Quarterly report pursuant to Section 13 or 15(d)

Fair Value Measurements

v2.4.0.6
Fair Value Measurements
 3 Months Ended
Mar. 31, 2013
Fair Value Disclosures [Abstract]  
Fair Value Measurements
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

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

 
 
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)
 
 
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
$
4,478

Discounted cash flow, Market comparables
Yield
2% to 25%
6
%
Trading account assets – Mortgage trading loans and ABS
459

Prepayment speed
1% to 30% CPR
10
%
Loans and leases
1,286

Default rate
0% to 44% CDR
6
%
Loans held-for-sale
2,733

Loss severity
6% to 85%
43
%
Instruments backed by commercial real estate assets
$
1,910

Discounted cash flow
Yield
5%
n/a

Other assets
1,910

Loss severity
51% to 100%
88
%
Commercial loans, debt securities and other
$
10,778

Discounted cash flow, Market comparables
Yield
0% to 25%
4
%
Trading account assets – Corporate securities, trading loans and other
2,289

Enterprise value/EBITDA multiple
2x to 11x
5x

Trading account assets – Mortgage trading loans and ABS
4,476

Prepayment speed
5% to 30%
20
%
AFS debt securities – Other taxable securities
3,012

Default rate
1% to 5%
4
%
Loans and leases
1,001

Loss severity
25% to 40%
35
%
Auction rate securities
$
3,414

Discounted cash flow, Market comparables
Discount rate
4% to 5%
4
%
Trading account assets – Corporate securities, trading loans and other
1,437

Projected tender price/Re-financing level
50% to 100%
92
%
AFS debt securities – Other taxable securities
916

 
 
AFS debt securities – Tax-exempt securities
1,061

 
 
 
Structured liabilities
 
 
 
 
 
Long-term debt (2)
$
(2,301
)
Industry standard derivative pricing (3)
Equity correlation
30% to 97%
n/m

 
 
Long-dated volatilities
20% to 70%
n/m

 
 
 
 
 


Quantitative Information about Level 3 Fair Value Measurements for Net Derivative Assets at December 31, 2012
(Dollars in millions)
 
 
Inputs
Financial Instrument
Fair Value
Valuation Technique
Significant Unobservable
Inputs
Ranges of Inputs
Net derivatives assets
 
 
 
 
Credit derivatives
$
2,327

Discounted cash flow, Stochastic recovery correlation model
Yield
2% to 25%
 
 
Credit spreads
58 bps to 615 bps
 
 
Upfront points
25 points to 99 points
 
 
Spread to index
-2,080 bps to 1,972 bps
 
 
Credit correlation
19% to 75%
 
 
Prepayment speed
3% to 30% CPR
 
 
Default rate
0% to 8% CDR
 
 
Loss severity
25% to 42%
Equity derivatives
$
(1,295
)
Industry standard derivative pricing (3)
Equity correlation
30% to 97%
 
 
Long-dated volatilities
20% to 70%
 
 
 
 
Commodity derivatives
$
(5
)
Discounted cash flow
Natural gas forward price
$3/MMBtu to $12/MMBtu
Interest rate derivatives
$
441

Industry standard derivative pricing (4)
Correlation (IR/IR)
15% to 99%
 
 
Correlation (FX/IR)
-65% to 50%
 
 
Long-dated inflation rates
2% to 3%
 
 
Long-dated inflation volatilities
0% to 1%
 
 
Long-dated volatilities (FX)
5% to 36%
 
 
Long-dated swap rates
8% to 10%
Total net derivative assets
$
1,468

 
 
 
(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 215: Trading account assets – Corporate securities, trading loans and other of $3.7 billion, Trading account assets – Mortgage trading loans and ABS of $4.9 billion, AFS debt securities – Other taxable securities of $3.9 billion, AFS debt securities – Tax-exempt securities of $1.1 billion, Loans and leases of $2.3 billion, LHFS of $2.7 billion and Other assets of $1.9 billion.
(2) 
For additional information on the ranges of inputs for equity correlation and long-dated volatilities, see the qualitative equity derivatives discussion on page 220.
(3) 
Includes models such as Monte Carlo simulation and Black-Scholes.
(4) 
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
n/m = not meaningful
CPR = Constant Prepayment Rate
CDR = Constant Default Rate
EBITDA = Earnings before interest, taxes, depreciation and amortization
MMBtu = Million British thermal units
IR = Interest Rate
FX = Foreign Exchange
In the tables above, instruments backed by residential and commercial real estate assets include RMBS, CMBS, whole loans, mortgage CDOs and net monoline exposure. Commercial loans, debt securities and other includes corporate CLOs and CDOs, commercial loans and bonds, and securities backed by non-real estate assets. Structured liabilities primarily includes equity-linked notes that are accounted for under the fair value option.

In addition to the instruments in the tables above, the Corporation held $1.2 billion of instruments at both March 31, 2013 and December 31, 2012 consisting primarily of certain direct private equity investments and private equity funds that were classified as Level 3 and reported within other assets. Valuations of direct private equity investments are based on the most recent company financial information. Inputs generally include market and acquisition comparables, entry level multiples, as well as other variables. The Corporation selects a valuation methodology (e.g., market comparables) for each investment and, in certain instances, multiple inputs are weighted to derive the most representative value. Discounts are applied as appropriate to consider the lack of liquidity and marketability versus publicly-traded companies. For private equity funds, fair value is determined using the net asset value as provided by the individual fund's general partner.

For information on the inputs and techniques used in the valuation of MSRs, see Note 19 – Mortgage Servicing Rights.

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

The level of aggregation and diversity within the products disclosed in the tables result in certain ranges of inputs being wide and unevenly distributed across asset and liability categories. At December 31, 2012, weighted averages were disclosed for all loans and securities. At March 31, 2013, weighted averages are disclosed for all loans, securities, structured liabilities and net derivative assets.

For credit derivatives, the range of credit spreads represented positions with varying levels of default risk to the underlying instruments. The lower end of the credit spread range typically represented shorter-dated instruments and those with better perceived credit risk. The higher end of the range represented longer-dated instruments and those referencing debt issuances that were more likely to be impaired or nonperforming. At December 31, 2012, the majority of inputs were concentrated in the lower end of the range. Similarly, the spread to index could vary significantly based on the risk of the instrument. The spread will be positive for instruments that have a higher risk of default than the index (which is based on a weighted average of its components) and negative for instruments that have a lower risk of default than the index. At December 31, 2012, inputs were distributed evenly throughout the range for spread to index. In addition, for yield and credit correlation, the majority of the inputs were concentrated in the center of the range. Inputs were concentrated in the middle to lower end of the range for upfront points. The range for loss severity reflected exposures that were concentrated in the middle to upper end of the range while the ranges for prepayment speed and default rates reflected exposures that were concentrated in the lower end of the range.

For equity derivatives at December 31, 2012, including those embedded in long-term debt, the range for equity correlation represented exposure primarily concentrated toward the upper end of the range. The range for long-dated volatilities represented exposure primarily concentrated toward the lower end of the range.

For interest rate derivatives, the diversity in the portfolio was reflected in wide ranges of inputs because the variety of currencies and tenors of the transactions required the use of numerous foreign exchange and interest rate curves. Since foreign exchange and interest rate correlations were measured between curves and across the various tenors on the same curve, the range of potential values could include both negative and positive values. For the correlation (IR/IR) range, the exposure represented the valuation of interest rate correlations on less liquid pairings and was concentrated at the upper end of the range at December 31, 2012. For the correlation (FX/IR) range, the exposure was the sensitivity to a broad mix of interest rate and foreign exchange correlations and was distributed evenly throughout the range at December 31, 2012. For long-dated inflation rates and volatilities as well as long-dated volatilities (FX), the inputs were concentrated in the middle of the range.

Sensitivity of Fair Value Measurements to Changes in Unobservable Inputs

Loans and Securities

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

For closed-end auction rate securities (ARS), a significant increase in discount rates would result in a significantly lower fair value. For student loan and municipal ARS, a significant increase in projected tender price/refinancing levels would result in a significantly higher fair value.

Structured Liabilities and Derivatives

For credit derivatives, a significant increase in market yield, including spreads to indices, upfront points (i.e., a single upfront payment made by a protection buyer at inception), 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 and, in the case of CLOs, whether prepayments can be reinvested.

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

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

The Corporation holds certain assets that are measured at fair value, but only in certain situations (for example, impairment) and these measurements are referred to herein as nonrecurring. These assets primarily include LHFS, certain loans and leases, and foreclosed properties. The amounts below represent only balances measured at fair value during the three months ended March 31, 2013 and 2012, and still held as of the reporting date.

Assets Measured at Fair Value on a Nonrecurring Basis
 
March 31, 2013
 
Three Months Ended March 31, 2013
(Dollars in millions)
Level 2
 
Level 3
 
Gains (Losses)
Assets
 
 
 
 
 
Loans held-for-sale
$
3,902

 
$
795

 
$
(96
)
Loans and leases (1)
20

 
3,619

 
(640
)
Foreclosed properties (2)
48

 
1,981

 
(19
)
Other assets
65

 
12

 
(6
)
 
 
 
 
 
 
 
March 31, 2012
 
Three Months Ended March 31, 2012
(Dollars in millions)
Level 2
 
Level 3
 
Gains (Losses)
Assets
 
 
 
 
 
Loans held-for-sale
$
3,465

 
$
857

 
$
60

Loans and leases (1)
21

 
5,813

 
(1,497
)
Foreclosed properties (2)
—

 
2,149

 
(67
)
Other assets
—

 
14

 
—

(1) 
Losses represent charge-offs on real estate-secured loans.
(2) 
Amounts are included in other assets on the Consolidated Balance Sheet and represent fair value and related losses on foreclosed properties that were written down subsequent to their initial classification as foreclosed properties.

The table below presents information about significant unobservable inputs related to the Corporation's nonrecurring Level 3 financial assets and liabilities at March 31, 2013 and December 31, 2012.

Quantitative Information about Nonrecurring 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
Instruments backed by residential real estate assets
$
4,312

Discounted cash flow, Market comparables
Yield
4% to 5%
4
%
Loans held-for-sale
693

Prepayment speed
3% to 26%
14
%
Loans and leases
3,619

Default rate
0% to 51%
7
%
 
 
Loss severity
5% to 63%
44
%
 
 
OREO discount
0% to 28%
15
%
 
 
Cost to sell
8%
n/a

Instruments backed by commercial real estate assets
$
102

Discounted cash flow
Yield
5% to 11%
9
%
Loans held-for-sale
102

Loss severity
31% to 93%
81
%

Quantitative Information about Nonrecurring Level 3 Fair Value Measurements at December 31, 2012
 
Instruments backed by residential real estate assets
$
9,932

Discounted cash flow, Market comparables
Yield
3% to 5%
3
%
Loans held-for-sale
748

Prepayment speed
3% to 30%
15
%
Loans and leases
9,184

Default rate
0% to 55%
7
%
 
 
Loss severity
6% to 66%
48
%
 
 
OREO discount
0% to 28%
15
%
 
 
Cost to sell
8%
n/a

Instruments backed by commercial real estate assets
$
388

Discounted cash flow
Yield
4% to 13%
6
%
Loans held-for-sale
388

Loss severity
24% to 88%
53
%

n/a = not applicable

Instruments backed by residential real estate assets represent residential mortgages where the loan has been written down to the fair value of the underlying collateral or, in the case of LHFS, are carried at the lower of cost or fair value.

In addition to the instruments disclosed in the table above, the Corporation holds foreclosed residential properties where the fair value is based on unadjusted third-party appraisals or broker price opinions. Appraisals are conducted every 90 days. Factors considered in determining the fair value include geographic sales trends, the value of comparable surrounding properties as well as the condition of the property.