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

9 Months Ended

Sep. 30, 2017

Under applicable accounting standards, 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 under applicable accounting standards and conducts a review of its fair value hierarchy classifications on a quarterly basis. Transfers into or out of fair value hierarchy classifications are considered to be effective as of the beginning of the quarter in which they occur. During the nine months ended September 30, 2017, there were no changes to valuation approaches or techniques that had, or are expected to have, a material impact on the Corporation’s consolidated financial position or results of operations.

For more information regarding the fair value hierarchy and how the Corporation measures fair value and valuation processes and techniques, see Note 1 – Summary of Significant Accounting Principles and Note 20 – Fair Value Measurements to the Consolidated Financial Statements of the Corporation's 2016 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.

Recurring Fair Value

Assets and liabilities carried at fair value on a recurring basis at September 30, 2017 and December 31, 2016, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.




	September 30, 2017
	Fair Value Measurements
(Dollars in millions)	Level 1		Level 2		Level 3		Netting Adjustments ⁽¹⁾			Assets/Liabilities at Fair Value
Assets
Federal funds sold and securities borrowed or purchased under agreements to resell	$	—	$	56,780	$	—	$	—		$	56,780
Trading account assets:
U.S. Treasury and agency securities ⁽²⁾	32,688		589		—		—			33,277
Corporate securities, trading loans and other	535		27,760		1,742		—			30,037
Equity securities	58,886		29,149		244		—			88,279
Non-U.S. sovereign debt	16,623		14,346		552		—			31,521
Mortgage trading loans, MBS and ABS:
U.S. government-sponsored agency guaranteed ⁽²⁾	—		18,973		—		—			18,973
Mortgage trading loans, ABS and other MBS	—		6,980		1,252		—			8,232
Total trading account assets ⁽³⁾	108,732		97,797		3,790		—			210,319
Derivative assets ^{(4, 5)}	6,756		360,066		3,878		(332,316		)	38,384
AFS debt securities:
U.S. Treasury and agency securities	48,591		1,677		—		—			50,268
Mortgage-backed securities:
Agency	—		196,194		—		—			196,194
Agency-collateralized mortgage obligations	—		7,049		—		—			7,049
Non-agency residential	—		2,657		—		—			2,657
Commercial	—		12,464		—		—			12,464
Non-U.S. securities	774		4,630		36		—			5,440
Other taxable securities	—		6,555		483		—			7,038
Tax-exempt securities	—		18,725		467		—			19,192
Total AFS debt securities	49,365		249,951		986		—			300,302
Other debt securities carried at fair value:
Mortgage-backed securities:
Agency-collateralized mortgage obligations	—		5		—		—			5
Non-agency residential	—		3,036		22		—			3,058
Non-U.S. securities	11,911		1,349		—		—			13,260
Other taxable securities	—		239		—		—			239
Total other debt securities carried at fair value	11,911		4,629		22		—			16,562
Loans and leases	—		5,667		618		—			6,285
Mortgage servicing rights ⁽⁶⁾	—		—		2,407		—			2,407
Loans held-for-sale	—		2,353		775		—			3,128
Customer and other receivables	—		230		—		—			230
Other assets	17,991		1,083		267		—			19,341
Total assets	$	194,755	$	778,556	$	12,743	$	(332,316	)	$	653,738
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	468	$	—	$	—		$	468
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		38,852		—		—			38,852
Trading account liabilities:
U.S. Treasury and agency securities	20,390		366		—		—			20,756
Equity securities	31,647		4,018		—		—			35,665
Non-U.S. sovereign debt	16,606		4,118		—		—			20,724
Corporate securities and other	211		9,053		25		—			9,289
Total trading account liabilities	68,854		17,555		25		—			86,434
Derivative liabilities ^{(4, 5)}	6,589		349,863		5,901		(330,572		)	31,781
Short-term borrowings	—		1,904		—		—			1,904
Accrued expenses and other liabilities	21,121		1,239		9		—			22,369
Long-term debt	—		28,007		1,890		—			29,897
Total liabilities	$	96,564	$	437,888	$	7,825	$	(330,572	)	$	211,705


⁽¹⁾	Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.


⁽²⁾	Includes $19.5 billion of GSE obligations.


⁽³⁾	Includes securities with a fair value of $15.3 billion that were segregated in compliance with securities regulations or deposited with clearing organizations. This amount is included in the parenthetical disclosure on the Consolidated Balance Sheet.

⁽⁴⁾

During the nine months ended September 30, 2017, $3.0 billion of derivative assets and $2.4 billion of derivative liabilities were transferred from Level 1 to Level 2 and $543 million of derivative assets and $496 million of derivative liabilities were transferred from Level 2 to Level 1 based on the inputs used to measure fair value. For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.

⁽⁵⁾

Derivative assets and liabilities reflect the effects of contractual amendments by two central clearing counterparties to legally re-characterize daily cash variation margin from collateral, which secures an outstanding exposure, to settlement, which discharges an outstanding exposure. One of these central clearing counterparties amended its governing documents, which became effective in January 2017. In addition, the Corporation elected to transfer its existing positions to the settlement platform for the other central clearing counterparty in September 2017.


⁽⁶⁾	MSRs include the $1.7 billion core MSR portfolio held in Consumer Banking, the $162 million non-core MSR portfolio held in All Other and the $518 million non-U.S. MSR portfolio held in Global Markets.




	December 31, 2016
	Fair Value Measurements
(Dollars in millions)	Level 1		Level 2		Level 3		Netting Adjustments ⁽¹⁾			Assets/Liabilities at Fair Value
Assets
Federal funds sold and securities borrowed or purchased under agreements to resell	$	—	$	49,750	$	—	$	—		$	49,750
Trading account assets:
U.S. Treasury and agency securities ⁽²⁾	34,587		1,927		—		—			36,514
Corporate securities, trading loans and other	171		22,861		2,777		—			25,809
Equity securities	50,169		21,601		281		—			72,051
Non-U.S. sovereign debt	9,578		9,940		510		—			20,028
Mortgage trading loans, MBS and ABS:
U.S. government-sponsored agency guaranteed ⁽²⁾	—		15,799		—		—			15,799
Mortgage trading loans, ABS and other MBS	—		8,797		1,211		—			10,008
Total trading account assets ⁽³⁾	94,505		80,925		4,779		—			180,209
Derivative assets ⁽⁴⁾	7,337		619,848		3,931		(588,604		)	42,512
AFS debt securities:
U.S. Treasury and agency securities	46,787		1,465		—		—			48,252
Mortgage-backed securities:
Agency	—		189,486		—		—			189,486
Agency-collateralized mortgage obligations	—		8,330		—		—			8,330
Non-agency residential	—		2,013		—		—			2,013
Commercial	—		12,322		—		—			12,322
Non-U.S. securities	1,934		3,600		229		—			5,763
Other taxable securities	—		10,020		594		—			10,614
Tax-exempt securities	—		16,618		542		—			17,160
Total AFS debt securities	48,721		243,854		1,365		—			293,940
Other debt securities carried at fair value:
Mortgage-backed securities:
Agency-collateralized mortgage obligations	—		5		—		—			5
Non-agency residential	—		3,114		25		—			3,139
Non-U.S. securities	15,109		1,227		—		—			16,336
Other taxable securities	—		240		—		—			240
Total other debt securities carried at fair value	15,109		4,586		25		—			19,720
Loans and leases	—		6,365		720		—			7,085
Mortgage servicing rights ⁽⁵⁾	—		—		2,747		—			2,747
Loans held-for-sale	—		3,370		656		—			4,026
Debt securities in assets of business held for sale	619		—		—		—			619
Other assets	11,824		1,739		239		—			13,802
Total assets	$	178,115	$	1,010,437	$	14,462	$	(588,604	)	$	614,410
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	731	$	—	$	—		$	731
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		35,407		359		—			35,766
Trading account liabilities:
U.S. Treasury and agency securities	15,854		197		—		—			16,051
Equity securities	25,884		3,014		—		—			28,898
Non-U.S. sovereign debt	9,409		2,103		—		—			11,512
Corporate securities and other	163		6,380		27		—			6,570
Total trading account liabilities	51,310		11,694		27		—			63,031
Derivative liabilities ⁽⁴⁾	7,173		615,896		5,244		(588,833		)	39,480
Short-term borrowings	—		2,024		—		—			2,024
Accrued expenses and other liabilities	12,978		1,643		9		—			14,630
Long-term debt	—		28,523		1,514		—			30,037
Total liabilities	$	71,461	$	695,918	$	7,153	$	(588,833	)	$	185,699


⁽¹⁾	Amounts represent the impact of legally enforceable master netting agreements and also cash collateral held or placed with the same counterparties.


⁽²⁾	Includes $17.5 billion of GSE obligations.


⁽³⁾	Includes securities with a fair value of $14.6 billion that were segregated in compliance with securities regulations or deposited with clearing organizations. This amount is included in the parenthetical disclosure on the Consolidated Balance Sheet.


⁽⁴⁾	During 2016, $2.3 billion of derivative assets and $2.4 billion of derivative liabilities were transferred from Level 1 to Level 2 and $2.0 billion of derivative assets and $1.8 billion of derivative liabilities were transferred from Level 2 to Level 1 based on the inputs used to measure fair value. For further disaggregation of derivative assets and liabilities, see Note 2 – Derivatives.


⁽⁵⁾	MSRs include the $2.1 billion core MSR portfolio held in Consumer Banking, the $212 million non-core MSR portfolio held in All Other and the $469 million non-U.S. MSR portfolio held in Global Markets.

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 and nine months ended September 30, 2017 and 2016, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.




Level 3 – Fair Value Measurements ⁽¹⁾
	Three Months Ended September 30, 2017
										Gross
(Dollars in millions)	Balance July 1 2017			Total Realized/Unrealized Gains/(Losses) ⁽²⁾			Gains (Losses) in OCI ⁽³⁾			Purchases		Sales			Issuances			Settlements			Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance September 30 2017			Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held ⁽²⁾
Trading account assets:
Corporate securities, trading loans and other	$	1,777		$	77		$	—		$	35	$	(79	)	$	5		$	(208	)	$	288		$	(153	)	$	1,742		$	35
Equity securities	229			8			—			3		(3		)	—			—			17			(10		)	244			10
Non-U.S. sovereign debt	506			33			18			—		—			—			(5		)	—			—			552			33
Mortgage trading loans, ABS and other MBS	1,232			10			(1		)	150		(157		)	—			(46		)	83			(19		)	1,252			(2		)
Total trading account assets	3,744			128			17			188		(239		)	5			(259		)	388			(182		)	3,790			76
Net derivative assets ⁽⁴⁾	(1,803		)	(252		)	—			150		(367		)	—			278			7			(36		)	(2,023		)	(283		)
AFS debt securities:
Non-U.S. securities	139			1			4			7		—			—			(115		)	—			—			36			—
Other taxable securities	483			—			1			—		—			—			(1		)	—			—			483			—
Tax-exempt securities	518			—			1			—		—			—			(7		)	—			(45		)	467			—
Total AFS debt securities	1,140			1			6			7		—			—			(123		)	—			(45		)	986			—
Other debt securities carried at fair value – Non-agency residential MBS	23			—			—			—		—			—			(1		)	—			—			22			—
Loans and leases ^{(5, 6)}	667			2			—			2		(24		)	—			(29		)	—			—			618			2
Mortgage servicing rights ^{(6, 7)}	2,501			54			—			—		(28		)	69			(189		)	—			—			2,407			(20		)
Loans held-for-sale ⁽⁵⁾	766			38			10			—		(4		)	—			(93		)	58			—			775			27
Other assets	294			70			(43		)	—		(52		)	—			(2		)	—			—			267			28
Federal funds purchased and securities loaned or sold under agreements to repurchase ⁽⁵⁾	(135		)	—			—			—		—			—			135			—			—			—			—
Trading account liabilities – Corporate securities and other	(22		)	1			—			—		(3		)	(1		)	—			—			—			(25		)	—
Accrued expenses and other liabilities ⁽⁵⁾	(9		)	—			—			—		—			—			—			—			—			(9		)	—
Long-term debt ⁽⁵⁾	(1,646		)	(87		)	(7		)	63		—			(129		)	115			(244		)	45			(1,890		)	(87		)


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

⁽²⁾

Includes gains/losses reported in earnings in the following income statement line items: Trading account assets/liabilities - primarily trading account profits (losses); Net derivative assets - primarily trading account profits (losses) and mortgage banking income (loss); MSRs - primarily mortgage banking income (loss); Long-term debt - trading account profits (losses). For MSRs, the amounts reflect the changes in modeled MSR fair value due to observed changes in interest rates, volatility, spreads and the shape of the forward swap curve, and periodic adjustments to the valuation model to reflect changes in the modeled relationships between inputs and projected cash flows, as well as changes in cash flow assumptions including cost to service.

⁽³⁾

Includes gains/losses in OCI related to unrealized gains/losses on AFS securities, foreign currency translation adjustments and the impact of changes in the Corporation’s credit spreads on long-term debt accounted for under the fair value option. For additional information, see Note 1 – Summary of Significant Accounting Principles to the Consolidated Financial Statements of the Corporation's 2016 Annual Report on Form 10-K.


⁽⁴⁾	Net derivatives include derivative assets of $3.9 billion and derivative liabilities of $5.9 billion.


⁽⁵⁾	Amounts represent instruments that are accounted for under the fair value option.


⁽⁶⁾	Issuances represent loan originations and MSRs recognized following securitizations or whole-loan sales.


⁽⁷⁾	Settlements represent the net change in fair value of the MSR asset due to the recognition of modeled cash flows and the passage of time.

Significant transfers into Level 3, primarily due to decreased price observability, during the three months ended September 30, 2017 included $388 million of trading account assets and $244 million of long-term debt. Transfers occur on a regular basis for 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.

Significant transfers out of Level 3, primarily due to increased price observability, during the three months ended September 30, 2017 included $182 million of trading account assets.




Level 3 – Fair Value Measurements ⁽¹⁾
	Three Months Ended September 30, 2016
										Gross
(Dollars in millions)	Balance July 1 2016			Total Realized/Unrealized Gains/(Losses) ⁽²⁾			Gains (Losses) in OCI ⁽³⁾			Purchases		Sales			Issuances			Settlements			Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance September 30 2016			Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held ⁽²⁾
Trading account assets:
Corporate securities, trading loans and other	$	2,654		$	57		$	—		$	226	$	(245	)	$	—		$	(134	)	$	202		$	(198	)	$	2,562		$	20
Equity securities	455			11			—			10		(98		)	—			—			27			(39		)	366			5
Non-U.S. sovereign debt	630			20			(7		)	—		—			—			(4		)	—			—			639			19
Mortgage trading loans, ABS and other MBS	1,286			102			—			331		(441		)	—			(103		)	15			(24		)	1,166			62
Total trading account assets	5,025			190			(7		)	567		(784		)	—			(241		)	244			(261		)	4,733			106
Net derivative assets ⁽⁴⁾	(648		)	(131		)	—			114		(346		)	—			118			(53		)	(41		)	(987		)	(198		)
AFS debt securities:
Non-agency residential MBS	134			—			—			189		—			—			(102		)	6			—			227			—
Other taxable securities	717			1			(1		)	—		—			—			(30		)	—			—			687			—
Tax-exempt securities	559			—			2			—		—			—			—			10			—			571			—
Total AFS debt securities	1,410			1			1			189		—			—			(132		)	16			—			1,485			—
Other debt securities carried at fair value – Non-agency residential MBS	28			(2		)	—			—		—			—			—			—			—			26			—
Loans and leases ^{(5, 6)}	1,459			(9		)	—			—		—			—			(54		)	—			(41		)	1,355			(8		)
Mortgage servicing rights ^{(6, 7)}	2,269			313			—			—		—			101			(206		)	—			—			2,477			262
Loans held-for-sale ⁽⁵⁾	690			13			(4		)	—		(56		)	—			(25		)	4			(35		)	587			10
Other assets	348			11			—			4		—			—			—			—			—			363			17
Federal funds purchased and securities loaned or sold under agreements to repurchase ⁽⁵⁾	(313		)	(17		)	—			—		—			—			10			(19		)	1			(338		)	(17		)
Trading account liabilities – Corporate securities and other	(26		)	2			—			—		(2		)	—			—			—			—			(26		)	1
Accrued expenses and other liabilities ⁽⁵⁾	(9		)	—			—			—		—			—			—			—			—			(9		)	—
Long-term debt ⁽⁵⁾	(2,156		)	(22		)	(23		)	15		—			(3		)	363			(206		)	98			(1,934		)	(24		)


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

⁽²⁾

Includes gains/losses reported in earnings in the following income statement line items: Trading account assets/liabilities - trading account profits (losses); Net derivative assets - primarily trading account profits (losses) and mortgage banking income (loss); MSRs - primarily mortgage banking income (loss); Long-term debt - trading account profits (losses). For MSRs, the amounts reflect the changes in modeled MSR fair value due principally to observed changes in interest rates, volatility, spreads and the shape of the forward swap curve.

⁽³⁾


⁽⁴⁾	Net derivatives include derivative assets of $4.9 billion and derivative liabilities of $5.9 billion.


⁽⁵⁾	Amounts represent instruments that are accounted for under the fair value option.


⁽⁶⁾	Issuances represent loan originations and MSRs recognized following securitizations or whole-loan sales.


⁽⁷⁾	Settlements represent the net change in fair value of the MSR asset due to the recognition of modeled cash flows and the passage of time.

Significant transfers into Level 3, primarily due to decreased price observability, during the three months ended September 30, 2016 included $244 million of trading account assets and $206 million of long-term debt. Transfers occur on a regular basis for 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.

Significant transfers out of Level 3, primarily due to increased price observability, during the three months ended September 30, 2016 included $261 million of trading account assets.




Level 3 – Fair Value Measurements ⁽¹⁾
	Nine Months Ended September 30, 2017
										Gross
(Dollars in millions)	Balance January 1 2017			Total Realized/Unrealized Gains/(Losses) ⁽²⁾			Gains (Losses) in OCI ⁽³⁾			Purchases		Sales			Issuances			Settlements			Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance September 30 2017			Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held ⁽²⁾
Trading account assets:
Corporate securities, trading loans and other	$	2,777		$	225		$	—		$	353	$	(679	)	$	5		$	(443	)	$	506		$	(1,002	)	$	1,742		$	72
Equity securities	281			23			—			45		(67		)	—			(10		)	119			(147		)	244			11
Non-U.S. sovereign debt	510			64			12			26		(59		)	—			(73		)	72			—			552			60
Mortgage trading loans, ABS and other MBS	1,211			195			(2		)	747		(846		)	—			(169		)	187			(71		)	1,252			107
Total trading account assets	4,779			507			10			1,171		(1,651		)	5			(695		)	884			(1,220		)	3,790			250
Net derivative assets ⁽⁴⁾	(1,313		)	(1,098		)	—			558		(843		)	—			722			36			(85		)	(2,023		)	(561		)
AFS debt securities:
Non-U.S. securities	229			2			16			49		—			—			(260		)	—			—			36			—
Other taxable securities	594			3			6			5		—			—			(31		)	—			(94		)	483			—
Tax-exempt securities	542			—			1			—		(56		)	—			(10		)	35			(45		)	467			—
Total AFS debt securities	1,365			5			23			54		(56		)	—			(301		)	35			(139		)	986			—
Other debt securities carried at fair value – Non-agency residential MBS	25			(1		)	—			—		—			—			(2		)	—			—			22			—
Loans and leases ^{(5, 6)}	720			20			—			2		(24		)	—			(93		)	—			(7		)	618			18
Mortgage servicing rights ^{(6, 7)}	2,747			40			—			—		(22		)	207			(565		)	—			—			2,407			(202		)
Loans held-for-sale ⁽⁵⁾	656			109			7			2		(159		)	—			(281		)	473			(32		)	775			60
Other assets	239			53			(31		)	2		(52		)	—			(8		)	64			—			267			21
Federal funds purchased and securities loaned or sold under agreements to repurchase ⁽⁵⁾	(359		)	(5		)	—			—		—			(12		)	171			(58		)	263			—			(5		)
Trading account liabilities – Corporate securities and other	(27		)	13			—			4		(13		)	(2		)	—			—			—			(25		)	(1		)
Accrued expenses and other liabilities ⁽⁵⁾	(9		)	—			—			—		—			—			—			—			—			(9		)	—
Long-term debt ⁽⁵⁾	(1,514		)	(160		)	(18		)	81		—			(279		)	398			(530		)	132			(1,890		)	(158		)


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

⁽²⁾

⁽³⁾


⁽⁴⁾	Net derivatives include derivative assets of $3.9 billion and derivative liabilities of $5.9 billion.


⁽⁵⁾	Amounts represent instruments that are accounted for under the fair value option.


⁽⁶⁾	Issuances represent loan originations and MSRs recognized following securitizations or whole-loan sales.


⁽⁷⁾	Settlements represent the net change in fair value of the MSR asset due to the recognition of modeled cash flows and the passage of time.

Significant transfers into Level 3, primarily due to decreased price observability, during the nine months ended September 30, 2017 included $884 million of trading account assets, $473 million of LHFS and $530 million of long-term debt. Transfers occur on a regular basis for 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.

Significant transfers out of Level 3, primarily due to increased price observability, during the nine months ended September 30, 2017 included $1.2 billion of trading account assets, $139 million of AFS debt securities, $263 million of federal funds purchased and securities loaned or sold under agreements to repurchase and $132 million of long-term debt.




Level 3 – Fair Value Measurements ⁽¹⁾
	Nine Months Ended September 30, 2016
										Gross
(Dollars in millions)	Balance January 1 2016			Total Realized/Unrealized Gains/(Losses) ⁽²⁾			Gains (Losses) in OCI ⁽³⁾			Purchases		Sales			Issuances			Settlements			Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance September 30 2016			Change in Unrealized Gains/(Losses) Related to Financial Instruments Still Held ⁽²⁾
Trading account assets:
Corporate securities, trading loans and other	$	2,838		$	118		$	2		$	925	$	(638	)	$	—		$	(479	)	$	432		$	(636	)	$	2,562		$	11
Equity securities	407			93			—			53		(135		)	—			(72		)	60			(40		)	366			(19		)
Non-U.S. sovereign debt	521			112			91			3		(1		)	—			(87		)	—			—			639			110
Mortgage trading loans, ABS and other MBS	1,868			197			(2		)	681		(1,264		)	—			(270		)	91			(135		)	1,166			110
Total trading account assets	5,634			520			91			1,662		(2,038		)	—			(908		)	583			(811		)	4,733			212
Net derivative assets ⁽⁴⁾	(441		)	356			—			313		(965		)	—			7			(177		)	(80		)	(987		)	(108		)
AFS debt securities:
Non-agency residential MBS	106			—			3			385		(92		)	—			(181		)	6			—			227			—
Other taxable securities	757			3			(7		)	—		—			—			(66		)	—			—			687			—
Tax-exempt securities	569			—			(8		)	1		—			—			(1		)	10			—			571			—
Total AFS debt securities	1,432			3			(12		)	386		(92		)	—			(248		)	16			—			1,485			—
Other debt securities carried at fair value – Non-agency residential MBS	30			(4		)	—			—		—			—			—			—			—			26			—
Loans and leases ^{(5, 6)}	1,620			(13		)	—			69		—			50			(143		)	6			(234		)	1,355			(3		)
Mortgage servicing rights ^{(6, 7)}	3,087			(295		)	—			—		—			307			(622		)	—			—			2,477			(457		)
Loans held-for-sale ⁽⁵⁾	787			97			51			20		(236		)	—			(77		)	43			(98		)	587			76
Other assets	374			(27		)	—			38		—			—			(24		)	2			—			363			(15		)
Federal funds purchased and securities loaned or sold under agreements to repurchase ⁽⁵⁾	(335		)	12			—			—		—			(14		)	17			(19		)	1			(338		)	(21		)
Trading account liabilities – Corporate securities and other	(21		)	4			—			1		(10		)	—			—			—			—			(26		)	3
Short-term borrowings ⁽⁵⁾	(30		)	1			—			—		—			—			29			—			—			—			—
Accrued expenses and other liabilities ⁽⁵⁾	(9		)	—			—			—		—			—			—			—			—			(9		)	—
Long-term debt ⁽⁵⁾	(1,513		)	(192		)	(41		)	44		—			(326		)	496			(751		)	349			(1,934		)	(208		)


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

⁽²⁾

Includes gains/losses reported in earnings in the following income statement line items: Trading account assets/liabilities - trading account profits (losses); Net derivative assets - primarily trading account profits (losses) and mortgage banking income (loss); MSRs - primarily mortgage banking income (loss); Long-term debt - primarily trading account profits (losses). For MSRs, the amounts reflect the changes in modeled MSR fair value due principally to observed changes in interest rates, volatility, spreads and the shape of the forward swap curve.

⁽³⁾


⁽⁴⁾	Net derivatives include derivative assets of $4.9 billion and derivative liabilities of $5.9 billion.


⁽⁵⁾	Amounts represent instruments that are accounted for under the fair value option.


⁽⁶⁾	Issuances represent loan originations and MSRs recognized following securitizations or whole-loan sales.


⁽⁷⁾	Settlements represent the net change in fair value of the MSR asset due to the recognition of modeled cash flows and the passage of time.

Significant transfers into Level 3, primarily due to decreased price observability, during the nine months ended September 30, 2016 included $583 million of trading account assets, $177 million of net derivative assets and $751 million of long-term debt. Transfers occur on a regular basis for 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.

Significant transfers out of Level 3, primarily due to increased price observability, during the nine months ended September 30, 2016 included $811 million of trading account assets, $234 million of loans and leases and $349 million of long-term debt.

The following tables present information about significant unobservable inputs related to the Corporation’s material categories of Level 3 financial assets and liabilities at September 30, 2017 and December 31, 2016.




Quantitative Information about Level 3 Fair Value Measurements at September 30, 2017

(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	$	914		Discounted cash flow	Yield	0% to 25%		6	%
Trading account assets – Mortgage trading loans, ABS and other MBS	293				Prepayment speed	0% to 22% CPR		12	%
Loans and leases	617				Default rate	0% to 3% CDR		2	%
Loans held-for-sale	4				Loss severity	0% to 54%		18	%
Instruments backed by commercial real estate assets	$	264		Discounted cash flow	Yield	0% to 25%		6	%
Trading account assets – Corporate securities, trading loans and other	218				Price	$0 to $100		$68
Trading account assets – Mortgage trading loans, ABS and other MBS	46
Commercial loans, debt securities and other	$	3,754		Discounted cash flow, Market comparables	Yield	0% to 12%		4	%
Trading account assets – Corporate securities, trading loans and other	1,498				Prepayment speed	10% to 20%		15	%
Trading account assets – Non-U.S. sovereign debt	552				Default rate	3% to 4%		4	%
Trading account assets – Mortgage trading loans, ABS and other MBS	913				Loss severity	35% to 40%		37	%
AFS debt securities – Other taxable securities	19				Price	$0 to $185		$63
Loans and leases	1
Loans held-for-sale	771
Auction rate securities	$	957		Discounted cash flow, Market comparables	Price	$10 to $100		$94
Trading account assets – Corporate securities, trading loans and other	26
AFS debt securities – Other taxable securities	464
AFS debt securities – Tax-exempt securities	467
MSRs	$	2,407		Discounted cash flow	Weighted-average life, fixed rate ⁽⁴⁾	0 to 14 years		5 years
					Weighted-average life, variable rate ⁽⁴⁾	0 to 10 years		3 years
					Option Adjusted Spread, fixed rate	9% to 14%		10	%
					Option Adjusted Spread, variable rate	9% to 15%		12	%
Structured liabilities
Long-term debt	$	(1,890	)	Discounted cash flow, Market comparables, Industry standard derivative pricing ⁽²⁾	Equity correlation	3% to 100%		64	%
					Long-dated equity volatilities	4% to 76%		22	%
					Yield	7.5	%	n/a
					Price	$0 to $100		$65
Net derivative assets
Credit derivatives	$	(325	)	Discounted cash flow, Stochastic recovery correlation model	Yield	1% to 5%		3	%
					Upfront points	0 points to 100 points		73 points
					Credit correlation	12% to 90%		58	%
					Prepayment speed	15% to 20% CPR		16	%
					Default rate	1% to 4% CDR		2	%
					Loss severity	35	%	n/a
					Price	$0 to $102		$76
Equity derivatives	$	(2,235	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	3% to 100%		64	%
				Industry standard derivative pricing ⁽²⁾	Long-dated equity volatilities	4% to 76%		22	%
Commodity derivatives	$	2		Discounted cash flow, Industry standard derivative pricing ⁽²⁾	Natural gas forward price	$2/MMBtu to $6/MMBtu		$3/MMBtu
					Correlation	68% to 90%		85	%
					Volatilities	25% to 90%		49	%
Interest rate derivatives	$	535		Industry standard derivative pricing ⁽³⁾	Correlation (IR/IR)	15% to 90%		53	%
					Correlation (FX/IR)	0% to 46%		1	%
					Long-dated inflation rates	-10% to 38%		6	%
					Long-dated inflation volatilities	0% to 1%		1	%
Total net derivative assets	$	(2,023	)

⁽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 114: Trading account assets – Corporate securities, trading loans and other of $1.7 billion, Trading account assets – Non-U.S. sovereign debt of $552 million, Trading account assets – Mortgage trading loans, ABS and other MBS of $1.3 billion, AFS debt securities – Other taxable securities of $483 million, AFS debt securities – Tax-exempt securities of $467 million, Loans and leases of $618 million and LHFS of $775 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.


⁽⁴⁾	The weighted-average life is a product of changes in market rates of interest, prepayment rates and other model and cash flow assumptions.

CPR = Constant Prepayment Rate

CDR = Constant Default Rate

MMBtu = Million British thermal units

IR = Interest Rate

FX = Foreign Exchange

n/a = not applicable




Quantitative Information about Level 3 Fair Value Measurements at December 31, 2016

(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	$	1,066		Discounted cash flow, Market comparables	Yield	0% to 50%		7	%
Trading account assets – Mortgage trading loans, ABS and other MBS	337				Prepayment speed	0% to 27% CPR		14	%
Loans and leases	718				Default rate	0% to 3% CDR		2	%
Loans held-for-sale	11				Loss severity	0% to 54%		18	%
Instruments backed by commercial real estate assets	$	317		Discounted cash flow, Market comparables	Yield	0% to 39%		11	%
Trading account assets – Corporate securities, trading loans and other	178				Price	$0 to $100		$65
Trading account assets – Mortgage trading loans, ABS and other MBS	53
Loans held-for-sale	86
Commercial loans, debt securities and other	$	4,486		Discounted cash flow, Market comparables	Yield	1% to 37%		14	%
Trading account assets – Corporate securities, trading loans and other	2,565				Prepayment speed	5% to 20%		19	%
Trading account assets – Non-U.S. sovereign debt	510				Default rate	3% to 4%		4	%
Trading account assets – Mortgage trading loans, ABS and other MBS	821				Loss severity	0% to 50%		19	%
AFS debt securities – Other taxable securities	29				Price	$0 to $292		$68
Loans and leases	2				Duration	0 to 5 years		3 years
Loans held-for-sale	559				Enterprise value/EBITDA multiple	34x		n/a
Auction rate securities	$	1,141		Discounted cash flow, Market comparables	Price	$10 to $100		$94
Trading account assets – Corporate securities, trading loans and other	34				Price
AFS debt securities – Other taxable securities	565
AFS debt securities – Tax-exempt securities	542
MSRs	$	2,747		Discounted cash flow	Weighted-average life, fixed rate ⁽⁴⁾	0 to 15 years		6 years
					Weighted-average life, variable rate ⁽⁴⁾	0 to 14 years		4 years
					Option Adjusted Spread, fixed rate	9% to 14%		10	%
					Option Adjusted Spread, variable rate	9% to 15%		12	%
Structured liabilities
Long-term debt	$	(1,514	)	Discounted cash flow, Market comparables Industry standard derivative pricing ⁽²⁾	Equity correlation	13% to 100%		68	%
					Long-dated equity volatilities	4% to 76%		26	%
					Yield	6% to 37%		20	%
					Price	$12 to $87		$73
					Duration	0 to 5 years		3 years
Net derivative assets
Credit derivatives	$	(129	)	Discounted cash flow, Stochastic recovery correlation model	Yield	0% to 24%		13	%
					Upfront points	0 to 100 points		72 points
					Credit spreads	17 bps to 814 bps		248 bps
					Credit correlation	21% to 80%		44	%
					Prepayment speed	10% to 20% CPR		18	%
					Default rate	1% to 4% CDR		3	%
					Loss severity	35	%	n/a
Equity derivatives	$	(1,690	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	13% to 100%		68	%
				Industry standard derivative pricing ⁽²⁾	Long-dated equity volatilities	4% to 76%		26	%
Commodity derivatives	$	6		Discounted cash flow, Industry standard derivative pricing ⁽²⁾	Natural gas forward price	$2/MMBtu to $6/MMBtu		$4/MMBtu
					Correlation	66% to 95%		85	%
					Volatilities	23% to 96%		36	%

Interest rate derivatives	$	500		Industry standard derivative pricing⁽³⁾	Correlation (IR/IR)	15% to 99%		56	%
					Correlation (FX/IR)	0% to 40%		2	%
					Illiquid IR and long-dated inflation rates	-12% to 35%		5	%
					Long-dated inflation volatilities	0% to 2%		1	%
Total net derivative assets	$	(1,313	)

⁽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 115: Trading account assets – Corporate securities, trading loans and other of $2.8 billion, Trading account assets – Non-U.S. sovereign debt of $510 million, Trading account assets – Mortgage trading loans, ABS and other MBS of $1.2 billion, AFS debt securities – Other taxable securities of $594 million, AFS debt securities – Tax-exempt securities of $542 million, Loans and leases of $720 million and LHFS of $656 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.


⁽⁴⁾	The weighted-average life is a product of changes in market rates of interest, prepayment rates and other model and cash flow assumptions.

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

n/a = not applicable

In the previous tables, instruments backed by residential and commercial real estate assets include RMBS, commercial MBS, 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.

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 results in certain ranges of inputs being wide and unevenly distributed across asset and liability categories.

Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs

Loans and Securities

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. A significant increase in price would result in a significantly higher fair value for long positions and short positions would be impacted in a directionally opposite way.

Mortgage Servicing Rights

The weighted-average lives and fair value of MSRs are sensitive to changes in modeled assumptions. The weighted-average life is a product of changes in market rates of interest, prepayment rates and other model and cash flow assumptions. The weighted-average life represents the average period of time that the MSRs' cash flows are expected to be received. Absent other changes, an increase (decrease) to the weighted-average life would generally result in an increase (decrease) in the fair value of the MSRs. For example, a 10 percent or 20 percent decrease in prepayment rates, which impact the weighted-average life, could result in an increase in fair value of $88 million or $183 million, while a 10 percent or 20 percent increase in prepayment rates could result in a decrease in fair value of $81 million or $156 million. A 100 bp or 200 bp decrease in option-adjusted spread (OAS) levels could result in an increase in fair value of $74 million or $154 million, while a 100 bp or 200 bp increase in OAS levels could result in a decrease in fair value of $69 million or $135 million. These sensitivities are hypothetical and actual amounts may vary materially. As the amounts indicate, changes in fair value based on variations in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of a variation in a particular assumption on the fair value of MSRs that continue to be held by the Corporation is calculated without changing any other assumption. In reality, changes in one factor may result in changes in another, which might magnify or counteract the sensitivities. In addition, these sensitivities do not reflect any hedge strategies that may be undertaken to mitigate such risk. The Corporation manages the risk in MSRs with derivatives such as options and interest rate swaps, which are not designated as accounting hedges, as well as securities including MBS and U.S. Treasury securities. The securities used to manage the risk in the MSRs are classified in other assets on the Consolidated Balance Sheet.

Structured Liabilities and Derivatives

For credit derivatives, a significant increase in market yield, upfront points (i.e., a single upfront payment made by a protection buyer at inception), credit spreads, 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.

Structured credit derivatives are impacted by credit 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.

For equity derivatives, commodity derivatives, interest rate derivatives and structured liabilities, a significant change in long-dated rates and volatilities and correlation inputs (i.e., the degree of correlation between an equity security and an index, between two different commodities, 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 depend on whether the Corporation is long or short the exposure. For structured liabilities, a significant increase in yield or decrease in price would result in a significantly lower fair value. A significant decrease in duration may result in a significantly higher fair value.

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. The amounts below represent assets still held as of the reporting date for which a nonrecurring fair value adjustment was recorded during the three and nine months ended September 30, 2017 and 2016.




Assets Measured at Fair Value on a Nonrecurring Basis
	September 30, 2017				Three Months Ended September 30, 2017			Nine Months Ended September 30, 2017
(Dollars in millions)	Level 2		Level 3		Gains (Losses)
Assets
Loans held-for-sale	$	70	$	16	$	—		$	(4	)
Loans and leases ⁽¹⁾	—		813		(152		)	(307		)
Foreclosed properties ^{(2, 3)}	—		79		(21		)	(35		)
Other assets	353		—		(1		)	(121		)

	September 30, 2016				Three Months Ended September 30, 2016			Nine Months Ended September 30, 2016
Assets
Loans held-for-sale	$	191	$	48	$	(1	)	$	(44	)
Loans and leases ⁽¹⁾	—		1,333		(143		)	(399		)
Foreclosed properties ^{(2, 3)}	—		113		(23		)	(41		)
Other assets	173		—		(18		)	(44		)


⁽¹⁾	Includes $71 million and $132 million of losses on loans that were written down to a collateral value of zero during the three and nine months ended September 30, 2017, compared to losses of $48 million and $112 million for the same periods in 2016.


⁽²⁾	Amounts are included in other assets on the Consolidated Balance Sheet and represent the carrying value of foreclosed properties that were written down subsequent to their initial classification as foreclosed properties. Losses on foreclosed properties include losses taken during the first 90 days after transfer of a loan to foreclosed properties.


⁽³⁾	Excludes $879 million and $1.3 billion of properties acquired upon foreclosure of certain government-guaranteed loans (principally FHA-insured loans) at September 30, 2017 and 2016.

The table below presents information about significant unobservable inputs related to the Corporation’s nonrecurring Level 3 financial assets and liabilities at September 30, 2017 and December 31, 2016. Loans and leases backed by residential real estate assets represent residential mortgages where the loan has been written down to the fair value of the underlying collateral.




Quantitative Information about Nonrecurring Level 3 Fair Value Measurements

	September 30, 2017
(Dollars in millions)				Inputs
Financial Instrument	Fair Value		Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted Average
Loans and leases backed by residential real estate assets	$	813	Market comparables	OREO discount	8% to 54%	21	%
				Costs to sell	7% to 45%	9	%



	December 31, 2016
Loans and leases backed by residential real estate assets	$	1,416	Market comparables	OREO discount	8% to 56%	21	%
				Costs to sell	7% to 45%	9	%

- 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