Bank of America Corporation Quarterly report pursuant to Section 13 or 15(d)

Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

Fair Value Measurements

3 Months Ended

Mar. 31, 2014

NOTE 14 – Fair Value Measurements

Under applicable accounting guidance, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The Corporation determines the fair values of its financial instruments based on the fair value hierarchy established under applicable accounting guidance which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs used to measure fair value. The Corporation conducts a review of its fair value hierarchy classifications on a quarterly basis. Transfers into or out of fair value hierarchy classifications are made if the significant inputs used in the financial models measuring the fair values of the assets and liabilities became unobservable or observable, respectively, in the current marketplace. These transfers are considered to be effective as of the beginning of the quarter in which they occur. For more information regarding the fair value hierarchy and how the Corporation measures fair value, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2013 Annual Report on Form 10-K. The Corporation accounts for certain financial instruments under the fair value option. For additional information, see Note 15 – Fair Value Option.

Valuation Processes and Techniques

The Corporation has various processes and controls in place to ensure that fair value is reasonably estimated. A model validation policy governs the use and control of valuation models used to estimate fair value. This policy requires review and approval of models by personnel who are independent of the front office, and periodic reassessments of models to ensure that they are continuing to perform as designed. In addition, detailed reviews of trading gains and losses are conducted on a daily basis by personnel who are independent of the front office. A price verification group, which is also independent of the front office, utilizes available market information including executed trades, market prices and market-observable valuation model inputs to ensure that fair values are reasonably estimated. The Corporation performs due diligence procedures over third-party pricing service providers in order to support their use in the valuation process. Where market information is not available to support internal valuations, independent reviews of the valuations are performed and any material exposures are escalated through a management review process.

While the Corporation believes its valuation methods are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date.

During the three months ended March 31, 2014, there were no changes to the valuation techniques that had, or are expected to have, a material impact on the Corporation's consolidated financial position or results of operations.

Level 1, 2 and 3 Valuation Techniques

Financial instruments are considered Level 1 when the valuation is based on quoted prices in active markets for identical assets or liabilities. Level 2 financial instruments are valued using quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or models using inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques, and at least one significant model assumption or input is unobservable and when determination of the fair value requires significant management judgment or estimation.

Trading Account Assets and Liabilities and Debt Securities

The fair values of trading account assets and liabilities are primarily based on actively traded markets where prices are based on either direct market quotes or observed transactions. The fair values of debt securities are generally based on quoted market prices or market prices for similar assets. Liquidity is a significant factor in the determination of the fair values of trading account assets and liabilities and debt securities. Market price quotes may not be readily available for some positions, or positions within a market sector where trading activity has slowed significantly or ceased. Some of these instruments are valued using a discounted cash flow model, which estimates the fair value of the securities using internal credit risk, interest rate and prepayment risk models that incorporate management's best estimate of current key assumptions such as default rates, loss severity and prepayment rates. Principal and interest cash flows are discounted using an observable discount rate for similar instruments with adjustments that management believes a market participant would consider in determining fair value for the specific security. Other instruments are valued using a net asset value approach which considers the value of the underlying securities. Underlying assets are valued using external pricing services, where available, or matrix pricing based on the vintages and ratings. Situations of illiquidity generally are triggered by the market's perception of credit uncertainty regarding a single company or a specific market sector. In these instances, fair value is determined based on limited available market information and other factors, principally from reviewing the issuer's financial statements and changes in credit ratings made by one or more rating agencies.

Derivative Assets and Liabilities

The fair values of derivative assets and liabilities traded in the OTC market are determined using quantitative models that utilize multiple market inputs including interest rates, prices and indices to generate continuous yield or pricing curves and volatility factors to value the position. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. When third-party pricing services are used, the methods and assumptions are reviewed by the Corporation. Estimation risk is greater for derivative asset and liability positions that are either option-based or have longer maturity dates where observable market inputs are less readily available, or are unobservable, in which case, quantitative-based extrapolations of rate, price or index scenarios are used in determining fair values. The fair values of derivative assets and liabilities include adjustments for market liquidity, counterparty credit quality and other instrument-specific factors, where appropriate. In addition, the Corporation incorporates within its fair value measurements of OTC derivatives a valuation adjustment to reflect the credit risk associated with the net position. Positions are netted by counterparty, and fair value for net long exposures is adjusted for counterparty credit risk while the fair value for net short exposures is adjusted for the Corporation's own credit risk. An estimate of severity of loss is also used in the determination of fair value, primarily based on market data.

Loans and Loan Commitments

The fair values of loans and loan commitments are based on market prices, where available, or discounted cash flow analyses using market-based credit spreads of comparable debt instruments or credit derivatives of the specific borrower or comparable borrowers. Results of discounted cash flow analyses may be adjusted, as appropriate, to reflect other market conditions or the perceived credit risk of the borrower.

Mortgage Servicing Rights

The fair values of MSRs are determined using models that rely on estimates of prepayment rates, the resultant weighted-average lives of the MSRs and the option-adjusted spread (OAS) levels. For more information on MSRs, see Note 17 – Mortgage Servicing Rights.

Loans Held-for-sale

The fair values of LHFS are based on quoted market prices, where available, or are determined by discounting estimated cash flows using interest rates approximating the Corporation's current origination rates for similar loans adjusted to reflect the inherent credit risk.

Private Equity Investments

Private equity investments consist of direct investments and fund investments which are initially valued at their transaction price. Thereafter, the fair value of direct investments is based on an assessment of each individual investment using methodologies that include publicly-traded comparables derived by multiplying a key performance metric (e.g., earnings before interest, taxes, depreciation and amortization) of the portfolio company by the relevant valuation multiple observed for comparable companies, acquisition comparables, entry level multiples and discounted cash flow analyses, and are subject to appropriate discounts for lack of liquidity or marketability. After initial recognition, the fair value of fund investments is based on the Corporation's proportionate interest in the fund's capital as reported by the respective fund managers.

Securities Financing Agreements

The fair values of certain reverse repurchase agreements, repurchase agreements and securities borrowed transactions are determined using quantitative models, including discounted cash flow models that require the use of multiple market inputs including interest rates and spreads to generate continuous yield or pricing curves, and volatility factors. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services.

Deposits

The fair values of deposits are determined using quantitative models, including discounted cash flow models that require the use of multiple market inputs including interest rates and spreads to generate continuous yield or pricing curves, and volatility factors. The majority of market inputs are actively quoted and can be validated through external sources, including brokers, market transactions and third-party pricing services. The Corporation considers the impact of its own credit spreads in the valuation of these liabilities. The credit risk is determined by reference to observable credit spreads in the secondary cash market.

Short-term Borrowings and Long-term Debt

The Corporation issues structured liabilities that have coupons or repayment terms linked to the performance of debt or equity securities, indices, currencies or commodities. The fair values of these structured liabilities are estimated using quantitative models for the combined derivative and debt portions of the notes. These models incorporate observable and, in some instances, unobservable inputs including security prices, interest rate yield curves, option volatility, currency, commodity or equity rates and correlations among these inputs. The Corporation also considers the impact of its own credit spreads in determining the discount rate used to value these liabilities. The credit spread is determined by reference to observable spreads in the secondary bond market.

Asset-backed Secured Financings

The fair values of asset-backed secured financings are based on external broker bids, where available, or are determined by discounting estimated cash flows using interest rates approximating the Corporation's current origination rates for similar loans adjusted to reflect the inherent credit risk.

Recurring Fair Value

Assets and liabilities carried at fair value on a recurring basis at March 31, 2014 and December 31, 2013, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.



	March 31, 2014
	Fair Value Measurements
(Dollars in millions)	Level 1 ⁽¹⁾		Level 2 ⁽¹⁾		Level 3		Netting Adjustments ⁽²⁾			Assets/Liabilities at Fair Value
Assets
Federal funds sold and securities borrowed or purchased under agreements to resell	$	—	$	68,091	$	—	$	—		$	68,091
Trading account assets:
U.S. government and agency securities ⁽³⁾	34,181		19,819		—		—			54,000
Corporate securities, trading loans and other	1,132		29,886		2,617		—			33,635
Equity securities	32,732		20,587		343		—			53,662
Non-U.S. sovereign debt	28,641		11,369		533		—			40,543
Mortgage trading loans and ABS	—		9,822		4,287		—			14,109
Total trading account assets	96,686		91,483		7,780		—			195,949
Derivative assets ⁽⁴⁾	2,094		815,234		6,908		(778,934		)	45,302
AFS debt securities:
U.S. Treasury and agency securities	27,293		2,274		—		—			29,567
Mortgage-backed securities:
Agency	—		165,747		—		—			165,747
Agency-collateralized mortgage obligations	—		18,572		—		—			18,572
Non-agency residential	—		5,258		—		—			5,258
Commercial	—		1,734		—		—			1,734
Non-U.S. securities	3,738		3,384		—		—			7,122
Corporate/Agency bonds	—		845		—		—			845
Other taxable securities	20		11,265		3,437		—			14,722
Tax-exempt securities	—		5,631		783		—			6,414
Total AFS debt securities	31,051		214,710		4,220		—			249,981
Other debt securities carried at fair value:
U.S. Treasury and agency securities	4,182		—		—		—			4,182
Mortgage-backed securities:
Agency	—		16,290		—		—			16,290
Agency-collateralized mortgage obligations	—		123		—		—			123
Commercial	—		770		—		—			770
Non-U.S. securities	12,779		1,451		—		—			14,230
Total other debt securities carried at fair value	16,961		18,634		—		—			35,595
Loans and leases	—		8,010		3,053		—			11,063
Mortgage servicing rights	—		—		4,765		—			4,765
Loans held-for-sale	—		5,436		736		—			6,172
Other assets	15,567		2,482		1,132		—			19,181
Total assets	$	162,359	$	1,224,080	$	28,594	$	(778,934	)	$	636,099
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	1,835	$	—	$	—		$	1,835
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		34,044		—		—			34,044
Trading account liabilities:
U.S. government and agency securities	23,733		418		—		—			24,151
Equity securities	28,675		4,170		—		—			32,845
Non-U.S. sovereign debt	22,324		1,860		—		—			24,184
Corporate securities and other	781		7,079		36		—			7,896
Total trading account liabilities	75,513		13,527		36		—			89,076
Derivative liabilities ⁽⁴⁾	2,529		799,499		7,483		(772,600		)	36,911
Short-term borrowings	—		2,305		—		—			2,305
Accrued expenses and other liabilities	11,004		1,692		8		—			12,704
Long-term debt	—		43,732		1,841		—			45,573
Total liabilities	$	89,046	$	896,634	$	9,368	$	(772,600	)	$	222,448


⁽¹⁾	During the three months ended March 31, 2014, gross transfers between Level 1 and Level 2 were not significant.


⁽²⁾	Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.


⁽³⁾	Includes $25.2 billion of government-sponsored enterprise obligations.


⁽⁴⁾	For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.



	December 31, 2013
	Fair Value Measurements
(Dollars in millions)	Level 1 ⁽¹⁾		Level 2 ⁽¹⁾		Level 3		Netting Adjustments ⁽²⁾			Assets/Liabilities at Fair Value
Assets
Federal funds sold and securities borrowed or purchased under agreements to resell	$	—	$	75,614	$	—	$	—		$	75,614
Trading account assets:
U.S. government and agency securities ⁽³⁾	34,222		14,625		—		—			48,847
Corporate securities, trading loans and other	1,147		27,746		3,559		—			32,452
Equity securities	41,324		22,741		386		—			64,451
Non-U.S. sovereign debt	24,357		12,399		468		—			37,224
Mortgage trading loans and ABS	—		13,388		4,631		—			18,019
Total trading account assets	101,050		90,899		9,044		—			200,993
Derivative assets ⁽⁴⁾	2,374		910,602		7,277		(872,758		)	47,495
AFS debt securities:
U.S. Treasury and agency securities	6,591		2,363		—		—			8,954
Mortgage-backed securities:
Agency	—		164,935		—		—			164,935
Agency-collateralized mortgage obligations	—		22,492		—		—			22,492
Non-agency residential	—		6,239		—		—			6,239
Commercial	—		2,480		—		—			2,480
Non-U.S. securities	3,698		3,415		107		—			7,220
Corporate/Agency bonds	—		873		—		—			873
Other taxable securities	20		12,963		3,847		—			16,830
Tax-exempt securities	—		5,122		806		—			5,928
Total AFS debt securities	10,309		220,882		4,760		—			235,951
Other debt securities carried at fair value:
U.S. Treasury and agency securities	4,062		—		—		—			4,062
Mortgage-backed securities:
Agency	—		16,500		—		—			16,500
Agency-collateralized mortgage obligations	—		218		—		—			218
Commercial	—		749		—		—			749
Non-U.S. securities	7,457		3,858		—		—			11,315
Total other debt securities carried at fair value	11,519		21,325		—		—			32,844
Loans and leases	—		6,985		3,057		—			10,042
Mortgage servicing rights	—		—		5,042		—			5,042
Loans held-for-sale	—		5,727		929		—			6,656
Other assets	14,474		1,912		1,669		—			18,055
Total assets	$	139,726	$	1,333,946	$	31,778	$	(872,758	)	$	632,692
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	1,899	$	—	$	—		$	1,899
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		33,684		—		—			33,684
Trading account liabilities:
U.S. government and agency securities	26,915		348		—		—			27,263
Equity securities	23,874		3,711		—		—			27,585
Non-U.S. sovereign debt	20,755		1,387		—		—			22,142
Corporate securities and other	518		5,926		35		—			6,479
Total trading account liabilities	72,062		11,372		35		—			83,469
Derivative liabilities ⁽⁴⁾	1,968		897,107		7,301		(868,969		)	37,407
Short-term borrowings	—		1,520		—		—			1,520
Accrued expenses and other liabilities	10,130		1,093		10		—			11,233
Long-term debt	—		45,045		1,990		—			47,035
Total liabilities	$	84,160	$	991,720	$	9,336	$	(868,969	)	$	216,247


⁽¹⁾	During 2013, $500 million of other assets were transferred from Level 1 to Level 2 primarily due to a restriction that became effective for a private equity investment that was subsequently sold once the restriction was lifted.


⁽²⁾	Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.


⁽³⁾	Includes $17.2 billion of government-sponsored enterprise obligations.


⁽⁴⁾	For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.

The following tables present a reconciliation of all assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the three months ended March 31, 2014 and 2013, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.



Level 3 – Fair Value Measurements ⁽¹⁾
	Three Months Ended March 31, 2014
										Gross
(Dollars in millions)	Balance January 1 2014			Gains (Losses) in Earnings			Gains (Losses) in OCI			Purchases		Sales			Issuances			Settlements			Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance March 31 2014
Trading account assets:
Corporate securities, trading loans and other	$	3,559		$	122		$	—		$	286	$	(354	)	$	—		$	(238	)	$	148		$	(906	)	$	2,617
Equity securities	386			19			—			30		(29		)	—			—			7			(70		)	343
Non-U.S. sovereign debt	468			55			—			23		(6		)	—			(6		)	—			(1		)	533
Mortgage trading loans and ABS	4,631			78			—			366		(552		)	—			(224		)	—			(12		)	4,287
Total trading account assets	9,044			274			—			705		(941		)	—			(468		)	155			(989		)	7,780
Net derivative assets ⁽²⁾	(24		)	5			—			125		(618		)	—			(101		)	12			26			(575		)
AFS debt securities:
Non-U.S. securities	107			—			—			—		—			—			(107		)	—			—			—
Other taxable securities	3,847			8			(2		)	47		—			—			(463		)	—			—			3,437
Tax-exempt securities	806			1			1			—		—			—			(25		)	—			—			783
Total AFS debt securities	4,760			9			(1		)	47		—			—			(595		)	—			—			4,220
Loans and leases ^{(3, 4)}	3,057			32			—			—		(3		)	689			(723		)	6			(5		)	3,053
Mortgage servicing rights ⁽⁴⁾	5,042			(290		)	—			—		(20		)	265			(232		)	—			—			4,765
Loans held-for-sale ⁽³⁾	929			12			—			—		(3		)	—			(201		)	—			(1		)	736
Other assets ⁽⁵⁾	1,669			(60		)	—			—		(269		)	—			(208		)	—			—			1,132
Trading account liabilities – Corporate securities and other	(35		)	1			—			3		(7		)	—			—			—			2			(36		)
Accrued expenses and other liabilities ⁽³⁾	(10		)	1			—			—		—			—			—			—			1			(8		)
Long-term debt ⁽³⁾	(1,990		)	(67		)	—			46		—			(9		)	119			(144		)	204			(1,841		)


⁽¹⁾	Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.


⁽²⁾	Net derivatives include derivative assets of $6.9 billion and derivative liabilities of $7.5 billion.


⁽³⁾	Amounts represent instruments that are accounted for under the fair value option.


⁽⁴⁾	Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole-loan sales.


⁽⁵⁾	Other assets is primarily comprised of private equity investments and certain long-term fixed-rate margin loans that are accounted for under the fair value option.

During the three months ended March 31, 2014, the transfers into Level 3 included $155 million of trading account assets and $144 million of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased availability of third-party prices for certain corporate loans and securities, primarily municipal bonds. Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. Transfers occur on a regular basis for these long-term debt instruments due to changes in the impact of unobservable inputs on the value of the embedded derivative in relation to the instrument as a whole.

During the three months ended March 31, 2014, the transfers out of Level 3 included $989 million of trading account assets and $204 million of long-term debt. Transfers out of Level 3 for trading account assets were primarily the result of increased market liquidity and availability of third-party prices for certain corporate loans and securities. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities.



Level 3 – Fair Value Measurements ⁽¹⁾
	Three Months Ended March 31, 2013
									Gross
(Dollars in millions)	Balance January 1 2013			Gains (Losses) in Earnings			Gains (Losses) in OCI		Purchases		Sales			Issuances			Settlements			Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance March 31 2013
Trading account assets:
Corporate securities, trading loans and other	$	3,726		$	88		$	—	$	805	$	(966	)	$	—		$	(140	)	$	218		$	(124	)	$	3,607
Equity securities	545			42			—		29		(109		)	—			—			8			(18		)	497
Non-U.S. sovereign debt	353			51			—		15		(1		)	—			—			—			(1		)	417
Mortgage trading loans and ABS	4,935			162			—		653		(643		)	—			(631		)	5			(1		)	4,480
Total trading account assets	9,559			343			—		1,502		(1,719		)	—			(771		)	231			(144		)	9,001
Net derivative assets ⁽²⁾	1,468			293			—		179		(466		)	—			(660		)	52			197			1,063
AFS debt securities:
Non-agency commercial MBS	10			—			—		—		—			—			—			—			—			10
Non-U.S securities	—			—			—		1		—			—			—			—			—			1
Corporate/Agency bonds	92			—			4		—		—			—			—			—			—			96
Other taxable securities	3,928			—			2		243		—			—			(128		)	—			—			4,045
Tax-exempt securities	1,061			1			3		—		—			—			(24		)	—			—			1,041
Total AFS debt securities	5,091			1			9		244		—			—			(152		)	—			—			5,193
Loans and leases ^{(3, 4)}	2,287			51			—		71		—			5			(41		)	—			(10		)	2,363
Mortgage servicing rights ⁽⁴⁾	5,716			434			—		—		(183		)	123			(314		)	—			—			5,776
Loans held-for-sale ⁽³⁾	2,733			(39		)	—		—		(210		)	—			(101		)	22			—			2,405
Other assets ⁽⁵⁾	3,129			(448		)	—		17		(27		)	—			(42		)	—			—			2,629
Trading account liabilities – Corporate securities and other	(64		)	—			—		7		(14		)	—			—			(8		)	21			(58		)
Accrued expenses and other liabilities ⁽³⁾	(15		)	29			—		—		—			(586		)	116			—			1			(455		)
Long-term debt ⁽³⁾	(2,301		)	11			—		89		(4		)	(36		)	60			(381		)	207			(2,355		)


⁽¹⁾	Assets (liabilities). For assets, increase (decrease) to Level 3 and for liabilities, (increase) decrease to Level 3.


⁽²⁾	Net derivatives include derivative assets of $8.0 billion and derivative liabilities of $6.9 billion.


⁽³⁾	Amounts represent instruments that are accounted for under the fair value option.


⁽⁴⁾	Issuances represent loan originations and mortgage servicing rights retained following securitizations or whole-loan sales.


⁽⁵⁾	Other assets is primarily comprised of net monoline exposure to a single counterparty and private equity investments.

During the three months ended March 31, 2013, the transfers into Level 3 included $231 million of trading account assets and $381 million of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of decreased market liquidity for certain corporate loans and securities. Transfers into Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities. Transfers occur on a regular basis for these long-term debt instruments due to changes in the impact of unobservable inputs on the value of the embedded derivative in relation to the instrument as a whole.

During the three months ended March 31, 2013, the transfers out of Level 3 included $144 million of trading account assets, $197 million of net derivative assets and $207 million of long-term debt. Transfers out of Level 3 for trading account assets primarily related to increased market liquidity for certain corporate loans and securities. Transfers out of Level 3 for net derivative assets primarily related to increased price observability (i.e., market comparables for the reference instruments) for certain options. Transfers out of Level 3 for long-term debt were primarily due to changes in the impact of unobservable inputs on the value of certain structured liabilities.

The table below summarizes gains (losses) due to changes in fair value, including both realized and unrealized gains (losses), recorded in earnings for Level 3 assets and liabilities during the three months ended March 31, 2014 and 2013. These amounts include gains (losses) on loans, LHFS, loan commitments and structured liabilities that are accounted for under the fair value option.



Level 3 – Total Realized and Unrealized Gains (Losses) Included in Earnings
	Three Months Ended March 31, 2014
(Dollars in millions)	Trading Account Profits (Losses)			Mortgage Banking Income (Loss) ⁽¹⁾			Other ⁽²⁾			Total
Trading account assets:
Corporate securities, trading loans and other	$	122		$	—		$	—		$	122
Equity securities	19			—			—			19
Non-U.S. sovereign debt	55			—			—			55
Mortgage trading loans and ABS	78			—			—			78
Total trading account assets	274			—			—			274
Net derivative assets	(168		)	173			—			5
AFS debt securities:
Other taxable securities	—			—			8			8
Tax-exempt securities	—			—			1			1
Total AFS debt securities	—			—			9			9
Loans and leases ⁽³⁾	—			—			32			32
Mortgage servicing rights	(5		)	(285		)	—			(290		)
Loans held-for-sale ⁽³⁾	—			—			12			12
Other assets	—			(36		)	(24		)	(60		)
Trading account liabilities – Corporate securities and other	1			—			—			1
Accrued expenses and other liabilities ⁽³⁾	—			—			1			1
Long-term debt ⁽³⁾	(53		)	—			(14		)	(67		)
Total	$	49		$	(148	)	$	16		$	(83	)

	Three Months Ended March 31, 2013
Trading account assets:
Corporate securities, trading loans and other	$	88		$	—		$	—		$	88
Equity securities	42			—			—			42
Non-U.S. sovereign debt	51			—			—			51
Mortgage trading loans and ABS	162			—			—			162
Total trading account assets	343			—			—			343
Net derivative assets	(114		)	407			—			293
AFS debt securities – Tax-exempt securities	—			—			1			1
Loans and leases ⁽³⁾	—			—			51			51
Mortgage servicing rights	—			434			—			434
Loans held-for-sale ⁽³⁾	—			4			(43		)	(39		)
Other assets	—			(3		)	(445		)	(448		)
Accrued expenses and other liabilities ⁽³⁾	—			29			—			29
Long-term debt ⁽³⁾	22			—			(11		)	11
Total	$	251		$	871		$	(447	)	$	675


⁽¹⁾	Mortgage banking income (loss) does not reflect the impact of Level 1 and Level 2 hedges on MSRs.


⁽²⁾	Amounts included are primarily recorded in other income (loss). Equity investment losses of $23 million and gains of $2 million recorded on other assets were also included for the three months ended March 31, 2014 and 2013.


⁽³⁾	Amounts represent instruments that are accounted for under the fair value option.

The table below summarizes changes in unrealized gains (losses) recorded in earnings during the three months ended March 31, 2014 and 2013 for Level 3 assets and liabilities that were still held at March 31, 2014 and 2013. These amounts include changes in fair value on loans, LHFS, loan commitments and structured liabilities that are accounted for under the fair value option.



Level 3 – Changes in Unrealized Gains (Losses) Relating to Assets and Liabilities Still Held at Reporting Date
	Three Months Ended March 31, 2014
(Dollars in millions)	Trading Account Profits (Losses)			Mortgage Banking Income (Loss) ⁽¹⁾			Other ⁽²⁾			Total
Trading account assets:
Corporate securities, trading loans and other	$	111		$	—		$	—		$	111
Equity securities	17			—			—			17
Non-U.S. sovereign debt	55			—			—			55
Mortgage trading loans and ABS	16			—			—			16
Total trading account assets	199			—			—			199
Net derivative assets	(212		)	44			—			(168		)
Loans and leases ⁽³⁾	—			—			28			28
Mortgage servicing rights	(5		)	(468		)	—			(473		)
Loans held-for-sale ⁽³⁾	—			—			4			4
Other assets	—			(28		)	6			(22		)
Trading account liabilities – Corporate securities and other	1			—			—			1
Accrued expenses and other liabilities ⁽³⁾	—			—			1			1
Long-term debt ⁽³⁾	(53		)	—			(14		)	(67		)
Total	$	(70	)	$	(452	)	$	25		$	(497	)

	Three Months Ended March 31, 2013
Trading account assets:
Corporate securities, trading loans and other	$	48		$	—		$	—		$	48
Equity securities	33			—			—			33
Non-U.S. sovereign debt	51			—			—			51
Mortgage trading loans and ABS	89			—			—			89
Total trading account assets	221			—			—			221
Net derivative assets	(169		)	246			—			77
Loans and leases ⁽³⁾	—			—			43			43
Mortgage servicing rights	—			336			—			336
Loans held-for-sale ⁽³⁾	—			10			(52		)	(42		)
Other assets	—			12			(462		)	(450		)
Accrued expenses and other liabilities ⁽³⁾	—			25			—			25
Long-term debt ⁽³⁾	21			—			(11		)	10
Total	$	73		$	629		$	(482	)	$	220


⁽¹⁾	Mortgage banking income does not reflect the impact of Level 1 and Level 2 hedges on MSRs.


⁽²⁾	Amounts included are primarily recorded in other income (loss). Equity investment gains of $9 million and losses of $15 million recorded on other assets were also included for the three months ended March 31, 2014 and 2013.


⁽³⁾	Amounts represent instruments that are accounted for under the fair value option.

The following tables present information about significant unobservable inputs related to the Corporation's material categories of Level 3 financial assets and liabilities at March 31, 2014 and December 31, 2013.



Quantitative Information about Level 3 Fair Value Measurements at March 31, 2014
(Dollars in millions)					Inputs
Financial Instrument	Fair Value			Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted Average
Loans and Securities ⁽¹⁾
Instruments backed by residential real estate assets	$	3,864		Discounted cash flow, Market comparables	Yield	1% to 25%	6	%
Trading account assets – Mortgage trading loans and ABS	326				Prepayment speed	0% to 35% CPR	9	%
Loans and leases	2,802				Default rate	1% to 15% CDR	6	%
Loans held-for-sale	736				Loss severity	21% to 80%	33	%
Commercial loans, debt securities and other	$	10,027		Discounted cash flow, Market comparables	Yield	0% to 40%	4	%
Trading account assets – Corporate securities, trading loans and other	2,488				Enterprise value/EBITDA multiple	1x to 31x	8x
Trading account assets – Non-U.S. sovereign debt	533				Prepayment speed	5% to 40%	19	%
Trading account assets – Mortgage trading loans and ABS	3,961				Default rate	1% to 5%	4	%
AFS debt securities – Other taxable securities	2,794				Loss severity	25% to 42%	36	%
Loans and leases	251				Duration	0 years to 5 years	4 years
Auction rate securities	$	1,555		Discounted cash flow, Market comparables	Projected tender price/Refinancing level	60% to 100%	96	%
Trading account assets – Corporate securities, trading loans and other	129				Projected tender price/Refinancing level
AFS debt securities – Other taxable securities	643
AFS debt securities – Tax-exempt securities	783
Structured liabilities
Long-term debt	$	(1,841	)	Industry standard derivative pricing ^{(2, 3)}	Equity correlation	22% to 98%	68	%
					Long-dated equity volatilities	6% to 58%	22	%
					Long-dated volatilities (IR)	0% to 2%	1	%
Net derivatives assets
Credit derivatives	$	529		Discounted cash flow, Stochastic recovery correlation model	Yield	0% to 25%	15	%
					Upfront points	1 point to 100 points	61 points
					Spread to index	0 bps to 475 bps	97 bps
					Credit correlation	24% to 99%	51	%
					Prepayment speed	3% to 40% CPR	14	%
					Default rate	1% to 5% CDR	3	%
					Loss severity	20% to 42%	35	%
Equity derivatives	$	(1,782	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	22% to 98%	68	%
				Industry standard derivative pricing ⁽²⁾	Long-dated equity volatilities	6% to 58%	22	%
Commodity derivatives	$	48		Discounted cash flow, Industry standard derivative pricing ⁽²⁾	Natural gas forward price	$3/MMBtu to $8/MMBtu	$5/MMBtu
					Correlation	47% to 89%	81	%
					Volatilities	11% to 111%	29	%
Interest rate derivatives	$	630		Industry standard derivative pricing⁽³⁾	Correlation (IR/IR)	20% to 99%	60	%
					Correlation (FX/IR)	-30% to 40%	-5	%
					Long-dated inflation rates	0% to 3%	2	%
					Long-dated inflation volatilities	0% to 2%	1	%
Total net derivative assets	$	(575	)

⁽¹⁾

The categories are aggregated based upon product type which differs from financial statement classification. The following is a reconciliation to the line items in the table on page 213: Trading account assets – Corporate securities, trading loans and other of $2.6 billion, Trading account assets – Non-U.S. sovereign debt of $533 million, Trading account assets – Mortgage trading loans and ABS of $4.3 billion, AFS debt securities – Other taxable securities of $3.4 billion, AFS debt securities – Tax-exempt securities of $783 million, Loans and leases of $3.1 billion and LHFS of $736 million.


⁽²⁾	Includes models such as Monte Carlo simulation and Black-Scholes.


⁽³⁾	Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.

CPR = Constant Prepayment Rate

CDR = Constant Default Rate

EBITDA = Earnings before interest, taxes, depreciation and amortization

MMBtu = Million British thermal units

IR = Interest Rate

FX = Foreign Exchange



Quantitative Information about Level 3 Fair Value Measurements at December 31, 2013
(Dollars in millions)					Inputs
Financial Instrument	Fair Value			Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted Average
Loans and Securities ⁽¹⁾
Instruments backed by residential real estate assets	$	3,443		Discounted cash flow, Market comparables	Yield	2% to 25%	6	%
Trading account assets – Mortgage trading loans and ABS	363				Prepayment speed	0% to 35% CPR	9	%
Loans and leases	2,151				Default rate	1% to 20% CDR	6	%
Loans held-for-sale	929				Loss severity	21% to 80%	35	%
Commercial loans, debt securities and other	$	12,135		Discounted cash flow, Market comparables	Yield	0% to 45%	5	%
Trading account assets – Corporate securities, trading loans and other	3,462				Enterprise value/EBITDA multiple	0x to 24x	7x
Trading account assets – Non-U.S. sovereign debt	468				Prepayment speed	5% to 40%	19	%
Trading account assets – Mortgage trading loans and ABS	4,268				Default rate	1% to 5%	4	%
AFS debt securities – Other taxable securities	3,031				Loss severity	25% to 42%	36	%
Loans and leases	906				Duration	1 year to 5 years	4 years
Auction rate securities	$	1,719		Discounted cash flow, Market comparables	Project tender price/Refinancing level	60% to 100%	96	%
Trading account assets – Corporate securities, trading loans and other	97				Project tender price/Refinancing level
AFS debt securities – Other taxable securities	816
AFS debt securities – Tax-exempt securities	806
Structured liabilities
Long-term debt	$	(1,990	)	Industry standard derivative pricing ^{(2, 3)}	Equity correlation	18% to 98%	70	%
					Long-dated equity volatilities	4% to 63%	27	%
					Long-dated volatilities (IR)	0% to 2%	1	%
Net derivatives assets
Credit derivatives	$	1,008		Discounted cash flow, Stochastic recovery correlation model	Yield	3% to 25%	14	%
					Upfront points	0 points to 100 points	63 points
					Spread to index	-1,407 bps to 1,741 bps	91 bps
					Credit correlation	14% to 99%	47	%
					Prepayment speed	3% to 40% CPR	13	%
					Default rate	1% to 5% CDR	3	%
					Loss severity	20% to 42%	35	%
Equity derivatives	$	(1,596	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	18% to 98%	70	%
				Industry standard derivative pricing ⁽²⁾	Long-dated equity volatilities	4% to 63%	27	%
Commodity derivatives	$	6		Discounted cash flow, Industry standard derivative pricing ⁽²⁾	Natural gas forward price	$3/MMBtu to $11/MMBtu	$6/MMBtu
					Correlation	47% to 89%	81	%
					Volatilities	9% to 109%	30	%
Interest rate derivatives	$	558		Industry standard derivative pricing ⁽³⁾	Correlation (IR/IR)	24% to 99%	60	%
					Correlation (FX/IR)	-30% to 40%	-4	%
					Long-dated inflation rates	0% to 3%	2	%
					Long-dated inflation volatilities	0% to 2%	1	%
Total net derivative assets	$	(24	)

⁽¹⁾

The categories are aggregated based upon product type which differs from financial statement classification. The following is a reconciliation to the line items in the table on page 214: Trading account assets – Corporate securities, trading loans and other of $3.6 billion, Trading account assets – Non-U.S. sovereign debt of $468 million, Trading account assets – Mortgage trading loans and ABS of $4.6 billion, AFS debt securities – Other taxable securities of $3.8 billion, AFS debt securities – Tax-exempt securities of $806 million, Loans and leases of $3.1 billion and LHFS of $929 million.


⁽²⁾	Includes models such as Monte Carlo simulation and Black-Scholes.


⁽³⁾	Includes models such as Monte Carlo simulation, Black-Scholes and other methods that model the joint dynamics of interest, inflation and foreign exchange rates.

CPR = Constant Prepayment Rate

CDR = Constant Default Rate

EBITDA = Earnings before interest, taxes, depreciation and amortization

MMBtu = Million British thermal units

IR = Interest Rate

FX = Foreign Exchange

In the tables above, instruments backed by residential real estate assets include RMBS, whole loans and mortgage CDOs. Commercial loans, debt securities and other include corporate CLOs and CDOs, commercial loans and bonds, and securities backed by non-real estate assets. Structured liabilities primarily include equity-linked notes that are accounted for under the fair value option.

In addition to the instruments in the tables above, the Corporation held $504 million and $767 million of instruments at March 31, 2014 and December 31, 2013 consisting primarily of certain direct private equity investments and private equity funds that were classified as Level 3 and reported within other assets. Valuations of direct private equity investments are based on the most recent company financial information. Inputs generally include market and acquisition comparables, entry level multiples, as well as other variables. The Corporation selects a valuation methodology (e.g., market comparables) for each investment and, in certain instances, multiple inputs are weighted to derive the most representative value. Discounts are applied as appropriate to consider the lack of liquidity and marketability versus publicly-traded companies. For private equity funds, fair value is determined using the net asset value as provided by the individual fund's general partner.

The Corporation uses multiple market approaches in valuing certain of its Level 3 financial instruments. For example, market comparables and discounted cash flows are used together. For a given product, such as corporate debt securities, market comparables may be used to estimate some of the unobservable inputs and then these inputs are incorporated into a discounted cash flow model. Therefore, the balances disclosed encompass both of these techniques.

The level of aggregation and diversity within the products disclosed in the tables result in certain ranges of inputs being wide and unevenly distributed across asset and liability categories. At March 31, 2014 and December 31, 2013, weighted averages are disclosed for all loans, securities, structured liabilities and net derivative assets.

For more information on the inputs and techniques used in the valuation of MSRs, see Note 17 – Mortgage Servicing Rights.

Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs

Loans and Securities

For instruments backed by residential real estate assets and commercial loans, debt securities and other, a significant increase in market yields, default rates, loss severities or duration would result in a significantly lower fair value for long positions. Short positions would be impacted in a directionally opposite way. The impact of changes in prepayment speeds would have differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested.

For auction rate securities, a significant increase in projected tender price/refinancing levels would result in a significantly higher fair value.

Structured Liabilities and Derivatives

For credit derivatives, a significant increase in market yield, including spreads to indices, upfront points (i.e., a single upfront payment made by a protection buyer at inception), default rates or loss severities would result in a significantly lower fair value for protection sellers and higher fair value for protection buyers. The impact of changes in prepayment speeds would have differing impacts depending on the seniority of the instrument and, in the case of CLOs, whether prepayments can be reinvested.

Structured credit derivatives, which include tranched portfolio CDS and derivatives with derivative product company (DPC) and monoline counterparties, are impacted by credit correlation, including default and wrong-way correlation. Default correlation is a parameter that describes the degree of dependence among credit default rates within a credit portfolio that underlies a credit derivative instrument. The sensitivity of this input on the fair value varies depending on the level of subordination of the tranche. For senior tranches that are net purchases of protection, a significant increase in default correlation would result in a significantly higher fair value. Net short protection positions would be impacted in a directionally opposite way. Wrong-way correlation is a parameter that describes the probability that as exposure to a counterparty increases, the credit quality of the counterparty decreases. A significantly higher degree of wrong-way correlation between a DPC counterparty and underlying derivative exposure would result in a significantly lower fair value.

For equity derivatives, interest rate derivatives and structured liabilities, a significant change in long-dated rates and volatilities and correlation inputs (e.g., the degree of correlation between an equity security and an index, between two different interest rates, or between interest rates and foreign exchange rates) would result in a significant impact to the fair value; however, the magnitude and direction of the impact depends on whether the Corporation is long or short the exposure.

Nonrecurring Fair Value

The Corporation holds certain assets that are measured at fair value, but only in certain situations (e.g., impairment) and these measurements are referred to herein as nonrecurring. These assets primarily include LHFS, certain loans and leases, and foreclosed properties. The amounts below represent only balances measured at fair value during the three months ended March 31, 2014 and 2013, and still held as of the reporting date.



Assets Measured at Fair Value on a Nonrecurring Basis
	March 31, 2014				Three Months Ended March 31, 2014
(Dollars in millions)	Level 2		Level 3		Gains (Losses)
Assets
Loans held-for-sale	$	4,325	$	104	$	(3	)
Loans and leases	17		1,733		(330		)
Foreclosed properties ⁽¹⁾	4		1,179		(14		)
Other assets	77		—		—

	March 31, 2013				Three Months Ended March 31, 2013
Assets
Loans held-for-sale	$	3,902	$	795	$	(96	)
Loans and leases	20		3,619		(640		)
Foreclosed properties ⁽¹⁾	48		1,981		(19		)
Other assets	65		12		(6		)


⁽¹⁾	Amounts are included in other assets on the Consolidated Balance Sheet and represent fair value of, and related losses on, foreclosed properties that were written down subsequent to their initial classification as foreclosed properties.

The table below presents information about significant unobservable inputs related to the Corporation's nonrecurring Level 3 financial assets and liabilities at March 31, 2014 and December 31, 2013.



Quantitative Information about Nonrecurring Level 3 Fair Value Measurements

	March 31, 2014
(Dollars in millions)				Inputs
Financial Instrument	Fair Value		Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted Average
Instruments backed by residential real estate assets	$	1,733	Market comparables	OREO discount	0% to 25%	10	%
Loans and leases	1,733		Market comparables	Cost to sell	8%	n/a



	December 31, 2013
Instruments backed by residential real estate assets	$	5,240	Market comparables	OREO discount	0% to 19%	8	%
Loans and leases	5,240		Market comparables	Cost to sell	8%	n/a

n/a = not applicable

Instruments backed by residential real estate assets represent residential mortgages where the loan has been written down to the fair value of the underlying collateral. In addition to the instruments disclosed in the table above, the Corporation holds foreclosed residential properties where the fair value is based on unadjusted third-party appraisals or broker price opinions. Appraisals are generally conducted every 90 days. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.

- 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 + Details