Fifth Third Bank 2009 Annual Report Download - page 70

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
68 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. The Bancorp has
evaluated subsequent events through February 26, 2010, the date
of issuance of the Consolidated Financial Statements, to
determine if either recognition or disclosure of significant events
or transactions is required.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America (U.S. GAAP) 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 are
classified as held-to-maturity and 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. 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 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
(OTTI). For debt securities, if the Bancorp intends to sell the debt
security or will more likely than not be required to sell the debt
security before recovery of the entire amortized cost basis, then an
OTTI has occurred. However, even if the Bancorp does not
intend to sell the debt security and will not likely be required to
sell the debt security before recovery of its entire amortized cost
basis, the Bancorp must evaluate expected cash flows to be
received and determine if a credit loss has occurred. In the event
of a credit loss, the credit component of the impairment is
recognized within noninterest income and the non-credit
component is recognized through accumulated other
comprehensive income. For equity securities, the Bancorp's
management evaluates the securities in an unrealized loss position
in the available-for-sale portfolio for OTTI on the basis of the
duration of the decline in value of the security and severity of that
decline as well as the Bancorp’s intent and ability to hold these
securities for a period of time sufficient to allow for any
anticipated recovery in the market value. If it is determined that
the impairment on an equity security is other than temporary, an
impairment loss equal to the difference between the carrying value
of the security and its fair value is recognized within noninterest
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 both 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 either the cost recovery or cash basis 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 section for further
discussion.
A loan is accounted for as a troubled debt restructuring if the
Bancorp, for economic or legal reasons related to the borrower's
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 effective yield of the
loan. Beginning with the first quarter of 2009, based on published
guidance with respect to troubled debt restructurings from certain
banking regulators and to conform to general practices within the
banking industry, the Bancorp determined it was appropriate to
maintain consumer loans modified as part of a troubled debt
restructuring on accrual status, provided there is reasonable
assurance of repayment and of performance according to the
modified terms based upon a current, well-documented credit
evaluation. Management believes this policy is reflective of recent
regulatory guidance and provides better comparability to other
financial institutions. Troubled debt restructurings on commercial
loans remain on nonaccrual status until a six-month payment
history is sustained. During the nonaccrual period, troubled debt
restructurings on commercial loans are accounted for using the
cash basis method, provided that full repayment of principal
under the modified terms of the loan is reasonably assured.