Fifth Third Bank 2004 Annual Report Download

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2004 ANNUAL REPORT
we are FOCUSED.
we are INVESTORS.
we are FifthThird.
we are COMMITTED.

Table of contents

  • Page 1
    2 0 0 4 A N N U A L REPO RT w e are FO CU SED. w e are CO M M ITTED. w e are IN VESTO RS. w e are Fifth Third.

  • Page 2
    ... South Bend Toledo Cleveland Indianapolis Dayton Columbus Cincinnati Evansville Louisville Lexington we are Fifth Third. Nashville Orlando Fifth Third Bancorp Assets: $94 billion Rank in assets among U.S. peers: 11th Tampa Sarasota Naples Market value of stock: $26 billion Rank by market...

  • Page 3
    ... Value Year-End Market Price At Year-End Assets Loans and Leases Deposits Shareholders' Equity Market Capitalization Key Ratios (Percent) Return on Average Assets (ROA) Return on Average Equity (ROE) Net Interest Margin Efficiency Ratio Average Shareholders' Equity to Average Assets Actuals Number...

  • Page 4
    ... low interest rate environment led to declines in asset yields, net interest margin and returns on capital in 2004 that ultimately led us to the decision to reposition the balance sheet. Although this action impacted fourth quarter and full-year results, we believe it was in the best long-term...

  • Page 5
    ..., our Nashville affiliate provides a strong springboard for continued growth in the Southeast. • The acquisition of First National Bankshares of Florida, a $5.6 billion asset bank holding company located primarily in the rapidly expanding markets of Orlando, Tampa, Sarasota, Naples and Fort Myers...

  • Page 6
    ... stock price appreciation over the long-term. Fifth Third has grown over the years to become one of the largest and strongest financial services companies in the United States. With more than 1,000 banking remain intact..." locations in attractive metropolitan markets, nearly $100 billion in assets...

  • Page 7
    ... loan and deposit growth by adding new customers, increasing market share and striving to meet all the financial services needs of our customers. Fifth Third continues to maintain a cost advantage over competitors, possesses one of the strongest balance sheets in the industry, has a best-in-class...

  • Page 8
    ... we are deliver the best service in delivering in every every single one of our affiliate, region and markets. Ultimately, banking center. For the first customers trust us to time in our history, ensure the safety of their incentive compensation money. This is a trust that programs across the we are...

  • Page 9
    ... services. COMMERCIAL BANKING Fifth Third's 1,200 commercial relationship officers and support staff offer companies within our geographic footprint a business partner of unparalleled capital strength and stability, sound expertise and experience and comprehensive and customized financial solutions...

  • Page 10
    ... 76 new banking is attracting people to centers in 2004, excluding work for Fifth Third. In relocations, that attracted 2004, Fifth Third added over $657 million in new 1,155 net new sales deposits and $178 million positions throughout our in new loans. 17 affiliate markets. Leadership, teamwork...

  • Page 11
    ... completed this year to our online banking platform, online customer interfaces, banking center workstations, network capacity and numerous sales information systems. We are now able to access more timely and detailed financial information ...in ACQUISITIONS regarding sales and In addition to core...

  • Page 12
    ..., resources and ability to provide them with customized financial solutions. All of our officers run their own business, manage to detailed financial statements and are compensated based on performance. In short, we strive to create a culture of business ownership, and we reward each of our officers...

  • Page 13
    ...Employee Community Affairs diversity councils and department identifies minority mentoring (L to R) R. Mark Graf, Senior Vice President & Chief Financial lending and real estate programs are just two of Officer; Pete Pesce, Executive Vice President, Human Resources; opportunities in the ways we work...

  • Page 14
    ...paying, foreign-born individuals living in the Midwest. The program helps encourage many first-time homebuyers, as well as those with limited traditional credit histories, to begin a banking relationship. We are proud of our legacy of philanthropy. These initiatives and many others reflect our long...

  • Page 15
    ... Stock-Based Compensation Other Noninterest Income and Other Noninterest Expense Sales and Transfers of Loans Discontinued Operations Income Taxes Retirement and Benefit Plans Earnings Per Share Fair Value of Financial Instruments Business Combinations Certain Regulatory Requirements and Capital...

  • Page 16
    ... real estate owned...74 .89 .95 .96 .77 Average Balances Loans and leases, including held for sale ...$57,042 52,414 45,539 44,888 42,690 Investment securities and other short-term investments ...30,597 28,947 23,585 19,938 18,830 Total assets ...94,896 87,481 75,037 70,683 66,611 Demand deposits...

  • Page 17
    ...derived primarily from electronic funds transfer ("EFT") and merchant transaction processing fees, fiduciary and investment management fees, banking fees and service charges, mortgage banking revenue and operating lease revenue. Net interest income, net interest margin, net interest rate spread and...

  • Page 18
    ... charged and recoveries are credited to the reserve. Provisions for loan and lease losses are based on the Bancorp's review of the historical credit loss experience and such factors that, in management's judgment, deserve consideration under existing economic conditions in estimating probable credit...

  • Page 19
    ... 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, Michigan, Illinois, Florida, Tennessee, West Virginia and...

  • Page 20
    ...in 2005 will depend upon the timing, frequency, magnitude and direction of further interest rate changes, the level and mix of earning asset and deposit growth and the impact of capital management activities. The Bancorp currently expects net interest income and earning asset growth on an annualized...

  • Page 21
    ... 40 (147) Savings...(1) (5) (6) (21) (73) Money market ...3 4 7 27 (22) Other time deposits ...(7) (27) (34) (81) (58) Certificates - $100,000 and over ...(26) 11 (15) 38 (52) Foreign office deposits ...7 7 14 )24 (15) Federal funds purchased ...(13) 10 (3) 47 (21) Short-term bank notes ...15 - 15...

  • Page 22
    ...initiatives, an increased sales force and new customer relationships. Retail deposit revenues were ï¬,at compared to last year. Growth in the number of retail checking account relationships and in deposits is a key focus for the Bancorp for the upcoming year. Mortgage banking net revenue declined to...

  • Page 23
    ... millions) Cardholder fees ...Consumer loan and lease fees ...Commercial banking revenue ...Bank owned life insurance income ...Insurance income ...Gain on sale of branches...Gain on sale of property and casualty insurance product lines ...Gain on sale of small merchant processing contracts...Other...

  • Page 24
    ... initiatives include increasing levels of process automation, the rationalization and reduction of non-core businesses as they relate to the Bancorp's retail and middle market customer base, an increased emphasis on required returns on invested capital and related opportunities for continued growth...

  • Page 25
    ... and small business loan originations, the strength of new customer additions, the acquisition of $441 million of commercial loans obtained in the Franklin Financial acquisition in 2004 and strong results in several markets, including Cincinnati, Chicago and Indianapolis. Consumer loan and lease...

  • Page 26
    ... asset backed securities (primarily credit card, automobile and commercial loan backed securities) and corporate bond securities. (c) Other securities consists of FHLB, Federal Reserve Bank and Federal Home Loan Mortgage Corporation ("FHLMC") stock holdings, certain mutual fund holdings and equity...

  • Page 27
    ... the Chicago, Cleveland, Columbus, Detroit and Florida markets, due to the popularity of existing products. The Bancorp expects to attract new customer relationships across its footprint to drive transaction account deposit growth. Borrowings The Bancorp reduced its dependence on overnight wholesale...

  • Page 28
    ... 23 Indiana ...11 10 10 10 Illinois ...10 10 10 10 Kentucky ...6 6 7 7 Tennessee ...3 2 1 1 Florida ...2 2 2 2 Pennsylvania ...1 1 - 1 West Virginia ...- 1 - - Out-of-footprint ...12 12 13 11 Total...100% 100 100 100 (a) Outstanding reï¬,ects total commercial customer loan and lease balances, net of...

  • Page 29
    ...of Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia and Pennsylvania. Exclusive of a national large-ticket leasing business, the commercial portfolio is characterized by 95% of outstanding balances and 93% of exposures concentrated within these nine states. The mortgage...

  • Page 30
    ... mortgage loans ...Real estate - construction loans ...Real estate - residential mortgage loans ...Consumer loans ...Lease financing ...Total recoveries ...Net losses charged off: Commercial, financial and agricultural loans ...Real estate - commercial mortgage loans ...Real estate - construction...

  • Page 31
    ... amount of the reserve for loan and lease losses by category. MARKET RISK MANAGEMENT Market risk arises from ï¬,uctuations in interest rates, foreign exchange rates and equity prices that may result in the potential reduction in net interest income. Interest rate risk, a component of market risk, is...

  • Page 32
    ...'s loan rate is distinctly higher than prevailing market rates. See Note 8 to the Consolidated Financial Statements for further discussion on servicing rights. Foreign Currency Risk The Bancorp enters into foreign exchange derivative contracts for the benefit of commercial customers involved...

  • Page 33
    ... and long-term funding sources, which include the use of various regional Federal Home Loan Banks as a funding source. Certificates carrying a balance of $100,000 or more and deposits in the Bancorp's foreign branch located in the Cayman Islands are wholesale funding tools utilized to fund asset...

  • Page 34
    ... as a market risk management tool in meeting the Bancorp's ALCO capital planning directives, to hedge changes in fair value of its largely fixed rate mortgage servicing rights portfolio or to provide qualifying customers access to the derivative products market. These policies are reviewed and...

  • Page 35
    ... these debt instruments. (c) Represents expected interest expense to be incurred on fixed-rate long-term debt. See Note 11 of the Notes to the Consolidated Financial Statements for additional information. (d) Includes federal funds purchased, bank notes, securities sold under repurchase agreements...

  • Page 36
    .... 123, "Accounting for Stock-Based Compensation," and the adoption of Financial Accounting Standards Board Interpretation No. 46, "Consolidation of Variable Interest Entities") expressed an unqualified opinion on those financial statements. Cincinnati, Ohio February 9, 2005 34 Fifth Third Bancorp

  • Page 37
    ... generally accepted in the United States of America. As discussed in Note 1 - New Accounting Pronouncements, effective January 1, 2004, the Bancorp changed its method of accounting for stock-based compensation by adopting the fair value recognition provisions of Statement of Financial Accounting...

  • Page 38
    ... deposits: Interest checking ...Savings ...Money market ...Other time ...Certificates-$100,000 and over ...Foreign office ...Total interest on deposits ...Interest on federal funds purchased ...Interest on short-term bank notes) ...Interest on other short-term borrowings...Interest on long-term debt...

  • Page 39
    ...Intangible assets ...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 purchased ...Short-term bank notes ...Other short...

  • Page 40
    ... shares issued...Loans issued related to the exercise of stock options, net ...Excess corporate tax benefit related to stock-based compensation ...Other ...Balance at December 31, 2003 ...Net income ...Other comprehensive income...Comprehensive income ...Cash dividends declared: Common stock at...

  • Page 41
    ...Stock options ...Common stock issued ...Securitizations: Capitalized servicing rights...Residual interest ...Securities retained ...Reclassification of minority interest to long-term debt ...Consolidation of special purpose entity: Operating leases ...Long-term debt ...Other assets/liabilities, net...

  • Page 42
    ... centers located throughout Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia and Pennsylvania. Principal activities include Commercial Banking, Retail Banking, Investment Advisors and Fifth Third Processing Solutions. Basis of Presentation The Consolidated Financial...

  • Page 43
    ... 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, Michigan, Illinois, Florida, Tennessee, West Virginia and...

  • Page 44
    ... market value of ending account balances associated with individual contracts. The Bancorp recognizes revenue from its electronic payment processing services on an accrual basis as such services are performed, recording revenues net of certain costs (primarily interchange fees charged by credit card...

  • Page 45
    ... three years and risk-free interest rates of 3.9%, 4.4% and 5.0%, respectively. In December 2004, the FASB issued SFAS No. 123 (Revised 2004), "Share-Based Payment." This Statement requires measurement of the cost of employee services received in exchange for an award of equity instruments based on...

  • Page 46
    ... that the Bancorp has provided for the benefit of the wholly-owned issuing trust entities related to their debt obligations. In March 2004, the Securities and Exchange Commission staff released Staff Accounting Bulletin ("SAB") No. 105, "Application of Accounting Principles to Loan Commitments...

  • Page 47
    ... 10 years ...Other securities ...Total... Available-for-Sale Amortized Cost Fair Value $ 46 1,514 2,637 19,598 1,006 46 1,531 2,640 19,471 999 24,687 $24,801 The following tables provide the gross unrealized loss and fair value, aggregated by investment category and length of time the individual...

  • Page 48
    ... financing ...Total commercial ...Consumer: Residential mortgage ...Construction ...Credit card ...Home equity ...Other consumer ...Consumer lease financing ...Total consumer ...Total loans and leases held for investment ...Gross $ - 545 14 559 Unearned Income - - - - Net - 545 14 559 Gross 17...

  • Page 49
    ...assets consist of servicing rights, core deposits, acquired merchant processing portfolios, customer lists and non-compete agreements. Intangibles are amortized on either a straight-line or an accelerated basis over their estimated useful lives, generally over a period of up to 25 years. The Bancorp...

  • Page 50
    ... net loss of $10 million and a net gain of $15 million in 2004 and 2003, respectively, related to changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio. As of December 31, 2003, the Bancorp no longer held any available-for-sale securities...

  • Page 51
    ... by interest rate volatility. The interest rate lock commitments and free-standing derivative instruments related to the MSR portfolio are marked to market and recorded as a component of mortgage banking net revenue, and the foreign exchange derivative contracts, other customer derivative contracts...

  • Page 52
    ... free-standing derivatives included in the Consolidated Balance Sheets as of December 31: ($ in millions) Included in other assets: Foreign exchange contracts for customers ...Interest rate contracts for customers ...Interest rate lock commitments ...Forward contracts related to interest rate lock...

  • Page 53
    ... to long-term debt and its corresponding minority interest expense to interest expense due to the existence of the mandatory redemption feature. At December 31, 2004, Federal Home Loan Bank advances have rates ranging from 1.09% to 8.34%, with interest payable monthly. The advances are secured by...

  • Page 54
    ... degrees, elements of credit risk, counterparty risk and market risk in excess of the amounts recognized in the Bancorp's Consolidated Balance Sheets. As of December 31, 2004, 100% of the Bancorp's risk management derivatives exposure was to investment grade companies. The contract or notional...

  • Page 55
    ... real estate, physical plant and property, inventory, receivables, cash and marketable securities. Given the investment grade nature of the loans transferred as well as the underlying collateral security provided, the Bancorp has not maintained any loss reserve related to these loans transferred...

  • Page 56
    ... Income," in the Consolidated Statements of Changes in Shareholders' Equity on page 38 and in the table below. Disclosure of the reclassification ($ in millions) 2004 Losses on available-for-sale securities ...Reclassification adjustment for losses recognized in net income ...Losses on...

  • Page 57
    ... of continued employment and include dividend and voting rights. The Bancorp applies the fair value provisions of SFAS No. 123 in accounting for stock-based compensation plans. Under SFAS No. 123, the Bancorp recognizes compensation expense for the fair value of stock-based awards issued over their...

  • Page 58
    ... income: Cardholder fees ...Consumer loan and lease fees ...Commercial banking revenue ...Bank owned life insurance income ...Insurance income ...Gain on sale of branches ...Gain on sale of property and casualty insurance product lines ...Gain on sale of small merchant processing contracts ...Other...

  • Page 59
    ...on Fair Value Rate 10% 20% -% - - .35 - 1.25 $- - - - - 1 $- - - 1 - 1 ($ in millions) Rate Residential mortgage loans: Servicing assets...Fixed Servicing assets...Adjustable Home equity lines of credit: Servicing assets...Adjustable Residual interest...Adjustable Automotive loans: Servicing assets...

  • Page 60
    ...the securitization trust have no recourse to the Bancorp's other assets for failure of debtors to pay when due. The Bancorp's retained interest is subordinate to investor's interests and its value is subject to credit, prepayment and interest rate risks on the sold home equity lines of credit. As of...

  • Page 61
    ... interest and expenses in the Consolidated Balance Sheets and are comprised of the following temporary differences as of December 31: ($ in millions) Deferred tax assets: Reserves for credit losses ...Deferred compensation ...Other comprehensive income ...State net operating losses ...Other ...Total...

  • Page 62
    ... return on assets ...Contributions ...Settlement ...Benefits paid...Fair value of plan assets at December 31 ...Funded status ...Unrecognized transition amount ...Unrecognized prior service cost ...Unrecognized actuarial loss...Net amount recognized Amounts recognized in the Consolidated Balance...

  • Page 63
    ...securities ...Trading securities ...Other short-term investments ...Loans held for sale ...Total loans and leases, net ...Derivative assets ...Bank owned life insurance assets ...Financial liabilities: Deposits...Federal funds purchased ...Short-term bank notes ...Other short-term borrowings ...Long...

  • Page 64
    ... by the Bancorp were based on the insurance contract's cash surrender value, net of any policy loans. 26. BUSINESS COMBINATIONS On June 11, 2004, the Bancorp completed the acquisition of Franklin Financial, a bank holding company located in the Nashville, Tennessee metropolitan market. Under the...

  • Page 65
    ... range of investment alternatives for individuals, companies and not-for-profit organizations. Fifth Third Processing Solutions provides electronic funds transfer, debit, credit and merchant transaction processing, operates the Jeanie® ATM network and provides other data processing services to af...

  • Page 66
    ... as independent entities. Generally, the segments form synergies by taking advantage of cross-sell opportunities and when funding operations by accessing the capital markets as a collective unit. In 2004, the Bancorp refined its segment reporting as a result of a cost center review and point of...

  • Page 67
    ...735 5,603 5,390 5,005 4,695 4,200 (a) Federal funds sold 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 68
    ...Executive Vice President, Secretary & General Counsel Robert A. Sullivan Executive Vice President AFFILIATE PRESIDENTS & CEOs AFFILIATE CHAIRMEN H. Lee Cooper Southern Indiana James R. Gaunt Louisville Gordon E. Inman Tennessee Donald B. Shackelford Central Ohio William A. Stinnett III Ohio Valley...

  • Page 69
    ... 250 East Fifth Street Cincinnati, OH 45202 Transfer Agent Computershare Investor Services LLC PO Box 2388 Chicago, IL 60690-2388 (888) 294-8285 Investordirect.53.com Stock Trading The common stock of Fifth Third Bancorp is traded in the over-the-counter market and is listed under the symbol "FITB...

  • Page 70
    we are Fifth Third. visit www.53.com