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, 2013

NOTE 16 – 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 2012 Annual Report on Form 10-K. The Corporation accounts for certain financial instruments under the fair value option. For more information, see Note 17 – 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, 2013, there were no changes to the valuation techniques that had, or are expected to have, a material impact on its 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 used 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 calculations 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 19 – 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 and Short-term Borrowings

The fair values of deposits and short-term borrowings 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.

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 between 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, 2013 and December 31, 2012, including financial instruments which the Corporation accounts for under the fair value option, are summarized in the following tables.



	March 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	$	—	$	94,673	$	—	$	—		$	94,673
Trading account assets:
U.S. government and agency securities	47,957		24,921		—		—			72,878
Corporate securities, trading loans and other	1,702		33,874		3,607		—			39,183
Equity securities	31,398		13,968		497		—			45,863
Non-U.S. sovereign debt	33,681		14,536		417		—			48,634
Mortgage trading loans and ABS	—		11,990		4,480		—			16,470
Total trading account assets	114,738		99,289		9,001		—			223,028
Derivative assets ⁽³⁾	5,078		1,201,709		8,011		(1,162,551		)	52,247
AFS debt securities:
U.S. Treasury securities and agency securities	14,639		2,800		—		—			17,439
Mortgage-backed securities:
Agency	—		174,268		—		—			174,268
Agency-collateralized mortgage obligations	—		34,761		—		—			34,761
Non-agency residential	—		8,877		—		—			8,877
Non-agency commercial	—		3,824		10		—			3,834
Non-U.S. securities	2,699		2,950		1		—			5,650
Corporate/Agency bonds	—		1,289		96		—			1,385
Other taxable securities	20		6,989		4,045		—			11,054
Tax-exempt securities	—		3,541		1,041		—			4,582
Total AFS debt securities	17,358		239,299		5,193		—			261,850
Other debt securities carried at fair value:
U.S. Treasury securities and agency securities	3,861		—		—		—			3,861
Mortgage-backed securities:
Agency	—		29,178		—		—			29,178
Agency-collateralized mortgage obligations	—		958		—		—			958
Non-agency commercial	—		103		—		—			103
Non-U.S. securities	8,872		310		—		—			9,182
Total other debt securities carried at fair value	12,733		30,549		—		—			43,282
Loans and leases	—		6,457		2,363		—			8,820
Mortgage servicing rights	—		—		5,776		—			5,776
Loans held-for-sale	—		11,482		2,405		—			13,887
Other assets	15,578		5,036		2,629		—			23,243
Total assets	$	165,485	$	1,688,494	$	35,378	$	(1,162,551	)	$	726,806
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	2,130	$	—	$	—		$	2,130
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		47,842		—		—			47,842
Trading account liabilities:
U.S. government and agency securities	25,292		472		—		—			25,764
Equity securities	21,786		2,963		—		—			24,749
Non-U.S. sovereign debt	27,945		1,432		—		—			29,377
Corporate securities and other	574		10,025		58		—			10,657
Total trading account liabilities	75,597		14,892		58		—			90,547
Derivative liabilities ⁽³⁾	3,888		1,184,636		6,948		(1,147,647		)	47,825
Short-term borrowings	—		3,168		—		—			3,168
Accrued expenses and other liabilities	12,016		1,814		455		—			14,285
Long-term debt	—		50,006		2,355		—			52,361
Total liabilities	$	91,501	$	1,304,488	$	9,816	$	(1,147,647	)	$	258,158


⁽¹⁾	During the three months ended March 31, 2013, $500 million of assets were transferred from Level 1 to Level 2 primarily due to a restriction that became effective for a private equity investment.


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


⁽³⁾	For further disaggregation of derivative assets and liabilities, see Note 3 – Derivatives.



	December 31, 2012
	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	$	—	$	98,670	$	—	$	—		$	98,670
Trading account assets:
U.S. government and agency securities	57,655		29,319		—		—			86,974
Corporate securities, trading loans and other	1,292		32,882		3,726		—			37,900
Equity securities	28,144		14,626		545		—			43,315
Non-U.S. sovereign debt	29,254		13,139		353		—			42,746
Mortgage trading loans and ABS	—		11,905		4,935		—			16,840
Total trading account assets	116,345		101,871		9,559		—			227,775
Derivative assets ⁽³⁾	2,997		1,372,398		8,073		(1,329,971		)	53,497
AFS debt securities:
U.S. Treasury securities and agency securities	21,514		2,958		—		—			24,472
Mortgage-backed securities:
Agency	—		188,149		—		—			188,149
Agency-collateralized mortgage obligations	—		37,538		—		—			37,538
Non-agency residential	—		9,494		—		—			9,494
Non-agency commercial	—		3,914		10		—			3,924
Non-U.S. securities	2,637		2,981		—		—			5,618
Corporate/Agency bonds	—		1,358		92		—			1,450
Other taxable securities	20		8,180		3,928		—			12,128
Tax-exempt securities	—		3,072		1,061		—			4,133
Total AFS debt securities	24,171		257,644		5,091		—			286,906
Other debt securities carried at fair value:
U.S. Treasury securities and agency securities	491		—		—		—			491
Mortgage-backed securities:
Agency	—		13,073		—		—			13,073
Agency-collateralized mortgage obligations	—		929		—		—			929
Non-U.S. securities	9,151		300		—		—			9,451
Total other debt securities carried at fair value	9,642		14,302		—		—			23,944
Loans and leases	—		6,715		2,287		—			9,002
Mortgage servicing rights	—		—		5,716		—			5,716
Loans held-for-sale	—		8,926		2,733		—			11,659
Other assets	18,535		4,826		3,129		—			26,490
Total assets	$	171,690	$	1,865,352	$	36,588	$	(1,329,971	)	$	743,659
Liabilities
Interest-bearing deposits in U.S. offices	$	—	$	2,262	$	—	$	—		$	2,262
Federal funds purchased and securities loaned or sold under agreements to repurchase	—		42,639		—		—			42,639
Trading account liabilities:
U.S. government and agency securities	22,351		1,079		—		—			23,430
Equity securities	19,852		2,640		—		—			22,492
Non-U.S. sovereign debt	18,875		1,369		—		—			20,244
Corporate securities and other	487		6,870		64		—			7,421
Total trading account liabilities	61,565		11,958		64		—			73,587
Derivative liabilities ⁽³⁾	2,859		1,355,309		6,605		(1,318,757		)	46,016
Short-term borrowings	—		4,074		—		—			4,074
Accrued expenses and other liabilities	15,457		1,122		15		—			16,594
Long-term debt	—		46,860		2,301		—			49,161
Total liabilities	$	79,881	$	1,464,224	$	8,985	$	(1,318,757	)	$	234,333

⁽¹⁾

During 2012, $2.0 billion and $350 million of assets and liabilities were transferred from Level 1 to Level 2, and $785 million and $40 million of assets and liabilities were transferred from Level 2 to Level 1. Of the asset transfers from Level 1 to Level 2, $940 million was due to a restriction that became effective for a private equity investment during 2012, while $535 million of the transfers from Level 2 to Level 1 was due to the lapse of this restriction during 2012. The remaining transfers were the result of additional information associated with certain equities, derivative contracts and private equity investments.


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


⁽³⁾	For further disaggregation of derivative assets and liabilities, see Note 3 – 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, 2013 and 2012, including net realized and unrealized gains (losses) included in earnings and accumulated OCI.



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 referenced 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.



Level 3 – Fair Value Measurements ⁽¹⁾
	Three Months Ended March 31, 2012
									Gross
(Dollars in millions)	Balance January 1 2012			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 2012
Trading account assets:
Corporate securities, trading loans and other	$	6,880		$	93		$	—	$	675		$	(1,065	)	$	—		$	(189	)	$	59		$	(452	)	$	6,001
Equity securities	544			15			—		79			(109		)	—			(10		)	8			(2		)	525
Non-U.S. sovereign debt	342			24			—		273			(81		)	—			—			—			(12		)	546
Mortgage trading loans and ABS	3,689			99			—		184			(455		)	—			(89		)	742			(158		)	4,012
Total trading account assets	11,455			231			—		1,211			(1,710		)	—			(288		)	809			(624		)	11,084
Net derivative assets ⁽²⁾	5,866			(837		)	—		359			(321		)	—			(634		)	106			(352		)	4,187
AFS debt securities:
Mortgage-backed securities:
Agency	37			—			—		—			—			—			(4		)	—			—			33
Non-agency residential	860			(69		)	19		—			(293		)	—			—			—			(488		)	29
Non-agency commercial	40			—			—		—			—			—			(2		)	—			—			38
Corporate/Agency bonds	162			(2		)	—		(2		)	—			—			—			—			(27		)	131
Other taxable securities	4,265			7			17		362			—			—			(418		)	—			(58		)	4,175
Tax-exempt securities	2,648			26			18		—			(35		)	—			(762		)	—			—			1,895
Total AFS debt securities	8,012			(38		)	54		360			(328		)	—			(1,186		)	—			(573		)	6,301
Loans and leases ^{(3, 4)}	2,744			164			—		—			—			—			(117		)	—			(9		)	2,782
Mortgage servicing rights ⁽⁴⁾	7,378			655			—		—			—			77			(521		)	—			—			7,589
Loans held-for-sale ⁽³⁾	3,387			169			—		4			—			—			(97		)	31			(632		)	2,862
Other assets ⁽⁵⁾	4,235			(32		)	—		43			(581		)	—			(167		)	—			(11		)	3,487
Trading account liabilities – Corporate securities and other	(114		)	—			—		48			(27		)	—			—			(65		)	34			(124		)
Accrued expenses and other liabilities ⁽³⁾	(14		)	3			—		5			—			—			—			—			3			(3		)
Long-term debt ⁽³⁾	(2,943		)	(241		)	—		76			(33		)	(65		)	433			(532		)	805			(2,500		)


⁽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 $11.3 billion and derivative liabilities of $7.1 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, 2012, the transfers into Level 3 included $809 million of trading account assets, $106 million of net derivative assets and $532 million of long-term debt. Transfers into Level 3 for trading account assets were primarily the result of updated information related to certain CLOs. Transfers into Level 3 for net derivative assets primarily related to decreased market activity (i.e., executed trades) for certain structured rate derivatives. 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, 2012, the transfers out of Level 3 included $624 million of trading account assets, $352 million of net derivative assets, $573 million of AFS debt securities, $632 million of LHFS and $805 million of long-term debt. Transfers out of Level 3 for trading account assets primarily related to increased market liquidity for certain corporate and commercial real estate loans. Transfers out of Level 3 for net derivative assets primarily related to increased price observability (i.e., market comparables for the referenced instruments) for certain total return swaps and foreign exchange swaps. Transfers out of Level 3 for AFS debt securities primarily related to increased price observability for certain non-agency RMBS. Transfers out of Level 3 for LHFS primarily related to increased observable inputs, primarily liquid comparables. 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 following tables summarize 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, 2013 and 2012. 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, 2013
(Dollars in millions)	Equity Investment Income (Loss)		Trading Account Profits (Losses)			Mortgage Banking Income (Loss) ⁽¹⁾			Other Income (Loss)			Total
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 ⁽²⁾	—		—			—			51			51
Mortgage servicing rights	—		—			434			—			434
Loans held-for-sale ⁽²⁾	—		—			4			(43		)	(39		)
Other assets	2		—			(3		)	(447		)	(448		)
Accrued expenses and other liabilities ⁽²⁾	—		—			29			—			29
Long-term debt ⁽²⁾	—		22			—			(11		)	11
Total	$	2	$	251		$	871		$	(449	)	$	675

	Three Months Ended March 31, 2012
Trading account assets:
Corporate securities, trading loans and other	$	—	$	93		$	—		$	—		$	93
Equity securities	—		15			—			—			15
Non-U.S. sovereign debt	—		24			—			—			24
Mortgage trading loans and ABS	—		99			—			—			99
Total trading account assets	—		231			—			—			231
Net derivative assets	—		(1,373		)	536			—			(837		)
AFS debt securities:
Non-agency residential MBS	—		—			—			(69		)	(69		)
Corporate/Agency bonds	—		—			—			(2		)	(2		)
Other taxable securities	—		—			—			7			7
Tax-exempt securities	—		—			—			26			26
Total AFS debt securities	—		—			—			(38		)	(38		)
Loans and leases ⁽²⁾	—		—			—			164			164
Mortgage servicing rights	—		—			655			—			655
Loans held-for-sale ⁽²⁾	—		—			90			79			169
Other assets	10		—			(8		)	(34		)	(32		)
Accrued expenses and other liabilities ⁽²⁾	—		—			—			3			3
Long-term debt ⁽²⁾	—		(139		)	—			(102		)	(241		)
Total	$	10	$	(1,281	)	$	1,273		$	72		$	74


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


⁽²⁾	Amounts represent instruments that are accounted for under the fair value option.

The following tables summarize changes in unrealized gains (losses) recorded in earnings during the three months ended March 31, 2013 and 2012 for Level 3 assets and liabilities that were still held at March 31, 2013 and 2012. 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, 2013
(Dollars in millions)	Equity Investment Income (Loss)			Trading Account Profits (Losses)			Mortgage Banking Income (Loss) ⁽¹⁾		Other Income (Loss)			Total
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 ⁽²⁾	—			—			—		43			43
Mortgage servicing rights	—			—			336		—			336
Loans held-for-sale ⁽²⁾	—			—			10		(52		)	(42		)
Other assets	(15		)	—			12		(447		)	(450		)
Accrued expenses and other liabilities ⁽²⁾	—			—			25		—			25
Long-term debt ⁽²⁾	—			21			—		(11		)	10
Total	$	(15	)	$	73		$	629	$	(467	)	$	220

	Three Months Ended March 31, 2012
Trading account assets:
Corporate securities, trading loans and other	$	—		$	56		$	—	$	—		$	56
Equity securities	—			11			—		—			11
Non-U.S. sovereign debt	—			13			—		—			13
Mortgage trading loans and ABS	—			53			—		—			53
Total trading account assets	—			133			—		—			133
Net derivative assets	—			(1,314		)	300		—			(1,014		)
Loans and leases ⁽²⁾	—			—			—		163			163
Mortgage servicing rights	—			—			470		—			470
Loans held-for-sale ⁽²⁾	—			—			51		23			74
Other assets	(19		)	—			6		(34		)	(47		)
Accrued expenses and other liabilities ⁽²⁾	—			—			—		3			3
Long-term debt ⁽²⁾	—			(129		)	—		(102		)	(231		)
Total	$	(19	)	$	(1,310	)	$	827	$	53		$	(449	)


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


⁽²⁾	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, 2013 and December 31, 2012.



Quantitative Information about Level 3 Fair Value Measurements at March 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	$	3,676		Discounted cash flow, Market comparables	Yield	0% to 25%	6	%
Trading account assets – Mortgage trading loans and ABS	365				Prepayment speed	1% to 35% CPR	10	%
Loans and leases	906				Default rate	0% to 35% CDR	5	%
Loans held-for-sale	2,405				Loss severity	4% to 85%	41	%
Instruments backed by commercial real estate assets	$	1,454		Discounted cash flow	Yield	5%	n/a
Other assets	1,454			Discounted cash flow	Loss severity	51% to 100%	80	%
Commercial loans, debt securities and other	$	11,257		Discounted cash flow, Market comparables	Yield	0% to 33%	4	%
Trading account assets – Corporate securities, trading loans and other	2,471				Enterprise value/EBITDA multiple	1x to 17x	6	x
Trading account assets – Mortgage trading loans and ABS	4,115				Prepayment speed	5% to 40%	19	%
AFS debt securities – Other taxable securities	3,214				Default rate	1% to 5%	4	%
Loans and leases	1,457				Loss severity	25% to 40%	36	%
Auction rate securities	$	3,008		Discounted cash flow, Market comparables	Discount rate	4% to 5%	5	%
Trading account assets – Corporate securities, trading loans and other	1,136				Projected tender price/Re-financing level	50% to 100%	93	%
AFS debt securities – Other taxable securities	831				Projected tender price/Re-financing level
AFS debt securities – Tax-exempt securities	1,041
Structured liabilities
Long-term debt	$	(2,355	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	30% to 97%	73	%
					Long-dated volatilities	15% to 115%	26	%

Net derivatives assets
Credit derivatives	$	1,839		Discounted cash flow, Stochastic recovery correlation model	Yield	3% to 30%	16	%
					Credit spreads	37 bps to 346 bps	200 bps
					Upfront points	12 points to 100 points	71 points
					Spread to index	-1,657 bps to 1,988 bps	400 bps
					Credit correlation	21% to 75%	39	%
					Prepayment speed	4% to 30% CPR	9	%
					Default rate	1% to 5% CDR	3	%
					Loss severity	27% to 50%	37	%
Equity derivatives	$	(1,215	)	Industry standard derivative pricing ⁽²⁾	Equity correlation	30% to 97%	73	%
					Long-dated volatilities	15% to 115%	26	%

Commodity derivatives	$	(4	)	Discounted cash flow	Natural gas forward price	$3/MMBtu to $12/MMBtu	$7/MMBtu
Interest rate derivatives	$	443		Industry standard derivative pricing⁽³⁾	Correlation (IR/IR)	19% to 99%	69	%
					Correlation (FX/IR)	-65% to 50%	7	%
					Long-dated inflation rates	2% to 3%	2	%
					Long-dated inflation volatilities	0% to 2%	1	%
Total net derivative assets	$	1,063

⁽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 – Mortgage trading loans and ABS of $4.5 billion, AFS debt securities – Other taxable securities of $4.0 billion, AFS debt securities – Tax-exempt securities of $1.0 billion, Loans and leases of $2.4 billion, LHFS of $2.4 billion and Other assets of $1.5 billion.


⁽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.

n/a = not applicable

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 for Loans, Securities and Structured Liabilities at December 31, 2012
(Dollars in millions)