Fifth Third Bank 2013 Annual Report Download - page 95

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
93 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 VIEs 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. The investments in 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.
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 securities are reported at fair value
with unrealized gains and losses, net of related deferred income
taxes, included in other comprehensive income. Trading securities
are reported at fair value with unrealized gains and losses included
in noninterest income. 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.
Loans acquired by the Bancorp through a purchase business
combination are recorded at fair value as of the acquisition date.
The Bancorp does not carry over the acquired company’s ALLL,
nor does the Bancorp add to its existing ALLL as part of purchase
accounting.
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 resulting directly from a change in the
contractual interest rate are recognized prospectively as a reduction
of the accretable yield. The present value of any decreases in
expected cash flows after the purchase date as a result of credit
deterioration is recognized by recording an ALLL or a direct charge-
off. Subsequent to the purchase date, the methods utilized to
estimate the required ALLL are 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.