Fifth Third Bank 2004 Annual Report Download - page 27

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 25
life basis, anticipating future prepayments. Yield information is
presented on an FTE basis and is computed utilizing historical cost
balances. Maturity and yield calculations for the total available-for-
sale portfolio exclude equity securities that have no stated yield or
maturity.
Deposits
Total deposits at December 31, 2004 increased two percent
compared to December 31, 2003. The $767 million of deposits
obtained in the Franklin Financial acquisition and the $2.8 billion,
or seven percent, increase in transaction deposits excluding Frank-
lin Financial were offset by the decrease in foreign offi ce depos-
its in 2004. The Bancorp utilizes these deposits, which represent
U.S. dollar denominated deposits of the Bancorp’s foreign branch
located in the Cayman Islands, as a method to fund earning asset
growth. Transaction deposit balances represent an important source
of funding and revenue growth opportunity and the Bancorp is
continuing to focus on net checking account growth in its retail and
commercial franchises. The Bancorp is confi dent in its ability to
competitively price and generate growth in customers and deposit
balances in an increasing interest rate environment.
Overall, the Bancorp experienced deposit growth with signifi -
cant contributions from 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 fund-
ing during 2004, given the rising interest rate environment. As
previously mentioned in the Statements of Income Analysis section,
the Bancorp retired approximately $3.8 billion of long-term debt
during 2004. These instruments had a weighted-average coupon of
approximately 5.4% and a total weighted-average remaining matu-
rity of approximately fi ve years. The Bancorp continues to explore
additional alternatives regarding the level and cost of various other
sources of funds. Refer to the Liquidity Risk Management section
for discussion of the Bancorp’s liquidity management and Note 11
to the Consolidated Financial Statements for a detail of long-term
debt.
RISK MANAGEMENT
Managing risk is an essential component of successfully operating
afi nancial services company. The Bancorp’s risk management func-
tion is responsible for the identifi cation, measurement, monitoring,
control and reporting of risk and avoidance of those risks that are
inconsistent with the Bancorp’s risk profi le. The Enterprise Risk
Management division, led by the Bancorp Chief Risk Offi cer, ensures
consistency in the Bancorp’s approach to managing and monitor-
ing risk including, but not limited to, credit, market, operational
and regulatory compliance risk, within the structure of Fifth Third’s
affi liate operating model. In addition, the Internal Audit division
provides an independent assessment of the Bancorp’s internal
control structure and related systems and processes. The Enterprise
Risk Management division includes the following key functions: (i)
a Risk Policy function that ensures consistency in the approach to
risk management as the Bancorp’s clearinghouse for credit, market
and operational risk policies, procedures and guidelines; (ii) an
Operational Risk Management function that is responsible for the
risk self-assessment process, the change control evaluation process,
business continuity planning and disaster recovery, fraud preven-
tion and detection, and root cause analysis and corrective action
plans relating to identifi ed operational losses; (iii) an Insurance Risk
Management function that is responsible for all property, casualty
and liability insurance policies including the claims administration
process for the Bancorp; (iv) a Capital Markets Risk Management
function that is responsible for establishing and monitoring propri-
etary trading limits, monitoring liquidity and interest rate risk and
utilizing value at risk and earnings at risk models; (v) an Affi liate
Risk Management function that is responsible for the coordination
of risk management activities in each banking affi liate and division;
(vi) a Credit Risk Review function that is responsible for evaluat-
ing the suffi ciency of underwriting, documentation and approval
processes for consumer and commercial credits; (vii) a Compli-
ance Risk Management function that is responsible for oversight of
compliance with all banking regulations and; (viii) a Risk Strategies
and Reporting function that is responsible for quantitative analytics
and Board of Director and senior management reporting on credit,
market and operational risk metrics.
All business lines and affi liates have a designated risk manager
reporting jointly to a senior executive within the division or affi liate
and to the Enterprise Risk Management division.
Risk management oversight and governance is provided by
the Risk and Compliance Committee of the Board of Directors
and through multiple management committees whose member-
ship includes a broad cross-section of line of business, affi liate and
support representatives. The Risk and Compliance Committee of
the Board of Directors consists of three outside directors and has
the responsibility for the oversight of credit, market, operational,
regulatory compliance and strategic risk management activities for
the Bancorp as well as for the Bancorp’s overall aggregate risk profi le.
The Risk and Compliance Committee has approved the formation
of key management governance committees that are responsible for
evaluating risks and controls. These committees include the Market
TABLE 17: BORROWINGS
As of December 31 ($ in millions) 2004 2003 2002 2001 2000
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 4,714 6,928 4,748 2,544 2,178
Short-term bank notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 775 500 — 34 —
Other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,537 5,742 4,075 4,875 4,166
Long-term debt and convertible subordinated debentures . . . . . . . . . . . . . . 13,983 9,063 8,179 7,030 6,239
Total borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $24,009 22,233 17,002 14,483 12,583
TABLE 16: DEPOSITS
As of December 31 ($ in millions) 2004 2003 2002 2001 2000
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $13,486 12,142 10,095 9,243 7,152
Interest checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19,481 19,757 17,878 13,474 10,320
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8,310 7,375 10,056 7,065 5,991
Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4,321 3,201 1,044 1,352 923
Other time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6,837 6,201 7,638 11,301 14,231
Certifi cates - $100,000 and over . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2,121 1,856 1,723 2,197 5,049
Foreign offi ce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3,670 6,563 3,774 1,222 4,694
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $58,226 57,095 52,208 45,854 48,360