Fifth Third Bancorp 10-K 2005
Documents found in this filing:
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
For the fiscal year ended December 31, 2004
For the transition period from to
Commission file number 0-8076
FIFTH THIRD BANCORP
(Exact name of Registrant as specified in its charter)
38 Fountain Square Plaza
Cincinnati, Ohio 45263
(Address of principal executive offices) (Zip Code)
Registrants telephone number, including area code:
Securities registered pursuant to Section 12(g) of the Act:
Common Stock Without Par Value
(Title of Class)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: x No: ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes: x No: ¨
The Aggregate Market Value of the Voting Stock held by non-affiliates of the Registrant was $25,776,059,754 as of June 30, 2004.
There were 553,283,714 shares of the Registrants Common Stock, without par value, outstanding as of January 31, 2005.
DOCUMENTS INCORPORATED BY REFERENCE
FIFTH THIRD BANCORP
2004 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
This report may contain forward-looking statements about Fifth Third Bancorp and/or the company as combined with acquired entities within the meaning of Sections 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve inherent risks and uncertainties. This report may contain certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Fifth Third Bancorp and/or the combined company including statements preceded by, followed by or that include the words or phrases such as believes, expects, anticipates, plans, trend, objective, continue, remain or similar expressions or future or conditional verbs such as will, would, should, could, might, can, may or similar expressions. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) competitive pressures among depository institutions increase significantly; (2) changes in the interest rate environment reduce interest margins; (3) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; (4) general economic conditions, either national or in the states in which Fifth Third, one or more acquired entities and/or the combined company do business, are less favorable than expected; (5) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (6) changes and trends in the securities markets; (7) legislative or regulatory changes or actions, or significant litigation, adversely affect Fifth Third, one or more acquired entities and/or the combined company or the businesses in which Fifth Third, one or more acquired entities and/or the combined company are engaged; (8) difficulties in combining the operations of acquired entities and (9) the impact of reputational risk created by the developments discussed above on such matters as business generation and retention, funding and liquidity. Fifth Third undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this report.
Fifth Third Bancorp (the Registrant) is an Ohio corporation organized in 1975 and is a bank holding company under the Bank Holding Company Act of 1956, as amended (the BHCA), and subject to regulation by the Board of Governors of the Federal Reserve System (FRB). The Registrant, with its principal office located in Cincinnati, is a bank holding company as defined in the BHCA and is registered as such with the FRB. At December 31, 2004, the Registrants wholly-owned second tier holding company, Fifth Third Financial Corporation, had eight wholly-owned direct subsidiaries: Fifth Third Bank; Fifth Third Bank (Michigan); Fifth Third Bank National Association (Fifth Third Bank, N.A.); Fifth Third Community Development Corporation; Fifth Third Investment Company; Old Kent Capital Trust I, Franklin Capital Trust I and Fifth Third Reinsurance Company, LTD.
At December 31, 2004, the Registrant, its affiliated banks and other subsidiaries had consolidated total assets of approximately $94.5 billion, consolidated total deposits of approximately $58.2 billion and consolidated total shareholders equity of approximately $8.9 billion.
The Registrant, through its subsidiaries, engages primarily in commercial and retail banking, electronic payment processing services and investment advisory services. Direct subsidiaries of the Registrants subsidiary banks include: The Fifth Third Company; Fifth Third Leasing Company; Fifth Third International Company; Fifth Third Holdings, LLC; Fifth Third Securities, Inc.; Fifth Third Real Estate Capital Markets Company; Fifth Third Mortgage Company; Fifth Third Mortgage Insurance Reinsurance Company; Fifth Third Insurance Agency, Inc.; Old Kent Investment Corporation; Home Equity of America, Inc.; Fifth Third Asset Management, Inc.; Old Kent Mortgage Services, Inc. and GNB Management, LLC. Refer to Exhibit 21 attached to this document for a list of all the subsidiaries of the Registrant. The Registrants subsidiaries provide a wide range of financial products and services to the retail, commercial, financial, governmental, educational and medical sectors, including a wide variety of checking, savings and money market accounts, and credit products such as credit cards, installment loans, mortgage loans and leasing. Each of the banking subsidiaries has deposit insurance provided by the Federal Deposit Insurance Corporation (FDIC) through the Bank Insurance Fund (BIF) and/or the Savings Association Insurance Fund (SAIF).
Fifth Third Processing Solutions, the Registrants electronic payment processing division, operates for itself and other financial institutions, a proprietary automated teller machine (ATM) and Point of Sale (POS) network, Jeanie® and provides electronic fund transfers, ATM processing, electronic personal banking, merchant transaction processing, electronic bill payment and electronic benefit transfer services for thousands of regional banks, bank holding companies, service retailers and other financial institutions throughout the United States. The Registrants banking subsidiaries participate in several regional shared ATM networks including NYCE®, Pulse®, and Star®. The Registrants banking subsidiaries also participate in Cirrus®, and Plus System®, which are international ATM networks.
Additional information regarding the Registrants businesses is included in the Management Editorial (page 7) in the Registrants 2004 Annual Report to Shareholders and is incorporated herein by reference and attached to this filing as Exhibit 13.
The Registrant has completed a number of mergers and acquisitions over the years involving financial institutions throughout Ohio, Indiana, Kentucky, Michigan, Wisconsin, and Florida. On June 11, 2004, the Registrant completed the acquisition of Franklin Financial Corporation (Franklin Financial) and its subsidiary, Franklin National Bank, headquartered in Franklin, Tennessee. Under the terms of the transaction, each share of Franklin Financial common stock was exchanged for .5933 shares of the Registrants common stock, resulting in the issuance of 5.1 million shares of common stock. The common stock issued to effect the transaction was valued at $55.52 per common share for a total transaction value, including fair value of employee stock awards, of $317 million.
On August 2, 2004, the Registrant and First National Bankshares of Florida, Inc. (First National) announced the signing of a definitive agreement in which the Registrant would acquire First National and its subsidiaries, headquartered in Naples, Florida. As of December 31, 2004, First National has approximately $5.6 billion in total assets, $3.8 billion in total deposits and 77 full-service banking centers located primarily in Orlando, Tampa, Sarasota, Naples and Fort Myers. The acquisition, which closed on January 1, 2005, provided First Nationals shareholders with .5065 shares of the Registrants common stock for each share of First National common stock. Based on the price of the Registrants common shares at the close of business on December 31, 2004, the transaction is valued at $23.96 per share of First National common stock. The total transaction value, including the fair value of employee stock awards, is approximately $1.5 billion.
See Business Regulation and Supervision The Registrant The BCHA Acquisitions and Permissible Activities on page 5 for a discussion of regulatory restrictions on acquisitions.
The Registrants strategy for growth includes strengthening its presence in core markets, expanding into contiguous markets and broadening its product offerings while taking into account the integration and other risks of growth. The Registrant evaluates strategic acquisition opportunities and conducts due diligence activities in connection with possible transactions. As a result, discussions, and in some cases, negotiations may take place and future acquisitions involving cash, debt or equity securities may occur. These typically involve the payment of a premium over book value and current market price, and therefore, some dilution of book value and net income per share may occur with any future transactions.
Additional information, with respect to acquisitions, is included in Note 26 (page 62) of the Notes to Consolidated Financial Statements in the Registrants 2004 Annual Report to Shareholders, and is incorporated herein by reference and attached to this filing as Exhibit 13.
There are hundreds of commercial banks, savings and loans and other financial service providers in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri and nationally that provide strong competition to the Registrants banking subsidiaries. The Registrant competes for deposits, loans and other banking services in its principal geographic markets as well as in selected national markets as opportunities arise. In addition to the challenge of attracting and retaining customers for traditional banking services, the Registrants competitors now include securities dealers, brokers, mortgage bankers, investment advisors and insurance companies. The Gramm-Leach-Bliley Act of 1999, effective March 11, 2000, has changed the competitive environment in which the Registrant conducts business. See Regulation and Supervision below. These competitors with focused products targeted at highly profitable customer segments, compete across geographic boundaries and provide customers increasing access to meaningful alternatives to banking services in nearly all significant products. The increasingly competitive environment is a result primarily of changes in regulation, changes in technology, product delivery systems and the accelerating pace of consolidation among financial service providers. These competitive trends are likely to continue. The Registrants ability to maintain its history of strong financial performance and return on investment to shareholders will depend in part on the Registrants ability over time to expand its scope of available financial services as needed to meet the needs and demands of its customers. With respect to electronic payment processing services, Fifth Third Processing Solutions, the Registrants electronic payment processing division, competes with other national electronic fund transfer (EFT) and merchant processing service providers.
REGULATION AND SUPERVISION
In addition to the generally applicable state and federal laws governing businesses and employers, the Registrant and its subsidiary banks are subject to extensive regulation by federal and state laws and regulations applicable to financial institutions and their parent companies. Virtually all aspects of the business of the Registrant and its subsidiary banks are subject to specific requirements or restrictions and general regulatory oversight. The principal objectives of state and federal banking laws are the maintenance of the safety and soundness of financial institutions and the federal deposit insurance system and the protection of consumers or classes of consumers, rather than the specific protection of shareholders of a bank or the parent company of a bank, such as the Registrant. In addition, the supervision, regulation and examination of the Registrant and its subsidiaries by the bank regulatory agencies is not
intended for the protection of the Registrants security holders. To the extent the following material describes statutory or regulatory provisions, it is qualified in its entirety by reference to the particular statute or regulation.
General. The Registrant is a bank holding company registered under the BHCA. The Registrant is subject to regulation and supervision by the FRB and the Ohio Division of Financial Institutions (the Division). The Registrant is required to file various reports with, and is subject to examination by, the FRB and the Division. The FRB has the authority to issue orders to bank holding companies to cease and desist from unsound banking practices and violations of conditions imposed by, or violations of agreements with, the FRB. The FRB is also empowered to assess civil money penalties against companies or individuals who violate the BHCA or orders or regulations thereunder, to order termination of non-banking activities of non-banking subsidiaries of bank holding companies, and to order termination of ownership and control of a non-banking subsidiary by a bank holding company.
The BHCA Acquisitions and Permissible Activities. The BHCA requires the prior approval of the FRB, for a bank holding company to acquire substantially all the assets of a bank or acquiring direct or indirect ownership or control of more than 5% of any class of the voting shares of any bank, bank holding company or savings association, or increasing any such non-majority ownership or control of any bank, bank holding company or savings association, or merging or consolidating with any bank holding company. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 generally authorizes bank holding companies to acquire banks located in any state, subject to certain state-imposed age and deposit concentration limits, and also generally authorizes interstate bank holding company and bank mergers and to a lesser extent, interstate branching.
Unless a bank holding company becomes a financial holding company (FHC) under the Gramm-Leach-Bliley Act of 1999 (GLBA) (as discussed below), the BHCA also prohibits a bank holding company from acquiring a direct or indirect interest in or control of more than 5% of any class of the voting shares of a company that is not a bank or a bank holding company and from engaging directly or indirectly in activities other than those of banking, managing or controlling banks or furnishing services to its subsidiary banks, except that it may engage in and may own shares of companies engaged in certain activities the FRB has determined to be so closely related to banking or managing or controlling banks as to be proper incident thereto.
The GLBA, which was enacted on November 12, 1999, permits a qualifying bank holding company to become a FHC and thereby to engage directly or indirectly in a broader range of activities than had previously been permitted for a bank holding company under the BHCA. Permitted activities include securities underwriting and dealing, insurance underwriting and brokerage, merchant banking and other activities that are declared by the FRB, in cooperation with the Treasury Department, to be financial in nature or incidental thereto or are declared by the FRB unilaterally to be complementary to financial activities. In addition, a FHC is allowed to conduct permissible new financial activities or acquire permissible non-bank financial companies with after-the-fact notice to the FRB. A bank holding company may elect to become a FHC if each of its subsidiary banks is well capitalized (as discussed on pages 7 - 8 under The Subsidiary Banks) is well managed and has at least a Satisfactory rating under the Federal Community Reinvestment Act (CRA). In 2000, the Registrant elected and qualified for FHC status under the GLBA.
The Registrant has three subsidiary banks, Fifth Third Bank, Fifth Third Bank (Michigan) and Fifth Third Bank, N.A. (the Subsidiary Banks). Fifth Third Bank and Fifth Third Bank (Michigan) are state-chartered banks subject primarily to federal regulation from the FRB and the Federal Deposit Insurance Corporation (FDIC) and, in addition, are regulated and examined by their respective state banking departments. Fifth Third Bank, N.A. is a national bank and is subject to regulation and examination primarily by the Office of Comptroller of the Currency (OCC) and secondarily by the FDIC and FRB.
Subsidiary banks are limited by law and regulations in the scope of permitted activities and investments. Subsidiary state banks and their operating subsidiaries may engage in any activities that are determined by the appropriate state banking regulator to be part of or incidental to the business of banking. In addition, the GLBA permits a state chartered member bank to engage in expanded activities through the formation of a financial subsidiary. Fifth Third Bank has filed a notice to control, or acquire an interest in, a financial subsidiary with the FRB and may thus engage through a financial subsidiary in any activity that is financial in nature or incidental to a financial activity, except for insurance underwriting, insurance investments, real estate investment or development, or merchant banking. So as to qualify to establish or acquire, and thereafter maintain, a financial subsidiary, Fifth Third Bank and each of its depository institution affiliates must be well capitalized and well managed, and may not have a less than Satisfactory CRA rating. In addition, the total assets of all financial subsidiaries of a state chartered member bank may not exceed the lesser of $50 billion or 45% of the parent banks total assets. A state chartered member bank that is one of the largest 100 insured banks in the United States, such as Fifth Third Bank, must also have issued debt with a certain rating. In addition to calculating its risk-based capital information from its consolidated financial statements, a state chartered member bank with one or more financial subsidiaries must also be well capitalized after excluding from its assets and equity all equity investments, including retained earnings, in a financial subsidiary, and the assets of the financial subsidiary from the banks consolidated assets. The bank must also have policies and procedures to assess financial subsidiary risk and protect the bank from such risks and potential liabilities.
Capital Requirements. The FRB has adopted capital adequacy 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 BHCA. These capital adequacy guidelines generally require bank holding companies to maintain total capital equal to 8% of total risk-adjusted assets and off-balance sheet items (the Total Risk-Based Capital Ratio), with at least one-half of that amount consisting of Tier I or core capital and the remaining amount consisting of Tier II or supplementary capital. As a practical matter, however, the FRB requires larger bank holding companies, such as the Registrant, to maintain a Total Risk-Based Capital Ratio of at least 10%, and a Tier 1 capital ratio of at least 6%, which is the standard for a well-capitalized bank holding company. Tier I capital for bank holding companies generally consists of the sum of common shareholders equity and perpetual preferred and trust preferred stock (subject in the case of the preferred stock to limitations on the kind and amount of such stock which may be included as Tier I capital), less goodwill and certain other intangible assets. Tier II capital generally consists of perpetual and trust preferred stock which 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.
In addition to the risk-based capital requirements, the FRB requires bank holding companies to maintain a minimum leverage capital ratio of Tier I capital (defined by reference to the risk-based capital guidelines) to total average assets (the Leverage Ratio) of 3.0%. Total 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. The FRB has announced that the 3.0% Leverage Ratio requirement is the minimum for the top-rated bank holding companies without any supervisory, financial or operational weaknesses or deficiencies or those that are not experiencing or anticipating significant growth. For all other bank holding companies, the minimum leverage ratio is 4%, and bank holding companies with supervisory, financial, managerial or operational weaknesses or organizations expecting significant growth are expected to maintain capital ratios well above minimum levels.
As a practical matter, the FRB requires larger bank holding companies, such as the Registrant, to maintain a Leverage Ratio of at least 5% in order to qualify as well capitalized.
The Registrant is currently in compliance with the Total Risk-Based Capital Ratio, Tier I Capital and the Leverage Ratio requirements. As of December 31, 2004, the Registrant had a Tier I Risk-Based Capital Ratio and a Total Risk-Based Capital Ratio equal to 10.31% and 12.31%, respectively, and a Leverage Ratio equal to 8.89%. U.S. bank regulatory authorities and international bank supervisory organizations, principally the Basel Committee on Banking Supervision, currently are 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 Registrant.
Limitations on Acquisitions of Common Stock. The Federal Change in Bank Control Act prohibits a person or group of persons from acquiring control of a depository institution or a depository institution holding company unless the appropriate federal banking agency has been given at least 60 days to review the proposal and public notice has been provided. Control is generally defined under this Act as ownership of 25% or more of any class of voting stock. In addition, under a rebuttable presumption established by the FRB, the acquisition of 10% or more of a class of voting stock of a depository institution or a depository institution holding company, with a class of securities registered under Section 12 of the Securities Exchange Act of 1934, as amended (the Exchange Act) would, under the circumstances set forth in the presumption, constitute the acquisition of control. Furthermore, any company, as that term is broadly defined in the BHCA, would be required to obtain the approval of the FRB under BHCA before acquiring 25% (5% in the case of an acquirer that is a bank holding company) or more of any class of voting securities of a depository institution or a depository institution holding company, or such lesser percentage as the FRB deems to constitute a controlling influence.
Ohio Law. Ohio law, the principal state law governing the Registrant and its largest bank subsidiary, does not require bank holding companies to register with the Division. As a general matter, the Division does not rule upon or regulate the activities in which bank holding companies or their non-bank subsidiaries engage. A bank holding company, however, may not acquire control of an Ohio bank through purchase, assignment, transfer, pledge, or other disposition of voting securities without the prior consent of the Division. In examining the Ohio banks of a bank holding company, the bank holding company itself is subject to review by the Division. The Division has the authority to issue orders to bank holding companies to cease and desist from unsound banking practices and violations of law and of conditions imposed by, or violations of agreements with, the Division in connection with the operation of Ohio banks. The Division is also empowered to assess civil money penalties against bank holding companies and banks engaging in unsafe or unsound practices.
Bank Holding Company Dividends. The FRB has authority to prohibit bank holding companies from paying dividends if such payment is deemed to be an unsafe or unsound practice. The FRB has indicated generally that it may be an unsafe or unsound practice for bank holding companies to pay dividends unless a bank holding companys net income is sufficient to fund the dividends and the expected rate of earnings retention is consistent with the organizations capital needs, asset quality and overall financial condition. The Registrant depends in part upon dividends received from its subsidiary banks to fund its activities, including the payment of dividends. Each of the Subsidiary Banks is subject to regulatory limitations on the amount of dividends it may declare and pay.
Bank Holding Company Support of Subsidiary Banks. Under FRB policy, a bank holding company is expected to act as a source of financial and managerial strength to each of its subsidiary banks and to commit resources to their support. This support may be required at times when the bank holding company may not have the resources to provide it. Similarly, under the cross-guarantee provisions of the Federal Deposit Insurance Act (FDIA), the FDIC can hold any FDIC-insured depository institution liable for any loss suffered or anticipated by the FDIC in connection with (1) the default of a commonly controlled FDIC-insured depository institution; or (2) any assistance provided by the FDIC to a commonly controlled FDIC-insured depository institution in danger of default.
The Subsidiary Banks
State-Chartered. The Registrant owns two state banks, Fifth Third Bank and Fifth Third Bank (Michigan), chartered under the laws of Ohio and Michigan, respectively. These banks are subject to extensive state regulation and examination by the appropriate state banking agency in the particular state or states where each bank is chartered, by the FRB, and by the FDIC, which insures the deposits of each of the state banks to the maximum extent permitted by law. The federal and state laws and regulations that are applicable to banks regulate, among other matters, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds, the amount of loans to individual and related borrowers and the nature, amount of and collateral for certain loans, and the amount of interest that may be charged on loans. Various state consumer laws and regulations also affect the operations of the state banks.
National. The Registrants national subsidiary bank, Fifth Third Bank, N.A. is subject to regulation and examination primarily by the OCC and secondarily by the FRB and the FDIC, which insures the deposits to the maximum extent permitted by law. The federal laws and regulations that are applicable to banks regulate, among other matters, the scope of their business, their investments, their reserves against deposits, the timing of the availability of deposited funds, the amount of loans to individual and related borrowers and the nature, amount of and collateral for certain loans, and the amount of interest that may be charged on loans.
FDIC Insurance Premiums. The Registrants Subsidiary Banks pay deposit insurance premiums to the FDIC generally based on an assessment rate established by the FDIC for Bank Insurance Fund-member institutions. The FDIC has established a risk-based assessment system under which institutions are classified, and generally pay premiums according to their perceived risk to the federal deposit insurance funds. FDIA does not require the FDIC to charge all banks deposit insurance premiums when the ratio of deposit insurance reserves to insured deposits is maintained above specified levels and, at the present time, the ratio is above the minimum level and, accordingly all banks are not required to pay premiums. However, as a result of general economic conditions and recent bank failures, it is possible that the ratio of deposit insurance reserves to insured deposits could fall below the minimum ratio that FDIA requires, which would result in the FDIC setting deposit insurance assessment rates sufficient to increase deposit insurance reserves to the required ratio. A resumption of assessments of deposit insurance premiums charged to all institutions would have an adverse effect on net earnings.
Capital Requirements. Both the FRB and OCC have promulgated regulations regarding the capital adequacy of the 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 promulgated substantially similar regulations to implement the system of prompt corrective action established by Section 38 of the FDIA. Under the regulations, a bank generally shall be deemed to be (i) well capitalized if it has a Total Risk-Based Capital Ratio of 10.0% or more, a Tier I Risk-Based Capital Ratio of 6.0% or more, a Leverage Ratio of 5.0% or more and is not subject to any written capital order or directive; (ii) adequately capitalized if it has a Total Risk-Based Capital Ratio of 8.0% or more, a Tier I Risk-Based Capital Ratio of 4.0% or more, and a Leverage Ratio of 4.0% or more (3.0% under certain circumstances) and does not meet the definition of well capitalized; (iii) undercapitalized if it has a Total Risk-Based Capital Ratio that is less than 8.0%, a Tier I Risk-Based Capital Ratio that is less than 4.0% or a Leverage Ratio that is less than 4.0% (3.0% under certain circumstances); (iv) significantly undercapitalized if it has a Total Risk-Based Capital Ratio that is less than 6.0%, a Tier I Risk-Based Capital Ratio that is less than 3.0% or a Leverage Ratio that is less than 3.0%, and (v) critically undercapitalized if it has a ratio of tangible equity to total assets that is equal to or less than 2.0%. If an institution becomes undercapitalized, it would become subject to significant additional oversight, regulation and requirements as mandated by the FDIA.
As of December 31, 2004, each of the Registrants Subsidiary Banks was deemed to be a well-capitalized institution for the above purposes. As discussed above, the Subsidiary Banks are required to remain well-capitalized institutions at all times because the Registrant elected to be treated as an FHC. Additional information, with respect to these capital and leverage ratios, is included in Note 27 (pages 62 and 63) of the Notes to Consolidated Financial Statements in the Registrants 2004 Annual Report to Shareholders, and is incorporated herein by reference and attached to this filing as Exhibit 13.
Transactions with Affiliates. Federal law, Sections 23A and 23B of the Federal Reserve Act, restricts transactions between a bank and an affiliated company, including a parent bank holding company. The Subsidiary Banks are subject to certain restrictions on loans to affiliated companies, on investments in the stock or securities thereof, on the taking of such stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or letter of credit on their behalf. Among other things, these restrictions limit the amount of such transactions, require collateral in prescribed amounts for extensions of credit, prohibit the purchase of low quality assets and require that the terms of such transactions be substantially equivalent to terms of similar transactions with non-affiliates. The FRB adopted a final rule, which became effective April 1, 2003, to implement comprehensively Sections 23A and 23B of the Federal Reserve Act.
This rule, among numerous other requirements, specifies that derivative transactions are subject to the substantially equivalent terms requirements of Section 23B (including use of daily marks and two way collateralization) but generally not to the amount and collateral requirements of Section 23A, except that derivatives in which the bank provides credit protection to a non-affiliate on behalf of an affiliate will be treated as a guarantee for purposes of Section 23A. The rule also requires banks to establish policies and procedures to monitor credit exposure to affiliates. The FRB has stated that it intends to propose future regulations to treat derivatives that are the functional equivalent of a loan to an affiliate as subject to Section 23A. One result of these restrictions is a limitation on the ability of the Subsidiary Banks to fund the Registrant. Generally, each Subsidiary Bank is limited in its extensions of credit to any affiliate to 10% of the Subsidiary Banks capital and in its extensions of credit to all affiliates to 20% of the Subsidiary Banks capital.
Activities and Investments of Insured State-Chartered Banks. Section 24 of the FDIA generally limits the activities as principal and equity investments of FDIC-insured, state-chartered banks to those that are permissible for national banks. However, the GLBA permits national banks and state banks, to the extent permitted under state law, to engage through a financial subsidiary in certain new activities that are permissible for subsidiaries of a FHC. In order to form a financial subsidiary, a state bank must be well capitalized, and the bank would be subject to certain capital deductions, risk management and affiliate transaction rules. As previously mentioned, Fifth Third Bank has established a financial subsidiary that is subject to these requirements.
Community Reinvestment Act. The CRA generally requires insured depository institutions to identify the communities they serve and to make loans and investments and provide services that meet the credit needs of these communities. Furthermore, the CRA requires the FRB to evaluate the performance of each of the Subsidiary Banks in helping to meet the credit needs of their communities. As a part of the CRA program, the Subsidiary Banks are subject to periodic examinations by the FRB, and must maintain comprehensive records of their CRA activities for this purpose. During these examinations, the FRB rates such institutions compliance with CRA as Outstanding, Satisfactory, Needs to Improve or Substantial Noncompliance. Failure of an institution to receive at least a Satisfactory rating could inhibit such institution or its holding company from undertaking certain activities, including engaging in activities newly permitted as a financial holding company under the GLBA and acquisitions of other financial institutions, or, as discussed above, require divestitures. The FRB must take into account the record of performance of banks in meeting the credit needs of the entire community served, including low-and moderate-income neighborhoods. Each of the Subsidiary Banks has a CRA rating of Satisfactory. Because the Registrant is an FHC, with limited exceptions, the Registrant may not commence any new financial activities or acquire control of any companies engaged in financial activities in reliance on the GLBA if any of the Subsidiary Banks receives a CRA rating of less than Satisfactory.
Customer Information Security. The FRB, the FDIC and other bank regulatory agencies have adopted final guidelines (the Guidelines) for safeguarding confidential, personal customer information. The Guidelines require each financial institution, under the supervision and ongoing oversight of its Board of Directors or an appropriate committee thereof, to create, implement and maintain a comprehensive written information security program designed to ensure the security and confidentiality of customer information, protect against any anticipated threats or hazards to the security or integrity of such information and protect against unauthorized access to or use of such information that could result in substantial harm or inconvenience to any customer. The Registrant has adopted a customer information security program that has been approved by the Registrants Board of Directors (the Board).
USA PATRIOT Act. The Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001 (the Patriot Act), designed to deny terrorists and others the ability to obtain access to the United States financial system, has significant implications for depository institutions, brokers, dealers and other businesses involved in the transfer of money. The Patriot Act, as implemented by various federal regulatory agencies, requires financial institutions, including the Registrant and its subsidiaries, to implement new policies and procedures or amend existing policies and procedures with respect to, among other matters, anti-money laundering, compliance, suspicious activity and currency transaction reporting and due diligence on customers. The Patriot Act and its underlying regulations also permit information sharing for counter-terrorist purposes between
federal law enforcement agencies and financial institutions, as well as among financial institutions, subject to certain conditions, and require the FRB (and other federal banking agencies) to evaluate the effectiveness of an applicant in combating money laundering activities when considering applications filed under Section 3 of the BHCA or the Bank Merger Act. The Registrants Board has approved policies and procedures that are believed to be compliant with the USA Patriot Act.
Regulatory Enforcement Authority. The enforcement powers available to federal banking regulators include, among other things, the ability to assess civil money penalties, to issue cease-and-desist or removal orders, to require written agreements and to initiate injunctive actions against banking organizations and institution-affiliated parties, as defined. In general, these enforcement actions may be initiated for violations of laws and regulations and unsafe or unsound practices. Other actions or inactions may provide the basis for enforcement action, including misleading or untimely reports filed with regulatory authorities. Federal law requires, except under certain circumstances, public disclosure of final enforcement actions by the federal banking agencies, such as the Written Agreement. In addition, the FRB may take various other informal actions.
Regulation of Investment Companies. Certain mutual fund and unit investment trust custody and administrative clients are regulated as investment companies as that term is defined under the Investment Company Act of 1940, as amended (the ICA), and are subject to various examination and reporting requirements.
The provisions of the ICA and the regulations promulgated thereunder prescribe the type of institution that may act as a custodian of investment company assets, as well as the manner in which a custodian administers the assets in its custody. As a custodian for a number of investment company clients, these regulations require, among other things, that certain minimum aggregate capital, surplus and undivided profit levels are maintained by the Subsidiary Banks. Additionally, arrangements with clearing agencies or other securities depositories must meet ICA requirements for segregation of assets, identification of assets and client approval. Future legislative and regulatory changes in the existing laws and regulations governing custody of investment company assets, particularly with respect to custodian qualifications, may have a material and adverse impact on the Registrant. Currently, management believes the Registrant is in compliance with all minimum capital and securities depository requirements. Further, the Registrant is not aware of any proposed or pending regulatory developments, which, if approved, would adversely affect its ability to act as custodian to an investment company.
Investment companies are also subject to extensive record keeping and reporting requirements. These requirements dictate the type, volume and duration of the record keeping the Registrant undertakes, either in the role as custodian for an investment company or as a provider of administrative services to an investment company. Further, specific ICA guidelines must be followed when calculating the net asset value of a client mutual fund. Consequently, changes in the statutes or regulations governing record keeping and reporting or valuation calculations will affect the manner in which operations are conducted.
New legislation or regulatory requirements could have a significant impact on the information reporting requirements applicable to the Registrant and may in the short term adversely affect the Registrants ability to service clients at a reasonable cost. Any failure to provide such support could cause the loss of customers and have a material adverse effect on financial results. Additionally, legislation or regulations may be proposed or enacted to regulate the Registrant in a manner that may adversely affect financial results. Furthermore, the mutual fund industry may be significantly affected by new laws and regulations following revelations about timing trading and late trading.
Other Securities Laws Issues. The GLBA amended the federal securities laws to eliminate the blanket exceptions that banks traditionally have had from the definition of broker and dealer for a bank. In February 2003, the SEC extended the temporary exemption from the definition of dealer for banks until September 30, 2003 and, in April 2003, it extended the temporary exemption from the definition of broker until November 12, 2004 and in June 2004, the SEC further extended the temporary exemption to January 1, 2006. In February 2003, the SEC also issued final rules that, among other matters, adopt amendments to its rule granting an exemption to banks from dealer registration for a de minimis number of riskless principal transactions, and to its rule that defines terms used in the bank exception to dealer registration for asset-backed transactions, and it adopted a new exemption for banks from the definition of broker and dealer under the Exchange Act for certain securities lending transactions. Banks not falling within the specific exemptions provided by the new law may have to register with the SEC as a broker or a dealer or both and become subject to SEC jurisdiction. The Registrant evaluated the activities of its subsidiary banks in light of the revisions to the bank exemption from the definition of dealer as effective September 30, 2003. The Registrant determined that the activities of its subsidiary banks fall within the bank exemption from the definition of dealer as revised and effective September 30, 2003. The Registrant is currently evaluating alternatives to ensure that its subsidiary banks will not be required to register as a broker upon the January 1, 2006 effective date of the revisions to the bank exemption from the definition of broker.
The Sarbanes-Oxley Act. The Sarbanes-Oxley Act of 2002, (Sarbanes-Oxley) implements a broad range of corporate governance and accounting measures for public companies (including publicly-held bank holding companies such as the Registrant) designed to promote honesty and transparency in corporate America. Sarbanes-Oxleys principal provisions, many of which have been interpreted through regulations, provide for and include, among other things: (i) the creation of an independent accounting
oversight board; (ii) auditor independence provisions that restrict non-audit services that accountants may provide to their audit clients; (iii) additional corporate governance and responsibility measures, including the requirement that the chief executive officer and chief financial officer of a public company certify financial statements; (iv) the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuers securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; (v) an increase in the oversight of, and enhancement of certain requirements relating to, audit committees of public companies and how they interact with the Companys independent auditors; (vi) requirements that audit committee members must be independent and are barred from accepting consulting, advisory or other compensatory fees from the issuer; (vii) requirements that companies disclose whether at least one member of the audit committee is a financial expert (as such term is defined by the SEC) and if not discussed, why the audit committee does not have a financial expert; (viii) expanded disclosure requirements for corporate insiders, including accelerated reporting of stock transactions by insiders and a prohibition on insider trading during pension blackout periods; (ix) a prohibition on personal loans to directors and officers, except certain loans made by insured financial institutions on nonpreferential terms and in compliance with other bank regulatory requirements; (x) disclosure of a code of ethics and filing a Form 8-K for a change or waiver of such code; (xi) requirements that management assess the effectiveness of internal control over financial reporting and the Companys Independent Registered Public Accounting Firm attest to the assessment; and (xii) a range of enhanced penalties for fraud and other violations.
Additional information regarding regulatory matters is included in Note 27 (pages 62 and 63) of the Notes to Consolidated Financial Statements in the Registrants 2004 Annual Report to Shareholders, and is incorporated herein by reference and attached to this filing as Exhibit 13.
As of December 31, 2004, there were no employees of the Registrant. Subsidiaries of the Registrant employed 21,027 employees 4,675 were officers and 2,733 were part-time employees. There were 19,659 full-time equivalent employees as of December 31, 2004.
Information about the Registrants business segments is included in Note 29 (pages 63 and 64) of the Notes to the Consolidated Financial Statements in the Registrants 2004 Annual Report to Shareholders and is incorporated herein by reference and attached to this filing as Exhibit 13.
AVERAGE BALANCE SHEETS
The average balance sheets for each of the last three fiscal years are incorporated herein by reference to Table 4 of Managements Discussion and Analysis of Financial Condition and Results of Operations (page 19) of the Registrants 2004 Annual Report to Shareholders attached to this filing as Exhibit 13.
ANALYSIS OF NET INTEREST INCOME AND NET INTEREST INCOME CHANGES
The analysis of net interest income and the analysis of net interest income changes are incorporated herein by reference to Table 4 and Table 5 of Managements Discussion and Analysis of Financial Condition and Results of Operations and the related discussion on pages 18 through 20 of the Registrants 2004 Annual Report to Shareholders attached to this filing as Exhibit 13.
INVESTMENT SECURITIES PORTFOLIO
The investment securities portfolio as of December 31 for each of the last five years and the weighted-average maturity and weighted-average yield of investment securities as of December 31, 2004 are incorporated herein by reference to Table 14 and Table 15 of Managements Discussion and Analysis of Financial Condition and Results of Operations and the related discussion on pages 24 and 25 of the Registrants 2004 Annual Report to Shareholders attached to this filing as Exhibit 13.
LOAN AND LEASE PORTFOLIO
The loan and lease portfolio as of December 31 for each of the last five years and maturities and sensitivities of loans and leases to changes in interest rates at December 31, 2004 are incorporated herein by reference to Table 13, Table 25 and Table 26 of Managements Discussion and Analysis of Financial Condition and Results of Operations and the related discussion on pages 23 and 24 of the Registrants 2004 Annual Report to Shareholders attached to this filing as Exhibit 13.
RISK ELEMENTS OF LOAN AND LEASE PORTFOLIO
The risk elements of the loan and lease portfolio, including a summary of credit loss experience, are incorporated herein by reference to Table 18, Table 19, Table 20, Table 21, Table 22 and Table 23 and the related discussions in the Credit Risk Management section of Managements Discussion and Analysis of Financial Condition and Results of Operations (pages 26 through 29) of the Registrants 2004 Annual Report to Shareholders attached to this filing as Exhibit 13.
The types of deposits and maturity distribution of certificates - $100,000 and over at December 31, 2004 is incorporated herein by reference to Tables 16 and 27 of Managements Discussion and Analysis of Financial Condition and Results of Operations and the related discussion on page 25 of the Registrants 2004 Annual Report to Shareholders attached to this filing as Exhibit 13.
An analysis of the average balances and the average rate paid by deposit category for each of the last three years is incorporated herein by reference to Table 4 of Managements Discussion and Analysis of Financial Condition and Results of Operations of the Registrants 2004 Annual Report to Shareholders attached to this filing as Exhibit 13.
RETURN ON EQUITY AND ASSETS
Information about the Registrants return on average assets, return on average equity, dividend payout ratio and average equity as a percent of average assets is included in Table 1 of Managements Discussion and Analysis of Financial Condition and Results of Operations in the Registrants 2004 Annual Report to Shareholders and is incorporated herein by reference and attached to this filing as Exhibit 13.
Short-term borrowings related detail by category as of December 31 for each of the last three years is incorporated herein by reference to Note 10 (page 50) of the Notes to the Consolidated Financial Statements of the Registrants 2004 Annual Report to Shareholders attached to this filing as Exhibit 13.
AVAILABILITY OF FINANCIAL INFORMATION
The Registrant files reports with the SEC. Those reports include the annual report on Form 10-K, quarterly reports on Form 10-Q, current event reports on Form 8-K and proxy statements, as well as any amendments to those reports. The public may read and copy any materials the Registrant files with the SEC at the SECs Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an internet site that contains reports, proxy and information statements and other information regarding issuers that file electronically with the SEC at www.sec.gov. The Registrants annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to section 13(a) or 15(d) of the Exchange Act are accessible at no cost on the Registrants web site at www.53.com on a same day basis after they are electronically filed with or furnished to the SEC.
The Registrants executive offices and the main office of Fifth Third Bank are located on Fountain Square Plaza in downtown Cincinnati, Ohio in a 32-story office tower, a five-story office building with an attached parking garage and a separate ten-story office building known as the Fifth Third Center, the William S. Rowe Building and the 530 Building, respectively. The Registrants main operations center is located in Cincinnati, Ohio, in a three-story building with an attached parking garage known as the Madisonville Operations Center. A subsidiary of the Registrant owns 100 percent of these buildings.
At December 31, 2004, the Registrant, through its banking and non-banking subsidiaries, operated 1,011 banking centers, of which 703 were owned and 308 were leased, located throughout in the states of Ohio, Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia and Pennsylvania. The Registrants significant owned properties are owned free from mortgages and major encumbrances.
Legal and regulatory proceedings are incorporated herein by reference to Note 13 (page 52) of the Notes to the Consolidated Financial Statements in the Registrants 2004 Annual Report to Shareholders attached to this filing as Exhibit 13.
EXECUTIVE OFFICERS OF THE REGISTRANT
The names, ages and positions of the Executive Officers of the Registrant as of March 1, 2005 are listed below along with their business experience during the past 5 years. Officers are appointed annually by the Board of Directors at the meeting of Directors immediately following the Annual Meeting of Shareholders.
EXECUTIVE OFFICERS OF THE REGISTRANT (Continued)
The information required by this item is incorporated herein by reference to Corporate Information (page 67) and the discussion of dividend limitations that the subsidiaries can pay to the Registrant discussed in Note 27 (pages 62 and 63) of the Notes to the Consolidated Financial Statements in the Registrants 2004 Annual Report to Shareholders attached to this filing as Exhibit 13. Additionally, as of December 31, 2004, the Registrant had approximately 53,000 shareholders of record.
Issuer Purchases of Equity Securities
(a) The Registrant purchased 5,134, 4,133 and 5,826 shares of its common stock during October, November and December 2004, respectively, in connection with various employee compensation and incentive plans of the Registrant. These purchases are not included against the maximum number of shares that may yet be purchased under the Board of Directors authorization.
(b) On June 15, 2004, the Registrant announced that its Board of Directors had authorized management to purchase up to 40 million shares of the Registrants common stock through the open market or any private transaction. The timing of the purchases and the exact number of shares to be purchased depends upon the market conditions. The authorization does not include specific price targets or an expiration date.
The information required by this item is incorporated herein by reference to Managements Discussion and Analysis of Financial Condition and Results of Operations (page 14) of the Registrants 2004 Annual Report to Shareholders attached to this filing as Exhibit 13.
The information required by this item is incorporated herein by reference to Managements Discussion and Analysis of Financial Condition and Results of Operations (pages 14 through 33) of the Registrants 2004 Annual Report to Shareholders attached to this filing as Exhibit 13.
The information required by this item is incorporated herein by reference to the Market Risk Management section of Managements Discussion and Analysis of Financial Condition and Results of Operations (pages 29 through 31) of the Registrants 2004 Annual Report to Shareholders attached to this filing as Exhibit 13.
The information required by this item is incorporated herein by reference to pages 35 through 64 of the Registrants 2004 Annual Report to Shareholders attached to this filing as Exhibit 13.
The information required by this item is incorporated herein by reference to pages 33 and 34 of the Registrants 2004 Annual Report to Shareholders attached to this filing as Exhibit 13.
The information required by this item relating to the Executive Officers of the Registrant is included in PART I (pages 13 and 14) under EXECUTIVE OFFICERS OF THE REGISTRANT.
The information required by this item concerning Directors is incorporated herein by reference under the caption ELECTION OF DIRECTORS (pages 2 through 5) of the Registrants Proxy Statement for the 2005 Annual Meeting of Shareholders.
The information required by this item concerning Audit Committee expert and Code of Business Conduct and Ethics is incorporated herein by reference under the caption BOARD OF DIRECTORS, ITS COMMITTEES, MEETINGS AND FUNCTIONS (pages 6 through 7) of the Registrants Proxy Statement for the 2005 Annual Meeting of Shareholders.
The information required by this item concerning Section 16 (a) Beneficial Ownership Reporting Compliance is incorporated herein by reference under the caption SECTION 16 (a) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE (page 11) of the Registrants Proxy Statement for the 2005 Annual Meeting of Shareholders.
The information required by this item is incorporated herein by reference under the caption EXECUTIVE COMPENSATION (pages 7 through 16) and FINANCIAL PERFORMANCE (pages 18 through 19) of the Registrants Proxy Statement for the 2005 Annual Meeting of Shareholders.
Security ownership information of certain beneficial owners and management is incorporated herein by reference under the captions CERTAIN BENEFICIAL OWNERS, ELECTION OF DIRECTORS AND EXECUTIVE COMPENSATION (pages 2 through 5 and page 10) of the Registrants Proxy Statement for the 2005 Annual Meeting of Shareholders.
The information required by this item concerning Equity Compensation Plan information is incorporated herein by reference to Note 18 of the Notes to the Consolidated Financial Statements (pages 55 through 56) of the Registrants 2004 Annual Report to Shareholders attached to this filing as Exhibit 13.
The information required by this item is incorporated herein by reference under the caption CERTAIN TRANSACTIONS (page 18) of the Registrants Proxy Statement for the 2005 Annual Meeting of Shareholders.
The information required by this item is incorporated herein by reference under the caption PRINCIPAL INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM FEES (page 18) of the Registrants Proxy Statement for the 2005 Annual Meeting of Shareholders.
a) Documents Filed as Part of the Report
1. Index to Financial Statements
2. Financial Statement Schedules
The schedules for the Registrant and its subsidiaries are omitted because of the absence of conditions under which they are required, or because the information is set forth in the consolidated financial statements or the notes thereto.
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to requirements of the Securities Exchange Act of 1934, this report has been signed on March 1, 2005 by the following persons on behalf of the Registrant and in the capacities indicated.