Fair Values of Assets and Liabilities

9 Months Ended

Sep. 30, 2011

Fair Values of Assets and Liabilities [Abstract]

Fair Values of Assets and Liabilities

Note 13    Fair Values of Assets and Liabilities

The Company uses fair value measurements for the initial recording of certain assets and liabilities, periodic remeasurement of certain assets and liabilities, and disclosures. Derivatives, trading and available-for-sale investment securities, certain mortgage loans held for sale (“MLHFS”) and MSRs are recorded at fair value on a recurring basis. Additionally, from time to time, the Company may be required to record at fair value other assets on a nonrecurring basis, such as loans held for sale, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-fair value accounting or impairment write-downs of individual assets.

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. A fair value measurement reflects all of the assumptions that market participants would use in pricing the asset or liability, including assumptions about the risk inherent in a particular valuation technique, the effect of a restriction on the sale or use of an asset, and the risk of nonperformance.

The Company groups its assets and liabilities measured at fair value into a three-level hierarchy for valuation techniques used to measure financial assets and financial liabilities at fair value. This hierarchy is based on whether the valuation inputs are observable or unobservable. These levels are:

• Level 1 — Quoted prices in active markets for identical assets or liabilities. Level 1 includes U.S. Treasury and exchange-traded instruments.

• Level 2 — Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Level 2 includes debt securities that are traded less frequently than exchange-traded instruments and which are valued using third-party pricing services; derivative contracts whose value is determined using a pricing model with inputs that are observable in the market or can be derived principally from or corroborated by observable market data; and MLHFS whose values are determined using quoted prices for similar assets or pricing models with inputs that are observable in the market or can be corroborated by observable market data.

• Level 3 — Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation. This category includes residential MSRs, certain debt securities, including the Company’s SIV-related securities and non-agency mortgage-backed securities, and certain derivative contracts.

When the Company changes its valuation inputs for measuring financial assets and financial liabilities at fair value, either due to changes in current market conditions or other factors, it may need to transfer those assets or liabilities to another level in the hierarchy based on the new inputs used. The Company recognizes these transfers at the end of the reporting period that the transfers occur. For the nine months ended September 30, 2011 and 2010, there were no significant transfers of financial assets or financial liabilities between the hierarchy levels.

The following section describes the valuation methodologies used by the Company to measure financial assets and liabilities at fair value and for estimating fair value for financial instruments not recorded at fair value as required under disclosure guidance related to the fair value of financial instruments. In addition, for financial assets and liabilities measured at fair value, the following section includes an indication of the level of the fair value hierarchy in which the assets or liabilities are classified. Where appropriate, the description includes information about the valuation models and key inputs to those models.

Cash and Cash Equivalents The carrying value of cash, amounts due from banks, federal funds sold and securities purchased under resale agreements was assumed to approximate fair value.

Investment Securities When available, quoted market prices are used to determine the fair value of investment securities and such items are classified within Level 1 of the fair value hierarchy.

For other securities, the Company determines fair value based on various sources and may apply matrix pricing with observable prices for similar securities where a price for the identical security is not observable. Prices are verified, where possible, to prices of observable market trades as obtained from independent sources. Securities measured at fair value by such methods are classified within Level 2.

The fair value of securities for which there are no market trades, or where trading is inactive as compared to normal market activity, are classified within Level 3. Securities classified within Level 3 include non-agency mortgage-backed securities, certain asset-backed securities, certain collateralized debt obligations and collateralized loan obligations, certain corporate debt securities and SIV-related securities. Due to the limited number of trades of non-agency mortgage-backed securities and lack of reliable evidence about transaction prices, the Company determines the fair value of these securities using a cash flow methodology and incorporating observable market information, where available.

Cash flow methodologies and other market valuation techniques involving management judgment use assumptions regarding housing prices, interest rates and borrower performance. Inputs are refined and updated to reflect market developments. The primary valuation drivers of these securities are the prepayment rates, default rates and default severities associated with the underlying collateral, as well as the discount rate used to calculate the present value of the projected cash flows.

The following table shows the valuation assumption ranges for Level 3 available-for-sale non-agency mortgage-backed securities:

	Prime (a)									Non-prime
	Minimum			Maximum			Average			Minimum			Maximum			Average
September 30, 2011
Estimated lifetime prepayment rates		4	%		23	%		13	%		1	%		13	%		6	%
Lifetime probability of default rates		–			14			2			–			20			7
Lifetime loss severity rates		9			80			39			8			88			54
Discount margin		3			38			6			4			40			11
December 31, 2010
Estimated lifetime prepayment rates		4	%		28	%		13	%		1	%		13	%		6	%
Lifetime probability of default rates		–			14			1			–			20			8
Lifetime loss severity rates		16			100			41			10			88			56
Discount margin		3			30			6			3			40			11

(a) Prime securities are those designated as such by the issuer or those with underlying asset characteristics and/or credit enhancements consistent with securities designated as prime.

Certain mortgage loans held for sale MLHFS measured at fair value, for which an active secondary market and readily available market prices exist, are initially valued at the transaction price and are subsequently valued by comparison to instruments with similar collateral and risk profiles. MLHFS are classified within Level 2. Included in mortgage banking revenue was a $98 million net gain and a $26 million net loss, for the three months ended September 30, 2011 and 2010, respectively, and a $38 million net loss and a $100 million net gain for the nine months ended September 30, 2011 and 2010, respectively, from the changes to fair value of these MLHFS under fair value option accounting guidance. Changes in fair value due to instrument specific credit risk were immaterial. The fair value of MLHFS was $5.2 billion as of September 30, 2011, which exceeded the unpaid principal balance by $242 million as of that date. Interest income for MLHFS is measured based on contractual interest rates and reported as interest income in the Consolidated Statement of Income. Electing to measure MLHFS at fair value reduces certain timing differences and better matches changes in fair value of these assets with changes in the value of the derivative instruments used to economically hedge them without the burden of complying with the requirements for hedge accounting.

Loans The loan portfolio includes adjustable and fixed-rate loans, the fair value of which was estimated using discounted cash flow analyses and other valuation techniques. The expected cash flows of loans considered historical prepayment experiences and estimated credit losses for nonperforming loans and were discounted using current rates offered to borrowers of similar credit characteristics. Generally, loan fair values reflect Level 3 information.

Mortgage servicing rights MSRs are valued using a cash flow methodology and third-party prices, if available. Accordingly, MSRs are classified within Level 3. The Company determines fair value by estimating the present value of the asset’s future cash flows using market-based prepayment rates, discount rates, and other assumptions validated through comparison to trade information, industry surveys, and independent third-party valuations. Risks inherent in MSRs valuation include higher than expected prepayment rates and/or delayed receipt of cash flows.

Derivatives Exchange-traded derivatives are measured at fair value based on quoted market (i.e., exchange) prices. Because prices are available for the identical instrument in an active market, these fair values are classified within Level 1 of the fair value hierarchy.

The majority of derivatives held by the Company are executed over-the-counter and are valued using standard cash flow, Black-Scholes and Monte Carlo valuation techniques. The models incorporate inputs, depending on the type of derivative, including interest rate curves, foreign exchange rates and volatility. In addition, all derivative values incorporate an assessment of the risk of counterparty nonperformance, measured based on the Company’s evaluation of credit risk as well as external assessments of credit risk, where available. In its assessment of nonperformance risk, the Company considers its ability to net derivative positions under master netting agreements, as well as collateral received or provided under collateral support agreements. The majority of these derivatives are classified within Level 2 of the fair value hierarchy as the significant inputs to the models are observable. An exception to the Level 2 classification is certain derivative transactions for which the risk of nonperformance cannot be observed in the market. These derivatives are classified within Level 3 of the fair value hierarchy. In addition, commitments to sell, purchase and originate mortgage loans that meet the requirements of a derivative, are valued by pricing models that include market observable and unobservable inputs. Due to the significant unobservable inputs, these commitments are classified within Level 3 of the fair value hierarchy.

Deposit Liabilities The fair value of demand deposits, savings accounts and certain money market deposits is equal to the amount payable on demand. The fair value of fixed-rate certificates of deposit was estimated by discounting the contractual cash flow using current market rates.

Short-term Borrowings Federal funds purchased, securities sold under agreements to repurchase, commercial paper and other short-term funds borrowed have floating rates or short-term maturities. The fair value of short-term borrowings was determined by discounting contractual cash flows using current market rates.

Long-term Debt The fair value for most long-term debt was determined by discounting contractual cash flows using current market rates. Junior subordinated debt instruments were valued using market quotes.

Loan Commitments, Letters of Credit and Guarantees The fair value of commitments, letters of credit and guarantees represents the estimated costs to terminate or otherwise settle the obligations with a third-party. The fair value of residential mortgage commitments is estimated based on observable and unobservable inputs. Other loan commitments, letters of credit and guarantees are not actively traded, and the Company estimates their fair value based on the related amount of unamortized deferred commitment fees adjusted for the probable losses for these arrangements.

The following table summarizes the balances of assets and liabilities measured at fair value on a recurring basis:

(Dollars in Millions)	Level 1		Level 2		Level 3		Netting			Total
September 30, 2011
Available-for-sale securities
U.S. Treasury and agencies	$	583	$	906	$	–	$	–		$	1,489
Mortgage-backed securities
Residential
Agency		–		39,738		–		–			39,738
Non-agency
Prime		–		–		859		–			859
Non-prime		–		–		857		–			857
Commercial
Agency		–		147		–		–			147
Non-agency		–		–		45		–			45
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		–		93		125		–			218
Other		–		566		120		–			686
Obligations of state and political subdivisions		–		6,499		–		–			6,499
Obligations of foreign governments		–		6		–		–			6
Corporate debt securities		–		960		9		–			969
Perpetual preferred securities		–		406		–		–			406
Other investments		182		8		–		–			190
Total available-for-sale		765		49,329		2,015		–			52,109
Mortgage loans held for sale		–		5,152		–		–			5,152
Mortgage servicing rights		–		–		1,466		–			1,466
Derivative assets		–		775		1,364		(361	)		1,778
Other assets		–		927		–		–			927
Total	$	765	$	56,183	$	4,845	$	(361	)	$	61,432
Derivative liabilities	$	–	$	2,694	$	34	$	(1,680	)	$	1,048
Other liabilities		–		876		–		–			876
Total	$	–	$	3,570	$	34	$	(1,680	)	$	1,924
December 31, 2010
Available-for-sale securities
U.S. Treasury and agencies	$	873	$	1,664	$	–	$	–		$	2,537
Mortgage-backed securities
Residential
Agency		–		37,703		–		–			37,703
Non-agency
Prime		–		–		1,103		–			1,103
Non-prime		–		–		947		–			947
Commercial
Agency		–		197		–		–			197
Non-agency		–		–		50		–			50
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		–		89		135		–			224
Other		–		587		133		–			720
Obligations of state and political subdivisions		–		6,417		–		–			6,417
Obligations of foreign governments		–		6		–		–			6
Corporate debt securities		–		949		9		–			958
Perpetual preferred securities		–		448		–		–			448
Other investments		181		18		–		–			199
Total available-for-sale		1,054		48,078		2,377		–			51,509
Mortgage loans held for sale		–		8,100		–		–			8,100
Mortgage servicing rights		–		–		1,837		–			1,837
Derivative assets		–		846		953		(280	)		1,519
Other assets		–		470		–		–			470
Total	$	1,054	$	57,494	$	5,167	$	(280	)	$	63,435
Derivative liabilities	$	–	$	2,072	$	102	$	(1,163	)	$	1,011
Other liabilities		–		470		–		–			470
Total	$	–	$	2,542	$	102	$	(1,163	)	$	1,481

The following table presents the changes in fair value for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended September 30:

						Net Gains			Net Total					Net Change in
						(Losses)			Purchases,					Unrealized Gains
			Net Gains			Included in			Sales, Principal					(Losses) Relating
	Beginning		(Losses)			Other			Payments,			End		to Assets
	of Period		Included in			Comprehensive			Issuances and			of Period		Still Held at
(Dollars in Millions)	Balance		Net Income			Income (Loss)			Settlements			Balance		End of Period
2011
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime	$	896	$	1		$	(2	)	$	(36	)	$	859	$	(2	)
Non-prime		895		(2	)		(5	)		(31	)		857		(5	)
Commercial non-agency		50		1			(1	)		(5	)		45		–
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		133		3			(2	)		(9	)		125		(2	)
Other		129		1			(4	)		(6	)		120		(4	)
Corporate debt securities		9		–			–			–			9		–
Total available-for-sale		2,112		4	(a)		(14	)		(87	)		2,015		(13	)
Mortgage servicing rights		1,989		(629	) (b)		–			106			1,466		(629	) (b)
Net derivative assets and liabilities		836		836	(c)		–			(342	)		1,330		77	(d)
2010
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime	$	1,197	$	1		$	22		$	(51	)	$	1,169	$	22
Non-prime		907		(9	)		36			11			945		36
Commercial non-agency		15		1			1			33			50		1
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		75		3			2			69			149		2
Other		328		3			8			(209	)		130		8
Corporate debt securities		10		(1	)		–			–			9		–
Other investments		266		2			16			(7	)		277		16
Total available-for-sale		2,798		–	(e)		85			(154	)		2,729		85
Mortgage servicing rights		1,543		(280	) (b)		–			159			1,422		(280	) (b)
Net derivative assets and liabilities		1,294		682	(f)		–			(544	)		1,432		119	(g)

(a)	Approximately $(9) million included in securities gains (losses) and $13 million included in interest income.
(b)	Included in mortgage banking revenue.
(c)	Approximately $445 million included in other noninterest income and $391 million included in mortgage banking revenue.
(d)	Approximately $317 million included in other noninterest income and $(240) million included in mortgage banking revenue.
(e)	Approximately $(18) million included in securities gains (losses) and $18 million included in interest income.
(f)	Approximately $252 million included in other noninterest income and $430 million included in mortgage banking revenue.
(g)	Approximately $504 million included in other noninterest income and $(385) million included in mortgage banking revenue.

Additional detail of purchases, sales, principal payments, issuances and settlements for assets and liabilities classified within Level 3 for the three months ended September 30, 2011, was as follows:

						Principal
(Dollars in Millions)	Purchases		Sales			Payments			Issuances			Settlements			Net Total
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime	$	–	$	–		$	(36	)	$	–		$	–		$	(36	)
Non-prime		–		–			(31	)		–			–			(31	)
Commercial non-agency		–		(4	)		(1	)		–			–			(5	)
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		–		–			(9	)		–			–			(9	)
Other		–		–			(6	)		–			–			(6	)
Total available-for-sale		–		(4	)		(83	)		–			–			(87	)
Mortgage servicing rights		5		–			–			101	(a)		–			106
Net derivative assets and liabilities		–		(2	)		–			–			(340	)		(342	)

(a) Represents MSRs capitalized during the period

The following table presents the changes in fair value for all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the nine months ended September 30:

						Net Gains			Net Total					Net Change in
						(Losses)			Purchases,					Unrealized Gains
			Net Gains			Included in			Sales, Principal					(Losses) Relating
	Beginning		(Losses)			Other			Payments,			End		to Assets
	of Period		Included in			Comprehensive			Issuances and			of Period		Still Held at
(Dollars in Millions)	Balance		Net Income			Income (Loss)			Settlements			Balance		End of Period
2011
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime	$	1,103	$	4		$	22		$	(270	)	$	859	$	14
Non-prime		947		(4	)		27			(113	)		857		26
Commercial non-agency		50		2			(1	)		(6	)		45		–
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		135		10			6			(26	)		125		7
Other		133		8			(2	)		(19	)		120		(2	)
Corporate debt securities		9		–			–			–			9		–
Total available-for-sale		2,377		20	(a)		52			(434	)		2,015		45
Mortgage servicing rights		1,837		(803	) (b)		–			432			1,466		(803	) (b)
Net derivative assets and liabilities		851		1,252	(c)		–			(773	)		1,330		(92	) (d)
2010
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime	$	1,429	$	1		$	72		$	(333	)	$	1,169	$	66
Non-prime		968		(46	)		104			(81	)		945		104
Commercial non-agency		13		1			3			33			50		2
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		98		3			–			48			149		3
Other		357		(2	)		6			(231	)		130		7
Corporate debt securities		10		(1	)		–			–			9		–
Other investments		231		4			63			(21	)		277		63
Total available-for-sale		3,106		(40	) (e)		248			(585	)		2,729		245
Mortgage servicing rights		1,749		(773	) (b)		–			446			1,422		(773	) (b)
Net derivative assets and liabilities		815		1,741	(f)		–			1,124			1,432		160	(g)

(a)	Approximately $(24) million included in securities gains (losses) and $44 million included in interest income.
(b)	Included in mortgage banking revenue.
(c)	Approximately $672 million included in other noninterest income and $580 million included in mortgage banking revenue.
(d)	Approximately $303 million included in other noninterest income and $(395) million included in mortgage banking revenue.
(e)	Approximately $(85) million included in securities gains (losses) and $45 million included in interest income.
(f)	Approximately $865 million included in other noninterest income and $876 million included in mortgage banking revenue.
(g)	Approximately $842 million included in other noninterest income and $(682) million included in mortgage banking revenue.

Additional detail of purchases, sales, principal payments, issuances and settlements for assets and liabilities classified within Level 3 for the nine months ended September 30, 2011, was as follows:

						Principal
(Dollars in Millions)	Purchases		Sales			Payments			Issuances			Settlements			Net Total
Available-for-sale securities
Mortgage-backed securities
Residential non-agency
Prime	$	–	$	(115	)	$	(155	)	$	–		$	–		$	(270	)
Non-prime		–		(12	)		(101	)		–			–			(113	)
Commercial non-agency		–		(4	)		(2	)		–			–			(6	)
Asset-backed securities
Collateralized debt obligations/Collateralized loan obligations		–		–			(26	)		–			–			(26	)
Other		–		–			(19	)		–			–			(19	)
Total available-for-sale		–		(131	)		(303	)		–			–			(434	)
Mortgage servicing rights		16		–			–			416	(a)		–			432
Net derivative assets and liabilities		–		(5	)		–			–			(768	)		(773	)

(a) Represents MSRs capitalized during the period

The Company is also required periodically to measure certain other financial assets at fair value on a nonrecurring basis. These measurements of fair value usually result from the application of lower-of-cost-or-fair value accounting or write-downs of individual assets.

The following table summarizes the adjusted carrying values and the level of valuation assumptions for assets measured at fair value on a nonrecurring basis:

	September 30, 2011								December 31, 2010
(Dollars in Millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Loans (a)	$	–	$	–	$	170	$	170	$	–	$	404	$	1	$	405
Other real estate owned (b)		–		–		255		255		–		812		–		812
Other intangible assets		–		–		–		–		–		–		1		1
Other assets		–		–		3		3		–		4		9		13

(a)	Represents the carrying value of loans for which adjustments were based on the fair value of the collateral, excluding loans fully charged-off.
(b)	Represents the fair value of foreclosed properties that were measured at fair value based on an appraisal or broker price opinion of the collateral subsequent to their initial acquisition.

The following table summarizes losses recognized related to nonrecurring fair value measurements of individual assets or portfolios:

	Three Months				Nine Months
	Ended September 30,				Ended September 30,
(Dollars in Millions)	2011		2010		2011		2010
Loans (a)	$	32	$	67	$	153	$	280
Other real estate owned (b)		81		97		230		212
Other intangible assets		–		–		–		–
Other assets		–		–		–		–

(a)	Represents write-downs of loans which were based on the fair value of the collateral, excluding loans fully charged-off.
(b)	Represents related losses of foreclosed properties that were measured at fair value subsequent to their initial acquisition.

Fair Value Option

The following table summarizes the differences between the aggregate fair value carrying amount of MLHFS for which the fair value option has been elected and the aggregate unpaid principal amount that the Company is contractually obligated to receive at maturity:

	September 30, 2011							December 31, 2010
					Carrying							Carrying
	Fair Value		Aggregate		Amount Over			Fair Value		Aggregate		Amount Over
	Carrying		Unpaid		(Under) Unpaid			Carrying		Unpaid		(Under) Unpaid
(Dollars in Millions)	Amount		Principal		Principal			Amount		Principal		Principal
Total loans	$	5,152	$	4,910	$	242		$	8,100	$	8,034	$	66
Nonaccrual loans		7		14		(7	)		11		18		(7	)
Loans 90 days or more past due		2		4		(2	)		6		6		–

Disclosures about Fair Value of Financial Instruments The following table summarizes the estimated fair value for financial instruments as of September 30, 2011 and December 31, 2010, and includes financial instruments that are not accounted for at fair value. In accordance with disclosure guidance related to fair values of financial instruments, the Company did not include assets and liabilities that are not financial instruments, such as the value of goodwill, long-term relationships with deposit, credit card, merchant processing and trust customers, other purchased intangibles, premises and equipment, deferred taxes and other liabilities.

The estimated fair values of the Company’s financial instruments are shown in the table below:

	September 30, 2011				December 31, 2010
	Carrying		Fair		Carrying		Fair
(Dollars in Millions)	Amount		Value		Amount		Value
Financial Assets
Cash and due from banks	$	13,708	$	13,708	$	14,487	$	14,487
Investment securities held-to-maturity		16,269		16,613		1,469		1,419
Mortgages held for sale (a)		4		4		4		4
Other loans held for sale		219		220		267		267
Loans		199,818		202,037		191,751		192,058
Financial Liabilities
Deposits		222,632		223,042		204,252		204,799
Short-term borrowings		32,029		32,094		32,557		32,839
Long-term debt		30,624		31,467		31,537		31,981

(a) Balance excludes mortgages held for sale for which the fair value option under applicable accounting guidance was elected.

The fair value of unfunded commitments, standby letters of credit and other guarantees is approximately equal to their carrying value. The carrying value of unfunded commitments and standby letters of credit was $358 million and $353 million at September 30, 2011 and December 31, 2010, respectively. The carrying value of other guarantees was $372 million and $330 million at September 30, 2011 and December 31, 2010, respectively.