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 September 30, 2017 and December 31, 2016, by major category and by valuation hierarchy level:



	September 30, 2017
(Dollars in millions)	Level 1			Level 2			Level 3			Netting Adjustment⁽¹⁾			Fair Value
Assets
Trading account assets:
U.S. Treasury securities	$	—		$	2,503		$	—		$	—		$	2,503
U.S. government-sponsored agency securities	—			94			—			—			94
State and municipal securities	—			35			—			—			35
Commercial paper	—			111			—			—			111
Other sovereign government obligations	—			9			—			—			9
Corporate bonds	—			848			—			—			848
Asset-backed securities	—			84			—			—			84
Mortgage-backed securities	—			5,725			—			—			5,725
Equities	51			—			—			—			51
Interest rate derivative contracts	17			880			2			(306		)	593
Commodity derivative contracts	—			74			—			(70		)	4
Foreign exchange derivative contracts	—			240			1			(79		)	162
Equity derivative contracts	1			—			161			(158		)	4
Total trading account assets	69			10,603			164			(613		)	10,223
Securities available for sale:
U.S. Treasury	—			2,982			—			—			2,982
U.S. government sponsored agencies	—			12			—			—			12
Residential mortgage-backed securities:
U.S government and government-sponsored agencies	—			10,046			—			—			10,046
Privately issued	—			551			—			—			551
Privately issued - commercial mortgage-backed securities	—			742			—			—			742
Collateralized loan obligations	—			2,141			—			—			2,141
Other	—			5			—			—			5
Other debt securities:
Direct bank purchase bonds	—			—			1,545			—			1,545
Other	—			56			24			—			80
Equity securities	10			—			—			—			10
Total securities available for sale	10			16,535			1,569			—			18,114
Other assets:
Mortgage servicing rights	—			—			56			—			56
Interest rate hedging contracts	—			2			—			—			2
Other derivative contracts	—			—			1			—			1
Total other assets	—			2			57			—			59
Total assets	$	79		$	27,140		$	1,790		$	(613	)	$	28,396
Percentage of total	—		%	96		%	6		%	(2		)%	100		%
Percentage of total Company assets	—		%	17		%	1		%	—		%	18		%
Liabilities
Trading account liabilities:
Securities sold, not yet purchased:
U.S. Treasury	$	—		$	2,257		$	—		$	—		$	2,257
State and municipal	—			105			—			—			105
Other sovereign government obligations	—			12			—			—			12
Corporate bonds	—			437			—			—			437
Equities	56			—			—			—			56
Trading derivatives:
Interest rate derivative contracts	1			627			—			(417		)	211
Commodity derivative contracts	—			53			—			(24		)	29
Foreign exchange derivative contracts	1			137			1			(69		)	70
Equity derivative contracts	—			—			161			—			161
Total trading account liabilities	58			3,628			162			(510		)	3,338
Other liabilities:
FDIC clawback liability	—			—			114			—			114
Interest rate hedging contracts	—			164			—			(164		)	—
Other derivative contracts	—			18			5			(17		)	6
Total other liabilities	—			182			119			(181		)	120
Total liabilities	$	58		$	3,810		$	281		$	(691	)	$	3,458
Percentage of total	2		%	110		%	8		%	(20		)%	100		%
Percentage of total Company liabilities	—		%	3		%	—		%	—		%	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.



	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 and nine months ended September 30, 2017 and 2016. Level 3 available for sale securities at September 30, 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
	September 30, 2017															September 30, 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	$	171		$	1,572		$	49		$	(169	)	$	(118	)	$	187		$	1,607		$	15	$	(186	)	$	(124	)
Total gains (losses) (realized/unrealized):
Included in income before taxes	17			—			(1		)	(17		)	(1		)	11			—			—		(10		)	—
Included in other comprehensive income	—			3			—			—			—			—			(3		)	—		—			—
Purchases/additions	—			4			9			—			—			—			1			2		—			—
Settlements	(24		)	(10		)	—			24			—			(19		)	(5		)	—		20			—
Asset (liability) balance, end of period	$	164		$	1,569		$	57		$	(162	)	$	(119	)	$	179		$	1,600		$	17	$	(176	)	$	(124	)
Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period	$	17		$	—		$	(1	)	$	(17	)	$	(1	)	$	11		$	—		$	—	$	(10	)	$	—




	For the Nine Months Ended
	September 30, 2017															September 30, 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	58			—			(3		)	(57		)	2			12			—			—		(12		)	(10		)
Included in other comprehensive income	—			15			—			—			—			—			2			—		—			—
Purchases/additions	—			6			36			—			—			—			81			3		—			—
Settlements	(62		)	(90		)	—			61			—			(61		)	(86		)	—		59			—
Transfers in (out) of level 3	—			—			—			—			—			—			—			13		—			—
Asset (liability) balance, end of period	$	164		$	1,569		$	57		$	(162	)	$	(119	)	$	179		$	1,600		$	17	$	(176	)	$	(124	)
Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period	$	58		$	—		$	(3	)	$	(57	)	$	2		$	12		$	—		$	—	$	(12	)	$	(10	)

The following table presents information about significant unobservable inputs related to the Company’s significant Level 3 assets and liabilities at September 30, 2017:



	September 30, 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	$	1,545	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	%	27.4	%

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, 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.



	September 30, 2017								Gain (Loss) For the Three Months Ended September 30, 2017			Gain (Loss) For the Nine Months Ended September 30, 2017
(Dollars in millions)	Fair Value		Level 1		Level 2		Level 3		Gain (Loss) For the Three Months Ended September 30, 2017			Gain (Loss) For the Nine Months Ended September 30, 2017
Loans:
Impaired loans	$	97	$	—	$	—	$	97	$	(21	)	$	(42	)
Other assets:
Software	—		—		—		—		(1		)	(4		)
Loans held for sale	7		—		—		7		(1		)	(3		)
Renewable energy investment	—		—		—		—		—			2
Consolidated LIHC VIE	81		—		—		81		(3		)	(11		)
Total	$	185	$	—	$	—	$	185	$	(26	)	$	(58	)



	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:
Impaired loans	$	194	$	—	$	—	$	194	$	(55	)	$	(198	)
Other assets:
Loans held for sale	4		—		—		4		—			(3		)
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	)

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 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. 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 and intangible assets was determined using appraised values 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, 2017 and as of December 31, 2016:



	September 30, 2017
(Dollars in millions)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	3,634	$	3,634	$	3,634	$	—	$	—
Securities borrowed or purchased under resale agreements	21,891		21,891		—		21,891		—
Securities held to maturity	10,343		10,349		—		10,349		—
Loans held for investment ⁽¹⁾	76,512		77,771		—		—		77,771
Liabilities
Deposits	$	85,349	$	85,328	$	—	$	85,328	$	—
Commercial paper and other short-term borrowings	6,026		6,026		—		6,026		—
Securities loaned or sold under repurchase agreements	27,307		27,307		—		27,307		—

Long-term debt	11,419		11,452				11,452
Off-Balance Sheet Instruments
Commitments to extend credit and standby and commercial letters of credit	$	181	$	181	$	—	$	—	$	181


(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.