Fifth Third Bank 2011 Annual Report Download - page 144

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
142 Fifth Third Bancorp
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 represent those assets
that were subject to fair value adjustments during the years ended
December 31, 2011 and 2010 and still held as of the end of the
period, and the related 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
($ in millions) Level 1 Level 2 Level 3 Total 2011
Commercial loans held for sale(a) $ - - 27 27 (67)
Commercial and industrial loans - - 101 101 (328)
Commercial mortgage loans - - 85 85 (124)
Commercial construction loans - - 55 55 (60)
MSRs - - 681 681 (242)
OREO property - - 224 224 (171)
Total $ - - 1,173 1,173 (992)
Fair Value Measurements Using Total Losses
($ in millions) Level 1 Level 2 Level 3 Total 2010
Commercial loans held for sale(a) $ 120 - 770 890 (448)
Commercial and industrial loans - - 272 272 (470)
Commercial mortgage loans - - 234 234 (207)
Commercial construction loans - - 109 109 (159)
Residential mortgage loans - - 3 3 (6)
Other consumer loans - 71 10 81 (12)
MSRs - - 822 822 (36)
OREO property - - 527 527 (264)
Total $ 120 71 2,747 2,938 (1,602)
(a) Includes commercial nonaccrual loans held for sale.
During 2011, the Bancorp transferred $143 million of commercial
loans from the portfolio to loans held for sale that upon transfer
were measured at fair value. These loans had fair value adjustments
totaling $31 million and were based on discounted cash flow models
incorporating appraisals of the underlying collateral, as well as
assumptions about investor return requirements and amounts and
timing of expected cash flows, and were therefore, classified within
Level 3 of the valuation hierarchy. Additionally, during 2011,
existing commercial loans held for sale with a fair value of $48
million were further adjusted using the same methodology as loans
transferred to held for sale. Therefore, these loans were classified
within Level 3 of the valuation hierarchy.
During 2011 and 2010, the Bancorp recorded nonrecurring
impairment adjustments to certain commercial and industrial,
commercial mortgage and commercial construction loans 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. 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 table.
During 2011, the Bancorp recognized temporary impairments
in certain classes of the MSR portfolio in which the carrying value
was adjusted to fair value as of December 31, 2011. 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 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 12 for further information on the Bancorp’s MSRs.
During the 2011 and 2010, 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, less costs to sell. Nonrecurring losses
included in the above table are primarily due to declines in real
estate values of the OREO properties. These losses include $100
million in losses, recorded as charge-offs, on new OREO properties
transferred from loans during the period and $71 million in losses,
recorded in other noninterest income, attributable to fair value
adjustments on OREO properties subsequent to their transfer from
loans. 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 tables reflect the fair value measurements of the properties
before deducting the estimated costs to sell.
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. 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 $24 million and $26 million were transferred to the
Bancorp’s portfolio during 2011 and 2010, respectively. The net
impact related to fair value adjustments on these loans was a gain of
$4 million during 2011. Fair value adjustments on residential
mortgage loans transferred to the Bancorp’s portfolio during 2010
were immaterial.
Fair value changes included in earnings for instruments held at
December 31, 2011 and 2010 for which the fair value option was
elected included gains of $123 million and $25 million, respectively.
Additionally, fair value changes included in earnings for instruments
for which the fair value option was elected but are no longer held by
the Bancorp at December 31, 2011 and 2010 included gains of $168
million and $171 million during 2011 and 2010, respectively. These