Fair Value Measurements

6 Months Ended

Jun. 30, 2017

21. 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. 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. For more information regarding the fair value hierarchy, refer to Note 1 of the Notes to Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2016.

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 as of:

	Fair Value Measurements Using
June 30, 2017 ($ 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	$	69	-	-	69
Obligations of states and political subdivisions securities		-	45	-	45
Mortgage-backed securities:
Agency residential mortgage-backed securities		-	16,177	-	16,177
Agency commercial mortgage-backed securities		-	9,262	-	9,262
Non-agency commercial mortgage-backed securities		-	3,364	-	3,364
Asset-backed securities and other debt securities		-	2,206	-	2,206
Equity securities^(a)		89	1	-	90
Available-for-sale and other securities^(a)		158	31,055	-	31,213
Trading securities:
U.S. Treasury and federal agencies securities		-	20	-	20
Obligations of states and political subdivisions securities		-	27	-	27
Mortgage-backed securities:
Agency residential mortgage-backed securities		-	413	-	413
Asset-backed securities and other debt securities		-	30	-	30
Equity securities		352	-	-	352
Trading securities		352	490	-	842
Residential mortgage loans held for sale		-	674	-	674
Residential mortgage loans^(b)		-	-	142	142
MSRs^(f)		-	-	849	849
Derivative assets:
Interest rate contracts		3	555	14	572
Foreign exchange contracts		-	118	-	118
Commodity contracts		39	51	-	90
Derivative assets^(d)		42	724	14	780
Total assets	$	552	32,943	1,005	34,500
Liabilities:
Derivative liabilities:
Interest rate contracts	$	3	161	5	169
Foreign exchange contracts		-	133	-	133
Equity contracts		-	-	98	98
Commodity contracts		7	84	-	91
Derivative liabilities^(e)		10	378	103	491
Short positions^(e)		17	5	-	22
Total liabilities	$	27	383	103	513

Excludes FHLB, FRB and DTCC restricted stock holdings totaling $248, $360 and $2, respectively, at June 30, 2017.
Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
During both the three and six months ended June 30, 2017, no assets or liabilities were transferred between Level 1 and Level 2.
Included in other assets in the Condensed Consolidated Balance Sheets.
Included in other liabilities in the Condensed Consolidated Balance Sheets.
Effective January 1, 2017, the Bancorp has elected the fair value measurement method for all existing classes of its residential mortgage servicing rights. The servicing rights were measured at fair value at June 30, 2017 and were measured under the amortization method at December 31, 2016.

	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 holdings 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 Condensed Consolidated Balance Sheets.
Included in other liabilities in the Condensed Consolidated Balance Sheet

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.

MSRs

Effective January 1, 2017, the Bancorp elected the fair value measurement method for all existing classes of its residential mortgage servicing rights. 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 11 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.

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. At June 30, 2017 and December 31, 2016, derivatives classified as Level 3, which are valued using models containing unobservable inputs, consisted primarily of 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.

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 June 30, 2017 was $14 million. Immediate decreases in current interest rates of 25 bps and 50 bps would result in increases in the fair value of the IRLCs of approximately $6 million and $12 million, respectively. Immediate increases of current interest rates of 25 bps and 50 bps would result in decreases in the fair value of the IRLCs of approximately $7 million and $15 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 $3 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 $3 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 Bancorp previously held a warrant, which was fully exercised in 2016, associated with the initial sale of the Bancorp’s 51% interest in Vantiv Holding, LLC to Advent International. 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.

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
		Mortgage		Derivatives,	Equity	Total
For the three months ended June 30, 2017 ($ in millions)		Loans	MSRs^(d)	Net^(a)	Derivatives	Fair Value
Balance, beginning of period	$	141	776	11	(97)		831
Total gains (losses) (realized/unrealized):
Included in earnings		1	(47)	26	(9)		(29)
Purchases/originations		-	120	-	-		120
Settlements		(4)	-	(28)	8		(24)
Transfers into Level 3^(b)		4	-	-	-		4
Balance, end of period	$	142	849	9	(98)		902
The amount of total gains (losses) for the period
included in earnings attributable to the change in unrealized
gains or losses relating to assets still held at June 30, 2017^(c)	$	1	(47)	14	(9)		(41)

Net interest rate derivatives include derivative assets and liabilities of $14 and $5, respectively, as of June 30, 2017.
Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment.
Includes interest income and expense.
Effective January 1, 2017, the Bancorp has elected the fair value measurement method for all existing classes of its residential mortgage servicing rights. The servicing rights were measured at fair value at June 30, 2017 and were measured under the amortization method at December 31, 2016.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		Residential	Interest Rate	Equity
		Mortgage	Derivatives,	Derivatives,	Total
For the three months ended June 30, 2016 ($ in millions)		Loans	Net^(a)	Net^(a)	Fair Value
Balance, beginning of period	$	160	25	253		438
Total gains (losses) (realized/unrealized):
Included in earnings		1	43	(31)		13
Settlements		(11)	(38)	6		(43)
Transfers into Level 3^(b)		4	-	-		4
Balance, end of period	$	154	30	228		412
The amount of total gains (losses) for the period
included in earnings attributable to the change in unrealized
gains or losses relating to assets still held at June 30, 2016^(c)	$	1	33	(31)		3

Net interest rate derivatives include derivative assets and liabilities of $34 and $4, respectively, as of June 30, 2016. Net equity derivatives include derivative assets and liabilities of $327 and $99, respectively, as of June 30, 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
		Mortgage		Derivatives,	Equity	Total
For the six months ended June 30, 2017 ($ in millions)		Loans	MSRs^(d)	Net^(a)	Derivatives	Fair Value
Balance, beginning of period	$	143	744	8	(91)		804
Total gains (losses) (realized/unrealized):
Included in earnings		1	(70)	49	(22)		(42)
Purchases/originations		-	175	(1)	-		174
Settlements		(9)	-	(47)	15		(41)
Transfers into Level 3^(b)		7	-	-	-		7
Balance, end of period	$	142	849	9	(98)		902
The amount of total gains (losses) for the period
included in earnings attributable to the change in unrealized
gains or losses relating to assets still held at June 30, 2017^(c)	$	1	(70)	15	(22)		(76)

Net interest rate derivatives include derivative assets and liabilities of $14 and $5, respectively, as of June 30, 2017.
Includes certain residential mortgage loans held for sale that were transferred to held for investment.
Includes interest income and expense.
Effective January 1, 2017, the Bancorp has elected the fair value measurement method for all existing classes of its residential mortgage servicing rights. The servicing rights were measured at fair value at June 30, 2017 and were measured under the amortization method at December 31, 2016.

	Fair Value Measurements Using Significant Unobservable Inputs (Level 3)
		Residential	Interest Rate	Equity
		Mortgage	Derivatives,	Derivatives,	Total
For the six months ended June 30, 2016 ($ in millions)		Loans	Net^(a)	Net^(a)	Fair Value
Balance, beginning of period	$	167	12	201		380
Total gains (realized/unrealized):
Included in earnings		3	84	16		103
Purchases		-	(1)	-		(1)
Settlements		(22)	(65)	11		(76)
Transfers into Level 3^(b)		6	-	-		6
Balance, end of period	$	154	30	228		412
The amount of total gains for the period
included in earnings attributable to the change in unrealized
gains or losses relating to assets still held at June 30, 2016^(c)	$	3	34	16		53

Net interest rate derivatives include derivative assets and liabilities of $34 and $4, respectively, as of June 30, 2016. Net equity derivatives include derivative assets and liabilities of $327 and $99, respectively, as of June 30, 2016.
Includes certain residential mortgage loans originated as 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 Condensed Consolidated Statements of Income as follows:

		For the three months ended		For the six months ended
		June 30,		June 30,
($ in millions)		2017	2016	2017	2016
Mortgage banking net revenue	$	(21)	44	(21)	86
Corporate banking revenue		1	-	1	1
Other noninterest income		(9)	(31)	(22)	16
Total (losses) gains	$	(29)	13	(42)	103

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 June 30, 2017 and 2016 were recorded in the Condensed Consolidated Statements of Income as follows:

		For the three months ended		For the six months ended
		June 30,		June 30,
($ in millions)		2017	2016	2017	2016
Mortgage banking net revenue	$	(33)	34	(55)	36
Corporate banking revenue		1	-	1	1
Other noninterest income		(9)	(31)	(22)	16
Total (losses) gains	$	(41)	3	(76)	53

The following tables present information as of June 30, 2017 and 2016 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 June 30, 2017 ($ in millions)
Financial Instrument		Fair Value	Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted-Average
Residential mortgage loans	$	142	Loss rate model	Interest rate risk factor	(9.6) - 15.0%	2.9%
				Credit risk factor	0 - 46.2%	1.0%
MSRs		849	Discounted cash flow	Prepayment speed	1.2-100%	(Fixed) 11.5%(Adjustable) 24.8%
				OAS spread (bps)	430-1,515	(Fixed) 530(Adjustable) 773
IRLCs, net		14	Discounted cash flow	Loan closing rates	9.6 - 96.8%	73.0%
Swap associated with the sale of Visa, Inc.		(98)	Discounted cash flow	Timing of the resolution	6/30/2019 -	NM
Class B Shares				of the Covered Litigation	12/31/2022

As of June 30, 2016 ($ in millions)
Financial Instrument		Fair Value	Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted-Average
Residential mortgage loans	$	154	Loss rate model	Interest rate risk factor	(5.2) - 16.3%	5.0%
				Credit risk factor	0 - 80.5%	1.1%
IRLCs, net		34	Discounted cash flow	Loan closing rates	5.3 - 94.0%	75.5%
Stock warrant associated with Vantiv		327	Black-Scholes option-	Expected term (years)	2.0 - 13.0	5.8
Holding, LLC			pricing model	Expected volatility^(a)	21.6 - 27.4%	24.3%
Swap associated with the sale of Visa, Inc.		(99)	Discounted cash flow	Timing of the resolution	12/31/2018 -	NM
Class B Shares				of the Covered Litigation	12/31/2022

(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 June 30, 2017 and 2016 and for which a nonrecurring fair value adjustment was recorded during the three and six months ended June 30, 2017 and 2016, 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	Total Losses
						For the three months ended June 30, 2017	For the six months ended June 30, 2017
As of June 30, 2017 ($ in millions)		Level 1	Level 2	Level 3	Total	For the three months ended June 30, 2017	For the six months ended June 30, 2017
Commercial loans held for sale	$	-	-	45	45	(13)	(32)
Commercial and industrial loans		-	-	405	405	(32)	(58)
Commercial mortgage loans		-	-	26	26	(9)	(11)
Commercial leases		-	-	3	3	(1)	(2)
OREO		-	-	11	11	(1)	(5)
Bank premises and equipment		-	-	16	16	(2)	(5)
Operating lease equipment		-	-	56	56	-	(20)
Total	$	-	-	562	562	(58)	(133)


		Fair Value Measurements Using				Total (Losses) Gains	Total (Losses) Gains
						For the three months	For the six months
As of June 30, 2016 ($ in millions)		Level 1	Level 2	Level 3	Total	ended June 30, 2016	ended June 30, 2016
Commercial loans held for sale	$	-	-	20	20	(5)	(7)
Commercial and industrial loans		-	-	426	426	(19)	(66)
Commercial mortgage loans		-	-	67	67	(7)	(1)
Commercial construction loans		-	-	-	-	-	2
Commercial leases		-	-	3	3	(1)	(1)
MSRs^(a)		-	-	621	621	(45)	(131)
OREO		-	-	38	38	(6)	(9)
Bank premises and equipment		-	-	20	20	2	2
Operating lease equipment		-	-	38	38	(5)	(5)
Total	$	-	-	1,233	1,233	(86)	(216)

Effective January 1, 2017, the Bancorp has elected the fair value measurement method for all existing classes of its residential mortgage servicing rights. The servicing rights were measured at fair value at June 30, 2017 and were measured under the amortization method at June 30, 2016.

The following tables present information as of June 30, 2017 and 2016 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets and liabilities measured on a nonrecurring basis:

As of June 30, 2017 ($ in millions)
Financial Instrument		Fair Value	Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted-Average
Commercial loans held for sale	$	45	Appraised value	Appraised value	NM	NM
Commercial and industrial loans		405	Appraised value	Collateral value	NM	NM
Commercial mortgage loans		26	Appraised value	Collateral value	NM	NM
Commercial leases		3	Appraised value	Collateral value	NM	NM
OREO		11	Appraised value	Appraised value	NM	NM
Bank premises and equipment		16	Appraised value	Appraised value	NM	NM
Operating lease equipment		56	Appraised value	Appraised value	NM	NM

As of June 30, 2016 ($ in millions)
Financial Instrument		Fair Value	Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted-Average
Commercial loans held for sale	$	20	Appraised value	Appraised Value	NM	NM
				Costs to sell	NM	10.0%
Commercial and industrial loans		426	Appraised value	Collateral value	NM	NM
Commercial mortgage loans		67	Appraised value	Collateral value	NM	NM
Commercial construction loans		-	Appraised value	Collateral value	NM	NM
Commercial leases		3	Appraised value	Collateral value	NM	NM
MSRs		621	Discounted cash flow	Prepayment speed	0-100%	(Fixed) 15.0%(Adjustable) 26.9%
				OAS spread (bps)	404-1,515	(Fixed) 648(Adjustable) 762
OREO		38	Appraised value	Appraised value	NM	NM
Bank premises and equipment		20	Appraised value	Appraised value	NM	NM
Operating lease equipment		38	Appraised value	Appraised value	NM	NM

Commercial loans held for sale

During the three and six months ended June 30, 2017, the Bancorp transferred $57 million and $75 million, respectively, of commercial loans from the portfolio to loans held for sale that upon transfer were measured at lower of cost or fair value. During the three and six months ended June 30, 2016, the Bancorp transferred $20 million and $25 million, respectively, of commercial loans from the portfolio to loans held for sale that upon transfer were measured at lower of cost or fair value. There were $13 million and $30 million of fair value adjustments for the three and six months ended June 30, 2017, respectively. There were $5 million of fair value adjustments for both the three and six months ended June 30, 2016. The fair value adjustments were generally based on 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, fair value adjustments on existing loans held for sale were immaterial for both the three and six months ended June 30, 2017 and 2016, respectively. The fair value adjustments were also based on appraisals of the underlying collateral. The Bancorp recognized an immaterial amount of losses on the sale of commercial loans held for sale during both the three months ended June 30, 2017 and 2016. The Bancorp recognized $2 million in losses on the sale of commercial loans held for sale for both the six months ended June 30, 2017 and 2016.

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, review 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.

Commercial loans held for investment

During the three and six months ended June 30, 2017 and 2016, 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 were 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.

MSRs

Effective January 1, 2017, the Bancorp elected the fair value measurement method for all existing classes of its residential mortgage servicing rights. The servicing rights were measured at fair value at June 30, 2017 and under the amortization method at December 31, 2016. Mortgage interest rates decreased during the six months ended June 30, 2016 and the Bancorp recognized temporary impairment in certain classes of the MSR portfolio and the carrying value was adjusted to the fair value. Refer to the MSRs section of the Assets and Liabilities Measured at Fair Value on a Recurring Basis discussion for additional information.

OREO

During the three and six months ended June 30, 2017 and 2016, 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. These losses included $1 million and $3 million in losses, recorded as charge-offs, on new OREO properties transferred from loans during the three and six months ended June 30, 2017, respectively, and $3 million and $5 million for the three and six months ended June 30, 2016, respectively. These losses also included an immaterial amount of losses and $2 million in losses for the three and six months ended June 30, 2017, respectively, and $3 million and $4 million in losses for the three and six months ended June 30, 2016, respectively, recorded as negative fair value adjustments on OREO in other noninterest expense in the Condensed 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 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 were 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 were 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 and equipment. For further information on bank premises and equipment and discussion on changes to the branch network, refer to Note 7.

Operating lease equipment

During both the three and six months ended June 30, 2017 and 2016, 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. The Bancorp recorded net losses of an immaterial amount and $20 million for the three and six months ended June 30, 2017, respectively, and net losses of $5 million for both the three and six months ended June 30, 2016 as a reduction to corporate banking revenue in the Condensed 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.

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 June 30, 2017 and 2016 for which the fair value option was elected, as well as the changes in fair value of the underlying IRLCs, included gains of $26 million and $45 million for the six months ended June 30, 2017 and 2016, respectively. These gains 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 $1 million and $2 million at June 30, 2017 and December 31, 2016, respectively. 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 unpaid principal balance for residential mortgage loans measured at fair value as of:

		Aggregate	Aggregate Unpaid
($ in millions)		Fair Value	Principal Balance	Difference
June 30, 2017
Residential mortgage loans measured at fair value	$	816	790	26
Past due loans of 90 days or more		2	2	-
Nonaccrual loans		1	1	-
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	-

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 June 30, 2017 ($ in millions)		Amount	Level 1	Level 2	Level 3	Fair Value
Financial assets:
Cash and due from banks	$	2,203	2,203	-	-	2,203
Other securities		610	-	610	-	610
Held-to-maturity securities		26	-	-	26	26
Other short-term investments		2,163	2,163	-	-	2,163
Loans held for sale		92	-	-	94	94
Portfolio loans and leases:
Commercial and industrial loans		40,215	-	-	41,425	41,425
Commercial mortgage loans		6,781	-	-	6,729	6,729
Commercial construction loans		4,349	-	-	4,349	4,349
Commercial leases		4,143	-	-	3,885	3,885
Residential mortgage loans		15,225	-	-	15,921	15,921
Home equity		7,250	-	-	7,757	7,757
Automobile loans		9,277	-	-	9,023	9,023
Credit card		2,018	-	-	2,374	2,374
Other consumer loans and leases		930	-	-	977	977
Unallocated ALLL		(110)	-	-	-	-
Total portfolio loans and leases, net	$	90,078	-	-	92,440	92,440
Financial liabilities:
Deposits	$	101,880	-	101,855	-	101,855
Federal funds purchased		117	117	-	-	117
Other short-term borrowings		5,389	-	5,389	-	5,389
Long-term debt		13,456	13,565	564	-	14,129

		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

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.