Fifth Third Bank 2003 Annual Report Download - page 56

FIFTH THIRD BANCORP AND SUBSIDIARIES
54
Management’s Discussion and Analysis of
Financial Condition and Results of Operations
any collection would be uncertain, and, if achieved, time consuming
and would require a significant amount of focused research. During
the second quarter of 2003 the Bancorp concluded the review of the
treasury clearing and other related settlement accounts that gave rise to
the $82 million pre-tax ($53 million after-tax) charge-off realized in
2002. The Bancorp expended considerable effort and internal
resources and employed significant external resources with expertise in
treasury operations in the review and reconstruction of these accounts
as well as in the validation of the results. The conclusion of this process
in the second quarter of 2003 identified a $31 million pre-tax ($20
million after-tax) recovery, realized as a credit to other operating
expenses. Based on activities performed by the Bancorp and
independent third-party experts, including the completion of a third-
party review of all the Bancorp’s account reconciliations, the Bancorp
has concluded that there is no additional material financial impact
relating to these treasury clearing and other related settlement
accounts. Additionally, upon completion of the review of the treasury
clearing and other related settlement accounts, the Bancorp did not
identify any specific triggering event that gave rise to the $82 million
pre-tax charge-off to a period other than the third quarter of 2002.
(See also the “Regulatory Matters” section of Management’s
Discussion and Analysis of Financial Condition and Results of
Operations for additional information.)
Securities
At December 31, 2003, total available-for-sale, held-to-maturity and
trading investment securities were $29.2 billion, compared to $25.5
billion at December 31, 2002, an increase of 14 percent, remaining
relatively proportionate with the growth in the overall balance sheet.
Table 8 provides a breakout of the weighted-average expected
maturity of the available-for-sale portfolio by security type at
December 31. The investment portfolio consists largely of fixed and
floating-rate mortgage-related securities, predominantly
underwritten to the standards of and guaranteed by the
government-sponsored agencies of FHLMC, FNMA and GNMA.
These securities differ from traditional debt securities primarily in
that they have uncertain maturity dates and are priced based on
estimated prepayment rates on the underlying mortgages. The other
bonds, notes and debentures portion of the portfolio at December
31, 2003 consisted of certain non-agency mortgage backed securities
totaling approximately $507 million, certain other asset backed
securities (primarily credit card, automobile and commercial loan
backed securities) totaling approximately $842 million and
corporate bond securities totaling approximately $54 million. The
other securities portion of the portfolio at December 31, 2003
consisted of Federal Home Loan Bank, Federal Reserve Bank and
FHLMC stock holdings totaling approximately $650 million and
certain mutual fund holdings and equity security holdings totaling
approximately $313 million. The estimated average life of the
available-for-sale portfolio increased to 5.2 years at December 31,
2003 based on current prepayment expectations compared to 3.1
years at December 31, 2002. The weighted-average yield of the
available-for-sale securities portfolio at December 31, 2003 was
4.66%, compared to 5.33% at December 31, 2002.
Table 7—Securities Portfolio at December 31
($ in millions) 2003 2002 2001 2000 1999
Securities Available-for-Sale:
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 815 304 96 198 368
U.S. Government agencies and corporations . . . . . . . . . . . . 3,860 2,389 1,202 1,240 1,020
States and political subdivisions . . . . . . . . . . . . . . . . . . . . . . 977 1,090 1,218 903 934
Agency mortgage-backed securities . . . . . . . . . . . . . . . . . . . 20,981 19,833 15,308 13,940 11,410
Other bonds, notes and debentures . . . . . . . . . . . . . . . . . . . 1,403 1,102 1,896 1,957 1,867
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 963 746 787 791 326
Securities Held-to-Maturity:
U.S. Treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $— ——— 3
U.S. Government agencies and corporations . . . . . . . . . . . . ————28
States and political subdivisions . . . . . . . . . . . . . . . . . . . . . . 126 52 16 475 599
Agency mortgage-backed securities . . . . . . . . . . . . . . . . . . . ————87
Other bonds, notes and debentures . . . . . . . . . . . . . . . . . . . 9——4511
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . ———3310
Table 8—Weighted-Average Maturity of Securities at December 31, 2003
Within 1 Year 1-5 Years 6-10 Years Over 10 Years Total
($ in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
Securities Available-for-Sale:
U.S. Treasury . . . . . . . . . . . . $ 42 1.77% $ 292 3.08% $ 481 3.71% $ — 8.36% $ 815 3.39%
U.S. Government agencies
and corporations . . . . . . . . 20 6.44 2,795 3.37 1,036 4.00 9 10.29 3,860 3.57
States and political
subdivisions (a) . . . . . . . . . 48 8.17 253 7.75 431 7.42 245 7.49 977 7.56
Agency mortgage-
backed securities (b) . . . . . . 779 6.11 10,705 4.95 8,291 4.53 1,206 4.33 20,981 4.78
Other bonds, notes and
debentures (c) . . . . . . . . . . 93 6.31 1,094 3.76 78 6.92 138 9.23 1,403 4.64
Maturities of mortgage-backed securities were estimated based on historical and predicted prepayment trends. Yields are computed based on historical cost balances.
(a) Taxable-equivalent yield using a federal income tax rate of 35%, reduced by the nondeductible portion of interest expense. Taxable-equivalent yield adjustments included in
the above table are 2.77%, 2.62%, 2.52%, 2.54% and 2.56% for securities maturing within 1 year, 1-5 years, 6-10 years, over 10 years and in total, respectively.
(b) Included in agency mortgage-backed securities available-for-sale are floating-rate securities totaling $1,847 million.
(c) Included in other bonds, notes and debentures available-for-sale are floating-rate securities totaling $189 million.