Fifth Third Bancorp

Public Company
Incorporated: 1908 as The Fifth Third National Bank of Cincinnati
Employees: 22,423
Total Assets: $119.8 billion (2008)
Stock Exchanges: NASDAQ Global Select Market
Ticker Symbol: FITB
NAICS: 522110 Commercial Banking; 522210 Credit Card Issuing; 522190 Other Depository Credit Intermediation; 551111 Offices of Bank Holding Companies; 522310 Mortgage and Nonmortgage Loan Brokers; 523930 Investment Advice

Fifth Third Bancorp ranks among the 20 largest bank holding companies in the United States. The $120 billion-asset operation serves its customers through 16 banking affiliates and their 1,308 full-service Banking Centers, 94 of which are grocery store locations open seven days a week. The bank also has 2,350 ATMs, spread throughout its midwest and southeastern U.S. markets. In addition to its home base of Ohio, the company operates in Kentucky, Indiana, Michigan, Illinois, Florida, Tennessee, West Virginia, Pennsylvania, Missouri, Georgia, and North Carolina. Fifth Third Bancorp’s five main business segments are Branch Banking, Consumer Lending, Investment Advisors, Commercial Banking, and Fifth Third Processing Solutions. A 51 percent majority of the latter was sold in 2009 to raise needed capital.

PIONEER OF THE NATIONAL BANKING SYSTEM

Fifth Third Bancorp traces its history to the mid-19th-century formulation of the national banking system in the United States. Although national banks had existed since the late 18th century, a lack of consensus on the advantages of a national currency prevented the federal government from establishing a unified currency structure. Rampant inflation during the Civil War, however, prompted the 1863 ratification of the Federal Banking Act, thereby creating a uniform, government-backed national currency to replace the diverse currencies issued by state banks and other firms. That same year, a group of influential Cincinnati businessmen led by A. L. Mowry applied for and received one of the first national bank charters. Their institution, Cincinnati’s Third National Bank, opened in a Masonic Temple later that year under a 20-year charter.

The firm that would become Fifth Third Bancorp evolved and grew through dozens of mergers over the ensuing decades. When the Third National Bank acquired the Bank of the Ohio Valley in 1871, the Cincinnati Enquirer hailed the union as “one of the best managed banks in Ohio.” The superlative descriptions continued when Third National was recapitalized in 1882 at $1.6 million, the highest-asset bank in the state.

The Panic of 1907 brought a run on banks and the first substantial banking and currency reform since the Civil War. Fearful of widespread bank failures, the federal government ordered the consolidation of several big-city banks to shore up weaker institutions. As a result, Third National merged with Fifth National to form The Fifth Third National Bank of Cincinnati, with a capitalization of $2.5 million and $12.1 million in deposits, in 1908. Fifth Third’s 1910 acquisition of two other local banks, American National Bank and S. Kuhn & Sons, increased its capital to $3 million.

The Federal Reserve Act of 1913 organized a regional system of 12 Federal Reserve banks that were capitalized with contributions from national banks in each region. The legislation required each national bank to deposit 3 percent of its capital and surplus into its regional Federal Reserve bank. These moves helped inspire confidence in the national banks, thus preventing panics and runs on banks. The Federal Reserve Act also gave the federal government more control over the U.S. money supply, made commercial credit available, and discouraged venturesome banking practices. Although bankers initially resisted its creation, the Federal Reserve laid the groundwork for the country’s modern banking system.

DEPRESSION AND WAR YEARS

Another bank industry consolidation followed World War I. The 1919 affiliation with Union Savings Bank and Trust Company, a state-chartered bank, brought several changes to Fifth Third’s operations. Affiliation with a state bank permitted Fifth Third to circumvent the stricture against national banks’ establishment of branches. Before the end of the year, Fifth Third assumed control of the assets of several local banks, including Market National Bank, Security Savings Bank and Safe Deposit Company, Mohawk State Bank, and Walnut Hills Savings Bank. It operated these institutions as branch offices.

Although the 1920s were marked by increased governmental supervision and general economic prosperity, many U.S. banks remained weak. The situation gave Fifth Third the opportunity to continue to grow through the acquisition of four local banks. Fifth Third consolidated with the Union Trust Company to form the Fifth Third Union Trust Company in 1927. The advent of the Great Depression in 1929 intensified this activity somewhat, because Fifth Third was one of the stronger banks in the Cincinnati area. Fifth Third assumed control of three banks from 1930 to 1933.

The Great Depression also brought increased regulation of the banking industry, including expansion of the Federal Reserve Board’s powers and the establishment of the Federal Deposit Insurance Corporation (FDIC). The economic crisis also spawned a plethora of federal and state legislation restricting interstate retail banking. Strong popular and governmental reaction to the Great Depression helped make banking one of the most regulated segments of U.S. industry (and inspired the Economist to call the American system “one of the world’s wackiest banking systems” in 1988). These barriers effectively restricted Fifth Third’s growth through acquisition until after World War II.

DIVERSIFICATION INTO PERSONAL AND COMMERCIAL BANKING: 1955-76

Distanced from the Great Depression by the trauma of global war, U.S. banks began to cautiously expand their operations to include a broader range of financial services, especially in the field of retail or personal banking, in the postwar era. Under the direction of G. Carlton Hill from 1955 to 1963, Fifth Third began to formulate its focus on retail or consumer banking. For example, the company established a travel department to issue traveler’s checks and plan tours. These activities intensified during the presidency of Bill Rowe, who was the son of 1930s-era Fifth Third leader John J. Rowe. Over the course of the 1960s, the bank instituted a program of internal expansion with an emphasis on convenience and personal service. Advertising featuring the company’s 5/3 shield logo promoted Fifth Third’s many suburban locations and extended hours. During the 1970s, the bank shifted its lending emphasis from commercial or business loans to consumer credit. In 1973, Fifth Third hired Johnny Bench, famed catcher for the Cincinnati Reds baseball team, as spokesman. It adopted the long-running slogan “The only bank you’ll ever need” the same year.

“Back office” changes supported the bank’s growth and profitability. Fifth Third, which had booted up its first computer in 1960, initiated home banking services and JEANIE automated teller machines (ATMs) in the 1970s. The institution’s home banking system, which could be accessed via the average touchtone phone, was uniquely user-friendly. These electronic services formed the basis of what would become Fifth Third’s Midwest Payment Services department. Later in the decade, the bank offered its automated services to other banks and corporate clients. By the early 1990s, Midwest Payment Services maintained ATMs and electronic cash registers for more than 1,000 clients. This lucrative business niche contributed one-third of the bank’s annual income in the early 1990s.

The 1975 creation of a bank holding company, Fifth Third Bancorp, enabled the institution to sidestep some of the most rigorous state banking regulations. This new corporate entity was not technically a bank and thus was exempt from laws that prohibited cross-county branching. By 1976 Fifth Third included 37 banking offices.

AGGRESSIVE GROWTH AND INCREASED ACQUISITIONS: 1980-89

The further liberalization of Ohio banking laws in the early 1980s expanded both the types of products banks were permitted to offer and the geographic reach they were allowed to attain. Strictures against growth outside the home bank’s county were first to fall. Barriers to interstate branching continued to deteriorate in the early 1980s. In September 1985, federal and state banking regulations changed dramatically, freeing Ohio’s banks to enter into agreements with banking organizations outside the state. Fifth Third became Ohio’s first holding company to take advantage of the new legislation when it acquired American National Bank in Newport, Kentucky, just across the Ohio River, later that year. Fifth Third’s roster of branches increased 125 percent over the course of the 1980s, and it expanded its reach from a single Ohio county to an interstate bank.

Much of this vigorous growth was inspired by a new corporate leader, Clement L. Buenger, who took the helm of Fifth Third in 1981. Buenger, who was called “one of the best acts in the business” in a 1991 Fortune article, brought his background in life insurance sales to the bank. The new president transformed the bank’s corporate culture through innovative incentive programs and personal example. Whereas some Fifth Third offices were only open from 10:00 A.M. to 2:00 P.M., Buenger worked 10 to 12-hour days and expected many of his managers to do the same. The president (who later became CEO and chairman) even made cold calls on prospective clients. One incentive program, the “Shoe Leather Award,” evolved from his passion for earning new business. A new pair of designer shoes was awarded to each month’s best cold caller. In fact, all employees could earn sales incentives: Fortune noted in 1991 that the bank “already had several secretaries worth $500,000.”

Fifth Third’s focus on consumer banking and safe lending helped the bank avoid the real estate loans, Third World debt, and leveraged buyout problems that troubled many financial institutions during the 1980s. The “banking bust” that followed led Fortune to call the early 1990s “the hardest times for bankers since the Great Depression” in November 1991.

George Schaefer Jr. took Fifth Third’s reins in 1989 at the age of 44. Schaefer was trained in engineering, Page 166  |  Top of Articlebut when a hoped for job designing a nuclear power plant fell through in 1969, he entered the bank’s management trainee program. Some industry observers predicted that the new leader would be stymied, both by the shadow of his predecessor and by the difficult banking environment. Yet while literally hundreds of banks failed each year in the late 1980s and early 1990s, Fifth Third continued its outstanding performance and was even able to benefit from the misfortune of others by inexpensively acquiring dozens of new outlets. This allowed the bank to slowly expand its sphere of influence, yet maintain shareholder value.

CONTINUED GROWTH: 1992-94

In 1992 Fifth Third proposed a merger with Star Banc Corp. that would have unified the two largest Cincinnati-based financial institutions. Star had not grown as fast as Fifth Third, but its record of continued growth made it an enticing acquisition target. The alliance was viewed by many analysts and investors as a good deal for both banks. Fifth Third made a generous offer of $42 per share, which amounted to more than twice Star’s book value. However, when CEO Schaefer prematurely publicized the heretofore private proposition, Star’s longtime president, Oliver Waddell, balked, and the target’s board unanimously rejected the offer.

Shunned by Star, Schaefer returned to Fifth Third’s previous course of growth through relatively small acquisitions. Then, in 1994, the bank made two significant purchases: the 45-office Cumberland Federal Bancorporation in Kentucky, which had $1.1 billion in assets; and Falls Financial Inc. in northeastern Ohio, a company with $581 million in assets. The Cumberland acquisition became Fifth Third Bank of Kentucky, Louisville, and the Falls purchase was merged with Fifth Third Bank, Northeastern Ohio. According to the company’s 1994 annual report, these two acquisitions contributed to the largest one-year increase in assets, 22 percent, in the institution’s history. The purchases also made Fifth Third the preeminent operator of supermarket bank locations in the United States, with 81 full-service locations.

RAPID EXPANSION THROUGH ACQUISITIONS: 1995-99

Fifth Third moved aggressively through the second half of the decade, building upon its 20 consecutive years of increased earnings. To remain competitive and to ensure continued growth and strong earnings, the company stepped up its acquisition efforts and began to pursue new businesses, including mortgage brokering and investment services, and new territories. In mid-1995, for instance, Fifth Third acquired Bank of Naples, Florida, and increased its assets in the Florida region, which Fifth Third first entered in 1989. Other acquisitions Fifth Third made in 1995 included Mutual Federal Savings Bank in Dayton, Ohio; Bank One Lebanon; PNC Bank’s Dayton division; and seven offices of Bank One, Cincinnati. The PNC purchase, which included 12 offices, increased Fifth Third’s banking centers in the Dayton area to 30, making it the fourth largest financial establishment in the region.

In the following years the firm continued to follow its strategy to increase market share in the Midwest by acquiring small businesses. Fifth Third made three acquisitions in 1996: the Ohio branch of 1st Nationwide Bank, the Ohio operations of First Chicago NBD Bank, and Kentucky Enterprise Bancorp, Inc., located in northern Kentucky. Four acquisitions were made the following year, all in Fifth Third’s familiar midwest region. In June, Fifth Third purchased Gateway Leasing Corporation for $2.2 million, and a month later it bought Suburban Bancorporation, Inc., a savings and loan holding company. Fifth Third also acquired Heartland Capital Management Inc., a money managing company in Indiana, and Great Lakes National Bank Ohio, with eight branches in Ohio, in 1997.

Fifth Third found substantial support from industry analysts, who regarded the company’s stock as reliable and profitable. From 1993 to 1998, according to the Wall Street Journal, Fifth Third’s annual revenue increased 15.9 percent, about three points better than the industry average. To continue its streak of increased earnings, Fifth Third in 1998 branched into new business arenas and made some major acquisitions. To start out 1998, Fifth Third announced it would acquire CitFed Bancorp Inc. of Dayton and its subsidiary Citizens Federal Bank FSB for $661 million in stock. CitFed had 35 offices in Ohio. The acquisition, completed in June, created the largest bank in Dayton and boosted its market share there to 28 percent. Fifth Third’s market share in its hometown of Cincinnati was 22.7 percent.

Also at the beginning of 1998 Fifth Third announced plans to buy State Savings Co. of Columbus, which would create the fourth largest bank in Columbus, and The Ohio Company, a brokerage and investment management firm with 49 offices in Ohio and four additional states. Fifth Third expanded into another business field when it acquired W. Lyman Case & Company, a commercial mortgage banking company with headquarters in Columbus. Also that year Fifth Third bought State Savings Company and its subsidiaries, State Savings Bank, Century Bank, and State Savings Bank, FSB, which provided Fifth Third access to a new territory: Arizona. Four offices of Bank One were acquired as well, boosting Fifth Third’s presence in southern Ohio. Fifth Third celebrated its 25th consecutive year of increased revenues at the end of 1998 and had increased the number of its branches from 35 to 468.

The year 1999 showed no signs of slowdown for Fifth Third. CEO Schaefer revealed in the Cincinnati Business Courier that he planned to continue expanding through acquisitions. “I see more opportunity for us now than at any point in the last 25 years,” said Schaefer. “We continue to pick up market share in every market.” The company completed the acquisition of Enterprise Federal Bancorp Inc., one of the biggest thrifts in the Cincinnati area. The purchase, estimated at $96.4 million, provided Fifth Third with 11 additional branches in greater Cincinnati. Fifth Third also acquired Ashland Bankshares, Inc., and subsidiary Bank of Ashland, both based in Kentucky. The $80 million purchase gave Fifth Third four more branches, as well as $160 million in assets. Fifth Third also began to implement plans to expand further into Florida and acquired South Florida Bank Holding Corp. in June, adding another four branches to its Florida roster. Additional expansion into the Cleveland, Ohio, area came with the acquisition of Emerald Financial Corp. for $204 million. Fifth Third also acquired Cleveland-based Emerald Financial Corp. and its subsidiary, Strongsville Savings Bank.

Fifth Third further strengthened its commercial banking services by acquiring Vanguard Financial Corporation, a commercial mortgage banking firm, in July 1999. Fifth Third merged Vanguard with previously acquired W. Lyman Case and created Fifth Third Real Estate Capital Markets Company. Prior to the purchases, Fifth Third offered three-year commercial real estate financing, which meant loans had to be renegotiated every three years. With the acquisitions, however, Fifth Third was able to provide long-term financing, thus better serving the business client.

In mid-1999 Fifth Third made its largest acquisition to date when it announced it would purchase CNB Bancshares Inc., the biggest independent bank holding company in Indiana. The $2.4 billion purchase propelled Fifth Third deeper into Indiana and made Fifth Third the third largest bank in Indiana, as well as the 28th biggest bank in the nation. CNB was the parent company of Civitas Bank and had 145 banking offices and $7.2 billion in assets. The CNB purchase also provided Fifth Third with an entry into insurance sales. Fifth Third quickly followed up the CNB purchase with another significant acquisition. Increasing its presence in the Indianapolis area, Fifth Third bought Peoples Bank & Trust Co. for $228 million. The buy moved Fifth Third from sixth place to fourth in the Indianapolis market, with a market share of about 7 percent. Peoples had nine Indianapolis offices.

CEO Schaefer told the Cincinnati Business Courier that Fifth Third was ready to undertake additional billion-dollar deals and move away from smaller, million-dollar acquisitions. After accomplishing 12 deals, amounting to nearly $5 billion in a mere 16 months, Fifth Third was certainly on a fast track. In 1999 Fifth Third received the top ranking from Salomon Smith Barney in its Top 50 Bank Annual for the eighth consecutive year. Banks were rated according to profitability, operating efficiency, asset quality, capital strength, and operating growth. Its Midwest Payment Systems data processing subsidiary saw net income increase 34 percent in 1998 over 1997, and in mid-1999 the subsidiary’s profits were up 37 percent from the previous year. Fifth Third’s net income for the first half of 1999 was up 21 percent compared to the same period a year earlier. Reporter Geert De Lombaerde declared in the Cincinnati Business Courier, “Fifth Third is in the midst of a metamorphosis. It is no longer primarily a commercial bank—40 percent of revenues comes from fees—or just a strong performer in the middle-of-the-road Midwest. It is on the cusp of becoming a sizable national player.”

NEW COMPLEXITIES: 2000-03

At the beginning of the new century, Fifth Third bolstered its payments business through mergers, two in 2000 and a third in 2001. Midwest Payment Systems was renamed Fifth Third Processing Solutions in January 2003.

Meanwhile, on the banking front, longtime CEO George Schaefer broke with a tried and true strategy. “His tightly focused, hands-on style worked smoothly over a decade of prosperity. He built up the company one safe little step at a time, largely through small acquisitions close to home,” Jack Milligan observed in a March 2001American Banker article. The deal to acquire Old Kent Financial Corp. of Grand Rapids, Michigan, struck in November 2000, was two times the size of any previous acquisition. The addition of Old Kent moved Fifth Third from 24th to 16th place among the largest U.S. banking companies, with $70 million in assets.

At the outset the new road seemed rocky, the economy was in a downturn, 15 percent of its new Old Kent workforce faced layoffs, and its stock price lagged behind its Midwest peers. Yet Fifth Third’s integration strategy, by and large, had proved successful in the past. One exception was a 1998 regional brokerage acquisition. Brokers and client assets drained off, as staff took umbrage with the new management style.

“Of course, Mr. Schaefer isn’t the only banker to stub his toe entering the securities industry, and he hasn’t tried again since. But Fifth Third could join the noteworthy group of companies, among them Bank One, First Union, and Bank America, that have had trouble with very large acquisitions,” Milligan surmised.

To bring this unprecedented acquisition into Fifth Third’s culture, Old Kent would be divided into three affiliate banks, two under Fifth Third executives and one under an Old Kent executive. Moreover, Fifth Third quickly “exposed Old Kent to its aggressive sales style,” according to Milligan. A sales push during 2000, produced earnings growth of nearly 18 percent for Fifth Third.

The $4.92 billion Old Kent acquisition, completed on April 2, 2001, taxed back-office operations; Fifth Third had not only increased in sheer size but also in complexity. To further complicate matters, a rash of wrongdoing by U.S. corporations and an attack on U.S. soil resulted in more stringent regulation of financial institutions in certain areas.

In September 2002, Fifth Third revealed a $54 million charge tied to an error “in the booking of certain securities transactions,” Matthias Rieker reported in American Banker. In response, Ohio regulators and the Federal Reserve Bank of Cleveland imposed a moratorium on Fifth Third’s acquisitions, halting one in its tracks.

In a March 2003 agreement among Fifth Third, the Cleveland Fed, and the Ohio Division of Financial Institutions, Fifth Third was cited for being out of compliance with holding company requirements of the Gramm-Leach-Bliley Act, in addition to other issues. “To the surprise of virtually all observers, the regulators required the banking company to comply with a long list of improvements of its controls and to submit to an independent review of its board, board committees, directors, management structure, and senior officers,” Rieker explained.

RESHUFFLING: 2004-06

When the acquisition moratorium lifted, Fifth Third moved to complete the deal for Franklin Financial Corporation of Nashville, accomplished in June 2004. Fifth Third followed up with a bid for 16-branch First National Bankshares of Florida, Inc., the largest remaining independent bank in the state. Some analysts and investors questioned the premium price linked to the Florida expansion, American Banker reported. As for internal growth engines, Schaefer looked to fee generation, cross-selling, and new locations. The thousandth branch opened in August 2004.

The company’s compensation committee pared back executive bonuses during 2005. CEO Schaefer and three other of the highest paid executives had failed to meet performance goals. Schaefer’s base salary of $990,018, frozen for three years running, was slightly above the median base of peer comparison companies, American Banker reported.

The $106 billion-asset company’s operational, financial, and regulatory problems translated into a downturn in its price per share. In early 2002, the stock traded at nearly $70 per share. In late August 2006, it traded at just below $40 per share.

Fifth Third shook things up, attempting to return to its previous glory days. A new management team comprised of experienced banking executives was put in place, led by Schaefer as chairman and Kevin Kabat, formerly head of Old Kent, as president and CEO. Improvements in retail banking service, product cross selling, technology, and communication with analysts and investors were on the to-do list. The balance sheet received a makeover.

American Banker explained in August 2006, “The company’s sizable securities portfolio was ill-positioned for rising short-term interest rates and a flattening yield curve, causing much pain to earnings over the last two years. It was one of the last big banking companies to reshuffle its balance sheet when the yield curve started to flatten.”

To further its reemergence, Fifth Third planned renewed merger and acquisition activity and continued organic growth. It had entered St. Louis and Pittsburgh and looked toward Baltimore, Charlotte, and Atlanta as target markets.

ECONOMIC UPHEAVAL: 2007-09

Unfortunately, massive upheaval in the mortgage market sent the U.S. economy into a tailspin in 2007. Real estate values fell and bank valuations tumbled. Michigan, Ohio, and Florida were hit hard by foreclosures, and less so, Indiana and Illinois.

While reporting 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,” the bank was not immune to the economic downslide. Fifth Third posted charges linked to loan losses and soured investments. To mitigate further harm, the company began to intervene earlier in problem credit situations and exited riskier lines of business. The electronic payments processing segment, meanwhile, continued to be a pocket of strength.

In November 2007, Fifth Third acquired R-C Crown Bank and its 30 Florida and three Augusta, Georgia, locations. Fifth Third added nine Atlanta-area branches, in May 2008, and entered North Carolina in June, both through acquisitions. In a sign of the times, Fifth Third assumed about $250 million in deposits of an insolvent bank, in November, through FDIC action.

Despite the acquisition activity and declaration of capital strength, Fifth Third’s future was less certain, as the economy continued to spiral down. The company posted a net loss of $2.2 billion in 2008, versus a net income of $1.1 billion a year earlier.

Fifth Third had tapped into the Troubled Asset Relief Program (TARP) to a tune of $3.45 billion, at the end of 2008. Just nine U.S. banks had received a greater infusion of federal money, the Wall Street Journal reported on March 28, 2009. Subsequent plans to renovate executive offices raised the hackles of those at odds with the massive bailout of the country’s financial institutions.

In a move to further strengthen its capital base, Fifth Third agreed to sell 51 percent of its profitable payment-processing unit to private-equity firm Advent International Corp. for $561 million in cash. Fifth Third would retain 49 percent of the stand-alone company, Fifth Third Processing Solutions, LLC, and chipped in $1.25 billion in bank loans for the new company, evidence of the dearth of deal financing available in the skittish private market. The sale was expected to close in the second quarter of 2009. Meanwhile the federal government continued stress testing the nation’s largest banks, hoping to forestall future failures.

Company Perspectives

The Bancorp believes that banking is first and foremost a relationship business where the strength of the competition and challenges for 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.

Key Dates

1863:

The Third National Bank forms in Cincinnati, Ohio.

1908:

The Third National Bank merges with The Fifth National Bank to form The Fifth Third National Bank of Cincinnati.

1927:

Company merges with The Union Trust Company and establishes The Fifth Third Union Trust Company.

1969:

Fifth Third Union Trust Company is renamed Fifth Third Bank.

1975:

Fifth Third Bancorp incorporates.

1998:

Company completes two largest acquisitions to date, CitFed Bancorp, Inc., and State Savings Company; celebrates its 25th consecutive year of increased earnings.

2001:

Old Kent Financial Corp. acquisition increases Fifth Third’s size by nearly 50 percent.

2004:

The 1,000th branch opens.

2007:

Real estate market crisis creates new problems for the bank.

2008:

Fifth Third taps into the federal government’s Capital Purchase Program.

2009:

Majority of profitable payment-processing unit is sold.