Fifth Third Bank 2002 Annual Report Download - page 23

Notes to Consolidated Financial Statements
FIFTH THIRD BANCORP AND SUBSIDIARIES
21
1. Summary of Significant Accounting and
Reporting Policies
Nature of Operations
Fifth Third Bancorp (Bancorp), an Ohio corporation, conducts its
principal activities through its banking and non-banking subsidiaries
from 930 offices located throughout Ohio, Indiana, Kentucky,
Michigan, Illinois, Florida, West Virginia and Tennessee. Principal
activities include commercial and retail banking, investment
advisory services and electronic payment processing.
Basis of Presentation
The Consolidated Financial Statements include the accounts of the
Bancorp and its majority-owned subsidiaries. Unconsolidated
investments in which there is greater than 20% ownership are
accounted for by the equity method; those in which there is less than
20% ownership are generally carried at cost. All material
intercompany transactions and balances have been eliminated. Certain
prior period data has been reclassified to conform to current period
presentation.
Financial data for all periods prior to 2001 have been restated to
reflect the 2001 merger with Old Kent Financial Corporation (Old
Kent). This merger was tax-free and was accounted for as a pooling of
interests. Certain reclassifications were made to Old Kent’s financial
statements to conform presentation.
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.
Securities
Securities are classified as held-to-maturity, available-for-sale or
trading on the date of purchase. Only those securities classified as
held-to-maturity, and which management has the intent and ability
to hold to maturity, are reported at amortized cost. Available-for-
sale and trading securities are reported at fair value with unrealized
gains and losses, net of related deferred income taxes, included in
accumulated nonowner changes in equity and income, respectively.
The fair value of a security is determined based on quoted market
prices. If quoted market prices are not available, fair value is
determined based on quoted prices of similar instruments. Realized
securities gains or losses are reported within Other Operating
Income in the Consolidated Statements of Income. The cost of
securities sold is based on the specific identification method.
Available-for-sale and held-to-maturity securities are reviewed
quarterly for possible other-than-temporary impairment. The
review includes an analysis of the facts and circumstances of each
individual investment such as the length of time the fair value has
been below cost, the expectation for that security’s performance,
the credit worthiness of the issuer and the Bancorp’s ability to hold
the security to maturity. A decline in value that is considered to be
other-than-temporary is recorded as a loss within Other Operating
Income in the Consolidated Statements of Income.
Loans and Leases
Interest income on loans is based on the principal balance
outstanding, with the exception of interest on discount basis loans,
computed using a method which approximates the effective interest
rate. The accrual of interest income for commercial, construction and
mortgage loans is discontinued when there is a clear indication 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 well secured and in the process of collection. Consumer loans
and revolving lines of credit for equity lines that have principal and
interest payments that have become past due one hundred and twenty
days and credit cards that have principal and interest payments that
have become past due one hundred and eighty days are charged off to
the allowance for credit losses. When a loan is placed on nonaccrual
status, all previously accrued and unpaid interest receivable is
charged against income and the loan is accounted for on the cash
method thereafter, until qualifying for return to accrual status.
Generally, a loan is returned to accrual status when all delinquent
interest and principal payments become current in accordance with the
terms of the loan agreement or when the loan is both well secured and
in the process of collection and collectibility is no longer doubtful.
Loan and lease origination and commitment fees and certain
direct loan origination costs are deferred and the net amount
amortized over the estimated life of the related loans or
commitments as a yield adjustment.
Interest income on direct financing leases is recognized to
achieve a constant periodic rate of return on the outstanding
investment. Interest income on leveraged leases is recognized 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.
Residential mortgage loans held for sale are valued at the lower
of aggregate cost or fair value. Loans held for sale that qualify for
fair value hedge accounting are carried at fair value. Fair value is
based on the contract price at which the mortgage loans will be sold.
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.
Impaired loans are measured based on the present value of
expected future cash flows discounted at the loan’s effective interest
rate or the fair value of the underlying collateral. The Bancorp
evaluates the collectibility of both principal and interest when
assessing the need for a loss accrual.
Reserve for Credit Losses
The Bancorp maintains a reserve to absorb probable loan and lease
losses inherent in the portfolio. The reserve for credit losses is
maintained at a level the Bancorp considers to be adequate to
absorb probable loan and lease losses inherent in the portfolio, based
on evaluations of the collectibility and historical loss experience of
loans and leases. Credit losses are charged and recoveries are credited
to the reserve. Provisions for credit losses are based on the Bancorp’s
review of the historical credit loss experience and such factors which,
in management’s judgment, deserve consideration under existing
economic conditions in estimating probable credit losses.
The reserve is based on ongoing quarterly assessments of the
probable estimated losses inherent in the loan and lease portfolio. In
determining the appropriate level of reserves, the Bancorp estimates
losses using a range derived from “base” and “conservative” estimates.
The Bancorp’s methodology for assessing the appropriate reserve level
consists of several key elements, as discussed below. The Bancorp’s
strategy for credit risk management includes stringent, centralized
credit policies, and uniform underwriting criteria for all loans as well as
an overall $25 million credit limit for each customer, with limited