Fifth Third Bank 2010 Annual Report Download - page 75

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 73
Nonaccrual Loans
When a loan is placed on nonaccrual status, the accrual of interest
is discontinued and all previously accrued and unpaid interest is
charged against income. Commercial loans are placed on
nonaccrual status when there is a clear indication that the
borrower’s cash flow may not be sufficient to meet payments as
they become due. Such loans are also placed on nonaccrual status
when the principal or interest is past due ninety days or more,
unless the loan is both well secured and in the process of
collection. Residential mortgage loans that have principal and
interest payments that have become past due 150 days are placed
on nonaccrual status unless such loans are both well secured and
in the process of collection. Home equity, automobile, and other
consumer loans and leases that have principal and interest
payments that have become past due ninety days are placed on
nonaccrual status unless the loan is both well secured and in the
process of collection. Nonaccrual commercial loans, other than
loans modified in a TDR, are accounted for on the cost recovery
method. Nonaccrual residential mortgage loans and nonaccrual
consumer loans are accounted for on the cash basis method.
Nonaccrual loans may be returned to accrual status when all
delinquent interest and principal payments become current in
accordance with the loan agreement or when the loan is both well-
secured and in the process of collection.
Commercial loans on nonaccrual status, as well as
commercial loans above a specified threshold are subject to an
individual review to identify charge-offs. Residential mortgage
loans and credit card loans that have principal and interest
payments that have become past due 180 days are charged off to
the ALLL, unless such loans are both well-secured and in the
process of collection. Home equity, automobile and other
consumer loans and leases that have principal and interest
payments that have become past due one hundred and twenty
days are charged off to the ALLL, unless such loans are both well-
secured and in the process of collection.
Restructured Loans
A loan is accounted for as a TDR if the Bancorp, for economic or
legal reasons related to the borrower’s financial difficulties, grants
a concession to the borrower that it would not otherwise consider.
A TDR typically involves a modification of terms such as a
reduction of the stated interest rate or face amount of the loan, a
reduction of accrued interest, or an extension of the maturity
date(s) at a stated interest rate lower than the current market rate
for a new loan with similar risk. The Bancorp measures the
impairment loss of a TDR based on the difference between the
original loan’s carrying amount and the present value of expected
future cash flows discounted at the original, effective yield of the
loan. Beginning with the first quarter of 2009, based on published
guidance with respect to TDRs from certain banking regulators
and to conform to general practices within the banking industry,
the Bancorp determined it was appropriate to maintain consumer
loans modified as part of a TDR on accrual status, provided there
is reasonable assurance of repayment and of performance
according to the modified terms based upon a current, well-
documented credit evaluation. Management believes this policy is
reflective of regulatory guidance and provides better comparability
to other financial institutions. TDRs on commercial loans remain
on nonaccrual status until a six-month payment history is
sustained. During the nonaccrual period, TDRs on commercial
loans are accounted for using the cash basis method for income
recognition, provided that full repayment of principal under the
modified terms of the loan is reasonably assured.
Impaired Loans
A loan is considered to be impaired when, based on current
information and events, it is probable that the Bancorp will be
unable to collect all amounts due (including both principal and
interest) according to the contractual terms of the loan agreement.
For loans modified in a TDR, the contractual terms of the loan
agreement refer to the terms specified in the original loan
agreement. A loan restructured in a TDR is no longer considered
impaired in years after the restructuring if the restructuring
agreement specifies a rate equal to or greater than the rate the
Bancorp was willing to accept at the time of the restructuring for a
new loan with comparable risk and the loan is not impaired based
on the terms specified by the restructuring agreement. Refer to
the ALLL section for discussion regarding the Bancorp’s
methodology for identifying impaired loans and determination of
the need for a loss accrual.
Loans Held for Sale
Loans held for sale represent conforming fixed rate residential
mortgage loan originations intended to be sold in the secondary
market, commercial loans and other loans that management has
an active plan to sell. Loans held for sale may be carried at the
lower of cost or fair value, or carried at fair value where the
Bancorp has elected the fair value option of accounting under
U.S. GAAP. The Bancorp has elected to measure residential
mortgage loans originated as held for sale under the fair value
option. For loans in which the Bancorp has not elected the fair
value option, the lower of cost or fair value is determined at the
individual loan level.
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,
thereafter, reported within the Bancorp’s residential mortgages
class of portfolio loans and leases. In such cases, the residential
mortgage loans will continue to be measured at fair value. The fair
value of residential mortgage loans is estimated based upon
mortgage-backed securities prices and spreads to those prices or,
for certain ARM loans, discounted cash flow models that may
incorporate the anticipated portfolio composition, credit spreads
of asset-backed securities with similar collateral, and market
conditions. The anticipated portfolio composition includes the
effects of interest rate spreads and discount rates due to loan
characteristics such as the state in which the loan was originated,
the loan amount and the ARM margin. These fair value marks are
recorded as a component of noninterest income in mortgage
banking net revenue. The Bancorp generally has commitments to
sell residential mortgage loans held for sale in the secondary
market. Gains or losses on sales are recognized in mortgage
banking net revenue upon delivery.
Loans held for sale are placed on nonaccrual status consistent
with the Bancorp’s nonaccrual policy for portfolio loans and
leases.
Other Real Estate Owned
OREO, which is included in other assets, represents property
acquired through foreclosure or other proceedings and is carried
at the lower of cost or fair value, less costs to sell. All OREO
property is periodically evaluated and decreases in carrying value
are recognized as reductions in other noninterest income in the
Consolidated Statements of Income.
Allowance for Loan and Lease Losses
The Bancorp disaggregates its portfolio loans and leases into
portfolio segments for purposes of determining the ALLL. The
Bancorp’s portfolio segments include commercial, residential
mortgage, and consumer. The Bancorp further disaggregates its
portfolio segments into classes for purposes of monitoring and
assessing credit quality based on certain risk characteristics.
Classes within the commercial portfolio segment include