Fifth Third Bank 2013 Annual Report Download - page 163

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
161 Fifth Third Bancorp
A
s of December 31, 2012 ($ in millions)
Significant Unobservable Ranges of
Financial Instrument Fair Value Valuation Technique Inputs Inputs Weighted-Average
Commercial loans held for sale $ 9
A
ppraised value
A
ppraised value N
M
NM
Cost to sell N
M
10.0%
Commercial and industrial loans 83
A
ppraised value Default rates 100% NM
Collateral value N
M
NM
Commercial mortgage loans 46
A
ppraised value Default rates 100% NM
Collateral value N
M
NM
Commercial construction loans 4
A
ppraised value Default rates 100% NM
Collateral value N
M
NM
MSRs 697 Discounted cash flow Prepayment speed 0 - 100%
(Fixed) 16.1%
(Adjustable) 26.9%
Discount rates 9.4 - 18.0%
(Fixed) 10.5%
(Adjustable) 11.7%
OREO 165
A
ppraised value
A
ppraised value N
M
NM
Commercial loans held for sale
During 2013 and 2012, the Bancorp transferred $5 million and $16
million, respectively, of commercial loans from the portfolio to
loans held for sale that upon transfer were measured at fair value
using significant unobservable inputs. These loans had fair value
adjustments in 2013 and 2012 totaling $4 million and $1 million,
respectively, and were generally based on appraisals of the
underlying collateral and were therefore, classified within Level 3 of
the valuation hierarchy. Additionally, during 2013 and 2012 there
were fair value adjustments on existing commercial loans held for
sale of $3 million and $12 million, respectively. The fair value
adjustments were also based on appraisals of the underlying
collateral and were therefore classified within Level 3 of the
valuation hierarchy. An adverse change in the fair value of the
underlying collateral would result in a decrease in the fair value
measurement. The Accounting Department determines the
procedures for valuation of commercial HFS loans which may
include a comparison to recently executed transactions of similar
type loans. A monthly review of the portfolio is performed for
reasonableness. Quarterly, appraisals approaching a year old are
updated and the Real Estate Valuation group, which reports to the
Chief Risk and Credit Officer, in conjunction with the Commercial
Line of Business review the third party appraisals for
reasonableness. Additionally, the Commercial Line of Business
Finance Department, which reports to the Bancorp Chief Financial
Officer, in conjunction with Accounting review all loan appraisal
values, carrying values and vintages.
Commercial loans held for investment
During 2013 and 2012, the Bancorp recorded nonrecurring
impairment adjustments to certain commercial and industrial,
commercial mortgage and commercial construction loans 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.
An adverse change in the fair value of the underlying collateral
would result in a decrease in the fair value measurement. The fair
values and recognized impairment losses are reflected in the
previous table. Commercial Credit Risk, which reports to the Chief
Risk and Credit Officer, is responsible for preparing and reviewing
the fair value estimates for commercial loans held for investment.
MSRs
Mortgage interest rates increased during the year ended December
31, 2013 and the Bancorp recognized a recovery of temporary
impairment on servicing rights. The Bancorp recognized temporary
impairments in certain classes of the MSR portfolio during the year
ended December 31, 2012 and the carrying value was adjusted to
the fair value. 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
discounted cash flow models with certain unobservable inputs,
primarily prepayment speed assumptions, discount rates and
weighted average lives, resulting in a classification within Level 3 of
the valuation hierarchy. Refer to Note 11 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 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 2013 and 2012, 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, 2013 and
2012, these losses include $19 million and $17 million, respectively,
recorded as charge-offs, on new OREO properties transferred from
loans during the respective periods and $26 million and $57 million,
respectively, recorded as negative fair value adjustments on OREO
in other noninterest 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