Fifth Third Bank 2002 Annual Report Download

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Financial Strength and
Consistent Growth
2002 ANNUAL REPORT

Table of contents

  • Page 1
    2002 ANNUAL REPORT Financial Strength and Consistent Growth

  • Page 2
    ...Bancorp. Today, Fifth Third operates â- Traverse City 17 affiliates with 930 full-service locations primarily in five Midwestern â- â- Detroit Grand Rapids states. We serve 5.5 million customers Chicago â- â- Toledo â- Cleveland through our affiliate banking network â- Columbus â- â- Dayton...

  • Page 3
    ...are as follows: 2002 2001 Percent Change Net Income ROAA ROAE Efficiency Ratio $1,634 2.18% 19.9% 44.9% 1,393 1.97 19.2 46.6 17.3 10.7 3.6 (3.6) Investment Qualities Fifth Third Bancorp shareholders have: â- Received an annualized total return of 25% since the Bancorp began trading in April of...

  • Page 4
    ... the 2001 purchase acquisition of Universal Companies (USB), on the addition of several significant new merchant and electronic funds transfer (EFT) customer relationships. Successful sales of Retail and Commercial deposit accounts fueled an annual increase in deposit service revenues of 17 percent...

  • Page 5
    ... realizing a recovery. We also continue to work closely with the Federal Reserve Bank of Cleveland, our primary federal regulator, and the respective state agencies that govern our six bank charters whose reviews have encompassed, among other items, an evaluation of Total Equity billions of dollars...

  • Page 6
    ... identify and reward top performers. We concentrate on four businesses in each of our markets: Retail and Commercial Banking, Investment Advisors and Electronic Payment Processing. All lines of business report to the local presidents, not to the home office. This approach ensures that sales efforts...

  • Page 7
    ... growth opportunity for Fifth Third. FIFTH THIRD AFFILIATE LEADERSHIP Location President Years at Fifth Third 2002 ANNUAL REPORT â-¼ Cincinnati Western Michigan Chicago Southern Indiana Western Ohio Eastern Michigan Central Ohio Northwestern Ohio Central Indiana Northeastern Ohio Northern...

  • Page 8
    ...Banking Centers Fifth Third checking accounts offer competitive rates and convenient access ...and for a limited time, a free soccer chair. Open any checking account - from Totally Free with no monthly service charge to PlatinumSM with premium tiered interest rates to the Capital Management Account...

  • Page 9
    ... Sands, a Banking Center Manager in Cleveland, OH, with customer Darrell Boff. He chose Fifth Third for its flexibility and convenience. Mr. Bock recently opened a Capital Management Account. His monthly statement now enables him to conveniently review his entire financial profile: savings, checking...

  • Page 10
    ... great year for Fifth Third Mortgage in 2002. Fifth Third views mortgage banking as a great way to introduce new customers to all of our products and services. A Powerful Commercial Partnership Fifth Third's Banking Center Managers, with the assistance of the Small Business Development Group, also...

  • Page 11
    ...42 percent in 2002. Over 1,800 Banking Center employees are licensed and participating in the sale of mutual funds, annuity products and Capital Management Accounts, Fifth Third's integrated banking and investment solution. This number has increased from just 76 three years ago. Fifth Third's Retail...

  • Page 12
    ... our customers' corporate banking needs - from traditional lending to real estate and leasing opportunities, to treasury management and international finance, investment management and corporate finance. Fifth Third offers individually tailored solutions and innovative technologies for companies of...

  • Page 13
    ... of equity products and four distinct investment styles: Quality Growth, Disciplined Value, Broadly Diversified, and Fixed Income. Fifth Third's Institutional Officers offer retirement plan services, investment management, municipal and public finance solutions, institutional custody services, and...

  • Page 14
    ... cash management solution. 2002 - A Year of Growth and Accelerating Momentum Fifth Third (Chicago) customer, W.S. Darley & Co. has been an industry-leading manufacturer of fire trucks and allied equipment for a worldwide customer base since 1908. Pictured left to right are Paul Darley, President...

  • Page 15
    ...exchange services and an overall 26 percent increase in total international revenues. Institutional fixed income trading and sales also demonstrated meaningful growth and advanced by 23 percent in 2002. Commercial loan and lease fees increased by 55 percent in 2002 with the addition of new customers...

  • Page 16
    ... available in grants. Community Affairs Fifth Third's Community Affairs Office is committed to community development. The group identifies opportunities for the Bank to participate in residential mortgage, small business lending and real estate projects in under-served com- FIFTH THIRD BANCORP...

  • Page 17
    ..., Jr., Banking Center Manager, teaches children the fundamentals of personal finance at the Walton Elementary school in Cleveland. Fifth Third sponsors these in-school programs as a way to help children become responsible adults and thereby develop a more secure future. 2002 ANNUAL REPORT 15

  • Page 18
    ... of Cash Flows Notes to Consolidated Financial Statements Independent Auditors' Report Management's Discussion and Analysis of Financial Condition and Results of Operations Consolidated Ten Year Comparison Directors and Officers Corporate Information 17 18 19 20 21 42 43 61 62 63 16 FIFTH THIRD...

  • Page 19
    ... Credit Losses ...Net Interest Income After Provision for Credit Losses ...Other Operating Income Electronic Payment Processing Income...Service Charges on Deposits ...Mortgage Banking Net Revenue ...Investment Advisory Income ...Other Service Charges and Fees ...Securities Gains, Net ...Securities...

  • Page 20
    ... Assets...Mortgage Servicing Rights ...Other Assets...Total Assets ...Liabilities Deposits Demand ...Interest Checking ...Savings ...Money Market ...Other Time ...Certificates-$100,000 and Over...Foreign Office...Total Deposits ...Federal Funds Borrowed ...Short-Term Bank Notes ...Other Short...

  • Page 21
    ... (Losses) on Securities Available-for-Sale, Net ...Net Income and Nonowner Changes in Equity Cash Dividends Declared Fifth Third Bancorp: Common Stock at $.70 per share ...Pooled Companies Prior to Acquisition: Common Stock...Preferred Stock ...Shares Acquired for Treasury or Retired...Stock Options...

  • Page 22
    ... of Long-Term Debt...Payment of Cash Dividends...Exercise of Stock Options ...Proceeds from Sale of Common Stock ...Purchases of Treasury Stock...Other ...Net Cash Provided by (Used in) Financing Activities ...(Decrease) Increase in Cash and Due from Banks ...Cash and Due from Banks at Beginning of...

  • Page 23
    ... 930 offices located throughout Ohio, Indiana, Kentucky, Michigan, Illinois, Florida, West Virginia and Tennessee. Principal activities include commercial and retail banking, investment advisory services and electronic payment processing. Basis of Presentation The Consolidated Financial Statements...

  • Page 24
    ... loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience. The Bancorp's primary market areas for lending are Ohio, Kentucky, Indiana, Florida, Michigan, Illinois, West...

  • Page 25
    ... with matching terms and currencies that are generally settled daily. Credit risks arise from the possible inability of counterparties to meet the terms of their contracts and from any resultant exposure to movement in foreign currency exchange rates, limiting the Bancorp's exposure to the...

  • Page 26
    ... electronic payment processing services as such services are performed, recording revenues net of certain costs (primarily interchange fees charged by credit card associations) not controlled by the Bancorp. Treasury stock is carried at cost. New Accounting Pronouncements In June 2001, the Financial...

  • Page 27
    FIFTH THIRD BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements for impairment and details both a probability-weighted and "primaryasset" approach to estimate cash flows in testing for impairment of a long-lived asset. This statement supersedes SFAS No. 121, "Accounting for the ...

  • Page 28
    ...of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. This Interpretation requires variable interest entities to be consolidated by the primary beneficiary which represents the...

  • Page 29
    ... to credit recourse and with servicing retained, a total of approximately $2.4 billion in leased autos to an unrelated asset-backed special purpose entity that have subsequently been leased back to the Bancorp. There were no such sales during 2002. As of December 31, 2002, the outstanding balance of...

  • Page 30
    ... of core deposits, acquired merchant processing and credit card portfolios and mortgage servicing rights. Intangibles, excluding mortgage servicing right assets, are amortized on a straight-line basis over their estimated useful lives, generally over a period of up to 25 years. The Bancorp reviews...

  • Page 31
    ...million in commercial paper, with unused lines of credit of $6.8 million available to support commercial paper transactions and other corporate requirements. In March 1997, Fifth Third Capital Trust 1 (FTCT1), a wholly-owned finance subsidiary of the Bancorp, issued 8.136% Capital Securities due in...

  • Page 32
    ...Balance Sheets and are comprised of the following temporary differences at December 31: ($ in millions) Lease financing ...Reserve for credit losses ...Bank premises and equipment ...Net unrealized gains on securities available-for-sale and hedging instruments . Mortgage servicing and other ...Total...

  • Page 33
    ... manage the risk of the mortgage servicing rights portfolio and to meet the financing needs of its customers. These financial instruments primarily include commitments to extend credit, standby and commercial letters of credit, foreign exchange contracts, interest rate swap agreements, interest rate...

  • Page 34
    FIFTH THIRD BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements securities. The Bancorp receives a fixed rate of 8.136% and pays a variable rate based on three-month LIBOR plus 50 basis points. In 2002, the Bancorp entered into $1.3 billion of interest rate swaps to swap existing ...

  • Page 35
    ... the merger charge in 2000. Plan assets consist primarily of common trust and mutual funds managed by Fifth Third Bank, an affiliate of the Bancorp, and Fifth Third Bancorp common stock securities. 2002 Weighted-average assumptions: For disclosure: Discount rate ...Rate of compensation increase...

  • Page 36
    ... and Capital Ratios The principal source of income and funds for the Bancorp (parent company) are dividends from its subsidiaries. During 2003, the amount of dividends the subsidiaries can pay to the Bancorp without prior approval of regulatory agencies is limited to their 2003 eligible net profits...

  • Page 37
    FIFTH THIRD BANCORP AND SUBSIDIARIES Notes to Consolidated Financial Statements ($ in millions) 2002 Accumulated nonowner changes in equity: Beginning balance - Unrealized gains (losses) on securities available-for-sale . . $ 17.9 Current period change ...420.2 Ending balance - Unrealized net gains...

  • Page 38
    ... transfers...Transfers received from QSPE ...Fees received ...2002 $257.6 $269.8 $ 26.3 2001 203.0 178.5 22.6 traded financial holding company headquartered in Grand Rapids, Michigan. The contribution of Old Kent to consolidated net interest income, other operating income and net income available...

  • Page 39
    ..., the Bancorp entered into an agreement to acquire Franklin Financial Corporation and its subsidiary, Franklin National Bank, headquartered in Franklin, Tennessee. At December 31, 2002, Franklin Financial Corporation had approximately $890 million in total assets and $758 million in total deposits...

  • Page 40
    ... market rates and limited credit risk, carrying amounts approximate fair value. Those financial instruments include cash and due from banks, other short-term investments, accrued income receivable, certain deposits (demand, interest checking, savings and money market), Federal funds borrowed, short...

  • Page 41
    ... at the reporting date. Foreign exchange contracts-fair values were based on quoted market prices of comparable instruments and represent a net asset to the Bancorp. Condensed Balance Sheets (Parent Company Only) December 31 2002 Assets Cash ...$ .1 Securities Available-for-Sale ...- Loans to...

  • Page 42
    ..., Commercial Banking, Investment Advisory Services and Electronic Payment Processing. Retail Banking provides a full range of deposit products and consumer loans and leases. Commercial Banking offers banking, cash management and financial services to business, government and professional customers...

  • Page 43
    ... Income Taxes ...Net Income Available to Common Shareholders ...Selected Financial Information Identifiable Assets ...Depreciation and Amortization ...Commercial Banking Retail Banking Investment Electronic Advisory Payment Services Processing (a) General Corporate and Other Eliminations (a) Total...

  • Page 44
    ... 1, the Bancorp adopted the provisions of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," effective January 1, 2002. Cincinnati, Ohio February 12, 2003 Fifth Third Funds® Performance Disclosure *Investments in the Fifth Third Funds are: NOT INSURED BY...

  • Page 45
    ... and policies affecting financial services companies, credit quality and credit risk management, changes in the banking industry including the effects of consolidation resulting from possible mergers of financial institutions, acquisitions and integration of acquired businesses. Fifth Third Bancorp...

  • Page 46
    ... share. The Bancorp's net income, earnings per share, earnings per diluted share, dividends per share, efficiency ratio, net income to average assets, referred to as return on average assets (ROA), and return on average shareholders' equity (ROE) for the most recent five years are as follows: 2002...

  • Page 47
    ... millions) Electronic payment processing income ...Service charges on deposits...Mortgage banking net revenue ...Investment advisory income ...Other service charges and fees ...Subtotal ...Securities gains, net ...Securities gains, net - non-qualifying hedges on mortgage servicing . . Total...After...

  • Page 48
    ... of the Bancorp's retail and commercial network, continued sales success in treasury management services, successful sales campaigns promoting retail and commercial deposit accounts, the introduction of new cash management products for commercial customers and the benefit of a lower interest rate...

  • Page 49
    ...life insurance (BOLI) represent the majority of other service charges and fees. The commercial banking revenue component of other service charges and fees grew 26% to $157.2 million in 2002, led by international department revenue which includes foreign currency exchange, letters of credit and trade...

  • Page 50
    ... 2002 by approximately $.3 million. The value of the Plan assets has decreased from $264.3 million at Securities Portfolio at December 31 ($ in millions) Securities Available-for-Sale: U.S. Treasury ...U.S. Government agencies and corporations ...States and political subdivisions ...Agency mortgage...

  • Page 51
    ... 2002 primarily due to higher electronic transfer volume from debit and ATM card usage, expansion of business-to-business e-commerce and new sales. Total operating expenses for 2001 include pretax merger-related charges of $348.6 million related to the acquisition of Old Kent. These charges consist...

  • Page 52
    ... line outstandings from successful 2002 sales campaigns. Residential mortgage loan balances increased 4% over 2001, including Loans Held for Sale, primarily due 50 Manufacturing...Real Estate...Construction ...Retail Trade...Business Services ...Wholesale Trade ...Financial Services & Insurance...

  • Page 53
    ... SUBSIDIARIES Management's Discussion and Analysis of Financial Condition and Results of Operations To maintain balance sheet flexibility and enhance liquidity during 2002 and 2001, the Bancorp transferred, with servicing retained, certain fixed-rate, short-term investment grade commercial loans to...

  • Page 54
    ... mortgage loans ...Real estate - construction loans ...Real estate - residential mortgage loans ...Consumer loans ...Lease financing...Total net losses charged off ...Reserve of acquired institutions and other...Provision charged to operations ...Merger-related provision ...Reserve for credit losses...

  • Page 55
    ... merger-related charge-off, the decrease in commercial loan net charge-offs in 2002 reflected several factors, including improved credit performance in the Bancorp's Toledo, Evansville and Detroit markets and an increase in the size of the commercial portfolio. Total commercial mortgage net charge...

  • Page 56
    ...and currencies that are generally settled daily. Regulatory Matters On November 7, 2002, the Bancorp received a supervisory letter from the Federal Reserve Bank of Cleveland and the Ohio Department of Commerce, Division of Financial Institutions relating to matters including procedures for access to...

  • Page 57
    ... loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience. The Bancorp's primary market areas for lending are Ohio, Kentucky, Indiana, Florida, Michigan, Illinois, West...

  • Page 58
    ...objective of the Bancorp's asset/liability management function is to maintain consistent growth in net interest income within the Bancorp's policy limits. This objective is accomplished through management of the Bancorp's balance sheet composition, liquidity, and interest rate risk exposures arising...

  • Page 59
    ... Mortgage Association guidelines are sold for cash upon origination. Periodically, additional assets such as adjustable-rate residential mortgages, certain consumer leases and certain short-term commercial loans are also securitized, sold or transferred off balance sheet. In 2002 and 2001, a total...

  • Page 60
    ...of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated support from other parties. This Interpretation requires variable interest entities to be consolidated by the primary beneficiary which represents the...

  • Page 61
    ... investment policies provide a framework within which the Bancorp and its affiliates may use certain authorized financial derivatives as an asset/liability management tool in meeting the Bancorp's ALCO capital planning directives, to hedge changes in fair value of its fixed rate mortgage servicing...

  • Page 62
    ...Accounting Principle, Net of Tax - Net Income ...1,634.7 Dividends on Preferred Stock ...7 Net Income Available to Common Shareholders ...$1,634.0 Earnings Per Share (a) ...$ 2.82 Earnings Per Diluted Share (a) ...$ 2.76 Cash Dividends Declared Per Share (a) ...$ .98 2001 4,708.8 2,275.8 2,433.0 200...

  • Page 63
    ... 9.64 9.00 8.32 7.66 6.62 6.16 (a) Federal funds loaned and interest-bearing deposits in banks are combined in other short-term investments in the Consolidated Financial Statements. (b) Number of shares outstanding and per share data have been adjusted for stock splits in 2000, 1998, 1997 and 1996...

  • Page 64
    .... President & CEO Fifth Third Bancorp and Fifth Third Bank Darryl F. Allen Retired Chairman President & CEO Aeroquip-Vickers, Inc. John F. Barrett Chairman, President & CEO The Western & Southern Life Insurance Company Thomas B. Donnell Chairman Emeritus Fifth Third Bank (Northwestern Ohio) Richard...

  • Page 65
    ... AND FIFTH THIRD BANKS OF MICHIGAN; INDIANA; KENTUCKY, INC. AND NORTHERN KENTUCKY Prime-1 Aa2 A-1+ AA- F1+ AA- Short-Term Deposit Long-Term Deposit Prime-1 Aa1 A-1+ AA- F1+ AA ©Fifth Third Bank 2003 Member F.D.I.C. - Federal Reserve System ®Reg. U.S. Pat. & T.M. Office 2002 ANNUAL REPORT...

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