Fifth Third Bank 2009 Annual Report Download - page 109

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 107
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.
Fair Value Measurements Using Total Losses
($ in millions) Level 1 Level 2 Level 3 Total
Year Ended
December 31, 2009
Commercial loans held for sale $60 - 163 $223 ($56)
Residential mortgage loans held for sale - - 55 55 (2)
Commercial loans 64 - 243 307 (217)
Commercial mortgage loans 37 - 303 340 (136)
Commercial construction loans 40 - 199 239 (150)
Commercial leases - - 1 1 (2)
Mortgage servicing rights - - 699 699 (24)
Other real estate owned property - - 461 461 (131)
Total $201 - 2,124 $2,325 ($718)
Fair Value Measurements Using Total Losses
($ in millions) Level 1 Level 2 Level 3 Total
Year Ended
December 31, 2008
Commercial loans held for sale $90 - 383 $473 ($523)
Commercial loans - - 512 512 (298)
Commercial mortgage loans - - 461 461 (186)
Commercial construction loans - - 743 743 (274)
Mortgage servicing rights - - 496 496 (207)
Total $90 2,595 $2,685 ($1,488)
During 2009, the Bancorp transferred certain commercial loans
with a fair value of $45 million from the portfolio to loans held
for sale. The fair value of these loans was based on bids from
potential buyers and, therefore, were classified within Level 1 of
the valuation hierarchy. During the fourth quarter of 2008, the
Bancorp transferred certain commercial, commercial mortgage
and commercial construction loans from the portfolio to loans
held for sale. During 2009, the Bancorp recorded $56 million in
impairment adjustments on these loans. As of December 31,
2009, loans with a fair value of $60 million were based on bids
from potential buyers and, therefore, classified within Level 1 of
the valuation hierarchy and loans with a fair value of $163 million
were based on appraisals of the underlying collateral value and,
therefore, classified within Level 3 of the valuation hierarchy.
During 2009, the Bancorp purchased residential mortgage
loans with a principal balance of $57 million. The Bancorp
subsequently recorded nonrecurring impairment adjustments
totaling $2 million during 2009. Such amounts are generally based
on the fair value of the underlying collateral supporting the loan
and, therefore, were classified within Level 3 of the valuation
hierarchy.
During 2009 and 2008, the Bancorp recorded nonrecurring
impairment adjustments to certain commercial, commercial
mortgage and commercial construction loans and commercial
leases held for investment. Such amounts are generally based on
the fair value of the underlying collateral supporting the loan and
were classified within Level 3 of the valuation hierarchy. Amounts
that are based on bids for the loans in active markets were
classified within Level 1 of the valuation hierarchy. In cases where
the carrying value exceeds the fair value of the collateral or
quoted bids, an impairment loss is recognized. The fair values and
recognized impairment losses are reflected in the previous table.
During 2009 and 2008, the Bancorp recognized temporary
impairments of $24 million and $207 million, respectively, in
certain classes of the MSR portfolio in which the carrying value
was adjusted to fair value as of December 31, 2009 and 2008,
respectively. MSRs do not currently 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 discounted cash flow models with certain
unobservable inputs, primarily prepayment speed assumptions,
resulting in a classification within Level 3 of the valuation
hierarchy. Refer to Note 11 for further information on the
Bancorp’s MSRs.
During 2009, the Bancorp recorded nonrecurring
adjustments to certain commercial and residential real estate
properties classified as other real estate owned (OREO) and
measured at the lower of carrying amount or fair value, less costs
to sell. Such 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 table reflects the fair value
measurements of the properties before deducting the estimated
costs to sell.
Fair Value Option
The Bancorp has elected to measure residential mortgage loans
held for sale under the fair value option as allowed under U.S.
GAAP. 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.
Residential loans with fair values of $29 million and $8 million,
respectively, were transferred to the Bancorp’s portfolio during
2009 and 2008. Losses related to fair value adjustments on these
loans were $2 million and $1 million, during 2009 and 2008,
respectively.
Fair value changes included in earnings for instruments for
which the fair value option was elected included losses of $162
million and gains of $13 million, respectively during 2009 and