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Fair Value Measurement

3 Months Ended

Mar. 31, 2019

NOTE 12—FAIR VALUE MEASUREMENT

Fair value, also referred to as an exit price, 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. 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 Level 1 prices, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for 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.

The determination and 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. For additional information on the valuation techniques used in estimating the fair value of our financial assets and liabilities on a recurring basis, see “Note 17—Fair Value Measurement” in our 2018 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 participate in the review and validation process. Tasks performed by these groups include periodic verification of fair value measurements to determine if assigned fair values are reasonable, including comparing prices from vendor pricing services to other available market information.

Our Fair Value Committee (“FVC”), which includes representation from business areas, Risk Management and Finance, provides guidance and oversight to ensure an appropriate valuation control environment. The FVC regularly reviews and approves our fair valuations to ensure that our valuation practices are consistent with industry standards and adhere to regulatory and accounting guidance.

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 and fair value measurements. The Model Risk Office validates all models and provides ongoing monitoring of their performance.

The fair value 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 convenes to review escalated valuation disputes.

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, 2019 and December 31, 2018.

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



	March 31, 2019
	Fair Value Measurements Using						Netting Adjustments⁽¹⁾
(Dollars in millions)	Level 1		Level 2		Level 3		Netting Adjustments⁽¹⁾			Total
Assets:
Securities available for sale:
U.S. Treasury securities	$	4,127	$	0	$	0	—			$	4,127
RMBS	0		34,431		434		—			34,865
CMBS	0		5,313		9		—			5,322
Other securities	198		1,376		0		—			1,574
Total securities available for sale	4,325		41,120		443		—			45,888
Other assets:
Derivative assets⁽²⁾	1		1,178		42		$	(512	)	709
Other⁽³⁾	306		0		155		—			461
Total assets	$	4,632	$	42,298	$	640	$	(512	)	$	47,058
Liabilities:
Other liabilities:
Derivative liabilities⁽²⁾	$	1	$	838	$	36	$	(421	)	$	454
Total liabilities	$	1	$	838	$	36	$	(421	)	$	454



	December 31, 2018
	Fair Value Measurements Using						Netting Adjustments⁽¹⁾
(Dollars in millions)	Level 1		Level 2		Level 3		Netting Adjustments⁽¹⁾			Total
Assets:
Securities available for sale:
U.S. Treasury securities	$	6,144	$	0	$	0	—			$	6,144
RMBS	0		33,212		433		—			33,645
CMBS	0		4,729		10		—			4,739
Other securities	219		1,403		0		—			1,622
Total securities available for sale	6,363		39,344		443		—			46,150
Other assets:
Derivative assets⁽²⁾	0		1,501		38		$	(1,079	)	460
Other⁽³⁾	265		0		158		—			423
Total assets	$	6,628	$	40,845	$	639	$	(1,079	)	$	47,033
Liabilities:
Other liabilities:
Derivative liabilities⁽²⁾	$	0	$	1,153	$	48	$	(287	)	$	914
Total liabilities	$	0	$	1,153	$	48	$	(287	)	$	914

__________


⁽¹⁾	Represents balance sheet netting of derivative assets and liabilities, and related payables and receivables for cash collateral held or placed with the same counterparty. See “Note 9—Derivative Instruments and Hedging Activities” for additional information.

⁽²⁾

Does not reflect $7 million and $2 million recognized as a net valuation allowance on derivative assets and liabilities for non-performance risk as of March 31, 2019 and December 31, 2018, respectively. Non-performance risk is included in derivative assets and liabilities, which are part of other assets and liabilities on the consolidated balance sheets, and is offset through non-interest income in the consolidated statements of income.


⁽³⁾	As of March 31, 2019 and December 31, 2018, other includes retained interests in securitizations of $155 million and $158 million, deferred compensation plan assets of $305 million and $264 million, and equity securities of $1 million and $1 million, respectively.

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, 2019 and 2018. Generally, transfers into Level 3 were primarily driven by the usage of unobservable assumptions in the pricing of these financial instruments as evidenced by wider pricing variations among pricing vendors and transfers out of Level 3 were primarily driven by the usage of assumptions corroborated by market observable information as evidenced by tighter pricing among multiple pricing sources.

Table 12.2: Level 3 Recurring Fair Value Rollforward



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three Months Ended March 31, 2019
				Total Gains (Losses) (Realized/Unrealized)																						Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of March 31, 2019⁽¹⁾
				Total Gains (Losses) (Realized/Unrealized)
(Dollars in millions)	Balance, January 1, 2019			Included in Net Income⁽¹⁾			Included in OCI		Purchases		Sales		Issuances			Settlements			Transfers Into Level 3		Transfers Out of Level 3			Balance, March 31, 2019
Securities available for sale:⁽²⁾
RMBS	$	433		$	8		$	11	$	0	$	0	$	0		$	(12	)	$	17	$	(23	)	$	434	$	8
CMBS	10			0			0		0		0		0			(1		)	0		0			9		0
Total securities available for sale	443			8			11		0		0		0			(13		)	17		(23		)	443		8
Other assets:
Retained interest in securitizations	158			(3		)	0		0		0		0			0			0		0			155		(3		)
Net derivative assets (liabilities)⁽³⁾	(10		)	5			0		0		0		(6		)	19			0		(2		)	6		6



	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three Months Ended March 31, 2018
			Total Gains (Losses) (Realized/Unrealized)																								Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of March 31, 2018⁽¹⁾
			Total Gains (Losses) (Realized/Unrealized)
(Dollars in millions)	Balance, January 1, 2018		Included in Net Income⁽¹⁾			Included in OCI			Purchases		Sales			Issuances		Settlements			Transfers Into Level 3		Transfers Out of Level 3			Balance, March 31, 2018
Securities available for sale:
RMBS	$	614	$	9		$	(2	)	$	0	$	0		$	0	$	(21	)	$	61	$	(47	)	$	614		$	9
CMBS	14		0			0			0		0			0		(1		)	0		0			13			0
Other securities	5		0			0			0		0			0		0			0		0			5			0
Total securities available for sale	633		9			(2		)	0		0			0		(22		)	61		(47		)	632			9
Other assets:
Consumer MSRs	92		3			0			0		(97		)	2		0			0		0			0			0
Retained interest in securitizations	172		4			0			0		0			0		0			0		0			176			4
Net derivative assets (liabilities)⁽³⁾	13		(22		)	0			0		0			1		(1		)	0		0			(9		)	(22		)

__________


⁽¹⁾	Realized gains (losses) on securities available for sale are included in net securities gains (losses), and retained interests in securitizations are reported as a component of non-interest income in our consolidated statements of income. Gains (losses) on derivatives are included as a component of net interest income or non-interest income in our consolidated statements of income.


⁽²⁾	Net unrealized gains included in other comprehensive income related to Level 3 securities available for sale still held as of March 31, 2019 were $10 million.


⁽³⁾	Includes derivative assets and liabilities of $42 million and $36 million, respectively, as of March 31, 2019, and $36 million and $45 million, respectively, as of March 31, 2018.

Significant Level 3 Fair Value Asset and Liability Inputs

Generally, uncertainties in fair value measurements of financial instruments, such as 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 used to determine the fair values of our Level 3 financial instruments on a recurring basis. We utilize multiple vendor pricing services to obtain fair value for our securities. Several of our vendor pricing services are only able to provide unobservable input information for a limited number of securities due to software licensing restrictions. Other vendor 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. 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,
2019

Significant

Valuation

Techniques

Significant

Unobservable

Inputs

Range

Weighted

Average⁽¹⁾

Securities available for sale:

RMBS

434

Discounted cash flows (vendor pricing)

Yield
Voluntary prepayment rate
Default rate
Loss severity

2-15%
0-15%
0-7%
0-85%

5%
7%
3%
69%

CMBS

Discounted cash flows (vendor pricing)

Yield

Other assets:

Retained interests in securitization⁽²⁾

155

Discounted cash flows

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

1-54
2-15%
4-6%
1-4%
52-98%

N/A

Net derivative assets (liabilities)

Discounted cash flows

Swap rates

Quantitative Information about Level 3 Fair Value Measurements

(Dollars in millions)

Fair Value at

December 31,

2018

Significant

Valuation

Techniques

Significant

Unobservable

Inputs

Range

Weighted

Average⁽¹⁾

Securities available for sale:

RMBS

433

Discounted cash flows (vendor pricing)

Yield
Voluntary prepayment rate
Default rate
Loss severity

3-11%
0-17%
0-7%
0-75%

5%
5%
3%
65%

CMBS

Discounted cash flows (vendor pricing)

Yield

Other assets:

Retained interests in securitization⁽²⁾

158

Discounted cash flows

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

3-56
3-14%
4-6%
2-4%
50-104%

N/A

Net derivative assets (liabilities)

(10

)

Discounted cash flows

Swap rates

__________


⁽¹⁾	Weighted averages are calculated by using the product of the input multiplied by the relative fair value of the instruments.


⁽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 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 fair value accounting or when we evaluate for impairment).

The following table presents the carrying value of the assets measured at fair value on a nonrecurring basis and still held as of March 31, 2019 and December 31, 2018, and for which a nonrecurring fair value measurement was recorded during three and twelve months then ended.

Table 12.4: Nonrecurring Fair Value Measurements



	March 31, 2019
	Estimated Fair Value Hierarchy				Total
(Dollars in millions)	Level 2		Level 3		Total
Loans held for investment	$	0	$	191	$	191
Loans held for sale	192		0		192
Other assets⁽¹⁾	0		55		55
Total	$	192	$	246	$	438



	December 31, 2018
	Estimated Fair Value Hierarchy				Total
(Dollars in millions)	Level 2		Level 3		Total
Loans held for investment	$	0	$	129	$	129
Loans held for sale	38		0		38
Other assets⁽¹⁾	0		100		100
Total	$	38	$	229	$	267

__________

⁽¹⁾

As of March 31, 2019, other assets included equity investments accounted for under the measurement alternative of $5 million, repossessed assets of $49 million and long-lived assets held for sale of $1 million. As of December 31, 2018, other assets included equity investments accounted for under the measurement alternative of $24 million, foreclosed property and repossessed assets of $57 million and long-lived assets held for sale of $19 million.

In the above table, loans held for investment are generally 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. The non-recoverable rate ranged from 0% to 60%, with a weighted average of 7%, and from 0% to 84%, with a weighted average of 33%, as of March 31, 2019 and December 31, 2018, respectively. The weighted average non-recoverable rate is calculated based on the estimated market value of the underlying collateral. The significant unobservable inputs and related quantitative information related to fair value of the other assets 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, 2019 and 2018.

Table 12.5: Nonrecurring Fair Value Measurements Included in Earnings



	Total Gains (Losses)
	Three Months Ended March 31,
(Dollars in millions)	2019			2018
Loans held for investment	$	(75	)	$	(76	)
Loans held for sale	(1		)	0
Other assets⁽¹⁾	(49		)	(11		)
Total	$	(125	)	$	(87	)

__________


⁽¹⁾	Other assets include fair value adjustments related to equity investments accounted for under the measurement alternative, repossessed assets and long-lived assets held for sale.

Fair Value of Financial Instruments

The following table presents the carrying value and estimated fair value, including the level within the fair value hierarchy, of our financial instruments that are not measured at fair value on a recurring basis on our consolidated balance sheets as of March 31, 2019 and December 31, 2018.

Table 12.6: Fair Value of Financial Instruments



	March 31, 2019
	Carrying Value		Estimated Fair Value		Estimated Fair Value Hierarchy
(Dollars in millions)	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	17,469	$	17,469	$	4,572	$	12,897	$	0
Restricted cash for securitization investors	1,969		1,969		1,969		0		0
Securities held to maturity	36,503		36,955		0		36,922		33
Net loans held for investment	232,960		235,081		0		0		235,081
Loans held for sale	905		920		0		920		0
Interest receivable	1,615		1,615		0		1,615		0
Other investments⁽¹⁾	1,341		1,341		0		1,341		0
Financial liabilities:
Deposits with defined maturities	39,869		39,851		0		39,851		0
Securitized debt obligations	19,273		19,371		0		19,371		0
Senior and subordinated notes	30,645		31,004		0		31,004		0
Federal funds purchased and securities loaned or sold under agreements to repurchase	335		335		0		335		0
Other borrowings⁽²⁾	22		22		0		22		0
Interest payable	382		382		0		382		0



	December 31, 2018
	Carrying Value		Estimated Fair Value		Estimated Fair Value Hierarchy
(Dollars in millions)	Carrying Value		Estimated Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	13,186	$	13,186	$	4,768	$	8,418	$	0
Restricted cash for securitization investors	303		303		303		0		0
Securities held to maturity	36,771		36,619		0		36,513		106
Net loans held for investment	238,679		241,556		0		0		241,556
Loans held for sale	1,192		1,218		0		1,218		0
Interest receivable	1,614		1,614		0		1,614		0
Other investments⁽¹⁾	1,725		1,725		0		1,725		0
Financial liabilities:
Deposits with defined maturities	38,471		38,279		0		38,279		0
Securitized debt obligations	18,307		18,359		0		18,359		0
Senior and subordinated notes	30,826		30,635		0		30,635		0
Federal funds purchased and securities loaned or sold under agreements to repurchase	352		352		0		352		0
Other borrowings⁽²⁾	9,354		9,354		0		9,354		0
Interest payable	458		458		0		458		0

__________


⁽¹⁾	Other investments include FHLB and Federal Reserve stock. These investments are included in other assets on our consolidated balance sheets.

⁽²⁾

Other borrowings excludes finance lease liabilities.

- 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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