Fifth Third Bank 2003 Annual Report Download - page 44

FIFTH THIRD BANCORP AND SUBSIDIARIES
42
Notes to Consolidated Financial Statements
shareholders for the period prior to the merger was as follows:
Three Months Ended
($ in millions) March 31, 2001
Net Interest Income:
Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $393
Old Kent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 195
Combined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $588
Other Operating Income:
Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $292
Old Kent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 121
Combined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $413
Net Income Available to
Common Shareholders:
Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $244
Old Kent . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 55
Combined . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $299
In the second and third quarters of 2001, as a result of the Old
Kent acquisition and a formally developed integration plan, the
Bancorp recorded merger-related charges of $384 million ($294
million after tax) of which $349 million was recorded as operating
expense and $35 million was recorded as additional provision for
credit losses. Credit quality charges relate to conforming Old Kent
commercial and consumer loans to the Bancorp’s credit policies.
Specifically, these loans were conformed to the Bancorp’s credit rating
and review systems, as documented in the Bancorp’s credit policies.
The merger-related operating charges consist of:
($ in millions) 2001
Employee severance and benefit obligations . . . . . . . . . . . . . . . $ 77
Duplicate facilities and equipment. . . . . . . . . . . . . . . . . . . . . . 95
Conversion expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 51
Professional fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 46
Contract termination costs . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Loss on portfolio sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29
Net loss on sales of subsidiaries and out-
of-market line of business operations . . . . . . . . . . . . . . . . . . 15
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 16
Merger-related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $349
In 2001, employee severance included the packages negotiated with
approximately 1,400 people (including all levels of the previous Old
Kent organization from the executive management level to back office
support staff) and the change-in-control payments made pursuant to
pre-existing employment agreements. Employee-related payments
made through December 31, 2002 totaled $77 million, including
payments to the approximate 1,400 people that were terminated as of
December 31, 2002. All terminations related to this transaction were
completed in 2002.
Duplicate facilities and equipment charges of $95 million
largely include write-downs of duplicative equipment and software,
negotiated terminations of several office leases and other facility
exit costs. The Bancorp has approximately $1 million and $4
million of remaining negotiated termination and lease payments of
exited facilities as of December 31, 2003 and December 31, 2002,
respectively.
Summary of merger-related accrual activity at December 31:
($ in millions) 2003 2002
Balance, January 1 . . . . . . . . . . . . . . . . . . . . . . . $4)55
Cash payments . . . . . . . . . . . . . . . . . . . . . . . . . . (3) (51)
Balance, December 31 . . . . . . . . . . . . . . . . . . . . $1)4
The pro forma effect and the financial results of Capital Holdings,
Inc. included in the results of operations subsequent to the date of
the acquisitions were not material to the Bancorp’s financial
condition and operating results for the periods presented.
28.Pending Acquisition
On July 23, 2002, the Bancorp entered into an agreement to acquire
Franklin Financial Corporation and its subsidiary, Franklin National
Bank, headquartered in Franklin, Tennessee. At December 31, 2003,
Franklin Financial Corporation had approximately $954 million in
total assets and $801 million in total deposits. The pending
transaction is structured as a tax-free exchange of stock for a total
transaction value of approximately $310 million. The pending
transaction is subject to regulatory approvals. In addition, the
transaction is subject to the approval of Franklin Financial
Corporation shareholders. Pursuant to the current terms of the
Affiliation Agreement with Franklin Financial Corporation, the
transaction must be consummated by June 30, 2004.
29. Regulatory Requirements 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, as defined, and the adjusted retained 2002
and 2001 net income of the subsidiaries.
The Bancorp’s subsidiary banks must maintain cash reserve
balances when total reservable deposit liabilities are greater than the
regulatory exemption. These reserve requirements may be satisfied
with vault cash and noninterest-bearing cash balances on reserve
with the Federal Reserve Bank (FRB). In 2003 and 2002, the banks
were required to maintain average cash reserve balances of $290
million and $303 million, respectively.
In December of 2003, the Bancorp completed the merger of its
Fifth Third Bank, Kentucky, Inc., Fifth Third Bank, Northern
Kentucky, Inc., Fifth Third Bank, Indiana and Fifth Third Bank,
Florida subsidiary banks with and into Fifth Third Bank
(Michigan). Although these mergers changed the legal structure of
the subsidiary banks, there were no significant changes to the
Bancorp’s affiliate structure or operating model.
The FRB adopted quantitative measures which assign risk
weightings to assets and off-balance-sheet items and also define and
set minimum regulatory capital requirements (risk-based capital
ratios). All banks are required to have core capital (Tier 1) of at least
4% of risk-weighted assets, total capital of at least 8% of risk-
weighted assets and a minimum Tier 1 leverage ratio of 3% of
adjusted quarterly average assets. Tier 1 capital consists principally of
shareholders’ equity including capital-qualifying subordinated debt
but excluding unrealized gains and losses on securities available-for-
sale, less goodwill and certain other intangibles. Total capital consists
of Tier 1 capital plus certain debt instruments and the reserve for
credit losses, subject to limitation. Failure to meet certain capital
requirements can initiate certain actions by regulators that, if
undertaken, could have a direct material effect on the Consolidated
Financial Statements of the Bancorp. The regulations also define well-
capitalized levels of Tier 1, total capital and Tier 1 leverage as 6%,
10%, and 5%, respectively. The Bancorp and each of its subsidiary
banks had Tier 1, total capital and leverage ratios above the well-
capitalized levels at December 31, 2003 and 2002. As of December
31, 2003, the most recent notification from the FRB categorized the