Fifth Third Bank 2013 Annual Report Download - page 96

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
94 Fifth Third Bancorp
Leveraged leases are carried at the aggregate of lease payments (less
nonrecourse debt payments) plus estimated residual value of the
leased property, less unearned income. Interest income on leveraged
leases is recognized over the term of the lease to achieve a constant
rate of return on the outstanding investment in the lease, net of the
related deferred income tax liability, in the years in which the net
investment is positive.
Nonaccrual Loans
When a loan is placed on nonaccrual status, the accrual of interest,
amortization of loan premium, accretion of loan discount, and
amortization/accretion of deferred net loan fees are 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 flows 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 90 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 as nonaccrual unless the loan is both well secured
and in the process of collection. Residential mortgage loans may
stay on nonperforming status for an extended time as the
foreclosure process typically lasts longer than 180 days. During the
fourth quarter of 2013, the Bancorp modified its nonaccrual policy
for home equity loans and lines of credit. Home equity loans and
lines of credit are reported on nonaccrual status if principal or
interest has been in default for 90 days or more unless the loan is
both well secured and in the process of collection. Home equity
loans and lines of credit that have been in default for 60 days or
more are also reported on nonaccrual status if the senior lien has
been in default 120 days or more, unless the loan is both well
secured and in the process of collection. Residential mortgage,
home equity, 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 unless the loan is both well
secured and in the process of collection. Commercial and 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 those 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, including those
modified in a troubled debt restructuring, 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 loans and credit card loans that have principal
and interest payments that have become past due 180 days are
assessed for a charge-off to the ALLL, unless such loans are both
well-secured and in the process of collection. The Bancorp modified
its charge-off policy for home equity loans and lines of credit in the
fourth quarter of 2013 to assess for a charge-off to the ALLL when
such loans or lines of credit have become past due 120 days if the
senior lien is also 120 days past due, 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 assessed for a charge-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. During the third quarter of 2012, the OCC, a national
bank regulatory agency, issued interpretive guidance that requires
non-reaffirmed loans included in Chapter 7 bankruptcy filings to be
accounted for as nonperforming TDRs and collateral dependent
loans regardless of their payment history and capacity to pay in the
future. The Bancorp’s banking subsidiary is a state chartered bank
which therefore is not subject to guidance of the OCC. The
Bancorp does not consider the bankruptcy court’s discharge of the
borrower’s debt a concession when the discharged debt is not
reaffirmed, and as such these loans are classified as TDRs only if
one or more of the previously mentioned concessions are granted.
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. Commercial loans and credit
card loans modified as part of a TDR are maintained on accrual
status provided there is a sustained payment history of six-months
or greater prior to the modification in accordance with the modified
terms and all remaining contractual payments under the modified