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Fair Value Disclosures

12 Months Ended

Dec. 31, 2019

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

Agency Debt and Mortgage-backed Securities

The Company’s agency mortgage-backed securities portfolio is comprised of debt 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.

The fair value measurements of agency debentures and other 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.

US Treasuries

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 greater 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.

Non-agency Debt Securities

The Company's non-agency debt securities include senior classes of commercial mortgage-backed securities and ABS collateralized by credit card, automobile loan and student loan receivables. The fair value of non-agency debt securities was determined using a market approach with recent transactions and spread data for identical or similar instruments. Non-agency debt securities were categorized in Level 2 of the fair value hierarchy.

The Company sold its municipal bonds during the three months ended March 31, 2019. As of December 31, 2018, these securities were valued using a market approach with pricing service valuations corroborated by recent market transactions for identical or similar bonds and were categorized in Level 2 of the fair value hierarchy.

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.

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.

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:



	Unobservable Inputs	Average		Range
December 31, 2019:
Loans receivable:
One- to four-family	Appraised value	$	815,900	$92,000 - $2,700,000
Home equity	Appraised value	$	437,300	$75,000 - $1,440,000
Real estate owned	Appraised value	$	391,700	$80,000 - $897,000

December 31, 2018:
Loans receivable:
One- to four-family	Appraised value	$	594,700	$17,000 - $2,000,000
Home equity	Appraised value	$	397,700	$73,000 - $1,060,000
Real estate owned	Appraised value	$	329,500	$57,900 - $900,000

Recurring and Nonrecurring Fair Value Measurements

The following tables present the significant components of assets and liabilities measured at fair value (dollars in millions):



	Level 1		Level 2		Level 3		Total Fair Value
December 31, 2019:
Recurring fair value measurements:
Assets
Available-for-sale securities:
Agency mortgage-backed securities	$	—	$	17,035	$	—	$	17,035
Agency debentures	—		659		—		659
US Treasuries	—		1,227		—		1,227
Non-agency asset-backed securities	—		417		—		417
Non-agency mortgage-backed securities	—		163		—		163
Total available-for-sale securities	—		19,501		—		19,501
Total assets measured at fair value on a recurring basis⁽¹⁾	$	—	$	19,501	$	—	$	19,501
Nonrecurring fair value measurements:
Loans receivable, net:
One- to four-family	$	—	$	—	$	14	$	14
Home equity	—		—		4		4
Total loans receivable	—		—		18		18
Other assets:
Real estate owned	—		—		12		12
Total assets measured at fair value on a nonrecurring basis⁽²⁾	$	—	$	—	$	30	$	30


(1)	Assets measured at fair value on a recurring basis represented 32% of the Company’s total assets at December 31, 2019.


(2)	Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheet at December 31, 2019, and for which a fair value measurement was recorded during the period.



	Level 1		Level 2		Level 3		Total Fair Value
December 31, 2018:
Recurring fair value measurements:
Assets
Available-for-sale securities:
Agency mortgage-backed securities	$	—	$	22,162	$	—	$	22,162
Agency debentures	—		839		—		839
Agency debt securities	—		139		—		139
Municipal bonds	—		12		—		12
Other	—		1		—		1
Total available-for-sale securities	—		23,153		—		23,153
Derivative assets⁽¹⁾	—		1		—		1
Total assets measured at fair value on a recurring basis⁽²⁾	$	—	$	23,154	$	—	$	23,154
Nonrecurring fair value measurements:
Loans receivable, net:
One- to four-family	$	—	$	—	$	17	$	17
Home equity	—		—		6		6
Total loans receivable	—		—		23		23
Other assets:
Real estate owned	—		—		10		10
Total assets measured at fair value on a nonrecurring basis⁽³⁾	$	—	$	—	$	33	$	33


(1)	All derivative assets were interest rate contracts at December 31, 2018. Information related to derivative instruments is detailed in Note 8—Derivative Instruments and Hedging Activities.


(2)	Assets measured at fair value on a recurring basis represented 36% of the Company’s total assets at December 31, 2018.


(3)	Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheet at December 31, 2018, and for which a fair value measurement was recorded during the period.

Gains and losses on assets measured at fair value on a nonrecurring basis were not material for the periods presented.

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. The Company had no transfers between levels during the periods presented.

Fair Value of Financial Instruments Not Carried at Fair Value

The following tables present 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 (dollars in millions):



	December 31, 2019
	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
Assets
Cash and equivalents	$	750	$	750	$	—	$	—	$	750
Cash segregated under federal or other regulations	$	1,879	$	1,879	$	—	$	—	$	1,879
Held-to-maturity securities:
Agency mortgage-backed securities	$	20,085	$	—	$	20,329	$	—	$	20,329
Agency debentures	267		—		271		—		271
Agency debt securities	1,617		—		1,646		—		1,646
Total held-to-maturity securities	$	21,969	$	—	$	22,246	$	—	$	22,246
Margin receivables⁽¹⁾	$	9,675	$	—	$	9,675	$	—	$	9,675
Loans receivable, net:
One- to four-family	$	802	$	—	$	—	$	835	$	835
Home equity	624		—		—		659		659
Securities-based lending	169		—		169		—		169
Total loans receivable, net⁽²⁾	$	1,595	$	—	$	169	$	1,494	$	1,663
Receivables from brokers, dealers and clearing organizations⁽¹⁾	$	1,395	$	—	$	1,395	$	—	$	1,395
Other assets⁽¹⁾⁽³⁾	$	313	$	—	$	313	$	—	$	313
Liabilities
Deposits	$	38,606	$	—	$	38,605	$	—	$	38,605
Customer payables	$	12,849	$	—	$	12,849	$	—	$	12,849
Payables to brokers, dealers and clearing organizations	$	893	$	—	$	893	$	—	$	893
Corporate debt	$	1,410	$	—	$	1,485	$	—	$	1,485

(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 $14.0 billion at December 31, 2019. Of this amount, $2.1 billion had been pledged or sold in connection with securities loaned and deposits with clearing organizations at December 31, 2019.


(2)	The carrying value of loans receivable, net includes the allowance for loan losses of $17 million and loans that are recorded at fair value on a nonrecurring basis at December 31, 2019.


(3)	Includes $200 million of securities purchased under agreements to resell and $113 million of securities borrowing from customers under the fully paid lending program. The fair value of the securities that the Company received as collateral for securities purchased under agreements to resell was $206 million at December 31, 2019.



	December 31, 2018
	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
Assets
Cash and equivalents	$	2,333	$	2,333	$	—	$	—	$	2,333
Cash segregated under federal or other regulations	$	1,011	$	1,011	$	—	$	—	$	1,011
Held-to-maturity securities:
Agency mortgage-backed securities	$	18,085	$	—	$	17,748	$	—	$	17,748
Agency debentures	1,824		—		1,808		—		1,808
Agency debt securities	1,975		—		1,935		—		1,935
Total held-to-maturity securities	$	21,884	$	—	$	21,491	$	—	$	21,491
Margin receivables⁽¹⁾	$	9,560	$	—	$	9,560	$	—	$	9,560
Loans receivable, net:
One- to four-family	$	1,069	$	—	$	—	$	1,099	$	1,099
Home equity	810		—		—		825		825
Consumer	117		—		—		115		115
Securities-based lending	107		—		107		—		107
Total loans receivable, net⁽²⁾	$	2,103	$	—	$	107	$	2,039	$	2,146
Receivables from brokers, dealers and clearing organizations⁽¹⁾	$	760	$	—	$	760	$	—	$	760
Other assets⁽¹⁾⁽³⁾	$	36	$	—	$	36	$	—	$	36
Liabilities
Deposits	$	45,313	$	—	$	45,313	$	—	$	45,313
Customer payables	$	10,117	$	—	$	10,117	$	—	$	10,117
Payables to brokers, dealers and clearing organizations	$	948	$	—	$	948	$	—	$	948
Corporate debt	$	1,409	$	—	$	1,372	$	—	$	1,372

(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 $12.9 billion at December 31, 2018. Of this amount, $2.3 billion had been pledged or sold in connection with securities loaned and deposits with clearing organizations at December 31, 2018.


(2)	The carrying value of loans receivable, net includes the allowance for loan losses of $37 million and loans that are recorded at fair value on a nonrecurring basis at December 31, 2018.


(3)	The $36 million in other assets at December 31, 2018 represents securities borrowing from customers under the fully paid lending program.

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.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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