Fifth Third Bank 2005 Annual Report Download - page 80

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp
78
27. CERTAIN REGULATORY REQUIREMENTS AND CAPITAL RATIOS
The principal source of income and funds for the Bancorp (parent
company) are dividends from its subsidiaries. During 2005, the
amount of dividends the bank subsidiaries can pay to the Bancorp
without prior approval of regulatory agencies was limited to their
2005 eligible net profits, as defined, and the adjusted retained 2004
and 2003 net income of those subsidiaries.
The Bancorp’s subsidiary banks must maintain cash reserve
balances when total reservable deposit liabilities are greater than
the regulatory exemption. These reserve requirements may be
satisfied with vault cash and noninterest-bearing cash balances on
reserve with a Federal Reserve Bank. In 2005 and 2004, the banks
were required to maintain average cash reserve balances of $211
million and $192 million, respectively.
The FRB adopted guidelines pursuant to which it assesses the
adequacy of capital in examining and supervising a bank holding
company and in analyzing applications to it under the Bank
Holding Company Act of 1956, as amended. These guidelines
include quantitative measures that assign risk weightings to assets
and off-balance sheet items, as well as define and set minimum
regulatory capital requirements. All bank holding companies are
required to maintain core capital (Tier I) of at least 4% of risk-
weighted assets and off-balance sheet items (Tier I capital ratio),
total capital of at least 8% of risk-weighted assets and off-balance
sheet items (Total risk-based capital ratio) and Tier I capital of at
least 3% of adjusted quarterly average assets (Tier I leverage ratio).
Failure to meet the minimum capital requirements can initiate
certain actions by regulators that could have a direct material effect
on the Consolidated Financial Statements of the Bancorp.
Tier I capital consists principally of shareholders’ equity
including Tier I qualifying subordinated debt but excluding
unrealized gains and losses on securities available-for-sale, less
goodwill and certain other intangibles. Tier II capital consists
principally of perpetual and trust preferred stock that is not eligible
to be included as Tier I capital, term subordinated debt,
intermediate-term preferred stock and, subject to limitations,
general allowances for loan and lease losses. Assets are adjusted
under the risk-based guidelines to take into account different risk
characteristics. Average assets for this purpose does not include
goodwill and any other intangible assets and investments that the
FRB determines should be deducted from Tier I capital.
Both the FRB and the Office of Comptroller of the Currency
(“OCC”) have issued regulations regarding the capital adequacy of
subsidiary banks. These requirements are substantially similar to
those adopted by the FRB regarding bank holding companies, as
described above. In addition, the federal banking agencies have
issued substantially similar regulations to implement the system of
prompt corrective action established by Section 38 of the Federal
Deposit Insurance Act. Under the regulations, a bank generally
shall be deemed to be well-capitalized if it has a Total risk-based
capital ratio of 10.0% or more, a Tier I capital ratio of 6.0% or
more, a Tier I leverage ratio of 5.0% or more and is not subject to
any written capital order or directive. If an institution becomes
undercapitalized, it would become subject to significant additional
oversight, regulations and requirements as mandated by the Federal
Deposit Insurance Act. The Bancorp and each of its subsidiary
banks had Tier I, Total risk-based capital and Tier I leverage ratios
above the well-capitalized levels at December 31, 2005 and 2004.
As of December 31, 2005, the most recent notification from the
FRB categorized the Bancorp and each of its subsidiary banks as
well-capitalized under the regulatory framework for prompt
corrective action. To continue to qualify for financial holding
company status pursuant to the Gramm-Leach-Bliley Act of 1999,
the Bancorp’s subsidiary banks must, among other things, maintain
“well capitalized” capital ratios.
U.S. bank regulatory authorities and international bank
supervisory organizations, principally the Basel Committee on
Banking Supervision, are currently considering changes to the risk-
based capital adequacy framework for banks, including emphasis
on credit, market and operational risk components, which
ultimately could affect the appropriate capital guidelines for bank
holding companies such as the Bancorp.
Capital and risk-based capital and leverage ratios for the
Bancorp and its significant subsidiary banks at December 31:
2005 2004
($ in millions) Amount Ratio Amount Ratio
Total risk-based capital (to risk-weighted assets):
Fifth Third Bancorp (Consolidated) $10,240 10.45 % $10,176 12.31 %
Fifth Third Bank (Ohio) 6,237 12.61 5,772 12.85
Fifth Third Bank (Michigan) 5,352 11.04 4,164 10.72
Fifth Third Bank, N.A. 177 12.04 161 13.57
Tier I capital (to risk-weighted assets):
Fifth Third Bancorp (Consolidated) 8,209 8.38 8,522 10.31
Fifth Third Bank (Ohio) 4,973 10.05 5,009 11.15
Fifth Third Bank (Michigan) 4,922 10.16 3,617 9.31
Fifth Third Bank, N.A. 167 11.31 153 12.89
Tier I leverage (to average assets):
Fifth Third Bancorp (Consolidated) 8,209 8.08 8,522 8.89
Fifth Third Bank (Ohio) 4,973 8.77 5,009 8.48
Fifth Third Bank (Michigan) 4,922 10.75 3,617 9.39
Fifth Third Bank, N.A. 167 12.24 153 14.44