Fair Value Measurements

3 Months Ended

Mar. 31, 2019

25. 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, 2018.

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
March 31, 2019 ($ in millions)		Level 1^(c)	Level 2^(c)	Level 3	Total Fair Value
Assets:
Available-for-sale debt and other securities:
U.S. Treasury and federal agency securities	$	797	-	-	797
Obligations of states and political subdivisions securities		-	6	-	6
Mortgage-backed securities:
Agency residential mortgage-backed securities		-	15,689	-	15,689
Agency commercial mortgage-backed securities		-	12,513	-	12,513
Non-agency commercial mortgage-backed securities		-	3,375	-	3,375
Asset-backed securities and other debt securities		-	2,087	-	2,087
Available-for-sale debt and other securities^(a)		797	33,670	-	34,467
Trading debt securities:
U.S. Treasury and federal agency securities		1	6	-	7
Obligations of states and political subdivisions securities		-	25	-	25
Agency residential mortgage-backed securities		-	66	-	66
Asset-backed securities and other debt securities		-	227	-	227
Trading debt securities		1	324	-	325
Equity securities		418	8	-	426
Residential mortgage loans held for sale		-	626	-	626
Residential mortgage loans^(b)		-	-	190	190
Commercial loans held for sale		-	22	-	22
MSRs		-	-	1,141	1,141
Derivative assets:
Interest rate contracts		-	837	11	848
Foreign exchange contracts		-	139	-	139
Commodity contracts		25	165	-	190
Derivative assets^(d)		25	1,141	11	1,177
Total assets	$	1,241	35,791	1,342	38,374
Liabilities:
Derivative liabilities:
Interest rate contracts	$	7	425	9	441
Foreign exchange contracts		-	126	-	126
Equity contracts		-	-	143	143
Commodity contracts		20	150	-	170
Derivative liabilities^(e)		27	701	152	880
Short positions^(e)		55	53	-	108
Total liabilities	$	82	754	152	988

Excludes FHLB, FRB and DTCC restricted stock holdings totaling $137, $442 and $2, respectively, at March 31, 2019.
Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
During the three months ended March 31, 2019, 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.

	Fair Value Measurements Using
December 31, 2018 ($ in millions)		Level 1^(c)	Level 2^(c)	Level 3	Total Fair Value
Assets:
Available-for-sale debt and other securities:
U.S. Treasury and federal agency securities	$	97	-	-	97
Obligations of states and political subdivisions securities		-	2	-	2
Mortgage-backed securities:
Agency residential mortgage-backed securities		-	16,247	-	16,247
Agency commercial mortgage-backed securities		-	10,650	-	10,650
Non-agency commercial mortgage-backed securities		-	3,267	-	3,267
Asset-backed securities and other debt securities		-	2,015	-	2,015
Available-for-sale debt and other securities^(a)		97	32,181	-	32,278
Trading debt securities:
U.S. Treasury and federal agency securities		-	16	-	16
Obligations of states and political subdivisions securities		-	35	-	35
Agency residential mortgage-backed securities		-	68	-	68
Asset-backed securities and other debt securities		-	168	-	168
Trading debt securities		-	287	-	287
Equity securities		452	-	-	452
Residential mortgage loans held for sale		-	537	-	537
Residential mortgage loans^(b)		-	-	179	179
Commercial loans held for sale		-	7	-	7
MSRs		-	-	938	938
Derivative assets:
Interest rate contracts		-	648	7	655
Foreign exchange contracts		-	152	-	152
Commodity contracts		93	214	-	307
Derivative assets^(d)		93	1,014	7	1,114
Total assets	$	642	34,026	1,124	35,792
Liabilities:
Derivative liabilities:
Interest rate contracts	$	8	313	8	329
Foreign exchange contracts		-	142	-	142
Equity contracts		-	-	125	125
Commodity contracts		19	259	-	278
Derivative liabilities^(e)		27	714	133	874
Short positions^(e)		110	28	-	138
Total liabilities	$	137	742	133	1,012

Excludes FHLB, FRB and DTCC restricted stock holdings totaling $184, $366 and $2, respectively, at December 31, 2018.
Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
During the year ended December 31, 2018, 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.

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 debt and other securities, trading debt securities and equity 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 equity securities. 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 may include federal agency 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.

Commercial loans held for sale

For commercial loans held for sale for which the fair value election has been made, fair value is estimated based upon quoted prices of identical or similar assets in an active market, which are reviewed and approved by the Market Risk department, which reports to the Bancorp’s Chief Risk Officer. These loans are generally valued using a market approach based on observable prices and are classified within Level 2 of the valuation hierarchy.

MSRs

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 14 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 quarterly 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 March 31, 2019 and December 31, 2018, 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 the fair value of the derivative liability; conversely, a decrease in the loss estimate or an acceleration of the resolution of the Covered Litigation would result in a decrease in the fair value of the derivative liability. The Accounting and Treasury departments, both of which report to the Bancorp’s Chief Financial Officer, 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 asset fair value of the IRLCs at March 31, 2019 was $11 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 $4 million and $7 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 $4 million and $10 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.

Short positions

Where quoted prices are available in an active market, short positions are classified within Level 1 of the valuation hierarchy. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics or DCFs and therefore are classified within Level 2 of the valuation hierarchy.


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 March 31, 2019 ($ in millions)		Loans	MSRs	Net^(a)	Derivatives	Fair Value
Balance, beginning of period	$	179	938	(1)	(125)		991
Total (losses) gains (realized/unrealized):
Included in earnings		-	(84)	24	(31)		(91)
Purchases/originations/acquisitions		-	287	(1)	-		286
Settlements		(4)	-	(20)	13		(11)
Transfers into Level 3^(b)		15	-	-	-		15
Balance, end of period	$	190	1,141	2	(143)		1,190
The amount of total (losses) gains for the period
included in earnings attributable to the change in unrealized
gains or losses relating to instruments still held at March 31, 2019^(c)	$	-	(69)	11	(31)		(89)

Net interest rate derivatives include derivative assets and liabilities of $11 and $9, respectively, as of March 31, 2019.
Includes certain residential mortgage loans originated as 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 three months ended March 31, 2018 ($ in millions)		Loans	MSRs	Net^(a)	Derivatives	Fair Value
Balance, beginning of period	$	137	858	3	(137)		861
Total gains (losses) (realized/unrealized):
Included in earnings		(2)	28	14	(39)		1
Purchases/originations		-	40	(2)	-		38
Settlements		(135)	-	(11)	11		(135)
Transfers into Level 3^(b)		136	-	-	-		136
Balance, end of period	$	136	926	4	(165)		901
The amount of total (losses) gains for the period
included in earnings attributable to the change in unrealized
gains or losses relating to instruments still held at March 31, 2018^(c)	$	(2)	28	11	(39)		(2)

Net interest rate derivatives include derivative assets and liabilities of $11 and $7, respectively, as of March 31, 2018.
Includes certain residential mortgage loans originated as held for sale that were transferred to held for investment.
Includes interest income and expense.

The total losses and gains 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
		March 31,
($ in millions)		2019	2018
Mortgage banking net revenue	$	(60)	39
Corporate banking revenue		-	1
Other noninterest income		(31)	(39)
Total (losses) gains	$	(91)	1

The total losses included in earnings attributable to changes in unrealized gains and losses related to Level 3 assets and liabilities still held at March 31, 2019 and 2018 were recorded in the Condensed Consolidated Statements of Income as follows:

		For the three months ended
		March 31,
($ in millions)		2019	2018
Mortgage banking net revenue	$	(58)	36
Corporate banking revenue		-	1
Other noninterest income		(31)	(39)
Total losses	$	(89)	(2)

The following tables present information as of March 31, 2019 and 2018 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 March 31, 2019 ($ in millions)
Financial Instrument		Fair Value	Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted-Average
Residential mortgage loans	$	190	Loss rate model	Interest rate risk factor	(13.4) - 19.4%	0.6%
				Credit risk factor	0 - 39.9%	0.5%
MSRs		1,141	DCF	Prepayment speed	0-100.0%	(Fixed) 11.2%(Adjustable) 23.1%
				OAS spread (bps)	447-1,513	(Fixed) 538(Adjustable) 884
IRLCs, net		11	DCF	Loan closing rates	7.3 - 96.6%	78.9%
Swap associated with the sale of Visa, Inc.		(143)	DCF	Timing of the resolution	3/31/2021 -	1/6/2022
Class B Shares				of the Covered Litigation	11/30/2023

As of March 31, 2018 ($ in millions)
Financial Instrument		Fair Value	Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted-Average
Residential mortgage loans	$	136	Loss rate model	Interest rate risk factor	(12.6) - 14.1%	1.3%
				Credit risk factor	0 - 46.2%	1.5%
MSRs		926	DCF	Prepayment speed	0.5-98.1%	(Fixed) 10.0%(Adjustable) 24.6%
				OAS spread (bps)	446-1,515	(Fixed) 548(Adjustable) 797
IRLCs, net		11	DCF	Loan closing rates	9.5- 102.7%	76.6%
Swap associated with the sale of Visa, Inc.		(165)	DCF	Timing of the resolution	2/28/2021 -	9/8/2021
Class B Shares				of the Covered Litigation	12/31/2023

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 March 31, 2019 and 2018, and for which a nonrecurring fair value adjustment was recorded during the three months ended March 31, 2019 and 2018, 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. The following tables exclude the fair values of assets acquired and liabilities assumed in the acquisition of MB Financial, Inc. on March 22, 2019. Refer to Note 3 for additional information on the acquisition of MB Financial, Inc.

		Fair Value Measurements Using				Total (Losses) Gains
						For the three months
As of March 31, 2019 ($ in millions)		Level 1	Level 2	Level 3	Total	ended March 31, 2019
Commercial and industrial loans	$	-	-	109	109	(20)
Commercial mortgage loans		-	-	9	9	-
Commercial leases		-	-	13	13	(1)
OREO		-	-	12	12	(2)
Bank premises and equipment		-	-	22	22	(20)
Private equity investments		-	1	7	8	2
Total	$	-	1	172	173	(41)


		Fair Value Measurements Using				Total (Losses) Gains
						For the three months
As of March 31, 2018 ($ in millions)		Level 1	Level 2	Level 3	Total	ended March 31, 2018
Commercial loans held for sale	$	-	-	5	5	(1)
Commercial and industrial loans		-	-	277	277	(44)
Commercial mortgage loans		-	-	4	4	6
Commercial leases		-	-	2	2	(2)
OREO		-	-	17	17	(3)
Bank premises and equipment		-	-	4	4	(8)
Operating lease equipment		-	-	12	12	(2)
Private equity investments		-	50	33	83	19
Total	$	-	50	354	404	(35)

The following tables present information as of March 31, 2019 and 2018 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 March 31, 2019 ($ in millions)
Financial Instrument		Fair Value	Valuation Technique	Significant Unobservable Inputs	Ranges of Inputs	Weighted-Average
Commercial and industrial loans	$	109	Appraised value	Collateral value	NM	NM
Commercial mortgage loans		9	Appraised value	Collateral value	NM	NM
Commercial leases		13	Appraised value	Collateral value	NM	NM
OREO		12	Appraised value	Appraised value	NM	NM
Bank premises and equipment		22	Appraised value	Appraised value	NM	NM
Private equity investments		7	Comparable company analysis	Market comparable transactions	NM	NM

As of March 31, 2018 ($ 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
				Costs to sell	NM	10.0%
Commercial and industrial loans		277	Appraised value	Collateral value	NM	NM
Commercial mortgage loans		4	Appraised value	Collateral value	NM	NM
Commercial leases		2	Appraised value	Collateral value	NM	NM
OREO		17	Appraised value	Appraised value	NM	NM
Bank premises and equipment		4	Appraised value	Appraised value	NM	NM
Operating lease equipment		12	Appraised value	Appraised value	NM	NM
Private equity investments		29	Liquidity discount applied	Liquidity discount	0-43.0%	10.5%
			to fund's NAV
		4	Comparable company analysis	Market comparable transactions	NM	NM

Portfolio commercial loans and leases

During the three months ended March 31, 2019 and 2018, the Bancorp recorded nonrecurring impairment adjustments to certain commercial and industrial loans, commercial mortgage 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.

OREO

During both the three months ended March 31, 2019 and 2018, 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 include $1 million in losses, recorded as charge-offs on new OREO properties transferred from loans during the both the three months ended March 31, 2019 and 2018. These losses also included $1 million and $2 million in losses for the three months ended March 31, 2019 and 2018, 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 appraisals 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. Enterprise Workplace Services, 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 refer to Note 8.

Operating lease equipment

During the three months ended March 31, 2018, 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 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.

Private equity investments

The Bancorp accounts for its private equity investments, except for those accounted for under the equity method of accounting, at each investment’s cost basis minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for identical or similar investments of the same issuer. The Bancorp recognized gains of $5 million and $35 million resulting from observable price changes during the three months ended March 31, 2019 and 2018, respectively. The carrying value of the Bancorp’s private equity investments still held as of March 31, 2019 includes a cumulative $53 million of positive adjustments as a result of observable price changes since January 1, 2018. Because these adjustments are based on observable transactions in inactive markets, they are classified in Level 2 of the fair value hierarchy.

For private equity investments which are accounted for using the measurement alternative to fair value, the Bancorp qualitatively evaluates each investment quarterly to determine if impairment may exist. If necessary, the Bancorp then measures impairment by estimating the value of its investment and comparing that to the investment’s carrying value, whether or not the Bancorp considers the impairment to be temporary. These valuations are typically developed using a DCF method, but other methods may be used if more appropriate for the circumstances. These valuations are based on unobservable inputs and therefore are classified in Level 3 of the fair value hierarchy. The Bancorp recognized impairment of $3 million and $10 million for the three months ended March 31, 2019 and 2018, respectively. The carrying value of the Bancorp’s private equity investments still held as of March 31, 2019 includes a cumulative $15 million of impairment charges recognized since adoption of the measurement alternative to fair value on January 1, 2018.

The Bancorp did not recognize any OTTI and recognized $6 million of OTTI primarily associated with certain nonconforming investments affected by the Volcker Rule during the three months ended March 31, 2019 and 2018, 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 the funds by applying an estimated market discount to the reported NAV of the fund or through a DCF analysis. 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 NAVs 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 Head of Payments, Strategy and Digital Solutions, 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 and commercial 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. Electing to measure certain commercial loans held for sale at fair value reduces certain timing differences and better reflects changes in fair value of these assets that are expected to be sold in the short term. Management’s intent to sell residential mortgage or commercial 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 residential mortgage loans held at March 31, 2019 and 2018 for which the fair value option was elected, as well as the changes in fair value of the underlying IRLCs, included gains of $23 million and $12 million, respectively. These gains are reported in mortgage banking net revenue in the Condensed Consolidated Statements of Income. Fair value changes recognized in earnings for commercial loans held at March 31, 2019 and 2018 for which the fair value option was elected included losses of an immaterial amount and gains of an immaterial amount, respectively. These gains are reported in corporate banking 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 at both March 31, 2019 and December 31, 2018. Valuation adjustments related to instrument-specific credit risk for commercial loans measured at fair value had an immaterial impact on the fair value of those loans at both March 31, 2019 and December 31, 2018. Interest on 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 and commercial loans measured at fair value as of:

		Aggregate	Aggregate Unpaid
March 31, 2019 ($ in millions)		Fair Value	Principal Balance	Difference
Residential mortgage loans measured at fair value	$	816	793	23
Past due loans of 90 days or more		2	2	-
Nonaccrual loans		1	1	-
Commercial loans measured at fair value		22	22	-
December 31, 2018
Residential mortgage loans measured at fair value	$	716	696	20
Past due loans of 90 days or more		2	2	-
Nonaccrual loans		2	2	-
Commercial loans measured at fair value		7	7	-

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 March 31, 2019 ($ in millions)		Amount	Level 1	Level 2	Level 3	Fair Value
Financial assets:
Cash and due from banks	$	2,749	2,749	-	-	2,749
Other short-term investments		3,556	3,556	-	-	3,556
Other securities		581	-	581	-	581
Held-to-maturity securities		21	-	-	21	21
Loans and leases held for sale		44	-	-	44	44
Portfolio loans and leases:
Commercial and industrial loans		51,345	-	-	52,138	52,138
Commercial mortgage loans		10,603	-	-	10,587	10,587
Commercial construction loans		5,197	-	-	5,263	5,263
Commercial leases		3,889	-	-	3,559	3,559
Residential mortgage loans		16,542	-	-	17,219	17,219
Home equity		6,396	-	-	6,722	6,722
Indirect secured consumer loans		9,983	-	-	9,871	9,871
Credit card		2,238	-	-	2,668	2,668
Other consumer loans		2,456	-	-	2,610	2,610
Unallocated ALLL		(112)	-	-	-	-
Total portfolio loans and leases, net	$	108,537	-	-	110,637	110,637
Financial liabilities:
Deposits	$	123,664	-	123,627	-	123,627
Federal funds purchased		2,630	2,630	-	-	2,630
Other short-term borrowings		1,329	-	1,329	-	1,329
Long-term debt		15,483	15,229	816	-	16,045

		Net Carrying	Fair Value Measurements Using			Total
As of December 31, 2018 ($ in millions)		Amount	Level 1	Level 2	Level 3	Fair Value
Financial assets:
Cash and due from banks	$	2,681	2,681	-	-	2,681
Other short-term investments		1,825	1,825	-	-	1,825
Other securities		552	-	552	-	552
Held-to-maturity securities		18	-	-	18	18
Loans and leases held for sale		63	-	-	63	63
Portfolio loans and leases:
Commercial and industrial loans		43,825	-	-	44,668	44,668
Commercial mortgage loans		6,894	-	-	6,851	6,851
Commercial construction loans		4,625	-	-	4,688	4,688
Commercial leases		3,582	-	-	3,180	3,180
Residential mortgage loans		15,244	-	-	15,688	15,688
Home equity		6,366	-	-	6,719	6,719
Indirect secured consumer loans		8,934	-	-	8,717	8,717
Credit card		2,314	-	-	2,759	2,759
Other consumer loans		2,309	-	-	2,428	2,428
Unallocated ALLL		(110)	-	-	-	-
Total portfolio loans and leases, net	$	93,983	-	-	95,698	95,698
Financial liabilities:
Deposits	$	108,835	-	108,782	-	108,782
Federal funds purchased		1,925	1,925	-	-	1,925
Other short-term borrowings		573	-	573	-	573
Long-term debt		14,426	14,287	445	-	14,732