The Bancorp measures certain financial assets and liabilities at fair value in accordance with U.S. GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument's categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument's fair value measurement. The three levels within the fair value hierarchy are described as follows:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Bancorp has the ability to access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Bancorp's own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include the Bancorp's own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.

Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following tables summarize assets and liabilities measured at fair value on a recurring basis, including residential mortgage loans held for sale for which the Bancorp has elected the fair value option as of:

	Fair Value Measurements Using
September 30, 2012 ($ in millions)		Level 1^(c)	Level 2^(c)	Level 3	Total Fair Value
Assets:
Available-for-sale securities:
U.S. Treasury and government agencies	$	41	-	-	41
U.S. Government sponsored agencies		-	1,922	-	1,922
Obligations of states and political subdivisions		-	211	-	211
Agency mortgage-backed securities		-	8,986	-	8,986
Other bonds, notes and debentures		-	3,164	-	3,164
Other securities^(a)		79	156	-	235
Available-for-sale securities^(a)		120	14,439	-	14,559

Trading securities:
Obligations of states and political subdivisions		-	10	1	11
Agency mortgage-backed securities		-	14	-	14
Other bonds, notes and debentures		-	13	-	13
Other securities		167	-	-	167
Trading securities		167	37	1	205

Residential mortgage loans held for sale		-	1,741	-	1,741
Residential mortgage loans^(b)		-	-	76	76
Derivative assets:
Interest rate contracts		8	1,613	102	1,723
Foreign exchange contracts		-	216	-	216
Equity contracts		-	-	198	198
Commodity contracts		-	99	-	99
Derivative assets		8	1,928	300	2,236
Total assets	$	295	18,145	377	18,817

Liabilities:
Derivative liabilities
Interest rate contracts	$	92	662	3	757
Foreign exchange contracts		-	198	-	198
Equity contracts		-	-	22	22
Commodity contracts		-	95	-	95
Derivative liabilities		92	955	25	1,072

Short positions		11	3	-	14
Total liabilities	$	103	958	25	1,086


	Fair Value Measurements Using
December 31, 2011 ($ in millions)		Level 1	Level 2	Level 3	Total Fair Value
Assets:
Available-for-sale securities:
U.S. Treasury and Government agencies	$	171	-	-	171
U.S. Government sponsored agencies		-	1,962	-	1,962
Obligations of states and political subdivisions		-	101	-	101
Agency mortgage-backed securities		-	10,284	-	10,284
Other bonds, notes and debentures		-	1,812	-	1,812
Other securities^(a)		185	5	-	190
Available-for-sale securities^(a)		356	14,164	-	14,520

Trading securities:
Obligations of states and political subdivisions		-	8	1	9
Agency mortgage-backed securities		-	11	-	11
Other bonds, notes and debentures		-	13	-	13
Other securities		144	-	-	144
Trading securities		144	32	1	177

Residential mortgage loans held for sale		-	2,751	-	2,751
Residential mortgage loans^(b)		-	-	65	65
Derivative assets:
Interest rate contracts		8	1,773	34	1,815
Foreign exchange contracts		-	294	-	294
Equity contracts		-	-	113	113
Commodity contracts		-	134	-	134
Derivative assets		8	2,201	147	2,356
Total assets	$	508	19,148	213	19,869

Liabilities:
Derivative liabilities
Interest rate contracts	$	54	802	2	858
Foreign exchange contracts		-	275	-	275
Equity contracts		-	-	81	81
Commodity contracts		-	130	-	130
Derivative liabilities		54	1,207	83	1,344

Short positions		2	4	-	6
Total liabilities	$	56	1,211	83	1,350


	Fair Value Measurements Using
September 30, 2011 ($ in millions)		Level 1	Level 2	Level 3	Total Fair Value
Assets:
Available-for-sale securities:
U.S. Treasury and government agencies	$	202	-	-	202
U.S. Government sponsored agencies		-	1,990	-	1,990
Obligations of states and political subdivisions		-	105	-	105
Agency mortgage-backed securities		-	11,017	-	11,017
Other bonds, notes and debentures		-	1,573	-	1,573
Other securities^(a)		491	7	-	498
Available-for-sale securities^(a)		693	14,692	-	15,385

Trading securities:
Obligations of states and political subdivisions		-	11	1	12
Agency mortgage-backed securities		-	20	-	20
Other bonds, notes and debentures		-	15	-	15
Other securities		142	-	-	142
Trading securities		142	46	1	189

Residential mortgage loans held for sale		-	1,593	-	1,593
Residential mortgage loans^(b)		-	-	62	62
Derivative assets:
Interest rate contracts		3	1,872	39	1,914
Foreign exchange contracts		-	471	-	471
Equity contracts		-	-	103	103
Commodity contracts		-	112	-	112
Derivative assets		3	2,455	142	2,600
Total assets	$	838	18,786	205	19,829

Liabilities:
Derivative liabilities
Interest rate contracts	$	59	862	2	923
Foreign exchange contracts		-	447	-	447
Equity contracts		-	-	30	30
Commodity contracts		-	105	-	105
Derivative liabilities		59	1,414	32	1,505

Short positions		7	1	-	8
Total liabilities	$	66	1,415	32	1,513

The following is a description of the valuation methodologies used for significant instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include government bonds and exchange traded equities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which are classified within Level 2 of the valuation hierarchy, include agency and non-agency mortgage-backed securities, other asset-backed securities, obligations of U.S. Government sponsored agencies, and corporate and municipal bonds. Agency mortgage-backed securities, obligations of U.S. Government sponsored agencies, and corporate and municipal bonds are generally valued using a market approach based on observable prices of securities with similar characteristics.

Non-agency mortgage-backed securities and other asset-backed securities are generally valued using an income approach based on discounted cash flows, incorporating prepayment speeds, performance of underlying collateral and specific tranche-level attributes. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

For residential mortgage loans held for sale, fair value is estimated based upon mortgage-backed securities prices and spreads to those prices or, for certain ARM loans, DCF models that may incorporate the anticipated portfolio composition, credit spreads of asset-backed securities with similar collateral and market conditions. The anticipated portfolio composition includes the effect of interest rate spreads and discount rates due to loan characteristics such as the state in which the loan was originated, the loan amount and the ARM margin. Residential mortgage loans held for sale that are valued based on mortgage backed securities prices are classified within Level 2 of the valuation hierarchy as the valuation is based on external pricing for similar instruments. ARM loans classified as held for sale are also classified within Level 2 of the valuation hierarchy due to the use of observable inputs in the DCF model. These observable inputs include interest rate spreads from agency mortgage-backed securities market rates and observable discount rates.

Residential mortgage loans held for sale that are reclassified to held for investment are transferred from Level 2 to Level 3 of the fair value hierarchy. It is the Bancorp's policy to value any transfers between levels of the fair value hierarchy based on end of period fair values.

For residential mortgage loans reclassified from held for sale to held for investment, the fair value estimation is based on mortgage-backed securities prices, interest rate risk and an internally developed credit component. Therefore, these loans are classified within Level 3 of the valuation hierarchy. An adverse change in the loss rate or severity assumption would result in a decrease in fair value of the related loan. The Secondary Marketing Department, which reports to the Bancorp's Chief Operating Officer, in conjunction with the Consumer Credit Risk Department, which reports to the Bancorp's Chief Risk Officer, are responsible for determining the valuation methodology for residential mortgage loans held for investment. The Secondary Marketing Department reviews loss severity assumptions quarterly to determine if adjustments are necessary based on decreases in observable housing market data. This group also reviews trades in comparable benchmark securities and adjusts the values of loans as necessary. Consumer Credit Risk is responsible for the credit component of the fair value which is based on internally developed loss rate models that take into account historical loss rates and loss severities based on underlying collateral values.

Exchange-traded derivatives valued using quoted prices and certain over-the-counter derivatives valued using active bids are classified within Level 1 of the valuation hierarchy. Most of the Bancorp's derivative contracts are valued using discounted cash flow or other models that incorporate current market interest rates, credit spreads assigned to the derivative counterparties and other market parameters and, therefore, are classified within Level 2 of the valuation hierarchy. Such derivatives include basic and structured interest rate swaps and options. Derivatives that are valued based upon models with significant unobservable market parameters are classified within Level 3 of the valuation hierarchy. At September 30, 2012, December 31, 2011 and September 30, 2011, derivatives classified as Level 3, which are valued using an option-pricing model containing unobservable inputs, consisted primarily of warrants associated with the sale of the processing business to Advent International and a total return swap associated with the Bancorp's sale of Visa, Inc. Class B shares. Level 3 derivatives also include interest rate lock commitments, which utilize internally generated loan closing rate assumptions as a significant unobservable input in the valuation process.

In connection with the sale of the processing business, the Bancorp provided Advent International with certain put options that were exercisable in the event of certain circumstances. In addition, the associated warrants allow the Bancorp to purchase approximately 20 million incremental nonvoting units in Vantiv Holding, LLC under certain defined conditions involving change of control. The put options expired as a result of the Vantiv, Inc. initial public offering in March of 2012. The fair value of the warrants is calculated in conjunction with a third party valuation provider by applying Black-Scholes option valuation models using probability weighted scenarios which contain the following inputs: Vantiv, Inc. stock price, strike price per Warrant Agreement and several unobservable inputs, such as expected term, expected volatility, risk free rate and expected dividend rate.

For the warrants, an increase in the expected term (years), the expected volatility and the risk free rate assumptions would result in an increase in the fair value; correspondingly, a decrease in these assumptions would result in a decrease in the fair value. The Accounting and Treasury Departments, both of which report to the Bancorp's Chief Financial Officer, determined the valuation methodology for the warrants and put option. Accounting and Treasury review changes in fair value on a quarterly basis for reasonableness based on changes in historical and implied volatilities, expected terms, probability weightings of the related scenarios, and other assumptions.

Under the terms of the total return swap, the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Visa, Inc. Class B shares into Class A shares. The fair value of the total return swap was calculated using a discounted cash flow model based on unobservable inputs consisting of management's estimate of the probability of certain litigation scenarios, the timing of the resolution of the Covered Litigation and Visa litigation loss estimate in excess, or shortfall, of the Bancorp's proportional share of escrow funds.

An increase in the loss estimate or a delay in the resolution of the Covered Litigation would result in an increase in fair value; correspondingly, a decrease in the loss estimate or an acceleration of the resolution of the Covered Litigation would result in a decrease in fair value. The Accounting and Treasury Departments determined the valuation methodology for the total return swap. Accounting and Treasury review the changes in fair value on a quarterly basis for reasonableness based on Visa stock price changes, litigation contingencies, and escrow funding.

The net fair value of the interest rate lock commitments at September 30, 2012 was $102 million. Immediate decreases in current interest rates of 25 bps and 50 bps would result in increases in the fair value of the interest rate lock commitments of approximately $23 million and $37 million, respectively. Immediate increases of current interest rates of 25 bps and 50 bps would result in decreases in the fair value of the interest rate lock commitments of approximately $30 million and $66 million, respectively. The decrease in fair value of interest rate lock commitments due to immediate 10% and 20% adverse changes in the assumed loan closing rates would be approximately $10 million and $21 million, respectively, and the increase in fair value due to immediate 10% and 20% favorable changes in the assumed loan closing rates would be approximately $10 million and $21 million, respectively. These sensitivities are hypothetical and should be used with caution, as changes in fair value based on a variation in assumptions typically cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear.

The Secondary Marketing Department and the Consumer Line of Business Finance Department, which reports to the Bancorp's Chief Financial Officer, are responsible for determining the valuation methodology for IRLCs. Secondary Marketing, in conjunction with a third party valuation provider, periodically review loan closing rate assumptions and recent loan sales to determine if adjustments are needed for current market conditions not reflected in historical data.

The following tables are a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
			Residential	Interest Rate	Equity
For the three months ended September 30, 2012		Trading	Mortgage	Derivatives,	Derivatives,	Total
($ in millions)		Securities	Loans	Net^(a)	Net^(a)	Fair Value
Beginning balance	$	1	76	54	184		315
Total gains or losses (realized/unrealized):
Included in earnings		-	1	163	(17)		147
Purchases		-	-	-	-		-
Sales		-	-	-	-		-
Settlements		-	(5)	(118)	9		(114)
Transfers into Level 3^(b)		-	4	-	-		4
Ending balance	$	1	76	99	176		352
Changes in unrealized gains or losses for the period
included in earnings for assets held at
September 30, 2012^(c)	$	-	1	101	(17)		85


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
			Residential	Interest Rate	Equity
For the three months ended September 30, 2011		Trading	Mortgage	Derivatives,	Derivatives,	Total
($ in millions)		Securities	Loans	Net^(a)	Net^(a)	Fair Value
Beginning balance	$	1	59	5	85		150
Total gains or losses (realized/unrealized):
Included in earnings		-	3	100	(14)		89
Purchases		-	-	-	2		2
Sales		-	-	-	-		-
Settlements		-	(2)	(68)	-		(70)
Transfers into Level 3^(b)		-	2	-	-		2
Ending balance	$	1	62	37	73		173
The amount of total gains or losses for the period
included in earnings attributable to the change in
unrealized gains or losses relating to assets
still held at September 30, 2011^(c)	$	-	3	37	(14)		26

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
			Residential	Interest Rate	Equity
For the nine months ended September 30, 2012		Trading	Mortgage	Derivatives,	Derivatives,	Total
($ in millions)		Securities	Loans	Net^(a)	Net^(a)	Fair Value
Beginning balance	$	1	65	32	32		130
Total gains or losses (realized/unrealized):
Included in earnings		-	-	338	57		395
Purchases		-	-	-	-		-
Sales		-	-	-	-		-
Settlements		-	(10)	(271)	87		(194)
Transfers into Level 3^(b)		-	21	-	-		21
Ending balance	$	1	76	99	176		352
Changes in unrealized gains or losses for the period
included in earnings for assets held at
September 30, 2012^(c)	$	-	-	173	57		230


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
			Residential	Interest Rate	Equity
For the nine months ended September 30, 2011		Trading	Mortgage	Derivatives,	Derivatives,	Total
($ in millions)		Securities	Loans	Net^(a)	Net^(a)	Fair Value
Beginning balance	$	6	46	2	53	$	107
Total gains or losses (realized/unrealized):
Included in earnings		-	4	154	-		158
Purchases		-	-	-	2		2
Sales		(5)	-	-	-		(5)
Settlements		-	(5)	(119)	18		(106)
Transfers into Level 3^(b)		-	17	-	-		17
Ending balance	$	1	62	37	73	$	173
The amount of total gains or losses for the period
included in earnings attributable to the change in
unrealized gains or losses relating to assets
still held at September 30, 2011^(c)	$	-	4	41	-	$	45

The total gains and losses included in earnings for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) were recorded in the Condensed Consolidated Statements of Income as follows:

		For the three months		For the nine months
		ended September 30,		ended September 30,
($ in millions)		2012	2011	2012	2011
Mortgage banking net revenue	$	165	104	339	159
Corporate banking revenue		-	-	-	1
Other noninterest income		(18)	(15)	56	(2)
Total gains	$	147	89	395	158

The total gains and losses included in earnings attributable to changes in unrealized gains and losses related to Level 3 assets and liabilities still held at September 30, 2012 and 2011 were recorded in the Condensed Consolidated Statements of Income as follows:

		For the three months		For the nine months
		ended September 30,		ended September 30,
($ in millions)		2012	2011	2012	2011
Mortgage banking net revenue	$	103	41	174	46
Corporate banking revenue		-	-	-	1
Other noninterest income		(18)	(15)	56	(2)
Total gains	$	85	26	230	45

The following table presents information as of September 30, 2012 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets and liabilities measured on a recurring basis.

($ in millions)
Financial Instrument		Fair Value	Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted-Average
Residential mortgage loans	$	76	Loss rate model	Interest rate risk factor	(91.0) - 16.6%	6.5%
				Credit risk factor	2.3 - 68.4%	4.6%
IRLCs, net		102	Discounted cash flow	Loan closing rates	9.8 - 95.0%	60.1%
Stock warrants associated with the sale		197	Black-Scholes option	Expected term (years)	2.00 - 16.75	6.2
of the processing business			valuation model	Expected volatility^(a)	27.7 - 40.6%	34.2%
				Risk free rate	0.2 - 2.6%.	0.9%
				Expected dividend rate	-	-
Swap associated with the sale of Visa, Inc.		(21)	Discounted cash flow	Timing of the resolution	6/30/2013 -	NM
Class B shares				of the Covered Litigation	6/30/2015

Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

The following tables represent those assets that were subject to fair value adjustments during the quarters ended September 30, 2012 and 2011 and still held as of the end of the period, and the related losses from fair value adjustments on assets sold during the period as well as assets still held as of the end of the period.

		Fair Value Measurements Using				Total Losses	Total Losses
						For the three months	For the nine months
As of September 30, 2012 ($ in millions)		Level 1	Level 2	Level 3	Total	ended September 30, 2012	ended September 30, 2012
Commercial loans held for sale^(a)	$	-	-	13	13	(4)	(10)
Commercial and industrial loans		-	-	79	79	(31)	(86)
Commercial mortgage loans		-	-	59	59	(11)	(40)
Commercial construction loans		-	-	8	8	(5)	(21)
MSRs		-	-	679	679	(72)	(122)
OREO property		-	-	114	114	(16)	(60)
Total	$	-	-	952	952	(139)	(339)


		Fair Value Measurements Using				Total Losses	Total Losses
						For the three months	For the nine months
						ended September 30,	ended September 30,
As of September 30, 2011 ($ in millions)		Level 1	Level 2	Level 3	Total	2011	2011
Commercial loans held for sale^(a)	$	-	-	60	60	(23)	(48)
Commercial and industrial loans		-	-	155	155	(84)	(283)
Commercial mortgage loans		-	-	145	145	(46)	(99)
Commercial construction loans		-	-	59	59	(14)	(52)
MSRs		-	-	662	662	(201)	(228)
OREO property		-	-	181	181	(30)	(139)
Total	$	-	-	1,262	1,262	(398)	(849)

The following table presents information as of September 30, 2012 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets and liabilities measured on a nonrecurring basis.

($ in millions)
Financial Instrument		Fair Value	Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted-Average
Commercial loans held for sale	$	13	Appraised value	Appraised value	NM	NM
				Cost to sell	NM	10.0%
Commercial and industrial loans		79	Appraised value	Default rates	100%	NM
				Collateral value	NM	NM
				Loss severities	0 - 97.4%	11.6%
Commercial mortgage loans		59	Appraised value	Default rates	100%	NM
				Collateral value	NM	NM
				Loss severities	0 - 100%	30.0%
Commercial construction loans		8	Appraised value	Default rates	100%	NM
				Collateral value	NM	NM
				Loss severities	0 - 27.0%	3.1%
MSRs		679	Discounted cash flow	Prepayment speed	0 - 100%	(Fixed) 16.9% (Adjustable) 27.1%
				Discount rates	9.4 - 18.0%	(Fixed) 10.6% (Adjustable) 11.7%
OREO property		114	Appraised value	Appraised value	NM	NM

During the third quarter of 2012, the Bancorp transferred $9 million of commercial loans from the portfolio to loans held for sale that upon transfer were measured at fair value. These loans had fair value adjustments totaling $1 million for the three and nine months ended September 30, 2012 and were generally based on appraisals of the underlying collateral. Additionally, there were fair value adjustments on existing loans held for sale of $3 million and $9 million for the three and nine months ended September 30, 2012. Therefore, these loans were classified within Level 3 of the valuation hierarchy. An adverse change in the fair value of the underlying collateral would result in a decrease in the fair value measurement. The Accounting Department determines the procedures for valuation of commercial HFS loans which may include a comparison to recently executed transactions of similar type loans. A monthly review of the portfolio is performed for reasonableness. Quarterly, appraisals approaching a year-old are updated and the Real Estate Valuation group, which reports to the Chief Credit Officer, in conjunction with the Commercial Line of Business review the third party appraisals for reasonableness. Additionally, the Commercial Line of Business Finance Department, which reports to the Bancorp Chief Financial Officer, in conjunction with Accounting review all loan appraisal values, carry values and vintages.

During the three and nine months ended September 30, 2012 and 2011, the Bancorp recorded nonrecurring impairment adjustments to certain commercial and industrial, commercial mortgage and commercial construction loans held for investment. Larger commercial loans included within aggregate borrower relationship balances exceeding $1 million that exhibit probable or observed credit weaknesses are subject to individual review for impairment. The Bancorp considers the current value of collateral, credit quality of any guarantees, the guarantor's liquidity and willingness to cooperate, the loan structure and other factors when evaluating whether an individual loan is impaired. When the loan is collateral dependent, the fair value of the loan is generally based on the fair value of the underlying collateral supporting the loan and therefore these loans were classified within Level 3 of the valuation hierarchy. An adverse change in the fair value of the underlying collateral would result in a decrease in the fair value measurement. In cases where the carrying value exceeds the fair value, an impairment loss is recognized. The fair values and recognized impairment losses are reflected in the previous table. Commercial Credit Risk, which reports to the Chief Risk Officer, is responsible for preparing and reviewing the fair value estimates for commercial loans held for investment.

MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly, the Bancorp estimates the fair value of MSRs using internal discounted cash flow models with certain unobservable inputs, primarily prepayment speed assumptions, discount rates and weighted average lives, resulting in a classification within Level 3 of the valuation hierarchy. Refer to Note 10 for further information on the assumptions used in the valuation of the Bancorp's MSRs. The Secondary Marketing Department and Treasury Department are responsible for determining the valuation methodology for MSRs. Representatives from Secondary Marketing, Treasury, Accounting and Risk Management are responsible for reviewing key assumptions used in the internal discounted cash flow model. Two external valuations of the MSR portfolio are obtained from third parties that use valuation models in order to assess the reasonableness of the internal discounted cash flow model. Additionally, the Bancorp participates in peer surveys that provide additional confirmation of the reasonableness of key assumptions utilized in the MSR valuation process and the resulting MSR prices.

During the three and nine months ended September 30, 2012, the Bancorp recorded nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO and measured at the lower of carrying amount or fair value. These nonrecurring losses are primarily due to declines in real estate values of the properties recorded in OREO. These losses include $4 million and $13 million in losses, recorded as charge-offs, on new OREO properties transferred from loans during the three and nine months ended September 30, 2012, respectively, and $12 million and $47 million in losses for the three and nine months ended September 30, 2012, recorded in other noninterest income, attributable to fair value adjustments on OREO properties subsequent to their transfer from loans. As discussed in the following paragraphs, the fair value amounts are generally based on appraisals of the property values, resulting in a classification within Level 3 of the valuation hierarchy. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. The previous tables reflect the fair value measurements of the properties before deducting the estimated costs to sell.

The Real Estate Valuation department, which reports to the Chief Credit Officer, is solely responsible for managing the appraisal process and evaluating the appraisal for all for commercial properties transferred to OREO. All appraisals on commercial OREO properties are updated on at least an annual basis.

The Real Estate Valuation department reviews the BPO data and internal market information to determine the initial charge-off on residential real estate loans transferred to OREO. Once the foreclosure process is completed, the Bancorp performs an interior inspection to update the initial fair value of the property. These properties are reviewed at least every 30 days after the initial interior inspections are completed. The Asset Manager receives a monthly status report for each property which includes the number of showings, recently sold properties, current comparable listings and overall market conditions.

The Bancorp elected to measure certain residential mortgage loans held for sale under the fair value option as allowed under U.S. GAAP. Electing to measure residential mortgage loans held for sale 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. Management's intent to sell residential mortgage loans classified as held for sale may change over time due to such factors as changes in the overall liquidity in markets or changes in characteristics specific to certain loans held for sale. Consequently, these loans may be reclassified to loans held for investment and maintained in the Bancorp's loan portfolio. In such cases, the loans will continue to be measured at fair value.

Fair value changes recognized in earnings for the three and nine months ended September 30, 2012 for instruments held at September 30, 2012 for which the fair value option was elected as well as the changes in fair value of the underlying IRLCs, included gains of $122 million. Additionally, fair value changes recognized in earnings for the three and nine months ended September 30, 2012 for instruments for which the fair value option was elected but are no longer held by the Bancorp at September 30, 2012 included gains of $138 million and $556 million, respectively. Fair value changes recognized in earnings for the three and nine months ended September 30, 2011 for instruments held at September 30, 2011 for which the fair value option was elected as well as the changes in fair value of the underlying IRLCs included gains of $77 million. Additionally, fair value changes recognized in earnings for the three and nine months ended September 30, 2011 for instruments for which the fair value option was elected but are no longer held by the Bancorp at September 30, 2011 included gains of $93 and $205 million, respectively. These gains and losses are reported in mortgage banking net revenue in the Condensed Consolidated Statements of Income.

Valuation adjustments related to instrument-specific credit risk for residential mortgage loans measured at fair value negatively impacted the fair value of those loans by $3 million at September 30, 2012, December 31, 2011 and September 30, 2011. Interest on residential mortgage loans measured at fair value is accrued as it is earned using the effective interest method and is reported as interest income in the Condensed Consolidated Statements of Income.

The following table summarizes the difference between the fair value and the principal balance for residential mortgage loans measured at fair value as of:

		Aggregate	Aggregate Unpaid
($ in millions)		Fair Value	Principal Balance	Difference
September 30, 2012
Residential mortgage loans measured at fair value	$	1,817	1,695	122
Past due loans of 90 days or more		3	4	(1)
Nonaccrual loans		-	-	-

December 31, 2011
Residential mortgage loans measured at fair value		2,816	2,693	123
Past due loans of 90 days or more		4	5	(1)
Nonaccrual loans		-	-	-

September 30, 2011
Residential mortgage loans measured at fair value		1,655	1,578	77
Past due loans of 90 days or more		4	4	-
Nonaccrual loans		-	-	-

Fair Value of Certain Financial Instruments
The following tables summarize the carrying amounts and estimated fair values for certain financial instruments, excluding financial instruments measured at fair value on a recurring basis.

		Net Carrying	Fair Value Measurements Using			Total
As of September 30, 2012 ($ in millions)		Amount	Level 1	Level 2	Level 3	Fair Value
Financial assets:
Cash and due from banks	$	2,490	2,490	-	-	2,490
Other securities		843	-	843	-	843
Held-to-maturity securities		287	-	-	287	287
Other short-term investments		1,286	1,286	-	-	1,286
Loans held for sale		61	-	-	61	61
Portfolio loans and leases:
Commercial and industrial loans		32,526	-	-	33,701	33,701
Commercial mortgage loans		8,989	-	-	8,259	8,259
Commercial construction loans		633	-	-	520	520
Commercial leases		3,478	-	-	3,355	3,355
Residential mortgage loans^(a)		11,400	-	-	11,350	11,350
Home equity		10,080	-	-	10,064	10,064
Automobile loans		11,884	-	-	11,825	11,825
Credit card		1,910	-	-	2,070	2,070
Other consumer loans and leases		274	-	-	292	292
Unallocated allowance for loan and lease losses		(116)	-	-	-	-
Total portfolio loans and leases, net^(a)	$	81,058	-	-	81,436	81,436
Financial liabilities:
Deposits		84,688	-	84,779	-	84,779
Federal funds purchased		686	686	-	-	686
Other short-term borrowings		5,503	-	5,503	-	5,503
Long-term debt		8,127	6,973	2,057	-	9,030

(a) Excludes $76 of residential mortgage loans measured at fair value on a recurring basis.

		Net Carrying
As of December 31, 2011 ($ in millions)		Amount	Fair Value
Financial assets:
Cash and due from banks	$	2,663	2,663
Other securities		842	842
Held-to-maturity securities		322	322
Other short-term investments		1,781	1,781
Loans held for sale		203	203
Portfolio loans and leases:
Commercial and industrial loans		29,854	30,300
Commercial mortgage loans		9,697	8,870
Commercial construction loans		943	791
Commercial leases		3,451	3,237
Residential mortgage loans^(a)		10,380	9,978
Home equity		10,524	9,737
Automobile loans		11,784	11,747
Credit card		1,872	1,958
Other consumer loans and leases		329	346
Unallocated allowance for loan and lease losses		(136)	-
Total portfolio loans and leases, net^(a)	$	78,698	76,964
Financial liabilities:
Deposits		85,710	85,599
Federal funds purchased		346	346
Other short-term borrowings		3,239	3,239
Long-term debt		9,682	10,197

(a) Excludes $65 of residential mortgage loans measured at fair value on a recurring basis.


		Net Carrying
As of September 30, 2011 ($ in millions)		Amount	Fair Value
Financial assets:
Cash and due from banks	$	2,348	2,348
Other securities		842	842
Held-to-maturity securities		337	337
Other short-term investments		2,028	2,028
Loans held for sale		247	247
Portfolio loans and leases:
Commercial and industrial loans		28,245	29,538
Commercial mortgage loans		9,857	9,167
Commercial construction loans		1,134	889
Commercial leases		3,284	3,131
Residential mortgage loans^(a)		9,954	9,516
Home equity		10,711	9,765
Automobile loans		11,536	11,575
Credit card		1,759	1,831
Other consumer loans and leases		384	430
Unallocated allowance for loan and lease losses		(149)	-
Total portfolio loans and leases, net^(a)	$	76,715	75,842
Financial liabilities:
Deposits		82,047	82,196
Federal funds purchased		427	427
Other short-term borrowings		4,894	4,894
Long-term debt		9,800	10,199

(a) Excludes $62 million of residential mortgage loans measured at fair value on a recurring basis.

Cash and due from banks, other securities, other short-term investments, deposits, federal funds purchased and other short-term borrowings

For financial instruments with a short-term or no stated maturity, prevailing market rates and limited credit risk, carrying amounts approximate fair value. Those financial instruments include cash and due from banks, FHLB and FRB restricted stock, other short-term investments, certain deposits (demand, interest checking, savings, money market and foreign office deposits), and federal funds purchased. Fair values for other time deposits, certificates of deposit $100,000 and over and other short-term borrowings were estimated using a discounted cash flow calculation that applied prevailing LIBOR/swap interest rates for the same maturities.

The Bancorp's held-to-maturity securities are primarily composed of instruments that provide income tax credits as the economic return on the investment. The fair value of these instruments is estimated based on current U.S. Treasury tax credit rates.

Fair values for commercial loans held for sale were valued based on executable bids when available, or on discounted cash flow models incorporating appraisals of the underlying collateral, as well as assumptions about investor return requirements and amounts and timing of expected cash flows. Fair values for other consumer loans held for sale are based on contractual values upon which the loans may be sold to a third party, and approximate their carrying value.

Fair values were estimated by discounting future cash flows using the current market rates of loans to borrowers with similar credit characteristics and similar remaining maturities.

Fair value of long-term debt was based on quoted market prices, when available, or a discounted cash flow calculation using LIBOR/swap interest rates and, in some cases, a spread for new issuances with similar terms.