Fifth Third Bank 2014 Annual Report Download - page 96

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
94 Fifth Third Bancorp
severity, and any additional information obtained from the GSEs
regarding future mortgage repurchase and file request criteria. At the
time of a loan sale, the Bancorp records a representation and
warranty reserve at the estimated fair value of the Bancorp’s
guarantee and continually updates the reserve during the life of the
loan as losses in excess of the reserve become probable and
reasonably estimable. The provision for the estimated fair value of
the representation and warranty guarantee arising from the loan
sales is recorded as an adjustment to the gain on sale, which is
included in other noninterest income at the time of sale. Updates to
the reserve are recorded in other noninterest expense.
Legal Contingencies
The Bancorp is party to numerous claims and lawsuits as well as
threatened or potential actions or claims concerning matters arising
from the conduct of its business activities. The outcome of claims
or litigation and the timing of ultimate resolution are inherently
difficult to predict, and significant judgment may be required in the
determination of both the probability of loss and whether the
amount of the loss is reasonably estimable. The Bancorp’s estimates
are subjective and are based on the status of legal and regulatory
proceedings, the merit of the Bancorp’s defenses and consultation
with internal and external legal counsel. A reserve for a potential
litigation loss is established when information related to the loss
contingency indicates both that a loss is probable and that the
amount of loss can be reasonably estimated. This reserve is included
in Other Liabilities in the Consolidated Balance Sheets and is
adjusted from time to time as appropriate to reflect changes in
circumstances. Legal expenses are recorded in other noninterest
expense in the Consolidated Statements of Income.
Bank Premises and Equipment
Bank premises and equipment, including leasehold improvements,
are carried at cost less accumulated depreciation and amortization.
Depreciation is calculated using the straight-line method based on
estimated useful lives of the assets for book purposes, while
accelerated depreciation is used for income tax purposes.
Amortization of leasehold improvements is computed using the
straight-line method over the lives of the related leases or useful
lives of the related assets, whichever is shorter. Whenever events or
changes in circumstances dictate, the Bancorp tests its long-lived
assets for impairment by determining whether the sum of the
estimated undiscounted future cash flows attributable to a long-lived
asset or asset group is less than the carrying amount of the long-
lived asset or asset group through a probability-weighted
approach. In the event the carrying amount of the long-lived asset
or asset group is not recoverable, an impairment loss is measured as
the amount by which the carrying amount of the long-lived asset or
asset group exceeds its fair value. Maintenance, repairs and minor
improvements are charged to noninterest expense in the
Consolidated Statements of Income as incurred.
Derivative Financial Instruments
The Bancorp accounts for its derivatives as either assets or liabilities
measured at fair value through adjustments to AOCI and/or current
earnings, as appropriate. On the date the Bancorp enters into a
derivative contract, the Bancorp designates the derivative
instrument as either a fair value hedge, cash flow hedge or as a free-
standing derivative instrument. For a fair value hedge, changes in
the fair value of the derivative instrument and changes in the fair
value of the hedged asset or liability attributable to the hedged risk
are recorded in current period net income. For a cash flow hedge,
changes in the fair value of the derivative instrument, to the extent
that it is effective, are recorded in AOCI and subsequently
reclassified to net income in the same period(s) that the hedged
transaction impacts net income. For free-standing derivative
instruments, changes in fair values are reported in current period net
income.
Prior to entering into a hedge transaction, the Bancorp
formally documents the relationship between the hedging
instrument and the hedged item, as well as the risk management
objective and strategy for undertaking the hedge transaction. This
process includes linking the derivative instrument designated as a
fair value or cash flow hedge to a specific asset or liability on the
balance sheet or to specific forecasted transactions and the risk
being hedged, along with a formal assessment at both inception of
the hedge and on an ongoing basis as to the effectiveness of the
derivative instrument in offsetting changes in fair values or cash
flows of the hedged item. If it is determined that the derivative
instrument is not highly effective as a hedge, hedge accounting is
discontinued.
Income Taxes
The Bancorp estimates income tax expense based on amounts
expected to be owed to the various tax jurisdictions in which the
Bancorp conducts business. On a quarterly basis, management
assesses the reasonableness of its effective tax rate based upon its
current estimate of the amount and components of net income, tax
credits and the applicable statutory tax rates expected for the full
year. The estimated income tax expense is recorded in the
Consolidated Statements of Income.
Deferred income tax assets and liabilities are determined using
the balance sheet method and the net deferred tax asset or liability is
reported in other assets or accrued taxes, interest and expenses in
the Consolidated Balance Sheets. Under this method, the net
deferred tax asset or liability is based on the tax effects of the
differences between the book and tax basis of assets and liabilities,
and reflects enacted changes in tax rates and laws. Deferred tax
assets are recognized to the extent they exist and are subject to a
valuation allowance based on management’s judgment that
realization is more likely than not. This analysis is performed on a
quarterly basis and includes an evaluation of all positive and
negative evidence, such as the limitation on the use of any net
operating losses, to determine whether realization is more likely
than not.
Accrued taxes represent the net estimated amount due to
taxing jurisdictions and are reported in accrued taxes, interest and
expenses in the Consolidated Balance Sheets. The Bancorp
evaluates and assesses the relative risks and appropriate tax
treatment of transactions and filing positions after considering
statutes, regulations, judicial precedent and other information and
maintains tax accruals consistent with its evaluation of these relative
risks and merits. Changes to the estimate of accrued taxes occur
periodically due to changes in tax rates, interpretations of tax laws,
the status of examinations being conducted by taxing authorities
and changes to statutory, judicial and regulatory guidance that
impact the relative risks of tax positions. These changes, when they
occur, can affect deferred taxes and accrued taxes as well as the
current period’s income tax expense and can be significant to the
operating results of the Bancorp. Any interest and penalties incurred
in connection with income taxes are recorded as a component of
income tax expense in the Consolidated Financial Statements. For
additional information on income taxes, refer to Note 20.
Earnings Per Share
Basic earnings per share is computed by dividing net income
available to common shareholders by the weighted-average number
of shares of common stock outstanding during the period. Earnings
per diluted share is computed by dividing adjusted net income
available to common shareholders by the weighted-average number