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FAIR VALUE MEASUREMENTS | 6 Months Ended
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Jun. 30, 2018
Fair Value Disclosures [Abstract] |
FAIR VALUE MEASUREMENTS | FAIR VALUE MEASUREMENTS As discussed in Note 19 “Fair Value Measurements,” to the Company’s audited Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2017, the Company measures or monitors many of its assets and liabilities on a fair value basis. Fair value is used on a recurring basis for assets and liabilities for which fair value is the required or elected measurement basis of accounting. Additionally, fair value is used on a nonrecurring basis to evaluate assets for impairment or for disclosure purposes. Nonrecurring fair value adjustments typically involve the application of lower of cost or market accounting or write-downs of individual assets. The Company also applies the fair value measurement guidance to determine amounts reported for certain disclosures in this Note for assets and liabilities that are not required to be reported at fair value in the financial statements. The Company elected to account for residential mortgage loans held for sale and certain commercial and commercial real estate loans held for sale at fair value. Applying fair value accounting to the residential mortgage loans held for sale better aligns the reported results of the economic changes in the value of these loans and their related economic hedge instruments. Certain commercial and commercial real estate held for sale loans are managed by a commercial secondary loan desk that provides liquidity to banks, finance companies and institutional investors. Applying fair value accounting to this portfolio is appropriate because the Company holds these loans with the intent to sell within the near-term periods. Fair Value Option Residential Mortgage Loans Held for Sale The fair value of residential mortgage loans held for sale is derived from observable mortgage security prices and includes adjustments for loan servicing value, agency guarantee fees, and other loan level attributes which are mostly observable in the marketplace. Credit risk does not significantly impact the valuation since these loans are sold shortly after origination. Therefore, the Company classifies the residential mortgage loans held for sale in Level 2 of the fair value hierarchy. The election of the fair value option for financial assets and financial liabilities is optional and irrevocable. The residential mortgage loans accounted for under the fair value option are initially measured at fair value (i.e., acquisition cost) when the financial asset is acquired. Subsequent changes in fair value are recognized in mortgage banking fees on the Consolidated Statements of Operations. The Company recognized changes in fair value in mortgage banking income of $4 million and $3 million for the three months ended June 30, 2018 and 2017, respectively. The Company recognized changes in fair value in mortgage banking income of $1 million and $10 million for the six months ended June 30, 2018 and 2017, respectively. Interest income on residential mortgage loans held for sale is calculated based on the contractual interest rate of the loan and is recorded in interest income. Commercial and Commercial Real Estate Loans Held for Sale The fair value of commercial and commercial real estate loans held for sale is estimated using observable prices of similar loans that transact in the marketplace. In addition, the Company uses external pricing services that provide estimates of fair values based on quotes from various dealers transacting in the market, sector curves or benchmarking techniques. Therefore, the Company classifies the commercial and commercial real estate loans managed by the commercial secondary loan desk in Level 2 of the fair value hierarchy given the observable market inputs. There were no loans in this portfolio that were 90 days or more past due or nonaccruing as of June 30, 2018 and December 31, 2017. The loans accounted for under the fair value option are initially measured at fair value when the financial asset is recognized. Subsequent changes in fair value are recognized in other noninterest income on the Consolidated Statements of Operations. Since all loans in the Company’s commercial trading portfolio consist of floating rate obligations, all changes in fair value are due to changes in credit risk. Such credit-related fair value changes may include observed changes in overall credit spreads and/or changes to the creditworthiness of an individual borrower. Unsettled trades within the commercial trading portfolio are not recognized on the Consolidated Balance Sheets and represent off-balance sheet commitments. Refer to Note 11 “Commitments and Contingencies” for further information. Interest income on commercial and commercial real estate loans held for sale is calculated based on the contractual interest rate of the loan and is recorded in interest income. The Company recognized ($1) million in other noninterest income related to its commercial trading portfolio for the three months ended June 30, 2018 and $1 million for the three months ended June 30, 2017.The Company recognized no other noninterest income related to its commercial trading portfolio for the six months ended June 30, 2018 and $3 million for the six months ended June 30, 2017. The following table presents the difference between the aggregate fair value and the aggregate unpaid principal balance of loans held for sale measured at fair value:
| June 30, 2018 |  | December 31, 2017
(in millions) | Aggregate Fair Value | Aggregate Unpaid Principal | Aggregate Fair Value Less Aggregate Unpaid Principal |  | Aggregate Fair Value | Aggregate Unpaid Principal | Aggregate Fair Value Less Aggregate Unpaid Principal
Residential mortgage loans held for sale, at fair value |  | $365 |  |  | $365 |  |  | $— |  |  |  | $326 |  |  | $326 |  |  | $— |
Commercial and commercial real estate loans held for sale, at fair value | 156 |  | 156 |  | — |  |  | 171 |  | 171 |  | — |
Recurring Fair Value Measurements The Company utilizes a variety of valuation techniques to measure its assets and liabilities at fair value. The valuation methodologies used for significant assets and liabilities carried on the balance sheet at fair value on a recurring basis are presented below: Debt securities available for sale The fair value of debt securities classified as AFS is based upon quoted prices, if available. Where observable quoted prices are available in an active market, the security is classified as Level 1 in the fair value hierarchy. Classes of instruments that are valued using this market approach include debt securities issued by the U.S. Treasury. If quoted market prices are not available, the fair value for the security is estimated under the market or income approach using pricing models. These instruments are classified as Level 2 because they currently trade in active markets and the inputs to the valuations are observable. The pricing models used to value securities generally begin with market prices (or rates) for similar instruments and make adjustments based on the characteristics of the instrument being valued. These adjustments reflect assumptions made regarding the sensitivity of each security’s value to changes in interest rates and prepayment speeds. Classes of instruments that are valued using this market approach include specified pool mortgage “pass-through” securities and other debt securities issued by U.S. government-sponsored entities and state and political subdivisions. The pricing models used to value securities under the income approach generally begin with the contractual cash flows of each security and make adjustments based on forecasted prepayment speeds, default rates, and other market-observable information. The adjusted cash flows are then discounted at a rate derived from observed rates of return for comparable assets or liabilities that are traded in the market. Classes of instruments that are valued using this market approach include residential and commercial CMOs. A significant majority of the Company’s Level 1 and 2 debt securities are priced using an external pricing service. The Company verifies the accuracy of the pricing provided by its primary outside pricing service on a quarterly basis. This process involves using a secondary external vendor to provide valuations for the Company’s securities portfolio for comparison purposes. Any valuation discrepancies beyond a certain threshold are researched and, if necessary, corroborated by an independent outside broker. In certain cases where there is limited activity or less transparency around inputs to the valuation model, securities are classified as Level 3. Residential loans held for sale See the “Fair Value Option, Residential Mortgage Loans Held for Sale” discussion above. Commercial loans held for sale See the “Fair Value Option, Commercial and Commercial Real Estate Loans Held for Sale” discussion above. Derivatives The vast majority of the Company’s derivatives portfolio is composed of “plain vanilla” interest rate swaps, which are traded in over-the-counter markets where quoted market prices are not readily available. For these interest rate derivatives, fair value is determined utilizing models that primarily use market observable inputs, such as swap rates and yield curves. The pricing models used to value interest rate swaps calculate the sum of each instrument’s fixed and variable cash flows, which are then discounted using an appropriate yield curve (i.e., LIBOR or Overnight Index Swap curve) to arrive at the fair value of each swap. The pricing models do not contain a high level of subjectivity as the methodologies used do not require significant judgment. The Company also considers certain adjustments to the modeled price that market participants would make when pricing each instrument, including a credit valuation adjustment that reflects the credit quality of the swap counterparty. The Company incorporates the effect of exposure to a particular counterparty’s credit by netting its derivative contracts with the available collateral and calculating a credit valuation adjustment on the basis of the net position with the counterparty where permitted. The determination of this adjustment requires judgment on behalf of Company management; however, the total amount of this portfolio-level adjustment is not material to the total fair value of the interest rate swaps in their entirety. Therefore, interest rate swaps are classified as Level 2 in the valuation hierarchy. The Company’s other derivatives include foreign exchange contracts. The fair value of foreign exchange derivatives uses the mid-point of daily quoted currency spot prices. A valuation model estimates fair value based on the quoted spot rates together with interest rate yield curves and forward currency rates. Since all of these inputs are observable in the market, foreign exchange derivatives are classified as Level 2 in the fair value hierarchy. Money Market Mutual Fund Investments Fair value is determined based upon unadjusted quoted market prices and is considered a Level 1 fair value measurement. Other equity securities The fair values of the Company’s other equity securities are based on security prices in markets that are not active; therefore, these investments are classified as Level 2 in the fair value hierarchy. The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities on a recurring basis at June 30, 2018:
(in millions) | Total |  | Level 1 |  | Level 2 |  | Level 3 |
Debt securities available for sale: |  |  |  |
Mortgage-backed securities |  | $20,139 |  |  | $— |  |  | $20,139 |  |  | $— |
State and political subdivisions | 6 |  | — |  | 6 |  | — |
U.S. Treasury and other | 12 |  | 12 |  | — |  | — |
Total debt securities available for sale | 20,157 |  | 12 |  | 20,145 |  | — |
Loans held for sale, at fair value: |  |  |  |
Residential loans held for sale | 365 |  | — |  | 365 |  | — |
Commercial loans held for sale | 156 |  | — |  | 156 |  | — |
Total loans held for sale, at fair value | 521 |  | — |  | 521 |  | — |
Derivative assets: |  |  |  |
Interest rate swaps | 206 |  | — |  | 206 |  | — |
Foreign exchange contracts | 143 |  | — |  | 143 |  | — |
Other contracts | 8 |  | — |  | 8 |  | — |
Total derivative assets | 357 |  | — |  | 357 |  | — |
Equity securities, at fair value: |  |  |  |
Money market mutual fund investments | 170 |  | 170 |  | — |  | — |
Other investments | — |  | — |  | — |  | — |
Total equity securities, at fair value | 170 |  | 170 |  | — |  | — |
Total assets |  | $21,205 |  |  | $182 |  |  | $21,023 |  |  | $— |
Derivative liabilities: |  |  |  |
Interest rate swaps |  | $436 |  |  | $— |  |  | $436 |  |  | $— |
Foreign exchange contracts | 126 |  | — |  | 126 |  | — |
Other contracts | 6 |  | — |  | 6 |  | — |
Total derivative liabilities | 568 |  | — |  | 568 |  | — |
Total liabilities |  | $568 |  |  | $— |  |  | $568 |  |  | $— |
The following table presents assets and liabilities measured at fair value, including gross derivative assets and liabilities on a recurring basis at December 31, 2017:
(in millions) | Total |  | Level 1 |  | Level 2 |  | Level 3 |
Debt securities available for sale: |  |  |  |
Mortgage-backed securities |  | $20,139 |  |  | $— |  |  | $20,139 |  |  | $— |
State and political subdivisions | 6 |  | — |  | 6 |  | — |
U.S. Treasury and other | 12 |  | 12 |  | — |  | — |
Total debt securities available for sale | 20,157 |  | 12 |  | 20,145 |  | — |
Loans held for sale, at fair value: |  |  |  |
Residential loans held for sale | 326 |  | — |  | 326 |  | — |
Commercial loans held for sale | 171 |  | — |  | 171 |  | — |
Total loans held for sale, at fair value | 497 |  | — |  | 497 |  | — |
Derivative assets: |  |  |  |
Interest rate swaps | 538 |  | — |  | 538 |  | — |
Foreign exchange contracts | 148 |  | — |  | 148 |  | — |
Other contracts | 7 |  | — |  | 7 |  | — |
Total derivative assets | 693 |  | — |  | 693 |  | — |
Equity securities, at fair value: |  |  |  |
Money market mutual fund investments | 165 |  | 165 |  | — |  | — |
Other investments | 4 |  | — |  | 4 |  | — |
Total equity securities, at fair value | 169 |  | 165 |  | 4 |  | — |
Total assets |  | $21,516 |  |  | $177 |  |  | $21,339 |  |  | $— |
Derivative liabilities: |  |  |  |
Interest rate swaps |  | $379 |  |  | $— |  |  | $379 |  |  | $— |
Foreign exchange contracts | 149 |  | — |  | 149 |  | — |
Other contracts | 5 |  | — |  | 5 |  | — |
Total derivative liabilities | 533 |  | — |  | 533 |  | — |
Total liabilities |  | $533 |  |  | $— |  |  | $533 |  |  | $— |
There were no Level 3 assets measured at fair value on a recurring basis as of June 30, 2018 and December 31, 2017. Nonrecurring Fair Value Measurements Fair value is also used on a nonrecurring basis to evaluate certain assets for impairment or for disclosure purposes. Examples of nonrecurring uses of fair value include MSRs accounted for by the amortization method and loan impairments for certain loans and leases. The following valuation techniques are utilized to measure significant assets for which the Company utilizes fair value on a nonrecurring basis: Impaired Loans The carrying amount of collateral-dependent impaired loans is compared to the appraised value of the collateral less costs to dispose and is classified as Level 2. Any excess of carrying amount over the appraised value is charged to the ALLL. Mortgage Servicing Rights MSRs do not trade in an active market with readily observable prices. MSRs are classified as Level 3 since the valuation methodology utilizes significant unobservable inputs. The fair value was calculated using a discounted cash flow model which used assumptions, including weighted-average life, weighted-average constant prepayment rate and weighted-average discount rate. Refer to Note 8 “Mortgage Banking” to the Company’s audited Consolidated Financial Statements in the Annual Report on Form 10-K for the year ended December 31, 2017 and Note 5 “Mortgage Banking” for more information. Foreclosed assets Foreclosed assets consist primarily of residential properties. Foreclosed assets are carried at the lower of cost or fair value less costs to sell. Fair value is based upon independent market prices or appraised values of the collateral and is classified as Level 2. Leased assets The fair value of assets under operating leases is determined using collateral specific pricing digests, external appraisals, broker opinions, recent sales data from industry equipment dealers, and discounted cash flows derived from the underlying lease agreement. As market data for similar assets and lease agreements is available and used in the valuation, these assets are classified as Level 2 fair value measurement. The following table presents gains (losses) on assets and liabilities measured at fair value on a nonrecurring basis and recorded in earnings:
| Three Months Ended June 30, |  | Six Months Ended June 30,
(in millions) | 2018 |  |  | 2017 |  |  | 2018 |  |  | 2017 |
Impaired collateral-dependent loans |  | ($4 | ) |  |  | ($8 | ) |  |  | ($6 | ) |  |  | ($27 | )
MSRs | — |  |  | 1 |  |  | 3 |  |  | 1 |
Foreclosed assets | — |  |  | (1 | ) |  | (1 | ) |  | (2 | )
Leased assets | (2 | ) |  | (15 | ) |  | (2 | ) |  | (15 | )
The following table presents assets and liabilities measured at fair value on a nonrecurring basis:
| June 30, 2018 |  | December 31, 2017
(in millions) | Total |  | Level 1 |  | Level 2 |  | Level 3 |  |  | Total |  | Level 1 |  | Level 2 |  | Level 3 |
Impaired collateral-dependent loans |  | $408 |  |  | $— |  |  | $408 |  |  | $— |  |  |  | $393 |  |  | $— |  |  | $393 |  |  | $— |
MSRs | 254 |  | — |  | — |  | 254 |  |  | 218 |  | — |  | — |  | 218 |
Foreclosed assets | 25 |  | — |  | 25 |  | — |  |  | 31 |  | — |  | 31 |  | — |
Leased assets | 108 |  | — |  | 108 |  | — |  |  | 112 |  | — |  | 112 |  | — |
Disclosures about Fair Value of Financial Instruments Following is a description of valuation methodologies used to estimate the fair value of financial instruments for disclosure purposes (these instruments are not recorded in the financial statements at fair value): Debt securities held to maturity The fair values of debt securities classified as HTM are estimated under the market or income approach using the same pricing models as those used to measure the fair value of the Company’s AFS securities. For more information, see “Recurring Fair Value Measurements — Debt securities Available for Sale,” within this Note. Equity securities, at cost The cost basis of equity securities, at cost, such as FHLB stock and FRB stock, is assumed to approximate the fair value of these securities. As a member of the FHLB and FRB, the Company is required to hold FHLB and FRB stock. The stock can be sold only to the FHLB and FRB upon termination of membership, or redeemed at the FHLB’s or FRB’s sole discretion. The stock may only be sold or redeemed at par, and therefore the cost basis represents the best estimate of fair value. Loans and leases For loans and leases not recorded at fair value on a recurring basis that are not accounted for as collateral-dependent impaired loans, fair value is estimated by using one of two methods: a discounted cash flow method or a securitization method. The discounted cash flow method involves discounting the expected future cash flows using current rates which a market participant would likely use to value similar pools of loans. Inputs used in this method include observable information such as contractual cash flows (net of servicing cost) and unobservable information such as estimated prepayment speeds, credit loss exposures, and discount rates. The securitization method involves utilizing market securitization data to value the assets as if a securitization transaction had been executed. Inputs used include observable market-based MBS data and pricing adjustments based on unobservable data reflecting the liquidity risk, credit loss exposure and other characteristics of the underlying loans. The internal risk-weighted balances of loans are grouped by product type for purposes of these estimated valuations. For nonaccruing loans, fair value is estimated by discounting management’s estimate of future cash flows with a discount rate commensurate with the risk associated with such assets. Fair value of collateral-dependent loans is primarily based on the appraised value of the collateral. Other loans held for sale Balances represent loans that were transferred to other loans held for sale and are reported at the lower of cost or fair value. When applicable, the fair value of other loans held for sale is estimated using one of two methods: a discounted cash flow method or a securitization method (as described above). Deposits The fair value of demand deposits, checking with interest accounts, regular savings, money market accounts and other deposits is the amount payable on demand at the balance sheet date. The fair value of term deposits is estimated by discounting the expected future cash flows using rates currently offered for deposits of similar remaining maturities. Federal funds purchased and securities sold under agreements to repurchase, other short-term borrowed funds, and long-term borrowed funds Rates currently available to the Company for debt of similar terms and remaining maturities are used to discount the expected cash flows of existing debt. The following table presents the estimated fair value for financial instruments not recorded at fair value in the unaudited interim Consolidated Financial Statements. The carrying amounts are recorded in the Consolidated Balance Sheets under the indicated captions:
| June 30, 2018
| Total |  | Level 1 |  | Level 2 |  | Level 3
(in millions) | Carrying Value | Estimated Fair Value |  | Carrying Value | Estimated Fair Value |  | Carrying Value | Estimated Fair Value |  | Carrying Value | Estimated Fair Value
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Securities held to maturity |  | $4,417 |  |  | $4,260 |  |  |  | $— |  |  | $— |  |  |  | $4,417 |  |  | $4,260 |  |  |  | $— |  |  | $— |
Equity securities, at cost | 769 |  | 769 |  |  | — |  | — |  |  | 769 |  | 769 |  |  | — |  | — |
Other loans held for sale | 189 |  | 189 |  |  | — |  | — |  |  | — |  | — |  |  | 189 |  | 189 |
Loans and leases | 113,407 |  | 112,637 |  |  | — |  | — |  |  | 408 |  | 408 |  |  | 112,999 |  | 112,229 |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |
Deposits | 117,073 |  | 116,907 |  |  | — |  | — |  |  | 117,073 |  | 116,907 |  |  | — |  | — |
Federal funds purchased and securities sold under agreements to repurchase | 326 |  | 326 |  |  | — |  | — |  |  | 326 |  | 326 |  |  | — |  | — |
Other short-term borrowed funds | 1,499 |  | 1,499 |  |  | — |  | — |  |  | 1,499 |  | 1,499 |  |  | — |  | — |
Long-term borrowed funds | 13,641 |  | 13,643 |  |  | — |  | — |  |  | 13,641 |  | 13,643 |  |  | — |  | — |
| December 31, 2017
| Total |  | Level 1 |  | Level 2 |  | Level 3
(in millions) | Carrying Value | Estimated Fair Value |  | Carrying Value | Estimated Fair Value |  | Carrying Value | Estimated Fair Value |  | Carrying Value | Estimated Fair Value
Financial Assets: |  |  |  |  |  |  |  |  |  |  |
Securities held to maturity |  | $4,685 |  |  | $4,668 |  |  |  | $— |  |  | $— |  |  |  | $4,685 |  |  | $4,668 |  |  |  | $— |  |  | $— |
Equity securities, at cost | 722 |  | 722 |  |  | — |  | — |  |  | 722 |  | 722 |  |  | — |  | — |
Other loans held for sale | 221 |  | 221 |  |  | — |  | — |  |  | — |  | — |  |  | 221 |  | 221 |
Loans and leases | 110,617 |  | 111,168 |  |  | — |  | — |  |  | 393 |  | 393 |  |  | 110,224 |  | 110,775 |
Financial Liabilities: |  |  |  |  |  |  |  |  |  |  |
Deposits | 115,089 |  | 115,039 |  |  | — |  | — |  |  | 115,089 |  | 115,039 |  |  | — |  | — |
Federal funds purchased and securities sold under agreements to repurchase | 815 |  | 815 |  |  | — |  | — |  |  | 815 |  | 815 |  |  | — |  | — |
Other short-term borrowed funds | 1,856 |  | 1,856 |  |  | — |  | — |  |  | 1,856 |  | 1,856 |  |  | — |  | — |
Long-term borrowed funds | 11,765 |  | 11,891 |  |  | — |  | — |  |  | 11,765 |  | 11,891 |  |  | — |  | — |

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- Definition The entire disclosure for the fair value of financial instruments (as defined), including financial assets and financial liabilities (collectively, as defined), and the measurements of those instruments as well as disclosures related to the fair value of non-financial assets and liabilities. Such disclosures about the financial instruments, assets, and liabilities would include: (1) the fair value of the required items together with their carrying amounts (as appropriate); (2) for items for which it is not practicable to estimate fair value, disclosure would include: (a) information pertinent to estimating fair value (including, carrying amount, effective interest rate, and maturity, and (b) the reasons why it is not practicable to estimate fair value; (3) significant concentrations of credit risk including: (a) information about the activity, region, or economic characteristics identifying a concentration, (b) the maximum amount of loss the entity is exposed to based on the gross fair value of the related item, (c) policy for requiring collateral or other security and information as to accessing such collateral or security, and (d) the nature and brief description of such collateral or security; (4) quantitative information about market risks and how such risks are managed; (5) for items measured on both a recurring and nonrecurring basis information regarding the inputs used to develop the fair value measurement; and (6) for items presented in the financial statement for which fair value measurement is elected: (a) information necessary to understand the reasons for the election, (b) discussion of the effect of fair value changes on earnings, (c) a description of [similar groups] items for which the election is made and the relation thereof to the balance sheet, the aggregate carrying value of items included in the balance sheet that are not eligible for the election; (7) all other required (as defined) and desired information. + References Reference 1: http://www.xbrl.org/2003/role/presentationRef -Publisher FASB -Name Accounting Standards Codification -Topic 820 -URI http://asc.fasb.org/topic&trid=2155941 + Details
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