Fifth Third Bank 2010 Annual Report Download - page 74

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
72 Fifth Third Bancorp
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Nature of Operations
Fifth Third 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 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.
Cash and Due From Banks
Cash and due from banks consist of currency and coin, cash items
in the process of collection and due from banks. Currency and
coin includes both U.S. and foreign currency owned and held at
Fifth Third offices and that is in-transit to the FRB. Cash items in
the process of collection include checks and drafts that are drawn
on another depository institution or the FRB that are payable
immediately upon presentation in the U.S. Balances due from
banks include non-interest bearing balances that are funds on
deposit at other depository institutions or the FRB.
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 with
unrealized losses are reviewed quarterly for possible 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 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.
Portfolio Loans and Leases
Basis of Accounting
Portfolio loans and leases are generally reported at the principal
amount outstanding, net of unearned income, deferred loan fees
and costs, and any direct principal charge-offs. Direct loan
origination fees and costs are deferred and the net amount is
amortized over the estimated life of the related loans as a yield
adjustment. Interest income is recognized based on the principal
balance outstanding computed using the effective interest method.
Purchased loans are evaluated for evidence of credit
deterioration at acquisition and recorded at their initial fair value.
For loans acquired with no evidence of credit deterioration, the
fair value discount or premium is amortized over the contractual
life of the loan as an adjustment to yield. For loans acquired with
evidence of credit deterioration, the Bancorp determines at the
acquisition date the excess of the loan’s contractually required
payments over all cash flows expected to be collected as an
amount that should not be accreted into interest income
(nonaccretable difference). The remaining amount representing
the difference in the expected cash flows of acquired loans and
the initial investment in the acquired loans is accreted into interest
income over the remaining life of the loan or pool of loans
(accretable yield). Subsequent to the purchase date, increases in
expected cash flows over those expected at the purchase date are
recognized prospectively as interest income over the remaining
life of the loan. The present value of any decreases in expected
cash flows after the purchase date is recognized by recording an
ALLL or a direct charge-off. Subsequent to the purchase date, the
methods utilized to estimate the required ALLL is similar to
originated loans. Loans carried at fair value, mortgage loans held
for sale and loans under revolving credit agreements are excluded
from the scope of this guidance on loans acquired with
deteriorated credit quality.
The Bancorp’s lease portfolio consists of both direct
financing and leveraged leases. 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. Leveraged leases are carried at the aggregate of lease
payments (less nonrecourse debt payments) plus estimated
residual value of the leased property, less unearned income.
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.