Fair Value Measurements

3 Months Ended

Mar. 31, 2020

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. Accounting Standards Codification ("ASC") Topic 820, Fair Value Measurement, provides a three-level hierarchy for classifying financial instruments, which is based on whether the inputs to the valuation techniques used to measure the fair value of each financial instrument are observable or unobservable. It also requires certain disclosures about those measurements. The three-level valuation hierarchy is as follows:


•	Level 1: Fair values determined by Level 1 inputs are defined as those that utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access.

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Level 2: Fair values determined by Level 2 inputs are those that utilize inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active or inactive markets, quoted prices for the identical assets in an inactive market, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. The Company evaluates factors such as the frequency of transactions, the size of the bid-ask spread and the significance of adjustments made when considering transactions involving similar assets or liabilities to assess the relevance of those observed prices. If relevant and observable prices are available, the fair values of the related assets or liabilities would be classified as Level 2.

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Level 3: Fair values determined by Level 3 inputs are those based on unobservable inputs and include situations where there is little, if any, market activity for the asset or liability being valued. In instances in which the inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety is classified is based on the lowest level input that is significant to the fair value measurement in its entirety. The Company may utilize both observable and unobservable inputs in determining the fair values of financial instruments classified within the Level 3 category.

The determination of classification of its financial instruments within the fair value hierarchy is performed at least quarterly by the Company. For transfers in and out of the levels of the fair value hierarchy, the Company discloses the fair value measurement based on the value immediately preceding the transfer.

The Company's assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and involves consideration of factors specific to the asset or liability. Furthermore, certain techniques used to measure fair value involve some degree of judgment and, as a result, are not necessarily indicative of the amounts the Company would realize in a current market exchange.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Assets and liabilities measured at fair value on a recurring basis are as follows (dollars in millions):

	Quoted Price in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total
Balance at March 31, 2020
Assets
Fair value - OCI
U.S. Treasury securities	$	10,110	$	—	$	—	$	10,110
Residential mortgage-backed securities - Agency	—		393		—		393
Available-for-sale investment securities	$	10,110	$	393	$	—	$	10,503

Fair value - Net income
Derivative financial instruments - fair value hedges⁽¹⁾	$	—	$	1	$	—	$	1

Liabilities
Fair value - OCI
Derivative financial instruments - cash flow hedges⁽¹⁾	$	—	$	9	$	—	$	9

Fair value - Net income
Derivative financial instruments - fair value hedges⁽¹⁾	$	—	$	1	$	—	$	1

Balance at December 31, 2019
Assets
Fair value - OCI
U.S. Treasury securities	$	9,906	$	—	$	—	$	9,906
Residential mortgage-backed securities - Agency	—		417		—		417
Available-for-sale investment securities	$	9,906	$	417	$	—	$	10,323

Liabilities
Fair value - OCI
Derivative financial instruments - cash flow hedges⁽¹⁾	$	—	$	2	$	—	$	2

Fair value - Net income
Derivative financial instruments - fair value hedges⁽¹⁾	$	—	$	4	$	—	$	4
Derivative financial instruments - foreign exchange forward contracts⁽¹⁾	$	—	$	1	$	—	$	1


(1)	Derivative instrument carrying values in an asset or liability position are presented as part of other assets or accrued expenses and other liabilities, respectively, in the Company's condensed consolidated statements of financial condition.

Available-for-Sale Investment Securities

Investment securities classified as available-for-sale consist of U.S. Treasury securities and residential mortgage-backed securities. The fair value estimates of investment securities classified as Level 1, consisting of U.S. Treasury securities, are determined based on quoted market prices for the same securities. The Company classifies residential mortgage-backed securities as Level 2, the fair value estimates of which are based on the best information available. This data may consist of observed market prices, broker quotes or discounted cash flow models that incorporate assumptions such as benchmark yields, issuer spreads, prepayment speeds, credit ratings and losses, the priority of which may vary based on availability of information.

The Company validates the fair value estimates provided by pricing services primarily by comparison to valuations obtained through other pricing sources. The Company evaluates pricing variances amongst different pricing sources to ensure

that the valuations utilized are reasonable. The Company also corroborates the reasonableness of the fair value estimates with analysis of trends of significant inputs, such as market interest rate curves. The Company further performs due diligence in understanding the procedures and techniques performed by the pricing services to derive fair value estimates.

At March 31, 2020, amounts reported in residential mortgage-backed securities reflect government-rated obligations issued by Fannie Mae, Freddie Mac and Ginnie Mae with a par value of $377 million, a weighted-average coupon of 2.81% and a weighted-average remaining maturity of three years.

Derivative Financial Instruments

The Company's derivative financial instruments consist of interest rate swaps and foreign exchange forward contracts. These instruments are classified as Level 2 as their fair values are estimated using proprietary pricing models, containing certain assumptions based on readily observable market-based inputs, including interest rate curves, option volatility and foreign currency forward and spot rates. In determining fair values, the pricing models use widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity and the observable market-based inputs. The fair values of the interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments are based on an expectation of future interest rates derived from the observable market interest rate curves. The Company considers collateral and master netting agreements that mitigate credit exposure to counterparties in determining the counterparty credit risk valuation adjustment. The fair values of the currency instruments are valued comparing the contracted forward exchange rate pertaining to the specific contract maturities to the current market exchange rate.

The Company validates the fair value estimates of interest rate swaps primarily through comparison to the fair value estimates computed by the counterparties to each of the derivative transactions. The Company evaluates pricing variances amongst different pricing sources to ensure that the valuations utilized are reasonable. The Company also corroborates the reasonableness of the fair value estimates with analysis of trends of significant inputs, such as market interest rate curves. The Company performs due diligence in understanding the impact to any changes to the valuation techniques performed by proprietary pricing models prior to implementation, working closely with the third-party valuation service and reviews the control objectives of the service at least annually. The Company corroborates the fair value of foreign exchange forward contracts through independent calculation of the fair value estimates.

Assets and Liabilities Measured at Fair Value on a Non-Recurring Basis

The Company also has assets that under certain conditions are subject to measurement at fair value on a non-recurring basis. These assets include those associated with acquired businesses, including goodwill and other intangible assets. For these assets, measurement at fair value in periods subsequent to the initial recognition of the assets is applicable if one or more of the assets is determined to be impaired. The Company had no impairments related to these assets during the three months ended March 31, 2020 and 2019.

Financial Instruments Measured at Other Than Fair Value

The following tables disclose the estimated fair value of the Company's financial assets and financial liabilities that are not required to be carried at fair value (dollars in millions):

Balance at March 31, 2020	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Carrying Value
Assets
Amortized cost
Residential mortgage-backed securities - Agency	$	—	$	288	$	—	$	288	$	279
Held-to-maturity investment securities	$	—	$	288	$	—	$	288	$	279

Net loan receivables	$	—	$	—	$	93,574	$	93,574	$	86,050

Carrying value approximates fair value⁽¹⁾
Cash and cash equivalents	$	10,028	$	—	$	—	$	10,028	$	10,028
Restricted cash	$	1,183	$	—	$	—	$	1,183	$	1,183
Accrued interest receivables⁽²⁾	$	—	$	1,027	$	—	$	1,027	$	1,027

Liabilities
Amortized cost
Time deposits⁽³⁾	$	—	$	34,460	$	—	$	34,460	$	33,862

Long-term borrowings - owed to securitization investors	$	—	$	13,647	$	151	$	13,798	$	13,939
Other long-term borrowings	—		12,042		—		12,042		12,159
Long-term borrowings	$	—	$	25,689	$	151	$	25,840	$	26,098

Carrying value approximates fair value⁽¹⁾
Accrued interest payables⁽²⁾	$	—	$	220	$	—	$	220	$	220

(1) The carrying values of these assets and liabilities approximate fair value due to the nature of their liquidity (i.e., due or payable in less than one year).
(2) Accrued interest receivable and payable carrying values are presented as part of other assets or accrued expenses and other liabilities, respectively, in the Company's
condensed consolidated statements of financial condition.
(3) Excludes deposits without contractually defined maturities for all periods presented.

The following tables disclose the estimated fair value of the Company's financial assets and financial liabilities that are not required to be carried at fair value (dollars in millions):

Balance at December 31, 2019	Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)		Total		Carrying Value
Assets
Amortized cost
Residential mortgage-backed securities - Agency	$	—	$	274	$	—	$	274	$	272
Held-to-maturity investment securities	$	—	$	274	$	—	$	274	$	272

Net loan receivables	$	—	$	—	$	96,094	$	96,094	$	92,511

Carrying value approximates fair value⁽¹⁾
Cash and cash equivalents	$	6,924	$	—	$	—	$	6,924	$	6,924
Restricted cash	$	40	$	—	$	—	$	40	$	40
Accrued interest receivables⁽²⁾	$	—	$	1,044	$	—	$	1,044	$	1,044

Liabilities
Amortized cost
Time deposits⁽³⁾	$	—	$	34,910	$	—	$	34,910	$	34,381

Long-term borrowings - owed to securitization investors	$	—	$	14,211	$	172	$	14,383	$	14,284
Other long-term borrowings	—		12,189		—		12,189		11,417
Long-term borrowings	$	—	$	26,400	$	172	$	26,572	$	25,701

Carrying value approximates fair value⁽¹⁾
Accrued interest payables⁽²⁾	$	—	$	283	$	—	$	283	$	283


(1)	The carrying values of these assets and liabilities approximate fair value due to the nature of their liquidity (i.e., due or payable in less than one year).


(2)	Accrued interest receivable and payable carrying values are presented as part of other assets or accrued expenses and other liabilities, respectively, in the Company's condensed consolidated statements of financial condition.

(3)

Excludes deposits without contractually defined maturities for all periods presented.

- 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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