NOTE 12—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.

For additional information on the valuation techniques used in estimating the fair value of our financial assets and liabilities on a recurring or nonrecurring basis and for estimating the fair value for financial instruments that are not recorded at fair value, see “Note 19—Fair Value Measurement” in our 2015 Form 10-K.

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 March 31, 2016 and December 31, 2015:

Table 12.1: Assets and Liabilities Measured at Fair Value on a Recurring Basis



	March 31, 2016
	Fair Value Measurements Using
(Dollars in millions)	Level 1		Level 2		Level 3		Total
Assets:
Securities available for sale:
U.S. Treasury securities	$	4,966	$	0	$	0	$	4,966
RMBS	0		27,763		505		28,268
CMBS	0		5,253		251		5,504
Other ABS	0		1,008		30		1,038
Other securities	303		2		11		316
Total securities available for sale	5,269		34,026		797		40,092
Other assets:
Consumer MSRs	0		0		59		59
Derivative assets⁽¹⁾⁽²⁾	2		1,950		71		2,023
Retained interests in securitizations	0		0		201		201
Total assets	$	5,271	$	35,976	$	1,128	$	42,375
Liabilities:
Other liabilities:
Derivative liabilities⁽¹⁾⁽²⁾	$	3	$	752	$	40	$	795
Total liabilities	$	3	$	752	$	40	$	795



	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

__________

⁽¹⁾

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 $1.7 billion and $986 million, and the net derivative liabilities were $445 million and $377 million as of March 31, 2016 and December 31, 2015, respectively. See “Note 9—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 March 31, 2016 and December 31, 2015. 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 the three months ended March 31, 2016, 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 three months ended March 31, 2016 and 2015. When assets and liabilities are transferred between levels, we recognize the transfer as of the end of the period.

Table 12.2: Level 3 Recurring Fair Value Rollforward



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three Months Ended March 31, 2016
				Total Gains (Losses) (Realized/Unrealized)																								Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of March 31, 2016⁽³⁾
				Total Gains (Losses) (Realized/Unrealized)
(Dollars in millions)	Balance, January 1, 2016			Included in Net Income⁽¹⁾			Included in OCI			Purchases		Sales		Issuances			Settlements			Transfers Into Level 3⁽²⁾		Transfers Out of Level 3⁽²⁾			Balance, March 31, 2016
Assets:
Securities available for sale:
RMBS	$	504		$	6		$	(5	)	$	0	$	0	$	0		$	(17	)	$	127	$	(110	)	$	505		$	6
CMBS	97			0			1			93		0		0			(4		)	64		0			251			0
Other ABS	0			0			0			30		0		0			0			0		0			30			0
Other securities	14			0			0			0		0		0			(3		)	0		0			11			0
Total securities available for sale	615			6			(4		)	123		0		0			(24		)	191		(110		)	797			6
Other assets:
Consumer MSRs	68			(12		)	0			0		0		4			(1		)	0		0			59			(12		)
Derivative assets⁽⁴⁾	57			19			0			0		0		12			(11		)	0		(6		)	71			19
Retained interest in securitizations	211			(10		)	0			0		0		0			0			0		0			201			(10		)
Liabilities:
Other liabilities:
Derivative liabilities⁽⁴⁾	$	(27	)	$	(14	)	$	0		$	0	$	0	$	(7	)	$	3		$	0	$	5		$	(40	)	$	(14	)



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three Months Ended March 31, 2015
				Total Gains (Losses) (Realized/Unrealized)																									Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of March 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, March 31, 2015
Assets:
Securities available for sale:
Corporate debt securities guaranteed by U.S. government agencies	$	333		$	(2	)	$	5		$	0	$	(68	)	$	0		$	(8	)	$	0	$	(88	)	$	172		$	0
RMBS	561			8			8			0		0			0			(13		)	85		(94		)	555			9
CMBS	228			0			1			0		0			0			(21		)	0		(34		)	174			0
Other ABS	65			1			(2		)	0		(20		)	0			0			0		(37		)	7			0
Other securities	18			0			0			0		0			0			0			0		0			18			0
Total securities available for sale	1,205			7			12			0		(88		)	0			(42		)	85		(253		)	926			9
Other assets:
Consumer MSRs	53			(3		)	0			0		0			4			(1		)	0		0			53			(3		)
Derivative assets⁽⁴⁾	66			11			0			0		0			9			(12		)	0		(1		)	73			11
Retained interest in securitization	221			2			0			0		0			0			0			0		0			223			2
Liabilities:
Other liabilities:
Derivative liabilities⁽⁴⁾	$	(43	)	$	(10	)	$	0		$	0	$	0		$	(7	)	$	12		$	0	$	0		$	(48	)	$	(10	)

__________


⁽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 three months ended March 31, 2016 and 2015, the transfers into Level 3 were primarily driven by less consistency among vendor pricing on individual securities, while the transfers out of Level 3 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 12.3: Quantitative Information about Level 3 Fair Value Measurements

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in millions)

Fair Value at March 31,
2016

Significant

Valuation

Techniques

Significant

Unobservable

Inputs

Range

Weighted

Average

Assets:

Securities available for sale:

RMBS

505

Discounted cash flows (3rd party pricing)

Yield
Constant prepayment rate
Default rate
Loss severity

0-15%
0-27%
0-11%
9-88%

6%
5%
4%
54%

CMBS

251

Discounted cash flows (3rd party pricing)

Yield
Constant prepayment rate

1-3%
0-15%

2%
2%

Other ABS

Discounted cash flows (3rd party pricing)

Yield
Constant prepayment rate

1%
3%

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)

10-20%
15%
435-1,500 bps
$93-$201

17%
15%
477 bps
$98

Derivative assets⁽¹⁾

Discounted cash flows

Swap rates

Retained interests in securitization⁽²⁾

201

Discounted cash flows

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

14-83
1-12%
3-11%
1-6%
6-117%

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,

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

__________


⁽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 March 31, 2016 and December 31, 2015, and for which a nonrecurring fair value measurement was recorded during the three and twelve months then ended:

Table 12.4: Nonrecurring Fair Value Measurements Related to Assets Still Held at Period End



	March 31, 2016
	Estimated Fair Value Hierarchy						Total
(Dollars in millions)	Level 1		Level 2		Level 3		Total
Loans held for investment	$	0	$	0	$	716	$	716
Loans held for sale	0		6		0		6
Other assets⁽¹⁾	0		0		39		39
Total	$	0	$	6	$	755	$	761



	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

__________


⁽¹⁾	Includes foreclosed property and repossessed assets of $39 million and long-lived assets held for sale of $0 million as of March 31, 2016, compared to foreclosed property and repossessed assets of $54 million and long-lived assets held for sale of $38 million as of December 31, 2015.

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 0% to 78%, with a weighted average of 11%, and from 9% to 73%, with a weighted average of 20%, as of March 31, 2016 and December 31, 2015, 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 March 31, 2016 and 2015:

Table 12.5: Nonrecurring Fair Value Measurements Included in Earnings Related to Assets Still Held at Period End



	Total Gains (Losses)
	Three Months Ended March 31,
(Dollars in millions)	2016			2015
Loans held for investment	$	(71	)	$	(5	)
Loans held for sale	0			0
Other assets⁽¹⁾	(4		)	(4		)
Total	$	(75	)	$	(9	)

__________


⁽¹⁾	Includes losses related to foreclosed property and repossessed 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 12.6: Fair Value of Financial Instruments



	March 31, 2016
	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	$	5,235	$	5,235	$	5,235	$	0	$	0
Restricted cash for securitization investors	960		960		960		0		0
Securities held to maturity	25,080		26,455		200		26,204		51
Net loans held for investment	222,197		224,489		0		0		224,489
Loans held for sale	1,251		1,308		0		1,308		0
Interest receivable	1,221		1,221		0		1,221		0
Other investments⁽¹⁾	1,754		1,754		0		1,754		0
Financial liabilities:
Non-interest bearing deposits	$	25,182	$	25,182	$	25,182	$	0	$	0
Interest-bearing deposits	196,597		192,475		0		16,336		176,139
Securitized debt obligations	14,913		14,961		0		14,961		0
Senior and subordinated notes	21,736		21,697		0		21,697		0
Federal funds purchased and securities loaned or sold under agreements to repurchase	917		917		917		0		0
Other borrowings	12,931		12,920		0		12,920		0
Interest payable	217		217		0		217		0



	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	1,189		1,189		0		1,189		0
Other investments⁽¹⁾	2,060		2,060		0		2,060		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	299		299		0		299		0

__________


⁽¹⁾	Primarily includes our investments in Federal Home Loan Banks (“FHLB”) and the Board of Governors of the Federal Reserve System (“Federal Reserve”) stock. These investments are included in other assets on our consolidated balance sheets.