Fair Value Measurements

9 Months Ended

Sep. 30, 2018

Fair Value Disclosures [Abstract]

Fair Value Measurements

5. Fair Value Measurements

Fair Value Determination

In accordance with GAAP, Key measures certain assets and liabilities at fair value. Fair value is defined as the price to sell an asset or transfer a liability in an orderly transaction between market participants in our principal market.

Additional information regarding our accounting policies for determining fair value is provided in Note 7 (“Fair Value Measurements”) and Note 1 (“Summary of Significant Accounting Policies”) under the heading “Fair Value Measurements” of our 2017 Form 10-K.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Certain assets and liabilities are measured at fair value on a recurring basis in accordance with GAAP. The following tables present these assets and liabilities at September 30, 2018, and December 31, 2017.

	September 30, 2018									December 31, 2017
	Level 1		Level 2		Level 3		Total			Level 1		Level 2		Level 3		Total
in millions
ASSETS MEASURED ON A RECURRING BASIS
Trading account assets:
U.S. Treasury, agencies and corporations	—		$	759	—		$	759		—		615		—		615
States and political subdivisions	—		54		—		54			—		37		—		37
Other mortgage-backed securities	—		86		—		86			—		104		—		104
Other securities	3		39		—		42			—		65		—		65
Total trading account securities	3		938		—		941			—		821		—		821
Commercial loans	—		17		—		17			—		15		—		15
Total trading account assets	3		955		—		958			—		836		—		836
Securities available for sale:
U.S. Treasury, agencies and corporations	—		145		—		145			—		157		—		157
States and political subdivisions	—		7		—		7			—		9		—		9
Agency residential collateralized mortgage obligations	—		14,192		—		14,192			—		14,660		—		14,660
Agency residential mortgage-backed securities	—		1,661		—		1,661			—		1,439		—		1,439
Agency commercial mortgage-backed securities	—		2,316		—		2,316			—		1,854		—		1,854
Other securities	—		—		$	20	20			—		—		20		20
Total securities available for sale	—		18,321		20		18,341			—		18,119		20		18,139
Other investments:
Principal investments:
Direct	—		—		12		12			—		—		13		13
Indirect (measured at NAV) (a)	—		—		—		101			—		—		—		124
Total principal investments	—		—		12		113			—		—		13		137
Equity investments:
Direct	—		1		7		8			—		4		3		7
Direct (measured at NAV) (a)	—		—		—		1			—		—		—		—
Total equity investments	—		1		7		9			—		4		3		7
Total other investments	—		1		19		122			—		4		16		144
Loans, net of unearned income	—		—		3		3			—		—		2		2
Loans held for sale	—		87		—		87			—		70		1		71
Derivative assets:
Interest rate	—		304		6		310			—		713		9		722
Foreign exchange	$	70	32		—		102			$	100	$	30	$	—	$	130
Commodity	—		491		—		491			—		255		—		255
Credit	—		—		—		—			—		—		1		1
Other	—		5		2		7			—		1		3		4
Derivative assets	70		832		8		910			100		999		13		1,112
Netting adjustments (b)	—		—		—		(162		)	—		—		—		(443		)
Total derivative assets	70		832		8		748			100		999		13		669
Accrued income and other assets	—		—		—		—			—		—		—		—
Total assets on a recurring basis at fair value	$	73	$	20,196	$	50	$	20,259		$	100	$	20,028	$	52	$	19,861
LIABILITIES MEASURED ON A RECURRING BASIS
Bank notes and other short-term borrowings:
Short positions	$	37	$	600	—		$	637		$	72	$	562	$	—	$	634
Derivative liabilities:
Interest rate	—		445		—		445			—		520		—		520
Foreign exchange	62		31		—		93			98		26		—		124
Commodity	—		481		—		481			—		246		—		246
Credit	—		3		—		3			—		4		—		4
Other	—		3		—		3			—		13		—		13
Derivative liabilities	62		963		—		1,025			98		809		—		907
Netting adjustments (b)	—		—		—		(582		)	—		—		—		(616		)
Total derivative liabilities	62		963		—		443			98		809		—		291
Accrued expense and other liabilities	—		—		—		—			—		—		—		—
Total liabilities on a recurring basis at fair value	$	99	$	1,563	—		$	1,080		$	170	$	1,371	$	—	$	925

(a) Certain investments that are measured at fair value using the net asset value per share (or its equivalent) practical expedient have not been classified in the fair value hierarchy. The fair value amounts presented in this table are intended to permit reconciliation of the fair value hierarchy to the amounts presented in the consolidated balance sheet.

(b) Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Total derivative assets and liabilities include these netting adjustments.

Qualitative Disclosures of Valuation Techniques

The following describes the valuation techniques and significant inputs for Level 2 and Level 3 assets and liabilities:

Securities (trading account assets and available for sale). We own several types of securities, requiring a range of valuation methods:

• Level 2 securities include municipal bonds, bonds backed by the U.S. government, corporate bonds, agency residential and CMBS, securities issued by the U.S. Treasury, money markets, and certain agency and corporate CMOs. Fair value is determined using pricing models (either by a third-party pricing service or internally) or quoted prices of similar securities.

• Our Level 3 instruments consist principally of debt securities. The securities are valued using a cash flow analysis of the associated private company issuers based on internal models or a third-party valuation service. We also employ a market approach that utilizes revenue multiples of comparable companies. We reference guideline public companies with growth prospects, margin, and risks that are comparable to the subject companies. The valuations of the securities are negatively affected by projected net losses of the associated private companies and positively affected by projected net gains.

The valuations provided by the third-party pricing service are based on observable market inputs, which include benchmark yields, reported trades, issuer spreads, benchmark securities, bids, offers, and reference data obtained from market research publications. Inputs used by the third-party pricing service in valuing CMOs and other mortgage-backed securities also include new issue data, monthly payment information, whole loan collateral performance, and “To Be Announced” prices. We validate the pricing methodologies utilized by our third-party pricing service to ensure that the fair value determination is consistent with the applicable accounting guidance. This includes comparing the actual inputs used by our third-party pricing service to comparable inputs for similar securities and comparing the fair values to prices from other independent sources for the same and similar securities.

Commercial loans (trading account assets). Commercial loans recorded as trading account assets are valued based on market spreads since there is an active market for similar assets. Bid and ask prices are received from multiple loan dealers and valuations reflect prices within the bid-ask spread that are most representative of fair value for the respective loans. The price point used within the bid/ask spread is further validated using an independent, third party service provider.

Principal investments. Principal investments consist of investments in equity and debt instruments made by our principal investing entities. They include direct investments (investments made in a particular company) and indirect investments (investments made through funds that include other investors). In most cases, quoted market prices are not available for our direct investments, and we must estimate the fair value based on operating performance, market multiples for comparable businesses, and unique facts and circumstances related to each individual investment. Indirect investments are valued using a methodology that is consistent with accounting guidance allowing us to estimate fair value based upon net asset value per share (or its equivalent, such as member units or an ownership interest in partners’ capital to which a proportionate share of net assets is attributed).

The following table presents the fair value of our direct and indirect principal investments and related unfunded commitments at September 30, 2018, as well as financial support provided for the three and nine months ended September 30, 2018, and September 30, 2017.

					Financial support provided
					Three months ended September 30,					Nine months ended September 30,
	September 30, 2018				2018		2017			2018			2017
in millions	Fair Value		Unfunded Commitments		Funded Commitments	Funded Other	Funded Commitments		Funded Other	Funded Commitments		Funded Other	Funded Commitments		Funded Other
INVESTMENT TYPE
Direct investments (a)	$	12	—		—	—	—		—	—		—	—		$	—
Indirect investments (measured at NAV)	101		$	28	—	—	$	—	—	$	1	—	$	1	—
Total	$	113	$	28	—	—	$	—	—	$	1	—	$	1	$	—

 

(a) Our direct investments consist of equity and debt investments directly in independent business enterprises. Operations of the business enterprises are handled by management of the portfolio company. The purpose of funding these enterprises is to provide financial support for business development and acquisition strategies. We infuse equity capital based on an initial contractual cash contribution and later from additional requests on behalf of the companies’ management.

(b) Our indirect investments consist of buyout funds, venture capital funds, and fund of funds. These investments are generally not redeemable. Instead, distributions are received through the liquidation of the underlying investments of the fund. An investment in any one of these funds typically can be sold only with the approval of the fund’s general partners. We estimate that the underlying investments of the funds will be liquidated over a period of one to six years. The purpose of funding our capital commitments to these investments is to allow the funds to make additional follow-on investments and pay fund expenses until the fund dissolves. We, and all other investors in the fund, are obligated to fund the full amount of our respective capital commitments to the fund based on our and their respective ownership percentages, as noted in the applicable Limited Partnership Agreement.

Other Equity Investments. Our other equity investments measured on a recurring basis are direct investments in equity instruments of private companies. Quoted market prices are not available for these investments and we must perform valuations using other methods in a similar manner to our direct principal investments.

Loans Held for Sale and Held for Investment. Residential mortgage loans are valued based on quoted market prices, where available, prices for other traded mortgage loans with similar characteristics, and purchase commitments and bid information received from market participants. We have elected the fair value option for residential mortgage loans held for sale as this aligns with the related forward mortgage loan sale commitments.

Our residential mortgage activity also includes temporarily unsalable residential mortgage loans that are included in “Loans, net of unearned income” and loans with salability issues included in “Loans held for sale” on the balance sheet.  These loans have an origination defect that makes them temporarily unable to be sold into the performing loan sales market. Because transaction details regarding sales of this type of loan are often unavailable, unobservable bid information from brokers and investors is heavily relied upon. Accordingly, based on the significance of unobservable inputs, these loans are classified as Level 3.

Derivatives. The majority of our derivative positions are Level 2 instruments, which are valued using internally developed models, based on market convention. These models use observable market inputs, such as interest rate curves, LIBOR and Overnight Index Swap discount rates and curves, index pricing curves, foreign currency curves, volatility surfaces (a three-dimensional graph of implied volatility against strike price and maturity) and current prices for mortgage securities and investor supplied prices.

Level 3 derivative instruments primarily consist of interest rate lock commitments and several customized derivative instruments. The value of interest rate lock commitments is based on interest rates observable in the market and the probability of the loan closing.  Therefore, the valuation methodology employs a model which uses current interest rates and adjusts the probability of the loan closing at the approved terms in the current interest rate environment. Various other customized derivative instruments are priced using internally developed models which leverage market and internal data and assumptions.

Liability for short positions. Level 2 items are fixed income securities held by our broker dealer in its trading inventory. These items are measured at fair value based upon market activity, spreads, credit ratings and interest rates for each security type. Additionally, recent values used in transactions for the same or similar securities are also utilized in the valuation.

Changes in Level 3 Fair Value Measurements

The following table shows the components of the change in the fair values of our Level 3 financial instruments for the three and nine months ended September 30, 2018, and September 30, 2017. 

in millions	Beginning of Period Balance			Gains (Losses) Included in Other Comprehensive Income		Gains (Losses) Included in Earnings				Purchases	Sales		Settlements		Transfers Other		Transfers into Level 3 (a)			Transfers out of Level 3 (a)				End of Period Balance		Unrealized Gains (Losses) Included in Earnings
Nine months ended September 30, 2018
Securities available for sale
Other securities	$	20		$	—	—				—	—		—		—		—			—				$	20	—
Other investments
Principal investments
Direct	13			—		$	(1	)	(b)	1	(1	)	—		—		—			—				12		$	1		(b)
Equity investments
Direct	3			—		—				—	—		—		—		$	4		—				7		—
Loans held for sale	1			—		—				—	(1	)	—		—		—			—				—		—
Loans held for investment	2			—		—				—	—		—		1		—			—				3		—
Derivative instruments (c)
Interest rate	9			—		(2		)	(d)	1	(2	)	—		—		6		(e)	$	(6	)	(e)	6		—
Credit	1			—		(26		)	(d)	—	—		$	25	—		—			—				—		—
Other (f)	3			—		—				—	—		—		(1	)	—			—				2		—
Three months ended September 30, 2018
Securities available for sale
Other securities	$	20		$	—	—				—	—		—		—		—			$	—			$	20	—
Other investments
Principal investments
Direct	13			—		$	(1	)	(b)	—	—		—		—		—			—				12		(1		)	(b)
Equity investments
Direct	7			—		—				—	—		—		—		—			—				7		—
Loans held for sale	—			—		—				—	—		—		—		—			—				—		—
Loans held for investment	3			—		—				—	—		—		—		—			—				3		—
Derivative instruments (c)
Interest rate	5			—		—			(d)	—	—		—		—		2		(e)	(1		)	(e)	6		—
Credit	(9		)	—		(6		)	(d)	—	—		$	15	—		—			—				—		—
Other (f)	3			—		—				—	—		—		(1	)	—			—				2		—

in millions	Beginning of Period Balance		Gains (Losses) Included in Other Comprehensive Income		Gains (Losses) Included in Earnings				Purchases		Sales			Settlements		Transfers Other		Transfers into Level 3 (a)			Transfers out of Level 3 (a)				End of Period Balance		Unrealized Gains (Losses) Included in Earnings
Nine months ended September 30, 2017
Securities available for sale
Other securities	$	17	$	3	—				—		—			—		—		—			—				$	20	—
Other investments
Principal investments
Direct	27		$	—	$	(7	)	(b)	—		$	(7	)	—		—		—			—				13		$	(1	)	(b)
Loans held for sale	—		—		—				—		(1		)	—		3		—			—				2		—
Derivative instruments (c)
Interest rate	7		—		—				—		—			—		—		$	13	(e)	$	(9	)	(e)	11		—
Credit	1		—		(12		)	(d)	—		—			$	12	—		—			—				1		—
Other (f)	2		—		—				—		—			—		$	2	—			—				4		—
Three months ended September 30, 2017
Securities available for sale
Other securities	$	20	$	1	—				—		—			—		—		—			$	(1	)		$	20	—
Other investments
Principal investments
Direct	15		$	—	$	(2	)	(b)	—		$	—		—		—		—			—				13		$	2		(b)
Loans held for sale	—		—		—				—		(1		)	—		3		—			—				2		—
Derivative instruments (c)
Interest rate	16		—		—				—		—			—		—		$	1	(e)	$	(6	)	(e)	11		—
Credit	1		—		(5		)	(d)	—		—			$	5	—		—			—				1		—
Other (f)	4		—		—				$	—	—			—		$	—	—			—				4		—

(a) Our policy is to recognize transfers into and transfers out of Level 3 as of the end of the reporting period.

(b) Realized and unrealized gains and losses on principal investments are reported in “other income” on the income statement.

(c) Amounts represent Level 3 derivative assets less Level 3 derivative liabilities.

(d) Realized and unrealized gains and losses on derivative instruments are reported in “corporate services income” and “other income” on the income statement.

(e) Certain derivatives previously classified as Level 2 were transferred to Level 3 because Level 3 unobservable inputs became significant. Certain derivatives previously classified as Level 3 were transferred to Level 2 because Level 3 unobservable inputs became less significant.

(f) Amounts represent Level 3 interest rate lock commitments.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis in accordance with GAAP. The adjustments to fair value generally result from the application of accounting guidance that requires assets and liabilities to be recorded at the lower of cost or fair value, or assessed for impairment. There were no liabilities measured at fair value on a nonrecurring basis at September 30, 2018, and December 31, 2017.

The following table presents our assets measured at fair value on a nonrecurring basis at September 30, 2018, and December 31, 2017:

	September 30, 2018							December 31, 2017
in millions	Level 1	Level 2		Level 3		Total		Level 1	Level 2		Level 3			Total
ASSETS MEASURED ON A NONRECURRING BASIS
Impaired loans and leases	—	$	—	$	97	$	97	—	—		$	9		$	9
Accrued income and other assets	—	—		24		24		—	$	5	133		(a)	138
Total assets on a nonrecurring basis at fair value	—	$	—	$	121	$	121	—	$	5	$	142		$	147

(a) At December 31, 2017, we recorded $31 million of impairment related to $119 million of LIHTC and Historic Tax Credit investments impacted by the enactment of the TCJ Act. Refer to the “LIHTC and Historic Tax Credit Investments” section below for a description of the valuation technique and inputs applied for this fair value measurement.

Impaired loans and leases. The following two internal methods are used to value impaired loans and leases:

• Cash flow analysis considers internally developed inputs, such as discount rates, default rates, costs of foreclosure, and changes in collateral values.

• The fair value of the underlying collateral, which may take the form of real estate or personal property, is based on internal estimates, field observations, and assessments provided by third-party appraisers. 

Reviews are done on a quarterly basis for non-accrual and TDRs greater than $2.5 million to determine the amount of specific allocations for impairment needed. Impairment valuations are back-tested each quarter, based on a look-back of actual incurred losses on closed deals previously evaluated for impairment. The overall percent variance of actual net loan charge-offs on closed deals compared to the specific allocations on such deals is considered in determining each quarter’s specific allocations.

Commercial loans held for sale. Through a quarterly analysis of our loan portfolios held for sale, which include both performing and nonperforming commercial loans, we determine any adjustments necessary to record the portfolios at the lower of cost or fair value in accordance with GAAP. For loans sold in an active market, we utilize non-binding bids for the respective loans or similar loans, or recent sales to determine the fair value. For inactive markets, we assess appraisal values, strength of sponsor/guarantor, loan pricing relative to current comparable transactions, current market conditions and market demographics. Our analysis concluded that there were no commercial loans held for sale adjusted to fair value at September 30, 2018, and December 31, 2017.

Direct financing leases and operating lease assets held for sale. Valuations of direct financing leases and operating lease assets held for sale are performed using an internal model that relies on market data, such as swap rates and bond ratings, as well as on our own assumptions about the exit market for the leases and details about the individual leases in the portfolio. The inputs based on our assumptions include changes in the value of leased items and internal credit ratings. These leases have been classified as Level 3 assets. Leases for which we receive a current nonbinding bid, and for which the sale is considered probable, may be classified as Level 2. No direct financing leases and operating lease assets held for sale were adjusted to fair value at September 30, 2018, and December 31, 2017.

Other assets. OREO and other repossessed properties are valued based on inputs such as appraisals and third-party price opinions, less estimated selling costs. Generally, we classify these assets as Level 3, but OREO and other repossessed properties for which we receive binding purchase agreements are classified as Level 2. Returned lease inventory is valued based on market data for similar assets and is classified as Level 2.

LIHTC, HTC, and NMTC Investments. Valuation of LIHTC, HTC, and NMTC investments involves measuring the present value of future tax benefits and comparing that value against the current carrying value of the investments. LIHTC, HTC, and NMTC investments are impaired when it is more likely than not that the carrying amount of the investments will not be realized. A primary driver of impairment in the fourth quarter of 2017 was the enactment of the TCJ Act, which reduced future depreciation tax benefits expected to be realized by certain LIHTC, HTC, and NMTC investments. No impairment was recorded for the three and nine months ended September 30, 2018.

Other Equity Investments. We have other investments in equity securities that do not have readily determinable fair values and do not qualify for the practical expedient to measure the investment using a net asset value per share. We have elected to measure these securities at cost less impairment plus or minus adjustments due to observable orderly transactions. Impairment is recorded when there is evidence that the expected fair value of the investment has declined to below the recorded cost. At each reporting period, we assess if these investments continue to qualify for this measurement alternative. At September 30, 2018, the carrying amount of equity investments recorded under this method was $106 million. No impairment was recorded for the three and nine months ended September 30, 2018.

Quantitative Information about Level 3 Fair Value Measurements

The range and weighted average of the significant unobservable inputs used to fair value our material Level 3 recurring and nonrecurring assets at September 30, 2018, and December 31, 2017, along with the valuation techniques used, are shown in the following table:

September 30, 2018	Fair Value of Level 3 Assets		Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
dollars in millions
Recurring
Other investments — principal investments — direct:	$	12	Individual analysis of the  condition of each investment
Debt instruments				EBITDA multiple	N/A (6.88)
Equity instruments of private companies				EBITDA multiple	N/A (6.88)
Nonrecurring
Impaired loans	97		Fair value of underlying collateral	Discount	0.00 - 75.00% (20.00%)

December 31, 2017	Fair Value of Level 3 Assets		Valuation Technique	Significant Unobservable Input	Range (Weighted-Average)
dollars in millions
Recurring
Other investments — principal investments — direct:	$	13	Individual analysis of the condition of each investment
Debt instruments				EBITDA multiple	N/A (6.00)
Equity instruments of private companies				EBITDA multiple	N/A (6.00)
Nonrecurring
Impaired loans	9		Fair value of underlying collateral	Discount	0.00 - 50.00% (23.00%)

Fair Value Disclosures of Financial Instruments

The levels in the fair value hierarchy ascribed to our financial instruments and the related carrying amounts at September 30, 2018, and December 31, 2017, are shown in the following tables. Assets and liabilities are further arranged by measurement category.

	September 30, 2018
				Fair Value
in millions	Carrying Amount			Level 1		Level 2			Level 3		Measured at NAV		Netting Adjustment				Total
ASSETS (by measurement category)
Fair value - net income
Trading account assets (b)	$	958		3		$	955		—		—		—				$	958
Other investments (b)	681			—		1			$	578	$	102	—				681
Loans, net of unearned income (d)	3			—		—			3		—		—				3
Loans held for sale (b)	87			—		87			—		—		—				87
Derivative assets - trading (b)	700			$	68	794			8		—		$	(170	)	(f)	700
Fair value - OCI
Securities available for sale (b)	18,341			—		18,321			$	20	—		—				18,341
Derivative assets - hedging (b)	48			2		38			—		—		8			(f)	48
Amortized cost
Held-to-maturity securities (c)	11,869			—		11,261			—		—		—				11,261
Loans, net of unearned income (d)	88,378			—		—			86,418		—		—				86,418
Loans held for sale (b)	1,531			—		—			1,531		—		—				1,531
Other
Cash and short-term investments (a)	2,591			2,591		—			—		—		—				2,591
LIABILITIES (by measurement category)
Fair value - net income
Derivative liabilities - trading (b)	$	446		$	61	$	967		—		—		$	(582	)	(f)	$	446
Fair value - OCI
Derivative liabilities - hedging (b)	(3		)	1		(4		)	—		—		—			(f)	(3		)
Amortized cost
Time deposits (e)	13,583			—		13,654			—		—		—				13,654
Short-term borrowings (a)	1,922			$	37	1,885			—		—		—				1,922
Long-term debt (e)	13,849			12,659		1,205			—		—		—				13,864
Other
Deposits with no stated maturity (a)	92,197			—		92,197			—		—		—				92,197

	December 31, 2017
				Fair Value
in millions	Carrying Amount			Level 1		Level 2		Level 3		Measured at NAV		Netting Adjustment				Total
ASSETS (by measurement category)
Fair value - net income
Trading account assets (b)	$	836		—		$	836	—		—		—				$	836
Other investments (b)	726			—		4		$	598	$	124	—				726
Loans, net of unearned income (d)	2			—		—		2		—		—				2
Loans held for sale (b)	71			—		70		1		—		—				71
Derivative assets - trading (b)	681			$	99	918		13		—		$	(349	)	(f)	681
Fair value - OCI
Securities available for sale (b)	18,139			—		18,119		20		—		—				18,139
Derivative assets - hedging (b)	(12		)	1		81		—		—		(94		)	(f)	(12		)
Amortized cost
Held-to-maturity securities (c)	11,830			—		11,565		—		—		—				11,565
Loans, net of unearned income (d)	85,526			—		—		84,003		—		—				84,003
Loans held for sale (b)	1,036			—		—		1,036		—		—				1,036
Other
Cash and short-term investments (a)	5,118			5,118		—		—		—		—				5,118
LIABILITIES (by measurement category)
Fair value - net income
Derivative liabilities - trading (b)	$	289		$	94	$	763	—		—		$	(568	)	(f)	$	289
Fair value - OCI
Derivative liabilities - hedging (b)	2			4		46		—		—		(48		)	(f)	2
Amortized cost
Time deposits (e)	11,647			—		11,750		—		—		—				11,750
Short-term borrowings (a)	1,011			72		939		—		—		—				1,011
Long-term debt (e)	14,333			13,407		$	1,219	—		—		—				14,626
Other
Deposits with no stated maturity (a)	93,588			—		93,588		—		—		—				93,588

Valuation Methods and Assumptions

(a) Fair value equals or approximates carrying amount. The fair value of deposits with no stated maturity does not take into consideration the value ascribed to core deposit intangibles.

(b) Information pertaining to our methodology for measuring the fair values of these assets and liabilities is included in the sections entitled “Qualitative Disclosures of Valuation Techniques” and “Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis” in this Note. Investments accounted for under the cost method (or cost less impairment adjusted for observable price changes for certain equity investments) are classified as Level 3 assets. These investments are not actively traded in an open market as sales for these types of investments are rare. The carrying amount of the investments carried at cost are adjusted for declines in value if they are considered to be other-than-temporary (or due to observable orderly transactions of the same issuer for equity investments eligible for the cost less impairment measurement alternative). These adjustments are included in “other income” on the income statement.

(c) Fair values of held-to-maturity securities are determined by using models that are based on security-specific details, as well as relevant industry and economic factors. The most significant of these inputs are quoted market prices, interest rate spreads on relevant benchmark securities, and certain prepayment assumptions. We review the valuations derived from the models to ensure that they are reasonable and consistent with the values placed on similar securities traded in the secondary markets.

(d) The fair value of loans is based on the present value of the expected cash flows. The projected cash flows are based on the contractual terms of the loans, adjusted for prepayments and use of a discount rate based on the relative risk of the cash flows, taking into account the loan type, maturity of the loan, liquidity risk, servicing costs, and a required return on debt and capital. In addition, an incremental liquidity discount is applied to certain loans, using historical sales of loans during periods of similar economic conditions as a benchmark. The fair value of loans includes lease financing receivables at their aggregate carrying amount, which is equivalent to their fair value.

(e) Fair values of time deposits and long-term debt are based on discounted cash flows utilizing relevant market inputs.

(f) Netting adjustments represent the amounts recorded to convert our derivative assets and liabilities from a gross basis to a net basis in accordance with the applicable accounting guidance. The net basis takes into account the impact of bilateral collateral and master netting agreements that allow us to settle all derivative contracts with a single counterparty on a net basis and to offset the net derivative position with the related cash collateral. Total derivative assets and liabilities include these netting adjustments.

Education lending business. The discontinued education lending business consists of loans in portfolio recorded at carrying value with appropriate valuation reserves, and loans in portfolio recorded at fair value. All of these loans were excluded from the table above as follows:

• Loans at carrying value, net of allowance, of $1.1 billion ($1.0 billion at fair value) at September 30, 2018, and $1.3 billion ($1.0 billion at fair value) at December 31, 2017;

• Portfolio loans at fair value of $2 million at September 30, 2018, and $2 million at December 31, 2017.

These loans and securities are classified as Level 3 because we rely on unobservable inputs when determining fair value since observable market data is not available.