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 additional information related to the valuation methodologies used for certain financial assets and financial liabilities measured at fair value, and information about the Company's valuation processes, see Note 11 "Fair Value Measurement and Fair Value of Financial Instruments" to our Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” in our 2018 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. 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 additional information related to the fair value hierarchy, see Note 11 "Fair Value Measurement and Fair Value of Financial Instruments" to our Consolidated Financial Statements in Part II, Item 8. “Financial Statements and Supplementary Data” in our 2018 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 at June 30, 2019 and December 31, 2018, by major category and by valuation hierarchy level.



	June 30, 2019
(Dollars in millions)	Level 1			Level 2			Level 3			Netting Adjustment⁽¹⁾			Fair Value
Assets
Trading account assets:
U.S. Treasury securities	$	—		$	3,409		$	—		$	—		$	3,409
U.S. government-sponsored agency securities	—			115			—			—			115
State and municipal securities	—			13			—			—			13
Commercial paper	—			201			—			—			201
Corporate bonds	—			1,189			—			—			1,189
Asset-backed securities	—			403			—			—			403
Mortgage-backed securities	—			4,521			—			—			4,521
Other trading securities	—			5			—			—			5
Equities	101			—			—			—			101
Interest rate derivative contracts	9			990			—			(121		)	878
Commodity derivative contracts	—			16			—			(15		)	1
Foreign exchange derivative contracts	—			255			—			(182		)	73
Equity derivative contracts	—			—			12			(11		)	1
Total trading account assets	110			11,117			12			(329		)	10,910
Securities available for sale:
Asset Liability Management securities:
U.S. Treasury	—			2,263			—			—			2,263
Residential mortgage-backed securities:
U.S government and government-sponsored agencies	—			8,331			—			—			8,331
Privately issued	—			921			—			—			921
Privately issued - commercial mortgage-backed securities	—			1,542			—			—			1,542
Collateralized loan obligations	—			1,535			—			—			1,535
Other	—			4			—			—			4
Other debt securities:
Direct bank purchase bonds	—			—			943			—			943
Other	—			28			145			—			173
Total securities available for sale	—			14,624			1,088			—			15,712
Other assets:
Mortgage servicing rights	—			—			218			—			218
Loans held for sale	—			—			298			—			298
Interest rate hedging contracts	—			1			—			—			1
Other derivative contracts	—			11			3			(8		)	6
Equity securities	10			—			—			—			10
Total other assets	10			12			519			(8		)	533
Total assets	$	120		$	25,753		$	1,619		$	(337	)	$	27,155
Percentage of total	—		%	95		%	6		%	(1		)%	100		%
Percentage of total Company assets	—		%	15		%	1		%	—		%	16		%
Liabilities
Trading account liabilities:
Securities sold, not yet purchased:
U.S. Treasury	$	—		$	2,832		$	—		$	—		$	2,832
Corporate bonds	—			544			—			—			544
Equities	89			—			—			—			89
Trading derivatives:
Interest rate derivative contracts	40			475			—			(331		)	184
Commodity derivative contracts	—			13			—			(9		)	4
Foreign exchange derivative contracts	—			164			—			(24		)	140
Equity derivative contracts	—			—			12			—			12
Total trading account liabilities	129			4,028			12			(364		)	3,805
Other liabilities:
FDIC clawback liability	—			—			119			—			119
Other derivative contracts	—			3			6			(1		)	8
Total other liabilities	—			3			125			(1		)	127
Total liabilities	$	129		$	4,031		$	137		$	(365	)	$	3,932
Percentage of total	3		%	103		%	3		%	(9		)%	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, 2018
(Dollars in millions)	Level 1			Level 2			Level 3			Netting Adjustment⁽¹⁾			Fair Value
Assets
Trading account assets:
U.S. Treasury securities	$	—		$	2,998		$	—		$	—		$	2,998
U.S. government-sponsored agency securities	—			73			—			—			73
State and municipal securities	—			10			—			—			10
Commercial paper	—			51			—			—			51
Corporate bonds	—			1,367			—			—			1,367
Asset-backed securities	—			299			—			—			299
Mortgage-backed securities	—			5,785			—			—			5,785
Equities	127			—			—			—			127
Interest rate derivative contracts	9			522			—			(130		)	401
Commodity derivative contracts	—			25			—			(24		)	1
Foreign exchange derivative contracts	1			259			—			(170		)	90
Equity derivative contracts	9			—			13			(11		)	11
Total trading account assets	146			11,389			13			(335		)	11,213
Securities available for sale:
Asset Liability Management securities:
U.S. Treasury	—			3,429			—			—			3,429
Residential mortgage-backed securities:
U.S government and government-sponsored agencies	—			8,007			—			—			8,007
Privately issued	—			864			—			—			864
Privately issued - commercial mortgage-backed securities	—			1,162			—			—			1,162
Collateralized loan obligations	—			1,474			—			—			1,474
Other	—			4			—			—			4
Other debt securities:
Direct bank purchase bonds	—			—			1,190			—			1,190
Other	—			43			141			—			184
Total securities available for sale	—			14,983			1,331			—			16,314
Other assets:
Mortgage servicing rights	—			—			159			—			159
Loans held for sale	—			—			117			—			117
Interest rate hedging contracts	—			6			—			(3		)	3
Other derivative contracts	—			26			1			(16		)	11
Equity securities⁽²⁾	9			—			—			—			9
Total other assets	9			32			277			(19		)	299
Total assets	$	155		$	26,404		$	1,621		$	(354	)	$	27,826
Percentage of total	—		%	95		%	6		%	(1		)%	100		%
Percentage of total Company assets	—		%	16		%	1		%	—		%	17		%
Liabilities
Trading account liabilities:
Securities sold, not yet purchased:
U.S. Treasury	$	—		$	2,753		$	—		$	—		$	2,753
Commercial paper	—			10			—			—			10
Corporate bonds	—			717			—			—			717
Equities	70			—			—			—			70
Trading derivatives:
Interest rate derivative contracts	55			545			—			(262		)	338
Commodity derivative contracts	—			18			—			(4		)	14
Foreign exchange derivative contracts	—			168			—			(56		)	112
Equity derivative contracts	—			—			13			—			13
Total trading account liabilities	125			4,211			13			(322		)	4,027
Other liabilities:
FDIC clawback liability	—			—			116			—			116
Other derivative contracts	—			3			2			—			5
Total other liabilities	—			3			118			—			121
Total liabilities	$	125		$	4,214		$	131		$	(322	)	$	4,148
Percentage of total	3		%	102		%	3		%	(8		)%	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.

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, 2019 and 2018. Level 3 securities available for sale at June 30, 2019 and 2018 primarily consist of direct bank purchase bonds.




	For the Three Months Ended
	June 30, 2019														June 30, 2018
(Dollars in millions)	Trading Account Assets		Securities Available for Sale			Other Assets			Trading Account Liabilities			Other Liabilities			Trading Account Assets			Securities Available for Sale			Other Assets		Trading Account Liabilities			Other Liabilities
Asset (liability) balance, beginning of period	$	12	$	1,268		$	386		$	(12	)	$	(119	)	$	55		$	1,506		$	106	$	(54	)	$	(119	)
Total gains (losses) - realized/unrealized:
Included in income before taxes			—			(45		)				(6		)	4			—			2		(4		)	—
Included in other comprehensive income			9			—									—			(1		)	—		—			—
Purchases/additions			2			178									—			1			41		—			—
Settlements			(191		)	—									(9		)	(11		)	—		9			—
Asset (liability) balance, end of period	$	12	$	1,088		$	519		$	(12	)	$	(125	)	$	50		$	1,495		$	149	$	(49	)	$	(119	)
Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period	$	—	$	—		$	(45	)	$	—		$	(6	)	$	4		$	—		$	2	$	(4	)	$	—



	For the Six Months Ended
	June 30, 2019															June 30, 2018
(Dollars in millions)	Trading Account Assets			Securities Available for Sale			Other Assets			Trading Account Liabilities			Other Liabilities			Trading Account Assets			Securities Available for Sale			Other Assets		Trading Account Liabilities			Other Liabilities
Asset (liability) balance, beginning of period	$	13		$	1,331		$	277		$	(13	)	$	(118	)	$	139		$	1,600		$	65	$	(138	)	$	(119	)
Total gains (losses) - realized/unrealized):
Included in income before taxes	2			—			(76		)	(2		)	(7		)	(6		)	—			9		6			—
Included in other comprehensive income	—			20			—			—			—			—			(17		)	—		—			—
Purchases/additions	—			4			318			—			—			—			73			75		—			—
Settlements	(3		)	(267		)	—			3			—			(83		)	(161		)	—		83			—
Asset (liability) balance, end of period	$	12		$	1,088		$	519		$	(12	)	$	(125	)	$	50		$	1,495		$	149	$	(49	)	$	(119	)
Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period	$	2		$	—		$	(76	)	$	(2	)	$	(7	)	$	(6	)	$	—		$	9	$	6		$	—

The following table presents information about significant unobservable inputs related to the Company’s significant Level 3 assets and liabilities at June 30, 2019.



	June 30, 2019
(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	$	943	Return on equity	Market-required return on capital	8.0 - 10.0	%	9.4	%
				Probability of default	0.0 - 25.0		0.3
				Loss severity	10.0 - 45.0		20.2

The direct bank purchase bonds generally 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 six months ended June 30, 2019 and 2018 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.



	June 30, 2019								For the Three Months Ended June 30, 2019			For the Six Months Ended June 30, 2019
(Dollars in millions)	Fair Value		Level 1		Level 2		Level 3		Gains (Losses)			Gains (Losses)
Loans held for investment
Impaired loans	$	210	$	—	$	—	$	210	$	12		$	(3	)
Other assets
Software	—		—		—		—		(1		)	(3		)
Premises and equipment, net	—		—		—		—		—			(1		)
Loans held for sale	114		—		—		114		(9		)	(9		)
Renewable energy investment	—		—		—		—		—			(1		)
Other	—		—		—		—		—			(1		)
Total	$	324	$	—	$	—	$	324	$	2		$	(18	)



	June 30, 2018								For the Three Months Ended June 30, 2018			For the Six Months Ended June 30, 2018
(Dollars in millions)	Fair Value		Level 1		Level 2		Level 3		Gains (Losses)			Gains (Losses)
Loans held for investment
Impaired loans	$	122	$	—	$	—	$	122	$	(13	)	$	(14	)
Other assets
Software	—		—		—		—		—			(2		)
Private equity investments	10		—		—		10		—			(2		)
Renewable energy investment	2		—		—		2		(2		)	(2		)
Consolidated LIHC VIE	54		—		—		54		(8		)	(8		)
Total	$	188	$	—	$	—	$	188	$	(23	)	$	(28	)

Fair Value of Financial Instruments Disclosures

The tables below present the carrying amount and estimated fair value of certain financial instruments, all of which are accounted for at amortized cost, classified by valuation hierarchy level at June 30, 2019 and December 31, 2018.



	June 30, 2019
(Dollars in millions)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	9,955	$	9,955	$	9,955	$	—	$	—
Securities borrowed or purchased under resale agreements	24,006		24,022		—		24,022		—
Securities held to maturity	9,883		9,967		—		9,967		—
Loans held for investment⁽¹⁾	86,685		87,544		—		—		87,544
Other assets	43		43		43		—		—
Liabilities
Time deposits	$	17,106	$	17,162	$	—	$	17,162	$	—
Securities loaned or sold under repurchase agreements	28,917		28,924		—		28,924		—
Commercial paper and other short-term borrowings	8,685		8,685		—		8,685		—
Long-term debt	16,068		16,274		—		16,274		—
Off-Balance Sheet Instruments
Commitments to extend credit and standby and commercial letters of credit	$	86	$	266	$	—	$	—	$	266


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



	December 31, 2018
(Dollars in millions)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	8,350	$	8,350	$	8,350	$	—	$	—
Securities borrowed or purchased under resale agreements	22,368		22,368		—		22,368		—
Securities held to maturity	10,901		10,720		—		10,720		—
Loans held for investment⁽¹⁾	84,805		84,729		—		—		84,729
Other assets	48		48		48		—		—
Liabilities
Time deposits	$	11,739	$	11,714	$	—	$	11,714	$	—
Securities loaned or sold under repurchase agreements	27,285		27,285		—		27,285		—
Commercial paper and other short-term borrowings	9,263		9,263		—		9,263		—
Long-term debt	17,918		17,961		—		17,961		—
Off-Balance Sheet Instruments
Commitments to extend credit and standby and commercial letters of credit	$	120	$	242	$	—	$	—	$	242


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