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Fair Value Measurement and Fair Value of Financial Instruments
 6 Months Ended
Jun. 30, 2014
Fair Value Measurement and Fair Value of Financial Instruments  
Fair Value Measurement and Fair Value of Financial Instruments

Note 9—Fair Value Measurement and Fair Value of Financial Instruments

  • Valuation Methodologies

        Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability (i.e., an exit price) in an orderly transaction between willing market participants at the measurement date. The Company has an established and documented process for determining fair value for financial assets and liabilities that are measured at fair value on either a recurring or nonrecurring basis. When available, quoted market prices are used to determine fair value. If quoted market prices are not available, fair value is based upon valuation techniques that use, where possible, current market-based or independently sourced parameters, such as yield curves, foreign exchange rates, credit spreads, commodity prices, and implied volatilities. Valuation adjustments may be made to ensure the financial instruments are recorded at fair value. These adjustments include amounts that reflect counterparty credit quality and that consider the Company's creditworthiness in determining the fair value of its trading liabilities. For further information related to the valuation methodologies used for certain financial assets and financial liabilities measured at fair value, see Note 12 to the Consolidated Financial Statements in Part II, Item 8. "Financial Statements and Supplementary Data" in our 2013 Form 10-K.

  • Fair Value Hierarchy

        In determining fair value, the Company maximizes the use of observable market inputs and minimizes the use of unobservable inputs. Observable inputs reflect market-derived or market-based information obtained from independent sources, while unobservable inputs reflect the Company's estimate about market data. Based on the observability of the significant inputs used, the Company classifies its fair value measurements in accordance with the three-level hierarchy as defined by U.S. GAAP. This hierarchy is based on the quality, observability, and reliability of the information used to determine fair value. For further information related to the fair value hierarchy, see Note 12 to the Consolidated Financial Statements in Part II, Item 8. "Financial Statements and Supplementary Data" in our 2013 Form 10-K.

  • Valuation Processes

        The Company has established a Valuation Committee (VC) to oversee its valuation framework for measuring fair value and to establish valuation policies and procedures. The VC's responsibilities include reviewing fair value measurements and categorizations within the fair value hierarchy and monitoring the use of pricing sources, mark-to-model valuations, dealer quotes, and other valuation processes. The VC reports to the Company's Risk & Capital Committee and meets at least quarterly.

        Independent Price Verification (IPV) is performed periodically by the Company to test the market data and valuations of substantially all instruments measured at fair value on a recurring basis. As part of its IPV procedures, the Company compares pricing sources, tests data variance within certain thresholds and performs variance analysis, utilizing third party valuations and both internal and external models. Results are formally reported on a quarterly basis to the VC. For further information related to valuation processes, see Note 12 to the Consolidated Financial Statements in Part II, Item 8. "Financial Statements and Supplementary Data" in our 2013 Form 10-K.

  • Fair Value Measurements on a Recurring Basis

        The following tables present financial assets and financial liabilities measured at fair value on a recurring basis as of June 30, 2014 and December 31, 2013, by major category and by valuation hierarchy level:

 
   June 30, 2014  
(Dollars in millions)   Level 1   Level 2   Level 3   Netting
Adjustment(1)		   Fair Value  

Assets

                                

Trading account assets:

                                

U.S. Treasury

   $ —   $ 25   $ —   $ —   $ 25  

U.S. government sponsored agencies

     —     121     —     —     121  

State and municipal

     —     24     —     —     24  

Interest rate derivative contracts

     1     790     6     (150 )   647  

Commodity derivative contracts

     —     108     9     (48 )   69  

Foreign exchange derivative contracts

     —     23     2     (10 )   15  

Equity derivative contracts

     —     —     286     (246 )   40  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total trading account assets

     1     1,091     303     (454 )   941  

Securities available for sale:

                                

U.S. government sponsored agencies

     —     —     —     —     —  

Residential mortgage-backed securities:

                                

U.S. government and government sponsored agencies                        

     —     8,157     —     —     8,157  

Privately issued

     —     191     —     —     191  

Privately issued—commercial mortgage-backed securities

     —     1,813     —     —     1,813  

Collateralized loan obligations

     —     2,534     —     —     2,534  

Asset-backed and other

     —     19     —     —     19  

Other debt securities:

                                

Direct bank purchase bonds

     —     —     1,897     —     1,897  

Other

     —     4     48     —     52  

Equity securities

     7     —     —     —     7  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total securities available for sale

     7     12,718     1,945     —     14,670  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Other assets:

                                

Interest rate hedging contracts

     —     40     —     —     40  

Other derivative contracts

     —     —     2     —     2  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total other assets

     —     40     2     —     42  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total assets

   $ 8   $ 13,849   $ 2,250   $ (454 ) $ 15,653  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                       

Percentage of Total

     — %   89 %   14 %   (3 )%   100 %

Percentage of Total Company Assets

     — %   12 %   2 %   — %   14 %

Liabilities

                                

Trading account liabilities:

                                

Interest rate derivative contracts

   $ 4   $ 667   $ —   $ (408 ) $ 263  

Commodity derivative contracts

     —     98     9     (79 )   28  

Foreign exchange derivative contracts

     —     53     2     (23 )   32  

Equity derivative contracts

     —     —     287     —     287  

Securities sold, not yet purchased

     —     54     —     —     54  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total trading account liabilities

     4     872     298     (510 )   664  

Other liabilities:

                                

FDIC clawback liability

     —     —     102     —     102  

Interest rate hedging contracts

     —     2     —     —     2  

Other derivative contracts

     —     2     3     —     5  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total other liabilities

     —     4     105     —     109  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total liabilities

   $ 4   $ 876   $ 403   $ (510 ) $ 773  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                       

Percentage of Total

     1 %   113 %   52 %   (66 )%   100 %

Percentage of Total Company Liabilities

     — %   1 %   — %   — %   1 %
(1)
Amounts represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net settle all contracts.

 
   December 31, 2013  
(Dollars in millions)   Level 1   Level 2   Level 3   Netting
Adjustment(1)		   Fair Value  

Assets

                                

Trading account assets:

                                

U.S. Treasury

   $ —   $ 8   $ —   $ —   $ 8  

U.S. government sponsored agencies

     —     116     —     —     116  

State and municipal

     —     5     —     —     5  

Other loans

     —     140     —     —     140  

Interest rate derivative contracts

     1     705     7     (212 )   501  

Commodity derivative contracts

     —     67     9     (66 )   10  

Foreign exchange derivative contracts

     1     30     2     (18 )   15  

Equity derivative contracts

     —     —     253     (197 )   56  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total trading account assets

     2     1,071     271     (493 )   851  

Securities available for sale:

                                

U.S. government sponsored agencies

     —     73     —     —     73  

Residential mortgage-backed securities:

                                

U.S government and government sponsored agencies                        

     —     8,900     —     —     8,900  

Privately issued

     —     222     —     —     222  

Privately issued—commercial mortgage-backed securities

     —     1,870     —     —     1,870  

Collateralized loan obligations

     —     2,673     —     —     2,673  

Asset-backed and other

     —     35     —     —     35  

Other debt securities:

                                

Direct bank purchase bonds

     —     —     1,960     —     1,960  

Other

     —     18     58     —     76  

Equity securities

     8     —     —     —     8  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total securities available for sale

     8     13,791     2,018     —     15,817  

Other assets:

                                

Interest rate hedging contracts

     —     8     —     —     8  

Other derivative contracts

     —     1     1     —     2  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total other assets

     —     9     1     —     10  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total assets

   $ 10   $ 14,871   $ 2,290   $ (493 ) $ 16,678  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                       

Percentage of Total

     — %   89 %   14 %   (3 )%   100 %

Percentage of Total Company Assets

     — %   14 %   2 %   — %   16 %

Liabilities

                                

Trading account liabilities:

                                

Interest rate derivative contracts

   $ 3   $ 606   $ —   $ (379 ) $ 230  

Commodity derivative contracts

     —     53     8     (33 )   28  

Foreign exchange derivative contracts

     1     26     2     (11 )   18  

Equity derivative contracts

     —     —     254     —     254  

Securities sold, not yet purchased

     —     10     —     —     10  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total trading account liabilities

     4     695     264     (423 )   540  

Other liabilities:

                                

FDIC clawback liability

     —     —     96     —     96  

Interest rate hedging contracts

     —     13     —     —     13  

Other derivative contracts

     —     1     3     —     4  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total other liabilities

     —     14     99     —     113  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total liabilities

   $ 4   $ 709   $ 363   $ (423 ) $ 653  
                       
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                       

Percentage of Total

     1 %   109 %   55 %   (65 )%   100 %

Percentage of Total Company Liabilities

     — %   1 %   — %   — %   1 %
(1)
Amounts represent the impact of legally enforceable master netting agreements between the same counterparties that allow the Company to net settle all contracts.

        The following tables present a reconciliation of the assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three and six months ended June 30, 2014 and 2013. Level 3 available for sale securities at June 30, 2014 and 2013 primarily consist of direct bank purchase bonds. The Company's policy is to recognize transfers in and out of Level 1, 2 and 3 as of the end of a reporting period.

 
   For the Three Months Ended  
 
   June 30, 2014   June 30, 2013  
(Dollars in millions)   Trading
Assets		   Securities
Available
for Sale		   Other
Assets		   Trading
Liabilities		   Other
Liabilities		   Trading
Assets		   Securities
Available
for Sale		   Other
Assets		   Trading
Liabilities		   Other
Liabilities		  

Asset (liability) balance, beginning of period

   $ 273   $ 2,046   $ 1   $ (266 ) $ (103 ) $ 186   $ 1,592   $ 1   $ (187 ) $ (96 )

Total gains (losses) (realized/unrealized):

                                                              

Included in income before taxes

     35     —     1     (36 )   (2 )   (5 )   —     1     5     2  

Included in other comprehensive income

     —     7     —     —     —     —     18     —     —     —  

Purchases/additions

     —     14     —     —     —     1     192     —     —     —  

Sales

     —     —     —     (1 )   —     —     —     —     (1 )   —  

Settlements

     (5 )   (122 )   —     5     —     —     (40 )   —     —     —  
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Asset (liability) balance, end of period

   $ 303   $ 1,945   $ 2   $ (298 ) $ (105 ) $ 182   $ 1,762   $ 2   $ (183 ) $ (94 )
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                                           

Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period

   $ 35   $ —   $ 1   $ (36 ) $ (2 ) $ (5 ) $ —   $ 1   $ 5   $ 2  


 

 
   For the Six Months Ended  
 
   June 30, 2014   June 30, 2013  
(Dollars in millions)   Trading
Assets		   Securities
Available
for Sale		   Other
Assets		   Trading
Liabilities		   Other
Liabilities		   Trading
Assets		   Securities
Available
for Sale		   Other
Assets		   Trading
Liabilities		   Other
Liabilities		  

Asset (liability) balance, beginning of period

   $ 271   $ 2,018   $ 1   $ (264 ) $ (99 ) $ 136   $ 1,499   $ —   $ (136 ) $ (95 )

Total gains (losses) (realized/unrealized):

                                                              

Included in income before taxes

     36     —     1     (37 )   (6 )   42     —     1     (43 )   1  

Included in other comprehensive income

     —     15     —     —     —     —     37     —     —     —  

Purchases/additions

     3     137     —     —     —     4     329     1     —     —  

Sales

     —     —     —     (4 )   —     —     (14 )   —     (4 )   —  

Settlements

     (7 )   (225 )   —     7     —     —     (89 )   —     —     —  
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Asset (liability) balance, end of period

   $ 303   $ 1,945   $ 2   $ (298 ) $ (105 ) $ 182   $ 1,762   $ 2   $ (183 ) $ (94 )
                                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                                           

Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period

   $ 36   $ —   $ 1   $ (37 ) $ (6 ) $ 42   $ —   $ 1   $ (43 ) $ 1  

        The following table presents information about significant unobservable inputs related to the Company's significant Level 3 assets and liabilities at June 30, 2014.

 
   June 30, 2014  
(Dollars in millions)   Level 3 Fair
Value		   Valuation Technique(s)   Significant Unobservable Input(s)   Range of Inputs   Weighted
Average		  

Securities available for sale:

                            

Direct bank purchase bonds

   $ 1,897   Return on equity   Market-required return on capital     8.0 - 10.0 %   9.9 %

 

             Probability of default     0.0 - 8.0 %   0.5 %

 

             Loss severity     10.0 - 60.0 %   31.6 %

Other liabilities:

                            

FDIC clawback liability

   $ 102   Discounted cash flow   Probability of default     0.1 - 100.0 %   56.2 %

 

             Loss severity     0.0 - 100.0 %   40.0 %

        The direct bank purchase bonds use a return on equity valuation technique. This technique uses significant unobservable inputs such as market-required return on capital, probability of default, and loss severity. Increases (decreases) in any of these inputs in isolation would result in a lower (higher) fair value measurement.

        The FDIC clawback liability uses a discounted cash flow valuation technique. This technique uses significant unobservable inputs such as probability of default and loss severity. Increases (decreases) in probability of default and loss severity would result in a lower (higher) liability.

  • Fair Value Measurement on a Nonrecurring Basis

        Certain assets may be measured at fair value on a nonrecurring basis. These assets are subject to fair value adjustments that result from the application of the lower of cost or fair value accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis during the three and six months ended June 30, 2014 and 2013 that were still held on the consolidated balance sheet as of the respective periods ended, the following tables present the fair value of such financial instruments by the level of valuation assumptions used to determine each fair value adjustment.

 
   June 30, 2014    
    
  
 
   Loss for the
Three Months
Ended
June 30, 2014		   Loss for the
Six Months
Ended
June 30, 2014		  
(Dollars in millions)   Fair
Value		   Level 1   Level 2   Level 3  

Loans:

                                      

Impaired loans

   $ 198   $ —   $ —   $ 198   $ (6 ) $ (35 )

Other assets:

                                      

OREO

     14     —     —     14     (1 )   (3 )
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 212   $ —   $ —   $ 212   $ (7 ) $ (38 )
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                           

 
   June 30, 2013    
    
  
 
   Loss for the
Three Months
Ended
June 30, 2013		   Loss for the
Six Months
Ended
June 30, 2013		  
(Dollars in millions)   Fair
Value		   Level 1   Level 2   Level 3  

Loans:

                                      

Impaired loans

   $ 91   $ —   $ —   $ 91   $ (11 ) $ (23 )

Other assets:

                                      

OREO

     37     —     —     37     (3 )   (6 )
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​

Total

   $ 128   $ —   $ —   $ 128   $ (14 ) $ (29 )
                           
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ ​
                           

        Loans include individually impaired loans that are measured based on the fair value of the underlying collateral or the fair value of the loan. The fair value of impaired loans was determined based on appraised values of the underlying collateral or market pricing for the loan, adjusted for management judgment, as of the measurement date. The fair value of OREO was primarily based on independent appraisals.

  • Fair Value of Financial Instruments Disclosures

        The tables below present the carrying amount and estimated fair value of certain financial instruments by the level of valuation assumptions held by the Company as of June 30, 2014 and as of December 31, 2013:

 
   June 30, 2014  
(Dollars in millions)   Carrying
Amount		   Fair
Value		   Level 1   Level 2   Level 3  

Assets

                                

Cash and cash equivalents

   $ 4,329   $ 4,329   $ 4,329   $ —   $ —  

Securities held to maturity

     8,177     8,251     —     8,251     —  

Loans held for investment, net of allowance for loan losses(1)

     70,988     71,934     —     —     71,934  

FDIC indemnification asset

     101     11     —     —     11  

Other assets

     4     4     —     —     4  

Liabilities

    
 		    
 		    
 		    
 		    
 		  

Deposits

   $ 81,566   $ 81,713   $ —   $ 81,713   $ —  

Commercial paper and other short-term borrowings

     2,870     2,870     —     2,870     —  

Long-term debt

     6,995     7,167     —     7,167     —  

Off-Balance Sheet Instruments

    
 		    
 		    
 		    
 		    
 		  

Commitments to extend credit and standby and commercial letters of credit

   $ 290   $ 290   $ —   $ —   $ 290  
(1)
Excludes lease financing, net of related allowance.

 
   December 31, 2013  
(Dollars in millions)   Carrying
Amount		   Fair
Value		   Level 1   Level 2   Level 3  

Assets

                                

Cash and cash equivalents

   $ 6,203   $ 6,203   $ 6,203   $ —   $ —  

Securities held to maturity

     6,509     6,439     —     6,439     —  

Loans held for investment, net of allowance for loan losses(1)

     66,898     68,132     —     —     68,132  

FDIC indemnification asset

     141     95     —     —     95  

Other assets

     3     3     —     —     3  

Liabilities

    
 		    
 		    
 		    
 		    
 		  

Deposits

   $ 80,101   $ 80,228   $ —   $ 80,228   $ —  

Commercial paper and other short-term borrowings

     2,563     2,563     —     2,563     —  

Long-term debt

     6,547     6,709     —     6,709     —  

Off-Balance Sheet Instruments

    
 		    
 		    
 		    
 		    
 		  

Commitments to extend credit and standby and commercial letters of credit

   $ 273   $ 273   $ —   $ —   $ 273  
(1)
Excludes lease financing, net of related allowance.

        For further information on methodologies for approximating fair values, see Note 12 to the Consolidated Financial Statements in Part II, Item 8. "Financial Statements and Supplementary Data" in our 2013 Form 10-K.