Fair Value Measurement and Fair Value of Financial Instruments

12 Months Ended

Dec. 31, 2020

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.

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. 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:

Loans Held for Investment: A collateral-dependent individually assessed loan may be measured based on a loan's observable market price or the underlying collateral securing the loan, which approximates 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. These loans are reviewed and evaluated at least quarterly for additional impairment and adjusted accordingly. 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, 2020 and 2019, by major category and by valuation hierarchy level.


	December 31, 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	$	—		$	3,118		$	—		$	—		$	3,118		$	—		$	2,393		$	—		$	—		$	2,393
Mortgage-backed:
U.S. agencies	—			8,936			—			—			8,936			—			5,376			—			—			5,376
Corporate debt	—			838			—			—			838			—			1,212			—			—			1,212
Other debt	—			354			—			—			354			—			306			—			—			306
Equity	925			—			—			—			925			127			—			—			—			127
Derivative contracts	20			2,277			1			(431)			1,867			16			1,195			8			(256)			963
Total trading account assets	945			15,523			1			(431)			16,038			143			10,482			8			(256)			10,377
Securities available for sale:
U.S. Treasury and government agencies	—			4,473			—			—			4,473			—			5,438			—			—			5,438
Mortgage-backed:
U.S. agencies	—			5,922			—			—			5,922			—			5,468			—			—			5,468
Residential - non-agency	—			539			—			—			539			—			762			—			—			762
Commercial - non-agency	—			4,473			16			—			4,489			—			3,471			18			—			3,489
Collateralized loan obligations	—			1,367			—			—			1,367			—			1,491			—			—			1,491
Direct bank purchase bonds	—			—			930			—			930			—			—			936			—			936
Other	—			11			528			—			539			—			28			177			—			205
Total securities available for sale	—			16,785			1,474			—			18,259			—			16,658			1,131			—			17,789
Other assets:
Mortgage servicing rights	—			—			110			—			110			—			—			270			—			270
Loans held for sale	—			—			43			—			43			—			—			42			—			42
Derivative contracts	—			2			13			(1)			14			—			10			4			(8)			6
Equity securities	20			—			—			—			20			10			—			—			—			10
Total other assets	20			2			166			(1)			187			10			10			316			(8)			328
Total assets	$	965		$	32,310		$	1,641		$	(432)		$	34,484		$	153		$	27,150		$	1,455		$	(264)		$	28,494
Percentage of total	3		%	93		%	5		%	(1)		%	100		%	1		%	95		%	5		%	(1)		%	100		%
Percentage of total Company assets	1		%	19		%	1		%	—		%	21		%	—		%	16		%	1		%	—		%	17		%
Liabilities
Trading account liabilities:
U.S. Treasury and government agencies	$	—		$	2,359		$	—		$	—		$	2,359		$	—		$	2,299		$	—		$	—		$	2,299
Corporate debt	—			483			—			—			483			—			646			—			—			646
Other debt	—			—			—			—			—			—			4			—			—			4
Equity	144			—			—			—			144			105			—			—			—			105
Derivatives contracts	58			962			1			(674)			347			11			499			8			(306)			212
Total trading account liabilities	202			3,804			1			(674)			3,333			116			3,448			8			(306)			3,266
Other liabilities:
FDIC clawback liability	—			—			—			—			—			—			—			121			—			121
Derivatives contracts	—			3			4			(1)			6			—			2			3			—			5
Total other liabilities	—			3			4			(1)			6			—			2			124			—			126
Total liabilities	$	202		$	3,807		$	5		$	(675)		$	3,339		$	116		$	3,450		$	132		$	(306)		$	3,392
Percentage of total	6		%	114		%	—		%	(20)		%	100		%	3		%	102		%	4		%	(9)		%	100		%
Percentage of total Company liabilities	—		%	3		%	—		%	—		%	3		%	—		%	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 years ended December 31, 2020 and 2019. Level 3 securities available for sale at December 31, 2020 and 2019 largely consist of direct bank purchase bonds.



	For the Year Ended
	December 31, 2020										December 31, 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)		—		(166)		2		(2)		4		—		(88)		(4)		(6)
Included in other comprehensive income	—		13		—		—		—		—		31		—		—		—
Purchases/additions	—		382		16		—		—		—		57		396		—		—
Sales	—		—		—		—		—		—		—		(269)		—		—
Settlements	(5)		(52)		—		5		122		(9)		(288)		—		9		—

Asset (liability) balance, end of period	$	1	$	1,474	$	166	$	(1)	$	(4)	$	8	$	1,131	$	316	$	(8)	$	(124)
Changes in unrealized gains (losses) included in income before taxes for assets and liabilities still held at end of period	$	(2)	$	—	$	(166)	$	2	$	(2)	$	4	$	—	$	(103)	$	(4)	$	(6)

The following table presents information about significant unobservable inputs related to the Company's significant Level 3 assets and liabilities at December 31, 2020.


	December 31, 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	$	930	Return on equity	Market-required return on capital	8.0-10.0	%	10.0	%
				Probability of default	0.0-8.0		0.4
				Loss severity	10.0-65.0		21.7

Other	$	528	Discounted cash flow	Discount rate	1.1-4.5		3.5
				Liquidity adjustment	0.8-3.2		2.4

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.

Other securities available for sale generally use a discounted cash flow valuation technique. This technique uses significant unobservable inputs such as discount rate and liquidity adjustment. 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, 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.


	December 31, 2020								For the Year Ended December 31, 2020
(Dollars in millions)	Fair Value		Level 1		Level 2		Level 3		Gains (Losses)
Loans held for investment	$	187	$	—	$	—	$	187	$	(134)
Goodwill (1)	1,407		—		—		1,407		(357)
Other assets	89		—		—		89		(72)
Total	$	1,683	$	—	$	—	$	1,683	$	(563)

(1)For further information, see Note 5 to these consolidated financial statements.


	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.

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, 2020 and 2019.


	December 31, 2020
(Dollars in millions)	Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Assets
Cash and cash equivalents	$	16,414	$	16,414	$	16,414	$	—	$	—
Securities borrowed or purchased under resale agreements	17,608		17,607		—		17,607		—
Securities held to maturity	7,311		7,532		—		7,532		—
Loans held for investment (1)	79,873		81,528		—		—		81,528
Other assets	31		31		31		—		—
Liabilities
Time deposits	$	7,419	$	7,451	$	—	$	7,451	$	—
Securities loaned or sold under repurchase agreements	27,161		27,161		—		27,161		—
Commercial paper and other short-term borrowings	110		110		—		110		—
Long-term debt	14,631		14,973		—		14,973		—
Off-Balance Sheet Instruments
Commitments to extend credit and standby and commercial letters of credit	$	40	$	313	$	—	$	—	$	313

(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.

- Definition

The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information.

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