FAIR VALUE

Fair Value Measurement

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. For a discussion of the Bank’s valuation methodologies for assets and liabilities measured at fair value and the fair value hierarchy, see Note 3 of our 2018 Annual Report on Form 10-K.

Quantitative Disclosure by Fair Value Hierarchy

Assets and liabilities measured at fair value by class on a recurring basis are summarized as follows:



(In millions)	March 31, 2019
	Level 1		Level 2		Level 3		Total
ASSETS
Investment securities:
Available-for-sale: ¹
U.S. Treasury, agencies and corporations	$	40	$	13,559	$	—	$	13,599
Municipal securities			1,283				1,283
Other debt securities			22				22
Total Available-for-sale	40		14,864		—		14,904
Trading account	161		155				316
Other noninterest-bearing investments:
Bank-owned life insurance			518				518
Private equity investments					107		107
Other assets:
Agriculture loan servicing and interest-only strips					17		17
Deferred compensation plan assets	107						107
Derivatives:
Derivatives designated as hedges			9				9
Derivatives not designated as hedges:
Customer-facing interest rate			69				69
Other interest rate			1				1
Foreign exchange	3						3
Total Assets	$	311	$	15,616	$	124	$	16,051
LIABILITIES
Securities sold, not yet purchased	$	52	$	—	$	—	$	52
Other liabilities:
Deferred compensation plan obligations	107						107
Derivatives:
Derivatives not designated as hedges:
Customer-facing interest rate			22				22
Other interest rate			1				1
Foreign exchange	2						2
Total Liabilities	$	161	$	23	$	—	$	184

¹ We used a third-party pricing service to measure fair value for approximately 94% of our AFS Level 2 securities.



(In millions)	December 31, 2018
	Level 1		Level 2		Level 3		Total
ASSETS
Investment securities:
Available-for-sale: ¹
U.S. Treasury, agencies and corporations	$	40	$	13,385	$	—	$	13,425
Municipal securities			1,291				1,291
Other debt securities			21				21
Total Available-for-sale	40		14,697		—		14,737
Trading account	14		92				106
Other noninterest-bearing investments:
Bank-owned life insurance			516				516
Private equity investments					102		102
Other assets:
Agriculture loan servicing and interest-only strips					18		18
Deferred compensation plan assets	95						95
Derivatives:
Derivatives not designated as hedges:
Customer-facing interest rate			40				40
Other interest rate			1				1
Foreign exchange	4						4
Total Assets	$	153	$	15,346	$	120	$	15,619
LIABILITIES
Securities sold, not yet purchased	$	85	$	—	$	—	$	85
Other liabilities:
Deferred compensation plan obligations	95						95
Derivatives:
Derivatives not designated as hedges:
Customer-facing interest rate			36				36
Other interest rate			1				1
Foreign exchange	2						2
Total Liabilities	$	182	$	37	$	—	$	219

¹ We used a third-party pricing service to measure fair value for approximately 95% of our AFS Level 2 securities.

Level 3 Valuations

The Bank’s Level 3 holdings include private equity investments (“PEIs”), agriculture loan servicing, and interest-only strips. For additional information regarding the financial instruments measured under Level 3, and the methods and significant assumptions used to estimate their fair value, see Note 3 of our 2018 Annual Report on Form 10-K.

Reconciliation of Level 3 Fair Value Measurements

The following reconciles the beginning and ending balances of assets and liabilities that are measured at fair value by class on a recurring basis using Level 3 inputs:



	Level 3 Instruments
	Three Months Ended
	March 31, 2019					March 31, 2018
(In millions)	Private equity investments		Ag loan svcg and int-only strips			Private equity investments		Ag loan svcg and int-only strips

Balance at beginning of period	$	102	$	18		$	95	$	18
Securities gains (losses), net	1		—			—		—
Other noninterest income	—		(1		)	—		—
Purchases	4		—			5		—
Balance at end of period	$	107	$	17		$	100	$	18

The reconciliation of Level 3 instruments does not include any realized gains and losses in the statement of income during the three months ended March 31, 2019 and 2018.

Nonrecurring Fair Value Measurements

Included in the balance sheet amounts are the following amounts of assets that had fair value changes measured on a nonrecurring basis.



(In millions)	Fair value at March 31, 2019								Fair value at December 31, 2018
(In millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
ASSETS
Private equity investments	$	—	$	—	$	—	$	—	$	—	$	—	$	1	$	1
Impaired loans	—		2		—		2		—		32		—		32
Other real estate owned	—		1		—		1		—		—		—		—
Total	$	—	$	3	$	—	$	3	$	—	$	32	$	1	$	33

The previous fair values may not be current as of the dates indicated, but rather as of the date the fair value change occurred, such as a charge for impairment. Accordingly, carrying values may not equal current fair value.



	Gains (losses) from fair value changes
(In millions)	Three Months Ended March 31,
(In millions)	2019			2018
ASSETS
Private equity investments	$	—		$	—
Impaired loans	(4		)	(4		)
Other real estate owned	—			(1		)
Total	$	(4	)	$	(5	)

During the three months ended March 31, we recognized less than $1 million of net gains in 2019 and 2018 from the sale of OREO properties that had a carrying value, at the time of sale, of approximately $1 million during these same periods. Prior to their sale, we recognized an insignificant amount of impairment on these properties during the three months ended March 31, 2019 and 2018.

Private equity investments carried at cost were measured at fair value for impairment purposes according to the methodology previously discussed for these investments. Amounts of PEIs carried at cost were $10 million at March 31, 2019 and December 31, 2018. Amounts of other noninterest-bearing investments carried at cost were $272 million at March 31, 2019 and $329 million at December 31, 2018, which were comprised of Federal Reserve and Federal Home Loan Bank (“FHLB”) stock. Private equity investments accounted for using the equity method were $36 million at March 31, 2019 and $35 million at December 31, 2018.

Impaired (or nonperforming) loans that are collateral-dependent were measured at fair value based on the fair value of the collateral. OREO was measured initially at fair value based on collateral appraisals at the time of transfer and subsequently at the lower of cost or fair value. For additional information regarding the measurement of fair value for impaired loans, collateral-dependent loans, and OREO, see Note 3 of our 2018 Annual Report on Form 10-K.

Fair Value of Certain Financial Instruments

Following is a summary of the carrying values and estimated fair values of certain financial instruments:



	March 31, 2019					December 31, 2018
(In millions)	Carrying value		Estimated fair value		Level	Carrying value		Estimated fair value		Level
Financial assets:
HTM investment securities	$	764	$	762	2	$	774	$	767	2
Loans and leases (including loans held for sale), net of allowance	47,178		46,197		3	46,312		45,251		3
Financial liabilities:
Time deposits	4,928		4,921		2	4,336		4,319		2
Long-term debt	1,228		1,240		2	724		727		2

This summary excludes financial assets and liabilities for which carrying value approximates fair value and financial instruments that are recorded at fair value on a recurring basis. For additional information regarding the financial instruments within the scope of this disclosure, and the methods and significant assumptions used to estimate their fair value, see Note 3 of our 2018 Annual Report on Form 10-K.