Fair Values of Assets and Liabilities

9 Months Ended

Sep. 30, 2023

Fair Value Disclosures [Abstract]

Fair Values of Assets and Liabilities

 Note 15   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, MSRs, certain time deposits and substantially all MLHFS 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. Other financial instruments, such as held-to-maturity investment securities, loans, the majority of time deposits, short-term borrowings and long-term debt, are accounted for at amortized cost. See “Fair Value of Financial Instruments” in this Note for further information on the estimated fair value of these other financial instruments. In accordance with disclosure guidance, certain financial instruments, such as deposits with no defined or contractual maturity, receivables and payables due in one year or less, insurance contracts and equity investments not accounted for at fair value, are excluded from this Note.

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 securities, as well as 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 typically valued using third party pricing services; derivative contracts and other assets and liabilities, including securities, and certain time deposits, 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 MSRs and certain derivative contracts.

Valuation Methodologies

The valuation methodologies used by the Company to measure financial assets and liabilities at fair value are described below. In addition, 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 descriptions include information about the valuation models and key inputs to those models. During the nine months ended September 30, 2023 and 2022, there were no significant changes to the valuation techniques used by the Company to measure fair value.

Available-For-Sale Investment Securities When quoted market prices for identical securities are available in an active market, these prices are used to determine fair value and these securities are classified within Level 1 of the fair value hierarchy. Level 1 investment securities include U.S. Treasury and exchange-traded securities.

For other securities, quoted market prices may not be readily available for the specific securities. When possible, the Company determines fair value based on market observable information, including quoted market prices for similar securities, inactive transaction prices, and broker quotes. These securities are classified within Level 2 of the fair value hierarchy. Level 2 valuations are generally provided by a third-party pricing service. Level 2 investment securities are predominantly agency mortgage-backed securities, certain other asset-backed securities, obligations of state and political subdivisions and agency debt securities.

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 were net losses of $28 million and $144 million for the three months ended September 30, 2023 and 2022, respectively, and net losses of $61 million and $442 million for the nine months ended September 30, 2023 and 2022, 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. Interest income for MLHFS is measured based on contractual interest rates and reported as interest income on 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.

Time Deposits The Company elects the fair value option to account for certain time deposits that are hedged with derivatives that do not qualify for hedge accounting. Electing to measure these time deposits at fair value reduces certain timing differences and better matches changes in fair value of these deposits with changes in the value of the derivative instruments used to economically hedge them. The time deposits measured at fair value are valued using a discounted cash flow model that utilizes market observable inputs and are classified within Level 2. Included in interest expense on deposits were net gains of $1 million for the three months and nine months ended September 30, 2023 from the changes in fair value of time deposits under fair value option accounting guidance.

Mortgage Servicing Rights MSRs are valued using a discounted cash flow methodology, and are classified within Level 3. The Company determines fair value of the MSRs by projecting future cash flows for different interest rate scenarios using prepayment rates and other assumptions, and discounts these cash flows using a risk adjusted rate based on option adjusted spread levels. There is minimal observable market activity for MSRs on comparable portfolios and, therefore, the determination of fair value requires significant management judgment. Refer to Note 7 for further information on MSR valuation assumptions.

Derivatives The majority of derivatives held by the Company are executed over-the-counter or centrally cleared through clearinghouses and are valued using market standard cash flow valuation techniques. The models incorporate inputs, depending on the type of derivative, including interest rate curves, foreign exchange rates and volatility. All derivative values incorporate an assessment of the risk of counterparty nonperformance, measured based on the Company’s evaluation of credit risk including external assessments of credit risk. The Company monitors and manages its nonperformance risk by considering its ability to net derivative positions under master netting arrangements, as well as collateral received or provided under collateral arrangements. Accordingly, the Company has elected to measure the fair value of derivatives, at a counterparty level, on a net basis. The majority of the derivatives are classified within Level 2 of the fair value hierarchy, as the significant inputs to the models, including nonperformance risk, are observable. However, certain derivative transactions are with counterparties where risk of nonperformance cannot be observed in the market and, therefore, the credit valuation adjustments result in these derivatives being classified within Level 3 of the fair value hierarchy.

The Company also has other derivative contracts that are created through its operations, including commitments to purchase and originate mortgage loans and swap agreements executed in conjunction with the sale of a portion of its Class B common and preferred shares of Visa Inc. (the “Visa swaps”). The mortgage loan commitments are valued by pricing models that include market observable and unobservable inputs, which result in the commitments being classified within Level 3 of the fair value hierarchy. The unobservable inputs include assumptions about the percentage of commitments that actually become a closed loan and the MSR value that is inherent in the underlying loan value. The Visa swaps require payments by either the Company or the purchaser of the Visa Inc. Class B common and preferred shares when there are changes in the conversion rate of the Visa Inc. Class B common and preferred shares to Visa Inc. Class A common and preferred shares, respectively, as well as quarterly payments to the purchaser based on specified terms of the agreements. Management reviews and updates the Visa swaps fair value in conjunction with its review of Visa Inc. related litigation contingencies, and the associated escrow funding. The expected litigation resolution impacts the Visa Inc. Class B common share to Visa Inc. Class A common share conversion rate, as well as the ultimate termination date for the Visa swaps. Accordingly, the Visa swaps are classified within Level 3. Refer to Note 16 for further information on the Visa Inc. restructuring and related card association litigation.

Significant Unobservable Inputs of Level 3 Assets and Liabilities

The following section provides information to facilitate an understanding of the uncertainty in the fair value measurements for the Company’s Level 3 assets and liabilities recorded at fair value on the Consolidated Balance Sheet.

This section includes a description of the significant inputs used by the Company and a description of any interrelationships between these inputs. The discussion below excludes nonrecurring fair value measurements of collateral value used for impairment measures for loans and OREO. These valuations utilize third party appraisal or broker price opinions, and are classified as Level 3 due to the significant judgment involved.

Mortgage Servicing Rights The significant unobservable inputs used in the fair value measurement of the Company’s MSRs are expected prepayments and the option adjusted spread that is added to the risk-free rate to discount projected cash flows. Significant increases in either of these inputs in isolation would have resulted in a significantly lower fair value measurement. Significant decreases in either of these inputs in isolation would have resulted in a significantly higher fair value measurement. There is no direct interrelationship between prepayments and option adjusted spread. Prepayment rates generally move in the opposite direction of market interest rates. Option adjusted spread is generally impacted by changes in market return requirements.

The following table shows the significant valuation assumption ranges for MSRs at September 30, 2023:

	Minimum			Maximum			Weighted- Average (a)
Expected prepayment		6	%		16	%		8	%
Option adjusted spread		4			11			5

(a) Determined based on the relative fair value of the related mortgage loans serviced.

Derivatives The Company has two distinct Level 3 derivative portfolios: (i) the Company’s commitments to purchase and originate mortgage loans that meet the requirements of a derivative and (ii) the Company’s asset/liability and customer-related derivatives that are Level 3 due to unobservable inputs related to measurement of risk of nonperformance by the counterparty. In addition, the Company’s Visa swaps are classified within Level 3.

The significant unobservable inputs used in the fair value measurement of the Company’s derivative commitments to purchase and originate mortgage loans are the percentage of commitments that actually become a closed loan and the MSR value that is inherent in the underlying loan value. A significant increase in the rate of loans that close would have resulted in a larger derivative asset or liability. A significant increase in the inherent MSR value would have resulted in an increase in the derivative asset or a reduction in the derivative liability. Expected loan close rates and the inherent MSR values are directly impacted by changes in market rates and will generally move in the same direction as interest rates.

The following table shows the significant valuation assumption ranges for the Company’s derivative commitments to purchase and originate mortgage loans at September 30, 2023:

	Minimum			Maximum			Weighted- Average (a)
Expected loan close rate		35	%		100	%		79	%
Inherent MSR value (basis points per loan)		58			194			118

(a) Determined based on the relative fair value of the related mortgage loans.

The significant unobservable input used in the fair value measurement of certain of the Company’s asset/liability and customer-related derivatives is the credit valuation adjustment related to the risk of counterparty nonperformance. A significant increase in the credit valuation adjustment would have resulted in a lower fair value measurement. A significant decrease in the credit valuation adjustment would have resulted in a higher fair value measurement. The credit valuation adjustment is impacted by changes in market rates, volatility, market implied credit spreads, and loss recovery rates, as well as the Company’s assessment of the counterparty’s credit position. At September 30, 2023, the minimum, maximum and weighted-average credit valuation adjustment as a percentage of the net fair value of the counterparty’s derivative contracts prior to adjustment was 0 percent, 3,348 percent and 4 percent, respectively.

The significant unobservable inputs used in the fair value measurement of the Visa swaps are management’s estimate of the probability of certain litigation scenarios occurring, and the timing of the resolution of the related litigation loss estimates in excess, or shortfall, of the Company’s proportional share of escrow funds. An increase in the loss estimate or a delay in the resolution of the related litigation would have resulted in an increase in the derivative liability. A decrease in the loss estimate or an acceleration of the resolution of the related litigation would have resulted in a decrease in the derivative liability.

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, 2023
Available-for-sale securities
U.S. Treasury and agencies	$	14,112	$	4,595	$	—	$	—		$	18,707
Mortgage-backed securities
Residential agency		—		25,614		—		—			25,614
Commercial
Agency		—		6,942		—		—			6,942
Non-agency		—		6		—		—			6
Asset-backed securities		—		6,868		—		—			6,868
Obligations of state and political subdivisions		—		9,066		—		—			9,066
Other		—		4		—		—			4
Total available-for-sale		14,112		53,095		—		—			67,207
Mortgage loans held for sale		—		2,263		—		—			2,263
Mortgage servicing rights		—		—		3,582		—			3,582
Derivative assets		4		6,253		1,380		(4,515	)		3,122
Other assets		406		2,006		—		—			2,412
Total	$	14,522	$	63,617	$	4,962	$	(4,515	)	$	78,586
Time deposits	$	—	$	444	$	—	$	—		$	444
Derivative liabilities		—		6,685		5,136		(4,307	)		7,514
Short-term borrowings and other liabilities (a)		309		1,644		—		—			1,953
Total	$	309	$	8,773	$	5,136	$	(4,307	)	$	9,911
December 31, 2022
Available-for-sale securities
U.S. Treasury and agencies	$	13,723	$	8,310	$	—	$	—		$	22,033
Mortgage-backed securities
Residential agency		—		29,271		—		—			29,271
Commercial
Agency		—		7,145		—		—			7,145
Non-agency		—		7		—		—			7
Asset-backed securities		—		4,323		—		—			4,323
Obligations of state and political subdivisions		—		10,124		1		—			10,125
Other		—		6		—		—			6
Total available-for-sale		13,723		59,186		1		—			72,910
Mortgage loans held for sale		—		1,849		—		—			1,849
Mortgage servicing rights		—		—		3,755		—			3,755
Derivative assets		9		6,608		1,255		(5,427	)		2,445
Other assets		248		1,756		—		—			2,004
Total	$	13,980	$	69,399	$	5,011	$	(5,427	)	$	82,963
Derivative liabilities	$	4	$	6,241	$	4,454	$	(4,551	)	$	6,148
Short-term borrowings and other liabilities (a)		125		1,564		—		—			1,689
Total	$	129	$	7,805	$	4,454	$	(4,551	)	$	7,837

Note: Excluded from the table above are equity investments without readily determinable fair values. The Company has elected to carry these investments at historical cost, adjusted for impairment and any changes resulting from observable price changes for identical or similar investments of the issuer. The aggregate carrying amount of these equity investments was $132 million and $104 million at September 30, 2023 and December 31, 2022, respectively. The Company recorded a $5 million impairment on these equity investments during the first nine months ended 2023, and the cumulative impairment on these equity investments is $5 million. The Company has not recorded adjustments for observable price changes on these equity investments during the first nine months of 2023, or on a cumulative basis.

(a) Primarily represents the Company’s obligation on securities sold short required to be accounted for at fair value per applicable accounting guidance.

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:

(Dollars in Millions)	Beginning of Period Balance			Net Gains (Losses) Included in Net Income			Net Gains (Losses) Included in Other Comprehensive Income (Loss)		Purchases		Sales			Principal Payments		Issuances			Settlements		End of Period Balance			Net Change in Unrealized Gains (Losses) Relating to Assets and Liabilities Held at End of Period
2023
Mortgage servicing rights	$	3,633		$	134	(a)	$	—	$	1	$	(292	)	$	—	$	106	(c)	$	—	$	3,582		$	134	(a)
Net derivative assets and liabilities		(3,419	)		(1,315	) (b)		—		25		(9	)		—		—			962		(3,756	)		(693	) (d)
2022
Available-for-sale securities
Obligations of state and political subdivisions	$	1		$	—		$	—	$	—	$	—		$	—	$	—		$	—	$	1		$	—
Total available-for-sale		1			—			—		—		—			—		—			—		1			—
Mortgage servicing rights		3,707			27	(a)		—		1		—			—		134	(c)		—		3,869			27	(a)
Net derivative assets and liabilities		(2,175	)		(2,398	) (e)		—		259		(29	)		—		11			456		(3,876	)		(1,978	) (f)

(a) Included in mortgage banking revenue.

(b) Approximately $35 million, $(1.4) billion and $1 million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.

(c) Represents MSRs capitalized during the period.

(d) Approximately $11 million, $(705) million and $1 million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.

(e) Approximately $(95) million, $(2.1) billion and $(154) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.

(f) Approximately $(78) million, $(1.7) billion and $(154) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.

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:

(Dollars in Millions)	Beginning of Period Balance			Net Gains (Losses) Included in Net Income			Net Gains (Losses) Included in Other Comprehensive Income (Loss)			Purchases		Sales			Principal Payments			Issuances			Settlements		End of Period Balance			Net Change in Unrealized Gains (Losses) Relating to Assets and Liabilities Held at End of Period
2023
Available-for-sale securities
Obligations of state and political subdivisions	$	1		$	—		$	—		$	—	$	—		$	(1	)	$	—		$	—	$	—		$	—
Total available-for-sale		1			—			—			—		—			(1	)		—			—		—			—
Mortgage servicing rights		3,755			(37	) (a)		—			3		(440)			—			301	(c)		—		3,582			(37	) (a)
Net derivative assets and liabilities		(3,199	)		(3,558	) (b)		—			430		(28)			—			—			2,599		(3,756	)		(1,925	) (d)
2022
Available-for-sale securities
Asset-backed securities	$	7		$	—		$	(3	)	$	—	$	(4	)	$	—		$	—		$	—	$	—		$	—
Obligations of state and political subdivisions		1			—			—			—		—			—			—			—		1			—
Total available-for-sale		8			—			(3	)		—		(4	)		—			—			—		1			—
Mortgage servicing rights		2,953			435	(a)		—			7		1			—			473	(c)		—		3,869			435	(a)
Net derivative assets and liabilities		799			(5,759	) (e)		—			351		(30	)		—			11			752		(3,876	)		(4,240	) (f)

(a) Included in mortgage banking revenue.

(b) Approximately $133 million and $(3.7) billion included in mortgage banking revenue and commercial products revenue, respectively.

(c) Represents MSRs capitalized during the period.

(d) Approximately $11 million and $(1.9) billion included in mortgage banking revenue and commercial products revenue, respectively.

(e) Approximately $(198) million, $(5.4) billion and $(154) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.

(f) Approximately $(78) million, $(4.0) billion and $(154) million included in mortgage banking revenue, commercial products revenue and other noninterest income, respectively.

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 balances as of the measurement date of assets measured at fair value on a nonrecurring basis, and still held as of the reporting date:

	September 30, 2023								December 31, 2022
(Dollars in Millions)	Level 1		Level 2		Level 3		Total		Level 1		Level 2		Level 3		Total
Loans (a)	$	—	$	—	$	173	$	173	$	—	$	—	$	97	$	97
Other assets (b)		—		—		24		24		—		—		21		21

(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) Primarily 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 Ended September 30				Nine Months Ended September 30
(Dollars in Millions)	2023		2022		2023		2022
Loans (a)	$	71	$	2	$	281	$	35
Other assets (b)		1		1		2		12

(a) Represents write-downs of loans which were based on the fair value of the collateral, excluding loans fully charged-off.

(b) Primarily 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 the assets and liabilities for which the fair value option has been elected and the aggregate remaining contractual principal balance outstanding:

	September 30, 2023							December 31, 2022
(Dollars in Millions)	Fair Value Carrying Amount		Contractual Principal Outstanding		Carrying Amount Over (Under) Contractual Principal Outstanding			Fair Value Carrying Amount		Contractual Principal Outstanding		Carrying Amount Over (Under) Contractual Principal Outstanding
Total loans (a)	$	2,263	$	2,266	$	(3	)	$	1,849	$	1,848	$	1
Time deposits		444		445		(1	)		—		—		—

(a) Includes nonaccrual loans of $1 million carried at fair value with  contractual principal outstanding of $1 million at September 30, 2023 and $1 million carried at fair value with contractual principal outstanding of $1 million at December 31, 2022. Includes loans 90 days or more past due of $3 million carried at fair value with contractual principal outstanding of $3 million at September 30, 2023 and $1 million carried at fair value with contractual principal outstanding of $1 million at December 31, 2022. 

Fair Value of Financial Instruments

The following section summarizes the estimated fair value for financial instruments accounted for at amortized cost as of September 30, 2023 and December 31, 2022. 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. Additionally, in accordance with the disclosure guidance, receivables and payables due in one year or less, insurance contracts, equity investments not accounted for at fair value, and deposits with no defined or contractual maturities are excluded.

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

	September 30, 2023										December 31, 2022
	Carrying Amount		Fair Value								Carrying Amount		Fair Value
(Dollars in Millions)			Level 1		Level 2		Level 3		Total				Level 1		Level 2		Level 3		Total
Financial Assets
Cash and due from banks	$	64,354	$	64,354	$	—	$	—	$	64,354	$	53,542	$	53,542	$	—	$	—	$	53,542
Federal funds sold and securities purchased under resale agreements		1,847		—		1,847		—		1,847		356		—		356		—		356
Investment securities held-to-maturity		85,342		1,283		69,076		—		70,359		88,740		1,293		76,581		—		77,874
Loans held for sale (a)		73		—		—		73		73		351		—		—		351		351
Loans		368,016		—		—		356,814		356,814		381,277		—		—		368,874		368,874
Other (b)		2,369		—		1,710		659		2,369		2,962		—		2,224		738		2,962
Financial Liabilities
Time deposits (c)		53,100		—		52,934		—		52,934		32,946		—		32,338		—		32,338
Short-term borrowings (d)		19,947		—		19,612		—		19,612		29,527		—		29,145		—		29,145
Long-term debt		43,074		—		40,377		—		40,377		39,829		—		37,622		—		37,622
Other (d)		5,196		—		1,314		3,882		5,196		5,137		—		1,500		3,637		5,137

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

(b) Includes investments in Federal Reserve Bank and Federal Home Loan Bank stock and tax-advantaged investments.

(c) Excludes time deposits for which the fair value option under applicable accounting guidance was elected.

(d) Excludes the Company’s obligation on securities sold short required to be accounted for at fair value per applicable accounting guidance.

(d) Includes operating lease liabilities and liabilities related to tax-advantaged investments.

The fair value of unfunded commitments, deferred non-yield related loan fees, standby letters of credit and other guarantees is approximately equal to their carrying value. The carrying value of unfunded commitments, deferred non-yield related loan fees and standby letters of credit was $604 million and $498 million at September 30, 2023 and December 31, 2022, respectively. The carrying value of other guarantees was $202 million and $241 million at September 30, 2023 and December 31, 2022, respectively.