Fifth Third Bank 2004 Annual Report Download - page 33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 31
TABLE 30: SHARE REPURCHASES
For the Years Ended December 31 2004 2003 2002
Shares authorized for repurchase at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14,137,512 5,600,681 17,338,791
Additional authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 40,000,000 20,000,000 —
Shares repurchases (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (18,452,400) (11,463,169) (11,738,110)
Shares authorized for repurchase at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 35,685,112 14,137,512 5,600,681
Average price paid per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $53.48 57.13 61.30
(a) Excludes 40,850 shares repurchased during 2004 in connection with various employee compensation plans. These repurchases are not included against the maximum number
of shares that may yet be repurchased under the Board of Directors’ authorization.
TABLE 29: CAPITAL RATIOS
As of December 31 ($ in millions) 2004 2003 2002 2001 2000
Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 8,522 8,272 7,747 7,433 6,377
Total capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10,176 10,096 8,935 8,656 7,554
Risk-weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 82,633 74,477 65,444 59,491 55,943
Risk-based capital ratios:
Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10.31% 11.11 11.84 12.49 11.40
Total capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 12.31 13.56 13.65 14.55 13.50
Leverage ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 8.89 9.23 9.84 10.64 9.49
TABLE 28: AGENCY RATINGS
As of February 9, 2005 Moody’s Standard and Poor’s Fitch
Fifth Third Bancorp:
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prime-1 A-1 F1+
Senior debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aa2 A+ AA-
Fifth Third Bank and Fifth Third Bank (Michigan):
Short-term deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Prime-1 A-1+ F1+
Long-term deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Aa1 AA- AA
an independent determination of currency volatility and credit
equivalent exposure on these contracts, counterparty credit approv-
als and country limits.
LIQUIDITY RISK MANAGEMENT
The goal of liquidity risk management is to provide adequate funds
to satisfy changes in loan and lease demand or unexpected deposit
withdrawals. This goal is accomplished by maintaining liquid assets
in the form of investment securities, maintaining suffi cient unused
borrowing capacity in the national money markets and delivering
consistent growth in core deposits. The primary source of asset
driven liquidity is provided by debt securities in the available-for-
sale securities portfolio. The estimated average life of the avail-
able-for-sale portfolio is 4.4 years at December 31, 2004, based on
current prepayment expectations. Of the $24.7 billion (fair value
basis) of available-for-sale securities in the portfolio at December
31, 2004, $3.8 billion is expected to be received in the next 12
months, and an additional $2.8 billion is expected to be received in
the next 13 to 24 months. In addition to the proceeds from avail-
able-for-sale portfolio securities, asset-driven liquidity is provided
by the Bancorp’s ability to sell or securitize loan and lease assets.
In order to reduce the exposure to interest rate fl uctuations as well
as to manage liquidity, the Bancorp has developed securitization
and sale procedures for several types of interest-sensitive assets. A
majority of the long-term, fi xed-rate single-family residential mort-
gage loans underwritten according to FHLMC or Federal National
Mortgage Association guidelines are sold for cash upon origination.
Periodically, additional assets such as jumbo fi xed-rate residen-
tial mortgages, certain fl oating rate short-term commercial loans,
certain fl oating rate home equity loans, certain auto loans and other
consumer loans are also securitized, sold or transferred off-balance
sheet. For the years ended December 31, 2004 and 2003, a total of
$6.7 billion and $15.9 billion, respectively, were sold, securitized,
or transferred off-balance sheet.
The Bancorp also has in place a shelf registration with the
Securities and Exchange Commission permitting ready access to the
public debt markets. As of December 31, 2004, $1.5 billion of debt
or other securities were available for issuance under this shelf regis-
tration. Additionally, as determined in accordance with applicable
regulatory requirements, the Bancorp as of December 31, 2004
has $14.3 billion of funding available for issuance through private
offerings of debt securities pursuant to its bank note program. In
January 2005, a subsidiary of the Bancorp issued $500 million of
subordinated bank notes under this bank note program. Such bank
notes may be sold to qualifi ed institutional buyers, fi nancial institu-
tions, banks, insurance companies and similar entities in the ordi-
nary course of business from time to time, which together with the
Bancorp’s 9.34% average equity capital base and shelf registration
availability, constitute some of the various sources of funds utilized
to maintain a stable and diverse funding base.
Since June 2002, Moody’s senior debt rating for the Bancorp
has been Aa2, a rating equaled or surpassed by only three other
U.S. bank holding companies. This rating by Moody’s refl ects the
Bancorp’s capital strength and fi nancial stability. Table 28 provides
Moody’s, Standard and Poor’s and Fitch’s deposit and debt ratings
as of February 9, 2005 for the Bancorp, Fifth Third Bank and Fifth
Third Bank (Michigan). These debt ratings, along with capital ratios
signifi cantly above regulatory guidelines, provide the Bancorp with
additional access to liquidity.
Core customer deposits have historically provided the Bancorp
with a sizeable source of relatively stable and low-cost funds. The
Bancorp’s average core deposits and stockholders’ equity funded
61% of its average total assets during 2004. In addition to core
deposit funding, the Bancorp also accesses a variety of other short-
term and long-term funding sources, which include the use of
various regional Federal Home Loan Banks as a funding source.
Certifi cates 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 growth. The maturity
distribution of domestic certifi cates of deposit of $100,000 and over
as of December 31, 2004 is shown in Table 27. Management does
not rely on any one source of liquidity and manages availability in
response to changing balance sheet needs.
CAPITAL MANAGEMENT
The Bancorp maintains a relatively high level of capital as a margin
of safety for its depositors and shareholders. At December 31, 2004,
shareholders’ equity was $8.9 billion compared to $8.7 billion at
December 31, 2003, an increase of three percent. Average share-
holders’ equity as a percentage of average assets for the year ended