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FAIR VALUE

9 Months Ended

Sep. 30, 2020

Fair value measurement requires that valuation techniques maximize the use of observable inputs and minimize the use of unobservable inputs, and also establishes a fair value hierarchy that categorizes the inputs to valuation techniques used to measure fair value into three levels as follows:

•Level 1 inputs are quoted prices in active markets for identical assets or liabilities that can be accessed as of the measurement date. Active markets are those in which transactions for the asset or liability occur in sufficient frequency and volume to provide pricing information on an ongoing basis.

•Level 2 inputs are those other than quoted prices included in Level 1 that are observable for the assets or liabilities, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.

•Level 3 inputs are those that are unobservable or not readily observable for the asset or liability and are used to measure fair value to the extent relevant observable inputs are not available.

Assets and liabilities measured at fair value, by their nature, result in a higher degree of financial statement volatility. When available, the Company uses quoted market prices or matrix pricing in active markets to determine fair value and classifies such items as Level 1 or Level 2 assets or liabilities. If quoted market prices in active markets are not available, fair value is determined using third-party broker quotes and/or DCF models incorporating various assumptions including interest rates, prepayment speeds and credit losses. Assets and liabilities valued using broker quotes and/or DCF models are classified as either Level 2 or Level 3, depending on the lowest level classification of an input that is considered significant to the overall valuation.

NOTE 12. FAIR VALUE (continued)

The Company values assets and liabilities based on the principal market in which each would be sold (in the case of assets) or transferred (in the case of liabilities). The principal market is the forum with the greatest volume and level of activity. In the absence of a principal market, the valuation is based on the most advantageous market. In the absence of observable market transactions, the Company considers liquidity valuation adjustments to reflect the uncertainty in pricing the instruments. The fair value of a financial asset is measured on a stand-alone basis and cannot be measured as a group, with the exception of certain financial instruments held and managed on a net portfolio basis. In measuring the fair value of a nonfinancial asset, the Company assumes the highest and best use of the asset by a market participant, not just the intended use, to maximize the value of the asset. The Company also considers whether any credit valuation adjustments are necessary based on the counterparty's credit quality.

Any models used to determine fair values or validate dealer quotes based on the descriptions below are subject to review and testing as part of the Company's model validation and internal control testing processes.

The Company's Market Risk Department is responsible for determining and approving the fair values of all assets and liabilities valued at fair value, including the Company's Level 3 assets and liabilities. Price validation procedures are performed and the results are reviewed for Level 3 assets and liabilities by the Market Risk Department. Price validation procedures performed for these assets and liabilities can include comparing current prices to historical pricing trends by collateral type and vintage, comparing prices by product type to indicative pricing grids published by market makers, and obtaining corroborating dealer prices for significant securities.

The Company reviews the assumptions utilized to determine fair value on a quarterly basis. Any changes in methodologies or significant inputs used in determining fair values are further reviewed to determine if a change in fair value level hierarchy has occurred.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables present the assets and liabilities that are measured at fair value on a recurring basis by major product category and fair value hierarchy as of September 30, 2020 and December 31, 2019.


(in thousands)	Level 1		Level 2		Level 3		Balance at September 30, 2020		Level 1		Level 2		Level 3		Balance at December 31, 2019
Financial assets:
U.S. Treasury securities	$	—	$	215,654	$	—	$	215,654	$	—	$	4,090,938	$	—	$	4,090,938
Corporate debt	—		172,908		—		172,908		—		139,713		—		139,713
ABS	—		60,575		50,566		111,141		—		75,165		63,235		138,400
State and municipal securities	—		3		—		3		—		9		—		9
MBS	—		10,579,266		—		10,579,266		—		9,970,698		—		9,970,698
Investment in debt securities AFS(3)	—		11,028,406		50,566		11,078,972		—		14,276,523		63,235		14,339,758
Other investments - trading securities	2,359		40,105		—		42,464		379		718		—		1,097
RICs HFI(4)	—		—		61,448		61,448		—		17,634		84,334		101,968
LHFS (1)(5)	—		240,190		—		240,190		—		289,009		—		289,009
MSRs (2)	—		—		81,776		81,776		—		—		130,855		130,855
Other assets - derivatives (3)	—		1,387,232		16,367		1,403,599		—		553,222		3,109		556,331










Total financial assets (6)	$	2,359	$	12,695,933	$	210,157	$	12,908,449	$	379	$	15,137,106	$	281,533	$	15,419,018
Financial liabilities:
Other liabilities - derivatives (3)	—		1,214,548		5,837		1,220,385		—		543,560		2,854		546,414










Total financial liabilities	$	—	$	1,214,548	$	5,837	$	1,220,385	$	—	$	543,560	$	2,854	$	546,414

(1) LHFS disclosed on the Condensed Consolidated Balance Sheets also includes LHFS that are held at the lower of cost or fair value and are not presented within this table.

(2) The Company had total MSRs of $81.8 million and $132.7 million as of September 30, 2020 and December 31, 2019, respectively. The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or fair value and are not presented within this table.

(3) Refer to Note 2 for the fair value of investment securities and to Note 11 for the fair values of derivative assets and liabilities on a further disaggregated basis.

(4) RICs collateralized by vehicle titles at SC and RV/marine loans at SBNA.

(5) Residential mortgage loans.

(6) Approximately $210.2 million of these financial assets were measured using model-based techniques, or Level 3 inputs, and represented approximately 1.6% of total assets measured at fair value on a recurring basis and approximately 0.1% of total consolidated assets.

NOTE 12. FAIR VALUE (continued)

Valuation Processes and Techniques - Recurring Fair Value Assets and Liabilities

The following is a description of the valuation techniques used for instruments measured at fair value on a recurring basis:

Investments in debt securities AFS

Investments in debt securities AFS are accounted for at fair value. The Company utilizes a third-party pricing service to value its investment securities portfolios on a global basis. Its primary pricing service has consistently proved to be a high quality third-party pricing provider. For those investments not valued by pricing vendors, other trusted market sources are utilized. The Company monitors and validates the reliability of vendor pricing on an ongoing basis, which can include pricing methodology reviews, performing detailed reviews of the assumptions and inputs used by the vendor to price individual securities, and price validation testing. Price validation testing is performed independently of the risk-taking function and can include corroborating the prices received from third-party vendors with prices from another third-party source, reviewing valuations of comparable instruments, comparison to internal valuations, or by reference to recent sales of similar securities.

The classification of securities within the fair value hierarchy is based upon the activity level in the market for the security type and the observability of the inputs used to determine their fair values. Actively traded quoted market prices for debt securities AFS, such as U.S. Treasury and government agency securities, corporate debt, state and municipal securities, and MBS, are not readily available. The Company's principal markets for its investment securities are the secondary institutional markets with an exit price that is predominantly reflective of bid-level pricing in these markets. These investment securities are priced by third-party pricing vendors. The third-party vendors use a variety of methods when pricing these securities that incorporate relevant observable market data to arrive at an estimate of what a buyer in the marketplace would pay for a security under current market conditions. These investment securities are, therefore, considered Level 2.

Certain ABS are valued using DCF models. The DCF models are obtained from a third-party pricing vendor which uses observable market data and therefore are classified as Level 2. Other ABS that could not be valued using a third-party pricing service are valued using an internally-developed DCF model and are classified as Level 3.

Realized gains and losses on investments in debt securities are recognized in the Condensed Consolidated Statements of Operations through Net gain(loss) on sale of investment securities.

RICs HFI

For certain RICs reported in LHFI, net, the Company has elected the FVO. At December 31, 2019, the Company has used the most recent purchase price as the fair value for certain loans and hence classified those RICs as Level 2. The estimated fair value of the all RICs HFI at September 30, 2020 is estimated using a DCF model and are classified as Level 3.

LHFS

The Company's LHFS portfolios that are measured at fair value on a recurring basis consist primarily of residential mortgage LHFS. The fair values of LHFS are estimated using published forward agency prices to agency buyers such as FNMA and FHLMC. The majority of the residential mortgage LHFS portfolio is sold to these two agencies. The fair value is determined using current secondary market prices for portfolios with similar characteristics, adjusted for servicing values and market conditions.

These loans are regularly traded in active markets, and observable pricing information is available from market participants. The prices are adjusted as necessary to include the embedded servicing value in the loans as well as the specific characteristics of certain loans that are priced based on the pricing of similar loans. These adjustments represent unobservable inputs to the valuation, and are not significant given the relative insensitivity of the value to changes in these inputs to the fair value of the loans. Accordingly, residential mortgage LHFS are classified as Level 2. Gains and losses on residential mortgage LHFS are recognized in the Condensed Consolidated Statements of Operations through Miscellaneous income, net. See further discussion below in the section captioned "FVO for Financial Assets and Financial Liabilities."

NOTE 12. FAIR VALUE (continued)

MSRs

The model to value MSRs estimates the present value of the future net cash flows from mortgage servicing activities based on various assumptions. These cash flows include servicing and ancillary revenue, offset by the estimated costs of performing servicing activities. Significant assumptions used in the valuation of residential MSRs include CPRs and the discount rate, reflective of a market participant's required return on an investment for similar assets. Other important valuation assumptions include market-based servicing costs and the anticipated earnings on escrow and similar balances held by the Company in the normal course of mortgage servicing activities. All of these assumptions are considered to be unobservable inputs. Historically, servicing costs and discount rates have been less volatile than CPR and earnings rates, both of which are directly correlated with changes in market interest rates. Increases in prepayment speeds, discount rates and servicing costs result in lower valuations of MSRs. Decreases in the anticipated earnings rate on escrow and similar balances result in lower valuations of MSRs. For each of these items, the Company makes assumptions based on current market information and future expectations. All of the assumptions are based on standards that the Company believes would be utilized by market participants in valuing MSRs and are derived and/or benchmarked against independent public sources. Accordingly, MSRs are classified as Level 3. Gains and losses on MSRs are recognized on the Condensed Consolidated Statements of Operations through Miscellaneous income, net.

Listed below are the most significant inputs that are utilized by the Company in the evaluation of residential MSRs:

• A 10% and 20% increase in the CPR speed would decrease the fair value of the residential servicing asset by $4.7 million and $9.0 million, respectively, at September 30, 2020.

•A 10% and 20% increase in the discount rate would decrease the fair value of the residential servicing asset by $2.3 million and $4.5 million, respectively, at September 30, 2020.

Significant increases/(decreases) in any of those inputs in isolation would result in significantly (lower)/higher fair value measurements, respectively. These sensitivity calculations are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the MSRs is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another, which may either magnify or counteract the effect of the change. Prepayment estimates generally increase when market interest rates decline and decrease when market interest rates rise. Discount rates typically increase when market interest rates increase and/or credit and liquidity risks increase, and decrease when market interest rates decline and/or credit and liquidity conditions improve.

Derivatives

The valuation of these instruments is determined using commonly accepted valuation techniques, including DCF analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable and unobservable market-based inputs. The fair value represents the estimated amount the Company would receive or pay to terminate the contract or agreement, taking into account current interest rates, foreign exchange rates, equity prices and, when appropriate, the current creditworthiness of the counterparties.

The Company incorporates credit valuation adjustments in the fair value measurement of its derivatives to reflect the counterparty's nonperformance risk in the fair value measurement of its derivatives, except for those derivative contracts with associated credit support annexes which provide credit enhancements, such as collateral postings and guarantees.

The Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy. Certain of the Company's derivatives utilize Level 3 inputs, which are primarily related to mortgage banking derivatives-interest rate lock commitments and total return settlement derivative contracts.

NOTE 12. FAIR VALUE (continued)

The DCF model is utilized to determine the fair value of the mortgage banking derivatives-interest rate lock commitments and the total return settlement derivative contracts. The significant unobservable inputs for mortgage banking derivatives used in the fair value measurement of the Company's loan commitments are "pull through" percentage and the MSR value that is inherent in the underlying loan value. The pull through percentage is an estimate of loan commitments that will result in closed loans. The significant unobservable inputs for total return settlement derivative contracts used in the fair value measurement of the Company's liabilities are discount percentages, which are based on comparable financial instruments. Significant increases (decreases) in any of these inputs in isolation would result in significantly higher (lower) fair value measurements. Significant increases (decreases) in the fair value of a mortgage banking derivative asset (liability) results when the probability of funding increases (decreases). Significant increases (decreases) in the fair value of a mortgage loan commitment result when the embedded servicing value increases (decreases).

Gains and losses related to derivatives affect various line items in the Condensed Consolidated Statements of Operations. See Note 11 to these Consolidated Financial Statements for a discussion of derivatives activity.

Level 3 Rollforward for Assets and Liabilities Measured at Fair Value on a Recurring Basis

The tables below present the changes in Level 3 balances for the three-month and nine-month periods ended September 30, 2020 and 2019, respectively, for those assets and liabilities measured at fair value on a recurring basis.


	Three-Month Period Ended September 30, 2020								Three-Month Period Ended September 30, 2019
(in thousands)	Investments AFS		RICs HFI		MSRs		Derivatives, net		Total		Investments AFS		RICs HFI		MSRs		Derivatives, net		Total
Balances, beginning of period	$	50,664	$	72,862	$	88,674	$	9,970	$	222,170	$	324,979	$	104,193	$	129,913	$	1,939	$	561,024
Losses in OCI	(97)		—		—		—		(97)		(634)		—		—		—		(634)
Gains/(losses) in earnings	—		3,895		(2,834)		495		1,556		—		2,841		(8,878)		(2,395)		(8,432)
Additions/Issuances	—		—		3,365		—		3,365		—		—		10,353		—		10,353
Settlements(1)	(1)		(15,309)		(7,429)		65		(22,674)		(250,815)		(13,641)		(4,897)		117		(269,236)
Balances, end of period	$	50,566	$	61,448	$	81,776	$	10,530	$	204,320	$	73,530	$	93,393	$	126,491	$	(339)	$	293,075
Changes in unrealized gains (losses) included in earnings related to balances still held at end of period	$	—	$	3,895	$	(2,834)	$	812	$	1,873	$	—	$	2,841	$	(8,878)	$	(2,022)	$	(8,059)

	Nine-Month Period Ended September 30, 2020								Nine-Month Period Ended September 30, 2019
(in thousands)	Investments AFS		RICs HFI		MSRs		Derivatives, net		Total		Investments AFS		RICs HFI		MSRs		Derivatives, net		Total
Balances, beginning of period	$	63,235	$	84,334	$	130,855	$	255	$	278,679	$	327,199	$	126,312	$	149,660	$	1,866	$	605,037
Losses in OCI(2)	(416)		—		—		—		(416)		(2,136)		—		—		—		(2,136)
Gains/(losses) in earnings	—		10,845		(38,457)		10,045		(17,567)		—		9,793		(32,815)		(2,496)		(25,518)
Additions/Issuances	—		2,512		9,788		—		12,300		—		2,079		21,456		—		23,535
Transfer from level 2(3)	—		17,634		—		—		17,634		—		—		—		—		—
Settlements(1)	(12,253)		(53,877)		(20,410)		230		(86,310)		(251,533)		(44,791)		(11,810)		291		(307,843)
Balances, end of period	$	50,566	$	61,448	$	81,776	$	10,530	$	204,320	$	73,530	$	93,393	$	126,491	$	(339)	$	293,075
Changes in unrealized gains (losses) included in earnings related to balances still held at end of period	$	—	$	10,845	$	(38,457)	$	(3,031)	$	(30,643)	$	—	$	9,793	$	(32,815)	$	(3,917)	$	(26,939)

(1)Settlements include charge-offs, prepayments, paydowns and maturities.

(2)Losses in OCI during the three-month period ended September 30, 2020 increased by $0.1 million from the prior reporting date of June 30, 2020.

(3)The Company transferred RIC's from Level 2 to Level 3 during 2020 because the fair value for these assets cannot be determined by using readily observable inputs as of September 30, 2020. There were no other transfers into or out of Level 3 during the three-month and nine-month periods ended September 30, 2020 and 2019.

NOTE 12. FAIR VALUE (continued)

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The Company may be required to measure certain assets and liabilities at fair value on a nonrecurring basis in accordance with GAAP from time to time. These adjustments to fair value usually result from application of lower-of-cost-or-fair value accounting or certain impairment measures. Assets measured at fair value on a nonrecurring basis that were still held on the balance sheet were as follows:


(in thousands)	Level 1		Level 2		Level 3		Balance at September 30, 2020		Level 1		Level 2		Level 3		Balance at December 31, 2019
Impaired commercial LHFI	$	—	$	47,237	$	160,798	$	208,035	$	—	$	133,640	$	356,220	$	489,860
Foreclosed assets	—		9,926		34,739		44,665		—		17,168		51,080		68,248
Vehicle inventory	—		374,071		—		374,071		—		346,265		—		346,265
LHFS(1)	—		—		907,389		907,389		—		—		1,131,214		1,131,214
Auto loans impaired due to bankruptcy	—		188,226		—		188,226		—		200,504		503		201,007
Goodwill	—		—		350,000		350,000		—		—		—		—
MSRs	—		—		—		—		—		—		8,197		8,197

(1) These amounts include $763.3 million and $1.0 billion of personal LHFS that were impaired as of September 30, 2020 and December 31, 2019, respectively.

Valuation Processes and Techniques - Nonrecurring Fair Value Assets and Liabilities

Impaired commercial LHFI in the table above represents the recorded investment of impaired commercial loans for which the Company measures impairment during the period based on the fair value of the underlying collateral supporting the loan. Written offers to purchase a specific impaired loan are considered observable market inputs, which are considered Level 1 inputs. Appraisals are obtained to support the fair value of the collateral and incorporate measures such as recent sales prices for comparable properties and are considered Level 2 inputs. Loans for which the value of the underlying collateral is determined using a combination of real estate appraisals, field examinations and internal calculations are classified as Level 3. The inputs in the internal calculations may include the loan balance, estimation of the collectability of the underlying receivables held by the customer used as collateral, sale and liquidation value of the inventory held by the customer used as collateral and historical loss-given-default parameters. In cases in which the carrying value exceeds the fair value of the collateral less cost to sell, an impairment charge is recognized. The net carrying value of these loans was $192.7 million and $448.8 million at September 30, 2020 and December 31, 2019, respectively. Loans previously impaired which were not marked to fair value during the periods presented are excluded from this table.

Foreclosed assets represent the recorded investment in assets taken during the period presented in foreclosure of defaulted loans, and are primarily comprised of commercial and residential real properties and generally measured at fair value less costs to sell. The fair value of the real property is generally determined using appraisals or other indications of market value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace.

The Company estimates the fair value of its vehicles, which are obtained either through repossession or lease termination, using historical auction rates and current market values of used cars.

The Company's LHFS portfolios that are measured at fair value on a nonrecurring basis primarily consist of personal, commercial, and RIC LHFS. The estimated fair value of these LHFS is calculated based on a combination of estimated market rates for similar loans with similar credit risks and a DCF analysis in which the Company uses significant unobservable inputs on key assumptions, including historical default rates and adjustments to reflect voluntary prepayments, prepayment rates, discount rates reflective of the cost of funding, and credit loss expectations. The lower of cost or fair value adjustment for personal LHFS includes customer default activity and adjustments related to the net change in the portfolio balance during the reporting period.

For loans that are considered collateral-dependent, such as certain bankruptcy loans, impairment is measured based on the fair value of the collateral less its estimated cost to sell. For the underlying collateral, the estimated fair value is obtained using historical auction rates and current market levels of used car prices.

NOTE 12. FAIR VALUE (continued)

The estimated fair value of goodwill is valued using unobservable inputs and is classified as Level 3. Fair value is calculated using widely-accepted valuation techniques, such as the guideline public company market approach (earnings and price-to-tangible book value multiples of comparable public companies) and the income approach (the DCF method). The Company uses a combination of these accepted methodologies to determine the fair valuation of reporting units. Several factors are taken into account, including actual operating results, future business plans, economic projections, and market data. On a quarterly basis, the Company assesses whether or not impairment indicators are present. For information on the Company's goodwill impairment test and the results of the most recent goodwill impairment test, see Note 5 for a description of the Company's goodwill valuation methodology.

Fair Value Adjustments

The following table presents the increases and decreases in value of certain assets that are measured at fair value on a nonrecurring basis for which a fair value adjustment has been included in the Condensed Consolidated Statements of Operations relating to assets held at period-end:


		Three-Month Period Ended September 30,				Nine-Month Period Ended September 30,
(in thousands)	Statement of Operations Location	2020		2019		2020		2019
Impaired LHFI	Credit loss expense	$	(12,036)	$	(3,877)	$	(5,883)	$	(9,990)
Foreclosed assets	Miscellaneous income, net (1)	(736)		(4,014)		(3,857)		(7,798)

LHFS	Miscellaneous income, net (1)	(56,598)		(67,021)		(387,900)		(239,059)
Auto loans impaired due to bankruptcy	Credit loss expense	—		1,943		—		(9,721)
Goodwill impairment	Impairment of goodwill (1)(2)	—		—		(1,848,228)		—
MSRs	Miscellaneous income, net (1)	—		(128)		(138)		(483)

(1) Gains are disclosed as positive numbers while losses are shown as a negative number regardless of the line item being affected.

(2) In the period ended September 30, 2020, Goodwill totaling $2.2 billion was written down to its implied fair value of $350.0 million, resulting in a goodwill impairment charge of $1.8 billion.

Level 3 Inputs - Significant Recurring and Nonrecurring Fair Value Assets and Liabilities

The following table presents quantitative information about the significant unobservable inputs within significant Level 3 recurring and nonrecurring assets and liabilities at September 30, 2020 and December 31, 2019, respectively:

(dollars in thousands)

Fair Value at September 30, 2020

Valuation Technique

Unobservable Inputs

Range
(Weighted Average)

Financial Assets:

ABS

Financing bonds

50,566

DCF

Discount rate (1)

0.32% - 0.32% (0.32% )

RICs HFI

61,448

DCF

CPR (2)

6.66

Discount rate (3)

9.5% - 14.5% (11.66%)

Recovery rate (4)

25% - 43% (42.22%)

Personal LHFS (8)

763,292

Lower of market or Income approach

Market participant view

60.00% - 70.00%

Discount rate

20.00% - 30.00%

Default rate

40.00% - 50.00%

Net principal & interest payment rate

65.00% - 75.00%

Loss severity rate

90.00% - 95.00%

MSRs (7)

81,776

DCF

CPR (5)

[0.00% - 30.60%] (16.30%)

Discount rate (6)

9.38

(1) Based on the applicable term and discount index.

(2) Based on the analysis of available data from a comparable market securitization of similar assets.

(3) Based on the cost of funding of debt issuance and recent historical equity yields. Weighted average amount was developed by weighting the associated relative unpaid principal balances.

(4) Based on the average severity utilizing reported severity rates and loss severity utilizing available market data from a comparable securitized pool. Weighted average amount was developed by weighting the associated relative unpaid principal balances.

(5) Average CPR projected from collateral stratified by loan type and note rate. Weighted average amount was developed by weighting the associated relative unpaid principal balances.

(6) Average discount rate from collateral stratified by loan type and note rate. Weighted average amount was developed by weighting the associated relative unpaid principal balances.

(7) Excludes MSR valued on a non-recurring basis for which we do not consider there to be significant unobservable assumptions.

NOTE 12. FAIR VALUE (continued)

(8) Excludes non-significant Level 3 LHFS portfolios. The estimated fair value for personal LHFS (Bluestem) is calculated based on the lower of market participant view, a DCF analysis in which the Company uses significant unobservable inputs on key assumptions, and also considers the possible outcomes of the Bluestem bankruptcy process.


(dollars in thousands)	Fair Value at December 31, 2019		Valuation Technique	Unobservable Inputs	Range (Weighted Average)
Financial Assets:
ABS
Financing bonds	$	51,001	DCF	Discount rate (1)	1.64% - 1.64% (1.64% )
Sale-leaseback securities	12,234		Consensus pricing (9)	Offered quotes (10)	103.00	%
RICs HFI	84,334		DCF	CPR (2)	6.66	%
				Discount rate (3)	9.50% - 14.50% (13.16%)
				Recovery rate (4)	25% - 43% (41.12%)
Personal LHFS (8)	1,007,105		Lower of market or Income approach	Market participant view	70.00% - 80.00%
				Discount rate	15.00% - 25.00%
				Default rate	30.00% - 40.00%
				Net principal & interest payment rate	70.00% - 85.00%
				Loss severity rate	90.00% - 95.00%




MSRs (7)	130,855		DCF	CPR (5)	7.83% - 100.00% (11.97%)
				Discount rate (6)	9.63	%

(1), (2), (3), (4), (5), (6), (7), (8) - See corresponding footnotes to the September 30, 2020 Level 3 significant inputs table above.

(9) Consensus pricing refers to fair value estimates that are generally developed using information such as dealer quotes or other third-party valuations or comparable asset prices.

(10) Based on the nature of the input, a range or weighted average does not exist. The Company owns one sale-leaseback security.

Fair Value of Financial Instruments

The carrying amounts and estimated fair values, as well as the level within the fair value hierarchy, of the Company's financial instruments are as follows:


	September 30, 2020										December 31, 2019
(in thousands)	Carrying Value		Fair Value		Level 1		Level 2		Level 3		Carrying Value		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	8,871,504	$	8,871,504	$	8,871,504	$	—	$	—	$	7,644,372	$	7,644,372	$	7,644,372	$	—	$	—
Investments in debt securities AFS	11,078,972		11,078,972		—		11,028,406		50,566		14,339,758		14,339,758		—		14,276,523		63,235
Investments in debt securities HTM	5,488,576		5,668,891		—		5,668,891		—		3,938,797		3,957,227		—		3,957,227		—
Other investments (3)	792,464		792,465		2,359		790,106		—		1,097		1,097		379		718		—
LHFI, net	85,377,508		89,460,378		—		47,237		89,413,141		89,059,251		90,490,760		—		1,142,998		89,347,762
LHFS	1,147,578		1,147,579		—		240,190		907,389		1,420,223		1,420,295		—		289,009		1,131,286
Restricted cash	5,827,423		5,827,423		5,827,423		—		—		3,881,880		3,881,880		3,881,880		—		—
MSRs(1)	81,776		81,776		—		—		81,776		132,683		139,052		—		—		139,052
Derivatives	1,403,599		1,403,599		—		1,387,232		16,367		556,331		556,331		—		553,222		3,109

Financial liabilities:
Deposits (2)	4,385,602		4,421,527		—		4,421,527		—		9,375,281		9,384,994		—		9,384,994		—
Borrowings and other debt obligations	48,135,215		49,010,598		—		32,953,345		16,057,253		50,654,406		51,232,798		—		36,114,404		15,118,394
Derivatives	1,220,385		1,220,385		—		1,214,548		5,837		546,414		546,414		—		543,560		2,854

(1) The Company has elected to account for the majority of its MSR balance using the FVO, while the remainder of the MSRs are accounted for using the lower of cost or fair value.

(2) This line item excludes deposit liabilities with no defined or contractual maturities in accordance with ASU 2016-01.

(3) This line item includes CDs with a maturity greater than 90 days and investments in trading securities.

NOTE 12. FAIR VALUE (continued)

Valuation Processes and Techniques - Financial Instruments

The preceding tables present disclosures about the fair value of the Company's financial instruments. Those fair values for certain instruments are presented based upon subjective estimates of relevant market conditions at a specific point in time and information about each financial instrument. In cases in which quoted market prices are not available, fair values are based on estimates using present value or other valuation techniques. These techniques involve uncertainties resulting in variability in estimates affected by changes in assumptions and risks of the financial instruments at a certain point in time. Therefore, the derived fair value estimates presented above for certain instruments cannot be substantiated by comparison to independent markets. In addition, the fair values do not reflect any premium or discount that could result from offering for sale at one time an entity’s entire holding of a particular financial instrument, nor do they reflect potential taxes and the expenses that would be incurred in an actual sale or settlement. Accordingly, the aggregate fair value amounts presented above do not represent the underlying value of the Company.

The following methods and assumptions were used to estimate the fair value of each class of financial instruments not measured at fair value on the Condensed Consolidated Balance Sheets:

Cash, cash equivalents and restricted cash

Cash and cash equivalents include cash and due from depository institutions, interest-bearing deposits in other banks, federal funds sold, and securities purchased under agreements to resell. The related fair value measurements have been classified as Level 1, since their carrying value approximates fair value due to the short-term nature of the asset.

Restricted cash is related to cash restricted for investment purposes, cash posted for collateral purposes, cash advanced for loan purchases, and lockbox collections. Cash and cash equivalents, including restricted cash, have maturities of three months or less and, accordingly, the carrying amount of these instruments is deemed to be a reasonable estimate of fair value.

Investments in debt securities HTM

Investments in debt securities HTM are recorded at amortized cost and are priced by third-party pricing vendors. The third-party vendors use a variety of methods when pricing these securities that incorporate relevant observable market data to arrive at an estimate of what a buyer in the marketplace would pay for a security under current market conditions. These investment securities are, therefore, considered Level 2.

LHFI, net

The fair values of loans are estimated based on groupings of similar loans, including but not limited to stratifications by type, interest rate, maturity, and borrower creditworthiness. Discounted future cash flow analyses are performed for these loans incorporating assumptions of current and projected voluntary prepayment speeds. Discount rates are determined using the Company's current origination rates on similar loans, adjusted for changes in current liquidity and credit spreads (if necessary). Because the current liquidity spreads are generally not observable in the market and the expected loss assumptions are based on the Company's experience, these are Level 3 valuations. Impaired loans are valued at fair value on a nonrecurring basis. See further discussion under the section captioned "Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis" above.

LHFS

The Company has LHFS portfolios that are accounted for at the lower of cost or market. This primarily consists of RICs HFS for which the estimated fair value is based on prices obtained in recent market transactions or expected to be obtained in the subsequent sales for similar assets.

Deposits

For deposits with no stated maturity, such as non-interest-bearing and interest-bearing demand deposit accounts, savings accounts and certain money market accounts, the carrying value approximates fair values. The fair value of fixed-maturity deposits is estimated by discounting cash flows using currently offered rates for deposits of similar remaining maturities and have been classified as Level 2.

NOTE 12. FAIR VALUE (continued)

Borrowings and other debt obligations

Fair value is estimated by discounting cash flows using rates currently available to the Company for other borrowings with similar terms and remaining maturities. Certain other debt obligation instruments are valued using available market quotes for similar instruments, which contemplates issuer default risk. The related fair value measurements have generally been classified as Level 2. A certain portion of debt relating to revolving credit facilities is classified as Level 3. Management believes that the terms of these credit agreements approximate market terms for similar credit agreements and, therefore, they are considered to be Level 3.

FVO for Financial Assets and Financial Liabilities

LHFS

The Company's LHFS portfolios that are measured using the FVO consist of residential mortgage LHFS. The adoption of the FVO for residential mortgage loans classified as HFS allows the Company to record the mortgage LHFS portfolio at fair market value compared to the lower of cost, net of deferred fees, deferred origination costs, or market. The Company economically hedges its residential LHFS portfolio, which is reported at fair value. A lower of cost or market accounting treatment would not allow the Company to record the excess of the fair market value over book value, but would require the Company to record the corresponding reduction in value on the hedges. Both the loans and related hedges are carried at fair value, which reduces earnings volatility, as the amounts more closely offset.

RICs HFI

To reduce accounting and operational complexity, the Company elected the FVO for certain of its RICs HFI. These loans consisted primarily of SC’s RICs accounted for by SC under ASC 310-30 and non-performing loans acquired by SC under optional clean up calls from its non-consolidated Trusts.

The following table summarizes the differences between the fair value and the principal balance of LHFS and RICs measured at fair value on a recurring basis as of September 30, 2020 and December 31, 2019:


	September 30, 2020						December 31, 2019
(in thousands)	Fair Value		Aggregate UPB		Difference		Fair Value		Aggregate UPB		Difference
LHFS(1)	$	240,190	$	227,691	$	12,499	$	289,009	$	284,111	$	4,898

RICs HFI	61,448		64,646		(3,198)		101,968		113,863		(11,895)
Nonaccrual loans	2,343		3,036		(693)		10,616		12,917		(2,301)

(1) LHFS disclosed on the Condensed Consolidated Balance Sheets also includes LHFS that are held at the lower of cost or fair value that are not presented within this table. There were no nonaccrual loans related to the LHFS measured using the FVO.

Residential MSRs

The Company maintains an MSR asset for sold residential real estate loans serviced for others. The Company elected to account for the majority of its existing portfolio of MSRs at fair value. This election created greater flexibility with regard to risk management of the asset by aligning the accounting for the MSRs with the accounting for risk management instruments, which are also generally carried at fair value. At September 30, 2020 and December 31, 2019, the balance of these loans serviced for others accounted for at fair value was $13.4 billion and $15.0 billion, respectively. Changes in fair value are recorded through Miscellaneous income, net on the Condensed Consolidated Statements of Operations. As deemed appropriate, the Company economically hedges MSRs using interest rate swaps and forward contracts to purchase MBS. See further discussion on these derivative activities in Note 11 to these Condensed Consolidated Financial Statements. The remainder of the MSRs are accounted for using the lower of cost or fair value and are presented above in the section captioned "Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis.

- 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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