Fifth Third Bank 2003 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 952 banking centers 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. Other entities,
including certain joint ventures, in which there is greater than 20%
ownership, but upon which the Bancorp does not possess, nor
cannot exert, significant influence or control, are accounted for by
the equity method and not consolidated; those in which there is
less than 20% ownership, but upon which the Bancorp does not
possess nor cannot exert, significant influence or control are
generally carried at the lower of cost or fair value. All material
intercompany transactions and balances have been eliminated.
Certain prior period data has been reclassified to conform to
current period presentation.
Use of Estimates
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
intent and 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 computed using the effective interest method. 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
reserve 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 and lease origination costs are deferred and the net
amount amortized over the estimated life of the related loans or
commitments as a yield adjustment.
Direct financing leases are carried at the aggregate of lease
payments plus estimated residual value of the leased property, less
unearned income. Interest income on direct financing leases is
recognized over the term of the lease to achieve a constant periodic
rate of return on the outstanding investment. 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.
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.
Other Real Estate Owned
Other real estate owned (OREO), which is included in other assets,
represents property acquired through foreclosure or other
proceedings. OREO is carried at the lower of cost or fair value, less
costs to sell. All property is periodically evaluated and reductions in
fair value are recognized in other operating expense in the
Consolidated Statements of Income.
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 that,
in management’s judgment, deserve consideration under existing
economic conditions in estimating probable credit losses.