Fifth Third Bank 2005 Annual Report Download - page 56

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp
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1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Nature of Operations
Fifth Third Bancorp (“Bancorp”), an Ohio corporation, conducts
its principal lending, deposit gathering, transaction processing and
service advisory activities through its banking and non-banking
subsidiaries from 1,119 banking centers located throughout Ohio,
Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West
Virginia, Pennsylvania and Missouri.
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, significant influence 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
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 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 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 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 and leases 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 allowance for loan and lease
losses. When a loan is placed on nonaccrual status, all previously
accrued and unpaid interest 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 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.
Conforming residential mortgage loans are typically classified
as held for sale upon origination based upon management’s intent
to sell all the production of these loans. 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 and leases 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 noninterest expense
in the Consolidated Statements of Income.
Allowance for Loan and Lease Losses
The Bancorp maintains an allowance to absorb probable loan and
lease losses inherent in the portfolio. The allowance is maintained
at a level the Bancorp considers to be adequate and is based on
ongoing quarterly assessments and evaluations of the collectibility
and historical loss experience of loans and leases. Credit losses are
charged and recoveries are credited to the allowance. 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 estimating probable credit losses. In
determining the appropriate level of the allowance, the Bancorp
estimates losses using a range derived from “base” and
“conservative” estimates.
Larger commercial loans that exhibit probable or observed
credit weaknesses are subject to individual review. Where
appropriate, allowances are allocated to individual loans based on
management’s estimate of the borrower’s ability to repay the loan
given the availability of collateral, other sources of cash flow and
legal options available to the Bancorp. The review of individual
loans includes those loans that are impaired as provided in
Statement of Financial Accounting Standard (“SFAS”) No. 114,
“Accounting by Creditors for Impairment of a Loan.” Any
allowances for impaired loans are measured based on the present
value of expected future cash flows discounted at the loan’s