v2.4.0.6
Fair Values of Assets and Liabilities
 3 Months Ended
Mar. 31, 2013
Fair Value Disclosures [Abstract]  
Fair Values of Assets and Liabilities

We use fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Trading assets (excluding derivatives), securities available for sale, derivatives, substantially all residential MHFS, certain commercial LHFS, certain loans held for investment, fair value MSRs and securities sold but not yet purchased (short sale liabilities) are recorded at fair value on a recurring basis. Additionally, from time to time, we may be required to record at fair value other assets on a nonrecurring basis, such as certain residential and commercial MHFS, certain LHFS, loans held for investment and certain other assets. These nonrecurring fair value adjustments typically involve application of lower-of-cost-or-market accounting or write-downs of individual assets.

       See Note 1 in our 2012 Form 10-K for discussion of how we determine fair value and classify assets and liabilities within the fair value hierarchy. For descriptions of the valuation methodologies we use for assets and liabilities recorded at fair value on a recurring or nonrecurring basis and for estimating fair value for financial instruments not recorded at fair value, see Note 17 in our 2012 Form 10-K.

              

Level 3 Asset and Liability Valuation Processes

We generally determine fair value of our Level 3 assets and liabilities by using internally developed models and, to a lesser extent, prices obtained from third-party pricing services or brokers (collectively, vendors). Our valuation processes vary depending on which approach is utilized.

 

INTERNAL MODEL VALUATIONS Our internally developed models primarily consist of discounted cash flow techniques. Use of such techniques requires determining relevant inputs, some of which are unobservable. Unobservable inputs are generally derived from historic performance of similar assets or determined from previous market trades in similar instruments. These unobservable inputs usually consist of discount rates, default rates, loss severity upon default, volatilities, correlations and prepayment rates, which are inherent within our Level 3 instruments. Such inputs can be correlated to similar portfolios with known historic experience or recent trades where particular unobservable inputs may be implied; but due to the nature of various inputs being reflected within a particular trade, the value of each input is considered unobservable. We attempt to correlate each unobservable input to historic experience and other third party data where available.

       Internal valuation models are subject to review prescribed within our model risk management policies and procedures which includes model validation. The purpose of model validation includes ensuring the model is appropriate for its intended use and the appropriate controls exist to help mitigate risk of invalid valuations. Model validation assesses the adequacy and appropriateness of the model, including reviewing its key components such as inputs, processing components, logic or theory, output results and supporting model documentation. Validation also includes ensuring significant unobservable model inputs are appropriate given observable market transactions or other market data within the same or similar asset classes. This ensures modeled approaches are appropriate given similar product valuation techniques and are in line with their intended purpose.

       We have ongoing monitoring procedures in place for our Level 3 assets and liabilities that use such internal valuation models. These procedures, which are designed to provide reasonable assurance that models continue to perform as expected after approved, include:

  • ongoing analysis and benchmarking to market transactions and other independent market data (including pricing vendors, if available);
  • back-testing of modeled fair values to actual realized transactions; and
  • review of modeled valuation results against expectations, including review of significant or unusual value fluctuations.

 

       We update model inputs and methodologies periodically to reflect these monitoring procedures. Additionally, procedures and controls are in place to ensure existing models are subject to periodic reviews, and we perform full model revalidations as necessary.

       All internal valuation models are subject to ongoing review by business-unit-level management. More complex models are subject to additional oversight by a corporate-level risk management department. Corporate oversight responsibilities include evaluating adequacy of business unit risk management programs, maintaining company-wide model validation policies and standards and reporting the results of these activities to management and our Enterprise Risk Management Committee (ERMC). The ERMC, which consists of senior executive management and reports on top risks to the Company's Board of Directors, monitors all company-wide risks, including credit risk, market risk, and reputational risk.

 

VENDOR-DEVELOPED VALUATIONS In certain limited circumstances we obtain pricing from third party vendors for the value of our Level 3 assets or liabilities. We have processes in place to approve such vendors to ensure information obtained and valuation techniques used are appropriate. Once these vendors are approved to provide pricing information, we monitor and review the results to ensure the fair values are reasonable and in line with market experience in similar asset classes. While the input amounts used by the pricing vendor in determining fair value are not provided, and therefore unavailable for our review, we do perform one or more of the following procedures to validate the prices received:

  • comparison to other pricing vendors (if available);
  • variance analysis of prices;
  • corroboration of pricing by reference to other independent market data such as market transactions and relevant benchmark indices;
  • review of pricing by Company personnel familiar with market liquidity and other market-related conditions; and
  • investigation of prices on a specific instrument-by-instrument basis.

Fair Value Measurements from Brokers or Third Party Pricing Services

For certain assets and liabilities, we obtain fair value measurements from brokers or third party pricing services and record the unadjusted fair value in our financial statements. The detail by level is shown in the table below. Fair value measurements obtained from brokers or third party pricing services that we have adjusted to determine the fair value recorded in our financial statements are not included in the following table.

               
               
        Brokers Third party pricing services
(in millions) Level 1Level 2Level 3 Level 1Level 2Level 3
               
March 31, 2013        
Trading assets (excluding derivatives)$ - 664 7  1,335 813 -
Securities available for sale:        
 Securities of U.S. Treasury and federal agencies  - - -   716 6,168 -
 Securities of U.S. states and political subdivisions  - 161 -   - 36,630 -
 Mortgage-backed securities  - 365 4  - 139,882 283
 Other debt securities  - 14,839 2,588  - 29,621 73
  Total debt securities  - 15,365 2,592  716 212,301 356
  Total marketable equity securities  - 3 -   - 810 -
   Total securities available for sale  - 15,368 2,592  716 213,111 356
Derivatives (trading and other assets)  - 8 -   - 591 2
Derivatives (liabilities)  - 71 -   - 593 -
Other liabilities   6 218 -   - 41 -
               
               
December 31, 2012        
Trading assets (excluding derivatives)$ - 406 8  1,314 1,016 -
Securities available for sale:        
 Securities of U.S. Treasury and federal agencies  - - -   915 6,231 -
 Securities of U.S. states and political subdivisions  - - -   - 35,036 -
 Mortgage-backed securities  - 138 4  - 121,703 292
 Other debt securities  - 1,516 12,465  - 28,314 149
  Total debt securities  - 1,654 12,469  915 191,284 441
  Total marketable equity securities  - 3 -   29 774 -
   Total securities available for sale  - 1,657 12,469  944 192,058 441
Derivatives (trading and other assets)  - 8 -   - 602 -
Derivatives (liabilities)  - 26 -   - 634 -
Other liabilities   - 121 -   - 104 -
               

Assets and Liabilities Recorded at Fair Value on a Recurring Basis

The following two tables present the balances of assets and liabilities measured at fair value on a recurring basis.

               
               
(in millions) Level 1Level 2Level 3 Netting Total
March 31, 2013        
Trading assets (excluding derivatives)        
 Securities of U.S. Treasury and federal agencies$ 8,378 4,318 -   -   12,696
 Securities of U.S. states and political subdivisions  - 3,758 36  -   3,794
 Collateralized loan and other debt obligations (1)  - 202 505  -   707
 Corporate debt securities  - 8,018 29  -   8,047
 Mortgage-backed securities  - 12,805 5  -   12,810
 Asset-backed securities  - 708 143  -   851
 Equity securities  4,089 55 -   -   4,144
  Total trading securities(2)  12,467 29,864 718  -   43,049
 Other trading assets  2,190 1,900 70  -   4,160
   Total trading assets (excluding derivatives)  14,657 31,764 788  -   47,209
Securities of U.S. Treasury and federal agencies  716 6,168 -   -   6,884
Securities of U.S. states and political subdivisions  - 36,927 3,529(3) -   40,456
Mortgage-backed securities:        
 Federal agencies  - 105,472 -   -   105,472
 Residential  - 15,164 95  -   15,259
 Commercial  - 19,728 192  -   19,920
  Total mortgage-backed securities  - 140,364 287  -   140,651
Corporate debt securities  104 21,064 281  -   21,449
Collateralized loan and other debt obligations(4)  - 13,725 2,938(3) -   16,663
Asset-backed securities:        
 Auto loans and leases  - 18 5,704(3) -   5,722
 Home equity loans  - 853 -   -   853
 Other asset-backed securities  - 8,383 3,436(3) -   11,819
  Total asset-backed securities  - 9,254 9,140  -   18,394
Other debt securities  - 884 -   -   884
   Total debt securities  820 228,386 16,175  -   245,381
Marketable equity securities:        
 Perpetual preferred securities (5)  659 796 807(3) -   2,262
 Other marketable equity securities  475 42 -   -   517
   Total marketable equity securities  1,134 838 807  -   2,779
    Total securities available for sale  1,954 229,224 16,982  -   248,160
Mortgages held for sale   - 39,437 3,187  -   42,624
Loans  - 208 5,975  -   6,183
Mortgage servicing rights (residential)  - - 12,061  -   12,061
Derivative assets:        
 Interest rate contracts  6 61,054 933  -   61,993
 Commodity contracts  - 2,928 34  -   2,962
 Equity contracts  621 3,081 905  -   4,607
 Foreign exchange contracts  36 5,297 5  -   5,338
 Credit contracts  - 1,009 579  -   1,588
 Other derivative contracts  - - -   -   -
  Netting  - - -   (59,572)(6) (59,572)
   Total derivative assets (7)  663 73,369 2,456  (59,572)  16,916
Other assets  324 5 348  -   677
     Total assets recorded at fair value$ 17,598 374,007 41,797  (59,572)  373,830
Derivative liabilities:        
 Interest rate contracts$ (32) (59,488) (375)  -   (59,895)
 Commodity contracts  - (3,008) (37)  -   (3,045)
 Equity contracts  (271) (3,621) (1,034)  -   (4,926)
 Foreign exchange contracts  (14) (3,792) (39)  -   (3,845)
 Credit contracts  - (1,020) (1,604)  -   (2,624)
 Other derivative contracts  - - (52)  -   (52)
  Netting  - - -   66,419(6) 66,419
   Total derivative liabilities (7)  (317) (70,929) (3,141)  66,419  (7,968)
Short sale liabilities:        
 Securities of U.S. Treasury and federal agencies  (6,915) (1,370) -   -   (8,285)
 Securities of U.S. states and political subdivisions  - (18) -   -   (18)
 Corporate debt securities  - (4,801) -   -   (4,801)
 Equity securities  (1,731) - -   -   (1,731)
 Other securities  (1) (147) (8)  -   (156)
  Total short sale liabilities  (8,647) (6,336) (8)  -   (14,991)
Other liabilities  - (31) (48)  -   (79)
     Total liabilities recorded at fair value$ (8,964) (77,296) (3,197)  66,419  (23,038)
               

  • Includes collateralized debt obligations of $8 million that are classified as trading assets.
  • Net gains (losses) from trading activities recognized in the income statement include $(141) million and $138 million in net unrealized gains (losses) on trading securities held at March 31, 2013 and 2012, respectively.
  • Balances consist of securities that are predominantly investment grade based on ratings received from the ratings agencies or internal credit grades categorized as investment grade if external ratings are not available. The securities are classified as Level 3 due to limited market activity.
  • Includes collateralized debt obligations of $674 million that are classified as securities available for sale.
  • Perpetual preferred securities include ARS and corporate preferred securities. See Note 7 for additional information.
  • Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the offsetting of amounts related to certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.
  • Derivative assets and derivative liabilities include contracts qualifying for hedge accounting, economic hedges, and derivatives included in trading assets and trading liabilities, respectively.

 

(continued from previous page)      
               
               
(in millions) Level 1Level 2Level 3 Netting Total
December 31, 2012        
Trading assets (excluding derivatives)        
 Securities of U.S. Treasury and federal agencies$ 5,104 3,774 -   -   8,878
 Securities of U.S. states and political subdivisions  - 1,587 46  -   1,633
 Collateralized loans and other debt obligations (1)  - - 742  -   742
 Corporate debt securities  - 6,664 52  -   6,716
 Mortgage-backed securities  - 13,380 6  -   13,386
 Asset-backed securities  - 722 138  -   860
 Equity securities  3,481 356 3  -   3,840
  Total trading securities(2)  8,585 26,483 987  -   36,055
 Other trading assets  2,150 887 76  -   3,113
   Total trading assets (excluding derivatives)  10,735 27,370 1,063  -   39,168
Securities of U.S. Treasury and federal agencies  915 6,231 -   -   7,146
Securities of U.S. states and political subdivisions  - 35,045 3,631(3) -   38,676
Mortgage-backed securities:        
 Federal agencies  - 97,285 -   -   97,285
 Residential  - 15,837 94  -   15,931
 Commercial  - 19,765 203  -   19,968
  Total mortgage-backed securities  - 132,887 297  -   133,184
Corporate debt securities  125 20,934 274  -   21,333
Collateralized loan and other debt obligations (4)  - - 13,188(3) -   13,188
Asset-backed securities:        
 Auto loans and leases  - 7 5,921(3) -   5,928
 Home equity loans  - 867 51  -   918
 Other asset-backed securities  - 7,828 3,283(3) -   11,111
  Total asset-backed securities  - 8,702 9,255  -   17,957
Other debt securities  - 930 -   -   930
   Total debt securities  1,040 204,729 26,645  -   232,414
Marketable equity securities:        
 Perpetual preferred securities (5)  629 753 794(3) -   2,176
 Other marketable equity securities  554 55 -   -   609
   Total marketable equity securities  1,183 808 794  -   2,785
    Total securities available for sale  2,223 205,537 27,439  -   235,199
Mortgages held for sale   - 39,055 3,250  -   42,305
Loans held for sale  - 6 -   -   6
Loans  - 185 6,021  -   6,206
Mortgage servicing rights (residential)  - - 11,538  -   11,538
Derivative assets:        
 Interest rate contracts  16 70,277 1,058  -   71,351
 Commodity contracts  - 3,386 70  -   3,456
 Equity contracts  432 2,747 604  -   3,783
 Foreign exchange contracts  19 5,481 24  -   5,524
 Credit contracts  - 1,160 650  -   1,810
 Other derivative contracts  - - -   -   -
  Netting  - - -   (62,108)(6) (62,108)
   Total derivative assets (7)  467 83,051 2,406  (62,108)  23,816
Other assets  136 123 162  -   421
     Total assets recorded at fair value$ 13,561 355,327 51,879  (62,108)  358,659
Derivative liabilities:        
 Interest rate contracts$ (52) (68,244) (399)  -   (68,695)
 Commodity contracts  - (3,541) (49)  -   (3,590)
 Equity contracts  (199) (3,239) (726)  -   (4,164)
 Foreign exchange contracts  (23) (3,553) (3)  -   (3,579)
 Credit contracts  - (1,152) (1,800)  -   (2,952)
 Other derivative contracts  - - (78)  -   (78)
  Netting  - - -   71,116(6) 71,116
   Total derivative liabilities (7)  (274) (79,729) (3,055)  71,116  (11,942)
Short sale liabilities:        
 Securities of U.S. Treasury and federal agencies  (4,225) (875) -   -   (5,100)
 Securities of U.S. states and political subdivisions  - (9) -   -   (9)
 Corporate debt securities  - (3,941) -   -   (3,941)
 Equity securities  (1,233) (35) -   -   (1,268)
 Other securities  - (47) -   -   (47)
  Total short sale liabilities  (5,458) (4,907) -   -   (10,365)
Other liabilities  - (34) (49)  -   (83)
     Total liabilities recorded at fair value$ (5,732) (84,670) (3,104)  71,116  (22,390)
               

  • Includes collateralized debt obligations of $21 million that are classified as trading assets.
  • Net gains from trading activities recognized in the income statement include $305 million in net unrealized gains on trading securities we held at December 31, 2012.
  • Balances consist of securities that are predominantly investment grade based on ratings received from the ratings agencies or internal credit grades categorized as investment grade if external ratings are not available. The securities are classified as Level 3 due to limited market activity.
  • Includes collateralized debt obligations of $644 million that are classified as securities available for sale.
  • Perpetual preferred securities include ARS and corporate preferred securities. See Note 7 for additional information.
  • Derivatives are reported net of cash collateral received and paid and, to the extent that the criteria of the accounting guidance covering the offsetting of amounts related to certain contracts are met, positions with the same counterparty are netted as part of a legally enforceable master netting agreement.
  • Derivative assets and derivative liabilities include contracts qualifying for hedge accounting, economic hedges, and derivatives included in trading assets and trading liabilities, respectively.

 

Changes in Fair Value Levels

We monitor the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy and transfer between Level 1, Level 2, and Level 3 accordingly. Observable market data includes but is not limited to quoted prices and market transactions. Changes in economic conditions or market liquidity generally will drive changes in availability of observable market data. Changes in availability of observable market data, which also may result in changing the valuation technique used, are generally the cause of transfers between Level 1, Level 2, and Level 3.

       All current period transfers into and out of Level 1, Level 2, and Level 3 are provided within the following table. The amounts reported as transfers represent the fair value as of the beginning of the quarter in which the transfer occurred.

 

            
   Transfers Between Fair Value Levels 
   Level 1 Level 2 Level 3 (1) 
(in millions) InOut InOut InOut Total
Quarter ended March 31, 2013          
Trading securities (2) $ - -  202 (25)  25 (202) -
Securities available for sale (2)  17 -  10,676 (17)  - (10,676) -
Mortgages held for sale  - -  93 (97)  97 (93) -
Loans  - -  48 -  - (48) -
Net derivative assets and liabilities  - -  (21) -  - 21 -
 Total transfers $ 17 -  10,998 (139)  122 (10,998) -
Quarter ended March 31, 2012          
Trading securities $ - -  10 (14)  14 (10) -
Securities available for sale  - -  93 (43)  43 (93) -
Mortgages held for sale  - -  86 (87)  87 (86) -
Loans  - -  - -  - - -
Net derivative assets and liabilities  - -  12 8  (8) (12) -
 Total transfers $ - -  201 (136)  136 (201) -
            

  • All transfers in and out of Level 3 are disclosed within the recurring level 3 rollforward table in this Note.
  • For quarter ended March 31, 2013, consists of $202 million of collateralized loan obligations classified as trading assets and $10.6 billion classified as securities available for sale that we transferred from Level 3 to Level 2 as a result of increased observable market data in the valuation of such instruments.

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended March 31, 2013, are summarized as follows:

 

                 
                 
               Net unrealized 
         Total net gainsPurchases,   gains (losses) 
         (losses) included insales,   included in 
          Otherissuances   income related 
        Balance, compre-andTransfersTransfersBalance,to assets and 
       beginningNethensivesettlements,intoout ofend ofliabilities held 
(in millions)  of periodincomeincomenet (1)Level 3 Level 3 periodat period end (2) 
Quarter ended March 31, 2013          
Trading assets          
 (excluding derivatives):          
 Securities of U.S. states and          
  political subdivisions$ 46 3 - (13) - - 36 1 
 Collateralized loan and other debt obligations  742 39 - (74) - (202) 505 4 
 Corporate debt securities   52 2 - (25) - - 29 2 
 Mortgage-backed securities  6 - - (1) - - 5 -  
 Asset-backed securities  138 5 - (25) 25 - 143 -  
 Equity securities  3 - - (3) - - - -  
  Total trading securities  987 49 - (141) 25 (202) 718 7 
 Other trading assets  76 (6) - - - - 70 (2) 
   Total trading assets          
    (excluding derivatives)  1,063 43 - (141) 25 (202) 788 5(3)
Securities available for sale:          
 Securities of U.S. states and          
  political subdivisions  3,631 2 (9) (95) - - 3,529 -  
 Mortgage-backed securities:          
  Residential  94 (4) 6 - - (1) 95 -  
  Commercial  203 (3) 8 (5) - (11) 192 (1) 
   Total mortgage-backed          
    securities  297 (7) 14 (5) - (12) 287 (1) 
 Corporate debt securities   274 2 8 - - (3) 281 -  
 Collateralized loan and other debt obligations  13,188 (1) 69 295 - (10,613) 2,938 -  
 Asset-backed securities:          
  Auto loans and leases  5,921 - 9 (226) - - 5,704 -  
  Home equity loans  51 3 (1) (5) - (48) - -  
  Other asset-backed securities  3,283 28 (5) 130 - - 3,436 -  
   Total asset-backed securities  9,255 31 3 (101) - (48) 9,140 -  
    Total debt securities  26,645 27 85 94 - (10,676) 16,175 (1)(4)
 Marketable equity securities:          
  Perpetual preferred securities  794 1 21 (9) - - 807 -  
  Other marketable equity securities  - - - - - - - -  
    Total marketable          
     equity securities  794 1 21 (9) - - 807 - (5)
     Total securities          
      available for sale  27,439 28 106 85 - (10,676) 16,982 (1) 
Mortgages held for sale  3,250 (7) - (60) 97 (93) 3,187 (7)(6)
Loans  6,021 (47) - 49 - (48) 5,975 (39)(6)
Mortgage servicing rights  11,538 11 - 512 - - 12,061 761(6)
Net derivative assets and liabilities:          
 Interest rate contracts  659 268 - (369) - - 558 357 
 Commodity contracts  21 10 - (23) - (11) (3) -  
 Equity contracts  (122) (39) - - - 32 (129) 8 
 Foreign exchange contracts  21 (53) - (2) - - (34) (56) 
 Credit contracts  (1,150) (13) - 138 - - (1,025) 17 
 Other derivative contracts  (78) 26 - - - - (52) -  
  Total derivative contracts  (649) 199 - (256) - 21 (685) 326(7)
Other assets  162 (2) - 188 - - 348 (1)(3)
Short sale liabilities  - - - (8) - - (8) - (3)
Other liabilities (excluding derivatives)  (49) 1 - - - - (48) - (6)
                 
                 

  • See next page for detail.
  • Represents only net gains (losses) that are due to changes in economic conditions and management's estimates of fair value and excludes changes due to the collection/realization of cash flows over time.
  • Included in trading activities and other noninterest income in the income statement.
  • Included in debt securities available for sale in the income statement.
  • Included in equity investments in the income statement.
  • Included in mortgage banking and other noninterest income in the income statement.
  • Included in mortgage banking, trading activities and other noninterest income in the income statement.

The following table presents gross purchases, sales, issuances and settlements related to the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended March 31, 2013.

 

             
             
            
(in millions)  PurchasesSalesIssuancesSettlementsNet
Quarter ended March 31, 2013      
Trading assets      
 (excluding derivatives):      
 Securities of U.S. states and      
  political subdivisions$ 77 (90) - - (13)
 Collateralized loan and other debt obligations  249 (323) - - (74)
 Corporate debt securities   58 (83) - - (25)
 Mortgage-backed securities  - (1) - - (1)
 Asset-backed securities  6 (20) - (11) (25)
 Equity securities  - (3) - - (3)
  Total trading securities  390 (520) - (11) (141)
 Other trading assets  - - - - -
   Total trading assets      
    (excluding derivatives)  390 (520) - (11) (141)
Securities available for sale:      
 Securities of U.S. states and      
  political subdivisions  - (67) 75 (103) (95)
 Mortgage-backed securities:      
  Residential  - - - - -
  Commercial  - (1) - (4) (5)
   Total mortgage-backed      
    securities  - (1) - (4) (5)
 Corporate debt securities   - - - - -
 Collateralized loan and other debt obligations  402 (14) - (93) 295
 Asset-backed securities:      
  Auto loans and leases  351 - 148 (725) (226)
  Home equity loans  - (5) - - (5)
  Other asset-backed securities  511 (34) 302 (649) 130
   Total asset-backed securities  862 (39) 450 (1,374) (101)
    Total debt securities  1,264 (121) 525 (1,574) 94
 Marketable equity securities:      
  Perpetual preferred securities  - - - (9) (9)
  Other marketable equity securities  - - - - -
    Total marketable      
     equity securities  - - - (9) (9)
     Total securities      
      available for sale  1,264 (121) 525 (1,583) 85
Mortgages held for sale  102 - - (162) (60)
Loans  1 - 117 (69) 49
Mortgage servicing rights  - (423) 935 - 512
Net derivative assets and liabilities:      
 Interest rate contracts  - 1 - (370) (369)
 Commodity contracts  1 (1) - (23) (23)
 Equity contracts  99 (67) - (32) -
 Foreign exchange contracts  - - - (2) (2)
 Credit contracts  (3) 1 - 140 138
 Other derivative contracts  - - - - -
  Total derivative contracts  97 (66) - (287) (256)
Other assets  197 - - (9) 188
Short sale liabilities  - (8) - - (8)
Other liabilities (excluding derivatives)  - - (3) 3 -
             
             

The changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended March 31, 2012, are summarized as follows:

 

                 
                 
               Net unrealized 
         Total net gainsPurchases,   gains (losses) 
         (losses) included insales,   included in 
          Otherissuances   income related 
        Balance, compre-andTransfersTransfersBalance,to assets and 
       beginningNethensivesettlements,intoout ofend ofliabilities held 
(in millions)  of periodincomeincomenet (1)Level 3 Level 3 periodat period end (2) 
Quarter ended March 31, 2012          
Trading assets          
 (excluding derivatives):          
 Securities of U.S. states and          
  political subdivisions$ 53 - - 50 - - 103 -  
 Collateralized loan and other debt obligations  1,582 17 - (60) - - 1,539 (12) 
 Corporate debt securities   97 - - 35 - - 132 (2) 
 Mortgage-backed securities  108 (1) - (43) - (10) 54 (3) 
 Asset-backed securities  190 11 - (51) 14 - 164 4 
 Equity securities  4 - - (1) - - 3 -  
  Total trading securities  2,034 27 - (70) 14 (10) 1,995 (13) 
 Other trading assets  115 (7) - - - - 108 -  
   Total trading assets          
    (excluding derivatives)  2,149 20 - (70) 14 (10) 2,103 (13)(3)
Securities available for sale:          
 Securities of U.S. states and          
  political subdivisions  11,516 (4) 164 838 - - 12,514 (6) 
 Mortgage-backed securities:          
  Residential  61 - 1 (1) 27 (30) 58 -  
  Commercial  232 (15) 22 (7) - - 232 -  
   Total mortgage-backed          
    securities  293 (15) 23 (8) 27 (30) 290 -  
 Corporate debt securities   295 5 11 (4) 1 - 308 -  
 Collateralized loan and other debt obligations  8,599 57 183 324 - - 9,163 -  
 Asset-backed securities:          
  Auto loans and leases  6,641 1 20 251 - - 6,913 -  
  Home equity loans  282 7 18 (1) 14 (63) 257 -  
  Other asset-backed securities  2,863 3 57 (55) 1 - 2,869 -  
   Total asset-backed securities  9,786 11 95 195 15 (63) 10,039 -  
    Total debt securities  30,489 54 476 1,345 43 (93) 32,314 (6)(4)
 Marketable equity securities:          
  Perpetual preferred securities  1,344 31 8 (210) - - 1,173 -  
  Other marketable equity securities  23 - (15) (5) - - 3 -  
    Total marketable          
     equity securities  1,367 31 (7) (215) - - 1,176 - (5)
     Total securities          
      available for sale  31,856 85 469 1,130 43 (93) 33,490 (6) 
Mortgages held for sale  3,410 (35) - (46) 87 (86) 3,330 (36)(6)
Loans  23 - - 2 - - 25 - (6)
Mortgage servicing rights  12,603 (801) - 1,776 - - 13,578 (158)(6)
Net derivative assets and liabilities:          
 Interest rate contracts  609 1,158 - (1,432) - - 335 199 
 Commodity contracts  - 1 - (7) (8) - (14) (7) 
 Equity contracts  (75) (95) - 3 - (13) (180) (88) 
 Foreign exchange contracts  (7) 27 - (5) - 1 16 24 
 Credit contracts  (1,998) 171 - 74 - - (1,753) 233 
 Other derivative contracts  (117) 51 - - - - (66) -  
  Total derivative contracts  (1,588) 1,313 - (1,367) (8) (12) (1,662) 361(7)
Other assets  244 (3) - (13) - - 228 (11)(3)
Short sale liabilities  - - - - - - - - (3)
Other liabilities (excluding derivatives)  (44) 1 - 1 - - (42) - (6)
                 
                 

  • See next page for detail.
  • Represents only net gains (losses) that are due to changes in economic conditions and management's estimates of fair value and excludes changes due to the collection/realization of cash flows over time.
  • Included in trading activities and other noninterest income in the income statement.
  • Included in debt securities available for sale in the income statement.
  • Included in equity investments in the income statement.
  • Included in mortgage banking and other noninterest income in the income statement.
  • Included in mortgage banking, trading activities and other noninterest income in the income statement.

The following table presents gross purchases, sales, issuances and settlements related to the changes in Level 3 assets and liabilities measured at fair value on a recurring basis for the quarter ended March 31, 2012.

 

             
             
            
(in millions)  PurchasesSalesIssuancesSettlementsNet
Quarter ended March 31, 2012      
Trading assets      
 (excluding derivatives):      
 Securities of U.S. states and      
  political subdivisions$ 59 (9) - - 50
 Collateralized loan and other debt obligations  190 (250) - - (60)
 Corporate debt securities   81 (46) - - 35
 Mortgage-backed securities  3 (46) - - (43)
 Asset-backed securities  72 (111) - (12) (51)
 Equity securities  - (1) - - (1)
  Total trading securities  405 (463) - (12) (70)
 Other trading assets  - - - - -
   Total trading assets      
    (excluding derivatives)  405 (463) - (12) (70)
Securities available for sale:      
 Securities of U.S. states and      
  political subdivisions  582 - 588 (332) 838
 Mortgage-backed securities:      
  Residential  - - - (1) (1)
  Commercial  - - - (7) (7)
   Total mortgage-backed      
    securities  - - - (8) (8)
 Corporate debt securities   - - - (4) (4)
 Collateralized loan and other debt obligations  550 - - (226) 324
 Asset-backed securities:      
  Auto loans and leases  1,835 - 163 (1,747) 251
  Home equity loans  - - - (1) (1)
  Other asset-backed securities  399 (26) 335 (763) (55)
   Total asset-backed securities  2,234 (26) 498 (2,511) 195
    Total debt securities  3,366 (26) 1,086 (3,081) 1,345
 Marketable equity securities:      
  Perpetual preferred securities  - - - (210) (210)
  Other marketable equity securities  - (4) - (1) (5)
    Total marketable      
     equity securities  - (4) - (211) (215)
     Total securities      
      available for sale  3,366 (30) 1,086 (3,292) 1,130
Mortgages held for sale  111 - - (157) (46)
Loans  2 - - - 2
Mortgage servicing rights  - - 1,776 - 1,776
Net derivative assets and liabilities:      
 Interest rate contracts  - (1) - (1,431) (1,432)
 Commodity contracts  5 (7) - (5) (7)
 Equity contracts  115 (165) - 53 3
 Foreign exchange contracts  - - - (5) (5)
 Credit contracts  1 (1) - 74 74
 Other derivative contracts  - - - - -
  Total derivative contracts  121 (174) - (1,314) (1,367)
Other assets  3 - - (16) (13)
Short sale liabilities  - - - - -
Other liabilities (excluding derivatives)  (1) 2 - - 1
             
             

The following table provides quantitative information about the valuation techniques and significant unobservable inputs used in the valuation of substantially all of our Level 3 assets and liabilities measured at fair value on a recurring basis for which we use an internal model.

       The significant unobservable inputs for Level 3 assets and liabilities that are valued using fair values obtained from third party vendors are not included in the table as the specific inputs applied are not provided by the vendor (see discussion regarding vendor-developed valuations within the “Level 3 Asset and Liabilities Valuation Processes” section previously within this Note). In addition, the table excludes the valuation techniques and significant unobservable inputs for certain classes of Level 3 assets and liabilities measured using an internal model that we consider, both individually and in the aggregate, insignificant relative to our overall Level 3 assets and liabilities. We made this determination based upon an evaluation of each class which considered the magnitude of the positions, nature of the unobservable inputs and potential for significant changes in fair value due to changes in those inputs.

               
     Fair Value  Significant Range of Weighted
($ in millions, except cost to service amounts)Level 3 Valuation Technique(s)Unobservable Input Inputs Average (1)
March 31, 2013          
Trading and available for sale securities:          
 Securities of U.S. states and          
 political subdivisions:          
  Government, healthcare and          
   other revenue bonds$ 2,983 Discounted cash flowDiscount rate0.5-5.0%1.4
               
  Auction rate securities and other municipal bonds  582 Discounted cash flowDiscount rate0.5-13.3 5.2
        Weighted average life3.0-13.0yrs3.6
 Collateralized loan and other debt obligations(2)  876 Market comparable pricingComparability adjustment(22.3)-24.0%(3.0)
     2,567 Vendor priced      
 Asset-backed securities:          
  Auto loans and leases  5,704 Discounted cash flowDefault rate 2.0- 9.3 3.0
         Discount rate 0.4- 1.8 0.8
         Loss severity 50.0- 66.5 53.0
         Prepayment rate 0.6- 0.9 0.7
  Other asset-backed securities:          
   Dealer floor plan  1,472 Discounted cash flowDiscount rate0.6-2.2 1.6
   Diversified payment rights (3)  620 Discounted cash flowDiscount rate1.2-2.8 1.9
   Other commercial and consumer  1,413(4)Discounted cash flowDiscount rate0.6-8.7 2.8
         Weighted average life0.8-7.3yrs2.1
       74 Vendor priced      
 Marketable equity securities: perpetual          
 preferred  807(5)Discounted cash flowDiscount rate4.4-9.2 %5.9
        Weighted average life1.0-7.0yrs5.5
Mortgages held for sale (residential)  3,187 Discounted cash flowDefault rate0.7-14.9%3.5
         Discount rate3.4-7.9 5.5
         Loss severity1.4-36.2 26.6
         Prepayment rate1.0-10.6 5.7
Loans  5,975(6)Discounted cash flowDiscount rate2.3-3.0 2.8
         Prepayment rate1.9-42.1 11.9
         Utilization rate0.0-2.0 0.8
Mortgage servicing rights (residential)  12,061 Discounted cash flowCost to service per loan (7)$ 90-854 216
         Discount rate6.4-10.8%7.3
         Prepayment rate (8)7.5-23.3 14.2
Net derivative assets and (liabilities):          
 Interest rate contracts  143 Discounted cash flowDefault rate0.0-20.0 5.6
         Loss severity50.0-81.8 51.3
         Prepayment rate5.8-15.6 15.0
 Interest rate contracts: derivative loan           
  commitments  415 Discounted cash flowFall-out factor1.0-99.0 21.9
       Initial-value servicing(13.7)-124.3bps79.7
 Equity contracts  (129) Option modelCorrelation factor(25.0)-94.5%67.3
         Volatility factor9.5-68.2 22.9
 Credit contracts  (1,031) Market comparable pricingComparability adjustment(32.8)-33.5 0.1
       6 Option modelCredit spread0.1-14.0 1.2
      Loss severity16.5-87.5 45.6
               
Insignificant Level 3 assets,          
 net of liabilities  875(9)       
  Total level 3 assets, net of liabilities$ 38,600(10)       
               

  • Weighted averages are calculated using outstanding unpaid principal balance for cash instruments such as loans and securities, and notional amounts for derivative instruments.
  • Includes $682 million of collateralized debt obligations.
  • Securities backed by specified sources of current and future receivables generated from foreign originators.
  • Consists primarily of investments in asset-backed securities that are revolving in nature, in which the timing of advances and repayments of principal are uncertain.
  • Consists of auction rate preferred equity securities with no maturity date that are callable by the issuer.
  • Consists predominantly of reverse mortgage loans securitized with GNMA which were accounted for as secured borrowing transactions.
  • The high end of the range of inputs is for servicing modified loans. For non-modified loans the range is $90 - $383.
  • Includes a blend of prepayment speeds and expected defaults. Prepayment speeds are influenced by mortgage interest rates as well as our estimation of drivers of borrower behavior.
  • Represents the aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The amount includes corporate debt securities, mortgage-backed securities, asset-backed securities backed by home equity loans, other marketable equity securities, other assets, other liabilities and certain net derivative assets and liabilities, such as commodity contracts, foreign exchange contracts and other derivative contracts.
  • Consists of total Level 3 assets of $41.8 billion and total Level 3 liabilities of $3.2 billion, before netting of derivative balances.

               
     Fair Value  Significant Range of Weighted
($ in millions, except cost to service amounts)Level 3 Valuation Technique(s)Unobservable Input Inputs Average (1)
December 31, 2012          
Trading and available for sale securities:          
 Securities of U.S. states and          
 political subdivisions:          
  Government, healthcare and          
   other revenue bonds$ 3,081 Discounted cash flowDiscount rate0.5-4.8%1.8
               
  Auction rate securities and other municipal bonds  596 Discounted cash flowDiscount rate2.0-12.9 4.4
        Weighted average life3.0-7.5yrs3.4
 Collateralized loan and other debt obligations(2)  1,423 Market comparable pricingComparability adjustment(22.5)-24.7%3.5
     12,507 Vendor priced      
 Asset-backed securities:          
  Auto loans and leases  5,921 Discounted cash flowDefault rate 2.1- 9.7 3.2
         Discount rate 0.6- 1.6 1.0
         Loss severity 50.0- 66.6 51.8
         Prepayment rate 0.6- 0.9 0.7
  Other asset-backed securities:          
   Dealer floor plan  1,030 Discounted cash flowDiscount rate0.5-2.2 1.9
   Diversified payment rights (3)  639 Discounted cash flowDiscount rate1.0-2.9 1.8
   Other commercial and consumer  1,665(4)Discounted cash flowDiscount rate0.6-6.8 2.7
         Weighted average life1.0-7.5yrs2.9
       87 Vendor priced      
 Marketable equity securities: perpetual          
  preferred  794(5)Discounted cash flowDiscount rate4.3-9.3 %6.3
        Weighted average life1.0-7.0yrs5.3
Mortgages held for sale (residential)  3,250 Discounted cash flowDefault rate0.6-14.8%5.5
         Discount rate3.4-7.5 5.4
         Loss severity1.3-35.3 26.4
         Prepayment rate1.0-11.0 6.2
Loans  6,021(6)Discounted cash flowDiscount rate2.4-2.8 2.6
         Prepayment rate1.6-44.4 11.6
         Utilization rate0.0-2.0 0.8
Mortgage servicing rights (residential)  11,538 Discounted cash flowCost to service per loan (7)$ 90-854 219
         Discount rate6.7-10.9%7.4
         Prepayment rate (8)7.3-23.7 15.7
Net derivative assets and (liabilities):          
 Interest rate contracts  162 Discounted cash flowDefault rate0.0-20.0 5.4
         Loss severity45.8-83.2 51.6
         Prepayment rate7.4-15.6 14.9
 Interest rate contracts: derivative loan           
  commitments  497 Discounted cash flowFall-out factor1.0-99.0 22.9
       Initial-value servicing(13.7)-137.2bps85.6
 Equity contracts  (122) Option modelCorrelation factor(43.6)-94.5%50.3
         Volatility factor3.0-68.9 26.5
 Credit contracts  (1,157) Market comparable pricingComparability adjustment(34.4)-30.5 0.1
       8 Option modelCredit spread0.1-14.0 2.0
      Loss severity16.5-87.5 52.3
               
Insignificant Level 3 assets,          
 net of liabilities  835(9)       
  Total level 3 assets, net of liabilities$ 48,775(10)       
               

  • Weighted averages are calculated using outstanding unpaid principal balance for cash instruments such as loans and securities, and notional amounts for derivative instruments.
  • Includes $665 million of collateralized debt obligations.
  • Securities backed by specified sources of current and future receivables generated from foreign originators.
  • Consists primarily of investments in asset-backed securities that are revolving in nature, in which the timing of advances and repayments of principal are uncertain.
  • Consists of auction rate preferred equity securities with no maturity date that are callable by the issuer.
  • Consists predominantly of reverse mortgage loans securitized with GNMA which were accounted for as secured borrowing transactions.
  • The high end of the range of inputs is for servicing modified loans. For non-modified loans the range is $90 - $437.
  • Includes a blend of prepayment speeds and expected defaults. Prepayment speeds are influenced by mortgage interest rates as well as our estimation of drivers of borrower behavior.
  • Represents the aggregate amount of Level 3 assets and liabilities measured at fair value on a recurring basis that are individually and in the aggregate insignificant. The amount includes corporate debt securities, mortgage-backed securities, asset-backed securities backed by home equity loans, other marketable equity securities, other assets, other liabilities and certain net derivative assets and liabilities, such as commodity contracts, foreign exchange contracts and other derivative contracts.
  • Consists of total Level 3 assets of $51.9 billion and total Level 3 liabilities of $3.1 billion, before netting of derivative balances.

The valuation techniques used for our Level 3 assets and liabilities, as presented in the previous table, are described as follows:

  • Discounted cash flow - Discounted cash flow valuation techniques generally consist of developing an estimate of future cash flows that are expected to occur over the life of an instrument and then discounting those cash flows at a rate of return that results in the fair value amount.
  • Option model - Option model valuation techniques are generally used for instruments in which the holder has a contingent right or obligation based on the occurrence of a future event, such as the price of a referenced asset going above or below a predetermined strike price. Option models estimate the likelihood of the specified event occurring by incorporating assumptions such as volatility estimates, price of the underlying instrument and expected rate of return.
  • Market comparable pricing - Market comparable pricing valuation techniques are used to determine the fair value of certain instruments by incorporating known inputs such as recent transaction prices, pending transactions, or prices of other similar investments which require significant adjustment to reflect differences in instrument characteristics.
  • Vendor-priced – Prices obtained from third party pricing vendors or brokers that are used to record the fair value of the asset or liability, of which the related valuation technique and significant unobservable inputs are not provided.

 

       Significant unobservable inputs presented in the previous table are those we consider significant to the fair value of the Level 3 asset or liability. We consider unobservable inputs to be significant, if by their exclusion, the fair value of the Level 3 asset or liability would be impacted by a predetermined percentage change or based on qualitative factors such as nature of the instrument, type of valuation technique used, and the significance of the unobservable inputs relative to other inputs used within the valuation. Following is a description of the significant unobservable inputs provided in the table.

 

  • Comparability adjustment – is an adjustment made to observed market data such as a transaction price in order to reflect dissimilarities in underlying collateral, issuer, rating, or other factors used within a market valuation approach, expressed as a percentage of an observed price.
  • Correlation factor - is the likelihood of one instrument changing in price relative to another based on an established relationship expressed as a percentage of relative change in price over a period over time.
  • Cost to service - is the expected cost per loan of servicing a portfolio of loans which includes estimates for unreimbursed expenses (including delinquency and foreclosure costs) that may occur as a result of servicing such loan portfolios.
  • Credit spread – is the portion of the interest rate in excess of a benchmark interest rate, such as LIBOR or U.S. Treasury rates, that when applied to an investment captures changes in the obligor's creditworthiness.
  • Default rate – is an estimate of the likelihood of not collecting contractual amounts owed expressed as a constant default rate (CDR).
  • Discount rate – is a rate of return used to present value the future expected cash flow to arrive at the fair value of an instrument. The discount rate consists of a benchmark rate component and a risk premium component. The benchmark rate component, for example, LIBOR or U.S. Treasury rates, is generally observable within the market and is necessary to appropriately reflect the time value of money. The risk premium component reflects the amount of compensation market participants require due to the uncertainty inherent in the instruments' cash flows resulting from risks such as credit and liquidity.
  • Fall-out factor - is the expected percentage of loans associated with our interest rate lock commitment portfolio that are likely of not funding.
  • Initial-value servicing - is the estimated value of the underlying loan, including the value attributable to the embedded servicing right, expressed in basis points of outstanding unpaid principal balance.
  • Loss severity – is the percentage of contractual cash flows lost in the event of a default.
  • Prepayment rate – is the estimated rate at which forecasted prepayments of principal of the related loan or debt instrument are expected to occur, expressed as a constant prepayment rate (CPR).
  • Utilization rate – is the estimated rate in which incremental portions of existing reverse mortgage credit lines are expected to be drawn by borrowers, expressed as an annualized rate.
  • Volatility factor – is the extent of change in price an item is estimated to fluctuate over a specified period of time expressed as a percentage of relative change in price over a period over time.

  • Weighted average life – is the weighted average number of years an investment is expected to remain outstanding, based on its expected cash flows reflecting the estimated date the issuer will call or extend the maturity of the instrument or otherwise reflecting an estimate of the timing of an instrument's cash flows whose timing is not contractually fixed.

 

Significant Recurring Level 3 Fair Value Asset and Liability Input Sensitivity

We generally use discounted cash flow or similar internal modeling techniques to determine the fair value of our Level 3 assets and liabilities. Use of these techniques requires determination of relevant inputs and assumptions, some of which represent significant unobservable inputs as indicated in the preceding table. Accordingly, changes in these unobservable inputs may have a significant impact on fair value.

       Certain of these unobservable inputs will (in isolation) have a directionally consistent impact on the fair value of the instrument for a given change in that input. Alternatively, the fair value of the instrument may move in an opposite direction for a given change in another input. Where multiple inputs are used within the valuation technique of an asset or liability, a change in one input in a certain direction may be offset by an opposite change in another input having a potentially muted impact to the overall fair value of that particular instrument. Additionally, a change in one unobservable input may result in a change to another unobservable input (that is, changes in certain inputs are interrelated to one another), which may counteract or magnify the fair value impact.

 

SECURITIES, LOANS and MORTGAGES HELD FOR SALE The fair values of predominantly all Level 3 trading securities, mortgages held for sale, loans and securities available for sale have consistent inputs, valuation techniques and correlation to changes in underlying inputs. The internal models used to determine fair value for these Level 3 instruments use certain significant unobservable inputs within a discounted cash flow or market comparable pricing valuation technique. Such inputs include discount rate, prepayment rate, default rate, loss severity, utilization rate and weighted average life.

       These Level 3 assets would decrease (increase) in value based upon an increase (decrease) in discount rate, default rate, loss severity, or weighted average life inputs. Conversely, the fair value of these Level 3 assets would generally increase (decrease) in value if the prepayment rate input were to increase (decrease) or if the utilization rate input were to increase (decrease).

       Generally, a change in the assumption used for default rate is accompanied by a directionally similar change in the risk premium component of the discount rate (specifically, the portion related to credit risk) and a directionally opposite change in the assumption used for prepayment rates. Unobservable inputs for loss severity, utilization rate and weighted average life do not increase or decrease based on movements in the other significant unobservable inputs for these Level 3 assets.

 

DERIVATIVE INSTRUMENTS Level 3 derivative instruments are valued using market comparable pricing, option pricing and discounted cash flow valuation techniques. We utilize certain unobservable inputs within these techniques to determine the fair value of the Level 3 derivative instruments. The significant unobservable inputs consist of credit spread, a comparability adjustment, prepayment rate, default rate, loss severity, initial value servicing, fall-out factor, volatility factor, and correlation factor.

       Level 3 derivative assets (liabilities) would decrease (increase) in value upon an increase (decrease) in default rate, fall-out factor, credit spread or loss severity inputs. Conversely, Level 3 derivative assets (liabilities) would increase (decrease) in value upon an increase (decrease) in prepayment rate, initial-value servicing or volatility factor inputs. The correlation factor and comparability adjustment inputs may have a positive or negative impact on the fair value of these derivative instruments depending on the change in value of the item the correlation factor and comparability adjustment is referencing. The correlation factor and comparability adjustment is considered independent from movements in other significant unobservable inputs for derivative instruments.

       Generally, for derivative instruments for which we are subject to changes in the value of the underlying referenced instrument, change in the assumption used for default rate is accompanied by directionally similar change in the risk premium component of the discount rate (specifically, the portion related to credit risk) and a directionally opposite change in the assumption used for prepayment rates. Unobservable inputs for loss severity, fall-out factor, initial-value servicing, and volatility do not increase or decrease based on movements in other significant unobservable inputs for these Level 3 instruments.

 

MORTGAGE SERVICING RIGHTS We use a discounted cash flow valuation technique to determine the fair value of Level 3 mortgage servicing rights. These models utilize certain significant unobservable inputs including prepayment rate, discount rate and costs to service. An increase in any of these unobservable inputs will reduce the fair value of the mortgage servicing rights and alternatively, a decrease in any one of these inputs would result in the mortgage servicing rights increasing in value. Generally, a change in the assumption used for the default rate is accompanied by a directionally similar change in the assumption used for cost to service and a directionally opposite change in the assumption used for prepayment. The sensitivity of our residential MSRs is discussed further in Note 7.

Assets and Liabilities Recorded at Fair Value on a Nonrecurring Basis

We may be required, from time to time, to measure certain assets at fair value on a nonrecurring basis in accordance with GAAP. These adjustments to fair value usually result from application of LOCOM accounting or write-downs of individual assets. For assets measured at fair value on a nonrecurring basis in the quarter ended March 31, 2013 and year ended December 31, 2012, that were still held in the balance sheet at each respective period end, the following table provides the fair value hierarchy and the fair value of the related individual assets or portfolios at period end.

                 
                 
        March 31, 2013 December 31, 2012
(in millions)  Level 1Level 2Level 3Total Level 1Level 2Level 3Total
Mortgages held for sale (LOCOM) (1)$ - 2,155 1,042 3,197  - 1,509 1,045 2,554
Loans held for sale  - - - -   - 4 - 4
Loans:          
 Commercial  - 228 3 231  - 1,507 - 1,507
 Consumer  - 1,541 4 1,545  - 5,889 4 5,893
  Total loans (2)  - 1,769 7 1,776  - 7,396 4 7,400
Other assets (3)  - 290 66 356  - 989 144 1,133
                 
                 

  • Predominantly real estate 1-4 family first mortgage loans.
  • Represents carrying value of loans for which adjustments are based on the appraised value of the collateral.
  • Includes the fair value of foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets.

       The following table presents the increase (decrease) in value of certain assets that are measured at fair value on a nonrecurring basis for which a fair value adjustment has been recognized in the periods presented.

           
           
       Quarter ended March 31,
(in millions) 2013 2012
Mortgages held for sale (LOCOM)$ 39  48
Loans held for sale  -  (1)
Loans:    
 Commercial   (91)  (301)
 Consumer(1)  (907)  (1,203)
  Total loans   (998)  (1,504)
Other assets (2)  (79)  (140)
   Total$ (1,038)  (1,597)
           

 

  • Represents write-downs of loans based on the appraised value of the collateral.
  • Includes the losses on foreclosed real estate and other collateral owned that were measured at fair value subsequent to their initial classification as foreclosed assets.

       The table below provides quantitative information about the valuation techniques and significant unobservable inputs used in the valuation of substantially all of our Level 3 assets and liabilities measured at fair value on a nonrecurring basis for which we use an internal model.

       We have excluded from the table classes of Level 3 assets and liabilities measured using an internal model that we consider, both individually and in the aggregate, insignificant relative to our overall Level 3 nonrecurring measurements. We made this determination based upon an evaluation of each class which considered the magnitude of the positions, nature of the unobservable inputs and potential for significant changes in fair value due to changes in those inputs.

                   
                   
        Fair Value  Significant Range Weighted 
($ in millions) Level 3 Valuation Technique(s) (1)Unobservable Inputs (1) of inputs Average (2) 
March 31, 2013            
Residential mortgages held for sale            
 (LOCOM)$ 1,042(3)Discounted cash flowDefault rate(4)1.1-6.5%3.0%
           Discount rate 4.0-11.8 10.7 
           Loss severity 2.0-42.6 5.8 
           Prepayment rate(5)1.0-100.0 66.3 
Insignificant level 3 assets  73          
 Total    1,115          
                   
December 31, 2012            
Residential mortgages held for sale$1,045(3)Discounted cash flowDefault rate(4)2.9-21.2%7.9%
 (LOCOM)    Discount rate 4.1-11.9 10.9 
           Loss severity 2.0-45.0 6.0 
           Prepayment rate(5)1.0-100.0 66.7 
Insignificant level 3 assets  148          
 Total    1,193          

  • Refer to the narrative following the recurring quantitative Level 3 table of this Note for a definition of the valuation technique(s) and significant unobservable inputs.
  • Weighted averages are calculated using outstanding unpaid principal balance of the loans.
  • Consists of approximately $942 million government insured/guaranteed loans purchased from GNMA-guaranteed mortgage securitization, for both March 31, 2013 and December 31, 2012, and $100 million and $103 million of other mortgage loans which are not government insured/guaranteed for March 31, 2013 and December 31, 2012, respectively.
  • Applies only to non-government insured/guaranteed loans.
  • Includes the impact on prepayment rate of expected defaults for the government insured/guaranteed loans, which impacts the frequency and timing of early resolution of loans.

 

Alternative Investments

The following table summarizes our investments in various types of funds, which are included in trading assets, securities available for sale and other assets. We use the funds' net asset values (NAVs) per share as a practical expedient to measure fair value on recurring and nonrecurring bases. The fair values presented in the table are based upon the funds' NAVs or an equivalent measure.

            
            
           Redemption
        FairUnfundedRedemptionnotice
(in millions) valuecommitmentsfrequencyperiod
March 31, 2013     
Offshore funds $ 444 -Daily - Annually1 - 180 days
Funds of funds  1 -Quarterly90 days
Hedge funds  2 -Daily - Annually5 - 95 days
Private equity funds   773 183N/AN/A
Venture capital funds   78 19N/AN/A
 Total$ 1,298 202  
December 31, 2012     
Offshore funds $ 379 -Daily - Annually1 - 180 days
Funds of funds  1 -Quarterly90 days
Hedge funds  2 -Daily - Annually5 - 95 days
Private equity funds   807 195N/AN/A
Venture capital funds  82 21N/AN/A
 Total$ 1,271 216  
            

N/A - Not applicable

Offshore funds primarily invest in investment grade European fixed-income securities. Redemption restrictions are in place for these investments with a fair value of $216 million and $189 million at March 31, 2013 and December 31, 2012, respectively, due to lock-up provisions that will remain in effect until February 2016.

       Private equity funds invest in equity and debt securities issued by private and publicly-held companies in connection with leveraged buyouts, recapitalizations and expansion opportunities. Substantially all of these investments do not allow redemptions. Alternatively, we receive distributions as the underlying assets of the funds liquidate, which we expect to occur over the next eight years.

       Venture capital funds invest in domestic and foreign companies in a variety of industries, including information technology, financial services and healthcare. These investments can never be redeemed with the funds. Instead, we receive distributions as the underlying assets of the fund liquidate, which we expect to occur over the next five years.

Fair Value Option

We measure MHFS at fair value for prime MHFS originations for which an active secondary market and readily available market prices exist to reliably support fair value pricing models used for these loans. Loan origination fees on these loans are recorded when earned, and related direct loan origination costs are recognized when incurred. We also measure at fair value certain of our other interests held related to residential loan sales and securitizations. We believe fair value measurement for prime MHFS and other interests held, which we hedge with free-standing derivatives (economic hedges) along with our MSRs measured at fair value, reduces certain timing differences and better matches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets.

       We elected to measure certain LHFS portfolios at fair value in conjunction with customer accommodation activities, to better align the measurement basis of the assets held with our management objectives given the trading nature of these portfolios. In addition, we elected to measure at fair value certain letters of credit and nonmarketable equity securities that are hedged with derivative instruments to better reflect the economics of the transactions. The letters of credit are included in trading account assets or liabilities, and the nonmarketable equity securities are included in other assets.

       Loans that we measure at fair value consist predominantly of reverse mortgage loans previously transferred under a GNMA reverse mortgage securitization program accounted for as a secured borrowing. Before the transfer, they were classified as MHFS measured at fair value and, as such, remain carried on our balance sheet under the fair value option.

       Similarly, we may elect fair value option for the assets and liabilities of certain consolidated VIEs. This option is generally elected for newly consolidated VIEs for which predominantly all of our interests, prior to consolidation, are carried at fair value with changes in fair value recorded to earnings. Accordingly, such an election allows us to continue fair value accounting through earnings for those interests and eliminate income statement mismatch otherwise caused by differences in the measurement basis of the consolidated VIEs assets and liabilities.

       The following table reflects the differences between fair value carrying amount of certain assets and liabilities for which we have elected the fair value option and the contractual aggregate unpaid principal amount at maturity.

            
            
    March 31, 2013 December 31, 2012 
      Fair value   Fair value 
      carrying   carrying 
      amount   amount 
      less   less 
   Fair valueAggregateaggregate Fair valueAggregateaggregate 
    carryingunpaidunpaid carryingunpaidunpaid 
(in millions) amountprincipalprincipal amountprincipalprincipal 
Mortgages held for sale:         
 Total loans$ 42,624 41,907 717(1) 42,305 41,183 1,122(1)
 Nonaccrual loans   336 633 (297)  309 655 (346) 
 Loans 90 days or more past due and still accruing  49 66 (17)  49 64 (15) 
Loans held for sale:         
 Total loans  - 9 (9)  6 10 (4) 
 Nonaccrual loans   - 6 (6)  2 6 (4) 
Loans:         
 Total loans  6,183 5,693 490  6,206 5,669 537 
 Nonaccrual loans   112 110 2  89 89 - 
Other assets  197n/an/a  -n/an/a 
Long-term debt  - (199) 199(2) (1) (1,157) 1,156(2)
            
            

  • The difference between fair value carrying amount and aggregate unpaid principal includes changes in fair value recorded at and subsequent to funding, gains and losses on the related loan commitment prior to funding, and premiums on acquired loans.
  • Represents collateralized, non-recourse debt securities issued by certain of our consolidated securitization VIEs that are held by third party investors. To the extent cash flows from the underlying collateral are not sufficient to pay the unpaid principal amount of the debt, those third party investors absorb losses.

 

       The assets and liabilities accounted for under the fair value option are initially measured at fair value. Gains and losses from initial measurement and subsequent changes in fair value are recognized in earnings. The changes in fair value related to initial measurement and subsequent changes in fair value included in earnings for these assets and liabilities measured at fair value are shown, by income statement line item, below.

 

          
          
  2013  2012 
  Net gains   Net gains  
 Mortgage(losses)  Mortgage(losses)  
 bankingfromOther  bankingfromOther  
 noninteresttradingnoninterest noninteresttradingnoninterest 
(in millions) incomeactivitiesincome incomeactivitiesincome 
Quarter ended March 31,         
Mortgages held for sale$ 973 - -  1,795 - 1 
Loans held for sale  - - -  - - 13 
Loans  - - (47)  - - 42 
Other assets  - - 14  - - - 
Other interests held  - (7) 6  - (9) 23 
          
          

For performing loans, instrument-specific credit risk gains or losses were derived principally by determining the change in fair value of the loans due to changes in the observable or implied credit spread. Credit spread is the market yield on the loans less the relevant risk-free benchmark interest rate. In recent years spreads have been significantly affected by the lack of liquidity in the secondary market for mortgage loans. For nonperforming loans, we attribute all changes in fair value to instrument-specific credit risk. The following table shows the estimated gains and losses from earnings attributable to instrument-specific credit risk related to assets accounted for under the fair value option.

      
   Quarter ended March 31,
(in millions)  2013 2012
Gains (losses) attributable to   
 instrument-specific credit risk:   
 Mortgages held for sale$ 37 (39)
 Loans held for sale  - 13
  Total$ 37 (26)
      

Disclosures about Fair Value of Financial Instruments

The table below is a summary of fair value estimates for financial instruments, excluding financial instruments recorded at fair value on a recurring basis as they are included within the Assets and Liabilities Recorded at Fair Value on a Recurring Basis table included earlier in this Note. The carrying amounts in the following table are recorded in the balance sheet under the indicated captions.

We have not included assets and liabilities that are not financial instruments in our disclosure, such as the value of the long-term relationships with our deposit, credit card and trust customers, amortized MSRs, premises and equipment, goodwill and other intangibles, deferred taxes and other liabilities. The total of the fair value calculations presented does not represent, and should not be construed to represent, the underlying value of the Company.

              
              
      Estimated fair value 
(in millions) Carrying amount Level 1 Level 2 Level 3 Total 
March 31, 2013           
              
Financial assets           
 Cash and due from banks (1)$ 16,217  16,217  -   -   16,217 
 Federal funds sold, securities purchased under resale           
  agreements and other short-term investments (1)  143,804  4,505  139,299  -   143,804 
 Mortgages held for sale (2)  4,078  -   3,032  1,042  4,074 
 Loans held for sale (2)  194  -   190  13  203 
 Loans, net (3)  764,756  -   57,607  717,077  774,684 
 Nonmarketable equity investments (cost method)  6,649  -   2  8,146  8,148 
Financial liabilities           
 Deposits  1,010,733  -   956,330  55,308  1,011,638 
 Short-term borrowings (1)   60,693  -   60,693  -   60,693 
 Long-term debt (4)  126,179  -   118,812  10,842  129,654 
December 31, 2012           
              
Financial assets           
 Cash and due from banks (1)$ 21,860  21,860  -   -   21,860 
 Federal funds sold, securities purchased under resale            
  agreements and other short-term investments (1)  137,313  5,046  132,267  -   137,313 
 Mortgages held for sale (2)  4,844  -   3,808  1,045  4,853 
 Loans held for sale (2)  104  -   83  29  112 
 Loans, net (3)  763,968  -   56,237  716,114  772,351 
 Nonmarketable equity investments (cost method)  6,799  -   2  8,229  8,231 
Financial liabilities           
 Deposits  1,002,835  -   946,922  57,020  1,003,942 
 Short-term borrowings (1)   57,175  -   57,175  -   57,175 
 Long-term debt (4)  127,366  -   119,220  11,063  130,283 
              

  • Amounts consist of financial instruments in which carrying value approximates fair value.
  • Balance reflects MHFS and LHFS, as applicable, other than those MHFS and LHFS for which election of the fair value option was made.
  • Loans exclude balances for which the fair value option was elected and also exclude lease financing with a carrying amount of $12.4 billion at both March 31, 2013 and December 31, 2012, respectively.
  • The carrying amount and fair value exclude balances for which the fair value option was elected and obligations under capital leases of $12 million at both March 31, 2013 and December 31, 2012, respectively.

 

Loan commitments, standby letters of credit and commercial and similar letters of credit are not included in the table above. A reasonable estimate of the fair value of these instruments is the carrying value of deferred fees plus the related allowance. This amounted to $629 million and $586 million at March 31, 2013 and December 31, 2012, respectively.