NOTE 19—FAIR VALUE MEASUREMENT

Fair value is defined as the price that would be received for an asset or paid to transfer a liability in an orderly transaction between market participants on the measurement date (also referred to as an exit price). The fair value accounting guidance provides a three-level fair value hierarchy for classifying financial instruments. This hierarchy is based on the markets in which the assets or liabilities trade and whether the inputs to the valuation techniques used to measure fair value are observable or unobservable. The fair value measurement of a financial asset or liability is assigned a level based on the lowest level of any input that is significant to the fair value measurement in its entirety. The three levels of the fair value hierarchy are described below:



Level 1:		Valuation is based on quoted prices (unadjusted) in active markets for identical assets or liabilities.
Level 2:		Valuation is based on observable market-based inputs, other than quoted prices in active markets for identical assets or liabilities, quoted prices in markets that are not active, or models using inputs that are observable or can be corroborated by observable market data of substantially the full term of the assets or liabilities.
Level 3:		Valuation is generated from techniques that use significant assumptions not observable in the market. Valuation techniques include pricing models, discounted cash flow methodologies or similar techniques.

The accounting guidance for fair value measurements requires that we maximize the use of observable inputs and minimize the use of unobservable inputs in determining fair value. The accounting guidance provides for the irrevocable option to elect, on a contract-by-contract basis, to measure certain financial assets and liabilities at fair value at inception of the contract and record any subsequent changes in fair value in earnings. We have not made any material fair value option elections as of or for the periods disclosed herein.

Fair Value Governance and Control

We have a governance framework and a number of key controls that are intended to ensure that our fair value measurements are appropriate and reliable. Our governance framework provides for independent oversight and segregation of duties. Our control processes include review and approval of new transaction types, price verification and review of valuation judgments, methods, models, process controls and results. Groups independent of our trading and investing functions, including our Corporate Valuations Group (“CVG”), Fair Value Committee (“FVC”) and Model Validation Group (“MVG”), participate in the review and validation process. The fair valuation governance process is set up in a manner that allows the Chairperson of the FVC to escalate valuation disputes that cannot be resolved by the FVC to a more senior committee called the Valuations Advisory Committee (“VAC”) for resolution. The VAC is chaired by the Chief Financial Officer and includes other members of senior management. The VAC is only required to convene to review escalated valuation disputes and may meet for a general update on the valuation process.

The CVG performs periodic verification of fair value measurements to determine if assigned fair values are reasonable. For example, in cases where we rely on third-party pricing services to obtain fair value measures, we analyze pricing variances among different pricing sources and validate the final price used by comparing the information to additional sources, including dealer pricing indications in transaction results and other internal sources, where necessary. Additional validation procedures performed by the CVG include reviewing (either directly or indirectly through the reasonableness of assigned fair values) valuation inputs and assumptions and monitoring acceptable variances between recommended prices and validation prices. The CVG and the Trade Analytics and Valuation (“TAV”) team perform due diligence reviews of the third-party pricing services by comparing their prices to those from other sources and periodically reviewing research publications. Additionally, when necessary, the CVG and TAV challenge prices from third-party vendors to ensure reasonableness of prices through a pricing challenge process. This may include a request for transparency of the assumptions used by the third party.

The FVC, which includes representation from our Risk Management and Finance functions, is a forum for discussing fair market valuations, related inputs, assumptions, methodologies, as well as variance thresholds, valuation control environments and material risks or concerns related to fair market valuations. Additionally, the FVC is empowered to resolve valuation disputes between the primary valuation providers and the CVG, and provides guidance and oversight to ensure an appropriate valuation control environment. The FVC regularly reviews and approves our valuation methodologies to ensure that our methodologies and practices are consistent with industry standards and adhere to regulatory and accounting guidance. The Chief Financial Officer determines when material issues or concerns regarding valuations shall be raised to the Audit Committee or another delegated committee of the Board of Directors.

We have a model policy, established by an independent Model Risk Office, which governs the validation of models and related supporting documentation to ensure the appropriate use of models for pricing. The MVG is part of the Model Risk Office and validates all models and provides ongoing monitoring of their performance, including the validation and monitoring of the performance of all valuation models.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table displays our assets and liabilities measured on our consolidated balance sheets at fair value on a recurring basis as of December 31, 2015 and 2014:

Table 19.1: Assets and Liabilities Measured at Fair Value on a Recurring Basis



	December 31, 2015
	Fair Value Measurements Using
(Dollars in millions)	Level 1		Level 2		Level 3		Total
Assets:
Securities available for sale:
U.S. Treasury securities	$	4,660	$	0	$	0	$	4,660
RMBS	0		26,807		504		27,311
CMBS	0		5,282		97		5,379
Other ABS	0		1,340		0		1,340
Other securities	355		2		14		371
Total securities available for sale	5,015		33,431		615		39,061
Other assets:
Consumer MSRs	0		0		68		68
Derivative assets⁽¹⁾⁽²⁾	2		1,459		57		1,518
Retained interests in securitizations	0		0		211		211
Total assets	$	5,017	$	34,890	$	951	$	40,858
Liabilities:
Other liabilities:
Derivative liabilities⁽¹⁾⁽²⁾	$	2	$	491	$	27	$	520
Total liabilities	$	2	$	491	$	27	$	520



	December 31, 2014
	Fair Value Measurements Using
(Dollars in millions)	Level 1		Level 2		Level 3		Total
Assets:
Securities available for sale:
U.S. Treasury securities	$	4,117	$	1	$	0	$	4,118
Corporate debt securities guaranteed by U.S. government agencies	0		467		333		800
RMBS	0		24,820		561		25,381
CMBS	0		5,291		228		5,519
Other ABS	0		2,597		65		2,662
Other securities	111		899		18		1,028
Total securities available for sale	4,228		34,075		1,205		39,508
Other assets:
Consumer MSRs	0		0		53		53
Derivative assets⁽¹⁾⁽²⁾	4		1,382		66		1,452
Retained interests in securitizations	0		0		221		221
Total assets	$	4,232	$	35,457	$	1,545	$	41,234
Liabilities:
Other liabilities:
Derivative liabilities⁽¹⁾⁽²⁾	$	3	$	293	$	43	$	339
Total liabilities	$	3	$	293	$	43	$	339

__________

⁽¹⁾

As of January 1, 2015, we changed our accounting principle to move from a gross basis of presentation to a net basis, for presenting qualifying derivative assets and liabilities, as well as the related right to reclaim cash collateral or obligation to return cash collateral. See “Note 1—Summary of Significant Accounting Policies” for additional information. Prior period results have been recast to conform to this presentation.

The balances represent gross derivative amounts and are not reduced by the impact of legally enforceable master netting agreements that allow us to net positive and negative positions and the related payables and receivables for cash collateral held or placed with the same counterparty. The net derivative assets were $986 million and $828 million, and the net derivative liabilities were $377 million and $175 million as of December 31, 2015 and December 31, 2014, respectively. See “Note 11—Derivative Instruments and Hedging Activities” for further information.


⁽²⁾	Does not reflect $4 million recognized as a net valuation allowance on derivative assets and liabilities for non-performance risk as of both December 31, 2015 and 2014. Non-performance risk is reflected in other assets and liabilities on the consolidated balance sheets and offset through non-interest income in the consolidated statements of income.

The determination of the classification of financial instruments in the fair value hierarchy is performed at the end of each reporting period. We consider all available information, including observable market data, indications of market liquidity and orderliness, and our understanding of the valuation techniques and significant inputs. Based upon the specific facts and circumstances of each instrument or instrument category, judgments are made regarding the significance of the unobservable inputs to the instruments’ fair value measurement in its entirety. If unobservable inputs are considered significant, the instrument is classified as Level 3. The process for determining fair value using unobservable inputs is generally more subjective and involves a high degree of management judgment and assumptions. During 2015, we had minimal movements between Levels 1 and 2.

Level 3 Recurring Fair Value Rollforward

The table below presents a reconciliation for all assets and liabilities measured and recognized at fair value on a recurring basis using significant unobservable inputs (Level 3) for the years ended December 31, 2015 and 2014. When assets and liabilities are transferred between levels, we recognize the transfer as of the end of the period.

Table 19.2: Level 3 Recurring Fair Value Rollforward



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Year Ended December 31, 2015
				Total Gains (Losses) (Realized/Unrealized)																									Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of Dcember 31, 2015⁽³⁾
				Total Gains (Losses) (Realized/Unrealized)
(Dollars in millions)	Balance, January 1, 2015			Included in Net Income⁽¹⁾			Included in OCI			Purchases		Sales			Issuances			Settlements			Transfers Into Level 3⁽²⁾		Transfers Out of Level 3⁽²⁾			Balance, December 31, 2015
Assets:
Securities available for sale:
Corporate debt securities guaranteed by U.S. government agencies	$	333		$	(1	)	$	6		$	0	$	(226	)	$	0		$	(12	)	$	0	$	(100	)	$	0		$	0
RMBS	561			35			(3		)	0		0			0			(63		)	343		(369		)	504			36
CMBS	228			0			(1		)	138		0			0			(52		)	0		(216		)	97			0
Other ABS	65			1			(2		)	0		(20		)	0			0			0		(44		)	0			0
Other securities	18			0			0			4		0			0			(8		)	0		0			14			0
Total securities available for sale	1,205			35			0			142		(246		)	0			(135		)	343		(729		)	615			36
Other assets:
Consumer MSRs	53			(1		)	0			0		0			22			(6		)	0		0			68			(1		)
Derivative assets⁽⁴⁾	66			14			0			0		0			49			(59		)	0		(13		)	57			14
Retained interest in securitizations	221			(10		)	0			0		0			0			0			0		0			211			(10		)
Liabilities:
Other liabilities:
Derivative liabilities⁽⁴⁾	$	(43	)	$	(9	)	$	0		$	0	$	0		$	(20	)	$	36		$	0	$	9		$	(27	)	$	(9	)



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Year Ended December 31, 2014
				Total Gains (Losses) (Realized/Unrealized)																								Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of December 31, 2014⁽³⁾
				Total Gains (Losses) (Realized/Unrealized)
(Dollars in millions)	Balance, January 1, 2014			Included in Net Income⁽¹⁾			Included in OCI		Purchases		Sales			Issuances			Settlements			Transfers Into Level 3⁽²⁾		Transfers Out of Level 3⁽²⁾			Balance, December 31, 2014
Assets:
Securities available for sale:
Corporate debt securities guaranteed by U.S. government agencies	$	927		$	(5	)	$	20	$	0	$	(248	)	$	0		$	(63	)	$	64	$	(362	)	$	333		$	0
RMBS	1,304			65			39		1,022		0			0			(171		)	259		(1,957		)	561			64
CMBS	739			0			3		192		0			0			(75		)	66		(697		)	228			0
Other ABS	343			5			12		0		0			0			(3		)	75		(367		)	65			5
Other securities	17			(1		)	0		0		0			0			(8		)	10		0			18			0
Total securities available for sale	3,330			64			74		1,214		(248		)	0			(320		)	474		(3,383		)	1,205			69
Other assets:
Consumer MSRs	69			(27		)	0		0		0			15			(4		)	0		0			53			(27		)
Derivative assets⁽⁴⁾	50			20			0		0		0			20			(21		)	0		(3		)	66			19
Retained interest in securitization	199			22			0		0		0			0			0			0		0			221			22
Liabilities:
Other liabilities:
Derivative liabilities⁽⁴⁾	$	(38	)	$	(20	)	$	0	$	0	$	0		$	(15	)	$	29		$	0	$	1		$	(43	)	$	(20	)

__________


⁽¹⁾	Gains (losses) related to Level 3 Consumer MSRs, derivative assets and derivative liabilities, and retained interests in securitizations are reported in other non-interest income, which is a component of non-interest income, in our consolidated statements of income.


⁽²⁾	During the years ended December 31, 2015 and 2014, the transfers into Level 3 were primarily driven by less consistency among vendor pricing on individual securities, while the transfers out of Level 3 for 2015 and 2014 were primarily driven by greater consistency among multiple pricing sources.

⁽³⁾

The amount presented for unrealized gains (losses) for assets still held as of the reporting date primarily represents impairments of securities available for sale, accretion on certain fixed maturity securities, changes in fair value of derivative instruments and mortgage servicing rights transactions. Impairment is reported in total OTTI, which is a component of non-interest income, in our consolidated statements of income.


⁽⁴⁾	All Level 3 derivative assets and liabilities are presented on a gross basis and are not reduced by the impact of legally enforceable master netting agreements that allow us to net positive and negative positions and the related payables and receivables for cash collateral held or placed with the same counterparty.

Significant Level 3 Fair Value Asset and Liability Input Sensitivity

Changes in unobservable inputs may have a significant impact on fair value. Certain of these unobservable inputs will, in isolation, have a directionally consistent impact on the fair value of the instrument for a given change in that input. Alternatively, the fair value of the instrument may move in an opposite direction for a given change in another input. In general, an increase in the discount rate, default rates, loss severity and credit spreads, in isolation, would result in a decrease in the fair value measurement. In addition, an increase in default rates would generally be accompanied by a decrease in recovery rates, slower prepayment rates and an increase in liquidity spreads.

Techniques and Inputs for Level 3 Fair Value Measurements

The following table presents the significant unobservable inputs relied upon to determine the fair values of our Level 3 financial instruments on a recurring basis. We utilize multiple third-party pricing services to obtain fair value measures for our securities. Several of our third-party pricing services are only able to provide unobservable input information for a limited number of securities due to software licensing restrictions. Other third-party pricing services are able to provide unobservable input information for all securities for which they provide a valuation. As a result, the unobservable input information for the securities available for sale presented below represents a composite summary of all information we are able to obtain for a majority of our securities. The unobservable input information for all other Level 3 financial instruments is based on the assumptions used in our internal valuation models.

Table 19.3: Quantitative Information about Level 3 Fair Value Measurements

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in millions)

Fair Value at December 31,
2015

Significant

Valuation

Techniques

Significant

Unobservable

Inputs

Range

Weighted

Average

Assets:

Securities available for sale:

RMBS

504

Discounted cash flows (3rd party pricing)

Yield
Constant prepayment rate
Default rate
Loss severity

0-12%
0-28%
0-8%
16-85%

6%
4%
4%
55%

CMBS

Discounted cash flows (3rd party pricing)

Yield
Constant prepayment rate

2-3%
0-15%

3%
9%

Other securities

Discounted cash flows

Yield

Other assets:

Consumer MSRs

Discounted cash flows

Total prepayment rate
Discount rate
Option-adjusted spread rate
Servicing cost ($ per loan)

11-18%
12%
435-1,500 bps
$93-$201

16%
12%
474 bps
$98

Derivative assets⁽¹⁾

Discounted cash flows

Swap rates

Retained interests in securitization⁽²⁾

211

Discounted cash flows

Life of receivables (months) Constant prepayment rate
Discount rate
Default rate
Loss severity

16-75
1-13%
4-9%
2-6%
15-94%

N/A

Liabilities:

Derivative liabilities⁽¹⁾

Discounted cash flows

Swap rates

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in millions)

Fair Value at

December 31,

2014

Significant

Valuation

Techniques

Significant

Unobservable

Inputs

Range

Weighted

Average

Assets:

Securities available for sale:

RMBS

561

Discounted cash flows (3rd party pricing)

Yield
Constant prepayment rate
Default rate
Loss severity

0-18%
0-23%
0-15%
0-85%

6%
4%
5%
55%

CMBS

228

Discounted cash flows (3rd party pricing)

Yield
Constant prepayment rate

1-4%
0-100%

1%
5%

Other ABS

Discounted cash flows (3rd party pricing)

Yield
Constant prepayment rate
Default rate
Loss severity

2-7%
0-3%
1-10%
30-88%

5%
2%
7%
71%

U.S. government guaranteed debt and other securities

351

Discounted cash flows (3rd party pricing)

Yield

1-4%

Other assets:

Consumer MSRs

Discounted cash flows

Total prepayment rate
Discount rate
Option-adjusted spread rate
Servicing cost ($ per loan)

12-27%
12%
435-1,500 bps
$93-$209

18%
12%
478 bps
$101

Derivative assets⁽¹⁾

Discounted cash flows

Swap rates

2-3%

Retained interests in securitization⁽²⁾

221

Discounted cash flows

Life of receivables (months) Constant prepayment rate
Discount rate
Default rate
Loss severity

25-72
2-13%
4-9%
2-8%
19-95%

N/A

Liabilities:

Derivative liabilities⁽¹⁾

Discounted cash flows

Swap rates

2-3%

__________


⁽¹⁾	All Level 3 derivative assets and liabilities are presented on a gross basis and are not reduced by the impact of legally enforceable master netting agreements that allow us to net positive and negative positions and the related payables and receivables for cash collateral held or placed with the same counterparty.


⁽²⁾	Due to the nature of the various mortgage securitization structures in which we have retained interests, it is not meaningful to present a consolidated weighted average for the significant unobservable inputs.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

We are required to measure and recognize certain other assets at fair value on a nonrecurring basis on the consolidated balance sheets. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments in certain circumstances (for example, from the application of lower of cost or market accounting or when we evaluate for impairment). The following table presents the carrying amount of the assets measured at fair value on a nonrecurring basis and still held as of December 31, 2015 and 2014, and for which a nonrecurring fair value measurement was recorded during the years then ended:

Table 19.4: Nonrecurring Fair Value Measurements Related to Assets Still Held at Period End



	December 31, 2015
	Estimated Fair Value Hierarchy						Total
(Dollars in millions)	Level 1		Level 2		Level 3		Total
Loans held for investment	$	0	$	0	$	362	$	362
Loans held for sale	0		149		0		149
Other assets⁽¹⁾	0		0		92		92
Total	$	0	$	149	$	454	$	603



	December 31, 2014
	Estimated Fair Value Hierarchy						Total
(Dollars in millions)	Level 1		Level 2		Level 3		Total
Loans held for investment	$	0	$	0	$	121	$	121
Loans held for sale	0		34		0		34
Other assets⁽¹⁾	0		0		65		65
Total	$	0	$	34	$	186	$	220

__________


⁽¹⁾	Includes foreclosed property and repossessed assets of $54 million and long-lived assets held for sale of $38 million as of December 31, 2015, compared to foreclosed property and repossessed assets of $60 million and long-lived assets held for sale of $5 million as of December 31, 2014.

In the above table, loans held for investment primarily include nonperforming loans for which specific reserves or charge-offs have been recognized. These loans are classified as Level 3 as they are valued based in part on the estimated fair value of the underlying collateral and the non-recoverable rate, which is considered to be a significant unobservable input. Collateral fair value sources include the appraisal value obtained from independent appraisers, broker pricing opinions or other available market information. The non-recoverable rate ranged from 9% to 73%, with a weighted average of 20%, and from 0% to 74%, with a weighted average of 30%, as of December 31, 2015 and 2014, respectively. The fair value of the other assets classified as Level 3 is determined based on appraisal value or listing price which involves significant judgment; the significant unobservable inputs and related quantitative information are not meaningful to disclose as they vary significantly across properties and collateral.

The following table presents total nonrecurring fair value measurements for the period, included in earnings, attributable to the change in fair value relating to assets that are still held at December 31, 2015 and 2014:

Table 19.5: Nonrecurring Fair Value Measurements Included in Earnings Related to Assets Still Held at Period End



	Total Losses
	Year Ended December 31,
(Dollars in millions)	2015			2014
Loans held for investment	$	(80	)	$	(24	)
Loans held for sale	(1		)	0
Other assets⁽¹⁾	(45		)	(12		)
Total	$	(126	)	$	(36	)

__________


⁽¹⁾	Includes losses related to foreclosed property, repossessed assets and long-lived assets.

Fair Value of Financial Instruments

The following table is a summary of the fair value estimates for our financial instruments, excluding those financial instruments that are recorded at fair value on a recurring basis as they are included within the “Assets and Liabilities Measured at Fair Value on a Recurring Basis” table included earlier in this Note.

Table 19.6: Fair Value of Financial Instruments



	December 31, 2015
	Carrying Amount		Estimated Fair Value		Estimated Fair Value Hierarchy
(Dollars in millions)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	8,023	$	8,023	$	8,023	$	0	$	0
Restricted cash for securitization investors	1,017		1,017		1,017		0		0
Securities held to maturity	24,619		25,317		198		25,068		51
Net loans held for investment	224,721		222,007		0		0		222,007
Loans held for sale	904		933		0		860		73
Interest receivable⁽¹⁾	1,189		1,189		0		1,189		0
Financial liabilities:
Non-interest bearing deposits	$	25,847	$	25,847	$	25,847	$	0	$	0
Interest-bearing deposits	191,874		185,075		0		15,848		169,227
Securitized debt obligations	16,166		16,225		0		16,225		0
Senior and subordinated notes	21,837		22,062		0		22,062		0
Federal funds purchased and securities loaned or sold under agreements to repurchase	981		981		981		0		0
Other borrowings	20,131		20,134		0		20,134		0
Interest payable⁽¹⁾	299		299		0		299		0



	December 31, 2014
	Carrying Amount		Estimated Fair Value		Estimated Fair Value Hierarchy
(Dollars in millions)	Carrying Amount		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	7,242	$	7,242	$	7,242	$	0	$	0
Restricted cash for securitization investors	234		234		234		0		0
Securities held to maturity	22,500		23,634		0		23,503		131
Net loans held for investment	203,933		207,104		0		0		207,104
Loans held for sale	626		650		0		650		0
Interest receivable⁽¹⁾	1,079		1,079		0		1,079		0
Financial liabilities:
Non-interest bearing deposits	$	25,081	$	25,081	$	25,081	$	0	$	0
Interest-bearing deposits	180,467		174,074		0		11,668		162,406
Securitized debt obligations	11,624		11,745		0		11,745		0
Senior and subordinated notes	18,684		19,083		0		19,083		0
Federal funds purchased and securities loaned or sold under agreements to repurchase	880		880		880		0		0
Other borrowings	17,269		17,275		0		17,275		0
Interest payable⁽¹⁾	254		254		0		254		0

__________

⁽¹⁾

As of January 1, 2015, we changed our accounting principle to move from a gross basis of presentation to a net basis, for presenting qualifying derivative assets and liabilities, as well as the related right to reclaim cash collateral or obligation to return cash collateral. Prior period results have been recast to conform to this presentation. See additional information in “Note 1—Summary of Significant Accounting Policies.”

Financial Assets and Liabilities

The following describes the valuation techniques used in estimating the fair value of our financial assets and liabilities as of December 31, 2015 and 2014. We applied the fair value provisions to the financial instruments not recognized on the consolidated balance sheets at fair value, which include securities held to maturity, loans held for investment, loans held for sale, interest receivable, interest-bearing deposits, securitized debt obligations, other borrowings and senior and subordinated notes. The provisions requiring us to maximize the use of observable inputs and to measure fair value using a notion of exit price were factored into our selection of inputs for our established valuation techniques.

Cash and Cash Equivalents

The carrying amounts of cash and due from banks, federal funds sold and securities purchased under agreements to resell and interest-bearing deposits with banks approximate fair value.

Restricted Cash for Securitization Investors

The carrying amount of restricted cash for securitization investors approximates the fair value due to its relatively short-term nature.

Investment Securities

Quoted prices in active markets are used to measure the fair value of U.S. Treasury debt obligations. For the majority of securities in other investment categories, we utilize multiple third-party pricing services to obtain fair value measurements. A pricing service may be considered as the primary pricing provider for certain types of securities, and the designation of the primary pricing provider may vary depending on the type of securities. The determination of the primary pricing provider is based on our experience and validation benchmark of the pricing service’s performance in terms of providing fair value measurements for the various types of securities.

Certain securities are classified as Level 2 and 3, the majority of which are RMBS and CMBS. When significant assumptions are not consistently observable, fair values are derived using the best available data. Such data may include quotes provided by a dealer, the use of external pricing services, independent pricing models or other model-based valuation techniques such as calculation of the present values of future cash flows incorporating assumptions such as benchmark yields, spreads, prepayment speeds, credit ratings and losses. The techniques used by the pricing services utilize observable market data to the extent available. Pricing models may be used, which can vary by asset class and may incorporate available trade, bid and other market information. Across asset classes, information such as trader/dealer input, credit spreads, forward curves and prepayment speeds are used to help determine appropriate valuations. Because many fixed income securities do not trade on a daily basis, the pricing models may apply available information through processes such as benchmarking curves, like securities, sector groupings and matrix pricing to prepare valuations. In addition, model processes are used by the pricing services to develop prepayment and interest rate scenarios.

We validate the pricing obtained from the primary pricing providers through comparison of pricing to additional sources, including other pricing services, dealer pricing indications in transaction results and other internal sources. Pricing variances among different pricing sources are analyzed and validated. Additionally, on an on-going basis, we select a sample of securities and test the third-party valuation by obtaining more detailed information about the pricing methodology, sources of information and assumptions used to value the securities.

The significant unobservable inputs used in the fair value measurement of our RMBS, CMBS and other ABS include yield, prepayment rate, default rate and loss severity in the event of default. Significant increases or decreases in any of those inputs in isolation or combination would result in a significant change in fair value measurement. Generally, an increase in the yield assumption will result in a decrease in fair value measurement; however, an increase or decrease in prepayment rate, default rate or loss severity may have a different impact on the fair value given various characteristics of the security including the capital structure of the deal, credit enhancement for the security or other factors.

Net Loans Held For Investment

Loans held for investment that are individually impaired are carried at the lower of cost or fair value of the underlying collateral, less the estimated cost to sell. The fair values of credit card loans, installment loans, auto loans, home loans and commercial loans are estimated using a discounted cash flow method, which is a form of the income approach. Discount rates are determined considering rates at which similar portfolios of loans would be made under current conditions and considering liquidity spreads applicable to each loan portfolio based on the secondary market. The fair value of credit card loans excludes any value related to customer account relationships. For loans held for investment that are recorded at fair value on our consolidated balance sheets and are measured on a nonrecurring basis, the fair value is determined using appraisal values that are obtained from independent appraisers, broker pricing opinions or other available market information, adjusted for the estimated costs to transact the sale.

Due to the use of significant unobservable inputs, loans held for investment are classified as Level 3 under the fair value hierarchy. Fair value adjustments for individually impaired collateralized loans held for investment are recorded in provision for credit losses in the consolidated statements of income.

Loans Held For Sale

Loans held for sale are carried at the lower of aggregate cost, net of deferred fees and deferred origination costs, or fair value. We originate loans with the intent to sell them. Certain commercial mortgage loans are sold to government-sponsored enterprises as part of a delegated underwriting and servicing (“DUS”) program. For DUS commercial mortgage loans, the fair value is estimated primarily using contractual prices and other observable market-based inputs. For residential mortgage loans classified as held for sale, the fair value is estimated using observable market prices for loans with similar characteristics as the primary component, with the secondary component derived from typical securitization activities and market conditions. Credit card loans held for sale are valued based on other observable market-based inputs. These assets are therefore classified as Level 2. Fair value adjustments to loans held for sale are recorded in other non-interest income in our consolidated statements of income.

Interest Receivable

The carrying amount of interest receivable approximates the fair value of this asset due to its relatively short-term nature.

Derivative Assets and Liabilities

We use both exchange-traded derivatives and OTC derivatives to manage our interest rate and foreign currency risk exposure. Quoted market prices are available and used to value our exchange-traded derivatives, which we classify as Level 1. However, predominantly all of our derivatives are traded in OTC markets where quoted market prices are not always readily available. Therefore, we value most OTC derivatives using valuation techniques, which include internally-developed models. We primarily rely on market observable inputs for our models, such as interest rate yield curves, credit curves, option volatility and currency rates, that vary depending on the type of derivative and nature of the underlying rate, price or index upon which the derivative’s value is based. Where model inputs can be observed in a liquid market and the model does not require significant judgment, such derivatives are typically classified as Level 2. When instruments are traded in less liquid markets and significant inputs are unobservable, such as interest rate swaps whose remaining terms do not correlate with market observable interest rate yield curves, the derivatives are classified as Level 3. The impact of counterparty non-performance risk is considered when measuring the fair value of derivative assets. We validate the pricing obtained from the internal models through comparison of pricing to additional sources, including external valuation agents and other internal sources. Pricing variances among different pricing sources are analyzed and validated. These derivatives are included in other assets or other liabilities on the consolidated balance sheets.

Mortgage Servicing Rights

We record consumer MSRs at fair value on a recurring basis, while commercial MSRs are subsequently measured at amortized cost with impairment recognized as a reduction in other non-interest income. MSRs do not trade in an active market with readily observable prices. Accordingly, we determine the fair value of MSRs using a valuation model that calculates the present value of estimated future net servicing income. The model incorporates assumptions that we believe other market participants use in estimating future net servicing income, including estimates of prepayment speeds, discount rate/option-adjusted spreads, cost to service, contractual servicing fee income, ancillary income and late fees. Fair value measurements of MSRs use significant unobservable inputs and, accordingly, are classified as Level 3. In the event we enter into an agreement with a third party to sell the MSRs, the valuation is based on the agreed upon sale price which is considered to be the exit price and the MSRs are classified as Level 2.

Retained Interests in Securitizations

We have retained interests in various mortgage securitizations from previous acquisitions. Our retained interest includes rights to future cash flows arising from the receivables, the most significant being certificated interest-only bonds issued by a trust. We record our interest in these deals at fair value using market indications and valuation models to calculate the present value of future income. The models incorporate various assumptions that market participants use in estimating future income including weighted-average life, constant prepayment rate, discount rate, default rate and severity.

Other Assets

Included in other assets are foreclosed property, other repossessed assets and long-lived assets held for sale. Foreclosed property, other repossessed assets and long-lived assets held for sale are carried at the lower of the carrying amount or fair value less costs to sell. The fair value is determined based on the appraisal value, listing price of the property or collateral provided by independent appraisers, and is adjusted for the estimated costs to transact the sale. Due to the use of significant unobservable inputs, these assets are classified as Level 3 under the fair value hierarchy. Fair value adjustments for these assets are recorded in other non-interest expense in the consolidated statements of income.

Non-Interest Bearing Deposits

The carrying amount of non-interest bearing deposits approximates fair value.

Interest-Bearing Deposits

The fair value of interest-bearing deposits is determined based on discounted expected cash flows using discount rates consistent with current market rates for similar products with similar remaining terms.

Securitized Debt Obligations

We utilized multiple third-party pricing services to obtain fair value measurements for the large majority of our securitized debt obligations. The techniques used by the pricing services utilize observable market data to the extent available; and pricing models may be used which incorporate available trade, bid and other market information. We used internal pricing models, discounted cash flow models or similar techniques to estimate the fair value of certain securitization trusts where third-party pricing was not available.

Senior and Subordinated Notes

We engage multiple third-party pricing services in order to estimate the fair value of senior and subordinated notes. The pricing services utilize pricing models that incorporate available trade, bid and other market information. It also incorporates spread assumptions, volatility assumptions and relevant credit information into the pricing models.

Federal Funds Purchased and Securities Loaned or Sold under Agreements to Repurchase and Other Borrowings

The carrying amount of federal funds purchased and repurchase agreements approximates fair value. The fair value of FHLB advances is determined based on discounted expected cash flows using discount rates consistent with current market rates for FHLB advances with similar remaining terms.

Interest Payable

The carrying amount of interest payable approximates the fair value of this liability due to its relatively short-term nature.