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, 2018

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, 2018, 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 2017 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, 2018 and December 31, 2017, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.




	September 30, 2018
	Fair Value Measurements
(Dollars in millions)	Level 1		Level 2		Level 3		Netting Adjustments ⁽¹⁾			Assets/Liabilities at Fair Value
Assets
Time deposits placed and other short-term investments	$	1,528	$	—	$	—	$	—		$	1,528
Federal funds sold and securities borrowed or purchased under agreements to resell	—		52,524		—		—			52,524
Trading account assets:
U.S. Treasury and agency securities ⁽²⁾	39,677		1,251		—		—			40,928
Corporate securities, trading loans and other	—		27,281		1,534		—			28,815
Equity securities	66,850		28,049		290		—			95,189
Non-U.S. sovereign debt	5,667		19,524		469		—			25,660
Mortgage trading loans, MBS and ABS:
U.S. government-sponsored agency guaranteed	—		18,697		—		—			18,697
Mortgage trading loans, ABS and other MBS	—		8,350		1,479		—			9,829
Total trading account assets ⁽³⁾	112,194		103,152		3,772		—			219,118
Derivative assets	9,961		322,940		4,380		(291,664		)	45,617
AFS debt securities:
U.S. Treasury and agency securities	50,900		1,406		—		—			52,306
Mortgage-backed securities:
Agency	—		136,112		—		—			136,112
Agency-collateralized mortgage obligations	—		5,678		—		—			5,678
Non-agency residential	—		1,593		544		—			2,137
Commercial	—		13,510		—		—			13,510
Non-U.S. securities	759		6,317		3		—			7,079
Other taxable securities	—		3,869		7		—			3,876
Tax-exempt securities	—		18,349		1		—			18,350
Total AFS debt securities	51,659		186,834		555		—			239,048
Other debt securities carried at fair value:
Mortgage-backed securities:
Non-agency residential	—		1,400		296		—			1,696
Non-U.S. securities	9,943		945		—		—			10,888
Other taxable securities	—		3		—		—			3
Total other debt securities carried at fair value	9,943		2,348		296		—			12,587
Loans and leases	—		5,321		410		—			5,731
Loans held-for-sale	—		2,590		526		—			3,116
Other assets ⁽⁴⁾	18,858		1,740		3,140		—			23,738
Total assets	$	204,143	$	677,449	$	13,079	$	(291,664	)	$	603,007
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	529	$	—	$	—		$	529
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		34,242		—		—			34,242
Trading account liabilities:
U.S. Treasury and agency securities	15,403		362		—		—			15,765
Equity securities	38,743		4,673		—		—			43,416
Non-U.S. sovereign debt	12,496		9,863		—		—			22,359
Corporate securities and other	—		8,407		17		—			8,424
Total trading account liabilities	66,642		23,305		17		—			89,964
Derivative liabilities	9,142		309,966		4,950		(287,869		)	36,189
Short-term borrowings	—		1,789		—		—			1,789
Accrued expenses and other liabilities	22,667		1,849		—		—			24,516
Long-term debt	—		27,754		923		—			28,677
Total liabilities	$	98,451	$	399,434	$	5,890	$	(287,869	)	$	215,906


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


⁽²⁾	Includes $19.9 billion of GSE obligations.


⁽³⁾	Includes securities with a fair value of $14.2 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⁾	Includes MSRs of $2.2 billion which are classified as Level 3 assets.




	December 31, 2017
	Fair Value Measurements
(Dollars in millions)	Level 1		Level 2		Level 3		Netting Adjustments ⁽¹⁾			Assets/Liabilities at Fair Value
Assets
Time deposits placed and other short-term investments	$	2,234	$	—	$	—	$	—		$	2,234
Federal funds sold and securities borrowed or purchased under agreements to resell	—		52,906		—		—			52,906
Trading account assets:
U.S. Treasury and agency securities ⁽²⁾	38,720		1,922		—		—			40,642
Corporate securities, trading loans and other	—		28,714		1,864		—			30,578
Equity securities	60,747		23,958		235		—			84,940
Non-U.S. sovereign debt	6,545		15,839		556		—			22,940
Mortgage trading loans, MBS and ABS:
U.S. government-sponsored agency guaranteed	—		20,586		—		—			20,586
Mortgage trading loans, ABS and other MBS	—		8,174		1,498		—			9,672
Total trading account assets ⁽³⁾	106,012		99,193		4,153		—			209,358
Derivative assets	6,305		341,178		4,067		(313,788		)	37,762
AFS debt securities:
U.S. Treasury and agency securities	51,915		1,608		—		—			53,523
Mortgage-backed securities:
Agency	—		192,929		—		—			192,929
Agency-collateralized mortgage obligations	—		6,804		—		—			6,804
Non-agency residential	—		2,669		—		—			2,669
Commercial	—		13,684		—		—			13,684
Non-U.S. securities	772		5,880		25		—			6,677
Other taxable securities	—		5,261		509		—			5,770
Tax-exempt securities	—		20,106		469		—			20,575
Total AFS debt securities	52,687		248,941		1,003		—			302,631
Other debt securities carried at fair value:
Mortgage-backed securities:
Non-agency residential	—		2,769		—		—			2,769
Non-U.S. securities	8,191		1,297		—		—			9,488
Other taxable securities	—		229		—		—			229
Total other debt securities carried at fair value	8,191		4,295		—		—			12,486
Loans and leases	—		5,139		571		—			5,710
Loans held-for-sale	—		1,466		690		—			2,156
Other assets ⁽⁴⁾	19,367		789		2,425		—			22,581
Total assets	$	194,796	$	753,907	$	12,909	$	(313,788	)	$	647,824
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	449	$	—	$	—		$	449
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		36,182		—		—			36,182
Trading account liabilities:
U.S. Treasury and agency securities	17,266		734		—		—			18,000
Equity securities	33,019		3,885		—		—			36,904
Non-U.S. sovereign debt	11,976		7,382		—		—			19,358
Corporate securities and other	—		6,901		24		—			6,925
Total trading account liabilities	62,261		18,902		24		—			81,187
Derivative liabilities	6,029		334,261		5,781		(311,771		)	34,300
Short-term borrowings	—		1,494		—		—			1,494
Accrued expenses and other liabilities	21,887		945		8		—			22,840
Long-term debt	—		29,923		1,863		—			31,786
Total liabilities	$	90,177	$	422,156	$	7,676	$	(311,771	)	$	208,238


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


⁽²⁾	Includes $21.3 billion of GSE obligations.


⁽³⁾	Includes securities with a fair value of $16.8 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⁾	Includes MSRs of $2.3 billion which are classified as Level 3 assets.

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, 2018 and 2017, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.




Level 3 – Fair Value Measurements for the Three Months Ended September 30, 2018 ⁽¹⁾

	Balance July 1 2018			Total Realized/Unrealized Gains (Losses) ⁽²⁾			Gains (Losses) in OCI ⁽³⁾			Gross											Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance September 30 2018			Change in Unrealized Gains (Losses) Related to Financial Instruments Still Held ⁽²⁾
(Dollars in millions)										Purchases		Sales			Issuances			Settlements
Trading account assets:
Corporate securities, trading loans and other	$	1,638		$	14		$	—		$	54	$	(87	)	$	—		$	(175	)	$	269		$	(179	)	$	1,534		$	(14	)
Equity securities	228			8			—			21		—			—			—			43			(10		)	290			8
Non-U.S. sovereign debt	368			10			(13		)	—		—			—			—			109			(5		)	469			11
Mortgage trading loans, ABS and other MBS	1,523			16			(1		)	75		(184		)	—			(29		)	191			(112		)	1,479			8
Total trading account assets	3,757			48			(14		)	150		(271		)	—			(204		)	612			(306		)	3,772			13
Net derivative assets ⁽⁴⁾	(1,588		)	(53		)	—			23		(66		)	—			111			20			983			(570		)	(51		)
AFS debt securities:
Non-agency residential MBS	453			31			(28		)	—		(72		)	—			—			235			(75		)	544			—
Non-U.S. securities	3			—			—			—		—			—			—			—			—			3			—
Other taxable securities	99			(1		)	(3		)	—		(22		)	—			—			—			(66		)	7			—
Tax-exempt securities	1			—			—			—		—			—			—			—			—			1			—
Total AFS debt securities	556			30			(31		)	—		(94		)	—			—			235			(141		)	555			—
Other debt securities carried at fair value – Non-agency residential MBS	287			(23		)	—			—		—			—			—			60			(28		)	296			(10		)
Loans and leases ^{(5, 6)}	493			—			—			—		(62		)	—			(21		)	—			—			410			(1		)
Loans held-for-sale ⁽⁵⁾	577			12			(4		)	39		—			—			(82		)	12			(28		)	526			9
Other assets ^{(6, 7)}	3,184			121			—			—		(22		)	31			(174		)	—			—			3,140			55
Trading account liabilities – Corporate securities and other	(35		)	9			—			9		—			—			—			—			—			(17		)	(6		)
Long-term debt ⁽⁵⁾	(1,225		)	11			(1		)	—		—			(11		)	106			(106		)	303			(923		)	13


⁽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 - predominantly trading account profits; Net derivative assets - primarily trading account profits and other income; Other debt securities carried at fair value - other income; Loans and leases - other income; Loans held-for-sale - other income; Other assets - primarily other income related to MSRs; Long-term debt - trading account profits. 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 unrealized gains (losses) in OCI on AFS debt 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 2017 Annual Report on Form 10-K.


⁽⁴⁾	Net derivative assets include derivative assets of $4.4 billion and derivative liabilities of $5.0 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 primarily represent the net change in fair value of the MSR asset due to the recognition of modeled cash flows and the passage of time.

Transfers into Level 3, primarily due to decreased price observability, during the three months ended September 30, 2018 included $612 million of trading account assets, $235 million of AFS debt securities, $60 million of other debt securities carried at fair value and $106 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.

Transfers out of Level 3, primarily due to increased price observability, during the three months ended September 30, 2018 included $306 million of trading account assets, $983 million of net derivative assets, $141 million of AFS debt securities and $303 million of long-term debt.




Level 3 – Fair Value Measurements for the Three Months Ended September 30, 2017 ⁽¹⁾

	Balance July 1 2017			Total Realized/Unrealized Gains (Losses) ⁽²⁾			Gains (Losses) in OCI ⁽³⁾			Gross											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⁾
(Dollars in millions)										Purchases		Sales			Issuances			Settlements
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
Loans held-for-sale ⁽⁵⁾	766			38			10			—		(4		)	—			(93		)	58			—			775			27
Other assets ^{(6, 7)}	2,795			124			(43		)	—		(80		)	69			(191		)	—			—			2,674			8
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 - predominantly trading account profits; Net derivative assets - primarily trading account profits and other income; Loans and leases - other income; Loans held-for-sale - other income; Other assets - primarily other income related to MSRs; Long-term debt - trading account profits. 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⁾


⁽⁴⁾	Net derivative assets 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 primarily represent the net change in fair value of the MSR asset due to the recognition of modeled cash flows and the passage of time.

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.

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 for the Nine Months Ended September 30, 2018 ⁽¹⁾

(Dollars in millions)	Balance January 1 2018			Total Realized/Unrealized Gains (Losses) ⁽²⁾			Gains (Losses) in OCI ⁽³⁾			Gross											Gross Transfers into Level 3			Gross Transfers out of Level 3			Balance September 30 2018			Change in Unrealized Gains (Losses) Related to Financial Instruments Still Held ⁽²⁾
										Purchases		Sales			Issuances			Settlements
Trading account assets:
Corporate securities, trading loans and other	$	1,864		$	(14	)	$	(1	)	$	328	$	(298	)	$	—		$	(388	)	$	517		$	(474	)	$	1,534		$	(88	)
Equity securities	235			17			—			29		(11		)	—			(4		)	73			(49		)	290			17
Non-U.S. sovereign debt	556			39			(55		)	7		(50		)	—			(8		)	117			(137		)	469			40
Mortgage trading loans, ABS and other MBS	1,498			157			2			392		(760		)	—			(136		)	541			(215		)	1,479			92
Total trading account assets	4,153			199			(54		)	756		(1,119		)	—			(536		)	1,248			(875		)	3,772			61
Net derivative assets ⁽⁴⁾	(1,714		)	203			—			371		(919		)	—			488			87			914			(570		)	(138		)
AFS debt securities:
Non-agency residential MBS	—			39			(42		)	—		(72		)	—			—			694			(75		)	544			—
Non-U.S. securities	25			—			(1		)	—		(10		)	—			(14		)	3			—			3			—
Other taxable securities	509			1			(5		)	—		(22		)	—			(10		)	60			(526		)	7			—
Tax-exempt securities	469			—			—			—		—			—			—			1			(469		)	1			—
Total AFS debt securities ⁽⁵⁾	1,003			40			(48		)	—		(104		)	—			(24		)	758			(1,070		)	555			—
Other debt securities carried at fair value – Non-agency residential MBS	—			(27		)	—			—		(7		)	—			—			358			(28		)	296			(5		)
Loans and leases ^{(6, 7)}	571			(20		)	—			—		(71		)	—			(70		)	—			—			410			(17		)
Loans held-for-sale ⁽⁶⁾	690			24			(31		)	51		—			—			(160		)	12			(60		)	526			18
Other assets ^{(5, 7, 8)}	2,425			389			—			2		(68		)	83			(585		)	929			(35		)	3,140			188
Trading account liabilities – Corporate securities and other	(24		)	11			—			9		(11		)	(2		)	—			—			—			(17		)	(7		)
Accrued expenses and other liabilities ⁽⁶⁾	(8		)	—			—			—		—			—			8			—			—			—			—
Long-term debt ⁽⁶⁾	(1,863		)	97			2			9		—			(131		)	429			(253		)	787			(923		)	87


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

⁽²⁾

⁽³⁾


⁽⁴⁾	Net derivative assets include derivative assets of $4.4 billion and derivative liabilities of $5.0 billion.


⁽⁵⁾	Transfer primarily relates to the reclassification of certain securities.


⁽⁶⁾	Amounts represent instruments that are accounted for under the fair value option.


⁽⁷⁾	Issuances represent loan originations and MSRs recognized following securitizations or whole-loan sales.


⁽⁸⁾	Settlements primarily represent the net change in fair value of the MSR asset due to the recognition of modeled cash flows and the passage of time.

Transfers into Level 3, primarily due to decreased price observability, during the nine months ended September 30, 2018 included $1.2 billion of trading account assets, $758 million of AFS debt securities, $358 million of other debt securities carried at fair value and $253 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.

Transfers out of Level 3, primarily due to increased price observability, during the nine months ended September 30, 2018 included $875 million of trading account assets, $914 million of net derivatives assets and $787 million of long-term debt.




Level 3 – Fair Value Measurements for the Nine Months Ended September 30, 2017 ⁽¹⁾

	Balance January 1 2017			Total Realized/Unrealized Gains (Losses) ⁽²⁾			Gains (Losses) in OCI ⁽³⁾			Gross											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⁾
(Dollars in millions)										Purchases		Sales			Issuances			Settlements
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
Loans held-for-sale ⁽⁵⁾	656			109			7			2		(159		)	—			(281		)	473			(32		)	775			60
Other assets ^{(6, 7)}	2,986			93			(31		)	2		(74		)	207			(573		)	64			—			2,674			(181		)
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 derivative assets 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 primarily represent the net change in fair value of the MSR asset due to the recognition of modeled cash flows and the passage of time.

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.

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.

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, 2018 and December 31, 2017.




Quantitative Information about Level 3 Fair Value Measurements at September 30, 2018

(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	$	1,615		Discounted cash flow, Market comparables	Yield	0% to 25%	7%
Trading account assets – Mortgage trading loans, ABS and other MBS	353				Prepayment speed	0% to 19% CPR	11%
Loans and leases	410				Default rate	0% to 3% CDR	1%
Loans held-for-sale	1				Loss severity	0% to 51%	17%
AFS debt securities, primarily non-agency residential	555				Price	$0 to $141	$75
Other debt securities carried at fair value - Non-agency residential	296
Instruments backed by commercial real estate assets	$	361		Discounted cash flow	Yield	0% to 25%	7%
Trading account assets – Corporate securities, trading loans and other	272				Price	$0 to $102	$78
Trading account assets – Mortgage trading loans, ABS and other MBS	89
Commercial loans, debt securities and other	$	3,293		Discounted cash flow, Market comparables	Yield	1% to 46%	14%
Trading account assets – Corporate securities, trading loans and other	1,262				Prepayment speed	10% to 20%	14%
Trading account assets – Non-U.S. sovereign debt	469				Default rate	3% to 4%	4%
Trading account assets – Mortgage trading loans, ABS and other MBS	1,037				Loss severity	35% to 40%	38%
Loans held-for-sale	525				Price	$0 to $141	$65
Other assets, primarily auction rate securities	$	950		Discounted cash flow, Market comparables	Price	$10 to $100	$96


MSRs	$	2,190		Discounted cash flow	Weighted-average life, fixed rate ⁽⁴⁾	0 to 14 years	6 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	$	(923	)	Discounted cash flow, Market comparables, Industry standard derivative pricing ⁽²⁾	Equity correlation	9% to 100%	61%
					Long-dated equity volatilities	4% to 79%	27%
					Yield	7% to 46%	18%
					Price	$0 to $100	$70
Net derivative assets
Credit derivatives	$	(304	)	Discounted cash flow, Stochastic recovery correlation model	Yield	2% to 12%	4%
					Upfront points	0 points to 100 points	69 points
					Credit correlation	70%	n/a
					Prepayment speed	15% to 20% CPR	15%
					Default rate	1% to 4% CDR	2%
					Loss severity	35%	n/a
					Price	$0 to $101	$77
Equity derivatives	$	(857	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	9% to 100%	61%
				Industry standard derivative pricing ⁽²⁾	Long-dated equity volatilities	4% to 79%	27%
Commodity derivatives	$	11		Discounted cash flow, Industry standard derivative pricing ⁽²⁾	Natural gas forward price	$1/MMBtu to $11/MMBtu	$3/MMBtu
					Correlation	53% to 89%	78%
					Volatilities	13% to 495%	55%
Interest rate derivatives	$	580		Industry standard derivative pricing ⁽³⁾	Correlation (IR/IR)	15% to 80%	53%
					Correlation (FX/IR)	0% to 46%	1%
					Long-dated inflation rates	-20% to 38%	2%
					Long-dated inflation volatilities	0% to 1%	1%
Total net derivative assets	$	(570	)

⁽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 99: Trading account assets – Corporate securities, trading loans and other of $1.5 billion, Trading account assets – Non-U.S. sovereign debt of $469 million, Trading account assets – Mortgage trading loans, ABS and other MBS of $1.5 billion, AFS debt securities of $555 million, Other debt securities carried at fair value - Non-agency residential of $296 million, Other assets, including MSRs, of $3.1 billion, Loans and leases of $410 million and LHFS of $526 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, 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	$	871		Discounted cash flow	Yield	0% to 25%	6%
Trading account assets – Mortgage trading loans, ABS and other MBS	298				Prepayment speed	0% to 22% CPR	12%
Loans and leases	570				Default rate	0% to 3% CDR	1%
Loans held-for-sale	3				Loss severity	0% to 53%	17%
Instruments backed by commercial real estate assets	$	286		Discounted cash flow	Yield	0% to 25%	9%
Trading account assets – Corporate securities, trading loans and other	244				Price	$0 to $100	$67
Trading account assets – Mortgage trading loans, ABS and other MBS	42
Commercial loans, debt securities and other	$	4,023		Discounted cash flow, Market comparables	Yield	0% to 12%	5%
Trading account assets – Corporate securities, trading loans and other	1,613				Prepayment speed	10% to 20%	16%
Trading account assets – Non-U.S. sovereign debt	556				Default rate	3% to 4%	4%
Trading account assets – Mortgage trading loans, ABS and other MBS	1,158				Loss severity	35% to 40%	37%
AFS debt securities – Other taxable securities	8				Price	$0 to $145	$63
Loans and leases	1
Loans held-for-sale	687
Auction rate securities	$	977		Discounted cash flow, Market comparables	Price	$10 to $100	$94
Trading account assets – Corporate securities, trading loans and other	7
AFS debt securities – Other taxable securities	501
AFS debt securities – Tax-exempt securities	469
MSRs	$	2,302		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	$	(1,863	)	Discounted cash flow, Market comparables, Industry standard derivative pricing ⁽²⁾	Equity correlation	15% to 100%	63%
					Long-dated equity volatilities	4% to 84%	22%
					Yield	7.5%	n/a
					Price	$0 to $100	$66
Net derivative assets
Credit derivatives	$	(282	)	Discounted cash flow, Stochastic recovery correlation model	Yield	1% to 5%	3%
					Upfront points	0 points to 100 points	71 points
					Credit correlation	35% to 83%	42%
					Prepayment speed	15% to 20% CPR	16%
					Default rate	1% to 4% CDR	2%
					Loss severity	35%	n/a
					Price	$0 to $102	$82
Equity derivatives	$	(2,059	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	15% to 100%	63%
				Industry standard derivative pricing ⁽²⁾	Long-dated equity volatilities	4% to 84%	22%
Commodity derivatives	$	(3	)	Discounted cash flow, Industry standard derivative pricing ⁽²⁾	Natural gas forward price	$1/MMBtu to $5/MMBtu	$3/MMBtu
					Correlation	71% to 87%	81%
					Volatilities	26% to 132%	57%
Interest rate derivatives	$	630		Industry standard derivative pricing⁽³⁾	Correlation (IR/IR)	15% to 92%	50%
					Correlation (FX/IR)	0% to 46%	1%
					Long-dated inflation rates	-14% to 38%	4%
					Long-dated inflation volatilities	0% to 1%	1%
Total net derivative assets	$	(1,714	)

⁽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 100: Trading account assets – Corporate securities, trading loans and other of $1.9 billion, Trading account assets – Non-U.S. sovereign debt of $556 million, Trading account assets – Mortgage trading loans, ABS and other MBS of $1.5 billion, AFS debt securities – Other taxable securities of $509 million, AFS debt securities – Tax-exempt securities of $469 million, Loans and leases of $571 million and LHFS of $690 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

Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs

For more information on the types of instruments, valuation approaches and the impact of changes in unobservable inputs used in Level 3 measurements, see Note 20 – Fair Value Measurements to the Consolidated Financial Statements of the Corporation’s 2017 Annual Report on Form 10-K.

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 impacts the weighted-average life, could result in an increase in fair value of $60 million or $125 million, while a 10 percent or 20 percent increase in prepayment rates could result in a decrease in fair value of $56 million or $109 million. A 100 bp or 200 bp decrease in option-adjusted spread (OAS) levels could result in an increase in fair value of $67 million or $139 million, while a 100 bp or 200 bp increase in OAS levels could result in a decrease in fair value of $63 million or $121 million. These sensitivities are hypothetical and actual amounts may vary materially. For more information on variations in assumptions and sensitivities on MSRs, see Note 20 – Fair Value Measurements to the Consolidated Financial Statements of the Corporation’s 2017 Annual Report on Form 10-K.

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, 2018 and 2017.




Assets Measured at Fair Value on a Nonrecurring Basis

	September 30, 2018				Three Months Ended September 30, 2018			Nine Months Ended September 30, 2018
(Dollars in millions)	Level 2		Level 3		Gains (Losses)
Assets
Loans held-for-sale	$	45	$	12	$	(2	)	$	(2	)
Loans and leases ⁽¹⁾	—		492		(63		)	(194		)
Foreclosed properties ^{(2, 3)}	—		87		(8		)	(22		)
Other assets	294		3		(22		)	(58		)

	September 30, 2017				Three Months Ended September 30, 2017			Nine Months Ended September 30, 2017
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		)


⁽¹⁾	Includes $24 million and $76 million of losses on loans that were written down to a collateral value of zero during the three and nine months ended September 30, 2018, compared to losses of $71 million and $132 million for the same periods in 2017.


⁽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 recorded during the first 90 days after transfer of a loan to foreclosed properties.


⁽³⁾	Excludes $500 million and $879 million of properties acquired upon foreclosure of certain government-guaranteed loans (principally FHA-insured loans) at September 30, 2018 and 2017.

The table below presents information about significant unobservable inputs related to the Corporation’s nonrecurring Level 3 financial assets and liabilities at September 30, 2018 and December 31, 2017. 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

Inputs

Financial Instrument

Fair Value

Valuation

Technique

Significant Unobservable

Inputs

Ranges of

Inputs

Weighted Average

(Dollars in millions)

September 30, 2018

Loans and leases backed by residential real estate assets

492

Market comparables

OREO discount

13% to 59%

Costs to sell

8% to 26%

December 31, 2017

Loans and leases backed by residential real estate assets

894

Market comparables

OREO discount

15% to 58%

Costs to sell

5% to 49%

- 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