Fifth Third Bank 2007 Annual Report Download - page 58

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 banking centers located throughout the
Midwestern and Southeastern regions of the United States.
Basis of Presentation
The Consolidated Financial Statements include the accounts of
the Bancorp and its majority-owned subsidiaries and variable
interest entities in which the Bancorp has been determined to be
the primary beneficiary. Other entities, including certain joint
ventures, in which there is greater than 20% ownership, but upon
which the Bancorp does not possess and 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
are generally carried at the lower of cost or fair value.
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 which
management has the intent and ability to hold to maturity and are
classified as held-to-maturity are reported at amortized cost.
Securities are classified as available-for-sale when, in
management’s judgment, they may be sold in response to, or in
anticipation of, changes in market conditions. The Bancorp’s
management has evaluated the securities in an unrealized loss
position in the available-for-sale portfolio and maintains the intent
and ability to hold these securities to the earlier of the recovery of
the losses or maturity. Available-for-sale and trading securities are
reported at fair value with unrealized gains and losses, net of
related deferred income taxes, included in 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 management’s intent and ability
to hold the security to recovery. 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 loans is
discontinued when there is a clear indication that 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. 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 cost recovery 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. 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 residential mortgage loans 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. Commercial loans are
subject to individual review to identify charge-offs. Refer to the
Allowance for Loan and Lease Losses below for further
discussion.
Loan and lease origination and commitment fees and direct
loan and lease origination costs are deferred and the net amount
is 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 fixed 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. Additionally, the carrying value of
loans held for sale designated as the hedged item in a fair value
hedge transaction are adjusted for changes in their fair value over
the term of the hedging relationship. 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 carrying 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.