NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  Nonaccrual Loans  Loans Held for Sale  Restructured Loans  Other Real Estate Owned  Allowance for Loan and Lease Losses  Impaired Loans  Fifth Third Bancorp 73 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 A loan is considered to be impaired when, based on current  information and events, it is probable that the Bancorp will be  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.  Loans held for sale are placed on nonaccrual status consistent  with the Bancorp’s nonaccrual policy for portfolio 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 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. 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 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.  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.  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. 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. 