Fifth Third Bank 2013 Annual Report Download - page 164

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
162 Fifth Third Bancorp
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 Risk and 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.
Private equity investment funds
The Volcker Rule, which was approved by the respective federal
agencies on December 10, 2013 and becomes effective July 21,
2015, prohibits the Bancorp from retaining an interest in certain of
its private equity fund investments. Therefore, while the Bancorp
has not approved a formal plan to sell any of the private equity
funds, the Bancorp has determined that it may be forced to sell
certain of these funds prior to their scheduled redemption dates. As
a result, the Bancorp has performed nonrecurring fair value
measurements on a fund by fund basis to determine whether OTTI
exists. The Bancorp estimated the fair value of a fund by using the
net asset value reported by the fund manager, and in some cases,
applying an estimated market discount to the reported net asset
value of the fund. Because the length of time until the investment
will become redeemable is generally not certain, these funds were
classified within Level 3 of the valuation hierarchy. An adverse
change in the reported net asset values or estimated market
discounts where applicable, would result in a decrease in the fair
value estimate. In cases where the carrying value exceeds the fair
value, an impairment loss is recognized. The Bancorp’s private
equity department, which reports to the Chief Operating Officer, in
conjunction with Accounting, is responsible for preparing and
reviewing the fair value estimates.
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, 2013 and 2012 for which the fair value option was
elected as well as the changes in fair value of the underlying IRLCs,
included gains of $20 million and $157 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, 2013 and 2012 included gains of $451
million and $849 million during 2013 and 2012, 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 $2 million and $3 million
at December 31, 2013 and 2012, respectively. Interest on residential
mortgage loans measured at fair value is accrued as it is earned using
the effective interest method and is reported as interest income in
the Consolidated Statements of Income.
The following table summarizes the difference between the fair value and the principal balance for residential mortgage loans measured at fair
v
alue as of:
Aggregate Aggregate Unpaid
($ in millions) Fair Value Principal Balance Difference
December 31, 2013
Residential mortgage loans measured at fair value $ 982 962 20
Past due loans of 90 days or more 1 2 (1)
Nonaccrual loans 2 2 -
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)