Fifth Third Bank 2012 Annual Report Download - page 154

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
152 Fifth Third Bancorp
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 discounted cash flow
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 discounted cash flow 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.
OREO
During 2012 and 2011, 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 are
primarily due to declines in real estate values of the properties
recorded in OREO. For the years ended December 31, 2012 and
2011, these losses include $17 million and $100 million in losses,
respectively, recorded as charge-offs, on new OREO properties
transferred from loans during the periods and $57 million and $71
million, respectively, in losses, recorded in other noninterest
income, attributable to fair value adjustments on OREO properties
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, which reports to the
Chief Credit Officer, is solely responsible for managing the appraisal
process and evaluating the appraisal for all 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.
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 December 31, 2012 and 2011 for which the fair value option was
elected as well as the changes in fair value of the underlying IRLCs,
included gains of $157 million and $123 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, 2012 and 2011 included gains of $849
million and $341 million during 2012 and 2011, respectively. These
gains are reported in mortgage banking net revenue in the
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 $3 million at December 31,
2012 and 2011. Interest on residential mortgage loans measured at
fair value is accrued as it is earned using the effective interest
method and is reported as interest income in the Consolidated
Statements of Income.
The following table summarizes the difference between the fair value and the principal balance for residential mortgage loans measured at fair
v
alue as of:
Aggregate Aggregate Unpaid
($ in millions) Fair Value Principal Balance Difference
December 31, 2012
Residential mortgage loans measured at fair value $ 2,932 2,775 157
Past due loans of 90 days or more 3 4 (1)
Nonaccrual loans - 1 (1)
December 31, 2011
Residential mortgage loans measured at fair value $ 2,816 2,693 123
Past due loans of 90 days or more 4 5 (1)
Nonaccrual loans - - -