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.

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.

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.

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.

A description of the valuation methodologies used for certain financial assets and 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. When available, these securities are classified as Level 1 and include exchange traded equities. If such quoted market prices are not available, management utilizes third-party pricing services and broker quotations from dealers in the specific instruments. These securities are classified as Level 2 and include U.S. Treasuries, U.S. government-sponsored agencies, RMBS and CMBS, CLOs, and certain other debt securities. If no market prices or broker quotes are available, internal 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. When pricing model valuations use significant unobservable inputs, the securities are classified as Level 3. These other debt securities primarily include direct bank purchase bonds. The valuation of these securities is based upon a return on equity method, which incorporates a market-required return on capital, probability of default and loss severity.

Other Assets: Other assets included mortgage servicing rights, loans held for sale and derivative contracts. The fair value of the Company's mortgage servicing rights asset is determined using a discounted cash flow model with significant unobservable inputs, primarily influenced by forecasted future servicing revenues and prepayment speed assumptions. The fair value of the Company's loans held for sale is based on secondary market offerings for loans with similar characteristics. Mortgage servicing rights and loans held for sale are classified as Level 3. See discussion below on derivatives.

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. These derivatives, which are included in trading account assets, trading account liabilities, other assets and other liabilities are generally classified as Level 2. Trading account assets and trading account liabilities include Level 3 derivatives comprised of embedded derivatives contained in market-linked CDs and matched over-the-counter options, whose fair value is obtained through unadjusted third party broker quotes, which incorporate significant unobservable inputs.

Trading Account Liabilities: Trading account liabilities are recorded at fair value and primarily consist of securities sold, not yet purchased and derivatives. See discussion above on derivatives valuation. Securities sold, not yet purchased consist of U.S. Treasury, U.S. government-sponsored agencies, state and municipal, sovereign government obligations, corporate bonds, ABS and equities and are classified as Level 2, which utilize the same valuation methodology as securities available for sale.

Other Liabilities: Other liabilities included the FDIC clawback liability and derivative contracts. The fair value of the Company's FDIC clawback liability is determined using a discounted cash flow model with significant unobservable inputs, which include probability of default and loss severity. The FDIC clawback liability is classified as Level 3. See discussion above on derivatives.

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 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.

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 December 31, 2019 and 2018, by major category and by valuation hierarchy level.



	December 31, 2019															December 31, 2018
(Dollars in millions)	Level 1			Level 2			Level 3			Netting⁽¹⁾			Fair Value			Level 1			Level 2			Level 3			Netting⁽¹⁾			Fair Value
Assets
Trading account assets:
U.S. Treasury and government agencies	$	—		$	2,393		$	—		$	—		$	2,393		$	—		$	3,071		$	—		$	—		$	3,071
Mortgage-backed:
U.S. agencies	—			5,376			—			—			5,376			—			5,785			—			—			5,785
Corporate debt	—			1,212			—			—			1,212			—			1,367			—			—			1,367
Other debt	—			306			—			—			306			—			360			—			—			360
Equity	127			—			—			—			127			127			—			—			—			127
Derivative contracts	16			1,195			8			(256		)	963			19			806			13			(335		)	503
Total trading account assets	143			10,482			8			(256		)	10,377			146			11,389			13			(335		)	11,213
Securities available for sale:
U.S. Treasury and government agencies	—			5,438			—			—			5,438			—			3,429			—			—			3,429
Mortgage-backed:
U.S. agencies	—			5,468			—			—			5,468			—			8,007			—			—			8,007
Residential - non-agency	—			762			—			—			762			—			864			—			—			864
Commercial - non-agency	—			3,471			18			—			3,489			—			1,180			—			—			1,180
Collateralized loan obligations	—			1,491			—			—			1,491			—			1,474			—			—			1,474
Direct bank purchase bonds	—			—			936			—			936			—			—			1,190			—			1,190
Other	—			28			177			—			205			—			29			141			—			170
Total securities available for sale	—			16,658			1,131			—			17,789			—			14,983			1,331			—			16,314
Other assets:
Mortgage servicing rights	—			—			270			—			270			—			—			159			—			159
Loans held for sale	—			—			42			—			42			—			—			117			—			117
Derivative contracts	—			10			4			(8		)	6			—			32			1			(19		)	14
Equity securities	10			—			—			—			10			9			—			—			—			9
Total other assets	10			10			316			(8		)	328			9			32			277			(19		)	299
Total assets	$	153		$	27,150		$	1,455		$	(264	)	$	28,494		$	155		$	26,404		$	1,621		$	(354	)	$	27,826
Percentage of total	1		%	95		%	5		%	(1		)%	100		%	—		%	95		%	6		%	(1		)%	100		%
Percentage of total Company assets	—		%	16		%	1		%	—		%	17		%	—		%	16		%	1		%	—		%	17		%
Liabilities
Trading account liabilities:
U.S. Treasury and government agencies	$	—		$	2,299		$	—		$	—		$	2,299		$	—		$	2,753		$	—		$	—		$	2,753
Corporate debt	—			646			—			—			646			—			717			—			—			717
Other debt	—			4			—			—			4			—			10			—			—			10
Equity	105			—			—			—			105			70			—			—			—			70
Derivatives contracts	11			499			8			(306		)	212			55			731			13			(322		)	477
Total trading account liabilities	116			3,448			8			(306		)	3,266			125			4,211			13			(322		)	4,027
Other liabilities:
FDIC clawback liability	—			—			121			—			121			—			—			116			—			116
Derivatives contracts	—			2			3			—			5			—			3			2			—			5
Total other liabilities	—			2			124			—			126			—			3			118			—			121
Total liabilities	$	116		$	3,450		$	132		$	(306	)	$	3,392		$	125		$	4,214		$	131		$	(322	)	$	4,148
Percentage of total	3		%	102		%	4		%	(9		)%	100		%	3		%	102		%	3		%	(8		)%	100		%
Percentage of total Company liabilities	—		%	2		%	—		%	—		%	2		%	—		%	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 years ended December 31, 2019 and 2018. Level 3 securities available for sale at December 31, 2019 and 2018 largely consist of direct bank purchase bonds.



	For the Year Ended
	December 31, 2019															December 31, 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	4			—			(88		)	(4		)	(6		)	(10		)	—			(8		)	9			1
Included in other comprehensive income	—			31			—			—			—			—			(9		)	—			—			—
Purchases/additions	—			57			396			—			—			—			126			220			—			—
Sales	—			—			(269		)	—			—			—			—			—			—			—
Settlements	(9		)	(288		)	—			9			—			(116		)	(386		)	—			116			—
Asset (liability) balance, end of period	$	8		$	1,131		$	316		$	(8	)	$	(124	)	$	13		$	1,331		$	277		$	(13	)	$	(118	)
Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period	$	4		$	—		$	(103	)	$	(4	)	$	(6	)	$	(10	)	$	—		$	(8	)	$	9		$	1

The following table presents information about significant unobservable inputs related to the Company's significant Level 3 assets and liabilities at December 31, 2019.



	December 31, 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	$	936	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	%	20.0	%

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 years ended December 31, 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.



	December 31, 2019								For the Year Ended December 31, 2019
(Dollars in millions)	Fair Value		Level 1		Level 2		Level 3		Gains (Losses)
Loans held for investment	$	64	$	—	$	—	$	64	$	(20	)
Goodwill ⁽¹⁾	1,764		—		—		1,764		(1,614		)
Other assets	301		—		—		301		(36		)
Total	$	2,129	$	—	$	—	$	2,129	$	(1,670	)


(1)	For further information, see Note 5 to these Consolidated Financial Statements.



	December 31, 2018								For the Year Ended December 31, 2018
(Dollars in millions)	Fair Value		Level 1		Level 2		Level 3		Gains (Losses)
Loans held for investment	$	151	$	—	$	—	$	151	$	(106	)
Other assets	139		—		—		139		(45		)
Total	$	290	$	—	$	—	$	290	$	(151	)

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 borrowed or purchased under resale agreements, securities loaned or 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.

Financial instruments for which their carrying amounts do not approximate fair value include securities held to maturity, loans held for investment, interest bearing deposits with stated maturities, certain other short-term borrowings, long-term debt and off-balance sheet instruments.

Securities Held to Maturity: The fair value of U.S. Treasury, U.S. government agency and government-sponsored agencies securities, including RMBS and CMBS classified as held to maturity are based on unadjusted third party pricing service prices.

Loans Held for Investment: 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 loans were estimated based upon the type of loan and maturity and were determined by discounting the future expected cash flows using the current origination rates for similar loans made to borrowers with similar credit ratings and include adjustments for liquidity premiums.

Interest Bearing Deposits: The fair value of fixed maturity CDs was estimated using a discounted cash flow calculation that applies current interest rates being offered on certificates with similar maturities.

Commercial Paper and Other Short-Term Borrowings: 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 trusts was estimated using market quotes of similar securities.

Off-Balance Sheet Instruments: Commitments to extend credit and issued standby and commercial letters of credit are instruments that generate ongoing fees, which are recognized over the term of the commitment period. The carrying amount of these instruments was the amount of deferred fees and the fair value was estimated using a discounted cash flow calculation and reflected the portion of unused commitments expected to become funded. The Company maintains an allowance for losses on unfunded credit commitments.

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 as of December 31, 2019 and 2018.



	December 31, 2019
(Dollars in millions)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	9,641	$	9,641	$	9,641	$	—	$	—
Securities borrowed or purchased under resale agreements	23,943		23,946		—		23,946		—
Securities held to maturity	9,421		9,508		—		9,508		—
Loans held for investment ⁽¹⁾	86,687		87,506		—		—		87,506
Other assets	54		54		54		—		—
Liabilities
Time deposits	$	15,651	$	15,691	$	—	$	15,691	$	—
Securities loaned or sold under repurchase agreements	28,866		28,866		—		28,866		—
Commercial paper and other short-term borrowings	6,484		6,484		—		6,484		—
Long-term debt	17,129		17,344		—		17,344		—
Off-Balance Sheet Instruments
Commitments to extend credit and standby and commercial letters of credit	$	87	$	280	$	—	$	—	$	280


(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.