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Fair Value

9 Months Ended

Sep. 30, 2019

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)	September 30, 2019
			Level 1			Level 2			Level 3			Total
ASSETS
Investment securities:
Available-for-sale: ¹
U.S. Treasury, agencies and corporations	$	25		$	12,639		$	—		$	12,664
Municipal securities				1,344						1,344




Other debt securities				25						25
Total Available-for-sale	25			14,008			—			14,033
Trading account	127			153						280
Other noninterest-bearing investments:
Bank-owned life insurance				525						525
Private equity investments							108			108
Other assets:
Agriculture loan servicing and interest-only strips							19			19
Deferred compensation plan assets	108									108
Derivatives:

Derivatives not designated as hedges:
Customer-facing interest rate				203						203

Other interest rate				4						4
Foreign exchange	3									3
Total Assets	$	263		$	14,893		$	127		$	15,283
LIABILITIES
Securities sold, not yet purchased	$	4		$	—		$	—		$	4
Other liabilities:
Deferred compensation plan obligations	108									108
Derivatives:

Derivatives not designated as hedges:
Customer-facing interest rate				13						13

Other interest rate				1						1
Foreign exchange	2									2


Total Liabilities	$	114		$	14		$	—		$	128

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														Nine Months Ended
	September 30, 2019						September 30, 2018						September 30, 2019				September 30, 2018
(In millions)	Private equity investments		Ag loan svcg and int-only strips		Private equity investments		Ag loan svcg and int-only strips		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	$	105	$	19	$	102	$	18	$	102	$	18	$	95	$	18

Securities gains (losses), net	1		—		(1)		—		—		—		—		—
Other noninterest income	—		—		—		—		—		1		—		—
Purchases	1		—		2		—		5		—		8		—


Balance at end of period	$	107	$	19	$	103	$	18	$	107	$	19	$	103	$	18

The reconciliation of Level 3 instruments includes $9 million in realized losses in the statement of income during the three months ended September 30, 2019, and no realized gains and losses during the same period in 2018. During the nine months ended September 30, there was $9 million in realized losses in the statement of income in 2019 and $3 million in realized losses in 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 September 30, 2019																					Fair value at December 31, 2018
			Level 1			Level 2			Level 3			Total			Level 1			Level 2			Level 3			Total
ASSETS
Private equity investments	$	—		$	—		$	1		$	1		$	—		$	—		$	1		$	1
Impaired loans	—			6			—			6			—			32			—			32
Other real estate owned	—			1			—			1			—			—			—			—
Total	$	—		$	7		$	1		$	8		$	—		$	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 September 30,									Nine Months Ended September 30,
			2019			2018			2019			2018
ASSETS
Private equity investments	$	(1)		$	—		$	(1)		$	—
Impaired loans	—			(9)			(9)			(15)
Other real estate owned	—			—			(1)			(1)
Total	$	(1)		$	(9)		$	(11)		$	(16)

During the three months ended September 30, we recognized $2 million of net gains in 2019 and an insignificant amount of net gains in 2018 from the sale of other real estate owned (“OREO”) properties. During the nine months ended September 30, we recognized $3 million of net gains in 2019 and $1 million in 2018 from the sale of OREO properties that had a carrying value, at the time of sale, of $4 million and $3 million during these same periods. Prior to their sale, we recognized an insignificant amount of impairment on these properties during the nine months ended September 30, 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 $8 million at

September 30, 2019 and $10 million at December 31, 2018. Amounts of other noninterest-bearing investments carried at cost were $252 million at September 30, 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 $41 million at September 30, 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:


	September 30, 2019									December 31, 2018
(In millions)	Carrying value		Estimated fair value		Level	Carrying value		Estimated fair value		Level
Financial assets:
HTM investment securities	$	658	$	662	2	$	774	$	767	2
Loans and leases (including loans held for sale), net of allowance	48,466		47,819		3	46,312		45,251		3
Financial liabilities:
Time deposits	4,942		4,953		2	4,336		4,319		2


Long-term debt	1,242		1,255		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.

- 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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