NOTES TO CONSOLIDATED FINANCIAL STATEMENTS  1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES  Nature of Operations  Basis of Presentation  Portfolio Loans and Leases  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. 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. 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 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 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.  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. 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. 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.  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  72 Fifth Third Bancorp Securities  Cash and Due From Banks  Use of Estimates  Basis of Accounting 