2 0 0 4 A N N U A L R E P O R T
we are FOCUSED.
we are COMMITTED.
we are INVESTORS.
we are Fifth Third.
C O R P O R A T E P R O F I L E
Grand Rapids
Detroit
Toledo
Chicago
South Bend
Cleveland
Indianapolis
Columbus
Dayton
Cincinnati
Evansville
Louisville
Lexington
Nashville
Orlando
Tampa
Sarasota
Naples
Fifth Third
Bancorp
Assets: $94 billion
Rank in assets
among U.S. peers: 11th
we are Fifth Third.
We are committed to acting with the highest level
of integrity in everything we do and in every relationship –
with our customers, shareholders and communities.
We are focused on taking every opportunity to exceed
our customers’ expectations – in products, price and
service. We are committed to working as a team to meet
customer needs – across business lines, geography
and functions. We will continue to invest to achieve
best-in-class performance – in convenience, sales and
growth. We are focused on creating value – growing
revenue, controlling expenses and effectively balancing
risk and reward. We are committed, focused and
will invest in the communities where we live and
Market value of stock: $26 billion
work – through charitable donations, volunteerism and
Rank by market value
among U.S. peers: 8th
Total Employed: 21,027
Banking Centers: 1,011
civic leadership. We will maintain the flexibility and
financial strength to adapt to changing business and
economic conditions. We are Fifth Third.
Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. The Company has $94.5
billion in assets as of December 31, 2004. The Company operates 17 affiliates with 1,011 full-service Banking Centers,
including 128 Bank Mart® locations open seven days a week inside select grocery stores and 1,898 Jeanie® ATMs in Ohio,
Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia and Pennsylvania. The financial strength of Fifth
Third’s largest banks continues to be recognized by rating agencies with deposit ratings of AA- and Aa1 from Standard &
Poor’s and Moody’s, respectively. Additionally, Fifth Third Bancorp continues to maintain among the highest short-term
ratings available at A-1 and Prime-1 and is recognized by Moody’s with one of the highest senior debt ratings for any U.S.
bank holding company of Aa2. Fifth Third operates four main businesses: Retail, Commercial, Investment Advisors and Fifth
Third Processing Solutions. Investor information and press releases can be viewed at www.53.com. Fifth Third’s common
stock is traded through the NASDAQ® National Market System under the symbol “FITB.”
F I N A N C I A L H I G H L I G H T S
For the years ended December 31
$ in millions, except share data
2004
2003
Percent
Change
Earnings and Dividends
Net Income
Cash Dividends Declared
Per Share
Earnings
Diluted Earnings
Cash Dividends Declared
Year-End Book 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 of Shares
Number of Banking Locations
Number of Full-Time Equivalent Employees
$ 1,525
735
$ 1,665
645
$ 2.72
2.68
1.31
16.00
47.30
$94,456
59,808
58,226
8,924
26,377
1.61
17.2
3.48
53.9
9.34
$ 2.91
2.87
1.13
15.29
59.10
$91,254
52,308
57,095
8,667
33,491
1.90
19.0
3.62
47.0
10.01
557,648,989
1,011
19,659
566,685,301
952
18,899
(8)
14
(7)
(7)
16
5
(20)
4
14
2
3
(21)
(15)
(9)
(4)
15
(7)
(2)
6
4
Deposit and Debt Ratings
Moody’s
Standard & Poor’s
Fitch
Fifth Third Bancorp
Commercial Paper
Senior Debt
Fifth Third Bank and Fifth Third Bank (Michigan)
Short-Term Deposit
Long-Term Deposit
Prime -1
Aa2
Prime -1
Aa1
A-1
A+
A-1+
AA-
F1+
AA-
F1+
AA
1
L E T T E R F R O M T H E P R E S I D E N T & C H I E F E X E C U T I V E
we know who we are
Dear Shareholders and Friends,
We improved our competitive positioning on many
fronts in 2004 in order to drive revenue and earnings
growth in the years to come. Business line revenue
growth, success in attracting new deposit and loan
customers and improved credit quality, however, were
offset by the difficulties in managing through the
transition from the lowest level in interest rates in
over 40 years.
Earnings per diluted share for the full year 2004 were
$2.68, a decrease of seven percent over last year’s
earnings of $2.87. Return on average assets was 1.61
percent and return on average equity was 17.2 percent,
compared to 1.90 percent and 19.0 percent,
respectively, in 2003. Earnings in 2004 were impacted
by initiatives undertaken in the fourth quarter to better
position the balance sheet for current and expected
market conditions, including debt termination charges
and securities losses totaling $326 million pre-tax ($208
million after-tax) or $.37 per diluted share.
The prolonged 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 interests of our
shareholders. The balance sheet is now better positioned
as the economy trends toward what we believe will be a
more normalized and favorable interest rate
environment.
George A. Schaefer, Jr.
President & CEO
2
“We improved our
competitive positioning
on many fronts to drive revenue and
earnings growth in the years to come.”
2004 highlights include:
• The 2004 dividend of $1.31 per share was a 16
• The acquisition and integration of Franklin Financial,
percent increase over last year and a 34 percent
combined with continuing de-novo expansion,
increase over the 2002 annual dividend.
provided entry into the attractive Nashville market.
• Credit quality improved in 2004 with nonperforming
assets and net charge-offs, as a percent of loans and
leases, declining from .61 percent in 2003 to .51
With $1.9 billion in assets and 14 locations, our
Nashville affiliate provides a strong springboard for
continued growth in the Southeast.
percent in 2004 and from .63 percent in 2003 to .45
• The acquisition of First National Bankshares of Florida,
percent in 2004, respectively.
• Average loans and leases increased by nine percent
and average transaction deposits increased by seven
percent over 2003.
• We added 1,155 net new sales positions throughout
our markets.
a $5.6 billion asset bank holding company located
primarily in the rapidly expanding markets of
Orlando, Tampa, Sarasota, Naples and Fort Myers, was
announced in 2004 and subsequently completed early
in 2005. First National was the largest bank holding
company headquartered in the state of Florida and
provides Fifth Third with a tremendous platform in
some of the fastest growing deposit markets in the
• We added 76 new banking center locations in 2004,
United States.
excluding relocations of existing facilities. We believe
this is the most cost-effective method of expansion in
our largest affiliate markets.
• We also invested significantly in information
technology including the launch of an improved
internet banking platform. We completed numerous
automation and infrastructure improvements
that will all serve to ensure the scalability and
strength of your company.
3
“our vision has not changed,
and the very same
core principles responsible
for our success remain intact...”
Outstanding financial performance has long been a
locations in attractive metropolitan markets, nearly
hallmark of Fifth Third. Revenue and earnings per
$100 billion in assets, and, with a market capitalization
diluted share have both increased at annual compound
in excess of $25 billion, we rank among the 10 largest
rates of 11 percent over the last 10 years. Over the last
banks in the country. We are very enthusiastic about
five years, these same measures have increased at
the future and, with only an eight percent market share
annual compound rates of nine percent and 12 percent,
in our markets and a best-in-class operating model and
respectively. Owners of our company have realized just
distribution network, we have a tremendous opportunity
a one percent annualized total return on this earnings
in front of us. Our vision has not changed and the very
growth over the same five-year time period. While
same core principles responsible for our past success
outperforming many broader market indices, this level
remain intact, including an unwavering commitment to
of investment performance has been the source of
be the premier financial services provider and employer
frustration for our management team and investors alike.
of choice in all of our markets. We continue to strive to
However, our focus as a management team remains on
making the necessary investments and sound decisions
exceed the expectations of our customers, shareholders
and neighbors, and I invite you to read about our
to strengthen our competitive advantage within our core
approach and what we feel is the strength of our
middle market commercial and retail customer base.
franchise in the pages that follow.
Ultimately, top line revenue growth and disciplined
expense control will continue to drive the earnings and
capital growth that we believe provides for stock price
appreciation over the long-term.
Today, Fifth Third is comprised of 17 affiliates
headquartered in metropolitan markets throughout the
Midwest and Florida. While every market is unique,
two things remain constant at Fifth Third: a deeply held
Fifth Third has grown over the years to become one of
the largest and strongest financial services companies in
belief in the talent and entrepreneurship of our
employees combined with the knowledge that a
the United States. With more than 1,000 banking
decentralized operating model allows them the
4
flexibility to better serve our customers. We empower
deposit growth by adding new customers, increasing
local managers to find the best ways to produce growth.
market share and striving to meet all the financial
In the years to come, you can expect to see us continue
services needs of our customers. Fifth Third continues
to increase our presence in our existing markets and
to maintain a cost advantage over competitors,
establish affiliates in new metropolitan markets as an
possesses one of the strongest balance sheets in the
important part of our continuing growth. On average,
industry, has a best-in-class distribution network, and,
our expectation is to add 70 to 100 banking centers and
with significant growth potential, we look with great
to increase our sales force by 15 to 20 percent every
optimism to the challenges that lie ahead in 2005.
year. Our existing competitive and financial strength
combined with enhanced infrastructure and technology,
Sincerely,
make me extremely optimistic about the future.
Last year marked the passing of a good friend: James D.
Kiggen served on our Board for 20 years and his insight
was instrumental in the success of Fifth Third. He will
be missed. I would also like to extend our appreciation
George A. Schaefer, Jr.
President & Chief Executive Officer
for the guidance and leadership of Richard T. Farmer and
January 2005
Joseph H. Head, Jr., both of whom retired from our
Board of Directors in 2004 after 22 and 17 years of
service, respectively.
I would also like to thank our customers, employees,
board members and our communities for their continued
support and confidence. The focus in all of our markets
in 2005 will be driving revenue and quality loan and
We recently began hosting a series
of employee meetings throughout our markets.
Our credo, You Make the Difference, helps keep
all clearly focused on our mission of exceeding the
expectations of our customers, co-workers and shareholders,
of being our customers’ first choice and of being a great place to work.
5
we are focused
...on customer’s NEEDS AND EXPECTATIONS
Our sales culture is
renowned throughout the
industry, and our sales
force has always worked
extremely hard to generate
new relationships to offer
competitively-priced
financial products and
services. More recently,
we have enhanced these
efforts through the
implementation of
detailed relationship
management databases,
account retention
strategies, increased
automation and process
improvement programs
designed to reduce error
rates. In early 2005, we
began interviewing
customers monthly about
their experiences in our
banking centers so we can
evaluate the service we are
delivering in every
affiliate, region and
banking center. For the first
time in our history,
incentive compensation
programs across the
Bancorp will incorporate
customer satisfaction
results. There are many
factors affecting a
customer’s decision
about where to bank.
Fifth Third offers not only
convenience and
competitively priced
products, but also
integrity, financial stability
and a relentless drive to
deliver the best service in
every single one of our
markets. Ultimately,
customers trust us to
ensure the safety of their
money. This is a trust that
we are intensely focused
on maintaining every day.
...on REPUTATION
The past couple of years
have brought about a
number of changes in our
economy as corporate
America continues to
respond to the challenges
of an evolving regulatory
landscape. Fifth Third
believes that great
companies have a very real
opportunity to differentiate
themselves in this
environment and we are
committed to being among
them. Fifth Third has long
been known for its
commitment to
accountability at every
level of the organization
and this holds true for
our commitment to
best-in-class compliance,
governance and risk
management functions.
A reputation for excellence
takes a lifetime to build
and only a moment to
destroy, and Fifth Third
views the integrity of its
actions as one of its
greatest assets.
(L to R) Malcolm D. Griggs, Executive Vice President & Chief Risk Officer
Daniel T. Poston, Executive Vice President, Internal Audit
Paul L. Reynolds, Executive Vice President, Secretary & General Counsel
6
...on our CORE BUSINESS
In all of our markets,
we focus on four business
lines – retail and
commercial banking,
investment advisors and
Fifth Third Processing
Solutions (“FTPS”). Nearly
half of our revenues are
derived from retail
banking and a third from
the commercial business.
Our investment advisors
division makes up about
10 percent of our revenues
and is one of the largest
money managers in the
Midwest with $34 billion
in directly managed assets
and over $182 billion in
assets under care. FTPS
handles ATM processing
and merchant credit and
debit card processing.
FTPS, which accounts
for about 11 percent of
our revenues, processed
12 billion electronic
transactions in 2004.
Fifth Third believes that
these businesses provide
us with a diversified and
profitable mix, as well as
the necessary expertise to
meet all of the financial
service needs of our core
retail and middle-market
commercial customer
base.
RETAIL BANKING
Fifth Third’s 1,011 banking
centers, including 128
Bank Mart® locations,
serve as the primary point
of contact for our six
million customers.
Through these locations,
Fifth Third strives to
provide best-in-class
products, convenience and
customer service to the
individual and small
business customers within
our geographic footprint.
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 for all their cash
management, international
and borrowing needs.
(L to R) Robert A. Sullivan, Executive Vice President, Commercial
Banking; Kevin T. Kabat, Executive Vice President, Retail Banking and
Affiliate Administration; Neal E. Arnold, Executive Vice President,
Investment Advisors and Fifth Third Processing Solutions.
FIFTH THIRD
PROCESSING SOLUTIONS
FTPS authorizes, initiates,
captures and settles
electronic payment
transactions as part of an
integrated cash
management solution for
financial institutions and
merchants all over the
world. As a leading
electronic processor,
Fifth Third helps our
commercial customers
eliminate paper and
reduce cycle time and
expense while providing
instant on-line access to
information through a
platform integrated with
traditional banking
services.
INVESTMENT
ADVISORS
Fifth Third is a full-service
money management firm
featuring a broad array of
equity and fixed income
products catering to retail
and commercial clients
across our footprint.
From retirement planning,
wealth management,
public finance to private
client services,
Fifth Third delivers
a full spectrum of
investment strategies
of varying scope and
complexity for both
long and short-term
investment horizons.
7
we are investors
...in DISTRIBUTION
Over the last couple of
years, our level of
investment in our core
businesses has accelerated
rapidly. Most notably,
we began a significant
de-novo branching effort
in 2002 to enhance
distribution in our larger
markets. This marks the
first time in our history
that we have undertaken a
de-novo effort on this
scale. For most of the last
two decades, many in our
industry believed that
deregulation and the
emergence of the internet
would signal the demise
of traditional bricks and
mortar as a sales channel
for the financial services
industry. Fifth Third
believes banking centers
will continue to be a very
important sales channel
because we listen to our
customers. The
overwhelming majority of
our customers visit one of
our 1,011 banking centers
several times a month.
For this reason, Fifth Third
built 76 new banking
centers in 2004, excluding
relocations, that attracted
over $657 million in new
deposits and $178 million
in new loans.
...in PEOPLE
Fifth Third has the
business model,
technology, incentives,
awareness and ambition
to become the employer of
choice in all of our
markets. More so than at
any time in our history,
the promise of being
recognized and rewarded
for individual performance
is attracting people to
work for Fifth Third. In
2004, Fifth Third added
1,155 net new sales
positions throughout our
17 affiliate markets.
Leadership, teamwork and
integrity are just a few of
the attributes of a Fifth
Third employee – and why
we think we have the best
employees in the industry.
8
Fifth Third asks employees to
be leaders in sales and
service and matches that
action with generous
performance incentives and a
commitment to career
development.
...in TECHNOLOGY
Fifth Third is investing in
technology in order to
improve efficiency, provide
greater convenience for our
customers and drive
financial performance.
We have invested
significantly over the past
couple of years and spent a
great deal of time and
effort upgrading our sales
and support systems.
Many of our customer
information systems have
been enhanced to provide
for increased availability of
information, reliability and
timeliness. Significant
upgrades were 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
regarding sales and
profitability results. This
information can be viewed
on several levels, including
line of business, affiliate,
officer and banking center.
...in ACQUISITIONS
In addition to core growth
in our established markets,
Fifth Third periodically
utilizes acquisitions as a
means of expanding its
presence and gaining entry
into new metropolitan
markets. Our approach to
acquisitions has remained
unchanged over the years.
Our primary hurdle when
evaluating any transaction
is determining whether we
can grow revenue from the
resulting platform. Cost
cutting in the first year is
not a path to long-term
success and does not meet
our return requirements.
We are interested in
adding platforms in large,
deposit-rich metropolitan
markets adjacent to our
footprint that when
combined with expansion
efforts will enable us to
achieve #1 market share
over time. This holds true
for our most recent
acquisition of First
National. This acquisition
provides Fifth Third with a
tremendous platform and
opportunity in the most
attractive and fastest
growing markets in
Western and Central
Florida. We believe the
foundation we have
acquired will easily
assimilate into our affiliate
bank operating model and
become an integral part of
Fifth Third’s continuing
growth.
9
we are committed
...to our BUSINESS MODEL
Our affiliate operating
structure differentiates us
from our competitors and
ensures that our customers
receive individualized
service and comprehensive
financial solutions. All
aspects of customer
relationships are managed
strength to support their
growth and the
willingness, 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 for making the
right decisions. A local
presence with market
knowledge, management
accountability and a team
approach characterize our
affiliate banking model.
We are committed to it.
locally by local affiliate
Presidents responsible for
the bank’s operation and
community development;
and by local officers with
the authority and
incentives to make the
right decisions for the
Bank and our customers.
Competitive pressures are
different in every market
and on every street corner,
so we rely on experienced
local officers empowered
with the authority and
infrastructure to employ
the best practices of our
company to deliver a
personalized level of
service to our customers.
This approach is central to
our strategy of ensuring
decisions are made by the
people most familiar with
our customer’s needs.
Fifth Third’s team has the
experience to advise our
customers, the financial
10
...to our EMPLOYEES
Banking is first and
foremost a relationship
built upon the foundation
of daily interaction
between customers and
our most vital asset – our
employees. The quality of
our customer experience
begins and ends with our
team members. Motivated,
talented and knowledge-
able employees will earn
the trust of their
communities and gain
market share over time.
Our employees are the
driver of our success. Each
of our team members
knows that they own their
business, can impact the
bottom line, are
accountable for their
results and are rewarded
for their accomplishments.
Our employees make the
difference in terms of
realizing our vision of
continuing to be a growth
company. Our employees
make the difference in the
lives of our customers,
co-workers and neighbors
by delivering superior
performance. There is
no stronger correlation
than between daily
individual employee
contributions and growth
in customers, revenue and
bottom line earnings.
We are committed to it.
(L to R) R. Mark Graf, Senior Vice President & Chief Financial
Officer; Pete Pesce, Executive Vice President, Human Resources;
Greg D. Carmichael, Executive Vice President &
Chief Information Officer; Diane L. Dewbrey,
Senior Vice President, Operations
...to our COMMUNITIES
Fifth Third provides
banking, investments
and processing solutions
to six million customers
everyday, and we leverage
our success to strengthen
the communities we serve.
We reaffirmed our
commitment through over
$30 million in grants and
support to deserving
organizations, including
$22 million from the Fifth
Third Foundation and
charitable trusts for which
the Bank serves as Trustee.
We were again honored to
be included in
BusinessWeek magazine’s
“America’s Most
Philanthropic Companies”
listing for our giving as a
percentage of revenues.
Our commitment to
diversity is equally
unwavering. Employee
diversity councils and
minority mentoring
programs are just two of
the ways we work to build
and nurture diverse
employment and
leadership throughout the
Bancorp. The Fifth Third
Foundation Office,
Community Development
Corporation and
Community Affairs
department are three key
extensions of the Bank’s
community investment
activities.
The Foundation Office
helps direct grants for Arts
& Culture, Community
Development, Education
and Health & Human
Services, while the
Fifth Third Community
Development Corporation
invests in low-income
housing, historic tax credit
and economic
development projects to
support community
revitalization. Our
Community Affairs
department identifies
lending and real estate
opportunities in
traditionally underserved
11
markets, such as ethnically
diverse, urban and low- to
moderate-income census
tracts. This group also
champions financial
literacy – the keystone for
stable communities – by
providing homebuyer
training, credit counseling
and college savings match
programs.
As a leader in residential
mortgage lending, Fifth
Third partnered with
Freddie Mac to launch the
Homeownership Mobile,
or eBus, a 38-foot mobile
classroom. Fifth Third and
Freddie Mac eBus staffers
provide multi-lingual
assistance, and the
initiative helps combat
many misconceptions
about homeownership and
the homebuyer process,
such as the perceived need
for near perfect credit or
downpayments as large as
20 percent of the home
price. Fifth Third also
launched a new mortgage
product, Immigrant
Homeownership Program,
to better serve the 4.2
million U.S. tax-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-held belief
that if you help build a
stronger community, you
will build a stronger bank.
We are committed to it.
United Way GIVING
Over the past five years, Fifth Third’s corporate
and employee contributions to the United Way
have reached $38.8 million.
2000 $5.5 million
2001 $6.5 million
2002 $7.4 million
2003 $9.0 million
2004 $10.4 million
12
FIFTH THIRD BANCORP 2004 ANNUAL REPORT
FINANCIAL CONTENTS
Management’s Discussion and Analysis of Financial Condition and Results of Operations
Selected Financial Data
Overview
Recent Accounting Standards
Critical Accounting Policies
Statements of Income Analysis
Balance Sheet Analysis
Risk Management
Controls and Procedures
Management’s Assessment as to the Effectiveness of Internal Control over Financial Reporting
Reports of Independent Registered Public Accounting Firm
Financial Statements
Consolidated Statements of Income
Consolidated Balance Sheets
Consolidated Statements of Changes in Shareholders’ Equity
Consolidated Statements of Cash Flows
Notes to Consolidated Financial Statements
Summary of Signifi cant Accounting and Reporting Policies
Securities
Loans and Leases and Reserve for Loan and Lease Losses
Bank Premises and Equipment
Operating Lease Equipment
Goodwill
Intangible Assets
Servicing Rights and Retained Interests
Derivatives
Short-Term Borrowings
Long-Term Debt
Commitments and Contingent Liabilities
Legal and Regulatory Proceedings
Guarantees
Related Party Transactions
Consolidated Ten Year Comparison
Directors and Offi cers
Corporate Information
40
45
46
47
47
47
47
48
48
50
51
52
52
53
53
Other Comprehensive Income
Common Stock and Treasury Stock
Stock-Based Compensation
Other Noninterest Income and Other Noninterest Expense
Sales and Transfers of Loans
Discontinued Operations
Income Taxes
Retirement and Benefi t Plans
Earnings Per Share
Fair Value of Financial Instruments
Business Combinations
Certain Regulatory Requirements and Capital Ratios
Parent Company Financial Statements
Segments
14
15
16
16
18
23
25
33
34
34
36
37
38
39
54
54
55
56
57
59
59
60
61
61
62
62
63
63
65
66
67
FORWARD-LOOKING STATEMENTS
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 fi nancial condition, results of opera-
tions, 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 materi-
ally 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 signifi cantly; (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 signifi cant 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) diffi culties 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 refl ect events or
circumstances after the date of this report.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of certain signifi cant factors that have affected Fifth Third Bancorp’s (the “Bancorp”
or “Fifth Third”) fi nancial condition and results of operations during the periods included in the Consolidated Financial Statements, which
are a part of this report.
TABLE 1: SELECTED FINANCIAL DATA
For the Years Ended December 31 ($ in millions, except per share data)
Income Statement Data
Net interest income (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total revenue (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Common Share Data
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends per common share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Book value per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Dividend payout ratio, as originally reported . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial Ratios
Return on average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Return on average shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average equity as a percent of average assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest margin (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effi ciency ratio (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit Quality
Net losses charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net losses charged off as a percent of average loans and leases . . . . . . . . . . . . . . . .
Reserve for loan and lease losses as a percent of loans and leases (b) . . . . . . . . . . .
Reserve for credit losses as a percent of loans and leases (b) . . . . . . . . . . . . . . . . . .
Nonperforming assets as a percent of loans, leases and other assets, including
other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Underperforming assets as a percent of loans, leases and other assets, including
other real estate owned . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
$ 3,048
2,465
5,513
268
2,972
1,525
$ 2.72
2.68
1.31
16.00
48.9%
1.61%
17.2
9.34
3.48
53.9
$ 252
.45%
1.19
1.31
.51
.74
2003
2,944
2,483
5,427
399
2,551
1,665
2.91
2.87
1.13
15.29
39.4
1.90
19.0
10.01
3.62
47.0
312
.63
1.33
1.47
.61
.89
2002
2,738
2,183
4,921
246
2,337
1,531
2.64
2.59
.98
14.98
37.8
2.04
18.4
11.08
3.96
47.5
187
.43
1.49
1.49
.59
.95
2001
2,476
1,788
4,264
236
2,453
1,002
1.74
1.70
.83
13.31
48.8
1.42
13.6
10.40
3.82
57.5
227
.54
1.50
1.50
.57
.96
2000
2,297
1,476
3,773
138
2,027
1,055
1.86
1.83
.70
11.83
41.7
1.58
17.5
9.06
3.73
53.7
109
.26
1.43
1.43
.47
.77
Average Balances
Loans and leases, including held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment securities and other short-term investments . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Demand deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest-bearing deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Regulatory Capital Ratios
Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total risk-based capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 leverage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(a) Amounts presented on a fully taxable equivalent basis (“FTE”).
(b) As of December 31, 2004, the reserve for unfunded commitments has been reclassifi ed from the reserve for loan and lease losses to other liabilities. The 2003 year-end reserve
for unfunded commitments has been reclassifi ed to conform to the current period presentation. The reserve for credit losses is the sum of the reserve for loan and lease losses and
the reserve for unfunded commitments.
$57,042
30,597
94,896
12,327
43,908
13,539
13,323
8,860
52,414
28,947
87,481
10,482
44,008
12,373
8,747
8,754
44,888
19,938
70,683
7,394
38,255
8,799
6,301
7,348
45,539
23,585
75,037
8,953
39,976
7,191
7,640
8,317
42,690
18,830
66,611
6,257
38,164
9,725
4,707
6,033
10.31%
12.31
8.89
12.49
14.55
10.64
11.84
13.65
9.84
11.40
13.50
9.49
11.11
13.56
9.23
TABLE 2: QUARTERLY INFORMATION
For the Three Months Ended ($ in millions, except per share data)
Net interest income (FTE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income taxes,
minority interest and cumulative effect . . . . . . . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
12/31
$752
65
479
935
222
176
.31
.31
2004
2003
9/30
6/30
3/31
12/31
9/30
6/30
3/31
766
26
611
648
694
471
.84
.83
771
90
749
742
679
448
.80
.79
759
87
626
648
641
430
.76
.75
745
94
599
657
583
442
.78
.77
735
112
680
657
636
418
.73
.72
749
109
618
621
627
415
.72
.71
716
85
586
614
593
390
.68
.67
14 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
This overview of management’s discussion and analysis highlights
selected information in the fi nancial results of the Bancorp and may
not contain all of the information that is important to you. For
a more complete understanding of trends, events, commitments,
uncertainties, liquidity, capital resources and critical accounting
policies and estimates, you should carefully read this entire docu-
ment. Each of these items could have an impact on the Bancorp’s
fi nancial condition and results of operations.
The Bancorp is a diversifi ed fi nancial services company head-
quartered in Cincinnati, Ohio. The Bancorp has $94.5 billion in
assets, operates 17 affi liates with 1,011 full-service banking centers
and 1,898 Jeanie® ATMs in Ohio, Kentucky, Indiana, Michigan,
Illinois, Florida, Tennessee, West Virginia and Pennsylvania. The
fi nancial strength of the Bancorp’s largest banks, Fifth Third Bank
and Fifth Third Bank (Michigan), continues to be recognized by
rating agencies with deposit ratings of AA- and Aa1 from Standard
& Poor’s and Moody’s, respectively. Additionally, the Bancorp is
recognized by Moody’s with one of the highest senior debt ratings
for any U.S. bank holding company of Aa2. The Bancorp oper-
ates four main businesses: Commercial Banking, Retail Banking,
Investment Advisors and Fifth Third Processing Solutions.
Fifth Third believes that banking is fi rst and foremost a rela-
tionship business where the strength of the competition and chal-
lenges for growth can vary in every market. Our affi liate operating
model provides a competitive advantage by keeping the decisions
close to the customer and by emphasizing individual relationships.
Through our affi liate operating model, individual managers, from
the banking center to the executive level, are given the opportunity
to tailor fi nancial solutions for their customers.
The Bancorp’s revenues are fairly evenly dependent on net
interest income and noninterest income. During 2004, net interest
income, on a fully taxable equivalent (“FTE”) basis, and noninter-
est income provided 55% and 45% of total revenue, respectively.
Changes in interest rates, credit quality, economic trends and the
capital markets are primary factors that drive the performance of
the Bancorp. As discussed later in the Risk Management section,
risk identifi cation, measurement, monitoring, control and report-
ing are important to the management of risk and to the continua-
tion of the strong fi nancial performance and capital strength of the
Bancorp.
Net interest income is the difference between interest income
on earning assets such as loans, leases and securities, and interest
expense paid on liabilities such as deposits and borrowings, and
continues to be the Bancorp’s largest revenue source. Net interest
income is affected by the general level of interest rates, changes in
interest rates and by changes in the amount and composition of
interest-earning assets and interest-bearing liabilities. Generally,
the rates of interest the Bancorp earns on its assets and owes on
its liabilities are established for a period of time. The change in
market interest rates over time exposes the Bancorp to interest-
rate risk and potential adverse changes in net interest income. The
Bancorp manages this risk by continually analyzing and adjusting
the composition of its assets and liabilities based on their payment
streams and interest rates, the timing of their maturities and their
sensitivity to changes in market interest rates. Additionally, in the
ordinary course of business, the Bancorp enters into certain deriva-
tive transactions as part of its overall strategy to manage its interest
rate risks and prepayment risks.
The Bancorp is also exposed to the risk of losses on its loan and
lease portfolio as a result of changing expected cash fl ows caused by
loan defaults and inadequate collateral, among other factors.
Noninterest income is derived primarily from electronic funds
transfer (“EFT”) and merchant transaction processing fees, fi du-
ciary 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 the effi ciency ratio are presented in Management’s Discussion
and Analysis of Financial Condition and Results of Operations
on an FTE basis. The FTE basis adjusts for the tax-favored status
of income from certain loans and securities held by the Bancorp
that are not taxable for federal income tax purposes. The Bancorp
believes this measure to be the preferred industry measurement of
net interest income as it provides a relevant comparison between
taxable and non-taxable amounts.
The Bancorp’s net income was $1.5 billion in 2004, down
eight percent compared to $1.7 billion in 2003. Earnings per dilut-
ed share were $2.68 in 2004, down seven percent from $2.87 in
2003. The Bancorp’s dividend in 2004 increased 16% to $1.31 per
common share from $1.13 in 2003. The results of operations refl ect
the impact of the balance sheet repositioning initiatives announced
and completed during the fourth quarter of 2004, including debt
retirement charges and losses from security sales, which reduced net
income and earnings per diluted share by $208 million and $.37,
respectively. The prolonged low interest rate environment led to
declines in asset yields, net interest margin and returns on capital in
2004, which ultimately led to the decision to reposition the balance
sheet. Further discussion of the repositioning is included in relevant
sections throughout this report. The results of operations also refl ect
the impact of the after-tax gain of $91 million, or $.16 per diluted
share, from the sales of certain small merchant processing contracts
in 2004 and an additional after-tax charge of $50 million, or $.09
per diluted share, from the early retirement of debt in the second
quarter of 2004.
The Bancorp experienced growth across nearly all of the
lines of business, including solid growth in both commercial and
consumer loans. The Bancorp also benefi ted from improvements in
commercial credit and continued control of operational expenses.
Noninterest income was fl at compared to 2003 as benefi ts from
the emphasis on cross-selling services and the gain from the sales
of certain small merchant processing contracts were offset by losses
on securities sold as a result of the balance sheet repositioning and a
decrease in mortgage banking revenues.
The Bancorp continues to invest in the geographic areas
within its footprint that offer the best growth prospects. The
Bancorp opened 76 new banking centers during 2004, excluding
relocations, with a net increase of 50, excluding acquisitions. The
Bancorp plans to add a similar number of new banking centers in
2005, as it believes additional banking centers are a cost effective
method of expansion in its largest affi liate markets. The Bancorp
also completed its acquisition of Franklin Financial Corpora-
tion (“Franklin Financial”) in June of 2004, which expanded the
Bancorp’s presence in the Nashville market to 14 locations. In
August 2004, the Bancorp announced an agreement to acquire
First National Bankshares of Florida, Inc., a bank holding company
with $5.6 billion in assets located primarily in Orlando, Tampa,
Sarasota, Naples and Fort Myers. The acquisition was completed
on January 1, 2005 and as a result of this transaction, the Florida
affi liate now has nearly 100 full-service locations and approximately
$5 billion in deposits.
The Bancorp’s capital ratios exceed the “well-capitalized” guide-
lines as defi ned by the Board of Governors of the Federal Reserve
System (“FRB”). As of December 31, 2004, the Tier 1 capital ratio
was 10.31% and the total risk-based capital ratio was 12.31%. The
Bancorp’s capital strength and fi nancial stability have enabled it to
maintain a Moody’s credit rating that is equaled or surpassed by
only three other U.S. bank holding companies.
Fifth Third Bancorp 15
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RECENT ACCOUNTING STANDARDS
In December 2002, the Financial Accounting Standards Board
(“FASB”) issued Statement of Financial Accounting Standard
(“SFAS”) No. 148, “Accounting for Stock-Based Compensation-
Transition and Disclosure—an Amendment of FASB Statement
No. 123.” This Statement amends SFAS No. 123, “Accounting
for Stock-Based Compensation,” to provide alternative methods
of transition for a voluntary change to the fair value method of
accounting for stock-based employee compensation. Effective Janu-
ary 1, 2004, the Bancorp adopted the fair value recognition provi-
sions of SFAS No. 123 using the retroactive restatement method
described in SFAS No. 148. As a result, fi nancial information for all
prior periods has been restated to refl ect the compensation expense
that would have been recognized had the fair value method of
accounting been applied to all awards granted to employees after
January 1, 1995. Stock-based compensation expense is included in
salaries, wages and incentives expense in the Consolidated State-
ments of Income.
In December 2004, the FASB issued SFAS No. 123 (Revised
2004), “Share-Based Payment.” This Statement requires measure-
ment of the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of
the award with the cost to be recognized over the vesting period.
As the Bancorp has previously adopted the fair value recognition
provisions of SFAS No. 123 and the retroactive restatement method
described in SFAS No. 148, the adoption of this Statement will
not have a material impact on the Bancorp’s Consolidated Financial
Statements.
In May 2003, the FASB issued SFAS No. 150, “Accounting for
Certain Financial Instruments with Characteristics of Both Liabili-
ties and Equity.” This Statement establishes standards for how an
entity classifi es and measures certain fi nancial instruments with
characteristics of both liabilities and equity. This Statement requires
that an issuer classify a fi nancial instrument that is within its scope
as a liability. Many of those instruments were previously classifi ed
as equity, or in some cases, presented between the liabilities section
and the equity section of the statement of fi nancial position. This
CRITICAL ACCOUNTING POLICIES
Reserve for Loan and Lease Losses
The Bancorp maintains a reserve to absorb probable loan and lease
losses inherent in the portfolio. The reserve is maintained at a level
the Bancorp considers to be adequate and is based on ongoing quar-
terly assessments and evaluations of the collectibility and historical
loss experience of loans and leases. Credit losses are 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 esti-
mating probable credit losses. In determining the appropriate level
of reserves, the Bancorp estimates losses using a range derived
from “base” and “conservative” estimates. The Bancorp’s method-
ology for assessing the appropriate reserve level consists of several
key elements. The Bancorp’s strategy for credit risk management
includes a combination of conservative exposure limits signifi cantly
below legal lending limits and conservative underwriting, docu-
mentation and collections standards. The strategy also emphasizes
diversifi cation on a geographic, industry and customer level, regu-
lar credit examinations and quarterly management reviews of large
credit exposures and loans experiencing deterioration of credit qual-
ity.
Larger commercial loans that exhibit probable or observed
credit weaknesses are subject to individual review. Where appropri-
ate, reserves are allocated to individual loans based on management’s
estimate of the borrower’s ability to repay the loan given the avail-
ability of collateral, other sources of cash fl ow and legal options avail-
able to the Bancorp. The review of individual loans includes those
16 Fifth Third Bancorp
Statement was effective for fi nancial instruments entered into or
modifi ed after May 31, 2003 and otherwise was effective at the
beginning of the fi rst interim period beginning after June 15, 2003.
Adoption of this Statement on July 1, 2003 required a reclassifi ca-
tion of a minority interest to long-term debt and the corresponding
minority interest expense to interest expense, relating to preferred
stock issued during 2001 by a subsidiary of the Bancorp. The
existence of the mandatory redemption feature of this issue upon
its mandatory conversion to trust preferred securities necessitated
these reclassifi cations and did not result in any change in bottom
line income statement trends.
In January 2003, the FASB issued Interpretation No. 46 (“FIN
46”), “Consolidation of Variable Interest Entities.” This interpreta-
tion requires variable interest entities (“VIEs”) to be consolidated
by the primary benefi ciary, which is defi ned as the enterprise that
will absorb the majority of the VIE’s expected losses if they occur,
receive a majority of the VIE’s residual returns if they occur, or
both. In December 2003, FASB issued Interpretation No. 46R
(“FIN 46R”), “Consolidation of Variable Interest Entities — an
interpretation of ARB 51 (revised December 2003).” FIN 46R
was primarily issued to clarify the required accounting for interests
in VIEs. The Bancorp early adopted the provisions of FIN 46 on
July 1, 2003 and consolidated a VIE for which the Bancorp was
deemed to be the primary benefi ciary and was created for the sole
purpose of participating in the sale and subsequent leaseback of
leased autos. The Bancorp consolidated the operating lease assets
and corresponding liability of the VIE as well as recognized an after-
tax cumulative effect charge of $11 million ($.02 per diluted share)
representing the difference between the carrying value of the leased
autos sold and the carrying value of the newly consolidated obliga-
tion as of July 1, 2003. Consolidation of these operating lease assets
and corresponding liability did not impact risk-based capital ratios
or bottom line income statement trends; however lease payments
on the operating lease assets are now refl ected as a component of
noninterest income and depreciation expense is now refl ected as a
component of noninterest expense.
loans that are impaired as provided in SFAS No. 114, “Accounting
by Creditors for Impairment of a Loan.” Any reserves for impaired
loans are measured based on the present value of expected future
cash fl ows discounted at the loan’s effective interest rate or fair value
of the underlying collateral. The Bancorp evaluates the collectibility
of both principal and interest when assessing the need for a loss
accrual. Historical loss rates are applied to other commercial loans
not subject to specifi c reserve allocations. The loss rates are derived
from a migration analysis, which computes the net charge-off expe-
rience sustained on loans according to their internal risk grade. The
Bancorp utilizes two risk grading systems for commercial loans and
leases. The current risk grading system utilized for reserve analysis
purposes encompasses ten categories. The Bancorp also maintains
a dual risk rating system that provides for 13 probability of default
grade categories and an additional six grade categories measuring
loss factors given an event of default. The probability of default and
loss given default analyses are not separated in the ten grade risk
rating system. The Bancorp is in the process of completing signifi -
cant validation and testing of the dual risk rating system prior to
implementation for reserve analysis purposes. The dual risk rating
system is consistent with Basel II expectations and allows for more
precision in the analysis of commercial credit risk.
Homogenous loans, such as consumer installment, residen-
tial mortgage loans and automobile leases are not individually risk
graded. Rather, standard credit scoring systems and delinquency
monitoring are used to assess credit risks. Reserves are established
for each pool of loans based on the expected net charge-offs for one
year. Loss rates are based on the average net charge-off history by
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
loan category.
Historical loss rates for commercial and consumer loans may
be adjusted for signifi cant factors that, in management’s judgment,
refl ect the impact of any current conditions on loss recognition.
Factors that management considers in the analysis include the
effects of the national and local economies, trends in the nature and
volume of loans (delinquencies, charge-offs and nonaccrual loans),
changes in mix, credit score migration comparisons, asset quality
trends, risk management and loan administration, changes in the
internal lending policies and credit standards, collection practices
and examination results from bank regulatory agencies and the
Bancorp’s internal credit examiners.
An unallocated reserve is maintained to recognize the impreci-
sion in estimating and measuring loss when evaluating reserves for
individual loans or pools of loans. Reserves on individual loans and
historical 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 Pennsylvania. When evaluating the adequacy of
reserves, consideration is given to this regional geographic concen-
tration and the closely associated effect changing economic condi-
tions have on the Bancorp’s customers.
The Bancorp has not substantively changed any aspect to its
overall approach in the determination of the reserve for loan and
lease losses. There have been no material changes in assumptions or
estimation techniques as compared to prior periods that impacted
the determination of the current period reserve for loan and lease
losses. As of December 31, 2004, the reserve for unfunded commit-
ments has been reclassifi ed from the reserve for loan and lease losses
to other liabilities. The December 31, 2003 reserve for unfunded
commitments and all subsequent activity has been reclassifi ed to
conform to current period presentation.
Valuation of Servicing Rights
When the Bancorp sells loans through either securitizations or indi-
vidual loan sales in accordance with its investment policies, it may
retain servicing rights. Servicing rights resulting from loan sales
are amortized in proportion to and over the period of estimated
net servicing revenues. Servicing rights are assessed for impairment
monthly, based on fair value, with temporary impairment recog-
nized through a valuation allowance and permanent impairment
recognized through a write-off of the servicing asset and related
valuation reserve. Key economic assumptions used in measuring
any potential impairment of the servicing rights include the prepay-
ment speeds of the underlying loans, the weighted-average life of
the loan, the discount rate, the weighted-average coupon and the
weighted-average default rate, as applicable. The primary risk of
material changes to the value of the servicing rights resides in the
potential volatility in the economic assumptions used, particularly
the prepayment speeds. The Bancorp monitors risk and adjusts
its valuation allowance as necessary to adequately reserve for any
probable impairment in the portfolio. For purposes of measuring
impairment, the servicing rights are stratifi ed based on the fi nancial
asset type and interest rates. In addition, the Bancorp obtains an
independent third-party valuation of the mortgage servicing rights
(“MSR”) portfolio on a quarterly basis. Fees received for servicing
loans owned by investors are based on a percentage of the outstand-
ing monthly principal balance of such loans and are included in
noninterest income as loan payments are received. Costs of servic-
ing loans are charged to expense as incurred.
The change in the fair value of MSRs at December 31, 2004,
due to immediate 10% and 20% adverse changes in the current
prepayment assumptions would be a decrease of approximately $18
million and $33 million, respectively and due to immediate 10%
and 20% favorable changes in the current prepayment assumption
would be approximately $19 million and $40 million, respectively.
The change in the fair value of the MSR portfolio at December
31, 2004, due to immediate 10% and 20% adverse changes in the
discount rate assumptions would be a decrease of approximately $10
million and $18 million, respectively and due to immediate 10%
and 20% favorable changes in the discount rate assumption would
be approximately $10 million and $20 million, respectively. Sensi-
tivity analysis related to other consumer and commercial servicing
rights is not material to the Bancorp’s Consolidated Financial State-
ments. These sensitivities are hypothetical and should be used with
caution. As the fi gures indicate, change in fair value based on a 10%
and 20% variation in assumptions typically cannot be extrapolated
because the relationship of the change in assumptions to change
in fair value may not be linear. Also, the effect of a variation in
a particular assumption on the fair value of the retained interests
is calculated without changing any other assumption; in reality,
changes in one factor may result in changes in another, which might
magnify or counteract the sensitivities.
Securities
Securities are classifi ed as held-to-maturity, available-for-sale or
trading on the date of purchase. Only those securities classifi ed as
held-to-maturity, and which management has both the intent and
ability to hold to maturity, are reported at amortized cost. Available-
for-sale and trading securities are reported at fair value with unreal-
ized gains and losses, net of related deferred income taxes, included
in accumulated other comprehensive income on the Consolidated
Balance Sheets and noninterest income in the Consolidated State-
ments of Income, respectively. The fair value of a security is deter-
mined based on quoted market prices. If quoted market prices are
not available, fair value is determined based on quoted prices of
similar instruments. Realized securities gains or losses are report-
ed within noninterest income in the Consolidated Statements of
Income. The cost of securities sold is based on the specifi c identi-
fi cation method. Available-for-sale and held-to-maturity securities
are reviewed quarterly for possible other-than-temporary impair-
ment. The review includes an analysis of the facts and circumstanc-
es of each individual investment such as the severity of loss, the
length of time the fair value has been below cost, the expectation
for that security’s performance, the creditworthiness of the issuer
and the Bancorp’s intent and ability to hold the security. A decline
in value that is considered to be other-than-temporary is recorded
as a loss within noninterest income in the Consolidated Statements
of Income. At December 31, 2004, 94% of the unrealized losses in
the available-for-sale security portfolio were comprised of securities
issued by U.S. Treasury and Government agencies, U.S. Govern-
ment sponsored agencies and states and political subdivisions as
well as agency mortgage-backed securities. The Bancorp believes
the price movements in these securities are dependent upon the
movement in market interest rates particularly given the negligible
inherent credit risk for these securities. The Bancorp also maintains
its intent and ability to hold these securities.
Fifth Third Bancorp 17
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
STATEMENTS OF INCOME ANALYSIS
TABLE 3: CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31 ($ in millions, except per share data)
Interest income (FTE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income (FTE) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net interest income after provision for loan and lease losses (FTE) . . . .
Noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before income taxes, minority
interest and cumulative effect (FTE) . . . . . . . . . . . . . . . . . . . . . . . .
Taxable equivalent adjustment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before minority interest and
cumulative effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority interest, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from continuing operations before cumulative effect . . . . . . . .
Income from discontinued operations, net of tax . . . . . . . . . . . . . . . . .
Income before cumulative effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of change in accounting principle, net of tax . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per diluted share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash dividends declared per share . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
$4,150
1,102
3,048
268
2,780
2,465
2,972
2,273
36
712
1,525
—
1,525
—
1,525
—
$1,525
$ 2.72
2.68
1.31
2003
4,030
1,086
2,944
399
2,545
2,483
2,551
2,477
39
786
1,652
(20)
1,632
44
1,676
(11)
1,665
2.91
2.87
1.13
2002
4,168
1,430
2,738
246
2,492
2,183
2,337
2,338
39
734
1,565
(38)
1,527
4
1,531
—
1,531
2.64
2.59
.98
2001
4,754
2,278
2,476
236
2,240
1,788
2,453
1,575
45
523
1,007
(2)
1,005
4
1,009
(7)
1,002
1.74
1.70
.83
2000
4,994
2,697
2,297
138
2,159
1,476
2,027
1,608
47
511
1,050
—
1,050
5
1,055
—
1,055
1.86
1.83
.70
Net Interest Income
The relative performance of lending and deposit-raising functions
is frequently measured by two statistics – net interest margin and
net interest rate spread. Net interest margin is determined by divid-
ing net interest income (FTE) by average interest-earning assets.
Net interest rate spread is the difference between the average FTE
yield on interest-earning assets and the average rate paid on inter-
est-bearing liabilities. Net interest margin is generally greater than
the net interest rate spread due to the additional income earned on
those assets funded by noninterest-bearing liabilities, or free fund-
ing, such as demand deposits and shareholders’ equity.
Table 4 presents net interest income, net interest margin and
net interest spread for the three years ended December 31, 2004,
2003 and 2002, comparing interest income, average interest-bear-
ing liabilities and average free funding outstanding. Nonaccrual
loans and leases and loans held for sale have been included in the
average loans and leases balances. Average outstanding securities
balances are based upon amortized cost with any unrealized gains or
losses on available-for-sale securities included in other assets. Table
5 also provides the relative impact of growth in the balance sheet
and changes in interest rates on net interest income.
Net interest income (FTE) in 2004 was $3.0 billion, a four
percent increase over $2.9 billion in 2003. The increase in net inter-
est income was due to the $6.3 billion, or eight percent, increase
in average interest-earning assets, mitigated by the 14 basis point
(“bp”) decrease in net interest margin. The net interest margin
contracted in 2004 as compared to 2003 due to the low absolute
level of interest rates in the fi rst half of 2004 and interest-bear-
ing liabilities repricing more quickly than interest-earning assets in
response to rising interest rates in the second half of 2004. Addi-
tionally, the contribution of noninterest-bearing funding to the net
interest margin decreased to 31 bp in 2004 from 34 bp in 2003.
The Bancorp implemented several actions, largely in the fourth
quarter, to improve its long-term profi le and reduce the risks associ-
ated with increasing interest rates. These actions included: (i) the
sale of approximately $6.4 billion of available-for-sale securities
with a weighted-average coupon of 3.2%; (ii) the early retirement
of approximately $3.8 billion of long-term debt, $2.8 billion in the
fourth quarter, with a weighted-average rate of 5.4% and a weight-
ed-average remaining maturity of approximately fi ve years and; (iii)
18 Fifth Third Bancorp
the termination of approximately $4.9 billion in notional of receive-
fi xed/pay-variable interest rate swaps. In total, these actions resulted
in pre-tax securities losses of $79 million recorded in noninterest
income and pre-tax debt termination charges of $325 million, $247
million in the fourth quarter, recorded in other noninterest expense.
The Bancorp also decreased certain wholesale borrowings in order
to further decrease the speed at which liabilities reprice relative to
earning assets in response to anticipated increases in interest rates.
These actions stabilized and improved the net interest margin as
the 2004 year ended and have resulted in improved balance sheet
positioning. Margin trends 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 sequen-
tial basis during 2005 in the low double digit range.
Interest income (FTE) on loans and leases increased $136
million, or fi ve percent, compared to 2003. The increase in aver-
age loans and leases included growth in commercial loans of $3.3
billion, or 13% in 2004. Excluding the impact of the Franklin
Financial acquisition, average commercial loans increased by 12%;
comparisons being provided to supplement an understanding of
the fundamental trends. The increase in average commercial loans
was primarily due to strong growth in the Chicago, Indianapolis
and Cincinnati markets. The Bancorp’s continued investment in
additional commercial sales people has largely contributed to its
commercial loan portfolio growth in a period of fl at to declining
commercial loan demand. The Bancorp continues to benefi t from
increased credit line usage from existing commercial customers
as well as success in gaining new customers within its footprint.
Average consumer loans increased by $1.3 billion, or fi ve percent,
compared to 2003. Comparisons in consumer loans are impacted
by the sales and securitizations of $903 million of home equity lines
in the third quarter of 2003 and $750 million of automotive loans
in the second quarter of 2004. Excluding these transactions, average
consumer loans increased nine percent in 2004 from 2003; compar-
isons being provided to supplement an understanding of the funda-
mental trends. Average consumer loans increased in nearly all of
the Bancorp’s markets with strong growth in Cleveland, Columbus
and Detroit.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 4: CONSOLIDATED AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME (FTE)
For the Years Ended December 31
2004
Average
($ in millions) Balance
Revenue/
Cost
Average
Yield/Rate
Average
Balance
2003
Revenue/
Cost
Average
Yield/Rate
Average
Balance
2002
Revenue/
Cost
Average
Yield/Rate
$57,042
$2,860
5.01%
$52,414
$2,724
5.20%
$45,539
$2,824
6.20%
Assets
Interest-earning assets:
Loans and leases . . . . . . . . . . . . . .
Securities:
Taxable . . . . . . . . . . . . . . . . . . .
Exempt from income taxes . . . . .
Other short-term investments . . .
Total interest-earning assets . . . . . .
Cash and due from banks . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . .
Reserve for loan and lease losses . . .
1,217
68
5
4,150
4.15
7.44
1.48
4.73
29,365
917
315
87,639
2,216
5,763
(722)
Total assets . . . . . . . . . . . . . . . . . . .
$94,896
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest checking . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . .
Other time deposits . . . . . . . . . . .
Certifi cates - $100,000 and over .
Foreign offi ce deposits . . . . . . . . .
Federal funds purchased . . . . . . . .
Short-term bank notes . . . . . . . . .
Other short-term borrowings . . . .
Long-term debt . . . . . . . . . . . . . .
Total interest-bearing liabilities . . . .
Demand deposits . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . .
Total liabilities . . . . . . . . . . . . . . . .
Minority interest . . . . . . . . . . . . . .
Shareholders’ equity . . . . . . . . . . . .
Total liabilities and shareholders’
$19,434
7,941
3,473
6,208
2,403
4,449
5,896
1,003
6,640
13,323
70,770
12,327
2,939
86,036
—
8,860
$ 174
58
39
162
48
58
77
15
78
393
1,102
.89%
.72
1.12
2.62
1.99
1.31
1.30
1.46
1.17
2.95
1.56
equity . . . . . . . . . . . . . . . . . . . .
$94,896
Net interest income margin . . . . . .
Net interest rate spread . . . . . . . . . .
Interest-bearing liabilities to interest-
earning assets . . . . . . . . . . . . . . .
$3,048
3.48%
3.17
80.75
27,584
1,056
307
81,361
1,600
5,250
(730)
$87,481
$18,679
8,020
3,189
6,426
3,832
3,862
7,001
22
5,350
8,747
65,128
10,482
2,883
78,493
234
8,754
$87,481
1,226
77
3
4,030
4.45
7.26
.97
4.95
$ 189
64
32
196
63
44
80
—
55
363
1,086
1.01%
.79
1.01
3.04
1.65
1.13
1.14
1.06
1.03
4.15
1.67
1,257
81
6
4,168
5.68
7.40
1.72
6.03
$ 296
158
27
335
77
35
54
—
67
381
1,430
1.83%
1.67
2.36
3.78
3.44
1.71
1.66
3.40
1.71
4.99
2.61
22,145
1,101
339
69,124
1,551
5,007
(645)
$75,037
16,239
9,465
1,162
8,855
2,237
2,018
3,262
2
3,927
7,640
54,807
8,953
2,520
66,280
440
8,317
$2,944
3.62%
3.28
80.05
$75,037
$2,738
3.96%
3.42
79.29
TABLE 5: CHANGES IN NET INTEREST INCOME (FTE) ATTRIBUTED TO VOLUME AND YIELD/RATE (a)
For the Years Ended December 31
2004 Compared to 2003
2003 Compared to 2002
($ in millions)
Volume
Yield/Rate
Total
Volume
Yield/Rate
Total
Increase (decrease) in interest income:
Loans and leases . . . . . . . . . . . . . . . . . . . . . . .
Securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exempt from income taxes . . . . . . . . . . . .
Other short-term investments . . . . . . . . . . . .
Total change in interest income . . . . . . . . . . . . .
Increase (decrease) in interest expense:
Interest checking . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . . . .
Other time deposits . . . . . . . . . . . . . . . . . . . .
Certifi cates - $100,000 and over . . . . . . . . . .
Foreign offi ce deposits . . . . . . . . . . . . . . . . . .
Federal funds purchased . . . . . . . . . . . . . . . . .
Short-term bank notes . . . . . . . . . . . . . . . . . .
Other short-term borrowings . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . .
Total change in interest expense . . . . . . . . . . . . .
$235
76
(10)
—
301
8
(1)
3
(7)
(26)
7
(13)
15
15
154
155
Total change in net interest income . . . . . . . . . .
$146
(99)
(85)
1
2
(181)
(23)
(5)
4
(27)
11
7
10
—
8
(124)
(139)
(42)
136
(9)
(9)
2
120
(15)
(6)
7
(34)
(15)
14
(3)
15
23
30
16
104
393
273
(3)
(1)
662
40
(21)
27
(81)
38
)24
47
—
20
51
145
517
(493)
(304)
(1)
(2)
(800)
(147)
(73)
(22)
(58)
(52)
(15)
(21)
—
(32)
(69)
(489)
(311)
(100)
(31)
(4)
(3)
(138)
(107)
(94)
5)
(139)
(14)
9)
26)
—
(12)
(18)
(344)
206)
(a) Changes in interest not solely due to volume or yield/rate are allocated in proportion to the absolute amount of change in volume or yield/rate.
Fifth Third Bancorp 19
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 6: COMPONENTS OF AVERAGE LOAN PORTFOLIO
For the Years Ended December 31 ($ in millions)
Commercial loans:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial loans, including held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans:
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage and construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans, including held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loan portfolio, including held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loan portfolio, excluding held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The interest income (FTE) from investment securities and
short-term investments decreased by $16 million, or one percent, in
2004 compared to 2003. The decrease in interest income is due to
lower asset yields. As previously mentioned, the Bancorp sold approx-
imately $6.4 billion of securities in the fourth quarter of 2004 with a
weighted-average coupon of approximately 3.2% in order to improve
its long-term profi le and reduce the risks associated with increasing
interest rates.
The interest paid on interest-bearing deposits decreased $49
million, or eight percent, in 2004 compared to 2003. Average
interest-bearing deposits were lower by $100 million, or less than
one percent, compared to 2003. The four percent increase in aver-
age interest checking balances and nine percent increase in money
market balances were mitigated by the 37% decline in certifi cates
of deposit greater than $100,000. The movement in the certifi cates
of deposit category is largely a function of overall balance sheet
funding requirements. Average demand deposits in 2004 increased
$1.8 billion, or 18%, over 2003 refl ecting the Bancorp’s success in
generating new account growth in its commercial line of business.
The growth in noninterest-bearing funding is a critical component
in the growth in net interest income. A key focus of the Bancorp
in 2005 continues to be growing its transaction account products
such as checking, savings and money market accounts in order to
reduce its reliance on other sources to fund the expected growth in
the balance sheet.
The interest paid on long-term debt increased by $30 million,
or eight percent, in 2004 compared to 2003 due to the increase in
the average long-term debt outstanding. Average long-term debt
increased $4.6 billion, or 52%, in 2004 over 2003. The Bancorp has
increased long-term debt to fund the growth in the balance sheet
and to reduce its short-term wholesale funding position. Average
federal funds purchased declined $1.1 billion, or 16%, compared
to 2003. The interest expense associated with federal funds declined
by only $3 million, or four percent, due to the federal funds rate
increases that occurred throughout 2004.
Provision for Loan and Lease Losses
The Bancorp provides as an expense an amount for probable credit
losses within the loan portfolio that is based on factors discussed in
the Critical Accounting Policies. The provision is recorded to bring
the reserve for loan and lease losses to a level deemed appropriate
by the Bancorp. Actual credit losses on loans and leases are charged
against the reserve for loan and lease losses. The amount of loans
actually removed from the Consolidated Balance Sheets is referred
to as charge-offs and net charge-offs include current charge-offs less
recoveries in the current period on previously charged off assets.
The provision for loan and lease losses was $268 million
in 2004 compared to $399 million in 2003. The $131 million
decrease in the provision was due to the reduction in net charge-
offs as a percentage of average loans and leases and the continued
improvement and expected stability in credit quality trends. Net
charge-offs decreased to $252 million in 2004 as compared to $312
20 Fifth Third Bancorp
2004
$14,908
7,391
3,807
3,296
29,402
17,755
6,801
787
2,297
27,640
$57,042
$55,951
2003
13,672
6,299
3,097
3,037
26,105
16,343
6,880
591
2,495
26,309
52,414
49,700
2002
11,665
5,834
3,023
2,640
23,162
13,461
6,377
478
2,061
22,377
45,539
43,529
million in 2003. The reserve for loan and lease losses as a percent
of loans and leases declined to 1.19% at December 31, 2004 from
1.33% at December 31, 2003. In addition, nonperforming assets
as a percentage of loans, leases and other assets, including other real
estate owned, declined to .51% from .61% in 2003. Refer to the
Credit Risk Management section for further information on the
provision for loan and lease losses, net charge-offs, nonperforming
assets and other factors considered by the Bancorp in assessing the
credit quality of the loan portfolio and the reserve for loan and lease
losses.
Noninterest Income
Electronic payment processing revenue increased $47 million, or
eight percent, in 2004 despite the sales of certain small merchant
processing contracts. Excluding the lost revenue associated with
the sold contracts of approximately $70 million for all of 2004,
revenue increased 23%; comparisons being provided to supplement
an understanding of the fundamental revenue trends. The Bancorp
continues to realize strong sales momentum from the addition of
new customer relationships in both its merchant services and EFT
businesses. Merchant processing revenue was essentially fl at in 2004
compared to 2003 due to the above-mentioned sales of certain
small merchant processing contracts. Excluding the lost revenue
associated with the sold contracts, merchant processing revenue
increased 29% due to the addition of new customers and the result-
ing increases in merchant transaction volumes, as well as an increase
in transaction volume growth on the existing customer base refl ec-
tive of an improving retail sector of the economy. Compared to
2003, EFT revenues, including debit and credit card interchange,
increased by 18% in 2004. The Bancorp now handles electronic
processing for more than 127,000 merchant locations and 1,300
fi nancial institutions worldwide.
Service charges on deposits increased $30 million, or six
percent, over 2003 primarily due to continued sales success in
corporate treasury management products and commercial deposit
campaigns. Commercial deposit revenues increased 14% over 2003
on the strength of a continued focus on cross-sell initiatives, an
increased sales force and new customer relationships. Retail deposit
revenues were fl 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 $178 million in
2004 from $302 million as a result of the record high level of
refi nancing activity seen in 2003 that has declined in 2004 due
to rising interest rates. The components of mortgage banking net
revenue are shown in Table 8. As a result of rising interest rates,
mortgage originations declined to $8.4 billion in 2004 compared to
$16.0 billion in 2003, directly contributing to the decrease in core
mortgage banking fees in 2004. The increase in interest rates during
2004 and the resulting impact of changing prepayment speeds led
to the recovery of $60 million in temporary impairment on the
MSR portfolio in 2004 as compared to the $3 million in tempo-
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 7: NONINTEREST INCOME
For the Years Ended December 31 ($ in millions)
Electronic payment processing revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage banking net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment advisory revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities (losses) gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities gains, net – non-qualifying hedges on mortgage servicing rights . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TABLE 8: COMPONENTS OF MORTGAGE BANKING NET REVENUE
For the Years Ended December 31 ($ in millions)
Total mortgage banking fees and loan sales . . . . . . . . . . . . . . . . . . . . . . . . . .
Net (losses) gains and mark-to-market adjustments on both settled and
outstanding free-standing derivative fi nancial instruments . . . . . . . . . . . .
Net valuation adjustments and amortization on mortgage servicing rights . .
2004
$ 622
515
178
360
671
156
(37)
—
$2,465
2004
$ 219
(9)
(32)
Mortgage banking net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 178
2004
$ 48
57
174
61
31
—
—
157
143
$ 671
TABLE 9: COMPONENTS OF OTHER NONINTEREST INCOME
For the Years Ended December 31 ($ in 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
rary impairment recognized in 2003. Servicing rights are deemed
impaired when a borrower’s loan rate is distinctly higher than
prevailing market rates. As temporary impairment was recognized
on the MSR portfolio in 2003 due to falling primary and second-
ary mortgage rates and earnings rates and corresponding increases
in prepayment speeds, the Bancorp sold certain securities that
were held at the time as a component of an overall non-qualifying
hedging strategy it maintained in order to manage a portion of the
risk associated with changes in impairment on its MSR portfolio.
As a result, the Bancorp realized net gains of $3 million in 2003
that were captured as a component of other noninterest income in
the Consolidated Statements of Income. In addition, the Bancorp
recognized a 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 related to its non-
qualifying hedging strategy.
In 2004, the Bancorp primarily used principal only swaps and
swaptions to hedge the economic risk of the MSR portfolio as they
are deemed to be the best available instrument for several reasons.
Principal only swaps hedge the mortgage-LIBOR spread because
they appreciate in value as a result of tightening spreads. They also
provide prepayment protection as they increase in value as prepay-
ment speeds increase, as opposed to MSRs that lose value in a faster
prepayment environment. Swaptions are positive convexity hedges
primarily used to hedge the negative convexity of the MSR port-
folio. Due to an increasing interest rate environment in 2004, the
2003
2002
2001
2000
575
485
302
332
581
124
81
3
512
431
188
325
580
—
114
33
347
367
63
298
542
—
28
143
252
298
256
275
389
—
6
—
2,483
2,183
1,788
1,476
2003
466
14
(178)
302
2002
386
98
(296)
188
2001
354
20
(311)
63
2000
315
—
(59)
256
2003
2002
2001
2000
59
65
178
62
28
—
—
—
189
581
51
70
157
62
55
7
26
—
152
580
50
59
125
52
49
43
—
—
164
542
42
49
86
43
48
—
—
—
121
389
Bancorp increased the level of purchased options/swaptions used
to economically hedge the MSR portfolio as compared to 2003. As
of December 31, 2004 and 2003, the Bancorp held a combination
of free-standing derivatives, including principal only swaps, swap-
tions and interest rate swaps with a fair value of $4 million and $8
million, respectively, on an outstanding notional amount of $1.9
billion and $.9 billion, respectively. The increase in the derivative
outstanding notionals at December 31, 2004 as compared to 2003
was primarily due to the level of current interest rates.
The Bancorp expects the core contribution of mortgage bank-
ing to total revenues to remain relatively fl at from 2004 levels as
refi nance activity and new applications continue to moderate.
The Bancorp’s total residential mortgage loan servicing port-
folio at the end of 2004 and 2003 was $30.6 billion and $30.0
billion, respectively, with $23.0 billion and $24.5 billion, respec-
tively, of loans serviced for others.
The increase of $28 million, or eight percent, in investment
advisory service revenue in 2004 compared to 2003 resulted primar-
ily from strengthening sales in retirement plan services, improved
institutional asset management and mutual fund revenues. The
Bancorp is one of the largest money managers in the Midwest and
as of December 31, 2004 had over $182 billion in assets under
care, $34 billion of assets under management and $13 billion in its
proprietary Fifth Third Funds.*
The increase in operating lease revenue is due to the consoli-
dation beginning in the third quarter of 2003 of a special purpose
entity (“SPE”) formed for the purpose of the sale and subsequent
leaseback of leased autos. The consolidation was the result of the
*FIFTH THIRD FUNDS® PERFORMANCE DISCLOSURE
Investments in the Fifth Third Funds are: NOT INSURED BY THE FDIC or any other government agency, are not deposits or obli-
gations of, or guaranteed by, any bank, the distributor or any of their affi liates, and involve investment risks, including the possible
loss of the principal amount invested. An investor should consider the fund’s investment objectives, risks, and charges and expenses carefully before
investing or sending money. This and other important information about the investment company can be found in the fund’s prospectus. To obtain a
prospectus, please call 1-800-282-5706 or visit www.53.com. Please read the prospectus carefully before investing.
Fifth Third Bancorp 21
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 10: NONINTEREST EXPENSE
For the Years Ended December 31 ($ in millions)
Salaries, wages and incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefi ts . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger-related charges . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TABLE 11: COMPONENTS OF OTHER NONINTEREST EXPENSE
For the Years Ended December 31 ($ in millions)
Marketing and communications . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postal and courier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bankcard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible and goodwill amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Franchise and other taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan and lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Printing and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing and operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total other noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
$1,018
261
84
185
114
—
1,310
$2,972
2004
$ 99
49
197
29
32
82
33
41
114
325
309
$1,310
2003
1,031
240
82
159
94
—
945
2,551
2002
1,029
201
79
142
—
—
886
2,337
2001
2000
959
148
91
146
—
349
760
893
144
100
138
—
87
665
2,453
2,027
2003
2002
2001
2000
99
49
176
40
33
106
35
35
97
20
255
945
96
48
142
37
30
91
37
38
82
—
285
886
102
50
103
71
18
62
40
34
70
1
209
760
97
45
72
60
28
39
41
34
86
1
162
665
Bancorp’s adoption of FIN 46. The Bancorp expects operating lease
revenue to decline in 2005 as the leases mature.
The major components of other noninterest income for each
of the last fi ve years are shown in Table 9. In the second and third
quarters of 2004, the Bancorp sold certain small merchant process-
ing contracts resulting in a total gain of $157 million. The other
component was impacted by the $22 million gain on the securitiza-
tion and sale of $903 million of home equity lines of credit in 2003.
The remaining categories in 2004 are fl at to down as compared to
2003.
over year decrease in stock compensation expense was offset by an
increase in profi t sharing expense to $69 million in 2004 from $48
million in 2003. Signifi cant investments in the sales force contrib-
uted to a four percent increase in full time equivalent employees
from 2003 to 2004. Full time equivalent employees totaled 19,659
as of December 31, 2004 compared to 18,899 as of December
31, 2003. Net occupancy expenses increased primarily due to $10
million of higher depreciation expense related to the increase in
banking centers and expansion of the Bancorp’s main operations
center and $10 million of higher repairs and maintenance expense.
Noninterest Expense
The Bancorp continues to focus on effi ciency initiatives as part of
its core emphasis on operating leverage. These 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.
Operating expense levels are often measured using an effi -
ciency ratio (noninterest expense divided by the sum of net interest
income (FTE) and noninterest income). The effi ciency ratio was
53.9% and 47.0% for 2004 and 2003, respectively.
Noninterest expense increased 17% in 2004 compared to 2003.
Comparisons to the prior year are impacted by (i) $247 million of
charges related to the early retirement of approximately $2.8 billion
of long-term debt in the fourth quarter of 2004; (ii) a charge of $78
million related to the early retirement of approximately $1 billion
of Federal Home Loan Bank (“FHLB”) advances in the second
quarter of 2004; (iii) a charge of $20 million related to the early
retirement of approximately $200 million of FHLB advances in
2003 and; (iv) a $31 million pre-tax recovery in 2003 of previously
charged off treasury clearing and settlement account balances. Each
of these items was recorded in other noninterest expense. Exclud-
ing the impact of these items, noninterest expense increased three
percent compared to 2003; comparisons being provided to supple-
ment an understanding of the fundamental trends in noninterest
expense.
Total personnel costs (salaries, wages and incentives plus
employee benefi ts) increased by less than one percent in 2004
compared to 2003, and included $87 million in total stock
compensation expense compared to $110 million in 2003. The year
22 Fifth Third Bancorp
Pension Plans
Pension costs, included in employee benefi ts, declined to $16 million
in 2004 compared to $31 million in 2003. The decrease is primarily
due to lower amortization of actuarial losses and lower settlement
expense. The Bancorp’s net pension expense for 2004 is based upon
specifi c actuarial assumptions, including an expected long-term
rate of return on plan assets of 8.75%. The expected long-term
rate of return on plan assets assumption refl ects the average return
expected on the assets invested to provide for the plan’s liabilities.
In determining the expected long-term rate of return on plan assets
assumption, the Bancorp evaluated actuarial and economic inputs,
including long-term infl ation rate assumptions and broad equity
and bond indices long-term return projections as well as actual long-
term plan performance. The discount rate assumption refl ects the
yield of a portfolio of high quality fi xed-income instruments that
have a similar duration to the plan’s liabilities. The discount rate
determined on this basis has decreased from 6.00% at December
31, 2003 to 5.85% at December 31, 2004. Lowering the expected
rate of return on plan assets by .25% (8.75% to 8.50%) and by
lowering the discount rate by .25% (6.00% to 5.75%) would have
increased the 2004 pension expense by approximately $1 million.
The Bancorp based the determination of pension expense on
a market-related valuation of assets. This market-related valuation
recognizes investment gains or losses over a three-year period from
the year in which they occur. Investment gains or losses for this
purpose are the difference between the expected return calculated
using the market-related value of assets and the actual return based
on the market-related value of assets. Since the market-related
value of assets recognizes gains or losses over a three-year period,
the future value of assets will be impacted as previously deferred
gains or losses are recorded. As of December 31, 2004 the Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 12: APPLICABLE INCOME TAXES
For the Years Ended December 31 ($ in millions)
Income from continuing operations before income taxes, minority interest
and cumulative effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
had cumulative losses of approximately $101 million, which remain
to be recognized in the calculation of the market-related value of
assets. These unrecognized net actuarial losses result in an increase
in the Bancorp’s future pension expense depending on several
factors, including whether such losses at each measurement date
exceed the corridor in accordance with SFAS No. 87, “Employers’
Accounting for Pensions.”
The value of the plan assets has decreased from $223 million
at December 31, 2003 to $201 million at December 31, 2004
as settlements and benefi ts paid exceeded the investment returns
and contributions made during 2004. The Bancorp’s unfunded
plan status, net of benefi t obligations, increased from $41 million
at December 31, 2003 to an unfunded status of $53 million at
December 31, 2004. During 2004, the Bancorp made $3 million in
cash contributions to the plan and believes that, based on the actu-
arial assumptions, no cash contribution to the plan will be required
in 2005.
Applicable Income Taxes
The Bancorp’s income from continuing operations before income
taxes, applicable income tax expense and effective tax rate for each
of the periods indicated are shown in Table 12. Applicable income
tax expense for all periods include the benefi t from tax-exempt
income, tax-advantaged investments and general business tax cred-
its, partially offset by the effect of nondeductible expenses.
Comparison of 2003 with 2002
Net income in 2003 increased to $1.7 billion compared to $1.5
billion in 2002. Earnings per diluted share were $2.87 compared
to $2.59.
BALANCE SHEET ANALYSIS
Loans
Table 13 summarizes the end of period commercial and consumer
loans and leases, including loans held for sale, by major category.
Commercial loan and lease outstandings, including loans held for
sale, increased 14% compared to December 31, 2003. The increase
in commercial loans and leases was attributable to growth in middle-
market 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 outstandings, including loans held
for sale, increased nine percent compared to 2003. Consumer loan
2004
$2,237
712
31.8%
2003
2,438
786
32.3
2002
2,299
734
31.9
2001
1,530
523
34.2
2000
1,561
511
32.7
Return on average assets was 1.90% and return on average
shareholders’ equity was 19.0% compared to 2.04% and 18.4%,
respectively, in 2002.
Net interest income (FTE) was $2.9 billion in 2003 compared
to $2.7 billion in 2002. The net interest margin declined to 3.62%
in 2003 from 3.96% in 2002, which is attributable to the low abso-
lute levels of interest rates in 2003 and corresponding impact of
accelerated prepayments across all asset classes and higher origina-
tion volumes at the lower rates. The decline in net interest margin
was offset by an 18% increase in average earning assets from 2002
to 2003.
Noninterest income increased 14% to $2.5 billion in 2003
compared to $2.2 billion in 2002. The increase in 2003 was driven,
in part, by mortgage banking as a result of the large volume of
mortgage originations due to the interest rate declines in the fi rst
half of 2003. The increase was also due, in part, to the adoption of
FIN 46 in the third quarter of 2003 and the resulting recognition
of $124 million of operating lease revenue.
Noninterest expense totaled $2.6 billion in 2003 compared
to $2.3 billion in 2002. The increase, in part, resulted from the
adoption of FIN 46 in the third quarter of 2003 and the resulting
recognition of $94 million of operating lease expense. Remaining
increases were largely related to the expansion of the sale force and
investment in additional banking centers.
The provision for loan and lease losses was $399 million in 2003
compared to $246 million in 2002. During 2003, net charge-offs
were $312 million, or .63% of average loans and leases outstanding,
compared to $187 million, or .43%, during 2002. The increase in
charge-offs was largely refl ective of the overall challenging economic
landscape in 2003 and growth in the overall loan portfolio.
comparisons to the prior periods are impacted by the securitization
and sale of $750 million of automotive loans and $140 million of
consumer loans obtained in the Franklin Financial acquisition in
2004. Consumer installment loan originations were $6.9 billion in
2004 compared to $7.4 billion in 2003. The Bancorp is continuing
to devote signifi cant focus on producing retail-based loan origi-
nations given the strong credit performance and attractive yields
available in these products. Residential mortgage and construction
loans, including held for sale, increased 35% compared to 2003 as
the overall proportion of retained originations increased. Compari-
sons to prior periods are dependent upon the volume and timing
of originations as well as the timing of loan sales. Residential mort-
gage originations totaled $8.4 billion in 2004 compared to $16.0
TABLE 13: COMPONENTS OF LOAN PORTFOLIO (INCLUDING HELD FOR SALE)
As of December 31 ($ in millions)
Commercial loans:
2004
2003
2002
2001
2000
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans:
Installment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage and construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$16,058
7,636
4,348
3,426
31,468
18,093
7,912
843
2,051
28,899
Total loan portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$60,367
14,226
6,894
3,301
3,264
27,685
17,429
5,865
762
2,448
26,504
54,189
12,786
5,885
3,009
3,019
24,699
14,584
7,123
537
2,343
24,587
49,286
10,909
6,085
3,103
2,487
22,584
12,138
6,815
448
1,743
21,144
43,728
10,734
6,227
2,819
2,571
22,351
11,249
7,570
361
2,654
21,834
44,185
Fifth Third Bancorp 23
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
billion in 2003. Consumer lease balances decreased 16% in 2004
compared to 2003 largely resulting from continued competition
from captive fi nance companies offering promotional lease rates.
Consumer loan and lease outstandings are affected considerably by
sales and securitizations, which totaled approximately $6.0 billion
in 2004 and $15.6 billion in 2003.
Investment Securities
As of December 31, 2004, total investment securities were $25.0
billion, compared to $29.2 billion at December 31, 2003 represent-
ing a decrease of 14%. The increased rate environment resulted in
a net unrealized loss on the available-for-sale securities portfolio at
December 31, 2004 of $114 million, compared to a net unreal-
ized loss of $77 million at December 31, 2003. Responding to the
change in interest rates, the Bancorp has allocated a greater portion
of current purchases to adjustable-rate and shorter-term securities.
As a result of all purchase and sale activity during 2004, 14% of the
debt securities in the available-for-sale portfolio at December 31,
2004 were adjustable-rate instruments, compared to seven percent
at December 31, 2003. The estimated average life of the debt secu-
rities in the available-for-sale portfolio at December 31, 2004 was
4.4 years based on current prepayment expectations, compared to
5.2 years at December 31, 2003.
Information presented in Table 15 is on a weighted-average
TABLE 14: COMPONENTS OF INVESTMENT SECURITIES (AMORTIZED COST BASIS)
As of December 31 ($ in millions)
Available-for-sale:
U.S. Treasury and Government agencies . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government sponsored agencies . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . . .
Agency mortgage-backed securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other bonds, notes and debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Held-to-maturity:
Obligations of states and political subdivisions . . . . . . . . . . . . . . . . . . . .
Other bonds, notes and debentures . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total held-to-maturity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
2003
2002
2001
2000
$ 503
2,036
823
17,571
2,862
1,006
$24,801
$ 245
10
—
$ 255
838
3,877
922
21,101
1,401
937
29,076
126
9
—
135
303
2,308
1,033
19,328
1,084
734
24,790
52
—
—
52
188
1,142
1,198
15,287
1,872
792
20,479
16
—
—
16
211
1,235
889
13,897
1,978
776
18,986
475
45
33
553
TABLE 15: CHARACTERISTICS OF AVAILABLE-FOR-SALE SECURITIES
As of December 31, 2004 ($ in millions)
U.S. Treasuries and Government agencies:
Average life of one year or less . . . . . . . . . . . . . . . . .
Average life 1 – 5 years . . . . . . . . . . . . . . . . . . . . . . .
Average life 5 – 10 years . . . . . . . . . . . . . . . . . . . . . .
Average life greater than 10 years . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
U.S. Government sponsored agencies:
Average life of one year or less . . . . . . . . . . . . . . . . .
Average life 1 – 5 years . . . . . . . . . . . . . . . . . . . . . . .
Average life 5 – 10 years . . . . . . . . . . . . . . . . . . . . . .
Average life greater than 10 years . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Obligations of states and political subdivisions (a):
Average life of one year or less . . . . . . . . . . . . . . . . .
Average life 1 – 5 years . . . . . . . . . . . . . . . . . . . . . . .
Average life 5 – 10 years . . . . . . . . . . . . . . . . . . . . . .
Average life greater than 10 years . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Agency mortgage-backed securities:
Average life of one year or less . . . . . . . . . . . . . . . . .
Average life 1 – 5 years . . . . . . . . . . . . . . . . . . . . . . .
Average life 5 – 10 years . . . . . . . . . . . . . . . . . . . . . .
Average life greater than 10 years . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other bonds, notes and debentures (b):
Average life of one year or less . . . . . . . . . . . . . . . . .
Average life 1 – 5 years . . . . . . . . . . . . . . . . . . . . . . .
Average life 5 – 10 years . . . . . . . . . . . . . . . . . . . . . .
Average life greater than 10 years . . . . . . . . . . . . . . .
Amortized Cost
Fair Value
Weighted-Average
Life (in years)
Weighted-Average
Yield
$ —
1
502
—
503
5
1,677
354
—
2,036
86
374
348
15
823
190
13,855
3,410
116
17,571
29
2,187
644
2
—
1
490
—
491
5
1,662
346
—
2,013
88
392
367
16
863
190
13,796
3,348
111
17,445
29
2,201
644
2
—
2.0
8.4
—
8.4
.2
3.0
6.2
—
3.6
.5
3.1
6.5
11.4
4.4
.6
4.0
6.1
10.8
4.4
.5
3.4
6.9
16.9
—%
6.08
3.70
—
3.71
7.15
3.60
4.08
—
3.70
8.20
7.65
7.25
6.63
7.52
6.02
4.43
4.48
4.65
4.46
6.53
4.20
3.21
5.63
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities (c) . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total available-for-sale securities . . . . . . . . . . . . . . . . . .
(a) Taxable-equivalent yield adjustments included in above table are 2.81%, 2.62%, 2.49%, 2.28% and 2.58% for securities with an average life of one year or less, 1-5 years,
2,862
1,006
2,876
999
4.00
—
4.43%
$24,801
24,687
4.2
—
4.4
5-10 years, greater than 10 years and in total, respectively.
(b) Other bonds, notes and debentures consist of non-agency mortgage-backed securities, certain other 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
security holdings.
24 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 $3.8 billion of long-term debt
during 2004. These instruments had a weighted-average coupon of
approximately 5.4% and a total weighted-average remaining matu-
rity of approximately fi ve years. The Bancorp continues to explore
additional alternatives regarding the level and cost of various other
sources of funds. Refer to the Liquidity Risk Management section
for discussion of the Bancorp’s liquidity management and Note 11
to the Consolidated Financial Statements for a detail of long-term
debt.
TABLE 16: DEPOSITS
As of December 31 ($ in millions)
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certifi cates - $100,000 and over . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign offi ce . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TABLE 17: BORROWINGS
As of December 31 ($ in millions)
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term bank notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt and convertible subordinated debentures . . . . . . . . . . . . . .
Total borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
RISK MANAGEMENT
Managing risk is an essential component of successfully operating
a fi 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
2004
$13,486
19,481
8,310
4,321
6,837
2,121
3,670
$58,226
2004
$ 4,714
775
4,537
13,983
$24,009
2003
12,142
19,757
7,375
3,201
6,201
1,856
6,563
57,095
2003
6,928
500
5,742
9,063
22,233
2002
10,095
17,878
10,056
1,044
7,638
1,723
3,774
52,208
2002
4,748
—
4,075
8,179
17,002
2001
9,243
13,474
7,065
1,352
11,301
2,197
1,222
45,854
2001
2,544
34
4,875
7,030
14,483
2000
7,152
10,320
5,991
923
14,231
5,049
4,694
48,360
2000
2,178
—
4,166
6,239
12,583
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
Fifth Third Bancorp 25
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 18: COMMERCIAL LOAN AND LEASE PORTFOLIO EXPOSURE (a)
As of December 31 ($ in millions)
Outstanding
Exposure
Outstanding
Exposure
2004
2003
By industry
Manufacturing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retail trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Business services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Wholesale trade . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Individuals . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financial services and insurance . . . . . . . . . . . . . . . . . . . .
Healthcare . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transportation and warehousing . . . . . . . . . . . . . . . . . . .
Accommodation and food . . . . . . . . . . . . . . . . . . . . . . . .
Public administration . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Communication and information . . . . . . . . . . . . . . . . . .
Entertainment and recreation . . . . . . . . . . . . . . . . . . . . . .
Agribusiness . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Utilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mining . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
By loan size
Less than $5 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5 million to $15 million . . . . . . . . . . . . . . . . . . . . . . . . .
$15 million to $25 million . . . . . . . . . . . . . . . . . . . . . . . .
Greater than $25 million . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
By state
Ohio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Michigan . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Indiana . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Illinois . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Kentucky . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tennessee . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Florida . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Pennsylvania . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
West Virginia . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Out-of-footprint . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 3,970
7,287
3,654
2,957
1,751
1,619
1,673
744
1,355
1,382
850
796
748
781
478
443
509
237
234
$31,468
62%
25
9
4
100%
30%
25
11
10
6
3
2
1
—
12
100%
9,034
8,620
5,823
4,903
3,124
3,178
2,135
2,348
2,245
1,678
1,237
911
1,027
1,335
971
639
676
729
413
3,497
6,303
3,121
2,449
1,851
1,330
1,511
602
1,151
1,222
861
862
648
645
423
401
456
164
188
7,464
7,289
4,896
4,060
2,964
2,508
1,943
1,938
1,714
1,434
1,144
965
878
857
768
603
593
531
278
51,026
27,685
42,827
49
26
13
12
100
33
23
10
10
6
2
2
1
1
12
100
66
24
7
3
100
31
26
10
10
7
1
2
—
—
13
100
55
26
12
7
100
35
23
10
10
7
1
2
1
—
11
100
(a) Outstanding refl ects total commercial customer loan and lease balances, net of unearned income and exposure refl ects total commercial customer lending commitments.
Risk Committee, the Credit Risk Committee and the Operational
Risk Committee. There are also new products and new initiatives
processes applicable to every line of business to ensure an appropri-
ate standard readiness assessment is performed before launching a
new product or initiative.
Signifi cant risk policies approved by the management gover-
nance committees are also reviewed and approved by the Board of
Directors Risk and Compliance Committee.
CREDIT RISK MANAGEMENT
The objective of the Bancorp’s credit risk management strategy
is to quantify and manage credit risk on an aggregate portfolio
basis as well as to limit the risk of loss resulting from an individual
customer default. Credit risk is managed through a combination of
conservative exposure limits and underwriting, documentation and
collection standards and overall counterparty limits. The Bancorp’s
credit risk management strategy also emphasizes diversifi cation on
a geographic, industry and customer level, regular credit examina-
tions and monthly management reviews of large credit exposures
and credits experiencing deterioration of credit quality. Lending
offi cers with the authority to extend credit are delegated specifi c
authority amounts, the utilization of which is closely monitored.
Lending activities are largely decentralized, while the Enterprise
Risk Management division manages the policy process centrally.
The Credit Risk Review function, within the Enterprise Risk
Management division, provides objective assessments of the qual-
26 Fifth Third Bancorp
ity of underwriting and documentation, the accuracy of risk grades
and the charge-off and reserve analysis process.
The Bancorp’s credit review process and overall assessment of
required reserves is based on ongoing quarterly assessments of the
probable estimated losses inherent in the loan and lease portfolio.
In addition to the individual review of larger commercial loans that
exhibit probable or observed credit weaknesses, the commercial
credit review process includes the use of a risk grading system. The
Bancorp utilizes two risk grading systems for commercial loans and
leases. The current risk grading system utilized for reserve analysis
purposes encompasses ten categories. The Bancorp also maintains
a dual risk rating system that provides for 13 probability of default
grade categories and an additional six grade categories measuring
loss factors given an event of default. The probability of default and
loss given default analyses are not separated in the ten grade risk
rating system. The Bancorp is in the process of completing signifi -
cant validation and testing of the dual risk rating system prior to
implementation for reserve analysis purposes. The dual risk rating
system is consistent with Basel II expectations and allows for more
precision in the analysis of commercial credit risk. Scoring systems
and delinquency monitoring are used to assess the credit risk in the
Bancorp’s homogenous consumer loan portfolios.
The Bancorp’s credit risk management strategy includes mini-
mizing size risk and other concentrations of risk. Table 18 provides a
breakout of the commercial loan and lease portfolio, including held
for sale, by major industry classifi cation, by size of credit and by state,
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The table below provides a breakout of the commercial nonaccrual loans and leases by loan size further illustrating the granularity of the Bancorp’s
commercial loan portfolio.
TABLE 19: SUMMARY OF COMMERCIAL NONACCRUAL LOANS AND LEASES BY LOAN SIZE
As of December 31
Less than $200,000 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$200,000 to $1 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1 million to $5 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5 million to $10 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$10 million to $15 million . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TABLE 20: SUMMARY OF NONPERFORMING AND UNDERPERFORMING ASSETS
2004
24%
39
24
13
—
100%
2003
23
34
28
15
—
100
2002
16
19
34
25
6
100
As of December 31 ($ in millions)
Commercial loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgages . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgages and construction . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total nonaccrual loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Renegotiated loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets, including other real estate owned . . . . . . . . . . . . . . . . . . . . .
Total nonperforming assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgages and construction . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card receivables . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgages and construction . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total ninety days past due loans and leases . . . . . . . . . . . . . . . . . . . . . .
2004
$110
51
13
24
30
228
1
74
303
22
13
13
43
51
142
Total underperforming assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$445
Nonperforming assets as a percent of total loans, leases and other
assets, including other real estate owned . . . . . . . . . . . . . . . . . . . . . . . .
.51%
Underperforming assets as a percent of total loans, leases and other
assets, including other real estate owned . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for loan and lease losses as a percent of total nonperforming
assets (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve for credit losses as a percent of total nonperforming assets . . . . . .
Reserve for loan and lease losses as a percent of total
.74
235
259
2003
2002
2001
2000
129
42
19
25
27
242
8
69
319
15
12
13
51
54
145
464
.61
.89
219
242
159
41
14
18
15
247
—
26
273
29
18
9
60
46
162
435
.59
.95
251
251
122
57
26
11
—
216
—
19
235
25
24
8
56
51
164
399
.57
.96
265
265
73
42
11
42
6
174
2
25
201
31
6
5
49
37
128
329
.47
.77
304
304
underperforming assets (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
185
Reserve for credit losses as a percent of total underperforming assets . . . .
185
(a) As of December 31, 2004, the reserve for unfunded commitments has been reclassifi ed from the reserve for loan and lease losses to other liabilities. The 2003 year-end reserve
for unfunded commitments has been reclassifi ed to conform to the current year presentation. The reserve for unfunded commitments balance was $72 million and $73 million
at December 31, 2004 and 2003, respectively. The reserve for credit losses is the sum of the reserve for loan and lease losses and the reserve for unfunded commitments.
160
176
156
156
157
157
150
166
illustrating the diversity and granularity of the Bancorp’s portfolio.
The commercial portfolio is further characterized by 88%
of outstanding balances and exposures concentrated within the
Bancorp’s primary market areas of Ohio, Kentucky, Indiana, Michi-
gan, Illinois, Florida, Tennessee, West Virginia and Pennsylvania.
Exclusive of a national large-ticket leasing business, the commercial
portfolio is characterized by 95% of outstanding balances and 93%
of exposures concentrated within these nine states. The mortgage
and construction segments of the commercial portfolio are charac-
terized by 98% of outstanding balances and exposures concentrated
within these nine states.
Analysis of Nonperforming Assets
Nonperforming assets include nonaccrual loans and leases on which
ultimate collectibility of the full amount of the interest is uncer-
tain, loans and leases which have been renegotiated to provide for a
reduction or deferral of interest or principal because of deterioration
TABLE 21: CHANGES IN RESERVE FOR LOAN AND LEASE LOSSES
For the Years Ended December 31 ($ in millions)
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reserve of acquired institutions and other . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Merger-related provision . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassifi cation of reserve related to unfunded commitments . . . . . . . . .
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
in the fi nancial position of the borrower and other assets, includ-
ing other real estate owned and repossessed equipment. Underper-
forming assets include nonperforming assets and loans and leases
past due 90 days or more as to principal or interest, which are not
already accounted for as nonperforming assets.
Commercial nonaccrual credits as a percent of loans improved
considerably in 2004 to .56% from .68% in 2003 and were primar-
ily driven by the Cincinnati, Columbus, Toledo, Indianapolis and
Evansville markets. Consumer nonaccrual credits as a percent of
loans increased slightly from .19% in 2003 to .21% in 2004 and
was not attributable to any particular market. Overall, nonaccrual
credits continue to represent a small portion of the portfolio at just
.38% as of December 31, 2004, compared to .46% as of December
31, 2003.
Total nonperforming assets were $303 million at December
31, 2004, down $16 million compared to $319 million at Decem-
ber 31, 2003. Total nonperforming assets as a percent of total loans,
2004
$697
(252)
—
268
—
—
$713
2003
683
(312)
—
399
—
(73)
697
2002
624
(187)
—
246
—
—
683
2001
609
(227)
6
201
35
—
624
2000
573
(109)
7
126
12
—
609
Fifth Third Bancorp 27
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 22: ATTRIBUTION OF RESERVE FOR LOAN AND LEASE LOSSES TO LOAN PORTFOLIOS
As of December 31 ($ in millions)
Reserve attributed to:
Commercial, fi nancial and agricultural loans . . . . . . . . . . . . . . . . . .
Real estate - commercial mortgage loans . . . . . . . . . . . . . . . . . . . . .
Real estate - construction loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential mortgage loans . . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease fi nancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total reserve for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit portfolios (excluding held for sale):
Commercial, fi nancial and agricultural loans . . . . . . . . . . . . . . . . . .
Real estate - commercial mortgage loans . . . . . . . . . . . . . . . . . . . . .
Real estate - construction loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential mortgage loans . . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease fi nancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans and leases (excluding held for sale) . . . . . . . . . . . . . . . . . . .
Reserve as a percent of loan and lease portfolios (excluding held for sale):
Commercial, fi nancial and agricultural loans . . . . . . . . . . . . . . . . . .
Real estate - commercial mortgage loans . . . . . . . . . . . . . . . . . . . . .
Real estate - construction loans . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential mortgage loans . . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease fi nancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unallocated (as a percent of total loans and leases) . . . . . . . . . . . . . .
2004
2003
2002(a)
2001(a)
2000(a)
$ 210
73
43
44
160
47
136
$ 713
$16,058
7,636
4,726
6,988
18,923
5,477
$59,808
1.31%
.96
.90
.63
.85
.86
.23
234
77
34
29
146
64
113
697
14,209
6,894
3,636
4,425
17,432
5,712
52,308
1.65
1.12
.94
.66
.84
1.12
.22
159
117
41
43
141
132
50
683
12,743
5,885
3,327
3,495
15,116
5,362
45,928
1.24
1.98
1.24
1.24
.93
2.46
.11
118
102
32
31
132
101
108
624
10,807
6,085
3,356
4,505
12,565
4,230
41,548
1.09
1.69
.97
.69
1.05
2.38
.26
107
103
28
18
134
113
106
609
10,669
6,227
3,223
5,635
11,551
5,225
42,530
1.00
1.65
.87
.31
1.16
2.17
.25
Total loans and leases (excluding held for sale) . . . . . . . . . . . . . . . . . . .
(a) The reserve for loan and lease losses in 2002, 2001 and 2000 includes funded and unfunded commitments. As of December 31, 2004, the reserve for unfunded commitments
has been reclassifi ed from the reserve for loan and lease losses to other liabilities. The 2003 year-end reserve for unfunded commitments has been reclassifi ed to conform to the
current period presentation.
1.19%
1.50
1.49
1.33
1.43
TABLE 23: SUMMARY OF CREDIT LOSS EXPERIENCE
For the Years Ended December 31 ($ in millions)
2004
2003
2002
2001
2000
Losses charged off:
Commercial, fi nancial and agricultural loans . . . . . . . . . . . . . . . . . . .
Real estate - commercial mortgage loans . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential mortgage loans . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease fi nancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries of losses previously charged off:
Commercial, fi nancial and agricultural loans . . . . . . . . . . . . . . . . . . .
Real estate - commercial mortgage loans . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential mortgage loans . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease fi nancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total recoveries . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net losses charged off:
Commercial, fi nancial and agricultural loans . . . . . . . . . . . . . . . . . . .
Real estate - commercial mortgage loans . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential mortgage loans . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease fi nancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (95)
(14)
(7)
(15)
(156)
(34)
(321)
14
5
—
—
41
9
69
(81)
(9)
(7)
(15)
(115)
(25)
Total net losses charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (252)
Net charge-offs as a percent of average loans and leases (excluding held for sale):
Commercial, fi nancial and agricultural loans . . . . . . . . . . . . . . . . . . .
Real estate - commercial mortgage loans . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - residential mortgage loans . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease fi nancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net charge-offs as a percent of average loans and leases (excluding
held for sale) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
.54%
.12
.15
.27
.63
.46
.45%
(152)
(9)
(3)
(24)
(136)
(56)
(380)
16
2
1
—
40
9
68
(136)
(7)
(2)
(24)
(96)
(47)
(312)
1.00
.10
.09
.57
.58
.84
.63
(81)
(18)
(6)
(10)
(115)
(43)
(273)
20
5
3
—
46
12
86
(61)
(13)
(3)
(10)
(69)
(31)
(187)
.52
.23
.12
.23
.49
.65
.43
(106)
(12)
(2)
(7)
(117)
(65)
(309)
21
10
—
—
39
12
82
(85)
(2)
(2)
(7)
(78)
(53)
(227)
.79
.04
.06
.14
.65
1.13
.54
(37)
(22)
(1)
(3)
(73)
(40)
(176)
16
10
—
1
31
9
67
(21)
(12)
(1)
(2)
(42)
(31)
(109)
.20
.21
.03
.04
.41
.58
.26
28 Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
leases and other assets, including other real estate owned declined
to .51% as of December 31, 2004 from .61% as of December
31, 2003. Loans and leases 90 days past due have also declined
at December 31, 2004 compared to December 31, 2003. The
Bancorp expects credit quality trends in 2005 to remain similar
to 2004.
At December 31, 2004, there were $40.9 million of loans
and leases currently performing in accordance with contractual
terms, but for which there were serious doubts as to the ability of
the borrower to comply with such terms. For the years 2004 and
2003, interest income of $6 million and $5 million, respectively,
was recorded on nonaccrual and renegotiated loans and leases.
For the years 2004 and 2003, additional interest income of $33
million and $23 million, respectively, would have been recorded if
the nonaccrual and renegotiated loans and leases had been current
in accordance with the original terms.
Analysis of Net Loan Charge-offs
Net charge-offs as a percent of average loans and leases outstanding
decreased 18 bp to .45% for 2004 from .63% for 2003. The decrease
in net charge-offs in the current year compared to 2003 was primar-
ily due to lower net charge-offs in commercial loans and commercial
and consumer lease fi nancing. Total commercial loan net charge-offs
decreased $55 million to $81 million in 2004 compared to $136
million in 2003. Commercial loan net charge-offs as a percentage of
average commercial loans outstanding were .54% in 2004, compared
to 1.00% in 2003. The decrease in commercial loan net charge-offs
compared to 2003 was concentrated in several markets, includ-
ing Columbus and Chicago. The Bancorp experienced signifi cant
improvement in commercial loan net charge-off activity in 2004
as compared to 2003 as a result of overall improving credit trends
and economic outlook. Commercial mortgage net charge-offs were
comparable to the low level seen in 2003. Commercial leasing net
charge-offs improved due to charge-offs related to two commercial
airline leases totaling $20 million occurring in 2003. Total consumer
loan net charge-offs in 2004 increased to $115 million compared
with $96 million in 2003, with increases not concentrated in any
specifi c market. The ratio of consumer loan net charge-offs to aver-
age loans outstanding increased slightly to .63% in 2004 from .58%
in 2003, and the ratio for residential mortgage loan net charge-offs
improved from .57% to .27% due to improvements in most of the
Bancorp’s markets.
Provision and Reserve for Loan and Lease Losses
The reserve for loan and lease losses provides coverage for probable
and estimable losses in the loan and lease portfolio. The Bancorp
evaluates the reserve each quarter to determine that it is adequate
to cover inherent losses. In the current year, the Bancorp has not
substantively changed any aspect to its overall approach in the
determination of the reserve for loan and lease losses, and there have
been no material changes in assumptions or estimation techniques
as compared to prior periods that impacted the determination of the
current period reserve. Table 21 shows the changes in the reserve for
loan and lease losses during 2004. As of December 31, 2004, the
reserve for unfunded commitments has been reclassifi ed from the
reserve for loan and lease losses to other liabilities. The December 31,
2003 reserve for unfunded commitments and all subsequent activity
has been reclassifi ed to conform to current period presentation.
The increase in the balance of the reserve for loan and lease
losses in 2004 compared to 2003 is primarily due to the increase
in the total loan and lease portfolio. The reserve for loan and lease
losses at December 31, 2004 decreased to 1.19% of the total loan
and lease portfolio compared to 1.33% at December 31, 2003
due to improvements in credit quality trends. Additionally, the
Bancorp’s long history of low exposure limits, minimal exposure to
national or sub-prime lending businesses, centralized risk manage-
ment and its diversifi ed portfolio reduces the likelihood of signifi -
cant unexpected credit losses. Table 22 provides the amount of the
reserve for loan and lease losses by category.
MARKET RISK MANAGEMENT
Market risk arises from fl 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 the exposure to adverse changes in net interest
income due to changes in interest rates. Management considers
interest rate risk a prominent market risk in terms of its poten-
tial impact on earnings. Interest rate risk can occur for any one or
more of the following reasons: (i) assets and liabilities may mature
or reprice at different times; (ii) short-term and long-term market
interest rates may change by different amounts or; (iii) the remain-
ing maturity of various assets or liabilities may shorten or lengthen
as interest rates change. In addition to the direct impact of interest
rate changes on net interest income, interest rates can indirectly
impact earnings through their effect on loan demand, credit losses,
mortgage origination fees, the value of servicing rights and other
sources of the Bancorp’s earnings. Consistency of the Bancorp’s net
interest income is largely dependent upon the effective manage-
ment of interest rate risk.
Net Interest Income Simulation Model
The Bancorp employs a variety of measurement techniques to iden-
tify and manage its interest rate risk, including the use of an earn-
ings simulation model to analyze net interest income sensitivity to
changing interest rates. The model is based on actual cash fl ows and
repricing characteristics for all of the Bancorp’s fi nancial instru-
ments and incorporates market-based assumptions regarding the
effect of changing interest rates on the prepayment rates of certain
assets and liabilities. The model also includes senior management
projections for activity levels in each of the product lines offered
by the Bancorp and incorporates the loss of free funding result-
ing from the Bancorp’s share repurchase activity. Actual results
will differ from these simulated results due to timing, magnitude
and frequency of interest rate changes as well as changes in market
conditions and management strategies.
The Bancorp’s Asset/Liability Risk Management Committee
(“ALCO”), which includes senior management representatives and
is accountable to the Risk and Compliance Committee of the Board
of Directors, monitors and manages interest rate risk within Board
approved policy limits. In addition to the risk management activi-
ties of ALCO, the Bancorp created a Market Risk Management
department as part of the Enterprise Risk Management Division,
which provides independent oversight of market risk activities. The
Bancorp’s current interest rate risk policy limits are determined by
measuring the anticipated change in net interest income over a 12-
month and 24-month horizon assuming a 200 bp linear increase
or decrease in all interest rates. In accordance with the current
policy, the rate movements are assumed to occur over one year and
are sustained thereafter. Given the low level of interest rates, the
Bancorp’s ALCO has measured the risk of a decrease in interest
rates at 100 basis points. Additionally, in order to further illus-
trate the estimated earnings sensitivity of interest rate changes, the
Bancorp has included the anticipated change to net interest income
over a 12-month and 24-month horizon assuming a 100 bp linear
increase. The following table shows the Bancorp’s estimated earn-
ings sensitivity profi le on the asset and liability positions as of
December 31, 2004:
TABLE 24: ESTIMATED EARNINGS SENSITIVITY PROFILE
Change in Interest Rates (bp)
+200
+100
-100
Change in
Net Interest Income
12 Months
.34%
.32
.04
24 Months
4.07
2.86
(4.05)
Fifth Third Bancorp 29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Based upon expected repayments, the following is a summary of the remaining maturities of loans and leases held for investment as of Decem-
ber 31, 2004:
TABLE 25: LOAN AND LEASE MATURITIES
($ in millions)
Less than 1 year
1-5 years
Greater than 5 years
Commercial, fi nancial and agricultural . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial mortgage loans . . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease fi nancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 9,503
2,124
2,657
1,957
5,583
1,524
$ 23,348
5,641
4,729
1,669
2,527
9,465
3,163
27,194
914
783
400
2,504
3,875
790
9,266
Total
16,058
7,636
4,726
6,988
18,923
5,477
59,808
Segregated by sensitivity to interest rate changes, the following is a summary of expected repayments exceeding one year as of December 31, 2004:
TABLE 26: LOAN AND LEASE INTEREST RATE SENSITIVITY
($ in millions)
Commercial, fi nancial and agricultural . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - commercial mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Real estate - construction loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Lease fi nancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
TABLE 27: MATURITY DISTRIBUTION OF CERTIFICATES – $100,000 AND OVER
As of December 31, 2004 ($ in millions)
Interest Rate
Predetermined
Floating or Adjustable
$ 1,992
2,228
478
1,647
6,438
3,953
$16,736
4,563
3,284
1,591
3,384
6,902
—
19,724
Three months or less . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over three months through six months . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over six months through one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over one year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 908
292
422
499
$2,121
The balance sheet repositioning in the fourth quarter of 2004
changed the interest rate sensitivity profi le of the Bancorp from
liability sensitive to asset sensitive (i.e., from a negative outlook to
a positive outlook in a rising rate environment). Management does
not expect any signifi cant adverse effect to net interest income in
2005 based on the current composition of the portfolio, antici-
pated trends in rates and earning asset and deposit growth.
Use of Derivatives to Manage Interest Rate Risk
An integral component of the Bancorp’s interest risk management
strategy is its use of derivative instruments to minimize signifi -
cant unplanned fl uctuations in earnings and cash fl ows caused
by market volatility. Examples of derivative instruments that the
Bancorp may use as part of its interest rate risk management strate-
gy include interest rate swaps, interest rate fl oors, interest rate caps,
forward contracts, principal only swaps, options and swaptions.
Interest rate swap contracts are exchanges of interest payments,
such as fi xed-rate payments for fl oating-rate payments, based on
a common notional amount and maturity date. Interest rate fl oors
protect against declining rates, while interest rate caps protect
against rising interest rates. Forwards are contracts in which the
buyer agrees to purchase, and the seller agrees to make delivery of,
a specifi c fi nancial instrument at a predetermined price or yield.
Swaptions provide the buyer the option to exchange streams of
payments with the seller over a specifi ed period of time.
As part of its overall risk management strategy relative to
its mortgage banking activity, the Bancorp enters into forward
contracts accounted for as free-standing derivatives to economically
hedge interest rate lock commitments, which are also considered
free-standing derivatives.
The Bancorp also establishes derivative contracts with repu-
table third parties to economically hedge signifi cant exposures
assumed in commercial customer accommodation derivative
contracts. Generally, these contracts have similar terms in order to
protect the Bancorp from the market volatility. Credit risks arise
from the possible inability of counterparties to meet the terms
of their contracts, which the Bancorp minimizes through credit
30 Fifth Third Bancorp
approvals, limits and monitoring procedures. The notional amount
and fair values of these derivatives as of December 31, 2004 are
included in Note 9 to the Consolidated Financial Statements.
Mortgage Servicing Rights and Interest Rate Risk
The net carrying amount of the MSR portfolio was $339 million
as of December 31, 2004. The Bancorp maintains a non-qualifying
hedging strategy relative to its mortgage banking activity, including
consultation with an independent third-party specialist, in order to
manage a portion of the risk associated with changes in impairment
on its MSR portfolio as a result of changing interest rates. This
strategy includes the purchase of free-standing derivatives (princi-
pal only swaps, swaptions, fl oors, interest rate swaps, options and
forward contracts). The mark-to-market adjustments associated
with these derivatives are expected to economically hedge a portion
of the change in value of the MSR portfolio caused by fl uctuating
discount rates, earnings rates and prepayment speeds. The value
of servicing rights can fl uctuate sharply depending on changes in
interest rates and other factors. Generally, as interest rates decline
and loans are prepaid to take advantage of refi nancing, the total
value of existing servicing rights declines because no further servic-
ing fees are collected on repaid loans.
The increase in interest rates during 2004 and the resulting
impact of changing prepayment speeds led to the recovery of $60
million in temporary impairment in the MSR portfolio as compared
to the $3 million in temporary impairment recognized in 2003.
The servicing rights are deemed impaired when a borrower’s loan
rate is distinctly higher than prevailing market rates. See Note 8
to the Consolidated Financial Statements for further discussion on
servicing rights.
Foreign Currency Risk
The Bancorp enters into foreign exchange derivative contracts
for the benefi t of commercial customers involved in international
trade to hedge their exposure to foreign currency fl uctuations. The
Bancorp has in place several controls to ensure excessive risk is not
being taken in providing this service to customers. These include
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 28: AGENCY RATINGS
As of February 9, 2005
Fifth Third Bancorp:
Moody’s
Standard and Poor’s
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Senior debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fifth Third Bank and Fifth Third Bank (Michigan):
Short-term deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term deposit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Prime-1
Aa2
Prime-1
Aa1
A-1
A+
A-1+
AA-
TABLE 29: CAPITAL RATIOS
As of December 31 ($ in millions)
Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-weighted assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Risk-based capital ratios:
Tier 1 capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total capital . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leverage ratio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
$ 8,522
10,176
82,633
10.31%
12.31
8.89
2003
8,272
10,096
74,477
11.11
13.56
9.23
2002
7,747
8,935
65,444
11.84
13.65
9.84
2001
7,433
8,656
59,491
12.49
14.55
10.64
Fitch
F1+
AA-
F1+
AA
2000
6,377
7,554
55,943
11.40
13.50
9.49
TABLE 30: SHARE REPURCHASES
For the Years Ended December 31
2004
2003
2002
Shares authorized for repurchase at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Additional authorizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares repurchases (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares authorized for repurchase at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average price paid per share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(a) Excludes 40,850 shares repurchased during 2004 in connection with various employee compensation plans. These repurchases are not included against the maximum number
14,137,512
40,000,000
(18,452,400)
5,600,681
20,000,000
(11,463,169)
17,338,791
—
(11,738,110)
35,685,112
14,137,512
5,600,681
$53.48
57.13
61.30
of shares that may yet be repurchased under the Board of Directors’ authorization.
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
Fifth Third Bancorp 31
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
December 31, 2004 was 9.34%. The FRB adopted quantitative
measures that assign risk weightings to assets and off-balance sheet
items and also defi ne and set minimum regulatory capital require-
ments (risk-based capital ratios). The guidelines defi ne “well-capi-
talized” ratios of Tier 1, total capital and leverage as 6%, 10% and
5%, respectively. The Bancorp exceeded these “well-capitalized”
ratios at December 31, 2004 and 2003. The Bancorp expects to
maintain these ratios above the well-capitalized levels.
Dividend Policy
The Bancorp’s common stock dividend policy refl ects its earnings
outlook, desired payout ratios, the need to maintain adequate capi-
tal levels and alternative investment opportunities. In 2004, the
Bancorp’s annual dividend increased to $1.31 from $1.13 in 2003.
On June 15, 2004, the Bancorp announced that its Board
of Directors had authorized management to purchase 40 million
shares of the Bancorp’s common stock through the open market
or in any private transaction. The timing of the purchases and
the exact number of shares to be purchased depends upon market
conditions. The authorization does not include specifi c price targets
or an expiration date. The Bancorp’s repurchase of equity securities
is shown in Table 30.
On January 10, 2005, the Bancorp repurchased 35.5 million
shares of its common stock, approximately six percent of total
outstanding shares, for approximately $1.6 billion in an overnight
accelerated share repurchase transaction. The transaction provides
that the counterparty will purchase shares in the market over a
period of time. Upon completion, the Bancorp will receive or pay
a price adjustment in the form of cash or shares, at its election, that
is largely based on the volume weighted-average price of the shares
purchased by the counterparty. On January 18, 2005, the Bancorp
announced that its Board of Directors had authorized manage-
ment to purchase 20 million shares of the Bancorp’s common stock
through the open market or in any private transaction. The timing
of the purchases and the exact number of shares to be purchased
depends upon market conditions and may commence upon the
completion of the overnight accelerated share repurchase transac-
tion. The authorization does not include specifi c price targets or an
expiration date.
The Bancorp’s stock repurchase program is an important
element of its capital planning activities. The Bancorp views share
repurchases as an effective means of delivering value to shareholders.
Off-Balance Sheet Arrangements
The Bancorp consolidates all of its majority-owned subsidiaries.
Other entities, including certain joint ventures, in which there is
greater than 20% ownership, but upon which the Bancorp does
not possess, nor can it exert, signifi cant infl uence or control, are
accounted for by equity method accounting and not consolidated.
Those entities in which there is less than 20% ownership are gener-
ally carried at the lower of cost or fair value.
The Bancorp does not participate in any trading activities
involving commodity contracts that are accounted for at fair value.
In addition, the Bancorp has no fair value contracts for which a
lack of marketplace quotations necessitates the use of fair value
estimation techniques. The Bancorp’s derivative product policy and
investment policies provide a framework within which the Bancorp
and its affi liates may use certain authorized fi nancial derivatives as
a market risk management tool in meeting the Bancorp’s ALCO
capital planning directives, to hedge changes in fair value of its
largely fi xed rate mortgage servicing rights portfolio or to provide
qualifying customers access to the derivative products market.
These policies are reviewed and approved annually by the Audit
Committee and the Risk and Compliance Committee of the Board
of Directors.
32 Fifth Third Bancorp
As part of the Bancorp’s market risk management, the Bancorp
may transfer, subject to credit recourse, certain types of individual
fi nancial assets to a non-consolidated qualifi ed special purpose
entity (“QSPE”) that is wholly owned by an independent third-
party. The accounting for QSPEs is currently under review by the
FASB, and the conditions for consolidation or non-consolidation
of such entities could change. During the year ended December
31, 2004, certain commercial loans (primarily fi xed-rate short-term
investment grade) were transferred to the QSPE. Generally, the
loans transferred provide a lower yield due to their investment grade
nature and therefore transferring these loans to the QSPE allows the
Bancorp to reduce its exposure to these lower yielding loan assets
while maintaining these customer relationships. These individual
loans are transferred at par with no gain or loss recognized and qual-
ify as sales, as set forth in SFAS No. 140, “Accounting for Transfers
and Servicing of Financial Assets and Extinguishments of Liabilities
– a Replacement of FASB Statement No. 125.” At December 31,
2004, the outstanding balance of loans transferred was $1.9 billion.
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.
The Bancorp utilizes securitization trusts formed by inde-
pendent third parties to facilitate the securitization process of
residential mortgage loans, certain fl oating rate home equity lines
of credit, certain auto loans and other consumer loans. The cash
fl ows to and from the securitization trusts are principally limited
to the initial proceeds from the securitization trust at the time of
sale with subsequent cash fl ows relating to retained interests. The
Bancorp’s securitization policy permits the retention of subordinat-
ed tranches, servicing rights, interest-only strips, residual interests,
credit recourse, other residual interests and, in some cases, a cash
reserve account. At December 31, 2004, the Bancorp had retained
servicing assets totaling $352 million, subordinated tranche secu-
rity interests totaling $34 million and residual interests totaling $52
million.
The Bancorp had the following cash fl ows with these uncon-
solidated QSPEs during the year ended December 31, 2004 and
2003.
TABLE 31: CASH FLOWS WITH UNCONSOLIDATED QSPEs
For the Years Ended December 31 ($ in millions)
Proceeds from transfers, including new
2004
2003
securitizations . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,379
1,345
Proceeds from collections reinvested in
162
164
32
revolving-period securitizations . . . . . . . . . . . . .
Transfers received from QSPEs . . . . . . . . . . . . . . . .
Fees received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
46
116
25
At December 31, 2004, the Bancorp had provided credit
recourse on approximately $569 million of residential mortgage
loans sold to unrelated third parties. In the event of any customer
default, pursuant to the credit recourse provided, the Bancorp
is required to reimburse the third party. The maximum amount
of credit risk in the event of nonperformance by the underlying
borrowers is equivalent to the total outstanding balance of $569
million. In the event of nonperformance, the Bancorp has rights to
the underlying collateral value attached to the loan. Consistent with
its overall approach in estimating credit losses for various categories
of residential mortgage loans held in its loan portfolio, the Bancorp
maintains an estimated credit loss reserve of $17 million relating to
these residential mortgage loans sold.
Contractual Obligations and Commitments
The Bancorp has certain obligations and commitments to make
future payments under contracts. At December 31, 2004, the
aggregate contractual obligations and commitments were:
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 32: CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
As of December 31, 2004 ($ in millions)
Contractually obligated payments due by period:
Total deposits (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on fi xed-rate long-term debt (c) . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term borrowings (d) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noncancelable leases (e) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchase obligations (f ) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total contractually obligated payments due by period . . . . . . . . . . . . . . . . .
Other commitments by expiration period:
Letters of credit (g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commitments to extend credit (g) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Less than
1 year
$54,504
3,306
169
10,026
49
29
$68,083
$ 1,817
18,698
1-3 years
4-5 years
Greater than
5 years
195
4,587
240
—
87
22
5,131
2,360
12,614
21
3,246
178
—
69
8
3,522
1,452
—
3,506
2,844
717
—
186
—
7,253
294
—
Total
58,226
13,983
1,304
10,026
391
59
83,989
5,923
31,312
Total other commitments by expiration period . . . . . . . . . . . . . . . . . . . . . .
37,235
(a) Includes demand, interest checking, savings, money market, other time, certifi cates-$100,000 and over and foreign offi ce deposits. For additional information see the Deposits
$20,515
14,974
1,452
294
discussion in the Balance Sheet Analysis section of Management’s Discussion and Analysis.
(b) See Note 11 of the Notes to the Consolidated Financial Statements for additional information on these debt instruments.
(c) Represents expected interest expense to be incurred on fi xed-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 and other debt instruments as discussed in Note 10 of the Notes to the Consolidated
Financial Statements.
(e) See Note 4 of the Notes to the Consolidated Financial Statements for additional information on these noncancelable leases.
(f ) Represents agreements to purchase goods or services.
(g) See Note 12 of the Notes to the Consolidated Financial Statements for additional information on these commitments.
CONTROLS AND PROCEDURES
The Bancorp maintains disclosure controls and procedures that
are designed to ensure that information required to be disclosed in
the Bancorp’s Securities Exchange Act of 1934 (“Exchange Act”)
reports is recorded, processed, summarized and reported within
the time periods specifi ed in the Securities and Exchange Commis-
sion’s rules and forms, and that such information is accumulated
and communicated to the Bancorp’s management, including its
Chief Executive Offi cer and Chief Financial Offi cer, as appropri-
ate, to allow timely decisions regarding required disclosure based
closely on the defi nition of “disclosure controls and procedures”
in Exchange Act Rules 13a-15(e) and 15d-15(e). In designing and
evaluating the disclosure controls and procedures, management
recognized that any controls and procedures, no matter how well
designed and operated, can provide only reasonable assurance of
achieving the desired control objectives, and management necessar-
ily was required to apply its judgment in evaluating the cost-benefi t
relationship of possible controls and procedures.
As of the end of the period covered by this report, the Bancorp
carried out an evaluation, under the supervision and with the
participation of the Bancorp’s management, including the Bancorp’s
Chief Executive Offi cer and Chief Financial Offi cer, of the effec-
tiveness of the design and operation of the Bancorp’s disclosure
controls and procedures. Based on the foregoing, the Bancorp’s
Chief Executive Offi cer and Chief Financial Offi cer concluded
that the Bancorp’s disclosure controls and procedures were effec-
tive, in all material respects, to ensure that information required to
be disclosed in the reports the Bancorp fi les and submits under the
Exchange Act is recorded, processed, summarized and reported as
and when required.
The Bancorp’s management also conducted an evaluation of
internal control over fi nancial reporting to determine whether any
changes occurred during the year covered by this report that have
materially affected, or are reasonably likely to materially affect, the
Bancorp’s internal control over fi nancial reporting. Based on this
evaluation, there has been no such change during the year covered
by this report.
Fifth Third Bancorp 33
MANAGEMENT’S ASSESSMENT AS TO THE EFFECTIVENESS OF INTERNAL CONTROL OVER
FINANCIAL REPORTING
The Management of Fifth Third Bancorp is responsible for establishing and maintaining adequate internal control, designed to provide reasonable
assurance regarding the reliability of fi nancial reporting and the preparation of fi nancial statements for external purposes in accordance with gener-
ally accepted accounting principles. Internal control over fi nancial reporting of Fifth Third Bancorp and subsidiaries (“the Bancorp”) includes those
policies and procedures that: (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly refl ect the transactions of the
Bancorp; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of fi nancial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the Bancorp are being made only in accordance with authorizations of
management and directors of the Bancorp; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use or disposition of the Bancorp’s assets that could have a material effect on the fi nancial statements.
All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circum-
vention of overriding controls. Accordingly, even effective internal control can provide only reasonable assurance with respect to fi nancial statement
preparation. Further, because of changes in conditions, the effectiveness of internal control may vary over time.
The Bancorp’s Management assessed the effectiveness of the Bancorp’s internal control over fi nancial reporting as of December 31, 2004 as required
by Section 404 of the Sarbanes Oxley Act of 2002. Management’s assessment is based on the criteria established in the Internal Control — Integrated
Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and was designed to provide reasonable assurance that
the Bancorp maintained effective internal control over fi nancial reporting as of December 31, 2004. Based on this assessment, Management believes
that the Bancorp maintained effective internal control over fi nancial reporting as of December 31, 2004.
The Bancorp’s independent registered public accounting fi rm, that audited the Bancorp’s consolidated fi nancial statements included in this
annual report, has issued an attestation report on our internal control over fi nancial reporting as of December 31, 2004 and Bancorp Management’s
assessment of the internal control over fi nancial reporting. This report appears below.
George A. Schaefer, Jr.
President and Chief Executive Offi cer
February 9, 2005
R. Mark Graf
Senior Vice President and Chief Financial Offi cer
February 9, 2005
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Fifth Third Bancorp:
We have audited management’s assessment, included in the accompanying Management’s Assessment as to the Effectiveness of Internal Control
over Financial Reporting, that Fifth Third Bancorp and subsidiaries (the “Bancorp”) maintained effective internal control over fi nancial reporting as
of December 31, 2004, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission. The Bancorp’s management is responsible for maintaining effective internal control over fi nancial reporting and for its
assessment of the effectiveness of internal control over fi nancial reporting. Our responsibility is to express an opinion on management’s assessment and
an opinion on the effectiveness of the Bancorp’s internal control over fi nancial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards
require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over fi nancial reporting was main-
tained in all material respects. Our audit included obtaining an understanding of internal control over fi nancial reporting, evaluating management’s
assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we considered
necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.
A company’s internal control over fi nancial reporting is a process designed by, or under the supervision of, the company’s principal executive and
principal fi nancial offi cers, or persons performing similar functions, and effected by the company’s board of directors, management, and other person-
nel to provide reasonable assurance regarding the reliability of fi nancial reporting and the preparation of fi nancial statements for external purposes in
accordance with generally accepted accounting principles. A company’s internal control over fi nancial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly refl ect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of fi nancial statements in accordance with
generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of
management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material effect on the fi nancial statements.
Because of the inherent limitations of internal control over fi nancial reporting, including the possibility of collusion or improper management
override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evalua-
tion of the effectiveness of the internal control over fi nancial reporting to future periods are subject to the risk that the controls may become inadequate
because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, management’s assessment that the Bancorp maintained effective internal control over fi nancial reporting as of December 31,
2004, is fairly stated, in all material respects, based on the criteria established in Internal Control—Integrated Framework issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Also in our opinion, the Bancorp maintained, in all material respects, effective internal
control over fi nancial reporting as of December 31, 2004, based on the criteria established in Internal Control—Integrated Framework issued by the
Committee of Sponsoring Organizations of the Treadway Commission.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated
fi nancial statements as of and for the year ended December 31, 2004 of the Bancorp and our report dated February 9, 2005 (which includes an
explanatory paragraph related to the adoption on January 1, 2004 of the fair value recognition provisions of Statement of Financial Accounting Stan-
dards (SFAS) No. 123, “Accounting for Stock-Based Compensation,” and the adoption of Financial Accounting Standards Board Interpretation No.
46, “Consolidation of Variable Interest Entities”) expressed an unqualifi ed opinion on those fi nancial statements.
Cincinnati, Ohio
February 9, 2005
34 Fifth Third Bancorp
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Fifth Third Bancorp:
We have audited the accompanying consolidated balance sheets of Fifth Third Bancorp and subsidiaries (the “Bancorp”) as of December
31, 2004 and 2003, and the related consolidated statements of income, changes in shareholders’ equity, and cash fl ows for each of the three
years in the period ended December 31, 2004. These fi nancial statements are the responsibility of the Bancorp’s management. Our responsibil-
ity is to express an opinion on these fi nancial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audit to obtain reasonable assurance about whether the fi nancial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the fi nancial statements. An
audit also includes assessing the accounting principles used and signifi cant estimates made by management, as well as evaluating the overall
fi nancial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated fi nancial statements present fairly, in all material respects, the fi nancial position of Fifth Third Bancorp
and subsidiaries at December 31, 2004 and 2003, and the results of their operations and their cash fl ows for each of the three years in the
period ended December 31, 2004, in conformity with accounting principles 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 Standards (SFAS) No.
123, “Accounting for Stock-Based Compensation,” using the retroactive restatement method. As further discussed in Note 1 – New Account-
ing Pronouncements, the Bancorp adopted the provisions of Financial Accounting Standards Board Interpretation No. 46, “Consolidation of
Variable Interest Entities,” effective July 1, 2003.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the effec-
tiveness of the Bancorp’s internal control over fi nancial reporting as of December 31, 2004, based on the criteria established in Internal
Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated
February 9, 2005 expressed an unqualifi ed opinion on management’s assessment of the effectiveness of the Bancorp’s internal control over
fi nancial reporting and an unqualifi ed opinion on the effectiveness of the Bancorp’s internal control over fi nancial reporting.
Cincinnati, Ohio
February 9, 2005
Fifth Third Bancorp 35
CONSOLIDATED STATEMENTS OF INCOME
For the Years Ended December 31 ($ in millions, except per share data)
Interest Income
Interest and fees on loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on securities:
Taxable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exempt from income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest on securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest on other short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest Expense
Interest on 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total interest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Interest Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Interest Income After Provision for Loan and Lease Losses . . . . . . . . . . . . . . . . . . . .
Noninterest Income
Electronic payment processing revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Service charges on deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mortgage banking net revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investment advisory revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease revenue . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities (losses) gains, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities gains, net – non-qualifying hedges on mortgage servicing rights . . . . . . . . . . . . . .
Total noninterest income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Noninterest Expense
Salaries, wages and incentives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Employee benefits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net occupancy expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total noninterest expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from Continuing Operations Before Income Taxes, Minority Interest
and Cumulative Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from Continuing Operations Before Minority Interest and Cumulative Effect . . . . .
Minority interest, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income from Continuing Operations Before Cumulative Effect . . . . . . . . . . . . . . . . . . . . . .
Income from discontinued operations, net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income Before Cumulative Effect . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of change in accounting principle, net of tax . . . . . . . . . . . . . . . . . . . . . . .
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Income Available to Common Shareholders . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share from discontinued operations, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share from cumulative effect of change in accounting principle, net . . . . . . . . .
Earnings Per Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per diluted share from continuing operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per diluted share from discontinued operations, net . . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per diluted share from cumulative effect of change in accounting principle, net . . .
Earnings Per Diluted Share . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See Notes to Consolidated Financial Statements.
36 Fifth Third Bancorp
2004)
$2,847)
1,217)
45)
1,262)
5)
4,114)
174)
58)
39)
162)
48)
58)
539)
77)
15)
78)
393)
1,102)
3,012)
268)
2,744)
622)
515)
178)
360)
671)
156)
(37)
—)
2,465)
1,018)
261)
84)
185)
114)
1,310)
2,972)
2,237)
712)
1,525)
—)
1,525)
—)
1,525)
—)
$1,525)
$1,524)
$ 2.72)
—)
—)
$ 2.72)
$ 2.68)
—)
—)
$ 2.68)
2003)
2,711)
1,226)
51)
1,277)
3)
3,991)
189)
64)
32)
196)
63)
44)
588)
80)
—)
55)
363)
1,086)
2,905)
399)
2,506)
575)
485)
302)
332)
581)
124)
81)
3)
2,483)
1,031)
240)
82)
159)
94)
945)
2,551)
2,438)
786)
1,652)
(20)
1,632)
44)
1,676)
(11)
1,665)
1,664)
2.85)
(.08)
(.02)
2.91)
2.81)
(.08)
(.02)
2.87)
2002)
2,810)
1,257)
56)
1,313)
6)
4,129)
296)
158)
27)
335)
77)
35)
928)
54)
—)
67)
381)
1,430)
2,699)
246)
2,453)
512)
431)
188)
325)
580)
—)
114)
33)
2,183)
1,029)
201)
79)
142)
—)
886)
2,337)
2,299)
734)
1,565)
(38)
1,527)
4)
1,531)
—)
1,531)
1,530)
2.63)
.01)
—)
2.64)
2.58)
.01)
—)
2.59)
CONSOLIDATED BALANCE SHEETS
As of December 31 ($ in millions, except share data)
Assets
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale securities (amortized cost 2004–$24,801 and 2003–$29,076) . . . . . . . . . . . . . . . . . . . . . . . . . .
Held-to-maturity securities (fair value 2004–$255 and 2003–$135) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans and leases:
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Con struc tion loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Com mer cial mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Com mer cial lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Res i den tial mortgage loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Con sum er loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Con sum er lease financing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Re serve for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans and leases, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Operating lease equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing rights . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities
Deposits:
Demand . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
In ter est checking . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Savings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Money market . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other time . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Certificates–$100,000 and over . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Foreign office . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term bank notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued taxes, interest and expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ Equity
Common stock (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Preferred stock (b) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Capital surplus . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Retained earnings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities and Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
2003)
$ 2,561)
24,687)
255)
77)
532)
559)
16,058)
4,726)
7,636)
4,634)
6,988)
18,923)
2,273)
(1,430)
59,808)
(713)
59,095)
1,315)
304)
397)
979)
150)
352)
3,193)
$94,456)
$13,486)
19,481)
8,310)
4,321)
6,837)
2,121)
3,670)
58,226)
4,714)
775)
4,537)
2,216)
1,081)
13,983)
85,532)
1,295)
9)
1,934)
7,269)
(169)
(1,414)
8,924)
2,359)
28,999)
135)
55)
268)
1,881)
14,209)
3,636)
6,894)
4,430)
4,425)
17,432)
2,709)
(1,427)
52,308)
(697)
51,611)
1,061)
767)
408)
738)
195)
299)
2,478)
91,254)
12,142)
19,757)
7,375)
3,201)
6,201)
1,856)
6,563)
57,095)
6,928)
500)
5,742)
2,200)
1,059)
9,063)
82,587)
1,295)
9)
1,964)
6,481)
(120)
(962)
8,667)
$94,456)
91,254)
(a) Stated value $2.22 per share; authorized 1,300,000,000; outstanding at 2004 — 557,648,989 (excludes 25,802,702 treasury shares) and 2003 — 566,685,301
(excludes 16,766,390 treasury shares).
(b) 490,750 shares of undesignated no par value preferred stock are authorized of which none had been issued; 7,250 shares of 8.0% cumulative Series D convertible (at $23.5399
per share) perpetual preferred stock with a stated value of $1,000 per share were authorized, issued and outstanding; 2,000 shares of 8.0% cumulative Series E perpetual
preferred stock with a stated value of $1,000 per share were authorized, issued and outstanding.
See Notes to Consolidated Financial Statements.
Fifth Third Bancorp 37
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Accumulated
Other
Comprehensive Treasury
Income
8
361
369
(489)
(120)
(49)
Retained
Earnings
4,502
1,531
(567)
(1)
5,465
1,665
(645)
(1)
(3)
6,481
1,525
(735)
(1)
(1)
7,269
(169)
Stock
(4)
(720)
180
(544)
(655)
233
4
(962)
(987)
33
222
281
(1)
(1,414)
Total
7,752)
1,531 )
361)
1,892
(567)
(1)
(720)
128)
104)
19)
(3)
8,604)
1,665
(489)
1,176
(645)
(1)
(655)
110)
97)
(34)
18)
(3)
8,667
1,525
(49)
1,476
(735)
(1)
(987)
87)
—)
89)
11)
317)
—)
8,924)
($ in millions, except per share data)
Balance at December 31, 2001 . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . .
Cash dividends declared:
Common stock at $.98 per share . . . . . . . . . .
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . .
Shares acquired for treasury . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . .
Stock options exercised,
including treasury shares issued . . . . . . . . . . . .
Excess corporate tax benefit related to
stock-based compensation . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2002 . . . . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . .
Comprehensive income . . . . . . . . . . . . . . . . . . . .
Cash dividends declared:
Common stock at $1.13 per share . . . . . . . . .
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . .
Shares acquired for treasury . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . .
Stock options exercised,
including treasury 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 $1.31 per share . . . . . . . . .
Preferred stock . . . . . . . . . . . . . . . . . . . . . . . .
Shares acquired for treasury . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . .
Restricted stock grants . . . . . . . . . . . . . . . . . . . . .
Stock options exercised,
including treasury shares issued . . . . . . . . . . . .
Excess corporate tax benefit related to
stock-based compensation . . . . . . . . . . . . . . . .
Stock issued in business combinations . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31, 2004 . . . . . . . . . . . . .
See Notes to Con sol i dat ed Financial Statements.
Common
Stock
$1,294
Preferred
Stock
9
Capital
Surplus
1,943
1
1,295
9
1,295
9
$1,295
9
128
(77)
19
(3)
2,010
110
(136)
(34)
18
(4)
1,964
87
(33)
(133)
11
36
2
1,934
38 Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Years Ended December 31 ($ in millions)
Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Minority interest in net income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of change in accounting principle, net of tax . . . . . . . . . . . . . . . . . . . .
Depreciation, amortization and accretion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock-based compensation expense . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Benefit) provision for deferred income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized securities gains . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized securities gains – non-qualifying hedges on mortgage servicing rights . . . . . . . . .
Realized securities losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Realized securities losses – non-qualifying hedges on mortgage servicing rights . . . . . . . .
Proceeds from sales/transfers of residential mortgage and other loans held for sale . . . . . .
Net gains on sales of loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net gains on divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in residential mortgage and other loans held for sale . . . . . . . . . . . . . . . . . . . . . .
Decrease (increase) in trading securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in accrued interest receivable . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in accrued taxes, interest and expenses . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by Operating Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Investing Activities
Proceeds from sales of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from calls, paydowns and maturities of available-for-sale securities . . . . . . . . . . . . .
Purchases of available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from calls, paydowns and maturities of held-to-maturity securities . . . . . . . . . . . . .
Purchases of held-to-maturity securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Increase) decrease in other short-term investments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in loans and leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Decrease in operating lease equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of bank premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from disposal of bank premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash received from divestitures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash acquired in business combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Used in Investing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Financing Activities
Increase in core deposits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in certificates – $100,000 and over, including foreign office . . . . . . . . . .
(Decrease) increase in federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) in short-term bank notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(Decrease) increase in other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Repayment of long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Payment of cash dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercise of stock options, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Purchases of treasury stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by Financing Activities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (Decrease) in Cash and Due from Banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and Due from Banks at Beginning of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash and Due from Banks at End of Year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cash Payments
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Significant Noncash Transactions
Business acquisitions:
Fair value of tangible assets acquired (noncash) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Goodwill and identifiable intangible assets acquired . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Liabilities assumed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
See Notes to Consolidated Financial Statements.
2004
2003
$ 1,525
268
—
—
459
87
(13)
(58)
—
95
—
6,824
(112)
(91)
(4,788)
259
16
(867)
(26)
(73)
3,505
11,331
6,234
(13,425)
42
(148)
(264)
(7,749)
357
(391)
13
233
29
(3,738)
3,327
(2,962)
(2,238)
275
(1,210)
11,128
(6,283)
(704)
89
(987)
—
435
202
2,359
$ 2,561
$ 1,096
693
921
282
(916)
(36)
(281)
9
21
21
—
—
—
—
1,665
399
20
11
550
110
295
(150)
(3)
69
—
16,280
(340)
(40)
(10,501)
(37)
45
(646)
253
135
8,115
22,522
9,264
(36,123)
18
(92)
33
(10,651)
214
(284)
16
67
—
(15,016)
1,908
2,978
2,180
500
2,093
1,095
(2,159)
(631)
63
(655)
(3)
7,369
468
1,891
2,359
1,112
432
—
—
—
—
—
9
28
—
482
1,068
1,109
25
2002)
1,531)
246)
38)
—)
338)
128)
253)
(125)
(86)
11)
53)
9,924)
(269)
(34)
(9,892)
(18)
49)
453)
(114)
(276)
2,210)
20,605)
7,481)
(32,278)
5)
(35)
(69)
(5,608)
—)
(174)
14)
55)
—)
(10,004)
4,916)
1,536)
2,204)
(34)
(304)
1,143)
(635)
(553)
104)
(720)
(3)
7,654)
(140)
2,031)
1,891)
1,497)
456)
—
—
—
—
—
10
—
25
—
—
—
—
Fifth Third Bancorp 39
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Nature of Operations
Fifth Third Bancorp (“Bancorp”), an Ohio corporation, conducts
its principal activities through its banking and non-banking
subsidiaries from 1,011 banking centers located throughout Ohio,
Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West
Virginia and Pennsylvania. Principal activities include Commer-
cial Banking, Retail Banking, Investment Advisors and Fifth Third
Processing Solutions.
est payments that have become past due one hundred and eighty
days are charged off to the reserve for loan and lease losses. When
a loan is placed on nonaccrual status, all previously accrued and
unpaid interest receivable is charged against income and the loan
is accounted for on the cash method thereafter, until qualifying
for return to accrual status. Generally, a loan is returned to accrual
status when all delinquent interest and principal payments become
current in accordance with the terms of the loan agreement or when
the loan is both well secured and in the process of collection.
Basis of Presentation
The Consolidated Financial Statements include the accounts of
the Bancorp and its majority-owned subsidiaries. Other entities,
including certain joint ventures, in which there is greater than 20%
ownership, but upon which the Bancorp does not possess, nor can
it exert, signifi cant infl uence or control, are accounted for by the
equity method and not consolidated; those in which there is less
than 20% ownership are generally carried at the lower of cost or
fair value. All material intercompany transactions and balances
have been eliminated. Certain prior period data has been reclassi-
fi ed to conform to current period presentation.
Use of Estimates
The preparation of fi nancial statements in conformity with
accounting principles generally accepted in the United States of
Amer ica requires management to make estimates and assumptions
that affect the amounts reported in the fi nancial statements and
accompanying notes. Actual results could differ from those esti-
mates.
Securities
Securities are classifi ed as held-to-maturity, available-for-sale or
trading on the date of purchase. Only those securities classifi ed
as held-to-maturity, and which management has both the intent
and ability to hold to maturity, are reported at amortized cost.
Available-for-sale and trading securities are reported at fair value
with unrealized gains and losses, net of related deferred income
taxes, included in accumulated other comprehensive income and
other noninterest income, respectively. The fair value of a security
is determined based on quoted market prices. If quoted market
prices are not available, fair value is determined based on quoted
prices of similar instruments. Realized securities gains or losses are
reported within noninterest income in the Consolidated State-
ments of Income. The cost of securities sold is based on the specifi c
identifi cation method. Available-for-sale and held-to-maturity
securities are reviewed quarterly for possible other-than-tempo-
rary impairment. The review includes an analysis of the facts and
circumstances of each individual investment such as the severity
of loss, the length of time the fair value has been below cost, the
expectation for that security’s performance, the creditworthiness of
the issuer and the Bancorp’s intent and ability to hold the security.
A decline in value that is considered to be other-than-temporary is
recorded as a loss within noninterest income in the Consolidated
Statements of Income.
Loans and Leases
Interest income on loans is based on the principal balance outstand-
ing computed using the effective interest method. The accrual of
interest income for commercial, construction and mortgage loans
is discontinued when there is a clear indication the borrower’s cash
fl ow may not be suffi cient to meet payments as they become due.
Such loans are also placed on nonaccrual status when the prin-
cipal or interest is past due ninety days or more, unless the loan
is well secured and in the process of collection. Consumer loans
and revolving lines of credit for equity lines that have principal
and interest payments that have become past due one hundred
and twenty days and credit cards that have principal and inter-
40 Fifth Third Bancorp
Loan and lease origination and commitment fees and certain
direct loan and lease origination costs are deferred and the net
amount amortized over the estimated life of the related loans, leases
or commitments as a yield adjustment.
Direct fi nancing leases are carried at the aggregate of lease
payments plus estimated residual value of the leased property, less
unearned income. Interest income on direct fi nancing leases is
recognized over the term of the lease to achieve a constant periodic
rate of return on the outstanding investment. Interest income on
leveraged leases is recognized over the term of the lease to achieve a
constant rate of return on the outstanding investment in the lease,
net of the related deferred income tax liability, in the years in which
the net investment is positive.
Residential mortgage loans held for sale are valued at the lower
of aggregate cost or fair value. Loans held for sale that qualify for
fair value hedge accounting are carried at fair value. Fair value is
based on the contract price at which the mortgage loans will be
sold. The Bancorp generally has commitments to sell residential
mortgage loans held for sale in the secondary market. Gains or
losses on sales are recognized in mortgage banking net revenue
upon delivery.
Impaired loans are measured based on the present value of
expected future cash fl ows discounted at the loan’s effective interest
rate or the fair value of the underlying collateral. The Bancorp eval-
uates the collectibility of both principal and interest when assessing
the need for a loss accrual.
Other Real Estate Owned
Other real estate owned (“OREO”), which is included in other
assets, represents property acquired through foreclosure or other
proceedings. OREO is carried at the lower of cost or fair value, less
costs to sell. All property is periodically evaluated and reductions in
fair value are recognized in noninterest expense in the Consolidated
Statements of Income.
Reserve for Loan and Lease Losses
The Bancorp maintains a reserve to absorb probable loan and lease
losses inherent in the portfolio. The reserve is maintained at a level
the Bancorp considers to be adequate and is based on ongoing quar-
terly assessments and evaluations of the collectibility and historical
loss experience of loans and leases. Credit losses are 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 esti-
mating probable credit losses. In determining the appropriate level
of reserves, the Bancorp estimates losses using a range derived from
“base” and “conservative” estimates. The Bancorp’s methodology
for assessing the appropriate reserve level consists of several key
elements, as discussed below. The Bancorp’s strategy for credit
risk management includes a combination of conservative exposure
limits signifi cantly below legal lending limits and conservative
underwriting, documentation and collections standards. The strat-
egy also emphasizes diversifi cation on a geographic, industry and
customer level, regular credit examinations and quarterly manage-
ment reviews of large credit exposures and loans experiencing dete-
rioration of credit quality.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Larger commercial loans that exhibit probable or observed
credit weaknesses are subject to individual review. Where appro-
priate, reserves are allocated to individual loans based on manage-
ment’s estimate of the borrower’s ability to repay the loan given
the availability of collateral, other sources of cash fl ow and legal
options available to the Bancorp. The review of individual loans
includes those loans that are impaired as provided in SFAS No.
114, “Accounting by Creditors for Impairment of a Loan.” Any
reserves for impaired loans are measured based on the present
value of expected future cash fl ows discounted at the loan’s effec-
tive interest rate or fair value of the underlying collateral. The
Bancorp evaluates the collectibility of both principal and interest
when assessing the need for a loss accrual. Historical loss rates are
applied to other commercial loans not subject to specifi c reserve
allocations. The loss rates are derived from a migration analysis,
which computes the net charge-off experience sustained on loans
according to their internal risk grade. The Bancorp utilizes two risk
grading systems for commercial loans and leases. The current risk
grading system utilized for reserve analysis purposes encompasses
ten categories. The Bancorp also maintains a dual risk rating system
that provides for 13 probability of default grade categories and an
additional six grade categories measuring loss factors given an event
of default. The probability of default and loss given default analyses
are not separated in the ten grade risk rating system. The Bancorp
is in the process of completing signifi cant validation and testing
of the dual risk rating system prior to implementation for reserve
analysis purposes. The dual risk rating system is consistent with
Basel II expectations and allows for more precision in the analysis
of commercial credit risk.
Homogenous loans, such as consumer installment, residen-
tial mortgage loans and automobile leases are not individually risk
graded. Rather, standard credit scoring systems and delinquency
monitoring are used to assess credit risks. Reserves are established
for each pool of loans based on the expected net charge-offs for one
year. Loss rates are based on the average net charge-off history by
loan category.
Historical loss rates for commercial and consumer loans may
be adjusted for signifi cant factors that, in management’s judgment,
refl ect the impact of any current conditions on loss recognition.
Factors that management considers in the analysis include the
effects of the national and local economies, trends in the nature and
volume of loans (delinquencies, charge-offs and nonaccrual loans),
changes in mix, credit score migration comparisons, asset quality
trends, risk management and loan administration, changes in the
internal lending policies and credit standards, collection practices
and examination results from bank regulatory agencies and the
Bancorp’s internal credit examiners.
An unallocated reserve is maintained to recognize the impreci-
sion in estimating and measuring loss when evaluating reserves for
individual loans or pools of loans. Reserves on individual loans and
historical loss rates are reviewed quarterly and adjusted as neces-
sary 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 Pennsylvania. When evaluating the adequacy of
reserves, consideration is given to this regional geographic concen-
tration and the closely associated effect changing economic condi-
tions have on the Bancorp’s customers.
The Bancorp has not substantively changed any aspect to its
overall approach in the determination of the reserve for loan and
lease losses. There have been no material changes in assumptions or
estimation techniques as compared to prior periods that impacted
the determination of the current period reserve for loan and lease
losses. As of December 31, 2004, the reserve for unfunded commit-
ments has been reclassifi ed from the reserve for loan and lease losses
to other liabilities. The December 31, 2003 reserve for unfunded
commitments and all subsequent activity has been reclassifi ed to
conform to current period presentation.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level
believed by management to be suffi cient to absorb estimated prob-
able losses related to unfunded credit facilities. The determination
of the adequacy of the reserve is based upon an evaluation of the
unfunded credit facilities, including an assessment of historical
commitment utilization experience, credit risk grading and credit
grade migration. Net adjustments to the reserve for unfunded
commitments are included in other noninterest expense.
Loan Sales and Securitizations
When the Bancorp sells loans through either securitizations or
individual loan sales in accordance with its investment policies,
it may retain one or more subordinated tranches, servicing rights,
interest-only strips, credit recourse, other residual interests and
in some cases, a cash reserve account, all of which are considered
retained interests in the securitized or sold loans. Gain or loss on
sale or securitization of the loans depends in part on the previous
carrying amount of the fi nancial assets sold or securitized, allocated
between the assets sold and the retained interests based on their
relative fair value at the date of sale or securitization. To obtain
fair values, quoted market prices are used if available. If quotes
are not available for retained interests, the Bancorp calculates fair
value based on the present value of future expected cash fl ows using
both management’s best estimates and third-party data sources for
the key assumptions, including credit losses, prepayment speeds,
forward yield curves and discount rates commensurate with the risks
involved. Gain or loss on sale or securitization of loans is reported
as a component of noninterest income in the Consolidated State-
ments of Income. Retained interests from securitized or sold loans,
excluding servicing rights, are carried at fair value. Adjustments to
fair value for retained interests classifi ed as available-for-sale securi-
ties are included in accumulated other comprehensive income in
equity, or in noninterest income in the Consolidated Statements
of Income if the fair value has declined below the carrying amount
and such decline has been determined to be other-than-temporary.
Adjustments to fair value for retained interests classifi ed as trading
securities are recorded within noninterest income in the Consoli-
dated Statements of Income.
Servicing rights resulting from residential mortgage, home
equity line of credit and automotive loan sales are amortized in
proportion to and over the period of estimated net servicing reve-
nues and are reported as a component of mortgage banking net
revenue and other noninterest income, respectively, in the Consoli-
dated Statements of Income. Servicing rights are assessed for
impairment monthly, based on fair value, with temporary impair-
ment recognized through a valuation allowance and permanent
impairment recognized through a write-off of the servicing asset
and related valuation reserve. Key economic assumptions used in
measuring any potential impairment of the servicing rights include
the prepayment speeds of the underlying loans, the weighted-aver-
age life of the loan, the discount rate, weighted-average coupon and
the weighted-average default rate, as applicable. The primary risk
of material changes to the value of the servicing rights resides in the
potential volatility in the economic assumptions used, particularly
the prepayment speeds. The Bancorp monitors this risk and adjusts
its valuation allowance as necessary to adequately reserve for any
probable impairment in the portfolio. For purposes of measuring
impairment, the mortgage servicing rights are stratifi ed based on
the fi nancial asset type and interest rates. In addition, the Bancorp
obtains an independent third-party valuation of the mortgage
servicing portfolio on a quarterly basis. Fees received for servicing
loans owned by investors are based on a percentage of the outstand-
ing monthly principal balance of such loans and are included in
noninterest income. Costs of servicing loans are charged to expense
as incurred.
Fifth Third Bancorp 41
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Bank Premises and Equipment
Bank premises and equipment, including leasehold improvements,
are stated at cost less accumulated depreciation and amortization.
Depreciation is calculated using the straight-line method based on
estimated useful lives of the assets for book purposes, while acceler-
ated depreciation is used for income tax purposes. Amortization
of leasehold improvements is computed using the straight-line
method over the lives of the related leases or useful lives of the
related assets, whichever is shorter. In accordance with the adop-
tion of SFAS No. 144, “Accounting for the Impairment or Disposal
of Long-Lived Assets,” the Bancorp tests its long-lived assets for
impairment through both a “probability-weighted” and “primary-
asset” approach whenever events or changes in circumstances
dictate. Maintenance, repairs and minor improvements are charged
to noninterest expense as incurred.
Operating Lease Equipment
Operating lease equipment is recorded at cost, net of accumulated
depreciation. Income from operating leases is recognized ratably
over the term of the leases and recorded within noninterest income
in the Consolidated Statements of Income. Depreciation expense
on operating lease equipment is recorded on a straight-line basis
over the term of the lease from the original cost of the asset to
the estimated residual value at the end of the lease term. Depre-
ciation expense is recorded within operating lease expense in the
Consolidated Statements of Income. The estimated residual value
of operating lease assets is periodically reviewed and, in the event
that the original estimated residual value is determined to be greater
than the asset’s estimated market value at the end of the lease term,
depreciation expense is adjusted prospectively.
Derivative Financial Instruments
The Bancorp accounts for its derivatives in accordance with SFAS
No. 133, “Accounting for Derivative Instruments and Hedging
Activities,” as amended. The Statement requires recognition of
all derivatives as either assets or liabilities in the balance sheet and
requires measurement of those instruments at fair value through
adjustments to either accumulated other comprehensive income
within shareholders’ equity or current earnings or both, as appro-
priate. On the date the Bancorp enters into a derivative contract,
the Bancorp designates the derivative instrument as either a fair
value hedge, cash fl ow hedge or as a free-standing derivative instru-
ment. For a fair value hedge, changes in the fair value of the deriva-
tive instrument and changes in the fair value of the hedged asset
or liability or of an unrecognized fi rm commitment attributable to
the hedged risk are recorded in current period net income. For a
cash fl ow hedge, changes in the fair value of the derivative instru-
ment, to the extent that it is effective, are recorded in accumulated
other comprehensive income and subsequently reclassifi ed to net
income in the same period(s) that the hedged transaction impacts
net income. For free-standing derivative instruments, changes in
fair values are reported in current period net income.
Prior to entering a hedge transaction, the Bancorp formally
documents the relationship between the hedging instruments and
hedged items, as well as the risk management objective and strategy
for undertaking various hedge transactions. This process includes
linking all derivative instruments that are designated as fair value or
cash fl ow hedges to specifi c assets and liabilities on the balance sheet
or to specifi c forecasted transactions along with a formal assessment
at both inception of the hedge and on an ongoing basis as to the
effectiveness of the derivative instrument in offsetting changes in
fair values or cash fl ows of the hedged item. If it is determined that
the derivative instrument is not highly effective as a hedge, hedge
accounting is discontinued and the adjustment to fair value of the
derivative instrument is recorded in net income.
42 Fifth Third Bancorp
Earnings Per Share
In accordance with SFAS No. 128, “Earnings Per Share,” basic
earnings per share are computed by dividing net income available
to common shareholders by the weighted-average number of shares
of common stock outstanding during the period. Earnings per
diluted share are computed by dividing adjusted net income avail-
able to common shareholders by the weighted-average number of
shares of common stock and common stock equivalents outstand-
ing during the period. Dilutive common stock equivalents repre-
sent the assumed conversion of convertible preferred stock and the
exercise of stock options.
Other
Securities and other property held by Fifth Third Investment Advi-
sors, a division of the Bancorp’s banking subsidiaries, in a fi duciary
or agency capacity are not included in the Consolidated Balance
Sheets because such items are not assets of the subsidiaries. Invest-
ment advisory revenue in the Consolidated Statements of Income
is recognized on the accrual basis. Investment advisory service reve-
nues are recognized monthly based on a fee charged per transaction
processed and a fee charged on the 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 inter-
change fees charged by credit card associations) not controlled by
the Bancorp.
Acquisitions of treasury stock are carried at cost. Reissuance of
shares in treasury for acquisitions, stock option exercises or other
corporate purposes is recorded based on the specifi c identifi cation
method.
New Accounting Pronouncements
In December 2002, the FASB issued SFAS No. 148, “Account-
ing for Stock-Based Compensation-Transition and Disclosure—an
Amendment of FASB Statement No. 123.” This Statement amends
SFAS No. 123, “Accounting for Stock-Based Compensation,” to
provide alternative methods of transition for a voluntary change
to the fair value method of accounting for stock-based employee
compensation. In addition, this Statement amends the disclosure
requirements of SFAS No. 123 to require more prominent disclo-
sures about the method of accounting for stock-based employee
compensation and the effect of the method used on reported results
in both annual and interim fi nancial statements. This Statement
was effective for fi nancial statements for fi scal years ending after
December 15, 2002. Effective January 1, 2004, the Bancorp adopt-
ed the fair value recognition provisions of SFAS No. 123 using the
retroactive restatement method described in SFAS No. 148. As a
result, fi nancial information for all prior periods has been restated
to refl ect the compensation expense that would have been recog-
nized had the fair value method of accounting been applied to all
awards granted to employees after January 1, 1995.
The adoption of the retroactive restatement method resulted
in the restatement of previously reported balances of capital surplus,
retained earnings and deferred taxes. As of December 31, 2003,
previously reported capital surplus was increased by $633 million,
retained earnings were decreased by $529 million and deferred tax
assets were increased by $104 million. As of December 31, 2002,
previously reported capital surplus was increased by $530 million,
retained earnings were decreased by $439 million, and deferred
tax assets were increased by $91 million. In addition, in adopting
the fair value method of expense recognition, the Bancorp deter-
mined that in 2000 and 2001 certain outstanding stock options
exchanged in immaterial business combinations were omitted from
the determination of total purchase price and resulting goodwill.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Adjustment for those items resulted in an additional increase in
goodwill and capital surplus balances as of December 31, 2002
and 2003 of $38 million. Stock-based compensation expense is
included in salaries, wages and incentives expense in the Consoli-
dated Statements of Income.
The impact of the adoption of the retroactive restatement
method for employee stock-based compensation on previously
reported net income, basic and earnings per diluted share for 2003
and 2002 is as follows:
($ in millions, except per share data)
Net income available to common shareholders,
as originally reported . . . . . . . . . . . . . . . .
Stock-based compensation expense determined
under the fair value method, net of tax . .
Net income available to common shareholders,
as restated . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per share:
As originally reported . . . . . . . . . . . . . . . .
As restated . . . . . . . . . . . . . . . . . . . . . . . .
Earnings per diluted share:
As originally reported . . . . . . . . . . . . . . . .
As restated . . . . . . . . . . . . . . . . . . . . . . . .
2003
2002
$1,754
1,634
(90)
(104)
$1,664
1,530
$3.07
2.91
3.03
2.87
2.82
2.64
2.76
2.59
The weighted-average fair value of stock options and stock
appreciation rights granted was $14.11, $18.27 and $26.14 in
2004, 2003 and 2002, respectively. The fair value of each option
grant is estimated on the date of grant using the Black-Scholes
option pricing model with the following assumptions used for
grants in 2004, 2003 and 2002: expected option lives ranging from
six to nine years; expected dividend yield of 2.3% for 2004, 1.6%
for 2003, and 1.4% for 2002; expected volatility of 28% for all
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 measure-
ment of the cost of employee services received in exchange for an
award of equity instruments based on the grant-date fair value of
the award with the cost to be recognized over the vesting period.
This Statement is effective for fi nancial statements as of the begin-
ning of the fi rst interim or annual reporting period that begins
after June 15, 2005. As the Bancorp has previously adopted the fair
value recognition provisions of SFAS No. 123 and the retroactive
restatement method described in SFAS No. 148, the adoption of
this Statement will not have a material impact on the Bancorp’s
Consolidated Financial Statements.
In April 2003, the FASB issued SFAS No. 149, “Amendment
of Statement 133 on Derivative Instruments and Hedging Activi-
ties.” This Statement amends and clarifi es fi nancial accounting and
reporting for derivative instruments, including certain embedded
derivatives, and for hedging activities under SFAS No. 133. This
Statement amends SFAS No. 133 to refl ect the decisions made as
part of the Derivatives Implementation Group (“DIG”) and in
other FASB projects or deliberations. SFAS No. 149 was effective
for contracts entered into or modifi ed after June 30, 2003, and
for hedging relationships designated after June 30, 2003. Adoption
of this Statement did not have a material effect on the Bancorp’s
Consolidated Financial Statements.
In May 2003, the FASB issued SFAS No. 150, “Accounting
for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity.” This Statement establishes standards for
how an entity classifi es and measures certain fi nancial instruments
with characteristics of both liabilities and equity. This Statement
requires that an issuer classify a fi nancial instrument that is within
its scope as a liability. Many of those instruments were previously
classifi ed as equity, or in some cases, presented between the liabili-
ties section and the equity section of the statement of fi nancial posi-
tion. This Statement was effective for fi nancial instruments entered
into or modifi ed after May 31, 2003, and otherwise was effective
at the beginning of the fi rst interim period beginning after June
15, 2003. Adoption of this Statement on July 1, 2003 required
a reclassifi cation of a minority interest to long-term debt and the
corresponding minority interest expense to interest expense, relat-
ing to preferred stock issued during 2001 by a subsidiary of the
Bancorp. The existence of the mandatory redemption feature of
this issue upon its mandatory conversion to trust preferred secu-
rities necessitated these reclassifi cations and did not result in any
change in bottom line income statement trends.
In December 2003, the FASB issued SFAS No. 132 (Revised
2003), “Employers’ Disclosures about Pensions and Other Post-
retirement Benefi ts.” This Statement expands upon the existing
disclosure requirements as prescribed under the original SFAS No.
132 by requiring more details about pension plan assets, benefi t
obligations, cash fl ows, benefi t costs and related information. SFAS
No. 132(R) also requires companies to disclose various elements of
pension and postretirement benefi t costs in interim-period fi nan-
cial statements beginning after December 15, 2003. This State-
ment is effective for fi nancial statements with fi scal years ending
after December 15, 2003. The Bancorp adopted this Statement
and all of its required disclosures are included in Note 23.
In November 2002, the FASB issued Interpretation No. 45,
(“FIN 45”) “Guarantor’s Accounting and Disclosure Requirements
for Guarantees, Including Indirect Guarantees of Indebtedness of
Others,” which elaborates on the disclosures to be made by a guar-
antor about its obligations under certain guarantees issued. It also
clarifi es that a guarantor is required to recognize, at the inception
of a guarantee, a liability for the fair value of the obligation under-
taken in issuing the guarantee. The Interpretation expands on the
accounting guidance of SFAS No. 5, “Accounting for Contingen-
cies,” SFAS No. 57, “Related Party Disclosures,” and SFAS No.
107, “Disclosures about Fair Value of Financial Instruments.” It
also incorporates without change the provisions of FASB Interpreta-
tion No. 34, “Disclosure of Indirect Guarantees of Indebtedness of
Others,” which is superseded. The initial recognition and measure-
ment provisions of this Interpretation apply on a prospective basis
to guarantees issued or modifi ed after December 31, 2002. The
disclosure requirements in this Interpretation were effective for
periods ending after December 15, 2002. Signifi cant guarantees
that have been entered into by the Bancorp are disclosed in Note
14. Adoption of this Interpretation did not have a material effect
on the Bancorp’s Consolidated Financial Statements.
In January 2003, the FASB issued Interpretation No. 46
(“FIN 46”), “Consolidation of Variable Interest Entities.” This
Interpretation clarifi es the application of ARB No. 51, “Consoli-
dated Financial Statements,” for certain entities in which equity
investors do not have the characteristics of a controlling fi nancial
interest or do not have suffi cient equity at risk for the entity to
fi nance its activities without additional subordinated support from
other parties. This Interpretation requires variable interest enti-
ties (“VIEs”) to be consolidated by the primary benefi ciary which
represents the enterprise that will absorb the majority of the VIE’s
expected losses if they occur, receive a majority of the VIEs residual
returns if they occur, or both. Qualifying Special Purpose Entities
(“QSPE”) are exempt from the consolidation requirements of FIN
46. This Interpretation was effective for VIEs created after January
31, 2003 and for VIEs in which an enterprise obtains an interest
after that date.
In December 2003, the FASB issued Interpretation No. 46R
(“FIN 46R”), “Consolidation of Variable Interest Entities — an
interpretation of ARB 51 (revised December 2003),” which replac-
es FIN 46. FIN 46R was primarily issued to clarify the required
accounting for interests in VIEs. Additionally, this Interpretation
exempts certain entities from its requirements and provides for
special effective dates for enterprises that have fully or partially
applied FIN 46 as of December 24, 2003. Application of FIN 46R
is required in fi nancial statements of public enterprises that have
interests in structures that are commonly referred to as special-
Fifth Third Bancorp 43
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
purpose entities, or SPEs, for periods ending after December 15,
2003. Application by public enterprises, other than small business
issuers, for all other types of VIEs (i.e., non-SPEs) is required in
fi nancial statements for periods ending after March 15, 2004, with
earlier adoption permitted. The Bancorp early adopted the provi-
sions of FIN 46 on July 1, 2003. Through December 31, 2004
the Bancorp has provided full credit recourse to an unrelated and
unconsolidated asset-backed SPE in conjunction with the sale and
subsequent leaseback of leased autos. The unrelated and unconsoli-
dated asset-backed SPE was formed for the sole purpose of partici-
pating in the sale and subsequent lease-back transactions with the
Bancorp. Based on this credit recourse, the Bancorp is deemed to be
the primary benefi ciary as it maintains the majority of the variable
interests in this SPE and was therefore required to consolidate the
entity. Early adoption of this Interpretation required the Bancorp
to consolidate these operating lease assets and a corresponding
liability as well as recognize an after-tax cumulative effect charge
of $11 million ($.02 per diluted share) representing the difference
between the carrying value of the leased autos sold and the carrying
value of the newly consolidated obligation as of July 1, 2003. As of
December 31, 2004, the outstanding balance of leased autos sold
was approximately $259 million. Consolidation of these operating
lease assets did not impact risk-based capital ratios or bottom line
income statement trends; however lease payments on the operat-
ing lease assets are now refl ected as a component of noninterest
income and depreciation expense is now refl ected as a component
of noninterest expense. The Bancorp also early adopted the provi-
sions of FIN 46 related to the consolidation of two wholly-owned
fi nance entities involved in the issuance of trust preferred securi-
ties. Effective July 1, 2003, the Bancorp deconsolidated the wholly-
owned issuing trust entities resulting in a recharacterization of the
underlying consolidated debt obligation from the previous trust
preferred securities obligations to the junior subordinated deben-
ture obligations that exist between the Bancorp and the issuing
trust entities. See Note 14 for discussion of certain guarantees that
the Bancorp has provided for the benefi t of the wholly-owned issu-
ing trust entities related to their debt obligations.
In March 2004, the Securities and Exchange Commission
staff released Staff Accounting Bulletin (“SAB”) No. 105, “Applica-
tion of Accounting Principles to Loan Commitments.” This SAB
disallows the inclusion of expected future cash fl ows related to the
servicing of a loan in the determination of the fair value of a loan
commitment. Further, no other internally developed intangible
asset should be recorded as part of the loan commitment deriva-
tive. Recognition of intangible assets would only be appropriate
in a third-party transaction, such as a purchase of a loan commit-
ment or in a business combination. The SAB is effective for all
loan commitments entered into after March 31, 2004, but does
not require retroactive adoption for loan commitments entered
into on or before March 31, 2004. Adoption of this SAB did not
have a material effect on the Bancorp’s Consolidated Financial
Statements.
In March 2004, the Emerging Issues Task Force (“EITF”)
reached a consensus on Issue 03-1, “The Meaning of Other-Than-
Temporary Impairment and Its Application to Certain Invest-
ments.” The EITF reached a consensus on an other-than-temporary
impairment model for debt and equity securities accounted for
under SFAS No. 115, “Accounting for Certain Investments in
Debt and Equity Securities,” and cost method investments. The
basic model developed to evaluate whether an investment within
the scope of Issue 03-1 is other-than-temporarily impaired involves
a three-step process including, determining whether an invest-
ment is impaired (fair value less than cost), evaluating whether the
impairment is other-than-temporary and, if other-than-temporary,
requiring recognition of an impairment loss equal to the difference
between the investment’s cost and its fair value. In September 2004,
the FASB issued Staff Position (“FSP”) No. EITF 03-01-1, “Effec-
tive Date of Paragraphs 10-20 of EITF 03-01.” This FSP delays
the effective date of the measurement and recognition guidance
contained in paragraphs 10-20 of Issue 03-01. The amount of any
other-than-temporary impairment that needs to be recognized in
the future will be dependent on market conditions, the occurrence
of certain events or changes in circumstances relative to an investee,
the Bancorp’s intent and ability to hold the impaired investments
at the time of the valuation and the measurement and recognition
guidance to be defi ned in a future FSP issuance.
In December 2003, the Accounting Standards Executive
Committee of the American Institute of Certifi ed Public Accoun-
tants issued Statement of Position (“SOP”) 03-3, “Accounting for
Certain Loans and Debt Securities Acquired in a Transfer.” SOP
03-3 addresses the accounting for certain acquired loans that
show evidence of credit deterioration since their origination (i.e.
impaired loans) and for which a loss is deemed probable of occur-
ring. SOP 03-3 requires acquired loans to be recorded at their fair
value, defi ned as the present value of future cash fl ows, including
interest income, to be recognized over the life of the loan. SOP
03-3 prohibits the carryover of an allowance for loan loss on certain
acquired loans within its scope. SOP 03-3 is effective for loans that
are acquired in fi scal years beginning after December 15, 2004.
The Bancorp will evaluate the applicability of this SOP for all
prospective loans acquired in fi scal years beginning after December
15, 2004. The Bancorp does not anticipate this Statement to have
a material effect on its Consolidated Financial Statements.
44 Fifth Third Bancorp
2. SECURITIES
The following table provides a breakdown of the securities portfolio as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004
2003
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
($ in millions)
Available-for-sale:
U.S. Treasury and
Government agencies . . . .
U.S. Government sponsored
agencies . . . . . . . . . . . . . . .
Obligations of states and
$ 503
2,036
political subdivisions . . . . .
823
Agency mortgage-backed
securities . . . . . . . . . . . . . .
17,571
Other bonds, notes and
debentures . . . . . . . . . . . . .
Other securities . . . . . . . . . . .
2,862
1,006
—
3
41
89
23
1
Total . . . . . . . . . . . . . . . . . . . . . .
$24,801
157
Held-to-maturity:
Obligations of states and
political subdivisions . . . . .
$ 245
Other bonds, notes and
debentures . . . . . . . . . . . . .
10
Total . . . . . . . . . . . . . . . . . . . . . .
$ 255
—
—
—
(12)
(26)
(1)
(215)
(9)
(8)
(271)
—
—
—
491
2,013
863
17,445
2,876
999
24,687
245
10
255
838
3,877
922
21,101
1,401
937
29,076
126
9
135
2
13
55
163
12
35
280
—
—
—
(19)
(36)
—
(283)
(10)
(9)
(357)
—
—
—
821
3,854
977
20,981
1,403
963
28,999
126
9
135
The amortized cost and approximate fair value of securities
as of December 31, 2004, by contractual maturity, are shown in
the following table. Actual maturities may differ from contractual
maturities when there exists a right to call or prepay obligations
with or without call or prepayment penalties.
($ in millions)
Debt securities:
Under 1 year . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
1-5 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
6-10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Over 10 years . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-Sale
Held-to-Maturity
Amortized
Cost
$ 46
1,514
2,637
19,598
1,006
$24,801
Fair Value
46
1,531
2,640
19,471
999
24,687
Amortized
Cost
Fair Value
22
1
105
127
—
255
22
1
105
127
—
255
The following tables provide the gross unrealized loss and fair value, aggregated by investment category and length of time the individual
securities have been in a continuous unrealized loss position, as of December 31, 2004 and 2003:
($ in millions)
2004
U.S. Treasury and
Less than 12 months
12 months or more
Total
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Fair Value
Unrealized Losses
Government agencies . . . . . .
$ —
U.S. Government sponsored
agencies . . . . . . . . . . . . . . . .
1,092
Obligations of states and
political subdivisions . . . . . .
Agency mortgage-backed
securities . . . . . . . . . . . . . . .
Other bonds, notes and
debentures . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . .
13
7,510
1,234
47
Total . . . . . . . . . . . . . . . . . . . . .
$ 9,896
2003
U.S. Treasury and
Government agencies . . . . . .
$
735
U.S. Government sponsored
agencies . . . . . . . . . . . . . . . .
2,232
Agency mortgage-backed
securities . . . . . . . . . . . . . . .
12,868
Other bonds, notes and
debentures . . . . . . . . . . . . . .
Other securities . . . . . . . . . . . .
657
36
Total . . . . . . . . . . . . . . . . . . . . .
$16,528
—
(8)
(1)
(84)
(8)
(5)
(106)
(19)
(36)
(283)
(9)
(3)
(350)
485
634
—
5,706
76
28
6,929
—
—
—
23
36
59
(12)
(18)
—
(131)
(1)
(3)
(165)
—
—
—
(1)
(6)
(7)
485
1,726
13
13,216
1,310
75
16,825
735
2,232
12,868
680
72
16,587
(12)
(26)
(1)
(215)
(9)
(8)
(271)
(19)
(36)
(283)
(10)
(9)
(357)
Fifth Third Bancorp 45
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
At December 31, 2004, 94% of the unrealized losses in the
available-for-sale security portfolio were comprised of securities
issued by U.S. Treasury and Government agencies, U.S. Government
sponsored agencies and states and political subdivisions as well as
agency mortgage-backed securities. The Bancorp believes the price
movements in these securities are dependent upon the movement in
market interest rates particularly given the negligible inherent credit
risk for these securities. At December 31, 2004, the percentage of
unrealized losses in the available-for-sale security portfolio repre-
sented by non-rated securities was one percent.
At December 31, 2004 and 2003, securities with a fair value of
$17.8 billion and $17.9 billion, respectively, were pledged to secure
borrowings, public deposits, trust funds and for other purposes as
required or permitted by law.
Unrealized gains (losses) on trading securities held at Decem-
ber 31, 2004 and 2003 were not material to the Consolidated
Financial Statements.
3. LOANS AND LEASES AND RESERVE FOR LOAN AND LEASE LOSSES
A summary of the loan portfolio as of December 31:
As of December 31 ($ in millions)
Loans held for sale:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . .
Loans and leases held for investment:
Commercial:
Commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage . . . . . . . . . . . . . . . . . . . . . .
Commercial lease fi nancing . . . . . . . . . . . . . . . . . .
Total commercial . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer:
Residential mortgage . . . . . . . . . . . . . . . . . . . . . . .
Construction . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credit card . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Home equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer lease fi nancing . . . . . . . . . . . . . . . . . . .
Total consumer . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
Unearned
Income
—
—
—
—
—
—
—
(1,208)
(1,208)
—
—
—
—
—
(222)
(222)
Gross
$ —
545
14
$ 559
$16,058
4,348
7,636
4,634
32,676
6,988
378
843
10,508
7,572
2,273
28,562
Total loans and leases held for investment . . . . . . . . . . .
$61,238
(1,430)
2003
Unearned
Income
—
—
—
—
—
—
—
(1,166)
(1,166)
—
—
—
—
—
(261)
(261)
(1,427)
Gross
17
1,105
759
1,881
14,209
3,301
6,894
4,430
28,834
4,425
335
762
8,993
7,677
2,709
24,901
53,735
Net
—
545
14
559
16,058
4,348
7,636
3,426
31,468
6,988
378
843
10,508
7,572
2,051
28,340
59,808
A summary of the gross investment in lease fi nancing as of December 31:
($ in millions)
Direct fi nancing leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leveraged leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
The components of the investment in lease fi nancing as of December 31:
($ in millions)
Rentals receivable, net of principal and interest on nonrecourse debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Estimated residual value of leased assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gross investment in lease fi nancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Unearned income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net investment in lease fi nancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
$ 4,474
2,433
$ 6,907
2004
$ 4,749
2,158
6,907
(1,430)
$ 5,477
Net
17
1,105
759
1,881
14,209
3,301
6,894
3,264
27,668
4,425
335
762
8,993
7,677
2,448
24,640
52,308
2003
4,978
2,161
7,139
2003
4,917
2,222
7,139
(1,427)
5,712
At December 31, 2004, the minimum future lease payments receivable for each of the years 2005 through 2009 were $1,375 million,
$1,251 million, $934 million, $575 million and $356 million, respectively.
Transactions in the reserve for loan and lease losses for the years ended December 31:
($ in millions)
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Losses charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Recoveries of losses previously charged off . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net charge-offs . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Provision for loan and lease losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassifi cation of reserve for unfunded commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
$ 697
(321)
69
(252)
268
—
$ 713
2003
683
(380)
68
(312)
399
(73)
697
2002
624
(273)
86
(187)
246
—
683
46 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
As of December 31, 2004, the reserve for unfunded commit-
ments, totaling $72 million, is included in other liabilities. The
December 31, 2003 reserve for unfunded commitments has been
reclassifi ed from the reserve for loan and lease losses to other liabili-
ties and all subsequent activity has been reclassifi ed to conform to
the current period presentation. See Note 1 for a discussion of the
reserve for unfunded commitments.
As of December 31, 2004, impaired loans, under SFAS No.
114, with a valuation reserve totaled $108 million and impaired
loans without a valuation reserve totaled $54 million. The total
4. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment as of December 31:
($ in millions)
Land and improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Buildings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Leasehold improvements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction in progress . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Accumulated depreciation and amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
valuation reserve on the impaired loans at December 31, 2004 was
$28 million. As of December 31, 2003, impaired loans with a valu-
ation reserve totaled $173 million and impaired loans without a
valuation reserve totaled $32 million. The total valuation reserve
on the impaired loans at December 31, 2003 was $40 million.
Average impaired loans, net of valuation reserves, were $140
million in 2004, $166 million in 2003 and $163 million in 2002.
Cash basis interest income recognized on those loans during each
of the years was immaterial.
Estimated Useful Life
5 to 50 yrs.
3 to 20 yrs.
3 to 30 yrs.
2004
$ 265
933
811
175
133
(1,002)
$1,315
2003
210
858
723
118
63
(911)
1,061
Depreciation and amortization expense related to bank prem-
ises and equipment was $130 million in 2004, $106 million in
2003 and $97 million in 2002.
Occupancy expense has been reduced by rental income from
leased premises of $12 million in 2004, $14 million in 2003 and
$14 million in 2002.
The Bancorp’s subsidiaries have entered into a number of
noncancelable lease agreements with respect to bank premises and
5. OPERATING LEASE EQUIPMENT
Operating lease equipment primarily consists of automobiles leased
to customers, which are reported at cost, net of accumulated depre-
ciation. Upon the early adoption of FIN 46 on July 1, 2003, the
Bancorp was required to consolidate operating lease assets of an
unrelated and previously unconsolidated asset-backed SPE that
was formed for the sole purpose of participating in sale-leaseback
transactions with the Bancorp. See Note 1 for further discussion of
the adoption of FIN 46.
Operating lease equipment at December 31, 2004 and 2003
equipment. The minimum annual rental commitments under
noncancelable lease agreements for land and buildings at Decem-
ber 31, 2004, exclusive of income taxes and other charges, are $49
million in 2005, $45 million in 2006, $42 million in 2007, $37
million in 2008, $32 million in 2009 and $186 million in 2010 and
subsequent years.
Rental expense for cancelable and noncancelable leases was $57
million for 2004, $56 million for 2003 and $48 million for 2002.
was $304 million and $767 million, net of accumulated deprecia-
tion of $244 million and $542 million, respectively. Depreciable
lives for operating lease equipment generally range from three years
to ten years. The minimum future lease rental payments due from
customers on operating lease equipment at December 31, 2004,
totaled $270 million, of which $190 million is due in 2005, $77
million in 2006 and $3 million in 2007. Depreciation expense
related to operating lease equipment for the years ended December
31, 2004 and 2003 was $106 million and $87 million, respectively.
6. GOODWILL
Changes in the net carrying amount of goodwill by operating segment for the years ended December 31, 2004 and 2003 were as follows:
($ in millions)
Commercial Banking
Retail Banking
Investment Advisors
Processing Solutions
Balance as of December 31, 2002 . . . . . . . . . . . . . .
Goodwill adjustment . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2003 . . . . . . . . . . . . . .
Acquisition . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Divestiture . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Balance as of December 31, 2004 . . . . . . . . . . . . . .
$188
—
188
185
—
$373
234
—
234
78
—
312
101
(2)
99
4
—
103
217
—
217
—
(26)
191
Total
740
(2)
738
267
(26)
979
SFAS No. 142, “Goodwill and Other Intangible Assets,” issued in
June 2001, discontinued the practice of amortizing goodwill and
initiated an annual review for impairment. Impairment is to be
examined more frequently if certain indicators are encountered.
The Bancorp has completed its most recent annual goodwill
impairment test required by this Statement as of September 30,
2004 and has determined that no impairment exists.
7. INTANGIBLE ASSETS
Intangible assets consist of servicing rights, core deposits, acquired
merchant processing portfolios, customer lists and non-compete
agreements. Intangibles are amortized on either a straight-line or
an accelerated basis over their estimated useful lives, generally over
a period of up to 25 years. The Bancorp reviews intangible assets for
possible impairment whenever events or changes in circumstances
indicate that carrying amounts may not be recoverable.
Detail of amortizable intangible assets as of December 31:
Fifth Third Bancorp 47
($ in millions)
Mortgage servicing rights . . . . . .
Other consumer and
commercial servicing rights . .
Core deposits . . . . . . . . . . . . . . .
Merchant processing portfolios . .
Other intangible assets . . . . . . . .
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004
Gross Carrying
Amount
Accumulated
Amortization (a)
Net Carrying
Amount
Gross Carrying
Amount
$ 940
22
347
—
9
(601)
(9)
(204)
—
(2)
339
13
143
—
7
870
11
341
60
—
2003
Accumulated
Amortization (a)
Net Carrying
Amount
(581)
(1)
(181)
(25)
—
289
10
160
35
—
Total . . . . . . . . . . . . . . . . . . . . . .
(a) Accumulated amortization for mortgage servicing rights includes a $79 million and $152 million valuation allowance at December 31, 2004 and 2003, respectively.
$1,318
1,282
(816)
(788)
502
494
As of December 31, 2004, all of the Bancorp’s intangible assets
were being amortized. Amortization expense of $130 million, $216
million and $191 million, respectively, was recognized on intan-
gible assets (including servicing rights) for the years ended Decem-
ber 31, 2004, 2003 and 2002, respectively. Estimated amortization
expense, including servicing rights, is $119 million in 2005, $102
million in 2006, $82 million in 2007, $69 million in 2008 and
$55 million in 2009.
8. SERVICING RIGHTS AND RETAINED INTERESTS
Changes in capitalized servicing rights for the years ended Decem-
ber 31:
($ in millions)
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . .
Amount capitalized . . . . . . . . . . . . . . . . . . . . . . . . .
Amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Sales . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in valuation reserve . . . . . . . . . . . . . . . . . . .
2004
$299
94
(101)
—
60
2003
263
217
(177)
(1)
(3)
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . .
Changes in the servicing rights valuation reserve for the years ended
December 31:
$352
299
($ in millions)
Balance at January 1 . . . . . . . . . . . . . . . . . . . . . . . . .
Servicing valuation recovery (provision) . . . . . . . . . .
Permanent impairment write-off . . . . . . . . . . . . . . .
2004
$(152)
60
13
2003
(278)
(3)
129
$ (79)
Balance at December 31 . . . . . . . . . . . . . . . . . . . . . .
(152)
The Bancorp maintains a non-qualifying hedging strategy to
manage a portion of the risk associated with changes in impairment
on the mortgage servicing rights (“MSR”) portfolio. This strategy
includes the purchase of various free-standing derivatives (principal
only swaps, swaptions, fl oors, forward contracts, options and inter-
est rate swaps). The mark-to-market adjustments associated with
these derivatives are expected to economically hedge a portion of
the change in value of the MSR portfolio caused by fl uctuating
discount rates, earnings rates and prepayment speeds. The increase
in interest rates during 2004 and the resulting impact of changing
prepayment speeds led to the recovery of $60 million in temporary
impairment on the MSR portfolio. The combined magnitude of
decreasing interest rates during the fi rst six months of 2003 and
subsequent increasing interest rates in the last six months of 2003,
led to the recognition of a net $3 million in temporary impairment
on the MSR portfolio in 2003. As temporary impairment was
recognized on the MSR portfolio in 2003 due to falling primary
and secondary mortgage rates and earnings rates and corresponding
9. DERIVATIVES
The Bancorp maintains an overall interest rate risk management
strategy that incorporates the use of derivative instruments to
minimize signifi cant unplanned fl uctuations in earnings and cash
fl ows caused by interest rate volatility. The Bancorp’s interest rate
risk management strategy involves modifying the repricing charac-
teristics of certain assets and liabilities so that changes in interest
rates do not adversely affect the net interest margin and cash fl ows.
Examples of derivative instruments that the Bancorp may use as
part of its interest rate risk management strategy include interest
rate swaps, interest rate fl oors, interest rate caps, forward contracts,
options and swaptions. Interest rate swap contracts are exchanges
48 Fifth Third Bancorp
increases in prepayment speeds, the Bancorp sold certain securities
that were held at the time as a component of the overall non-quali-
fying hedging strategy, resulting in net realized gains of $3 million
in 2003 that were captured as a component of other noninterest
income in the Consolidated Statements of Income. In addition,
the Bancorp recognized a 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
related to its non-qualifying hedging strategy. As of December
31, 2004 and 2003, other assets included free-standing derivative
instruments with a fair value of $7 million and $8 million, respec-
tively, and other liabilities included a fair value of $3 million as of
December 31, 2004. The outstanding notional amounts on the
free-standing derivative instruments related to the MSR portfolio
totaled $1.9 billion and $.9 billion as of December 31, 2004 and
2003, respectively.
The continued decline in primary and secondary mortgage
rates during 2003 led to historically high refi nance rates and corre-
sponding increases in prepayment speeds. Therefore, the Bancorp
determined a portion of the MSR portfolio was permanently
impaired, resulting in a write-off of $129 million in MSRs against
the related valuation reserve. In 2004, interest rate movement
expectations and corresponding continued acceleration in prepay-
ment speeds resulted in the Bancorp determining a portion of the
MSR portfolio was permanently impaired, resulting in a write-
off of $13 million in MSRs against the related valuation reserve.
Temporary changes in the MSR valuation reserve are captured as a
component of mortgage banking net revenue in the Consolidated
Statements of Income.
The fair value of capitalized servicing rights was $353 million
and $307 million at December 31, 2004 and 2003, respectively.
The Bancorp serviced $23.0 billion and $24.5 billion of residential
mortgage loans and $1.3 billion and $.9 billion of consumer loans
for other investors at December 31, 2004 and 2003, respectively.
of interest payments, such as fi xed-rate payments for fl oating-rate
payments, based on a common notional amount and maturity
date. Forward contracts are contracts in which the buyer agrees
to purchase, and the seller agrees to make delivery of, a specifi c
fi nancial instrument at a predetermined price or yield. Swaptions,
which have the features of a swap and an option, allow, but do
not require, counterparties to exchange streams of payments over a
specifi ed period of time.
As part of its overall risk management strategy relative to its
mortgage banking activity, the Bancorp may enter into freestand-
ing forward contracts to economically hedge interest rate lock
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
commitments. Additionally, the Bancorp may enter into various
free-standing derivatives (principal only swaps, swaptions, fl oors,
options and interest rate swaps) to economically hedge changes in
fair value of its largely fi xed-rate MSR portfolio.
The Bancorp also enters into foreign exchange contracts and
interest rate swaps, fl oors and caps for the benefi t of customers. The
Bancorp economically hedges signifi cant exposures related to these
free-standing derivatives, entered into for the benefi t of custom-
ers, by entering into offsetting third-party contracts with approved,
reputable counterparties with matching terms and currencies that
are generally settled daily. Credit risks arise from the possible
inability of counterparties to meet the terms of their contracts.
The Bancorp’s exposure is limited to the replacement value of the
contracts rather than the notional, principal or contract amounts.
The Bancorp minimizes the credit risk through credit approvals,
limits and monitoring procedures.
Fair Value Hedges
The Bancorp enters into interest rate swaps to convert its fi xed-rate,
long-term debt to fl oating-rate debt. Decisions to convert fi xed-rate
debt to fl oating are made primarily by consideration of the asset/
liability mix of the Bancorp, the desired asset/liability sensitivity
and interest rate levels. For the years ended December 31, 2004 and
2003, certain interest rate swaps met the criteria required to qualify
for the shortcut method of hedge accounting as defi ned in SFAS
No. 133, as amended. Based on this shortcut method of account-
ing treatment, no ineffectiveness is assumed and fair value changes
in the interest rate swaps are recorded as changes in the value of
both the swap and the long-term debt. If any of the interest rate
swaps do not qualify for the shortcut method of accounting, the
ineffectiveness due to differences in the changes in the fair value of
the interest rate swap and the long-term debt are reported within
interest expense in the Consolidated Statements of Income. For the
years ended December 31, 2004 and 2003, changes in the fair value
of any interest rate swaps attributed to hedge ineffectiveness were
insignifi cant to the Bancorp’s Consolidated Statements of Income.
During 2004 and 2003, the Bancorp terminated interest rate
swaps designated as fair value hedges. In accordance with SFAS No.
133, the fair value of the swaps at the date of termination was recog-
nized as a premium on the previously hedged long-term debt and
is being amortized over the remaining life of the long-term debt as
an adjustment to yield.
The Bancorp also enters into forward contracts to hedge the
forecasted sale of its residential mortgage loans. For the years ended
December 31, 2004 and 2003, the Bancorp met certain criteria to
qualify for matched terms hedge accounting as defi ned in SFAS
No. 133, as amended, on the hedged loans for sale. Based on this
treatment, fair value changes in the forward contracts are recorded
as changes in the value of both the forward contract and loans held
for sale in the Consolidated Balance Sheets.
As of December 31, 2004, there were no instances of desig-
nated hedges no longer qualifying as fair value hedges. The follow-
ing table refl ects all fair value hedges included in the Consolidated
Balance Sheets as of December 31:
($ in millions)
Included in other assets:
Interest rate swaps related to debt . . . . . . . . .
Included in other liabilities:
Interest rate swaps related to debt . . . . . . . . .
Forward contracts related to mortgage loans
held for sale . . . . . . . . . . . . . . . . . . . . . . . .
Total included in other liabilities . . . . . . . . . . . .
2004
2003
$49
44
1
$45
54
—
3
3
Cash Flow Hedges
The Bancorp enters into interest rate swaps to convert fl oating-rate
assets and liabilities to fi xed rates and to hedge certain forecasted
transactions. The assets and liabilities are typically grouped and
share the same risk exposure for which they are being hedged. The
Bancorp may also enter into forward contracts to hedge certain
forecasted transactions. As of December 31, 2004 and 2003, $33
million and $8 million, respectively, in net deferred losses, net of
tax, related to cash fl ow hedges were recorded in accumulated other
comprehensive income. Gains and losses on derivative contracts
that are reclassifi ed from accumulated other comprehensive income
to current period earnings are included in the line item in which
the hedged item’s effect in earnings is recorded. As of December
31, 2004, $17 million in deferred losses, net of tax, on derivative
instruments included in accumulated other comprehensive income
are expected to be reclassifi ed into earnings during the next 12
months. All components of each derivative instrument’s gain or loss
are included in the assessment of hedge effectiveness.
The maximum term over which the Bancorp is hedging its
exposure to the variability of future cash fl ows is eight months for
hedges converting fl oating-rate debt to fi xed. During the years
ended December 31, 2004 and 2003, the Bancorp terminated
certain derivatives qualifying as cash fl ow hedges. The fair value
of these contracts, net of tax, is included in accumulated other
comprehensive income and is being amortized over the designated
hedging periods, which range from 17 months to 14 years.
For the year ended December 31, 2004, there were no cash
fl ow hedges that were discontinued related to forecasted transac-
tions deemed not probable of occurring. The Bancorp had less than
$1 million and had $7 million of cash fl ow hedges converting fl oat-
ing-rate debt to fi xed included in other liabilities as of December
31, 2004 and 2003, respectively.
Free-Standing Derivative Instruments
The Bancorp enters into various derivative contracts that focus
on providing derivative products to commercial customers. These
derivative contracts are not designated against specifi c assets or
liabilities on the balance sheet or to forecasted transactions and,
therefore, do not qualify for hedge accounting. These instruments
include foreign exchange derivative contracts entered into for the
benefi t of commercial customers involved in international trade
to hedge their exposure to foreign currency fl uctuations and vari-
ous interest rate derivative contracts for the benefi t of commercial
customers. The Bancorp economically hedges signifi cant exposures
related to these derivative contracts entered into for the benefi t of
customers by generally entering into offsetting third-party forward
contracts with approved reputable counterparties with matching
terms and currencies that are typically settled daily.
Interest rate lock commitments issued on residential mortgage
loan commitments that will be held for resale are also considered
free-standing derivative instruments. The interest rate exposure on
these commitments is economically hedged primarily with forward
contracts. The Bancorp also enters into a combination of freestand-
ing derivative instruments (principal only swaps, swaptions, fl oors,
forward contracts, options and interest rate swaps) to economically
hedge changes in fair value of its largely fi xed rate MSR portfolio.
Additionally, the Bancorp occasionally enters into free-standing
derivative instruments in order to minimize signifi cant fl uctua-
tions in earnings and cash fl ows caused 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 deriva-
tive contracts and interest rate risk derivative contracts are marked
to market and recorded within other noninterest income in the
Consolidated Statements of Income. The net gains (losses) recorded
in the Consolidated Statements of Income relating to free-stand-
ing derivative instruments for the years ended December 31 are
summarized in the table that follows on the next page.
Fifth Third Bancorp 49
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Foreign exchange contracts for customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate lock commitments and forward contracts related to interest rate lock commitments . . . . . . . . . . . .
Derivative instruments related to MSR portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative instruments related to interest rate risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
$ 45
1
(10)
7
2003
35
(1)
15
6
The following table refl ects all 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 commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative instruments related to MSR portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative instruments related to interest rate risk . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total included in other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Included in other liabilities:
Foreign exchange contracts for customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate contracts for customers . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest rate lock commitments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative instruments related to MSR portfolio . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total included in other liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
$168
46
1
—
7
—
$222
$137
46
1
3
$187
2002
25
(2)
100
—
2003
167
67
—
(1)
8
7
248
131
67
—
—
198
The following table summarizes the Bancorp’s derivative position (excluding $13.6 billion in notional amount related to customer accom-
modation activity) as of December 31, 2004:
($ in millions)
Interest rate swaps related to debt:
Receive fi xed/pay fl oating . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receive fl oating/pay fi xed . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forward contracts related to mortgage loans held for sale . . . . . . . . . . . . .
Mortgage servicing rights portfolio:
Principal only swaps . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Receive fi xed/pay fl oating interest rate swaps . . . . . . . . . . . . . . . . . . . .
Receive fl oating/pay fi xed interest rate swaps . . . . . . . . . . . . . . . . . . . .
Purchased swaptions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Notional
Amount
$2,832
72
386
130
475
101
1,195
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$5,191
Weighted-Average
Remaining Maturity
(in months)
Average Receive
Rate
Average Pay
Rate
82
4
1
19
93
77
2
4.99%
2.29
4.21
2.50
4.49
2.83%
3.99
2.57
2.32
4.08
10. SHORT-TERM BORROWINGS
Borrowings with original maturities of one year or less are classifi ed
as short-term. Federal funds purchased are excess balances in reserve
accounts held at Federal Reserve Banks that the Bancorp purchased
from other member banks on an overnight basis. Bank notes are
promissory notes issued by the Bancorp’s subsidiary banks. Other
($ in millions)
As of December 31:
short-term borrowings includes securities sold under repurchase
agreements, Federal Home Loan Bank advances and other borrow-
ings with original maturities of one year or less. A summary of
short-term borrowings and weighted-average rates follows:
2004
2003
2002
Amount
Rate
Amount
Rate
Amount
Rate
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term bank notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Average for the years ending December 31:
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term bank notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Maximum month-end balance:
Federal funds purchased . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short-term bank notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other short-term borrowings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$4,714
775
4,537
$5,896
1,003
6,640
$8,037
1,275
8,233
2.00%
2.30
1.71
1.30%
1.46
1.17
$6,928
500
5,742
$7,001
22
5,350
$7,768
500
6,907
.91%
1.05
.74
1.14%
1.06
1.03
$4,748
—
4,075
$3,262
2
3,927
$5,976
34
4,399
1.21%
—
1.27
1.66%
3.40
1.71
As of December 31, 2004, the Bancorp had issued $28 million
in commercial paper, with unused lines of credit of $72 million
available to support commercial paper transactions and other
corporate requirements.
50 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
11. LONG-TERM DEBT
A summary of long-term debt at December 31:
($ in millions)
Parent Company
Senior:
Maturity
Interest Rate
2004
2003
Extendable notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2006 – 2009
2.375%
$ 1,749
Subordinated:
Fixed-rate notes (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Junior subordinated:
Fixed-rate debentures (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2018
2027
4.5%
8.136%
Subsidiaries
Senior:
Fixed-rate bank notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Floating-rate bank notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Extendable bank notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005 – 2019
2005
2006 – 2014
1.05% – 5.20%
2.21% – 2.37%
2.11% – 2.43%
Subordinated:
Fixed-rate notes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
FixFloat notes (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2005
2010
6.625% – 6.75%
7.75%
Junior subordinated:
Floating-rate debentures (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Floating-rate debentures (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Mandatorily redeemable securities (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Federal Home Loan Bank advances . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Securities sold under repurchase agreements . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial paper-backed obligations . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
(a) Qualify as total capital for regulatory capital purposes.
The 8.136% junior subordinated debentures due in 2027 were
issued by the Bancorp to Fifth Third Capital Trust I (“FTCT1”). The
Bancorp has fully and unconditionally guaranteed all of FTCT1’s
obligations under trust preferred securities issued by FTCT1. The
trust preferred securities are redeemable beginning in 2007.
The three-month LIBOR plus 80 bp junior subordinated
debentures due in 2027 were issued to Old Kent Capital Trust 1
(“OKCT1”). The Bancorp has fully and unconditionally guaran-
teed all of OKCT1’s obligations under trust preferred securities
issued by OKCT1. The trust preferred securities are redeemable
beginning in 2007.
Upon the early adoption of FIN 46 effective July 1, 2003, the
Bancorp deconsolidated both FTCT1 and OKCT1 resulting in a
recharacterization of the underlying consolidated debt obligations
from the previous trust preferred securities obligations to junior
subordinated debenture obligations.
The junior subordinated debentures due in 2030 were assumed
by a subsidiary of the Bancorp in connection with the acquisition of
Franklin Financial. The obligations were issued to Franklin Capi-
tal Trust 1 (“FCT1”). The Bancorp has fully and unconditionally
guaranteed all of FCT1’s obligations under trust preferred securities
issued by FCT1.
The interest rate on the unsecured subordinated fi xfl oat notes
due in 2010 is 7.75% and will convert to a fl oating rate during
2005. The notes may be redeemed on a semi-annual basis.
The mandatorily redeemable securities due 2031 relate to
a preferred stock obligation of a subsidiary of the Bancorp. The
preferred stock will be automatically exchanged for trust preferred
securities in 2031. Beginning fi ve years from the date of issuance,
the Bancorp’s subsidiary has the option, subject to regulatory
approval, to exchange the preferred stock for trust preferred securi-
469
229
2,565
1,100
1,199
354
151
103
17
548
3,888
1,300
286
25
$13,983
—
458
233
497
—
—
365
159
103
—
505
5,094
825
792
32
9,063
2027
2030
2031
2005 – 2034
2007 – 2008
2005 – 2007
2005 – 2032
2.96%
5.57%
Varies
1.09% – 8.34%
2.00% – 2.15%
2.34% – 2.41%
Varies
ties or cash upon a change in the Bancorp’s senior debt rating to or
below BBB, a change in the investor’s tax elections or a change in
applicable tax law. Upon the adoption of SFAS No. 150 on July 1,
2003, the Bancorp reclassifi ed its previous minority interest obli-
gation 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 certain residential mortgage
loans and securities totaling $8.4 billion. The advances mature
as follows: $400 million in 2005, $105 million in 2006, $1,827
million in 2007, $3 million in 2008 and $1,553 million thereafter.
At December 31, 2004, securities sold under agreements to
repurchase have variable rates ranging from 2.00% to 2.15% with
interest payable monthly. The repurchase agreements mature as
follows: $1,000 million in 2007 and $300 million in 2008.
The fl oating-rate, commercial paper-backed obligations are
rolling in nature, mature through 2007 and were recognized as a
result of the early adoption of FIN 46 and related consolidation
of an unrelated SPE involved in the sale and subsequent leaseback
of certain automobile operating lease assets with the Bancorp. See
Note 1 for further discussion of adoption of FIN 46.
Medium-term senior notes and subordinated bank notes with
maturities ranging from one year to 30 years can be issued by two
subsidiary banks, of which $4.9 billion was outstanding at Decem-
ber 31, 2004 with $14.3 billion available for future issuance. There
were no other medium-term senior notes outstanding on either
of the two subsidiary banks as of December 31, 2004. In January
2005, a subsidiary of the Bancorp issued $500 million of subordi-
nated bank notes with a rate of 4.75% due in 2015.
Fifth Third Bancorp 51
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
12. COMMITMENTS AND CONTINGENT LIABILITIES
The Bancorp, in the normal course of business, uses derivatives
and other fi nancial instruments to manage its interest rate risks and
prepayment risks and to meet the fi nancing needs of its custom-
ers. These fi nancial instruments primarily include commitments
to extend credit, standby and commercial letters of credit, foreign
exchange contracts, commitments to sell residential mortgage
loans, principal only swaps, interest rate swap agreements, written
options and interest rate lock commitments. These instruments
involve, to varying 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 amounts
of these instruments refl ect the extent of involvement the Bancorp
has in particular classes of fi nancial instruments.
Creditworthiness for all instruments is evaluated on a case-by-
case basis in accordance with the Bancorp’s credit policies. While
notional amounts are typically used to express the volume of these
transactions, it does not represent the much smaller amounts that
are potentially subject to credit risk. Entering into derivative instru-
ments involves the risk of dealing with counterparties and their
ability to meet the terms of the contract. The Bancorp controls the
credit risk of these transactions through adherence to a derivatives
products policy, credit approval policies and monitoring proce-
dures. Collateral, if deemed necessary, is based on management’s
credit evaluation of the counterparty and may include business
assets of commercial borrowers, as well as personal property and
real estate of individual borrowers and guarantors.
A summary of signifi cant commitments and contingent liabil-
ities at December 31:
($ in millions)
Commitments to extend credit . . . . . . . . . . .
Letters of credit (including standby
letters of credit) . . . . . . . . . . . . . . . . . . . .
Foreign exchange contracts for customers:
Spots . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Forwards . . . . . . . . . . . . . . . . . . . . . . . . .
Written options . . . . . . . . . . . . . . . . . . . .
Forward contracts to sell mortgage loans . . .
Principal only swaps . . . . . . . . . . . . . . . . . . .
Interest rate swap agreements . . . . . . . . . . . .
Written options . . . . . . . . . . . . . . . . . . . . . .
Interest rate lock commitments . . . . . . . . . .
Contract or Notional Amount
2004
$31,312
2003
25,406
5,923
342
4,624
349
739
130
9,798
437
328
4,908
141
3,950
240
796
181
7,280
600
377
Commitments to extend credit are agreements to lend, typi-
cally having fi xed expiration dates or other termination clauses that
13. LEGAL AND REGULATORY PROCEEDINGS
During 2003, eight putative class action complaints were fi led in
the United States District Court for the Southern District of Ohio
against the Bancorp and certain of its offi cers alleging violations of
federal securities laws related to disclosures made by the Bancorp
regarding its integration of Old Kent and its effect on the Bancorp’s
infrastructure, including internal controls, and prospects and relat-
ed matters. The complaints, which have been consolidated, seek
unquantifi ed damages on behalf of putative classes of persons who
purchased the Bancorp’s common stock, attorneys’ fees and other
expenses. Management believes there are substantial defenses to
may require payment of a fee. Since many of the commitments
to extend credit may expire without being drawn upon, the total
commitment amounts do not necessarily represent future cash
fl ow requirements. The Bancorp is exposed to credit risk in the
event of nonperformance for the amount of the contract. Fixed-
rate commitments are also subject to market risk resulting from
fl uctuations in interest rates and the Bancorp’s exposure is limited
to the replacement value of those commitments. As of December
31, 2004 and 2003, the Bancorp had a reserve for probable credit
losses totaling $53 million and $55 million, respectively, included
in other liabilities.
Standby and commercial letters of credit are conditional
commitments issued to guarantee the performance of a customer
to a third party. At December 31, 2004, approximately $1,782
million of standby letters of credit expire within one year, $3,812
million expire between one to fi ve years and $294 million expire
thereafter. At December 31, 2004, letters of credit of approximately
$35 million were issued to commercial customers for a duration of
one year or less to facilitate trade payments in domestic and foreign
currency transactions. The amount of credit risk involved in issu-
ing letters of credit in the event of nonperformance by the other
party is the contract amount. As of December 31, 2004 and 2003,
the Bancorp had a reserve for probable credit losses totaling $19
million and $18 million, respectively, included in other liabilities.
As discussed in Note 9, the Bancorp’s policy is to enter into
derivative contracts to accommodate customers, to offset customer
accommodations and to offset its own market risk incurred in the
ordinary course of its business. Contingent obligations arising
from market risk assumed in derivatives are offset with additional
rights contained in other derivatives or contracts, such as loans or
borrowings. Certain derivatives provide the Bancorp rights with-
out contingent obligations (purchased options). Other derivatives
represent contingent obligations without providing additional
rights (written options, including interest rate lock commit-
ments). Still other derivatives provide additional rights combined
with contingent obligations (foreign exchange spots and forwards,
forward contracts to sell mortgage loans, principal only swaps and
interest rate swap agreements). All derivatives that possess a contin-
gent obligation are included in the table.
There are claims pending against the Bancorp and its subsidiar-
ies that have arisen in the normal course of business. Based on a
review of such litigation with legal counsel, management believes
any resulting liability would not have a material effect upon the
Bancorp’s consolidated fi nancial position or results of operations. See
Note 13 for additional information regarding these proceedings.
these lawsuits. Management believes the impact of the fi nal dispo-
sition of these lawsuits will not be material to the Bancorp.
The Bancorp and its subsidiaries are not parties to any other
material litigation other than those arising in the normal course of
business. While it is impossible to ascertain the ultimate resolu-
tion or range of fi nancial liability with respect to these contingent
matters, management believes any resulting liability from these
other actions would not have a material effect upon the Bancorp’s
consolidated fi nancial position or results of operations.
52 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
14. GUARANTEES
The Bancorp has performance obligations upon the occurrence
of certain events under fi nancial guarantees provided in certain
contractual arrangements. These various arrangements are summa-
rized below.
At December 31, 2004, the Bancorp had issued approximately
$5.9 billion of fi nancial and performance standby letters of credit
to guarantee the performance of various customers to third parties.
The maximum amount of credit risk in the event of nonperfor-
mance by these parties is equivalent to the contract amount and
totals $5.9 billion. Upon issuance, the Bancorp recognizes a liability
equivalent to the amount of fees received from the customer for
these standby letter of credit commitments. At December 31, 2004,
the Bancorp maintained a credit loss reserve of approximately $19
million related to these fi nancial standby letters of credit. Approxi-
mately 75% of the total standby letters of credit are secured and in
the event of nonperformance by the customers, the Bancorp has
rights to the underlying collateral provided including commercial
real estate, physical plant and property, inventory, receivables, cash
and marketable securities.
Through December 31, 2004, the Bancorp had transferred,
subject to credit recourse, certain primarily fl oating-rate and short-
term investment grade commercial loans to an unconsolidated
QSPE that is wholly owned by an independent third-party. The
outstanding balance of such loans at December 31, 2004 was
approximately $1.9 billion. These loans may be transferred back
to the Bancorp upon the occurrence of an event specifi ed in the
legal documents that established the QSPE. These events include
borrower default on the loans transferred, bankruptcy preferences
initiated against underlying borrowers and ineligible loans trans-
ferred by the Bancorp to the QSPE. The maximum amount of credit
risk in the event of nonperformance by the underlying borrowers is
approximately equivalent to the total outstanding balance of $1.9
billion at December 31, 2004. The outstanding balances are typi-
cally secured by the underlying collateral that include commercial
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.
At December 31, 2004, the Bancorp had provided credit
recourse on approximately $569 million of residential mortgage
loans sold to unrelated third parties. In the event of any customer
default, pursuant to the credit recourse provided, the Bancorp
is required to reimburse the third party. The maximum amount
of credit risk in the event of nonperformance by the underlying
15. RELATED PARTY TRANSACTIONS
At December 31, 2004 and 2003, certain directors, executive offi -
cers, principal holders of Bancorp common stock and associates of
such persons were indebted, including undrawn commitments to
lend, to the Bancorp’s banking subsidiaries in the aggregate amount,
net of participations, of $260 million and $385 million, respective-
ly. As of December 31, 2004 and 2003, the outstanding balance on
loans to related parties, net of participations and undrawn commit-
ments, was $70 million and $118 million, respectively.
Commitments to lend to related parties as of December 31,
2004 and 2003, net of participations, were comprised of $244
million and $364 million, respectively, in loans and guarantees for
various business and personal interests made to the Bancorp and
subsidiary directors and $16 million and $21 million, respectively,
to certain executive offi cers. This indebtedness was incurred in the
borrowers is equivalent to the total outstanding balance of $569
million. In the event of nonperformance, the Bancorp has rights to
the underlying collateral value attached to the loan. Consistent with
its overall approach in estimating credit losses for various categories
of residential mortgage loans held in its loan portfolio, the Bancorp
maintains an estimated credit loss reserve of approximately $17
million relating to these residential mortgage loans sold.
As of December 31, 2004, the Bancorp has also fully and
unconditionally guaranteed $349 million of certain long-term
borrowing obligations issued by three wholly-owned issuing trust
entities that have been deconsolidated upon the early adoption of
the provisions of FIN 46. See Note 1 for further discussion of adop-
tion of FIN 46.
During 2004, the Bancorp, through its electronic payment
processing division, processed VISA® and MasterCard® merchant
card transactions. Pursuant to VISA® and MasterCard® rules,
the Bancorp assumes certain contingent liabilities relating to these
transactions which typically arise from billing disputes between the
merchant and cardholder that are ultimately resolved in the card-
holder’s favor. In such cases, these transactions are “charged back” to
the merchant and disputed amounts are refunded to the cardholder.
In the event that the Bancorp is unable to collect these amounts from
the merchant, it will bear the loss for refunded amounts. The likeli-
hood of incurring a contingent liability arising from chargebacks
is relatively low, as most products or services are delivered when
purchased, and credits are issued on returned items. For the year
ended December 31, 2004, the Bancorp processed approximately
$121 million of chargebacks presented by issuing banks resulting
in actual losses to the Bancorp of approximately $3 million. The
Bancorp accrues for probable losses based on historical experience.
The credit loss reserve was not material at December 31, 2004.
Fifth Third Securities, Inc (“FTS”), a subsidiary of the Bancorp,
guarantees the collection of all margin account balances held by its
brokerage clearing agent for the benefi t of FTS customers. FTS is
responsible for payment to its brokerage clearing agent for any loss,
liability, damage, cost or expense incurred as a result of customers
failing to comply with margin or margin maintenance calls on all
margin accounts. The margin account balance held by the broker-
age clearing agent as of December 31, 2004 was $48 million. In
the event of any customer default, FTS has rights to the underlying
collateral provided. Given certain FTS margin account relation-
ships were in place prior to January 1, 2003 and the existence of
the underlying collateral provided as well as the negligible historical
credit losses, FTS does not maintain any loss reserve.
ordinary course of business on substantially the same terms as those
prevailing at the time of comparable transactions with unrelated
parties.
During 2004, the Bancorp entered into a daily line of credit
and term loan agreement with First National Bankshares of Florida,
Inc. (“First National”) and its subsidiaries. Outstanding balances on
the line of credit and term loan at December 31, 2004 were $328
million and $30 million, respectively. The Bancorp completed the
acquisition of First National on January 1, 2005.
None of the Bancorp’s affi liates, offi cers, directors or employ-
ees has an interest in or receives any remuneration from any special
purpose entities or qualifi ed special purpose entities with which the
Bancorp transacts business.
Fifth Third Bancorp 53
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
16. OTHER COMPREHENSIVE INCOME
The Bancorp has elected to present the disclosures required by
SFAS No. 130, “Reporting Comprehensive Income,” in the
Consolidated Statements of Changes in Shareholders’ Equity on
page 38 and in the table below. Disclosure of the reclassifi cation
adjustments, related tax effects allocated to other comprehensive
income and accumulated other comprehensive income as of and for
the years ended December 31:
($ in millions)
Current Period Activity
Accumulated Balance
Pre-Tax
Tax Effect
Net
Pre-Tax
Tax Effect
Net
2004
Losses on available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassifi cation adjustment for losses recognized in net income . . . . . . . . . . . . . . .
Losses on cash fl ow hedge derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassifi cation adjustment for gains recognized in net income . . . . . . . . . . . . . . . .
Change in minimum pension liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (74)
37
(39)
(1)
(1)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ (78)
2003
Losses on available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassifi cation adjustment for gains recognized in net income . . . . . . . . . . . . . . . .
Gains (losses) on cash fl ow hedge derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in minimum pension liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(667)
(84)
14
(17)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$(754)
2002
Gains on available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Reclassifi cation adjustment for gains recognized in net income . . . . . . . . . . . . . . . .
Losses on cash fl ow hedge derivatives . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Change in minimum pension liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 793
(147)
(10)
(80)
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 556
27
(13)
15
—
—
29
234
30
(5)
6
265
(277)
51
3
28
(195)
17. COMMON STOCK AND TREASURY STOCK
(47)
24
(24)
(1)
(1)
(49)
(433)
(54)
9
(11)
(489)
516
(96)
(7)
(52)
361
(114)
(52)
(98)
(264)
(77)
(12)
(97)
(186)
674
(26)
(80)
568
42
19
34
95
28
4
34
66
(236)
9
28
(199)
The following is a summary of the share activity within common stock issued and treasury stock for the years ended December 31:
Common Stock
Treasury Stock
($ and shares in millions)
Shares at December 31, 2001 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares acquired for treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options exercised, including treasury shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares at December 31, 2002 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares acquired for treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options exercised, including treasury shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares at December 31, 2003 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shares acquired for treasury . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock options exercised, including treasury shares issued . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock issued . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock issued in business combination . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Value
$1,294
—
1
1,295
—
—
—
1,295
—
—
—
—
—
Shares at December 31, 2004 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,295
Shares
583
—
—
583
—
—
—
583
—
—
—
—
—
583
Value
$ 4
720
(180)
544
655
(233)
(4)
962
987
(222)
(33)
(281)
1
$1,414
(72)
(33)
(64)
(169)
(49)
(8)
(63)
(120)
438
(17)
(52)
369
Shares
—
12
(3)
9
12
(4)
—
17
19
(4)
(1)
(5)
—
26
On January 10, 2005, the Bancorp repurchased 35.5 million
shares of its common stock, approximately six percent of the total
outstanding shares, for approximately $1.6 billion in an overnight
accelerated share repurchase transaction. The transaction provides
that the counterparty will purchase shares in the market over a
period of time. Upon completion, the Bancorp will receive or pay
a price adjustment in the form of cash or shares, at its election, that
is largely based on the volume weighted-average price of the shares
purchased by the counterparty.
54 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
18. STOCK-BASED COMPENSATION
The Bancorp has historically emphasized employee stock owner-
ship. Accordingly, the Bancorp encourages further ownership
through granting stock-based compensation to approximately
24% of its employees, including approximately 5,000 offi cers.
Based on total stock-based awards outstanding and shares remain-
ing for future grants under the Incentive Compensation Plan, the
Bancorp’s total overhang is approximately 11%. The following table
provides detail of the number of shares to be issued upon exercise
of outstanding stock-based awards and remaining shares available
for future issuance under all of the Bancorp’s equity compensation
plans, as of December 31, 2004:
Plan Category (in thousands)
Equity compensation plans approved by shareholders:
Options . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Restricted stock . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Performance units . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Stock appreciation rights (“SARs”) . . . . . . . . . . . . . . . . . . . . . . .
Equity compensation plans not approved by shareholders:
Employee stock purchase plan . . . . . . . . . . . . . . . . . . . . . . . . . .
Total (g)
Number of Shares to Be
Issued Upon Exercise
Weighted-Average
Exercise Price
Shares Available for
Future Issuance (a)
33,442
596
(d)
(e)
34,038
$46.40
(c)
(c)
(e)
$46.40
(b)
(b)
(b)
(b)
764(f )
20,413(h)
(a) Excludes shares to be issued upon exercise of outstanding awards.
(b) Under the Incentive Compensation Plan, 20.0 million shares of stock were authorized for issuance as nonqualifi ed and incentive stock options, SARs, restricted stock and
restricted stock units, performance shares and performance units and stock awards. As of December 31, 2004, 19.1 million shares remain available for future issuance.
(c) Not applicable
(d) The number of shares to be issued is dependent upon the Bancorp achieving certain predefi ned performance targets and ranges from zero shares to approximately 98 thousand
shares, dependent on relative performance.
(e) During 2004, approximately 3.7 million SARs were granted at a weighted-average grant price of $54.37. The number of shares to be issued upon exercise will be determined
at exercise based on the difference between the grant price and the market price at the date of exercise.
(f ) Represents remaining shares of Fifth Third common stock under the Bancorp’s 1993 Stock Purchase Plan, as amended and restated.
(g) Excludes 2.7 million outstanding options awarded under plans assumed by the Bancorp in connection with certain mergers and acquisitions. The Bancorp has not made any
awards under these plans and will make no additional awards under these plans. The weighted-average exercise price of the outstanding options is $31.92 per share.
(h) Includes .5 million shares issuable relating to deferred stock compensation plans.
Stock-based awards are eligible for issuance under the Bancorp’s
Incentive Compensation Plan to key employees and directors of
the Bancorp and its subsidiaries. The Incentive Stock Compensa-
tion Plan was approved by shareholders on March 23, 2004. The
plan authorized the issuance of up to 20 million shares as equity
compensation, in addition to those shares available for issuance
under the predecessor plan, the 1998 Long Term Incentive Stock
Plan. During 2004, the Bancorp utilized all shares remaining under
the predecessor plan. Options and SARs are issued at fair market
value at the date of grant, have up to ten-year terms and vest and
become fully exercisable at the end of three or four years of contin-
ued employment. Currently, all SARs outstanding are to be settled
with stock. Restricted stock grants vest after four years 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 vesting period. Stock-based compensation
expense was $87 million, $110 million and $128 million for the
years ended December 31, 2004, 2003 and 2002, respectively. The
exercise price of the Bancorp’s stock option grants equals the market
price of the underlying stock on the date of grant. A summary of
stock-based award activity during the years ended December 31:
Options (shares in thousands)
Outstanding at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted (a) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
2003
2002
Shares
40,727
(4,248)
(1,422)
1,105
Average
Option Price
$44.40
25.41
58.07
19.81
Shares
39,030
(3,843)
(958)
6,498
Average
Option Price
$41.85
27.25
58.61
51.88
Shares
36,735
(3,736)
(533)
6,564
Average
Option Price
$36.27
30.73
53.97
67.68
Outstanding at December 31 . . . . . . . . . . . . . . . . . . . . . . .
Exercisable at December 31 . . . . . . . . . . . . . . . . . . . . . . . .
(a) 2004 options granted include 1,021 options assumed as part of the Franklin Financial acquisition completed on June 11, 2004. These options were granted under a Franklin
36,162
30,912
$45.31
$43.57
39,030
29,935
$44.40
$40.46
40,727
30,574
$41.85
$36.96
Financial plan assumed by the Bancorp.
Stock Appreciation Rights (shares in thousands)
Outstanding at January 1 . . . . . . . . . . . . . . . . . . . . . . . . . .
Exercised . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding at December 31 . . . . . . . . . . . . . . . . . . . . . . .
Exercisable at December 31 . . . . . . . . . . . . . . . . . . . . . . . .
Shares
—
—
(187)
3,716
3,529
1
2004
2003
2002
Average
Grant Price
Shares
Average
Grant Price
Shares
Average
Grant Price
$ —
—
54.40
54.37
$54.37
$54.40
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
Fifth Third Bancorp 55
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Restricted Stock (shares in thousands)
Outstanding unvested at January 1 . . . . . . . . . . . . . . . . . . .
Vested . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Canceled . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Granted . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Outstanding unvested at December 31 . . . . . . . . . . . . . . . .
Shares
48
(18)
(41)
607
596
2004
2003
2002
Average
Market Price
at Grant
$58.11
59.16
54.26
53.86
$54.01
Average
Market Price
at Grant
$62.54
62.81
—
56.90
$58.11
Average
Market Price
at Grant
$54.73
54.23
—
62.78
$62.54
Shares
165
(155)
—
8
18
Shares
18
(8)
—
38
48
At December 31, 2004, there were 14.2 million incentive options,
22.0 million non-qualifi ed options, 3.5 million SARs, .1 million
shares reserved for performance unit awards and .6 million restrict-
ed stock awards outstanding and 19.1 million shares available for
grant. Options, SARs and restricted stock outstanding represent
seven percent of the Bancorp’s issued shares at December 31,
2004.
Exercise Price
per Share
Under $11 . . . . .
$11-$25 . . . . . . .
$25-$40 . . . . . . .
$40-$55 . . . . . . .
Over $55 . . . . . .
All options . . . . .
Lowest
Price
$ 5.06
11.06
25.22
40.17
55.01
$ 5.06
Highest
Price
$10.86
24.90
39.96
54.99
68.76
$68.76
Outstanding Stock Options
Exercisable Stock Options
Number of Options
at Year-End
(000’s)
Weighted-Average
Exercise Price
Average Remaining
Contractual Life
(in years)
Number
of Options
(000’s)
Weighted-Average
Exercise Price
358
4,990
5,100
19,365
6,349
36,162
$ 7.49
19.06
35.81
48.37
66.37
$45.31
1.24
2.11
3.55
6.02
7.27
5.30
358
4,990
5,086
15,680
4,798
30,912
$ 7.49
19.06
35.81
47.65
66.61
$43.57
In addition, approximately 98 thousand shares of perfor-
mance-based awards were granted during 2004. These awards are
payable in stock and cash contingent upon the Bancorp achieving
certain predefi ned performance targets over the three-year measure-
ment period. These performance targets are based on the Bancorp’s
performance relative to a defi ned peer group. The performance-
based awards were granted at an average fair value of $55.75 per
share.
The Bancorp sponsors a Stock Purchase Plan that allows
qualifying employees to purchase shares of the Bancorp’s common
stock at a 15% discount from market price. During the years ended
December 31, 2004, 2003 and 2002, respectively, there were
236,115, 194,133 and 157,308 shares purchased by participants
and the Bancorp recognized compensation expense of $2 million in
2004 and $1 million in both 2003 and 2002.
19. OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
The major components of other noninterest income and other noninterest expense for the years ended December 31:
($ in millions)
Other noninterest 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 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other noninterest expense:
Marketing and communication . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Postal and courier . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bankcard . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Intangible amortization . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Franchise and other taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loan and lease . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Printing and supplies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Travel . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Data processing and operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Debt prepayment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
2003
2002
$ 48
57
174
61
31
—
—
157
143
$ 671
$ 99
49
197
29
32
82
33
41
114
325
309
$1,310
59
65
178
62
28
—
—
—
189
581
99
49
176
40
33
106
35
35
97
20
255
945
51
70
157
62
55
7
26
—
152
580
96
48
142
37
30
91
37
38
82
—
285
886
56 Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
20. SALES AND TRANSFERS OF LOANS
The Bancorp sold fi xed and adjustable rate residential mortgage
loans in securitization transactions, during 2004 and 2003. The
Bancorp also securitized and sold certain automotive loans in 2004
and securitized and sold certain home equity lines of credit in 2003.
In all of those sales, the Bancorp retained servicing responsibilities.
In addition, the Bancorp retained a residual interest and an inter-
est only strip (“IO strip”) in the 2003 home equity lines of credit
securitization and a residual interest and a subordinated tranche
in the 2004 automotive loans securitization. The Bancorp receives
annual servicing fees at a percentage of the outstanding balance and
rights to future cash fl ows arising after the investors in the securi-
tization trusts have received the return for which they contracted.
The investors and the securitization trusts have no recourse to the
Bancorp’s other assets for failure of debtors to pay when due. The
Bancorp’s retained interests are subordinate to investor’s interests.
Their value is subject to credit, prepayment and interest rate risks
on the sold fi nancial assets. In 2004 and 2003, the Bancorp recog-
nized pretax gains of $112 million and $340 million, respectively,
on the sales of residential mortgage loans, home equity lines of
credit and automotive loans. Total proceeds from residential mort-
gage loan, home equity lines of credit and automotive loan sales in
2004 and 2003 were $6.1 billion and $16.0 billion, respectively.
Initial carrying values of retained interests recognized during
2004 and 2003 were as follows:
($ in millions)
2004
2003
$83
11
26
21
Mortgage servicing assets . . . . . . . . . . . . . . . . . . . . .
Other consumer and commercial servicing assets . . .
Consumer residual interests . . . . . . . . . . . . . . . . . . .
Subordinated interests . . . . . . . . . . . . . . . . . . . . . . .
206
11
29
—
The subordinated interests recognized in 2004 are securities
retained from the automotive loan securitization. These securities
are investment grade and are carried at their market value. Key
economic assumptions used in measuring other retained interests
at the date of securitization resulting from securitizations complet-
ed during 2004 and 2003 were as follows:
2004
2003
Weighted-
Average Life
(in years)
Prepayment
Speed
Assumption
Discount
Rate
Weighted-
Average
Default Rate
Weighted-
Average Life
(in years)
Prepayment
Speed
Assumption
Discount
Rate
Weighted-
Average
Default Rate
Rate
Residential mortgage loans:
Servicing assets . . . . .
Servicing assets . . . . Adjustable
Fixed
Home equity lines of credit:
Servicing assets . . . . . Adjustable
Residual interest . . . . Adjustable
Automotive loans:
Servicing assets . . . . .
Residual interest . . . .
Fixed
Fixed
7.0
4.4
2.0
2.0
2.9
2.9
16.1%
25.6
9.5%
10.7
38.8
38.8
1.55
1.55
11.7
11.7
12.0
12.0
N/A
N/A
N/A
.35%
N/A
1.25
6.2
3.3
2.1
2.1
—
—
15.5%
31.9
9.8%
10.7
40
40
—
—
12.0
11.7
—
—
N/A
N/A
N/A
.35%
—
—
Expected credit losses and the effect of an unfavorable change in credit losses for servicing rights have been deemed to be immaterial based
on historical credit experience. At December 31, 2004, key economic assumptions and the sensitivity of the current fair value of residual cash
fl ows to immediate 10% and 20% adverse changes in those assumptions are as follows:
Prepayment Speed Assumption Residual Servicing Cash Flows
Weighted-Average Default
($ in millions)
Rate
Residential mortgage loans:
Servicing assets . . . . .
Servicing assets . . . . .
Home equity lines of credit:
Servicing assets . . . . .
Residual interest . . . .
Fixed
Adjustable
Adjustable
Adjustable
Automotive loans:
Servicing assets . . . . .
Residual interest . . . .
Fixed
Fixed
Weighted-
Average Life
(in years)
Rate
Impact of Adverse
Change on Fair Value Discount
20%
10%
Rate
Impact of Adverse
Change on Fair Value
Impact of Adverse
Change on Fair Value
10%
20%
Rate
10%
20%
6.1
3.5
2.4
2.1
1.3
1.2
15.2% $16
2
29.6
35.0
35.0
1.55
1.55
1
2
—
—
$30
3
1
4
1
—
9.5%
11.4
11.7
11.7
12.0
12.0
$9
1
—
1
—
—
$17
1
—
1
—
1
—%
—
$—
—
—
.35
—
1.25
—
—
—
1
$—
—
—
1
—
1
Fair
Value
$313
26
7
29
7
23
These sensitivities are hypothetical and should be used with
caution. As the fi gures indicate, changes in fair value based on a
10% variation in assumptions typically cannot be extrapolated
because the relationship of the change in assumption to the change
in fair value may not be linear. Also, in the above table, the effect
of a variation in a particular assumption on the fair value of the
retained interest is calculated without changing any other assump-
tion; in reality, changes in one factor may result in changes in
another (for example, increases in market interest rates may result
in lower prepayments and increased credit losses), which might
magnify or counteract the sensitivities.
In addition to the retained interests listed above, the Bancorp
retains certain investment grade securities from securitizations.
The fair value of these retained securities was $34 million and $56
million at December 31, 2004 and 2003, respectively. The securi-
ties are valued using quoted market prices.
The following table provides a summary of the total loans and
leases managed by the Bancorp, including loans securitized:
Fifth Third Bancorp 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
For the Years Ended December 31 ($ in millions)
Commercial loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Commercial leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Construction loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Residential mortgage . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other consumer loans . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Consumer leases . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total loans and leases managed and securitized (a) . . . . . . . .
Less:
Loans securitized . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans held for sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
$16,058
7,636
3,426
4,726
7,629
20,222
2,051
61,748
1,381
559
Balance
2003
14,226
6,894
3,264
3,636
5,801
19,036
2,448
55,305
1,116
1,881
Balance of Loans 90 Days
or More Past Due
2004
2003
$ 21
8
1
9
44
62
3
$148
14
9
1
9
50
61
6
150
Net Credit Losses
2004
$ 81
9
7
6
15
118
19
$255
2003
136
7
22
2
24
96
25
312
Total loans and leases held for investment . . . . . . . . . . . . . .
(a) Excluding securitized assets that the Bancorp continues to service but with which it has no other continuing involvement.
$59,808
52,308
Static pool credit losses are calculated by aggregating the actual
and projected future credit losses for a securitization and dividing
these losses by the original balance in each pool of assets. For the
home equity lines of credit securitized in 2003, the static pool credit
losses were .78% and .66% as of December 31, 2004 and 2003,
respectively. For the automotive loans securitized in 2004, the static
pool credit losses were 1.14% as of December 31, 2004.
During 2004 and 2003, the Bancorp transferred, subject to
credit recourse, certain commercial loans to an unconsolidated QSPE
that is wholly owned by an independent third party. At December
31, 2004 and 2003, the outstanding balance of loans transferred was
$1.9 billion and $1.8 billion, respectively. The commercial loans
transferred to the QSPE are primarily fl oating-rate and short-term
investment grade in nature. Generally, the loans transferred provide
a lower yield due to their investment grade nature, and therefore
transferring these loans to the QSPE allows the Bancorp to reduce
its exposure to these lower yielding loan assets while maintaining
the customer relationships. These commercial loans are transferred
at par with no gain or loss recognized. The Bancorp receives rights
to future cash fl ows arising after the investors in the securitization
trust have received the return for which they contracted. Due to the
relatively short-term nature of the loans transferred, no value has
been assigned to this retained future stream of fees to be received.
As of December 31, 2004, the $1.9 billion balance of outstanding
loans had a weighted-average remaining maturity of 62 days.
During 2004, the Bancorp securitized and sold $750 million
in automotive loans to an unconsolidated QSPE that is wholly
owned by an independent third party. The Bancorp retained servic-
ing rights and receives a servicing fee based on a percentage of the
outstanding balance. Additionally, the Bancorp retained a subor-
dinated tranche of securities and rights to future cash fl ows arising
after investors in the securitization trust have received the return for
which they contracted. The investors and 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 automotive loans. As of December 31,
2004, the remaining balance of sold automotive loans was $568
million.
During 2003, the Bancorp securitized and sold $903 million
in home equity lines of credit to an unconsolidated QSPE that is
wholly owned by an independent third party. The Bancorp retained
servicing rights and receives a servicing fee based on a percentage of
the outstanding balance. Additionally, the Bancorp retained rights
to future cash fl ows arising after investors in the securitization trust
have received the return for which they contracted. The investors
and 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 December 31, 2004, the remaining balance of
sold home equity lines of credit was $717 million.
The Bancorp had the following cash fl ows with unconsolidated
QSPE’s during 2004 and 2003:
($ in millions)
Proceeds from transfers, including new securitizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from collections re-invested in revolving-period securitizations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Transfers received from QSPE’s . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fees received . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
$1,379
162
164
32
2003
1,345
46
116
25
58 Fifth Third Bancorp
21. DISCONTINUED OPERATIONS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In November 2003, the Bancorp announced an agreement to sell its
corporate trust business, a component of the Commercial Banking
segment. The transaction closed in December 2003. The Bancorp
recognized an after-tax gain of $40 million on the sale, which is
captured as a component of net income from discontinued opera-
tions in the Consolidated Statements of Income.
Financial information for discontinued operations is summa-
rized below:
($ in millions)
Total revenues . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Gain on sale . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Income before income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net income from discontinued operations . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2003
$12
62
6
68
24
$44
$ 2
2002
12
—
6
6
2
4
2
22. INCOME TAXES
The Bancorp and its subsidiaries fi le a consolidated Federal income tax return. A summary of applicable income taxes included in the Consoli-
dated Statements of Income as of December 31:
($ in millions)
Current income taxes:
U.S. income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total current tax . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred income taxes:
U.S. income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State and local income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
$691
34
725
(12)
(1)
(13)
Applicable income taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$712
2003
2002
482
9
491
264
31
295
786
454
27
481
257
(4)
253
734
Deferred income taxes are included as a component of accrued taxes, interest and expenses in the Consolidated Balance Sheets and are
comprised of the following temporary differences as of December 31:
($ in millions)
Deferred tax assets:
Reserves for credit losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other comprehensive income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State net operating losses . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax liabilities:
Lease fi nancing . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
State deferred taxes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Bank premises and equipment . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total deferred tax liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total net deferred tax liability . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
$ 250
141
95
153
122
761
1,819
236
75
231
2,361
$1,600
A reconciliation between the statutory U.S. income tax rate and the Bancorp’s effective tax rate for the years ended December 31:
Statutory tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase (decrease) resulting from:
State taxes, net of federal benefi t . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tax-exempt income . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Credits . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other, net . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
2004
35.0%
1.0
(2.0)
(1.7)
(.5)
Effective tax rate . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
31.8%
2003
35.0
1.0
(1.8)
(1.2)
(.8)
32.2
2003
269
137
66
154
53
679
1,801
238
54
241
2,334
1,655
2002
35.0
.6
(2.1)
(.9)
(.7)
31.9
Retained earnings at December 31, 2004 includes $157 million
in allocations of earnings for bad debt deductions of former thrift
subsidiaries for which no income tax has been provided. Under
current tax law, if certain of the Bancorp’s subsidiaries use these
bad debt reserves for purposes other than to absorb bad debt losses,
they will be subject to Federal income tax at the current corporate
tax rate.
Fifth Third Bancorp 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
rate of return assumption refl ects the average return expected on
the assets invested to provide for the Plan’s liabilities. In determin-
ing the expected long-term rate of return assumption, the Bancorp
evaluated actuarial and economic inputs, including long-term
infl ation rate assumptions and broad equity and bond indices long-
term return projections, as well as actual long-term historical Plan
performance.
Weighted-average assumptions
2004
2003
2002
For disclosure:
Discount rate . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . .
Expected return on plan assets . . . . . . . .
5.85%
5.10
8.00
For measuring net periodic pension cost:
Discount rate . . . . . . . . . . . . . . . . . . . . .
Rate of compensation increase . . . . . . . .
Expected return on plan assets . . . . . . . .
6.00
5.00
8.75
6.00
5.00
8.75
6.75
5.10
9.00
6.75
5.10
9.00
7.25
4.86
8.99
Plan assets consist primarily of common trust and mutual
funds (equities and fi xed income) managed by Fifth Third Bank, a
subsidiary of the Bancorp, and Bancorp common stock securities.
The following table provides the Bancorp’s weighted-average asset
allocations by asset category for 2004 and 2003:
Weighted-average asset allocation
2004
2003
Equity securities . . . . . . . . . . . . . . . . . . . . . .
Bancorp common stock . . . . . . . . . . . . . . . .
Total equity securities . . . . . . . . . . . . . . . . . .
Fixed income securities . . . . . . . . . . . . . . . . .
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
65%
10
75
25
—
54
18
72
26
2
100%
Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
100
The Bancorp’s policy for the investment of Plan assets is to
employ investment strategies that achieve a weighted-average
target asset allocation of 70% to 80% in equity securities, 20%
to 25% in fi xed income securities and up to fi ve percent in cash.
The accumulated benefi t obligation for all defi ned benefi t plans
was $251 million and $262 million at December 31, 2004 and
2003, respectively. For the Bancorp’s defi ned benefi t plans, with
an accumulated benefi t obligation exceeding assets, the total
projected benefi t obligation, accumulated benefi t obligation and
fair value of plan assets were $254 million, $251 million and
$201 million, respectively, as of December 31, 2004 and $260
million, $257 million and $218 million, respectively, as of Decem-
ber 31, 2003. The increase in the additional minimum pension
liability, recorded as a reduction to shareholders’ equity, was $1
million, net of a tax benefi t of less than $1 million, in 2004 and
$11 million, net of a tax benefi t of $6 million, in 2003. Based
on the actuarial assumptions, the Bancorp expects to make no
cash contribution to the Plan in 2005. Estimated pension benefi t
payments, which refl ect expected future service, are $22 million
in 2005 and $18 million in each year from 2006 to 2009. The
total estimated payments for the years 2010 to 2014 is $82 million.
The Bancorp’s profi t sharing plan expense was $69 million for
2004, $48 million for 2003 and $58 million for 2002. Expenses
recognized during the years ended December 31, 2004, 2003
and 2002 for matching contributions to the Bancorp’s defi ned
contribution savings plans were $28 million, $12 million and $14
million, respectively.
23. RETIREMENT AND BENEFIT PLANS
The measurement date for all of the Bancorp’s defi ned benefi t
retirement plans is December 31. A combined summary of the
defi ned benefi t retirement plans as of and for the years ended
December 31:
($ in millions)
Projected benefi t obligation at January 1 . . . . . . . .
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Actuarial loss . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefi ts paid . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Projected benefi t obligation at December 31 . . . . .
Fair value of plan assets at January 1 . . . . . . . . . . . .
Actual return on assets . . . . . . . . . . . . . . . . . . . . . .
Contributions . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Benefi ts 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
Sheets consist of:
Prepaid benefi t cost . . . . . . . . . . . . . . . . . . . .
Accrued benefi t liability . . . . . . . . . . . . . . . . .
Intangible asset . . . . . . . . . . . . . . . . . . . . . . .
Deferred tax asset . . . . . . . . . . . . . . . . . . . . .
Accumulated other comprehensive
income . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net amount recognized . . . . . . . . . . . . . . . . . . . . .
2004
$ 264
1
15
(17)
1
(10)
$ 254
$ 223
7
3
(22)
(10)
$ 201
$ (53)
—
3
101
$ 51
$ —
(51)
4
34
64
$ 51
2003
243
1
16
(27)
40
(9)
264
177
28
62
(35)
(9)
223
(41)
(1)
4
103
65
3
(39)
4
34
63
65
($ in millions)
2004
2003
2002
Components of net periodic pension cost:
Service cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Interest cost . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Curtailment . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Expected return on assets . . . . . . . . . . . . . . . . . . .
Amortization and deferral of transition amount . .
Amortization of actuarial loss . . . . . . . . . . . . . . . .
Amortization of unrecognized prior service cost . .
Settlement . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net periodic pension cost . . . . . . . . . . . . . . . . . . . . .
$ 1
15
—
(18)
(2)
9
1
10
$16
1
16
—
(15)
(2)
15
1
15
31
1
16
2
(23)
(2)
—
—
19
13
Net periodic pension cost is recorded as a component of
employee benefi ts in the Consolidated Statements of Income.
Net periodic pension cost for 2004, 2003 and 2002 included
settlement charges of $10 million, $15 million and $19 million,
respectively, primarily related to an increased level of lump-sum
distributions made during the respective years as a result of the
headcount reductions that occurred in connection with the inte-
gration of Old Kent.
The Plan assumptions are evaluated annually and are updated
as necessary. The discount rate assumption refl ects the yield of a
portfolio of high quality fi xed-income instruments that have a
similar duration to the Plan’s liabilities. The expected long-term
60 Fifth Third Bancorp
24. EARNINGS PER SHARE
Reconciliation of earnings per share to diluted earnings per share for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions, except per share data)
Income
EPS
Income from continuing operations before
2004
Average
Shares
Per Share
Amount
Income
2003
Average
Shares
Per Share
Amount
Income
2002
Average
Shares
Per Share
Amount
cumulative effect . . . . . . . . . . . . . . . . . . . . .
$1,525
$1,632
$1,527
Net income from continuing operations available
to commons shareholders (a) . . . . . . . . . . . .
Income from discontinued operations,
net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of change in accounting
principle, net of tax . . . . . . . . . . . . . . . . . . .
1,524
561
$2.72
1,631
572
$2.85
1,526
580
$2.63
—
—
—
—
44
(11)
.08
(.02)
4
—
.01
—
Net income available to common shareholders .
$1,524
561
$2.72
$1,664
572
$2.91
$1,530
580
$2.64
Diluted EPS
Net income from continuing operations available
to common shareholders . . . . . . . . . . . . . . .
Effect of dilutive securities . . . . . . . . . . . . . . . .
$1,524
Income from continuing operations plus assumed
conversions (b) . . . . . . . . . . . . . . . . . . . . . . .
1,525
561
7
568
Income from discontinued operations,
net of tax . . . . . . . . . . . . . . . . . . . . . . . . . . .
Cumulative effect of change in accounting
principle, net of tax . . . . . . . . . . . . . . . . . . .
Net income available to common shareholders
plus assumed conversions . . . . . . . . . . . . . . .
—
—
572
8
580
$1,631
$2.68
1,632
—
—
44
(11)
$1,526
$2.81
1,527
.08
(.02)
4
—
580
12
592
$2.58
.01
—
$1,525
568
$2.68
$1,665
580
$2.87
$1,531
592
$2.59
(a) Dividends on preferred stock are $.740 million for the years ended December 31, 2004, 2003 and 2002.
(b) The effect of dividends on convertible preferred stock is $.580 million for the years ended December 31, 2004, 2003 and 2002.
Options to purchase 16.2 million, 7.0 million and 6.2 million
shares outstanding at December 31, 2004, 2003 and 2002, respec-
tively, were not included in the computation of net income per
diluted share because the effect would be antidilutive.
25. FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values for fi nancial instruments as of December 31:
($ in millions)
Financial assets:
Cash and due from banks . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Available-for-sale securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Held-to-maturity 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-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Derivative liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Short positions . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other fi nancial instruments:
Commitments to extend credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Letters of credit . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Carrying
Amount
$ 2,561
24,687
255
77
532
559
59,095
271
1,573
58,226
4,714
775
4,537
13,983
232
15
53
19
2004
2003
Fair Value
Carrying
Amount
Fair Value
2,561
24,687
255
77
532
562
59,708
271
1,573
58,221
4,714
775
4,537
14,232
232
15
53
19
2,359
28,999
135
55
268
1,881
51,611
302
1,016
57,095
6,928
500
5,742
9,063
208
2
55
18
2,359
28,999
135
55
268
1,897
52,331
302
1,016
56,990
6,928
500
5,742
9,724
208
2
55
18
Fair values for fi nancial instruments, which were based on
various assumptions and estimates as of a specifi c point in time,
represent liquidation values and may vary signifi cantly from
amounts that will be realized in actual transactions. In addition,
certain non-fi nancial instruments were excluded from the fair value
disclosure requirements. Therefore, the fair values presented in the
table above should not be construed as the underlying value of the
Bancorp.
The following methods and assumptions were used in deter-
mining the fair value of selected fi nancial instruments:
Short-term fi nancial assets and liabilities—for fi nancial instru-
ments with a short-term or no stated maturity, prevailing market
rates and limited credit risk, carrying amounts approximate fair
value. Those fi nancial instruments include cash and due from banks,
other short-term investments, certain deposits (demand, interest
checking, savings and money market), federal funds purchased,
short-term bank notes and other short-term borrowings.
Fifth Third Bancorp 61
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Available-for-sale, held-to-maturity and trading securities,
including short positions—fair values were based on prices
obtained from an independent nationally recognized pricing
service.
Loans—fair values were estimated by discounting the future cash
fl ows using the current rates at which similar loans would be made
to borrowers with similar credit ratings and for the same remaining
maturities.
Loans held for sale—the fair value of loans held for sale was
estimated based on outstanding commitments from investors or
current investor yield requirements.
Deposits—fair values for other time, certifi cates of deposit – $100,000
and over and foreign offi ce were estimated using a discounted cash
fl ow calculation that applies interest rates currently being offered
for deposits of similar remaining maturities.
26. BUSINESS COMBINATIONS
On June 11, 2004, the Bancorp completed the acquisition of
Franklin Financial, a bank holding company located in the Nash-
ville, Tennessee metropolitan market.
Under the terms of the transaction, each share of Franklin
Financial common stock was exchanged for .5933 shares of the
Bancorp’s 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 of $317 million. The total purchase price also
includes the fair value of stock awards issued in exchange for stock
awards held by Franklin Financial employees, for which the aggre-
gate fair value was $36 million.
The assets and liabilities of Franklin Financial were recorded
on the balance sheet at their respective fair values as of the closing
date. The results of Franklin Financial’s operations were included
in the Bancorp’s income statement from the date of acquisition.
The transaction resulted in total goodwill and intangible assets
of $282 million based upon the purchase price, the fair values of
the acquired assets and assumed liabilities and applicable purchase
accounting adjustments. Of this total intangibles amount, $7
million was allocated to core deposit intangibles, $6 million was
allocated to customer lists and $2 million was allocated to noncom-
pete agreements. The core deposit intangible and the customer
lists are being amortized using an accelerated method over seven
Long-term debt—fair value of long-term debt was based on quoted
market prices, when available, and a discounted cash fl ow calcula-
tion using prevailing market rates for borrowings of similar terms.
Commitments and letters of credit—fair values of loan commit-
ments and letters of credit were based on estimated probable credit
losses.
Derivative assets and derivative liabilities—fair values were based
on the estimated amount the Bancorp would receive or pay to
terminate the derivative contracts, taking into account the current
interest rates and the creditworthiness of the counterparties. The
fair values represent an asset or liability at December 31, 2004.
Bank owned life insurance assets—fair values of insurance poli-
cies owned by the Bancorp were based on the insurance contract’s
cash surrender value, net of any policy loans.
and fi ve years, respectively. The noncompete agreements are being
amortized using the straight-line method over the duration of the
agreements. The remaining $267 million of intangible assets was
recorded as goodwill. Goodwill recognized in the Franklin Finan-
cial acquisition is not deductible for income tax purposes. The pro
forma effect and the fi nancial results of Franklin Financial included
in the results of operations subsequent to the date of acquisition
were not material to the Bancorp’s fi nancial condition or the oper-
ating results for the periods presented.
On August 2, 2004, the Bancorp and First National announced
the signing of a defi nitive agreement in which the Bancorp would
acquire First National and its subsidiaries, headquartered in Naples,
Florida. As of December 31, 2004, First National has approxi-
mately $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 National’s shareholders
with .5065 shares of the Bancorp’s common stock for each share of
First National common stock. Based on the price of the Bancorp’s
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.
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 2004, the
amount of dividends the bank subsidiaries can pay to the Bancorp
without prior approval of regulatory agencies was limited to their
2004 eligible net profi ts, as defi ned, and the adjusted retained 2003
and 2002 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 satisfi ed
with vault cash and noninterest-bearing cash balances on reserve
with a Federal Reserve Bank. In 2004 and 2003, the banks were
required to maintain average cash reserve balances of $192 million
and $290 million, respectively.
In December of 2003, the Bancorp completed the merger of
its Fifth Third Bank, Kentucky, Inc., Fifth Third Bank, Northern
Kentucky, Inc., Fifth Third Bank, Indiana and Fifth Third Bank,
Florida subsidiary banks with and into Fifth Third Bank (Michi-
gan). Although these mergers changed the legal structure of the
subsidiary banks, there were no signifi cant changes to the Bancorp’s
affi liate structure or operating model.
The Board of Governors of the Federal Reserve System (“FRB”)
adopted quantitative measures which assign risk weightings to
assets and off-balance sheet items and also defi ne and set minimum
62 Fifth Third Bancorp
regulatory capital requirements (risk-based capital ratios). All banks
are required to have core capital (Tier 1) of at least 4% of risk-
weighted assets, total capital of at least 8% of risk-weighted assets
and a minimum Tier 1 leverage ratio of 3% of adjusted quarterly
average assets. Tier 1 capital consists principally of shareholders’
equity including Tier 1 qualifying subordinated debt but exclud-
ing unrealized gains and losses on securities available-for-sale, less
goodwill and certain other intangibles. Total capital consists of Tier
1 capital plus certain debt instruments and the reserves for credit
losses, subject to limitation. Failure to meet the minimum capital
requirements can initiate certain actions by regulators that could
have a direct material effect on the Consolidated Financial State-
ments of the Bancorp. The regulations also defi ne well-capitalized
levels of Tier 1, total capital and Tier 1 leverage as 6%, 10% and
5%, respectively. The Bancorp and each of its subsidiary banks had
Tier 1, total capital and leverage ratios above the well-capitalized
levels at December 31, 2004 and 2003. As of December 31, 2004,
the most recent notifi cation from the FRB categorized the Bancorp
and each of its subsidiary banks as well-capitalized under the regu-
latory framework for prompt corrective action.
Capital and risk-based capital and leverage ratios for the
Bancorp and its signifi cant subsidiary banks as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2004
2003
Amount
Ratio
Amount
Ratio
$10,176
5,772
4,164
161
8,522
5,009
3,617
153
8,522
5,009
3,617
153
12.31%
12.85
10.72
13.57
10.31
11.15
9.31
12.89
8.89
8.48
9.39
14.44
$10,096
5,154
3,813
N/A
8,272
4,354
3,266
N/A
8,272
4,354
3,266
N/A
Condensed Statements of Cash Flows (Parent Company Only)
For the Years Ended December 31
2004
2003
13.56%
11.88
11.11
N/A
11.11
10.03
9.52
N/A
9.23
7.74
8.84
N/A
2002
Operating Activities
Net income . . . . . . . . . . . . . . . . . . . . . . . . . .
Adjustments to reconcile net income to net
cash provided by operating activities:
Stock-based compensation expense . . . . . .
Benefi t for deferred income taxes . . . . . . . .
Increase in other assets . . . . . . . . . . . . . . . .
(Decrease) increase in accrued expenses and
other liabilities . . . . . . . . . . . . . . . . . . . .
Increase in undistributed earnings of
subsidiaries . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by Operating Activities .
Investing Activities
Proceeds from sales of available-for-sale
$1,525
1,665
1,531
—
(1)
(24)
(84)
1
(5)
(39)
54
—
(3)
(29)
2
(835)
581
(391)
1,285
(257)
1,244
securities . . . . . . . . . . . . . . . . . . . . . . . . . .
Increase in loans to subsidiaries . . . . . . . . . . .
Net Cash Used in Investing Activities . . . . .
—
(759)
(759)
Financing Activities
Increase (decrease) in other short-term
borrowings . . . . . . . . . . . . . . . . . . . . . . . . .
Proceeds from issuance of long-term debt . . . .
Payment of cash dividends . . . . . . . . . . . . . . .
Purchases of treasury stock . . . . . . . . . . . . . . .
Exercise of stock options . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Net Cash Provided by (Used in) Financing
Activities . . . . . . . . . . . . . . . . . . . . . . . . . .
24
1,749
(704)
(987)
89
—
—
(471)
(471)
(89)
497
(631)
(655)
97
7
1
(159)
(158)
72
—
(553)
(719)
104
10
(Decrease) increase in cash . . . . . . . . . . . . . .
Cash at January 1 . . . . . . . . . . . . . . . . . . . . .
(7)
40
Cash at December 31 . . . . . . . . . . . . . . . . . .
$ 33
40
—
40
—
—
—
171
(774)
(1,086)
($ in millions)
Total Capital (to Risk-Weighted Assets):
Fifth Third Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fifth Third Bank (Ohio) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fifth Third Bank (Michigan) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fifth Third Bank, N.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 Capital (to Risk-Weighted Assets):
Fifth Third Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fifth Third Bank (Ohio) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fifth Third Bank (Michigan) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fifth Third Bank, N.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Tier 1 Leverage (to Average Assets):
Fifth Third Bancorp . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fifth Third Bank (Ohio) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fifth Third Bank (Michigan) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Fifth Third Bank, N.A. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
28. PARENT COMPANY FINANCIAL STATEMENTS
($ in millions)
Condensed Statements of Income (Parent Company Only)
2004
For the Years Ended December 31
2003
2002
Income
Dividends from subsidiaries . . . . . . . . . . . . . .
Interest on loans to subsidiaries . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total income . . . . . . . . . . . . . . . . . . . . . . . . .
Expenses
Interest . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total expenses . . . . . . . . . . . . . . . . . . . . . . . .
Income before taxes and change in
undistributed earnings of subsidiaries . . .
Applicable income taxes . . . . . . . . . . . . . . . .
Income before change in undistributed
$ 682
32
1
715
15
9
24
1,262
27
24
1,313
31
3
34
1,258
32
—
1,290
5
3
8
691
1
1,279
5
1,282
8
earnings of subsidiaries . . . . . . . . . . . . . .
690
1,274
1,274
Increase in undistributed earnings of
subsidiaries . . . . . . . . . . . . . . . . . . . . . . . .
835
391
257
Net Income . . . . . . . . . . . . . . . . . . . . . . . . . .
$1,525
1,665
1,531
2004
2003
Condensed Balance Sheets (Parent Company Only)
At December 31
Assets
Cash . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Loans to subsidiaries . . . . . . . . . . . . . . . . . . . . . . . . .
Investment in subsidiaries . . . . . . . . . . . . . . . . . . . . .
Goodwill . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Other assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$ 33
2,340
9,034
137
102
Total Assets . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .
$11,646
Liabilities
Commercial paper . . . . . . . . . . . . . . . . . . . . . . . . . .
Accrued expenses and other liabilities . . . . . . . . . . . .
Long-term debt . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Total Liabilities . . . . . . . . . . . . . . . . . . . . . . . . . . . .
Shareholders’ Equity . . . . . . . . . . . . . . . . . . . . . . .
$ 28
247
2,447
2,722
8,924
Total Liabilities and Shareholders’ Equity . . . . . . .
$11,646
29. SEGMENTS
40
1,581
7,743
137
46
9,547
4
185
691
880
8,667
9,547
The Bancorp’s principal activities include Commercial Banking,
Retail Banking, Investment Advisors and Fifth Third Processing
Solutions. Commercial Banking offers banking, cash management
and fi nancial services to business, government and professional
customers. Retail Banking provides a full range of deposit prod-
ucts and consumer loans and leases. Investment Advisors provides
a full range of investment alternatives for individuals, companies
and not-for-profi t 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 affi liated and unaffi liated
customers. The Other/Eliminations column includes the unal-
located portion of the investment portfolio, certain non-deposit
funding, unassigned equity and other items not attributed to the
other segments.
The Bancorp manages interest rate risk centrally at the corpo-
rate level by employing a funds transfer pricing (“FTP”) methodol-
ogy. This methodology insulates the segments from interest rate
Fifth Third Bancorp 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
risk, enabling them to focus on serving customers through loan
originations and deposit taking. The FTP system assigns charge
rates and credit rates to classes of assets and liabilities, respec-
tively, based on expected duration. In addition to the previously
mentioned items, the Other/Eliminations column includes the net
effect of the FTP methodology.
The performance measurement of the segments is based on the
management structure of the Bancorp and is not necessarily compa-
rable with similar information for any other fi nancial institution.
Additionally, the information presented is not necessarily indicative
of the segments’ fi nancial condition and results of operations if they
were to exist 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 refi ned its segment reporting as a result
of a cost center review and point of cross-sell identifi cation. Prior
periods have been conformed to the current period presentation.
The fi nancial information for each segment is reported on the basis
used internally by the Bancorp’s management to evaluate perfor-
mance and allocate resources. The allocation has been consistently
applied for all periods presented. Revenues from affi liated transac-
tions are typically charged at rates available to and transacted with
unaffi liated customers.
Results of operations and average assets by segment for each of
the three years ended December 31 are as follows:
($ in millions)
2004
Net interest income (b) . . . . . . . . . .
Provision for loan and lease losses . .
Net interest income after provision
for loan and lease losses . . . . . . .
Noninterest income . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . .
Income before income taxes . . . . . .
Applicable income taxes (c) . . . . . .
Net income . . . . . . . . . . . . . . . . . .
Average assets . . . . . . . . . . . . . . . . .
2003
Net interest income (b) . . . . . . . . . .
Provision for loan and lease losses . .
Net interest income after provision
for loan and lease losses . . . . . . .
Noninterest income . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . .
Income from continuing operations
before income taxes, minority
interest and cumulative effect . . .
Applicable income taxes (c) . . . . . .
Minority interest, net . . . . . . . . . . .
Discontinued operations, net . . . . .
Cumulative effect, net . . . . . . . . . .
Net income . . . . . . . . . . . . . . . . . .
Average assets . . . . . . . . . . . . . . . . .
2002
Net interest income (b) . . . . . . . . . .
Provision for loan and lease losses . .
Net interest income after provision
for loan and lease losses . . . . . . .
Noninterest income . . . . . . . . . . . .
Noninterest expense . . . . . . . . . . . .
Income from continuing operations
Commercial
Banking
Retail
Banking
Investment
Advisors
Processing
Solutions
Other/
Eliminations
Acquisitions
(a)
$ 1,203
96
1,107
429
608
928
280
$ 648
$25,327
$ 1,055
182
873
419
548
744
225
—
44
—
$
563
$22,561
$
889
101
788
343
505
1,929
175
1,754
1,053
1,266
1,541
524
1,017
54,769
1,784
202
1,582
1,187
1,262
1,507
512
—
—
(11)
984
54,562
1,554
133
1,421
889
1,114
168
8
160
379
359
180
61
119
2,309
128
10
118
349
346
121
41
—
—
—
80
1,899
101
6
95
333
316
15
10
5
697
408
294
100
194
665
14
9
5
512
377
140
47
—
—
—
93
602
11
7
4
450
314
(254)
(21)
(233)
(90)
343
(666)
(214)
(452)
12,244
(6)
(1)
(5)
27
42
(20)
5
(20)
—
—
(45)
8,738
216
2
214
179
111
(13)
—
(13)
(3)
(12)
(4)
(3)
(1)
(418)
(31)
(3)
(28)
(11)
(24)
(15)
(5)
—
—
—
(10)
(881)
(33)
(3)
(30)
(11)
(23)
Total
3,048
268
2,780
2,465
2,972
2,273
748
1,525
94,896
2,944
399
2,545
2,483
2,551
2,477
825
(20)
44
(11)
1,665
87,481
2,738
246
2,492
2,183
2,337
before income taxes and
112
minority interest . . . . . . . . . . . .
Applicable income taxes (c) . . . . . .
37
—
Minority interest, net . . . . . . . . . . .
—
Discontinued operations, net . . . . .
75
Net income . . . . . . . . . . . . . . . . . .
Average assets . . . . . . . . . . . . . . . . .
1,559
(a) In acquisitions accounted for under the purchase method, management “pools” historical results to improve comparability with the current period. The results of Franklin
626
205
—
4
$
425
$20,069
2,338
773
(38)
4
1,531
75,037
1,196
407
—
—
789
54,046
282
84
(38)
—
160
(458)
(18)
(7)
—
—
(11)
(795)
140
47
—
—
93
616
Financial have been included in the segments and eliminated in the Acquisitions column.
(b) Net interest income is fully taxable equivalent and is presented on an FTP basis.
(c) Applicable income taxes includes income tax provision and taxable equivalent adjustment reversal of $36 million, $39 million and $39 million for the years ended December
31, 2004, 2003 and 2002, respectively.
64 Fifth Third Bancorp
AVERAGE ASSETS ($ IN MILLIONS)
Interest-Earning Assets
CONSOLIDATED TEN YEAR COMPARISON
Loans and Leases
Federal Funds
Sold (a)
Interest-Bearing
Deposits in
Banks (a)
$57,042
52,414
45,539
44,888
42,690
38,652
36,014
33,850
30,742
27,598
$120
92
155
69
118
224
241
327
325
494
$195
215
184
132
82
103
135
186
211
182
Year
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
Securities
$30,282
28,640
23,246
19,737
18,630
16,901
16,090
15,425
14,959
12,715
Total
$87,639
81,361
69,124
64,826
61,520
55,880
52,480
49,788
46,237
40,989
Cash and Due
from Banks
Other Assets
Total Average
Assets
$2,216
1,600
1,551
1,482
1,456
1,628
1,566
1,367
1,401
1,365
$5,763
5,250
5,007
5,000
4,229
3,344
2,782
2,495
2,212
1,715
$94,896
87,481
75,037
70,683
66,611
60,292
56,306
53,161
49,367
43,608
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS ($ IN MILLIONS)
Year
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
Demand
$12,327
10,482
8,953
7,394
6,257
6,079
5,627
4,932
4,492
4,050
Interest
Checking
$19,434
18,679
16,239
11,489
9,531
8,553
7,030
6,209
5,559
5,017
Savings
$7,941
8,020
9,465
4,928
5,799
6,206
6,332
4,548
4,237
3,374
Money
Market
$3,473
3,189
1,162
2,552
939
1,328
1,471
2,508
2,909
2,949
INCOME ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Deposits
Certifi cates
— $100,000
and Over
Other Time
Foreign Offi ce
Total
Short-Term
Borrowings
$6,208
6,426
8,855
13,473
13,716
13,858
15,117
15,887
15,171
12,597
$2,403
3,832
2,237
3,821
4,283
4,197
3,856
4,173
4,186
3,944
$4,449
3,862
2,018
1,992
3,896
952
270
441
569
1,007
$56,235
54,490
48,929
45,649
44,421
41,173
39,703
38,698
37,123
32,938
$13,539
12,373
7,191
8,799
9,725
8,573
7,095
6,113
4,837
4,582
Year
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
Interest
Income
$4,114
3,991
4,129
4,709
4,947
4,199
4,052
3,933
3,621
3,239
Interest
Expense
$1,102
1,086
1,430
2,278
2,697
2,026
2,047
2,030
1,853
1,677
Noninterest
Income
$2,465
2,483
2,183
1,788
1,476
1,335
1,161
901
746
613
Noninterest
Expense
$2,972
2,551
2,337
2,453
2,027
1,987
1,826
1,486
1,423
1,225
Per Share (b)
Originally Reported
Net Income
Avail. to
Common
Shareholders Earnings
Diluted
Earnings
Dividends
Declared
Earnings
Diluted
Earnings
$1,524
1,664
1,530
1,001
1,054
871
759
756
646
588
$2.72
2.91
2.64
1.74
1.86
1.55
1.36
1.35
1.15
1.08
$2.68
2.87
2.59
1.70
1.83
1.53
1.34
1.33
1.13
1.06
$1.312/03
1.132/03
.982/03
.832/03
.702/03
.582/30
.471/30
.379/10
.324/70
.284/90
$2.72
2.91
2.64
1.74
1.70
1.32
1.09
1.10
.93
.85
$2.68
2.87
2.59
1.70
1.68
1.29
1.06
1.08
.91
.83
Total
$69,774
66,863
56,120
54,448
54,146
49,746
46,798
44,811
41,960
37,520
Dividend
Payout
Ratio
48.9%
39.4
37.8
48.8
41.7
45.5
44.6
35.2
35.8
34.3
MISCELLANEOUS AT DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Shareholders’ Equity
Number of
Shares of Stock
Outstanding (b)
557,648,989
566,685,301
574,355,247
582,674,580
569,056,843
565,425,468
557,438,774
556,356,059
564,561,419
548,266,213
Year
2004
2003
2002
2001
2000
1999
1998
1997
1996
1995
Common
Stock
Preferred
Stock
Capital
Surplus
Retained
Earnings
Accumulated
Other
Comprehensive
Income
Treasury
Stock
Total
Per Share (b)
Reserve for
Loan and
Lease Losses
$1,295
1,295
1,295
1,294
1,263
1,255
1,238
1,235
1,253
1,217
$ 9
9
9
9
9
9
9
9
9
14
$1,934
1,964
2,010
1,943
1,454
1,090
887
812
755
528
$7,269
6,481
5,465
4,502
3,982
3,551
3,179
3,000
2,663
2,397
$(169)
(120)
369
8
28
(302)
135
140
17
46
$(1,414)
(962)
(544)
(4)
(1)
—
(58)
(184)
—
—
$8,924
8,667
8,604
7,752
6,735
5,603
5,390
5,005
4,695
4,200
$16.00
15.29
14.98
13.31
11.83
9.91
9.67
9.00
8.32
7.66
$713
697
683
624
609
573
532
509
484
474
(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.
Fifth Third Bancorp 65
DIRECTORS AND OFFICERS
FIFTH THIRD BANCORP
DIRECTORS
George A. Schaefer, Jr.
President & CEO
Fifth Third Bancorp and
Fifth Third Bank
Darryl F. Allen
Retired Chairman
President & CEO
Aeroquip-Vickers, Inc.
John F. Barrett
Chairman, President & CEO
The Western & Southern Life
Insurance Company
James P. Hackett
President & CEO
Steelcase, Inc.
Joan R. Herschede
President & CEO
The Frank Herschede Company
Allen M. Hill
Retired President & CEO
DPL, Inc.
Robert L. Koch II
President & CEO,
Koch Enterprises, Inc.
Mitchel D. Livingston, Ph.D.
Vice President for Student Affairs
and Services
University of Cincinnati
Kenneth W. Lowe
President & CEO
The E.W. Scripps Company
Hendrik G. Meijer
Co-Chairman
Meijer, Inc.
Robert B. Morgan
Executive Counselor
Cincinnati Financial Corporation
& Cincinnati Insurance Company
James E. Rogers
Chairman, President & CEO
Cinergy Corp.
John J. Schiff, Jr.
Chairman, President & CEO
Cincinnati Financial Corporation
Dudley S. Taft
President
Taft Broadcasting Company
Thomas W. Traylor
CEO
Traylor Bros., Inc.
DIRECTORS EMERITI
Neil A. Armstrong
Philip G. Barach
Vincent H. Beckman
J. Kenneth Blackwell
Milton C. Boesel, Jr.
Douglas G. Cowan
Thomas L. Dahl
Ronald A. Dauwe
Gerald V. Dirvin
Thomas B. Donnell
Nicholas M. Evans
Richard T. Farmer
Louis R. Fiore
John D. Geary
Ivan W. Gorr
Joseph H. Head, Jr.
William G. Kagler
William J. Keating
Jerry L. Kirby
Michael H. Norris
David E. Reese
Brian H. Rowe
C. Wesley Rowles
Donald B. Shackelford
David B. Sharrock
Stephen Stranahan
Dennis J. Sullivan, Jr.
N. Beverley Tucker, Jr.
Alton C. Wendzel
FIFTH THIRD BANCORP
OFFICERS
George A. Schaefer, Jr.
President & CEO
Neal E. Arnold
Executive Vice President
Greg D. Carmichael
Executive Vice President and
Chief Information Officer
David J. DeBrunner
Senior Vice President &
Controller
Diane L. Dewbrey
Senior Vice President
R. Mark Graf
Senior Vice President and
Chief Financial Officer
Malcolm D. Griggs
Executive Vice President and
Chief Risk Officer
Kevin T. Kabat
Executive Vice President
Ronald D. Marks
Senior Vice President & Treasurer
Pete Pesce
Executive Vice President
Daniel T. Poston
Executive Vice President &
Auditor
Paul L. Reynolds
Executive Vice President,
Secretary & General Counsel
Robert A. Sullivan
Executive Vice President
AFFILIATE PRESIDENTS
& CEOs
Samuel G. Barnes
Lexington, Kentucky
Todd F. Clossin
Northeastern Ohio
John N. Daniel
Southern Indiana
Robert M. Eversole
Central Ohio
Patrick J. Fehring, Jr.
Eastern Michigan
Kevin C. Hale
Florida
Dan W. Hogan
Tennessee
Bruce K. Lee
Northwestern Ohio
Philip R. McHugh
Louisville, Kentucky
John E. Pelizzari
Northern Michigan
Timothy P. Rawe
Northern Kentucky
R. Daniel Sadlier
Western Ohio
Maurice J. Spagnoletti
Central Indiana
Michelle L. VanDyke
Western Michigan
Raymond J. Webb
Ohio Valley
Terry E. Zink
Chicago
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
John S. Szuch
Northwestern Ohio
Gary L. Tice
Florida
FIFTH THIRD BANCORP
BOARD COMMITTEES
Executive Committee
George A. Schaefer, Jr.,
Chairman
Allen M. Hill
Robert L. Koch II
John J. Schiff, Jr.
Dudley S. Taft
Compensation Committee
Allen M. Hill, Chairman
Kenneth W. Lowe
James E. Rogers
Audit Committee
Robert B. Morgan, Chairman
Darryl F. Allen, Vice Chairman
John F. Barrett
James P. Hackett
Joan R. Herschede
Nominating and Corporate
Governance Committee
Dudley S. Taft, Chairman
Darryl F. Allen
Robert L. Koch II
James E. Rogers
Risk and Compliance
Committee
John F. Barrett, Chairman
Hendrik G. Meijer
Thomas W. Traylor
Trust Committee
Mitchel D. Livingston, Ph.D.,
Chairman
Joan R. Herschede
Kenneth W. Lowe
George A. Schaefer, Jr.
66 Fifth Third Bancorp
C O R P O R A T E I N F O R M A T I O N
Corporate Office
Fifth Third Center
Cincinnati, Ohio 45263
(513) 579-5300
Website
www.53.com
Investor Relations
R. Mark Graf
Senior Vice President &
Chief Financial Officer
(513) 534-6936
(513) 534-3945 (fax)
Bradley S. Adams
Vice President &
Investor Relations Officer
(513) 534-0983
(513) 534-0629 (fax)
Independent Registered
Public Accounting Firm
Deloitte & Touche LLP
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” on
the NASDAQ® National Market.
Press Releases
For copies of current press releases,
please visit our website at www.53.com.
stock data
Fourth Quarter
Third Quarter
Second Quarter
First Quarter
©Fifth Third Bank 2005
Member F.D.I.C. – Federal Reserve System
®Reg. U.S. Pat. & T.M. Office
2004
Low
$45.32
$46.59
$51.13
$53.27
Dividends
Paid Per
Share
$.35
$.32
$.32
$.32
High
$60.01
$59.44
$60.49
$62.15
2003
Low
$55.47
$52.50
$47.24
$47.05
Dividends
Paid Per
Share
$.29
$.29
$.29
$.26
High
$52.34
$54.07
$57.00
$60.00
we are Fifth Third.
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