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 2019 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 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 2019 Form 10-K.

Fair Value Measurements on a Recurring Basis

The following table presents financial assets and financial liabilities measured at fair value on a recurring basis at September 30, 2020 and December 31, 2019, by major category and by valuation hierarchy level.



	September 30, 2020															December 31, 2019
(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	$	—		$	2,357		$	—		$	—		$	2,357		$	—		$	2,393		$	—		$	—		$	2,393
Mortgage-backed:
U.S. agencies	—			6,949			—			—			6,949			—			5,376			—			—			5,376
Corporate debt	—			721			—			—			721			—			1,212			—			—			1,212
Other debt	—			312			—			—			312			—			306			—			—			306
Equity	160			—			—			—			160			127			—			—			—			127
Derivative contracts	11			2,517			1			(525		)	2,004			16			1,195			8			(256		)	963
Total trading account assets	171			12,856			1			(525		)	12,503			143			10,482			8			(256		)	10,377
Securities available for sale:
U.S. Treasury and government agencies	—			3,282			—			—			3,282			—			5,438			—			—			5,438
Mortgage-backed:
U.S. agencies	—			5,461			—			—			5,461			—			5,468			—			—			5,468
Residential - non-agency	—			655			—			—			655			—			762			—			—			762
Commercial - non-agency	—			4,409			17			—			4,426			—			3,471			18			—			3,489
Collateralized loan obligations	—			1,371			—			—			1,371			—			1,491			—			—			1,491
Direct bank purchase bonds	—			—			937			—			937			—			—			936			—			936
Other	—			11			527			—			538			—			28			177			—			205
Total securities available for sale	—			15,189			1,481			—			16,670			—			16,658			1,131			—			17,789
Other assets:
Mortgage servicing rights	—			—			122			—			122			—			—			270			—			270
Loans held for sale	—			—			44			—			44			—			—			42			—			42
Derivative contracts	—			2			14			(1		)	15			—			10			4			(8		)	6
Equity securities	20			—			—			—			20			10			—			—			—			10
Total other assets	20			2			180			(1		)	201			10			10			316			(8		)	328
Total assets	$	191		$	28,047		$	1,662		$	(526	)	$	29,374		$	153		$	27,150		$	1,455		$	(264	)	$	28,494
Percentage of total	1		%	97		%	4		%	(2		)%	100		%	1		%	95		%	5		%	(1		)%	100		%
Percentage of total Company assets	—		%	17		%	1		%	—		%	18		%	—		%	16		%	1		%	—		%	17		%
Liabilities
Trading account liabilities:
U.S. Treasury and government agencies	$	—		$	1,998		$	—		$	—		$	1,998		$	—		$	2,299		$	—		$	—		$	2,299
Corporate debt	—			369			—			—			369			—			646			—			—			646
Other debt	—			71			—			—			71			—			4			—			—			4
Equity	96			—			—			—			96			105			—			—			—			105
Derivatives contracts	12			907			1			(648		)	272			11			499			8			(306		)	212
Total trading account liabilities	108			3,345			1			(648		)	2,806			116			3,448			8			(306		)	3,266
Other liabilities:
FDIC clawback liability	—			—			—			—			—			—			—			121			—			121
Derivatives contracts	—			3			5			(1		)	7			—			2			3			—			5
Total other liabilities	—			3			5			(1		)	7			—			2			124			—			126
Total liabilities	$	108		$	3,348		$	6		$	(649	)	$	2,813		$	116		$	3,450		$	132		$	(306	)	$	3,392
Percentage of total	4		%	119		%	—		%	(23		)%	100		%	3		%	102		%	4		%	(9		)%	100		%
Percentage of total Company liabilities	—		%	2		%	—		%	—		%	2		%	—		%	2		%	—		%	—		%	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, 2020 and 2019. Level 3 securities available for sale at September 30, 2020 and 2019 primarily consist of direct bank purchase bonds.




	For the Three Months Ended
	September 30, 2020															September 30, 2019
(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	$	2		$	1,125		$	200		$	(2	)	$	(108	)	$	12	$	1,088		$	519		$	(12	)	$	(125	)
Total gains (losses) - realized/unrealized:
Included in income before taxes	1			—			(23		)	(1		)	(5		)	—		—			(18		)	—			—
Included in other comprehensive income	—			10			—			—			—			—		5			—			—			—
Purchases/additions	—			350			3			—			—			—		52			76			—			—
Sales	—			—			—			—			—			—		—			(269		)	—			—
Settlements	(2		)	(4		)	—			2			108			—		(4		)	—			—			—
Transfers in (out) of level 3	—			—			—			—			—			—		—			—			—			—
Asset (liability) balance, end of period	$	1		$	1,481		$	180		$	(1	)	$	(5	)	$	12	$	1,141		$	308		$	(12	)	$	(125	)
Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period	$	1		$	—		$	(23	)	$	(1	)	$	(5	)	$	—	$	—		$	(33	)	$	—		$	—



	For the Nine Months Ended
	September 30, 2020															September 30, 2019
(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	$	8		$	1,131		$	316		$	(8	)	$	(124	)	$	13		$	1,331		$	277		$	(13	)	$	(118	)
Total gains (losses) - realized/unrealized):
Included in income before taxes	(2		)	—			(147		)	2			(3		)	2			—			(94		)	(2		)	(7		)
Included in other comprehensive income	—			11			—			—			—			—			25			—			—			—
Purchases/additions	—			380			11			—			—			—			56			394			—			—
Sales	—			—			—			—			—			—			—			(269		)	—			—
Settlements	(5		)	(41		)	—			5			122			(3		)	(271		)	—			3			—
Transfers in (out) of level 3	—			—			—			—			—			—			—			—			—			—
Asset (liability) balance, end of period	$	1		$	1,481		$	180		$	(1	)	$	(5	)	$	12		$	1,141		$	308		$	(12	)	$	(125	)
Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period	$	(2	)	$	—		$	(147	)	$	2		$	(3	)	$	2		$	—		$	(109	)	$	(2	)	$	(7	)

The following table presents information about significant unobservable inputs related to the Company’s significant Level 3 assets and liabilities at September 30, 2020.



	September 30, 2020
(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	$	937	Return on equity	Market-required return on capital	8.0-10.0	%	9.8	%
				Probability of default	0.0-25.0		0.5
				Loss severity	10.0-65.0		21.7

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 nine months ended September 30, 2020 and 2019 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, 2020								For the Three Months Ended September 30, 2020			For the Nine Months Ended September 30, 2020
(Dollars in millions)	Fair Value		Level 1		Level 2		Level 3		Gains (Losses)			Gains (Losses)
Loans held for investment	$	106	$	—	$	—	$	106	$	(31	)	$	(98	)
Goodwill impairment	1,407		—		—		1,407		(357		)	(357		)
Other assets	101		—		—		101		(15		)	(70		)
Total	$	1,614	$	—	$	—	$	1,614	$	(403	)	$	(525	)



	September 30, 2019								For the Three Months Ended September 30, 2019			For the Nine Months Ended September 30, 2019
(Dollars in millions)	Fair Value		Level 1		Level 2		Level 3		Gains (Losses)			Gains (Losses)
Loans held for investment	$	36	$	—	$	—	$	36	$	(17	)	$	(20	)
Goodwill impairment	1,764		—		—		1,764		(1,614		)	(1,614		)
Other assets	260		—		—		260		(6		)	(21		)
Total	$	2,060	$	—	$	—	$	2,060	$	(1,637	)	$	(1,655	)

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 September 30, 2020 and December 31, 2019.



	September 30, 2020
(Dollars in millions)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	15,187	$	15,187	$	15,187	$	—	$	—
Securities borrowed or purchased under resale agreements	17,535		17,537		—		17,537		—
Securities held to maturity	7,643		7,900		—		7,900		—
Loans held for investment⁽¹⁾	82,662		84,404		—		—		84,404
Other assets	46		46		46		—		—
Liabilities
Time deposits	$	8,402	$	8,449	$	—	$	8,449	$	—
Securities loaned or sold under repurchase agreements	23,432		23,433		—		23,433		—
Commercial paper and other short-term borrowings	849		849		—		849		—
Long-term debt	15,150		15,520		—		15,520		—
Off-Balance Sheet Instruments
Commitments to extend credit and standby and commercial letters of credit	$	74	$	310	$	—	$	—	$	310


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



	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.