Fair Value Measurement and Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2011

Fair Value Measurement and Fair Value of Financial Instruments [Abstract]

Fair Value Measurement and Fair Value of Financial Instruments

Note 15—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 financial 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 interest rates, yield curves, foreign exchange rates, commodity prices, volatilities and credit curves. 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. A description of the valuation methodologies used for certain financial assets and financial liabilities measured at fair value is as follows:

Recurring Fair Value Measurements:

Trading Account Assets: Trading account assets are recorded at fair value and primarily consist of securities and derivatives held for trading purposes. See discussion below on securities available for sale, which utilize the same valuation methodology as trading account securities. See also discussion below on derivatives valuation.

Securities Available for Sale: Securities available for sale are recorded at fair value based on readily available quoted market prices, if available. If such quoted market prices are not available, management utilizes third-party pricing services and broker quotations from dealers in the specific instruments. If no market prices or broker quotes are available, external pricing models are used.

To the extent possible, these pricing model valuations utilize observable market inputs obtained for similar securities. Typical inputs include LIBOR and U.S. Treasury yield curves, benchmark yields, consensus prepayment estimates and credit spreads. Level 1 classified securities include U.S. Government and agency securities. Level 2 classified securities include residential mortgage-backed securities and certain asset-backed securities.

Derivatives: The Company’s derivatives are primarily traded in over-the-counter markets where quoted market prices are not readily available. The Company values its derivatives using pricing models that are widely accepted in the financial services industry with inputs that are observable in the market or can be derived from or corroborated by observable market data. These models reflect the contractual terms of the derivatives including the period to maturity and market observable inputs such as yield curves and option volatility. Valuation adjustments are made to reflect counterparty credit quality and to consider the creditworthiness of the Company. Derivatives, which are included in trading account assets, trading account liabilities and other assets, are generally classified as Level 2.

Trading Account Liabilities: Trading account liabilities are recorded at fair value and primarily consist of derivatives and securities sold, not yet purchased. See discussion above on derivatives valuation. Securities sold, not yet purchased consist of U.S. Government securities and are classified as Level 1.

Nonrecurring Fair Value Measurements:

Individually Impaired Loans: Individually impaired loans are valued at the time the loan is identified as impaired based on the present value of the remaining expected cash flows. Because the discount factor applied is based on the loan’s original effective yield rather than a current market rate, that present value does not represent fair value. However, as a practical expedient, an impaired loan may be measured based on a loan’s observable market price or the underlying collateral securing the loan (provided that the loan is collateral dependent), which does approximate fair value. Collateral may be real estate or business assets, including equipment. The value of collateral is determined based on independent appraisals. Appraised values may be adjusted based on management’s historical knowledge, changes in market conditions from the time of valuation, and management’s knowledge of the client and the client’s business. The loan’s market price is determined using market pricing for similar assets, adjusted for management judgment. Impaired loans are reviewed and evaluated at least quarterly for additional impairment and adjusted accordingly. Impaired loans that are adjusted to fair value based on underlying collateral or the loan’s market price are classified as Level 3.

Loans Held for Sale: Residential mortgage and commercial loans held for sale are recorded at the lower of cost or fair value. The fair value of fixed-rate residential loans is based on whole loan forward prices obtained from GSEs. These loans are classified as Level 2. The fair value of commercial loans held for sale may be based on secondary market offerings for loans with similar characteristics or a valuation methodology utilizing the appraised value to outstanding loan balance ratio. These loan values are classified as Level 3.

Private Equity and CRA Investments: Private equity and CRA investments are recorded either at cost or using the equity method and are evaluated for impairment. The valuation of these investments requires significant management judgment due to the absence of quoted market prices, lack of liquidity and the long-term nature of these assets. When required, the fair value of the investments was estimated using the NAV of the fund or based on the investee’s business model, current and projected financial performance, liquidity and overall economic and market conditions. Private equity and CRA investment measurements are generally classified as Level 3.

OREO: OREO represents collateral acquired through foreclosure and is initially recorded at fair value as established by a current appraisal, adjusted for disposition costs. Subsequently, OREO is measured at lower of cost or fair value. OREO values are reviewed on an ongoing basis and any subsequent decline in fair value is recorded as a foreclosed asset expense in the current period. The value of OREO is determined based on independent appraisals and is generally classified as Level 3.

LIHC Investments: LIHC investments represent guaranteed and unguaranteed funds that are recorded using the effective yield or equity method of accounting, with the investment amortized over the period the tax credits are allocated. These investments are evaluated for impairment based on the realizability of the tax credits and benefits from operating losses. Realizability of the tax credits is based on the qualification of low-income status for the underlying properties. These investments are generally classified as Level 3.

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 US GAAP. This hierarchy is based on the quality and reliability of the information used to determine fair value.

Level 1: Valuations are based on quoted prices in active markets for identical assets or liabilities. Since the valuations are based on quoted prices that are readily available in an active market, they do not entail a significant degree of judgment.

Level 2: Valuations are based on quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active and model-based valuations for which all significant assumptions are observable or can be corroborated by observable market data.

Level 3: Valuations are based on at least one significant unobservable input that is supported by little or no market activity and is significant to the fair value measurement. Values are determined using pricing models and discounted cash flow models that include management judgment and estimation, which may be significant.

In assigning the appropriate levels, the Company performs a detailed analysis of the assets and liabilities that are measured at fair value. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. The level within which the fair value measurement is categorized is based on the lowest level input that is significant to the fair value measurement in its entirety. Therefore, an item may be classified in Level 3 even though there may be many significant inputs that are readily observable.

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 December 31, 2011 and 2010, by major category and by valuation hierarchy level.

	December 31, 2011
(Dollars in millions)	Level 1			Level 2			Level 3			Netting Adjustment(1)			Fair Value
Assets
Trading account assets:
U.S. Treasury	$	14		$	—		$	—		$	—		$	14
U.S. government sponsored agencies		17			—			—			—			17
State and municipal		—			17			—			—			17
Commercial paper		—			30			—			—			30
Foreign exchange derivative contracts		1			87			—			(40	)		48
Commodity derivative contracts		—			250			—			(165	)		85
Interest rate derivative contracts		1			921			—			(85	)		837
Equity derivative contracts		—			87			—			—			87
Total trading account assets		33			1,392			—			(290	)		1,135
Securities available for sale:
U.S. government sponsored agencies		6,997			—			—			—			6,997
Residential mortgage-backed securities:
U.S. government and government sponsored agencies		—			13,485			—			—			13,485
Privately issued		—			738			—			—			738
Commercial mortgage-backed securities		—			1,060			—			—			1,060
Asset-backed securities		—			284			—			—			284
Other debt securities		—			141			47			—			188
Equity securities		80			—			1			—			81
Total securities available for sale		7,077			15,708			48			—			22,833
Other assets:
Interest rate hedging contracts		—			3			—			(3	)		—
Total other assets		—			3			—			(3	)		—
Total assets	$	7,110		$	17,103		$	48		$	(293	)	$	23,968
Percentage of Total		30	%		71	%		—			(1	)%		100	%
Percentage of Total Company Assets		8	%		19	%		—			—			27	%
Liabilities
Trading account liabilities:
Foreign exchange derivative contracts	$	1		$	94		$	—		$	(7	)	$	88
Commodity derivative contracts		—			247			—			(43	)		204
Interest rate derivative contracts		4			865			—			(228	)		641
Equity derivative contracts		—			87			—			—			87
Other derivative contracts		—			—			—			—			—
Securities sold, not yet purchased		20			—			—			—			20
Total trading account liabilities		25			1,293			—			(278	)		1,040
Other liabilities		—			10			51			—			61
Total liabilities	$	25		$	1,303		$	51		$	(278	)	$	1,101
Percentage of Total		2	%		119	%		5	%		(25	)%		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, 2010
(Dollars in millions)	Level 1			Level 2			Level 3			Netting Adjustment(1)			Fair Value
Assets
Trading account assets:
U.S. Treasury	$	43		$	—		$	—		$	—		$	43
U.S. government sponsored agencies		68			—			—			—			68
State and municipal		—			42			—			—			42
Commercial paper		—			34			—			—			34
Foreign exchange derivative contracts		1			42			—			(10	)		33
Commodity derivative contracts		—			234			—			(58	)		176
Interest rate derivative contracts		3			593			—			(42	)		554
Equity derivative contracts		—			50			—			(1	)		49
Total trading account assets		115			995			—			(111	)		999
Securities available for sale:
U.S. Treasury		150			—			—			—			150
U.S. government sponsored agencies		6,764			—			—			—			6,764
Residential mortgage-backed securities:
U.S government and government sponsored agencies		—			12,756			—			—			12,756
Privately issued		—			682			—			—			682
Commercial mortgage-backed securities		—			2			—			—			2
Asset-backed securities		—			240			—			—			240
Other debt securities		—			150			7			—			157
Equity securities		39			—			1			—			40
Total securities available for sale		6,953			13,830			8			—			20,791
Other assets:
Interest rate hedging contracts		—			21			—			(2	)		19
Total other assets		—			21			—			(2	)		19
Total assets	$	7,068		$	14,846		$	8		$	(113	)	$	21,809
Percentage of Total		33	%		68	%		—			(1	)%		100	%
Percentage of Total Company Assets		9	%		19	%		—			—			28	%
Liabilities
Trading account liabilities:
Foreign exchange derivative contracts	$	1		$	48		$	—		$	(13	)	$	36
Commodity derivative contracts		—			233			—			(51	)		182
Interest rate derivative contracts		—			551			—			(60	)		491
Equity derivative contracts		—			50			—			—			50
Other derivative contracts		—			—			14			—			14
Securities sold, not yet purchased		1			—			—			—			1
Total trading account liabilities		2			882			14			(124	)		774
Other liabilities		—			—			36			—			36
Total liabilities	$	2		$	882		$	50		$	(124	)	$	810
Percentage of Total		—			109	%		6	%		(15	)%		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 years ended December 31, 2011 and 2010. Level 3 available for sale securities at December 31, 2011 and 2010 primarily consist of tax exempt community development bonds. There were no transfers in (out) of Level 1, 2, and 3 during 2011.

	For the Year Ended
	December 31, 2011									December 31, 2010
(Dollars in millions)	Securities Available for Sale			Trading Liabilities			Other Liabilities			Securities Available for Sale			Trading Liabilities			Other Liabilities
Asset (liability) balance, beginning of period	$	8		$	(14	)	$	(36	)	$	7		$	—		$	—
Total gains (losses) (realized/unrealized):
Included in income before taxes		—			14			(15	)		—			—			3
Included in other comprehensive income		(1	)		—			—			—			—			—
Purchases/additions		42			—			—			3			(14	)		(39	)
Sales		(1	)		—			—			(2	)		—			—
Asset (liability) balance, end of period	$	48		$	—		$	(51	)	$	8		$	(14	)	$	(36	)
Changes in unrealized losses included in income before taxes for assets and liabilities still held at end of period	$	—		$	—		$	15		$	—		$	—		$	—

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 years ended December 31, 2011 and 2010 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.

	December 31, 2011								Loss for the Year Ended December 31, 2011
(Dollars in millions)	Fair Value		Level 1		Level 2		Level 3
Loans:
Loans held for sale	$	1	$	—	$	—	$	1	$	(1	)
Impaired loans		144		—		—		144		(91	)
Other assets:
OREO		70		—		—		70		(40	)
Private equity investments		28		—		—		28		(4	)
Total	$	243	$	—	$	—	$	243	$	(136	)

	December 31, 2010								Loss for the Year Ended December 31, 2010
(Dollars in millions)	Fair Value		Level 1		Level 2		Level 3
Loans:
Impaired loans	$	393	$	—	$	—	$	393	$	(104	)
Other assets:
OREO		77		—		—		77		(22	)
Private equity investments		12		—		—		12		(6	)
LIHC Investments		9		—		—		9		(1	)
Other		—		—		—		—		(30	)
Total	$	491	$	—	$	—	$	491	$	(163	)

Loans include commercial loans held for sale measured at the lower cost or fair value and 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.

Other assets consist of private equity investments, LIHC investments, and OREO. The fair value of OREO was primarily based on independent appraisals. The fair value of private equity investments was estimated using net asset value. The fair value of the LIHC investment was estimated using a net present value of expected cash flows of operating results and tax credits.

Fair Value of Financial Instruments Disclosures

In addition to financial instruments recorded at fair value in the Company’s financial statements, the disclosure of the estimated fair value of financial instruments that are not carried at fair value is also required. Excluded from this disclosure requirement are lease financing arrangements, investments accounted for under the equity method, employee pension and other postretirement obligations and all nonfinancial assets and liabilities, including goodwill and other intangible assets such as long-term customer relationships. The fair values presented are estimates for certain individual financial instruments and do not represent an estimate of the fair value of the Company as a whole.

Certain financial instruments that are not recognized at fair value on the consolidated balance sheet are carried at amounts that approximate fair value due to their short-term nature. These financial instruments include cash and due from banks, interest bearing deposits in banks, federal funds sold and purchased, securities purchased under resale agreements, securities sold under repurchase agreements and commercial paper. In addition, the fair value of deposits with no stated maturity, such as noninterest bearing demand deposits, interest bearing checking, and market rate and other savings are deemed to equal their carrying amounts.

Private equity investments including direct investments in privately held companies and indirect investments in private equity funds are carried at amounts that approximate fair value. Due to the unavailability of quoted market prices, the investments are initially valued based on cost and subsequently valued utilizing available market data to determine if the carrying amount of these investments should be adjusted. Valuations are based on the investee’s recent financial performance and future potential, the value of underlying investee’s assets, the risks associated with the particular business, current market conditions, and other relevant factors.

Financial instruments for which their carrying amounts do not approximate fair value include loans, interest bearing deposits with stated maturities, other borrowed funds, long-term debt, and trust notes.

Securities held to maturity:    The fair value of CLOs classified as held to maturity was estimated using broker quotes as brokers are able to provide timely and consistent prices for the same or similar securities in primary and secondary markets. In 2010, the fair value of CLOs was estimated using both a pricing model and broker quotes. The model was based upon internally developed assumptions using available market data obtained from market participants and credit rating agencies.

Loans:    The fair value of FDIC covered loans was estimated using a discounted cash flow methodology that considered factors including the type of loan and related collateral, risk classification, term of loan, performance status and current discount rates. The fair values of mortgage loans were estimated based on quoted market prices for loans with similar credit and interest rate risk characteristics. The fair values of other types of loans were estimated based upon the type of loan and maturity. The fair value of these loans was determined by discounting the future expected cash flows using the current origination rates for similar loans made to borrowers with similar credit ratings.

FDIC indemnification asset:    The fair value of the FDIC indemnification asset was estimated using the present value of the cash flows that the Bank expects to collect from the FDIC under the loss share agreements.

Interest bearing deposits:    The fair values of savings accounts and certain money market accounts were based on the amounts payable on demand at the reporting date. The fair value of fixed maturity certificates of deposit was estimated using a discounted cash flow calculation that applies current interest rates being offered on certificates with similar maturities.

Other borrowed funds:    The fair values of Federal Reserve Bank term borrowings, FHLB borrowings and term federal funds purchased were estimated using a discounted cash flow calculation that applies current market rates for applicable maturities. The carrying amounts of other short-term borrowed funds were assumed to approximate their fair value due to their limited duration.

Long-term debt:    The fair value of senior and subordinated debt was estimated using either a discounted cash flow analysis based on current market interest rates for debt with similar maturities and credit quality or estimated using market quotes. The fair value of junior subordinated debt payable to subsidiary grant trust was estimated using market quotes of similar securities.

The table below presents the carrying amount and estimated fair value of certain financial instruments held by the Company as of December 31, 2011 and 2010.

	December 31, 2011				December 31, 2010
(Dollars in millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Assets
Securities held to maturity	$	1,273	$	1,429	$	1,323	$	1,560
Loans held for investment, net of allowance for loan losses (1)		51,823		52,423		46,164		46,231
FDIC indemnification asset		598		409		783		750
Liabilities
Interest bearing deposits		43,822		43,822		43,611		43,610
Commercial paper and other short-term borrowings		3,683		3,684		1,356		1,356
Long-term debt		6,684		6,798		5,598		5,669

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

Off-balance sheet commitments, which include commitments to extend credit and standby and commercial letters of credit, are excluded from the above table. These instruments generate ongoing fees, which are recognized over the term of the commitment period. In situations where the credit quality of the counterparty to a commitment has declined, the Company records a reserve. A reasonable estimate of the fair value of these instruments is the carrying amount of deferred fees plus the related reserve. This estimate totaled $287 million and $298 million at December 31, 2011 and 2010, respectively.