Fifth Third Bank 2004 Annual Report Download - page 42

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
40 Fifth Third Bancorp
Nature of Operations
Fifth Third Bancorp (“Bancorp”), an Ohio corporation, conducts
its principal activities through its banking and non-banking
subsidiaries from 1,011 banking centers located throughout Ohio,
Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West
Virginia and Pennsylvania. Principal activities include Commer-
cial Banking, Retail Banking, Investment Advisors and Fifth Third
Processing Solutions.
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 can
it exert, signifi cant infl uence or control, are accounted for by the
equity method and not consolidated; those in which there is less
than 20% ownership 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 reclassi-
fi ed to conform to current period presentation.
Use of Estimates
The preparation of fi nancial statements in conformity with
accounting principles generally accepted in the United States of
Amer ica requires management to make estimates and assumptions
that affect the amounts reported in the fi nancial statements and
accompanying notes. Actual results could differ from those esti-
mates.
Securities
Securities are classifi ed as held-to-maturity, available-for-sale or
trading on the date of purchase. Only those securities classifi ed
as held-to-maturity, and which management has both 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 other comprehensive income and
other noninterest 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 noninterest income in the Consolidated State-
ments of Income. The cost of securities sold is based on the specifi c
identifi cation method. Available-for-sale and held-to-maturity
securities are reviewed quarterly for possible other-than-tempo-
rary impairment. The review includes an analysis of the facts and
circumstances of each individual investment such as the severity
of loss, the length of time the fair value has been below cost, the
expectation for that security’s performance, the creditworthiness of
the issuer and the Bancorp’s intent and ability to hold the security.
A decline in value that is considered to be other-than-temporary is
recorded as a loss within noninterest income in the Consolidated
Statements of Income.
Loans and Leases
Interest income on loans is based on the principal balance outstand-
ing 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
fl ow may not be suffi cient to meet payments as they become due.
Such loans are also placed on nonaccrual status when the prin-
cipal 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 inter-
est payments that have become past due one hundred and eighty
days are charged off to the reserve for loan and lease 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.
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, leases
or commitments as a yield adjustment.
Direct fi nancing leases are carried at the aggregate of lease
payments plus estimated residual value of the leased property, less
unearned income. Interest income on direct fi nancing 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 fl ows discounted at the loan’s effective interest
rate or the fair value of the underlying collateral. The Bancorp eval-
uates 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 noninterest expense in the Consolidated
Statements of Income.
Reserve for Loan and Lease Losses
The Bancorp maintains a reserve to absorb probable loan and lease
losses inherent in the portfolio. The reserve is maintained at a level
the Bancorp considers to be adequate and is based on ongoing quar-
terly assessments and 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 loan and lease
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 esti-
mating probable credit losses. 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 a combination of conservative exposure
limits signifi cantly below legal lending limits and conservative
underwriting, documentation and collections standards. The strat-
egy also emphasizes diversifi cation on a geographic, industry and
customer level, regular credit examinations and quarterly manage-
ment reviews of large credit exposures and loans experiencing dete-
rioration of credit quality.
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES