Fifth Third Bank 2011 Annual Report Download - page 84

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
82 Fifth Third Bancorp
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. The Bancorp classifies
residential mortgage loans that have principal and interest payments
that have become past due 150 days and home equity loans with
principal and interest payments that have become past due 180 days
as nonaccrual unless the loan is both well secured and in the process
of collection. Automobile and other consumer loans and leases that
have been modified in a TDR and subsequently become past due 90
days are placed on nonaccrual status. Credit card loans that have
been modified in a TDR are classified as nonaccrual unless such
loans have sustained repayment performance of six months or
greater and are reasonably assured of repayment in accordance with
the restructured terms. Well secured loans are collateralized by
perfected security interests in real and/or personal property for
which the Bancorp estimates proceeds from sale would be sufficient
to recover the outstanding principal and accrued interest balance of
the loan and pay all costs to sell the collateral. The Bancorp
considers a loan in the process of collection if collection efforts or
legal action is proceeding and the Bancorp expects to collect funds
sufficient to bring the loan current or recover the entire outstanding
principal and accrued interest balance.
Nonaccrual commercial loans, other than loans modified in a
TDR and nonaccrual credit card loans, are generally accounted for
on the cost recovery method. The Bancorp believes the cost
recovery method is appropriate for nonaccrual commercial loans
and nonaccrual credit card loans because the assessment of
collectability of the remaining recorded investment of these loans
involves a high degree of subjectivity and uncertainty due to the
nature or absence of underlying collateral. Under the cost recovery
method, any payments received are applied to reduce principal.
Once the entire recorded investment is collected, additional
payments received are treated as recoveries of amounts previously
charged-off until recovered in full, and any subsequent payments are
treated as interest income. Nonaccrual residential mortgage loans
and other nonaccrual consumer loans are generally accounted for on
the cash basis method. The Bancorp believes the cash basis method
is appropriate for nonaccrual residential mortgage and other
nonaccrual consumer loans because such loans have generally been
written down to estimated collateral values and the collectability of
the remaining investment involves only an assessment of the fair
value of the underlying collateral, which can be measured more
objectively with a lesser degree of uncertainty than assessments of
typical commercial loan collateral. Under the cash basis method,
interest income is recognized upon cash receipt to the extent to
which it would have been accrued on the loan's remaining balance at
the contractual rate. 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 criticized
commercial loans with aggregate borrower relationships exceeding
$1 million are subject to an individual review to identify charge-offs.
The Bancorp does not have an established delinquency threshold
for partially or fully charging off commercial loans. Residential
mortgage, home equity 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. Automobile and other consumer loans and
leases that have principal and interest payments that have become
past due 120 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. Residential mortgage loans,
home equity loans, automobile loans and other consumer loans
modified as part of a TDR are maintained 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. TDRs of commercial loans and
credit cards remain on nonaccrual status until a six-month payment
history is sustained. During the nonaccrual period, TDRs of
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 loans originated or acquired with the intent to sell in the
secondary market and 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.
The fair value of residential mortgage loans held for sale 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.
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,