Fifth Third Bank 2001 Annual Report Download - page 22

Notes to Consolidated Financial Statements
FIFTH THIRD BANCORP AND SUBSIDIARIES
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An unallocated reserve is maintained to recognize the imprecision
in estimating and measuring loss when evaluating reserves for
individual loans or pools of loans. Reserves on individual loans and
historical loss rates are reviewed quarterly and adjusted as necessary
based on changing borrower and/or collateral conditions and actual
collection and charge-off experience.
Historical loss rates for commercial and consumer loans may be
adjusted for significant factors that, in management’s judgment, reflect
the impact of any current conditions on loss recognition. Factors
which management considers in the analysis include the effects of the
national and local economies, trends in the nature and volume of loans
(delinquencies, charge-offs, nonaccrual and problem loans), changes in
the internal lending policies and credit standards, collection practices
and examination results from bank regulatory agencies and the
Bancorp’s internal credit examiners.
The Bancorp has not substantively changed any aspect of its overall
approach in the determination of the allowance for loan losses. There
have been no material changes in assumptions or estimation
techniques as compared to prior years that impacted the determination
of the current year allowance.
Loan Sales
When the Bancorp sells loans through either securitizations or
individual loan sales in accordance with its investment policies, it
may retain one or more subordinated tranches, servicing rights
and in some cases a cash reserve account, all of which are retained
interests in the securitized or sold loans. Gain or loss on sale of the
loans depends in part on the previous carrying amount of the
financial assets involved in the sale, allocated between the assets
sold and the retained interests based on their relative fair value at
the date of sale. To obtain fair values, quoted market prices are
used if available. If quotes are not available for retained interests,
the Bancorp calculates fair value based on the present value of
future expected cash flows using management’s best estimates of
the key assumptions — credit losses, prepayment speeds, forward
yield curves and discount rates commensurate with the risks
involved.
Servicing rights resulting from loan sales are amortized in
proportion to, and over the period of estimated net servicing
revenues. Servicing rights are assessed for impairment periodically,
based on fair value, with any impairment recognized through a
valuation allowance. For purposes of measuring impairment, the
rights are stratified based on interest rate and original maturity. Fees
received for servicing mortgage loans owned by investors are based on
a percentage of the outstanding monthly principal balance of such
loans and are included in income as loan payments are received. Costs
of servicing loans are charged to expense as incurred.
Bank Premises and Equipment
Bank premises and equipment, including leasehold improvements,
are stated at cost less accumulated depreciation and amortization.
Depreciation is calculated using the straight-line method based on
estimated useful lives of the assets for book purposes, while
accelerated depreciation is used for income tax purposes.
Amortization of leasehold improvements is computed using the
straight-line method over the lives of the related leases or useful lives
of the related assets, whichever is shorter. Maintenance, repairs and
minor improvements are charged to operating expenses as incurred.
In June 2001, the Financial Accounting Standards Board (FASB)
issued SFAS No. 143, “Accounting for Asset Retirement Obligations.”
This Statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets
and the associated asset retirement costs. This Statement amends
SFAS No. 19, “Financial Accounting and Reporting by Oil and
Gas Producing Companies,” and is effective for financial
statements issued for fiscal years beginning after June 15, 2002.
Adoption of this standard is not expected to have a material effect
on the Bancorp’s Consolidated Financial Statements.
In August 2001, the FASB issued SFAS No. 144, “Accounting for
the Impairment and Disposal of Long-Term Assets.” This Statement
eliminates the allocation of goodwill to long-lived assets to be tested for
impairment and details both a probability-weighted and “primary-asset”
approach to estimate cash flows in testing for impairment of a long-
lived asset. This Statement supersedes SFAS No. 121, “Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to
Be Disposed Of,” and the accounting and reporting provisions of the
Accounting Principles Board (APB) Opinion No. 30, “Reporting the
Results of Operations–Reporting the Effects of Disposal of a Segment
of a Business, and Extraordinary, Unusual and Infrequently Occurring
Events and Transactions.” This Statement also amends Accounting
Research Bulletin (ARB) No. 51, “Consolidated Financial Statements.”
SFAS No. 144 is effective for financial statements issued for fiscal years
beginning after December 15, 2001. The Bancorp has not yet
determined the impact of adopting this standard.
Intangible Assets
Goodwill and other intangibles are amortized on a straight-line
basis, generally over a period of up to 25 years. Intangible assets, net
of accumulated amortization, included in Other Assets in the
Consolidated Balance Sheets at December 31, 2001 and 2000 were
$949.8 million and $767.5 million, respectively. Management
reviews intangible assets for possible impairment if there is a
significant event that detrimentally affects operations. Impairment is
measured using estimates of the discounted future earnings potential
of the entity or assets acquired.
In June 2001, the FASB issued SFAS No. 142, “Goodwill and
Other Intangible Assets.” SFAS No. 142 discontinues the practice of
amortizing goodwill and indefinite lived intangible assets and
initiates an annual review for impairment. Impairment would be
examined more frequently if certain indicators are encountered.
Intangible assets with a determinable useful life will continue to be
amortized over that period. The amortization provisions apply to
goodwill and intangible assets acquired after June 30, 2001.
Goodwill and intangible assets recorded at June 30, 2001 will be
affected when the Bancorp adopts the Statement. The Bancorp is
currently in the process of finalizing the determination of the
impact of the new FASB pronouncement concerning goodwill and
other intangible assets. The Bancorp currently has approximately
$682.3 million of unamortized goodwill included in other assets in
the December 31, 2001 Consolidated Balance Sheet that generates
approximately $13.8 million in quarterly pretax amortization
expense. Pending final implementation guidance, other related
interpretations, and the determination of any newly identified
intangible assets, the Bancorp expects the quarterly diluted earnings
per share impact to be minimal and in the range of approximately
$.01 to $.02 per share.
Derivative Financial Instruments
Effective January 1, 2001, the Bancorp adopted SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,” as