

 
32

Total debt securities

 
13,885

 

 
13,885

Publicly traded equity securities
7

 

 

 
7

Total available-for-sale securities
7

 
13,885

 

 
13,892

Other assets:
 
 
 
 
 
 
 
Derivative assets(1)

 
165

 

 
165

Total assets measured at fair value on a recurring basis(2)
$
7

 
$
14,050

 
$

 
$
14,057

Liabilities
 
 
 
 
 
 
 
Other liabilities:
 
 
 
 
 
 
 
Derivative liabilities(1)
$

 
$
31

 
$

 
$
31

Total liabilities measured at fair value on a recurring basis(2)
$

 
$
31

 
$

 
$
31

Nonrecurring fair value measurements:
 
 
 
 
 
 
 
Loans receivable, net:
 
 
 
 
 
 
 
One- to four-family
$

 
$

 
$
25

 
$
25

Home equity

 

 
21

 
21

Total loans receivable

 

 
46

 
46

Other assets:
 
 
 
 
 
 
 
Real estate owned

 

 
35

 
35

Total assets measured at fair value on a nonrecurring basis(3)
$

 
$

 
$
81

 
$
81

 
(1)
All derivative assets and liabilities were interest rate contracts at December 31, 2016. Information related to derivative instruments is detailed in Note 8—Derivative Instruments and Hedging Activities.
(2)
Assets and liabilities measured at fair value on a recurring basis represented 29% and less than 1% of the Company’s total assets and total liabilities, respectively, at December 31, 2016.
(3)
Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheet at December 31, 2016, and for which a fair value measurement was recorded during the period.
The following table presents losses recognized on assets measured at fair value on a nonrecurring basis during the years ended December 31, 2017 and 2016 (dollars in millions):
 
Year Ended December 31,
 
2017
 
2016
 
2015
One- to four-family
$
4

 
$
4

 
$
7

Home equity
5

 
12

 
14

Total losses on loans receivable measured at fair value
$
9

 
$
16

 
$
21


Transfers Between Levels 1, 2 and 3
For assets and liabilities measured at fair value on a recurring basis, the Company’s transfers between levels of the fair value hierarchy are deemed to have occurred at the beginning of the reporting period on a quarterly basis. The Company had no transfers between levels during the years ended December 31, 2017 and 2016.
Recurring Fair Value Measurements Categorized within Level 3
For the periods presented, no assets or liabilities measured at fair value on a recurring basis were categorized within Level 3 of the fair value hierarchy.
Fair Value of Financial Instruments Not Carried at Fair Value
The following table summarizes the carrying values, fair values and fair value hierarchy level classification of financial instruments that are not carried at fair value on the consolidated balance sheet at December 31, 2017 and 2016 (dollars in millions):
 
December 31, 2017
 
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
Assets
 
 
 
 
 
 
 
 
 
Cash and equivalents
$
931

 
$
931

 
$

 
$

 
$
931

Cash required to be segregated under federal or other regulations
$
872

 
$
872

 
$

 
$

 
$
872

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
Agency mortgage-backed securities
$
20,502

 
$

 
$
20,404

 
$

 
$
20,404

Agency debentures
710

 

 
708

 

 
708

Agency debt securities
2,615

 

 
2,595

 

 
2,595

Other
12

 

 

 
12

 
12

Total held-to-maturity securities
$
23,839

 
$

 
$
23,707

 
$
12

 
$
23,719

Margin receivables(1)
$
9,071

 
$

 
$
9,071

 
$

 
$
9,071

Loans receivable, net:
 
 
 
 
 
 
 
 
 
One- to four-family
$
1,417

 
$

 
$

 
$
1,463

 
$
1,463

Home equity
1,051

 

 

 
1,055

 
1,055

Consumer and other
186

 

 

 
187

 
187

Total loans receivable, net(2)
$
2,654

 
$

 
$

 
$
2,705

 
$
2,705

Receivables from brokers, dealers and clearing organizations(1)
$
878

 
$

 
$
878

 
$

 
$
878

Other assets(1)(3)
$
18

 
$

 
$
18

 
$

 
$
18

Liabilities
 
 
 
 
 
 
 
 
 
Deposits
$
42,742

 
$

 
$
42,741

 
$

 
$
42,741

Customer payables
$
9,449

 
$

 
$
9,449

 
$

 
$
9,449

Payables to brokers, dealers and clearing organizations
$
1,542

 
$

 
$
1,542

 
$

 
$
1,542

Other borrowings:
 
 
 
 
 
 
 
 
 
FHLB advances
$
500

 
$

 
$
500

 
$

 
$
500

Trust preferred securities
$
410

 
$

 
$

 
$
379

 
$
379

Total other borrowings
$
910


$


$
500


$
379


$
879

Corporate debt
$
991

 
$

 
$
992

 
$

 
$
992

(1)
The fair value of securities that the Company received as collateral in connection with margin receivables and securities borrowing activities, including the fully paid lending program, where the Company is permitted to sell or re-pledge the securities, was approximately $12.8 billion at December 31, 2017. Of this amount, $3.2 billion had been pledged or sold in connection with securities loaned and deposits with clearing organizations at December 31, 2017.
(2)
The carrying value of loans receivable, net includes the allowance for loan losses of $74 million and loans that are recorded at fair value on a nonrecurring basis at December 31, 2017.
(3)
The $18 million in other assets at December 31, 2017 represents securities borrowing from customers under the fully paid lending program.
 
December 31, 2016
 
Carrying
Value
 
Level 1
 
Level 2
 
Level 3
 
Total
Fair Value
Assets
 
 
 
 
 
 
 
 
 
Cash and equivalents
$
1,950

 
$
1,950

 
$

 
$

 
$
1,950

Cash required to be segregated under federal or other regulations
$
1,460

 
$
1,460

 
$

 
$

 
$
1,460

Held-to-maturity securities:
 
 
 
 
 
 
 
 
 
Agency mortgage-backed securities
$
12,868

 
$

 
$
12,839

 
$

 
$
12,839

Agency debentures
29

 

 
29

 

 
29

Agency debt securities
2,854

 

 
2,848

 

 
2,848

Total held-to-maturity securities
$
15,751

 
$

 
$
15,716

 
$

 
$
15,716

Margin receivables(1)
$
6,731

 
$

 
$
6,731

 
$

 
$
6,731

Loans receivable, net:
 
 
 
 
 
 
 
 
 
One- to four-family
$
1,918

 
$

 
$

 
$
1,942

 
$
1,942

Home equity
1,385

 

 

 
1,311

 
1,311

Consumer and other
248

 

 

 
249

 
249

Total loans receivable, net(2)
$
3,551

 
$

 
$

 
$
3,502

 
$
3,502

Receivables from brokers, dealers and clearing organizations
$
1,056

 
$

 
$
1,056

 
$

 
$
1,056

Liabilities
 
 
 
 
 
 
 
 
 
Deposits
$
31,682

 
$

 
$
31,681

 
$

 
$
31,681

Customer Payables
$
8,159

 
$

 
$
8,159

 
$

 
$
8,159

Payables to brokers, dealers and clearing organizations
$
983

 
$

 
$
983

 
$

 
$
983

Trust preferred securities
$
409

 
$

 
$

 
$
288

 
$
288

Corporate debt
$
994

 
$

 
$
1,050

 
$

 
$
1,050

 
(1)
The fair value of securities that the Company received as collateral in connection with margin receivables and securities borrowing activities, where the Company is permitted to sell or re-pledge the securities, was approximately $9.8 billion at December 31, 2016. Of this amount, $2.0 billion had been pledged or sold in connection with securities loaned and deposits with clearing organizations at December 31, 2016.
(2)
The carrying value of loans receivable, net includes the allowance for loan losses of $221 million and loans that are recorded at fair value on a nonrecurring basis at December 31, 2016.
The fair value measurement techniques for financial instruments not carried at fair value on the consolidated balance sheet are summarized as follows:
Cash and equivalents, cash required to be segregated under federal or other regulations, margin receivables, receivables from brokers, dealers and clearing organizations, customer payables, payables to brokers, dealers and clearing organizations and other assets—Due to their short term nature, fair value is estimated to be carrying value.
Held-to-maturity securities—Fair value of held-to-maturity securities is determined in a manner consistent with the pricing of available-for-sale securities described above.
Loans receivable, net—Fair value is estimated using a discounted cash flow model. Loans are differentiated based on their individual portfolio characteristics, such as product classification, loan category and pricing features. Assumptions for expected losses, prepayments, cash flows and discount rates are adjusted to reflect the individual characteristics of the loans, such as credit risk, coupon, lien position, and payment characteristics, as well as the secondary market conditions for these types of loans.
Although the market for one- to four-family and home equity loan portfolios has improved, given the lack of observability of valuation inputs, these fair value measurements cannot be determined with precision and changes in the underlying assumptions used, including discount rates, could significantly affect the results of current or future fair value estimates. In addition, the amount that would be realized in a forced liquidation, an actual sale or immediate settlement could be lower than both the carrying value and the estimated fair value of the portfolio.
Deposits—Fair value of certificates of deposit is estimated using a discounted cash flow model. For the remainder of deposits, fair value is the amount payable on demand at the reporting date.
Securities sold under agreements to repurchase and FHLB advances—Fair value for securities sold under agreements to repurchase and FHLB advances was determined by discounting future cash flows using discount factors derived from current observable rates implied for other similar instruments with similar remaining maturities.
Trust preferred securities—Fair value is estimated by discounting future cash flows at the yield implied by dealer pricing quotes.
Corporate debt—Fair value is estimated using dealer pricing quotes.
Fair Value of Commitments and Contingencies
In the normal course of business, the Company makes various commitments to extend credit and incur contingent liabilities that are not reflected in the consolidated balance sheet. Changes in the economy or interest rates may influence the impact that these commitments and contingencies have on the Company in the future. The Company does not estimate the fair value of those commitments. Information related to such commitments and contingent liabilities is included in Note 20—Commitments, Contingencies and Other Regulatory Matters.