Fair Value Measurement and Fair Value of Financial Instruments |
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 12 to the Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” in our 2016 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 12 to the Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” in our 2016 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 12 to the Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” in our 2016 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 March 31, 2017 and December 31, 2016, by major category and by valuation hierarchy level: | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2017 | (Dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustment(1) | | Fair Value | Assets | | | | | | | | | | | Trading account assets: | | | | | | | | | | | U.S. Treasury securities | | $ | — |
| | $ | 1,902 |
| | $ | — |
| | $ | — |
| | $ | 1,902 |
| U.S. government-sponsored agency securities | | — |
| | 121 |
| | — |
| | — |
| | 121 |
| State and municipal securities | | — |
| | 8 |
| | — |
| | — |
| | 8 |
| Commercial paper | | — |
| | 75 |
| | — |
| | — |
| | 75 |
| Other sovereign government obligations | | — |
| | 31 |
| | — |
| | — |
| | 31 |
| Corporate bonds | | — |
| | 1,273 |
| | — |
| | — |
| | 1,273 |
| Asset-backed securities | | — |
| | 183 |
| | — |
| | — |
| | 183 |
| Mortgage-backed securities | | — |
| | 4,582 |
| | — |
| | — |
| | 4,582 |
| Equities | | 42 |
| | — |
| | — |
| | — |
| | 42 |
| Interest rate derivative contracts | | 4 |
| | 984 |
| | 2 |
| | (361 | ) | | 629 |
| Commodity derivative contracts | | — |
| | 132 |
| | 1 |
| | (124 | ) | | 9 |
| Foreign exchange derivative contracts | | 1 |
| | 185 |
| | 1 |
| | (119 | ) | | 68 |
| Equity derivative contracts | | — |
| | — |
| | 168 |
| | (165 | ) | | 3 |
| Total trading account assets | | 47 |
| | 9,476 |
| | 172 |
| | (769 | ) | | 8,926 |
| Securities available for sale: | | | | | | | | | | | U.S. Treasury | | — |
| | 2,813 |
| | — |
| | — |
| | 2,813 |
| Residential mortgage-backed securities: | | | | | | | | | | | U.S government and government-sponsored agencies | | — |
| | 7,378 |
| | — |
| | — |
| | 7,378 |
| Privately issued | | — |
| | 426 |
| | — |
| | — |
| | 426 |
| Privately issued - commercial mortgage-backed securities | | — |
| | 663 |
| | — |
| | — |
| | 663 |
| Collateralized loan obligations | | — |
| | 1,997 |
| | — |
| | — |
| | 1,997 |
| Other | | — |
| | 7 |
| | — |
| | — |
| | 7 |
| Other debt securities: | | | | | | | | | | | Direct bank purchase bonds | | — |
| | — |
| | 1,543 |
| | — |
| | 1,543 |
| Other | | — |
| | 67 |
| | 26 |
| | — |
| | 93 |
| Equity securities | | 5 |
| | — |
| | — |
| | — |
| | 5 |
| Total securities available for sale | | 5 |
| | 13,351 |
| | 1,569 |
| | — |
| | 14,925 |
| Other assets: | | | | | | | | | | | Mortgage servicing rights | | — |
| | — |
| | 34 |
| | — |
| | 34 |
| Interest rate hedging contracts | | — |
| | 7 |
| | — |
| | (5 | ) | | 2 |
| Other derivative contracts | | — |
| | 16 |
| | 1 |
| | (13 | ) | | 4 |
| Total other assets | | — |
| | 23 |
| | 35 |
| | (18 | ) | | 40 |
| Total assets | | $ | 52 |
| | $ | 22,850 |
| | $ | 1,776 |
| | $ | (787 | ) | | $ | 23,891 |
| Percentage of total | | — | % | | 96 | % | | 7 | % | | (3 | )% | | 100 | % | Percentage of total Company assets | | — | % | | 15 | % | | 1 | % | | (1 | )% | | 15 | % | Liabilities | | | | | | | | | | | Trading account liabilities: | | | | | | | | | | | Securities sold, not yet purchased: | | | | | | | | | | | U.S. Treasury | | $ | — |
| | $ | 2,113 |
| | $ | — |
| | $ | — |
| | $ | 2,113 |
| State and municipal | | — |
| | 10 |
| | — |
| | — |
| | 10 |
| Other sovereign government obligations | | — |
| | 35 |
| | — |
| | — |
| | 35 |
| Corporate bonds | | — |
| | 474 |
| | — |
| | — |
| | 474 |
| Equities | | 42 |
| | — |
| | — |
| | — |
| | 42 |
| Trading derivatives: | | | | | | | | | | | Interest rate derivative contracts | | 3 |
| | 922 |
| | — |
| | (665 | ) | | 260 |
| Commodity derivative contracts | | — |
| | 104 |
| | — |
| | (55 | ) | | 49 |
| Foreign exchange derivative contracts | | 1 |
| | 99 |
| | 1 |
| | (18 | ) | | 83 |
| Equity derivative contracts | | — |
| | — |
| | 167 |
| | — |
| | 167 |
| Total trading account liabilities | | 46 |
| | 3,757 |
| | 168 |
| | (738 | ) | | 3,233 |
| Other liabilities: | | | | | | | | | | | FDIC clawback liability | | — |
| | — |
| | 113 |
| | — |
| | 113 |
| Interest rate hedging contracts | | — |
| | 230 |
| | — |
| | (230 | ) | | — |
| Other derivative contracts | | — |
| | — |
| | 6 |
| | — |
| | 6 |
| Total other liabilities | | — |
| | 230 |
| | 119 |
| | (230 | ) | | 119 |
| Total liabilities | | $ | 46 |
| | $ | 3,987 |
| | $ | 287 |
| | $ | (968 | ) | | $ | 3,352 |
| Percentage of total | | 1 | % | | 119 | % | | 9 | % | | (29 | )% | | 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, 2016 | (Dollars in millions) | | Level 1 | | Level 2 | | Level 3 | | Netting Adjustment(1) | | Fair Value | Assets | | | | | | | | | | | Trading account assets: | | | | | | | | | | | U.S. Treasury securities | | $ | — |
| | $ | 1,730 |
| | $ | — |
| | $ | — |
| | $ | 1,730 |
| U.S. government-sponsored agency securities | | — |
| | 73 |
| | — |
| | — |
| | 73 |
| State and municipal securities | | — |
| | 18 |
| | — |
| | — |
| | 18 |
| Commercial paper | | — |
| | 1 |
| | — |
| | — |
| | 1 |
| Other sovereign government obligations | | — |
| | 16 |
| | — |
| | — |
| | 16 |
| Corporate bonds | | — |
| | 841 |
| | — |
| | — |
| | 841 |
| Asset-backed securities | | — |
| | 106 |
| | — |
| | — |
| | 106 |
| Mortgage-backed securities | | — |
| | 5,221 |
| | — |
| | — |
| | 5,221 |
| Equities | | 85 |
| | — |
| | — |
| | — |
| | 85 |
| Interest rate derivative contracts | | 7 |
| | 1,065 |
| | 2 |
| | (343 | ) | | 731 |
| Commodity derivative contracts | | — |
| | 144 |
| | 1 |
| | (106 | ) | | 39 |
| Foreign exchange derivative contracts | | 1 |
| | 215 |
| | 1 |
| | (138 | ) | | 79 |
| Equity derivative contracts | | 1 |
| | — |
| | 164 |
| | (163 | ) | | 2 |
| Total trading account assets | | 94 |
| | 9,430 |
| | 168 |
| | (750 | ) | | 8,942 |
| Securities available for sale: | | | | | | | | | | | U.S. Treasury | | — |
| | 2,505 |
| | — |
| | — |
| | 2,505 |
| Residential mortgage-backed securities: | | | | | | | | | | | U.S government and government-sponsored agencies | | — |
| | 6,695 |
| | — |
| | — |
| | 6,695 |
| Privately issued | | — |
| | 327 |
| | — |
| | — |
| | 327 |
| Privately issued - commercial mortgage-backed securities | | — |
| | 664 |
| | — |
| | — |
| | 664 |
| Collateralized loan obligations | | — |
| | 2,218 |
| | — |
| | — |
| | 2,218 |
| Other | | — |
| | 7 |
| | — |
| | — |
| | 7 |
| Other debt securities: | | | | | | | | | | | Direct bank purchase bonds | | — |
| | — |
| | 1,613 |
| | — |
| | 1,613 |
| Other | | — |
| | 82 |
| | 25 |
| | — |
| | 107 |
| Equity securities | | 5 |
| | — |
| | — |
| | — |
| | 5 |
| Total securities available for sale | | 5 |
| | 12,498 |
| | 1,638 |
| | — |
| | 14,141 |
| Other assets: | | | | | | | | | | | Mortgage servicing rights | | — |
| | — |
| | 23 |
| | — |
| | 23 |
| Interest rate hedging contracts | | — |
| | 22 |
| | — |
| | (20 | ) | | 2 |
| Other derivative contracts | | — |
| | 2 |
| | 1 |
| | — |
| | 3 |
| Total other assets | | — |
| | 24 |
| | 24 |
| | (20 | ) | | 28 |
| Total assets | | $ | 99 |
| | $ | 21,952 |
| | $ | 1,830 |
| | $ | (770 | ) | | $ | 23,111 |
| Percentage of total | | — | % | | 95 | % | | 8 | % | | (3 | )% | | 100 | % | Percentage of total Company assets | | — | % | | 15 | % | | 1 | % | | (1 | )% | | 15 | % | Liabilities | | | | | | | | | | | Trading account liabilities: | | | | | | | | | | | Securities sold, not yet purchased: | | | | | | | | | | | U.S. Treasury | | $ | — |
| | $ | 1,973 |
| | $ | — |
| | $ | — |
| | $ | 1,973 |
| Other sovereign government obligations | | — |
| | 11 |
| | — |
| | — |
| | 11 |
| Corporate bonds | | — |
| | 298 |
| | — |
| | — |
| | 298 |
| Equities | | 47 |
| | — |
| | — |
| | — |
| | 47 |
| Trading derivatives: | | | | | | | | | | | Interest rate derivative contracts | | 1 |
| | 987 |
| | — |
| | (718 | ) | | 270 |
| Commodity derivative contracts | | — |
| | 111 |
| | 1 |
| | (68 | ) | | 44 |
| Foreign exchange derivative contracts | | 1 |
| | 129 |
| | 1 |
| | (33 | ) | | 98 |
| Equity derivative contracts | | — |
| | — |
| | 164 |
| | — |
| | 164 |
| Total trading account liabilities | | 49 |
| | 3,509 |
| | 166 |
| | (819 | ) | | 2,905 |
| Other liabilities: | | | | | | | | | | | FDIC clawback liability | | — |
| | — |
| | 115 |
| | — |
| | 115 |
| Interest rate hedging contracts | | — |
| | 199 |
| | — |
| | (199 | ) | | — |
| Other derivative contracts | | — |
| | 84 |
| | 6 |
| | (29 | ) | | 61 |
| Total other liabilities | | — |
| | 283 |
| | 121 |
| | (228 | ) | | 176 |
| Total liabilities | | $ | 49 |
| | $ | 3,792 |
| | $ | 287 |
| | $ | (1,047 | ) | | $ | 3,081 |
| Percentage of total | | 2 | % | | 123 | % | | 9 | % | | (34 | )% | | 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. |
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 months ended March 31, 2017 and 2016. Level 3 available for sale securities at March 31, 2017 and 2016 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 | | | March 31, 2017 | | March 31, 2016 | (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 | | $ | 168 |
| | $ | 1,638 |
|
| $ | 24 |
| | $ | (166 | ) | | $ | (121 | ) | | $ | 228 |
|
| $ | 1,603 |
|
| $ | 1 |
| | $ | (223 | ) | | $ | (114 | ) | Total gains (losses) (realized/unrealized): | | | | | | | | | | | | | | | | | | | | | Included in income before taxes | | 30 |
| | — |
| | — |
| | (28 | ) | | 2 |
| | (18 | ) | | — |
|
| 1 |
| | 17 |
| | (2 | ) | Included in other comprehensive income | | — |
| | 3 |
| | — |
| | — |
| | — |
| | — |
| | (2 | ) | | — |
| | — |
| | — |
| Purchases/additions | | — |
| | 1 |
| | 11 |
| | — |
| | — |
| | — |
|
| 78 |
|
| — |
| | — |
| | — |
| Sales | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| Settlements | | (26 | ) | | (73 | ) | | — |
| | 26 |
| | — |
| | (21 | ) | | (66 | ) | | — |
| | 19 |
| | — |
| Transfers in (out) of level 3 | | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 13 |
| | — |
| | — |
| Asset (liability) balance, end of period | | $ | 172 |
| | $ | 1,569 |
| | $ | 35 |
| | $ | (168 | ) | | $ | (119 | ) | | $ | 189 |
| | $ | 1,613 |
| | $ | 15 |
| | $ | (187 | ) | | $ | (116 | ) | Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period | | $ | 30 |
| | $ | — |
| | $ | — |
| | $ | (28 | ) | | $ | 2 |
| | $ | (18 | ) | | $ | — |
| | $ | 1 |
| | $ | 17 |
| | $ | (2 | ) |
The following table presents information about significant unobservable inputs related to the Company’s significant Level 3 assets and liabilities at March 31, 2017. | | | | | | | | | | | | | | | | | | March 31, 2017 | (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 | | $ | 1,543 |
| | Return on equity | | Market-required return on capital | | 8.0 - 10.0 | % | | 9.7 | % | | | | | | | Probability of default | | 0.0 - 25.0 | % | | 0.3 | % | | | | | | | Loss severity | | 10.0 - 60.0 | % | | 28.5 | % |
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 months ended March 31, 2017 and 2016 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. | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2017 | | Gain (Loss) For the Three Months Ended March 31, 2017 | (Dollars in millions) | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Loans: | | | | | | | | | | | Impaired loans | | $ | 139 |
| | $ | — |
| | $ | — |
| | $ | 139 |
| | $ | (16 | ) | Other assets: | | | | | | | | | | | Software | | — |
| | — |
| | — |
| | — |
| | (3 | ) | Loans held for sale | | 15 |
| | — |
| | — |
| | 15 |
| | (2 | ) | Renewable energy investment | | 9 |
| | — |
| | — |
| | 9 |
| | 2 |
| Total | | $ | 163 |
| | $ | — |
| | $ | — |
| | $ | 163 |
| | $ | (19 | ) |
| | | | | | | | | | | | | | | | | | | | | | | | March 31, 2016 | | Gain (Loss) For the Three Months Ended March 31, 2016 | (Dollars in millions) | | Fair Value | | Level 1 | | Level 2 | | Level 3 | | Loans: | | | | | | | | | | | Impaired loans | | $ | 375 |
| | $ | — |
| | $ | — |
| | $ | 375 |
| | $ | (127 | ) | Premises and equipment | | — |
| | — |
| | — |
| | — |
| | (4 | ) | Other assets: | | | | | | | | | | | Loans held for sale | | 5 |
| | — |
| | — |
| | 5 |
| | (3 | ) | OREO | | 2 |
| | — |
| | — |
| | 2 |
| | (1 | ) | Private equity investments | | 10 |
| | — |
| | — |
| | 10 |
| | (12 | ) | Intangible assets | | — |
| | — |
| | — |
| | — |
| | (1 | ) | Total | | $ | 392 |
| | $ | — |
| | $ | — |
| | $ | 392 |
| | $ | (148 | ) |
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 and renewable energy 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, premises and equipment, and intangible assets was determined using appraised values and market pricing, adjusted for management judgment, as of the measurement date. 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 March 31, 2017 and as of December 31, 2016: | | | | | | | | | | | | | | | | | | | | | | | | March 31, 2017 | (Dollars in millions) | | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 | Assets | | | | | | | | | | | Cash and cash equivalents | | $ | 4,827 |
| | $ | 4,827 |
| | $ | 4,827 |
| | $ | — |
| | $ | — |
| Securities borrowed or purchased under resale agreements | | 19,992 |
| | 19,992 |
| | — |
| | 19,992 |
| | — |
| Securities held to maturity | | 10,374 |
| | 10,348 |
| | — |
| | 10,348 |
| | — |
| Loans held for investment (1) | | 76,105 |
| | 77,234 |
| | — |
| | — |
| | 77,234 |
| Liabilities | | | | | | | | | | | Deposits | | $ | 86,533 |
| | $ | 86,519 |
| | $ | — |
| | $ | 86,519 |
| | $ | — |
| Commercial paper and other short-term borrowings | | 3,487 |
| | 3,487 |
| | — |
| | 3,487 |
| | — |
| Securities loaned or sold under repurchase agreements | | 25,079 |
| | 25,079 |
| | — |
| | 25,079 |
| | — |
| Long-term debt | | 11,333 |
| | 11,348 |
| | — |
| | 11,348 |
| | — |
| Off-Balance Sheet Instruments | | | | | | | | | | | Commitments to extend credit and standby and commercial letters of credit | | $ | 202 |
| | $ | 202 |
| | $ | — |
| | $ | — |
| | $ | 202 |
|
| | (1) | Excludes lease financing. The carrying amount is net of the allowance for loan and lease losses. |
| | | | | | | | | | | | | | | | | | | | | | | | December 31, 2016 | (Dollars in millions) | | Carrying Amount | | Fair Value | | Level 1 | | Level 2 | | Level 3 | Assets | | | | | | | | | | | Cash and cash equivalents | | $ | 5,753 |
| | $ | 5,753 |
| | $ | 5,753 |
| | $ | — |
| | $ | — |
| Securities borrowed or purchased under resale agreements | | 19,747 |
| | 19,747 |
| | — |
| | 19,747 |
| | — |
| Securities held to maturity | | 10,337 |
| | 10,316 |
| | — |
| | 10,316 |
| | — |
| Loans held for investment (1) | | 75,112 |
| | 76,257 |
| | — |
| | — |
| | 76,257 |
| Liabilities | | | | | | | | | | | Deposits | | $ | 86,947 |
| | $ | 86,930 |
| | $ | — |
| | $ | 86,930 |
| | $ | — |
| Commercial paper and other short-term borrowings | | 2,360 |
| | 2,360 |
| | — |
| | 2,360 |
| | — |
| Securities loaned or sold under repurchase agreements | | 24,616 |
| | 24,616 |
| | — |
| | 24,616 |
| | — |
| Long-term debt | | 11,410 |
| | 11,411 |
| | — |
| | 11,411 |
| | — |
| Off-Balance Sheet Instruments | | | | | | | | | | | Commitments to extend credit and standby and commercial letters of credit | | $ | 221 |
| | $ | 221 |
| | $ | — |
| | $ | — |
| | $ | 221 |
|
| | (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 12 to the Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” in our 2016 Form 10-K.
|