STI 2018 Annual Report

55 We record all single-family residential MSRs at fair value on a recurring basis. The fair value of residential MSRs is based on discounted cash flow analyses and can vary significantly quarter to quarter as market conditions and projected interest rates change. We provide disclosure of the key economic assumptions used to measure residential MSRs, including the uncertainty of the fair values to adverse changes to these assumptions, in Note 10, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements in this Form 10-K. The key assumptions do not take into account hedging activities discussed in the “Other Market Risk” section of this MD&A. Overall, the financial impact of the level 3 financial instruments did not have a material impact on our liquidity or capital. Table 20 discloses assets and liabilities measured at fair value on a recurring basis that are classified as level 3 measurements. Level 3 Assets and Liabilities Table 20 December 31 (Dollars in millions) 2018 2017 Assets: Derivative instruments 1 $20 $16 Securities AFS 2 — 72 LHFI 163 196 Residential MSRs 1,983 1,710 Total level 3 assets $2,166 $1,994 Total assets $215,543 $205,962 Total assets measured at fair value on a recurring basis 40,367 39,579 Level 3 assets as a % of total assets 1.0% 1.0% Level 3 assets as a % of total assets measured at fair value on a recurring basis 5.4% 5.0% Liabilities: Derivative instruments 1 $7 $16 Total level 3 liabilities $7 $16 Total liabilities $191,263 $180,808 Total liabilities measured at fair value on a recurring basis 2,296 2,049 Level 3 liabilities as a % of total liabilities —% —% Level 3 liabilities as a % of total liabilities measured at fair value on a recurring basis 0.3% 0.8% 1 Includes IRLCs. 2 Beginning January 1, 2018, we reclassified equity securities previously presented in Securities AFS to Other assets on the Consolidated Balance Sheets. Prior periods have been revised to conform to the current presentation. Level 3 securities AFS decreased by $72 million during the year ended December 31, 2018, driven primarily by sales of non- agency residential MBS and ABS. For a detailed discussion regarding level 3 financial instruments and valuation methodologies for each class of financial instrument, see Note 20, “Fair Value Election and Measurement,” and Note 1, “SignificantAccounting Policies,” to the Consolidated Financial Statements in this Form 10-K. Goodwill At December 31, 2018, our reporting units were Consumer and Wholesale. See Note 22, "Business Segment Reporting," to the Consolidated Financial Statements in this Form 10-K for further discussion of our reportable business segments. We conduct a qualitative goodwill assessment at the reporting unit level at least quarterly, or more frequently as events occur or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. Factors considered in our qualitative assessment include financial performance, financial forecasts, macroeconomic conditions, industry and market conditions, cost factors, market capitalization, carrying value, and events affecting the reporting units. If, after considering all relevant events and circumstances, we determine it is more-likely-than-not that the fair value of a reporting unit is less than its respective carrying amount, then a quantitative impairment test is necessary to perform. If we elect to bypass the qualitative analysis, or conclude fromour qualitative analysis that it is more-likely-than-not that the fair value of a reporting unit is less than its carrying amount, a two-step goodwill impairment test is performed either (i) annually as of October 1, or (ii) more frequently as considered necessary. In the first step of the impairment test, the fair value of each reporting unit is compared with its carrying amount. If the fair value is greater than the carrying amount, then the reporting unit’s goodwill is deemed not to be impaired. If the fair value is less than the carrying amount, then a second step is performed, which measures the amount of impairment by comparing the carrying amount of goodwill to its implied fair value. We performed a qualitative goodwill assessment for the Consumer and Wholesale reporting units as of October 1, 2018, and concluded that a quantitative goodwill impairment test was not necessary for either reporting unit. We performed quantitative goodwill impairment tests as of October 1, 2017 and 2016, and determined that for our reporting units with goodwill balances, the fair values were in excess of their respective carrying amounts; therefore, no goodwill impairment was recognized. For additional information, see Note 1, “Significant Accounting Policies,” and Note 10, “Goodwill and Other Intangible Assets,” to the Consolidated Financial Statements in this Form 10-K. When we perform a quantitative analysis, the carrying value of equity of the reporting units, as well as Corporate Other, is determined by allocating our total equity to each reporting unit based on RWA using our actual Tier 1 capital ratio as of the measurement date. Tier 1 capital is utilized as it most closely aligns with equity as reported under U.S. GAAP. Appropriate adjustments are made to each reporting unit’s allocation using Tier 1 capital to conform with U.S. GAAP equity, namely to add back equity tied to goodwill and other intangible assets. We view this approach of determining the reporting units' carrying amounts based on regulatory capital as an objective measurement of the equity that a market participant would require to operate the reporting units. The quantitative goodwill impairment analysis estimates the fair value of equity using discounted cash flow analyses. The inputs and assumptions specific to each reporting unit are incorporated in the valuations, including projections of future cash flows, discount rates, and an estimated long-term growth rate. We assess the reasonableness of the estimated fair value of the reporting units by comparing implied valuation multiples with valuation multiples from guideline companies and by comparing the aggregate estimated fair value of the reporting units to our market capitalization over a reasonable period of