104813 104813-FifthThird 1 2_21_2008 7:26:41 PM
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Building on the past to
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1 8 5 8 — 2 00 8
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104813 104813-FifthThird 2 2_21_2008 7:26:42 PM
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(cid:63)(cid:67)(cid:47)(cid:64)(cid:66)(cid:51)(cid:64)
(cid:18)(cid:33)(cid:35)(cid:28)(cid:33)(cid:34)(cid:14)
(cid:18)(cid:32)(cid:34)(cid:28)(cid:38)(cid:32)(cid:14)
(cid:18)(cid:30)(cid:28)(cid:34)(cid:34)(cid:14)
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(cid:18)(cid:33)(cid:37)(cid:28)(cid:37)(cid:35)(cid:14)
(cid:18)(cid:30)(cid:28)(cid:34)(cid:30)
(cid:18)(cid:34)(cid:31)(cid:28)(cid:31)(cid:37)(cid:14)
(cid:18)(cid:33)(cid:33)(cid:28)(cid:36)(cid:30)(cid:14)
(cid:18)(cid:30)(cid:28)(cid:34)(cid:32)(cid:14)
(cid:18)(cid:34)(cid:30)(cid:28)(cid:31)(cid:38)(cid:14)
(cid:18)(cid:33)(cid:35)(cid:28)(cid:39)(cid:35)(cid:14)
(cid:18)(cid:30)(cid:28)(cid:34)(cid:30)
(cid:18)(cid:34)(cid:33)(cid:28)(cid:33)(cid:32)(cid:14)
(cid:18)(cid:33)(cid:37)(cid:28)(cid:38)(cid:38)(cid:14)
(cid:18)(cid:30)(cid:28)(cid:34)(cid:32)(cid:14)
(cid:18)(cid:34)(cid:31)(cid:28)(cid:30)(cid:32)(cid:14)
(cid:18)(cid:33)(cid:35)(cid:28)(cid:38)(cid:36)(cid:14)
(cid:18)(cid:30)(cid:28)(cid:34)(cid:30)
(cid:18)(cid:34)(cid:31)(cid:28)(cid:34)(cid:31)(cid:14)
(cid:18)(cid:33)(cid:37)(cid:28)(cid:39)(cid:33)(cid:14)
(cid:18)(cid:30)(cid:28)(cid:34)(cid:32)(cid:14)
(cid:18)(cid:34)(cid:31)(cid:28)(cid:34)(cid:33)(cid:14)
(cid:18)(cid:33)(cid:36)(cid:28)(cid:33)(cid:30)(cid:14)
(cid:18)(cid:30)(cid:28)(cid:33)(cid:38)
(cid:49)(cid:93)(cid:96)(cid:94)(cid:93)(cid:96)(cid:79)(cid:98)(cid:83)(cid:14)(cid:61)(cid:84)(cid:191)(cid:14)(cid:81)(cid:83)
(cid:52)(cid:87)(cid:84)(cid:98)(cid:86)(cid:14)(cid:66)(cid:86)(cid:87)(cid:96)(cid:82)(cid:14)(cid:49)(cid:83)(cid:92)(cid:98)(cid:83)(cid:96)
(cid:55)(cid:92)(cid:82)(cid:83)(cid:94)(cid:83)(cid:92)(cid:82)(cid:83)(cid:92)(cid:98)(cid:14)(cid:64)(cid:83)(cid:85)(cid:87)(cid:97)(cid:98)(cid:83)(cid:96)(cid:83)(cid:82)(cid:14)(cid:62)(cid:99)(cid:80)(cid:90)(cid:87)(cid:81)(cid:14)
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(cid:49)(cid:87)(cid:92)(cid:81)(cid:87)(cid:92)(cid:92)(cid:79)(cid:98)(cid:87)(cid:26)(cid:14)(cid:61)(cid:54)(cid:14)(cid:34)(cid:35)(cid:32)(cid:36)(cid:33)
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(cid:35)(cid:31)(cid:33)(cid:28)(cid:35)(cid:37)(cid:39)(cid:28)(cid:35)(cid:33)(cid:30)(cid:30)
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(cid:56)(cid:83)(cid:84)(cid:84)(cid:14)(cid:64)(cid:87)(cid:81)(cid:86)(cid:79)(cid:96)(cid:82)(cid:97)(cid:93)(cid:92)
(cid:65)(cid:83)(cid:92)(cid:87)(cid:93)(cid:96)(cid:14)(cid:68)(cid:87)(cid:81)(cid:83)(cid:14)(cid:62)(cid:96)(cid:83)(cid:97)(cid:87)(cid:82)(cid:83)(cid:92)(cid:98)(cid:14)(cid:20)(cid:14)
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(cid:62)(cid:14)(cid:35)(cid:31)(cid:33)(cid:28)(cid:35)(cid:33)(cid:34)(cid:28)(cid:30)(cid:39)(cid:38)(cid:33)
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(cid:56)(cid:87)(cid:91)(cid:14)(cid:51)(cid:85)(cid:90)(cid:97)(cid:83)(cid:82)(cid:83)(cid:96)
(cid:68)(cid:87)(cid:81)(cid:83)(cid:14)(cid:62)(cid:96)(cid:83)(cid:97)(cid:87)(cid:82)(cid:83)(cid:92)(cid:98)
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(cid:32)(cid:35)(cid:30)(cid:14)(cid:51)(cid:79)(cid:97)(cid:98)(cid:14)(cid:52)(cid:87)(cid:84)(cid:98)(cid:86)(cid:14)(cid:65)(cid:98)(cid:96)(cid:83)(cid:83)(cid:98)
(cid:49)(cid:87)(cid:92)(cid:81)(cid:87)(cid:92)(cid:92)(cid:79)(cid:98)(cid:87)(cid:26)(cid:14)(cid:61)(cid:54)(cid:14)(cid:34)(cid:35)(cid:32)(cid:30)(cid:32)
(cid:66)(cid:96)(cid:79)(cid:92)(cid:97)(cid:84)(cid:83)(cid:96)(cid:14)(cid:47)(cid:85)(cid:83)(cid:92)(cid:98)
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(cid:62)(cid:14)(cid:38)(cid:38)(cid:38)(cid:28)(cid:32)(cid:39)(cid:34)(cid:28)(cid:38)(cid:32)(cid:38)(cid:35)
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(cid:65)(cid:98)(cid:93)(cid:81)(cid:89)(cid:14)(cid:66)(cid:96)(cid:79)(cid:82)(cid:87)(cid:92)(cid:85)
(cid:59)(cid:79)(cid:96)(cid:89)(cid:83)(cid:98)(cid:14)(cid:65)(cid:103)(cid:97)(cid:98)(cid:83)(cid:91)(cid:28)
(cid:62)(cid:96)(cid:83)(cid:97)(cid:97)(cid:14)(cid:64)(cid:83)(cid:90)(cid:83)(cid:79)(cid:97)(cid:83)(cid:97)
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(cid:98)(cid:86)(cid:83)(cid:14)(cid:97)(cid:103)(cid:91)(cid:80)(cid:93)(cid:90)(cid:14)(cid:181)(cid:52)(cid:55)(cid:66)(cid:48)(cid:182)(cid:14)(cid:93)(cid:92)(cid:14)(cid:98)(cid:86)(cid:83)(cid:14)(cid:60)(cid:47)(cid:65)(cid:50)(cid:47)(cid:63)(cid:149)(cid:14)(cid:53)(cid:90)(cid:93)(cid:80)(cid:79)(cid:90)(cid:14)(cid:65)(cid:83)(cid:90)(cid:83)(cid:81)(cid:98)(cid:14)
(cid:52)(cid:93)(cid:96)(cid:14)(cid:81)(cid:93)(cid:94)(cid:87)(cid:83)(cid:97)(cid:14)(cid:93)(cid:84)(cid:14)(cid:81)(cid:99)(cid:96)(cid:96)(cid:83)(cid:92)(cid:98)(cid:14)(cid:94)(cid:96)(cid:83)(cid:97)(cid:97)(cid:14)(cid:96)(cid:83)(cid:90)(cid:83)(cid:79)(cid:97)(cid:83)(cid:97)(cid:26)(cid:14)(cid:94)(cid:90)(cid:83)(cid:79)(cid:97)(cid:83)(cid:14)(cid:100)(cid:87)(cid:97)(cid:87)(cid:98)(cid:14)
(cid:93)(cid:99)(cid:96)(cid:14)(cid:69)(cid:83)(cid:80)(cid:14)(cid:97)(cid:87)(cid:98)(cid:83)(cid:14)(cid:79)(cid:98)(cid:14)(cid:101)(cid:101)(cid:101)(cid:28)(cid:35)(cid:33)(cid:28)(cid:81)(cid:93)(cid:91)(cid:28)
(cid:150)(cid:52)(cid:87)(cid:84)(cid:98)(cid:86)(cid:14)(cid:66)(cid:86)(cid:87)(cid:96)(cid:82)(cid:14)(cid:48)(cid:79)(cid:92)(cid:89)(cid:14)(cid:32)(cid:30)(cid:30)(cid:38)
(cid:59)(cid:83)(cid:91)(cid:80)(cid:83)(cid:96)(cid:14)(cid:52)(cid:50)(cid:55)(cid:49)(cid:14)(cid:179)(cid:14)(cid:52)(cid:83)(cid:82)(cid:83)(cid:96)(cid:79)(cid:90)(cid:14)(cid:64)(cid:83)(cid:97)(cid:83)(cid:96)(cid:100)(cid:83)(cid:14)(cid:65)(cid:103)(cid:97)(cid:98)(cid:83)(cid:91)
(cid:149)(cid:64)(cid:83)(cid:85)(cid:28)(cid:14)(cid:67)(cid:28)(cid:65)(cid:28)(cid:14)(cid:62)(cid:79)(cid:98)(cid:28)(cid:14)(cid:20)(cid:14)(cid:66)(cid:28)(cid:59)(cid:28)(cid:14)(cid:61)(cid:84)(cid:191)(cid:14)(cid:81)(cid:83)
Financial HigHligHts
For the years ended December 31
$ in millions, except per share data
2007
2006
Percent
change
Fifth Third Bancorp
Earnings and Dividends
Net Income
$
1,076
$
1,188
Common Dividends Declared
914
880
Per share
Earnings
Diluted Earnings
Cash Dividends
Book Value
at Year-End
Assets
$
2.00
$
1.99
1.70
17.20
2.14
2.13
1.58
18.02
$ 110,962
$ 100,669
Total Loans and Leases
84,582
75,503
Deposits
75,445
69,380
Shareholders’ Equity
9,161
10,022
Key Ratios
Return on Average Assets (ROA)
Return on Average Equity (ROE)
Net Interest Margin
Efficiency Ratio
Average Shareholders’ Equity to Average Assets
1.05
11.2
3.36
60.2
9.35
1.13
12.1
3.06
59.4
9.32
actuals
Common Shares Outstanding
532,672
556,253
Banking Centers
1,227
Full-Time Equivalent Employees
21,683
1,150
21,362
(9)
4
(7)
(7)
8
(5)
10
12
9
(9)
(7)
(7)
10
1
-
(4)
7
2
Deposit and Debt Ratings
Moody’s
standard
& Poor’s
Fitch
DBRs
Fifth third Bancorp
Commercial Paper
Senior Debt
Prime-1
Aa3
A-1
A+
Fifth third Bank (Ohio)
and Fifth third Bank (Michigan)
Short-Term Deposit
Long-Term Deposit
Prime-1
Aa2
A-1+
AA-
F1+
AA-
F1+
AA
R-1M
AAL
R-1H
AA
Celebrating 150 Years | 1
lEttER FROM tHE
president & CeO
DEaR sHaREHOlDERs,
2007 was perhaps the most challenging year that the
industry has seen in the last 30 years. During the first part
of the year, our new management team outlined a three-
year strategic plan to position the Company for future
growth. We made significant strides executing on this plan,
and I’ll discuss these successes later in this letter. At the
same time, market and economic conditions created
an operating environment that overshadowed some of
those achievements.
The most significant factors impacting the financial sector
in 2007 originated in the U.S. residential real estate markets.
A number of large financial institutions announced losses
ranging from the hundreds of millions to billions of dollars.
These losses stemmed from securities collateralized
with subprime mortgages and other troubled assets.
Additionally, delinquent and nonperforming loans increased
in nearly every category. It is important to note that Fifth
Third does not originate or hold subprime loans, nor do
we hold collateralized debt obligations (CDOs) or asset-
backed securities backed by subprime loans in our securities
portfolio. However, as a lending institution, we have
exposure to housing markets which weakened considerably
throughout the entire country. There was particular
weakness in the upper Midwest and Florida, where we have a
significant presence. Investor concerns related to rising loan
defaults in subprime lending and other areas related to real
estate led to significant decreases in the market valuation
of virtually every major U.S. bank. Fifth Third’s total return
in 2007 – the change in our stock price plus dividends –
was a disappointing -35 percent, in line with other major
Midwestern institutions as well as the -30 percent total
return produced by the S&P Bank Composite Index.
We are in the middle of a difficult credit cycle, and a certain
amount of negative sentiment is warranted. However, as
bankers, we should and do expect that we will experience
these cycles. Banking is a risk-taking business, and losses
come with the territory. That being said, we have taken a
number of steps to deal with the current credit cycle and to
reduce the problems we will experience in 2008 and beyond.
Given the difficulties facing many of our customers, we
have been intervening earlier in problem credit situations
and are actively working to identify higher risk accounts.
For example, when a customer’s credit file shows potential
weakness, we are making proactive calling efforts to form
cooperative relationships with these borrowers. When we
do have delinquencies, we’re working with our customers to
understand the reason for the delinquency and a borrower’s
capacity to pay. When necessary and warranted, we are
2 | FiFtH tHiRD BancORP
modifying loan terms over short time horizons in order to
give our borrowers time to regain their footing. During 2007,
we restructured $80 million in mortgage, home equity and
credit card loans to provide our customers with a more
workable loan arrangement. Helping our customers during
this challenging time will help form long-term beneficial
relationships with them. We are committed to helping our
clients and our communities in their worst times so that
they’ll turn to us in their best times.
Several other steps were taken throughout 2007 to help
reduce potentially higher credit losses. First was the
decision to terminate the products offered by Home
Equity of America, an entity that became part of Fifth
Third a number of years ago through an acquisition. Home
Equity of America offered brokered home equity loans
on a national level. Additionally, in response to market
conditions, we began to aggressively limit brokered home
equity production early in the year and ultimately shut
down our production altogether. Finally, we set up a flow
sale agreement with an agency servicer to remove the risk
posed to our balance sheet from originating “Alt-A” loans.
Separately and collectively, these actions have and will help
us avoid potentially higher credit losses.
While these and other steps have helped to partially insulate
us from the industry downturn, we are not immune to
broader trends. The Midwest economy as a whole has been
weaker than the rest of the country, and the Florida real
estate market has softened substantially. Michigan, Ohio
and Florida account for three of the top five foreclosure
rates by state, with Indiana and Illinois also ranking in the
top 10. While the pace of foreclosures has increased in
recent months in Florida, the growth rate of foreclosures in a
number of our geographies seems to be slowing. Therefore,
there is reason to hope that at some point during 2008 we
may begin to see stabilization in key credit trends. When
that occurs, we would expect our bottom line to begin to
benefit from the numerous steps we’ve taken to increase
the Company’s underlying earnings base.
2007 Results
Our 2007 results reflected the weak operating environment
outlined above. Reported earnings per diluted share were
$1.99, lower than the $2.13 per share in diluted earnings
reported in 2006. Results during the first three quarters of
2007 were solid, reflecting both the benefits of the balance
sheet actions we took in the fourth quarter of last year as
well as increases in revenue, which were more than offset by
the effect of rising provision expenses to cover increases
in loan losses.
During the fourth quarter of 2007, however, the Company
recorded several charges that reflected the deteriorating
credit environment experienced throughout the financial
sector. First, as a result of higher expected losses, we
recorded an incremental provision for loan and lease losses
over net charge-offs of $110 million. This represented $0.13
in earnings per share. Second, we took a charge of
$177 million, or $0.33 per share on an after-tax basis,
against one of our Bank-Owned Life Insurance (BOLI)
policies, to reflect losses experienced on the underlying
investments due to significant disruptions in the financial
markets. Additionally, Fifth Third and a number of other
banks were required to accrue expenses related to current
and future legal settlements as a member-bank owner
of Visa, Inc. These expenses were $78 million in the third
quarter and $94 million in the fourth quarter, totaling
$0.21 per share for the year. We fully expect to reverse
these legal accruals when Visa completes its initial public
offering, currently anticipated in the first half of 2008.
Finally, we recorded $8 million, or $0.01 per share, in merger-
related costs in the fourth quarter, primarily related to our
acquisition of R-G Crown Bank in Florida in November 2007.
As a reminder, in the fourth quarter of 2006, we recorded
pretax charges related to balance sheet actions totaling
$454 million, or $0.52 per share.
Setting aside the items outlined above, 2007 results were
in line with 2006, with significant improvements in our
underlying business largely offset by higher loan losses
during 2007. We are working hard to have the many
improvements made to the Company’s operations result
in a better bottom line.
While our credit trends were largely in line with the rest
of the industry, they also were disappointing. Higher loss
expectations drove provision expense to $628 million
compared to $343 million in 2006. Net loan losses were
$462 million in 2007 versus $316 million in 2006. As a
percentage of loans and leases, net losses rose to 0.61
percent for the full year of 2007 compared with 0.44
percent in 2006. The deterioration occurred mostly in our
consumer portfolio, which saw its loan loss ratio increase
from 0.55 percent in 2006 to 0.84 percent in 2007, largely
reflecting higher residential real estate losses, particularly in
Celebrating 150 Years | 3
Fifth Third Bancorp
home equity. Nonperforming assets were $1.1 billion at year-
end, compared to $455 million at the end of 2006. Home
equity, residential mortgage and commercial construction
saw the greatest increases on a year-over-year basis.
grew 9 percent, reflecting transaction-driven growth
in payments processing expense, higher technology-
related expenses reflecting infrastructure upgrades, and
de novo expenses.
Net interest income was $3 billion on a tax-equivalent basis
and increased 5 percent from 2006, benefiting from our
fourth quarter 2006 balance sheet actions. We continued
to see strong commercial loan growth in 2007, with average
balances up 7 percent. Consumer loan growth remained
solid, with average balances up 8 percent despite our
tightening of credit policies. Average core deposits increased
3 percent on a year-over-year basis, driven by strong growth
in savings and commercial sweep balances.
Noninterest income was $2.5 billion, a 23 percent
increase from 2006. Noninterest income in 2007 included
the effect of the $177 million charge to our BOLI portfolio,
while 2006 noninterest income included $415 million in
losses related to fourth quarter balance sheet actions.
Otherwise, noninterest income increased 9 percent from
2006. We continued to see strong growth in our electronic
payments processing revenue, which increased 15 percent
to $826 million in 2007. Corporate banking revenue also
showed strong growth of 15 percent.
Noninterest expense of $3.3 billion grew 14 percent from
2006. 2007 results reflect the inclusion of $172 million in
accrued expenses related to potential Visa-related legal
settlements, as well as $8 million in merger-related costs,
while 2006 results reflected the inclusion of $49 million
in charges related to the termination of debt and other
financing agreements. Otherwise, noninterest expenses
While we saw clear signs of progress during the year, our
results were not what we expected going into the year and
were reflective of a challenging operating environment.
We are fortunate that we continue to maintain the strength
that permits us to weather these storms and to support our
dividend, which we increased from $1.58 in 2006 to $1.70 in
2007. I’ll turn now to key elements of the progress we made
as a Company during 2007.
local Management
As you know, we manage the Company utilizing an affiliate
model that provides us with a number of key competitive
advantages. With full line-of-business support and staff
accountability for each of our 18 affiliates, we have local
executive management teams in our major metropolitan
markets that have a significant impact on our ability to adapt
to the unique challenges faced in each market. We firmly
believe that our model is a key competitive differentiator,
allowing us to offer high-touch service while benefiting from
the scale and a centralized back office that our size permits.
We discuss this key differentiator for Fifth Third in more
detail a few pages after this letter.
geographic Diversification
I mentioned earlier that, despite the obstacles we faced
in 2007, we continued to prepare our Company for the
future. One way we’ve done this is by diversifying our
geographic footprint. By way of comparison, at this time
4 | FiFtH tHiRD BancORP
Letter From the President & CEO
in 2004, 90 percent of our branches were located in
Midwestern markets. Upon completion of our pending
acquisitions, 24 percent of our franchise will be in the
Southeast, with an additional 14 percent of our branches
located in the strong and growing Chicago market.
In 2007, we announced our intention to acquire R-G Crown
Bank and First Charter Bank. Acquiring R-G Crown in
November 2007 has given our Company a foothold in the
vibrant Jacksonville market as well as Augusta, Georgia,
and also serves to reinforce our positions in Tampa Bay and
Orlando. First Charter, the fourth largest bank by deposits
in the Charlotte, North Carolina market, offered us a sizeable
entry point into this rapidly growing state, while also giving
us a small presence in Atlanta. Once this transaction closes,
Fifth Third will have strong positions in both the Midwest
and Southeast that we can grow through building new
(de novo) branches and opportunistic M&A activity. You will
see a further discussion of our evolving geographic position
in a few pages.
customer Experience
During 2007, we saw continued progression of our Customer
Experience initiative that I first discussed in last year’s
Annual Report. Overall, Retail customer satisfaction is now
in the top quartile of our competitors based on independent
surveys. While this is a marked improvement, it will remain
an area of continued focus for us as we expect to make
further headway in the coming year. In fact, we will be rolling
out similar customer satisfaction initiatives across our other
business units, starting with Commercial Banking and Fifth
Third Private Bank.
In 2007, the percentage of our customers who described
themselves as “loyal” increased by 10 percentage points
compared to mid-2006 when we first began tracking this
metric. Loyal customers are incredibly valuable to Fifth
Third: they have significantly lower attrition rates, higher
account balances and a higher average number of products
than other customers. All of these factors lead to enhanced
profitability, and we have a number of ways we are working
to increase customer loyalty.
One of the most important aspects of being able to retain
loyal customers is our ability to provide problem-free
service. However, if a problem does arise, we have placed
increased emphasis on ensuring that it is handled quickly
and efficiently without repeated customer handoffs. Our new
Escalation Center serves as an integrated resource where
particularly complex issues can be resolved effectively.
technology
Throughout 2007, we continued to improve our technology
foundation through branch network upgrades, an
enterprise customer information platform, and upgrades
to our mainframes, servers and data centers. With these
improvements in place, we now enjoy increased capacity to
support the Company’s growth as well as access to customer
data across the footprint. Comprehensive production
quality scorecards were implemented and are systematically
monitored to ensure our internal and external clients receive
outstanding service.
In support of our Customer Experience strategic initiative,
an automated customer issue tracking system was rolled out
to ensure effective problem resolution for our customers.
Banking center and call center staff now have consistent
information on customer issues right on their desktops, and
automated workflows ensure quick resolutions.
strategic initiatives and lines of Business
Commercial banking remains a great strength for our
Company and, in 2007, we developed strong momentum
with our corporate banking products. We continued to hire
top talent and gain market share across our footprint and
anticipate this will continue in 2008. Additionally, we expect
to capitalize on market disruption occurring in our footprint
resulting from large competitor acquisitions and other
developments among competitors. This presents us with
a unique opportunity to attract new talent and customers
during this transitional period.
Our success in both institutional sales and interest rate
derivatives continued in 2007, with revenue for these
products increasing by 37 percent and 28 percent,
respectively. We cross-sell these products into our existing
customer base, and also are able to realize meaningful
revenue synergies when we acquire companies that
lack them. These products were formerly unavailable to
customers of R-G Crown and First Charter, and they will
provide incremental revenue streams going forward.
We also continue to focus on expanding our presence in
the Healthcare segment. Our perspective on the Healthcare
space has expanded to include pharmaceuticals, outpatient
surgery centers, dialysis and durable medical equipment
lending, in addition to long-term care facilities. With experts
that truly understand the field, we are able to diversify the
type of business we bring into the Bank. As a result of our
efforts in this space, we added $1.4 billion of commitments
and generated fee income of $15 million in 2007.
Fifth Third Processing Solutions continued to deliver
exceptional organic growth, particularly in merchant
processing, where revenue was up 21 percent on a year-
over-year basis. We’ve targeted the gift card processing
and issuance sector and have made significant strides here –
we’re now the issuer for several of the nation’s largest
restaurant and pharmacy chains. We also realized a
16 percent increase in card issuer interchange this year,
driven by our success in expanding our credit card portfolio.
Celebrating 150 Years | 5
Letter from the President & CEO
In 2007, we averaged 24 new card openings per branch per
month compared to 14 per branch per month in 2006. Total
retail card balances were up 52 percent on a year-over-year
basis. While we have focused on growing this product, we
also have been careful to adhere to strict standards in order
to mitigate our risks in this area.
As I mentioned earlier, our Customer Experience initiative
has been a major focus for our Retail Banking operation. One
of the components of this effort has been the application of
consistent branding and sales management processes across
all of our affiliates. A customer conducting business at a
banking center in Chicago should have the same experience
as a customer in Orlando, and we have made this a reality.
We increased our value proposition to customers through
our continued geographic expansion, and we introduced
several new retail products that were favorably received.
Our new Fifth Third Goal-Setter Savings account allows
customers to target a dollar amount and specific date for
reaching their target, simplifying their day-to-day money
management. In addition, we sold 58,000 stored value cards
after introducing gift card centers into our branch network
in late November.
Consumer Lending had a difficult year. Credit concerns
led to a significant slowdown in production rates due to
decreased applications and a tighter decision-making
process. We have established regular credit meetings to
assess our underwriting standards and have avoided many
riskier mortgage products, notably subprime mortgages.
The Investment Advisors business produced a solid year
under its new management team. Fifth Third Private Bank –
which focuses on affluent clients with $1 million or more in
investable assets – had another strong year. During 2007, the
Private Bank created a new and consistent strategy focused
on building a national brand. The brokerage platform
realized strong revenue growth and outstanding bottom-line
results from successful targeted recruiting, particularly in the
second half of the year, increasing the number of registered
representatives from 268 in 2006 to 300 at the end of
2007. And Fifth Third Institutional Services re-engineered its
internal processes, allowing relationship managers to focus
more intimately on client needs.
corporate governance and Responsibility
We at Fifth Third are deeply aware that you, our share-
holders, own the Company, and it is to you that we are
accountable. Thus, we are proud to maintain among the
very highest corporate governance ratings in the industry.
Our Corporate Governance Quotient, as published by
Institutional Shareholder Services, is in the top 10 to 15
percent of companies in the S&P 500 and in the top 2
percent of all U.S. banks.
6 | FiFtH tHiRD BancORP
Among the steps we’ve taken to create a higher standard for
corporate governance:
• We have publicly disclosed governance guidelines
• Independent outside directors constitute 12
of 15 directors (80 percent), with a named lead
independent director
• The nominating, compensation and audit committees
are comprised solely of independent outside directors
• Outside directors meet regularly without
the CEO present
• Directors receive a significant portion of their
compensation in the form of equity
• Directors and executives are subject to stock
ownership guidelines, with mandatory holding
periods for restricted stock and stock acquired
through the exercise of options
• Our board is “declassified” – all directors are
elected annually
• We have eliminated the super-majority voting
provision in our Code of Regulations
• We have no “poison pill”
closing
As you know, my first year as CEO also marks the first year
for George A. Schaefer, Jr. – our former CEO – as chairman
of Fifth Third. George’s wise counsel – and that of the rest of
our board of directors – is a great source of support for our
new management team as we implement important changes
in the Company. I’d also like to express how much we will
miss Joni Herschede, who served on our board for 16 years
and who passed away last December. Joni’s commitment to
Fifth Third and to the many community efforts in which she
was involved were a testament to her strong leadership and
good heart.
My first year as Fifth Third’s CEO has been a challenging
and eventful one, but I knew it would not be an easy year.
As we enter our 150th year of operation, I am more excited
today than ever about our Company’s future and its ability
to weather such challenges. Our progress on our three-year
strategic plan makes me confident that we will be a stronger,
more competitive, and a more profitable company as we
emerge from this credit cycle.
Kevin t. Kabat
President and Chief Executive Officer
February 2008
EnHancing custOMER
ExPERiEncE tHROugH
c On s u l t a t i vE
a p p r OaC h
Customer Experience
Continuing to improve the Customer
Experience remains one of our top
strategic initiatives, with our ultimate
goal to build customer loyalty. Loyal
customers are incredibly valuable to
Fifth Third, as they are twice as likely
to stay with us over the long term, hold
higher account balances, and purchase
more products and services. We’re
working to increase customer loyalty in a
number of ways.
We also have developed a new approach
to the way we handle customer issues.
One of the most important aspects of
retaining loyal customers lies in our
ability to provide problem-free service.
But when a problem does arise, it’s
even more important that we address it
quickly and efficiently. We are committed
to providing better service and ensuring
that when a problem arises it is dealt with
decisively and only once.
In 2007, we significantly improved
our sales and service strategy to enhance
our strong culture by moving to a more
consultative approach. The goal is to
ensure our customers’ total needs are
being understood and met every time
we interact with them. Through great
service, we earn the right to provide
advice and become the customers’
trusted advisor. This new strategy has
driven a tremendous increase in service
levels, resulting in a 30 percent increase
in overall customer loyalty. This has
a large impact on our cross-selling
ability, as our loyal customers average
20 percent more products with us.
We’ve taken a number of steps to
improve our handling of problems this
year, including the introduction of a
centralized team to handle particularly
complex issues. Our new Escalation
Center supports our branch-level
personnel to drive first-contact resolution
of issues wherever possible.
In 2008, we will continue to evolve our
sales and service strategy across all areas
of the business and incorporate feedback
from our customers. By developing
a better understanding and deeper
relationships with our customers, we will
continue to drive strong customer loyalty
and, ultimately, profitability for the Bank.
Celebrating 150 Years | 7
Geographic Diversification
ExPanDing OuR FOOtPRint
intO HigH-gROwtH
m a r k e t s
In 2008, Fifth Third will celebrate its
150th anniversary. Throughout most
of our history, we were a Midwestern
bank. Since our origins as the Bank
of the Ohio Valley in 1858, we’ve had
our headquarters in Cincinnati and, as
recently as 2004, we did not have a
sizeable presence outside of the Midwest.
To diversify our geographic position and
to access higher growth markets, Fifth
Third began actively diversifying
its footprint several years ago.
Upon consummation of our pending
acquisition, we expect to have more than
150 banking centers in Florida, more
than 60 in North Carolina, more than
30 in Tennessee and five in Georgia.
Approximately 24 percent of our
banking centers will be in the Southeast,
which is quite a change from just a
short while ago.
Adding to our investment in the strong
and growing Chicago market, we expect
to have 38 percent of our banking
centers in high-growth markets entering
2008, compared with just 23 percent in
2004. Just adding to our existing pipeline
of new banking centers over the next
three years would lead to a company
with 43 percent of our banking centers in
those higher growth markets.
The weighted average population
growth rate for our footprint is now
approximately equal to the national
average, whereas three years ago it was
about half of that. This has enormous
implications for the organic growth
prospects of our Company in the future
and, when coupled with our expertise at
opening new banking centers, offers a lot
of opportunity.
We use sophisticated software programs
that enable us to pinpoint locations
8 | FiFtH tHiRD BancORP
Geographic Diversification
where future branches will be the most
financially successful. With greater
accuracy, we can predict the financial
success of proposed branches based on
traffic flow, the types of businesses and
households in the areas we serve, and
the competitive situation of the trade
area around the branch. We combine
this financial analysis with an analysis of
our overall efforts to provide financial
products and services to the entire
community and develop and execute
a strategy for each individual market.
On average, our branches built since
2004 are tracking to hit their targeted
deposits at maturity – between $35
million and $40 million after six years.
On an individual basis, approximately
70 percent of branches are tracking to
meet these thresholds. The remaining 30
percent may be below those aggressive
targets, but may meet other important
criteria such as geographic coverage,
and are generally on track for solid
profitability. Our goals for de novos are
to break even in less than two years and
to cumulatively break even in about three
years. Our new banking centers have a
targeted internal rate of return in excess
of 20 percent, which produces a strong
return on capital. We continue to refine
and improve this process, as we believe
that our ability to generate organic
growth is vital to our Company’s future.
Our current plan is to build approximately
50 new branches in 2008. Our de novo
program is expected to continue at
a pace of approximately 60 new
branches per year for the next three
years, with 42 percent of those located
in Florida, 43 percent in Chicago and
most of the remainder in faster growing
markets such as Tennessee, Georgia and
North Carolina.
cHanging OuR PROFilE
23% in HigH-
gROwtH MaRKEts*
1,005 BRancHEs
38% in HigH-
gROwtH MaRKEts*
1,335 BRancHEs
43% in HigH-
gROwtH MaRKEts*
1,455 BRancHEs
10%
13%
24%
77%
62%
57%
14%
27%
16%
2004
2008 pro forma
2010 plan*
Southeast includes: Florida, Georgia, Kentucky, North Carolina and Tennessee.
* Growth markets include Southeast and Chicago.
sOutHEast
cHicagO
OtHER
Celebrating 150 Years | 9
Affiliate Model
Maintaining a lOcal
PR EsEn cE
tH R Ou gH Ou t OuR
fOOt p r i n t
Overlaying the affiliate structure are
our lines of business. These are
essentially areas of expertise – Branch
Banking, Consumer Lending, Commercial
Banking, Processing Solutions, and
Investment Advisors – whose products
and services are delivered to customers
through the affiliates in a way that
ensures customer relationships are
viewed holistically.
We have 18 affiliates plus our Pittsburgh,
St. Louis, Augusta and Jacksonville
markets. For the year ended June
2007 (most recent FDIC data and
excluding headquarters), nearly three-
quarters of our existing and de novo
markets grew deposits.
The affiliate model is at the core of
Fifth Third and differentiates us
from other large financial institutions.
We operate each affiliate with local
management. An experienced president
and senior management team reside
in each market, driving the business.
Our affiliates each have a board of
directors comprised of local business
and community leaders. This means that
we have local decision-makers who are
able to view customer relationships in
holistic ways and make local decisions.
This model gives us a tremendous
competitive advantage. We are able to
be more responsive and attract
employees who are allowed to manage
the customer relationship locally. This
model also gives us 18 “mini-incubators”
for new ideas and best practices.
Our entrepreneurial sales culture is
at the heart of the affiliate model, and
contributes tremendously to Fifth
Third’s success.
aFFiliatE
cincinnati
chicago
Region
Ohio
Region
Michigan
Region
Florida
Region
tennessee
Region
PREsiDEnt
Bob sullivan
terry Zink**
todd clossin
Michelle vanDyke
gregory Kosch
Dan Hogan
Chicago
chip Reeves
Central Indiana
John Pelizzari
Southern Indiana
John Daniel
Northeastern Ohio
nancy Huber
Northwestern Ohio
Robert laclair
Central Ohio
Jordan Miller
Ohio Valley
David call
Western Ohio
Raymond webb
Western Michigan
Michelle vanDyke
Eastern Michigan
David girodat
Northern Michigan
Mark Eckhoff
South Florida
Kent Ellert
Central Florida
John Bultema
Tampa Bay
Brian Keenan
Tennessee
Dan Hogan
Louisville
Philip McHugh
Central Kentucky
samuel Barnes
BanKing cEntERs
135
307
301
247
141
96
DEPOsits***
$10.1B
$15.9B
$16.4B
$13.9B
$7.4B
$4.9B
% OF DEPOsits
15%
23%
24%
20%
11%
7%
All individuals shown in their positions as of February 2008
** Has oversight of all affiliates except Cincinnati
*** Bancorp deposits include $6.8 billion in National and non-affiliate deposits
10 | FiFtH tHiRD BancORP
Branch Banking
PR O v iDi n g
cOMPREHEnsivE sERvicE
i n p e r sOn
Or On l i n e
2007 Highlights
• $2.2 billion total revenue
• $621 million net income
• $17 billion average loans
• $40 billion average core deposits
• 1,227 full-service banking centers
• 2,211 full-service ATMs
• 1.2 million online banking
customers
Business Description • Fifth Third
provides a full range of deposit
and lending products to individuals
and small businesses in 11 states in the
Midwest, Tennessee, Georgia and
Florida. Our 3.2 million customers can
transact business 24-hours-a-day, seven
days a week through our Fifth Third
ATM network and our comprehensive
online banking service. Through these
channels, Fifth Third strives to provide
exceptional products, convenience and
service to our customers within our
geographic footprint.
customer Focus • Branch Banking
provides deposit, lending and investing
products and services for customers
at every stage of life or career. Branch
Banking’s 9,600 employees provide
knowledgeable and reliable guidance,
whether customers meet with them
personally or via any of our automated
banking solutions. Our business
bankers can provide full solutions to
a small business customer including
loans, treasury management products,
employee savings plans or employee
banking needs. Whether saving for a
home, a child’s education, planning for
retirement or building a business, our
associates consult with our customers,
help determine their needs, and provide
solutions that meet their goals both
today and tomorrow.
strategy • Fifth Third opened 66 new
banking centers in 2007. The Bank also
added 31 new banking centers through
the R-G Crown bank acquisition. In 2007,
the heaviest de novo markets were
Florida and Chicago, with 22 and 17 new
branches, respectively.
Fifth Third expects to continue branch
banking expansion activities with the
planned addition of approximately 50
new banking centers in 2008. Areas
of heaviest activity continue to be
primarily throughout the Southeast,
connecting the Bank’s Midwest footprint
with Florida. Our business banking area
now incorporates 225 business bankers
assisting customers with up to $10
million in sales throughout our footprint.
We continue to make improvements
in sales management processes and
customer service to increase productivity
and customer satisfaction and enhance
client retention.
Celebrating 150 Years | 11
Consumer Lending
Putting custOMER
DREaMs witHin
r e a Ch
2007 Highlights
• $601 million total revenue
• $130 million net income
• $22 billion average loans
• $35 billion mortgage
servicing portfolio
• 9,300 dealer indirect auto
lending network
strategy • Fifth Third understands that
not every customer needs the same loan
product to fulfill his or her needs. To
evolve with the dynamic marketplace and
meet the changing needs of customers
as they progress through life, we
continue to adjust our products to avoid
exposure to high-risk segments while
refining our lending solutions. In 2007,
many competitors exited the business.
We continued to sharpen our focus on
underwriting practices and selectively
increased our market share. Whether
customers need a first mortgage or a
loan to send their children to college, we
intend to be there with the right solution
for them.
Business Description • Consumer
Lending provides loan products to
banking center and other customers
across and beyond Fifth Third’s footprint.
In order to leverage its infrastructure,
Consumer Lending partners with a
network of auto dealers who originate
loans and leases on the Bank’s behalf,
otherwise known as Indirect Lending.
Additionally, Consumer Lending provides
loan products to individuals, including
real estate-secured mortgages and home
equity loans and lines, as well as federal
and private student education loans.
customer Focus • Recognizing that
personal loans are often a vital element
for the prosperity of our customers,
we offer a broad range of loans that
correspond to the financial situation of
our customers. Whether for a first car or
a retirement home, Fifth Third provides
loans that fit our customers’ needs, today
and tomorrow.
12 | FiFtH tHiRD BancORP
ME Et i n g cu s t O M E R
nEEDs tODaY anD
tOmOrrO w
2007 Highlights
• $562 million total revenue
• $100 million net income
• $3.2 billion average loans;
$5 billion average core deposits
• $33 billion assets under
management; $223 billion assets
under care
• $16 billion broker client assets
• 800 registered representatives
• 338 private bank
relationship managers
• 81,000 private bank relationships
Business Description • With more than
100 years of experience in helping
our clients build and manage their
wealth, Fifth Third Investment Advisors
provides integrated solutions to meet
the financial goals of individuals, families
and institutional investors. Investment
Advisors provides wealth planning,
banking services, customized lending,
asset management, trust, insurance and
brokerage services to individual and
institutional clients, as well as retirement
plan and custody services to businesses,
pension and profit sharing plans,
foundations and endowments.
client Focus • Clients receive
personalized advice from one of four
business lines: Fifth Third Private Bank,
Fifth Third Securities and Insurance, Fifth
Third Asset Management and Fifth Third
Institutional Services. Fifth Third Private
Bank offers specialized teams to provide
holistic strategies to affluent clients with
$1 million or more in investable assets in
wealth planning, investment and trust
services, private banking, insurance and
wealth protection. Fifth Third Securities
offers a suite of products from full-
service brokerage to self-managed
investing to provide our clients with
Investment Advisors
customized programs to meet their
needs today and tomorrow. Fifth Third
Asset Management provides asset
management services to institutional
clients and also advises the Company’s
proprietary family of mutual funds,
Fifth Third Funds. Fifth Third Institutional
Services, in conjunction with Fifth Third
Asset Management, provides advisory
services for institutional clients including
states and municipalities, Taft-Hartley
plans, pension and profit sharing plans,
and foundations and endowments.
strategy • Fifth Third Investment
Advisors continues to deepen client
relationships by offering an open
architecture framework and customized
products and solutions. We begin by
completely understanding our clients’
unique needs, goals and complexities.
We make it easy to do business with
Fifth Third by building customized
teams of professionals to meet their
wealth management needs in one
place. These unbiased wealth strategies
include investment offerings provided
by world-class external money managers
in addition to products offered through
Fifth Third Asset Management. We
continue to employ new technologies to
improve clients’ access to their accounts
and products. By leveraging our internal
company partnerships, we provide
complete, powerful financial solutions to
Fifth Third Investment Advisors clients.
Celebrating 150 Years | 13
Commercial Banking
OFFERing innOvativE
sOlutiOns tO BusinEss
Cl i e n t s
2007 Highlights
• $1.9 billion total revenue
• $702 million net income
• $35.7 billion average loans
• $15.9 billion average core deposits
• 650 corporate client relationships
• 11,500 middle market
client relationships
• 112,000 treasury
management relationships*
* includes small business relationships
in Branch Banking
Business Description • Fifth Third’s
1,100 Commercial bankers serve clients
ranging from middle market companies
with $10 million in annual revenue to
some of the largest companies in the
world. In addition to the traditional
lending and depository offerings, our
products and services include global
cash management, foreign exchange and
international trade finance, derivatives
and capital markets services, asset-
based lending, real estate finance,
public finance, commercial leasing and
syndicated finance.
customer Focus • Fifth Third has 150
years of Commercial banking experience
and, throughout our history, has always
believed in keeping decision-making
local. Through our affiliate model,
which allows us to keep close to the
communities we serve, Fifth Third
is able to offer the high level of service
of a local bank while maintaining
the financial strength and product
capabilities that come with being one of
the largest banks in the country.
We strive to offer complete financial
solutions to our clients. We believe the
focus should be on our total relationship
with our clients – not just meeting
today’s needs, but working with clients
to identify tomorrow’s requirements
as they grow.
strategy • Fifth Third remains committed
to offering innovative and integrated
solutions for our customers. We launched
12 new products in 2007, several with
market-leading functionality, including an
electronic depository service that allows
customers to scan checks and deposit
them electronically from whatever
location they choose. This allowed our
clients to focus more time on improving
their business rather than on routine
banking tasks, and enabled us to serve
as our customers’ depository institution
across the country. During 2007, we
processed 18.8 million electronic deposit
transactions totaling $31.3 billion from
2,473 locations. We also delivered
Remote Currency Manager, an innovative
solution that uses a smart safe to
automate the cash handling process from
the time cash is collected to the time it is
deposited and credited to a customer’s
account. This product consolidates
banking relationships, reduces the risk
of fraud and theft, and streamlines the
reconciliation process. By year’s end, we
had installed 500 electronic safes across
the country. We continue to add value
to all of our relationships by combining
our depth of experience with integrated
solutions that will best meet our clients’
evolving needs.
14 | FiFtH tHiRD BancORP
Fifth Third Processing Solutions
using tEcHnOlOgY
tO PROviDE cOMPlEtE
p a y m e n t
sOluti Ons
2007 Highlights
• $736 million total revenue
• $153 million net income
• 26.7 billion ATM and point
of sale transactions
• $267 billion annual debit and
credit card volume
• 42 million gift card
transactions processed
• 42 million debit cards issued
• 155,900 merchant locations
• 11,000 automated teller
machines supported in 43
states and 11 countries
• 2,600 financial institution clients
Business Description • For over 30 years,
Fifth Third Processing Solutions has been
a premier source of payment acceptance
services for leading businesses
nationwide, providing electronic
funds transfer (EFT), debit, credit and
merchant transaction processing for
Fifth Third and Fifth Third merchant
and financial institution customers.
Processing Solutions provides its clients
with the highest quality transaction
processing solutions available through a
complete global payments solution. Our
fully owned and operated processing
platforms, payment consultants, and
management and development teams
continue to create new technology
to offer unmatched flexibility and
customization in order to fulfill our clients’
current and future needs. Fifth Third
Processing Solutions provides its clients
with a one point connection to deliver
fully redundant, end-to-end credit, PIN
debit, EFT and gift card/stored value
processing. Processing Solutions also
manages Fifth Third’s debit and credit
card issuing businesses and operates the
ATM and point-of-sale network.
customer Focus • Fifth Third Processing
Solutions operates three primary
businesses – Merchant Services, Financial
Institution Services and Card Services.
Fifth Third’s Merchant Services Group
provides card acceptance solutions to
the nation’s top retailers and businesses.
Our flexible system architecture and
processing features are capable of
meeting the requirements of any
business. In addition to acquiring
solutions, Processing Solutions offers
flexible proprietary/private label
programs, co-branding programs and
agent bank credit card programs. Our
Financial Institution and Card Services
groups combine to provide a complete
global payments solution delivered with a
consultative approach. Clients are offered
a full array of capabilities including
correspondent banking services,
automated teller machine processing,
network gateway access, fraud and
image services and international banking.
strategy • Fifth Third is able
to leverage our significant market
position and distribution capabilities to
assist existing franchise customers
and gain new ones. We are creating a
more effective cross-selling and product-
bundling platform to strengthen current
customer relationships and capture
the complete processing business
from new customers. We are able to
demonstrate exceptional value by
leveraging our in-house expertise and
working with clients to help them
efficiently manage their merchant and
EFT businesses while our scale enables
us to be highly price-competitive.
Celebrating 150 Years | 15
Community Giving
invEsting in
cOMMunitiEs anD
p e Op l e
2007 Employee &
Corporate Giving
Over the past five years,
Fifth Third Bank’s corporate,
foundation and employee
contributions to the United
Way have totaled $50.3
million, including $9 million
contributed in 2007.
In Memoriam
Joan R. Herschede
16 | FiFtH tHiRD BancORP
supporting Our communities • The
Foundation Office at Fifth Third Bank
administers grants on behalf of the Fifth
Third Foundation and other charitable
trusts and foundations for which the
Bank serves as trustee or agent. In 2007,
the Fifth Third Foundation made 576
grants totaling more than $4.3 million in
the areas of arts and culture, community
development, education, and health and
human services. The Foundation funded
17 college scholarships of $2,500 each to
children of Fifth Third Bank employees
and matched more than $118,400 in
employees’ personal gifts to institutions
of higher education.
Fifth Third’s Community Development
Corporation (CDC) invests in low-
income housing, historic tax credits
and economic development projects
to support community revitalization in
neighborhoods throughout our footprint.
Our Community Affairs department
works with the affiliates and lines
of business to promote lending
and development opportunities in
traditionally underserved markets, such
as ethnically diverse, urban and low-to
moderate-income census tracts. This
group also champions financial literacy
by providing homebuyer training, credit
counseling and college savings programs,
and, through the implementation of
the Young Bankers Club, a nationally
recognized program that promotes
financial literacy in elementary schools
across our footprint. Since its inception
in Cincinnati in 2004, the Young Bankers
Club has expanded to Columbus,
Chicago, Grand Rapids, Indianapolis
and West Virginia.
In 2007, retired business owner and
philanthropist Joan R. “Joni” Herschede
passed away suddenly at the age of 67.
Joni served as a member of the Fifth
Third Bancorp board of directors for
more than 16 years. She also served on
the board’s Audit and Trust committees
and was a member and most recent chair
of the Charlotte R. Schmidlapp Fund,
for which the Bank serves as trustee. In
addition, she was a member of the Bank’s
Community Advisory Forum, a group of
Cincinnati business leaders who provide
advice and input to Fifth Third Bank on
issues facing Greater Cincinnati.
Joni was a community advocate, tireless
volunteer and generous philanthropist.
We were the beneficiaries of her
guidance, counsel and unwavering
commitment to Fifth Third. She will be
greatly missed.
2007 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
Risk Factors
Statements of Income Analysis
Business Segment Review
Fourth Quarter Review
Balance Sheet Analysis
Risk Management
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 Significant Accounting and Reporting Policies
Business Combinations
Securities
Loans and Leases and Allowance for Loan and Lease Losses
Loans Acquired in a Transfer
Bank Premises and Equipment
Goodwill
Intangible Assets
Sales of Receivables and Servicing Rights
Derivatives
Other Assets
Short-Term Borrowings
Long-Term Debt
Commitments, Contingent Liabilities and Guarantees
Annual Report on Form 10-K
Consolidated Ten Year Comparison
Directors and Officers
Corporate Information
56
61
62
63
64
64
64
65
65
67
70
70
71
72
Legal and Regulatory Proceedings
Related Party Transactions
Accumulated Other Comprehensive Income
Common Stock and Treasury Stock
Stock-Based Compensation
Other Noninterest Income and Other Noninterest Expense
Income Taxes
Retirement and Benefit Plans
Earnings Per Share
Fair Value of Financial Instruments
Certain Regulatory Requirements and Capital Ratios
Parent Company Financial Statements
Segments
18
19
20
20
22
25
31
35
36
39
50
51
52
53
54
55
73
74
75
76
76
79
79
81
82
83
84
85
86
88
99
100
FORWARD-LOOKING STATEMENTS
This report may contain forward-looking statements about Fifth Third Bancorp and/or the company as combined acquired entities within the meaning of Sections 27A of the
Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder,
that involve inherent risks and uncertainties. This report may contain certain forward-looking statements with respect to the financial condition, results of operations, plans,
objectives, future performance and business of Fifth Third Bancorp and/or the combined company including statements preceded by, followed by or that include the words or
phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain” or similar expressions or future or conditional verbs such as “will,”
“would,” “should,” “could,” “might,” “can,” “may” or similar expressions. There are a number of important factors that could cause future results to differ materially from
historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general economic conditions and
weakening in the economy, specifically the real estate market, 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; (2) deteriorating credit quality; (3) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or
other economic conditions; (4) changes in the interest rate environment reduce interest margins; (5) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss
provisions; (6) Fifth Third’s ability to maintain required capital levels and adequate sources of funding and liquidity; (7) changes and trends in capital markets; (8) competitive
pressures among depository institutions increase significantly; (9) effects of critical accounting policies and judgments; (10) changes in accounting policies or procedures as may be
required by the Financial Accounting Standards Board or other regulatory agencies; (11) legislative or regulatory changes or actions, or significant litigation, adversely affect Fifth
Third, one or more acquired entities and/or the combined company or the businesses in which Fifth Third, one or more acquired entities and/or the combined company are
engaged; (12) ability to maintain favorable ratings from rating agencies; (13) fluctuation of Fifth Third’s stock price; (14) ability to attract and retain key personnel; (15) ability to
receive dividends from its subsidiaries; (16) potentially dilutive effect of future acquisitions on current shareholders' ownership of Fifth Third; (17) effects of accounting or financial
results of one or more acquired entities; (18) difficulties in combining the operations of acquired entities; (19) ability to secure confidential information through the use of computer
systems and telecommunications networks; and (20) the impact of reputational risk created by these developments on such matters as business generation and retention, funding and
liquidity. Fifth Third undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this report.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following is management’s discussion and analysis of certain significant factors that have affected Fifth Third Bancorp’s (the “Bancorp”
or “Fifth Third”) financial condition and results of operations during the periods included in the Consolidated Financial Statements, which are
a part of this report. Reference to the Bancorp incorporates the parent holding company and all consolidated subsidiaries.
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, basic
Earnings per share, diluted
Cash dividends per common share
Book value per share
Dividend payout ratio
Financial Ratios
Return on average assets
Return on average equity
Average equity as a percent of average assets
Tangible equity
Net interest margin (a)
Efficiency (a)
Credit Quality
Net losses charged off
Net losses charged off as a percent of average loans and leases
Allowance for loan and lease losses as a percent of loans and leases
Allowance for credit losses as a percent of loans and leases
Nonperforming assets as a percent of loans, leases and other assets,
including other real estate owned
2007
$3,033
2,467
5,500
628
3,311
1,076
$2.00
1.99
1.70
17.20
84.9 %
1.05 %
11.2
9.35
6.05
3.36
60.2
$462
.61 %
1.17
1.29
1.32
2006
2,899
2,012
4,911
343
2,915
1,188
2.14
2.13
1.58
18.02
74.2
1.13
12.1
9.32
7.79
3.06
59.4
316
.44
1.04
1.14
.61
2005
2,996
2,374
5,370
330
2,801
1,549
2.79
2.77
1.46
17.00
52.7
1.50
16.6
9.06
6.87
3.23
52.1
299
.45
1.06
1.16
.52
2004
3,048
2,355
5,403
268
2,863
1,525
2.72
2.68
1.31
16.00
48.9
1.61
17.2
9.34
8.35
3.48
53.0
252
.45
1.19
1.31
.51
2003
2,944
2,398
5,342
399
2,466
1,665
2.91
2.87
1.13
15.29
39.4
1.90
19.0
10.01
8.56
3.62
46.2
312
.63
1.33
1.47
.61
Average Balances
Loans and leases, including held for sale
Total securities and other short-term investments
Total assets
Transaction deposits (b)
Core deposits (c)
Wholesale funding (d)
Shareholders’ equity
Regulatory Capital Ratios
Tier I capital
Total risk-based capital
Tier I leverage
(a) Amounts presented on a fully taxable equivalent basis (“FTE”). The taxable equivalent adjustments for years ending December 31, 2007, 2006, 2005, 2004 and 2003 were $24 million, $26
67,737
24,999
102,876
48,177
56,668
33,615
9,317
$78,348
11,994
102,477
50,987
61,765
27,254
9,583
73,493
21,288
105,238
49,678
60,178
31,691
9,811
57,042
30,597
94,896
43,260
49,468
33,629
8,860
52,414
28,947
87,481
40,372
46,798
28,812
8,754
7.72 %
10.16
8.50
8.35
10.42
8.08
8.39
11.07
8.44
10.31
12.31
8.89
10.97
13.42
9.11
million, $31 million, $36 million and $39 million, respectively.
(b) Includes demand, interest checking, savings, money market and foreign office deposits.
(c) Includes transaction deposits plus other time deposits.
(d) Includes certificates $100,000 and over, other foreign office deposits, federal funds purchased, short-term borrowings and long-term debt.
TABLE 2: QUARTERLY INFORMATION
For the three months ended ($ in millions, except per share data)
Net interest income (FTE)
Provision for loan and lease losses
Noninterest income
Noninterest expense
Income before cumulative effect
Cumulative effect of change in accounting principle, net of tax
Net income
Earnings per share, basic
Earnings per share, diluted
12/31
$785
284
509
940
16
-
16
.03
.03
2007
9/30
760
139
681
853
325
-
325
.61
.61
6/30
745
121
669
765
376
-
376
.69
.69
3/31
742
84
608
753
359
-
359
.65
.65
12/31
744
107
181
760
66
-
66
.12
.12
2006
9/30
719
87
626
731
377
-
377
.68
.68
6/30
716
71
622
726
382
-
382
.69
.69
3/31
718
78
584
698
359
4
363
.66
.65
18
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 financial results of the Bancorp and
may not contain all of the information that is important to you.
trends, events,
For a more complete understanding of
commitments, uncertainties, liquidity, capital resources and critical
accounting policies and estimates, you should carefully read this
entire document. Each of these items could have an impact on
the Bancorp’s financial condition, results of operations and cash
flows.
The Bancorp is a diversified financial services company
headquartered in Cincinnati, Ohio. At December 31, 2007, the
Bancorp had $111.0 billion in assets, operated 18 affiliates with
1,227 full-service Banking Centers including 102 Bank Mart®
locations open seven days a week inside select grocery stores and
2,211 Jeanie® ATMs in Ohio, Kentucky, Indiana, Michigan,
Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri
and Georgia. The Bancorp reports on five business segments:
Commercial Banking, Branch Banking, Consumer Lending,
Investment Advisors and Fifth Third Processing Solutions
(“FTPS”).
The Bancorp believes that banking is first and foremost a
relationship business where the strength of the competition and
challenges to growth can vary in every market. Its affiliate
operating model provides a competitive advantage by keeping the
decisions close to the customer and by emphasizing individual
relationships. Through its affiliate operating model, individual
managers from the banking center to the executive level are given
the opportunity to tailor financial solutions for their customers.
The Bancorp’s revenues are fairly evenly dependent on net
interest income and noninterest income. For the year ended
December 31, 2007, net interest income, on a fully taxable
equivalent (“FTE”) basis, and noninterest income provided 55%
and 45% of total revenue, respectively. Therefore, changes in
interest rates, credit quality, economic trends and the capital
markets are primary factors that drive the performance of the
Bancorp. As discussed in the Risk Management section, risk
identification, measurement, monitoring, control and reporting are
important to the management of risk and to the financial
performance and capital strength of the Bancorp.
Net interest income is the difference between interest income
earned on assets such as loans, leases and securities, and interest
expense paid on liabilities such as deposits, short-term borrowings
and long-term debt. Net interest income is affected by the general
level of interest rates, the relative level of short-term and long-
term interest rates, changes in interest rates and 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 pays 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 through potential adverse
changes to net interest income and financial position. 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
derivative transactions as part of its overall strategy to manage its
interest rate 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 flows caused by loan defaults and
inadequate collateral due to a weakening economy within the
Bancorp’s footprint.
Net interest income, net interest margin, net interest rate
spread and the efficiency 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 presentation to be the preferred
industry measurement of net interest income as it provides a
relevant comparison between taxable and non-taxable amounts.
Noninterest income is derived primarily from electronic
funds transfer (“EFT”) and merchant transaction processing fees,
card interchange, fiduciary and investment management fees,
corporate banking revenue, service charges on deposits and
mortgage banking revenue. Noninterest expense is primarily
driven by personnel costs and occupancy expenses in addition to
expenses incurred in the processing of credit and debit card
its customers and merchant and financial
transactions for
institution clients.
the Bancorp completed
On November 2, 2007,
its
acquisition of R-G Crown Bank (“Crown”), a subsidiary of R&G
Financial Corporation, with $2.8 billion in assets and $1.7 billion
in deposits located in Florida and Augusta, Georgia. As of
December 31, 2007, the Bancorp’s Florida affiliates have 141 full-
service locations, of which 28 were acquired as part of the Crown
acquisition. Additionally, the 3 Crown banking centers in Augusta
allowed the Bancorp to enter the state of Georgia.
On August 16, 2007, the Bancorp announced an agreement
to acquire First Charter Corporation ("First Charter"), which
operates 57 banking centers in North Carolina and 2 in suburban
Atlanta. The acquisition is awaiting regulatory approval with a
planned close in the second quarter of 2008.
Earnings Summary
The Bancorp’s net income was $1.1 billion or $1.99 per diluted
share in 2007, a nine percent decrease compared to $1.2 billion
and $2.13 per diluted share in 2006. Current year results were
impacted by a $177 million charge to lower the current cash
surrender value of one of the Bancorp’s bank-owned life
insurance (“BOLI”) policies. The BOLI charge reflected a
decrease in cash surrender value due to declines in value of the
policies underlying investments due to significant disruptions in
the financial markets and widening credit spreads. This charge
reflected an additional $22 million recorded subsequent to the
Bancorp’s issuance of fourth quarter of 2007 earnings. Current
year results were also impacted by provision for loan and lease
losses of $628 million, an increase of $285 million over 2006. The
increased provision for loan and lease losses was a result of the
deteriorating credit environment discussed further in the Risk
Management section.
Net interest income (FTE) increased five percent compared
to 2006. Net interest margin increased to 3.36% in 2007 from
3.06% in 2006 largely due to the balance sheet actions taken in the
fourth quarter of 2006. See Comparison of 2006 with 2005
section for specific balance sheet actions taken.
Noninterest income increased 23% compared to 2006.
Noninterest income in 2007 reflects the impact of the previously
mentioned $177 million BOLI charge, while the 2006 results
included $415 million in losses related to fourth quarter balance
sheet actions.
income
increased nine percent compared to 2006 with growth in
electronic payment processing, service charges on deposits and
corporate banking revenue offset by lower mortgage banking net
revenue.
Excluding these
items, noninterest
Noninterest expense increased 14% compared to 2006.
Noninterest expense in 2007 included $172 million in charges
related to the Bancorp’s indemnification of estimated current and
future Visa Inc. (“Visa”) litigation settlements and $8 million of
acquisition-related costs, while 2006 results included $49 million
in charges related to the termination of debt and other financing
agreements. Excluding these items, noninterest expense increased
nine percent resulting from volume-based transaction growth in
Fifth Third Bancorp 19
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
payment processing, higher technology related expenses reflecting
infrastructure upgrades and higher occupancy expense from
continued de novo growth.
The Bancorp maintains a conservative approach to both
lending and investing activities as it does not originate or hold
subprime loans, nor does it hold collateralized debt obligations
(“CDOs”) or asset-backed securities backed by subprime loans in
its securities portfolio. However, the Bancorp has exposure to the
housing markets, which weakened considerably during 2007,
particularly in the upper Midwest and Florida. Consequently, net
charge-offs as a percent of average loans and leases were 61 basis
points (“bp”) in 2007 compared to 44 bp in 2006. At December
31, 2007, nonperforming assets as a percent of loans and leases
increased to 1.32% from .61% at December 31, 2006.
The Bancorp’s capital ratios exceed the “well-capitalized”
guidelines as defined by the Board of Governors of the Federal
RECENT ACCOUNTING STANDARDS
In July 2006, the Financial Accounting Standards Board ("FASB")
issued Staff Position ("FSP") No. FAS 13-2, “Accounting for a
Change or Projected Change in the Timing of Cash Flows
Relating to Income Taxes Generated by a Leveraged Lease
Transaction.” This FSP was effective for fiscal years beginning
after December 15, 2006. Upon adoption of this FSP on January
1, 2007, the Bancorp recognized an after-tax adjustment to
beginning retained earnings of $96 million representing the
cumulative effect of applying the provisions of this FSP.
In July 2006, the FASB issued Interpretation (“FIN”) No. 48,
“Accounting for Uncertainty in Income Taxes - An Interpretation
of FASB Statement No. 109.” This Interpretation clarifies the
in
in
accounting for uncertainty
income taxes recognized
CRITICAL ACCOUNTING POLICIES
Allowance for Loan and Lease Losses
The Bancorp maintains an allowance to absorb probable loan and
lease losses inherent in the portfolio. The allowance is maintained
at a level the Bancorp considers to be adequate and is based on
ongoing quarterly assessments and evaluations of the collectibility
and historical loss experience of loans and leases. Credit losses
are charged and recoveries are credited to the allowance.
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 estimating probable credit losses.
In determining the appropriate level of the allowance, the
Bancorp estimates losses using a range derived from “base” and
“conservative” estimates. The Bancorp’s strategy for credit risk
management includes a combination of conservative exposure
limits significantly below legal lending limits and conservative
underwriting, documentation and collections standards. The
strategy also emphasizes diversification on a geographic, industry
and customer level, regular credit examinations and quarterly
management reviews of
loans
experiencing deterioration of credit quality.
large credit exposures and
Larger commercial loans that exhibit probable or observed
credit weakness are subject to individual review. When individual
loans are
impaired, allowances are allocated based on
management’s estimate of the borrower’s ability to repay the loan
given the availability of collateral and other sources of cash flow,
as well as an evaluation of legal options available to the Bancorp.
The review of individual loans includes those loans that are
impaired as provided in Statement of Financial Accounting
Standards ("SFAS") No. 114, “Accounting by Creditors for
Impairment of a Loan.” Any allowances for impaired loans are
measured based on the present value of expected future cash
flows discounted at the loan’s effective interest rate or the fair
value of the underlying collateral. The Bancorp evaluates the
20
Fifth Third Bancorp
Reserve System (“FRB”). As of December 31, 2007, the Tier I
capital ratio was 7.72% and the total risk-based capital ratio was
10.16%. The Bancorp had senior debt ratings of “Aa3” with
Moody’s, “A+” with Standard & Poor’s, “AA-” with Fitch and
“AAL” with DBRS at December 31, 2007, which indicate the
Bancorp’s strong capacity to meet its financial commitments. The
“well-capitalized” capital ratios, along with strong credit ratings,
provide the Bancorp with access to the capital markets.
The Bancorp continues to invest in the geographic areas that
offer the best growth prospects through acquisitions and de novo
expansion, while at the same time meeting the banking needs of
our existing communities through a well-distributed banking
center network. During 2007, the Bancorp opened 77 additional
banking centers. In 2008, banking center expansion will be
focused in high growth markets, such as Florida, Chicago,
Tennessee, Georgia and North Carolina.
accordance with FASB Statement No. 109, “Accounting for
Income Taxes.” This Interpretation also prescribes a recognition
threshold and measurement attribute for the financial statement
recognition and measurement of a tax position taken or expected
to be taken in a tax return. This Interpretation was effective for
fiscal years beginning after December 15, 2006. Upon adoption
of this Interpretation on January 1, 2007, the Bancorp recognized
an after-tax adjustment to beginning retained earnings of $2
million representing the cumulative effect of applying the
provisions of this Interpretation.
See Note 1 of the Notes to Consolidated Financial
Statements for further discussion on these standards along with a
description other recently issued accounting pronouncements
collectibility of both principal and interest when assessing the
need for a loss accrual. Historical loss rates are applied to
commercial loans which are not impaired and thus not subject to
specific allowance allocations. The loss rates are derived from a
migration analysis, which tracks the historical net charge-off
experience sustained on loans according to their internal risk
grade. The risk grading system currently utilized for allowance
analysis purposes encompasses ten categories.
Homogenous loans and leases, such as consumer installment
and residential mortgage, are not individually risk graded. Rather,
standard credit scoring systems and delinquency monitoring are
used to assess credit risks. Allowances are established for each
pool of loans based on the expected net charge-offs. 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 significant factors that, in management’s judgment,
are necessary to reflect losses inherent in the portfolio. Factors
that management considers in the analysis include the effects of
the national and local economies; trends in the nature and volume
of 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.
The Bancorp’s current methodology for determining the
allowance for loan and lease losses is based on historical loss rates,
current credit grades, specific allocation on impaired commercial
credits and other qualitative adjustments.
Allowances 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. An unallocated allowance is maintained to recognize
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
the imprecision in estimating and measuring loss when evaluating
allowances for individual loans or pools of loans.
the allowance
The Bancorp’s determination of
Loans acquired by the Bancorp through a purchase business
combination are evaluated for credit impairment. Reductions to
the carrying value of the acquired loans as a result of credit
impairment are recorded as an adjustment to goodwill. The
Bancorp does not carry over the acquired company’s allowance
for loan and lease losses, nor does the Bancorp add to its existing
allowance for the acquired loans as part of purchase accounting.
for
commercial loans is sensitive to the risk grade it assigns to these
loans. In the event that 10% of commercial loans in each risk
category would experience a downgrade of one risk category, the
allowance for commercial loans would increase by approximately
$66 million at December 31, 2007. The Bancorp’s determination
of the allowance for residential and retail loans is sensitive to
changes in estimated loss rates. In the event that estimated loss
rates would increase by 10%, the allowance for residential and
consumer loans would increase by approximately $35 million at
December 31, 2007. As several quantitative and qualitative factors
are considered in determining the allowance for loan and lease
losses, these sensitivity analyses do not necessarily reflect the
nature and extent of future changes in the allowance for loan and
lease losses. They are intended to provide insights into the impact
of adverse changes in risk grades and estimated loss rates and do
not imply any expectation of future deterioration in the risk
ratings or loss rates. Given current processes employed by the
Bancorp, management believes the risk grades and estimated loss
rates currently assigned are appropriate.
The Bancorp’s primary market areas for lending are the
Midwestern and Southeastern regions of the United States. When
evaluating the adequacy of allowances, consideration is given to
the closely
these
associated effect changing economic conditions have on the
Bancorp’s customers.
regional geographic concentrations and
In the current year, the Bancorp has not substantively
changed any material aspect of its overall approach to determining
its allowance for loan and lease losses. There have been no
material changes in criteria or estimation techniques as compared
to prior periods that impacted the determination of the current
period allowance for loan and lease losses.
Valuation of Securities
Securities are classified as held-to-maturity, available-for-sale or
trading on the date of purchase. Only those securities classified as
held-to-maturity are reported at amortized cost. Available-for-sale
and trading securities are reported at fair value with unrealized
gains and losses included in accumulated other comprehensive
income, net of related deferred income taxes, on the Consolidated
Balance Sheets and noninterest income in the Consolidated
Statements of 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
Statements of Income. The cost of securities sold is based on the
specific identification method. Available-for-sale and held-to-
maturity securities are reviewed quarterly for possible other-than-
temporary 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 to recovery. 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, 2007, 85% of the unrealized losses in the
available-for-sale securities portfolio were comprised of securities
issued by U.S. Government sponsored agencies and agency
mortgage-backed securities. The Bancorp believes the price
movements in these securities are dependent upon the movement
in market interest rates. The Bancorp’s management also
maintains the intent and ability to hold securities in an unrealized
loss position to the earlier of the recovery of losses or maturity.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level
believed by management to be sufficient to absorb estimated
probable losses related to unfunded credit facilities. The
determination of the adequacy of the reserve is based upon an
evaluation of
including an
the unfunded credit facilities,
assessment of historical commitment utilization experience, credit
risk grading and credit grade migration. Net adjustments to the
reserve for unfunded commitments are
in other
noninterest expense.
included
Income Taxes
The Bancorp estimates income tax expense based on amounts
expected to be owed to the various tax jurisdictions in which the
Bancorp conducts business. On a quarterly basis, management
assesses the reasonableness of its effective tax rate based upon its
current estimate of the amount and components of net income,
tax credits and the applicable statutory tax rates expected for the
full year. The estimated income tax expense is recorded in the
Consolidated Statements of Income.
Deferred income tax assets and liabilities are determined
using the balance sheet method and are reported in accrued taxes,
interest and expenses in the Consolidated Balance Sheets. Under
this method, the net deferred tax asset or liability is based on the
tax effects of the differences between the book and tax basis of
assets and liabilities and recognizes enacted changes in tax rates
and laws. Deferred tax assets are recognized to the extent they
exist and are subject to a valuation allowance based on
management’s judgment that realization is more-likely-than-not.
Accrued taxes represent the net estimated amount due to
taxing jurisdictions and are reported in accrued taxes, interest and
expenses in the Consolidated Balance Sheets. The Bancorp
evaluates and assesses the relative risks and appropriate tax
treatment of transactions and filing positions after considering
statutes, regulations, judicial precedent and other information and
maintains tax accruals consistent with its evaluation of these
relative risks and merits. Changes to the estimate of accrued taxes
occur periodically due to changes in tax rates, interpretations of
tax laws, the status of examinations being conducted by taxing
authorities and changes to statutory, judicial and regulatory
guidance that impact the relative risks of tax positions. These
changes, when they occur, can affect deferred taxes and accrued
taxes as well as the current period’s income tax expense and can
be significant to the operating results of the Bancorp. As of
January 1, 2007, the Bancorp adopted FIN 48, “Accounting for
Uncertainty in Income Taxes.” Refer to Note 1 of the Notes to
Consolidated Financial Statements for the impact of adopting this
Interpretation. As described in greater detail in Note 15 of the
Notes to Consolidated Financial Statements, the Internal Revenue
Service is currently challenging the Bancorp’s tax treatment of
certain leasing transactions. For additional information on
income taxes, see Note 21 of the Notes to Consolidated Financial
Statements.
Valuation of Servicing Rights
When the Bancorp sells loans through either securitizations or
individual loan sales in accordance with its investment policies, it
often obtains servicing rights. Servicing rights resulting from loan
sales are initially recorded at fair value and subsequently amortized
in proportion to, and over the period of, estimated net servicing
income. Servicing rights are assessed for impairment monthly,
based on fair value, with temporary impairment recognized
Fifth Third Bancorp 21
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Key economic assumptions used
impairment
through a valuation allowance and permanent
recognized through a write-off of the servicing asset and related
valuation allowance.
in
measuring any potential impairment of the servicing rights include
the prepayment speeds of the underlying loans, the weighted-
average life, 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 servicing portfolio. For purposes of measuring
impairment, the servicing rights are stratified into classes based on
the financial asset type and interest rates. Fees received for
servicing loans owned by investors are based on a percentage of
the outstanding monthly principal balance of such loans and are
included in noninterest income as loan payments are received.
Costs of servicing loans are charged to expense as incurred.
The change in the fair value of mortgage servicing rights
(“MSRs”) at December 31, 2007, due to immediate 10% and 20%
adverse changes in the current prepayment assumption would be
approximately $29 million and $56 million, respectively, and due
to immediate 10% and 20% favorable changes in the current
RISK FACTORS
Weakness in the economy and in the real estate market,
including specific weakness within Fifth Third’s geographic
footprint, has adversely affected Fifth Third and may
continue to adversely affect Fifth Third.
If the strength of the U.S. economy in general and the strength of
the local economies in which Fifth Third conducts operations
declines, or continues to decline, this could result in, among other
things, a deterioration in credit quality or a reduced demand for
credit, including a resultant effect on Fifth Third’s loan portfolio
and allowance for loan and lease losses. A significant portion of
Fifth Third’s residential mortgage and commercial real estate loan
portfolios are comprised of borrowers in Michigan, Northern
Ohio and Florida, which markets have been particularly adversely
affected by job losses, declines in real estate value, declines in
home sale volumes, and declines in new home building. These
factors could result in higher delinquencies and greater charge-offs
in future periods, which would materially adversely affect Fifth
Third’s financial condition and results of operations.
Deteriorating credit quality, particularly in real estate loans,
has adversely impacted Fifth Third and may continue to
adversely impact Fifth Third.
Fifth Third has experienced a downturn in credit performance,
particularly in the fourth quarter of 2007, and Fifth Third expects
credit conditions and the performance of its loan portfolio to
continue to deteriorate in the near term. This caused Fifth Third
to increase its allowance for loan and lease losses in the fourth
quarter of 2007, driven primarily by higher allocations related to
home equity loans and commercial real estate loans. Additional
increases in the allowance for loan and lease losses may be
necessary in the future. Accordingly, a decrease in the quality of
Fifth Third’s credit portfolio could have a material adverse effect
on earnings and results of operations.
Fifth Third’s results depend on general economic conditions
within its operating markets.
The revenues of FTPS are dependent on the transaction volume
generated by its merchant and financial institution customers.
This transaction volume is largely dependent on consumer and
corporate spending. If consumer confidence suffers and retail
sales decline, FTPS will be negatively impacted. Similarly, if an
22
Fifth Third Bancorp
prepayment assumption would be approximately $32 million and
$66 million, respectively. The change in the fair value of the MSR
portfolio at December 31, 2007, due to immediate 10% and 20%
adverse changes in the discount rate assumption would be
approximately $22 million and $42 million, respectively, and due
to immediate 10% and 20% favorable changes in the discount rate
assumption would be approximately $24 million and $48 million,
respectively. Sensitivity analysis related to other consumer and
commercial servicing rights is not material to the Bancorp’s
These sensitivities are
Consolidated Financial Statements.
hypothetical and should be used with caution. As the figures
indicate, changes 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 the change in fair
value may not be linear. Also, the effect of variation in a
particular assumption on the fair value of the interests that
continue to be held by the transferor 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. Additionally, the effect of the
Bancorp’s non-qualifying hedging strategy, which is maintained to
lessen the impact of changes in value of the MSR portfolio, is
excluded from the above analysis.
economic downturn results in a decrease in the overall volume of
corporate transactions, FTPS will be negatively impacted. FTPS is
also impacted by the financial stability of its merchant customers.
FTPS assumes certain contingent
liabilities related to the
processing of Visa®
and MasterCard® merchant card
transactions. These liabilities typically arise from billing disputes
between the merchant and the cardholder that are ultimately
resolved in favor of the cardholder. These transactions are
charged back to the merchant and disputed amounts are returned
to the cardholder. If FTPS is unable to collect these amounts
from the merchant, FTPS will bear the loss.
The fee revenue of Investment Advisors is largely dependent
on the fair market value of assets under care and trading volumes
in the brokerage business. General economic conditions and their
effect on the securities markets tend to act in correlation. When
general economic conditions deteriorate, consumer and corporate
confidence in securities markets erodes, and Investment Advisors’
revenues are negatively impacted as asset values and trading
volumes decrease. Neutral economic conditions can also
negatively impact revenue when stagnant securities markets fail to
attract investors.
Changes in interest rates could affect Fifth Third’s income
and cash flows.
Fifth Third’s income and cash flows depend to a great extent on
the difference between the interest rates earned on interest-
earning assets such as loans and investment securities, and the
interest rates paid on interest-bearing liabilities such as deposits
and borrowings. These rates are highly sensitive to many factors
that are beyond Fifth Third’s control, including general economic
conditions and the policies of various governmental and
regulatory agencies (in particular, the FRB). Changes in monetary
policy, including changes in interest rates, will influence the
origination of loans, the prepayment speed of loans, the purchase
of investments, the generation of deposits and the rates received
on loans and investment securities and paid on deposits or other
sources of funding. The impact of these changes may be
magnified if Fifth Third does not effectively manage the relative
sensitivity of its assets and liabilities to changes in market interest
rates. Fluctuations in these areas may adversely affect Fifth Third
and its shareholders.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third’s ability to maintain required capital levels and
adequate sources of funding and liquidity.
Fifth Third is required to maintain certain capital levels in
accordance with banking regulations. Fifth Third must also
maintain adequate funding sources in the normal course of
business to support its operations and fund outstanding liabilities.
Fifth Third’s ability to maintain capital levels, sources of funding
and liquidity could be impacted by changes in the capital markets
in which it operates.
Each of Fifth Third’s subsidiary banks must remain well-
capitalized for Fifth Third to retain its status as a financial holding
company. In addition, failure by Fifth Third’s bank subsidiaries to
meet applicable capital guidelines could subject the bank to a
variety of enforcement remedies available to the federal regulatory
authorities. These include limitations on the ability to pay
dividends, the issuance by the regulatory authority of a capital
directive to increase capital, and the termination of deposit
insurance by the FDIC.
Changes and trends in the capital markets may affect Fifth
Third’s income and cash flows.
Fifth Third enters into and maintains trading and investment
positions in the capital markets on its own behalf and on behalf of
its customers. These investment positions also include derivative
financial instruments. The revenues and profits Fifth Third
derives from its trading and investment positions are dependent
on market prices. If it does not correctly anticipate market
changes and trends, Fifth Third may experience investment or
trading losses that may materially affect Fifth Third and its
shareholders. Losses on behalf of its customers could expose
Fifth Third to litigation, credit risks or loss of revenue from those
customers. Additionally, substantial losses in Fifth Third’s
trading and investment positions could lead to a loss with respect
to those investments and may adversely affect cash flows and
funding costs.
If Fifth Third does not adjust to rapid changes in the
financial services industry, its financial performance may
suffer.
Fifth Third’s ability to deliver strong financial performance and
returns on investment to shareholders will depend in part on its
ability to expand the scope of available financial services to meet
the needs and demands of its customers. In addition to the
challenge of competing against other banks in attracting and
retaining customers for traditional banking services, Fifth Third’s
competitors also include securities dealers, brokers, mortgage
bankers, investment advisors, specialty finance and insurance
companies who seek to offer one-stop financial services that may
include services that banks have not been able or allowed to offer
to their customers in the past or may not be currently able or
allowed to offer. This increasingly competitive environment is
primarily a result of changes in regulation, changes in technology
and product delivery systems, as well as the accelerating pace of
consolidation among financial service providers.
financial
statements
The preparation of Fifth Third’s financial statements
requires the use of estimates that may vary from actual
results.
The preparation of consolidated
in
conformity with accounting principles generally accepted in the
United States of America requires management
to make
significant estimates that affect the financial statements. Two of
Fifth Third’s most critical estimates are the level of the allowance
for loan and lease losses and the valuation of mortgage servicing
rights. Due to the inherent nature of these estimates, Fifth Third
cannot provide absolute assurance that it will not significantly
increase the allowance for loan and lease losses and/or sustain
credit losses that are significantly higher than the provided
allowance, nor that it will not recognize a significant provision for
impairment of its mortgage servicing rights. If Fifth Third’s
allowance for loan and lease losses is not adequate, Fifth Third’s
business, financial condition, including its liquidity and capital, and
results of operations could be materially adversely affected.
Additionally, in the future, Fifth Third may increase its allowance
for loan and lease losses, which could have a material adverse
effect on its capital and results of operations. For more
information on the sensitivity of these estimates, please refer to
the Critical Accounting Policies section.
its
Fifth Third regularly reviews its litigation reserves for
adequacy considering
litigation risks and probability of
incurring losses related to litigation. However, Fifth Third cannot
be certain that its current litigation reserves will be adequate over
time to cover its losses in litigation due to higher than anticipated
settlement costs, prolonged litigation, adverse judgments, or other
factors that are largely outside of Fifth Third’s control. If Fifth
Third’s litigation reserves are not adequate, Fifth Third’s business,
financial condition, including its liquidity and capital, and results
of operations could be materially adversely affected. Additionally,
in the future, Fifth Third may increase its litigation reserves, which
could have a material adverse effect on its capital and results of
operations.
Changes in accounting standards could impact Fifth Third’s
reported earnings and financial condition.
The accounting standard setters, including FASB, U.S. Securities
and Exchange Commission (“SEC”) and other regulatory bodies,
periodically change the financial accounting and reporting
standards
the preparation of Fifth Third’s
consolidated financial statements. These changes can be hard to
predict and can materially impact how Fifth Third records and
reports its financial condition and results of operations. In some
cases, Fifth Third could be required to apply a new or revised
standard retroactively, which would result in the restatement of
Fifth Third’s prior period financial statements.
that govern
Legislative or regulatory compliance, changes or actions or
significant litigation, could adversely impact Fifth Third or
the businesses in which Fifth Third is engaged.
Fifth Third is subject to extensive state and federal regulation,
supervision and legislation that govern almost all aspects of its
operations and limit the businesses in which Fifth Third may
engage. These laws and regulations may change from time to time
and are primarily intended for the protection of consumers,
depositors and the deposit insurance funds. The impact of any
changes to laws and regulations or other actions by regulatory
agencies may negatively impact Fifth Third or its ability to
increase the value of its business. Additionally, actions by
regulatory agencies or significant litigation against Fifth Third
could cause it to devote significant time and resources to
defending itself and may lead to penalties that materially affect
Fifth Third and its shareholders. Future changes in the laws,
including tax laws, or regulations or their interpretations or
enforcement may also be materially adverse to Fifth Third and its
shareholders or may require Fifth Third to expend significant time
and resources to comply with such requirements.
Fifth Third and/or the holders of its securities could be
adversely affected by unfavorable ratings from rating
agencies.
Fifth Third’s ability to access the capital markets is important to
its overall funding profile. This access is affected by the ratings
assigned by rating agencies to Fifth Third, certain of its affiliates
and particular classes of securities they issue. The interest rates
that Fifth Third pays on its securities are also influenced by,
among other things, the credit ratings that it, its affiliates and/or
A
its securities receive from recognized rating agencies.
Fifth Third Bancorp 23
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
downgrade to Fifth Third’s, or its affiliates’, credit rating could
affect its ability to access the capital markets, increase its
borrowing costs and negatively impact its profitability. A ratings
downgrade to Fifth Third, its affiliates or their securities could
also create obligations or liabilities to Fifth Third under the terms
of its outstanding securities that could increase Fifth Third’s costs
or otherwise have a negative effect on Fifth Third’s results of
operations or financial condition. Additionally, a downgrade of
the credit rating of any particular security issued by Fifth Third or
its affiliates could negatively affect the ability of the holders of
that security to sell the securities and the prices at which any such
securities may be sold.
Fifth Third’s stock price is volatile.
Fifth Third’s stock price has been volatile in the past and several
factors could cause the price to fluctuate substantially in the
future. These factors include:
• Actual or anticipated variations in earnings;
• Changes in analysts’ recommendations or projections;
•
Fifth Third’s announcements of developments related to
its businesses;
• Operating and stock performance of other companies
deemed to be peers;
• Actions by government regulators;
• New technology used or services offered by traditional
and non-traditional competitors; and
• News reports of trends, concerns and other issues
related to the financial services industry.
Fifth Third’s stock price may fluctuate significantly in the future,
and these fluctuations may be unrelated to Fifth Third’s
performance. General market price declines or market volatility in
the future could adversely affect the price of its common stock,
and the current market price of such stock may not be indicative
of future market prices.
Fifth Third could suffer if it fails to attract and retain skilled
personnel.
As Fifth Third continues to grow, its success depends, in large
part, on
individuals.
its ability to attract and retain key
Competition for qualified candidates in the activities and markets
that Fifth Third serves is great and Fifth Third may not be able to
hire these candidates and retain them. If Fifth Third is not able to
hire or retain these key individuals, Fifth Third may be unable to
execute
suffer adverse
consequences to its business, operations and financial condition.
strategies and may
its business
If Fifth Third is unable to grow its deposits, it may be
subject to paying higher funding costs.
The total amount that Fifth Third pays for funding costs is
dependent, in part, on Fifth Third’s ability to grow its deposits. If
Fifth Third is unable to sufficiently grow its deposits, it may be
subject to paying higher funding costs. This could materially
adversely affect Fifth Third’s earnings and results of operations.
Fifth Third’s ability to receive dividends from its subsidiaries
accounts for most of its revenue and could affect its liquidity
and ability to pay dividends.
Fifth Third Bancorp is a separate and distinct legal entity from its
subsidiaries. Fifth Third Bancorp receives substantially all of its
revenue from dividends from its subsidiaries. These dividends are
the principal source of funds to pay dividends on Fifth Third
Bancorp’s stock and interest and principal on its debt. Various
federal and/or state laws and regulations limit the amount of
dividends that Fifth Third’s bank and certain nonbank subsidiaries
may pay. Also, Fifth Third Bancorp’s right to participate in a
liquidation or
distribution of assets upon a subsidiary’s
24
Fifth Third Bancorp
reorganization is subject to the prior claims of that subsidiary’s
creditors. Limitations on Fifth Third Bancorp’s ability to receive
dividends from its subsidiaries could have a material adverse effect
on Fifth Third Bancorp’s liquidity and ability to pay dividends on
stock or interest and principal on its debt.
Future acquisitions may dilute current shareholders’
ownership of Fifth Third and may cause Fifth Third to
become more susceptible to adverse economic events.
Future business acquisitions could be material to Fifth Third and
it may issue additional shares of common stock to pay for those
acquisitions, which would dilute current shareholders’ ownership
interests. Acquisitions also could require Fifth Third to use
substantial cash or other liquid assets or to incur debt. In those
events, Fifth Third could become more susceptible to economic
downturns and competitive pressures.
Difficulties in combining the operations of acquired entities
with Fifth Third’s own operations may prevent Fifth Third
from achieving the expected benefits from its acquisitions.
Inherent uncertainties exist when integrating the operations of an
acquired entity. Fifth Third may not be able to fully achieve its
strategic objectives and planned operating efficiencies in an
acquisition. In addition, the markets and industries in which Fifth
Third and its potential acquisition targets operate are highly
competitive. Fifth Third may lose customers or the customers of
acquired entities as a result of an acquisition. Future acquisition
and integration activities may require Fifth Third to devote
substantial time and resources and as a result Fifth Third may not
be able to pursue other business opportunities.
After completing an acquisition, Fifth Third may find certain
items are not accounted for properly in accordance with financial
accounting and reporting standards. Fifth Third may also not
realize the expected benefits of the acquisition due to lower
financial results pertaining to the acquired entity. For example,
Fifth Third could experience higher charge offs than originally
anticipated related to the acquired loan portfolio.
Material breaches in security of Fifth Third’s systems may
have a significant effect on Fifth Third’s business.
Fifth Third collects, processes and stores sensitive consumer data
by utilizing computer systems and telecommunications networks
operated by both Fifth Third and third party service providers.
Fifth Third has security, backup and recovery systems in place, as
well as a business continuity plan to ensure the system will not be
inoperable. Fifth Third also has security to prevent unauthorized
access to the system. In addition, Fifth Third requires its third
party service providers to maintain similar controls. However,
Fifth Third cannot be certain that the measures will be successful.
A security breach in the system and loss of confidential
information such as credit card numbers and related information
could result in losing the customers’ confidence and thus the loss
of their business.
Fifth Third is exposed to operational and reputational risk.
Fifth Third is exposed to many types of operational risk, including
reputational risk, legal and compliance risk, the risk of fraud or
theft by employees, customers or outsiders, unauthorized
transactions by employees or operational errors.
Negative public opinion can result from Fifth Third’s actual
or alleged conduct in activities, such as lending practices, data
security, corporate governance and acquisitions, and may damage
Fifth Third’s reputation.
taken by
government regulators and community organizations may also
damage Fifth Third’s reputation. This negative public opinion can
adversely affect Fifth Third’s ability to attract and keep customers
and can expose it to litigation and regulatory action.
Additionally, actions
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third’s necessary dependence upon automated systems
to record and process its transaction volume poses the risk that
technical system flaws or employee errors,
tampering or
manipulation of those systems will result in losses and may be
difficult to detect. Fifth Third may also be subject to disruptions
of its operating systems arising from events that are beyond its
control
(for example, computer viruses or electrical or
telecommunications outages). Fifth Third is further exposed to
the risk that its third party service providers may be unable to
fulfill their contractual obligations (or will be subject to the same
risk of fraud or operational errors as Fifth Third). These
disruptions may interfere with service to Fifth Third’s customers
and result in a financial loss or liability.
If Visa is unable to consummate its initial public offering on
the terms currently contemplated, Fifth Third will not
receive expected proceeds from such offering.
In the third and fourth quarters of 2007, Fifth Third incurred
non-cash charges of $78 million and $94 million pretax,
respectively, and created a $172 million litigation reserve, related
STATEMENTS OF INCOME ANALYSIS
Net Interest Income
Net interest income is the interest earned on debt securities, loans
and leases (including yield-related fees) and other interest-earning
assets less the interest paid for core deposits (which includes
transaction deposits plus other time deposits) and wholesale
funding (which includes certificates $100,000 and over, other
foreign office deposits, federal funds purchased, short-term
borrowings and long-term debt). The net interest margin is
calculated by dividing net interest income by average interest-
earning assets. Net interest spread is the difference between the
average rate earned on interest-earning assets and the average rate
paid on interest-bearing liabilities. Net interest margin is greater
than net interest rate spread due to the interest income earned on
those assets that are funded by non-interest bearing liabilities, or
free funding, such as demand deposits or shareholders’ equity.
Net interest income (FTE) increased five percent, or $134
million, to $3.0 billion as a result of an increase in the net interest
margin of 30 bp to 3.36%. The net interest margin improved as a
result of the fourth quarter 2006 balance sheet actions which
reduced the size of the Bancorp’s available-for-sale securities
portfolio to a size that was more consistent with its liquidity,
collateral and
interest rate risk management requirements;
improved the composition of the balance sheet with a lower
concentration of fixed-rate assets; lowered wholesale borrowings
TABLE 3: CONDENSED CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31 ($ 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)
Fully 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, basic
Earnings per share, diluted
Cash dividends declared per common share
to Fifth Third’s potential share of estimated current and future
litigation settlements that may be incurred due to Fifth Third
being a member of Visa. Visa has announced plans for an initial
public offering and to fund litigation settlements from an escrow
account to be funded by such initial public offering. If that occurs,
Fifth Third expects that it will be able to reverse the litigation
reserve and record any gains that Fifth Third might receive as a
selling stockholder in Visa’s proposed initial public offering. Visa
filed a registration statement with the SEC on November 9, 2007
to sell its common stock in an initial public offering. However,
there are no assurances that Visa will be able to complete an initial
public offering on the terms currently contemplated by its
registration statement or at all. If the number of shares or the
price per share of Visa’s offering is less than Visa currently
anticipates selling or if the Visa offering is not completed, Fifth
Third could be materially adversely affected and may not realize
proceeds sufficient to cover the indemnity liabilities Fifth Third
accrued relating to Visa in 2007 in respect of third-party litigation.
to reduce leverage; and better positioned the Bancorp for an
uncertain economic and interest rate environment. Specifically,
these actions included (i) the sale of $11.3 billion in available-for-
sale securities with a weighted-average yield of 4.30%; (ii)
reinvestment of approximately $2.8 billion in available-for-sale
securities that were more efficient when used as collateral; (iii)
repayment of $8.5 billion in wholesale borrowings at an average
rate paid of 5.30%; and (iv) the termination of approximately $1.1
billion of repurchase and reverse repurchase agreements. The sale
of investment securities and the corresponding repayment of
wholesale funding added approximately 35 bp to the 2007 net
interest margin.
The benefits of these balance sheet actions were partially
offset by the 12% decline in the Bancorp’s free funding position
in 2007. The decline primarily resulted from the increase in the
average balance of other assets as well as the use of $1.1 billion to
repurchase approximately 27 million shares during 2007. The
average balance of other assets increased due to a $386 million
deposit made with the Internal Revenue Service relating to
leveraged lease litigation and increases in partnership investments.
Refer to Note 15 of the Notes to Consolidated Financial
Statements for further discussion about the Bancorp’s leveraged
lease litigation.
2007
$6,051
3,018
3,033
628
2,405
2,467
3,311
1,561
24
461
1,076
-
1,076
-
1,076
-
$1,076
$2.00
1.99
1.70
2006
5,981
3,082
2,899
343
2,556
2,012
2,915
1,653
26
443
1,184
-
1,184
-
1,184
4
1,188
2.14
2.13
1.58
2005
5,026
2,030
2,996
330
2,666
2,374
2,801
2,239
31
659
1,549
-
1,549
-
1,549
-
1,549
2.79
2.77
1.46
2004
4,150
1,102
3,048
268
2,780
2,355
2,863
2,273
36
712
1,525
-
1,525
-
1,525
-
1,525
2.72
2.68
1.31
2003
4,030
1,086
2,944
399
2,545
2,398
2,466
2,477
39
786
1,652
(20)
1,632
44
1,676
(11)
1,665
2.91
2.87
1.13
Fifth Third Bancorp 25
($ in millions)
Assets
Interest-earning assets:
Loans and leases (a):
Commercial loans
Commercial mortgage
Commercial construction
Commercial leases
Subtotal - commercial
Residential mortgage
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Subtotal - consumer
Total loans and leases
Securities:
Taxable
Exempt from income taxes (a)
Other short-term investments
Total interest-earning assets
Cash and due from banks
Other assets
Allowance for loan and lease losses
Total assets
Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest-bearing core deposits:
Interest checking
Savings
Money market
Foreign office deposits
Other time deposits
Total interest-bearing core deposits
Certificates - $100,000 and over
Other foreign office deposits
Federal funds purchased
Short-term bank notes
Other short-term borrowings
Long-term debt
Average
Balance
$22,351
11,078
5,661
3,683
42,773
10,489
11,887
10,704
1,276
1,219
35,575
78,348
11,131
499
364
90,342
2,315
10,613
(793)
$102,477
$14,820
14,836
6,308
1,762
10,778
48,504
6,466
1,393
3,646
-
3,244
12,505
75,758
13,261
3,875
92,894
9,583
$102,477
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
2007
Revenue/
Cost
Average
Yield/Rate
Average
Balance
Average
Yield/Rate
Average
Balance
2006
Revenue/
Cost
2005
Revenue/
Cost
Average
Yield/Rate
$1,639
801
421
158
7.33 %
7.23
7.44
4.29
3,019 7.06
6.13
7.54
6.30
10.39
5.29
6.78
6.93
642
897
675
132
65
2,411
5,430
566
36
19
6,051
5.08
7.29
5.33
6.70
$20,504
9,797
6,015
3,730
40,046
9,574
12,070
9,570
838
1,395
33,447
73,493
20,306
604
378
94,781
2,495
8,713
(751)
$105,238
$1,479
700
460
185
7.21 %
7.15
7.64
4.97
2,824 7.05
5.94
7.45
5.77
11.84
4.87
6.54
6.82
568
900
552
99
68
2,187
5,011
$18,310
8,923
5,525
3,495
36,253
8,982
11,228
8,649
728
1,897
31,484
67,737
$1,063
551
342
179
5.81 %
6.17
6.19
5.11
2,135 5.89
5.51
6.08
5.26
11.13
4.27
5.70
5.80
495
683
455
81
81
1,795
3,930
904
45
21
5,981
4.45
7.38
5.52
6.31
24,017
789
193
92,736
2,758
8,102
(720)
$102,876
1,032
58
6
5,026
4.30
7.39
2.89
5.42
$318
456
269
73
495
1,611
328
68
184
-
140
687
3,018
2.14 %
3.07
4.26
4.15
4.59
3.32
5.07
4.91
5.04
-
4.32
5.50
3.98
$398
363
261
29
433
1,484
278
148
208
-
194
770
3,082
$16,650
12,189
6,366
732
10,500
46,437
5,795
2,979
4,148
-
4,522
14,247
78,128
13,741
3,558
95,427
9,811
$105,238
2.39 %
2.98
4.10
3.93
4.12
3.20
4.80
4.97
5.02
-
4.28
5.40
3.94
$18,884
10,007
5,170
248
8,491
42,800
4,001
3,719
4,225
248
5,038
16,384
76,415
13,868
3,276
93,559
9,317
$102,876
$314
176
140
6
263
899
129
120
138
6
138
600
2,030
1.66 %
1.76
2.71
2.59
3.09
2.10
3.22
3.21
3.26
2.60
2.74
3.66
2.66
Total interest-bearing liabilities
Demand deposits
Other liabilities
Total liabilities
Shareholders’ equity
Total liabilities and shareholders’ equity
Net interest income
Net interest margin
2.72
Net interest rate spread
Interest-bearing liabilities to interest-earning assets
83.86
(a) The fully taxable-equivalent adjustments included in the above table are $24 million, $26 million and $31 million for the years ended December 31, 2007, 2006 and 2005, respectively.
3.36 %
3.06 %
2.37
82.43
$3,033
$2,899
$2,996
3.23 %
2.76
82.40
Average loans and leases increased seven percent, or $4.9
billion. The growth in average loans and leases in 2007 outpaced
core deposit growth by $3.3 billion. This funding shortfall was
more than offset by a $9.3 billion reduction in the average
securities portfolio.
Average consumer loan and lease yields increased 24 bp, with
growth driven by automobile loan and other consumer loan and
lease yields. The interest rate on automobile loans increased 53 bp
from 5.77% in 2006 to 6.30% in 2007. The increase in yield was
due to increased pricing across the industry and a shift in the
automobile portfolio to a higher percentage of used automobiles.
The increase of 42 bp in the other consumer loan and lease yields
was caused by the continued run-off of the consumer lease
portfolio.
Interest expense on wholesale funding decreased 12%, or
$191 million, to $1.4 billion due to a 14% decline in average
balances. This decrease was the result of reductions in average
balances of other foreign office deposits and long-term debt.
The cost of interest-bearing core deposits increased 12 bp to
3.32%, up from 3.20% in 2006. During 2007, the Bancorp
continued to adjust its consumer deposit rates. The Bancorp’s
strategy in adjusting rates is to move away from promotional rates
towards highly competitive daily rates. This strategy resulted in an
increased cost of interest-bearing core deposits as account
balances migrate from interest checking to higher yielding
accounts, such as savings and time deposits. During 2007, interest
checking accounts comprised 31% of
interest-bearing core
deposits compared to 36% during 2006. During the third quarter
of 2007, the Bancorp reclassified certain foreign office deposits as
transaction deposits. The interest rates paid on these accounts are
comparable to other commercial deposit accounts. Refer to the
Deposits section for more information on this reclassification.
26
Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 5: CHANGES IN NET INTEREST INCOME (FTE) ATTRIBUTED TO VOLUME AND YIELD/RATE (a)
For the years ended December 31
2007 Compared to 2006
2006 Compared to 2005
Volume
Yield/Rate
Total
Volume
Yield/Rate
Total
($ in millions)
Assets
Increase (decrease) in interest income:
Loans and leases:
Commercial loans
Commercial mortgage
Commercial construction
Commercial leases
Subtotal - commercial
Residential mortgage
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Subtotal - consumer
Total loans and leases
Securities:
Taxable
Exempt from income taxes
Other short-term investments
Total interest-earning assets
Cash and due from banks
Other assets
Allowance for loan and lease losses
Total change in interest income
Liabilities and Shareholders’ Equity
Increase (decrease) in interest expense:
Interest-bearing core deposits:
Interest checking
Savings
Money market
Foreign office deposits
Other time deposits
Total interest-bearing core deposits
Certificates - $100,000 and over
Other foreign office deposits
Federal funds purchased
Short-term bank notes
Other short-term borrowings
Long-term debt
$135
93
(27)
(2)
199
56
(14)
69
46
(9)
148
347
(452)
(8)
(1)
(114)
25
8
(12)
(25)
(4)
18
11
54
(13)
6
76
72
114
(1)
(1)
184
160
101
(39)
(27)
195
74
(3)
123
33
(3)
224
419
(338)
(9)
(2)
70
136
57
32
11
236
34
54
51
13
(23)
129
365
(164)
(13)
8
196
(114)
184
70
196
(41)
81
(2)
43
12
93
34
(78)
(25)
-
(55)
(97)
(128)
(39)
12
10
1
50
34
16
(2)
1
-
1
14
64
(80)
93
8
44
62
127
50
(80)
(24)
-
(54)
(83)
(64)
(41)
45
38
18
71
131
71
(27)
(3)
(6)
(15)
(86)
65
280
92
86
(5)
453
39
163
46
5
10
263
716
36
-
7
759
759
125
142
83
5
99
454
78
55
73
-
71
256
987
987
416
149
118
6
689
73
217
97
18
(13)
392
1,081
(128)
(13)
15
955
955
84
187
121
23
170
585
149
28
70
(6)
56
170
1,052
1,052
(228)
(97)
Total interest-bearing liabilities
Demand deposits
Other liabilities
Total change in interest expense
Shareholders’ equity
Total liabilities and shareholders’ equity
Total change in net interest income
(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.
(128)
(64)
131
$14
134
120
65
64
Interest income (FTE) from investment securities and short-
term investments decreased $349 million to $621 million in 2007
compared to 2006 while the average yield on taxable securities
increased 63 bp to 5.08% primarily due to the balance sheet
actions in the fourth quarter of 2006.
Table 4 presents the components of net interest income, net
interest margin and net interest spread for 2007, 2006 and 2005.
Nonaccrual loans and leases and loans held for sale have been
included in the average loan and lease balances. Average
outstanding securities balances are based on amortized cost with
any unrealized gains or losses on available-for-sale securities
included in other assets. Table 5 provides the relative impact of
changes in the balance sheet and changes in interest rates on net
interest income.
Provision for Loan and Lease Losses
The Bancorp provides as an expense an amount for probable loan
and lease losses within the loan portfolio that is based on factors
previously discussed in the Critical Accounting Policies section.
The provision is recorded to bring the allowance for loan and
lease losses to a level deemed appropriate by the Bancorp. Actual
credit losses on loans and leases are charged against the allowance
for loan and lease losses. The amount of loans actually removed
from the Consolidated Balance Sheets is referred to as charge-
offs. Net charge-offs include current period charge-offs less
recoveries on previously charged-off loans and leases.
The provision for loan and lease losses increased to $628
million in 2007 compared to $343 million in 2006. The $285
million increase from the prior year is related to an increase in
delinquencies, increases in the severity of loss due to real estate
price deterioration in some the Bancorp’s key lending markets, the
increase in automobile loans and credit card balances and a
modest decline in economic conditions. As of December 31,
2007, the allowance for loan and lease losses as a percent of loans
and leases increased to 1.17% from 1.04% at December 31, 2006.
Refer to the Credit Risk Management section for more
detailed information on the provision for loan and lease losses
including an analysis of
loan portfolio composition, non-
performing assets, net charge-offs, and other factors considered
by the Bancorp in assessing the credit quality of the loan portfolio
and the allowance for loan and lease losses.
Fifth Third Bancorp 27
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 6: NONINTEREST INCOME
For the years ended December 31 ($ in millions)
Electronic payment processing revenue
Service charges on deposits
Investment advisory revenue
Corporate banking revenue
Mortgage banking net revenue
Other noninterest income
Securities gains (losses), net
Securities gains, net – non-qualifying hedges on mortgage servicing rights
Total noninterest income
Noninterest Income
Total noninterest income increased 23% compared to 2006
primarily due to the $415 million impact of the balance sheet
actions in the fourth quarter of 2006 partially offset by a $177
million charge, taken in the fourth quarter of 2007, to reflect the
decline in the cash surrender value of one of the BOLI policies.
See Note 11 of the Notes to Consolidated Financial Statements
for further
information on the Bancorp’s BOLI policies.
Excluding the impact of these charges, noninterest income
increased nine percent over 2006.
The components of
noninterest income are shown in Table 6.
Electronic payment processing revenue
increased $109
million, or 15%, in 2007 as FTPS realized growth in each of its
three product lines. The components of electronic payment
processing revenue are shown in Table 7.
TABLE 7: COMPONENTS OF ELECTRONIC PAYMENT
PROCESSING REVENUE
For the years ended December 31
($ in millions)
Merchant processing revenue
Financial institutions revenue
Card issuer interchange
Electronic payment processing revenue
2007
$308
305
213
$826
2006
255
279
183
717
2005
224
242
156
622
Merchant processing revenue increased $53 million, or 21%,
due to the continued addition of new national merchant
customers and resulting increases in merchant sales volumes.
During 2007, the Bancorp signed
large national merchant
contracts with Walgreen Co., which converted during the year,
and the U.S. Department of Treasury, a majority of which has
been converted. These contracts contributed 37% of the revenue
growth in merchant processing revenue during 2007. Financial
institutions revenue increased $26 million, or 10%, as a result of
continued success in attracting financial institution customers and
increased debit card volumes associated with these customers.
Card issuer interchange increased $30 million, or 16%, due to
continued growth in debit and credit card volumes, of 11% and
29%, respectively, stemming from success in the Bancorp’s
initiative in expanding its card customer base. Growth in card
issuer interchange revenue was slightly mitigated by the cost of
bankcard cash rewards. The Bancorp continues to see significant
opportunities in attracting new financial institution customers and
retailers. During 2007, the Bancorp processed over 26.7 billion
transactions and handled electronic processing for over 2,500
financial
locations
institutions and over 155,000 merchant
worldwide.
Service charges on deposits increased 12% compared to
2006. The increase was primarily driven by consumer deposit
service charges, which increased 18% in 2007. The number of net
new consumer checking accounts increased 49% during 2007
compared to 2006. Growth in the number of customer deposit
2007
$826
579
382
367
133
153
21
6
$2,467
2006
717
517
367
318
155
299
(364)
3
2,012
2005
622
522
358
299
174
360
39
-
2,374
2004
521
515
363
228
178
587
(37)
-
2,355
2003
509
485
335
241
302
442
81
3
2,398
increased
account relationships and deposit generation continues to be a
primary focus of the Bancorp.
Commercial deposit
five percent
revenues
compared to the prior year. Commercial deposit revenues are
offset by earnings credits on compensating balances. Net earnings
credits were $64 million and $63 million for the years ended
December 31, 2007 and 2006, respectively.
Commercial
customers receive earnings credits to offset the fees charged for
banking services on their deposit accounts such as account
maintenance, lockbox, ACH transactions, wire transfers and other
ancillary corporate treasury management services. Earnings
credits are based on the customer’s average balance in qualifying
deposits multiplied by the crediting rate. Qualifying deposits
include demand deposits and interest-bearing checking accounts.
The Bancorp has a standard crediting rate that is adjusted as
necessary based on competitive market conditions and changes in
short-term interest rates. Earnings credits cannot be given in
excess of the fees charged for banking services provided, and the
excess earnings credits may not be carried forward to future
periods. Earnings credits are netted against gross service charges
to arrive at commercial deposit revenue.
Investment advisory revenues increased four percent in 2007
compared to 2006 primarily due to success in cross-sell initiatives
within the private banking group and improved retail brokerage
performance. Private banking revenues increased $9 million, or
seven percent, while institutional revenue and securities and
brokerage revenue increased four percent and three percent,
respectively, compared to 2006. These increases were partially
offset by a slight decline in mutual fund fees. The Bancorp
continues to focus its sales efforts on improving execution in
retail brokerage and retail mutual funds and on growing the
improving
institutional money management business by
penetration and cross-sell in its large middle-market commercial
customer base. The Bancorp is one of the largest money
managers in the Midwest and, as of December 31, 2007, had
approximately $223.2 billion in assets under care, $33.4 billion in
assets under management and $13.4 billion in its proprietary Fifth
Third Funds.*
Corporate banking revenue increased $49 million, or 15%, in
2007 compared to 2006. The Bancorp has placed an increased
focus on broadening its suite of commercial products and has
seen a positive return on its investment. The growth in corporate
banking revenue was largely attributable to increased institutional
sales revenue, derivative product revenues, asset securitization and
syndication fees, as well as increased letter of credit fees. The
Bancorp is committed to providing a comprehensive range of
financial services to large and middle-market businesses and
continues to further seek opportunities to expand its product
offerings.
Mortgage banking net revenue decreased to $133 million in
*FIFTH THIRD FUNDS® PERFORMANCE DISCLOSURE
Fifth Third Funds investments are: NOT INSURED BY THE FDIC or any other government agency, are not deposits or obligations of, or
guaranteed by, any bank, the distributor or of the Funds any of their respective affiliates, 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. The
Funds’ prospectus contains this and other important information about the Funds. To obtain a prospectus or any other information about Fifth Third Funds, please call 1-800-282-
5706 or visit www.53.com. Please read the prospectus carefully before investing. Fifth Third Funds are distributed by ALPS Distributors, Inc., member NASD, d/b/a FTAM
Funds Distributor, Inc. ALPS Distributors, Inc. and FTAM Funds Distributor, Inc. are affiliated firms through direct ownership, although ALPS Distributors, Inc. and FTAM
Funds Distributor, Inc. are not affiliates of Fifth Third Bank. Fifth Third Asset Management, Inc. serves as Investment Adviser to Fifth Third Funds and receives a fee for its services.
28
Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
2007 from $155 million in 2006. The components of mortgage
banking net revenue are shown in Table 8. Residential mortgage
originations in 2007 were $11.9 billion compared to $9.4 billion in
2006. Despite the increase in originations, gains on loan sales
decreased $13 million as a result of lower margins on sales of
mortgages affected by widening credit spreads in the residential
mortgage market during 2007.
TABLE 8: COMPONENTS OF MORTGAGE BANKING NET
REVENUE
For the years ended December 31
($ in millions)
Origination fees and gains on loan sales
Servicing revenue:
Servicing fees
Servicing rights amortization
Net valuation adjustments on servicing
rights and free-standing derivatives
entered into to economically hedge MSR
2007
$79
2006
92
145
(92)
121
(68)
2005
128
109
(73)
1
54
$133
10
63
155
10
46
174
Net servicing revenue
Mortgage banking net revenue
instruments.
Mortgage net servicing revenue decreased $9 million
compared to 2006. Net servicing revenue is comprised of gross
servicing fees and related amortization as well as valuation
adjustments on mortgage servicing rights and mark-to-market
adjustments on both settled and outstanding free-standing
derivative financial
increased
compared to 2006 as a result of growth in the Bancorp’s portfolio
of residential mortgage loans serviced. The Bancorp’s total
residential mortgage loans serviced at December 31, 2007 and
2006 were $45.9 billion and $38.6 billion, respectively, with $34.5
billion and $28.7 billion, respectively, of residential mortgage loans
serviced for others. Servicing rights amortization increased over
the prior year due to an increase in MSRs and decreased weighted-
average life assumptions.
Servicing fees
Temporary impairment on the MSR portfolio was $22
million in 2007 compared to a recovery in temporary impairment
of $19 million in 2006. Servicing rights are deemed temporarily
impaired when a borrower’s loan rate is distinctly higher than
prevailing rates. Temporary impairment on servicing rights is
reversed when the prevailing rates return to a level commensurate
with the borrower’s loan rate. Further detail on the valuation of
mortgage servicing rights can be found in Note 9 of the Notes to
Consolidated Financial Statements. The Bancorp maintains a
non-qualifying hedging strategy to manage a portion of the risk
associated with the impact of changes in interest rates on the MSR
portfolio. The Bancorp recognized a net gain of $23 million and a
net loss of $9 million in 2007 and 2006, respectively, related to
changes in fair value and settlement of free-standing derivatives
purchased to economically hedge the MSR portfolio. See Note 10
of the Notes to Consolidated Financial Statements for more
information on the free-standing derivatives used to hedge the
MSR portfolio. In addition to the derivative positions used to
economically hedge the MSR portfolio, the Bancorp acquires
various securities (primarily principal-only strips) as a component
of its non-qualifying hedging strategy. A gain of $6 million and $3
million was recognized in 2007 and 2006, respectively, related to
the sale of securities used to economically hedge the MSR
portfolio.
Other noninterest income declined 48% compared to the
prior year. The major components of other noninterest income
for each of the last three years are shown in Table 9. The
decrease was primarily attributable to the previously mentioned
$177 million charge taken in the fourth quarter of 2007 to lower
the cash surrender value of one of the Bancorp’s BOLI policies.
Exclusive of this charge, BOLI income totaled $71 million, a
decrease of 16% compared to 2006 due to a lower crediting rate.
Other noninterest income for the year ended 2007 included $23
million in gains on the sale of $144 million non-strategic credit
card accounts recorded in the gain on loan sales caption.
Additionally, during 2007 the Bancorp recognized a $15 million
gain from the sale of FDIC deposit insurance credits, which were
one-time assessment credits that the Bancorp was allocated in the
FDIC Reform Act of 2005, offset by a $22 million loss due to the
termination of cash flow hedges originally hedging $1.0 billion of
auto loans classified as held for sale, both of which were recorded
in the ‘Other’ line item in Table 9. Other noninterest income for
the year ended 2006 included a $17 million loss in mark-to-market
on free-standing derivatives related to the balance sheet actions
taken in the fourth quarter, captured in the ‘Other’ line item in
Table 9.
TABLE 9: COMPONENTS OF OTHER NONINTEREST
INCOME
For the years ended December 31
($ in millions)
Bank owned life insurance
Cardholder fees
Consumer loan and lease fees
Insurance income
Operating lease income
Banking center fees
Gain on loan sales
Other
Total other noninterest income
2007
$(106)
56
46
32
32
29
25
39
$153
2006
86
49
47
28
26
22
17
24
299
2005
91
46
50
27
55
21
24
46
360
The Bancorp recognized net securities gains of $21 million in
2007 compared to net securities losses of $364 million in 2006.
Securities losses in 2006 primarily consisted of losses resulting
from balance sheet actions taken during the fourth quarter of
2006, partially offset by a $78 million gain from the sale of
MasterCard, Inc. shares.
Noninterest Expense
The Bancorp continued to focus on expense control during 2007.
The Bancorp expects that cost savings initiatives will continue to
be somewhat mitigated by investments in certain high opportunity
markets as well as continued volume-based expense growth in
payments processing and an expected increase in FDIC insurance
in 2008 due to the full utilization of FDIC insurance credits
expected to occur in the first half of 2008.
During 2007, the Bancorp continued its investment in the
expansion of its retail distribution network and information
technology
(noninterest
infrastructure. The efficiency ratio
expense divided by the sum of net interest income (FTE) and
noninterest income) was 60.2% and 59.4% for 2007 and 2006,
respectively. Noninterest expense for the year ended 2007 was
impacted by a $78 million charge to record a liability for the
Bancorp’s indemnification of Visa for the Visa/American Express
litigation settlement that occurred in the third quarter of 2007
along with a fourth quarter accrual of $94 million for additional
outstanding Visa litigation settlements. See Note 15 of the Notes
to Consolidated Financial Statements for additional discussion on
this litigation. Additionally, the efficiency ratio was impacted by
the previously mentioned $177 million charge to noninterest
income to lower the cash surrender value of one of the Bancorp’s
BOLI policies. Excluding these charges, the efficiency ratio for
2007 was 55.3% (comparison being provided to supplement an
understanding of fundamental trends).
Total noninterest expense increased 14% in 2007 compared
to 2006. This comparison is impacted by the previously
mentioned Visa litigation accrual in 2007 and a $49 million charge
related to the termination of debt and other financing agreements
in 2006. Exclusive of these charges, total noninterest expense
increased $267 million, or 10%, over 2006 primarily due to
increases
in volume-related payment processing expenses,
investments in information technology infrastructure and higher
de novo related expenses.
Fifth Third Bancorp 29
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 10: NONINTEREST EXPENSE
For the years ended December 31 ($ in millions)
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Payment processing expense
Technology and communications
Equipment expense
Other noninterest expense
Total noninterest expense
Efficiency ratio
Total personnel cost (salaries, wages and incentives plus
employee benefits) increased three percent in 2007 compared to
2006, due to higher revenue-based incentives and an increase in
the number of employees. As of December 31, 2007, the
Bancorp employed 22,678 employees, of which 6,349 were
officers and 2,755 were part-time employees. Full time equivalent
employees totaled 21,683 as of December 31, 2007 compared to
21,362 as of December 31, 2006.
Net occupancy expense increased 10% in 2007 over 2006
due to the addition of 46 banking centers, excluding 31 new
banking centers added as a result of the Crown acquisition. The
Bancorp remains focused on expanding its retail franchise through
de novo growth with plans to open approximately 50 new banking
centers in 2008, in addition to 57 new banking centers as a result
of the pending acquisition with First Charter.
Payment processing expense includes third-party processing
expenses, card management fees and other bankcard processing
expenses. Payment processing expense increased 32% compared
to last year due to increased processing volumes of 27% and 10%
in the merchant and financial institutions businesses, respectively.
Additionally, the increase in this caption reflects the conversion of
national merchant contracts during the year.
The major components of other noninterest expense for
each of the last three years are shown in Table 11. Other
noninterest expense increased 30% in 2007 compared to 2006
primarily due to the previously mentioned Visa
litigation
settlement charges of $172 million, higher loan processing costs
associated with collections activities, and volume-related increases
in affordable housing investments expense. Other noninterest
expense also included $13 million in provision for unfunded
commitments, recorded in the ‘Other’ line item in Table 11, an
$11 million increase over the prior year. Marketing expense
TABLE 12: APPLICABLE INCOME TAXES
For the years ended December 31 ($ in millions)
Income from continuing operations before income taxes, minority interest
and cumulative effect
Applicable income taxes
Effective tax rate
Comparison of 2006 with 2005
Net income for the year ended 2006 was $1.2 billion or $2.13 per
diluted share, a 23% decrease compared to $1.5 billion and $2.77
per diluted share in 2005. The decrease in net income was
primarily a result of the impact of the balance sheet actions
announced and completed during the fourth quarter of 2006,
which resulted in a pretax loss of $454 million. Specifically, these
balance sheet actions included:
•
Sale of $11.3 billion in available-for-sale securities with a
weighted-average yield of 4.30%;
• Reinvestment of approximately $2.8 billion in available-
for-sale securities that are more efficient when used as
collateral for pledging purposes;
• Repayment of $8.5 billion in wholesale borrowings at a
weighted-average rate paid of 5.30%; and
• Termination of approximately $1.1 billion of repurchase
and reverse repurchase agreements.
30
Fifth Third Bancorp
2007
$1,239
278
269
244
169
123
989
$3,311
60.2%
2006
1,174
292
245
184
141
116
763
2,915
59.4
2005
1,133
283
221
145
142
105
772
2,801
52.1
2004
1,018
261
185
114
120
84
1,081
2,863
53.0
2003
1,031
240
159
116
106
82
733
2,467
46.2
increased compared to the prior year as a result of the Bancorp’s
new branding, expansion into newer markets and increased
advertising as a result of the Crown acquisition.
TABLE 11: COMPONENTS OF OTHER NONINTEREST
EXPENSE
For the years ended December 31
($ in millions)
Loan processing
Marketing
Affordable housing investments
Travel
Postal and courier
Intangible asset amortization
Professional services fees
Supplies
Franchise and other taxes
Operating lease
Visa litigation accrual
Debt termination
Other
Total other noninterest expense
2007
$119
84
57
54
52
42
35
31
23
22
172
-
298
$989
2006
93
78
42
52
49
45
28
28
30
18
-
49
251
763
2005
89
76
35
54
50
46
26
35
37
40
-
-
284
772
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 includes the benefit from tax-
exempt income, tax-advantaged investments and general business
tax credits, partially offset by the effect of nondeductible
expenses. The increase in the effective tax rate in 2007 was a result
of an after-tax BOLI charge of $177 million on a lower pretax
income base. See Note 11 and Note 21 of the Notes to
Consolidated Financial Statements for further information.
2007
$1,537
461
30.0 %
2006
1,627
443
27.2
2005
2,208
659
29.9
2004
2,237
712
31.8
2003
2,438
786
32.3
collateral
These actions were taken to improve the asset/liability profile of
the Bancorp and reduce the size of the Bancorp’s available-for-
sale securities portfolio to a size that was more consistent with its
liquidity,
risk management
interest
requirements; improve the composition of the balance sheet with
a lower concentration in fixed-rate assets; lower wholesale
borrowings to reduce leverage; and better position the Bancorp
for an uncertain economic and interest rate environment. The
pretax losses consisted of:
rate
and
•
•
•
$398 million in losses on the sale of securities;
$17 million in losses on derivatives to hedge the price of
in other noninterest
the securities sold, recorded
income; and
$39 million in charges related to the termination of
certain repurchase and reverse repurchase financing
agreements, recorded in other noninterest expense.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Net interest income (FTE) decreased three percent compared
to 2005. Net interest margin decreased to 3.06% in 2006 from
3.23% in 2005 largely due to rising short-term interest rates, the
impact of the primarily fixed-rate securities portfolio and mix
shifts within the core deposit base from demand deposit and
interest checking categories to savings, money market and other
time deposit categories paying higher rates of interest.
Noninterest income decreased 15% in 2006 compared to
2005 primarily due to the losses on the sale of securities and
related derivative losses from the balance sheet actions taken in
the fourth quarter of 2006 totaling $415 million. Excluding these
losses, noninterest income increased $54 million, or two percent,
in 2006 compared to 2005 due to continued strong growth in
BUSINESS SEGMENT REVIEW
The Bancorp reports on five business segments: Commercial
Banking, Branch Banking, Consumer Lending, Investment
Advisors and Processing Solutions. Further detailed financial
information on each business segment is included in Note 27 of
the Notes to Consolidated Financial Statements.
Results of the Bancorp’s business segments are presented
based on its management structure and management accounting
practices. The structure and accounting practices are specific to
the Bancorp; therefore, the financial results of the Bancorp’s
business segments are not necessarily comparable with similar
information for other financial institutions. The Bancorp refines
its methodologies from time to time as management accounting
practices are improved and businesses change. During 2007, the
Bancorp changed the reporting of Processing Solutions to include
certain revenues and expenses related to credit card processing
that were previously listed under the Commercial and Branch
Banking segments. Revisions to the Bancorp’s methodologies are
applied on a retroactive basis.
The Bancorp manages interest rate risk centrally at the
corporate level by employing a funds transfer pricing (“FTP”)
methodology. This methodology insulates the business segments
from interest rate volatility, 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, respectively, based on expected duration and the
Treasury swap curve. Matching duration, or the expected average
term until an instrument can be repriced, allocates interest income
and interest expense to each segment so its resulting net interest
income is insulated from interest rate risk. In a rising rate
environment, the Bancorp benefits from the widening spread
between deposit costs and wholesale funding costs. However, the
Bancorp’s FTP system credits this benefit to deposit-providing
businesses, such as Branch Banking and Investment Advisors, on
a duration-adjusted basis.
impact of the FTP
methodology is captured in General Corporate and Other.
The net
Management made several changes to the FTP methodology
in 2007 to more appropriately calculate FTP charges and credits to
each of the Bancorp’s business segments. Changes to the FTP
methodology were applied retroactively and included adding a
liquidity premium to loans, deposits and certificates of deposit to
properly reflect the Bancorp’s marginal cost of longer term
2007
TABLE 13: BUSINESS SEGMENT NET INCOME
For the years ended December 31
($ in millions)
Income Statement Data
Commercial Banking
Branch Banking
Consumer Lending
Investment Advisors
Processing Solutions
General Corporate and Other
Net income
$702
621
130
100
153
(630)
$1,076
2006
2005
693
562
179
91
138
(475)
1,188
600
515
203
72
123
36
1,549
electronic payment processing and corporate banking revenue
offset by a $19 million decline in mortgage banking revenue.
four percent
Noninterest expense
in 2006
increased
compared to 2005 primarily due to increases in employee
incentives, volume-related payment processing expenditures,
equipment expenditures and occupancy expense related to the
addition of de novo banking centers, and $39 million in charges
related to the termination of certain repurchase and reverse
repurchase agreements. Excluding the $39 million in charges,
noninterest expense increased by three percent.
In 2006, net charge-offs as a percent of average loans and
leases were 44 bp compared to 45 bp in 2005. At December 31,
2006, nonperforming assets as a percent of loans and leases
.52% at December 31, 2005.
increased
.61%
from
to
funding. In addition, an FTP charge on fixed assets based on the
average 5 year Treasury curve was added to the new FTP
methodology.
The business segments are charged provision expense based
on the actual net charge-offs experienced by the loans owned by
each segment. Provision expense attributable to loan growth and
change in factors in the allowance for loan and lease losses are
captured in General Corporate and Other. The financial results of
the business segments include allocations for shared services and
headquarters expenses. Even with these allocations, the financial
results are not necessarily indicative of the business segments’
financial condition and results of operations as if they were to
exist as independent entities. Additionally, the business segments
form synergies by taking advantage of cross-sell opportunities and
when funding operations by accessing the capital markets as a
collective unit. Net income by business segment is summarized in
Table 13.
to
Commercial Banking
Commercial Banking offers banking, cash management and
financial services
large and middle-market businesses,
government and professional customers. In addition to the
traditional lending and depository offerings, Commercial Banking
products and services include, among others, foreign exchange
and international trade finance, derivatives and capital markets
services, asset-based lending, real estate finance, public finance,
commercial leasing and syndicated finance. Table 14 contains
selected financial data for the Commercial Banking segment.
Comparison of 2007 with 2006
Net income increased $9 million, or one percent, compared to
2006 as a result of continued success in the sale of corporate
banking services, offset by a higher provision for loan and lease
losses and growth in noninterest expense.
Net interest income was modestly lower in comparison to
2006 due to a 32 bp decline in the spread between loan yields and
the related FTP charge. Average loans and leases increased nine
percent over 2006, to $35.7 billion, with growth concentrated in
C&I loans and commercial mortgage loans. The increase in
commercial mortgage loans can be attributed to loans acquired
from Crown in November 2007 and to the conversion of
construction loans to permanent financing throughout 2007.
Average core deposits increased modestly to $15.9 billion in 2007
compared to 2006 as the decrease in savings and money market
balances were more than offset by the growth in foreign office
deposits. Foreign office deposits represent commercial customers
Eurodollar sweeps that pay rates comparable to money market
deposits. Net charge-offs as a percent of average loans increased
from 31 bp in 2006 to 36 bp in 2007 as the segment experienced a
$15 million fraud related charge-off in its Chicago affiliate and an
increase in charge-offs of commercial mortgage loans in parts of
its footprint, specifically eastern Michigan and northeastern Ohio.
Fifth Third Bancorp 31
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Noninterest income increased $82 million, or 17%, compared
to 2006 largely due to an increase in corporate banking revenue of
$49 million, or 17%. Increases in corporate banking revenue
occurred in all subcaptions as a result of a build-out of its
commercial product offerings by the Commercial Banking
segment. During 2007, the segment introduced new treasury
management products and remains focused on further penetration
of middle-market customers and
industry
throughout its affiliates. Other noninterest income grew by 62%
compared to the prior year, as operating lease income grew from
$18 million to $31 million on higher volumes.
the healthcare
Noninterest expense increased $66 million, or nine percent,
in 2007 compared to 2006 primarily due to higher sales related
incentives expense and a volume-related increase in affordable
housing investments expense.
Comparison of 2006 with 2005
Net income increased $93 million, or 16%, compared to 2005
largely as a result of loan and deposit growth and success in the
sale of corporate banking services. Average loans and leases
increased 12% over 2005, to $32.7 billion, with growth occurring
across all loan categories. Average core deposits increased to
$15.8 billion in 2006 from $14.4 billion in 2005. The moderate
decrease in average demand deposits from the prior year was
primarily due to lower relative compensating balance requirements
that was more than offset by increases in interest checking and
savings and money market deposits. The increase in average loans
and leases and core deposits led to a $140 million increase in net
interest income compared to the prior year.
Noninterest income increased $18 million, or four percent,
compared to 2005 largely due to an increase in corporate banking
revenue of $16 million, or six percent. Noninterest expense
increased $30 million, or four percent, in 2006 compared to 2005
primarily due to volume-related increases in loan, payment
processing, operating lease and data processing expenses.
Branch Banking
Branch Banking provides a full range of deposit and loan and
lease products to individuals and small businesses through 1,227
full-service banking centers. Branch Banking offers depository
and loan products, such as checking and savings accounts, home
equity loans and lines of credit, credit cards and loans for
TABLE 14: COMMERCIAL BANKING
For the years ended December 31
($ in millions)
Income Statement Data
Net interest income (FTE) (a)
Provision for loan and lease losses
Noninterest income:
Corporate banking revenue
Service charges on deposits
Other noninterest income
Noninterest expense:
Salaries, incentives and benefits
Other noninterest expenses
2007
2006
2005
$1,310
127
1,317
99
1,177
90
341
154
63
292
146
38
276
149
33
264
529
948
246
$702
244
483
967
274
693
247
450
848
248
600
Income before taxes
Applicable income taxes (a)
Net income
Average Balance Sheet Data
29,184
Commercial loans
6,347
Demand deposits
3,129
Interest checking
4,738
Savings and money market
1,113
Certificates $100,000 and over & other time
194
Foreign office deposits
Includes taxable-equivalent adjustments of $14 million for 2007, $13 million for 2006
and 2005.
$35,662
5,927
4,098
4,331
1,838
1,483
32,707
6,296
3,862
5,049
1,755
515
32
Fifth Third Bancorp
automobile and other personal financing needs, as well as
products designed to meet the specific needs of small businesses,
including cash management services. Table 15 contains selected
financial data for the Branch Banking segment.
Comparison of 2007 with 2006
Net income increased $59 million, or 10%, compared to 2006 as
the segment benefited from increased interest rates through the
majority of the year and increased service charges on deposits.
Net interest income increased $165 million as increases in total
deposits were partially offset by a deposit mix shift toward higher
paying deposit account types. Average core deposits increased
three percent, to $39.9 billion, compared to 2006. Interest
checking accounts decreased $1.9 billion, or 18% while savings
and money market deposits increased $2.9 billion, or 24%,
compared to 2006. Average loans and leases increased two
percent to $17.0 billion, led by growth in credit card balances of
56%.
The provision for loan and lease losses increased $54 million
over 2006 due to the deteriorating credit environment involving
home equity loans, particularly in Michigan and Florida. Net
charge-offs as a percent of average loans and leases increased
significantly from 64 bp to 95 bp, with much of the increase
occurring in the fourth quarter of 2007. The Bancorp experienced
growth in charge-offs on home equity lines and loans with high
loan-to-value (“LTV”) ratios, reflecting borrower stress and lower
home prices.
Noninterest income increased nine percent from 2006.
Service charges on deposits grew 15% compared to the prior year
due to growth in consumer deposit fees driven by new account
openings and higher levels of customer activity. Electronic
payment processing revenue increased nine percent as card issuer
interchange on debit cards grew $14 million, or 10%.
Noninterest expense increased eight percent compared to
2006. Net occupancy and equipment expenses increased 13%
compared to 2006 as a result of the continued opening of new
banking centers. The Bancorp built 66 de novo locations during
2007 and increased total banking centers by 77. The Bancorp will
continue to position itself for sustained long-term growth through
new banking center additions in key growth markets within its
footprint.
TABLE 15: BRANCH BANKING
For the years ended December 31
($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Service charges on deposits
Electronic payment processing
Investment advisory revenue
Other noninterest income
Noninterest expense:
Salaries, incentives and benefits
Net occupancy and equipment
expenses
Other noninterest expenses
Income before taxes
Applicable income taxes
Net income
Average Balance Sheet Data
Consumer loans
Commercial loans
Demand deposits
Interest checking
Savings and money market
Certificates $100,000 and over &
other time
2007
2006
2005
$1,465
162
1,300
108
1,210
97
421
174
90
94
483
173
467
959
338
$621
365
159
87
100
457
153
425
868
306
562
368
143
86
91
466
138
401
796
281
515
$11,838
5,173
5,757
8,692
14,748
11,461
5,296
5,840
10,578
11,886
10,775
5,278
5,977
13,489
9,265
13,729
13,031
10,189
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of 2006 with 2005
Net income increased $47 million, or nine percent, compared to
2005. Net interest income increased $90 million as increases in
average loans and leases and total deposits were partially offset by
a deposit mix shift toward higher paying deposit account types.
Average loans and leases increased four percent to $16.8 billion,
led by growth in credit card balances of 21%. Branch Banking
realized a shift to higher-rate deposit products throughout 2006.
Interest checking and demand deposits decreased $3.0 billion, or
22%, and savings, money market and other time deposits
increased $3.8 billion, or 21%, compared to 2005.
Noninterest income increased three percent from 2005 as
growth in electronic payment processing revenue of $12 million
was offset by $3 million decreases in both service charges on
deposits and mortgage banking net revenue. Noninterest expense
increased by three percent compared to 2005 as costs were
contained despite the effect from the Bancorp’s continued de
novo banking center growth strategy, which led to a 11% increase
in net occupancy and equipment expense.
Consumer Lending
Consumer Lending includes the Bancorp’s mortgage, home
equity, automobile and other indirect lending activities. Mortgage
and home equity lending activities include the origination,
retention and servicing of mortgage and home equity loans or
lines of credit, sales and securitizations of those loans or pools of
loans or lines of credit and all associated hedging activities. Other
indirect lending activities include loans to consumers through
mortgage brokers, automobile dealers and federal and private
student education loans. Table 16 contains selected financial data
for the Consumer Lending segment.
Comparison of 2007 with 2006
Net income decreased $49 million, or 28%, compared to 2006
despite increased originations, due to an increase in provision for
loan and lease losses and decreased gain on sale margins. Net
interest income was relatively flat compared to the prior year.
Average residential mortgage loans increased seven percent
compared to 2006 due to increased mortgage originations and
loans acquired from Crown. Net charge-offs increased to 73 bp
in 2007, an increase from 47 bp in 2006, due to greater severity of
loss on residential mortgages and automobile loans related to
declining real estate prices and a market surplus of used
automobiles, respectively. The segment is focusing on managing
credit risk through the restructuring of certain residential
mortgage loans and careful consideration of underwriting and
collection standards.
Noninterest income decreased 14% compared to 2006 due to
a decline in mortgage banking net revenue. The Bancorp’s
mortgage originations were $11.4 billion and $9.4 in 2007 and
TABLE 16: CONSUMER LENDING
For the years ended December 31
($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Mortgage banking net revenue
Other noninterest income
Noninterest expense:
Salaries, incentives and benefits
Other noninterest expenses
Income before taxes
Applicable income taxes
Net income
Average Balance Sheet Data
Residential mortgage loans
Home equity
Automobile loans
Consumer leases
2007
2006
2005
$404
148
122
75
84
169
200
70
$130
409
94
148
81
98
169
277
98
179
424
89
165
124
89
222
313
110
203
$10,156
1,335
9,711
917
9,523
1,311
8,560
1,328
8,957
1,173
7,584
1,822
2006, respectively. Despite the increase in originations, gain on
sale margins decreased due to widening credit spreads in the
residential mortgage market, resulting in a decrease in mortgage
banking net revenue of $26 million, or 18%.
Comparison of 2006 with 2005
Net income decreased $24 million, or 12%, compared to 2005.
Net interest income decreased $15 million, or four percent,
despite average loans and leases increasing six percent, due to an
81 bp decline in the spread between loan yields and the related
increasingly competitive
FTP charge as a result of
environment in which this segment competes.
the
The Bancorp’s mortgage originations were $9.4 billion and
$9.9 billion in 2006 and 2005, respectively. As a result of the
decrease in originations and the corresponding decrease in gains
on sales of mortgages, mortgage banking net revenue decreased
$17 million, or 10%. Decreases in other noninterest income and
expense were largely a result of the planned run off of the
consumer operating lease portfolios. Operating lease income and
expense decreased from 2005 by $39 million and $29 million,
respectively.
for
services
The Bancorp’s primary
Investment Advisors
investment
Investment Advisors provides a full range of
individuals, companies and not-for-profit
alternatives
organizations.
include
investments, trust, asset management, retirement plans and
custody. Fifth Third Securities, Inc., an indirect wholly-owned
subsidiary of the Bancorp, offers full service retail brokerage
services to individual clients and broker dealer services to the
institutional marketplace. Fifth Third Asset Management, Inc., an
indirect wholly-owned subsidiary of the Bancorp, provides asset
management services and also advises the Bancorp’s proprietary
family of mutual funds. Table 17 contains selected financial data
for the Investment Advisors segment.
Comparison of 2007 with 2006
Net income increased $9 million, or 10%, compared to 2006 on
increases in investment advisory revenue of 5%. Net interest
income increased 11% to $154 million on a five percent increase
in average loans and leases and a seven percent increase in core
deposits. Overall, noninterest income increased six percent from
2006. Fifth Third Private Bank, the Bancorp’s wealth management
group, increased revenues by six percent on execution of cross-
sell initiatives. Brokerage income also increased seven percent
compared to 2006 as the overall equity markets performed well
for much of 2007 and the segment increased the number of
registered representatives. The segment realized only modest
gains in institutional services income. Noninterest expenses
remain contained, increasing four percent compared to 2006.
TABLE 17: INVESTMENT ADVISORS
For the years ended December 31
($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Investment advisory revenue
Other noninterest income
Noninterest expense:
Salaries, incentives and benefits
Other noninterest expenses
Income before taxes
Applicable income taxes
Net income
Average Balance Sheet Data
Loans and leases
Core deposits
2007
$154
13
386
22
167
228
154
54
$100
2006
2005
139
4
367
19
172
209
140
49
91
122
4
360
17
169
214
112
40
72
$3,207
4,978
3,068
4,673
2,684
4,027
Fifth Third Bancorp 33
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Comparison of 2006 with 2005
Net income increased $15 million, or 12%, versus the prior year as
a result of increases in electronic payment processing fees
mitigated by increases in personnel costs and payment processing
expenses. Compared to 2006, merchant processing revenues and
financial institution revenue increased 16%, while card issuer
interchange earned on credit cards transactions increased 20%.
increased 20% primarily due
to
headcount additions, investment in information technology and
transaction processing costs. Salaries, incentives and benefits
increased 33% with the addition of over 300 employees.
Noninterest expense
General Corporate and Other
General Corporate and Other includes the unallocated portion of
the investment securities portfolio, securities gains/losses, certain
non-core deposit funding, unassigned equity, provision expense in
excess of net charge-offs and certain support activities and other
items not attributed to the business segments.
Comparison of 2007 with 2006
The results of General Corporate and Other were primarily
impacted by the increase in provision expense compared to the
prior year. Provision expense over charge-offs increased by
approximately $139 million compared to 2006 as the allowance
for loan and lease losses as a percentage of loan and leases
increased from 1.04% as of December 31, 2006 to 1.17% as of
December 31, 2007. The increase is attributable to a number of
factors including an increase in delinquencies, increases in the
severity of loss due to real estate price deterioration in some the
Bancorp’s key lending markets, the increase in automobile loans
and credit card balances and a modest decline in economic
conditions.
Comparison of 2006 with 2005
The results of General Corporate and Other were primarily
impacted by the balance sheet actions in the fourth quarter of
2006 and the related loss on the sale of securities. General
Corporate and Other was also impacted by wholesale funding
repricing at a faster rate than securities as a result of rising short-
term rates in the first half of 2006. The Bancorp experienced an
increase in the average interest rate on wholesale funding from
3.36% in 2005 to 5.02% in 2006 compared to an increase in the
average interest rate on securities from 4.36% in 2005 to 4.56% in
2006.
Comparison of 2006 with 2005
Net income increased $19 million, or 26%, compared to 2005 as a
result of an increase in net interest income and modest growth in
investment advisory revenue. Net interest income increased 14%,
to $139 million as the segment benefited from the liquidity
premium placed on deposit accounts as previously discussed.
Noninterest income increased three percent from 2005 as the
$7 million increase in Private Bank revenues was mitigated by a
decrease in mutual fund revenue of $3 million. The decrease in
mutual fund revenue was primarily the result of the deployment of
an open architecture on proprietary fund sales. Noninterest
expenses decreased modestly compared to the prior year due to
the focus on expense control.
Processing Solutions
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 affiliated and unaffiliated customers. Table
18 contains selected financial data for the Processing Solutions
segment.
revenues) continued
institutions processing and card
Comparison of 2007 with 2006
Net income increased $15 million, or 11%, versus the prior year as
electronic payment processing revenues (the sum of merchant
processing, financial
issuer
interchange
to produce double-digit
increases. Merchant processing increased $55 million, or 21%,
due to the addition and conversion of large national clients
throughout the year. Card issuer interchange revenues increased
primarily due to new customer additions and the resulting higher
card sales volumes from the success in the Bancorp’s initiative to
increase credit card penetration of its customer base. The
Bancorp continues to see significant opportunities to attract new
financial institution customers and retailers within this business
segment.
The strong increase in noninterest income was mitigated by a
19% increase in noninterest expense due to network charges
resulting from increased transaction volume in addition to
expenses related to the conversion of large national merchant
contracts. Expenses are expected to moderate in future periods to
be more consistent with revenue growth while reflecting spread
pressure relating to the renewal of current customer contracts.
TABLE 18: PROCESSING SOLUTIONS
For the years ended December 31
($ in millions)
Income Statement Data
Net interest income
Provision for loan and lease losses
Noninterest income:
Merchant processing
Financial institutions processing
Card issuer interchange
Other noninterest income
Noninterest expense:
Salaries, incentives and benefits
Payment processing expense
Other noninterest expenses
Income before taxes
Applicable income taxes
Net income
2007
2006
2005
$(6)
11
314
319
66
43
75
237
176
237
84
$153
(3)
9
259
290
52
34
70
169
171
213
75
138
(9)
18
224
250
43
41
53
127
162
189
66
123
34
Fifth Third Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
FOURTH QUARTER REVIEW
The Bancorp’s 2007 fourth quarter net income was $16 million, or
$.03 per diluted share, compared to $325 million, or $.61 per
diluted share, in the third quarter of 2007 and $66 million, or $.12
per diluted share, for the fourth quarter of 2006. Return on
average assets and return on average equity for the fourth quarter
of 2007 were .06% and .7%, respectively, compared to 1.26% and
13.8% in the third quarter of 2007 and .25% and 2.6% in 2006’s
fourth quarter. Fourth quarter 2007 earnings and ratios were
negatively impacted by a charge of $177 million to lower the
current cash surrender value of one of the Bancorp’s BOLI
policies, a charge of $94 million related to Visa members’
indemnification of future litigation settlements, as well as $8
million in acquisition-related costs. The BOLI charge reflected an
additional $22 million recorded subsequent to the Bancorp’s
issuance of fourth quarter of 2007 earnings. In the fourth quarter
of 2006, earnings and ratios were negatively impacted by $454
million in total pretax losses and charges related to balance sheet
actions taken to improve the asset/liability profile of the Bancorp.
Fourth quarter 2007 net interest income (FTE) of $785
million increased $25 million, or three percent, from the third
quarter of 2007 and $41 million, or six percent, from the same
period a year ago. Sequential growth in net interest income was
primarily driven by a five percent increase in earning assets and
lower funding costs, both
in core deposits and wholesale
borrowings, resulting from lower market interest rates. These
positive effects were partially offset by lower loan yields related to
lower market interest rates, the reversal of previously recognized
interest on higher nonperforming assets, and the impact of the
issuance of trust preferred securities during the third and fourth
quarters. Increases in net interest income compared to the fourth
quarter of 2006 were primarily a result of the balance sheet actions
in the prior year, mitigated by the issuance of $2.2 billion in trust
preferred securities throughout 2007. The net interest margin was
3.29%, a 5 bp decrease from the third quarter of 2007 and a 13 bp
increase over the fourth quarter of 2006.
Noninterest income of $509 million decreased by $172 million
compared to the third quarter of 2007 and increased $328 million
compared to the fourth quarter of 2006. Fourth quarter 2007
results include a $177 million charge to reduce the cash surrender
value of one of the Bancorp’s BOLI policies and $22 million
related to the termination of cash flow hedges on automobile loans
held for sale. Third quarter results included a gain of $15 million
on the sale of FDIC deposit insurance credits. Fourth quarter of
2006 results include $415 million in losses on securities and
derivatives related to the Bancorp’s fourth quarter of 2006 balance
sheet actions. Excluding those charges, sequential noninterest
income growth was $42 million, or six percent, and year-over-year
noninterest income growth was $112 million, or 19%, with strong
growth in service charges on deposits, corporate banking and
electronic payment processing revenue.
Electronic payment processing revenue of $223 million
increased five percent sequentially and 15% compared with last
year. Compared with a year ago, growth was driven by continued
strong merchant processing results and strong growth in card
issuer interchange driven by higher card usage and an increase in
credit card accounts stemming from success in the Bancorp’s
initiative to increase customer credit card penetration.
Service charges on deposits of $160 million increased six
percent from the third quarter of 2007 and 30% versus the same
quarter last year. Retail service charges increased three percent
from the third quarter, driven by higher levels of customer activity
and modest growth in transaction accounts. Retail service charges
grew 41% compared with the fourth quarter of 2006, driven by
higher levels of customer activity and comparisons to the unusual
weakness experienced in the same quarter last year. Commercial
service charges increased 10% sequentially and 19% compared with
last year, primarily due to lower earnings credits on commercial
deposit accounts and fee growth associated with new product and
service offerings.
revenue
increased
Investment advisory revenue of $94 million decreased one
percent sequentially and increased four percent over fourth quarter
of 2006. Private banking
two percent
sequentially, largely due to higher insurance revenue, and nine
percent from the same quarter last year on continued strong results
particularly in wealth planning and trust. Brokerage fee revenue
declined seven percent sequentially, reflecting the volatility in
equity markets in the fourth quarter of 2007, and was flat
compared with a year ago as the effect of adverse market
conditions offset growth in the number of licensed brokers.
Corporate banking revenue of $106 million increased 17%
sequentially and 29% over the fourth of 2006, reflecting the build
out of the Bancorp’s corporate banking capabilities. The Bancorp
realized growth both sequentially and year-over-year in all sub
captions of corporate banking revenue.
Mortgage banking net revenue totaled $26 million in the
fourth and third quarter of 2007 and $30 million in the fourth
quarter of 2006. Mortgage originations of $2.7 billion decreased
from $3.0 billion in the third quarter of 2007 and increased from
$2.3 billion in the fourth quarter of 2006. Gains on loan sales of
$18 million increased from $9 million in the third quarter and
decreased
fourth quarter of 2006.
Improvement in the liquidity of the residential mortgage market
during the fourth quarter of 2007 drove the higher gains on loan
sales compared with the third quarter. Net servicing revenue,
before MSR valuation adjustments, of $14 million in the fourth
quarter was consistent with the third quarter of 2007 and increased
$2 million over the fourth quarter of 2006.
from $23 million
in
Noninterest expense of $940 million increased 10% from
third quarter of 2007 and increased 24% from the fourth quarter of
2006. Comparisons reflect expenses accrued related to future Visa
litigation settlements of $94 million in the fourth quarter of 2007
and $78 million related to the Visa/American Express settlement
in the third quarter of 2007. Exclusive of the Visa accruals and a
$39 million charge associated with the termination of financing
agreements in the fourth quarter of 2006, noninterest expense
increased nine percent compared to the third quarter of 2006 and
17% compared to the same quarter last year. Both sequential and
year-over-year increases were driven by volume-based increases in
payment processing expense, higher de novo related occupancy
expense and increased provision expense for unfunded loan
commitments.
Net charge-offs as a percentage of average loans and leases
were 89 bp, or $174 million, in the fourth quarter, compared with
60 bp, or $115 million, last quarter and 52 bp, or $97 million, in the
fourth quarter of 2006. The increase was the result of commercial
and consumer real estate loans concentrated in Michigan, northern
Ohio and Florida. Comparisons were also affected by a $15
million fraud-related commercial loan charge-off in the fourth
quarter of 2007.
Average loan and lease balances grew five percent sequentially
and nine percent from the fourth quarter last year. Crown
contributed approximately one percent of the sequential and year-
over-year growth, primarily in commercial and residential mortgage
loans. The Bancorp continued to grow credit card balances,
increasing seven percent over the sequential quarter and 60% over
the fourth quarter of 2006. Average core deposits were up three
percent compared to the third quarter of 2007 and the fourth
quarter of 2006. Crown contributed approximately one percent of
the sequential and year-over-year growth. The Bancorp continued
to generate overall deposit growth while realizing a mix shift from
interest checking to savings accounts.
Fifth Third Bancorp 35
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
BALANCE SHEET ANALYSIS
Loans and Leases
Total loans and leases increased 12% compared to December 31,
2006. Table 19 presents the Bancorp’s total commercial and
consumer loan and lease portfolio classified by the primary
purpose of the loan.
Total commercial loans and leases increased $6.1 billion, or
15%, compared to the prior year. Excluding loans acquired from
Crown, commercial loans and leases increased approximately $5.6
billion, or 14%, reflecting growth in commercial and industrial
loans throughout the Bancorp’s footprint. Commercial mortgage
growth was primarily a result of the Crown acquisition. Growth
in commercial mortgage and the decrease
in commercial
construction is also attributed to the conversion of construction
loans to permanent financing.
loans
Total consumer loans and leases increased $3.0 billion, or
nine percent, compared to December 31, 2006 as a result of the
Crown acquisition, growth in the automobile loan portfolio and
increased promotion of credit cards. Excluding Crown, total
consumer loans and leases increased approximately $1.5 billion, or
four percent. Residential mortgage loans increased $1.5 billion, or
15%, compared to 2006, primarily from the Crown acquisition.
Excluding Crown,
increased
residential mortgage
approximately $260 million, or three percent, compared to the
prior year. Residential mortgage originations totaled $11.9 billion
in 2007 compared to $9.4 billion in 2006. Automobile loans
increased $1.2 billion, or 12%, compared to 2006. The growth in
automobile loans was attributed to an increase in the number of
dealers in the Bancorp’s indirect automobile lending network
from 8,700 in 2006 to 9,300 in 2007. A key focus for the Bancorp
in 2007 was increasing its penetration of credit cards within in its
retail footprint through marketing campaigns targeted to specific
borrowers. Credit card balances increased 58%, to $1.6 billion,
with growth primarily a result of a 26% increase in the number of
accounts. The Bancorp will continue to focus on growing credit
card balances throughout 2008.
Average commercial loans and leases increased $2.7 billion,
or seven percent, compared to December 31, 2006, with growth
in commercial loans and commercial mortgage loans. The
Bancorp experienced double-digit growth in more than a third of
its affiliates, including 11% in the Florida affiliates, 29% in
Lexington and 26% in Tennessee.
Average consumer loans and leases increased $2.1 billion, or
six percent, compared to 2006. The growth in average consumer
loans and leases was a result of strong growth in residential
mortgage, automobile and credit card balances mitigated by a
decline in home equity loans and consumer automobile leases.
The Bancorp experienced its largest growth in the Chicago
affiliate, an increase of $254 million, or nine percent. Additionally,
the Bancorp saw growth of 11% in the Florida affiliates and 30%
in Tennessee offset by a decline of nine percent in the Western
Ohio affiliate.
Investment Securities
The Bancorp uses investment securities as a means of managing
interest rate risk, providing liquidity support and providing
collateral for pledging purposes. As of December 31, 2007, total
investment securities were $11.2 billion compared to $11.6 billion
at December 31, 2006. Securities are classified as available-for-
sale when, in management’s judgment, they may be sold in
response to, or in anticipation of, changes in market conditions.
The Bancorp’s management has evaluated the securities in an
unrealized loss position in the available-for-sale portfolio and
maintains the intent and ability to hold these securities to the
earlier of the recovery of the losses or maturity.
Net unrealized losses on the available-for-sale securities
portfolio were $144 million at December 31, 2007 compared to
$183 million at December 31, 2006. At December 31, 2007, 85%
of the unrealized losses in the available-for-sale securities portfolio
were comprised of agency mortgage-backed securities and
securities issued by U.S. Government sponsored agencies. The
Bancorp’s management believes the price movements in these
TABLE 19: COMPONENTS OF TOTAL LOANS AND LEASES (INCLUDING HELD FOR SALE)
As of December 31 ($ in millions)
Commercial:
2006
2007
Commercial loans
Commercial mortgage
Commercial construction
Commercial leases
Total commercial loans and leases
Consumer:
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total consumer loans and leases
Total loans and leases
$26,079
11,967
5,561
3,737
47,344
11,433
11,874
11,183
1,591
1,157
37,238
$84,582
TABLE 20: COMPONENTS OF AVERAGE TOTAL LOANS AND LEASES
As of December 31 ($ in millions)
Commercial:
2007
Commercial loans
Commercial mortgage
Commercial construction
Commercial leases
Total commercial loans and leases (including held for sale)
Consumer:
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total consumer loans and leases (including held for sale)
Total loans and leases (including held for sale)
Total portfolio loans and leases (excluding held for sale)
36
Fifth Third Bancorp
$22,351
11,078
5,661
3,683
42,773
10,489
11,887
10,704
1,276
1,219
35,575
$78,348
$76,033
20,831
10,405
6,168
3,841
41,245
9,905
12,154
10,028
1,004
1,167
34,258
75,503
2006
20,504
9,797
6,015
3,730
40,046
9,574
12,070
9,570
838
1,395
33,447
73,493
72,447
2005
19,377
9,188
6,342
3,698
38,605
8,991
11,805
9,396
788
1,644
32,624
71,229
2005
18,310
8,923
5,525
3,495
36,253
8,982
11,228
8,649
728
1,897
31,484
67,737
66,685
2004
16,107
7,636
4,348
3,426
31,517
7,912
10,318
7,734
794
2,092
28,850
60,367
2004
14,955
7,391
3,807
3,296
29,449
6,801
9,584
8,128
740
2,340
27,593
57,042
55,951
2003
14,261
6,894
3,301
3,264
27,720
5,865
8,783
8,606
727
2,488
26,469
54,189
2003
13,705
3,097
6,299
3,037
26,138
6,880
8,796
7,403
559
2,638
26,276
52,414
49,700
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 21: COMPONENTS OF INVESTMENT SECURITIES (AMORTIZED COST BASIS)
As of December 31 ($ in millions)
2006
Available-for-sale and other:
2007
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 and other securities
Held-to-maturity:
Obligations of states and political subdivisions
Other bonds, notes and debentures
Total held-to-maturity
$3
160
490
8,738
385
1,045
$10,821
$351
4
$355
1,396
100
603
7,999
172
966
11,236
345
11
356
2005
506
2,034
657
16,127
2,119
1,090
22,533
378
11
389
2004
503
2,036
823
17,571
2,862
1,006
24,801
245
10
255
2003
838
3,877
922
21,101
1,401
937
29,076
126
9
135
securities were primarily the result of movement in market interest
rates.
At December 31, 2007, the Bancorp’s investment portfolio
primarily consisted of AAA rated agency mortgage-backed
securities and the Bancorp does not hold CDOs or asset-backed
securities backed by subprime loans. The balance of securities
below investment grade was immaterial as of December 31, 2007.
Available-for-sale securities, on an amortized cost basis,
decreased $415 million since December 31, 2006. At December
31, 2007, available-for-sale securities decreased to 11% of interest-
earning assets, compared to 13% at December 31, 2006. The
estimated weighted-average life of the debt securities in the
available-for-sale portfolio was 6.8 years at December 31, 2007
compared to 4.3 years at December 31, 2006. At December 31,
the available-for-sale
2007,
the fixed-rate securities within
securities portfolio had a weighted-average yield of 5.31%
compared to 5.13% at December 31, 2006. The increased yield
from the prior year was a result of the balance sheet actions taken
in the fourth quarter of 2006, which included the sale of $11.3
billion in available-for-sale securities with a weighted-average yield
of 4.30%.
Information presented in Table 22 is on a weighted-average
life basis, anticipating future prepayments. Yield information is
presented on an FTE basis and is computed using historical cost
balances. Maturity and yield calculations for the total available-
for-sale portfolio exclude equity securities that have no stated
yield or maturity. Further information on securities held by the
Bancorp can be found in Note 3 of the Notes to Consolidated
Financial Statements.
TABLE 22: CHARACTERISTICS OF AVAILABLE-FOR-SALE AND OTHER SECURITIES
Amortized Cost
Fair Value
Weighted-Average
Life (in years)
Weighted-Average
Yield
As of December 31, 2007 ($ in millions)
U.S. Treasury 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 (c):
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 securities (d)
Total available-for-sale and other securities
$-
-
-
3
3
-
160
-
-
160
246
187
21
36
490
2
1,879
6,577
280
8,738
$-
-
-
3
3
-
160
-
-
160
248
191
21
36
496
2
1,868
6,462
277
8,609
93
110
29
153
385
1,045
$10,821
92
108
29
147
376
1,033
$10,677
-
-
-
12.7
12.0
-
2.2
-
-
2.2
.4
2.2
6.9
10.7
2.1
.6
3.6
7.7
10.4
6.9
.1
3.7
5.2
28.3
12.7
- %
-
-
5.89
6.04
-
4.44
-
-
4.44
7.31
7.04(b)
7.98(b)
3.92(b)
7.20
7.04
4.97
5.23
5.45
5.18
5.88
5.54
5.59
7.45
6.38
5.31 %
(a) Taxable-equivalent yield adjustments included in the above table are 2.41%, 2.31%, 2.63%, 1.29% and 2.37% for securities with an average life of one year or less, 1-5 years, 5-10 years,
6.83
greater than 10 years and in total, respectively.
(b) Weighted-average yield excludes $3 million, $15 million and $35 million of securities with an average life of 1-5 years, 5-10 years and greater than 10 years, respectively, related to qualified
zone academy bonds whose yields are realized through income tax credits. The weighted-average effective yield of these instruments is 6.81%.
(c) Other bonds, notes, and debentures consist of commercial paper, non-agency mortgage backed securities, certain other asset backed securities (primarily automobile and commercial loan backed
securities) and corporate bond securities.
(d) Other securities consist of Federal Home Loan Bank (“FHLB”) and Federal Reserve Bank restricted stock holdings that are carried at cost, Federal Home Loan Mortgage Corporation
(“FHLMC”) preferred stock holdings, certain mutual fund holdings and equity security holdings.
Fifth Third Bancorp 37
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 23: DEPOSITS
As of December 31 ($ in millions)
Demand
Interest checking
Savings
Money market
Foreign office
Transaction deposits
Other time
Core deposits
Certificates - $100,000 and over
Other foreign office
Total deposits
TABLE 24: AVERAGE DEPOSITS
As of December 31 ($ in millions)
Demand
Interest checking
Savings
Money market
Foreign office
Transaction deposits
Other time
Core deposits
Certificates - $100,000 and over
Other foreign office
Total deposits
Deposits
Deposit balances represent an important source of funding and
revenue growth opportunity. The Bancorp is continuing to focus
on core deposit growth in its retail and commercial franchises by
expanding its retail franchise, enhancing its product offerings and
providing competitive rates. At December 31, 2007, core deposits
represented 59% of the Bancorp’s asset funding base, compared
to 62% at December 31, 2006.
In 2007, the Bancorp expanded its deposit product line by
offering an equity-linked certificate of deposit and a new savings
account to help customers identify and reach savings goals.
Additionally in 2007, the Bancorp reclassified certain foreign
office deposits as transaction deposits. Included in foreign office
deposits are Eurodollar sweep accounts for the Bancorp’s
commercial customers. These accounts bear interest at rates
slightly higher than money market accounts, but the Bancorp does
not have to pay FDIC insurance or hold collateral. The remaining
foreign office balances are brokered deposits and the Bancorp
uses these, as well as certificates of deposit $100,000 and over, as a
method to fund earning asset growth.
Core deposits grew five percent compared to December 31,
2006, however, the Bancorp continues to realize a mix shift as
customers move from lower-yield transaction accounts to higher-
yield time deposits. Core deposits acquired from Crown were
approximately $990 million at December 31, 2007.
On an average basis, core deposits increased three percent
compared to 2006, while customers continued to migrate from
interest checking to higher yielding accounts. This migration from
interest checking to savings and time deposit accounts resulted in
TABLE 25: BORROWINGS
As of December 31 ($ in millions)
Federal funds purchased
Short-term bank notes
Other short-term borrowings
Long-term debt
Total borrowings
38
Fifth Third Bancorp
2007
$14,404
15,254
15,635
6,521
2,572
54,386
11,440
65,826
6,738
2,881
$75,445
2007
$13,261
14,820
14,836
6,308
1,762
50,987
10,778
61,765
6,466
1,393
$69,624
2006
14,331
15,993
13,181
6,584
1,353
51,442
10,987
62,429
6,628
323
69,380
2006
13,741
16,650
12,189
6,366
732
49,678
10,500
60,178
5,795
2,979
68,952
2005
14,609
18,282
11,276
6,129
421
50,717
9,313
60,030
4,343
3,061
67,434
2005
13,868
18,884
10,007
5,170
248
48,177
8,491
56,668
4,001
3,719
64,388
2004
13,486
19,481
8,310
4,321
153
45,751
6,837
52,588
2,121
3,517
58,226
2004
12,327
19,434
7,941
3,473
85
43,260
6,208
49,468
2,403
4,364
56,235
2003
12,142
19,757
7,375
3,201
16
42,491
6,201
48,692
1,856
6,547
57,095
2003
10,482
18,679
8,020
3,189
2
40,372
6,426
46,798
3,832
3,860
54,490
double-digit growth in savings balances and a decrease in interest
checking deposits. The Bancorp experienced double-digit average
core deposit increases in the Tennessee, Orlando, Tampa,
Louisville and Ohio Valley markets.
Borrowings
As of December 31, 2007 and 2006, total borrowings as a
percentage of interest-bearing liabilities were 27% and 22%,
respectively. The increase in short-term funding in 2007
represents a return to more normalized levels as the balance sheet
actions during the fourth quarter of 2006 temporarily reduced the
need for short-term funding. Compared to 2006, average short-
term funding decreased $1.8 billion.
The Bancorp continues to explore additional alternatives
regarding the level and cost of various other sources of funding.
In March, August and October of 2007, Fifth Third Capital Trust
IV, V and VI, wholly-owned non-consolidated subsidiaries of the
Bancorp, issued $750 million, $575 million and $863 million,
respectively, of Tier I-qualifying trust preferred securities to third-
party investors and invested the proceeds in junior subordinated
notes issued by the Bancorp.
in
Information on the average rates paid on borrowings is
located
the Statement of Income Analysis, while a
comprehensive listing of the composition of long-term debt can
be found in Note 13 of the Notes to Consolidated Financial
Statements. In addition, refer to the Liquidity Risk Management
section for a discussion on the role of borrowings in the
Bancorp’s liquidity management.
2007
$4,427
-
4,747
12,857
$22,031
2006
1,421
-
2,796
12,558
16,775
2005
5,323
-
4,246
15,227
24,796
2004
4,714
775
4,537
13,983
24,009
2003
6,928
500
5,742
9,063
22,233
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
RISK MANAGEMENT
is responsible for the
Managing risk is an essential component of successfully operating a
financial services company. The Bancorp’s risk management
function
identification, measurement,
monitoring, control and reporting of risk and mitigation of those
risks that are inconsistent with the Bancorp’s risk profile. The
Enterprise Risk Management division (“ERM”),
led by the
Bancorp’s Chief Risk Officer, ensures consistency in the Bancorp’s
approach to managing and monitoring risk within the structure of
the Bancorp’s affiliate 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 risks faced by the Bancorp include, but are not
limited to, credit, market, liquidity, operational and regulatory
compliance. ERM includes the following key functions:
•
•
•
•
•
•
•
•
•
•
Risk Policy – ensures consistency in the approach to risk
management as the Bancorp’s clearinghouse for credit,
market and operational risk policies, procedures and
guidelines;
Credit Risk Review – responsible for evaluating the
sufficiency of underwriting, documentation and approval
processes for consumer and commercial credits, counter-
party credit risk, the accuracy of risk grades assigned to
commercial credit exposure, and appropriate recognition
accounting for charge-offs, non-accrual status and specific
reserves and reports directly to the Risk and Compliance
Committee of the Board of Directors;
Consumer Credit Risk Management – responsible for
credit risk management in consumer lending, including
oversight of underwriting and credit administration
processes as well as analytics and reporting functions;
Capital Markets Risk Management – responsible for
establishing and monitoring proprietary trading limits,
monitoring liquidity and interest rate risk and utilizing
value at risk and earnings at risk models;
Compliance Risk Management – responsible for oversight
of compliance with all banking regulations;
Operational Risk Management – responsible for enterprise
operational risk programs, such as risk self assessments,
key risk indicators and new products review as well as root
cause analysis and corrective action plans relating to
identified operational losses;
Bank Protection – responsible for fraud prevention and
detection, and investigations and recovery;
Insurance Risk Management – responsible for all property,
casualty and liability insurance policies including the claims
administration process for the Bancorp;
Investment Advisors Risk Management – responsible for
trust compliance, fiduciary risk, trading risk and credit risk
in the Investment Advisors line of business; and
Risk Strategies and Reporting –
for
quantitative analytics and Board of Directors and senior
management reporting on credit, market and operational
risk metrics.
responsible
Designated risk managers have been assigned to all business
lines. Affiliate risk management is handled by regional risk
managers who are responsible for multiple affiliates and report
directly to ERM.
Risk management oversight and governance is provided by
the Risk and Compliance Committee of the Board of Directors and
through multiple management committees whose membership
includes a broad cross-section of line of business, affiliate and
support representatives. The Risk and Compliance Committee of
the Board of Directors consists of five outside directors and has
the responsibility for the oversight of credit, market, operational,
regulatory compliance and strategic risk management activities for
These committees
the Bancorp, as well as for the Bancorp’s overall aggregate risk
profile. The Risk and Compliance Committee of the Board of
Directors has approved the formation of key management
governance committees that are responsible for evaluating risks
and controls.
include the Market Risk
Committee, the Corporate Credit Committee, the Credit Policy
Committee, the Operational Risk Committee and the Executive
Asset Liability Committee. There are also new products and
initiatives processes applicable to every line of business to ensure
an appropriate standard readiness assessment is performed before
launching a new product or initiative. Significant risk policies
approved by the management governance committees are also
reviewed and approved by the Risk and Compliance Committee of
the Board of Directors.
underwriting,
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. The Bancorp’s credit risk management strategy
is based on three core principles: conservatism, diversification and
monitoring. The Bancorp believes that effective credit risk
management begins with conservative lending practices. These
practices include conservative exposure and counterparty limits and
conservative
collection
standards. The Bancorp’s credit risk management strategy also
emphasizes diversification on a geographic, industry and customer
level as well as regular credit examinations and monthly
management reviews of
large credit exposures and credits
experiencing deterioration of credit quality. Lending officers with
the authority to extend credit are delegated specific authority
amounts, the utilization of which is closely monitored. Lending
activities are largely centralized, while ERM manages the policy and
authority delegation process directly. The Credit Risk Review
function, within ERM, provides objective assessments of the
quality of underwriting and documentation, the accuracy of risk
grades and the charge-off and reserve analysis process.
documentation
and
The Bancorp’s credit review process and overall assessment of
required allowances is based on quarterly assessments of the
probable estimated losses inherent in the loan and lease portfolio.
The Bancorp uses these assessments to promptly identify potential
problem loans or leases within the portfolio, maintain an adequate
reserve and take any necessary charge-offs. 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 two risk grading systems. The risk
grading system currently utilized for reserve analysis purposes
encompasses ten categories. The Bancorp also maintains a dual
risk rating system that provides for thirteen probabilities of default
grade categories and an additional six grade categories for
estimating actual losses given an event of default. The probability
of default and loss given default evaluations are not separated in
the ten-grade risk rating system. The Bancorp is in the process of
completing significant validation and testing of the dual risk rating
system prior to implementation for reserve analysis purposes. The
dual risk rating system is expected to be consistent with Basel II
expectations and allows for more precision in the analysis of
commercial credit risk. Scoring systems, various analytical tools
and delinquency monitoring are used to assess the credit risk in the
Bancorp’s homogenous consumer loan portfolios.
Commercial Portfolio
The Bancorp’s credit
includes
minimizing concentrations of risk through diversification. The
following table provides breakouts of the commercial loan and
industry
lease portfolio,
classification (as defined by the North American Industry
including held for sale, by major
risk management
strategy
Fifth Third Bancorp 39
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 26: COMMERCIAL LOAN AND LEASE PORTFOLIO EXPOSURE (a)
Outstanding
2007
Exposure Nonaccrual
Outstanding
2006
Exposure
Nonaccrual
As of December 31 ($ in millions)
By industry:
Real estate
Manufacturing
Construction
Retail trade
Transportation and warehousing
Financial services and insurance
Healthcare
Business services
Wholesale trade
Individuals
Other services
Accommodation and food
Other
Communication and information
Public administration
Entertainment and recreation
Agribusiness
Mining
Utilities
Total
By loan size:
Less than $200,000
$200,000 to $1 million
$1 million to $5 million
$5 million to $10 million
$10 million to $25 million
Greater than $25 million
Total
By state:
Ohio
Michigan
Florida
Illinois
Indiana
Kentucky
Tennessee
Pennsylvania
Missouri
All other states
$11,564
6,570
5,226
4,175
2,565
2,484
2,347
2,266
2,179
1,252
1,049
1,036
963
741
737
617
606
578
389
$47,334
3 %
13
28
26
13
17
100 %
26 %
20
11
9
8
5
3
2
1
15
14,450
14,365
8,534
7,251
3,076
6,916
4,007
4,251
4,127
1,626
1,455
1,470
1,897
1,439
957
873
788
1,090
1,210
79,782
3
10
23
23
14
27
100
147
28
258
29
21
6
15
25
16
15
17
21
59
1
-
6
3
3
2
672
9
24
43
19
5
-
100
10,652
5,198
5,490
3,655
2,097
1,509
1,860
1,862
1,827
1,364
959
860
578
567
792
602
609
288
370
41,139
4
16
32
17
21
10
100
13,196
11,443
8,963
6,515
2,432
4,855
3,208
3,640
3,642
1,785
1,373
1,323
1,269
1,073
930
841
782
637
1,187
69,094
3
12
27
16
24
18
100
50
22
69
27
4
8
9
16
11
13
14
10
4
1
-
2
8
3
-
271
13
34
48
5
-
-
100
30
18
9
9
8
5
3
2
1
15
100
20
36
23
6
9
2
1
-
-
3
100
25
22
10
10
9
6
3
1
1
13
100
28
19
9
10
9
6
3
2
1
13
100
36
19
9
8
15
8
1
-
-
4
100
100 %
Total
(a) Outstanding reflects total commercial customer loan and lease balances, including held for sale and net of unearned income, and exposure reflects total commercial customer lending commitments.
Classification System), by loan size and by state, illustrating the
diversity and granularity of the Bancorp’s portfolio.
large-ticket
The commercial portfolio
is characterized by 85% of
outstanding balances and exposures concentrated within the
Bancorp’s primary market areas of Ohio, Kentucky, Indiana,
Michigan, Illinois, Florida, Tennessee, Pennsylvania, and Missouri.
Exclusive of the national
leasing business, the
commercial portfolio is characterized by 91% of outstanding
balances and 89% of exposures concentrated within these nine
states. The following table provides further information on the
location of commercial real estate and construction industry loans
and leases.
TABLE 27: OUTSTANDING COMMERCIAL REAL ESTATE
AND CONSTRUCTION LOANS AND LEASES BY STATE
As of December 31 ($ in millions)
Michigan
Ohio
Florida
Illinois
Indiana
Kentucky
Tennessee
All other states
Total
2007
$4,692
4,167
2,790
1,425
1,298
791
496
1,131
$16,790
2006
4,637
4,072
2,543
1,337
1,294
794
399
1,066
16,142
40
Fifth Third Bancorp
As of December 31, 2007, the Bancorp had outstanding
homebuilder exposure of $4.4 billion, outstanding loans of $2.9
billion with $176 million in nonaccrual loans.
Residential Mortgage Portfolio
The Bancorp manages credit risk in the mortgage portfolio through
conservative underwriting and documentation standards and
geographic and product diversification. The Bancorp may also
package and sell loans in the portfolio without recourse or may
purchase mortgage insurance for the loans sold in order to mitigate
credit risk.
Certain mortgage products have contractual features that may
increase credit exposure to the Bancorp in the event of a decline in
housing prices. These types of mortgage products offered by the
Bancorp include loans with high LTV ratios, multiple loans on the
same collateral that when combined result in a high LTV (“80/20”)
and interest-only loans. Table 28 shows the Bancorp’s originations
of these products for the years ended December 31, 2007 and
2006. The Bancorp does not originate mortgage loans that permit
customers to defer principal payments or make payments that are
less than the accruing interest. Table 29 provides the amount of
these loans as a percent of the residential mortgage loans in the
Bancorp’s portfolio and the delinquency rates of these loan
products as of December 31, 2007 and 2006. The Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 28: RESIDENTIAL MORTGAGE ORIGINATIONS
For the years ended December 31 ($ in millions)
Greater than 80% LTV with no mortgage insurance
Interest-only
Greater than 80% LTV and interest-only
80/20 loans
80/20 loans and interest only
2007
$265
1,720
265
212
62
TABLE 29: RESIDENTIAL MORTGAGE OUTSTANDINGS
Balance
$2,146
1,620
493
-
As of December 31 ($ in millions)
Greater than 80% LTV with no mortgage insurance
Interest-only
Greater than 80% LTV and interest-only
80/20 loans
previously sold certain of these mortgage products in the secondary
market with recourse. The outstanding balances and delinquency
rates for these loans sold with recourse as of December 31, 2007
and 2006 were $1.5 billion and 3.03% and $1.3 billion and 1.74%,
respectively. Charge-offs on recourse loans were not material for
the years ended December 31, 2007 and 2006. The balance of the
mortgage portfolio not included in Table 29 is characterized by in
footprint mortgage loans with less than 80% loan-to-value, with
approximately two-thirds representing fixed rate mortgages.
The Bancorp originates certain non-conforming residential
mortgage loans known as “Alt-A” loans. Borrower qualifications
are comparable to other conforming residential mortgage products
and the Bancorp has sold, without recourse, the majority of these
loans into the secondary market. For the years ended December
31, 2007 and 2006, the Bancorp originated $756 million and $341
million of Alt-A mortgage loans. During 2007, approximately $152
million of Alt-A mortgage loans were moved from held for sale to
held for investment, and an impairment charge of approximately $3
million was recognized in mortgage banking net revenue. As of
December 31, 2007, the Bancorp held $134 million of Alt-A
mortgage loans for investment with approximately $2.5 million in
nonaccrual. As market conditions for these loans changed
throughout 2007, management responded by making adjustments
to underwriting standards and Alt-A loans are being underwritten
and sold under an agency flow sale agreement.
Home Equity Portfolio
The home equity portfolio is characterized by 86% of outstanding
balances within the Bancorp’s Midwest footprint of Ohio,
Michigan, Kentucky, Indiana and Illinois. The portfolio has an
average FICO score of 734 as of December 31, 2007, comparable
with 735 at December 31, 2006 and 738 at December 31, 2005.
Further detail on location and origination LTV ratios is included in
Table 30.
Analysis of Nonperforming Assets
A summary of nonperforming assets is included in Table 31.
Nonperforming assets include: (i) nonaccrual loans and leases for
which ultimate collectibility of the full amount of the principal
and/or interest is uncertain; (ii) restructured consumer loans which
have not yet met the requirements to be classified as a performing
TABLE 30: HOME EQUITY OUTSTANDINGS
Percent of total
2%
15
2
2
1
2006
$679
1,283
180
431
17
Percent of total
7%
14
2
5
-
2007
Percent
of total
21 %
16
5
-
2006
Percent
of total
23%
15
7
-
Delinquency
Ratio
Delinquency
Ratio
3.79%
.14
1.15
.72
8.93%
1.83
5.36
-
Balance
$1,893
1,227
560
28
asset; (iii) commercial loans and leases that have been renegotiated
to provide for a reduction or deferral of interest or principal
because of deterioration in the financial position of the borrower
and (iv) other assets, including other real estate owned and
repossessed equipment. Loans are placed on nonaccrual status
when the principal or interest is past due 90 days or more (unless
the loan is both well secured and in process of collection) and
payment of the full principal and/or interest under the contractual
terms of the loan are not expected. Additionally, loans are placed
on nonaccrual status upon deterioration of the financial condition
of the borrower or upon the restructuring of the loan. When a
loan is placed on nonaccrual status, the accrual of interest,
amortization of loan premium, accretion of loan discount and
amortization or accretion of deferred net loan fees or costs are
discontinued and previously accrued but unpaid
is
reversed. Commercial loans on nonaccrual status are reviewed for
impairment at least quarterly. If the principal or a portion of
principal is deemed a loss, the loss amount is charged off to the
allowance for loan and lease losses.
interest
As of December 31, 2007 and 2006, nonperforming assets as
a percentage of total loans and leases and other assets, including
other real estate owned were 1.32% and .61%, respectively. Total
nonperforming assets were $1.1 billion at December 31, 2007, an
increase of $609 million compared to $455 million at December 31,
2006. The composition of nonaccrual credits continues to shift as
84% of nonaccrual credits were secured by real estate as of
December 31, 2007 compared to 69% as of December 31, 2006
and 48% as of December 31, 2005.
Commercial nonaccrual credits increased from $271 million as
of December 31, 2006 to $672 million as of December 31, 2007.
The majority of the increase was driven by the real estate and
construction industries in the Southern Florida, Northeastern Ohio
and Eastern Michigan affiliates. These affiliates combined to
account for 42% of commercial nonaccrual credits as of December
31, 2007. As shown in Table 26, the real estate and construction
industries contributed to more than two-thirds of the increase in
nonaccrual credits. At year end, a total of $57 million in
nonaccrual credits were the result of the Crown acquisition.
Consumer nonaccrual credits increased from $81 million as of
December 31, 2006 to $221 million as of December 31, 2007. The
As of December 31 ($ in millions)
Ohio
Michigan
Indiana
Illinois
Kentucky
Florida
All other states
Total
2007
LTV less
than 80%
$1,873
1,393
628
637
508
536
174
$5,749
LTV greater
than 80%
$2,039
1,295
641
545
594
291
689
$6,094
Delinquency
Ratio
1.50%
2.06
1.95
1.66
1.52
2.93
3.07
1.90%
LTV less
than 80%
$2,006
1,529
684
617
533
418
153
$5,940
2006
LTV greater
than 80%
$2,124
1,354
686
582
631
229
678
$6,284
Delinquency
Ratio
1.30%
1.69
1.66
1.19
1.11
.96
1.61
1.41%
Fifth Third Bancorp 41
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 31: SUMMARY OF NONPERFORMING ASSETS AND DELINQUENT LOANS
As of December 31 ($ in millions)
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgages loans(a)
Home equity(b)(d)
Automobile loans(d)
Credit card(c)
Other consumer loans and leases(d)
Total nonaccrual loans and leases
2007
$175
243
249
5
121
91
3
5
1
893
-
171
$1,064
2006
127
84
54
6
38
40
3
-
-
352
-
103
455
Commercial renegotiated loans and leases
Repossessed personal property and other real estate owned
Total nonperforming assets
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgages loans(e)
Home equity(d)
Automobile loans(d)
Credit card
Other consumer loans and leases(d)
Total 90 days past due loans and leases
Nonperforming assets as a percent of total loans, leases and other assets,
including other real estate owned
$44
73
67
4
186
72
13
31
1
$491
38
17
6
2
68
51
11
16
1
210
2005
140
51
31
5
30
-
37
294
-
67
361
20
7
7
1
53
10
57
155
2004
105
51
13
5
24
-
30
228
1
74
303
21
8
5
1
43
13
51
142
2003
110
42
19
19
25
-
27
242
8
69
319
14
8
4
1
51
13
54
145
Allowance for loan and lease losses as a percent of nonperforming assets
(a) Residential mortgage nonaccrual loans include debt restructurings of $29 million as of December 31, 2007.
(b) Home equity nonaccrual loans include debt restructurings of $46 million as of December 31, 2007.
(c) All nonaccrual credit card balances are the result of debt restructurings.
(d) Prior to 2006, other consumer loans and leases include home equity, automobile and other consumer loans and leases.
(e) Information for all periods presented excludes advances made pursuant to servicing agreements to Government National Mortgage Association (“GNMA”) mortgage pools whose repayments are
insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. As of December 31, 2007, 2006 and 2005, these advances were $25 million, $14
million and $13 million, respectively. Information prior to 2004 was not available.
1.32 %
88
.61
170
.52
206
.51
235
.61
219
increase in consumer nonaccrual credits is primarily attributable to
the housing markets in the Michigan and Florida affiliates and the
restructuring of certain high risk loans. Michigan and Florida
nonaccrual credits accounted for 63% of the increase in nonaccrual
credits in the consumer loan portfolio and, as of December 31,
2007, represented approximately half of the consumer nonaccrual
credits. The Bancorp has devoted significant attention to loss
mitigation activities and, during the past year, decreased the timing
between delinquency and repossession of automobiles and
proactively restructured certain real estate loans. Consumer
restructured loans are recorded as nonaccrual credits until there is a
sustained period of payment by the borrower, generally a minimum
of six months of payments in accordance with the loans’ modified
terms. Consumer restructured loans contributed approximately
$80 million to nonaccrual loans as of December 31, 2007.
Included in nonaccrual credits as of December 31, 2007 were
$43 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 2007 and 2006, interest income of $22 million and $10
million, respectively, was recorded on nonaccrual and renegotiated
loans and leases. For the years ended 2007 and 2006, additional
interest income of $144 million and $85 million, respectively,
would have been recorded if the nonaccrual and renegotiated loans
and leases had been current in accordance with the original terms.
Although this value helps demonstrate the costs of carrying
nonaccrual credits, the Bancorp does not expect to recover the full
amount of interest as nonaccrual loans and leases are generally
carried below their principal balance.
Analysis of Net Loan Charge-offs
Net charge-offs as a percent of average loans and leases were 61 bp
for 2007, compared to 44 bp for 2006. Table 32 provides a
summary of credit loss experience and net charge-offs as a
percentage of average loans and leases outstanding by loan
category.
42
Fifth Third Bancorp
loans outstanding
increased to 43 bp
The ratio of commercial loan net charge-offs to average
commercial
in 2007
compared to 34 bp in 2006 due to increases in net charge-offs in
the commercial mortgage and commercial construction captions as
homebuilders and developers were affected by the downturn in the
real estate markets. Commercial net charge-offs in the Michigan
affiliates grew $30 million over 2006, with the most stress
appearing in the Detroit metro area. Commercial net charge-offs
in the Florida affiliates grew $13 million over 2006. The Chicago
affiliate also displayed a $21 million increase in commercial charge-
offs, primarily due to a $15 million fraud related loss during the
fourth quarter of 2007.
The ratio of consumer loan net charge-offs to average
consumer loans outstanding increased to 84 bp in 2007 compared
to 55 bp in 2006. Residential mortgage charge-offs increased 21 bp
compared to 2006, reflecting increased foreclosure rates in the
Bancorp’s key lending markets and the related increase in severity
of loss on mortgage loans. During 2007, Florida, Michigan and
Ohio were ranked among the top states in total mortgage
foreclosures. These foreclosures not only added to the volume of
charge-offs, but also hampered the Bancorp’s ability to recover the
value of the homes collateralizing the mortgages as they
contributed to declining home prices. Florida affiliates experienced
the most stress, with residential mortgage net charge-offs
increasing $11 million over 2006. Home equity charge-offs
increased $41 million to 82 bp of average loans, primarily due to
increases in the Michigan and Florida affiliates and among those
products originated through a broker channel. Brokered home
equity loans represented 50% of home equity charge-offs during
2007 despite representing only 23% of home equity lines and loans
as of December 31, 2007. Management responded to the
performance of the brokered home equity portfolio by reducing
originations in 2007 of this product by 64% compared to 2006 and,
at the end of 2007, eliminating this channel of origination. The
ratio of automobile loan net charge-offs to average automobile
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 32: SUMMARY OF CREDIT LOSS EXPERIENCE
For the years ended December 31 ($ in millions)
Losses charged off:
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total losses
Recoveries of losses previously charged off:
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total recoveries
Net losses charged off:
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
2007
$(121)
(46)
(29)
(1)
(43)
(106)
(117)
(54)
(27)
(544)
12
2
-
1
-
9
32
8
18
82
(109)
(44)
(29)
-
(43)
(97)
(85)
(46)
(9)
$(462)
Total net losses charged off
Net charge-offs as a percent of average loans and leases (excluding held for sale):
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total consumer loans and leases
Total net losses charged off
.49 %
.40
.51
.01
.43
.48
.82
.83
3.55
.83
.84
.61 %
2006
(131)
(27)
(7)
(4)
(23)
(65)
(87)
(36)
(28)
(408)
24
3
-
5
-
9
30
5
16
92
(107)
(24)
(7)
1
(23)
(56)
(57)
(31)
(12)
(316)
.53
.25
.11
(.03)
.34
.27
.46
.60
3.65
.91
.55
.44
2005
(99)
(13)
(5)
(38)
(19)
(60)
(63)
(46)
(30)
(373)
24
3
1
1
-
10
18
5
12
74
(75)
(10)
(4)
(37)
(19)
(50)
(45)
(41)
(18)
(299)
.41
.10
.08
1.06
.35
.23
.44
.53
5.65
1.06
.57
.45
2004
(95)
(14)
(7)
(8)
(15)
(52)
(56)
(35)
(39)
(321)
14
5
-
1
-
10
18
6
15
69
(81)
(9)
(7)
(7)
(15)
(42)
(38)
(29)
(24)
(252)
.54
.12
.17
.21
.35
.25
.44
.48
3.92
.98
.56
.45
2003
(153)
(9)
(4)
(24)
(24)
(52)
(41)
(31)
(42)
(380)
16
2
-
2
-
15
12
5
16
68
(137)
(7)
(4)
(22)
(24)
(37)
(29)
(26)
(26)
(312)
1.00
.10
.10
.72
.64
.53
.43
.40
4.70
1.06
.61
.63
loans increased to 83 bp in 2007 compared to 60 bp in 2006
displaying an expected increase due to a shift in the portfolio to a
higher percentage of used automobiles and an increase in loss of
severity due to a market surplus of used automobiles. The net
charge-off ratio on credit card balances modestly declined
compared to the prior year primarily due to a large origination of
card balances in 2007. Although the credit characteristics of the
credit card portfolio have been maintained during the origination
of new cards, including the weighted average FICO and average
line outstanding, the Bancorp does expect the charge-off ratio to
increase as the portfolio matures. The Bancorp employs a risk-
adjusted pricing methodology to ensure adequate compensation is
received for those products that have higher credit costs.
Allowance for Credit Losses
The allowance for credit losses is comprised of the allowance for
loan and lease losses and the reserve for unfunded commitments.
The allowance for loan and lease losses provides coverage for
probable and estimable losses in the loan and lease portfolio. The
Bancorp evaluates the allowance each quarter to determine its
adequacy to cover inherent losses. Several factors are taken into
consideration in the determination of the overall allowance for loan
and lease losses, including the unallocated component. These
factors include, but are not limited to, the overall risk profile of the
loan and lease portfolios, net charge-off experience, the extent of
impaired loans and leases, the level of nonaccrual loans and leases,
the level of 90 days past due loans and leases and the overall
percentage level of the allowance for loan and lease losses. The
trends, credit
Bancorp also considers overall asset quality
administration
risk
identification practices, credit policy and underwriting practices,
overall portfolio growth, portfolio concentrations and current
national and local economic conditions that might impact the
portfolio.
and portfolio management practices,
In 2007, the Bancorp has not substantively changed any
material aspect to its overall approach in the determination of the
allowance for loan and lease losses and there have been no material
changes in criteria or estimation techniques as compared to prior
periods that impacted the determination of the current period
allowance. In addition to the allowance for loan and lease losses,
the Bancorp maintains a reserve for unfunded commitments. The
methodology used to determine the adequacy of this reserve is
similar to the Bancorp’s methodology for determining the
allowance for loan and lease losses. The provision for unfunded
commitments is included in other noninterest expense on the
Consolidated Statements of Income. Table 33 shows the changes
in the allowance for credit losses during 2007.
Fifth Third Bancorp 43
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 33: CHANGES IN ALLOWANCE FOR CREDIT LOSSES
For the years ended December 31 ($ in millions)
Balance, beginning of year
Net losses charged off
Provision for loan and lease losses
Net change in reserve for unfunded commitments
Balance, end of year
Components of allowance for credit losses:
Allowance for loan and lease losses
Reserve for unfunded commitments
Total allowance for credit losses
2007
$847
(462)
628
19
$1,032
$937
95
$1,032
2006
814
(316)
343
6
847
771
76
847
2005
785
(299)
330
(2)
814
744
70
814
2004
770
(252)
268
(1)
785
713
72
785
2003
683
(312)
399
-
770
697
73
770
Certain inherent but undetected losses are probable within the
loan and lease portfolio. An unallocated component to the
allowance for loan and lease losses is maintained to recognize the
imprecision in estimating and measuring loss. The Bancorp’s
current methodology for determining this measure is based on
historical loss rates, current credit grades, specific allocation on
impaired commercial credits and other qualitative adjustments.
Approximately 90% of the required reserves come from the
baseline historical loss rates, specific reserve estimates and current
credit grades; while 10% comes from qualitative adjustments. As a
result, the required reserves tend to slightly lag the deterioration in
the portfolio due to the heavy reliance on realized historical losses
and the credit grade rating process. Consequently, a larger
unallocated allowance is required towards the end of the stronger
part of the credit cycle. As the credit cycle deteriorates and the
actual
the Bancorp’s
methodology will result in a lower unallocated allowance as the
incurred losses are reflected into the main components of the
methodology that drive the majority of the required reserve
calculations. Unallocated allowance as a percent of total portfolio
loans and leases for the year ended December 31, 2007 and 2006
were .06%.
loss rates and downgrades
increase,
The allowance for loan and lease losses at December 31, 2007
increased to 1.17% of the total portfolio loans and leases compared
to 1.04% at December 31, 2006. This increase is reflective of a
number of factors including: the increase in delinquencies, the real
estate price deterioration in some the Bancorp’s key lending
markets, the increase in automobile loans and credit card balances
and the modest decline in economic conditions. These factors
were the primary drivers of the increased reserve factors for most
of the Bancorp’s loan categories. Table 34 provides the amount of
the allowance for loan and lease losses by category.
Real estate price deterioration, as determined by the Home
Price Index, was most prevalent in Michigan, due in part to
cutbacks by automobile manufacturers, and Florida, due to past
real estate price appreciation and related overdevelopment. The
Bancorp has sizable exposure in both of these markets. The
deterioration in real estate values increased the expected loss once a
loan becomes delinquent, particularly for home equity loans with
high loan-to-value ratios.
During 2007, the Bancorp grew credit card balances as part of
an initiative to more fully develop relationships with its current
customers. In addition, the composition of the automobile loan
portfolio changed to
larger percentage of used
automobiles. Although these products naturally produce higher
charge-offs, which creates the need for a larger allowance for credit
losses, the Bancorp employs a risk-adjusted pricing methodology to
ensure adequate compensation is received for those products that
have higher credit costs.
include a
If trends in charge-offs, delinquent loans and economic
conditions continue to deteriorate in 2008, the Bancorp would
expect to record a larger allowance for credit losses in accordance
with its allowance methodology. Overall, the Bancorp’s long
history of low exposure limits, lack of exposure to subprime
lending businesses, centralized risk management and its diversified
portfolio reduces the likelihood of significant unexpected credit
losses.
TABLE 34: ATTRIBUTION OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO PORTFOLIO LOANS AND LEASES
As of December 31 ($ in millions)
Allowance attributed to:
Commercial loans
Commercial mortgage loans
Commercial construction loans
Residential mortgage loans
Consumer loans
Lease financing
Unallocated
2005
2006
2007
2004
252
95
49
51
247
29
48
771
201
78
46
38
183
56
142
744
$271
135
98
67
287
32
47
$937
210
73
42
45
160
47
136
713
Total allowance for loan and lease losses
Portfolio loans and leases:
Commercial loans
Commercial mortgage loans
Commercial construction loans
Residential mortgage loans
Consumer loans
Lease financing
Total portfolio loans and leases
Attributed allowance as a percent of respective portfolio loans:
Commercial loans
Commercial mortgage loans
Commercial construction loans
Residential mortgage loans
Consumer loans
Lease financing
Unallocated (as a percent of total portfolio loans and leases)
Total portfolio loans and leases
44
Fifth Third Bancorp
$24,813
11,862
5,561
10,540
22,943
4,534
$80,253
1.09 %
1.14
1.77
.63
1.25
.69
.06
1.17 %
20,831
10,405
6,168
8,830
23,204
4,915
74,353
1.21
.91
.80
.58
1.06
.59
.06
1.04
19,253
9,188
6,342
7,847
22,006
5,289
69,925
1.05
.85
.72
.49
.83
1.06
.20
1.06
16,107
7,636
4,347
7,366
18,875
5,477
59,808
1.31
.96
.96
.61
.85
.86
.23
1.19
2003
234
77
34
29
146
64
113
697
14,244
6,894
3,301
4,760
17,398
5,711
52,308
1.65
1.12
1.03
.61
.84
1.12
.22
1.33
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
MARKET RISK MANAGEMENT
Market risk arises from the potential for market fluctuations in
interest rates, foreign exchange rates and equity prices that may
result in potential reductions in net income. Interest rate risk, a
component of market risk, is the exposure to adverse changes in
net interest income or financial position due to changes in interest
rates. Management considers interest rate risk a prominent
market risk in terms of its potential impact on earnings. Interest
rate risk can occur for any one or more of the following reasons:
•
•
•
Assets and liabilities may mature or reprice at different
times;
Short-term and long-term market interest rates may
change by different amounts; or
The expected 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
originations, the value of servicing rights and other sources of the
Bancorp’s earnings. Stability of the Bancorp’s net interest income
is largely dependent upon the effective management of interest
rate risk. Management continually reviews the Bancorp’s balance
sheet composition and models the interest rate risk, and possible
actions to reduce this risk, given numerous possible future interest
rate scenarios.
interest
Net Interest Income Simulation Model
The Bancorp employs a variety of measurement techniques to
identify and manage its interest rate risk, including the use of an
earnings simulation model to analyze net
income
sensitivity to changing interest rates. The model is based on
contractual and assumed cash flows and repricing characteristics
for all of the Bancorp’s financial instruments, and incorporates
market-based assumptions regarding the effect of changing
interest rates on the prepayment rates of certain assets and
liabilities.
includes senior management
projections of the future volume and pricing of each of the
product lines offered by the Bancorp as well as other pertinent
assumptions. 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 model also
The Bancorp’s Executive Asset Liability 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
activities of ALCO, the Bancorp has a Market Risk Management
function as part of ERM that provides independent oversight of
market risk activities. The Bancorp’s current interest rate risk
exposure is evaluated by measuring the anticipated change in net
interest income over 12-month and 24-month horizons assuming
a 200 bp parallel ramped increase or decrease in market interest
rates. In accordance with the current policy, the rate movements
are assumed to occur over one year and are sustained thereafter.
Table 35 shows the Bancorp's estimated earnings sensitivity
profile and the ALCO policy limits on the asset and liability
positions as of December 31, 2007:
TABLE 35: ESTIMATED EARNINGS SENSITIVITY PROFILE
Change in Net Interest
Income (FTE)
12
Months
(.31)%
(.30)
1.11
1.44
13 to 24
Months
3.19
1.53
.60
(2.70)
Change in
Interest
Rates (bp)
+200
+100
-100
-200
ALCO Policy Limits
12
Months
(5.00)
-
-
(5.00)
13 to 24
Months
(7.00)
-
-
(7.00)
Economic Value of Equity
The Bancorp also employs economic value of equity (“EVE”) as a
measurement tool in managing interest rate sensitivity. Whereas
net interest income simulation highlights exposures over a
relatively short time horizon, the EVE analysis incorporates all
cash flows over the estimated remaining life of all balance sheet
and derivative positions. The EVE of the balance sheet, at a point
in time, is defined as the discounted present value of asset and
derivative cash flows less the discounted value of liability cash
flows. The sensitivity of EVE to changes in the level of interest
rates is a measure of the longer-term interest rate risk. In contrast
to the net interest income simulation, which assumes interest rates
will change over a period of time, EVE uses instantaneous
changes in rates. EVE values only the current balance sheet and
does not incorporate the growth assumptions used in the net
interest income simulation model. As with the net interest income
simulation model, assumptions about the timing and variability of
balance sheet cash flows are critical in the EVE analysis.
Particularly important are the assumptions driving prepayments
and the expected changes in balances and pricing of the
transaction deposit portfolios. The following table shows the
Bancorp’s EVE sensitivity profile as of December 31, 2007:
TABLE 36: ESTIMATED EVE SENSITIVITY PROFILE
Change in
Interest Rates (bp)
+200
-200
Change in EVE
(8.18)%
2.06
ALCO Policy Limits
(20.0)
(20.0)
While an instantaneous shift in interest rates is used in this
analysis to provide an estimate of exposure, the Bancorp believes
that a gradual shift in interest rates would have a much more
modest impact. Since EVE measures the discounted present
value of cash flows over the estimated lives of instruments, the
change in EVE does not directly correlate to the degree that
earnings would be impacted over a shorter time horizon (i.e., the
current fiscal year). Further, EVE does not take into account
factors such as future balance sheet growth, changes in product
mix, changes in yield curve relationships and changing product
spreads that could mitigate the adverse impact of changes in
interest rates. The net interest income simulation and EVE
analyses do not necessarily
that
management may undertake to manage this risk in response to
anticipated changes in interest rates.
include certain actions
Use of Derivatives to Manage Interest Rate Risk
An integral component of the Bancorp’s interest rate risk
management strategy is its use of derivative instruments to
minimize significant fluctuations in earnings and cash flows
caused by changes in market interest rates. Examples of
derivative instruments that the Bancorp may use as part of its
interest rate risk management strategy include interest rate swaps,
interest rate floors, interest rate caps, forward contracts, principal
only swaps, options and swaptions.
As part of its overall risk management strategy relative to its
mortgage banking activity, the Bancorp enters into forward
contracts accounted
to
economically hedge interest rate lock commitments that are also
considered free-standing derivatives. In addition, the Bancorp
hedges its exposure to mortgage loans held for sale.
free-standing derivatives
for as
The Bancorp also establishes derivative contracts with
reputable third parties to economically hedge significant exposures
assumed in commercial customer accommodation derivative
contracts. Generally, these contracts have similar terms in order
to protect the Bancorp from market volatility. Credit risks arise
from the possible inability of counterparties to meet the terms of
their contracts, which the Bancorp minimizes through approvals,
limits and monitoring procedures. The notional amount and fair
values of these derivatives as of December 31, 2007 are included
in Note 10 of the Notes to Consolidated Financial Statements.
Fifth Third Bancorp 45
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 37: PORTFOLIO LOAN AND LEASE PRINCIPAL CASH FLOWS
As of December 31, 2007 ($ in millions)
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total
Less than 1 year
$13,266
5,154
3,860
615
2,795
2,300
3,305
191
486
$31,972
1-5 years
10,035
4,946
1,302
1,523
4,066
4,878
5,377
1,400
536
34,063
Greater than 5
years
1,512
1,762
399
1,599
3,679
4,696
519
-
52
14,218
Total
24,813
11,862
5,561
3,737
10,540
11,874
9,201
1,591
1,074
80,253
TABLE 38: PORTFOLIO LOAN AND LEASE PRINCIPAL CASH FLOWS OCCURRING AFTER ONE YEAR
Interest Rate
As of December 31, 2007 ($ in millions)
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total
Portfolio Loans and Leases and Interest Rate Risk
Although the Bancorp’s portfolio loans and leases contain both
fixed and floating/adjustable rate products, the rates of interest
earned by the Bancorp on the outstanding balances are generally
established for a period of time. The interest rate sensitivity of
loans and leases is directly related to the length of time the rate
earned is established. Table 37 shows a summary of the expected
principal cash flows of the Bancorp’s portfolio loans and leases as
of December 31, 2007. Additionally, Table 38 shows a summary
of expected principal cash flows occurring after one year as of
December 31, 2007.
Mortgage Servicing Rights and Interest Rate Risk
The net carrying amount of the MSR portfolio was $610 million
as of December 31, 2007 compared to $519 million as of
December 31, 2006. The Bancorp maintains a non-qualifying
hedging strategy relative to its mortgage banking activity in order
to manage a portion of the risk associated with changes in the
value of its MSR portfolio as a result of changing interest rates.
The value of servicing rights can fluctuate sharply depending on
changes in interest rates and other factors. Generally, as interest
rates decline and loans are prepaid to take advantage of
refinancing opportunities, the total value of existing servicing
rights declines because no further servicing fees are collected on
repaid loans.
The decrease in interest rates, particularly during the fourth
quarter of 2007, led to the recognition of $22 million in temporary
impairment of servicing rights during 2007, compared to a
recovery of temporary impairment of $19 million in 2006.
Servicing rights are deemed temporarily
impaired when a
borrower’s loan rate is distinctly higher than prevailing market
rates. Impairment on servicing rights is reversed when the
level commensurate with the
prevailing rates return to a
borrower’s loan rate. The Bancorp recognized a gain of $29
million in 2007 and a loss of $6 million in 2006 on free-standing
derivatives and the sale of securities used to economically hedge
the MSR portfolio. See Note 9 of the Notes to Consolidated
Financial Statements for further discussion on servicing rights.
Foreign Currency Risk
The Bancorp enters into foreign exchange derivative contracts to
economically hedge certain foreign denominated loans. The
derivatives are classified as free-standing instruments with the
revaluation gain or loss being recorded within other noninterest
46
Fifth Third Bancorp
Fixed
$2,546
2,339
432
3,122
4,217
1,673
5,896
470
579
$21,274
Floating or Adjustable
9,001
4,369
1,269
-
3,528
7,901
-
930
9
27,007
income on the Consolidated Statements of Income. The balance
of the Bancorp’s foreign denominated loans at December 31,
2007 was approximately $329 million compared to approximately
$219 million at December 31, 2006. The Bancorp also enters into
foreign exchange contracts for the benefit of commercial
customers involved in international trade to hedge their exposure
to foreign currency fluctuations. The Bancorp has several internal
controls in place to ensure excessive risk is not being taken in
include an
to customers.
providing
independent determination of currency volatility and credit
equivalent exposure on these contracts, counterparty credit
approvals and country limits.
this service
These
LIQUIDITY RISK MANAGEMENT
The goal of liquidity management is to provide adequate funds to
meet changes in loan and lease demand, unexpected deposit
withdrawals and other contractual obligations. A summary of
certain obligations and commitments to make future payments
under contracts is included in Table 42. Mitigating liquidity risk is
accomplished by maintaining liquid assets in the form of
investment securities, maintaining sufficient unused borrowing
capacity in the national money markets and delivering consistent
growth in core deposits. The estimated weighted-average life of
the available-for-sale portfolio was 6.8 years at December 31,
2007, based on current prepayment expectations. Of the $10.7
billion (fair value basis) of securities in the available-for-sale
portfolio at December 31, 2007, $2.0 billion in principal and
interest is expected to be received in the next 12 months, and an
additional $1.5 billion is expected to be received in the next 13 to
24 months. In addition to available-for-sale 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 fluctuations and to manage liquidity, the Bancorp
has developed securitization and sale procedures for several types
of interest-sensitive assets. A majority of the long-term, fixed-rate
single-family residential mortgage loans underwritten according to
FHLMC or Federal National Mortgage Association (“FNMA”)
guidelines are sold for cash upon origination. Additional assets
such as jumbo fixed-rate residential mortgages, certain floating
rate short-term commercial loans, certain floating-rate home
equity loans, certain automobile loans and other consumer loans
are also capable of being securitized, sold or transferred off-
balance sheet. For the year ended December 31, 2007 and 2006,
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 39: AGENCY RATINGS
As of December 31, 2007
Fifth Third Bancorp:
Commercial paper
Senior debt
Subordinated debt
Fifth Third Bank and Fifth Third Bank (Michigan):
Short-term deposit
Long-term deposit
Senior debt
Subordinated debt
Moody’s
Standard and Poor’s
Fitch
Prime-1
Aa3
A1
Prime-1
Aa2
Aa2
Aa3
A-1
A+
A
A-1+
AA-
AA-
A+
F1+
AA-
A+
F1+
AA
AA-
A+
DBRS
R-1M
AAL
A
R-1H
AA
loans totaling $12.2 billion and $9.2 billion, respectively, were
sold, securitized or transferred off-balance sheet.
In 2007, an indirect, wholly-owned special purpose subsidiary
of the Bancorp established an effective shelf registration with the
SEC to issue securities backed by automobile loans originated by
the Bancorp’s Ohio and Michigan subsidiary banks. As of
December 31, 2007, the Bancorp held $2.0 billion in held for sale
automobile loans. The effect of the forecasted sale and
securitization of these loans on the Bancorp’s financial results will
depend on future market developments and related management
decisions.
Additionally, the Bancorp has a shelf registration in place
with the SEC permitting ready access to the public debt markets
and qualifies as a “well-known seasoned issuer” under SEC rules.
As of December 31, 2007, $5.8 billion of debt or other securities
were available for issuance from this shelf registration under the
current Bancorp’s Board of Directors’ authorizations. The
Bancorp also has $16.2 billion of funding available for issuance
through private offerings of debt securities pursuant to its bank
note program. These sources, in addition to a 9.35% average
equity capital base, provide the Bancorp with a stable funding
base.
Core deposits have historically provided the Bancorp with a
sizeable source of relatively stable and low cost funds. The
Bancorp’s average core deposits and shareholders’ equity funded
70% of its average total assets during 2007. 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. Certificates carrying a balance of $100,000 or more and
deposits in the Bancorp’s foreign branch located in the Cayman
Islands are wholesale funding tools utilized to fund asset growth.
Management does not rely on any one source of liquidity and
manages availability in response to changing balance sheet needs.
Table 39 provides Moody’s, Standard and Poor’s, Fitch’s and
DBRS deposit and debt ratings for the Bancorp, Fifth Third Bank
and Fifth Third Bank (Michigan). These debt ratings, along with
capital ratios above regulatory guidelines, provide the Bancorp
with additional access to liquidity.
TABLE 40: CAPITAL RATIOS
As of December 31 ($ in millions)
Average equity as a percent of average assets
Tangible equity as a percent of tangible assets
Tier I capital
Total risk-based capital
Risk-weighted assets
Regulatory capital ratios:
Tier I capital
Total risk-based capital
Tier I leverage
CAPITAL MANAGEMENT
The Bancorp maintains a relatively high level of capital as a
margin of safety for its depositors and shareholders. At
December 31, 2007, shareholders’ equity was $9.2 billion,
compared to $10.0 billion at December 31, 2006. Tangible equity
as a percent of tangible assets was 6.05% at December 31, 2007
and 7.79% at December 31, 2006. The declines in shareholders’
equity and the tangible equity ratios are primarily a result of $1.1
billion in share repurchases during 2007. In March, August, and
October of 2007, Fifth Third Capital Trust IV, V and VI, wholly-
owned non-consolidated subsidiaries of the Bancorp, issued $750
million, $575 million and $863 million of Tier I-qualifying trust
preferred securities to third party investors and invested the
proceeds in junior subordinated notes issued by the Bancorp. See
Note 13 of the Notes to Consolidated Financial Statements for
further discussion of these issuances.
Regulatory capital ratios were lower compared with the prior
year and were negatively affected by $1.1 billion in common stock
share repurchases throughout 2007, the approximately $690
million repurchase of Tier I-qualifying outstanding shares of its
Fifth Third REIT Series B Preferred Stock on December 27, 2007
and 12% growth in risk-weighted assets. The negative impacts of
these factors were partially offset by the previously mentioned
issuance of Tier I-qualifying trust preferred securities.
The Federal Reserve Board established quantitative measures
that assign risk weightings to assets and off-balance sheet items
and also define and set minimum regulatory capital requirements
(risk-based capital ratios). Additionally, the guidelines define
“well-capitalized” ratios for Tier I, total risk-based capital and
leverage as 6%, 10% and 5%, respectively. The Bancorp exceeded
these “well-capitalized” ratios for all periods presented. See Note
25 of the Notes to Consolidated Financial Statements for
additional information regarding regulatory capital ratios.
Dividend Policy and Stock Repurchase Program
The Bancorp views dividends and share repurchases as an
effective means of delivering value to shareholders. The
Bancorp’s common stock dividend policy reflects its earnings
outlook, desired payout ratios, the need to maintain adequate
capital levels and alternative investment opportunities. In 2007,
the Bancorp paid dividends per common share of $1.70, an
increase of eight percent over the $1.58 paid in 2006 and an
increase of 16% over the $1.46 paid in 2005.
The Bancorp’s stock repurchase program is an important
element of
The Bancorp’s
repurchase of equity securities is shown in Table 41 and details on
its capital planning activities.
2007
2006
9.35 % 9.32
7.79
6.05
$8,924
11,733
115,529
7.72 %
10.16
8.50
8,625
11,385
102,823
8.39
11.07
8.44
2005
9.06
6.87
8,209
10,240
98,293
8.35
10.42
8.08
2004
9.34
8.35
8,522
10,176
82,633
10.31
12.31
8.89
2003
10.01
8.56
8,168
9,992
74,477
10.97
13.42
9.11
Fifth Third Bancorp 47
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
TABLE 41: SHARE REPURCHASES
For the years ended December 31
35,685,112
Shares authorized for repurchase at January 1
20,000,000
Additional authorizations
(37,838,159)
Shares repurchases (a)
17,846,953
Shares authorized for repurchase at December 31
Average price paid per share
43.19
(a) Excludes 365,867, 357,612 and 134,435 shares repurchased during 2007, 2006 and 2005, respectively, in connection with various employee compensation plans. These
repurchases are not included in the calculation for average price paid and do not count against the maximum number of shares that may yet be repurchased under the Board of
Directors’ authorization.
15,807,045
30,000,000
(26,605,527)
19,201,518
$40.70
17,846,953
-
(2,039,908)
15,807,045
39.72
2006
2007
2005
the repurchase activity can be found in Note 18 of the Notes to
Consolidated Financial Statements. On May 21, 2007, the
Bancorp announced that its Board of Directors had authorized
management to purchase 30 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 specific price targets or an
expiration date. At December 31, 2007, the Bancorp had
approximately 19 million shares remaining under the current
Board of Directors’ authorization.
Off-Balance Sheet Arrangements
The Bancorp consolidates all of its majority-owned subsidiaries
and variable interest entities for which the Bancorp is the primary
beneficiary. Other entities, including certain joint ventures in
which there is greater than 20% ownership, but upon which the
Bancorp does not possess and cannot exert significant influence
or control, are accounted for by equity method accounting and
not consolidated. Those entities in which there is less than 20%
ownership are generally carried at the lower of cost or fair value.
In the ordinary course of business, the Bancorp enters into
financial transactions to extend credit, and various forms of
commitments and guarantees that may be considered off-balance
sheet arrangements. These transactions involve varying elements
of market, credit and liquidity risk. The nature and extent of these
transactions are provided in Note 14 of the Notes to Consolidated
Financial Statements. In addition, the Bancorp uses conduits,
asset securitizations and certain defined guarantees to provide a
source of funding. The use of these investment vehicles involves
differing degrees of risk. A summary of these transactions is
provided below.
Through December 31, 2007 and 2006, the Bancorp had
transferred, subject to credit recourse, certain primarily floating-
rate, short-term, investment grade commercial loans to an
unconsolidated qualified special purpose entity (“QSPE”) that is
wholly owned by an independent third-party. Generally, the loans
transferred provide a lower yield due to their investment grade
nature, and therefore transferring theses loans to the QSPE allows
the Bancorp to reduce its exposure to these lower yielding loan
assets while maintaining the customer relationships. Under
current accounting provisions, QSPEs are exempt
from
consolidation and, therefore, not included in the Bancorp’s
financial statements. The outstanding balance of such loans at
December 31, 2007 and 2006 was $3.0 billion and $3.4 billion,
respectively. As of December 31, 2007, the loans transferred had
a weighted average life of 2.3 years. These loans may be
transferred back to the Bancorp upon the occurrence of certain
specified events. These events include borrower default on the
loans
initiated against
underlying borrowers and ineligible loans transferred 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. In
2007 and 2006, the QSPE did not transfer any loans back to the
Bancorp as a result of a credit event. In addition, there have been
no material changes in the overall ratings of the loans transferred
to the QSPE. For the year ended December 31, 2007, the
transferred, bankruptcy preferences
48
Fifth Third Bancorp
Bancorp collected $1.1 billion in cash proceeds from loan
transfers and $30 million in fees from the QSPE. For the year
ended December 31, 2006, the Bancorp collected $1.6 billion in
cash proceeds from loan transfers and $30 million in fees from
the QSPE.
The QSPE issues commercial paper and uses the proceeds to
fund the acquisition of commercial loans transferred to it by the
Bancorp. The Bancorp also agrees to provide liquidity support to
the QSPE. As of December 31, 2007 and 2006, the liquidity
agreement was $5.0 billion and $3.8 billion, respectively. The
increase in liquidity facility during 2007 was due to the anticipated
increase in the volume of commercial loans transferred to the
QSPE. During the second half of 2007, the Bancorp purchased
asset-backed commercial paper from the QSPE and, as of
December 31, 2007, held $83 million of the QSPE’s asset-backed
commercial paper. The decision to purchase commercial paper
from the QSPE was due to widening credit spreads in the
commercial paper market and not due to a material difficulty in
obtaining funding. At December 31, 2007 and 2006, the
Bancorp’s loss reserve related to the liquidity support and credit
enhancement provided to the QSPE was $19 million and $16
million, respectively, and was recorded in other liabilities on the
Consolidated Balance Sheets.
interests,
interest-only strips, residual
The Bancorp utilizes securitization
trusts formed by
independent third parties to facilitate the securitization process of
residential mortgage loans, certain floating-rate home equity lines
of credit, certain automobile loans and other consumer loans.
The cash flows 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 flows relating to interests that
continue to held by the Bancorp. The Bancorp’s securitization
policy permits the retention of subordinated tranches, servicing
limited credit
rights,
recourse and, in some cases, a cash reserve account. At
December 31, 2007, the Bancorp had retained servicing assets
totaling $618 million, subordinated tranche security interests
totaling $3 million and residual interests totaling $10 million. At
December 31, 2006, the Bancorp had retained servicing assets
totaling $524 million, subordinated tranche security interests
totaling $15 million and residual interests totaling $21 million. For
the years ended December 31, 2007 and 2006 cash proceeds from
transfers reinvested in revolving-period securities totaled $73
million and $97 million, respectively. Additionally, for the years
ended December 31, 2007 and 2006, the Bancorp received fees of
$2 million and $5 million, respectively, from securitization trusts.
At December 31, 2007 and 2006, the Bancorp had provided
credit recourse on approximately $1.5 billion and $1.3 billion,
respectively, 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. In the event of nonperformance, the
Bancorp has rights to the underlying collateral value attached to
the loan. The Bancorp maintained an estimated credit loss reserve
of approximately $17 million and $18 million relating to these
residential mortgage loans sold at December 31, 2007 and 2006,
respectively. To determine the credit loss reserve, the Bancorp
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
used an approach that is consistent with its overall approach in
estimating credit losses for various categories of residential
mortgage loans held in its loan portfolio.
Contractual Obligations and Commitments
The Bancorp has certain obligations and commitments to make
future payments under contracts. The aggregate contractual
obligations and commitments at December 31, 2007 are shown in
Table 42. As of December 31, 2007, the Bancorp has
unrecognized tax benefits that, if recognized, would impact the
effective tax rate in future periods. Due to the uncertainty of the
amounts to be ultimately paid as well as the timing of such
payments, all uncertain tax liabilities that have not been paid have
been excluded from the Contractual Obligations and Other
Commitments table. Further detail on the impact of income taxes
is located in Note 21 of the Notes to the Consolidated Financial
Statements.
TABLE 42: CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
As of December 31, 2007 ($ in millions)
Contractually obligated payments due by period:
Total deposits (a)
Long-term debt (b)
Short-term borrowings (c)
Noncancelable leases (d)
Partnership investment commitments (e)
Pension obligations (f)
Capital expenditures (g)
Purchase obligations (h)
Total contractually obligated payments due by period
Other commitments by expiration period:
Less than
1 year
1-3 years
3-5 years
Greater than
5 years
$73,528
2,225
9,174
78
307
20
94
17
$85,443
308
3,623
-
142
-
41
-
27
4,141
60
1,008
-
120
-
38
-
8
1,234
1,549
6,001
-
394
-
83
-
-
8,027
Total
75,445
12,857
9,174
734
307
182
94
52
98,845
(b)
(c)
21,217
3,419
24,636
Commitments to extend credit (i)
Letters of credit (j)
Total other commitments by expiration period
(a)
$28,571
2,759
$31,330
Includes demand, interest checking, savings, money market, other time, certificates $100,000 and over and foreign office deposits. For additional information, see the Deposits
discussion in the Balance Sheet Analysis section of Management’s Discussion and Analysis.
In the banking industry, interest-bearing obligations are principally used to fund interest-earning assets. As such, interest charges on contractual obligations were excluded from
reported amounts, as the potential cash outflows would have corresponding cash inflows from interest-earning assets. See Note 13 of the Notes to Consolidated Financial Statements
for additional information on these debt instruments.
Includes federal funds purchased and borrowings with an original maturity of less than one year. For additional information, see Note 12 of the Notes to Consolidated Financial
Statements.
Includes both operating and capital leases.
(d)
(e) Includes low-income housing, historic tax and venture capital partnership investments.
(f) See Note 22 of the Notes to Consolidated Financial Statements for additional information on pension obligations.
(g) Includes commitments to various general contractors for work related to banking center construction.
(h) Represents agreements to purchase goods or services.
(i) Commitments to extend credit are agreements to lend, typically having fixed expiration dates or other termination clauses that may require payment of a fee. Many of the
49,788
8,522
58,310
-
1,849
1,849
-
495
495
commitments to extend credit may expire without being drawn upon. The total commitment amounts do not necessarily represent future cash flow requirements.
(j) Letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party.
Fifth Third Bancorp 49
MANAGEMENT’S ASSESSMENT AS TO THE EFFECTIVENESS OF INTERNAL CONTROL OVER FINANCIAL REPORTING
The Bancorp conducted an evaluation, under the supervision and with the participation of the Bancorp’s management, including the
Bancorp’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Bancorp’s disclosure
controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act). Based on the foregoing, as of the
end of the period covered by this report, the Bancorp’s Chief Executive Officer and Chief Financial Officer concluded that the Bancorp’s
disclosure controls and procedures were effective, in all material respects, to ensure that information required to be disclosed in the reports the
Bancorp files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required.
The management of Fifth Third Bancorp is responsible for establishing and maintaining adequate internal control, designed to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with accounting principles generally accepted in the United States of America. The Bancorp’s management assessed the
effectiveness of the Bancorp’s internal control over financial reporting as of December 31, 2007. 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 financial reporting
as of December 31, 2007. Based on this assessment, management believes that the Bancorp maintained effective internal control over financial
reporting as of December 31, 2007. The Bancorp’s independent registered public accounting firm, that audited the Bancorp’s consolidated
financial statements included in this annual report, has issued an attestation report on our internal control over financial reporting as of
December 31, 2007. This report appears on page 51 of the annual report.
The Bancorp’s management also conducted an evaluation of internal control over financial 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 financial reporting. Based on this evaluation, there has been no such change during the year covered by this report.
Kevin T. Kabat
President and Chief Executive Officer
February 22, 2008
Christopher G. Marshall
Executive Vice President and Chief Financial Officer
February 22, 2008
50
Fifth Third Bancorp
REPORTS OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Shareholders and Board of Directors of Fifth Third Bancorp:
We have audited the internal control over financial reporting of Fifth Third Bancorp and subsidiaries (the "Bancorp") as of December 31, 2007,
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 financial reporting and for its assessment of the
effectiveness of internal control over financial reporting, included in the accompanying Management’s Assessment as to the Effectiveness of Internal
Control over Financial Reporting. Our responsibility is to express an opinion on the Bancorp's internal control over financial 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 financial reporting was
maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a
material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such
other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and
principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel
to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in
accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures
that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the
company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial 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 financial statements.
Because of the inherent limitations of internal control over financial 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 evaluation
of the effectiveness of the internal control over financial 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, the Bancorp maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007,
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
financial statements as of and for the year ended December 31, 2007 of the Bancorp and our report dated February 22, 2008 expressed an unqualified
opinion on those consolidated financial statements.
Cincinnati, Ohio
February 22, 2008
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, 2007
and 2006, and the related consolidated statements of income, shareholders' equity, and cash flows for each of the three years in the period ended
December 31, 2007. These consolidated financial statements are the responsibility of the Bancorp's management. Our responsibility is to express an
opinion on these consolidated financial 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 financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for our opinion.
In our opinion, such consolidated financial statements present fairly, in all material respects, the financial position of Fifth Third Bancorp and
subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended
December 31, 2007, in conformity with accounting principles generally accepted in the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Bancorp’s
internal control over financial reporting as of December 31, 2007, 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 22, 2008 expressed unqualified
opinion on the Bancorp's internal control over financial reporting.
Cincinnati, Ohio
February 22, 2008
Fifth Third Bancorp 51
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
Interest on other short-term investments
Total interest income
Interest Expense
Interest on deposits
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
Investment advisory revenue
Corporate banking revenue
Mortgage banking net revenue
Other noninterest income
Securities gains (losses), net
Securities gains - non-qualifying hedges on mortgage servicing rights
Total noninterest income
Noninterest Expense
Salaries, wages and incentives
Employee benefits
Net occupancy expense
Payment processing expense
Technology and communications
Equipment expense
Other noninterest expense
Total noninterest expense
Income Before Income Taxes and Cumulative Effect
Applicable income taxes
Income Before Cumulative Effect
Cumulative effect of change in accounting principle, net of tax (a)
Net Income
Net Income Available to Common Shareholders (b)
Earnings Per Share
Earnings Per Diluted Share
(a) Reflects a benefit of $4 million (net of $2 million of tax) for the adoption of SFAS No. 123(R) as of January 1, 2006.
(b) Dividends on preferred stock are $.740 million for all years presented.
2007
2006
2005
590
$5,418 5,000 3,918
934 1,071
19 21 6
6,027 5,955 4,995
2,007 1,910 1,148
324 402 282
687 770 600
3,018 3,082 2,030
3,009 2,873 2,965
628 343 330
2,381 2,530 2,635
826 717 622
579 517 522
382 367 358
367 318 299
133 155 174
153 299 360
(364) 39
21
6 3 -
2,467 2,012 2,374
1,239 1,174 1,133
278 292 283
269 245 221
244 184
145
169 141 142
123 116 105
989
763 772
3,311 2,915 2,801
1,537 1,627 2,208
659
443
1,076 1,184 1,549
-
4 -
$1,076 1,188 1,549
$1,075 1,188 1,548
$2.00 2.14 2.79
$1.99 2.13 2.77
461
See Notes to Consolidated Financial Statements
52
Fifth Third Bancorp
CONSOLIDATED BALANCE SHEETS
2007
2006
2,737
11,053
356
187
809
1,150
$2,687
10,677
355
171
593
4,329
20,831
10,405
6,168
3,841
8,830
12,153
10,028
1,004
1,093
74,353
(771)
73,582
1,940
202
2,193
166
524
5,770
100,669
24,813
11,862
5,561
3,737
10,540
11,874
9,201
1,591
1,074
80,253
(937)
79,316
2,223
353
2,470
147
618
7,023
$110,962
As of December 31 ($ in millions, except share data)
Assets
Cash and due from banks
Available-for-sale and other securities (a)
Held-to-maturity securities (b)
Trading securities
Other short-term investments
Loans held for sale
Portfolio loans and leases:
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Portfolio loans and leases
Allowance for loan and lease losses
Portfolio loans and leases, net
Bank premises and equipment
Operating lease equipment
Goodwill
Intangible assets
Servicing rights
Other assets
Total Assets
Liabilities
Deposits:
Demand
Interest checking
Savings
Money market
Other time
Certificates - $100,000 and over
Foreign office
Total deposits
Federal funds purchased
Other short-term borrowings
Accrued taxes, interest and expenses
Other liabilities
Long-term debt
Total Liabilities
Shareholders' Equity
Common stock (c)
Preferred stock (d)
Capital surplus
Retained earnings
Accumulated other comprehensive income
Treasury stock
Total Shareholders' Equity
Total Liabilities and Shareholders' Equity
(a) Amortized cost: December 31, 2007 - $10,821 and December 31, 2006 - $11,236
(b) Market values: December 31, 2007 - $355 and December 31, 2006 - $356
(c) Common shares: Stated value $2.22 per share; authorized 1,300,000,000; outstanding at December 31, 2007 - 532,671,925 (excludes 51,516,339 treasury shares) and
14,331
$14,404
15,993
15,254
13,181
15,635
6,584
6,521
10,987
11,440
6,628
6,738
1,676
5,453
69,380
75,445
1,421
4,427
2,796
4,747
2,283
2,427
2,209
1,898
12,857
12,558
101,801 90,647
1,295
9
1,812
8,317
(179)
(1,232)
9,161 10,022
100,669
1,295
9
1,779
8,413
(126)
(2,209)
$110,962
December 31, 2006 - 556,252,674 (excludes 27,174,430 treasury shares).
(d) 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 53
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY
Accumulated
Other
Retained Comprehensive Treasury
Stock
Income
Earnings
(1,414)
(169)
7,269
1,549
(244)
(1,746)
43
206
1,413
219
(413)
(1,279)
288
(54)
(82)
45
84
(179)
(1,232)
53
(1,084)
59
86
(38)
(126)
(2,209)
(810)
(1)
8,007
1,188
(880)
(1)
1
2
8,317
1,076
(914)
(1)
1
(98)
38
(8)
2
8,413
Total
8,924
1,549
(244)
1,305
(810)
(1)
(1,649)
65
-
85
11
6
1,509
-
1
9,446
1,188
288
1,368
(54)
(880)
(1)
(82)
77
(6)
-
35
8
(1)
4
10,022
1,076
53
1,129
(914)
(1)
(1,084)
61
(98)
-
47
2
2
-
(8)
3
9,161
Common Preferred
Stock
9
$1,295
Stock
11
(11)
1,295
9
1,295
9
($ in millions, except per share data)
Balance at December 31, 2004
Net income
Other comprehensive income
Comprehensive income
Cash dividends declared:
Common stock at $1.46 per share
Preferred stock
Shares acquired for treasury
Stock-based compensation expense
Restricted stock grants
Stock-based awards exercised, including treasury shares issued
Loans repaid related to the exercise of stock-based awards, net
Change in corporate tax benefit related to stock-based
compensation
Shares issued in business combinations
Retirement of shares
Other
Balance at December 31, 2005
Net income
Other comprehensive income
Comprehensive income
Cumulative effect of change in accounting for pension and
other postretirement obligations
Cash dividends declared:
Common stock at $1.58 per share
Preferred stock
Shares acquired for treasury
Stock-based compensation expense
Impact of cumulative effect of change in accounting principle
Restricted stock grants
Stock-based awards exercised, including treasury shares issued
Loans repaid related to the exercise of stock-based awards, net
Change in corporate tax benefit related to stock-based
compensation
Other
Balance at December 31, 2006
Net income
Other comprehensive income
Comprehensive income
Cash dividends declared:
Common stock at $1.70 per share
Preferred stock
Shares acquired for treasury
Stock-based compensation expense
Impact of cumulative effect of change in accounting principle
Restricted stock grants
Stock-based awards exercised, including treasury shares issued
Loans repaid related to the exercise of stock-based awards, net
Change in corporate tax benefit related to stock-based
compensation
Capital
Surplus
1,934
97
65
(43)
(121)
11
6
85
(208)
1
1,827
76
(6)
(45)
(49)
8
(1)
2
1,812
60
(59)
(39)
2
2
Employee stock ownership through benefit plans
Impact of diversification of nonqualified deferred compensation plan
Other
Balance at December 31, 2007
$1,295
1
1,779
9
See Notes to Consolidated Financial Statements
54
Fifth Third Bancorp
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31 ($ in millions)
Operating Activities
Net Income
Adjustments to reconcile net income to net cash (used in) provided by operating activities:
Provision for loan and lease losses
Cumulative effect of change in accounting principle, net of tax
Depreciation, amortization and accretion
Stock-based compensation expense
Benefit for deferred income taxes
Realized securities gains
Realized securities gains - non-qualifying hedges on mortgage servicing rights
Realized securities losses
Net gains on sales of loans
Loans originated for sale, net of repayments
Proceeds from sales of loans held for sale
Decrease (increase) in trading securities
Decrease (increase) in other assets
Increase (decrease) in accrued taxes, interest and expenses
Excess tax benefit related to stock-based compensation
(Decrease) increase in other liabilities
Net Cash (Used In) 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
Decrease (increase) in other short-term investments
Net increase in loans and leases
Proceeds from sales of loans
(Increase) decrease in operating lease equipment
Purchases of bank premises and equipment
Proceeds from disposal of bank premises and equipment
Net cash (paid) acquired in business combination
Net Cash (Used In) Provided by Investing Activities
Financing Activities
Increase in core deposits
Increase in certificates - $100,000 and over, including other foreign office
Increase (decrease) in federal funds purchased
Decrease in short-term bank notes
Increase (decrease) in other short-term borrowings
Proceeds from issuance of long-term debt
Repayment of long-term debt
Payment of cash dividends
Exercise of stock-based awards, net
Purchases of treasury stock
Excess tax benefit related to stock-based compensation
Other
Net Cash Provided by (Used In) Financing Activities
(Decrease) Increase 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
Income taxes
Supplemental Cash Flow Information
Transfer from portfolio loans to loans held for sale, net
Business Acquisitions:
Fair value of tangible assets acquired (noncash)
Goodwill and identifiable intangible assets acquired
Liabilities assumed and note issued
Stock options
Common stock issued
See Notes to Consolidated Financial Statements
2007
$1,076
628
-
367
61
(178)
(16)
(6)
2
(95)
(13,125)
11,027
16
108
194
(4)
(741)
(686)
2,071
13,468
(15,541)
11
(11)
219
(6,181)
745
(172)
(459)
46
(230)
(6,034)
2,225
2,101
3,006
-
1,951
4,801
(5,494)
(898)
49
(1,084)
4
9
6,670
(50)
2,737
$2,687
$2,996
535
1,200
2,446
297
(2,513)
-
-
2006
1,188
343
(4)
399
77
(21)
(44)
(3)
408
(131)
(8,671)
8,812
(70)
(1,440)
(31)
-
642
1,454
12,568
3,033
(4,676)
38
(5)
(651)
(5,145)
540
(77)
(443)
60
(5)
5,237
1,467
479
(3,902)
-
(1,462)
3,731
(6,441)
(867)
43
(82)
-
2
(7,032)
(341)
3,078
2,737
3,051
489
(138)
6
17
(18)
-
-
2005
1,549
330
-
405
65
(16)
(46)
-
7
(162)
(8,683)
7,881
(40)
(922)
58
(16)
355
765
5,912
5,271
(7,785)
48
(181)
402
(8,297)
1,816
124
(437)
56
242
(2,829)
3,874
1,491
130
(775)
(687)
4,665
(3,782)
(794)
96
(1,649)
16
(4)
2,581
517
2,561
3,078
1,952
676
(16)
5,149
1,297
(5,179)
(63)
(1,446)
Fifth Third Bancorp 55
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 lending, deposit gathering, transaction processing and
service advisory activities through its banking and non-banking
subsidiaries from banking centers
the
Midwestern and Southeastern regions of the United States.
throughout
located
Basis of Presentation
The Consolidated Financial Statements include the accounts of
the Bancorp and its majority-owned subsidiaries and variable
interest entities in which the Bancorp has been determined to be
the primary beneficiary. Other entities, including certain joint
ventures, in which there is greater than 20% ownership, but upon
which the Bancorp does not possess and cannot exert significant
influence 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.
Intercompany transactions and balances have been eliminated.
Certain prior period data has been reclassified to conform to
current period presentation.
Use of Estimates
The preparation of financial statements in conformity with
accounting principles generally accepted in the United States of
America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those
estimates.
as
are
classified
available-for-sale when,
Securities
Securities are classified as held-to-maturity, available-for-sale or
trading on the date of purchase. Only those securities which
management has the intent and ability to hold to maturity and are
classified as held-to-maturity are reported at amortized cost.
Securities
in
management’s judgment, they may be sold in response to, or in
anticipation of, changes in market conditions. The Bancorp’s
management has evaluated the securities in an unrealized loss
position in the available-for-sale portfolio and maintains the intent
and ability to hold these securities to the earlier of the recovery of
the losses or maturity. Available-for-sale and trading securities are
reported at fair value with unrealized gains and losses, net of
related deferred income taxes, included in 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 Statements of Income. The cost of securities sold is
based on the specific identification method. Available-for-sale and
held-to-maturity securities are reviewed quarterly for possible
other-than-temporary 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 management’s intent and ability
to hold the security to recovery. 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 and leases is based on the principal
balance outstanding computed using the effective interest method.
The accrual of
is
discontinued when there is a clear indication that the borrower’s
cash flow may not be sufficient to meet payments as they become
due. Such loans are also placed on nonaccrual status when the
principal or interest is past due ninety days or more, unless the
loan is well secured and in the process of collection. When a loan
income for commercial
interest
loans
56
Fifth Third Bancorp
is placed on nonaccrual status, all previously accrued and unpaid
interest is charged against income and the loan is accounted for on
the cost recovery 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. 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 residential mortgage loans and
credit cards that have principal and interest payments that have
become past due one hundred and eighty days are charged off to
the allowance for loan and lease losses. Commercial loans are
subject to individual review to identify charge-offs. Refer to the
Allowance for Loan and Lease Losses below for further
discussion.
Loan and lease origination and commitment fees and direct
loan and lease origination costs are deferred and the net amount
is amortized over the estimated life of the related loans, leases or
commitments as a yield adjustment.
Direct financing leases are carried at the aggregate of lease
payments plus estimated residual value of the leased property, less
unearned income. Interest income on direct financing 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.
Conforming fixed residential mortgage loans are typically
classified as held for sale upon origination based upon
management’s intent to sell all the production of these loans.
Residential mortgage loans held for sale are valued at the lower of
aggregate cost or fair value. Additionally, the carrying value of
loans held for sale designated as the hedged item in a fair value
hedge transaction are adjusted for changes in their fair value over
the term of the hedging relationship. 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 and leases are measured based on the present
value of expected future cash flows discounted at the loan’s
effective interest rate or the fair value of the underlying collateral.
The Bancorp evaluates 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 carrying value are recognized in other noninterest
expense in the Consolidated Statements of Income.
Allowance for Loan and Lease Losses
The Bancorp maintains an allowance to absorb probable loan and
lease losses inherent in the portfolio. The allowance is maintained
at a level the Bancorp considers to be adequate and is based on
ongoing quarterly assessments and evaluations of the collectibility
and historical loss experience of loans and leases. Credit losses
are charged and recoveries are credited to the allowance.
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 estimating probable credit losses.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
In determining the appropriate level of the allowance, the
Bancorp estimates losses using a range derived from “base” and
“conservative” estimates.
Larger commercial loans that exhibit probable or observed
credit weaknesses are subject to individual review. Where
appropriate, allowances are allocated to individual loans based on
management’s estimate of the borrower’s ability to repay the loan
given the availability of collateral, other sources of cash flow, as
well as evaluation of legal options available to the Bancorp. The
review of individual loans includes those loans that are impaired as
provided in SFAS No. 114. Any allowances for impaired loans
are measured based on the present value of expected future cash
flows 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
commercial loans which are not impaired and thus not subject to
specific allowance allocations. The loss rates are derived from a
migration analysis, which tracks the historical net charge-off
experience sustained on loans according to their internal risk
grades. The risk grading system currently utilized for allowance
analysis purposes encompasses ten categories.
Homogenous loans and leases, such as consumer installment
and residential mortgage loans, are not individually risk graded.
Rather, standard credit scoring systems and delinquency
monitoring are used to assess credit risks. Allowances 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 significant factors that, in management’s judgment,
are necessary to reflect losses inherent in the portfolio. Factors
that management considers in the analysis include the effects of
the national and local economies; trends in the nature and volume
of 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.
The Bancorp’s current methodology for determining the
allowance for loan and lease losses is based on historical loss rates,
current credit grades, specific allocation on impaired commercial
credits and other qualitative adjustments.
Allowances 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. An unallocated allowance is maintained to recognize
the imprecision in estimating and measuring loss when evaluating
allowances for individual loans or pools of loans.
Loans acquired by the Bancorp through a purchase business
impairment.
combination are evaluated for possible credit
Reduction to the carrying value of the acquired loans as a result of
credit impairment is recorded as an adjustment to goodwill. The
Bancorp does not carry over the acquired company’s allowance
for loan and lease losses, nor does the Bancorp add to its existing
allowance for the acquired loans as part of purchase accounting.
The Bancorp’s primary market areas for lending are the
Midwestern and Southeastern regions of the United States. When
evaluating the adequacy of allowances, consideration is given to
this regional geographic concentration and the closely associated
effect changing economic conditions have on the Bancorp’s
customers.
In the current year, the Bancorp has not substantively
changed any material aspect to its overall approach in the
determination of allowance for loan and lease losses. There have
been no material changes in criteria or estimation techniques as
compared to prior periods that impacted the determination of the
current period allowance for loan and lease losses.
Reserve for Unfunded Commitments
The reserve for unfunded commitments is maintained at a level
believed by management to be sufficient to absorb estimated
probable losses related to unfunded credit facilities and is included
in other liabilities in the Consolidated Balance Sheets. The
determination of the adequacy of the reserve is based upon an
evaluation of
including an
the unfunded credit facilities,
assessment of historical commitment utilization experience, credit
risk grading and credit grade migration. Net adjustments to the
reserve for unfunded commitments are
in other
noninterest expense.
included
Loan Sales and Securitizations
When the Bancorp sells loans through either securitizations or
individual loan sales in accordance with its investment policies, it
may obtain 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
interests that continue to be held by the Bancorp 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 financial
assets sold or securitized. At the date of transfer, obtained
servicing rights are recorded at fair value and the remaining
carrying value of the transferred financial assets is allocated
between the assets sold and remaining interests that continue to
be held by the Bancorp based on their relative fair values at the
date of sale or securitization. To obtain fair values, quoted market
prices are used, if available. If quotes are not available for interests
that continue to be held by the Bancorp, the Bancorp calculates
fair value based on the present value of future expected cash flows
using management’s best estimates 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 Statements of Income.
Interests that continue to be held by the Bancorp from securitized
or sold loans, excluding servicing rights, are carried at fair value.
Adjustments to fair value for interests that continue to be held by
the Bancorp classified as available-for-sale securities are included
in accumulated other comprehensive income 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 interests that continue to be held by the Bancorp classified as
trading securities are recorded within noninterest income in the
Consolidated Statements of Income.
Servicing rights resulting from residential mortgage and
commercial loan sales are amortized in proportion to and over the
period of estimated net servicing revenues and are reported as a
component of mortgage banking net revenue and corporate
banking revenue, respectively, in the Consolidated Statements of
Income. Servicing rights are assessed for impairment monthly,
based on fair value, with temporary impairment recognized
through a valuation allowance and permanent
impairment
recognized through a write-off of the servicing asset and related
in
valuation allowance. Key economic assumptions used
measuring any potential impairment of the servicing rights include
the prepayment speed of the underlying loans, the weighted-
average life of the loans, the discount rate 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 stratified into classes
based on the financial asset type and interest rates. Fees received
Fifth Third Bancorp 57
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
for servicing loans owned by investors are based on a percentage
of the outstanding monthly principal balance of such loans and
are included in noninterest income as loan payments are received.
Costs of servicing loans are charged to expense as incurred.
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
income tax purposes.
is used for
accelerated depreciation
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 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.
Derivative Financial Instruments
The Bancorp accounts for its derivatives under SFAS No. 133,
“Accounting for Derivative Instruments and Hedging Activities,”
as amended. This Statement requires recognition of all derivatives
as either assets or liabilities in the balance sheet and requires
measurement of
through
adjustments to accumulated other comprehensive income and/or
current earnings, as appropriate. On the date the Bancorp enters
into a derivative contract, the Bancorp designates the derivative
instrument as either a fair value hedge, cash flow hedge or as a
free-standing derivative instrument. For a fair value hedge,
changes in the fair value of the derivative instrument and changes
in the fair value of the hedged asset or liability or of an
unrecognized firm commitment attributable to the hedged risk are
recorded in current period net income. For a cash flow hedge,
changes in the fair value of the derivative instrument, to the extent
that
in accumulated other
comprehensive income and subsequently reclassified 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.
instruments at fair value
is effective, are
recorded
those
it
Prior to entering into a hedge transaction, the Bancorp
formally documents the relationship between 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 flow hedges to specific assets and liabilities on
the balance sheet or to specific 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 flows 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.
Income Taxes
The Bancorp estimates income tax expense based on amounts
expected to be owed to the various tax jurisdictions in which the
Bancorp conducts business. On a quarterly basis, management
assesses the reasonableness of its effective tax rate based upon its
current estimate of the amount and components of net income,
tax credits and the applicable statutory tax rates expected for the
full year. The estimated income tax expense is recorded in the
Consolidated Statements of Income.
Deferred income tax assets and liabilities are determined
using the balance sheet method and are reported in accrued taxes,
interest and expenses in the Consolidated Balance Sheets. Under
this method, the net deferred tax asset or liability is based on the
58
Fifth Third Bancorp
tax effects of the differences between the book and tax basis of
assets and liabilities, and recognizes enacted changes in tax rates
and laws. Deferred tax assets are recognized to the extent they
exist and are subject to a valuation allowance based on
management’s judgment that realization is more-likely-than-not.
Accrued taxes represent the net estimated amount due to
taxing jurisdictions and are reported in accrued taxes, interest and
expenses in the Consolidated Balance Sheets. The Bancorp
evaluates and assesses the relative risks and appropriate tax
treatment of transactions and filing positions after considering
statutes, regulations, judicial precedent and other information and
maintains tax accruals consistent with its evaluation of these
relative risks and merits. Changes to the estimate of accrued taxes
occur periodically due to changes in tax rates, interpretations of
tax laws, the status of examinations being conducted by taxing
authorities and changes to statutory, judicial and regulatory
guidance that impact the relative risks of tax positions. These
changes, when they occur, can affect deferred taxes and accrued
taxes as well as the current period’s income tax expense and can
be significant to the operating results of the Bancorp. As of
January 1, 2007, the Bancorp adopted FIN 48; see New
Accounting Pronouncements for the impact of adopting this
interpretation. As described in greater detail in Note 15, the
Internal Revenue Service is currently challenging the Bancorp’s
tax treatment of certain leasing transactions. For additional
information on income taxes, see Note 21.
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
available to common shareholders by the weighted-average
number of shares of common stock and common stock
equivalents outstanding during the period. Dilutive common
stock equivalents represent the assumed conversion of convertible
preferred stock and the exercise of stock-based awards.
Other
Securities and other property held by Fifth Third Investment
Advisors, a division of the Bancorp’s banking subsidiaries, in a
fiduciary or agency capacity are not included in the Consolidated
Balance Sheets because such items are not assets of the
subsidiaries. Investment advisory revenue in the Consolidated
Statements of Income is recognized on the accrual basis.
Investment advisory service revenues are recognized monthly
based on a fee charged per transaction processed and/or 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
fees charged by credit card
interchange and assessment
associations) not controlled by the Bancorp.
The Bancorp purchases life insurance policies on the lives of
certain directors, officers and employees and is the owner and
beneficiary of the policies. The Bancorp invests in these policies,
known as BOLI, to provide an efficient form of funding for long-
term retirement and other employee benefits costs. The Bancorp
records
the
these BOLI policies within other assets
Consolidated Balance Sheets at each policy’s respective cash
surrender value, with changes recorded in noninterest income in
the Consolidated Statements of Income.
in
Other intangible assets consist of core deposits, customer
lists, non-competition agreements and cardholder relationships.
Other intangibles are amortized on either a straight-line or an
accelerated basis over their useful lives. The Bancorp reviews
other intangible assets for impairment whenever events or
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
changes in circumstances indicate that carrying amounts may not
be recoverable.
Goodwill acquired as a result of a business combination is
not amortized and is tested for impairment on a yearly basis or
more frequently when events or changes in circumstances indicate
that carrying amounts may not be recoverable.
Acquisitions of treasury stock are carried at cost. Reissuance
of shares in treasury for acquisitions, exercises of stock-based
awards or other corporate purposes is recorded based on the
specific identification method.
Advertising costs are generally expensed as incurred.
three
impacts on
this Statement had
New Accounting Pronouncements
In December 2004, the FASB issued Statement of SFAS No. 123
(Revised 2004), “Share-Based Payment.” This Statement requires
measurement 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 was effective for financial
statements as of the beginning of the first interim or annual
reporting period of the first fiscal year beginning after September
15, 2005. On January 1, 2006, the Bancorp elected to adopt this
Statement using the modified retrospective application. Adoption
of
the Bancorp’s
Consolidated Financial Statements: i) the recognition of a benefit
for the cumulative effect of change in accounting principle of
approximately $4 million (net of $2 million of tax) during the first
quarter of 2006 due to the recognition of an estimate of forfeiture
experience to be realized for all unvested stock-based awards
outstanding, ii) the reclassification in the Consolidated Statements
of Cash Flows of net cash provided related to the excess
corporate tax benefit received on stock-based compensation,
previously recorded in the operating activities section, to the
recognition of
financing activities
approximately $9 million of incremental salaries, wages and
incentives expense in the second quarter of 2006 related to the
issuance in April 2006 of stock-based awards to retirement-eligible
employees. The adoption of this Statement did not have an
impact on basic or diluted earnings per share. For further
information on stock-based compensation, see Note 19.
section, and
the
iii)
In February 2006, the FASB
issued SFAS No. 155,
“Accounting for Certain Hybrid Financial Instruments, an
amendment of FASB Statement No. 133 and 140.” This
Statement amends FASB SFAS No. 133, “Accounting for
Derivative Instruments and Hedging Activities,” and SFAS No.
140, “Accounting for Transfers and Servicing of Financial Assets
and Extinguishments of Liabilities - A Replacement of FASB
Statement No. 125,” as well as resolves issues addressed in
Statement No. 133 Implementation Issue No. D1, “Application of
Statement No. 133 to Beneficial Interests in Securitized Financial
Assets.” Specifically, this Statement: i) permits fair value
remeasurement for any hybrid financial instrument that contains
an embedded derivative that otherwise would require bifurcation;
ii) clarifies which interest-only strips and principal-only strips are
not subject to the requirements of SFAS No. 133; iii) establishes a
requirement to evaluate interests in securitized financial assets to
identify interests that are free-standing derivatives or that are
hybrid financial instruments that contain an embedded derivative
requiring bifurcation; iv) clarifies that concentrations of credit risk
in the form of subordination are not embedded derivatives; and v)
amends SFAS No. 140 to eliminate the prohibition on a QSPE
from holding a derivative financial instrument that pertains to a
beneficial
financial
instrument. This Statement was effective for all financial
instruments acquired or issued after the beginning of the first
fiscal year that begins after September 15, 2006. The adoption of
this Statement on January 1, 2007 did not have a material effect
on the Bancorp’s Consolidated Financial Statements.
than another derivative
interest other
the FASB
In March 2006,
issued SFAS No. 156,
“Accounting for Servicing of Financial Assets, an amendment of
FASB Statement No. 140.” This Statement amends SFAS No.
140 and requires that all separately recognized servicing rights be
initially measured at fair value, if practicable. For each class of
separately recognized servicing assets and liabilities, this Statement
permits the Bancorp to choose either to report servicing assets
and liabilities at fair value or at amortized cost. Under the fair
value approach, servicing assets and liabilities will be recorded at
fair value at each reporting date with changes in fair value
recorded in earnings in the period in which the changes occur.
Under the amortized cost method, servicing assets and liabilities
are amortized in proportion to and over the period of estimated
net servicing income or net servicing loss and are assessed for
impairment based on fair value at each reporting date. This
Statement was effective as of the beginning of the first fiscal year
that begins after September 15, 2006. Upon adoption of this
Statement on January 1, 2007, the Bancorp elected to continue to
report all classes of servicing assets and liabilities at amortized cost
subsequent to initial recognition at fair value. The adoption of
this Statement did not have a material effect on the Bancorp’s
Consolidated Financial Statements.
In July 2006, the FASB
issued FSP No. FAS 13-2,
“Accounting for a Change or Projected Change in the Timing of
Cash Flows Relating to Income Taxes Generated by a Leveraged
Lease Transaction.” This FSP addresses the accounting for a
change or projected change in the timing of lessor cash flows, but
not the total net income, relating to income taxes generated by a
leveraged lease transaction. This FSP amends SFAS No. 13,
“Accounting for Leases,” and applies to all transactions classified
as leveraged leases. The timing of cash flows relating to income
taxes generated by a leveraged lease is an important assumption
that affects the periodic income recognized by the lessor. Under
this FSP, the projected timing of income tax cash flows generated
by a leveraged lease transaction are required to be reviewed
annually or more frequently if events or circumstances indicate
that a change in timing has occurred or is projected to occur. If
during the lease term the expected timing of the income tax cash
flows generated by a leveraged lease is revised, the rate of return
and the allocation of income would be recalculated from the
inception of the lease. In the year of adoption, the cumulative
effect of the change in the net investment balance resulting from
the recalculation will be recognized as an adjustment to the
beginning balance of retained earnings. On an ongoing basis
following the adoption, a change in the net investment balance
resulting from a recalculation will be recognized as a gain or a loss
in the period in which the assumption changed and included in
income from continuing operations in the same line item where
leveraged lease income is recognized. These amounts would then
be recognized back into income over the remaining terms of the
affected leases. Additionally, upon adoption, only tax positions
that meet the more-likely-than-not recognition threshold should
be reflected in the financial statements and all recognized tax
positions in a leveraged lease must be measured in accordance
with FIN 48, “Accounting for Uncertainty in Income Taxes - An
Interpretation of FASB Statement No. 109,” issued in July 2006.
During May 2005, the Bancorp filed suit in the United States
District Court for the Southern District of Ohio related to a
dispute with the Internal Revenue Service concerning the timing
of deductions associated with certain leveraged lease transactions
in its 1997 tax return. The Internal Revenue Service has also
proposed adjustments to the tax effects of certain leveraged lease
transactions in subsequent tax return years. The proposed
adjustments, including penalties, relate to the Bancorp’s portfolio
of lease-in lease-out transactions, service contract leases and
qualified technology equipment leases with both domestic and
foreign municipalities. The Bancorp is challenging the Internal
Revenue Service’s proposed treatment of all of these leasing
Fifth Third Bancorp 59
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
transactions. The Bancorp’s original net investment in these
leases totaled approximately $900 million. The Bancorp continues
to believe that its treatment of these leveraged leases was
appropriate and in compliance with applicable tax law and
regulations. While management cannot predict with certainty the
result of the suit, given the tax treatment of these transactions has
been challenged by the Internal Revenue Service, the Bancorp
believes a resolution may involve a projected change in the timing
of these leveraged lease cash flows.
This FSP was effective for fiscal years beginning after
December 15, 2006. Upon adoption of this FSP on January 1,
2007, the Bancorp recognized an after-tax adjustment to
beginning retained earnings of $96 million representing the
cumulative effect of applying the provisions of this FSP.
In July 2006, the FASB issued FIN 48, “Accounting for
Uncertainty in Income Taxes - An Interpretation of FASB
Statement No. 109.” This Interpretation clarifies the accounting
for uncertainty in income taxes recognized in accordance with
This
SFAS No. 109, “Accounting for Income Taxes.”
Interpretation also prescribes a recognition
threshold and
measurement attribute for the financial statement recognition and
measurement of a tax position taken or expected to be taken in a
tax return. This Interpretation also provides guidance on
derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. The evaluation of a tax
position in accordance with this Interpretation is a two-step
process. The first step is a recognition process to determine
whether it is more-likely-than-not that a tax position will be
sustained upon examination, including resolution of any related
appeals or litigation processes, based on the technical merits of
the position. The second step is a measurement process whereby
a tax position that meets the more-likely-than-not recognition
threshold is calculated to determine the amount of benefit to be
recognized in the financial statements. In May 2007, the FASB
issued FSP No. FIN 48-1, “Definition of Settlement in FASB FIN
48.” FSP No. FIN 48-1 amends FIN 48 to provide guidance on
determining whether a tax position is “effectively settled” for the
purpose of recognizing previously unrecognized tax benefits. The
concept of “effectively settled” replaces the concept of “ultimately
settled” originally issued in FIN 48. The tax position can be
considered “effectively
settled” upon completion of an
examination by the taxing authority if the entity does not plan to
appeal or litigate any aspect of the tax position and it is remote
that the taxing authority would examine any aspect of the tax
position. For effectively settled tax positions, the full amount of
the tax benefit can be recognized. The guidance in FSP No. FIN
48-1 was effective upon initial adoption of FIN 48. FIN 48 was
effective for fiscal years beginning after December 15, 2006.
Upon adoption of this Interpretation on January 1, 2007, the
Bancorp recognized an after-tax adjustment to beginning retained
earnings of $2 million representing the cumulative effect of
applying the provisions of this Interpretation.
In September 2006, the FASB issued SFAS No. 157, “Fair
Value Measurements.”
This Statement defines fair value,
establishes a framework for measuring fair value and expands
disclosures about fair value measurements. This Statement
emphasizes that fair value is a market-based measurement and
should be determined based on assumptions that a market
participant would use when pricing an asset or liability. This
Statement clarifies that market participant assumptions should
include assumptions about risk as well as the effect of a restriction
on the sale or use of an asset. Additionally, this Statement
establishes a fair value hierarchy that provides the highest priority
to quoted prices in active markets and the lowest priority to
unobservable data. This Statement is effective for fiscal years
beginning after November 15, 2007, and interim periods within
those fiscal years. The adoption of this Statement on January 1,
60
Fifth Third Bancorp
2008 will not have a material effect on the Bancorp’s Consolidated
Financial Statements.
In September 2006, the FASB issued SFAS No. 158,
“Employer’s Accounting for Defined Benefit Pension and Other
Postretirement Plans – an Amendment of FASB Statements No.
87, 88, 106, and 132(R).” This Statement amends the current
accounting for pensions and postretirement benefits by requiring
an entity to recognize the overfunded or underfunded status of a
defined benefit pension or other postretirement plan as an asset or
liability in its statement of financial position and to recognize
changes in the funded status in the year in which the changes
occur through other comprehensive income. This Statement also
requires recognition, as a component of other comprehensive
income (net of tax), of the actuarial gains and losses and the prior
service costs and credits that arise during the period, but are not
recognized as components of net periodic benefit cost pursuant to
SFAS No. 87 and SFAS No. 106. Additionally, this Statement
requires an entity to measure defined benefit plan assets and
obligations as of the date of the employer’s fiscal year-end
statement of financial position. The Bancorp adopted this
Statement on December 31, 2006. The effect of this Statement
was to recognize $59 million, after-tax, of net actuarial losses and
prior service cost as a reduction
to accumulated other
comprehensive income.
In February 2007, the FASB issued SFAS No. 159, “The Fair
Value Option for Financial Assets and Financial Liabilities –
Including an Amendment of FASB Statement No. 115.” This
Statement permits an entity to choose to measure certain financial
items at fair value, on an
instruments and certain other
instrument-by-instrument basis. Once an entity has elected to
record eligible items at fair value, the decision is irrevocable and
the entity should report unrealized gains and losses on items for
which the fair value option has been elected in earnings. This
Statement is effective for fiscal years beginning after November
15, 2007. At the effective date, an entity may elect the fair value
option for eligible items that exist at that date with the effect of
the first remeasurement to fair value reported as a cumulative-
effect adjustment to the opening balance of retained earnings. On
January 1, 2008, upon adoption of this Statement, the Bancorp
will elect to prospectively measure at fair value, residential
mortgage loans originated on or after January 1, 2008 that have a
designation as held for sale.
retains
This Statement
In December 2007, the FASB issued SFAS No. 141(R),
“Business Combinations” which replaces SFAS No. 141,
“Business Combinations”.
the
fundamental requirements in SFAS No. 141 that the acquisition
method of accounting (formerly referred to as purchase method)
be used for all business combinations and that an acquirer be
identified for each business combination. This Statement defines
the acquirer as the entity that obtains control of one or more
businesses in the business combination and establishes the
acquisition date as of the date that the acquirer achieves control.
This Statement requires an acquirer to recognize the assets
acquired, the liabilities assumed, and any noncontrolling interest in
the acquiree at the acquisition date, measured at their fair values.
This Statement requires the acquirer to recognize acquisition-
related costs and restructuring costs separately from the business
combination as period expense. This Statement is effective for
business combinations for which the acquisition date is on or after
the beginning of the first annual reporting period beginning on or
after December 15, 2008. The adoption on this statement will
impact the accounting and reporting of acquisitions after January
1, 2008.
In December 2007, the FASB issued SFAS No. 160,
"Noncontrolling Interests in Consolidated Financial Statements -
an Amendment to ARB No. 51." This Statement establishes new
accounting and reporting standards that require the ownership
interests in subsidiaries held by parties other than the parent be
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
clearly identified, labeled, and presented in the consolidated
statement of financial position within equity, but separate from
the parent's equity. The Statement also requires the amount of
consolidated net income attributable to the parent and to the
noncontrolling interest be clearly identified and presented on the
face of the consolidated statement of income. In addition, when a
subsidiary is deconsolidated, any retained noncontrolling equity
investment in the former subsidiary shall be initially measured at
fair value, with the gain or loss on the deconsolidation of the
subsidiary measured using the fair value of any noncontrolling
equity investment rather than the carrying amount of that retained
investment. SFAS No. 160 also clarifies that changes in a parent's
ownership
in
deconsolidation are equity transactions if the parent retains its
controlling financial interest. The Statement also includes
expanded disclosure requirements regarding the interests of the
parent and its noncontrolling interest. This Statement is effective
for fiscal years, and interim periods within those fiscal years,
beginning on or after December 15, 2008. Early adoption is
prohibited. The Bancorp is currently in the process of evaluating
the
impact of adopting this Statement on the Bancorp’s
Consolidated Financial Statements.
in a subsidiary that do not result
interest
In June 2007, the Emerging Issues Task Force ("EITF")
issued EITF Issue No. 06-11, "Accounting for Income Tax
Benefits of Dividends on Share-Based Payment Awards." The
Issue states that a realized income tax benefit from dividends or
dividend equivalents that are charged to retained earnings and are
2. BUSINESS COMBINATIONS
On November 2, 2007, the Bancorp acquired 100% of the
outstanding stock in R-G Crown Bank, FSB from R&G Financial
Corporation. Crown operated 30 branches in Florida and three in
Augusta, Georgia. The acquisition strengthened the Bancorp’s
presence in the Greater Orlando and Tampa Bay markets and also
expanded its footprint into the Jacksonville and Augusta, Georgia
markets.
Under the terms of the transaction, the Bancorp paid $259
million to R&G Financial and assumed $50 million of trust
preferred securities. Additionally, Fifth Third Financial paid
approximately $16 million to R-G Crown Real Estate, LLC to
acquire land leased by Crown for certain branches. The assets and
liabilities of Crown were recorded on the Bancorp’s Consolidated
Balance Sheets at their respective fair values as of the closing date.
The results of Crown’s operations were included in the Bancorp’s
Consolidated Statements of Income from the date of acquisition.
In addition, the Bancorp realized charges against its earnings for
Crown acquisition-related expenses of $7 million in 2007. The
acquisition-related expenses consisted primarily of marketing,
consulting,
travel, and other costs associated with system
conversions.
The transaction resulted in total intangible assets of $297
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, $19
million was allocated to core deposit intangibles and the remaining
$278 million was recorded as goodwill.
in North Carolina and two
On August 16 2007, the Bancorp and First Charter
Corporation, a full service financial institution which operates 57
branches
in suburban Atlanta,
announced that they entered into a definitive agreement under
which the Bancorp will acquire 100% of the outstanding stock in
First Charter. Under the definitive agreement, the Bancorp will pay
$31.00 per First Charter share, or approximately $1.09 billion.
Consideration will be paid in the form of 70% Fifth Third Bancorp
common stock and 30% cash. The Bancorp is currently planning
to close this transaction in the second quarter of 2008, subject to
receipt of regulatory approval from the Federal Reserve.
paid to employees for equity classified nonvested equity shares,
nonvested equity share units, and outstanding equity share options
should be recognized as an increase to additional paid-in capital.
The amount recognized in additional paid-in capital for the
realized income tax benefit from dividends on those awards
should be included in the pool of excess tax benefits available to
absorb tax deficiencies on share-based payment awards. This
Issue was effective for fiscal years beginning after December 15,
2007, and interim periods within those fiscal years. The Bancorp
will prospectively apply this Issue to applicable dividends declared
on or after January 1, 2008.
In November 2007, the SEC issued Staff Accounting Bulletin
("SAB") No. 109, "Written Loan Commitments Recorded at Fair
Value through Earnings." This SAB supersedes SAB No. 105,
"Application of Accounting Principles to Loan Commitments",
and expresses the current view of the staff that, consistent with
guidance in SFAS No. 156 and No. 159, the expected net future
cash flows related to the associated servicing of a loan should be
included in the measurement of all written loan commitments that
are accounted for at fair value through earnings. Additionally, this
SAB expands the SAB No. 105 view that internally-developed
intangible assets should not be recorded as part of the fair value
for any written loan commitments that are accounted for at fair
value through earnings. This SAB was effective for fiscal quarters
beginning after December 15, 2007. The Bancorp will adopt SAB
109 for any loan commitments issued or modified on or after
January 1, 2008.
On January 1, 2005, the Bancorp acquired in a merger 100%
of the outstanding stock of First National Bankshares, Inc. (“First
National”), a bank holding company headquartered in Naples,
Florida. First National operated 77 full-service banking centers
located primarily in Orlando, Tampa, Sarasota, Naples and Fort
Myers. The acquisition of First National allowed the Bancorp to
increase its presence in the rapidly expanding Florida market.
Under the terms of the transaction, each share of First
National common stock was exchanged for .5065 shares of the
Bancorp’s common stock, resulting in the issuance of 30.6 million
shares of common stock. The common stock issued to effect the
transaction was valued at $47.30 per share, the closing price of the
Bancorp’s common stock on the previous trading day, for a total
transaction value of $1.5 billion. The total purchase price also
included the fair value of stock-based awards issued in exchange
for stock-based awards held by First National employees, for which
the aggregate fair value was $63 million.
The assets and liabilities of First National were recorded on
the Bancorp’s Consolidated Balance Sheets at their respective fair
values as of the closing date. The results of First National’s
operations were included in the Bancorp’s Consolidated Statements
of Income from the date of acquisition. In addition, the Bancorp
realized charges against its earnings for acquisition-related expenses
of $8 million during 2005. The acquisition-related expenses
consisted primarily of travel and relocation costs, printing, closure
of duplicate facilities, supplies and other costs associated with
system conversions.
The transaction resulted in total intangible assets of $1.3
billion 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, $85
million was allocated to core deposit intangibles, $7 million was
allocated to customer lists and $13 million was allocated to
noncompete agreements. The remaining $1.2 billion was recorded
as goodwill.
The pro forma effect of the financial results of Crown and
First National included in the results of operations subsequent to
the date of acquisition were not material to the Bancorp’s financial
condition and operating results for the periods presented.
Fifth Third Bancorp 61
3. SECURITIES
The following table provides a breakdown of the securities portfolio as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
Amortized
Cost
Unrealized
Gains
Unrealized
Losses
Fair Value
2007
2006
$3
160
490
8,738
385
1,045
$10,821
-
1
6
24
1
7
39
-
(1)
-
(153)
(10)
(19)
(183)
3
160
496
8,609
376
1,033
10,677
1,396
100
603
7,999
172
966
11,236
-
-
11
10
1
3
25
-
(5)
-
(193)
(2)
(8)
(208)
1,396
95
614
7,816
171
961
11,053
($ in millions)
Available-for-sale and other:
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(a)
Total
Held-to-maturity:
Obligations of states and
political subdivisions
Other debt securities
$351
4
$355
-
-
-
-
-
-
351
4
355
345
11
356
-
-
-
-
-
-
345
11
356
Total
(a) Other securities consist of FHLB and Federal Reserve Bank restricted stock holdings of $523 million and $199 million at December 31, 2007, respectively, and $527 million and $187 million
at December 31, 2006, respectively, that are carried at cost, FHLMC preferred stock holdings, certain mutual fund holdings and equity security holdings.
The amortized cost and approximate fair value of securities
at December 31, 2007, 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 2007, 2006, and
2005, gross realized securities gains were $28 million, $48 million,
and $46 million, respectively, while gross realized securities losses
were $1 million, $408 million, and $7 million, respectively.
($ in millions)
Debt securities:
Under 1 year
1-5 years
5-10 years
Over 10 years
Other securities
Total
Available-for-Sale & Other
Amortized
Cost
Fair Value
Held-to-Maturity
Amortized
Cost
Fair Value
$120
323
591
8,742
1,045
$10,821
120
326
591
8,607
1,033
10,677
3
63
259
30
-
355
3
63
259
30
-
355
The following table provides the fair value and gross unrealized loss, aggregated by investment category and length of time the individual
securities have been in a continuous unrealized loss position, as of December 31, 2007 and 2006:
($ in millions)
2007
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
2006
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
Less than 12 months
12 months or more
Total
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
Fair Value
Unrealized
Losses
$1
99
6
2,279
279
57
$2,721
$747
-
3
853
10
8
$1,621
-
(1)
-
(25)
(9)
(7)
(42)
-
-
-
(3)
-
(2)
(5)
1
-
1
3,730
6
27
3,765
1
95
4
5,383
119
41
5,643
-
-
-
(128)
(1)
(12)
(141)
-
(5)
-
(190)
(2)
(6)
(203)
2
99
7
6,009
285
84
6,486
748
95
7
6,236
129
49
7,264
-
(1)
-
(153)
(10)
(19)
(183)
-
(5)
-
(193)
(2)
(8)
(208)
The Bancorp completed balance sheet actions during the fourth
quarter of 2006, which included the sale of $11.3 billion in
available-for-sale securities with a weighted-average yield of 4.30%
in addition to the reinvestment of approximately $2.8 billion in
available-for-sale securities that are more efficient when used as
collateral for pledging purposes. These actions were taken to
improve the asset/liability profile of the Bancorp and reduce the
size of the Bancorp’s available-for-sale securities portfolio to a size
that was more consistent with its liquidity, collateral and interest
rate risk management requirements; improve the composition of
the balance sheet with a lower concentration in fixed-rate assets;
lower wholesale borrowings to reduce leverage; and better position
the Bancorp for an uncertain economic and
interest rate
environment.
At December 31, 2007, 85% of the unrealized losses in the
available-for-sale securities portfolio were comprised of debt
securities issued by the U.S. Government sponsored agencies and
agency mortgage-backed securities. The Bancorp believes the price
62 62
Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
movements in these securities are dependent upon movements in
market interest rates. At December 31, 2007, four percent of
unrealized losses in the available-for-sale securities portfolio were
represented by non-rated securities.
At December 31, 2007 and 2006, securities with a fair value of
$8.8 billion and $7.7 billion, respectively, were pledged to secure
borrowings, public deposits, trust funds and for other purposes as
required or permitted by law.
Unrealized gains and losses on trading securities held at
the
December 31, 2007 and 2006 were not material
Consolidated Financial Statements.
to
4. LOANS AND LEASES AND ALLOWANCE FOR LOAN AND LEASE LOSSES
A summary of the total loans and leases classified by primary purpose as of December 31:
($ in millions)
Loans and leases held for sale:
Commercial loans
Commercial mortgage loans
Residential mortgage loans
Home equity
Automobile loans
Other consumer loans and leases
Total loans and leases held for sale
Portfolio loans and leases (a):
Commercial loans
Commercial mortgage loans
Commercial construction loans
Commercial leases
Total commercial loans and leases
Residential mortgage loans
Home equity
Automobile loans
Credit card
Other consumer loans and leases
Total consumer loans and leases
Total portfolio loans and leases
(a) At December 31, 2007 and 2006, deposit overdrafts of $78 million and $43 million, respectively, were included in portfolio loans.
2007
$ 1,266
105
893
-
1,982
83
$4,329
$24,813
11,862
5,561
3,737
45,973
10,540
11,874
9,201
1,591
1,074
34,280
$80,253
2006
-
-
1,075
1
-
74
1,150
20,831
10,405
6,168
3,841
41,245
8,830
12,153
10,028
1,004
1,093
33,108
74,353
Total portfolio loans and leases were recorded net of unearned income, unamortized premiums and discounts, deferred loan fees and costs,
and fair value adjustments associated with acquired loans of $1.3 billion and $876 million as of December 31, 2007 and 2006, respectively.
The following is a summary of the gross investment in lease financing at December 31:
($ in millions)
Direct financing leases
Leveraged leases
Total
The components of the investment in lease financing at December 31:
($ in millions)
Rentals receivable, net of principal and interest on nonrecourse debt
Estimated residual value of leased assets
Initial direct cost, net of amortization
Gross investment in lease financing
Unearned income
Net investment in lease financing
2007
$3,407
2,452
$5,859
2007
$4,438
1,397
24
5,859
(1,325)
$4,534
2006
3,640
2,520
6,160
2006
4,479
1,652
29
6,160
(1,245)
4,915
At December 31, 2007, the minimum future lease payments receivable for each of the years 2008 through 2012 were $1.1 billion, $1.0 billion,
$.9 billion, $.6 billion and $.5 billion, respectively.
Transactions in the allowance for loan and lease losses for the years ended December 31:
($ in millions)
Balance at January 1
Losses charged off
Recoveries of losses previously charged off
Provision for loan and lease losses
Balance at December 31
As of December 31, 2007, impaired loans under SFAS No.
114 (not including loans acquired and accounted for under
Statement of Position 03-3) with a valuation allowance totaled
$306 million and impaired loans without a valuation allowance
totaled $188 million. The total valuation allowance on the
impaired loans at December 31, 2007 was $118 million. As of
December 31, 2006, impaired loans with a valuation allowance
totaled $193 million and impaired loans without a valuation
allowance totaled $100 million. The total valuation allowance on
the impaired loans at December 31, 2006 was $59 million.
2007
$771
(544)
82
628
$937
2006
744
(408)
92
343
771
2005
713
(373)
74
330
744
Average impaired loans, net of valuation allowances, were $280
million in 2007, $209 million in 2006 and $169 million in 2005.
Cash basis interest income recognized on those loans during each
of the years was immaterial.
At December 31, 2007 and 2006, total nonperforming assets
were $1.1 billion and $455 million, respectively, and total loans
and leases 90 days past due were $491 million and $210 million,
respectively.
Fifth Third Bancorp 63
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
5. LOANS ACQUIRED IN A TRANSFER
In 2007, the Bancorp acquired certain loans, primarily related to
the Crown acquisition, for which there was evidence of
deterioration of credit quality since origination and for which it
was probable, at acquisition, that all contractually required
payments would not be collected. These loans were evaluated
either individually or segregated into pools based on common risk
characteristics and accounted for under Statement of Position 03-
3, “Accounting for Certain Loans or Debt Securities Acquired in a
Transfer” (“SOP 03-3”). SOP 03-3 requires acquired loans within
its scope to be recorded at fair value and prohibits carrying over
valuation allowances when applying purchase accounting. Loans
carried at fair value, mortgage loans held for sale and loans under
revolving credit agreements are excluded from the scope of SOP
03-3. Prepayment assumptions were applied to contractually
required payments at acquisition of each loan.
As of December 31, 2007, the outstanding balance and
carrying amount of those loans accounted for under SOP 03-3
were as follows:
($ in millions)
Commercial
Consumer
Outstanding balance
Carrying amount
2007
$94
135
$229
$101
At the acquisition date, the Bancorp determines the excess of the
loan’s contractually required payments over all cash flows
6. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment at December 31:
($ in millions)
Land and improvements
Buildings
Equipment
Leasehold improvements
Construction in progress
Accumulated depreciation and amortization
Total
expected to be collected as an amount that should not be accreted
into interest income (nonaccretable difference). The remaining
amount representing the difference in the expected cash flows of
acquired loans and the basis in acquired loans is accreted into
interest income over the remaining life of the loan or pool of
loans. A summary of activity is provided below.
($ in millions)
Balance as of December 31, 2006
Additions
Accretion
Reclassifications from (to)
nonaccretable yield
Balance as of December 31, 2007
Accretable Yield
$-
8
(2)
-
$6
Loans acquired during 2007, for which it was probable at
acquisition that all contractually required payments would not be
collected, are summarized below. No such loans were acquired in
2006.
($ in millions)
Contractually required payments receivable at acquisition:
Commercial
Consumer
Total
Cash flows expected to be collected at acquisition
Fair value of acquired loans at acquisition
2007
$99
136
$235
$113
105
Estimated Useful Life
10 to 50 yrs.
3 to 20 yrs.
3 to 40 yrs.
2007
$620
1,383
1,210
320
113
(1,423)
$2,223
2006
487
1,218
1,121
270
137
(1,293)
1,940
Depreciation and amortization expense related to bank
premises and equipment was $205 million in 2007, $187 million in
2006 and $161 million in 2005.
Occupancy expense for cancelable and noncancelable leases
was $85 million for 2007, $78 million for 2006 and $68 million for
2005. Occupancy expense has been reduced by rental income
from leased premises of $12 million in 2007, 2006 and 2005.
The Bancorp’s subsidiaries have entered into a number of
lease agreements for
noncancelable lease agreements with respect to bank premises and
equipment. The minimum annual rental commitments under
noncancelable
land and buildings at
December 31, 2007, exclusive of income taxes and other charges,
are $78 million in 2008, $74 million in 2009, $68 million in 2010,
$62 million in 2011, $58 million in 2012 and $394 million in 2013
and subsequent years.
7. GOODWILL
Changes in the net carrying amount of goodwill by reporting segment for the years ended December 31, 2007 and 2006 were as follows:
($ in millions)
Balance as of December 31, 2005
Acquisition activity
Reclassification
Balance as of December 31, 2006
Acquisition activity
Balance as of December 31, 2007
Commercial
Banking
$871
-
-
871
124
$995
Branch
Banking
798
(1)
-
797
153
950
Consumer
Lending
182
-
-
182
-
182
Investment
Advisors
127
-
11
138
-
138
Processing
Solutions
191
14
-
205
-
205
Total
2,169
13
11
2,193
277
2,470
The Bancorp completed
its most recent annual goodwill
impairment test as of September 30, 2007 and determined that no
impairment exists. In the table above, acquisition activity includes
acquisitions in the respective period plus purchase accounting
adjustments related to previous acquisitions.
During 2007, the Bancorp acquired Crown, which resulted in
the recognition of $278 million in goodwill, of this amount $267
million is expected to be deductible for tax purposes. The Branch
Banking segment also included a $1 million reduction in goodwill
from a previous acquisition. During 2006, the Bancorp acquired a
credit card processing company. The acquisition resulted in the
recognition of $14 million of goodwill and did not have a material
impact on the financial results of the Bancorp. Additionally, during
2006, $11 million of goodwill was reclassified from other intangible
assets.
64 64
Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
8. INTANGIBLE ASSETS
Intangible assets consist of servicing rights, core deposits, customer
lists, non-competition agreements and cardholder relationships.
Intangibles, excluding servicing rights, are amortized on either a
straight-line or an accelerated basis over their estimated useful lives
and have an estimated weighted-average life at December 31, 2007
($ in millions)
As of December 31, 2007:
Mortgage servicing rights
Other consumer and commercial servicing rights
Core deposits
Other
Total intangible assets
As of December 31, 2006:
Mortgage servicing rights
Other consumer and commercial servicing rights
Core deposits
Other
Total intangible assets
of 3.3 years. For further information on servicing rights, see Note
9. The Bancorp reviews intangible assets for possible impairment
whenever events or changes in circumstances indicate that carrying
amounts may not be recoverable. The details of the Bancorp’s
intangible assets are shown in the following table.
Gross Carrying
Amount
Accumulated
Amortization
Valuation
Allowance
Net Carrying
Amount
$1,417
24
430
44
$1,915
$1,210
23
417
43
$1,693
(755)
(19)
(302)
(25)
(1,101)
(664)
(18)
(276)
(18)
(976)
(49)
-
-
-
(49)
(27)
-
-
-
(27)
613
5
128
19
765
519
5
141
25
690
As of December 31, 2007, all of the Bancorp’s intangible
assets were being amortized. Amortization expense recognized on
intangible assets, including servicing rights, for 2007 and 2006 was
Estimated
$135 million and $116 million,
respectively.
amortization expense, including servicing rights, is $145 million in
2008, $135 million in 2009, $114 million in 2010, $85 million in
2011 and $70 million in 2012.
9. SALES OF RECEIVABLES AND SERVICING RIGHTS
The Bancorp sold fixed and adjustable rate residential mortgage
loans during 2007 and 2006. In those sales, the Bancorp obtained
servicing responsibilities. The Bancorp receives annual servicing
fees based on a percentage of the outstanding balance. The
investors have no recourse to the Bancorp’s other assets for failure
of debtors to pay when due. The Bancorp identifies classes of
servicing assets based on financial asset type and interest rates. For
the years ended December 31, 2007 and 2006, the Bancorp
recognized pretax gains of $67 million and $68 million,
respectively, on the sales of $10.1 billion and $7.1 billion,
respectively, of residential mortgage loans. Additionally, the
Bancorp recognized $145 million and $121 million in servicing fees
on residential mortgages for the years ended December 31, 2007
and 2006. The gains on sales of residential mortgages and servicing
fees related to residential mortgages are included in mortgage
banking net revenue in the Consolidated Statements of Income.
During 2007 and 2006, the Bancorp sold student loans and
certain commercial loans and obtained servicing responsibilities.
At December 31, 2007 and 2006, the value of the servicing asset
and subordinated interest related to these sales was immaterial to
the Bancorp’s Consolidated Financial Statements.
Initial carrying values of servicing rights recognized during
2007 and 2006 were $205 million and $135 million, respectively.
As of December 31, 2007 and 2006, the key economic assumptions
used in measuring the servicing rights were as follows:
Rate
Residential mortgage loans:
Servicing assets
Servicing assets
Fixed
Adjustable
2007
2006
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
6.4
3.4
12.9%
29.4
9.6%
12.9
N/A
N/A
6.8
2.7
13.7%
38.6
10.4%
11.7
N/A
N/A
Based on historical credit experience, expected credit losses
for residential mortgage loan servicing assets have been deemed
immaterial. At December 31, 2007 and 2006, the Bancorp
serviced $34.5 billion and $28.7 billion of residential mortgage
loans for other investors.
The value of servicing assets is subject to credit, prepayment
and interest rate risks on the sold financial assets. At December
31, 2007, the sensitivity of the current fair value of residual cash
flows to immediate 10% and 20% adverse changes in those
assumptions are as follows:
Prepayment Speed
Assumption
Impact of Adverse
Change on Fair
Value
Rate
10%
20%
Weighted-
Average
Life (in
years)
Discount
Rate
Residual Servicing
Cash Flows
Impact of Adverse
Change on Fair
Value
Weighted-Average
Default
Impact of Adverse
Change on Fair
Value
10%
20%
Rate
10%
20%
Rate
($ in millions)
Residential mortgage loans:
Servicing assets
Servicing assets
Fixed
Adjustable
Fair
Value
$565
50
5.9
3.1
12.1%
26.5
$26
3
These sensitivities are hypothetical and should be used with
caution. As the figures 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 the effect of a
variation in a particular assumption on the fair value of the
$49
7
12.4
9.7 %
$20
2
$39
3
- %
-
servicing rights
is calculated without changing any other
assumption; 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.
$-
-
$-
-
Fifth Third Bancorp 65
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following table reflects changes in the servicing asset related to residential mortgage loans for the years ended December 31:
($ in millions)
Carrying amount as of the beginning of period
Servicing obligations that result from transfer of residential mortgage loans
Amortization
Carrying amount before valuation allowance
Valuation allowance for servicing assets:
Beginning balance
Servicing valuation impairment recovery
Ending balance
Carrying amount as of the end of the period
2007
$546
207
(91)
$662
(27)
(22)
(49)
$613
2006
479
135
(68)
546
(46)
19
(27)
519
in
Temporary impairment or impairment recovery, effected
through a change in the MSR valuation allowance, are reported as
a component of mortgage banking net revenue
the
Consolidated Statements of Income. The Bancorp maintains a
non-qualifying hedging strategy to manage a portion of the risk
associated with changes in value of the MSR portfolio. This
strategy
includes the purchase of free-standing derivatives
(principal-only swaps, swaptions and interest rate swaps) and
various available-for-sale securities
(primarily principal-only
strips). The interest income, mark-to-market adjustments and
gain or loss on sales activities associated with these portfolios are
expected to economically hedge a portion of the change in value
of the MSR portfolio caused by fluctuating discount rates,
earnings rates and prepayment speeds.
The Bancorp recognized a net gain of $29 million during
2007 and a net loss of $6 million during 2006 related to changes in
fair value and settlement of free-standing derivatives purchased to
economically hedge the MSR portfolio. As of December 31, 2007
and 2006, other assets
free-standing derivative
included
instruments related to the MSR portfolio with a fair value of $70
million and $14 million, respectively, and other liabilities included
free-standing derivative instruments with a fair value of $16
million and $5 million, respectively. The outstanding notional
amounts on the free-standing derivative instruments related to the
MSR portfolio totaled $4.3 billion and $2.9 billion as of December
31, 2007 and 2006, respectively. For the years ended December
31, 2007 and 2006, the Bancorp recognized a gain of $6 million
and $3 million, respectively, related to the sale of securities used to
economically hedge MSRs. As of December 31, 2007 and 2006,
the available-for-sale securities portfolio included $205 million and
$176 million, respectively, of securities related to the non-
qualifying hedging strategy.
The fair value of the servicing asset is based on the present
value of expected future cash flows. The following table displays
the beginning and ending fair value for the years ended December
31, 2007 and 2006:
($ in millions)
Fixed rate residential mortgage loans:
Fair value at beginning of period
Fair value at end of period
Adjustable rate residential mortgage loans:
Fair value at beginning of period
Fair value at end of period
floating-rate,
recourse, certain primarily
During 2007 and 2006, the Bancorp transferred, subject to
credit
short-term,
investment grade commercial loans to an unconsolidated QSPE
that is wholly owned by an independent third-party. The Bancorp
obtains servicing responsibilities and receives monthly servicing
fees. As of December 31, 2007 and 2006, the Bancorp had $3.0
billion and $3.4 billion, respectively, of outstanding loans with a
weighted-average remaining maturity of 2.3 years and 2.7 years,
respectively. These loans may be transferred back to the Bancorp
upon the occurrence of certain events. These events include
borrower default on the loans transferred, bankruptcy preferences
loans
initiated against underlying borrowers and
ineligible
($ in millions)
Commercial loans
Commercial mortgage
Commercial construction loans
Commercial leases
Residential mortgage loans
Home equity loans
Automobile loans
Other consumer loans and leases
Total loans and leases managed and securitized (a)
Less:
Loans securitized
Loans in unconsolidated QSPE
Loans held for sale
2007
$483
565
45
50
2006
413
483
45
45
transferred by the Bancorp to the QSPE. These commercial loans
are transferred at par with no gain or loss recognized. For the year
ended December 31, 2007, the Bancorp collected $1.1 billion in
cash proceeds from loan transfers and $30 million in fees from the
QSPE. For the year ended December 31, 2006, the Bancorp
collected $1.6 billion in cash proceeds from loan transfers and $30
million in fees from the QSPE.
The following table provides a summary of the total loans and
leases managed by the Bancorp, including loans securitized and
loans in the unconsolidated QSPE for the years ended December
31:
Balance
2007
$29,052
11,967
5,561
3,737
11,454
12,162
11,183
2,749
$87,865
2006
24,217
10,405
6,168
3,841
9,942
12,527
10,174
2,171
79,445
Balance of Loans 90 Days or
More Past Due
2007
43
73
67
5
187
74
13
32
494
2006
38
17
6
2
69
56
8
17
213
Net Credit
Losses
2007
109
44
29
-
43
99
86
54
464
2006
107
24
8
(1)
22
58
58
43
319
Total portfolio loans and leases
(a) Excluding securitized assets that the Bancorp continues to service but with which it has no other continuing involvement.
$310
2,973
4,329
$80,253
556
3,386
1,150
74,353
66
Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
10. DERIVATIVES
The Bancorp maintains an overall risk management strategy that
incorporates the use of derivative instruments to reduce certain
risks related to interest rate, prepayment and foreign currency
volatility.
The Bancorp’s
interest rate risk management strategy
involves modifying the repricing characteristics of certain financial
instruments so that changes in interest rates do not adversely
affect the net interest margin and cash flows. Derivative
instruments that the Bancorp may use as part of its interest rate
risk management strategy include interest rate swaps, interest rate
floors,
interest rate caps, forward contracts, options and
swaptions. Interest rate swap contracts are exchanges of interest
payments, such as fixed-rate payments for floating-rate payments,
based on a common notional amount and maturity date. Interest
rate floors protect against declining rates, while interest rate caps
protect against rising interest rates. Forward contracts are
contracts in which the buyer agrees to purchase, and the seller
agrees to make delivery of, a specific financial instrument at a
predetermined price or yield. Options provide the purchaser with
the right, but not the obligation, to purchase or sell a contracted
item during a specified period at an agreed upon price. Swaptions
are financial instruments granting the owner the right, but not the
obligation, to enter into or cancel a swap.
Prepayment volatility arises mostly from changes in fair value
of the largely fixed-rate MSR portfolio, mortgage loans and
mortgage-backed securities. The Bancorp may enter into various
free-standing derivatives (principal-only swaps, swaptions, floors,
options and
to economically hedge
prepayment volatility. Principal-only swaps are total return swaps
based on changes in the value of the underlying mortgage
principal-only trust.
interest rate swaps)
Foreign currency volatility occurs as the Bancorp enters into
certain foreign denominated loans. Derivative instruments that
the Bancorp may use to economically hedge these foreign
denominated loans include foreign exchange swaps and forward
contracts.
The Bancorp also enters into derivative contracts (including
foreign exchange contracts, commodity contracts and interest rate
swaps, floors and caps) for the benefit of commercial customers.
The Bancorp may economically hedge significant exposures
into
related to these free-standing derivatives by entering
offsetting
reputable
third-party contracts with approved,
counterparties with substantially matching terms and currencies.
Credit risk arises 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, counterparty
collateral and monitoring procedures.
($ in millions)
Included in other assets:
Interest rate swaps related to debt
Forward contracts related to mortgage loans held for sale
Total included in other assets
Included in other liabilities:
Interest rate swaps related to debt
Forward contracts related to mortgage loans held for sale
Total included in other liabilities
Fair Value Hedges
The Bancorp may enter into interest rate swaps to convert its
fixed-rate, long-term debt to floating-rate debt. Decisions to
convert fixed-rate debt to floating are made primarily through
consideration of the asset/liability mix of the Bancorp, the desired
asset/liability sensitivity and interest rate levels. For the years
ended December 31, 2007 and 2006, certain interest rate swaps
met the criteria required to qualify for the shortcut method of
accounting. Based on this shortcut method of accounting
treatment, no ineffectiveness is assumed. For interest rate swaps
that do not meet the shortcut requirements, an assessment of
hedge effectiveness was performed and such swaps were
accounted for using the “long-haul” method. The long-haul
method requires quarterly assessment of hedge effectiveness and
measurement of
interest rate swaps
accounted for as a fair value hedge using the long-haul method,
ineffectiveness is the difference between the changes in the fair
value of the interest rate swap and changes in fair value of the
long-term debt attributable to the risk being hedged. The
ineffectiveness on interest rate swaps hedging long-term debt is
reported within interest expense in the Consolidated Statements
of Income. For the years ended December 31, 2007 and 2006, the
Bancorp recognized a net gain of $3 million and a net loss of less
than $1 million, respectively, attributable to the ineffectiveness on
interest rate swaps hedging long-term debt.
ineffectiveness.
For
During 2006, the Bancorp terminated interest rate swaps
designated as fair value hedges and, in accordance with SFAS No.
133, an amount equal to the cumulative fair value adjustment to
the hedged items at the date of termination will be amortized as
an adjustment to interest expense over the remaining term of the
long-term debt. For the years ended December 31, 2007 and
2006, $11 million and $14 million in net deferred losses, net of
tax, on the terminated fair value hedges were amortized into
interest expense, respectively.
The Bancorp also enters into forward contracts to hedge its
residential mortgage loans held for sale. The hedged mortgage
loans held for sale are grouped into portfolios of loans with
similar risk exposure. For the years ended December 31, 2007
and 2006, the Bancorp recognized net losses of $11 million and $5
million, respectively, attributable to the ineffectiveness of the
hedging relationships related to residential mortgage loans held for
sale. The ineffectiveness of these forward contracts is reported
within noninterest
the Bancorp’s Consolidated
in
Statements of Income. Those forward contracts that do not meet
the criteria for fair value hedge accounting are accounted for as
free-standing derivatives.
income
The following table reflects the notional amount and fair
value of all fair value hedges included in the Consolidated Balance
Sheets as of December 31:
2007
Notional
Amount
Fair Value
2006
Notional
Amount
Fair Value
$ 3,000
183
$775
511
$ 67
1
$68
$21
4
$25
-
653
2,575
419
-
4
4
95
2
97
Fifth Third Bancorp 67
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Cash Flow Hedges
The Bancorp may enter into interest rate swaps to convert
floating-rate assets and liabilities to fixed rates or to hedge certain
forecasted transactions. The assets or liabilities are typically
grouped and share the same risk exposure for which they are
being hedged. The Bancorp may also enter into interest rate caps
and floors to limit cash flow variability of floating rate assets and
liabilities. As of December 31, 2007, all hedges designated as cash
flow hedges are assessed for effectiveness using regression
analysis. Ineffectiveness is generally measured as the amount by
which the cumulative change in the fair value of the hedging
instrument exceeds the present value of the cumulative change in
the hedged item’s expected cash flows. Ineffectiveness is reported
within other noninterest income in the Consolidated Statements
of Income. For the year ended December 31, 2007, the Bancorp
recognized a net gain of less than $1 million attributable to cash
flow hedge ineffectiveness. During the fourth quarter of 2007,
the Bancorp terminated certain interest rate swaps designated as
cash flow hedges. In conjunction with this termination, the
Bancorp reclassified $22 million of losses into earnings as it was
determined that the original forecasted transaction was no longer
probable of occurring by the end of the originally specified time
period or within the additional period of time as defined in SFAS
($ in millions)
Included in other assets:
Interest rate floors related to commercial loans
Interest rate caps related to debt
Total included in other assets
Included in other liabilities:
Interest rate swaps related to consumer loans
Total included in other liabilities
No. 133. These losses were reported within other noninterest
income in the Consolidated Statements of Income.
As of December 31, 2007, $25 million of deferred gains on
cash flow derivatives are recorded
in accumulated other
comprehensive income. Gains and losses on derivative contracts
are reclassified from accumulated other comprehensive income to
current period earnings when the forecasted transaction affects
earnings and are included in the line item in which the hedged
item's effect in earnings is recorded. As of December 31, 2007, $3
million in net deferred gains, net of tax, recorded in accumulated
other comprehensive income are expected to be reclassified into
earnings during the next twelve months.
In prior periods, the Bancorp terminated certain derivatives
qualifying as cash flow hedges. The deferred gains or losses of
those terminated instruments, net of tax, were included in
accumulated other comprehensive income and amortized over the
designated hedging periods. As of December 31, 2006, less than
$1 million of deferred losses, net of tax, related to terminated cash
flow hedges were recorded in accumulated other comprehensive
income.
The following table reflects the notional amount and market
value of all cash flow hedges included in the Consolidated Balance
Sheets as of December 31:
2007
Notional
Amount
Fair Value
2006
Notional
Amount
Fair Value
$1,500
1,750
$1,000
$ 107
11
$118
$11
$11
-
-
-
-
-
-
-
-
These
instruments
Free-Standing Derivative Instruments
The majority of the free-standing derivative instruments the
Bancorp enters into are for the benefit of commercial customers.
These derivative contracts are not designated against specific
assets or liabilities on the Consolidated Balance Sheets or to
forecasted transactions and, therefore, do not qualify for hedge
accounting.
include foreign exchange
derivative contracts entered into for the benefit of commercial
customers involved in international trade to hedge their exposure
to foreign currency fluctuations, commodity contracts to hedge
such items as natural gas and various other derivative contracts.
The Bancorp may economically hedge significant exposures
related to these derivative contracts entered into for the benefit of
customers by entering into offsetting contracts with approved,
reputable, independent counterparties with substantially matching
terms. The Bancorp hedges its interest rate exposure on
commercial customer transactions by executing offsetting swap
agreements with primary dealers. Revaluation gains and losses on
foreign exchange, commodity and other commercial customer
derivative contracts are recorded as a component of corporate
banking revenue in the Consolidated Statements of Income.
In 2007, the Bancorp began offering its customers an equity-
linked certificate of deposit that has a return linked to equity
indices. Under SFAS No. 133, a certificate of deposit that pays
interest based on changes on an equity index is a hybrid
instrument that requires separation into a host contract (the
certificate of deposit) and an embedded derivative contract
(written equity call option). The Bancorp enters into an offsetting
derivative contract to economically hedge the exposure taken
through the issuance of equity-linked certificates of deposit. Both
the embedded derivative and derivative contract entered into by
the Bancorp are recorded as free-standing derivatives and
recorded at fair value with offsetting gains and losses recognized
in the Consolidated Statements of Income.
68
Fifth Third Bancorp
The Bancorp enters
into foreign exchange derivative
contracts to economically hedge certain foreign denominated
loans. Derivative instruments that the Bancorp may use to
economically hedge these foreign denominated loans include
foreign exchange swaps and forward contracts. The Bancorp
does not designate
the foreign
instruments against
denominated
loans, and therefore, does not obtain hedge
accounting treatment. Revaluation gains and losses on such
foreign currency derivative contracts are recorded within other
noninterest income in the Consolidated Statements of Income, as
are revaluation gains and losses on foreign denominated loans.
these
As part of its overall risk management strategy relative to its
mortgage banking activity, the Bancorp may enter into various
free-standing derivatives (principal-only swaps, swaptions, floors,
options and interest rate swaps) to economically hedge changes in
fair value of its largely fixed-rate MSR portfolio. Principal-only
swaps hedge the mortgage-LIBOR spread because these swaps
appreciate in value as a result of tightening spreads. Principal-only
swaps also provide prepayment protection by increasing in value
when prepayment speeds increase, as opposed to MSRs that lose
value in a faster prepayment environment. Receive fixed/pay
floating interest rate swaps and swaptions increase in value when
interest rates do not increase as quickly as expected. The Bancorp
enters into forward contracts to economically hedge the change in
fair value of certain residential mortgage loans held for sale due to
changes in interest rates. The Bancorp enters into forward swaps
to economically hedge the change in fair value of certain
commercial mortgage loans held for sale due to changes in interest
rates. Interest rate lock commitments issued on commercial and
residential mortgage loan commitments that will be held for resale
are also considered free-standing derivative instruments and the
interest rate exposure on these commitments is economically
hedged primarily with forward contracts. Revaluation gains and
losses from free-standing derivatives related to mortgage banking
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
activity are recorded as a component of mortgage banking net
revenue in the Consolidated Statements of Income.
Additionally, the Bancorp occasionally may enter into free-
standing derivative instruments (options, swaptions and interest
rate swaps) in order to minimize significant fluctuations in
earnings and cash flows caused by interest rate volatility. The
gains and losses on these derivative contracts are recorded within
($ in millions)
Foreign exchange contracts
Commodity contracts for customers
Interest rate lock commitments
Derivative instruments related to held for sale mortgages
Derivative instruments related to MSR portfolio
Derivative instruments related to foreign currency risk
Derivative instruments related to interest rate risk
other noninterest income in the Consolidated Statements of
Income.
The net gains
(losses) recorded
the Consolidated
Statements of Income relating
to free-standing derivative
instruments for the years ended December 31 are summarized in
the table below:
in
2007
$60
2
3
(14)
23
(19)
(1)
2006
53
-
(2)
7
(9)
3
(20)
2005
52
-
1
(2)
(23)
-
3
The following table reflects the fair value of all free-standing derivatives included in the Consolidated Balance Sheets as of December 31:
($ in millions)
Included in other assets:
Foreign exchange contracts for customers
Interest rate contracts for customers
Commodity contracts for customers
Derivative instruments related to equity-linked CD
Interest rate lock commitments
Derivative instruments related to held for sale mortgages
Derivative instruments related to MSR portfolio
Derivative instruments related to foreign currency risk
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
Commodity contracts for customers
Derivative instruments related to equity-linked CD
Interest rate lock commitments
Derivative instruments related to held for sale mortgages
Derivative instruments related to MSR portfolio
Derivative instruments related to foreign currency risk
Derivative instruments related to interest rate risk
Total included in other liabilities
2007
Notional
Amount
Fair Value
2006
Notional
Amount
Fair Value
$7,132
12,265
167
50
656
229
3,062
-
1
$6,642
12,430
163
50
253
588
1,280
153
-
$255
391
28
5
3
1
70
-
-
$753
$234
391
22
5
1
9
16
1
-
$679
5,064
8,174
68
-
389
243
2,335
68
213
4,783
8,398
62
-
750
103
583
-
7
164
110
4
-
2
1
14
1
9
305
149
110
4
-
3
1
5
-
-
272
The following table summarizes the Bancorp’s derivative instrument positions (excluding $39.8 billion in notional amount from the customer
accommodation program) at December 31, 2007:
($ in millions)
Interest rate swaps related to debt:
Receive fixed/pay floating
Mortgage lending commitments:
Forward contracts on residential mortgage loans held for sale
Forward contracts on commercial mortgage loans held for sale
Mortgage servicing rights portfolio:
Interest rate swaps – Receive fixed/pay floating
Interest rate swaps – Receive floating/pay fixed
Interest rate swaptions – Pay fixed
Interest rate swaptions – Receive fixed
Aggregate balance sheet risk:
Interest rate floors
Interest rate caps
Forward swaps related to consumer loans
Foreign currency forward contracts
Interest rate futures/forwards
Total
Notional
Amount
$3,775
1,415
96
1,012
1,280
1,375
675
1,500
1,750
1,000
153
1
$14,032
Weighted-Average
Remaining Maturity
(in months)
Average Receive
Rate
Average Pay
Rate
247
5.44 %
5.35 %
1
98
88
47
2
9
64
42
23
2
14
5.44
4.95
4.31
5.09
4.72
5.48
Fifth Third Bancorp 69
11. OTHER ASSETS
The following table provides the components of other assets included in the Consolidated Balance Sheets as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Accounts receivable and drafts-in-process
Bank owned life insurance
Partnership investments
Derivative instruments
Accrued interest receivable
Other real estate owned
Prepaid pension and other expenses
Other
Total
The Bancorp purchases life insurance policies on the lives of
certain directors, officers and employees and is the owner and
beneficiary of the policies. The Bancorp invests in these policies,
known as BOLI, to provide an efficient form of funding for long-
term retirement and other employee benefits costs. Therefore,
the Bancorp’s BOLI policies are intended to be long-term
investments to provide funding for future payment of long-term
liabilities. The Bancorp records these BOLI policies within other
assets in the Consolidated Balance Sheets at each policy’s
respective cash surrender value, with changes recorded
in
noninterest income in the Consolidated Statements of Income.
Certain BOLI policies have a stable value agreement through
either a large, well-rated bank or multi-national insurance carrier
that provides limited cash surrender value protection from
declines in the value of each policy’s underlying investments.
During the second half of 2007, the value of the investments
12. SHORT-TERM BORROWINGS
Borrowings with original maturities of one year or less are classified
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
($ in millions)
As of December 31:
Federal funds purchased
Other short-term borrowings
Average for the years ended 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
2007
$1,892
1,832
958
939
564
159
116
563
$7,023
2006
1,446
1,949
698
309
533
90
119
626
5,770
underlying one of
the Bancorp’s BOLI policies declined
significantly due to disruptions in the credit markets, widening of
credit spreads between U.S. treasuries/swaps versus municipal
bonds and bank trust preferred securities, and illiquidity in the
asset-backed securities market. These factors caused the decline
in the cash surrender value to exceed the protection provided by
the stable value agreement.
As a result of exceeding the cash surrender value protection,
the Bancorp recorded a $177 million charge during the fourth
quarter of 2007 to reflect the cash surrender value related to this
policy. The cash surrender value of this BOLI policy was $505
million at December 31, 2007. In 2008, the cash surrender value
of this policy may increase or decrease further depending on
market conditions related to the underlying investments.
At December 31, 2007, the cash surrender value protection
had not been exceeded for any other BOLI policies.
banks. Other short-term borrowings include securities sold under
repurchase agreements, FHLB advances and other borrowings with
original maturities of one year or less. A summary of short-term
borrowings and weighted-average rates follows:
2007
2006
2005
Amount
Rate
Amount
Rate
Amount
Rate
$4,427
4,747
$3,646
-
3,244
$5,130
-
5,381
3.29%
3.90
5.04%
-
4.32
$1,421
2,796
$4,148
-
4,522
$5,434
-
6,287
5.26%
4.04
5.02%
-
4.28
$5,323
4,246
$4,225
248
5,038
$6,378
775
6,531
3.93%
2.94
3.26%
2.60
2.74
70
Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
13. LONG-TERM DEBT
A summary of long-term borrowings at December 31:
($ in millions)
Parent Company
Senior:
Extendable notes
Subordinated(b):
Fixed-rate notes
Fixed-rate notes
Floating-rate notes
Junior subordinated:
Fixed-rate debentures (b)
Floating-rate notes (a)
Floating-rate notes (a)
Floating-rate notes (a)
Subsidiaries
Senior:
Fixed-rate bank notes
Floating-rate bank notes
Extendable bank notes
Subordinated(b):
Fixed-rate bank notes
Junior subordinated(a):
Floating-rate bank notes
Floating-rate debentures
Floating-rate debentures
Mandatorily redeemable securities (a)
Federal Home Loan Bank advances
Other
Total
(a) Qualify as Tier I capital for regulatory capital purposes.
(b) Qualify as Tier II capital for regulatory capital purposes.
The Bancorp pays down long-term debt in accordance with
contractual terms over maturity periods summarized in the above
table. Contractually obligated payments for long-term debt are
due over the following periods as of December 31, 2007: $2.2
billion in 2008; $2.8 billion in 2009, $800 million in 2010, $2
million in 2011, $1.0 billion in 2012 and $6.0 billion after 2012.
Parent Company Long-Term Borrowings
The senior extendable notes currently pay interest at one-month
LIBOR plus 1 bp and, in 2008, the notes can be extended an
additional twelve months paying an interest rate of one-month
LIBOR plus 2 bp. During 2007, $31 million of the notes were
extended and the final maturity of these notes is 2009.
The Bancorp entered into interest rate swaps to convert the
subordinated fixed-rate notes due in 2017 and 2018 to floating-
rate. The rate paid on these swaps was 5.24% and 5.12%,
respectively, at December 31, 2007. The subordinated floating-
rate notes due in 2016 pay interest at three-month LIBOR plus 42
bp.
The 7.25% junior subordinated floating-rate notes due in
2067, with an outstanding debt balance of $876 million at
December 31, 2007, pay a fixed rate of 7.25% until 2057, then
convert to floating at three-month LIBOR plus 303 bp. The
Bancorp entered into interest rate swaps to convert $700 million
of the fixed-rate debt into floating. At December 31, 2007, the
weighted-average rate paid on the swaps was 6.11%. The 6.50%
junior subordinated floating-rate notes due in 2067 pay a fixed
rate of 6.50% until 2017, then convert to floating at three-month
LIBOR plus 137 bp until 2047. Thereafter, the notes pay a
floating rate at one-month LIBOR plus 237 bp. The junior
subordinated floating-rate notes due in 2067, with an outstanding
debt balance of $601 million at December 31, 2007, pay a fixed
rate of 7.25% until 2057, then convert to floating at three-month
LIBOR plus 257 bp. The Bancorp entered into interest rate swaps
to convert $500 million of the fixed-rate debt into floating. At
December 31, 2007, the weighted-average rate paid on these
swaps was 5.59%. The obligations were issued to Fifth Third
Capital Trusts IV, V and VI, respectively. The Bancorp has fully
Maturity
Interest Rate
2007
2006
2008 - 2009
4.91%
$1,745
1,748
2017
2018
2016
2027
2067
2067
2067
5.45%
4.50%
5.35%
8.14%
7.25%
6.50%
7.25%
2008 - 2019
2013
2009 - 2014
2.87% - 5.20%
5.02%
4.66% - 5.05%
2015
4.75%
2032 - 2033
2027
2033 - 2034
2031
2008 - 2037
2008 - 2032
8.09%-8.78%
7.73% - 7.78%
0% - 8.34%
Varies
510
485
250
-
876
750
601
1,640
500
1,200
513
52
-
67
-
3,571
97
$12,857
492
459
250
217
-
-
-
2,006
500
1,200
492
-
103
67
647
4,258
119
12,558
and unconditionally guaranteed all obligations under these trust
preferred securities. In addition, the Bancorp entered into
replacement capital covenants for the benefit of holders of long-
term debt senior to the junior subordinated notes that limits,
subject to certain restrictions, the Bancorp’s ability to redeem the
junior subordinated notes prior to their scheduled maturity.
During the first quarter of 2007, the Bancorp called the
8.14% junior subordinated debentures due in 2027 to Fifth Third
Capital Trust I.
Subsidiary Long-Term Borrowings
The senior fixed-rate bank notes due from 2008 to 2019 are the
obligations of a subsidiary bank. The maturities of the face value
of the senior fixed-rate bank notes are as follows: $500 million in
2008, $73 million in 2009, $800 million in 2010 and $275 million
in 2019. The Bancorp entered into interest rate swaps to convert
$1.1 billion of the fixed-rate debt into floating rates. At
December 31, 2007, the rates paid on these swaps ranged from
5.04% to 5.12%.
The senior floating-rate bank notes due in 2013 are the
obligations of a subsidiary bank. The notes pay a floating rate at
three-month LIBOR plus 11 bp.
The senior extendable notes consist of $800 million that
currently pay interest at three-month LIBOR plus 4 bp and $400
million that pay at the Federal Funds open rate plus 12 bp. In
2008, the notes can be extended an additional six years paying an
interest rate of one-month LIBOR plus 6 bp. During 2007, only
$3 million of the notes were extended and the final maturity of
these notes is 2014.
The subordinated fixed-rate bank notes due in 2015 are the
obligations of a subsidiary bank. The Bancorp entered into
interest rate swaps to convert the fixed-rate debt into floating rate.
At December 31, 2007, the weighted-average rate paid on the
swaps was 5.01%.
The junior subordinated floating-rate bank notes due in 2032
and 2033 were assumed by a Bancorp subsidiary as part of the
acquisition of Crown in November 2007. Two of the notes pay
floating at three-month LIBOR plus 310 and 325 bp. The third
Fifth Third Bancorp 71
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
note pays floating at six-month LIBOR plus 370 bp.
The three-month LIBOR plus 290 bp and the three-month
LIBOR plus 279 bp junior subordinated debentures due in 2033
and 2034, respectively, were assumed by a subsidiary of the
Bancorp in connection with the acquisition of First National
Bank. The obligations were issued to FNB Statutory Trusts I and
II, respectively. The Bancorp has fully and unconditionally
guaranteed all obligations under these trust preferred securities.
At December 31, 2007, FHLB advances have rates ranging
from 0% to 8.34%, with interest payable monthly. The advances
are secured by certain residential mortgage loans and securities
totaling $8.6 billion. The advances mature as follows: $6 million
in 2008, $1.5 billion in 2009, $1 million in 2010, $2 million in 2011
and $2.1 billion in 2012 and thereafter.
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 $3.8 billion was outstanding at
December 31, 2007 with $16.2 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, 2007.
During the first quarter of 2007, the Bancorp called the
three-month LIBOR plus 80 bp junior subordinated debentures
due in 2027 to Old Kent Capital Trust I. In addition, all of the
issued and outstanding shares of preferred stock related to the
mandatorily redeemable securities of Fifth Third Real Estate
Investment Trust, Inc. were purchased by a wholly-owned
subsidiary of the parent company during the third quarter of 2007.
14. COMMITMENTS, CONTINGENT LIABILITIES AND GUARANTEES
The Bancorp, in the normal course of business, enters into
instruments and various agreements to meet the
financial
financing needs of its customers. The Bancorp also enters in
certain transactions and agreements to manage its interest rate and
prepayment risks, provide funding, equipment and locations for
its operations and invest in its communities. These instruments
and agreements 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.
Creditworthiness for all instruments and agreements is evaluated
on a case-by-case basis in accordance with the Bancorp’s credit
policies. The Bancorp’s significant commitments, contingent
liabilities and guarantees in excess of the amounts recognized in
the Consolidated Balance Sheets are summarized as follows:
than $1 million. Approximately 70% of the total standby letters
of credit were secured as of December 31, 2007 and 2006. In the
event of nonperformance by the customers, the Bancorp has
rights to the underlying collateral, which can include commercial
real estate, physical plant and property, inventory, receivables,
cash and marketable securities.
lease
agreements. The minimum
The Bancorp’s subsidiaries have entered into a number of
noncancelable
rental
commitments under noncancelable lease agreements are shown in
the table. The Bancorp or the subsidiaries have also entered into a
limited number of agreements for work related to banking center
construction and to purchase goods or services.
Commitments
The Bancorp has certain commitments to make future payments
under contracts. A summary of significant commitments at
December 31:
($ in millions)
Commitments to extend credit
Letters of credit (including standby letters of
credit)
Customer derivatives in a loss position
Forward contracts to sell mortgage loans
Noncancelable lease obligations
Capital expenditures
Purchase obligations
2007
$49,788
2006
42,085
8,522
1,797
1,511
734
94
52
8,163
4,546
1,418
695
126
24
Commitments to extend credit are agreements to lend,
typically having fixed expiration dates or other termination clauses
that 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 flow 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 fluctuations in interest rates and the Bancorp’s
exposure
those
commitments. As of December 31, 2007 and 2006, the Bancorp
had a reserve for unfunded commitments totaling $95 million and
$76 million, respectively, included in other liabilities.
replacement value of
limited
the
to
is
Standby and commercial letters of credit are conditional
commitments issued to guarantee the performance of a customer
to a third party. At December 31, 2007, approximately $2.8
billion of standby letters of credit expire within one year, $5.3
billion expire between one to five years and $0.5 billion expire
thereafter.
letters of credit of
approximately $17 million were issued to commercial customers
for a duration of one year or less to facilitate trade payments in
domestic and foreign currency transactions. At December 31,
2007, the reserve related to these standby letters of credit was less
At December 31, 2007,
72
Fifth Third Bancorp
to accommodate customers,
Contingent Liabilities
As discussed in Note 10, the Bancorp’s policy is to enter into
derivative contracts
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. A liability arises when a
customer does not perform according to the derivative contract
while the Bancorp must perform the offsetting agreement.
Customer derivatives in a loss position with a corresponding
offset are included in the table. The fair value of these contracts at
December 31, 2007 and 2006 was $23 million and $69 million,
respectively.
The Bancorp, through its electronic payment processing
division, processes 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
cardholder’s favor. In such cases, these transactions are “charged-
back” to the merchant and disputed amounts are refunded to the
cardholder. If the Bancorp is unable to collect these amounts
from the merchant, it will bear the loss for refunded amounts.
The likelihood 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 years ended December 31, 2007 and 2006, the
Bancorp processed approximately $126 million and $120 million,
respectively, of chargebacks presented by issuing banks, resulting
in no material losses to the Bancorp. The Bancorp accrues for
probable losses based on historical experience and did not carry a
credit loss reserve related to such chargebacks at December 31,
2007 and 2006.
There are legal claims pending against the Bancorp and its
subsidiaries that have arisen in the normal course of business. See
Note 15 for additional information regarding these proceedings.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Guarantees
The Bancorp has performance obligations upon the occurrence of
certain events under financial guarantees provided in certain
contractual arrangements.
investment grade commercial
Through December 31, 2007 and 2006, the Bancorp had
transferred, subject to credit recourse, certain primarily floating-
rate, short-term
loans to an
unconsolidated QSPE that is wholly owned by an independent
third party. The outstanding balance of such loans at December
31, 2007 and 2006 was approximately $3.0 billion and $3.4 billion,
respectively. These loans may be transferred back to the Bancorp
upon the occurrence of certain specified events. These events
include borrower default on the loans transferred, bankruptcy
preferences initiated against underlying borrowers and ineligible
loans transferred 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 $3.0 billion and $3.4 billion, respectively, at
December 31, 2007 and 2006. In addition, the Bancorp’s
agreement to provide liquidity support to the QSPE was $5.0
billion as of year end 2007 compared to $3.8 billion as of year end
2006. During the years ended December 31, 2007 and 2006, no
amounts were drawn on the liquidity agreement. At December 31,
2007 and 2006, the Bancorp’s loss reserve related to the liquidity
support and credit enhancement provided to the QSPE was $18
million and $16 million, respectively, recorded in other liabilities
on the Consolidated Balance Sheets. To determine the credit loss
reserve, the Bancorp used an approach that is consistent with its
overall approach in estimating credit losses for various categories
of residential mortgage loans held in its loan portfolio.
At the end of the third quarter of 2007, the Bancorp began
purchasing asset-backed commercial paper from the QSPE due to
widening credit spreads in the commercial paper market. As of
December 31, 2007, the amount of commercial paper held by the
Bancorp was $83 million, representing three percent of the total
commercial paper issued by the QSPE.
At December 31, 2007 and 2006, the Bancorp had provided
credit recourse on residential mortgage loans sold to unrelated
third parties of approximately $1.5 billion and $1.3 billion,
respectively. 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. In the event of nonperformance, the
Bancorp has rights to the underlying collateral value securing the
loan. The Bancorp maintained an estimated credit loss reserve of
approximately $17 million and $18 million relating to these
residential mortgage loans sold at December 31, 2007 and 2006,
respectively, recorded in other liabilities on the Consolidated
15. LEGAL AND REGULATORY PROCEEDINGS
During May 2005, the Bancorp filed suit in the United States
District Court for the Southern District of Ohio related to a
dispute with the Internal Revenue Service concerning the timing
of deductions associated with certain leveraged lease transactions
in its 1997 tax return. The Internal Revenue Service has also
proposed adjustments to the tax effects of certain leveraged lease
transactions in subsequent tax return years. The proposed
adjustments, including penalties, relate to the Bancorp’s portfolio
of lease-in lease-out transactions, service contract leases and
qualified technology equipment leases with both domestic and
foreign municipalities. The Bancorp is challenging the Internal
Revenue Service’s proposed treatment of all of these leasing
transactions. The Bancorp’s original net investment in these
leases totaled approximately $900 million. Management continues
to believe that its treatment of these leveraged leases was
appropriate and in compliance with applicable tax law and
regulations. While management cannot predict with certainty the
Balance Sheets. To determine the credit loss reserve, the Bancorp
used an approach that is consistent with its overall approach in
estimating credit losses for various categories of residential
mortgage loans held in its loan portfolio.
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 benefit 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 brokerage clearing agent as of
December 31, 2007 was $48 million compared to $51 million as of
December 31, 2006. In the event of any customer default, FTS
has rights to the underlying collateral provided. Given the
existence of the underlying collateral provided and negligible
historical credit losses, the Bancorp does not maintain a loss
reserve related to the margin accounts.
As of December 31, 2007 and 2006, the Bancorp had fully
and unconditionally guaranteed certain long-term borrowing
obligations issued by four wholly-owned issuing trust entities of
$2.3 billion and $376 million, respectively.
For further
information on long-term borrowing obligations, see Note 13.
in accordance with
The Bancorp, as a member bank of Visa has certain
indemnification obligations pursuant to Visa’s certificate of
incorporation and bylaws and
their
membership agreements. In accordance with the Visa bylaws, the
Bancorp may be required to indemnify Visa for the Bancorp’s
proportional share of losses based on its membership interests.
On October 3, 2007, Visa announced it had completed
restructuring transactions in preparation for its initial public
offering (“IPO”) expected to occur in the first quarter of 2008.
As part of this restructuring, the Bancorp’s indemnification
obligation was modified to include only certain known litigation as
of the date of restructuring. This modification triggered a
requirement to fair value the indemnification obligation in
accordance with FIN 45, “Guarantor’s Accounting and Disclosure
Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others.” Accordingly, the Bancorp recorded an
indemnification liability under FIN 45 of $3 million. The Bancorp
has also recorded $85 million for its share of litigation settled by
Visa and $84 million for future settlements. These amounts are
accrued under SFAS No. 5 “Accounting for Contingencies.” Visa
has announced that they expect to fund an escrow account from a
portion of the IPO proceeds in order to resolve their remaining
litigation. In the event this occurs, a portion or all of the
Bancorp’s current liability at December 31, 2007 of $172 million
would no longer be required.
result of the suit, given the tax treatment of these transactions has
been challenged by the Internal Revenue Service, management
believes a resolution may involve a projected change in the timing
of the leveraged lease cash flows. Under FSP FAS No. 13-2,
which was effective as of January 1, 2007, a change or projected
change in the timing of lessor cash flows related to income taxes
generated by leveraged lease transactions, excluding interest and
penalty assessments, requires a lessor to recalculate the rate of
return and allocation of income to positive investment years from
inception of the lease. Upon adoption of FSP FAS No. 13-2 on
January 1, 2007, the Bancorp recorded a $96 million after-tax
charge to retained earnings related to its portfolio of leveraged
leases. The amount of this reduction will be recognized as income
over the remaining term of the affected leases. During the first
quarter of 2007, the Bancorp made deposits of $386 million with
the IRS to mitigate the risk associated with tax years currently
under audit. These deposits enable the Bancorp to stop the
Fifth Third Bancorp 73
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
accrual of interest on any tax deficiency, to the extent of the
deposit, if the Bancorp is not ultimately successful. Trial for this
litigation is scheduled to begin March 31, 2008.
During April 2006, the Bancorp was added as a defendant in
a consolidated antitrust class action lawsuit originally filed against
Visa®, MasterCard® and several other major financial institutions
in the United States District Court for the Eastern District of
New York. The plaintiffs, merchants operating commercial
businesses throughout the U.S. and trade associations, claim that
fees charged by card-issuing banks are
the
unreasonable and seek injunctive relief and unspecified damages.
In addition to being a named defendant, the Bancorp is also
subject to an indemnification obligation of Visa as discussed in
Note 14. Accordingly, the Bancorp recorded a contingent liability
included in the $172 million litigation reserve.
interchange
Several putative class action complaints have been filed
against the Bancorp in various federal and state courts. The
federal cases were consolidated by the Judicial Panel on
Multidistrict Litigation and are now known as “In Re TJX Security
Breach Litigation.” The state court actions have been removed to
federal court and have been consolidated into that same case. The
complaints relate to the alleged intrusion of The TJX Companies,
Inc.’s (“TJX”) computer system and the potential theft of their
customers’ non-public information and alleged violations of the
Gramm-Leach-Bliley Act. Some of the complaints were filed by
consumers and seek unquantified damages on behalf of putative
classes of persons who transacted business at any one of TJX’s
stores during the period of the alleged intrusion. Another was
filed by financial institutions and seeks unquantified damages on
behalf of other similarly situated entities that suffered losses in
relation to the alleged intrusion. The U.S. District Court
(“Court”) has granted the Bancorp’s motion to dismiss certain of
the claims, but additional claims remain pending. On November
29, 2007, the U.S. District Court, District of Massachusetts
("District Court") issued an order denying Plaintiffs’ Motion for
Class Certification in the consolidated cases brought by financial
institutions (the “Financial Institution Track”). On December 18,
2007, the District Court entered its final order in the Financial
Institution Track litigation that i) denied Plaintiffs’ Motion for
Leave to Amend their Complaint, without prejudice; ii) dismissed
the case for lack of subject matter jurisdiction; and iii) transferred
the case from
the
Massachusetts Superior Court in and for the County of Middlesex
("Massachusetts State Court"). On December 18, 2007, TJX
Companies, Inc. filed a notice of Appeal to the United States
Court of Appeals for the First Circuit ("First Circuit") as to that
portion of the Court's December 18 order transferring the case to
Massachusetts State Court and an emergency motion to stay the
Massachusetts State Court proceedings pending the appeal. On
the United States District Court
to
16. RELATED PARTY TRANSACTIONS
At December 31, 2007 and 2006, certain directors, executive
officers, principal holders of Bancorp common stock, associates of
such persons, and affiliated companies of such persons were
indebted,
lend, to the
Bancorp’s banking subsidiaries in the aggregate amount, net of
participations, of $348 million and $271 million, respectively. As
of December 31, 2007 and 2006, the outstanding balance on loans
to related parties, net of participations and undrawn commitments,
was $132 million and $76 million, respectively.
including undrawn commitments to
Commitments to lend to related parties as of December 31,
2007 and 2006, net of participations, were comprised of $340
million and $260 million, respectively, to directors and $8 million
and $11 million at December 31, 2007 and 2006 to executive
officers. The commitments are in the form of loans and
guarantees for various business and personal interests. This
indebtedness was incurred in the ordinary course of business on
substantially the same terms, including interest rates and collateral,
74
Fifth Third Bancorp
December 19, 2007, the First Circuit granted the request for stay
until further order of the Court. On December 20, 2007, Fifth
Third likewise filed a notice of appeal to the First Circuit solely as
to that portion of the District Court’s December 18 Order
transferring the case to the Massachusetts State Court. On
December 21, 2007, Plaintiffs also filed a Notice of Appeal in the
First Circuit as to the entirety of the District Court's December 18
Order and also as to all other prior "adverse rulings" including,
without limitation, the District Court’s denial of class certification
and dismissal of various claims. In regard to the consumer track
litigation, on January 9, 2008, the District Court issued an Order
of Preliminary Approval of a proposed class action settlement
funded solely by TJX and for the Publishing of Notice of a Final
Fairness Hearing set for July 15, 2008.
In June 2007, Ronald A. Katz Technology Licensing, L.P.
(“Katz”) filed a suit in the United States District Court for the
Southern District of Ohio against the Bancorp and its Ohio
banking subsidiary. In the suit, Katz alleges that the Bancorp and
its Ohio bank are infringing on Katz’s patents for interactive call
processing technology by offering certain automated telephone
banking and other services. This lawsuit is one of many related
patent infringement suits brought by Katz in various courts
against numerous other defendants. Katz is seeking unspecified
monetary damages and penalties as well as injunctive relief in the
suit. Management believes there are substantial defenses to these
claims and intends to defend them vigorously. The impact of the
final disposition of this lawsuit cannot be assessed at this time.
In February 2008, a shareholder of the Bancorp filed a
derivative suit in the Court of Common Pleas for Hamilton
County, Ohio, against the members of the Bancorp's Board of
Directors and, nominally, the Bancorp, alleging breach of fiduciary
duty and waste of corporate assets, among other charges, in
relation to the approval of the Bancorp's acquisition of First
Charter Corporation. The suit seeks an injunction to halt
proceeding with the acquisition of First Charter Corporation, an
independent valuation of First Charter Corporation as to its
worth, unspecified compensatory damages in favor of the
Bancorp from the Directors as well as costs and attorneys fees to
the plaintiff. The impact of the final disposition of this lawsuit
cannot be assessed at this time.
The Bancorp and its subsidiaries are not parties to any other
material litigation. However, there are other litigation matters that
arise in the normal course of business. While it is impossible to
ascertain the ultimate resolution or range of financial 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 financial position
or results of operations or cash flows.
as those prevailing at the time of comparable transactions with
unrelated parties. This indebtedness does not involve more than
the normal risk of repayment or present other unfavorable features.
None of the Bancorp’s affiliates, officers, directors or
employees has an interest in or receives any remuneration from any
special purpose entities or qualified special purpose entities with
which the Bancorp transacts business.
The Bancorp maintains a written policy and procedures
covering related party transactions. These procedures cover
transactions such as employee-stock purchase loans, personal lines
of credit, residential secured loans, overdrafts, letters of credit and
increases in indebtedness. Such transactions are subject to the
Bancorp’s normal underwriting and approval procedures. Prior to
the loan closing, Compliance Risk Management must approve and
determine whether the transaction requires approval from or a post
notification be sent to the Bancorp’s Board of Directors.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
17. ACCUMULATED OTHER COMPREHENSIVE INCOME
The Bancorp has elected to present the disclosures required by
SFAS No. 130, “Reporting of Comprehensive Income,” in the
Consolidated Statements of Changes in Shareholders’ Equity and
Disclosure of the reclassification
in the following table.
adjustments, related tax effects allocated to other comprehensive
income and accumulated other comprehensive income as of and
for the years ended December 31 were as follows:
Total Other Comprehensive
Total Accumulated Other
Comprehensive Income
Net
Activity
Beginning
Balance
Net
Activity
Ending
Balance
($ in millions)
2007
Gains on available-for-sale securities
Reclassification adjustment for net gains recognized in net income
Unrecognized gains (losses) on available-for-sale securities
Gains on cash flow hedge derivatives
Reclassification adjustment for net gains on cash flow hedge
derivatives recognized in net income
Unrecognized gains (losses) on cash flow hedge derivatives
Defined benefit plans:
Net prior service cost
Net actuarial loss
Total pension and other postretirement obligations
Total
2006
Gains on available-for-sale securities
Reclassification adjustment for net losses recognized in net income
Unrecognized gains (losses) on available-for-sale securities
Reclassification adjustment for cash flow hedge derivative net losses
recognized in net income
Unrecognized gains (losses) on cash flow hedge derivatives
Minimum pension liability (a)
Cumulative effect of change in accounting for pension and other
postretirement obligations (a)
Total
2005
Losses on available-for-sale securities
Reclassification adjustment for net gains recognized in net income
Unrecognized losses on available-for-sale securities
Gains on cash flow hedge derivatives
Reclassification adjustment for net losses recognized in net income
Unrecognized gains (losses) on cash flow hedge derivatives
Pretax
Activity
Income
Tax
Effect
$60
(21)
39
42
(1)
41
-
3
3
$83
$61
364
425
20
20
(23)
9
(14)
(15)
-
(15)
-
(1)
(1)
(30)
(20)
(129)
(149)
(8)
(8)
$445
(157)
$(455)
(39)
(494)
9
21
30
158
13
171
(3)
(7)
(10)
37
(12)
25
27
(1)
26
-
2
2
53
41
235
276
12
12
288
(297)
(26)
(323)
6
14
20
59
Minimum pension liability
Total
(244)
(a) Upon adoption of SFAS No. 158, the Bancorp measured its liability for its total pension and other postretirement obligations to be $59 million.
90
$(374)
(31)
130
(119)
25
(94)
(1)
(59)
(179)
26
2
53
25
(57)
(126)
(395)
276
(119)
(13)
(5)
-
(413)
12
5
(59)
234
(1)
-
(59)
(179)
(72)
(323)
(395)
(33)
(64)
(169)
20
59
(244)
(13)
(5)
(413)
Fifth Third Bancorp 75
18. COMMON STOCK AND TREASURY STOCK
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The following is a summary of the share activity within common stock issued and treasury stock for the years ended December 31:
($ and shares in millions)
Shares at December 31, 2004
Shares acquired for treasury
Stock-based awards exercised, including treasury shares issued
Restricted stock grants
Shares issued in business combinations
Retirement of shares
Shares at December 31, 2005
Shares acquired for treasury
Stock-based awards exercised, including treasury shares issued
Restricted stock grants
Shares at December 31, 2006
Shares acquired for treasury
Stock-based awards exercised, including treasury shares issued
Restricted stock grants
Employee stock ownership through benefit plans
Shares at December 31, 2007
Common Stock
Value
$1,295
-
-
-
11
(11)
$1,295
-
-
-
$1,295
-
-
-
-
$1,295
Shares
583
-
-
-
5
(5)
583
-
-
-
583
-
-
-
-
583
Treasury Stock
Value
$1,414
1,746
(206)
(43)
(1,413)
(219)
$1,279
82
(84)
(45)
$1,232
1,084
(86)
(59)
38
$2,209
Shares
26
38
(4)
(1)
(26)
(5)
28
2
(2)
(1)
27
27
(2)
(1)
1
52
The Bancorp’s stock repurchase program is an important element
of its capital planning activities and the Bancorp views share
repurchases as an effective means of delivering value to
shareholders. On May 21, 2007, the Bancorp announced that its
Board of Directors had authorized management to purchase an
additional 30 million shares of the Bancorp’s common stock
through the open market or in any private transaction. During
2007, the Bancorp repurchased approximately 27 million shares of
its common stock, five percent of total outstanding shares, in
open market transactions for $1.1 billion. At December 31, 2007,
approximately 19.2 million shares
for
repurchase.
remain authorized
During 2006, the Bancorp repurchased approximately 2
million shares of its common stock, less than one percent of total
outstanding shares, in open market transactions for $82 million.
transaction with a counterparty for
On January 10, 2005, the Bancorp executed an overnight
share repurchase
the
acquisition of 35.5 million shares of its common stock at a
purchase price of $45.95 per share, or $1.6 billion. Pursuant to the
agreement with the counterparty, the counterparty purchased 35.5
million shares in the open market over a period of time that was
completed during the third quarter of 2005. In accordance with
19. STOCK-BASED COMPENSATION
The Bancorp has historically emphasized employee stock ownership.
Based on total stock-based awards outstanding and shares remaining
for future grants under the Incentive Compensation Plan, the
Bancorp’s total overhang is approximately nine percent. The following
EITF Issue 99-7 “Accounting for an Accelerated Share
Repurchase Program,” the share transaction was considered two
separate transactions, (i) the acquisition of treasury shares on the
acquisition date and (ii) a forward contract indexed to the
Bancorp’s stock. The treasury shares were accounted for at cost as
a contra equity transaction. The forward contract associated with
the overnight share repurchase transaction was accounted for in
accordance with EITF Issue 00-19, “Accounting for Derivative
Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock,” as an equity instrument. At the end of
the purchase period, the Bancorp received a cash payment of $97
million for the purchase price adjustment based on the volume
weighted average purchase price of $43.55. The payment received
in connection with the price adjustment was recorded as an
addition to capital surplus. Additionally, for diluted earnings per
share purposes, the Bancorp assumed the transaction would be
net settled in shares as the Bancorp had the choice of settling in
cash or shares and the Bancorp did not have a stated policy or the
ability to demonstrate a past practice of cash settlement. These
incremental shares were subsequently excluded from quarterly
earnings per share calculations, as the effect of inclusion would
have been anti-dilutive.
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, 2007:
Plan Category (shares in thousands)
Equity compensation plans approved by shareholders:
Stock options (a)
Stock appreciation rights (“SARs”)
Restricted stock
Performance units
Performance-based restricted stock
Employee stock purchase plan
Deferred stock compensation plans
Number of Shares to Be
Issued Upon Exercise
Weighted-Average
Exercise Price
21,530
(c)
3,395
(e)
124
$50.61
(c)
(d)
(d)
(d)
Shares Available
for Future Issuance
7,321(b)
(b)
(b)
(b)
(b)
(b)
1,280(f)
275
8,876
Total shares
(a) Excludes 2.1 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
25,049
plans and will make no additional awards under these plans. The weighted-average exercise price of the outstanding options is $33.46 per share.
(b) Under the Incentive Compensation Plan, 20.0 million shares of stock were authorized for issuance as incentive and nonqualified stock options, SARs, restricted stock and restricted stock units,
and performance shares and restricted stock awards.
(c) At December 31, 2007, approximately 17.5 million SARs were outstanding at a weighted-average grant price of $41.81. The number of shares to be issued upon exercise will be determined at
vesting based on the difference between the grant price and the market price at the date of exercise.
(d) Not applicable.
(e) The number of shares to be issued is dependent upon the Bancorp achieving certain predefined performance targets and ranges from zero shares to approximately 290 thousand shares.
(f) Represents remaining shares of Fifth Third common stock under the Bancorp’s 1993 Stock Purchase Plan, as amended and restated, including an additional 1,500,000 shares approved by
shareholders on March 28, 2006.
76
Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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 Compensation
Plan was approved by shareholders on March 23, 2004. The plan
authorized the issuance of up to 20 million shares as equity
compensation and provides for incentive and nonqualified stock
options, stock appreciation rights, restricted stock and restricted
stock units, and performance share and restricted stock awards.
All of the Bancorp's stock-based awards are to be settled with
stock with the exception of a portion of the performance shares
that are to be settled in cash. The Bancorp has historically used
treasury stock to settle stock-based awards, when available. Stock
options, issued at fair market value based on the closing price of
the Bancorp’s common stock on the date of grant, have up to ten-
year terms and vest and become fully exercisable ratably over a
three or four year period of continued employment. SARs, issued
at fair market value based on the closing price of the Bancorp’s
common stock on the date of grant, have up to ten-year terms and
vest and become exercisable either ratably or fully over a four year
period of continued employment. The Bancorp does not grant
discounted stock options or SARs, re-price previously granted
stock options or SARs, or grant reload stock options. Restricted
stock grants vest either after four years or ratably after three, four
and five years of continued employment and include dividend and
voting rights. Performance share and performance restricted
stock awards have three-year cliff vesting terms with performance
or market conditions as defined by the plan.
As discussed in Note 1, effective January 1, 2006, the
the modified
Bancorp adopted SFAS No. 123(R) using
retrospective application basis in accounting for stock-based
compensation plans. Under SFAS No. 123(R), the Bancorp
2007
recognizes compensation expense for the grant-date fair value of
stock-based compensation issued over its requisite service period.
The grant-date fair value of stock options and SARs is measured
using the Black-Scholes option-pricing model. Awards with a
graded vesting are expensed on a straight-line basis.
Expected option life (in years)
Expected volatility
Expected dividend yield
Risk-free interest rate
The Bancorp uses the following assumptions, which are
evaluated and revised as necessary, in estimating the grant-date
fair value of each option grant for the year ended:
2006
6
23%
4.1%
4.9%
2007
6
22%
4.4%
4.6%
The expected option life is derived from historical exercise
patterns and represents the amount of time that options granted
are expected to be outstanding. The expected volatility is based
on a combination of historical and implied volatilities of the
Bancorp’s common stock. The expected dividend yield is based
on annual dividends divided by the Bancorp’s stock price. The
risk-free interest rate for periods within the contractual life of the
option is based on the U.S. Treasury yield curve in effect at the
time of grant.
2005
6
26%
3.5%
4.3%
Stock-based compensation expense was $63 million, $76
million and $65 million for the years ended December 31, 2007,
2006 and 2005, respectively. The total related income tax benefit
recognized was $22 million, $23 million and $16 million for the
years ended December 31, 2007, 2006 and 2005, respectively. The
following tables include a summary of stock-based compensation
transactions for the previous three fiscal years:
2006
2005
Weighted-
Average
Exercise
Stock Options (shares in thousands)
Price
$47.58
Outstanding at January 1
40.98
Granted (a)
26.91
Exercised
53.87
Forfeited or expired
$49.07
Outstanding at December 31
Exercisable at December 31
$49.07
(a) 2005 stock options granted include 2,514 options assumed as part of the First National acquisition completed on January 1, 2006. These options were granted under a First National plan
Weighted-
Average
Exercise
Price
$46.49
-
21.70
53.24
$47.58
$47.43
Weighted-
Average
Exercise
Price
$45.31
22.90
21.16
54.30
$46.49
$46.01
Shares
36,162
2,515
(4,830)
(2,301)
31,546
29,364
Shares
31,546
-
(1,931)
(2,715)
26,900
25,978
Shares
26,900
4
(2,068)
(1,191)
23,645
23,628
assumed by the Bancorp.
The weighted-average grant-date fair value of options granted
for the year ended 2007 was $7.39 per share. There were no stock
options granted during 2006. The weighted-average grant-date
fair value of options granted for the year ended 2005 was $20.54
per share.
The total intrinsic value of options exercised was $28 million,
$32 million and $103 million in 2007, 2006 and 2005, respectively.
Cash received from options exercised was $48 million, $35 million
and $90 million in 2007, 2006 and 2005, respectively. The actual
tax benefit realized from the exercised options was $7 million, $9
2007
million and $28 million in 2007, 2006 and 2005, respectively. The
total grant-date fair value of stock options that vested during
2007, 2006 and 2005 was $16 million, $25 million and $78 million,
respectively. As of December 31, 2007, the aggregate intrinsic
value of both outstanding options and exercisable options was $4
million.
At December 31, 2007, stock-based compensation expense
related to non-vested stock options not yet recognized was
immaterial. The expense is expected to be recognized over a
remaining weighted-average period of approximately 0.3 years.
2006
2005
Stock Appreciation Rights (shares in thousands)
Outstanding at January 1
Granted
Exercised
Forfeited or expired
Outstanding at December 31
Exercisable at December 31
Shares
13,053
6,613
(56)
(2,084)
17,526
2,972
Weighted-
Average
Grant Price
$43.43
38.45
39.36
41.36
$41.81
$41.45
Shares
7,541
6,949
-
(1,437)
13,053
989
Weighted-
Average
Grant Price
$47.51
39.18
-
44.31
$43.43
$42.99
Weighted-
Average
Grant Price
$54.37
42.82
-
48.88
$47.51
$54.37
Shares
3,529
4,892
-
(880)
7,541
4
The weighted-average grant-date fair value of SARs granted
was $6.24, $7.35 and $9.31 per share for the years ended 2007,
2006 and 2005, respectively. The total grant-date fair value of
SARs that vested during 2007, 2006 and 2005 was $19 million, $10
million and less than $1 million, respectively.
At December 31, 2007, there was $39 million of stock-based
compensation expense related to non-vested SARs not yet
recognized. The expense is expected to be recognized over a
remaining weighted-average period of approximately 2.1 years.
Fifth Third Bancorp 77
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2007
2006
2005
Weighted-
Average
Grant-Date
Fair Value
$40.28
38.19
48.28
40.95
$40.80
Shares
2,380
1,622
(39)
(444)
3,519
Shares
1,482
1,265
(24)
(343)
2,380
Weighted-
Average
Grant-Date
Fair Value
$46.16
38.93
44.91
40.76
$40.28
Weighted-
Average
Grant-Date
Fair Value
$54.01
42.31
50.62
48.19
$46.16
Shares
596
1,086
(29)
(171)
1,482
Restricted Stock (shares in thousands)
Nonvested at January 1
Granted
Vested
Forfeited
Nonvested at December 31
The total grant-date fair value of restricted stock that vested
during 2007, 2006 and 2005 was $1.9 million, $1.1 million and $1.2
million, respectively. At December 31, 2007, there was $42 million
of stock-based compensation expense related to nonvested
restricted stock not yet recognized. The expense is expected to be
recognized over a
approximately 3.0 years.
remaining weighted-average period of
The following table summarizes outstanding and exercisable
stock options by exercise price at December 31, 2007:
Outstanding Stock Options
Exercisable Stock Options
Exercise Price
per Share
Under $10.00
$10.01-$25.00
$25.01-$40.00
$40.01-$55.00
Over $55.00
All stock options
Number of
Options at Year
End (000’s)
28
629
3,762
14,672
4,554
23,645
Weighted-
Average
Exercise Price
$7.46
19.49
36.23
48.30
66.52
$49.07
Weighted-
Average
Remaining
Contractual Life
(in years)
3.17
2.33
1.01
3.00
4.29
2.91
Number of
Options at Year
End (000’s)
28
629
3,762
14,664
4,545
23,628
Weighted-
Average
Exercise Price
$7.46
19.49
36.23
48.29
66.54
$49.07
Weighted-
Average
Remaining
Contractual Life
(in years)
3.17
2.33
1.01
3.00
4.29
2.91
Approximately 132 thousand shares of performance-based
awards were granted during 2007. These awards are payable in
stock and cash contingent upon the Bancorp achieving certain
predefined performance targets over the three-year measurement
period. These performance targets are based on the Bancorp’s
performance relative to a defined peer group. The performance-
based awards were granted at a weighted-average grant-date fair
value of $39.89 per share.
Approximately 137 thousand performance-based restricted
shares were granted during 2007. These awards are payable in
stock contingent upon the Bancorp achieving certain predefined
performance targets over the one-year measurement period.
These performance
the Bancorp’s
performance relative to a defined peer group. If performance
targets are met, the shares are vested over a three-year period.
The performance-based restricted shares were granted at a
weighted-average grant-date fair value of $38.27 per share. The
performance condition related to the 2007 performance-based
restricted shares was achieved.
targets are based on
At December 31, 2007, there were 8.1 million incentive
options, 15.5 million non-qualified options, 17.5 million SARs, 3.5
million restricted stock awards outstanding, .3 million shares
reserved for performance unit awards, .1 million restricted
performance stock awards and 7.3 million shares available for
grant. Stock options, SARs and restricted stock outstanding
represent approximately eight percent of the Bancorp’s issued
shares at December 31, 2007.
The Bancorp sponsors a Stock Purchase Plan that allows
qualifying employees to purchase shares of the Bancorp’s
common stock with a 15% match. During the years ended
December 31, 2007, 2006 and 2005, respectively, there were
333,039, 317,483, and 333,472 shares purchased by participants
and the Bancorp recognized stock-based compensation expense
of $2 million for each of the years ended 2007, 2006 and 2005.
The Bancorp has no specific policy to repurchase common
shares to mitigate the dilutive impact of shares related to stock-
based compensation; however, the Bancorp has historically made
adequate discretionary purchases based on cash availability,
market trends and other factors, to satisfy exercise activity.
78
Fifth Third Bancorp
20. OTHER NONINTEREST INCOME AND OTHER NONINTEREST EXPENSE
The major components of other noninterest income and other noninterest expense for the years ended December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Other noninterest income:
Bank owned life insurance
Cardholder fees
Consumer loan and lease fees
Insurance income
Operating lease income
Banking center fees
Gain on loan sales
Other
Total
Other noninterest expense:
Loan processing
Marketing
Affordable housing investments
Travel
Postal and courier
Intangible amortization
Professional services fees
Supplies
Franchise and other taxes
Operating lease
Visa litigation expense
Debt and other financing agreement termination
Other
Total
2007
2006
2005
$(106)
56
46
32
32
29
25
39
$153
$119
84
57
54
52
42
35
31
23
22
172
-
298
$989
86
49
47
28
26
22
17
24
299
93
78
42
52
49
45
28
28
30
18
-
49
251
763
91
46
50
27
55
21
24
46
360
89
76
35
54
50
46
26
35
37
40
-
-
284
772
21. INCOME TAXES
The Bancorp and its subsidiaries file a consolidated Federal income tax return. The following is a summary of applicable income taxes
included in the Consolidated Statements of Income at December 31:
($ in millions)
Current income tax expense:
U.S. income taxes
State and local income taxes
Total current tax expense
Deferred income tax expense:
U.S. income taxes
State and local income taxes
Total deferred tax expense
Applicable income tax expense
2007
2006
2005
$623
16
639
(197)
19
(178)
$461
457
7
464
(24)
3
(21)
$443
654
21
675
(7)
(9)
(16)
659
2005
35.0
.4
(2.3)
(2.3)
(1.7)
.8
29.9
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 benefit
Tax-exempt income
Credits
Dividends on subsidiary preferred stock
Other, net
Effective tax rate
2007
35.0%
1.5
1.4
(5.0)
(2.5)
(.4)
30.0%
2006
35.0
.4
(2.8)
(3.9)
(2.2)
.7
27.2
Tax-exempt income in the rate reconciliation above includes
interest on municipal bonds, interest on tax-exempt lending, and
income/charges on life insurance policies held by the Bancorp.
The effective tax rate was adversely impacted in 2007 by a $177
million charge to certain life insurance policies held by the
Bancorp. See Note 11 for a further discussion of those charges.
The statute of limitations for federal income tax returns
remains open for tax years 2004 through 2007. In addition,
limited federal statute extensions are in place for tax years 1997
through 2003, primarily for leasing uncertainties. With the
exception of the state impact of the federal items discussed above
as well as a few states with insignificant uncertain liabilities, the
statutes of limitations for state income tax returns remain open
for tax years 2004 through 2007.
As of January 1, 2007, the Bancorp adopted FIN 48. Upon
adoption of this Interpretation on January 1, 2007, the Bancorp
recognized an after-tax adjustment to beginning retained earnings
of $2 million representing the cumulative effect of applying the
provisions of this Interpretation. At January 1, 2007 and at
December 31, 2007, the Bancorp had unrecognized tax benefits of
$446 million and $469 million, respectively. Those balances
included $99 million and $100 million of tax positions that, if
recognized, would impact the effective tax rate and $7 million and
$6 million in tax positions that would impact goodwill. The
remaining $340 million and $363 million is related to tax positions
for which the ultimate deductibility is highly certain but for which
there is uncertainty about the timing of the deductions. A
significant portion of these tax positions relate to the leveraged
lease litigation discussed below and in Note 15.
Any interest and penalties incurred in connection with
income taxes are recorded as a component of tax expense. For the
year ended December 31, 2007, the Bancorp accrued interest, net
of the related tax benefit, of $2 million and, at December 31,
2007, had accrued interest liabilities of $67 million, net of the
Fifth Third Bancorp 79
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
related tax benefits. No liabilities were recorded for penalties.
Included in other assets at December 31, 2007 is a deposit of
$386 million that the Bancorp made under Internal Revenue Code
section 6603 for taxes associated with the leveraged lease
portfolio.
Currently, the Internal Revenue Service is examining the
Bancorp’s income tax returns for the 2004 and 2005 years. While
fieldwork is expected to be completed during 2008, it is unlikely
that all issues will be resolved by year end.
The Bancorp has filed suit in the United States District Court
for the Southern District of Ohio in a dispute with the Internal
Revenue Service concerning the timing of deductions associated
with certain leveraged lease transactions in its 1997 tax return. A
jury trial is scheduled for March 2008. The Internal Revenue
Service has also proposed adjustments to the leveraged lease
transactions in subsequent tax return years. The proposed
adjustments relate to the Bancorp’s portfolio of leveraged leases,
with both domestic and foreign municipalities. The Bancorp
expects a trial court decision during 2008. Notwithstanding the
trial court decision, it is anticipated that the losing party will
appeal the decision to the Sixth Circuit Court of Appeals. It is
unlikely that the Appeals Court decision will be rendered during
2008. While the Bancorp is not expecting the litigation to be
resolved during 2008, the trial court decision, together with rulings
from other court jurisdictions where other leveraged lease cases
are pending, may cause the Bancorp to reevaluate its position and
associated unrecognized tax benefits during 2008. An estimate of
the range of reasonably possible changes to the unrecognized tax
benefits cannot be made at this time.
The following table provides a reconciliation of the
beginning and ending amounts of the Bancorp’s unrecognized tax
benefits.
($ in millions)
Unrecognized tax benefits at January 1
Gross increases for tax positions taken during prior period
Gross decreases for tax positions taken during prior period
Gross increases for tax positions taken during current period
Settlements with taxing authorities
Lapse of applicable statute of limitations
Unrecognized tax benefits at December 31
2007
$446
-
-
47
(4)
(20)
$469
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 at December 31:
2007
2006
$328
174
68
72
221
863
1,344
149
75
160
154
1,882
270
160
98
112
117
757
1,750
189
70
124
173
2,306
$1,019
1,549
($ in millions)
Deferred tax assets:
Allowance for credit losses
Deferred compensation
Other comprehensive income
State net operating losses
Other
Total deferred tax assets
Deferred tax liabilities:
Lease financing
State deferred taxes
Bank premises and equipment
Mortgage servicing rights
Other
Total deferred tax liabilities
Total net deferred tax liability
Retained earnings at December 31, 2007 included $157 million
in allocations of earnings for bad debt deductions of former thrift
subsidiaries for which no income tax has been provided. Under
current tax law, if certain of the Bancorp’s subsidiaries use these
bad debt reserves for purposes other than to absorb bad debt
losses, they will be subject to Federal income tax at the current
corporate tax rate.
80
Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
22. RETIREMENT AND BENEFIT PLANS
implemented SFAS No. 158, “Employers’
The Bancorp
Accounting
and Other
for Defined Benefit Pension
Postretirement Plans – an amendment of FASB Statements No.
87, 88, 106 and 132(R)” at December 31, 2006. SFAS No. 158
requires the funded status of pension plans to be recorded in the
balance sheet as an asset for plans with an overfunded status and a
liability for plans with an underfunded status. The Bancorp
recognized the overfunded and underfunded status of its pension
plans as an asset and liability, respectively, in the Consolidated
Balance Sheets as of December 31, 2007 and 2006.
Overfunded and underfunded amounts recognized in other
assets and other liabilities in the Consolidated Balance Sheets for
the defined benefit retirement plans as of December 31 consist of:
($ in millions)
Prepaid benefit cost
Accrued benefit liability
Net overfunded status
2007
$37
(36)
$1
2006
39
(37)
2
The
following
tables summarize
the defined benefit
retirement plans as of and for the years ended December 31:
Plans With an Overfunded Status
($ in millions)
Fair value of plan assets at January 1
Actual return on assets
Contributions
Settlement
Benefits paid
Fair value of plan assets at December 31
Projected benefit obligation at January 1
Service cost
Interest cost
Settlement
Actuarial loss
Benefits paid
Projected benefit obligation at December 31
Overfunded projected benefit obligation recognized
in the Consolidated Balance Sheets as an asset
Plans With an Underfunded Status
($ in millions)
Fair value of plan assets at January 1
Contributions
Benefits paid
Fair value of plan assets at December 31
Projected benefit obligation at January 1
Service cost
Interest cost
Actuarial loss
Benefits paid
Projected benefit obligation at December 31
Unfunded projected benefit obligation recognized in
the Consolidated Balance Sheets as a liability
2007
$252
12
-
(20)
(7)
$237
$213
-
12
(20)
2
(7)
$200
$37
2007
$ -
3
(3)
$ -
$37
-
2
-
(3)
$36
2006
238
26
15
(20)
(7)
252
220
1
12
(20)
7
(7)
213
39
2006
-
3
(3)
-
38
1
-
1
(3)
37
($36)
(37)
The following tables summarize net periodic benefit cost and
other changes in plan assets and benefit obligations recognized in
other comprehensive income for the years ended December 31:
($ in millions)
Components of net periodic benefit cost:
Service cost
Interest cost
Expected return on assets
Amortization of actuarial loss
Amortization of net prior service cost
Settlement
Net periodic benefit cost
2007
2006
2005
$-
14
(19)
7
1
7
$10
1
13
(19)
9
1
8
13
1
14
(18)
8
-
9
14
($ in millions)
Other changes in plan assets and benefit
obligations recognized in other
comprehensive income:
Net actuarial loss
Net prior service cost
Amortization of actuarial loss
Amortization of prior service cost
Settlements
Total recognized in other comprehensive
income
Total recognized in net periodic benefit cost
and other comprehensive income (a)
2007
2006
$10
-
(7)
(1)
(7)
(5)
$5
89
3
9
1
-
92
102
(a) Disclosure was not required for the year ended 2005 as SFAS No. 158 was not
effective until December 31, 2006.
The estimated net actuarial loss and prior service cost for the
defined benefit pension plans that will be amortized from
accumulated other comprehensive income into net periodic
benefit cost during 2008 are $6 million and $1 million,
respectively.
The plan assumptions are evaluated annually and are updated
as necessary. The discount rate assumption reflects the yield on a
portfolio of high quality fixed-income instruments that have a
similar duration to the plan’s liabilities. The expected long-term
rate of return assumption reflects the average return expected on
the assets invested to provide for the plan’s liabilities. In
determining the expected long-term rate of return, the Bancorp
evaluated actuarial and economic inputs, including long-term
inflation rate assumptions and broad equity and bond indices
long-term return projections, as well as actual long-term historical
plan performance.
The following table summarizes the plan assumptions for
the years ended December 31:
Weighted-average assumptions
For measuring benefit obligations at
year end:
Discount rate
Rate of compensation increase
Expected return on plan assets
For measuring net periodic benefit cost:
Discount rate
Rate of compensation increase
Expected return on plan assets
2007
2006
2005
6.26 %
5.00
8.52
5.80
5.00
8.50
5.80
5.00
8.50
5.375
5.00
8.45
5.375 5.65-5.85
5.00
5.00
8.00
8.45
The Bancorp’s qualified defined benefit plan is currently
overfunded. This plan’s benefits were frozen in 1998, except for
grandfathered employees. The Bancorp’s retirement plans with an
underfunded status consist of nonqualified, supplemental
retirement plans, which are funded on an as needed basis. A
majority of these plans were obtained in acquisitions from prior
years.
Lowering both the expected rate of return on the plan and
the discount rate by 0.25% would have increased the 2007
pension expense by approximately $1 million.
Plan assets consist primarily of common trust and mutual
funds (equities and fixed income) and Bancorp common stock.
As of December 31, 2007 and 2006, $153 million and $156
million, respectively, of plan assets were managed by Fifth Third
Bank, a subsidiary of the Bancorp, through common trust and
mutual funds and
included $9 million and $15 million,
respectively, of Bancorp common stock. Plan assets are not
expected to be returned to the Bancorp during 2008.
Fifth Third Bancorp 81
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
The Bancorp’s policy for the investment of plan assets is to
employ investment strategies that achieve a range of weighted-
average target asset allocations relating to equity securities
(including the Bancorp’s common stock), fixed income securities
and cash. The following table provides the Bancorp’s targeted
and actual weighted-average asset allocations by asset category for
2007 and 2006:
Weighted-average asset allocation
Equity securities
Bancorp common stock
Total equity securities
Total fixed income securities
Cash
Total
Targeted
range
70 – 80%
20 – 25
0 - 5
2007
71%
5
76
20
4
100%
2006
69
6
75
20
5
100
The risk tolerance for the plan is determined by management
to be moderate to aggressive, recognizing that higher returns
involve some volatility and that periodic declines in the portfolio’s
value are tolerated in an effort to achieve real capital growth.
Prohibited asset classes of the plan include precious metals,
venture capital, short sales and leveraged transactions. Per the
Employee Retirement Income Security Act (“ERISA”), the
Bancorp’s common stock cannot exceed ten percent of the fair
market value of plan assets.
The accumulated benefit obligation for all defined benefit
plans was $235 million and $249 million at December 31, 2007
and December 31, 2006, respectively. At December 31, 2007 and
2006, amounts relating to the Bancorp’s defined benefit plans with
benefit obligations exceeding assets were as follows:
($ in millions)
Projected benefit obligation
Accumulated benefit obligation
Fair value of plan assets
2007
$36
36
-
2006
37
38
-
Based on actuarial assumptions, the Bancorp does not expect
to contribute to the plan in 2008. Estimated pension benefit
payments, which reflect expected future service, are $20 million in
2008, $21 million in 2009, $20 million in 2010, $19 million in 2011
and $19 million in 2012. The total estimated payments for the
years 2013 through 2017 is $83 million.
The Bancorp’s profit sharing plan expense was $52 million
for 2007, $60 million for 2006 and $62 million for 2005.
Expenses recognized during the years ended December 31, 2007,
2006 and 2005 for matching contributions to the Bancorp’s
defined contribution savings plans were $37 million, $35 million
and $33 million, respectively.
23. EARNINGS PER SHARE
The calculation of earnings per share and the reconciliation of earnings per share to earnings per diluted share for the years ended December
31:
(in millions, except per share data)
Earnings per share:
Net income before cumulative effect
Net income available to common
shareholders before cumulative effect (a)
Cumulative effect of change in accounting
principle, net of tax
Net income available to common
shareholders (a)
Earnings per diluted share:
Net income available to common
shareholders before cumulative effect
Effect of dilutive securities:
Stock based awards
Convertible preferred stock (b)
Income plus assumed conversions before
cumulative effect
Cumulative effect of change in accounting
principle, net of tax
Net income available to common
$1,076
1,075
-
$1,075
-
1,076
-
2007
2006
Income
Average
Shares
Per Share
Amount
Income
$1,184
Average
Shares
Per Share
Amount
Income
$1,549
2005
Average
Shares
Per
Share
Amount
538
-
538
$2.00
1,184
-
4
$2.00
$1,188
555
-
555
$2.13
1,548
554
$2.79
.01
-
-
-
$2.14
$1,548
554
$2.79
$1,075
538
$2.00
$1,184
555
$2.13
$1,548
554
$2.79
2
-
540
-
540
(.01)
-
-
$1.99
1,184
-
4
$1.99
$1,188
2
-
557
-
557
(.01)
-
-
4
-
(.02)
-
$2.12
1,549
558
$2.77
.01
-
-
-
$2.13
$1,549
558
$2.77
shareholders plus assumed conversions
$1,076
(a) Dividends on preferred stock are $.740 million for all periods presented.
(b) The additive effect to income from dividends on convertible preferred stock is $.580 million and the average share dilutive effect from convertible preferred stock is .308 million shares for all periods
presented.
During the first quarter of 2006, the Bancorp recognized a
benefit for the cumulative effect of change in accounting principle
of $4 million, net of $2 million of tax, related to the adoption of
SFAS No. 123(R). The benefit recognized relates to the
Bancorp’s estimate of forfeiture experience to be realized for all
unvested stock-based awards outstanding.
At December 31, 2007, 2006 and 2005, there were 36.2
million, 33.1 million and 28.1 million shares outstanding,
respectively, that were not included in the computation of net
income per diluted share. The outstanding shares consist of
options, stock appreciation rights and restricted stock that have
not yet been exercised. These shares are excluded from the
computation of net income per diluted shares because the exercise
price of the shares was greater than the average market price of
the common shares and, therefore, the effect would be
antidilutive.
82
Fifth Third Bancorp
24. FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values for financial instruments as of December 31:
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
($ in millions)
Financial assets:
Cash and due from banks
Available-for-sale and other securities
Held-to-maturity securities
Trading securities
Other short-term investments
Loans held for sale
Portfolio loans and leases, net
Derivative assets
Financial liabilities:
Deposits
Federal funds purchased
Other short-term borrowings
Long-term debt
Derivative liabilities
Short positions
Other financial instruments:
Commitments to extend credit
Letters of credit
Fair values for financial instruments, which were based on various
assumptions and estimates as of a specific point in time, represent
liquidation values and may vary significantly from amounts that will
be realized in actual transactions. In addition, certain non-financial
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 to the
Bancorp.
The following methods and assumptions were used in
determining the fair value of selected financial instruments:
Short-term financial assets and
liabilities: For financial
instruments with a short-term or no stated maturity, prevailing
market rates and limited credit risk, carrying amounts approximate
fair value. Those financial instruments include cash and due from
banks, other short-term investments, certain deposits (demand,
interest checking, savings, money market and foreign office
deposits),
short-term
borrowings.
funds purchased and other
federal
trading and other
Available-for-sale, held-to-maturity,
securities, including short positions: In general, fair values were
based on quoted market prices, if available. If a quoted market
price is not available, fair value is estimated using quoted market
prices for similar securities.
Loans held for sale: The fair value of loans held for sale was
estimated based on outstanding commitments from investors,
observable market prices of similar instruments, or if a market
2007
2006
Carrying
Amount Fair Value
Carrying
Amount
Fair Value
$2,687
10,677
355
171
593
4,329
79,316
939
75,445
4,427
4,747
12,857
715
35
94
26
2,687
10,677
355
171
593
4,371
79,600
939
75,378
4,427
4,747
13,298
715
35
94
26
2,737
11,053
356
187
809
1,150
73,582
309
69,380
1,421
2,796
12,558
369
29
75
23
2,737
11,053
356
187
809
1,152
73,660
309
69,371
1,421
2,796
12,762
369
29
75
23
price is not available, a discounted cash flow calculation using
appropriate market rates for similar instruments.
Portfolio loans and leases, net: Fair values were estimated by
discounting future cash flows using the current rates as similar
loans would be made to borrowers for the same remaining
maturities.
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
the
current
counterparties. The fair values represent an asset or liability at
December 31, 2007 and 2006.
creditworthiness of
interest
rates
and
the
Deposits: Fair values for other time deposits and certificates of
deposit $100,000 and over were estimated using a discounted cash
flow calculation that applied prevailing LIBOR/Swap interest rates
for the same maturities.
Long-term debt: Fair value of long-term debt was based on
quoted market prices, when available, or a discounted cash flow
calculation using prevailing market rates for borrowings of similar
terms.
Commitments
to extend credit: Fair values of
commitments were based on estimated probable credit losses.
loan
Letters of credit: Fair values of letters of credit were based on
unamortized fees on the letters of credit.
Fifth Third Bancorp 83
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
25. CERTAIN REGULATORY REQUIREMENTS AND CAPITAL RATIOS
The principal source of income and funds for the Bancorp (parent
company) are dividends from its subsidiaries. During 2007, the
amount of dividends the bank subsidiaries could pay to the
Bancorp without prior approval of regulatory agencies was limited
to their 2007 eligible net profits, as defined, and the adjusted
retained 2006 and 2005 net income of those subsidiaries.
losses. Assets are adjusted under the risk-based guidelines to take
into account different risk characteristics. Average assets for this
purpose does not include goodwill and any other intangible assets
and investments that the FRB determines should be deducted from
Tier I capital.
The Bancorp’s subsidiary banks must maintain cash reserve
balances when total reservable deposit liabilities are greater than
the regulatory exemption. These reserve requirements may be
satisfied with vault cash and noninterest-bearing cash balances on
reserve with a Federal Reserve Bank. In 2007 and 2006, the
subsidiary banks were required to maintain average cash reserve
balances of $330 million and $289 million, respectively.
The FRB adopted guidelines pursuant to which it assesses the
adequacy of capital in examining and supervising a bank holding
company and in analyzing applications to it under the Bank
Holding Company Act of 1956, as amended. These guidelines
include quantitative measures that assign risk weightings to assets
and off-balance sheet items, as well as define and set minimum
regulatory capital requirements. All bank holding companies are
required to maintain core capital (Tier I) of at least 4% of risk-
weighted assets and off-balance sheet items (Tier I capital ratio),
total capital of at least 8% of risk-weighted assets and off-balance
sheet items (Total risk-based capital ratio) and Tier I capital of at
least 3% of adjusted quarterly average assets (Tier I leverage ratio).
Failure to meet the minimum capital requirements can initiate
certain actions by regulators that could have a direct material effect
on the Consolidated Financial Statements of the Bancorp.
Tier I capital consists principally of shareholders’ equity
including Tier I qualifying subordinated debt and
junior
subordinated debt but excluding unrealized gains and losses on
available-for-sale securities and unrecognized pension actuarial
gains and losses and prior service cost, less goodwill and certain
other intangibles. Tier II capital consists principally of perpetual
and trust preferred stock that is not eligible to be included as Tier I
capital, term subordinated debt, intermediate-term preferred stock
and, subject to limitations, general allowances for loan and lease
Both the FRB and the Office of Comptroller of the Currency
(“OCC”) have issued regulations regarding the capital adequacy of
subsidiary banks. These requirements are substantially similar to
those adopted by the FRB regarding bank holding companies, as
described above. In addition, the federal banking agencies have
issued substantially similar regulations to implement the system of
prompt corrective action established by Section 38 of the Federal
Deposit Insurance Act. Under the regulations, a bank generally
shall be deemed to be well-capitalized if it has a Total risk-based
capital ratio of 10% or more, a Tier I capital ratio of 6% or more, a
Tier I leverage ratio of 5% or more and is not subject to any
written capital order or directive. If an institution becomes
undercapitalized, it would become subject to significant additional
oversight, regulations and requirements as mandated by the Federal
Deposit Insurance Act. The Bancorp and each of its subsidiary
banks had Tier I, Total risk-based capital and Tier I leverage ratios
above the well-capitalized levels at December 31, 2007 and 2006.
As of December 31, 2007, the most recent notification from the
FRB categorized the Bancorp and each of its subsidiary banks as
well-capitalized under the regulatory framework for prompt
corrective action. To continue to qualify for financial holding
company status pursuant to the Gramm-Leach-Bliley Act of 1999,
the Bancorp’s subsidiary banks must, among other things, maintain
“well-capitalized” capital ratios.
U.S. bank regulatory authorities and
international bank
supervisory organizations, principally the Basel Committee on
Banking Supervision, are currently considering changes to the risk-
based capital adequacy framework for banks, including emphasis
on credit, market and operational risk components, which
ultimately could affect the appropriate capital guidelines for bank
holding companies such as the Bancorp.
Capital and risk-based capital and leverage ratios for the Bancorp and its significant subsidiary banks at December 31:
2007
2006
Amount
Ratio
Amount
Ratio
$11,733
6,058
5,787
519
10.16 %
10.39
10.13
21.76
$11,385
6,573
5,814
216
11.07 %
12.82
11.41
11.78
8,924
4,744
5,191
503
8,924
4,744
5,191
503
7.72
8.13
9.09
21.07
8.50
8.11
10.55
25.59
8,625
5,336
5,341
203
8,625
5,336
5,341
203
8.39
10.41
10.48
11.07
8.44
9.53
11.30
12.52
($ in millions)
Total risk-based capital (to risk-weighted assets):
Fifth Third Bancorp (Consolidated)
Fifth Third Bank (Ohio)
Fifth Third Bank (Michigan)
Fifth Third Bank, N.A.
Tier I capital (to risk-weighted assets):
Fifth Third Bancorp (Consolidated)
Fifth Third Bank (Ohio)
Fifth Third Bank (Michigan)
Fifth Third Bank, N.A.
Tier I leverage (to average assets):
Fifth Third Bancorp (Consolidated)
Fifth Third Bank (Ohio)
Fifth Third Bank (Michigan)
Fifth Third Bank, N.A.
84
Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
2007
26. PARENT COMPANY FINANCIAL STATEMENTS
($ in millions)
Condensed Statements of Income (Parent Company Only)
For the years ended December 31
Income
Dividends from subsidiaries
Interest on loans to subsidiaries
Other
Total income
Expenses
Interest
Other
Total expenses
Income Before Income Taxes and
$900
75
9
984
1,270
32
1
1,303
605
46
2
653
162
80
242
120
22
142
77
23
100
2005
2006
Change in Undistributed Earnings of
Subsidiaries
Applicable income taxes
Income Before Change in Undistributed
Earnings of Subsidiaries
Increase in undistributed earnings of
subsidiaries
Net Income
742
(58)
511
(35)
1,203
(25)
800
546
1,228
276
$1,076
642
1,188
321
1,549
Condensed Balance Sheets (Parent Company Only)
As of December 31
Assets
Cash
Loans to subsidiaries
Investment in subsidiaries
Goodwill
Other assets
Total Assets
Liabilities
Commercial paper
Accrued expenses and other liabilities
Long-term debt
Total Liabilities
Shareholders’ Equity
Total Liabilities and Shareholders’ Equity
2007
2006
$1,200
1,201
11,991
137
188
$14,717
$4
320
5,232
5,556
9,161
$14,717
909
636
11,735
137
37
13,454
7
259
3,166
3,432
10,022
13,454
Condensed Statements of Cash Flows (Parent Company Only)
For the years ended December 31
2006
Operating Activities
Net income
Adjustments to reconcile net income to net
cash provided by operating activities:
(Benefit) provision for deferred income
$1,076
1,188
2007
2005
1,549
taxes
Increase in other assets
Increase (decrease) in accrued expenses
and other liabilities
Increase in undistributed earnings of
subsidiaries
Other, net
Net Cash Provided by Operating
Activities
Investing Activities
Capital contribution to subsidiaries
Decrease in held-to-maturity and available-
for-sale securities
(Increase) decrease in loans to subsidiaries
Net Cash (Used in) Provided by
Investing Activities
Financing Activities
Increase (decrease) in other short-term
borrowings
Repayment of long-term debt
Proceeds from issuance of long-term debt
Payment of cash dividends
Exercise of stock-based awards
Purchases of treasury stock
Other, net
Net Cash Used in Financing Activities
Increase in Cash
Cash at Beginning of Year
Cash at End of Year
(7)
(98)
132
1
(1)
17
(1)
(4)
(29)
(276)
46
(642)
(14)
(321)
1
873
549
1,195
-
(25)
-
6
(565)
-
(107)
-
1,811
(559)
(132)
1,811
13
(209)
2,135
(898)
50
(1,084)
(30)
(23)
291
909
$1,200
5
(13)
748
(867)
43
(82)
(8)
(174)
243
666
909
(26)
-
-
(794)
96
(1,649)
-
(2,373)
633
33
666
Fifth Third Bancorp 85
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
27. SEGMENTS
The Bancorp’s principal activities include Commercial Banking,
Branch Banking, Consumer Lending, Investment Advisors and
Processing Solutions. Commercial Banking offers banking, cash
management and financial services to large and middle-market
businesses, government and professional customers. Branch
Banking provides a full range of deposit and loans and lease
products to individuals and small businesses through retail
locations. Consumer Lending includes the Bancorp’s mortgage,
home equity and other indirect lending activities. Investment
Advisors provides a full range of investment alternatives for
individuals,
organizations.
Processing Solutions provides electronic funds transfer, debit,
credit and merchant transaction processing, operates the Jeanie®
ATM network and provides other data processing services to
affiliated and unaffiliated customers. The General Corporate and
Other column includes the unallocated portion of the investment
portfolio, certain non-deposit funding, unassigned equity and
certain support activities and other items not attributed to the
business segments.
not-for-profit
companies
and
Results of the Bancorp’s business segments are presented
based on its management structure and management accounting
practices. The structure and accounting practices are specific to
the Bancorp; therefore, the financial results of the Bancorp’s
business segments are not necessarily comparable with similar
information for other financial institutions. The Bancorp refines
its methodologies from time to time as management accounting
practices are improved and businesses change. During 2007, the
Bancorp changed the reporting of Processing Solutions to include
certain revenues and expenses related to credit card processing
that were previously listed under the Commercial and Branch
Banking segments. Revisions to the Bancorp’s methodologies are
applied on a retroactive basis.
The Bancorp manages interest rate risk centrally at the
corporate level by employing a funds transfer pricing (“FTP”)
methodology. This methodology insulates the business segments
from interest rate volatility, enabling them to focus on serving
($ in millions)
2007
Net interest income (a)
Provision for loan and lease losses
Net interest income after provision for
loan and lease losses
Noninterest income:
Electronic payment processing
Service charges on deposits
Investment advisory revenue
Corporate banking revenue
Mortgage banking net revenue
Other noninterest income
Securities gains (losses), net
Total noninterest income
Noninterest expense:
Salaries, wages and incentives
Employee benefits
Payment processing expense
Net occupancy expense
Technology and communications
Equipment expense
Other noninterest expense
Commercial
Banking
Branch
Banking
Consumer
Lending
$1,310
127
1,183
(6)
154
3
341
-
66
-
558
1,465
162
1,303
174
421
90
13
7
74
-
779
404
148
256
-
-
-
-
122
69
6
197
220
44
-
15
4
3
507
793
948
246
$702
$38,796
382
101
6
136
14
37
447
1,123
959
338
621
45,054
56
28
-
8
2
1
158
253
200
70
130
23,728
customers through loan originations and deposit taking. The FTP
system assigns charge rates and credit rates to classes of assets and
liabilities, respectively, based on expected duration and the
Treasury swap curve. Matching duration, or the expected average
term until an instrument can be repriced, allocates interest income
and interest expense to each segment so its resulting net interest
income is insulated from interest rate risk. In a rising rate
environment, the Bancorp benefits from the widening spread
between deposit costs and wholesale funding costs. However, the
Bancorp’s FTP system credits this benefit to deposit-providing
businesses, such as Branch Banking and Investment Advisors, on
a duration-adjusted basis.
impact of the FTP
methodology is captured in General Corporate and Other.
The net
Management made several changes to the FTP methodology
in 2007 to more appropriately calculate FTP charges and credits to
each of the Bancorp’s business segments. Changes to the FTP
methodology were applied retroactively and included adding a
liquidity premium to loans, deposits and certificates of deposit to
properly reflect the Bancorp’s marginal cost of longer term
funding. In addition, an FTP charge on fixed assets based on the
average 5 year Treasury curve was added to the new FTP
methodology.
The business segments are charged provision expense based
on the actual net charge-offs experienced by the loans owned by
each segment. Provision expense attributable to loan growth and
change in factors in the allowance for loan and lease losses are
captured in General Corporate and Other. The financial results of
the business segments include allocations for shared services and
headquarters expenses. Even with these allocations, the financial
results are not necessarily indicative of the business segments’
financial condition and results of operations as if they were to
exist as independent entities. Additionally, the business segments
form synergies by taking advantage of cross-sell opportunities and
when funding operations by accessing the capital markets as a
collective unit. Results of operations and average assets by
segment for each of the three years ended December 31 are:
Investment
Advisors
Processing
Solutions
General
Corporate
Eliminations
Total
154
13
141
1
7
386
10
2
2
-
408
(6)
11
(17)
699
(1)
-
3
-
41
-
742
140
27
-
10
2
1
215
395
154
54
100
5,923
62
13
237
4
31
4
137
488
237
84
153
1,068
(294)
167
(461)
1
(2)
(5)
-
2
(99)
21
(82)
379
65
1
96
116
77
(340)
394
(937)
(307)
(630)
(12,092)
-
-
-
(43)(b)
-
(92)(c)
-
-
-
-
(135)
-
-
-
-
-
-
(135)
(135)
-
-
-
-
3,033
628
2,405
826
579
382
367
133
153
27
2,467
1,239
278
244
269
169
123
989
3,311
1,561
485
1,076
102,477
Total noninterest expense
Income before income taxes
Applicable income taxes (a)
Net income
Average assets
(a) Includes taxable-equivalent adjustments of $24 million.
(b) Electronic payment processing service revenues provided to the banking segments are eliminated in the Consolidated Statements of Income.
(c) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income.
86
Fifth Third Bancorp
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Commercial
Banking
Branch
Banking
Consumer
Lending
Investment
Advisors
Processing
Solutions
General
Corporate
Eliminations
Total
($ in millions)
2006
Net interest income (a)
Provision for loan and lease losses
Net interest income after provision for
loan and lease losses
Noninterest income:
Electronic payment processing
Service charges on deposits
Investment advisory revenue
Corporate banking revenue
Mortgage banking net revenue
Other noninterest income
Securities gains (losses), net
Securities gains, net – non qualifying
hedges on mortgage servicing rights
Total noninterest income
Noninterest expense:
Salaries, wages and incentives
Employee benefits
Payment processing expense
Net occupancy expense
Technology and communications
Equipment expense
Other noninterest expense
Total noninterest expense
Income before income taxes and
cumulative effect
$1,317
99
1,218
(5)
146
3
292
-
40
-
-
476
200
44
-
14
-
2
467
727
1,300
108
1,192
159
365
87
15
5
80
-
-
711
357
100
15
121
13
32
397
1,035
409
94
315
-
-
-
-
148
78
-
3
229
66
32
-
8
2
1
158
267
139
4
135
1
7
367
7
2
2
-
-
386
143
29
-
10
2
1
196
381
(3)
9
(12)
601
(1)
-
1
-
35
(1)
-
635
57
13
169
3
32
4
132
410
967
274
693
868
306
562
277
98
179
Applicable income taxes (a)
Income before cumulative effect
Cumulative effect of change in accounting
principle, net of tax
Net income
Average assets
(a) Includes taxable-equivalent adjustments of $26 million.
(b) Electronic payment processing service revenues provided to the banking segments are eliminated in the Consolidated Statements of Income.
(c) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income.
-
$693
$35,134
-
179
22,154
-
562
43,428
-
91
5,500
-
138
586
140
49
91
213
75
138
($ in millions)
2005
Net interest income (a)
Provision for loan and lease losses
Net interest income after provision for
loan and lease losses
Noninterest income:
Electronic payment processing
Service charges on deposits
Investment advisory revenue
Corporate banking revenue
Mortgage banking net revenue
Other noninterest income
Securities gains (losses), net
Total noninterest income
Noninterest expense:
Salaries, wages and incentives
Employee benefits
Payment processing expense
Net occupancy expense
Technology and communications
Equipment expense
Other noninterest expense
$1,177
90
1,087
-
149
3
276
-
30
-
458
1,210
97
1,113
143
368
86
19
5
67
-
688
424
89
335
-
-
-
-
165
124
-
289
122
4
118
1
7
360
2
2
5
-
377
(9)
18
(27)
517
(1)
-
1
-
41
-
558
201
46
-
12
3
1
434
697
848
248
$600
$31,062
362
104
17
110
13
28
371
1,005
796
281
515
41,139
59
30
-
6
1
1
214
311
313
110
203
20,627
140
29
-
8
2
1
203
383
112
40
72
4,568
44
9
127
3
31
3
125
342
189
66
123
502
Total noninterest expense
Income before income taxes
Applicable income taxes (a)
Net income
Average assets
(a) Includes taxable-equivalent adjustments of $31 million.
(b) Electronic payment processing service revenues provided to the banking segments are eliminated in the Consolidated Statements of Income.
(c) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Consolidated Statements of Income.
(263)
29
(292)
(1)
-
(3)
3
-
64
(363)
-
(300)
351
74
-
89
92
76
(462)
220
(812)
(333)
(479)
4
(475)
(1,563)
-
-
-
(38)(b)
-
(87)(c)
-
-
-
-
-
(125)
-
-
-
-
-
-
(125)
(125)
-
-
-
-
-
-
2,899
343
2,556
717
517
367
318
155
299
(364)
3
2,012
1,174
292
184
245
141
116
763
2,915
1,653
469
1,184
4
1,188
105,238
72
32
40
(4)
(1)
(5)
1
2
93
39
125
327
65
1
82
92
71
(454)
184
(19)
(55)
36
4,978
-
-
-
(35)(b)
-
(86)(c)
-
-
-
-
(121)
-
-
-
-
-
-
(121)
(121)
-
-
-
-
2,996
330
2,666
622
522
358
299
174
360
39
2,374
1,133
283
145
221
142
105
772
2,801
2,239
690
1,549
102,876
Fifth Third Bancorp 87
Commercial
Banking
Branch
Banking
Consumer
Lending
Investment
Advisors
Processing
Solutions
General
Corporate
Eliminations
Total
ANNUAL REPORT ON FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2007
Commission file number 0-8076
FIFTH THIRD BANCORP
Incorporated in the State of Ohio
I.R.S. Employer Identification #31-0854434
Address: 38 Fountain Square Plaza
Cincinnati, Ohio 45263
Telephone: (513) 534-5300
Securities registered
pursuant to Section
12(b) of the Act:
Name of exchange on
on which registered:
Common Stock , Without
Par Value
The NASDAQ Stock
Market LLC
7.25% Trust Preferred Securities
of Fifth Third Capital Trust V
7.25% Trust Preferred Securities
of Fifth Third Capital Trust VI
New York Stock Exchange
New York Stock Exchange
Indicate by checkmark if the registrant is a well-known
seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes: ⌧ No: (cid:133)
Indicate by checkmark if the registrant is not required to file
reports pursuant to Section 13 or Section 15(d) of the Act.
Yes: (cid:133) No: ⌧
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12
months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes: ⌧ No: (cid:133)
Indicate by check mark if disclosure of delinquent filers
pursuant to Item 405 of Regulation S-K(§229.405 of this
chapter) is not contained herein, and will not be contained, to
the best of registrant’s knowledge, in definitive proxy or
information statements incorporated by reference in Part III of
this Form 10-K or any amendment to this Form 10-K. ⌧
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of “accelerated filer and large accelerated filer”
in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer: ⌧
Accelerated filer: (cid:133)
Non-accelerated filer: (cid:133)
Indicate by check mark whether the registrant is a shell
company (as defined in Rule 12b-2 of the Act). Yes: (cid:133) No: ⌧
There were 532,798,583 shares of the Bancorp’s Common
Stock, without par value, outstanding as of January 31, 2008.
The Aggregate Market Value of the Voting Stock held by non-
affiliates of the Bancorp was $18,284,408,149 as of June 30,
2007.
88
Fifth Third Bancorp
report
incorporates
DOCUMENTS INCORPORATED BY REFERENCE
This
the
into a single document
requirements of the Securities and Exchange Commission
(“SEC”) with respect to annual reports on Form 10-K and
annual reports to shareholders. The Bancorp’s Proxy Statement
for the 2008 Annual Meeting of Shareholders is incorporated by
reference into Part III of this report.
Only those sections of this 2007 Annual Report to Shareholders
that are specified in this Cross Reference Index constitute part
of the Registrant’s Form 10-K for the year ended December 31,
2007. No other information contained in this 2007 Annual
Report to Shareholders shall be deemed to constitute any part of
this Form 10-K nor shall any such information be incorporated
into the Form 10-K and shall not be deemed “filed” as part of
the Registrant’s Form 10-K.
10-K Cross Reference Index
PART I
Item 1.
Business
Employees
Segment Information
Average Balance Sheets
Analysis of Net Interest Income and Net Interest
Income Changes
Investment Securities Portfolio
Loan and Lease Portfolio
Risk Elements of Loan and Lease Portfolio
Deposits
Return on Equity and Assets
Short-term Borrowings
Item 1A. Risk Factors
Item 1B. Unresolved Staff Comments
Item 2.
Item 3.
Item 4.
Properties
Legal Proceedings
Submission of Matters to a Vote of Security Holders
Executive Officers of the Bancorp
19-20, 89-92
30
31-34, 86-87
26
25-27
36-37, 62-63
36, 63
39-46
38
18
38, 70
22-25
none
92
73-74
none
92-93
PART II
Item 5. Market for Registrant’s Common Equity, Related
Stockholder Matters and Issuer Purchases of Equity
Securities
Selected Financial Data
Item 6.
Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Item 7A. Quantitative and Qualitative Disclosures About
Item 8.
Item 9.
Market Risk
Financial Statements and Supplementary Data
Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure
Item 9A. Controls and Procedures
Item 9B. Other Information
PART III
Item 10. Directors, Executive Officers and Corporate
Governance
Item 11. Executive Compensation
Item 12. Security Ownership of Certain Beneficial Owners and
93-94
18
18-49
39-49
52-87
none
50
none
95
95
Management and Related Stockholder Matters
76-78, 95
Item 13. Certain Relationships and Related Transactions, and
Director Independence
Item 14. Principal Accounting Fees and Services
PART IV
Item 15. Exhibits, Financial Statement Schedules
SIGNATURES
95
95
95-97
98
ANNUAL REPORT ON FORM 10-K
AVAILABILITY OF FINANCIAL INFORMATION
The Bancorp files reports with the SEC. Those reports include
the annual report on Form 10-K, quarterly reports on Form 10-
Q, current event reports on Form 8-K and proxy statements, as
well as any amendments to those reports. The public may read
and copy any materials the Bancorp files with the SEC at the
SEC’s Public Reference Room at 450 Fifth Street, NW,
Washington, DC 20549. The public may obtain information on
the operation of the Public Reference Room by calling the SEC
at 1-800-SEC-0330. The SEC maintains an internet site that
contains reports, proxy and information statements and other
information regarding issuers that file electronically with the
SEC at www.sec.gov. The Bancorp’s annual report on Form 10-
K, quarterly reports on Form 10-Q, current reports on Form 8-
K, proxy statements, and amendments to those reports filed or
furnished pursuant to section 13(a) or 15(d) of the Exchange
Act are accessible at no cost on the Bancorp’s web site at
www.53.com on a same day basis after they are electronically
filed with or furnished to the SEC.
PART I
ITEM 1. BUSINESS
General Information
Fifth Third Bancorp, an Ohio corporation organized in 1975, is
a bank holding company as defined by the Bank Holding
Company Act of 1956, as amended (the “BHCA”), and is
registered as such with the Board of Governors of the Federal
Reserve System (“FRB”). The Bancorp’s principal office is
located in Cincinnati, Ohio.
The Bancorp’s subsidiaries provide a wide range of
financial products and services to the retail, commercial,
financial, governmental, educational and medical sectors,
including a wide variety of checking, savings and money
market accounts, and credit products such as credit cards,
installment loans, mortgage loans and leases. Each of the
banking subsidiaries has deposit insurance provided by the
Federal Deposit Insurance Corporation (“FDIC”) through the
Deposit Insurance Fund. Refer to Exhibit 21 filed as an
attachment to this Annual Report on Form 10-K for a list of all
the subsidiaries of the Bancorp.
Additional information regarding the Bancorp’s businesses
is included in Management’s Discussion and Analysis of
Financial Condition and Results of Operations.
Competition
The Bancorp competes for deposits, loans and other banking
services in its principal geographic markets as well as in
selected national markets as opportunities arise. In addition to
the challenge of attracting and retaining customers for
traditional banking services, the Bancorp’s competitors include
investment
securities dealers, brokers, mortgage bankers,
advisors and insurance companies. These competitors, with
focused products
targeted at highly profitable customer
segments, compete across geographic boundaries and provide
customers increasing access to meaningful alternatives to
banking services in nearly all significant products. The
increasingly competitive environment is a result primarily of
changes in regulation, changes in technology, product delivery
systems and the accelerating pace of consolidation among
financial service providers. These competitive trends are likely
to continue.
Acquisitions
The Bancorp’s strategy for growth includes strengthening its
presence in core markets, expanding into contiguous markets
and broadening its product offerings while taking into account
the integration and other risks of growth. The Bancorp
evaluates strategic acquisition opportunities and conducts due
diligence activities in connection with possible transactions. As
a result, discussions, and in some cases, negotiations may take
place and future acquisitions involving cash, debt or equity
securities may occur. These typically involve the payment of a
premium over book value and current market price, and
therefore, some dilution of book value and net income per share
may occur with any future transactions.
Additional information regarding acquisitions is included
in the Regulation and Supervision section in addition to Note 2
of the Notes to Consolidated Financial Statements.
Regulation and Supervision
In addition to the generally applicable state and federal laws
governing businesses and employers, the Bancorp and its
subsidiary banks are subject to extensive regulation by federal
and state
to financial
laws and regulations applicable
institutions and their parent companies. Virtually all aspects of
the business of the Bancorp and its subsidiary banks are subject
to specific requirements or restrictions and general regulatory
oversight. The principal objectives of state and federal banking
laws are the maintenance of the safety and soundness of
financial institutions and the federal deposit insurance system
and the protection of consumers or classes of consumers, rather
than the specific protection of shareholders of a bank or the
parent company of a bank, such as the Bancorp. In addition, the
supervision, regulation and examination of the Bancorp and its
subsidiaries by the bank regulatory agencies is not intended for
the protection of the Bancorp’s security holders. To the extent
the following material describes statutory or regulatory
provisions, it is qualified in its entirety by reference to the
particular statute or regulation.
The Bancorp is subject to regulation and supervision by the
FRB and the Ohio Division of Financial Institutions (the
“Division”). The Bancorp is required to file various reports
with, and is subject to examination by, the FRB and the
Division. The FRB has the authority to issue orders to bank
holding companies to cease and desist from unsound banking
practices and violations of conditions imposed by, or violations
of agreements with, the FRB. The FRB is also empowered to
assess civil money penalties against companies or individuals
the Bank Holding Company Act of 1957
who violate
(“BHCA”) or orders or regulations thereunder, to order
activities of non-banking
termination of non-banking
subsidiaries of bank holding companies, and
to order
termination of ownership and control of a non-banking
subsidiary by a bank holding company.
The BHCA requires the prior approval of the FRB, for a
bank holding company to acquire substantially all the assets of
a bank or acquiring direct or indirect ownership or control of
more than 5% of any class of the voting shares of any bank,
bank holding company or savings association, or increasing any
such non-majority ownership or control of any bank, bank
holding company or savings association, or merging or
consolidating with any bank holding company.
The Riegle-Neal
Interstate Banking and Branching
Efficiency Act of 1994 generally authorizes bank holding
companies to acquire banks located in any state, subject to
certain state-imposed age and deposit concentration limits, and
also generally authorizes interstate bank holding company and
bank mergers and to a lesser extent, interstate branching.
The Gramm-Leach-Bliley Act of 1999 (“GLBA”) permits
a qualifying bank holding company to become a financial
holding company (“FHC”) and thereby to engage directly or
indirectly in a broader range of activities than had previously
been permitted for a bank holding company under the BHCA.
Fifth Third Bancorp 89
ANNUAL REPORT ON FORM 10-K
Permitted activities include securities underwriting and dealing,
insurance underwriting and brokerage, merchant banking and
other activities that are declared by the FRB, in cooperation
with the Treasury Department, to be “financial in nature or
incidental thereto” or are declared by the FRB unilaterally to be
“complementary” to financial activities. In addition, a FHC is
allowed to conduct permissible new financial activities or
acquire permissible non-bank financial companies with after-
the-fact notice to the FRB. A bank holding company may elect
to become a FHC if each of its subsidiary banks is “well
capitalized,” is “well managed” and has at least a “Satisfactory”
rating under
the Federal Community Reinvestment Act
(“CRA”). In 2000, the Bancorp elected and qualified for FHC
status under the GLBA.
Unless a bank holding company becomes a FHC under
GLBA, the BHCA also prohibits a bank holding company from
acquiring a direct or indirect interest in or control of more than
5% of any class of the voting shares of a company that is not a
bank or a bank holding company and from engaging directly or
indirectly in activities other than those of banking, managing or
controlling banks or furnishing services to its subsidiary banks,
except that it may engage in and may own shares of companies
engaged in certain activities the FRB has determined to be so
closely related to banking or managing or controlling banks as
to be proper incident thereto.
The FRB has authority to prohibit bank holding companies
from paying dividends if such payment is deemed to be an
unsafe or unsound practice. The FRB has indicated generally
that it may be an unsafe or unsound practice for bank holding
companies to pay dividends unless a bank holding company’s
net income is sufficient to fund the dividends and the expected
rate of earnings retention is consistent with the organization’s
capital needs, asset quality and overall financial condition. The
Bancorp depends in part upon dividends received from its
subsidiary banks to fund its activities, including the payment of
dividends. Each of the subsidiary banks is subject to regulatory
limitations on the amount of dividends it may declare and pay.
Under FRB policy, a bank holding company is expected to
act as a source of financial and managerial strength to each of
its subsidiary banks and to commit resources to their support.
This support may be required at times when the bank holding
company may not have the resources to provide it. Similarly,
under the cross-guarantee provisions of the Federal Deposit
Insurance Act (“FDIA”), the FDIC can hold any FDIC-insured
depository institution liable for any loss suffered or anticipated
by the FDIC in connection with (1) the “default” of a
commonly controlled FDIC-insured depository institution; or
(2) any assistance provided by the FDIC to a commonly
controlled FDIC-insured depository institution “in danger of
default.”
The Bancorp owns two state banks, Fifth Third Bank and
Fifth Third Bank (Michigan), chartered under the laws of Ohio
and Michigan, respectively. These banks are subject to
extensive state regulation and examination by the appropriate
state banking agency in the particular state or states where each
state bank is chartered, by the FRB, and by the FDIC, which
insures the deposits of each of the state banks to the maximum
extent permitted by law. The federal and state laws and
regulations that are applicable to banks regulate, among other
matters, the scope of their business, their investments, their
reserves against deposits, the timing of the availability of
deposited funds, the amount of loans to individual and related
borrowers and the nature, amount of and collateral for certain
loans, and the amount of interest that may be charged on loans.
90
Fifth Third Bancorp
Various state consumer laws and regulations also affect the
operations of the state banks.
The Bancorp’s national subsidiary bank, Fifth Third Bank,
N.A. is subject to regulation and examination primarily by the
Office of the Comptroller of the Currency (“OCC”) and
secondarily by the FRB and the FDIC, which insures the
deposits to the maximum extent permitted by law. The federal
laws and regulations that are applicable to national banks
regulate, among other matters, the scope of their business, their
investments, their reserves against deposits, the timing of the
availability of deposited funds, the amount of loans to
individual and related borrowers and the nature, amount of and
collateral for certain loans, and the amount of interest that may
be charged on loans.
in establishing
in adjusting deposit
In 2006, the Federal Deposit Insurance Reform Act of
2005 was signed into law (“FDIRA”). Pursuant to the FDIRA,
the Bank Insurance Fund and Savings Association Fund were
merged to create the Deposit Insurance Fund. The FDIC was
insurance
granted broader authority
premium rates and more flexibility
the
designated reserve ratio. FDIRA provided assessment credits to
insured depository institutions that could be used to offset 100%
of insurance premiums in 2007 and 90% of premiums in 2008-
2010 or until they are fully exhausted. Insured depository
institutions are placed into one of four risk categories under
FDIRA, with the vast majority qualifying for Risk Category I.
Risk Category I institutions insurance premiums are based upon
CAMELS ratings, long term debt issuer ratings (if applicable)
and various financial ratios derived from the Consolidated
Report of Condition and Income (“Call Report”). In 2007, the
FDIC set the Deposit Insurance Fund’s designated reserve ratio
at 1.25% and the Risk Category I assessment rates range from 5
to 7 basis points. The Bancorp expects to fully exhaust its
assessment credits in the second quarter of 2008 and anticipates
incurring $27 million of FDIC insurance premium for 2008.
Federal law, Sections 23A and 23B of the Federal Reserve
Act, restricts transactions between a bank and an affiliated
company, including a parent bank holding company. The
subsidiary banks are subject to certain restrictions on loans to
affiliated companies, on investments in the stock or securities
thereof, on the taking of such stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or
letter of credit on their behalf. Among other things, these
restrictions limit the amount of such transactions, require
collateral in prescribed amounts for extensions of credit,
prohibit the purchase of low quality assets and require that the
terms of such transactions be substantially equivalent to terms
of similar transactions with non-affiliates. One result of these
restrictions is a limitation on the subsidiary banks to fund the
Bancorp. Generally, each subsidiary bank is limited in its
extensions of credit to any affiliate to 10% of the subsidiary
bank’s capital and its extension of credit to all affiliates to 20%
of the subsidiary bank’s capital.
The CRA generally requires insured depository institutions
to identify the communities they serve and to make loans and
investments and provide services that meet the credit needs of
these communities. Furthermore, the CRA requires the FRB to
evaluate the performance of each of the subsidiary banks in
helping to meet the credit needs of their communities. As a part
of the CRA program, the subsidiary banks are subject to
periodic examinations by
the FRB, and must maintain
comprehensive records of their CRA activities for this purpose.
During these examinations, the FRB rates such institutions’
compliance with CRA as “Outstanding,” “Satisfactory,” “Needs
to Improve" or "Substantial Noncompliance.” Failure of an
ANNUAL REPORT ON FORM 10-K
institution to receive at least a “Satisfactory” rating could
inhibit such institution or its holding company from undertaking
certain activities, including engaging in activities permitted as a
financial holding company under the GLBA and acquisitions of
other financial institutions, or, as discussed above, require
divestitures. The FRB must take into account the record of
performance of banks in meeting the credit needs of the entire
community served,
low- and moderate-income
neighborhoods. Fifth Third Bank and Fifth Third Bank
(Michigan) received an “Outstanding” CRA rating and Fifth
Third Bank, N.A. received a “Satisfactory” rating. Because the
Bancorp is an FHC, with limited exceptions, the Bancorp may
not commence any new financial activities or acquire control of
any companies engaged in financial activities in reliance on the
GLBA if any of the subsidiary banks receives a CRA rating of
less than “Satisfactory.”
including
The FRB has established capital guidelines for financial
holding companies. The FRB and the OCC have also issued
regulations establishing capital requirements for banks. Failure
to meet capital requirements could subject the Bancorp and its
subsidiary banks to a variety of restrictions and enforcement
actions. In addition, as discussed above, each of the Bancorp’s
subsidiary banks must remain well capitalized for the Bancorp
to retain its status as a financial holding company.
The minimum risk-based capital requirements adopted by
the federal banking agencies follow the Capital Accord of the
Basel Committee on Banking Supervision. In 2004, the Basel
Committee published its new capital guidelines (“Basel II”)
governing the capital adequacy of large, internationally active
banking organizations (“core” banking organizations with at
least $250 billion in total assets or at least $10 billion in foreign
exposure). In November 2007, the federal banking agencies
adopted final rules to implement Basel II for core banking
organizations. Under Basel II, core banking organizations will
be required to enhance the measurement and management of
their risks, including credit risk and operational risk, through
the use of advanced approaches for calculating risk-based
capital requirements. The agencies announced they will issue a
proposed
that will provide all non-core banking
organizations which are not required to adopt Basel II’s
advance approaches, such as Bancorp, with the option to adopt
a standardized approach under Basel II. The proposed rule is
intended to be finalized before the core banking organizations
may start their first transition period under Basel II. This new
proposal will replace the earlier proposal to adopt the so-called
Basel IA option.
rule
Until such time as the new rules for non-core banking
organizations are adopted, Bancorp is unable to predict whether
it will adopt a standardized approach under Basel II.
The FRB, FDIC and other bank regulatory agencies have
adopted final guidelines (the “Guidelines”) for safeguarding
confidential, personal customer information. The Guidelines
require each financial institution, under the supervision and
ongoing oversight of its Board of Directors or an appropriate
committee thereof, to create, implement and maintain a
comprehensive written information security program designed
to ensure
the security and confidentiality of customer
information, protect against any anticipated threats or hazards to
the security or integrity of such information and protect against
unauthorized access to or use of such information that could
result in substantial harm or inconvenience to any customer.
The Bancorp has adopted a customer information security
program that has been approved by the Bancorp’s Board of
Directors (the “Board”).
the statute requires explanations
The GLBA requires financial institutions to implement
policies and procedures regarding the disclosure of nonpublic
personal information about consumers to non-affiliated third
parties. In general,
to
consumers on policies and procedures regarding the disclosure
of such nonpublic personal information, and, except as
otherwise
such
information except as provided in the subsidiary banks policies
and procedures. The subsidiary banks have implemented a
privacy policy effective since the GLBA became law, pursuant
to which all of its existing and new customers are notified of the
privacy policies.
law, prohibits disclosing
required by
The Uniting and Strengthening America by Providing
Appropriate Tools Required to Intercept and Obstruct Terrorism
Act of 2001 (the “Patriot Act”), designed to deny terrorists and
others the ability to obtain access to the United States financial
system, has significant implications for depository institutions,
brokers, dealers and other businesses involved in the transfer of
money. The Patriot Act, as implemented by various federal
regulatory agencies, requires financial institutions, including the
Bancorp and its subsidiaries, to implement new policies and
procedures or amend existing policies and procedures with
laundering,
to, among other matters, anti-money
respect
compliance, suspicious activity and currency
transaction
reporting and due diligence on customers. The Patriot Act and
its underlying regulations also permit information sharing for
counter-terrorist purposes between federal law enforcement
agencies and financial institutions, as well as among financial
institutions, subject to certain conditions, and require the FRB
(and other
the
effectiveness of an applicant in combating money laundering
activities when considering applications filed under Section 3 of
the BHCA or the Bank Merger Act. The Bancorp’s Board has
approved policies and procedures that are believed to be
compliant with the Patriot Act.
federal banking agencies)
to evaluate
Certain mutual fund and unit investment trust custody and
administrative clients are regulated as “investment companies”
as that term is defined under the Investment Company Act of
1940, as amended (the “ICA”), and are subject to various
examination and reporting requirements. The provisions of the
ICA and the regulations promulgated thereunder prescribe the
type of institution that may act as a custodian of investment
company assets, as well as the manner in which a custodian
administers the assets in its custody. As a custodian for a
number of investment company clients, these regulations
require, among other things, that certain minimum aggregate
capital, surplus and undivided profit levels are maintained by
the subsidiary banks. Additionally, arrangements with clearing
agencies or other securities depositories must meet ICA
requirements for segregation of assets, identification of assets
and client approval. Future legislative and regulatory changes in
laws and regulations governing custody of
the existing
investment company assets, particularly with respect
to
custodian qualifications, may have a material and adverse
impact on the Bancorp. Currently, management believes the
Bancorp is in compliance with all minimum capital and
securities depository requirements. Further, the Bancorp is not
aware of any proposed or pending regulatory developments,
which, if approved, would adversely affect its ability to act as
custodian to an investment company.
Investment companies are also subject to extensive record
keeping and reporting requirements. These requirements dictate
the type, volume and duration of the record keeping the
Bancorp undertakes, either in the role as custodian for an
investment company or as a provider of administrative services
Fifth Third Bancorp 91
ANNUAL REPORT ON FORM 10-K
to an investment company. Further, specific ICA guidelines
must be followed when calculating the net asset value of a
client mutual fund. Consequently, changes in the statutes or
regulations governing recordkeeping and reporting or valuation
calculations will affect the manner in which operations are
conducted.
New legislation or regulatory requirements could have a
significant impact on the information reporting requirements
applicable to the Bancorp and may in the short term adversely
affect the Bancorp’s ability to service clients at a reasonable
cost. Any failure to provide such support could cause the loss of
customers and have a material adverse effect on financial
results. Additionally, legislation or regulations may be proposed
or enacted to regulate the Bancorp in a manner that may
adversely affect financial results. Furthermore, the mutual fund
industry may be significantly affected by new laws and
regulations.
The GLBA amended the federal securities laws to
eliminate the blanket exceptions that banks traditionally have
had from the definition of “broker” and “dealer.” The GLBA
also required that there be certain transactional activities that
would not be “brokerage” activities, which banks could effect
without having to register as a broker. In September 2007, the
FRB and SEC approved Regulation R to govern bank securities
activities. Under Regulation R, we will have until January 1,
2009 to comply by either registering as a broker-dealer or
“pushing out” brokerage activities to affiliated broker-dealers.
The transactional exemptions will permit, without broker-dealer
registration, banks to enter into a de minimis number of riskless
principal transactions, certain asset-backed transactions and
certain securities lending transactions. The Bancorp is currently
evaluating alternatives to ensure that its subsidiary banks will
not be required to register as a broker upon the effective date.
to
including
(ii) auditor
responsibility measures,
The Sarbanes-Oxley Act of 2002, (“Sarbanes-Oxley”)
implements a broad range of corporate governance and
accounting measures for public companies (including publicly-
held bank holding companies such as the Bancorp) designed to
promote honesty and transparency in corporate America.
Sarbanes-Oxley’s principal provisions, many of which have
been interpreted through regulations, provide for and include,
among other things: (i) the creation of an independent
accounting oversight board;
independence
provisions that restrict non-audit services that accountants may
their audit clients; (iii) additional corporate
provide
governance and
the
requirement that the chief executive officer and chief financial
officer of a public company certify financial statements; (iv) the
forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer’s securities by directors and
senior officers in the twelve month period following initial
publication of any financial statements that later require
the oversight of, and
restatement; (v) an
enhancement of certain
to, audit
committees of public companies and how they interact with the
Bancorp’s independent auditors; (vi) requirements that audit
committee members must be independent and are barred from
accepting consulting, advisory or other compensatory fees from
the issuer; (vii) requirements that companies disclose whether at
least one member of the audit committee is a ‘financial expert’
(as such term is defined by the SEC) and if not discussed, why
the audit committee does not have a financial expert; (viii)
expanded disclosure requirements for corporate
insiders,
including accelerated reporting of stock transactions by insiders
and a prohibition on insider trading during pension blackout
periods; (ix) a prohibition on personal loans to directors and
in
requirements
increase
relating
92
Fifth Third Bancorp
officers, except certain loans made by insured financial
institutions on nonpreferential terms and in compliance with
other bank regulatory requirements; (x) disclosure of a code of
ethics and filing a Form 8-K for a change or waiver of such
the
code;
effectiveness of internal control over financial reporting and the
Bancorp’s Independent Registered Public Accounting Firm
attest to the assessment; and (xii) a range of enhanced penalties
for fraud and other violations.
that management assess
requirements
(xi)
Additional information regarding regulatory matters is
included in Note 25 of the Notes to Consolidated Financial
Statements.
ITEM 2. PROPERTIES
The Bancorp’s executive offices and the main office of Fifth
Third Bank are located on Fountain Square Plaza in downtown
Cincinnati, Ohio in a 32-story office tower, a five-story office
building with an attached parking garage and a separate ten-
story office building known as the Fifth Third Center, the
William S. Rowe Building and the 530 Building, respectively.
The Bancorp’s main operations center is located in Cincinnati,
Ohio, in a three-story building with an attached parking garage
known as the Madisonville Operations Center. A subsidiary of
the Bancorp owns 100 percent of these buildings.
At December 31, 2007, the Bancorp, through its banking
and non-banking subsidiaries, operated 1,227 banking centers,
of which 854 were owned, 270 were leased and 103 for which
the buildings are owned but the land is leased. The banking
centers are located in the states of Ohio, Kentucky, Indiana,
Michigan,
Illinois, Florida, Tennessee, West Virginia,
Pennsylvania, Missouri and Georgia. The Bancorp’s significant
owned properties are owned free from mortgages and major
encumbrances.
EXECUTIVE OFFICERS OF THE BANCORP
Officers are appointed annually by the Board of Directors at the
meeting of Directors
the Annual
Meeting of Shareholders. The names, ages and positions of the
Executive Officers of the Bancorp as of February 22, 2008 are
listed below along with their business experience during the
past 5 years:
immediately following
George A. Schaefer, Jr., 62. Chairman of the Bancorp since
June 2006. Formerly, Mr. Schaefer was the President and Chief
Executive Officer of the Bancorp and Fifth Third Bank since
1990.
Kevin T. Kabat, 51. President and Chief Executive Officer of
the Bancorp since June 2006 and April 2007, respectively.
Previously, Mr. Kabat was Executive Vice President of the
Bancorp since December 2003. Prior to that he was President
and CEO of Fifth Third Bank (Michigan) since April 2001.
Greg D. Carmichael, 46. Executive Vice President and Chief
Operating Officer of the Bancorp since June 2006. Prior to that
he was the Executive Vice President and Chief Information
Officer of the Bancorp since June 2003. Previously, Mr.
Carmichael was the Chief Information Officer of Emerson
Electric Company.
Charles D. Drucker, 44. Executive Vice President of the
Bancorp since June 2005 and President of Fifth Third
Processing Solutions since July 2004. Previously, Mr. Drucker
was Executive Vice President and Chief Operating Officer of
STAR ® Debit Services, a division of First Data Corporation.
Bruce K. Lee, 47. Executive Vice President of the Bancorp
since June 2005. Previously, Mr. Lee was President and CEO
of Fifth Third Bank (Northwestern Ohio) since July 2002 and
ANNUAL REPORT ON FORM 10-K
Executive Vice President, Commercial Banking Division, Fifth
Third Bank (Northwestern Ohio) since March 2001.
Christopher G. Marshall, 48. Executive Vice President and
Chief Financial Officer of the Bancorp since May 2006.
Previously, Mr. Marshall was a senior executive for Bank of
America and served in various management capacities since
2001.
Daniel T. Poston, 49. Executive Vice President of the Bancorp
since June 2003, and Controller of the Bancorp and Fifth Third
Bank since July 2007. Formerly, Mr. Poston was the Auditor of
the Bancorp and Fifth Third Bank since October 2001 and was
Senior Vice President of the Bancorp and Fifth Third Bank
since January 2002.
Paul L. Reynolds, 46. Executive Vice President, Secretary and
General Counsel of the Bancorp since September 1999, January
2002 and January 2002, respectively.
Mahesh Sankaran, 45. Senior Vice President and Treasurer of
the Bancorp since June 2006. Previously, Mr. Sankaran was
Treasurer for Huntington Bancshares Incorporated since
February 2005. Prior to that Mr. Sankaran was Treasurer for
Compass Bankshares, Inc.
Robert A. Sullivan, 53. Senior Executive Vice President of the
Bancorp since December 2002. Previously, Mr. Sullivan was
President and CEO of Fifth Third Bank (Northwestern Ohio)
since March 9, 2001.
Mary E. Tuuk, 43. Executive Vice President and Chief Risk
Officer of the Bancorp since June 2007. Previously, Ms. Tuuk
was Senior Vice President of Fifth Third Bancorp since 2003
and Senior Vice President of Fifth Third Bank (Western
Michigan) since April 2001.
Terry E. Zink, 56. Executive Vice President of the Bancorp
since March 2007 and President and CEO of Fifth Third Bank
(Chicago) since January 2005. Previously Mr. Zink was the
Executive Vice President/ Region President of Wells Fargo
Bank, Nebraska.
PART II
ITEM 5. MARKET FOR REGISTRANT’S COMMON
EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
The information required by this item is included in the
Corporate Information found on the inside of the back cover
and
the
subsidiaries can pay to the Bancorp discussed in Note 25 of the
Notes to the Consolidated Financial Statements. Additionally,
as of December 31, 2007, the Bancorp had approximately
55,961 shareholders of record.
the discussion of dividend
limitations
that
in
Issuer Purchases of Equity Securities
Shares
Purchased
(a)
Average
Price
Paid Per
Share
Period
October 2007
November 2007
December 2007
Total
Shares
Purchased
as Part of
Publicly
Announced
Plans or
Programs
-
-
-
-
Maximum
Shares that
May Be
Purchased
Under the
Plans or
Programs
(b)
19,201,518
19,201,518
19,201,518
19,201,518
(a) The Bancorp repurchased 527, 377 and 275 shares during October,
November and December of 2007 in connection with various employee
compensation plans of the Bancorp. These purchases are not included
against the maximum number of shares that may yet be purchased under the
Board of Directors authorization.
(b) On May 21, 2007, the Bancorp announced that its Board of Directors
had authorized management to purchase up to 30 million shares of the
Bancorp’s common stock through the open market or any private
transaction. The timing of the purchases and the exact number of shares to
be purchased depends upon market conditions. The authorization does not
include specific price targets or an expiration date.
527
377
275
1,179
$-
-
-
$-
Fifth Third Bancorp 93
ANNUAL REPORT ON FORM 10-K
The following performance graphs do not constitute soliciting material and should not be deemed filed or incorporated by
reference into any other Company filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the
extent the Bancorp specifically incorporates the performance graphs by reference therein.
Total Return Analysis
The graphs below summarize the cumulative return experienced by the Bancorp's shareholders over the years 2003 through 2007, and
1998 through 2007, respectively, compared to the S&P 500 Stock, the S&P Banks, and the NASDAQ Banks indices. Beginning with the
2008 Annual Report on Form 10-K, the performance graph will no longer compare Fifth Third’s performance to the NASDAQ Banks
Index. At 12/31/07, Fifth Third was the second largest bank by market capitalization in the NASDAQ Bank Index and made up
approximately seven percent of the index weighting. As a result, the NASDAQ Bank Index does not provide a strong correlation to the
Bancorp’s peer performance. The Bancorp has shown the 5 and 10-year return of this Index in the following charts:
FIFTH THIRD BANCORP VS. MARKET INDICES
5 YEAR RETURN
x
e
d
n
I
n
r
u
t
e
R
l
a
t
o
T
100
80
60
40
20
0
(20)
(40)
(60)
2002
2003
2004
2005
2006
2007
Fifth Third (FITB)
S&P 500 (SPX)
S&P Banks (BIX)
NASDAQ Banks (CBNX)
10 YEAR RETURN
120
100
80
60
40
20
0
x
e
d
n
I
n
r
u
t
e
R
l
a
t
o
T
(20)
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
Fifth Third Bank (FITB)
S&P 500 (SPX)
S&P Banks (BIX)
NASDAQ Banks (CBNX)
94
Fifth Third Bancorp
ANNUAL REPORT ON FORM 10-K
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND
CORPORATE GOVERNANCE
The information required by this item relating to the Executive
Officers of the Registrant is included in PART I under
“EXECUTIVE OFFICERS OF THE BANCORP.”
The information required by this item concerning Directors
and the nomination process is incorporated herein by reference
under the caption “ELECTION OF DIRECTORS” of the
Bancorp’s Proxy Statement for the 2008 Annual Meeting of
Shareholders.
The information required by this item concerning the Audit
Committee and Code of Business Conduct and Ethics is
captions
incorporated herein by
“CORPORATE GOVERNANCE”
“BOARD OF
DIRECTORS,
ITS COMMITTEES, MEETINGS AND
FUNCTIONS” of the Bancorp’s Proxy Statement for the 2008
Annual Meeting of Shareholders.
reference under
and
the
The information required by this item concerning Section
16
is
(a) Beneficial Ownership Reporting Compliance
incorporated herein by reference under the caption “SECTION
16
REPORTING
COMPLIANCE” of the Bancorp’s Proxy Statement for the 2008
Annual Meeting of Shareholders.
OWNERSHIP
BENEFICIAL
(a)
ITEM 11. EXECUTIVE COMPENSATION
The information required by this item is incorporated herein by
reference under the captions “COMPENSATION DISCUSSION
“COMPENSATION COMMITTEE
AND ANALYSIS,”
REPORT”
COMMITTEE
INTERLOCKS AND INSIDER PARTICIPATION” of the
Bancorp’s Proxy Statement for the 2008 Annual Meeting of
Shareholders.
“COMPENSATION
and
ITEM 12. SECURITY OWNERSHIP OF CERTAIN
BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
Security ownership information of certain beneficial owners and
management is incorporated herein by reference under the
captions “CERTAIN BENEFICIAL OWNERS,” “ELECTION
OF DIRECTORS” and “COMPENSATION DISCUSSION
AND ANALYSIS” of the Bancorp’s Proxy Statement for the
2008 Annual Meeting of Shareholders.
The information required by this item concerning Equity
Compensation Plan information is included in Note 18 of the
Notes to the Consolidated Financial Statements.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED
TRANSACTIONS, AND DIRECTOR INDEPENDENCE
The information required by this item is incorporated herein by
reference under the captions “CERTAIN TRANSACTIONS”,
“CORPORATE
“ELECTION
ITS
GOVERNANCE” and “BOARD OF DIRECTORS,
COMMITTEES, MEETINGS AND FUNCTIONS” of
the
Bancorp’s Proxy Statement for the 2008 Annual Meeting of
Shareholders.
DIRECTORS”,
OF
ITEM 14. PRINCIPAL ACCOUNTING FEES AND
SERVICES
The information required by this item is incorporated herein by
reference under the caption “PRINCIPAL INDEPENDENT
REGISTERED PUBLIC ACCOUNTING FIRM FEES” of the
Bancorp’s Proxy Statement for the 2008 Annual Meeting of
Shareholders.
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT
SCHEDULES
Financial Statements Filed
Report of Independent Registered Public Accounting Firm
Fifth Third Bancorp and Subsidiaries Consolidated Financial
Statements
Notes to Consolidated Financial Statements
Pages
51
52-55
56-87
The schedules for the Bancorp and its subsidiaries are omitted
because of the absence of conditions under which they are
required, or because the information is set forth in the
Consolidated Financial Statements or the notes thereto.
The following lists the Exhibits to the Annual Report on Form 10-K.
3(i)
3(ii)
4.1
4.2
4.3
4.4
Second Amended Articles of Incorporation of Fifth Third Bancorp,
as amended. Incorporated by reference to Registrant’s Quarterly
Report on Form 10-Q for the quarter ended March 31, 2001.
Code of Regulations of Fifth Third Bancorp, as amended.
Incorporated by reference to Registrant’s Quarterly Report on Form
10-Q for the quarter ended March 31, 2007.
Junior Subordinated Indenture, dated as of March 20, 1997 between
Fifth Third Bancorp and Wilmington Trust Company, as Debenture
Trustee. Incorporated by reference to Registrant’s Current Report on
Form 8-K filed with the Securities and Exchange Commission on
March 26, 1997.
Amended and Restated Trust Agreement, dated as of March 20, 1997
of Fifth Third Capital Trust II, among Fifth Third Bancorp, as
Depositor, Wilmington Trust Company, as Property Trustee, and the
Administrative Trustees named therein. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on March 26, 1997.
Guarantee Agreement, dated as of March 20, 1997 between Fifth
Third Bancorp, as Guarantor, and Wilmington Trust Company, as
Guarantee Trustee. Incorporated by reference to Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 26, 1997.
Agreement as to Expense and Liabilities, dated as of March 20, 1997
between Fifth Third Bancorp, as the holder of the Common
Securities of Fifth Third Capital Trust I and Fifth Third Capital Trust
II. Incorporated by reference to Registrant’s Current Report on Form
8-K filed with the Securities and Exchange Commission on March
26, 1997.
4.5
Indenture, dated as of May 23, 2003, between Fifth Third Bancorp
and Wilmington Trust Company, as Trustee. Incorporated by
reference to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on May 22, 2003.
4.6
Global security representing Fifth Third Bancorp’s $500,000,000
4.50% Subordinated Notes due 2018. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on May 22, 2003.
4.7
First Supplemental Indenture, dated as of December 20, 2006,
4.8
4.9
between Fifth Third Bancorp and Wilmington Trust Company, as
Trustee. Incorporated by reference to Registrant's Annual Report on
Form 10-K filed for the fiscal year ended December 31, 2006.
Global security representing Fifth Third Bancorp’s $500,000,000
5.45% Subordinated Notes due 2017. Incorporated by reference to
Registrant's Annual Report on Form 10-K filed for the fiscal year
ended December 31, 2006.
Global security representing Fifth Third Bancorp’s $250,000,000
Floating Rate Subordinated Notes due 2016. Incorporated by
reference to Registrant's Annual Report on Form 10-K filed for the
fiscal year ended December 31, 2006.
4.10 First Supplemental Indenture dated as of March 30, 2007 between
Fifth Third Bancorp and Wilmington Trust Company, as trustee, to
the Junior Subordinated Indenture dated as of May 20, 1997 between
Fifth Third and the Trustee. Incorporated by reference to Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on March 30, 2007.
4.11 Certificate Representing $500,000,000.00 of 6.50% Junior
Subordinated Notes of Fifth Third Bancorp. Incorporated by
reference to Registrant's Quarterly Report on Form 10-Q filed for the
quarter ended March 31, 2007.
4.12 Certificate Representing $250,010,000.00 of 6.50% Junior
Subordinated Notes of Fifth Third Bancorp. Incorporated by
reference to Registrant's Quarterly Report on Form 10-Q filed for the
Fifth Third Bancorp 95
quarter ended March 31, 2007.
4.28 Third Supplemental Indenture dated as of October 30, 2007 between
ANNUAL REPORT ON FORM 10-K
4.13 Amended and Restated Declaration of Trust dated as of March 30,
2007 of Fifth Third Capital Trust IV among Fifth Third Bancorp, as
Sponsor, Wilmington Trust Company, as Property Trustee and
Delaware Trustee, and the Administrative Trustees named therein.
Incorporated by reference to Registrant's Quarterly Report on Form
10-Q filed for the quarter ended March 31, 2007.
4.14 Certificate Representing 500,000 6.50% Trust Preferred Securities of
Fifth Third Capital Trust IV (liquidation amount $1,000 per Trust
Preferred Security). Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q filed for the quarter ended March 31,
2007.
4.15 Certificate Representing 250,000 6.50% Trust Preferred Securities of
Fifth Third Capital Trust IV (liquidation amount $1,000 per Trust
Preferred Security). Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q filed for the quarter ended March 31,
2007.
4.16 Certificate Representing 10 6.50% Common Securities of Fifth Third
Capital Trust IV (liquidation amount $1,000 per Common Security).
Incorporated by reference to Registrant's Quarterly Report on Form
10-Q filed for the quarter ended March 31, 2007.
4.17 Guarantee Agreement, dated as of March 30, 2007 between Fifth
Third Bancorp, as Guarantor, and Wilmington Trust Company, as
Guarantee Trustee. Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q filed for the quarter ended March 31,
2007.
4.18 Agreement as to Expense and Liabilities, dated as of March 30, 2007
between Fifth Third Bancorp and Fifth Third Capital Trust IV.
Incorporated by reference to Registrant's Quarterly Report on Form
10-Q filed for the quarter ended March 31, 2007.
4.19 Replacement Capital Covenant of Fifth Third Bancorp dated as of
March 30, 2007. Incorporated by reference to Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on March 30, 2007.
4.20 Second Supplemental Indenture dated as of August 8, 2007 between
Fifth Third Bancorp and Wilmington Trust Company, as trustee, to
the Junior Subordinated Indenture dated as of May 20, 1997 between
Fifth Third and the Trustee. Incorporated by reference to Registrant’s
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on August 8, 2007.
4.21 Certificate Representing $500,010,000 of 7.25% Junior Subordinated
Notes of Fifth Third Bancorp. Incorporated by reference to
Registrant’s Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on August 8, 2007.
4.22 Amended and Restated Declaration of Trust dated as of August 8,
2007 of Fifth Third Capital Trust V among Fifth Third Bancorp, as
Sponsor, Wilmington Trust Company, as Property Trustee and
Delaware Trustee, and the Administrative Trustees named therein.
Incorporated by reference to Registrant’s Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on
August 8, 2007.
4.23 Certificate Representing 20,000,000 7.25% Trust Preferred
Securities of Fifth Third Capital Trust V (liquidation amount $25 per
Trust Preferred Security). Incorporated by reference to Registrant’s
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on August 8, 2007.
4.24 Certificate Representing 400 7.25% Trust Preferred Securities of
Fifth Third Capital Trust V (liquidation amount $25 per Trust
Preferred Security). Incorporated by reference to Registrant's
Quarterly Report on Form 10-Q filed for the quarter ended June 30,
2007.
4.25 Guarantee Agreement, dated as of August 8, 2007 between Fifth
Third Bancorp, as Guarantor, and Wilmington Trust Company, as
Guarantee Trustee. Incorporated by reference to Registrant’s
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on August 8, 2007.
4.26 Agreement as to Expense and Liabilities, dated as of August 8, 2007
between Fifth Third Bancorp and Fifth Third Capital Trust V.
Incorporated by reference to Registrant's Quarterly Report on Form
10-Q filed for the quarter ended June 30, 2007.
4.27 Replacement Capital Covenant of Fifth Third Bancorp dated as of
August 8, 2007. Incorporated by reference to Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on August 8, 2007.
96
Fifth Third Bancorp
Fifth Third Bancorp and Wilmington Trust Company, as trustee, to
the Junior Subordinated Indenture dated as of May 20, 1997 between
Fifth Third and the trustee. Incorporated by reference to Registrant’s
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on October 31, 2007.
4.29 Certificate Representing $862,510,000 of 7.25% Junior Subordinated
Notes of Fifth Third Bancorp. Incorporated by reference to
Registrant’s Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on October 31, 2007.
4.30 Amended and Restated Declaration of Trust dated as of October 30,
2007 of Fifth Third Capital Trust VI among Fifth Third Bancorp, as
Sponsor, Wilmington Trust Company, as Property Trustee and
Delaware Trustee, and the Administrative Trustees named therein.
Incorporated by reference to Registrant’s Registration Statement on
Form 8-A filed with the Securities and Exchange Commission on
October 31, 2007.
4.31 Certificate Representing 20,000,000 7.25% Trust Preferred
Securities of Fifth Third Capital Trust VI (liquidation amount $25
per Trust Preferred Security). Incorporated by reference to
Registrant’s Registration Statement on Form 8-A filed with the
Securities and Exchange Commission on October 31, 2007. (Issuer
also entered into an identical certificate on October 30, 2007
representing $362,500,000 in aggregate liquidation amount of 7.25%
Trust Preferred Securities of Fifth Third Capital Trust VI.)
4.32 Certificate Representing 400 7.25% Common Securities of Fifth
Third Capital Trust VI (liquidation amount $25 per Trust Preferred
Security). Incorporated by reference to Registrant's Quarterly Report
on Form 10-Q filed for the quarter ended September 30, 2007.
4.33 Guarantee Agreement, dated as of October 30, 2007 between Fifth
Third Bancorp, as Guarantor, and Wilmington Trust Company, as
Guarantee Trustee. Incorporated by reference to Registrant’s
Registration Statement on Form 8-A filed with the Securities and
Exchange Commission on October 31, 2007.
4.34 Agreement as to Expense and Liabilities, dated as of October 30,
2007 between Fifth Third Bancorp and Fifth Third Capital Trust VI.
Incorporated by reference to Registrant's Quarterly Report on Form
10-Q filed for the quarter ended September 30, 2007.
4.35 Replacement Capital Covenant of Fifth Third Bancorp dated as of
October 30, 2007. Incorporated by reference to Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on October 31, 2007.
10.1 Fifth Third Bancorp Unfunded Deferred Compensation Plan for
Non-Employee Directors. Incorporated by reference to Registrant’s
Annual Report on Form 10-K filed for fiscal year ended December
31, 1985. *
10.2 Fifth Third Bancorp 1990 Stock Option Plan. Incorporated by
reference to Registrant’s filing with the Securities and Exchange
Commission as an exhibit to the Registrant’s Registration Statement
on Form S-8, Registration No. 33-34075. *
10.3 Fifth Third Bancorp 1987 Stock Option Plan. Incorporated by
reference to Registrant’s filing with the Securities and Exchange
Commission as an exhibit to the Registrant’s Registration Statement
on Form S-8, Registration No. 33-13252. *
10.4 Indenture effective November 19, 1992 between Fifth Third
Bancorp, Issuer and NBD Bank, N.A., Trustee. Incorporated by
reference to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 18, 1992 and as
Exhibit 4.1 to the Registrant’s Registration Statement on Form S-3,
Registration No. 33-54134.
10.5 Fifth Third Bancorp Master Profit Sharing Plan, as Amended.
Incorporated by reference to Registrant’s Annual Report on Form
10-K filed for the fiscal year ended December 31, 2004. *
10.6 Fifth Third Bancorp Incentive Compensation Plan. Incorporated by
reference to Registrant’s Proxy Statement dated February 19, 2004. *
10.7 Amended and Restated Fifth Third Bancorp 1993 Stock Purchase
Plan. Incorporated by reference to Registrant’s Annual Report on
Form 10-K filed for the fiscal year ended December 31, 2003. *
10.8 Fifth Third Bancorp 1998 Long-Term Incentive Stock Plan, as
Amended. Incorporated by reference to the Exhibits to Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2003.*
10.9 Fifth Third Bancorp Non-qualified Deferred Compensation Plan, as
Amended and Restated.
10.10 CNB Bancshares, Inc. 1999 Stock Incentive Plan, 1995 Stock
Incentive Plan, 1992 Stock Incentive Plan and Associate Stock
Option Plan; and Indiana Federal Corporation 1986 Stock Option
ANNUAL REPORT ON FORM 10-K
and Incentive Plan. Incorporated by reference to Registrant’s filing
with the Securities and Exchange Commission as an exhibit to a
Registration Statement on Form S-4, Registration No. 333-84955
and by reference to CNB Bancshares Annual Report on Form 10-K,
as amended, for the fiscal year ended December 31, 1998. *
10.11 Fifth Third Bancorp Stock Option Gain Deferral Plan. Incorporated
by reference to Registrant’s Proxy Statement dated February 9,
2001.*
10.30 Amendment Dated January 16, 2006 to the Letter Agreement with R.
Mark Graf. Incorporated by reference to Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on
January 17, 2006.
10.31 Separation Agreement between Fifth Third Bancorp and Neal E.
Arnold dated as of December 14, 2005. Incorporated by reference to
Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on December 22, 2005. *
10.12 Amendment No. 1 to Fifth Third Bancorp Stock Option Gain
10.32 Stipulation and Agreement of Settlement dated March 29, 2005, as
Deferral Plan. Incorporated by reference to Registrant’s Current
Report on Form 8-K filed with the Securities and Exchange
Commission on May 26, 2006. *
10.13 Old Kent Executive Stock Option Plan of 1986, as Amended.
Incorporated by reference to the following filings by Old Kent
Financial Corporation with the Securities and Exchange
Commission: Exhibit 10 to Form 10-Q for the quarter ended
September 30, 1995; Exhibit 10.19 to Form 8-K filed on March 5,
1997; Exhibit 10.3 to Form 8-K filed on March 2, 2000. *
10.14 Old Kent Stock Option Incentive Plan of 1992, as Amended.
Incorporated by reference to the following filings by Old Kent
Financial Corporation with the Securities and Exchange
Commission: Exhibit 10(b) to Form 10-Q for the quarter ended June
30, 1995; Exhibit 10.20 to Form 8-K filed on March 5, 1997; Exhibit
10(d) to Form 10-Q for the quarter ended June 30, 1997; Exhibit
10.3 to Form 8-K filed on March 2, 2000. *
10.15 Old Kent Executive Stock Incentive Plan of 1997, as Amended.
Incorporated by reference to Old Kent Financial Corporation’s
Annual Meeting Proxy Statement dated March 1, 1997. *
10.16 Old Kent Stock Incentive Plan of 1999. Incorporated by reference to
Old Kent Financial Corporation’s Annual Meeting Proxy Statement
dated March 1, 1999. *
10.17 Notice of Grant of Performance Units and Award Agreement.
Incorporated by reference to Registrant’s Annual Report on Form
10-K filed for the fiscal year ended December 31, 2004. *
10.18 Notice of Grant of Restricted Stock and Award Agreement (for
Executive Officers). Incorporated by reference to Registrant’s
Annual Report on Form 10-K filed for the fiscal year ended
December 31, 2004. *
10.19 Notice of Grant of Stock Appreciation Rights and Award
Agreement. Incorporated by reference to Registrant’s Annual Report
on Form 10-K filed for the fiscal year ended December 31, 2004. *
10.20 Notice of Grant of Restricted Stock and Award Agreement (for
Directors). Incorporated by reference to Registrant’s Annual Report
on Form 10-K filed for the fiscal year ended December 31, 2004. *
10.21 Franklin Financial Corporation 1990 Incentive Stock Option Plan.
Incorporated by reference to Franklin Financial Corporation’s
Annual Report on Form 10-K for the year ended December 31,
1989.*
10.22 Franklin Financial Corporation 2000 Incentive Stock Option Plan.
Incorporated by reference to Franklin Financial Corporation’s
Registration Statement on Form S-8, Registration No. 333-52928. *
10.23 Amended and Restated First National Bankshares of Florida, Inc.
2003 Incentive Plan. Incorporated by reference to First National
Bankshares of Florida, Inc.’s Annual Report on Form 10-K for the
year ended December 31, 2003. *
10.24 Southern Community Bancorp Equity Incentive Plan. Incorporated
by reference to Southern Community Bancorp’s Registration
Statement on Form SB-2, Registration No. 333-35548. *
10.25 Southern Community Bancorp Director Statutory Stock Option Plan.
Incorporated by reference to Southern Community Bancorp’s
Registration Statement on Form SB-2, Registration No. 333-35548. *
10.26 Peninsula Bank of Central Florida Key Employee Stock Option Plan.
Incorporated by reference to Southern Community Bancorp’s Annual
Report on Form 10-K for the year ended December 31, 2003. *
10.27 Peninsula Bank of Central Florida Director Stock Option Plan.
Incorporated by reference to Southern Community Bancorp’s Annual
Report on Form 10-K for the year ended December 31, 2003. *
10.28 First Bradenton Bank Amended and Restated Stock Option Plan.
Incorporated by reference to Registrant’s Annual Report on Form
10-K for the fiscal year ended December 31, 2004. *
10.29 Letter Agreement with R. Mark Graf. Incorporated by reference to
the Exhibits to Registrant’s Quarterly Report on Form 10-Q for the
quarter ended September 30, 2005. *
Amended. Incorporated by reference to Registrant’s Current Report
on Form 8-K filed with the Securities and Exchange Commission on
November 18, 2005.
10.33 Amendment to Stipulation dated May 10, 2005. Incorporated by
reference to Registrant’s Current Report on Form 8-K filed with the
Securities and Exchange Commission on November 18, 2005.
10.34 Second Amendment to Stipulation dated August 12, 2005.
Incorporated by reference to Registrant’s Current Report on Form 8-
K filed with the Securities and Exchange Commission on November
18, 2005.
10.35 Order and Final Judgment of the United States District Court for the
Southern District of Ohio. Incorporated by reference to Registrant’s
Current Report on Form 8-K filed with the Securities and Exchange
Commission on November 18, 2005.
10.36 Offer letter from Fifth Third Bancorp to Christopher G. Marshall
dated April 12, 2006. Incorporated by reference to Registrant’s
Quarterly Report on Form 10-Q for the quarter ended June 30,
2006.*
10.37 Form of Executive Agreements effective February 19, 2007, between
Fifth Third Bancorp and Kevin T. Kabat, Robert A. Sullivan, Greg
D. Carmichael, Christopher G. Marshall, Carlos Winston Wilkinson,
Bruce K. Lee and Charles D. Drucker. Incorporated by reference to
Registrant's Annual Report on Form 10-K filed for the fiscal year
ended December 31, 2006. *
10.38 Form of Executive Agreements effective February 19, 2007, between
Fifth Third Bancorp and Paul L. Reynolds, Malcolm D. Griggs and
Daniel T. Poston. Incorporated by reference to Registrant's Annual
Report on Form 10-K filed for the fiscal year ended December 31,
2006. *
10.39 Form of Executive Agreement effective February 19, 2007, between
Fifth Third Bancorp and Mahesh Sankaran. Incorporated by
reference to Registrant's Annual Report on Form 10-K filed for the
fiscal year ended December 31, 2006. *
12.1 Computations of Consolidated Ratios of Earnings to Fixed Charges.
12.2 Computations of Consolidated Ratios of Earnings to Combined
Fixed Charges and Preferred Stock Dividend Requirements.
Code of Ethics. Incorporated by reference to Exhibit 14 of the
14
Registrant’s Current Report on Form 8-K filed with the Securities
and Exchange Commission on January 23, 2007.
21
23
Fifth Third Bancorp Subsidiaries, as of December 31, 2007.
Consent of Independent Registered Public Accounting Firm-Deloitte
& Touche LLP.
31(i) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by Chief Executive Officer.
31(ii) Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of
2002 by Chief Financial Officer.
32(i) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief
Executive Officer.
32(ii) Certification Pursuant to 18 U.S.C. Section 1350, as Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief
Financial Officer.
* Denotes management contract or compensatory plan or arrangement.
Fifth Third Bancorp 97
ANNUAL REPORT ON FORM 10-K
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the Registrant has duly caused
this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
FIFTH THIRD BANCORP
Registrant
Kevin T. Kabat
President and CEO
Principal Executive Officer
February 22, 2008
Pursuant to requirements of the Securities Exchange Act of
1934, this report has been signed on February 22, 2008 by the
following persons on behalf of the Registrant and in the
capacities indicated.
OFFICERS:
Kevin T. Kabat
President and CEO
Principal Executive Officer
Christopher G. Marshall
Executive Vice President and CFO
Principal Financial Officer
Daniel T. Poston
Executive Vice President and Controller
Principal Accounting Officer
DIRECTORS:
Darryl F. Allen
John F. Barrett
Ulysses L. Bridgeman, Jr.
James P. Hackett
Gary R. Heminger
Allen M. Hill
Kevin T. Kabat
Robert L. Koch II
Mitchel D. Livingston, Ph.D.
Hendrik G. Meijer
James E. Rogers
George A. Schaefer, Jr.
John J. Schiff, Jr.
Dudley S. Taft
Thomas W. Traylor
98
Fifth Third Bancorp
AVERAGE ASSETS ($ IN MILLIONS)
CONSOLIDATED TEN YEAR COMPARISON
Year
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
Loans and
Leases
$78,348
73,493
67,737
57,042
52,414
45,539
44,888
42,690
38,652
36,014
Interest-Earning Assets
Interest-Bearing
Deposits in
Banks (a)
107
126
105
195
215
184
132
82
103
135
Federal Funds
Sold (a)
257
252
88
120
92
155
69
118
224
241
Securities
$11,630
20,910
24,806
30,282
28,640
23,246
19,737
18,630
16,901
16,090
Total
$90,342
94,781
92,736
87,639
81,361
69,124
64,826
61,520
55,880
52,480
Cash and Due
from Banks
$2,315
2,495
2,758
2,216
1,600
1,551
1,482
1,456
1,628
1,566
Other
Assets
$10,613
8,713
8,102
5,763
5,250
5,007
5,000
4,229
3,344
2,782
Total
Average
Assets
$102,477
105,238
102,876
94,896
87,481
75,037
70,683
66,611
60,292
56,306
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS ($ IN MILLIONS)
Deposits
Year
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
Demand
$13,261
13,741
13,868
12,327
10,482
8,953
7,394
6,257
6,079
5,627
Interest
Checking
$14,820
16,650
18,884
19,434
18,679
16,239
11,489
9,531
8,553
7,030
Savings
$14,836
12,189
10,007
7,941
8,020
9,465
4,928
5,799
6,206
6,332
Money
Market
$6,308
6,366
5,170
3,473
3,189
1,162
2,552
939
1,328
1,471
INCOME ($ IN MILLIONS, EXCEPT PER SHARE DATA)
Other
Time
$10,778
10,500
8,491
6,208
6,426
8,855
13,473
13,716
13,858
15,117
Certificates
- $100,000
and Over
$6,466
5,795
4,001
2,403
3,832
2,237
3,821
4,283
4,197
3,856
Foreign
Office
$3,155
3,711
3,967
4,449
3,862
2,018
1,992
3,896
952
270
Total
$69,624
68,952
64,388
56,235
54,490
48,929
45,649
44,421
41,173
39,703
Short-Term
Borrowings
$6,890
8,670
9,511
13,539
12,373
7,191
8,799
9,725
8,573
7,095
Total
$76,514
77,622
73,899
69,774
66,863
56,120
54,448
54,146
49,746
46,798
Year
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
Interest
Income
$6,027
5,955
4,995
4,114
3,991
4,129
4,709
4,947
4,199
4,052
Interest
Expense
$3,018
3,082
2,030
1,102
1,086
1,430
2,278
2,697
2,026
2,047
Noninterest
Income
$2,467
2,012
2,374
2,355
2,398
2,111
1,732
1,430
1,302
1,135
Noninterest
Expense
$3,311
2,915
2,801
2,863
2,466
2,265
2,397
1,981
1,954
1,800
Per Share (b)
Originally Reported
Net Income
Available to
Common
Shareholders Earnings
$1,075
1,188
1,548
1,524
1,664
1,530
1,001
1,054
871
759
$2.00
2.14
2.79
2.72
2.91
2.64
1.74
1.86
1.55
1.36
Diluted
Earnings
$1.99
2.13
2.77
2.68
2.87
2.59
1.70
1.83
1.53
1.34
Dividends
Declared Earnings
$1.70
1.58
1.46
1.31
1.13
.98
.83
.70
.582/3
.471/3
$2.00
2.14
2.79
2.72
2.91
2.64
1.74
1.70
1.32
1.09
Diluted
Earnings
$1.99
2.13
2.77
2.68
2.87
2.59
1.70
1.68
1.29
1.06
Dividend
Payout
Ratio
84.9%
74.2
52.7
48.9
39.4
37.8
48.8
41.7
45.5
44.6
MISCELLANEOUS AT DECEMBER 31 ($ IN MILLIONS, EXCEPT SHARE DATA)
Shareholders’ Equity
Year
2007
2006
2005
2004
2003
2002
2001
2000
1999
1998
Common Shares
Outstanding (b)
532,671,925
556,252,674
555,623,430
557,648,989
566,685,301
574,355,247
582,674,580
569,056,843
565,425,468
557,438,774
Common
Stock
$1,295
1,295
1,295
1,295
1,295
1,295
1,294
1,263
1,255
1,238
Preferred
Stock
$9
9
9
9
9
9
9
9
9
9
Capital
Surplus
$1,779
1,812
1,827
1,934
1,964
2,010
1,943
1,454
1,090
887
Retained
Earnings
$8,413
8,317
8,007
7,269
6,481
5,465
4,502
3,982
3,551
3,179
Accumulated
Other
Comprehensive
Income
$(126)
(179)
(413)
(169)
(120)
369
8
28
(302)
135
Treasury
Stock
$(2,209)
(1,232)
(1,279)
(1,414)
(962)
(544)
(4)
(1)
-
(58)
Book Value
Per
Share (b)
$17.20
18.02
17.00
16.00
15.29
14.98
13.31
11.83
9.91
9.67
Allowance
for Loan
and Lease
Losses
$937
771
744
713
697
683
624
609
573
532
Total
$9,161
10,022
9,446
8,924
8,667
8,604
7,752
6,735
5,603
5,390
(a) Federal funds sold and interest-bearing deposits in banks are combined in other short-term investments in the Consolidated Financial Statements.
(b) Adjusted for stock splits in 2000 and 1998.
Fifth Third Bancorp 99
FIFTH THIRD BANCORP
BOARD COMMITTEES
Executive Committee
George A. Schaefer, Jr.,
Chairman
James P. Hackett
Allen M. Hill
Kevin T. Kabat
Robert L. Koch II
Dudley S. Taft
Audit Committee
Gary R. Heminger, Chairman
Darryl F. Allen, Vice Chairman
John F. Barrett
Ulysses L. Bridgeman, Jr.
Robert L. Koch II
Compensation Committee
Allen M. Hill, Chairman
James P. Hackett
Hendrik G. Meijer
James E. Rogers
Nominating and Corporate
Governance Committee
Dudley S. Taft, Chairman
Darryl F. Allen
Mitchel D. Livingston, Ph.D.
James E. Rogers
Risk and Compliance
Committee
John F. Barrett, Chairman
Ulysses L. Bridgeman, Jr.
Gary R. Heminger
Hendrik G. Meijer
Thomas W. Traylor
Trust Committee
Mitchel D. Livingston, Ph.D.,
Chairman
Kevin T. Kabat
John J. Schiff, Jr.
FIFTH THIRD BANCORP
DIRECTORS
George A. Schaefer, Jr.
Chairman
Fifth Third Bancorp
Kevin T. Kabat
President & CEO
Fifth Third Bancorp
Darryl F. Allen
Retired Chairman
President & CEO
Aeroquip-Vickers, Inc.
John F. Barrett
Chairman, President & CEO
Western & Southern Financial
Group
Ulysses L. Bridgeman, Jr.
President
ERJ Inc. and Manna, Inc.
James P. Hackett
President & CEO
Steelcase, Inc.
Gary R. Heminger
Executive Vice President
Marathon Oil Corporation
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
Hendrik G. Meijer
Co-Chairman & CEO
Meijer, Inc.
James E. Rogers
Chairman, President & CEO
Duke Energy Corp.
John J. Schiff, Jr.
Chairman, President & CEO
Cincinnati Financial Corporation &
Cincinnati Insurance Company
Dudley S. Taft
President
Taft Broadcasting Company
Thomas W. Traylor
Chairman, President & CEO
Traylor Bros., Inc.
100
Fifth Third Bancorp
DIRECTORS AND OFFICERS
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
Robert B. Morgan
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.
Chairman
Kevin T. Kabat
President & CEO
Greg D. Carmichael
Executive Vice President &
Chief Operating Officer
Charles D. Drucker
Executive Vice President
Bruce K. Lee
Executive Vice President
Christopher G. Marshall
Executive Vice President &
Chief Financial Officer
Daniel T. Poston
Executive Vice President & Controller
Paul L. Reynolds
Executive Vice President, Secretary &
General Counsel
Mahesh Sankaran
Senior Vice President & Treasurer
Robert A. Sullivan
Senior Executive Vice President
Mary E. Tuuk
Executive Vice President &
Chief Risk Officer
Terry E. Zink
Executive Vice President
AFFILIATE CHAIRMEN
Charlie W. Brinkley, Jr.
Central Florida
H. Lee Cooper
Southern Indiana
Gordon E. Inman
Tennessee
R. Daniel Sadlier
Western Ohio
Donald B. Shackelford
Central Ohio
John S. Szuch
Northwestern Ohio
REGIONAL PRESIDENTS
Todd F. Clossin
Dan W. Hogan
Gregory L. Kosch
Robert A. Sullivan
Michelle L. VanDyke
Terry E. Zink
AFFILIATE PRESIDENTS
& CEOs
Samuel G. Barnes
Central Kentucky
John Bultema III
Central Florida
David A. Call
Ohio Valley
Todd F. Clossin
Northeastern Ohio
John N. Daniel
Southern Indiana
Mark Eckhoff
Northern Michigan
Kent Ellert
South Florida
David Girodat
Eastern Michigan
Dan W. Hogan
Tennessee
Brian P. Keenan
Tampa Bay
Robert W. LaClair
Northwestern Ohio
Philip R. McHugh
Louisville
Jordan A. Miller, Jr.
Central Ohio
John E. Pelizzari
Central Indiana
Robert A. Sullivan
Cincinnati
Michelle L. VanDyke
Western Michigan
Raymond J. Webb
Western Ohio
Charles N. Reeves
Chicago
104813 104813-FifthThird 2 2_21_2008 7:26:42 PM
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104813 104813-FifthThird 1 2_21_2008 7:26:41 PM
(cid:101)(cid:101)(cid:101)(cid:28)(cid:35)(cid:33)(cid:28)(cid:81)(cid:93)(cid:91)
Building on the past to
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(cid:52)(cid:67)(cid:66)(cid:67)(cid:64)(cid:51)
1 8 5 8 — 2 00 8
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