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Fair Value
 12 Months Ended
Dec. 31, 2017
Fair Value Disclosures [Abstract]  
Fair Value
FAIR VALUE

Fair Value Hierarchy

The Company is required to report fair value measurements for specified classes of assets and liabilities. See Note 1 — "Business and Summary of Significant Accounting Policies" for fair value measurement policy.

The Company characterizes inputs in the determination of fair value according to the fair value hierarchy. The fair value of the Company's assets and liabilities where the measurement objective specifically requires the use of fair value are set forth in the tables below.

Disclosures that follow in this note exclude assets and liabilities classified as discontinued operations.

Financial Assets and Liabilities Measured at Estimated Fair Value on a Recurring Basis

The following table summarizes the Company's assets and liabilities measured at estimated fair value on a recurring basis.

Assets and Liabilities Measured at Fair Value on a Recurring Basis (dollars in millions)
 
Total

 
Level 1

 
Level 2

 
Level 3

December 31, 2017
 

 
 

 
 

 
 

Assets
 

 
 

 
 

 
 

Debt Securities AFS
$
6,123.6

 
$
199.0

 
$
5,538.8

 
$
385.8

Securities carried at fair value with changes recorded in net income
0.4

 
—

 
—

 
0.4

Equity Securities AFS
44.7

 
0.2

 
44.5

 
—

Derivative assets at fair value — non-qualifying hedges(1)
68.5

 
—

 
68.4

 
0.1

Derivative assets at fair value — qualifying hedges
0.2

 
—

 
0.2

 
—

Total
$
6,237.4

 
$
199.2

 
$
5,651.9

 
$
386.3

Liabilities
 

 
 

 
 

 
 

Derivative liabilities at fair value — non-qualifying hedges(1)
$
(68.3
)
 
$
—

 
$
(54.2
)
 
$
(14.1
)
Derivative liabilities at fair value — qualifying hedges
(18.7
)
 
—

 
(18.7
)
 
—

Consideration holdback liability
(46.0
)
 
—

 
—

 
(46.0
)
FDIC True-up Liability
(65.1
)
 
—

 
—

 
(65.1
)
Total
$
(198.1
)
 
$
—

 
$
(72.9
)
 
$
(125.2
)
December 31, 2016
 

 
 

 
 

 
 

Assets
 

 
 

 
 

 
 

Debt Securities AFS
$
3,674.1

 
$
200.1

 
$
2,988.5

 
$
485.5

Securities carried at fair value with changes recorded in net income
283.5

 
—

 
—

 
283.5

Equity Securities AFS
34.1

 
0.3

 
33.8

 
—

Derivative assets at fair value — non-qualifying hedges(1)
94.7

 
—

 
94.7

 
—

Derivative assets at fair value — qualifying hedges
16.9

 
—

 
16.9

 
—

Total
$
4,103.3

 
$
200.4

 
$
3,133.9

 
$
769.0

Liabilities
 

 
 

 
 

 
 

Derivative liabilities at fair value — non-qualifying hedges(1)
$
(68.8
)
 
$
—

 
$
(57.3
)
 
$
(11.5
)
Consideration holdback liability
(47.2
)
 
—

 
—

 
(47.2
)
FDIC True-up Liability
(61.9
)
 
—

 
—

 
(61.9
)
Total
$
(177.9
)
 
$
—

 
$
(57.3
)
 
$
(120.6
)

(1) 
Derivative fair values include accrued interest.

Debt and Equity Securities Classified as AFS and Securities carried at fair value with changes recorded in net income — Debt and equity securities classified as AFS are carried at fair value, as determined either by Level 1, Level 2 or Level 3 inputs. Debt securities classified as AFS included investments in U.S. federal government agency, U.S. Treasury Notes and supranational securities and were valued using Level 2 inputs, primarily quoted prices for similar securities. U.S. Treasury Bills and certain equity securities classified as AFS were valued using Level 1 inputs, primarily quoted prices in active markets. For Agency pass-through MBS, which are classified as Level 2, the Company generally determines estimated fair value utilizing prices obtained from independent broker dealers and recent trading activity for similar assets. Debt securities classified as AFS and securities carried at fair value with changes recorded in net income represent non-Agency MBS, the market for such securities is not active and the estimated fair value was determined using a discounted cash flow technique. The significant unobservable assumptions, which are verified to the extent possible using broker dealer quotes, are estimated by type of underlying collateral, including credit loss assumptions, estimated prepayment speeds and appropriate discount rates. Given the lack of observable market data, the estimated fair value of the non-agency MBS is classified as Level 3.

Derivative Assets and Liabilities — These derivatives are valued using models that incorporate inputs depending on the type of derivative, such as interest rate curves, foreign exchange rates and volatility. Readily observable market inputs to models can be validated to external sources, including industry pricing services, or corroborated through recent trades, broker dealer quotes, yield curves, or other market-related data. As such, these derivative instruments are valued using a Level 2 methodology. In addition, these derivative values incorporate an assessment of the risk of counterparty nonperformance, measured based on the Company's evaluation of credit risk. The fair value of the TRS derivative, written options on certain CIT Bank CDs and credit derivatives were estimated using Level 3 inputs.

FDIC True-up Liability —The FDIC True-up liability was recorded at estimated fair value as of the Acquisition Date and is remeasured to fair value at each reporting date until the contingency is resolved. The FDIC True-up liability was valued using the discounted cash flow method based on the terms specified in the loss share agreement with the FDIC, the actual FDIC payments collected and significant unobservable inputs, including a risk-adjusted discount rate (reflecting the Company's credit risk plus a liquidity premium), prepayment and default rates. Due to the significant unobservable inputs used to calculate the estimated fair value, these measurements are classified as Level 3.

Consideration Holdback Liability — In connection with the OneWest acquisition, the parties negotiated 4 separate holdbacks related to select trailing risks, totaling $116 million, which reduced the cash consideration paid at closing. Any unapplied Holdback funds at the end of the respective holdback periods, which range from 1 — 5 years, are payable to the former OneWest shareholders. Unused funds for any of the four holdbacks cannot be applied against another holdback amount. The range of potential holdback to be paid is from $0 to $116 million. Based on management's estimate of the probability of each holdback it was determined that the probable amount of holdback to be paid was originally recorded at $62.4 million and currently is $46.0 million. The amount expected to be paid was discounted based on CIT's cost of funds, which approximates a market rate. This contingent consideration was measured at fair value at the Acquisition Date and is re-measured at fair value in subsequent accounting periods, with the changes in fair value recorded in the statement of income, until the related contingent issues are resolved. Gross payments, which are determined based on the Company's probability assessment, are discounted at a rate approximating the Company's average coupon rate on deposits and borrowings. Due to the significant unobservable inputs used to calculate the estimated fair value, these measurements are classified as Level 3.

The following tables summarize information about significant unobservable inputs related to the Company's categories of Level 3 financial assets and liabilities measured on a recurring basis as of December 31, 2017 and 2016.

Quantitative Information about Level 3 Fair Value Measurements — Recurring (dollars in millions)
Financial Instrument
Estimated
Fair Value

 
Valuation Technique(s)
 
Significant
Unobservable Inputs
 
Range of Inputs

 
Weighted
Average

December 31, 2017
 

 
    
 
    
 
    

 
    

Assets
 

 
   
 
   
 
   

 
   
Securities — AFS
$
385.8

 
Discounted cash flow
 
Discount Rate
 
0.0% – 37.1%

 
4.6
%
 
 

 
 
 
Prepayment Rate
 
2.1% – 22.3%

 
8.8
%
 
 

 
 
 
Default Rate
 
0.0% – 7.3%

 
3.7
%
 
 

 
 
 
Loss Severity
 
0.3% – 72.4%

 
35.3
%
Securities carried at fair value with changes recorded in net income
0.4

 
Discounted cash flow
 
Discount Rate
 
31.1
%
 
31.1
%
 
 

 
 
 
Prepayment Rate
 
10.9
%
 
10.9
%
 
 

 
 
 
Default Rate
 
2.4
%
 
2.4
%
 
 

 
 
 
Loss Severity
 
59.2
%
 
59.2
%
 
 
 
 
 
 
 
 
 
 
Derivative assets — non qualifying
0.1

 
Internal valuation model
 
Borrower Rate
 
3.0% – 4.4%

 
3.8
%
Total Assets
$
386.3

 
 
 
 
 
 

 
 
Liabilities
 

 
   
 
   
 
   

 
   
FDIC True-up liability
$
(65.1
)
 
Discounted cash flow
 
Discount Rate
 
2.9
%
 
2.9
%
Consideration holdback liability
(46.0
)
 
Discounted cash flow
 
Payment Probability
 
0% – 100%

 
48.0
%
 
 

 
 
 

 


 


Derivative liabilities — non qualifying
(14.1
)
 
Market Comparables(1)
 
   
 
   

 
   
Total Liabilities
$
(125.2
)
 
 
 
 
 
 

 
 
December 31, 2016
 

 
 
 
 
 
 

 
 
 
Securities — AFS
$
485.5

 
Discounted cash flow
 
Discount Rate
 
0.0% – 96.4%

 
5.5
%
 
 

 
 
 
Prepayment Rate
 
3.2% – 21.2%

 
8.8
%
 
 

 
 
 
Default Rate
 
0.0% – 9.0%

 
3.9
%
 
 

 
 
 
Loss Severity
 
1.0% – 79.8%

 
36.3
%
Securities carried at fair value with changes recorded in net income
283.5

 
Discounted cash flow
 
Discount Rate
 
0.0% – 34.6%

 
5.6
%
 
 

 
 
 
Prepayment Rate
 
6.1% – 16.2%

 
11.9
%
 
 

 
 
 
Default Rate
 
1.9% – 8.1%

 
4.6
%
 
 

 
 
 
Loss Severity
 
22.2% – 44.7%

 
25.8
%
Total Assets
$
769.0

 
 
 
 
 
 

 
 
 
FDIC True-up liability
$
(61.9
)
 
Discounted cash flow
 
Discount Rate
 
3.2
%
 
3.2
%
Consideration holdback liability
(47.2
)
 
Discounted cash flow
 
Payment Probability
 
0% – 100%

 
40.9
%
 
 

 
 
 
Discount Rate
 
1.3% – 4.0%

 
2.1
%
Derivative liabilities – non qualifying
(11.5
)
 
Market Comparables(1)
 
 
 
 

 
 
Total Liabilities
$
(120.6
)
 
 
 
 
 
 

 
 

(1) 
The valuation of these derivatives is primarily related to the GSI facilities, which is based on several factors using a discounted cash flow methodology, including a) funding costs for similar financings based on current market conditions; b) forecasted usage of long-dated facilities through the final maturity date in 2028; and c) forecasted amortization, due to principal payments on the underlying ABS, which impacts the amount of the unutilized portion.

The level of aggregation and diversity within the products disclosed in the tables results in certain ranges of inputs being wide and unevenly distributed across asset and liability categories. For instruments backed by residential real estate, diversity in the portfolio is reflected in a wide range for loss severity due to varying levels of default. The lower end of the range represents high performing loans with a low probability of default while the higher end of the range relates to more distressed loans with a greater risk of default.

The valuation techniques used for the Company's Level 3 assets and liabilities, as presented in the previous tables, are described as follows:

•
Discounted cash flow — Discounted cash flow valuation techniques generally consist of developing an estimate of future cash flows that are expected to occur over the life of an instrument and then discounting those cash flows at a rate of return that results in the estimated fair value amount. The Company utilizes both the direct and indirect valuation methods. Under the direct method, contractual cash flows are adjusted for expected losses. The adjusted cash flows are discounted at a rate which considers other costs and risks, such as market risk and liquidity. Under the indirect method, contractual cash flows are discounted at a rate which reflects the costs and risks associated with the likelihood of generating the contractual cash flows.

•
Market comparables — Market comparable(s) pricing valuation techniques are used to determine the estimated fair value of certain instruments by incorporating known inputs such as recent transaction prices, pending transactions, or prices of other similar investments which require significant adjustment to reflect differences in instrument characteristics.

•
Internal valuation model — The internal model for rate lock valuation uses the spread on borrower mortgage rate and the Fannie Mae pass through rate and applies a conversion factor to assess the derivative value.

Significant unobservable inputs presented in the previous tables are those the Company considers significant to the estimated fair value of the Level 3 asset or liability. The Company considers unobservable inputs to be significant if, by their exclusion, the estimated fair value of the Level 3 asset or liability would be significantly impacted based on qualitative factors such as nature of the instrument, type of valuation technique used, and the significance of the unobservable inputs on the values relative to other inputs used within the valuation. Following is a description of the significant unobservable inputs provided in the tables.

•
Default rate — is an estimate of the likelihood of not collecting contractual amounts owed expressed as a constant default rate.

•
Discount rate — is a rate of return used to present value the future expected cash flows to arrive at the estimated fair value of an instrument. The discount rate consists of a benchmark rate component and a risk premium component. The benchmark rate component, for example, LIBOR or U.S. Treasury rates, is generally observable within the market and is necessary to appropriately reflect the time value of money. The risk premium component reflects the amount of compensation market participants require due to the uncertainty inherent in the instruments' cash flows resulting from risks such as credit and liquidity.

•
Loss severity — is the percentage of contractual cash flows lost in the event of a default.

•
Prepayment rate — is the estimated rate at which forecasted prepayments of principal of the related loan or debt instrument are expected to occur, expressed as a constant prepayment rate ("CPR").

•
Payment Probability — is an estimate of the likelihood the consideration holdback amount will be required to be paid expressed as a percentage.

•
Borrower rate - Mortgage rate committed to the borrower by CIT Bank, effective for up to 90 days.

As reflected above, the Company generally uses discounted cash flow techniques to determine the estimated fair value of Level 3 assets and liabilities. Use of these techniques requires determination of relevant inputs and assumptions, some of which represent significant unobservable inputs and assumptions and as a result, changes in these unobservable inputs (in isolation) may have a significant impact to the estimated fair value. Increases in the probability of default and loss severities will result in lower estimated fair values, as these increases reduce expected cash flows. Increases in the discount rate will result in lower estimated fair values, as these increases reduce the present value of the expected cash flows.

Alternatively a change in one unobservable input may result in a change to another unobservable input due to the interrelationship among inputs, which may counteract or magnify the estimated fair value impact from period to period. The value of the Level 3 assets and liabilities estimated using a discounted cash flow technique would decrease (increase) upon an increase (decrease) in discount rate, default rate, loss severity or weighted average life inputs. Discount rates are influenced by market expectations for the underlying collateral performance, and therefore may directionally move with probability and severity of default; however, discount rates are also impacted by broader market forces, such as competing investment yields, sector liquidity, economic news, and other macroeconomic factors. There is no direct interrelationship between prepayments and discount rate. Prepayment rates generally move in the opposite direction of market interest rates. Increase in the probability of default will generally be accompanied with an increase in loss severity, as both are impacted by underlying collateral values.











The following table summarizes the changes in estimated fair value for all assets and liabilities measured at estimated fair value on a recurring basis using significant unobservable inputs (Level 3):

Changes in Estimated Fair Value of Level 3 Financial Assets and Liabilities Measured on a Recurring Basis (dollars in millions)
 
Securities-
AFS
 
Securities
carried at
fair value
with changes
recorded in
net income
 
FDIC
Receivable
 
Derivative
assets —
non-qualifying(1)
 
Derivative
liabilities —
non-qualifying(1)
 
FDIC
True-up
Liability
 
Consideration
holdback
Liability
December 31, 2016
$
485.5

 
$
283.5

 
$
0.6

 
$
—

 
$
(11.5
)
 
$
(61.9
)
 
$
(47.2
)
Included in earnings
6.6

 
23.0

 
0.8

 
0.1

 
(2.6
)
 
(3.2
)
 
1.2

Included in comprehensive income
7.7

 
—

 
—

 
—

 
—

 
—

 
—

Impairment
(1.1
)
 
—

 
—

 
—

 
—

 
—

 
—

Transfer from Securities- HTM
66.8

 
—

 
—

 
—

 
—

 
—

 
—

Sales, paydowns and adjustments
(179.7
)
 
(306.1
)
 
(1.0
)
 
—

 
—

 
—

 
—

December 31, 2017
$
385.8

 
$
0.4

 
$
0.4

 
$
0.1

 
$
(14.1
)
 
$
(65.1
)
 
$
(46.0
)
December 31, 2015
$
567.1

 
$
339.7

 
$
54.8

 
$
—

 
$
(55.5
)
 
$
(56.9
)
 
$
(60.8
)
Included in earnings
(5.8
)
 
13.0

 
10.7

 
—

 
44.0

 
(5.0
)
 
(0.7
)
Included in comprehensive income
20.6

 
—

 
—

 
—

 
—

 
—

 
—

Impairment
(3.3
)
 
—

 
—

 
—

 
—

 
—

 
—

Sales, paydowns and adjustments
(93.1
)
 
(69.2
)
 
(64.9
)
 
—

 
—

 
—

—

14.3

December 31, 2016
$
485.5

 
$
283.5

 
$
0.6

 
$
—

 
$
(11.5
)
 
$
(61.9
)
 
$
(47.2
)

(1) 
Valuation of the derivatives related to the TRS Transactions and written options on certain CIT Bank CDs.

The Company monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy. Changes in the observability of key inputs to a fair value measurement may result in a transfer of assets or liabilities between Level 1, 2 and 3. The Company's policy is to recognize transfers in and transfers out as of the end of the reporting period. For the years ended December 31, 2017 and 2016, there were no transfers into or out of Level 3.

Assets Measured at Estimated Fair Value on a Non-recurring Basis

Certain assets or liabilities are required to be measured at estimated fair value on a nonrecurring basis subsequent to initial recognition. Generally, these adjustments are the result of LOCOM or other impairment accounting. In determining the estimated fair values during the period, the Company determined that substantially all the changes in estimated fair value were due to declines in market conditions versus instrument specific credit risk. This was determined by examining the changes in market factors relative to instrument specific factors.

The following table presents assets measured at estimated fair value on a non-recurring basis for which a non-recurring change in fair value has been recorded in the current year:

Carrying Value of Assets Measured at Fair Value on a Non-recurring Basis (dollars in millions)
 
 
 
Fair Value Measurements
at Reporting Date Using:
 
 
 
Total

 
Level 1

 
Level 2

 
Level 3

 
Total
(Losses)

Assets
 

 
 

 
 

 
 

 
 

December 31, 2017
 

 
   
 
   
 
   
 
   
Assets held for sale
$
177.8

 
$
—

 
$
—

 
$
177.8

 
$
(15.0
)
Other real estate owned
18.8

 
—

 
—

 
18.8

 
(4.4
)
Impaired loans
89.1

 
—

 
—

 
89.1

 
(21.9
)
Total
$
285.7

 
$
—

 
$
—

 
$
285.7

 
$
(41.3
)
December 31, 2016
 

 
 

 
 

 
 

 
 

Goodwill
$
51.8

 
$
—

 
$
—

 
$
51.8

 
$
(354.2
)
Assets held for sale
201.6

 
—

 
—

 
201.6

 
(14.7
)
Other real estate owned
22.5

 
—

 
—

 
22.5

 
(3.2
)
Impaired loans
151.9

 
—

 
—

 
151.9

 
(26.8
)
Total
$
427.8

 
$
—

 
$
—

 
$
427.8

 
$
(398.9
)

Assets of continuing operations that are measured at fair value on a non-recurring basis are as follows:

Assets Held for Sale — Assets held for sale are recorded at the lower of cost or fair value on the balance sheet. As there is no liquid secondary market for the assets held for sale in the Company's portfolio, the fair value is estimated based on a binding contract, current letter of intent or other third-party valuation, or using internally generated valuations or discounted cash flow technique, all of which are Level 3 inputs. Carrying value of assets held for sale with impairment approximates fair value at December 31, 2017 and December 31, 2016.

Other Real Estate Owned — Estimated fair values of other real estate owned are reviewed on a quarterly basis and any decline in value below cost is recorded as impairment. Estimated fair value approximates carrying value and is generally based on market data, if available, or broker price opinions or independent appraisals, adjusted for costs to sell. The estimated costs to sell are incremental direct costs to transact a sale, such as broker commissions, legal fees, closing costs and title transfer fees. The costs must be essential to the sale and would not have been incurred if the decision to sell had not been made. The range of inputs used to estimate cost to sell were 5.4% to 52.6%, which resulted in a weighted average of 6.5% at December 31, 2017. Also a significant unobservable input is the binding contract, appraised value or the sales price and thus is classified as Level 3.

Impaired Loans — Impairment occurs when, based on current information and events, it is probable that CIT will be unable to collect all amounts due according to contractual terms of the agreement. Impairment is measured as the shortfall between estimated value and recorded investment in the loan, with the estimated value determined using fair value of collateral and other cash flows if the loan is collateralized, the present value of expected future cash flows discounted at the contract's effective interest rate, or observable market prices. The significant unobservable inputs result in the Level 3 classification. As of the reporting date, the carrying value of impaired loans approximates fair value.

Goodwill — In accordance with ASC 350, Intangibles - Goodwill and other, goodwill is assessed for impairment at least annually, or more often if events or circumstances have changed significantly from the annual test date that would indicate a potential reduction in the fair value of the reporting unit below its carrying value. During the fourth quarter of 2016, the Company performed its annual goodwill impairment test. Based on our assessments under both Step 1 and Step 2, the Company recorded an impairment of the Consumer Banking and Commercial Services RUs of $319.4 million and $34.8 million, respectively. See Note 26 - Goodwill and Intangible Assets for further information.
 
Fair Values of Financial Instruments

The carrying values and estimated fair values of financial instruments presented below exclude leases and certain other assets and liabilities, which are not required for disclosure.

Financial Instruments (dollars in millions)
 
 
 
Estimated Fair Value
 
 
 
Carrying
Value

 
Level 1

 
Level 2

 
Level 3

 
Total

December 31, 2017
 

 
 

 
 

 
 

 
 

Financial Assets
 

 
 

 
 

 
 

 
 

Cash and interest bearing deposits
$
1,718.7

 
$
1,718.7

 
$
—

 
$
—

 
$
1,718.7

Derivative assets at fair value — non-qualifying hedges
68.5

 
—

 
68.4

 
0.1

 
68.5

Derivative assets at fair value — qualifying hedges
0.2

 
—

 
0.2

 
—

 
0.2

Assets held for sale (excluding leases)
1,011.4

 
—

 
4.7

 
1,044.8

 
1,049.5

Loans (excluding leases)
26,428.1

 
—

 
624.3

 
26,220.5

 
26,844.8

Securities purchased under agreement to resell
150.0


—


150.0


—


150.0

Investment securities(1)
6,469.9

 
199.2

 
5,583.3

 
687.4

 
6,469.9

Indemnification assets(2)
113.5

 
—

 
—

 
87.4

 
87.4

Other assets subject to fair value disclosure and unsecured counterparty receivables(3)
542.2

 
—

 
—

 
542.2

 
542.2

Financial Liabilities
 

 
 

 
 

 
 

 
 

Deposits(4)
(29,586.5
)
 
—

 
—

 
(29,668.6
)
 
(29,668.6
)
Derivative liabilities at fair value — non-qualifying hedges
(68.3
)
 
—

 
(54.2
)
 
(14.1
)
 
(68.3
)
Derivative liabilities at fair value — qualifying hedges
(18.7
)
 
—

 
(18.7
)
 
—

 
(18.7
)
Borrowings(4)
(9,043.8
)
 
—

 
(8,281.7
)
 
(991.2
)
 
(9,272.9
)
Credit balances of factoring clients
(1,468.6
)
 
—

 
—

 
(1,468.6
)
 
(1,468.6
)
Other liabilities subject to fair value disclosure(5)
(725.2
)
 
—

 
—

 
(725.2
)
 
(725.2
)
December 31, 2016
 

 
 

 
 

 
 

 
 

Financial Assets
 

 
 

 
 

 
 

 
 

Cash and interest bearing deposits
$
6,430.6

 
$
6,430.6

 
$
—

 
$
—

 
$
6,430.6

Derivative assets at fair value — non-qualifying hedges
94.7

 
—

 
94.7

 
—

 
94.7

Derivative assets at fair value — qualifying hedges
16.9

 
—

 
16.9

 
—

 
16.9

Assets held for sale (excluding leases)
428.4

 
—

 
175.0

 
264.6

 
439.6

Loans (excluding leases)
26,683.0

 
—

 
390.3

 
26,456.4

 
26,846.7

Investment securities(1)
4,491.1

 
200.4

 
3,199.6

 
1,094.2

 
4,494.2

Indemnification assets(2)
233.4

 
—

 
—

 
201.0

 
201.0

Other assets subject to fair value disclosure and unsecured counterparty receivables(3)
712.2

 
—

 
—

 
712.2

 
712.2

Financial Liabilities
 

 
 

 
 

 
 

 
 

Deposits(4)
(32,323.2
)
 
—

 
—

 
(32,490.9
)
 
(32,490.9
)
Derivative liabilities at fair value — non-qualifying hedges
(68.8
)
 
—

 
(57.3
)
 
(11.5
)
 
(68.8
)
Borrowings(4)
(15,097.8
)
 
—

 
(14,457.8
)
 
(1,104.9
)
 
(15,562.7
)
Credit balances of factoring clients
(1,292.0
)
 
—

 
—

 
(1,292.0
)
 
(1,292.0
)
Other liabilities subject to fair value disclosure(5)
(1,003.6
)
 
—

 
—

 
(1,003.6
)
 
(1,003.6
)

(1) 
Level 3 estimated fair value at December 31, 2017, includes debt securities AFS ($385.8 million), debt securities carried at fair value with changes recorded in net income ($0.4 million), and non-marketable investments ($301.2 million). Level 3 estimated fair value at December 31, 2016, included debt securities AFS ($485.5 million), debt securities carried at fair value with changes recorded in net income ($283.5 million), non-marketable investments ($256.4 million), and debt securities HTM ($68.8 million).

(2) 
The indemnification assets included in the above table do not include Agency claims indemnification ($28.9 million and $108.0 million at December 31, 2017 and 2016, respectively), as they are not considered financial instruments.

(3) 
Other assets subject to fair value disclosure primarily include accrued interest receivable and miscellaneous receivables. These assets have carrying values that approximate fair value generally due to the short-term nature and are classified as Level 3. The unsecured counterparty receivables primarily consist of amounts owed to CIT from GSI for debt discount, return of collateral posted to GSI and settlements resulting from market value changes to asset-backed securities underlying the TRS.

(4) 
Deposits and borrowings include accrued interest, which is included in "Other liabilities" in the Balance Sheet.

(5) 
Other liabilities subject to fair value disclosure include accounts payable, accrued liabilities, customer security and maintenance deposits and miscellaneous liabilities. The fair value of these approximate carrying value and are classified as level 3.

The methods and assumptions used to estimate the fair value of each class of financial instruments are explained below:

Cash and interest bearing deposits — Cash and cash equivalents and restricted cash approximate estimated fair value and are classified as Level 1.

Derivatives — The estimated fair values of derivatives were calculated using observable market data and represent the gross amount receivable or payable to terminate, taking into account current market rates, which represent Level 2 inputs, except for the TRS derivative and written options on certain CIT Bank CDs and credit derivatives that utilized Level 3 inputs. See Note 11 — Derivative Financial Instruments for notional principal amounts and fair values.

Investment Securities — Debt and equity securities classified as AFS are carried at fair value, as determined either by Level 1, Level 2 or Level 3 inputs. Debt securities classified as AFS included investments in U.S. federal government agency securities, U.S. Treasury Notes and supranational securities and were valued using Level 2 inputs, primarily quoted prices for similar securities. Debt securities carried at fair value with changes recorded in net income include non-agency MBS where the market for such securities is not active; therefore the estimated fair value was determined using a discounted cash flow technique, which is a Level 3 input. U.S. Treasury Bills and certain equity securities classified as AFS were valued using Level 1 inputs, primarily quoted prices in active markets. Debt securities classified as HTM include government agency securities and were valued using Level 2 inputs, primarily quoted prices for similar securities. For debt securities HTM where no market rate was available, Level 3 inputs were utilized. Non-marketable equity investments utilize Level 3 inputs to estimate fair value and are generally recorded under the cost or equity method of accounting and are periodically assessed for OTTI, with the net asset values reduced when impairment is deemed to be other-than-temporary. For investments in limited partnership equity interests, the Company used the net asset value provided by the fund manager as an appropriate measure of fair value.

Assets held for sale — Of the assets held for sale above, $4.7 million carrying amount at December 31, 2017 was valued using Level 2 inputs. As there is no liquid secondary market for the other assets held for sale in the Company's portfolio, the fair value is estimated based on a binding contract, current letter of intent or other third-party valuation, or using internally generated valuations or discounted cash flow technique, all of which are Level 3 inputs. Commercial loans are generally valued individually, while small ticket commercial loans are valued on an aggregate portfolio basis.

Loans — Within the Loans category, there are several types of loans as follows:

•
Commercial and Consumer Loans — Of the loan balance above, $624.3 million at December 31, 2017 and $390.3 million at December 31, 2016, respectively, were valued using Level 2 inputs. As there is no liquid secondary market for the other loans in the Company's portfolio, the fair value is estimated based on discounted cash flow analyses which use Level 3 inputs at both December 31, 2017 and December 31, 2016. In addition to the characteristics of the underlying contracts, key inputs to the analysis include interest rates, prepayment rates, and credit spreads. For the commercial loan portfolio, the market based credit spread inputs are derived from instruments with comparable credit risk characteristics obtained from independent third party vendors. As these Level 3 unobservable inputs are specific to individual loans / collateral types, management does not believe that sensitivity analysis of individual inputs is meaningful, but rather that sensitivity is more meaningfully assessed through the evaluation of aggregate carrying values of the loans. The fair value of loans at December 31, 2017 was $26.8 billion, which was 101.6% of carrying value. The fair value of loans at December 31, 2016 was $26.8 billion, which was 100.6% of carrying value.

•
Impaired Loans — The value of impaired loans is estimated using the fair value of collateral (on an orderly liquidation basis) if the loan is collateralized, the present value of expected cash flows utilizing the current market rate for such loan, or observable market price. As these Level 3 unobservable inputs are specific to individual loans / collateral types, management does not believe that sensitivity analysis of individual inputs is meaningful, but rather that sensitivity is more meaningfully assessed through the evaluation of aggregate carrying values of impaired loans relative to contractual amounts owed (unpaid principal balance or "UPB") from customers. As of December 31, 2017, the UPB related to impaired loans totaled $195.5 million. Including related allowances, these loans are carried at $146.7 million, or 75.0% of UPB. Of these amounts, $86.1 million and $63.6 million of UPB and carrying value, respectively, relate to loans with no specific allowance. As of December 31, 2016 the UPB related to impaired loans, including PCI loans, totaled $244.3 million. Including related allowances, these loans were carried at $188.2 million, or 77.0% of UPB. Of these amounts, $74.7 million and $55.5 million of UPB and carrying value, respectively, relate to loans with no specific allowance. The difference between UPB and carrying value reflects cumulative charge-offs on accounts remaining in process of collection, FSA discounts and allowances. See Note 3 — Loans for more information.

•
PCI loans — These loans are valued by grouping the loans into performing and non-performing groups and stratifying the loans based on common risk characteristics such as product type, FICO score and other economic attributes. Due to a lack of observable market data, the estimated fair value of these loan portfolios was based on an internal model using unobservable inputs, including discount rates, prepayment rates, delinquency roll-rates, and loss severities. Due to the significance of the unobservable inputs, these instruments are classified as Level 3.

•
Jumbo Mortgage Loans — The estimated fair value was determined by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. Due to the unobservable nature of the inputs used in deriving the estimated fair value of these instruments, these loans are classified as Level 3.


Indemnification Assets — The Company's indemnification assets relating to the SFR loans purchased in the OneWest Bank Transaction are measured on the same basis as the related indemnified item, and the underlying SFR loans. The estimated fair values reflect the present value of expected reimbursements under the indemnification agreements based on the loan performance discounted at an estimated market rate, and classified as Level 3.

Deposits — The estimated fair value of deposits with no stated maturity such as: demand deposit accounts (including custodial deposits), money market accounts and savings accounts is the amount payable on demand at the reporting date.

The estimated fair value of time deposits is determined using a discounted cash flow analysis. The discount rate for the time deposit accounts is derived from the rate currently offered on alternate funding sources with similar maturities. Discount rates used in the present value calculation are based on the Company's average current deposit rates for similar terms, which are Level 3 inputs.

Borrowings

•
Unsecured debt — Approximately $3.8 billion par value at December 31, 2017 and $10.6 billion at December 31, 2016 were valued using market inputs, which are Level 2 inputs.

•
Secured borrowings — Secured borrowings include both structured financings and FHLB Advances. Approximately $4.3 billion par value at December 31, 2017 and $3.3 billion par value at December 31, 2016 were valued using market inputs, which are Level 2 inputs. Where market estimates were not available for approximately $1.0 billion and $1.1 billion par value at December 31, 2017 and December 31, 2016, respectively, values were estimated using a discounted cash flow analysis with a discount rate approximating current market rates for issuances by CIT of similar debt, which are Level 3 inputs. Included in the above is the estimated fair value of FHLB advances, which is based on the discounted cash flow model. The cash flows are calculated using the contractual features of the advance and they are discounted using observable rates. As the inputs for the calculation are observable and the model does not require significant judgment, FHLB advances are classified as Level 2.

Credit balances of factoring clients — The impact of the time value of money from the unobservable discount rate for credit balances of factoring clients is inconsequential due to the short term nature of these balances (typically 90 days or less) as of December 31, 2017 and December 31, 2016. Accordingly, credit balances of factoring clients approximate estimated fair value and are classified as Level 3.