Fair Value Measurement

3 Months Ended

Mar. 31, 2023

Fair Value Disclosures [Abstract]

Fair Value Measurement

NOTE 11—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 (“DCF”) 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. 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 observable or 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. 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.

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 “Part II—Item 8. Financial Statements and Supplementary Data—Note 16—Fair Value Measurement” in our 2022 Form 10-K.

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, 2023 and December 31, 2022.

Table 11.1: Assets and Liabilities Measured at Fair Value on a Recurring Basis

	March 31, 2023
	Fair Value Measurements Using						Netting Adjustments(1)
(Dollars in millions)	Level 1		Level 2		Level 3				Total
Assets:
Securities available for sale:
U.S. Treasury securities	$	5,163	$	0	$	0	—		$	5,163
RMBS	0		66,104		247		—		66,351
CMBS	0		8,284		145		—		8,429
Other securities	188		1,794		0		—		1,982
Total securities available for sale	5,351		76,182		392		—		81,925
Loans held for sale	0		358		0		—		358
Other assets:
Derivative assets(2)	523		1,292		837		$	(1,026)	1,626
Other(3)	520		4		36		—		560
Total assets	$	6,394	$	77,836	$	1,265	$	(1,026)	$	84,469
Liabilities:
Other liabilities:
Derivative liabilities(2)	$	526	$	1,855	$	819	$	(636)	$	2,564
Total liabilities	$	526	$	1,855	$	819	$	(636)	$	2,564

	December 31, 2022
	Fair Value Measurements Using						Netting Adjustments(1)
(Dollars in millions)	Level 1		Level 2		Level 3				Total
Assets:
Securities available for sale:
U.S. Treasury securities	$	5,041	$	0	$	0	—		$	5,041
RMBS	0		62,353		236		—		62,589
CMBS	0		7,728		142		—		7,870
Other securities	186		1,233		0		—		1,419
Total securities available for sale	5,227		71,314		378		—		76,919
Loans held for sale	0		191		0		—		191
Other assets:
Derivative assets(2)	474		2,545		79		$	(1,134)	1,964
Other(3)	464		3		36		—		503
Total assets	$	6,165	$	74,053	$	493	$	(1,134)	$	79,577
Liabilities:
Other liabilities:
Derivative liabilities(2)	$	823	$	3,653	$	74	$	(1,235)	$	3,315
Total liabilities	$	823	$	3,653	$	74	$	(1,235)	$	3,315

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(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 8—Derivative Instruments and Hedging Activities” for additional information.

(2)Does not reflect $3 million and $4 million recognized as a net valuation allowance on derivative assets and liabilities for non-performance risk as of March 31, 2023 and December 31, 2022, respectively. Non-performance risk is included in the measurement of derivative assets and liabilities on our consolidated balance sheets, and is recorded through non-interest income in the consolidated statements of income.

(3)As of March 31, 2023 and December 31, 2022, other includes retained interests in securitizations of $36 million and $36 million, deferred compensation plan assets of $515 million and $453 million, and equity securities of $9 million (including unrealized gain of $0 million) and $14 million (including unrealized losses of $23 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, 2023 and 2022. 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 11.2: Level 3 Recurring Fair Value Rollforward

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three Months Ended March 31, 2023
			Total Gains (Losses) (Realized/Unrealized)																		Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of March 31, 2023(1)
(Dollars in millions)	Balance, January 1, 2023		Included in Net Income(1)		Included in OCI		Purchases		Sales		Issuances		Settlements		Transfers Into Level 3		Transfers Out of Level 3		Balance, March 31, 2023
Securities available for sale:(2)
RMBS	$	236	$	1	$	3	$	0	$	0	$	0	$	(5)	$	34	$	(22)	$	247	$	2
CMBS	142		0		5		0		0		0		(2)		0		0		145		0
Total securities available for sale	378		1		8		0		0		0		(7)		34		(22)		392		2
Other assets:
Retained interests in securitizations	36		0		0		0		0		0		0		0		0		36		0
Net derivative assets (liabilities)(3)(4)	5		(5)		0		0		0		104		12		(97)		(1)		18		4

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
	Three Months Ended March 31, 2022
			Total Gains (Losses) (Realized/Unrealized)																		Net Unrealized Gains (Losses) Included in Net Income Related to Assets and Liabilities Still Held as of March 31, 2022(1)
(Dollars in millions)	Balance, January 1, 2022		Included in Net Income(1)		Included in OCI		Purchases		Sales		Issuances		Settlements		Transfers Into Level 3		Transfers Out of Level 3		Balance, March 31, 2022
Securities available for sale:(2)
RMBS	$	258	$	10	$	(12)	$	0	$	0	$	0	$	(28)	$	12	$	(29)	$	211	$	3
CMBS	9		0		0		0		0		0		(1)		13		0		21		(1)
Total securities available for sale	267		10		(12)		0		0		0		(29)		25		(29)		232		2
Other assets:
Retained interests in securitizations	41		(2)		0		0		0		0		0		0		0		39		(2)
Net derivative assets (liabilities)(3)	19		5		0		0		0		28		(2)		(28)		0		22		1

_________

(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 losses included in OCI related to Level 3 securities available for sale still held as of March 31, 2023 were $8 million. Net unrealized losses included in OCI related to Level 3 securities available for sale still held as of March 31, 2022 were $7 million.

(3)Includes derivative assets and liabilities of $837 million and $819 million, respectively, as of March 31, 2023 and $202 million and $180 million, respectively, as of March 31, 2022.

(4)Transfers into Level 3 primarily consist of term SOFR indexed interest rate derivatives.

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 or 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, and would lead to a decrease in the fair value measurement.

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 11.3: Quantitative Information about Level 3 Fair Value Measurements

	Quantitative Information about Level 3 Fair Value Measurements
(Dollars in millions)	Fair Value at March 31, 2023		Significant Valuation Techniques	Significant Unobservable Inputs	Range	Weighted Average(1)
Securities available for sale:
RMBS	$	247	Discounted cash flows (vendor pricing)	Yield Voluntary prepayment rate Default rate Loss severity	4-17% 1-15% 0-11% 30-80%	6% 8% 2% 57%
CMBS	145		Discounted cash flows (vendor pricing)	Yield	4-6%	5%
Other assets:
Retained interests in securitizations(2)	36		Discounted cash flows	Life of receivables (months) Voluntary prepayment rate Discount rate Default rate Loss severity	32-45 9-16% 5-8% 2% 45-163%	N/A
Net derivative assets (liabilities)	18		Discounted cash flows	Swap rates	3-5%	3%

	Quantitative Information about Level 3 Fair Value Measurements
(Dollars in millions)	Fair Value at December 31, 2022		Significant Valuation Techniques	Significant Unobservable Inputs	Range	Weighted Average(1)
Securities available for sale:
RMBS	$	236	Discounted cash flows (vendor pricing)	Yield Voluntary prepayment rate Default rate Loss severity	3-12% 4-20% 0-11% 30-80%	7% 8% 2% 58%
CMBS	142		Discounted cash flows (vendor pricing)	Yield	4-5%	5%
Other assets:
Retained interests in securitizations(2)	36		Discounted cash flows	Life of receivables (months) Voluntary prepayment rate Discount rate Default rate Loss severity	30-43 9-18% 4-7% 1% 62-291%	N/A
Net derivative assets (liabilities)	5		Discounted cash flows	Swap rates	3-4%	4%

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(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, 2023 and December 31, 2022, and for which a nonrecurring fair value measurement was recorded during the three and twelve months then ended.

Table 11.4: Nonrecurring Fair Value Measurements

	March 31, 2023
	Estimated Fair Value Hierarchy				Total
(Dollars in millions)	Level 2		Level 3
Loans held for investment	$	0	$	204	$	204
Other assets(1)	0		51		51
Total	$	0	$	255	$	255

	December 31, 2022
	Estimated Fair Value Hierarchy				Total
(Dollars in millions)	Level 2		Level 3
Loans held for investment	$	0	$	284	$	284
Loans held for sale	11		0		11
Other assets(1)	0		220		220
Total	$	11	$	504	$	515

__________

(1)As of March 31, 2023, other assets included investments accounted for under measurement alternative of $6 million and repossessed assets of $45 million. As of December 31, 2022, other assets included investments accounted for under measurement alternative of $4 million, cost method investments of $3 million, repossessed assets of $55 million and long-lived assets held for sale and right-of-use assets totaling $158 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 100%, with a weighted average of 25%, and from 0% to 43%, with a weighted average of 20%, as of March 31, 2023 and December 31, 2022, 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, 2023 and 2022.

Table 11.5: Nonrecurring Fair Value Measurements Included in Earnings

	Total Gains (Losses)
	Three Months Ended March 31,
(Dollars in millions)	2023		2022
Loans held for investment	$	(105)	$	(14)
Other assets(1)	(37)		(19)
Total	$	(142)	$	(33)

__________

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

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, 2023 and December 31, 2022.

Table 11.6: Fair Value of Financial Instruments

	March 31, 2023
	Carrying Value		Estimated Fair Value		Estimated Fair Value Hierarchy
(Dollars in millions)					Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	46,513	$	46,513	$	3,347	$	43,166	$	0
Restricted cash for securitization investors	460		460		460		0		0
Net loans held for investment	294,518		300,206		0		0		300,206
Loans held for sale	5		5		0		5		0
Interest receivable	2,250		2,250		0		2,250		0
Other investments(1)	1,327		1,327		0		1,327		0
Financial liabilities:
Deposits with defined maturities	76,044		75,495		0		75,495		0
Securitized debt obligations	17,813		17,737		0		17,737		0
Senior and subordinated notes	30,398		29,585		0		29,585		0
Federal funds purchased and securities loaned or sold under agreements to repurchase	542		542		0		542		0
Interest payable	621		621		0		621		0

	December 31, 2022
	Carrying Value		Estimated Fair Value		Estimated Fair Value Hierarchy
(Dollars in millions)					Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	$	30,856	$	30,856	$	5,193	$	25,663	$	0
Restricted cash for securitization investors	400		400		400		0		0
Net loans held for investment	299,091		302,920		0		0		302,920
Loans held for sale	11		11		0		11		0
Interest receivable	2,104		2,104		0		2,104		0
Other investments(1)	1,326		1,326		0		1,326		0
Financial liabilities:
Deposits with defined maturities	45,858		45,531		0		45,531		0
Securitized debt obligations	16,973		16,918		0		16,918		0
Senior and subordinated notes	30,826		30,744		0		30,744		0
Federal funds purchased and securities loaned or sold under agreements to repurchase	883		883		0		883		0
Interest payable	527		527		0		527		0

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