Fair Value Measurements

12 Months Ended

Dec. 31, 2016

27. FAIR VALUE MEASUREMENTS

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. For more information regarding the fair value hierarchy and how the Bancorp measures fair value, refer to Note 1.


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
December 31, 2016 ($ in millions)		Level 1^(c)	Level 2^(c)	Level 3	Total Fair Value
Assets:
Available-for-sale and other securities:
U.S. Treasury and federal agencies securities	$	471	78	-	549
Obligations of states and political subdivisions securities		-	45	-	45
Mortgage-backed securities:
Agency residential mortgage-backed securities		-	15,608	-	15,608
Agency commercial mortgage-backed securities		-	9,055	-	9,055
Non-agency commercial mortgage-backed securities		-	3,112	-	3,112
Asset-backed securities and other debt securities		-	2,116	-	2,116
Equity securities^(a)		90	1	-	91
Available-for-sale and other securities^(a)		561	30,015	-	30,576
Trading securities:
U.S. Treasury and federal agencies securities		-	23	-	23
Obligations of states and political subdivisions securities		-	39	-	39
Mortgage-backed securities:
Agency residential mortgage-backed securities		-	8	-	8
Asset-backed securities and other debt securities		-	15	-	15
Equity securities		325	-	-	325
Trading securities		325	85	-	410
Residential mortgage loans held for sale		-	686	-	686
Residential mortgage loans^(b)		-	-	143	143
Derivative assets:
Interest rate contracts		20	715	13	748
Foreign exchange contracts		-	202	-	202
Commodity contracts		22	85	-	107
Derivative assets^(d)		42	1,002	13	1,057
Total assets	$	928	31,788	156	32,872
Liabilities:
Derivative liabilities:
Interest rate contracts	$	3	257	5	265
Foreign exchange contracts		-	204	-	204
Equity contracts		-	-	91	91
Commodity contracts		27	79	-	106
Derivative liabilities^(e)		30	540	96	666
Short positions^(e)		17	4	-	21
Total liabilities	$	47	544	96	687

Excludes FHLB, FRB and DTCC restricted stock totaling $248, $358 and $1, respectively, at December 31, 2016.
Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
During the year ended December 31, 2016, no assets or liabilities were transferred between Level 1 and Level 2.
Included in other assets in the Consolidated Balance Sheets.
Included in other liabilities in the Consolidated Balance Sheets.

	Fair Value Measurements Using
December 31, 2015 ($ in millions)		Level 1^(c)	Level 2^(c)	Level 3	Total Fair Value
Assets:
Available-for-sale and other securities:
U.S. Treasury and federal agencies securities	$	100	1,087	-	1,187
Obligations of states and political subdivisions securities		-	52	-	52
Mortgage-backed securities:
Agency residential mortgage-backed securities		-	15,081	-	15,081
Agency commercial mortgage-backed securities		-	7,862	-	7,862
Non-agency commercial mortgage-backed securities		-	2,804	-	2,804
Asset-backed securities and other debt securities		-	1,355	-	1,355
Equity securities^(a)		98	1	-	99
Available-for-sale and other securities^(a)		198	28,242	-	28,440
Trading securities:
U.S. Treasury and federal agencies securities		-	19	-	19
Obligations of states and political subdivisions securities		-	9	-	9
Mortgage-backed securities:
Agency residential mortgage-backed securities		-	6	-	6
Asset-backed securities and other debt securities		-	19	-	19
Equity securities		333	-	-	333
Trading securities		333	53	-	386
Residential mortgage loans held for sale		-	519	-	519
Residential mortgage loans^(b)		-	-	167	167
Derivative assets:
Interest rate contracts		3	892	15	910
Foreign exchange contracts		-	386	-	386
Equity contracts		-	-	262	262
Commodity contracts		54	240	-	294
Derivative assets^(d)		57	1,518	277	1,852
Total assets	$	588	30,332	444	31,364
Liabilities:
Derivative liabilities:
Interest rate contracts	$	1	257	3	261
Foreign exchange contracts		-	340	-	340
Equity contracts		-	-	61	61
Commodity contracts		37	239	-	276
Derivative liabilities^(e)		38	836	64	938
Short positions^(e)		22	7	-	29
Total liabilities	$	60	843	64	967

Excludes FHLB, FRB and DTCC restricted stock totaling $248, $355 and $1, respectively, at December 31, 2015.
Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
During the year ended December 31, 2015, no assets or liabilities were transferred between Level 1 and Level 2.
Included in other assets in the Consolidated Balance Sheets.
Included in other liabilities in the Consolidated Balance Sheets.

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.

Available-for-sale and other securities and trading securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include U.S. Treasury securities 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 DCFs. Level 2 securities include federal agencies securities, obligations of states and political subdivisions securities, agency residential mortgage-backed securities, agency and non-agency commercial mortgage-backed securities, asset-backed securities and other debt securities and equity securities. These securities are generally valued using a market approach based on observable prices of securities with similar characteristics.

Residential mortgage loans held for sale

For residential mortgage loans held for sale for which the fair value election has been made, 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

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 for which the fair value election has been made, and that are 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 Head of the Consumer Bank, 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.

Derivatives

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 DCF 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, foreign exchange and commodity swaps and options. Derivatives that are valued based upon models with significant unobservable market parameters are classified within Level 3 of the valuation hierarchy. During the years ended December 31, 2016 and 2015, derivatives classified as Level 3, which are valued using models containing unobservable inputs, consisted primarily of a warrant associated with the initial sale of the Bancorp’s 51% interest in Vantiv Holding, LLC 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 IRLCs, which utilize internally generated loan closing rate assumptions as a significant unobservable input in the valuation process.

During the fourth quarter of 2016, the Bancorp exercised its right to purchase approximately 7.8 million Class C Units underlying the warrant at the $15.98 strike price. This exercise was settled on a net basis for approximately 5.7 million Class C Units, which were then exchanged for approximately 5.7 million shares of Vantiv, Inc. Class A Common Stock of which 4.8 million shares were sold in a secondary offering and 0.9 million shares were repurchased by Vantiv, Inc. For further information on the warrant transaction, refer to Note 19.

Prior to the aforementioned warrant transaction, the fair value of the warrant was calculated in conjunction with a third party valuation provider by applying Black-Scholes option-pricing models using probability weighted scenarios which contained the following inputs: Vantiv, Inc. stock price, strike price per the Warrant Agreement and unobservable inputs, such as expected term and expected volatility.

For the warrant, an increase in the expected term (years) and the expected volatility assumptions would result in an increase in the fair value; conversely, 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 warrant. Accounting and Treasury reviewed 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. Additionally, the Bancorp will make a quarterly payment based on Visa’s stock price and the conversion rate of the Visa, Inc. Class B Shares into Class A Shares until the date on which the Covered Litigation is settled. The fair value of the total return swap was calculated using a DCF 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 estimates 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; conversely, 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 asset of the IRLCs at December 31, 2016 was $12 million. Immediate decreases in current interest rates of 25 bps and 50 bps would result in increases in fair value of the IRLCs of approximately $6 million and $11 million, respectively. Immediate increases of current interest rates of 25 bps and 50 bps would result in decreases in fair value of the IRLCs of approximately $6 million and $13 million, respectively. The decrease in fair value of IRLCs due to immediate 10% and 20% adverse changes in the assumed loan closing rates would be approximately $1 million and $2 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 $1 million and $2 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 Consumer Line of Business Finance department, which reports to the Bancorp’s Chief Financial Officer, and the aforementioned Secondary Marketing department 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
	Trading		Mortgage	Derivatives,	Derivatives,	Total
For the year ended December 31, 2016 ($ in millions)	Securities		Loans	Net^(a)	Net^(a)	Fair Value
Balance, beginning of period	$	-	167	12	201		380
Total gains (losses) (realized/unrealized):
Included in earnings		-	(2)	115	17		130
Purchases		-	-	(3)	-		(3)
Sale and exercise of warrant		-	-	-	(334)		(334)
Settlements		-	(40)	(116)	25		(131)
Transfers into Level 3^(b)		-	18	-	-		18
Balance, end of period	$	-	143	8	(91)		60
The amount of total gains (losses) for the period
included in earnings attributable to the change in
unrealized gains or losses relating to instruments
still held at December 31, 2016^(c)	$	-	(2)	13	(56)		(45)

Net interest rate derivatives include derivative assets and liabilities of $13 and $5, respectively, as of December 31, 2016. Net equity derivatives include derivative assets and liabilities of $0 and $91, respectively, as of December 31, 2016.
Includes certain residential mortgage loans held for sale that were transferred to held for investment.
Includes interest income and expense.


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
			Residential	Interest Rate	Equity
	Trading		Mortgage	Derivatives,	Derivatives,	Total
For the year ended December 31, 2015 ($ in millions)	Securities		Loans	Net^(a)	Net^(a)	Fair Value
Balance, beginning of period	$	-	108	10	366	484
Total gains (realized/unrealized):
Included in earnings		-	-	111	288	399
Purchases		-	-	(2)	-	(2)
Sale and exercise of warrant		-	-	-	(477)	(477)
Settlements		-	(28)	(107)	24	(111)
Transfers into Level 3^(b)		-	87	-	-	87
Balance, end of period	$	-	167	12	201	380
The amount of total gains for the period
included in earnings attributable to the change in
unrealized gains or losses relating to instruments
still held at December 31, 2015^(c)	$	-	-	17	66	83

Net interest rate derivatives include derivative assets and liabilities of $15 and $3, respectively, as of December 31, 2015. Net equity derivatives include derivative assets and liabilities of $262 and $61, respectively, as of December 31, 2015.
Includes certain residential mortgage loans held for sale that were transferred to held for investment.
Includes interest income and expense.


	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
			Residential	Interest Rate	Equity
		Trading	Mortgage	Derivatives,	Derivatives,	Total
For the year ended December 31, 2014 ($ in millions)		Securities	Loans	Net^(a)	Net^(a)	Fair Value
Balance, beginning of period	$	1	92	8	336	437
Total gains (losses) (realized/unrealized):
Included in earnings		-	4	125	(7)	122
Purchases		-	-	(1)	-	(1)
Sales		(1)	-	-	-	(1)
Settlements		-	(17)	(122)	37	(102)
Transfers into Level 3^(b)		-	29	-	-	29
Balance, end of period	$	-	108	10	366	484
The amount of total gains (losses) for the period
included in earnings attributable to the change in
unrealized gains or losses relating to instruments
still held at December 31, 2014^(c)	$	-	4	13	(7)	10

Net interest rate derivatives include derivative assets and liabilities of $12 and $2, respectively, as of December 31, 2014. Net equity derivatives include derivative assets and liabilities of $415 and $49, respectively, as of December 31, 2014.
Includes certain residential mortgage loans held for sale that were transferred to held for investment.
Includes interest income and expense.

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 Consolidated Statements of Income for the years ended December 31, 2016, 2015 and 2014 as follows:

($ in millions)		2016	2015	2014
Mortgage banking net revenue	$	112	110	127
Corporate banking revenue		1	1	2
Other noninterest income		17	288	(7)
Total gains	$	130	399	122

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 December 31, 2016, 2015 and 2014 were recorded in the Consolidated Statements of Income as follows:

($ in millions)		2016	2015	2014
Mortgage banking net revenue	$	10	16	16
Corporate banking revenue		1	1	1
Other noninterest income		(56)	66	(7)
Total (losses) gains	$	(45)	83	10

The following tables present information as of December 31, 2016 and 2015 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets and liabilities measured at fair value on a recurring basis:

As of December 31, 2016 ($ in millions)
Financial Instrument		Fair Value	Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted-Average
Residential mortgage loans	$	143	Loss rate model	Interest rate risk factor	(11.5) - 13.8%	2.3%
				Credit risk factor	0 - 75.6%	1.4%
IRLCs, net		12	Discounted cash flow	Loan closing rates	23.8 - 99.5%	76.8%
Swap associated with the sale of Visa, Inc.		(91)	Discounted cash flow	Timing of the resolution	12/31/2018 -	NM
Class B Shares				of the Covered Litigation	12/31/2022


As of December 31, 2015 ($ in millions)
Financial Instrument		Fair Value	Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted-Average
Residential mortgage loans	$	167	Loss rate model	Interest rate risk factor	(9.2) - 16.5%	3.1%
				Credit risk factor	0 - 80.5%	1.3%
IRLCs, net		15	Discounted cash flow	Loan closing rates	5.8 - 94.0%	76.3%
Stock warrant associated with Vantiv Holding, LLC		262	Black-Scholes option-	Expected term (years)	2.0 - 13.5	5.9
			pricing model	Expected volatility^(a)	22.6 - 31.2%	25.9%
Swap associated with the sale of Visa, Inc.		(61)	Discounted cash flow	Timing of the resolution	12/31/2016 -	NM
Class B Shares				of the Covered Litigation	3/31/2021

(a) Based on historical and implied volatilities of Vantiv, Inc. and comparable companies assuming similar expected terms.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

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 provide the fair value hierarchy and carrying amount of all assets that were held as of December 31, 2016 and 2015 and for which a nonrecurring fair value adjustment was recorded during the years ended December 31, 2016 and 2015, and the related gains and 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) Gains
As of December 31, 2016 ($ in millions)		Level 1	Level 2	Level 3	Total	For the year ended December 31, 2016
Commercial loans held for sale	$	-	-	5	5	(32)
Commercial and industrial loans		-	-	412	412	(166)
Commercial mortgage loans		-	-	15	15	(4)
Commercial construction loans		-	-	-	-	2
Commercial leases		-	-	3	3	(3)
MSRs		-	-	744	744	7
OREO		-	-	42	42	(17)
Bank premises and equipment		-	-	28	28	(31)
Operating lease equipment		-	-	37	37	(9)
Private equity investments		-	-	60	60	(9)
Total	$	-	-	1,346	1,346	(262)


		Fair Value Measurements Using				Total (Losses) Gains
As of December 31, 2015 ($ in millions)		Level 1	Level 2	Level 3	Total	For the year ended December 31, 2015
Commercial loans held for sale	$	-	-	13	13	3
Residential mortgage loans held for sale		-	-	68	68	(2)
Automobile loans held for sale		-	-	2	2	-
Credit cards held for sale		-	-	4	4	(2)
Commercial and industrial loans		-	-	344	344	(137)
Commercial mortgage loans		-	-	103	103	(41)
Commercial construction loans		-	-	6	6	(5)
Residential mortgage loans		-	-	55	55	(1)
MSRs		-	-	784	784	4
OREO		-	-	58	58	(24)
Bank premises and equipment		-	-	83	83	(101)
Operating lease equipment		-	-	42	42	(33)
Private equity investments				13	13	(1)
Total	$	-	-	1,575	1,575	(340)


The following tables present information as of December 31, 2016 and 2015 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets measured on a nonrecurring basis:

As of December 31, 2016 ($ in millions)
Financial Instrument		Fair Value	Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted-Average
Commercial loans held for sale	$	5	Appraised value	Appraised value	NM	NM
Commercial and industrial loans		412	Appraised value	Collateral value	NM	NM
Commercial mortgage loans		15	Appraised value	Collateral value	NM	NM
Commercial construction loans		-	Appraised value	Collateral value	NM	NM
Commercial leases		3	Appraised value	Appraised value	NM	NM
MSRs		744	Discounted cash flow	Prepayment speed	0.7 - 100%	(Fixed) 10.2%(Adjustable) 25.3%
				OAS spread (bps)	100 - 1,515	(Fixed) 654(Adjustable) 738
OREO		42	Appraised value	Appraised value	NM	NM
Bank premises and equipment		28	Appraised value	Appraised value	NM	NM
Operating lease equipment		37	Appraised value	Appraised value	NM	NM
Private equity investments		60	Liquidity discount applied	Liquidity discount	5.0 - 37.5%	12.8%
			to fund's net asset value

As of December 31, 2015 ($ in millions)
				Significant Unobservable	Ranges of
Financial Instrument		Fair Value	Valuation Technique	Inputs	Inputs	Weighted-Average
Commercial loans held for sale	$	13	Discounted cash flow	Discount spread	NM	4.4%
Residential mortgage loans held for sale		68	Loss rate model	Interest rate risk factor	(7.5) - 0.1%	(1.6%)
				Credit risk factor	NM	0.1%
Automobile loans held for sale		2	Discounted cash flow	Discount spread	NM	3.1%
Credit cards held for sale		4	Comparable transactions	Estimated sales proceeds from	NM	NM
				comparable transactions
Commercial and industrial loans		344	Appraised value	Collateral value	NM	NM
Commercial mortgage loans		103	Appraised value	Collateral value	NM	NM
Commercial construction loans		6	Appraised value	Collateral value	NM	NM
Residential mortgage loans		55	Appraised value	Appraised value	NM	NM
MSRs		784	Discounted cash flow	Prepayment speed	1.0 - 100%	(Fixed) 11.8%(Adjustable) 27.0%
				OAS spread (bps)	364 - 1,515	(Fixed) 618(Adjustable) 703
OREO		58	Appraised value	Appraised value	NM	NM
Bank premises and equipment		83	Appraised value	Appraised value	NM	NM
Operating lease equipment		42	Appraised value	Appraised value	NM	NM
Private equity investments		13	Liquidity discount applied	Liquidity discount	NM	18.0%
			to fund's net asset value

Commercial loans held for sale

During the years ended December 31, 2016 and 2015, the Bancorp transferred $140 million and $37 million, respectively, of commercial loans from the portfolio to loans held for sale that upon transfer were measured at the lower of cost or fair value. These loans had fair value adjustments during the years ended December 31, 2016 and 2015 totaling $30 million and $1 million, respectively, and were generally based on either appraisals of the underlying collateral or were estimated by discounting future cash flows using the current market rates of loans to borrowers with similar credit characteristics, similar remaining maturities, prepayment speeds and loss severities and were, therefore, classified within Level 3 of the valuation hierarchy. Additionally, during the years ended December 31, 2016 and 2015 there were fair value adjustments on existing loans held for sale of $2 million and $1 million, respectively. The fair value adjustments were also based on appraisals of the underlying collateral. The Bancorp recognized an immaterial amount of net gains on the sale of certain commercial loans held for sale during the year ended December 31, 2016 and $5 million in gains on the sale of certain commercial loans held for sale during the year ended December 31, 2015.

The Accounting department determines the procedures for the valuation of commercial loans held for sale using appraised value 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 Bancorp’s Chief Risk Officer, in conjunction with the Commercial Line of Business reviews the third party appraisals for reasonableness. Additionally, the Commercial Line of Business Finance department, which reports to the Bancorp’s Chief Financial Officer, in conjunction with the Accounting department reviews all loan appraisal values, carry values and vintages. The Treasury department, which reports to the Bancorp’s Chief Financial Officer, is responsible for the estimate of fair value adjustments when a discounted future cash flow valuation technique is employed.

Residential mortgage loans held for sale

During the year ended December 31, 2016, the Bancorp did not transfer any residential mortgage loans from the portfolio to loans held for sale. During the year ended December 31, 2015, the Bancorp transferred $233 million of residential mortgage loans from the portfolio to loans held for sale that upon transfer were measured at the lower of cost or fair value using significant unobservable inputs. Fair values were estimated based on mortgage-backed securities prices, interest rate risk and an internally developed credit component. These loans had $2 million of fair value adjustments during the year ended December 31, 2015. The Secondary Marketing department, which reports to the Bancorp’s Head of the Consumer Bank, in conjunction with the Consumer Credit Risk department, which reports to the Bancorp’s Chief Risk Officer, is 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.

Commercial loans held for investment

During the years ended December 31, 2016 and 2015, the Bancorp recorded nonrecurring impairment adjustments to certain commercial and industrial loans, commercial mortgage loans, commercial construction loans and commercial leases 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 are classified within Level 3 of the valuation hierarchy. 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 tables. Commercial Credit Risk, which reports to the Bancorp’s Chief Risk Officer, is responsible for preparing and reviewing the fair value estimates for commercial loans held for investment.

Residential mortgage loans

During the year ended December 31, 2015, the Bancorp transferred approximately $55 million of restructured residential mortgage loans from held for sale to the portfolio as the Bancorp no longer had the intent to sell the loans. Upon transfer, the Bancorp recognized a nonrecurring fair value adjustment of $1 million on these loans, which had previously been transferred to held for sale in the fourth quarter of 2014.

MSRs

Mortgage interest rates increased during both the years ended December 31, 2016 and 2015 and the Bancorp recognized a recovery of temporary impairment in certain classes of the MSR portfolio and the carrying value was adjusted to the fair value. 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 OAS models with certain unobservable inputs, primarily prepayment speed assumptions, OAS and weighted-average lives, resulting in a classification within Level 3 of the valuation hierarchy. Refer to Note 12 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 OAS 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 OAS 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.

OREO

During the years ended December 31, 2016 and 2015, 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 were primarily due to declines in real estate values of the properties recorded in OREO. For the years ended December 31, 2016 and 2015, these losses include $8 million and $14 million, respectively, recorded as charge-offs, on new OREO properties transferred from loans during the respective periods and $9 million and $10 million, respectively, recorded as negative fair value adjustments on OREO in other noninterest expense in the Consolidated Statements of Income 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 Bancorp’s Chief Risk Officer, is solely responsible for managing the appraisal process and evaluating the appraisal 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.

Bank premises and equipment

The Bancorp performs assessments of the recoverability of long-lived assets when events or changes in circumstances indicate that their carrying values may not be recoverable. These properties are written down to their lower of cost or market values. At least annually thereafter, the Bancorp will review these properties for market fluctuations. The fair value amounts are generally based on appraisals of the property values, resulting in a classification within Level 3 of the valuation hierarchy. Corporate Facilities, which reports to the Bancorp’s Chief Administrative Officer, in conjunction with Accounting, are responsible for preparing and reviewing the fair value estimates for bank premises. For further information on bank premises and equipment and discussion on changes to the branch network, refer to Note 7.

Operating lease equipment

During the years ended December 31, 2016 and 2015, the Bancorp recorded nonrecurring impairment adjustments to certain operating lease equipment. When evaluating whether an individual asset is impaired, the Bancorp considers the current fair value of the asset, the changes in overall market demand for the asset and the rate of change in advancements associated with technological improvements that impact the demand for the specific asset under review. As part of this ongoing assessment, the Bancorp determined that the carrying values of certain operating lease equipment were not recoverable and as a result, the Bancorp recorded an impairment loss equal to the amount by which the carrying value of the assets exceeded the fair value. The fair value amounts were generally based on appraised values of the assets, resulting in a classification within Level 3 of the valuation hierarchy. During the years ended December 31, 2016 and 2015, the Bancorp recorded net losses of $9 million and $33 million, respectively, as a reduction to corporate banking revenue in the Consolidated Statements of Income. The Commercial Leasing department, which reports to the Bancorp’s Chief Operating Officer, is responsible for preparing and reviewing the fair value estimates for operating lease equipment. Refer to Note 8 for further information on impairment charges related to certain operating lease equipment.

Private equity investments

In December 2013, the U.S. banking agencies issued final rules to implement section 619 of the DFA, known as the Volcker Rule, which places limitations on banking organizations’ ability to own, sponsor or have certain relationships with certain private equity funds. The Bancorp recognized $9 million and $1 million of OTTI primarily associated with certain nonconforming investments affected by the Volcker Rule during the years ended December 31, 2016 and 2015, respectively. The Bancorp performed nonrecurring fair value measurements on a fund by fund basis to determine whether OTTI existed. The Bancorp estimated the fair value of a fund by applying an estimated market discount to the reported net asset value of the fund. Because the length of time until the investment will become redeemable is generally not certain, these funds were classified within Level 3 of the valuation hierarchy. An adverse change in the reported net asset values or estimated market discounts, where applicable, would result in a decrease in the fair value estimate. In cases where the carrying value exceeds the fair value, an impairment loss is recognized. The Bancorp’s Private Equity department, which reports to the Chief Strategy Officer, in conjunction with Accounting, is responsible for preparing and reviewing the fair value estimates.

Fair Value Option

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 instruments held at December 31, 2016 and 2015 for which the fair value option was elected, as well as the changes in fair value of the underlying IRLCs, included gains of $6 million and $17 million, respectively. These gains are reported in mortgage banking net revenue in the 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 $2 million at both December 31, 2016 and 2015. 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 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
December 31, 2016
Residential mortgage loans measured at fair value	$	829	823	6
Past due loans of 90 days or more		2	2	-
Nonaccrual loans		1	1	-
December 31, 2015
Residential mortgage loans measured at fair value	$	686	669	17
Past due loans of 90 days or more		2	2	-
Nonaccrual loans		2	2	-

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 December 31, 2016 ($ in millions)		Amount	Level 1	Level 2	Level 3	Fair Value
Financial assets:
Cash and due from banks	$	2,392	2,392	-	-	2,392
Other securities		607	-	607	-	607
Held-to-maturity securities		26	-	-	26	26
Other short-term investments		2,754	2,754	-	-	2,754
Loans held for sale		65	-	-	65	65
Portfolio loans and leases:
Commercial and industrial loans		40,958	-	-	41,976	41,976
Commercial mortgage loans		6,817	-	-	6,735	6,735
Commercial construction loans		3,887	-	-	3,853	3,853
Commercial leases		3,959	-	-	3,651	3,651
Residential mortgage loans		14,812	-	-	15,415	15,415
Home equity		7,637	-	-	8,421	8,421
Automobile loans		9,941	-	-	9,640	9,640
Credit card		2,135	-	-	2,503	2,503
Other consumer loans and leases		668	-	-	678	678
Unallocated ALLL		(112)	-	-	-	-
Total portfolio loans and leases, net	$	90,702	-	-	92,872	92,872
Financial liabilities:
Deposits	$	103,821	-	103,811	-	103,811
Federal funds purchased		132	132	-	-	132
Other short-term borrowings		3,535	-	3,535	-	3,535
Long-term debt		14,388	14,288	545	-	14,833


		Net Carrying	Fair Value Measurements Using			Total
As of December 31, 2015 ($ in millions)		Amount	Level 1	Level 2	Level 3	Fair Value
Financial assets:
Cash and due from banks	$	2,540	2,540	-	-	2,540
Other securities		604	-	604	-	604
Held-to-maturity securities		70	-	-	70	70
Other short-term investments		2,671	2,671	-	-	2,671
Loans held for sale		384	-	-	384	384
Portfolio loans and leases:
Commercial and industrial loans		41,479	-	-	41,802	41,802
Commercial mortgage loans		6,840	-	-	6,656	6,656
Commercial construction loans		3,190	-	-	2,918	2,918
Commercial leases		3,807	-	-	3,533	3,533
Residential mortgage loans		13,449	-	-	14,061	14,061
Home equity		8,234	-	-	8,948	8,948
Automobile loans		11,453	-	-	11,170	11,170
Credit card		2,160	-	-	2,551	2,551
Other consumer loans and leases		646	-	-	643	643
Unallocated ALLL		(115)	-	-	-	-
Total portfolio loans and leases, net	$	91,143	-	-	92,282	92,282
Financial liabilities:
Deposits	$	103,205	-	103,219	-	103,219
Federal funds purchased		151	151	-	-	151
Other short-term borrowings		1,507	-	1,507	-	1,507
Long-term debt^(a)		15,810	15,603	625	-	16,228

(a) Upon adoption of ASU 2015-03 on January 1, 2016, the December 31, 2015 Consolidated Balance Sheet was adjusted to reflect the reclassification of $34 of debt issuance costs from other assets to long-term debt. For further information, refer to Note 1.

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, other securities consisting of FHLB, FRB and DTCC restricted stock, other short-term investments, certain deposits (demand, interest checking, savings, money market, foreign office deposits and other deposits), federal funds purchased and other short-term borrowings excluding FHLB borrowings. Fair values for other time deposits, certificates of deposit $100,000 and over and FHLB borrowings were estimated using a DCF calculation that applies prevailing LIBOR/swap interest rates and a spread for new issuances with similar terms.

Held-to-maturity securities

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.

Loans held for sale

Fair values for commercial loans held for sale were valued based on executable bids when available, or on DCF 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 residential mortgage loans held for sale were valued based on estimated third-party valuations utilizing recent sales data from similar transactions. Broker opinion statements were also obtained as additional evidence to support the third-party valuations. Fair values for other consumer loans held for sale were based on contractual values upon which the loans may be sold to a third party, and approximate their carrying value.

Portfolio loans and leases, net

Fair values were estimated based on either appraisals of the underlying collateral or by discounting future cash flows using the current market rates of loans to borrowers with similar credit characteristics, similar remaining maturities, prepayment speeds and loss severities. The Bancorp estimates fair values at the transaction level whenever possible. For certain products with a large number of homogenous transactions, the Bancorp employs a pool approach. This approach involves stratifying and sorting the entire population of transactions into a smaller number of pools with like characteristics. Characteristics may include maturity date, coupon, origination date and principal amortization method.

Long-term debt

Fair value of long-term debt was based on quoted market prices, when available, or a DCF calculation using LIBOR/swap interest rates and, in some cases, Fifth Third credit and/or debt instrument spreads for new issuances with similar terms.