FAIR VALUE DISCLOSURES

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In determining fair value, the Company may use various valuation approaches, including market, income and/or cost approaches. The fair value hierarchy requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. Fair value is a market-based measure considered from the perspective of a market participant. Accordingly, even when market assumptions are not readily available, the Company’s own assumptions reflect those that market participants would use in pricing the asset or liability at the measurement date. The fair value measurement accounting guidance describes the following three levels used to classify fair value measurements:


•	Level 1—unadjusted quoted prices in active markets for identical assets or liabilities that are accessible by the Company


•	Level 2—quoted prices for similar assets and liabilities in an active market, quoted prices in markets that are not active or for which all significant inputs are observable, either directly or indirectly


•	Level 3—unobservable inputs that are significant to the fair value of the assets or liabilities

The availability of observable inputs can vary and in certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to a fair value measurement requires judgment and consideration of factors specific to the asset or liability.

Recurring Fair Value Measurement Techniques

Mortgage-backed Securities

The Company’s mortgage-backed securities portfolio is comprised of agency mortgage-backed securities which are guaranteed by U.S. government sponsored enterprises and federal agencies. The fair value of agency mortgage-backed securities was determined using a market approach with quoted market prices, recent transactions and spread data for identical or similar instruments. Agency mortgage-backed securities were categorized in Level 2 of the fair value hierarchy.

Other Debt Securities

The Company's fair value level classification of U.S. Treasuries is based on the original maturity dates of the securities and whether the securities are the most recent issuances of a given maturity. U.S. Treasuries with original maturities less than one year are classified as Level 1. U.S. Treasuries with original maturities longer than one year are classified as Level 1 if they represent the most recent issuance of a given maturity; otherwise, these securities are classified as Level 2.

The fair value measurements of agency debentures and agency debt securities were determined using market and income approaches along with the Company’s own trading activities for identical or similar instruments and were categorized in Level 2 of the fair value hierarchy.

All of the Company’s municipal bonds were rated investment grade at June 30, 2017. These securities were valued using a market approach with pricing service valuations corroborated by recent market transactions for identical or similar bonds. Municipal bonds and corporate bonds were categorized in Level 2 of the fair value hierarchy.

Publicly Traded Equity Securities

The fair value measurements of the Company's publicly traded equity securities were classified as Level 1 of the fair value hierarchy as they were based on quoted prices in active markets.

Derivative Instruments

Interest rate swap and option contracts were valued with an income approach using pricing models that are commonly used by the financial services industry. The market observable inputs used in the pricing models include the swap curve, the volatility surface, and prime or overnight indexed swap basis from a financial data provider. The Company does not consider these models to involve significant judgment on the part of management, and the Company corroborated the fair value measurements with counterparty valuations. The Company’s derivative instruments were categorized in Level 2 of the fair value hierarchy. The consideration of credit risk, the Company’s or the counterparty’s, did not result in an adjustment to the valuation of its derivative instruments in the periods presented.

Nonrecurring Fair Value Measurement Techniques

Certain other assets are recorded at fair value on a nonrecurring basis: 1) one- to four-family and home equity loans in which the amount of the loan balance in excess of the estimated current value of the underlying property less estimated selling costs has been charged-off; and 2) real estate owned that is carried at the lower of the property’s carrying value or fair value less estimated selling costs.

The Company evaluates and reviews assets that have been subject to fair value measurement requirements on a quarterly basis in accordance with policies and procedures that were designed to be in compliance with guidance from the Company’s regulators. These policies and procedures govern the frequency of the review, the use of acceptable valuation methods, and the consideration of estimated selling costs.

Loans Receivable

Loans that have been delinquent for 180 days or that are in bankruptcy and certain TDR loan modifications are charged-off based on the estimated current value of the underlying property less estimated selling costs. Property valuations for these one- to four-family and home equity loans are based on the most recent "as is" property valuation data available, which may include appraisals, broker price opinions (BPOs), automated valuation models or updated values using home price indices. Subsequent to the recording of an initial fair value measurement, these loans continue to be measured at fair value on a nonrecurring basis, utilizing the estimated value of the underlying property less estimated selling costs. These property valuations are updated on a monthly, quarterly or semi-annual basis depending on the type of valuation initially used. If the valuation data obtained is significantly different from the valuation previously received, the Company reviews additional property valuation data to corroborate or update the valuation. If the value of the underlying property has declined, an additional charge-off is recorded. If the value of the underlying property has increased, previously charged-off amounts are not reversed. Recoveries of previously charged-off amounts are recognized within the allowance for loan losses when received.

Real Estate Owned

Property valuations for real estate owned are based on the lowest value of the most recent property valuation data available, which may include appraisals, listing prices or approved offer prices.

Nonrecurring fair value measurements on one- to four-family and home equity loans and real estate owned were classified as Level 3 of the fair value hierarchy as the valuations included unobservable inputs that were significant to the fair value. The following table presents additional information about significant unobservable inputs used in the valuation of assets measured at fair value on a nonrecurring basis that were categorized in Level 3 of the fair value hierarchy at June 30, 2017 and December 31, 2016:



	Unobservable Inputs	Average		Range
June 30, 2017
Loans receivable:
One- to four-family	Appraised value	$	416,000	$40,000-$1,200,000
Home equity	Appraised value	$	320,500	$29,500-$1,990,000
Real estate owned	Appraised value	$	296,500	$17,000-$1,120,000

December 31, 2016
Loans receivable:
One- to four-family	Appraised value	$	408,100	$50,000-$1,490,000
Home equity	Appraised value	$	312,000	$6,000-$2,500,000
Real estate owned	Appraised value	$	342,300	$21,500-$1,800,000

Recurring and Nonrecurring Fair Value Measurements

Assets and liabilities measured at fair value at June 30, 2017 and December 31, 2016 are summarized in the following tables (dollars in millions):



	Level 1		Level 2		Level 3		Total Fair Value
June 30, 2017:
Recurring fair value measurements:
Assets
Available-for-sale securities:
Debt securities:
Agency mortgage-backed securities	$	—	$	17,380	$	—	$	17,380
Agency debentures	—		988		—		988
U.S. Treasuries	—		451		—		451
Agency debt securities	—		33		—		33
Municipal bonds	—		31		—		31
Total debt securities	—		18,883		—		18,883
Publicly traded equity securities	7		—		—		7
Total available-for-sale securities	7		18,883		—		18,890
Receivables from brokers, dealers and clearing organizations:
U.S. Treasuries	134		—		—		134
Other assets:
Derivative assets⁽¹⁾	—		90		—		90
Total assets measured at fair value on a recurring basis⁽²⁾	$	141	$	18,973	$	—	$	19,114
Liabilities
Other liabilities:
Derivative liabilities⁽¹⁾	$	—	$	38	$	—	$	38
Total liabilities measured at fair value on a recurring basis⁽²⁾	$	—	$	38	$	—	$	38
Nonrecurring fair value measurements:
Loans receivable, net:
One- to four-family	$	—	$	—	$	14	$	14
Home equity	—		—		19		19
Total loans receivable	—		—		33		33
Other assets:
Real estate owned	—		—		20		20
Total assets measured at fair value on a nonrecurring basis⁽³⁾	$	—	$	—	$	53	$	53


(1)	All derivative assets and liabilities were interest rate contracts at June 30, 2017. Information related to derivative instruments is detailed in Note 7—Derivative Instruments and Hedging Activities.


(2)	Assets and liabilities measured at fair value on a recurring basis represented 33% and less than 1% of the Company’s total assets and total liabilities, respectively, at June 30, 2017.


(3)	Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheet at June 30, 2017, and for which a fair value measurement was recorded during the period.



	Level 1		Level 2		Level 3		Total Fair Value
December 31, 2016:
Recurring fair value measurements:
Assets
Available-for-sale securities:
Debt securities:
Agency mortgage-backed securities	$	—	$	12,634	$	—	$	12,634
Agency debentures	—		788		—		788
U.S. Treasuries	—		407		—		407
Agency debt securities	—		24		—		24
Municipal bonds	—		32		—		32
Total debt securities	—		13,885		—		13,885
Publicly traded equity securities	7		—		—		7
Total available-for-sale securities	7		13,885		—		13,892
Other assets:
Derivative assets⁽¹⁾	—		165		—		165
Total assets measured at fair value on a recurring basis⁽²⁾	$	7	$	14,050	$	—	$	14,057
Liabilities
Other liabilities:
Derivative liabilities⁽¹⁾	$	—	$	31	$	—	$	31
Total liabilities measured at fair value on a recurring basis⁽²⁾	$	—	$	31	$	—	$	31
Nonrecurring fair value measurements:
Loans receivable, net:
One- to four-family	$	—	$	—	$	25	$	25
Home equity	—		—		21		21
Total loans receivable	—		—		46		46
Other assets:
Real estate owned	—		—		35		35
Total assets measured at fair value on a nonrecurring basis⁽³⁾	$	—	$	—	$	81	$	81


(1)	All derivative assets and liabilities were interest rate contracts at December 31, 2016. Information related to derivative instruments is detailed in Note 7—Derivative Instruments and Hedging Activities.


(2)	Assets and liabilities measured at fair value on a recurring basis represented 29% and less than 1% of the Company’s total assets and total liabilities, respectively, at December 31, 2016.


(3)	Represents the fair value of assets prior to deducting estimated selling costs that were carried on the consolidated balance sheet at December 31, 2016, and for which a fair value measurement was recorded during the period.

The following table presents gains and losses recognized on assets measured at fair value on a nonrecurring basis during the three and six months ended June 30, 2017 and 2016 (dollars in millions):



	Three Months Ended June 30,				Six Months Ended June 30,
	2017		2016		2017			2016
One- to four-family	$	1	$	1	$	2		$	2
Home equity	2		4		3			7
Total losses on loans receivable measured at fair value	$	3	$	5	$	5		$	9
Losses (gains) on real estate owned measured at fair value	$	—	$	1	$	(1	)	$	1

Transfers Between Levels 1, 2 and 3

For assets and liabilities measured at fair value on a recurring basis, the Company’s transfers between levels of the fair value hierarchy are deemed to have occurred at the beginning of the reporting period on a quarterly basis. The Company had no transfers between levels during the six months ended June 30, 2017 and 2016.

Recurring Fair Value Measurements Categorized within Level 3

For the periods presented, no assets or liabilities measured at fair value on a recurring basis were categorized within Level 3 of the fair value hierarchy.

Fair Value of Financial Instruments Not Carried at Fair Value

The following table summarizes the carrying values, fair values and fair value hierarchy level classification of financial instruments that are not carried at fair value on the consolidated balance sheet at June 30, 2017 and December 31, 2016 (dollars in millions):



	June 30, 2017
	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
Assets
Cash and equivalents	$	1,091	$	1,091	$	—	$	—	$	1,091
Cash required to be segregated under federal or other regulations	$	889	$	889	$	—	$	—	$	889
Held-to-maturity securities:
Agency mortgage-backed securities	$	18,426	$	—	$	18,479	$	—	$	18,479
Agency debentures	291		—		291		—		291
Agency debt securities	2,778		—		2,788		—		2,788
Other non-agency debt securities	7		—		—		7		7
Total held-to-maturity securities	$	21,502	$	—	$	21,558	$	7	$	21,565
Margin receivables⁽¹⁾	$	7,773	$	—	$	7,773	$	—	$	7,773
Loans receivable, net:
One- to four-family	$	1,642	$	—	$	—	$	1,676	$	1,676
Home equity	1,204		—		—		1,175		1,175
Consumer	209		—		—		209		209
Total loans receivable, net⁽²⁾	$	3,055	$	—	$	—	$	3,060	$	3,060
Receivables from brokers, dealers and clearing organizations⁽¹⁾	$	1,103	$	—	$	1,103	$	—	$	1,103
Liabilities
Deposits	$	40,072	$	—	$	40,072	$	—	$	40,072
Customer payables	$	7,992	$	—	$	7,992	$	—	$	7,992
Payables to brokers, dealers and clearing organizations	$	1,473	$	—	$	1,473	$	—	$	1,473
Other borrowings:
Securities sold under agreements to repurchase	$	400	$	—	$	400	$	—	$	400
FHLB advances	$	200	$	—	$	200	$	—	$	200
Trust preferred securities	$	409	$	—	$	—	$	321	$	321
Total other borrowings	$	1,009	$	—	$	600	$	321	$	921
Corporate debt	$	992	$	—	$	1,040	$	—	$	1,040

(1)

The fair value of securities that the Company received as collateral in connection with margin receivables and securities borrowing activities, where the Company is permitted to sell or re-pledge the securities, was approximately $11.0 billion and $9.8 billion at June 30, 2017 and December 31, 2016, respectively. Of this amount, $2.9 billion and $2.0 billion had been pledged or sold in connection with securities loans and deposits with clearing organizations at June 30, 2017 and December 31, 2016, respectively.


(2)	The carrying value of loans receivable, net includes the allowance for loan losses of $116 million and loans that are recorded at fair value on a nonrecurring basis at June 30, 2017.



	December 31, 2016
	Carrying Value		Level 1		Level 2		Level 3		Total Fair Value
Assets
Cash and equivalents	$	1,950	$	1,950	$	—	$	—	$	1,950
Cash required to be segregated under federal or other regulations	$	1,460	$	1,460	$	—	$	—	$	1,460
Held-to-maturity securities:
Agency mortgage-backed securities	$	12,868	$	—	$	12,839	$	—	$	12,839
Agency debentures	29		—		29		—		29
Agency debt securities	2,854		—		2,848		—		2,848
Total held-to-maturity securities	$	15,751	$	—	$	15,716	$	—	$	15,716
Margin receivables	$	6,731	$	—	$	6,731	$	—	$	6,731
Loans receivable, net:
One- to four-family	$	1,918	$	—	$	—	$	1,942	$	1,942
Home equity	1,385		—		—		1,311		1,311
Consumer	248		—		—		249		249
Total loans receivable, net⁽¹⁾	$	3,551	$	—	$	—	$	3,502	$	3,502
Receivables from brokers, dealers and clearing organizations	$	1,056	$	—	$	1,056	$	—	$	1,056
Liabilities
Deposits	$	31,682	$	—	$	31,681	$	—	$	31,681
Customer Payables	$	8,159	$	—	$	8,159	$	—	$	8,159
Payables to brokers, dealers and clearing organizations	$	983	$	—	$	983	$	—	$	983
Trust preferred securities	$	409	$	—	$	—	$	288	$	288
Corporate debt	$	994	$	—	$	1,050	$	—	$	1,050


(1)	The carrying value of loans receivable, net includes the allowance for loan losses of $221 million and loans that are recorded at fair value on a nonrecurring basis at December 31, 2016.

The fair value measurement techniques for financial instruments not carried at fair value on the consolidated balance sheet at June 30, 2017 and December 31, 2016 are summarized as follows:

Cash and equivalents, cash required to be segregated under federal or other regulations, margin receivables, receivables from brokers, dealers and clearing organizations, customer payables and payables to brokers, dealers and clearing organizations—Due to their short term nature, fair value is estimated to be carrying value.

Held-to-maturity securities—The held-to-maturity securities portfolio included agency mortgage-backed securities, agency debentures, agency debt securities, and other non-agency debt securities. The fair value of held-to-maturity securities is determined consistently with the pricing of available-for-sale securities described above.

Loans receivable, net—Fair value is estimated using a discounted cash flow model. Loans are differentiated based on their individual portfolio characteristics, such as product classification, loan category and pricing features. Assumptions for expected losses, prepayments, cash flows and discount rates are adjusted to reflect the individual characteristics of the loans, such as credit risk, coupon, lien position, and payment characteristics, as well as the secondary market conditions for these types of loans.

Although the market for one- to four-family and home equity loan portfolios has improved, given the lack of observability of valuation inputs, these fair value measurements cannot be determined with precision and changes in the underlying assumptions used, including discount rates, could significantly affect the results of current or future fair value estimates. In addition, the amount that would be realized in a forced liquidation, an actual sale or immediate settlement could be lower than both the carrying value and the estimated fair value of the portfolio.

Deposits—For certificates of deposit, fair value is estimated using a discounted cash flow model. For the remainder of deposits, fair value is the amount payable on demand at the reporting date.

Securities sold under agreements to repurchase and FHLB advances— Fair value for securities sold under agreements to repurchase and FHLB advances was determined by discounting future cash flows using discount factors derived from current observable rates implied for other similar instruments with similar remaining maturities.

Trust preferred securities—For subordinated debentures, fair value is estimated by discounting future cash flows at the yield implied by dealer pricing quotes.

Corporate debt—For interest-bearing corporate debt, fair value is estimated using dealer pricing quotes. The fair value of the non-interest-bearing convertible debentures is directly correlated to the intrinsic value of the Company’s underlying stock; therefore, as the price of the Company’s stock increases relative to the conversion price, the fair value of the convertible debentures increases.

Fair Value of Commitments and Contingencies

In the normal course of business, the Company makes various commitments to extend credit and incur contingent liabilities that are not reflected in the consolidated balance sheet. Changes in the economy or interest rates may influence the impact that these commitments and contingencies have on the Company in the future. The Company does not estimate the fair value of those commitments. The Company has the right to cancel these commitments in certain circumstances and has closed a significant amount of customer HELOCs in the past ten years. Information related to such commitments and contingent liabilities is included in Note 14—Commitments, Contingencies and Other Regulatory Matters.