Fifth Third Bank 2008 Annual Report Download - page 62

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
60 Fifth Third Bancorp
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 the Bancorp has the ability to exercise
significant influence over operating and financial policies of the
investee, but upon which the Bancorp does not possess control,
are accounted for by the equity method and not consolidated.
Those entities in which the Bancorp does not have the ability to
exercise significant influence 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. Securities are classified as trading when
bought and held principally for the purpose of selling them in the
near term. 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 or discounted cash flow models that
incorporate market inputs and assumptions including discount
rates, prepayment speeds, and loss rates. 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 above a
specified threshold are subject to individual review to identify
charge-offs. Refer to the Allowance for Loan and Lease Losses
below for further discussion.
A loan is accounted for as a troubled debt restructuring if the
Bancorp, for economic or legal reasons related to the borrowers’
financial difficulties, grants a concession to the borrower that it
would not otherwise consider. A troubled debt restructuring
typically involves a modification of terms such as a reduction of
the stated interest rate or face amount of the loan, a reduction of
accrued interest, or an extension of the maturity date(s) at a stated
interest rate lower than the current market rate for a new loan
with similar risk. The Bancorp measures the impairment loss of a
troubled debt restructuring based on the difference between the
original loan’s carrying amount and the present value of expected
future cash flows discounted at the original, contractual rate of the
loan. Troubled debt restructurings remain on nonaccrual status
until a six-month payment history is sustained.
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. The
Bancorp elected on January 1, 2008 to measure residential
mortgage loans held for sale at fair value in accordance with SFAS
No. 159. The election was prospective, at the instrument level, for
residential mortgage loans that have a designation as held for sale
on the day the specific loan closes. Existing residential mortgage
loans held for sale as of December 31, 2007 were not included in
the fair value option election and were valued at the lower of cost
or market. All other loans held for sale continue to be valued at
the lower of cost or market. For residential mortgage loans held
for sale, fair value is estimated based upon mortgage-backed
securities prices and spreads to those prices or, for certain loans,
discounted cash flow models that may incorporate the anticipated
portfolio composition, credit spreads of asset-backed securities
with similar collateral, and market conditions. These fair value