Annual report pursuant to Section 13 and 15(d)

Fair Value of Financial Instruments

v3.8.0.1
Fair Value of Financial Instruments
12 Months Ended
Dec. 31, 2017
Fair Value Disclosures [Abstract]  
Fair Value of Financial Instruments
Fair Value of Financial Instruments
Financial instruments are classified within the fair value hierarchy using the methodologies described in Note 20 – Fair Value Measurements. The following disclosures include financial instruments that are not carried at fair value or only a portion of the ending balance is carried at fair value on the Consolidated Balance Sheet.
Short-term Financial Instruments
The carrying value of short-term financial instruments, including cash and cash equivalents, time deposits placed and other short-term investments, federal funds sold and purchased, certain resale and repurchase agreements, customer and other receivables, customer payables (within accrued expenses and other liabilities on the Consolidated Balance Sheet), and short-term borrowings, approximates the fair value of these instruments. These financial instruments generally expose the Corporation to limited credit risk and have no stated maturities or have short-term maturities and carry interest rates that approximate market. The Corporation accounts for certain resale and repurchase agreements under the fair value option.
Under the fair value hierarchy, cash and cash equivalents are classified as Level 1. Time deposits placed and other short-term investments, such as U.S. government securities and short-term commercial paper, are classified as Level 1 or Level 2. Federal funds sold and purchased are classified as Level 2. Resale and repurchase agreements are classified as Level 2 because they are generally short-dated and/or variable-rate instruments collateralized by U.S. government or agency securities. Customer and other receivables primarily consist of margin loans, servicing advances and other accounts receivable and are classified as Level 2 or Level 3. Customer payables and short-term borrowings are classified as Level 2.
Held-to-maturity Debt Securities
HTM debt securities, which consist primarily of U.S. agency debt securities, are classified as Level 2 using the same methodologies as AFS U.S. agency debt securities. For more information on HTM debt securities, see Note 3 – Securities.
Loans
The fair values for commercial and consumer loans are generally determined by discounting both principal and interest cash flows expected to be collected using a discount rate for similar instruments with adjustments that the Corporation believes a market participant would consider in determining fair value. The Corporation estimates the cash flows expected to be collected using internal credit risk, interest rate and prepayment risk models that incorporate the Corporation’s best estimate of current key assumptions, such as default rates, loss severity and prepayment speeds for the life of the loan. The carrying value of loans is presented net of the applicable allowance for loan losses and excludes leases. The Corporation accounts for certain commercial loans and residential mortgage loans under the fair value option.
Deposits
The fair value for certain deposits with stated maturities is determined by discounting contractual cash flows using current market rates for instruments with similar maturities. The carrying value of non-U.S. time deposits approximates fair value. For deposits with no stated maturities, the carrying value is considered to approximate fair value and does not take into account the significant value of the cost advantage and stability of the Corporation’s long-term relationships with depositors. The Corporation accounts for certain long-term fixed-rate deposits under the fair value option.
Long-term Debt
The Corporation uses quoted market prices, when available, to estimate fair value for its long-term debt. When quoted market prices are not available, fair value is estimated based on current market interest rates and credit spreads for debt with similar terms and maturities. The Corporation accounts for certain structured liabilities under the fair value option.
Fair Value of Financial Instruments
The carrying values and fair values by fair value hierarchy of certain financial instruments where only a portion of the ending balance was carried at fair value at December 31, 2017 and 2016 are presented in the following table.
 
 
 
 
 
 
 
 
Fair Value of Financial Instruments
 
 
 
 
 
 
 
Fair Value
 
Carrying Value
 
Level 2
 
Level 3
 
Total
(Dollars in millions)
December 31, 2017
Financial assets
 
 
 
 
 
 
 
Loans
$
904,399

 
$
68,586

 
$
849,576

 
$
918,162

Loans held-for-sale
11,430

 
10,521

 
909

 
11,430

Financial liabilities
 
 
 
 
 
 
 
Deposits
1,309,545

 
1,309,398

 

 
1,309,398

Long-term debt
227,402

 
235,126

 
1,863

 
236,989

 
 
 
 
 
 
 
 
 
December 31, 2016
Financial assets
 
 
 
 
 
 
 
Loans
$
873,209

 
$
71,793

 
$
815,329

 
$
887,122

Loans held-for-sale
9,066

 
8,082

 
984

 
9,066

Financial liabilities
 

 
 
 
 
 
 

Deposits
1,260,934

 
1,261,086

 

 
1,261,086

Long-term debt
216,823

 
220,071

 
1,514

 
221,585


Commercial Unfunded Lending Commitments
Fair values are generally determined using a discounted cash flow valuation approach which is applied using market-based CDS or internally developed benchmark credit curves. The Corporation accounts for certain loan commitments under the fair value option. The carrying values and fair values of the Corporation’s commercial unfunded lending commitments were $897 million and $4.0 billion at December 31, 2017, and $937 million and $4.9 billion at December 31, 2016. Substantially all commercial unfunded lending commitments are classified as Level 3. The carrying value of these commitments is included in accrued expenses and other liabilities on the Consolidated Balance Sheet.
The Corporation does not estimate the fair values of consumer unfunded lending commitments because, in many instances, the Corporation can reduce or cancel these commitments by providing notice to the borrower. For more information on commitments, see Note 12 – Commitments and Contingencies.