NOTE 16 - FAIR VALUE ELECTION AND MEASUREMENT

The Company measures certain assets and liabilities at fair value, which are classified as level 1, 2, or 3 within the fair value hierarchy, as shown below, on the basis of whether the measurement employs observable or unobservable inputs. Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect the Company’s own assumptions, taking into account information about market participant assumptions that is readily available.


•	Level 1: Quoted prices for identical instruments in active markets


•	Level 2: Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations in which all significant inputs and significant value drivers are observable in active markets


•	Level 3: Valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable

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. The Company’s recurring fair value measurements are based on either a requirement to measure such assets and liabilities at fair value or on the Company’s election to measure certain financial assets and liabilities at fair value. Assets and liabilities that are required to be measured at fair value on a recurring basis include trading securities, securities AFS, and derivative financial instruments. Assets and liabilities that the Company has elected to measure at fair value on a recurring basis include its residential MSRs, trading loans, and certain LHFS, LHFI, brokered time deposits, and fixed rate debt issuances.

The Company elects to measure certain assets and liabilities at fair value to better align its financial performance with the economic value of actively traded or hedged assets or liabilities. The use of fair value also enables the Company to mitigate non-economic earnings volatility caused from financial assets and liabilities being measured using different bases of accounting, as well as to more accurately portray the active and dynamic management of the Company’s balance sheet.

The Company uses various valuation techniques and assumptions in estimating fair value. The assumptions used to estimate the value of an instrument have varying degrees of impact to the overall fair value of an asset or liability. This process involves gathering multiple sources of information, including broker quotes, values provided by pricing services, trading activity in other identical or similar securities, market indices, and pricing matrices. When observable market prices for the asset or liability are not available, the Company employs various modeling techniques, such as discounted cash flow analyses, to estimate fair value. Models used to produce material financial reporting information are validated prior to use and following any material change in methodology. Their performance is monitored at least quarterly, and any material deterioration in model performance is escalated. This review is performed by different internal groups depending on the type of fair value asset or liability.

The Company has formal processes and controls in place to support the appropriateness of its fair value estimates. For fair values obtained from a third party, or those that include certain trader estimates of fair value, there is an independent price validation function that provides oversight for these estimates. For level 2 instruments and certain level 3 instruments, the validation generally involves evaluating pricing received from two or more third party pricing sources that are widely used by market participants. The Company evaluates this pricing information from both a qualitative and quantitative perspective and determines whether any pricing differences exceed acceptable thresholds. If thresholds are exceeded, the Company assesses differences in valuation approaches used, which may include contacting a pricing service to gain further insight into the valuation of a particular security or class of securities to resolve the pricing variance, which could include an adjustment to the price used for financial reporting purposes.

The Company classifies instruments within level 2 in the fair value hierarchy when it determines that external pricing sources estimated fair value using prices for similar instruments trading in active markets. A wide range of quoted values from pricing sources may imply a reduced level of market activity and indicate that significant adjustments to price indications have been made. In such cases, the Company evaluates whether the asset or liability should be classified as level 3.

Determining whether to classify an instrument as level 3 involves judgment and is based on a variety of subjective factors, including whether a market is inactive. A market is considered inactive if significant decreases in the volume and level of activity for the asset or liability have been observed. In making this determination the Company evaluates the number of recent transactions in either the primary or secondary market, whether or not price quotations are current, the nature of market participants, the variability of price quotations, the breadth of bid/ask spreads, declines in, or the absence of, new issuances, and the availability of public information. When a market is determined to be inactive, significant adjustments may be made to price indications when estimating fair value. In making these adjustments the Company seeks to employ assumptions a market participant would use to value the asset or liability, including consideration of illiquidity in the referenced market.

Recurring Fair Value Measurements

The following tables present certain information regarding assets and liabilities measured at fair value on a recurring basis and the changes in fair value for those specific financial instruments for which fair value has been elected.



	March 31, 2018
	Fair Value Measurements
(Dollars in millions)	Level 1		Level 2		Level 3		Netting Adjustments ¹			Assets/Liabilities at Fair Value
Assets
Trading assets and derivative instruments:
U.S. Treasury securities		$182		$—		$—		$—			$182
Federal agency securities	—		238		—		—			238
U.S. states and political subdivisions	—		123		—		—			123
MBS - agency	—		699		—		—			699
Corporate and other debt securities	—		804		—		—			804
CP	—		169		—		—			169
Equity securities	51		—		—		—			51
Derivative instruments	252		2,805		17		(2,417		)	657
Trading loans	—		2,189		—		—			2,189
Total trading assets and derivative instruments	485		7,027		17		(2,417		)	5,112

Securities AFS:
U.S. Treasury securities	4,340		—		—		—			4,340
Federal agency securities	—		249		—		—			249
U.S. states and political subdivisions	—		636		—		—			636
MBS - agency residential	—		22,513		—		—			22,513
MBS - agency commercial	—		2,242		—		—			2,242
MBS - non-agency residential	—		57		—		—			57
MBS - non-agency commercial	—		874		—		—			874
ABS	—		7		—		—			7
Corporate and other debt securities	—		16		—		—			16
Total securities AFS ²	4,340		26,594		—		—			30,934

LHFS	—		1,428		—		—			1,428
LHFI	—		—		188		—			188
Residential MSRs	—		—		1,916		—			1,916
Other ²	143		—		—		—			143

Liabilities
Trading liabilities and derivative instruments:
U.S. Treasury securities	698		—		—		—			698
MBS - agency	—		1		—		—			1
Corporate and other debt securities	—		453		—		—			453
Equity securities	5		—		—		—			5
Derivative instruments	138		3,351		16		(2,925		)	580
Total trading liabilities and derivative instruments	841		3,805		16		(2,925		)	1,737

Brokered time deposits	—		302		—		—			302
Long-term debt	—		209		—		—			209

¹Amounts represent offsetting cash collateral received from, and paid to, the same derivative counterparties, and the impact of netting derivative assets and derivative liabilities when a legally enforceable master netting agreement or similar agreement exists. See Note 15, "Derivative Financial Instruments," for additional information.

²Beginning January 1, 2018, the Company reclassified equity securities previously presented in Securities available for sale to Other assets on the Consolidated Balance Sheets. Reclassifications have been made to previously reported amounts for comparability. See Note 9, "Other Assets," for additional information.



	December 31, 2017
	Fair Value Measurements
(Dollars in millions)	Level 1		Level 2		Level 3		Netting Adjustments ¹			Assets/Liabilities at Fair Value
Assets
Trading assets and derivative instruments:
U.S. Treasury securities		$157		$—		$—		$—			$157
Federal agency securities	—		395		—		—			395
U.S. states and political subdivisions	—		61		—		—			61
MBS - agency	—		700		—		—			700
Corporate and other debt securities	—		655		—		—			655
CP	—		118		—		—			118
Equity securities	56		—		—		—			56
Derivative instruments	395		3,493		16		(3,102		)	802
Trading loans	—		2,149		—		—			2,149
Total trading assets and derivative instruments	608		7,571		16		(3,102		)	5,093

Securities AFS:
U.S. Treasury securities	4,331		—		—		—			4,331
Federal agency securities	—		259		—		—			259
U.S. states and political subdivisions	—		617		—		—			617
MBS - agency residential	—		22,704		—		—			22,704
MBS - agency commercial	—		2,086		—		—			2,086
MBS - non-agency residential	—		—		59		—			59
MBS - non-agency commercial	—		866		—		—			866
ABS	—		—		8		—			8
Corporate and other debt securities	—		12		5		—			17
Total securities AFS ²	4,331		26,544		72		—			30,947

LHFS	—		1,577		—		—			1,577
LHFI	—		—		196		—			196
Residential MSRs	—		—		1,710		—			1,710
Other ²	56		—		—		—			56

Liabilities
Trading liabilities and derivative instruments:
U.S. Treasury securities	577		—		—		—			577
Corporate and other debt securities	—		289		—		—			289
Equity securities	9		—		—		—			9
Derivative instruments	183		4,243		16		(4,034		)	408
Total trading liabilities and derivative instruments	769		4,532		16		(4,034		)	1,283

Brokered time deposits	—		236		—		—			236
Long-term debt	—		530		—		—			530

¹ Amounts represent offsetting cash collateral received from, and paid to, the same derivative counterparties, and the impact of netting derivative assets and derivative liabilities when a legally enforceable master netting agreement or similar agreement exists. See Note 15, "Derivative Financial Instruments," for additional information.

² Beginning January 1, 2018, the Company reclassified equity securities previously presented in Securities available for sale to Other assets on the Consolidated Balance Sheets. Reclassifications have been made to previously reported amounts for comparability. See Note 9, "Other Assets," for additional information.

The following tables present the difference between fair value and the aggregate UPB for which the FVO has been elected for certain trading loans, LHFS, LHFI, brokered time deposits, and long-term debt instruments.



(Dollars in millions)	Fair Value at March 31, 2018		Aggregate UPB at March 31, 2018		Fair Value Over/(Under) Unpaid Principal
Assets:
Trading loans		$2,189		$2,142		$47
LHFS:
Accruing	1,428		1,397		31
LHFI:
Accruing	183		190		(7		)
Nonaccrual	5		7		(2		)
Liabilities:
Brokered time deposits	302		304		(2		)
Long-term debt	209		203		6

(Dollars in millions)	Fair Value at December 31, 2017		Aggregate UPB at December 31, 2017		Fair Value Over/(Under) Unpaid Principal
Assets:
Trading loans		$2,149		$2,111		$38
LHFS:
Accruing	1,576		1,533		43
Past due 90 days or more	1		1		—
LHFI:
Accruing	192		198		(6		)
Nonaccrual	4		6		(2		)
Liabilities:
Brokered time deposits	236		233		3
Long-term debt	530		517		13

The following tables present the change in fair value during the three months ended March 31, 2018 and 2017 of financial instruments for which the FVO has been elected, as well as for residential MSRs. The tables do not reflect the change in fair value attributable to related economic hedges that the Company uses to mitigate market-related risks associated with the financial instruments. Generally, changes in the fair value of economic hedges are recognized in Trading income, Mortgage production related income, Mortgage servicing related income, Commercial real estate related income, or Other noninterest income as appropriate, and are designed to partially offset the change in fair value of the financial instruments referenced in the tables below. The Company’s economic hedging activities are deployed at both the instrument and portfolio level.



	Fair Value Gain/(Loss) for the Three Months Ended March 31, 2018 for Items Measured at Fair Value Pursuant to Election of the FVO
(Dollars in millions)	Trading Income		Mortgage Production Related Income ¹			Mortgage Servicing Related Income		Other Noninterest Income			Total Changes in Fair Values Included in Earnings ²
Assets:
Trading loans		$2		$—			$—		$—			$2
LHFS	—		(13		)	—		—			(13		)
LHFI	—		—			—		(2		)	(2		)
Residential MSRs	—		3			56		—			59
Liabilities:
Brokered time deposits	7		—			—		—			7
Long-term debt	3		—			—		—			3

¹Income related to LHFS does not include income from IRLCs. For the three months ended March 31, 2018, income related to residential MSRs includes income recognized upon the sale of loans reported at LOCOM.

²Changes in fair value for the three months ended March 31, 2018 exclude accrued interest for the period then ended. Interest income or interest expense on trading loans, LHFS, LHFI, brokered time deposits, and long-term debt that have been elected to be measured at fair value are recognized in Interest income or Interest expense in the Consolidated Statements of Income.



	Fair Value Gain/(Loss) for the Three Months Ended March 31, 2017 for Items Measured at Fair Value Pursuant to Election of the FVO
(Dollars in millions)	Trading Income		Mortgage Production Related Income ¹		Mortgage Servicing Related Income			Other Noninterest Income		Total Changes in Fair Values Included in Earnings ²
Assets:
Trading loans		$2		$—		$—			$—		$2
LHFS	—		12		—			—		12
Residential MSRs	—		1		(24		)	—		(23		)
Liabilities:
Brokered time deposits	1		—		—			—		1
Long-term debt	6		—		—			—		6

¹Income related to LHFS does not include income from IRLCs. For the three months ended March 31, 2017, income related to residential MSRs includes income recognized upon the sale of loans reported at LOCOM.

²Changes in fair value for the three months ended March 31, 2017 exclude accrued interest for the period then ended. Interest income or interest expense on trading loans, LHFS, brokered time deposits, and long-term debt that have been elected to be measured at fair value are recognized in Interest income or Interest expense in the Consolidated Statements of Income.

The following is a discussion of the valuation techniques and inputs used in estimating fair value for assets and liabilities measured at fair value on a recurring basis and classified as level 1, 2, and/or 3.

Trading Assets and Derivative Instruments and Securities Available for Sale

Unless otherwise indicated, trading assets are priced by the trading desk and securities AFS are valued by an independent third party pricing service. The third party pricing service gathers relevant market data and observable inputs, such as new issue data, benchmark curves, reported trades, credit spreads, and dealer bids and offers, and integrates relevant credit information, market movements, and sector news into its matrix pricing and other market-based modeling techniques.

U.S. Treasury Securities

The Company estimates the fair value of its U.S. Treasury securities based on quoted prices observed in active markets; as such, these investments are classified as level 1.

Federal Agency Securities

The Company includes in this classification securities issued by federal agencies and GSEs. Agency securities consist of debt obligations issued by HUD, FHLB, and other agencies, as well as securities collateralized by loans that are guaranteed by the SBA, and thus, are backed by the full faith and credit of the U.S. government. For SBA instruments, the Company estimates fair value based on pricing from observable trading activity for similar securities or from a third party pricing service. Accordingly, these instruments are classified as level 2.

U.S. States and Political Subdivisions

The Company’s investments in U.S. states and political subdivisions (collectively “municipals”) include obligations of county and municipal authorities and agency bonds, which are general obligations of the municipality or are supported by a specified revenue source. Holdings are geographically dispersed, with no significant concentrations in any one state or municipality. Additionally, all AFS municipal obligations classified as level 2 are highly rated or are otherwise collateralized by securities backed by the full faith and credit of the federal government.

MBS – Agency

Agency MBS includes pass-through securities and collateralized mortgage obligations issued by GSEs and U.S. government agencies, such as Fannie Mae, Freddie Mac, and Ginnie Mae. Each security contains a guarantee by the issuing GSE or agency. For agency MBS, the Company estimates fair value based on pricing from observable trading activity for similar securities or from a third party pricing service; accordingly, the Company classified these instruments as level 2.

MBS – Non-agency

Non-agency residential MBS includes purchased interests in third party securitizations, as well as retained interests in Company-sponsored securitizations of 2006 and 2007 vintage residential mortgages (including both prime jumbo fixed rate collateral and floating rate collateral). At the time of purchase or origination, these securities had high investment grade ratings; however, they have experienced deterioration in credit quality leading to downgrades to non-investment grade levels. The Company obtains pricing for these securities from an independent pricing service. The Company evaluates third party pricing to determine the reasonableness of the information relative to changes in market data, such as any recent trades, information received from market participants and analysts, and/or changes in the underlying collateral performance. At March 31, 2018 and December 31, 2017, the Company classified non-agency residential MBS as level 2 and level 3, respectively.

Non-agency commercial MBS consists of purchased interests in third party securitizations. These interests have high investment grade ratings, and the Company obtains pricing for these securities from an independent pricing service. The Company has classified these non-agency commercial MBS as level 2, as the third party pricing service relies on observable data for similar securities in active markets.

Asset-Backed Securities

ABS classified as securities AFS includes purchased interests in third party securitizations collateralized by home equity loans. At March 31, 2018 and December 31, 2017, the Company classified ABS as level 2 and level 3, respectively.

Corporate and Other Debt Securities

Corporate debt securities are comprised predominantly of senior and subordinate debt obligations of domestic corporations and are classified as level 2. Other debt securities classified as AFS include bonds that are redeemable with the issuer at par. At March 31, 2018 and December 31, 2017, the Company classified other debt securities as level 2 and level 3, respectively.

Commercial Paper

The Company acquires CP that is generally short-term in nature (maturity of less than 30 days) and highly rated. The Company estimates the fair value of this CP based on observable pricing from executed trades of similar instruments; as such, CP is classified as level 2.

Equity Securities

The Company estimates the fair value of its equity securities classified as trading assets based on quoted prices observed in active markets; accordingly, these investments are classified as level 1.

Derivative Instruments

The Company holds derivative instruments for both trading and risk management purposes. Level 1 derivative instruments generally include exchange-traded futures or option contracts for which pricing is readily available. The Company’s level 2 instruments are predominantly OTC swaps, options, and forwards, measured using observable market assumptions for interest rates, foreign exchange, equity, and credit. Because fair values for OTC contracts are not readily available, the Company estimates fair values using internal, but standard, valuation models. The selection of valuation models is driven by the type of contract: for option-based products, the Company uses an appropriate option pricing model such as Black-Scholes. For forward-based products, the Company’s valuation methodology is generally a discounted cash flow approach.

The Company's derivative instruments classified as level 2 are primarily transacted in the institutional dealer market and priced with observable market assumptions at a mid-market valuation point, with appropriate valuation adjustments for liquidity and credit risk. See Note 15, “Derivative Financial Instruments,” for additional information on the Company's derivative instruments.

The Company's derivative instruments classified as level 3 include IRLCs that satisfy the criteria to be treated as derivative financial instruments. The fair value of IRLCs on LHFS, while based on interest rates observable in the market, is highly dependent on the ultimate closing of the loans. These “pull-through” rates are based on the Company’s historical data and reflect the Company’s best estimate of the likelihood that a commitment will result in a closed loan. As pull-through rates increase, the fair value of IRLCs also increases. Servicing value is included in the fair value of IRLCs, and the fair value of servicing is determined by projecting cash flows, which are then discounted to estimate an expected fair value. The fair value of servicing is impacted by a variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually specified servicing fees, servicing costs, and underlying portfolio characteristics. Because these inputs are not transparent in market trades, IRLCs are considered to be level 3 assets. During the three months ended March 31, 2018 and 2017, the Company transferred $6 million of net IRLC liabilities and $36 million of net IRLC assets out of level 3 as the associated loans were closed.

Trading Loans

The Company engages in certain businesses whereby electing to measure loans at fair value for financial reporting aligns with the underlying business purpose. Specifically, loans included within this classification include trading loans that are (i) made or acquired in connection with the Company’s TRS business, (ii) part of the loan sales and trading business within the Company’s Wholesale segment, or (iii) backed by the SBA. See Note 10, "Certain Transfers of Financial Assets and Variable Interest Entities," and Note 15, “Derivative Financial Instruments,” for further discussion of this business. All of these loans are classified as level 2 due to the nature of market data that the Company uses to estimate fair value.

The loans made in connection with the Company’s TRS business are short-term, senior demand loans supported by a pledge agreement granting first priority security interest to the Bank in all the assets held by the borrower, a VIE with assets comprised primarily of corporate loans. While these TRS-related loans do not trade in the market, the Company believes that the par amount of the loans approximates fair value and no unobservable assumptions are used by the Company to value these loans. At both March 31, 2018 and December 31, 2017, the Company had $1.7 billion and of these short-term loans outstanding, measured at fair value.

The loans from the Company’s sales and trading business are commercial and corporate leveraged loans that are either traded in the market or for which similar loans trade. The Company elected to measure these loans at fair value since they are actively traded. For both of the three months ended March 31, 2018 and 2017, the Company recognized an immaterial amount of gains/(losses) in the Consolidated Statements of Income due to changes in fair value attributable to instrument-specific credit risk. The Company is able to obtain fair value estimates for substantially all of these loans through a third party valuation service that is broadly used by market participants. While most of the loans are traded in the market, the Company does not believe that trading activity qualifies the loans as level 1 instruments, as the volume and level of trading activity is subject to variability and the loans are not exchange-traded. At March 31, 2018 and December 31, 2017, $74 million and $48 million, respectively, of loans related to the Company’s trading business were held in inventory.

SBA loans are similar to SBA securities discussed herein under “Federal agency securities,” except for their legal form. In both cases, the Company trades instruments that are fully guaranteed by the U.S. government as to contractual principal and interest and there is sufficient observable trading activity upon which to base the estimate of fair value. As these SBA loans are fully guaranteed, the changes in fair value are attributable to factors other than instrument-specific credit risk. At March 31, 2018 and December 31, 2017, the Company held $448 million and $368 million of SBA loans in inventory, respectively.

Loans Held for Sale and Loans Held for Investment

Residential Mortgage LHFS

The Company values certain newly-originated residential mortgage LHFS at fair value based upon defined product criteria. The Company chooses to fair value these residential mortgage LHFS to eliminate the complexities and inherent difficulties of achieving hedge accounting and to better align reported results with the underlying economic changes in value of the loans and related hedge instruments. Any origination fees are recognized within Mortgage production related income in the Consolidated Statements of Income when earned at the time of closing. The servicing value is included in the fair value of the loan and is initially recognized at the time the Company enters into IRLCs with borrowers. The Company employs derivative instruments to economically hedge changes in interest rates and the related impact on servicing value in the fair value of the loan. The mark-to-market adjustments related to LHFS and the associated economic hedges are captured in Mortgage production related income.

LHFS classified as level 2 are primarily agency loans which trade in active secondary markets and are priced using current market pricing for similar securities, adjusted for servicing, interest rate risk, and credit risk. Non-agency residential mortgage LHFS are also included in level 2.

For residential mortgages that the Company has elected to measure at fair value, the Company recognized an immaterial amount of gains/(losses) in the Consolidated Statements of Income due to changes in fair value attributable to borrower-specific credit risk for both of the three months ended March 31, 2018 and 2017. In addition to borrower-specific credit risk, there are other more significant variables that drive changes in the fair values of the loans, including interest rates and general market conditions.

Commercial Mortgage LHFS

The Company values certain commercial mortgage LHFS at fair value based upon observable current market prices for similar loans. These loans are generally transferred to agencies within 90 days of origination. The Company had commitments from agencies to purchase these loans at March 31, 2018 and December 31, 2017; therefore, they are classified as level 2. Origination fees are recognized within Commercial real estate related income in the Consolidated Statements of Income when earned at the time of closing. To mitigate the effect of interest rate risk inherent in entering into IRLCs with borrowers, the Company enters into forward contracts with investors at the same time that it enters into IRLCs with borrowers. The mark-to-market adjustments related to commercial mortgage LHFS, IRLCs, and forward contracts are recognized in Commercial real estate related income. For commercial mortgages that the Company has elected to measure at fair value, the Company recognized no gains/(losses) in the Consolidated Statements of Income due to changes in fair value attributable to borrower-specific credit risk for both of the three months ended March 31, 2018 and 2017.

LHFI

LHFI classified as level 3 includes predominantly mortgage loans that are not marketable, largely due to the identification of loan defects. The Company chooses to measure these mortgage LHFI at fair value to better align reported results with the underlying economic changes in value of the loans and any related hedging instruments. The Company values these loans using a discounted cash flow approach based on assumptions that are generally not observable in current markets, such as prepayment speeds, default rates, loss severity rates, and discount rates. Level 3 LHFI also includes mortgage loans that are valued using collateral based pricing. Changes in the applicable housing price index since the time of the loan origination are considered and applied to the loan's collateral value. An additional discount representing the return that a buyer would require is also considered in the overall fair value.

Residential Mortgage Servicing Rights

The Company records residential MSR assets at fair value using a discounted cash flow approach. The fair values of residential MSRs are impacted by a variety of factors, including prepayment assumptions, discount rates, delinquency rates, contractually specified servicing fees, servicing costs, and underlying portfolio characteristics. The underlying assumptions and estimated values are corroborated by values received from independent third parties based on their review of the servicing portfolio, and comparisons to market transactions. Because these inputs are not transparent in market trades, residential MSRs are classified as level 3 assets. For additional information see Note 8, "Goodwill and Other Intangible Assets."

Other

The Company estimates the fair value of its mutual fund investments and other equity securities with readily determinable fair values based on quoted prices observed in active markets; therefore, these investments are classified as level 1.

Liabilities

Trading Liabilities and Derivative Instruments

Trading liabilities are comprised primarily of derivative contracts, including IRLCs that satisfy the criteria to be treated as derivative financial instruments, as well as various contracts (primarily U.S. Treasury securities, corporate and other debt securities) that the Company uses in certain of its trading businesses. The Company's valuation methodologies for these derivative contracts and securities are consistent with those discussed within the corresponding sections herein under “Trading Assets and Derivative Instruments and Securities Available for Sale.”

During the second quarter of 2009, in connection with its sale of Visa Class B shares, the Company entered into a derivative contract whereby the ultimate cash payments received or paid, if any, under the contract are based on the ultimate resolution of the Litigation involving Visa. The fair value of the derivative is estimated based on the Company’s expectations regarding the ultimate resolution of that Litigation. The significant unobservable inputs used in the fair value measurement of the derivative involve a high degree of judgment and subjectivity; accordingly, the derivative liability is classified as level 3. See Note 14, "Guarantees," for a discussion of the valuation assumptions.

Brokered Time Deposits

The Company has elected to measure certain CDs that contain embedded derivatives at fair value. This fair value election better aligns the economics of the CDs with the Company’s risk management strategies. The Company evaluated, on an instrument by instrument basis, whether a new issuance would be measured at fair value.

The Company has classified CDs measured at fair value as level 2 instruments due to the Company's ability to reasonably measure all significant inputs based on observable market variables. The Company employs a discounted cash flow approach based on observable market interest rates for the term of the CD and an estimate of the Bank's credit risk. For any embedded derivative features, the Company uses the same valuation methodologies as if the derivative were a standalone derivative, as discussed herein under "Derivative instruments."

Long-term Debt

The Company has elected to measure at fair value certain fixed rate issuances of public debt that are valued by obtaining price indications from a third party pricing service and utilizing broker quotes to corroborate the reasonableness of those marks. Additionally, information from market data of recent observable trades and indications from buy side investors, if available, are taken into consideration as additional support for the value. Due to the availability of this information, the Company determined that the appropriate classification for these debt issuances is level 2. The Company utilizes derivative instruments to convert interest rates on its fixed rate debt to floating rates. The Company elected to measure certain fixed rate debt issuances at fair value to align the accounting for the debt with the accounting for offsetting derivative positions, without having to apply complex hedge accounting.

The valuation technique and range, including weighted average, of the unobservable inputs associated with the Company's level 3 assets and liabilities are as follows:



	Level 3 Significant Unobservable Input Assumptions
(Dollars in millions)	Fair value March 31, 2018		Valuation Technique	Unobservable Input	Range (weighted average)
Assets
Trading assets and derivative instruments:
Derivative instruments, net ¹		$1	Internal model	Pull through rate	36-100% (79%)
Derivative instruments, net ¹		$1	Internal model	MSR value	41-190 bps (120 bps)
LHFI	183		Monte Carlo/Discounted cash flow	Option adjusted spread	62-784 bps (181 bps)
				Conditional prepayment rate	7-24 CPR (13 CPR)
				Conditional default rate	0-2 CDR (0.7 CDR)
	5		Collateral based pricing	Appraised value	NM ²
Residential MSRs	1,916		Monte Carlo/Discounted cash flow	Conditional prepayment rate	6-33 CPR (13 CPR)
Residential MSRs	1,916		Monte Carlo/Discounted cash flow	Option adjusted spread	0-116% (4%)

¹Amount represents the net of IRLC assets and liabilities and includes the derivative liability associated with the Company's sale of Visa shares. Refer to the "Trading Liabilities and Derivative Instruments" section herein for a discussion of valuation assumptions related to the Visa derivative liability.

²Not meaningful.



	Level 3 Significant Unobservable Input Assumptions
(Dollars in millions)	Fair value December 31, 2017		Valuation Technique	Unobservable Input ¹	Range (weighted average)
Assets
Trading assets and derivative instruments:
Derivative instruments, net ²		$—	Internal model	Pull through rate	41-100% (81%)
Derivative instruments, net ²		$—	Internal model	MSR value	41-190 bps (113 bps)
Securities AFS:
MBS - non-agency residential	59		Third party pricing	N/A
ABS	8		Third party pricing	N/A
Corporate and other debt securities	5		Cost	N/A
LHFI	192		Monte Carlo/Discounted cash flow	Option adjusted spread	62-784 bps (215 bps)
				Conditional prepayment rate	2-34 CPR (11 CPR)
				Conditional default rate	0-5 CDR (0.7 CDR)
	4		Collateral based pricing	Appraised value	NM ³
Residential MSRs	1,710		Monte Carlo/Discounted cash flow	Conditional prepayment rate	6-30 CPR (13 CPR)
Residential MSRs	1,710		Monte Carlo/Discounted cash flow	Option adjusted spread	1-125% (4%)

¹For certain assets and liabilities where the Company utilizes third party pricing, the unobservable inputs and their ranges are not reasonably available, and therefore, have been noted as not applicable ("N/A").

²Amount represents the net of IRLC assets and liabilities and includes the derivative liability associated with the Company's sale of Visa shares. Refer to the "Trading Liabilities and Derivative Instruments" section herein for a discussion of valuation assumptions related to the Visa derivative liability.

³Not meaningful.

The following tables present a reconciliation of the beginning and ending balances for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (other than servicing rights which are disclosed in Note 8, “Goodwill and Other Intangible Assets”). Transfers into and out of the fair value hierarchy levels are assumed to occur at the end of the period in which the transfer occurred. None of the transfers into or out of level 3 have been the result of using alternative valuation approaches to estimate fair values. There were no transfers between level 1 and 2 during the three months ended March 31, 2018 and 2017.



	Fair Value Measurements Using Significant Unobservable Inputs
(Dollars in millions)	Beginning Balance January 1, 2018		Included in Earnings				OCI		Purchases		Sales		Settlements			Transfers to/from Other Balance Sheet Line Items		Transfers into Level 3		Transfers out of Level 3			Fair Value March 31, 2018		Included in Earnings (held at March 31, 2018 ¹)
Assets
Trading assets:
Derivative instruments, net		$—		($6	)	²		$—		$—		$—		$1			$6		$—		$—			$1		$16		²
Securities AFS:
MBS - non-agency residential	59		—				—		—		—		(2		)	—		—		(57		)	—		—
ABS	8		—				—		—		—		(1		)	—		—		(7		)	—		—
Corporate and other debt securities	5		—				—		—		—		—			—		—		(5		)	—		—
Total securities AFS	72		—				—		—		—		(3		)	—		—		(69		)	—		—

LHFI	196		(2		)	³	—		—		—		(7		)	—		1		—			188		(3		)	³

¹ Change in unrealized gains/(losses) included in earnings during the period related to financial assets still held at March 31, 2018.

² Includes issuances, fair value changes, and expirations. Amount related to residential IRLCs is recognized in Mortgage production related income, amount related to commercial IRLCs is recognized in Commercial real estate related income, and amount related to Visa derivative liability is recognized in Other noninterest expense.

³ Amounts are generally included in Mortgage production related income; however, the mark on certain fair value loans is included in Other noninterest income.



	Fair Value Measurements Using Significant Unobservable Inputs
(Dollars in millions)	Beginning Balance January 1, 2017		Included in Earnings			OCI				Purchases		Sales			Settlements			Transfers to/from Other Balance Sheet Line Items			Transfers into Level 3		Transfers out of Level 3		Fair Value March 31, 2017		Included in Earnings (held at March 31, 2017 ¹)
Assets
Trading assets:
Derivative instruments, net		$6		$48	²		$—				$—		$—			($1	)		($36	)		$—		$—		$17		$30	²
Securities AFS:
U.S. states and political subdivisions	4		—			—				—		—			—			—			—		—		4		—
MBS - non-agency residential	74		—			(1		)	³	—		—			(2		)	—			—		—		71		—
ABS	10		—			—			^—	—		—			(1		)	—			—		—		9		—
Corporate and other debt securities	5		—			—				—		—			—			—			—		—		5		—
Total securities AFS	93		—			(1		)	³	—		—			(3		)	—			—		—		89		—

Residential LHFS	12		—			—				—		(14		)	—			(2		)	10		—		6		—
LHFI	222		—			—				—		—			(6		)	1			4		—		221		—

¹ Change in unrealized gains included in earnings during the period related to financial assets still held at March 31, 2017.

² Includes issuances, fair value changes, and expirations. Amount related to residential IRLCs is recognized in Mortgage production related income and amount related to Visa derivative liability is recognized in Other noninterest expense.

³ Amounts recognized in OCI are included in change in net unrealized losses on securities AFS, net of tax.

Non-recurring Fair Value Measurements

The following tables present gains and losses recognized on assets still held at period end, and measured at fair value on a non-recurring basis, for the three months ended March 31, 2018 and the year ended December 31, 2017. Adjustments to fair value generally result from the application of LOCOM, or the measurement alternative, or through write-downs of individual assets. The tables do not reflect changes in fair value attributable to economic hedges the Company may have used to mitigate interest rate risk associated with LHFS.



			Fair Value Measurements						(Losses)/Gains for the Three Months Ended March 31, 2018
(Dollars in millions)	March 31, 2018		Level 1		Level 2		Level 3		(Losses)/Gains for the Three Months Ended March 31, 2018
LHFS		$13		$—		$13		$—		$—
LHFI	48		—		—		48		—
OREO	23		—		—		23		(2		)
Other assets	41		—		31		10		15

			Fair Value Measurements						Losses for the Year Ended December 31, 2017
(Dollars in millions)	December 31, 2017		Level 1		Level 2		Level 3		Losses for the Year Ended December 31, 2017
LHFS		$13		$—		$13		$—		$—
LHFI	49		—		—		49		—
OREO	24		—		1		23		(4		)
Other assets	53		—		4		49		(43		)

Discussed below are the valuation techniques and inputs used in estimating fair values for assets measured at fair value on a non-recurring basis and classified as level 2 and/or 3.

Loans Held for Sale

At March 31, 2018 and December 31, 2017, LHFS classified as level 2 consisted of commercial loans that were valued using market prices and measured at LOCOM. There were no gains/(losses) recognized in earnings during the three months ended March 31, 2018 or during the year ended December 31, 2017 as the charge-offs related to these loans are a component of the ALLL.

Loans Held for Investment

At March 31, 2018 and December 31, 2017, LHFI classified as level 3 consisted primarily of consumer loans discharged in Chapter 7 bankruptcy that had not been reaffirmed by the borrower, as well as nonperforming CRE loans for which specific reserves had been recognized. Cash proceeds from the sale of the underlying collateral is the expected source of repayment for a majority of these loans. Accordingly, the fair value of these loans is derived from the estimated fair value of the underlying collateral, incorporating market data if available. Due to the lack of market data for similar assets, all of these loans are classified as level 3. There were no gains/(losses) recognized during the three months ended March 31, 2018 or during the year ended December 31, 2017, as the charge-offs related to these loans are a component of the ALLL.

OREO

OREO is measured at the lower of cost or fair value less costs to sell. Level 2 OREO consists primarily of residential homes, commercial properties, and vacant lots and land for which binding purchase agreements exist. Level 3 OREO consists primarily of residential homes, commercial properties, and vacant lots and land for which initial valuations are based on property-specific appraisals, broker pricing opinions, or other limited, highly subjective market information. Updated value estimates are received regularly for level 3 OREO.

Other Assets

Other assets consists of equity investments, other repossessed assets, assets under operating leases where the Company is the lessor, branch properties, land held for sale, and software.

Pursuant to the adoption of ASU 2016-01 on January 1, 2018, the Company elected the measurement alternative for measuring certain equity securities without readily determinable fair values, which are adjusted based on any observable price changes in orderly transactions. These equity securities are classified as level 2 based on the valuation methodology and associated inputs. During the three months ended March 31, 2018, the Company recognized a remeasurement gain of $23 million on these equity securities.

Prior to the adoption of ASU 2016-01, equity investments were evaluated for potential impairment based on the expected remaining cash flows to be received from these assets discounted at a market rate that is commensurate with the expected risk, considering relevant company-specific valuation multiples, where applicable. Based on the valuation methodology and associated unobservable inputs, these investments are classified as level 3. During the year ended December 31, 2017, the Company recognized an immaterial amount of impairment charges on its equity investments.

Other repossessed assets comprises repossessed personal property that is measured at fair value less cost to sell. These assets are classified as level 3 as their fair value is determined based on a variety of subjective, unobservable factors. There were no losses recognized in earnings by the Company on other repossessed assets during the three months ended March 31, 2018 or during the year ended December 31, 2017, as the impairment charges on repossessed personal property were a component of the ALLL.

The Company monitors the fair value of assets under operating leases where the Company is the lessor and recognizes impairment on the leased asset to the extent the carrying value is not recoverable and is greater than its fair value. Fair value is determined using collateral specific pricing digests, external appraisals, broker opinions, recent sales data from industry equipment dealers, and the discounted cash flows derived from the underlying lease agreement. As market data for similar assets and lease arrangements is available and used in the valuation, these assets are considered level 2. No impairment charges were recognized during the three months ended March 31, 2018 attributable to changes in the fair value of various personal property under operating leases. During the year ended December 31, 2017, the Company recognized an immaterial amount of impairment charges attributable to changes in the fair value of various personal property under operating leases.

Branch properties are classified as level 3, as their fair value is based on market comparables and broker opinions. The Company recognized no impairment on branch properties during the three months ended March 31, 2018. During the year ended December 31, 2017, the Company recognized impairment charges of $10 million on branch properties.

Land held for sale is recorded at the lesser of carrying value or fair value less cost to sell, and is considered level 3 as its fair value is determined based on market comparables and broker opinions. The Company recognized no impairment charges on land held for sale during the three months ended March 31, 2018. During the year ended December 31, 2017, the Company recognized an immaterial amount of impairment charges on land held for sale.

Software consisted primarily of external software licenses and internally developed software that were impaired and for which fair value was determined using a level 3 measurement. This resulted in impairment charges of $8 million during the three months ended March 31, 2018 and $28 million during the year ended December 31, 2017.

Fair Value of Financial Instruments

The carrying amounts and fair values of the Company’s financial instruments are as follows:



			March 31, 2018				Fair Value Measurements
(Dollars in millions)	Measurement Category		Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	Amortized cost			$7,304		$7,304		$7,304		$—		$—
Trading assets and derivative instruments	Fair value		5,112		5,112		485		4,610		17
Securities AFS	Fair value		30,934		30,934		4,340		26,594		—
LHFS	Fair value	¹	2,377		2,389		—		2,348		41
LHFI, net	Amortized cost	²	140,924		141,174		—		—		141,174
Other	Amortized cost	³	561		561		143		—		418
Financial liabilities:
Time deposits	Amortized cost		13,715		13,478		—		13,478		—
Short-term borrowings	Amortized cost		3,572		3,572		—		3,572		—
Long-term debt	Amortized cost	²	10,692		10,743		—		9,631		1,112
Trading liabilities and derivative instruments	Fair value		1,737		1,737		841		880		16

¹ Certain LHFS are recorded at the lower of cost or fair value.

²The Company elected to measure certain LHFI and fixed rate debt issuances at fair value on a recurring basis.

³Other financial assets recorded at amortized cost consist primarily of FHLB of Atlanta stock and Federal Reserve Bank of Atlanta stock. Other financial assets also include mutual fund investments and other equity securities with readily determinable fair values, which are measured at fair value on a recurring basis.



			December 31, 2017				Fair Value Measurements
(Dollars in millions)	Measurement Category		Carrying Amount		Fair Value		Level 1		Level 2		Level 3
Financial assets:
Cash and cash equivalents	Amortized cost			$6,912		$6,912		$6,912		$—		$—
Trading assets and derivative instruments	Fair value		5,093		5,093		608		4,469		16
Securities AFS	Fair value		30,947		30,947		4,331		26,544		72
LHFS	Fair value	¹	2,290		2,293		—		2,239		54
LHFI, net	Amortized cost	²	141,446		141,575		—		—		141,575
Other	Amortized cost	³	474		474		56		—		418
Financial liabilities:
Time deposits	Amortized cost		12,076		11,906		—		11,906		—
Short-term borrowings	Amortized cost		4,781		4,781		—		4,781		—
Long-term debt	Amortized cost	²	9,785		9,892		—		8,834		1,058
Trading liabilities and derivative instruments	Fair value		1,283		1,283		769		498		16

¹ Certain LHFS are recorded at the lower of cost or fair value.

²The Company elected to measure certain LHFI and fixed rate debt issuances at fair value on a recurring basis.

³Other financial assets recorded at amortized cost consist primarily of FHLB of Atlanta stock and Federal Reserve Bank of Atlanta stock. Other financial assets also include mutual fund investments and other equity securities with determinable fair values, which are measured at fair value on a recurring basis.

Unfunded loan commitments and letters of credit are not included in the table above. At March 31, 2018 and December 31, 2017, the Company had $68.3 billion and $66.4 billion, respectively, of unfunded commercial loan commitments and letters of credit. A reasonable estimate of the fair value of these instruments is the carrying value of deferred fees plus the related unfunded commitments reserve, which was a combined $73 million and $84 million at March 31, 2018 and December 31, 2017, respectively. No active trading market exists for these instruments, and the estimated fair value does not include value associated with the borrower relationship. The Company does not estimate the fair values of consumer unfunded lending commitments which can generally be canceled by providing notice to the borrower.