Fifth Third Bank 2003 Annual Report Download - page 63

FIFTH THIRD BANCORP AND SUBSIDIARIES
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Management’s Discussion and Analysis of
Financial Condition and Results of Operations
and off-balance sheet items and also define and set minimum capital
requirements (risk-based capital ratios). The guidelines define “well-
capitalized” ratios of Tier 1, total capital and leverage as 6 percent, 10
percent and 5 percent, respectively. The Bancorp and each of its
subsidiaries had Tier 1, total capital and leverage ratios above the well-
capitalized levels at December 31, 2003 and 2002. The Bancorp
expects to maintain these ratios above the well capitalized levels in
2004.
Table 24 provides the Bancorp's regulatory risk-based capital and
risk-weighted assets and capital and liquidity ratios at December 31:
Table 24–Capital Ratios
($ in millions) 2003 2002 2001 2000 1999
Tier 1 capital . . . . . . . . . $ 8,168 7,656 7,358 6,317 5,573
Total capital . . . . . . . . . . $ 9,992 8,844 8,581 7,494 6,485
Risk-weighted assets . . . . $74,689 65,444 59,491 55,943 49,379
Risk-based capital ratios: . .
Tier 1 capital . . . . . . 10.94% 11.70 12.37 11.29 11.29
Total capital . . . . . . . 13.38% 13.51 14.42 13.40 13.13
Tier 1 leverage ratio . . . . 9.11% 9.73 10.54 9.40 9.04
Table 25–Average Equity Ratios
2003 2002 2001
Average shareholders’ equity to:
Average assets . . . . . . . . . . . . . . . . . 9.85% 10.93 10.28
Average deposits . . . . . . . . . . . . . . . 15.81% 16.75 15.91
Average loans and leases. . . . . . . . . . 16.44% 18.00 16.18
In December 2001, and as amended in May 2002, the Board of
Directors authorized the repurchase in the open market, or in any
private transaction, of up to three percent of common shares
outstanding. In March 2003, the Board of Directors authorized the
repurchase in the open market, or in any private transaction, of up to
an additional 20 million common shares. In 2003, the Bancorp
repurchased approximately 11.5 million shares of common stock at
an average price of $57 for an aggregate of approximately $655
million. During 2003, the authority under the repurchase plan
approved by the Board of Directors in December 2001 had been
completed and the remaining authority under the plan authorized in
March 2003 was approximately 14.1 million shares at December 31,
2003. With increasing capital levels and greater stability in earning
asset yields anticipated in 2004, the Bancorp continues to view share
repurchases as an effective means of returning excess capital to
shareholders.
Foreign Currency Exposure
At December 31, 2003 and 2002, the Bancorp maintained foreign
office deposits of $6.6 billion and $3.8 billion, respectively. These
foreign deposits represent U.S. dollar denominated deposits in the
Bancorp’s foreign branch located in the Cayman Islands. Foreign
deposits increased as compared to 2002 as the Bancorp utilized these
deposits to aid in the funding of earning asset growth. In addition,
the Bancorp enters into foreign exchange derivative contracts for the
benefit of customers involved in international trade to hedge their
exposure to foreign currency fluctuations. The Bancorp minimizes its
exposure to these derivative contracts by entering into offsetting third-
party forward contracts with approved reputable counterparties, with
matching terms and currencies that are generally settled daily.
Related Party Transactions
At December 31, 2003 and 2002, certain directors, executive officers,
principal holders of Bancorp common stock and associates of such
persons were indebted, including undrawn commitments to lend, to
the Bancorp’s banking subsidiaries in the aggregate amount, net of
participations, of $385 million and $486 million, respectively. The
merger in 2003 of four of the Bancorp’s subsidiary banks into Fifth
Third Bank (Michigan) resulted in a reduction in the number of
insiders and a corresponding reduction in the outstanding loan and
commitment balance at December 31, 2003. As of December 31,
2003 and 2002, the outstanding balance on loans to related parties,
net of participations and undrawn commitments, was $118 million
and $160 million, respectively.
Commitments to lend to related parties as of December 31, 2003,
net of participations, were comprised of $364 million in loans and
guarantees for various business and personal interests made to the
Bancorp and subsidiary directors and $21 million to certain executive
officers. This indebtedness was incurred in the ordinary course of
business on substantially the same terms as those prevailing at the
time of comparable transactions with unrelated parties.
None of the Bancorp’s affiliates, officers, directors or employees
have an interest in or receive any remuneration from any special
purpose entities or qualified special purpose entities with which the
Bancorp transacts business.
Regulatory Matters
On March 27, 2003, the Bancorp announced that it and Fifth Third
Bank had entered into a Written Agreement with the Federal Reserve
Bank of Cleveland and the State of Ohio Department of Commerce,
Division of Financial Institutions which outlines a series of steps to
address and strengthen the Bancorp’s risk management processes and
internal controls. These steps include independent third-party reviews
and the submission of written plans in a number of areas. These areas
include the Bancorp’s management, corporate governance, internal
audit, account reconciliation procedures and policies, information
technology and strategic planning. The Bancorp has submitted all
documentation and information currently required by the Written
Agreement, including all independent third-party reviews. The
Bancorp has largely completed the staffing of its Risk Management
group and has supplemented the size and expertise of the Internal
Audit group. The Bancorp believes the improvement of these areas, as
well as others described in the Written Agreement, is nearly
completed. The Bancorp is continuing to work in cooperation with
the Federal Reserve Bank and the State of Ohio and is devoting its
attention to assisting the Regulators in verifying this progress. The
Bancorp is targeting to accomplish this verification during the first
quarter of 2004. Reference is made to the text of the Written
Agreement (filed as Exhibit 99.8 to the Bancorp’s Form 10-K filed on
March 27, 2003) for additional information regarding the terms of
the Written Agreement. The Bancorp believes that the steps taken in
conjunction with the above Written Agreement have made the
organization stronger through the development of new and expanded
risk management, audit and infrastructure processes.
Reference is made to Item 1 “Business — Regulation and
Supervision” on pages 5, 6 and 8 in the Bancorp’s Form 10-K (filed
on March 27, 2003) for a discussion of certain possible effects of this
regulatory action, including, among others, no longer satisfying
financial holding company requirements for purposes of the Gramm-
Leach-Bliley Act, higher deposit insurance premiums, incremental
staff expenses and higher legal and consulting expenses.