Fifth Third Bank 2014 Annual Report Download - page 93

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
91 Fifth Third Bancorp
financing leases is recognized over the term of the lease to achieve a
constant periodic rate of return on the outstanding investment.
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 and Leases
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. 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 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 and are reasonably assured of repayment in accordance
with the contractual terms of 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 TDR, 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, home
equity loans and lines of credit 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. Home equity
loans and lines of credit are also assessed for 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 and Leases
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 remaining principal 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