Photo: A Fifth Third Bank branch in Sandusky, Ohio.
Fifth Third Bancorp
The history of the U.S. banking system has been one of instability. It is indeed ironic that the world’s most productive and innovative economy also has a banking system that has seen periodic booms and busts, and a regulatory environment that has swung from extreme liberalism to extreme regulation. For much of the 18th and 19th centuries, no nationwide regulation even existed; each state had its own (however loose) laws governing the state’s banking system. In the late 19th century, well over 1,000 banks across the U.S. issued their own banknotes, each backed by various degree of capital reserves. Due to this lack of regulation, many unscrupulous fraudsters would establish what was known as “wildcat banks,” quickly issuing as many banknotes as possible and using this money to purchase goods, other hard assets, or exchanging their own notes for other more reliable banknotes, then suddenly disappearing with the loots. As a matter of fact, during the first half of the 19th century, half of all U.S. banks would fail periodically, to be replaced by other equally unreliable new banks.
This finally changed in 1863, when the Congress passed the National Banking Act, creating for the first time a national banking registration and regulatory framework. This federal bank act created the distinction between nationally-chartered and regulated banks and banks authorized and chartered at the state level. Under the 1863 Act, only national banks subject to a strict capital reserve requirement were permitted to issue banknotes. This legal change not only prompted many former state banks to re-organize and apply for a national charter, but also the establishments of many new national banks. However, many banks also opted to keep their state charters without switching to a national charter. Further complicating things, national banks are still subject to many state bank regulations at the local level.
It should be noted that the term “national bank” in this context refers to a “bank with a national charter,” and does not suggest a bank with a nationwide branch network. Quite the contrary, the United States for a very long time heavily regulated where their banks could or could not operate. Many states allowed their state banks to offer service from just the head office (i.e. “branching” was forbidden) whereas some states permitted branch banking. Meanwhile, the nationally-chartered banks were not allowed to offer branch banking at all.
In order to be fair to both state banks and national banks, the U.S. Congress in 1927 passed the McFadden Act, which basically accorded the same “branching rights” to national banks as to state banks. As state-chartered banks were not permitted to operate outside of their home states, the McFadden Act forbade national banks based in one state from branching out into another state. This restriction is why the 1927 McFadden Act is known as the law that banned “inter-state banking.”
It is under such a complex environment that in 1863, the Third National Bank of Cincinnati was founded, the name was adopted because there existed already the First National Bank of Cincinnati and the Second National Bank of Cincinnati. In 1871, the Third National Bank acquired the Bank of the Ohio Valley (founded 1858) and became the largest bank in the state of Ohio.
Meanwhile, in 1888, the Queen City National Bank, founded six years earlier, underwent a re-organization and somehow condescended to the new name of The Fifth National Bank of Cincinnati.
In 1907, a widespread credit and confidence crisis in the U.S. led to nationwide bank runs; the weakened Fifth National Bank of Cincinnati in 1908 agreed to combine with the Third National Bank of Cincinnati to form the Fifth Third National Bank of Cincinnati. Then in 1919, Fifth Third National became affiliated with an Ohio state-chartered financial firm called the Union Savings Bank & Trust Company, which was renamed the Union Trust Company in 1923. Fifth Third National’s affiliation with the state-chartered firm gave it the ability to circumvent (as a national bank) the restriction against having branches, and the bank acquired a number of smaller banks around the city of Cincinnati during the 1920s.
In 1927, Fifth Third National and Union Trust finally fully consolidated, and adopted the name Fifth Third Union Trust Company. As one of the stronger banks in Ohio, the bank took over three insolvent banks between 1930 and 1933, in the midst of the Great Depression.
The rest of the 1930s and 1940s saw few significant changes for Fifth Third Union Trust. During the 1950s and 1960s, the bank consolidated a number of small banks within the state of Ohio. The rapid growth in consumerism saw the gradual shift from commercial banking to personal banking for the bank. In 1969, Fifth Third Union Trust adopted a simplified name: Fifth Third Bank. Five years later, a holding company called the Fifth Third Bancorp was created. Still, despite a history of consolidations over a century, Fifth Third as recent as in 1976 only had 37 branches around the Cincinnati county.
State and federal restrictions on branch banking finally relaxed in the 1980s, first allowing Ohio banks to open branches outside of their home counties, then certain states within the same region began to permit each other’s banks to cross state borders. In 1985, Fifth Third Bank acquired the American National Bank of Newport, just across the Ohio-Kentucky state line. Even though Newport is part of the Metropolitan Cincinnati area, as it is in the state of Kentucky, Fifth Third was now allowed to operate there until the legislation change of 1985. Suddenly liberated from the branching restrictions, Fifth Third quickly acquired more banks in northern Ohio, Kentucky and Indiana (the state to the west of Ohio).
The decade from 1985 to 1996, however, was otherwise very turbulent times in the American banking system. A sudden sharp rise in interest rates due to soaring inflation caught the savings and loans (S&Ls, as banking co-operatives are known in the U.S.) off-guard, as their business model relied on using personal deposits as the source of capital, then lending it as mortgage loans to borrowers. As personal deposits are often short-term and open in nature, but the mortgage loans are of longer and fixed-terms, as interest rates spiralled in the early 1980s, the S&Ls found their cost of capital (interest rates paid to personal deposits) rising high above the rate of returns (mortgage loan rates that were fixed before the sudden interest rate jumps). Before long, the S&Ls were suffering from severe losses from the asset-liability mis-match. At the same time, the credit crisis led to a sharp drop in real estate prices and the overall economy, and mortgage defaults skyrocketed. As capital was depleted, many S&Ls became insolvent. The situation became so dire that even the government-run deposit insurance schemes at quite a few states went bankrupt.
Fifth Third, being a more cautiously-run bank, took advantage of the crisis and absorbed many smaller rivals in financial trouble throughout the late 1980s and early 1990s, and slowly but surely expanded its branch network and market share. Then in 1992, Fifth Third held private talks to merge with Ohio rival Star Banc Corp., which traces its history to the First National Bank of Cincinnati. However, the discussion failed to result in a deal. (Star Banc Corp. eventually became U.S. Bancorp.)
In 1994, Fifth Third made two acquisitions. First, it bought the Cumberland Federal Bancorporation for USD $149-million, gaining 43 branches across Kentucky. Later in the same year, it bought Falls Financial for USD $76-million. Falls Financial was a small bank based in northeastern Ohio. Then in 1995, Fifth Third bought a small bank in Florida called the Bank of Naples, which had three branches.
Throughout the rest of the 1990s, the bank made numerous bank acquisitions in its core market of Ohio, Kentucky and Indiana, each time gaining no more than a dozen branches or so. Fifth Third, as such, was still a regional bank with meaningful operations only in three conjoining Midwest states at this time.
- In 1998, Fifth Third (branded as “5/3”) bought another Ohio rival CitFed Bancorp of Dayton for USD $727-million, whose subsidiary Citizens Federal Bank had 36 branches.
- Also in 1998, 5/3 purchased State Savings Co. for USD $918-million. The deal added 43 branches in the Columbus (Ohio) area and ten in Arizona to 5/3’s network, though the small Arizona network was disposed of later. By now Fifth Third had over 450 branches across Ohio, Kentucky, Indiana and Florida.
- Also in 1998, 5/3 bough two other financial services firms, namely the Ohio Company, a full-service broker-dealer and investment manager; and W. Lyman Case & Co., a commercial mortgage financier.
- In 1998 and 1999, 5/3 acquired several smaller banks in Ohio, Kentucky and Florida.
- In 1999, 5/3 made its biggest acquisition to date when it bought CNB Bancshares of Indiana for USD $2.3-billion. CNB’s subsidiary Civitas Bank had 145 branches and 200 ATMs mostly in Indiana, but also a small presence in Kentucky, Illinois and Michigan.
- Also in 1999, 5/3 bought Peoples Bank Corp. of Indianapolis for USD $228-million. Peoples Bank & Trust had nine branches.
- In 2000, 5/3 bought Ottawa Financial Corp. for USD $168-million. Ottawa Financial had 27 branches in Michigan.
- Also in 2000, 5/3 bought Capital Holdings of Ohio for USD $244-million.
- In 2001, 5/3 acquired Old Kent Financial Corp. for USD $4.92-billion. Old Kent had 340 branches in Michigan, Illinois and Indiana. The deal made Fifth Third one of the top five banks in Michigan and the Chicago area.
- In 2004, 5/3 bought First National Bancshares of Florida, Inc., for USD $1.58-billion. First National Bank of Florida operated 77 branches mainly in Southwest and Central Florida.
- In 2007, 5/3 agreed to purchase R-G Crown Bank from Puerto Rico's R & G Financial Corp. for USD $288-million. R-G Crown Bank operated 30 branches in Florida and 3 in Georgia.
- In 2007, 5/3 bought First Charter Corp. of Charlotte, North Carolina, for USD $1.09-billion. First Charter Bank operated 61 branches in North Carolina and another 2 in Georgia.
- By 2014, 5/3 operates over 1,300 branches across 12 contiguous Midwest states of Ohio, Kentucky, Indiana, Illinois, Michigan, Missouri, Georgia, North Carolina, Pennsylvania, West Virginia, Tennessee and Florida.
- In May 2018, 5/3 agreed to acquire Chicago-based MB Financial for USD $4.7-billion. MB Financial Bank's 91 branches will join Fifth Third's existing 148 branches in the city, though as many as 50 branches will be shut following the consolidation. The purchase will expand Fifth Third's deposit base in the Chicago area from $11-billion to $25-billion, making it one of the top four banks in the market.
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