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 own creditworthiness in determining the fair value of its trading assets and liabilities. For further information related to the valuation methodologies used for certain financial assets and financial liabilities measured at fair value, see Note 10 to the Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” in our 2015 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 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 10 to the Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” in our 2015 Form 10-K.

Valuation Processes

The Company has established a valuation committee to oversee its valuation framework for measuring fair value and to establish valuation policies and procedures. The valuation committee’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 valuation committee reports to the Company’s Disclosure & Accounting Committee and meets at least quarterly.

Independent price verification 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 independent price verification procedures, the Company compares pricing sources, tests data variances 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 valuation committee. For further information related to valuation processes, see Note 10 to the Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” in our 2015 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 September 30, 2016 and December 31, 2015, by major category and by valuation hierarchy level:



	September 30, 2016
(Dollars in millions)	Level 1			Level 2			Level 3			Netting Adjustment⁽¹⁾			Fair Value
Assets
Trading account assets:
U.S. Treasury securities	$	—		$	2,057		$	—		$	—		$	2,057
U.S. government-sponsored agency securities	—			121			—			—			121
State and municipal securities	—			32			—			—			32
Commercial paper	—			67			—			—			67
Other sovereign government obligations	—			48			—			—			48
Corporate bonds	—			1,368			—			—			1,368
Asset-backed securities	—			179			—			—			179
Mortgage-backed securities	—			4,095			—			—			4,095
Equities	60			—			—			—			60
Interest rate derivative contracts	1			1,594			3			(322		)	1,276
Commodity derivative contracts	—			185			4			(168		)	21
Foreign exchange derivative contracts	1			194			1			(118		)	78
Equity derivative contracts	—			—			171			(169		)	2
Other derivative contracts	—			1			—			—			1
Total trading account assets	62			9,941			179			(777		)	9,405
Securities available for sale:
U.S. Treasury	—			1,642			—			—			1,642
Residential mortgage-backed securities:
U.S government and government-sponsored agencies	—			6,321			—			—			6,321
Privately issued	—			299			—			—			299
Privately issued - commercial mortgage-backed securities	—			1,058			—			—			1,058
Collateralized loan obligations	—			2,709			—			—			2,709
Other	—			7			—			—			7
Other debt securities:
Direct bank purchase bonds	—			—			1,568			—			1,568
Other	—			84			32			—			116
Equity securities	8			—			—			—			8
Total securities available for sale	8			12,120			1,600			—			13,728
Other assets:
Mortgage servicing rights	—			—			14			—			14
Interest rate hedging contracts	—			234			—			(227		)	7
Other derivative contracts	2			14			3			—			19
Total other assets	2			248			17			(227		)	40
Total assets	$	72		$	22,309		$	1,796		$	(1,004	)	$	23,173
Percentage of total	—		%	96		%	8		%	(4		)%	100		%
Percentage of total Company assets	—		%	15		%	1		%	(1		)%	15		%
Liabilities
Trading account liabilities:
Securities sold, not yet purchased:
U.S. Treasury	$	—		$	2,146		$	—		$	—		$	2,146
Other sovereign government obligations	—			44			—			—			44
Corporate bonds	—			437			—			—			437
Asset-backed securities	—			3			—			—			3
Equities	59			—			—			—			59
Trading derivatives:
Interest rate derivative contracts	1			1,544			—			(1,264		)	281
Commodity derivative contracts	—			144			4			(54		)	94
Foreign exchange derivative contracts	—			111			1			(20		)	92
Equity derivative contracts	—			—			171			—			171
Other contracts	—			1			—			—			1
Total trading account liabilities	60			4,430			176			(1,338		)	3,328
Other liabilities:
FDIC clawback liability	—			—			118			—			118
Interest rate hedging contracts	—			6			—			(2		)	4
Other derivative contracts	—			2			6			—			8
Total other liabilities	—			8			124			(2		)	130
Total liabilities	$	60		$	4,438		$	300		$	(1,340	)	$	3,458
Percentage of total	2		%	128		%	9		%	(39		)%	100		%
Percentage of total Company liabilities	—		%	3		%	—		%	(1		)%	2		%


(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, 2015
(Dollars in millions)	Level 1			Level 2			Level 3			Netting Adjustment⁽¹⁾			Fair Value
Assets
Trading account assets:
U.S. Treasury securities	$	—		$	1,429		$	—		$	—		$	1,429
U.S. government-sponsored agency securities	—			363			—			—			363
State and municipal securities	—			5			—			—			5
Commercial paper	—			25			—			—			25
Other loans	—			—			—			—			—
Other sovereign government obligations	—			5			—			—			5
Corporate bonds	—			828			—			—			828
Asset-backed securities	—			133			—			—			133
Equities	30			—			—			—			30
Interest rate derivative contracts	—			998			4			(163		)	839
Commodity derivative contracts	—			408			1			(384		)	25
Foreign exchange derivative contracts	1			115			1			(70		)	47
Equity derivative contracts	—			—			222			(217		)	5
Total trading account assets	31			4,309			228			(834		)	3,734
Securities available for sale:
U.S. Treasury	—			594			—			—			594
U.S. government-sponsored agencies	—			—			—			—			—
Residential mortgage-backed securities:
U.S government and government-sponsored agencies	—			7,201			—			—			7,201
Privately issued	—			151			—			—			151
Privately issued - commercial mortgage-backed securities	—			1,546			—			—			1,546
Collateralized loan obligations	—			3,233			—			—			3,233
Other	—			22			—			—			22
Other debt securities:
Direct bank purchase bonds	—			—			1,572			—			1,572
Other	—			1			31			—			32
Equity securities	8			—			—			—			8
Total securities available for sale	8			12,748			1,603			—			14,359
Other assets:
Interest rate hedging contracts	—			75			—			(71		)	4
Other derivative contracts	—			13			1			(4		)	10
Total other assets	—			88			1			(75		)	14
Total assets	$	39		$	17,145		$	1,832		$	(909	)	$	18,107
Percentage of total	—		%	95		%	10		%	(5		)%	100		%
Percentage of total Company assets	—		%	11		%	1		%	—		%	12		%
Liabilities
Trading account liabilities:
Securities sold, not yet purchased:
U.S. Treasury	$	—		$	2,469		$	—		$	—		$	2,469
U.S. government sponsored agencies	—			—			—			—			—
State and municipal	—			—			—			—			—
Other sovereign government obligations	—			16			—			—			16
Corporate bonds	—			412			—			—			412
Asset-backed securities	—			—			—			—			—
Equities	42			—			—			—			42
Trading derivatives:
Interest rate derivative contracts	1			947			—			(775		)	173
Commodity derivative contracts	—			368			1			(61		)	308
Foreign exchange derivative contracts	1			91			1			(22		)	71
Equity derivative contracts	—			—			221			—			221
Total trading account liabilities	44			4,303			223			(858		)	3,712
Other liabilities:
FDIC clawback liability	—			—			112			—			112
Interest rate hedging contracts	—			16			—			(14		)	2
Other derivative contracts	—			—			2			—			2
Total other liabilities	—			16			114			(14		)	116
Total liabilities	$	44		$	4,319		$	337		$	(872	)	$	3,828
Percentage of total	1		%	113		%	9		%	(23		)%	100		%
Percentage of total Company liabilities	—		%	3		%	—		%	(1		)%	3		%


(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 nine months ended September 30, 2016 and 2015. Level 3 available for sale securities at September 30, 2016 and 2015 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
	September 30, 2016														September 30, 2015
(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	$	187		$	1,607		$	15	$	(186	)	$	(124	)	$	283		$	1,688		$	1	$	(278	)	$	(109	)
Total gains (losses) (realized/unrealized):
Included in income before taxes	11			—			—		(10		)	—			(78		)	—			1		77			(3		)
Included in other comprehensive income	—			(3		)	—		—			—			—			12			—		—			—
Purchases/additions	—			1			2		—			—			—			1			—		—			—
Sales	—			—			—		—			—			—			—			—		—			—
Settlements	(19		)	(5		)	—		20			—			(17		)	(60		)	—		17			—
Asset (liability) balance, end of period	$	179		$	1,600		$	17	$	(176	)	$	(124	)	$	188		$	1,641		$	2	$	(184	)	$	(112	)
Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period	$	11		$	—		$	—	$	(10	)	$	—		$	(78	)	$	—		$	1	$	77		$	(3	)



	For the Nine Months Ended
	September 30, 2016														September 30, 2015
(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	$	228		$	1,603		$	1	$	(223	)	$	(114	)	$	311		$	1,790		$	2	$	(305	)	$	(107	)
Total gains (losses) (realized/unrealized):
Included in income before taxes	12			—			—		(12		)	(10		)	(82		)	—			—		79			(5		)
Included in other comprehensive income	—			2			—		—			—			—			4			—		—			—
Purchases/additions	—			81			3		—			—			1			18			—		—			—
Sales	—			—			—		—			—			—			—			—		(1		)	—
Settlements	(61		)	(86		)	—		59			—			(42		)	(171		)	—		43			—
Transfers in (out) of level 3	—			—			13		—			—			—			—			—		—			—
Asset (liability) balance, end of period	$	179		$	1,600		$	17	$	(176	)	$	(124	)	$	188		$	1,641		$	2	$	(184	)	$	(112	)
Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period	$	12		$	—		$	—	$	(12	)	$	(10	)	$	(82	)	$	—		$	—	$	79		$	(5	)

The following table presents information about significant unobservable inputs related to the Company’s significant Level 3 assets and liabilities at September 30, 2016.



	September 30, 2016
(Dollars in millions)	Level 3 Fair Value		Valuation Technique	Significant Unobservable Input(s)	Range of Inputs		Weighted Average
Securities available for sale:
Direct bank purchase bonds	$	1,568	Return on equity	Market-required return on capital	8.0 - 10.0	%	9.8	%
				Probability of default	0.0 - 25.0	%	0.3	%
				Loss severity	10.0 - 60.0	%	29.1	%

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.

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 nine months ended September 30, 2016 and 2015 that were still held on the consolidated balance sheet as of the respective periods ended, the following tables present the fair value of such assets by the level of valuation assumptions used to determine each fair value adjustment.



	September 30, 2016								Gain (Loss) For the Three Months Ended September 30, 2016			Gain (Loss) For the Nine Months Ended September 30, 2016
(Dollars in millions)	Fair Value		Level 1		Level 2		Level 3		Gain (Loss) For the Three Months Ended September 30, 2016			Gain (Loss) For the Nine Months Ended September 30, 2016
Loans:
Loans held for sale	$	4	$	—	$	—	$	4	$	—		$	(3	)
Impaired loans	194		—		—		194		(55		)	(198		)
Other assets:
OREO	3		—		—		3		—			(1		)
Private equity investments	10		—		—		10		—			(12		)
Software	13		—		—		13		—			(5		)
Intangible assets	—		—		—		—		—			(1		)
Consolidated LIHC VIE	118		—		—		118		(27		)	(27		)
Total	$	342	$	—	$	—	$	342	$	(82	)	$	(247	)



	September 30, 2015								Gain (Loss) For the Three Months Ended September 30, 2015			Gain (Loss) For the Nine Months Ended September 30, 2015
(Dollars in millions)	Fair Value		Level 1		Level 2		Level 3		Gain (Loss) For the Three Months Ended September 30, 2015			Gain (Loss) For the Nine Months Ended September 30, 2015
Loans:
Impaired loans	$	18	$	—	$	—	$	18	$	1		$	(13	)
Premises and equipment	2		—		—		2		(1		)	(1		)
Other assets:
OREO	6		—		—		6		(1		)	(2		)
Private equity investments	7		—		—		7		—			(5		)
Intangible assets	3		—		—		3		(3		)	(3		)
Total	$	36	$	—	$	—	$	36	$	(4	)	$	(24	)

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. The fair value of private equity investments was determined using a discounted cash flow analysis and market pricing, adjusted for management judgment, as of the measurement date. The fair value of software and intangible assets was determined using appraised value and market pricing, adjusted for management judgment, as of the measurement date. The fair value of consolidated LIHC VIE investments was determined using a discounted cash flow analysis.

Fair Value of Financial Instruments Disclosures

The tables below present the carrying amount and estimated fair value of certain financial instruments, classified by valuation hierarchy level as of September 30, 2016 and as of December 31, 2015:



	September 30, 2016
(Dollars in millions)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	5,374	$	5,374	$	5,374	$	—	$	—
Securities borrowed or purchased under resale agreement	21,906		21,906		—		21,906		—
Securities held to maturity	10,388		10,649		—		10,649		—
Loans held for investment ⁽¹⁾	76,732		78,340		—		—		78,340
Liabilities
Deposits	$	84,643	$	84,660	$	—	$	84,660	$	—
Commercial paper and other short-term borrowings	5,865		5,865		—		5,865		—
Securities loaned or sold under repurchase agreements	25,582		25,582		—		25,582		—
Long-term debt	11,427		11,511		—		11,511		—
Off-Balance Sheet Instruments
Commitments to extend credit and standby and commercial letters of credit	$	237	$	237	$	—	$	—	$	237


(1)	Excludes lease financing. The carrying amount is net of the allowance for loan and lease losses.



	December 31, 2015
(Dollars in millions)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	4,807	$	4,807	$	4,807	$	—	$	—
Securities borrowed or purchased under resale agreement	31,072		31,072		—		31,072		—
Securities held to maturity	10,158		10,207		—		10,207		—
Loans held for investment ⁽¹⁾	76,634		78,124		—		—		78,124
Other assets	16		17		—		—		17
Liabilities
Deposits	$	84,300	$	84,335	$	—	$	84,335	$	—
Commercial paper and other short-term borrowings	3,425		3,425		—		3,425		—
Securities loaned or sold under repurchase agreements	29,141		29,141		—		29,141		—
Long-term debt	13,648		13,650		—		13,650		—
Off-Balance Sheet Instruments
Commitments to extend credit and standby and commercial letters of credit	$	243	$	243	$	—	$	—	$	243


(1)	Excludes lease financing. The carrying amount is net of the allowance for loan and lease losses.

For further information on methodologies for approximating fair values, see Note 10 to the Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” in our 2015 Form 10-K.