-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, C/I86+cwspNwz7XeHsasTfMsxYupgGA3LoIxqcAQZB7X9JZdLfdLqsZYo2ISrRSe xNJZGY19W8xih2EUuv9SKg== 0000950152-98-001940.txt : 19980313 0000950152-98-001940.hdr.sgml : 19980313 ACCESSION NUMBER: 0000950152-98-001940 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 6 CONFORMED PERIOD OF REPORT: 19971231 FILED AS OF DATE: 19980312 SROS: NASD FILER: COMPANY DATA: COMPANY CONFORMED NAME: FIFTH THIRD BANCORP CENTRAL INDEX KEY: 0000035527 STANDARD INDUSTRIAL CLASSIFICATION: STATE COMMERCIAL BANKS [6022] IRS NUMBER: 310854434 STATE OF INCORPORATION: OH FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: SEC FILE NUMBER: 000-08076 FILM NUMBER: 98564642 BUSINESS ADDRESS: STREET 1: 38 FOUNTAIN SQ PLZ STREET 2: FIFTH THIRD CENTER CITY: CINCINNATI STATE: OH ZIP: 45263 BUSINESS PHONE: 5135795300 10-K 1 FIFTH THIRD BANK 1 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 fiscal year ended December 31, 1997 Commission File Number 0-8076 FIFTH THIRD BANCORP (Exact name of Registrant as specified in its charter) Ohio 31-0854434 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) 38 Fountain Square Plaza Cincinnati, Ohio 45263 (Address of principal executive offices) (Zip Code) Registrant's telephone number, including area code: (513) 579-5300 Securities registered pursuant to Section 12(g) of the Act: Common Stock Without Par Value Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes: /X/ No: / / Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of 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. / / The Aggregate Market Value of the Voting Stock held by non-affiliates of the Registrant was $8,341,147,473 as of January 30, 1998. (Note 1) The number of shares outstanding of the Registrant's Common Stock, without par value, as of January 30, 1998 was 155,308,905 shares. DOCUMENTS INCORPORATED BY REFERENCE 1997 Annual Report to Stockholders: Parts I, II and IV Proxy Statement for 1998 Annual Meeting of Stockholders: Parts III and IV Note 1: In calculating the market value of securities held by non-affiliates of Registrant as disclosed on the cover page of this Form 10-K, Registrant has treated as securities held by affiliates as of December 31, 1997, voting stock owned of record by its directors and principal executive officers, stockholders owning greater than 10% of the voting stock, and voting stock held by Registrant's trust departments in a fiduciary capacity. 2 FIFTH THIRD BANCORP 1997 FORM 10-K ANNUAL REPORT TABLE OF CONTENTS PART I
Page ---- Item 1. Business 3 Item 2. Properties 13 Item 3. Legal Proceedings 13 Item 4. Submission of Matters to a Vote of Security Holders 13 PART II Item 5. Market For Registrant's Common Equity and Related Stockholder Matters 13 Item 6. Selected Financial Data 13 Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 Item 7A. Quantitative and Qualitative Disclosures About Market Risk 13 Item 8. Financial Statements and Supplementary Data 14 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 14 PART III Item 10. Directors and Executive Officers of the Registrant 14 Item 11. Executive Compensation 16 Item 12. Security Ownership of Certain Beneficial Owners and Management 16 Item 13. Certain Relationships and Related Transactions 16 PART IV Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K 17
2 3 PART I ITEM 1. BUSINESS ORGANIZATION Registrant was organized in 1974 under the laws of the State of Ohio. It began operations in 1975 upon reorganization of its principal subsidiary, The Fifth Third Bank. The executive offices of the Registrant are located in Cincinnati, Ohio. The Registrant is a multi-bank holding company as defined in the Bank Holding Company Act of 1956, as amended, and is registered as such with the Board of Governors of the Federal Reserve System and had fourteen wholly-owned subsidiaries: The Fifth Third Bank; The Fifth Third Bank of Columbus; The Fifth Third Bank of Northwestern Ohio, N.A.; The Fifth Third Bank of Southern Ohio; The Fifth Third Bank of Western Ohio; Fifth Third Bank of Northeastern Ohio; Fifth Third Bank of Florida; Fifth Third Bank of Northern Kentucky, Inc.; Fifth Third Bank of Kentucky, Inc.; The Fifth Third Bank of Central Indiana; Fifth Third Community Development Company; Fifth Third Investment Company; Fountain Square Insurance Company; and Heartland Capital Management, Inc. Unless the context otherwise indicates the term "Company" as used herein means the Registrant and the term "Bank" means its wholly-owned subsidiary, The Fifth Third Bank. As of December 31, 1997, the Company's consolidated total assets were $21,375,054,000 and stockholders' equity totalled $2,277,411,000. The Bank has five wholly-owned subsidiaries: Midwest Payment Systems, Inc.; Fifth Third Securities, Inc.; The Fifth Third Company; The Fifth Third Leasing Company; and Fifth Third International Company. Fifth Third International Company has a 99.9 percent owned subsidiary: Fifth Third Trade Services Limited. Fifth Third Investment Company owns the remaining .01 percent. ACQUISITIONS The Company is the result of mergers and acquisitions over the years involving financial institutions throughout Ohio, Indiana, Kentucky, and Florida. The Company made the following acquisitions during 1997: On June 6, 1997, the Company acquired the net assets and operations of Gateway Leasing Corporation for $2.2 million. On July 25, 1997, the Company purchased Suburban Bancorporation, Inc., a savings and loan holding company with total assets of $200.3 million and deposits of $126.1 million, for consideration consisting of 580,145 shares of the Company's common stock. On September 26, 1997, the Company purchased the Ohio branches and deposits of Great Lakes National Bank Ohio with $129 million in deposits and eight branches for $11.3 million. 3 4 On November 24, 1997, the Company purchased Heartland Capital Management, Inc., a money managing firm headquartered in Indianapolis, Indiana, for consideration consisting of 234,003 shares of the Company's common stock. In December 1997, the Company entered into a merger agreement with The Ohio Company, a full-service broker-dealer for retail and institutional clients headquartered in Columbus, Ohio. The merger is expected to be completed in mid-1998, will be accounted for as a purchase and is subject to approval by stockholders of The Ohio Company and appropriate regulatory agencies. In connection with the acquisition of The Ohio Company, the Company will issue shares of its common stock having a fair market value of $80 million in exchange for all the outstanding shares of The Ohio Company. In January 1998, the Company entered into merger agreements with State Savings Company, a privately-owned thrift holding company headquartered in Columbus, Ohio with $2.8 billion in assets and CitFed Bancorp, Inc., a publicly-traded savings and loan holding company headquartered in Dayton, Ohio with $3.3 billion in assets. These transactions are tax-free, stock-for-stock exchanges accounted for as poolings-of-interests. The Company will exchange 11,083,560 shares of Fifth Third Bancorp common stock for all outstanding shares of State Savings Company. The Company will exchange .67 shares of Fifth Third Bancorp common stock for each outstanding share of CitFed Bancorp, Inc. Both transactions are expected to be completed in mid-1998 and are subject to approval by the stockholders of State Savings Company and CitFed Bancorp, Inc., respectively and appropriate regulatory agencies. In January 1998, the Registrant's Board of Directors rescinded the Company's stock repurchase programs. No shares have been purchased under these programs since June 1997. COMPETITION There are hundreds of commercial banks, savings and loans and other financial services providers in Ohio, Kentucky, Indiana, Florida and nationally, which provide strong competition to the Company's banking subsidiaries. As providers of a full range of financial services, these subsidiaries compete with national and state banks, savings and loan associations, securities dealers, brokers, mortgage bankers, finance and insurance companies, and other financial service companies. With respect to data processing services, the Bank's data processing subsidiary, Midwest Payment Systems, Inc., competes with other electronic fund transfer (EFT) service providers such as Electronic Payment Systems, Deluxe Corporation and Electronic Data Systems and other merchant processing providers such as First Data Corporation, National Processing, Inc. and First USA Paymentech, Inc. The earnings of the Company are affected by general economic conditions as well as by the monetary policies of the Federal Reserve Board. Such policies, which include regulating the national supply of bank reserves and bank credit, can have a major effect upon the source and cost of funds and the rates of return earned on loans and investments. The Federal Reserve influences the size and distribution of bank reserves through its open market operations and changes in cash reserve requirements against member bank deposits. 4 5 REGULATION AND SUPERVISION The Company, as a bank holding company, is subject to the restrictions of the Bank Holding Company Act of 1956, as amended (the "Act"). The Act provides that the acquisition of control of a bank is subject to the prior approval of the Board of Governors of the Federal Reserve System. The Company is required to obtain the prior approval of the Federal Reserve Board before it can acquire control of more than 5 percent of the voting shares of another bank. The Act does not permit the Federal Reserve Board to approve an acquisition by the Company, or any of its subsidiaries, of any bank located in a state other than Ohio, unless the acquisition is specifically authorized by the law of the state in which such bank is located. On September 29, 1994, the Act was amended by The Interstate Banking and Branch Efficiency Act of 1994 which authorizes interstate bank acquisitions anywhere in the country effective one year after the date of enactment, and interstate branching by acquisition and consolidation effective June 1, 1997, in those states that have not opted out by that date. The Company's subsidiary state banks are primarily subject to the laws of the state in which each is located, the Board of Governors of the Federal Reserve System and/or the Federal Deposit Insurance Corporation. The subsidiary bank which is organized under the laws of the United States is primarily subject to regulation by the Comptroller of the Currency and the Federal Deposit Insurance Corporation. Prior to January, 1997, the Company, which was also a savings and loan holding company, and its savings and loan subsidiaries were subject to regulation by the Office of Thrift Supervision. The Company and its subsidiaries are subject to certain restrictions on intercompany loans and investments. The Company and its subsidiaries are also subject to certain restrictions with respect to engaging in the underwriting and public sale and distribution of securities. In addition, the Company and its subsidiaries are subject to examination at the discretion of supervisory authorities. The Bank Holding Company Act limits the activities which may be engaged in by the Company and its subsidiaries to ownership of banks and those activities which the Federal Reserve Board has deemed or may in the future find to be so closely related to banking as to be a proper incident thereto. The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides that a holding company's controlled insured depository institutions are liable for any loss incurred by the Federal Deposit Insurance Corporation in connection with the default of, or any FDIC-assisted transaction involving, an affiliated insured bank or savings association. The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC Improvement Act") covers a wide expanse of banking regulatory issues. The FDIC Improvement Act deals with the recapitalization of the Bank Insurance Fund, with deposit insurance reform, including requiring the FDIC to establish a risk-based premium assessment system, and with a number of other regulatory and supervisory matters. 5 6 EMPLOYEES As of December 31, 1997, there were no employees of the Company. Subsidiaries of the Company employed 7,180 employees -- 1,244 were officers and 1,363 were part-time employees. STATISTICAL INFORMATION Pages 6 to 12 contain statistical information on the Company and its subsidiaries. Information about the Company's business segments is incorporated herein by reference to pages 25 and 26 of Registrant's 1997 Annual Report to Stockholders attached to this filing as Exhibit 13. SECURITIES PORTFOLIO The securities portfolio as of December 31 for each of the last five years, and the maturity distribution and weighted average yield of securities as of December 31, 1997, are incorporated herein by reference to the securities tables on pages 32 and 33 of the Company's 1997 Annual Report to Stockholders attached to this filing as Exhibit 13. The weighted average yields for the securities portfolio are yields to maturity weighted by the par values of the securities. The weighted average yields on securities exempt from income taxes are computed on a taxable equivalent basis. The taxable equivalent yields are net after-tax yields to maturity divided by the complement of the full corporate tax rate (35 percent). In order to express yields on a taxable equivalent basis, yields on obligations of states and political subdivisions (municipal securities) have been increased as follows: Under 1 year 2.61% 1 - 5 years 2.19% 6 - 10 years 2.19% Over 10 years 2.48% Total municipal securities 2.24% AVERAGE BALANCE SHEETS The average balance sheets are incorporated herein by reference to Table 1 on pages 28 and 29 of the Company's 1997 Annual Report to Stockholders attached to this filing as Exhibit 13. ANALYSIS OF NET INTEREST INCOME AND NET INTEREST INCOME CHANGES The analysis of net interest income and the analysis of net interest income changes are incorporated herein by reference to Table 1 and Table 2 and the related discussion on pages 28 through 30 of the Company's 1997 Annual Report to Stockholders attached to this filing as Exhibit 13. 6 7 TYPES OF LOANS AND LEASES A summary of loans and leases by major category as of December 31 follows ($000's):
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Commercial, financial and agricultural loans $ 4,268,238 4,013,785 3,584,124 3,045,315 2,685,558 Real estate - construction loans 360,242 375,938 312,098 286,088 342,177 Real estate - mortgage loans 3,106,707 2,946,225 2,769,178 3,076,463 3,434,496 Consumer loans 2,769,786 2,600,169 3,062,697 2,407,261 2,090,154 Lease financing 3,480,869 3,026,834 2,288,573 1,703,492 1,170,231 ----------- ---------- ---------- ---------- --------- Loans and leases, gross 13,985,842 12,962,951 12,016,670 10,518,619 9,722,616 Unearned income (547,125) (448,159) (326,027) (232,162) (155,718) Reserve for credit losses (200,931) (187,278) (177,388) (155,918) (144,537) ----------- ---------- ---------- ---------- --------- Loans and leases, net $13,237,786 12,327,514 11,513,255 10,130,539 9,422,361 =========== ========== ========== ========== =========
MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES The remaining maturities of the loan portfolio distributed to reflect cash flows (excluding residential mortgage and consumer loans) at December 31, 1997, based on scheduled repayments and the sensitivity of loans to interest rate changes for loans due after one year was as follows ($000's):
Commercial, Financial and Real Estate Real Estate Agricultural Construction Commercial Loans Loans Loans Total ----- ----- ----- ----- Due in one year or less $2,443,943 135,422 203,434 $2,782,799 Due after one year through five years 1,660,589 157,070 474,890 2,292,549 Due after five years 163,706 67,750 132,114 363,570 ---------- ------- ------- ---------- Total $4,268,238 360,242 810,438 $5,438,918 ========== ======= ======= ========== Loans due after one year: Predetermined interest rate $1,372,075 130,369 438,432 $1,940,876 ========== ======= ======= ========== Floating or adjustable interest rate $ 452,220 94,451 168,572 $ 715,243 ========== ====== ======= ==========
7 8 RISK ELEMENTS Interest on loans is normally accrued at the rate agreed upon at the time each loan was negotiated. It is the Company's policy to discontinue accrual of interest on commercial, construction and mortgage loans when there is a clear indication that the borrower's cash flow may not be sufficient to meet payments as they become due. Loans, other than consumer loans, are placed on nonaccrual status when principal or interest is past due ninety days or more, unless the loan is well secured and in the process of collection. The following table presents data concerning loans and leases at risk at December 31, 1997 and previous years ($000's):
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Nonaccrual loans and leases $37,401 29,046 37,049 20,725 18,961 Loans and leases contractually past due ninety days or more as to interest, principal or rental payments 46,281 38,053 20,455 13,237 10,444 Loans and leases renegotiated to provide a reduction or deferral of interest, principal or rental payments because of the financial position deterioration of the borrower 128 1,121 506 443 2,378 Loans and leases currently performing in accordance with contractual terms where there are serious doubts as to the ability of the borrower to comply with such terms 29,145 43,097 39,621 35,254 35,992
For calendar year 1997, interest income of $489,000 was recorded on nonaccrual and renegotiated loans and leases. Additional interest income of $3,482,000 would have been recorded if the nonaccrual and renegotiated loans and leases had been current in accordance with their original terms. 8 9 SUMMARY OF CREDIT LOSS EXPERIENCE A summary of the activity in the reserve for credit losses arising from provisions charged to operations, losses charged off and recoveries of losses previously charged off was as follows ($000's):
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Loans and leases outstanding at December 31 $13,438,717 12,514,792 11,690,643 10,286,457 9,566,898 =========== ========== ========== ========== ========= Average loans and leases outstanding $12,783,555 12,304,544 10,960,757 9,902,901 8,869,432 =========== ========== ========== ========== ========= Reserve for credit losses, January 1 $ 187,278 177,388 155,918 144,537 121,452 ----------- ---------- ---------- --------- --------- Losses charged off: Commercial, financial and agricultural loans (8,823) (10,500) (6,596) (8,793) (12,113) Real estate - construction loans -- -- -- -- -- Real estate - mortgage loans (2,195) (3,774) (3,697) (3,485) (7,174) Consumer loans (59,384) (53,027) (26,330) (16,416) (16,035) Lease financing (21,399) (13,143) (5,084) (2,252) (1,850) ----------- ---------- ---------- --------- --------- Total losses (91,801) (80,444) (41,707) (30,946) (37,172) ----------- ---------- ---------- --------- --------- Recoveries of losses previously charged off: Commercial, financial and agricultural loans 2,159 2,865 1,443 1,795 2,103 Real estate - construction loans -- -- -- -- -- Real estate - mortgage loans 631 1,608 611 3,006 564 Consumer loans 15,196 13,174 8,399 7,898 6,793 Lease financing 5,421 2,835 1,393 773 638 ----------- ---------- ---------- --------- --------- Total recoveries 23,407 20,482 11,846 13,472 10,098 ----------- ---------- ---------- --------- --------- Net losses charged off: Commercial, financial and agricultural loans (6,664) (7,635) (5,153) (6,998) (10,010) Real estate - construction loans -- -- -- -- -- Real estate - mortgage loans (1,564) (2,166) (3,086) (479) (6,610) Consumer loans (44,188) (39,853) (17,931) (8,518) (9,242) Lease financing (15,978) (10,308) (3,691) (1,479) (1,212) ----------- ---------- ---------- --------- --------- Total net losses charged off (68,394) (59,962) (29,861) (17,474) (27,074) ----------- ---------- ---------- --------- --------- Letters of credit -- -- -- (7,800) -- Reserve of acquired institutions and other 1,705 5,838 8,369 875 2,122 Provision charged to operations 80,342 64,014 42,962 35,780 48,037 ----------- ---------- ---------- --------- --------- Reserve for credit losses, December 31 $ 200,931 187,278 177,388 155,918 144,537 =========== ========== ========== ========== =========
9 10 SUMMARY OF CREDIT LOSS EXPERIENCE, CONTINUED
December 31: 1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Reserve for credit losses, Commercial, financial and agricultural loans $104,643 98,491 92,988 72,906 71,825 Real estate - construction loans 4,762 4,853 5,033 5,405 6,442 Real estate - mortgage loans 48,727 39,879 30,392 26,298 23,397 Consumer loans 22,710 25,045 32,126 36,272 33,450 Lease financing 20,089 19,010 16,849 15,037 9,423 -------- ------- ------- ------- ------- Total reserve for credit losses $200,931 187,278 177,388 155,918 144,537 ======== ======= ======= ======= =======
The analysis above is for analytical purposes. The reserve for credit losses is general in nature and is available to absorb losses from any portion of the loan and lease portfolio. The distribution of loans and leases by type and the ratio of net charge-offs to average loans and leases outstanding was as follows:
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- Percentage of loans and leases to total loans and leases at December 31 Commercial, financial and agricultural loans 31.5% 31.9 30.5 29.5 28.0 Real estate - construction loans 2.7 3.0 2.7 2.8 3.6 Real estate - mortgage loans 23.1 23.6 23.7 29.9 35.8 Consumer loans 20.6 20.8 26.2 23.4 21.9 Lease financing 22.1 20.7 16.9 14.4 10.7 ----- ----- ----- ----- ----- Total 100.0% 100.0 100.0 100.0 100.0 ===== ===== ===== ===== ===== Ratio of net charge-offs during year to average loans and leases outstanding during year Commercial, financial and agricultural loans 0.16% 0.20 0.15 0.24 0.38 Real estate - construction loans -- -- -- -- -- Real estate - mortgage loans 0.05 0.07 0.10 0.01 0.21 Consumer loans 1.71 1.40 0.68 0.38 0.49 Lease financing 0.59 0.45 0.22 0.12 0.15 Weighted Average Ratio 0.54 0.49 0.27 0.18 0.31
10 11 RESERVE FOR CREDIT LOSSES The reserve for credit losses is established through charges to operations by a provision for credit losses. Loans and leases which are determined to be uncollectible are charged against the reserve and any subsequent recoveries are credited to the reserve. The amount charged to operations is based on several factors. These include the following: 1. Analytical reviews of the credit loss experience in relationship to outstanding loans and leases to determine an adequate reserve for credit losses required for loans and leases at risk. 2. A continuing review of problem or at risk loans and leases and the overall portfolio quality. 3. Regular examinations and appraisals of the loan and lease portfolio conducted by the Company's examination staff and the banking supervisory authorities. 4. Management's judgement with respect to the current and expected economic conditions and their impact on the existing loan and lease portfolio. The amount provided for credit losses exceeded actual net charge-offs by $11,948,000 in 1997, $4,052,000 in 1996 and $13,101,000 in 1995. Management reviews the reserve on a quarterly basis to determine whether additional provisions should be made after considering the factors noted above. Based on these procedures, management is of the opinion that the reserve at December 31, 1997 of $200,931,000 was adequate. MATURITY DISTRIBUTION OF DOMESTIC CERTIFICATES OF DEPOSIT OF $100,000 AND OVER AT DECEMBER 31, 1997 ($000'S) Three months or less $ 762,288 Over three months through six months 151,555 Over six months through twelve months 69,862 Over twelve months 26,733 ---------- Total certificates - $100,000 and over $1,010,438 ===========
Note: Foreign office deposits totalling $540,951 are denominated in amounts greater than $100,000. 11 12 RETURN ON EQUITY AND ASSETS The following table presents certain operating ratios:
1997 1996* 1995 ---- ----- ---- Return on assets (a) 1.96% 1.72 1.78 Return on equity (b) 19.6% 17.2 18.1 Dividend payout ratio (c) 33.6% 34.8 33.9 Equity to assets ratio (d) 10.03% 9.99 9.82
- --------------- (a) net income divided by average assets (b) net income divided by average equity (c) dividends declared per share divided by diluted earnings per share (d) average equity divided by average assets * 1996 ratios include the special SAIF assessment of $16.6 million pretax ($10.8 million after tax or $.06 per share). For comparability, excluding the impact of this assessment, return on average assets, return on average equity, and the dividend payout ratio for 1996 would have been 1.78% 17.8% and 33.7%, respectively. 12 13 ITEM 2. PROPERTIES The Company's executive offices and the main office of the Bank are located on Fountain Square Plaza in downtown Cincinnati, Ohio, located in a 32-story office tower and a 5-story office building and parking garage known as the Fifth Third Center and the William S. Rowe Building, respectively. One of the Bank's subsidiaries owns 100 percent of these buildings. At December 31, 1997, the Company, through its subsidiary banks, six located in Ohio, two in Kentucky, one in Indiana and one in Florida, operated 410 banking centers, of which 209 were owned and 201 were leased. The properties owned are free from mortgages and encumbrances. ITEM 3. LEGAL PROCEEDINGS The Company and its subsidiaries are not parties to any material legal proceedings other than routine litigation incidental to its business. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS The information required by this item is incorporated herein by reference to Page 1 of Registrant's 1997 Annual Report to Stockholders attached to this filing as Exhibit 13. ITEM 6. SELECTED FINANCIAL DATA The information required by this item is incorporated herein by reference to page 37 of Registrant's 1997 Annual Report to Stockholders attached to this filing as Exhibit 13. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The information required by this item is incorporated herein by reference to pages 28 through 36 of Registrant's 1997 Annual Report to Stockholders attached to this filing as Exhibit 13. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is incorporated herein by reference to pages 35 and 36 of Registrant's 1997 Annual Report to Stockholders attached to this filing as Exhibit 13. 13 14 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA The information required by this item is incorporated herein by reference to pages 13 through 27 and page 37 of Registrant's 1997 Annual Report to Stockholders attached to this filing as Exhibit 13. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information required by this item concerning Directors is incorporated herein by reference under the caption "ELECTION OF DIRECTORS" of the Registrant's 1998 Proxy Statement. The names, ages and positions of the Executive Officers of the Company as of January 30, 1998 are listed below along with their business experience during the past 5 years. Officers are appointed annually by the Board of Directors at the meeting of Directors immediately following the Annual Meeting of Stockholders.
Current Position and Name and Age Business Experience During Past 5 Years - ------------ --------------------------------------- George A. Schaefer, Jr., 52 PRESIDENT AND CEO. President and Chief Executive Officer of the Company and the Bank. Michael D. Baker, 47 EXECUTIVE VICE PRESIDENT. Executive Vice President of the Company and the Bank since August, 1995. Previously, Mr. Baker was Senior Vice President of the Company since March, 1993, and of the Bank. P. Michael Brumm, 50 EXECUTIVE VICE PRESIDENT. Executive Vice President of the Company and the Bank since August, 1995. Until June, 1997, Mr. Brumm was Chief Financial Officer of the Company and the Bank. Previously, Mr. Brumm was Senior Vice President and CFO of the Company and the Bank. James J. Hudepohl, 45 EXECUTIVE VICE PRESIDENT. Executive Vice President of the Company and the Bank since January, 1997. Previously, Mr. Hudepohl was Senior Vice President of the Bank.
14 15
Current Position and Name and Age Business Experience During Past 5 Years - ------------ --------------------------------------- Michael K. Keating, 42 EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND SECRETARY. Executive Vice President of the Company and the Bank since August, 1995 and Secretary of the Company and the Bank since January, 1994. Previously, Mr. Keating was Senior Vice President and General Counsel of the Company since March, 1993, and Senior Vice President and Counsel of the Bank. Robert P. Niehaus, 51 EXECUTIVE VICE PRESIDENT. Executive Vice President of the Company and the Bank since August, 1995. Previously, Mr. Niehaus was Senior Vice President of the Company since March, 1993, and Senior Vice President of the Bank. Stephen J. Schrantz, 48 EXECUTIVE VICE PRESIDENT. Executive Vice President of the Company and the Bank. Gerald L. Wissel, 41 EXECUTIVE VICE PRESIDENT. Executive Vice President of the Bank since January, 1997. Auditor of the Company and the Bank. Previously, Mr. Wissel was Senior Vice President of the Bank. Robert J. King, Jr., 42 EXECUTIVE VICE PRESIDENT. Executive Vice President of the Company since June, 1997. Vice Chairman of The Fifth Third Bank of Northwestern Ohio, N.A. and President and CEO of Fifth Third Bank of Northeastern Ohio since August, 1997. Previously, Mr. King was President and CEO of The Fifth Third Bank of Northwestern Ohio, N.A. Mr. King was Senior Vice President of the Company since March, 1995. James R. Gaunt, 52 EXECUTIVE VICE PRESIDENT. Executive Vice President of the Company since June, 1997. Senior Vice President of the Company since March, 1994, and President and CEO of Fifth Third Bank of Kentucky, Inc. since August, 1994. Previously, Mr. Gaunt was Senior Vice President of the Company and the Bank.
15 16
Current Position and Name and Age Business Experience During Past 5 Years - ------------ --------------------------------------- Neal E. Arnold, 37 CHIEF FINANCIAL OFFICER AND TREASURER. Chief Financial Officer of the Company and the Bank since June, 1997. Mr. Arnold has been the Treasurer of the Company and the Bank and Senior Vice President of the Bank since April, 1993. Roger W. Dean, 35 CONTROLLER. Controller of the Company and Senior Vice President of the Bank since March, 1997. Previously, Mr. Dean was Vice President of the Bank. Prior to June 1993, Mr. Dean was with Deloitte & Touche LLP, independent public accountants. Paul L. Reynolds, 36 ASSISTANT SECRETARY. Senior Vice President of the Company and the Bank since March, 1997. Assistant Secretary of the Company since March, 1995, General Counsel and Assistant Secretary of the Bank since January, 1995. Previously, Mr. Reynolds was Vice President, Counsel and Assistant Secretary of the Bank since 1990. Regina G. Livers, 40 COMMUNITY AFFAIRS OFFICER. Community Affairs Officer of the Company since March 1997. Previously, Ms. Livers was Vice President and Community Affairs Officer of the Bank.
ITEM 11. EXECUTIVE COMPENSATION The information required by this item is incorporated herein by reference under the caption "EXECUTIVE COMPENSATION" of the Registrant's 1998 Proxy Statement. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by this item is incorporated herein by reference under the captions "CERTAIN BENEFICIAL OWNERS, ELECTION OF DIRECTORS, AND EXECUTIVE COMPENSATION" of the Registrant's 1998 Proxy Statement. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by this item is incorporated herein by reference under the caption "CERTAIN TRANSACTIONS" of the Registrant's 1998 Proxy Statement. 16 17 PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K a) Documents Filed as Part of the Report Page ---- 1. Index to Financial Statements Consolidated Statements of Income for the Years Ended December 31, 1997, 1996 and 1995 * Consolidated Balance Sheets, December 31, 1997 and 1996 * Consolidated Statements of Changes in Stockholders' Equity for the Years Ended December 31, 1997, 1996 and 1995 * Consolidated Statements of Cash Flows for the Years Ended December 31, 1997, 1996 and 1995 * Notes to Consolidated Financial Statements * * Incorporated by reference to pages 13 through 27 of Registrant's 1997 Annual Report to Stockholders attached to this filing as Exhibit 13. 2. Financial Statement Schedules The schedules for Registrant and its subsidiaries are omitted because of the absence of conditions under which they are required, or because the information is set forth in the consolidated financial statements or the notes thereto. 3. Exhibits Exhibit No. 3- Amended Articles of Incorporation and Code of Regulations (a) Rider 17 4(a) Junior Subordinated Indenture, dated as of March 20, 1997 between Fifth Third Bancorp and Wilmington Trust Company, as Debenture Trustee (b)
17 18 4(b) Certificate Representing the 8.136% Junior Subordinated Deferrable Interest Debentures, Series A, of Fifth Third Bancorp (b) 4(c) 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 name therein (b) 4(d) Certificate Representing the 8.136% Capital Securities, Series A, of Fifth Third Capital Trust I (b) 4(e) Guarantee Agreement, dated as of March 20, 1997 between Fifth Third Bancorp, as Guarantor, and Wilmington Trust Company, as Guarantee Trustee (b) 4(f) 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 (b) 10(a)- Fifth Third Bancorp Unfunded Deferred Compensation Plan for Non-Employee Directors (c) 10(b)- Fifth Third Bancorp 1990 Stock Option Plan (d) 10(c)- Fifth Third Bancorp 1987 Stock Option Plan (e) 10(d)- Indenture effective November 19, 1992 between Fifth Third Bancorp, Issuer and NBD Bank, N.A., Trustee (f) 10(e)- Fifth Third Bancorp 1993 Discount Stock Purchase Plan (g) 10(f)- Fifth Third Bancorp Amended and Restated Stock Incentive Plan for selected Executive Officers, Employees and Directors of The Cumberland Federal Bancorporation, Inc. (h) 10(g)- Fifth Third Bancorp Master Profit Sharing Plan (i) 10(h)- Fifth Third Bancorp Amended and Restated Stock Option and Incentive Plan for Selected Executive Officers, Employees and Directors of Falls Financial, Inc. (j) 10(i)- Fifth Third Bancorp Amended 1993 Discount Stock Purchase Plan (k) 11- Computation of Consolidated Earnings Per Share for the Years Ended December 31, 1997, 1996, 1995, 1994 and 1993 18 19 13- Fifth Third Bancorp 1997 Annual Report to Stockholders 21- Fifth Third Bancorp Subsidiaries 23- Independent Auditors' Consent b) Reports on Form 8-K None. - ------------------------ (a) Incorporated by reference to Registrant's Registration Statement, Exhibits 3.1 and 3.2, on Form S-4, Registration No. 33-19965. (b) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission on March 26, 1997, a Form 8-K Current Report. (c) Incorporated in this Form 10-K Annual Report by reference to Form 10-K filed for fiscal year ended December 31, 1985. (d) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-8, Registration No. 33-34075. (e) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-8, Registration No. 33-13252. (f) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission on November 18, 1992 a Form 8-K Current Report dated November 16, 1992 and as Exhibit 4.1 to a Registration Statement on Form S-3, Registration No. 33-54134. (g) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-8, Registration No. 33-60474. (h) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-8, Registration No. 33-55223. (i) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-8, Registration No. 33-55553. 19 20 (j) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as an exhibit to a Registration Statement on Form S-8, Registration No. 33-61149. (k) Incorporated by reference to Registrant's filing with the Securities and Exchange Commission as Exhibit 10 to the Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. 20 21 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) /s/GEORGE A. SCHAEFER, JR. March 10, 1998 - -------------------------- George A. Schaefer, Jr. President and CEO (Principal Executive Officer) Pursuant to requirements of the Securities Exchange Act of 1934, this report has been signed on March 10, 1998 by the following persons on behalf of the Registrant and in the capacities indicated. /s/NEAL E. ARNOLD /s/ROGER W. DEAN /s/ROBERT B. MORGAN - ---------------------------- ------------------------------- -------------------------- Neal E. Arnold Roger W. Dean Robert B. Morgan Senior Vice President and CFO Controller Director (Principal Financial Officer) (Principal Accounting Officer) /s/IVAN W. GORR /s/JAMES E. ROGERS - ---------------------------- ------------------------------- -------------------------- Darryl F. Allen Ivan W. Gorr James E. Rogers Director Director Director /s/JOSEPH H. HEAD, JR. - ---------------------------- ------------------------------- -------------------------- John F. Barrett Joseph H. Head, Jr. Brian H. Rowe Director Director Director /s/MILTON C. BOESEL, JR. /s/JOAN R. HERSCHEDE /s/GEORGE A. SCHAEFER, JR. - ---------------------------- ------------------------------- -------------------------- Milton C. Boesel, Jr. Joan R. Herschede George A. Schaefer, Jr. Director Director Director /s/GERALD V. DIRVIN /s/JOHN J. SCHIFF, JR. - ---------------------------- ------------------------------- -------------------------- Gerald V. Dirvin William G. Kagler John J. Schiff, Jr. Director Director Director /s/THOMAS B. DONNELL /s/JAMES D. KIGGEN - ---------------------------- ------------------------------- -------------------------- Thomas B. Donnell James D. Kiggen Dennis J. Sullivan, Jr. Director Director Director /s/RICHARD T. FARMER /s/MITCHEL D. LIVINGSTON, PH.D. /s/DUDLEY S. TAFT - ---------------------------- ------------------------------- -------------------------- Richard T. Farmer Mitchel D. Livingston, Ph.D. Dudley S. Taft Director Director Director
21 EX-11 2 EXHIBIT 11 1 EXHIBIT 11 FIFTH THIRD BANCORP COMPUTATION OF CONSOLIDATED EARNINGS PER SHARE FOR THE YEARS ENDED DECEMBER 31
1997 1996 1995 1994 1993 ---- ---- ---- ---- ---- NET INCOME $401,237 335,059 287,685 244,459 206,235 ======== ======= ======= ======= ======= EARNINGS PER SHARE: WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (A) 155,103 155,991 148,319 144,870 140,960 ======== ======= ======= ======= ======= PER SHARE (NET INCOME DIVIDED BY THE WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING) $ 2.59 2.15 1.94 1.69 1.46 ======== ======= ======= ======= ======= DILUTED EARNINGS PER SHARE: NET INCOME $401,237 335,059 287,685 244,459 206,235 ADD - INTEREST ON 4-1/4% CONVERTIBLE SUBORDINATED NOTES DUE 1998, NET OF APPLICABLE INCOME TAXES -- 1,637 4,257 4,332 4,393 -------- ------- ------- ------- ------- ADJUSTED NET INCOME $401,237 336,696 291,942 248,791 210,628 ======== ======= ======= ======= ======= ADJUSTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING - AFTER GIVING EFFECT TO THE CONVERSION OF STOCK OPTIONS AND CONVERTIBLE SUBORDINATED NOTES (A) 157,684 159,603 153,963 150,582 147,011 ======== ======= ======= ======= ======= PER SHARE (ADJUSTED NET INCOME DIVIDED BY THE ADJUSTED WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING) $ 2.54 2.11 1.89 1.65 1.43 ======== ======= ======= ======= =======
- ---------------------------- (a) Per share amounts and average shares outstanding have been adjusted for the three-for-two stock splits effected in the form of stock dividends paid July 15, 1997 and January 12, 1996. EX-13 3 EXHIBIT 13 1 EXHIBIT 13 Financial Highlights
1997 1996 % Change ========================================================================================================================= EARNINGS AND DIVIDENDS ($000'S) Net Income ...................................................... $ 401,237 335,059 19.8 Operating Earnings (a) .......................................... 401,237 345,857 16.0 Cash Dividends Declared ......................................... 132,156 115,515 14.4 - ------------------------------------------------------------------------------------------------------------------------- PER SHARE Earnings ........................................................ $ 2.59 2.15 20.5 Diluted Earnings ................................................ 2.54 2.11 20.4 Excluding Special SAIF Assessment (a) ........................ 2.54 2.17 17.1 Cash Dividends Declared ......................................... .85 1/3 .73 1/3 16.4 Year-End Book Value ............................................. 14.67 13.50 8.7 Year-End Market Price ........................................... 81.75 41.87 95.2 - ------------------------------------------------------------------------------------------------------------------------- AT YEAR END ($ IN MILLIONS) Assets .......................................................... $ 21,375 20,549 4.0 Loans and Leases ................................................ 13,438 12,514 7.4 Deposits ........................................................ 14,914 14,375 3.7 Stockholders' Equity ............................................ 2,277 2,144 6.2 - ------------------------------------------------------------------------------------------------------------------------- KEY RATIOS Return on Average Assets (a) .................................... 1.96% 1.78 10.1 Return on Average Equity (a) .................................... 19.6 17.8 10.1 Overhead Ratio (a,b) ............................................ 41.0 43.5 (5.7) Net Interest Margin ............................................. 4.11 3.99 3.0 - ------------------------------------------------------------------------------------------------------------------------- Number of Shares ................................................ 155,224,561 158,838,831 (2.3) Number of Stockholders .......................................... 16,386 15,632 4.8 Number of Banking Locations ..................................... 410 414 (1.0) Number of Full-Time Equivalent Employees ........................ 6,787 6,549 3.6 - ------------------------------------------------------------------------------------------------------------------------- (a) For comparability, certain financial ratios and statistics exclude the impact of the 1996 special SAIF assessment of $16.6 million pretax ($10.8 million after tax or $.06 per share). (b) Operating expenses divided by the sum of fully taxable equivalent net interest income and other operating income.
FIFTH THIRD BANCORP STOCKHOLDER AND CORPORATE INFORMATION - ------------------------------------------------------------------------------------------------------------------------- STOCK DATA DIVIDENDS PAID PER YEAR PERIOD HIGH LOW SHARE - -------------------------------------------------------------------- 1997 Fourth Quarter $825/8 $641/8 $.22 Third Quarter 651/2 551/16 .22 Second Quarter 563/4 4613/16 .191/3 First Quarter 59 411/3 .191/3 - -------------------------------------------------------------------- 1996 Fourth Quarter $493/16 $39 $.191/3 Third Quarter 383/4 331/2 .171/3 Second Quarter 3811/16 337/16 171/3 First Quarter 397/16 293/16 .171/3 - -------------------------------------------------------------------- The common stock of Fifth Third Bancorp is traded in the over-the-counter market and is listed under the symbol "FITB" on the NASDAQ National Market System. - -------------------------------------------------------------------- RATINGS STANDARD DUFF & MOODY'S & POOR'S FITCH PHELPS - -------------------------------------------------------------------- FIFTH THIRD BANCORP Commercial Paper P1 A1+ F1+ Duff-1+ - -------------------------------------------------------------------- FIFTH THIRD BANK-Cincinnati Short-Term Deposit P1 A1+ F1+ Duff-1+ Long-Term Deposit Aa2 AA- AA+ AA - -------------------------------------------------------------------- Fifth Third Banks of Northwestern Ohio, N.A., Western Ohio, Columbus, Central Indiana, Kentucky, Inc., and Northern Kentucky Short-Term Deposit P1 A1+ F1+ Duff-1+ Long-Term Deposit Aa3 AA- AA+ AA - --------------------------------------------------------------------
CORPORATE OFFICE Fifth Third Center, Cincinnati, Ohio 45263 (513) 579-5300 ANNUAL MEETING The Annual Meeting of Stockholders will be held at 11:30 a.m. on Tuesday, March 17, 1998 on the fifth floor of the Corporate Office. FORM 10-K The Bancorp's 1997 Annual Report on Form 10-K (to be filed with the Securities and Exchange Commission before March 31, 1998) will be provided without charge to stockholders upon request. Send requests to the Investor Relations Department at the Corporate Office. INVESTOR RELATIONS/ANALYST CONTACT Neal E. Arnold, Senior Vice President and Chief Financial Officer (513) 579-4356 (513) 579-6246 (facsimile) TRANSFER AGENT/SHAREHOLDER RELATIONS Fifth Third Bank Corporate Trust Services, Mail Drop 1090F5-3212 Fifth Third Center, Cincinnati, Ohio 45263 (800) 837-2755 (513) 579-5320 (outside the continental U.S.) DIVIDEND REINVESTMENT AND DIRECT DEPOSIT For the convenience of stockholders, the Bancorp has established a plan whereby stockholders may have their dividends automatically reinvested in Fifth Third Bancorp common stock or the dividends may be deposited directly into your bank account. To take advantage of these options, return the card on the back page or contact Shareholder Relations. 1 2 Fifth Third Bancorp and Subsidiaries Consolidated Statements of Income - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31 ($000's) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and Fees on Loans and Leases ....................................... $1,043,102 992,407 898,310 - --------------------------------------------------------------------------------------------------------------------------- Interest on Securities Taxable .................................................................. 419,216 369,851 250,590 Exempt from Income Taxes ................................................. 13,889 21,336 23,014 - --------------------------------------------------------------------------------------------------------------------------- Total Interest on Securities ................................................ 433,105 391,187 273,604 - --------------------------------------------------------------------------------------------------------------------------- Interest on Other Short-Term Investments .................................... 2,181 1,519 1,251 - --------------------------------------------------------------------------------------------------------------------------- Total Interest Income ....................................................... 1,478,388 1,385,113 1,173,165 - --------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on Deposits Interest Checking ........................................................ 50,904 37,309 28,472 Savings .................................................................. 70,937 54,317 14,572 Money Market ............................................................. 42,769 57,088 62,233 Other Time ............................................................... 296,881 305,682 248,860 Certificates-$100,000 and Over ........................................... 47,928 47,553 40,522 Foreign Office ........................................................... 22,212 28,407 46,646 - --------------------------------------------------------------------------------------------------------------------------- Total Interest on Deposits .................................................. 531,631 530,356 441,305 Interest on Federal Funds Borrowed .......................................... 81,196 64,942 63,492 Interest on Short-Term Bank Notes ........................................... 36,852 30,278 47,956 Interest on Other Short-Term Borrowings ..................................... 55,702 48,644 41,136 Interest on Long-Term Debt and Notes ........................................ 28,045 21,649 15,844 - --------------------------------------------------------------------------------------------------------------------------- Total Interest Expense ...................................................... 733,426 695,869 609,733 - --------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME ......................................................... 744,962 689,244 563,432 Provision for Credit Losses ................................................. 80,342 64,014 42,962 - --------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES ....................... 664,620 625,230 520,470 - --------------------------------------------------------------------------------------------------------------------------- OTHER OPERATING INCOME Investment Advisory Income .................................................. 90,169 74,032 61,755 Service Charges on Deposits ................................................. 94,474 83,590 66,344 Data Processing Income ...................................................... 112,506 88,195 75,311 Other Service Charges and Fees .............................................. 141,986 118,035 97,516 Securities Gains ............................................................ 6,326 4,563 4,789 - --------------------------------------------------------------------------------------------------------------------------- Total Other Operating Income ................................................ 445,461 368,415 305,715 - --------------------------------------------------------------------------------------------------------------------------- OPERATING EXPENSES Salaries, Wages and Incentives .............................................. 199,696 185,793 156,545 Employee Benefits ........................................................... 36,888 44,682 38,648 Equipment Expenses .......................................................... 22,050 20,006 16,655 Net Occupancy Expenses ...................................................... 36,507 35,596 28,521 Other Operating Expenses .................................................... 211,017 190,641 155,248 SAIF Assessment ............................................................. -- 16,612 -- - --------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses .................................................... 506,158 493,330 395,617 - --------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES .................................................. 603,923 500,315 430,568 Applicable Income Taxes ..................................................... 202,686 165,256 142,883 - --------------------------------------------------------------------------------------------------------------------------- NET INCOME .................................................................. $ 401,237 335,059 287,685 - --------------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE .......................................................... $ 2.59 2.15 1.94 DILUTED EARNINGS PER SHARE .................................................. $ 2.54 2.11 1.89 - --------------------------------------------------------------------------------------------------------------------------- CASH DIVIDENDS DECLARED PER SHARE ........................................... $ .85 1/3 .73 1/3 .64 - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 13 3 Fifth Third Bancorp and Subsidiaries Consolidated Balance Sheets - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------- December 31 ($000's) 1997 1996 - --------------------------------------------------------------------------------------------------------------------------- ASSETS - --------------------------------------------------------------------------------------------------------------------------- Cash and Due from Banks ................................................................ $ 720,133 808,926 Securities Available for Sale (amortized cost 1997-$6,257,268 and 1996-$6,198,346) ..... 6,397,077 6,223,881 Securities Held to Maturity (market value 1997-$72,236 and 1996-$176,798) .............. 72,236 176,804 Other Short-Term Investments ........................................................... 29,424 44,579 Loans and Leases Commercial Loans .................................................................... 4,268,238 4,013,785 Construction Loans .................................................................. 360,242 375,938 Commercial Mortgage Loans ........................................................... 810,436 795,599 Commercial Lease Financing .......................................................... 1,416,227 1,093,422 Residential Mortgage Loans .......................................................... 2,296,271 2,150,626 Consumer Loans ...................................................................... 2,769,786 2,600,169 Consumer Lease Financing ............................................................ 2,064,642 1,933,412 Unearned Income ..................................................................... (547,125) (448,159) Reserve for Credit Losses ........................................................... (200,931) (187,278) - --------------------------------------------------------------------------------------------------------------------------- Total Loans and Leases ................................................................. 13,237,786 12,327,514 Bank Premises and Equipment ............................................................ 251,898 231,389 Accrued Income Receivable .............................................................. 178,803 182,854 Other Assets ........................................................................... 487,697 553,051 - --------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS ........................................................................... $21,375,054 20,548,998 - --------------------------------------------------------------------------------------------------------------------------- LIABILITIES - --------------------------------------------------------------------------------------------------------------------------- Deposits Demand .............................................................................. $ 2,426,198 2,495,839 Interest Checking ................................................................... 2,252,571 1,957,895 Savings ............................................................................. 2,298,749 1,940,897 Money Market ........................................................................ 1,106,850 1,462,794 Other Time .......................................................................... 5,278,375 5,597,729 Certificates-$100,000 and Over ...................................................... 1,010,438 786,787 Foreign Office ...................................................................... 540,951 132,715 - --------------------------------------------------------------------------------------------------------------------------- Total Deposits ......................................................................... 14,914,132 14,374,656 Federal Funds Borrowed ................................................................. 1,253,553 1,420,694 Short-Term Bank Notes .................................................................. 555,000 806,000 Other Short-Term Borrowings ............................................................ 1,252,378 1,038,738 Accrued Taxes, Interest and Expenses ................................................... 505,048 374,304 Other Liabilities ...................................................................... 159,654 112,820 Long-Term Debt ......................................................................... 457,878 277,661 - --------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES ...................................................................... 19,097,643 18,404,873 - --------------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY (a) - --------------------------------------------------------------------------------------------------------------------------- Common Stock (b) ....................................................................... 344,599 352,622 Capital Surplus ........................................................................ 483,054 495,600 Retained Earnings ...................................................................... 1,548,451 1,279,559 Unrealized Gains on Securities Available for Sale ...................................... 90,876 16,598 Treasury Stock ......................................................................... (189,569) (254) - --------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY ............................................................. 2,277,411 2,144,125 - --------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............................................. $21,375,054 20,548,998 - ---------------------------------------------------------------------------------------------------------------------------
(a) 500,000 shares of no par value preferred stock are authorized of which none have been issued. (b) Stated value $2.22 per share; authorized 300,000,000; outstanding 1997 -- 155,224,561 (excludes 3,616,590 treasury shares) and 1996 -- 158,838,831 (excludes 5,896 treasury shares). See Notes to Consolidated Financial Statements. 14 4 Fifth Third Bancorp and Subsidiaries Consolidated Statements of Changes in Stockholders' Equity - --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------- Common Stock -------------------- Unrealized Shares Capital Retained Gains Treasury ($000's) Outstanding Amount Surplus Earnings (Losses) Stock Total - ------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1994 ............... 145,595,934 $323,223 253,352 870,417 (48,218) -- 1,398,774 Net Income ................................. 287,685 287,685 Cash Dividends Declared at $.64 per share .. (95,181) (95,181) Shares Acquired for Treasury ............... (4,277) (9) (64) (73) Stock Options Exercised, Including Treasury Shares Issued ........ 302,912 673 2,953 64 3,690 Corporate Tax Benefit Related to Exercise of Non-Qualified Stock Options .......... 357 357 Fractional Shares Purchased in Stock Split Effected in the Form of a Stock Dividend (250) (250) Stock Issued in Conversion of Subordinated Notes ...................... 12,375 27 323 350 Stock Issued in Acquisitions and Other ..... 4,727,550 10,495 58,194 (2,486) 66,203 Change in Unrealized Gains/Losses on Securities Available for Sale ........ 63,020 63,020 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1995 ............... 150,634,494 334,409 315,179 1,060,185 14,802 -- 1,724,575 Net Income ................................. 335,059 335,059 Cash Dividends Declared at $.73 1/3 per share (115,515) (115,515) Shares Acquired for Treasury ............... (69,081) (153) (2,943) (3,096) Stock Options Exercised, Including Treasury Shares Issued ........ 615,552 1,366 6,843 2,689 10,898 Corporate Tax Benefit Related to Exercise of Non-Qualified Stock Options .......... 871 871 Stock Issued in Conversion of Subordinated Notes ...................... 5,065,992 11,246 132,009 143,255 Stock Issued in Acquisition and Other ...... 2,591,874 5,754 40,698 (170) 46,282 Change in Unrealized Gains/Losses on Securities Available for Sale ........ 1,796 1,796 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1996 ............... 158,838,831 352,622 495,600 1,279,559 16,598 (254) 2,144,125 Net Income ................................. 401,237 401,237 Cash Dividends Declared at $.85 1/3 per share (132,156) (132,156) Shares Acquired for Treasury ............... (5,191,427) (11,525) (264,782) (276,307) Stock Options Exercised, Including Treasury Shares Issued ........ 766,585 1,703 (20,695) 35,316 16,324 Corporate Tax Benefit Related to Exercise of Non-Qualified Stock Options .......... 1,929 1,929 Fractional Shares Purchased in Stock Split Effected in the Form of a Stock Dividend (3,576) (8) (189) (197) Stock Issued in Acquisitions and Other ..... 814,148 1,807 6,220 40,151 48,178 Change in Unrealized Gains/Losses on Securities Available for Sale ........ 74,278 74,278 - ------------------------------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31, 1997 ............... 155,224,561 $344,599 483,054 1,548,451 90,876 (189,569) 2,277,411 - -------------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. 15 5 Fifth Third Bancorp and Subsidiaries Consolidated Statements of Cash Flows - --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------------------------------------------------- For the Years Ended December 31 ($000's) 1997 1996 1995 - --------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income ...................................................................... $ 401,237 335,059 287,685 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Credit Losses .................................................. 80,342 64,014 42,962 Depreciation, Amortization and Accretion ..................................... 54,159 49,724 27,612 Provision for Deferred Income Taxes .......................................... 77,650 74,886 65,155 Realized Securities Gains .................................................... (11,422) (6,251) (6,118) Realized Securities Losses ................................................... 5,096 1,688 1,329 Proceeds from Sales of Residential Mortgage Loans Held for Sale .............. 433,289 473,310 481,140 Net Gains on Sales of Loans .................................................. (7,478) (7,479) (9,915) Increase in Residential Mortgage Loans Held for Sale ......................... (473,877) (513,915) (405,248) Decrease (Increase) in Accrued Income Receivable ............................. 5,294 (46,784) (16,427) Decrease (Increase) in Other Assets .......................................... 82,935 (142,743) (6,765) Increase (Decrease) in Accrued Taxes, Interest and Expenses .................. 13,098 (22,214) 16,544 Increase (Decrease) in Other Liabilities ..................................... 41,638 (12,185) (17,622) - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES ....................................... 701,961 247,110 460,332 - --------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds from Sales of Securities Available for Sale ............................ 1,776,678 411,117 568,171 Proceeds from Calls, Paydowns and Maturities of Securities Available for Sale ................................................. 959,558 811,793 328,898 Purchases of Securities Available for Sale ...................................... (2,131,673) (2,368,274) (521,435) Proceeds from Calls, Paydowns and Maturities of Securities Held to Maturity .............................................................. 167,119 274,400 494,311 Purchases of Securities Held to Maturity ........................................ (62,551) (264,657) (462,161) Decrease (Increase) in Other Short-Term Investments ............................. 15,155 (34,269) 38,666 Purchase of Loans in Acquisitions ............................................... (186) (224,313) (178,101) Proceeds from Securitizations and Sales of Automobile Loans ..................... -- 824,607 -- Increase in Loans and Leases .................................................... (1,414,258) (2,111,951) (1,708,565) Purchases of Bank Premises and Equipment ........................................ (42,599) (40,327) (33,194) Proceeds from Disposal of Bank Premises and Equipment ........................... 5,364 4,473 4,778 Cash Paid in Purchases of Subsidiaries and Other Acquisitions ................... (15,159) (175,572) (40,575) - --------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES ........................................... (742,552) (2,892,973) (1,509,207) - --------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Purchases of Deposits ........................................................... 128,927 1,921,019 389,586 Increase (Decrease) in Core Deposits ............................................ (347,409) 695,847 404,207 Increase (Decrease) in CDs-- $100,000 and Over, including Foreign ............... 631,887 (944,129) 457,641 Increase (Decrease) in Federal Funds Borrowed ................................... (167,141) 867,653 (125,566) Increase (Decrease) in Short-Term Bank Notes .................................... (301,000) 356,000 (394,995) Increase in Other Short-Term Borrowings ......................................... 213,640 36,284 90,559 Proceeds from Issuance of Long-Term Debt and Notes .............................. 200,000 10,125 266,556 Repayment of Long-Term Debt ..................................................... (20,130) (15,257) (20,115) Payment of Cash Dividends ....................................................... (128,725) (110,907) (89,131) Purchases of Treasury Stock ..................................................... (276,307) (3,096) (73) Exercise of Stock Options ....................................................... 18,253 11,769 4,047 Other ........................................................................... (197) 946 (315) - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED (USED) BY FINANCING ACTIVITIES ................................ (48,202) 2,826,254 982,401 - --------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH AND DUE FROM BANKS .................................. (88,793) 180,391 (66,474) CASH AND DUE FROM BANKS AT BEGINNING OF YEAR .................................... 808,926 628,535 695,009 - --------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF YEAR .......................................... $720,133 808,926 628,535 - ---------------------------------------------------------------------------------------------------------------------------
Note: The Bancorp paid Federal income taxes of $97,500,000, $106,000,000 and $72,000,000 in 1997, 1996 and 1995, respectively. The Bancorp paid interest of $746,673,000, $701,318,000 and $602,818,000 in 1997, 1996 and 1995, respectively. The Bancorp had noncash investing activities consisting of the securitization and transfer to securities of $646,269,000, $829,108,000 and $854,511,000 of residential mortgage loans in 1997, 1996 and 1995, respectively. In connection with the 1997 acquisition of Suburban Bancorporation, the Bancorp acquired $178,021,000 of loans and $18,509,000 of securities and assumed $126,071,000 of deposits. The Bancorp had noncash activities consisting of the reclassification of $2,311,567,000 in securities from held to maturity to available for sale in 1995. See Notes to Consolidated Financial Statements. 16 6 Fifth Third Bancorp and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES NATURE OF OPERATIONS Fifth Third Bancorp (Bancorp) conducts its principal activities through its banking and non-banking subsidiaries from 410 offices located throughout Ohio, Indiana, Kentucky and Florida. Principal activities include commercial and retail banking, investment advisory services and data processing. BASIS OF PRESENTATION The Consolidated Financial Statements include the accounts of Fifth Third Bancorp and its subsidiaries. All material intercompany transactions and balances have been eliminated. Certain prior period data has been reclassified to conform to current period presentation. The preparation of financial statements in conformity with generally accepted accounting principles 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. SECURITIES Securities are classified as held to maturity, available for sale or trading. Only those securities classified as held to maturity, and which management has the intent and ability to hold to maturity, are reported at amortized cost. Available for sale and trading securities are reported at fair value with unrealized gains and losses, net of related deferred income taxes, included in stockholders' equity or income, respectively. Realized securities gains or losses are reported in the Consolidated Statements of Income. The cost of securities sold is based on the specific identification method. LOANS AND LEASES Interest income on loans is based on the principal balance outstanding, with the exception of interest on discount basis loans which is computed using a method which approximates the interest method. The accrual of interest for commercial, construction and mortgage loans is discontinued when there is a clear indication 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 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 is placed on nonaccrual status, all previously accrued and unpaid interest is charged against income. Loan and lease origination and commitment fees and certain direct loan origination costs are deferred and the net amount amortized over the estimated life of the related loans or commitments as a yield adjustment. Income on direct financing leases is recognized on a basis to achieve a constant periodic rate of return on the outstanding investment. Income on leveraged leases is recognized on a basis to achieve a constant rate of return on the outstanding investment in the lease, net of the related deferred tax liability, in the years in which the net investment is positive. Residential mortgage loans held for sale are valued at the lower of aggregate cost or market value and were $62,122,000 and $15,756,000 at December 31, 1997 and 1996, respectively. The Bancorp has commitments to sell residential mortgage loans held for sale in the secondary market. Gains or losses on sales are recognized in Other Service Charges and Fees upon delivery. Statement of Financial Accounting Standards (SFAS)No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities," was adopted January 1, 1997 and provides accounting and reporting standards for transfers and servicing of financial assets and extinguishments of liabilities. The adoption of SFAS No. 125 did not have a material effect on the Consolidated Financial Statements. SFAS No. 122, "Accounting for Mortgage Servicing Rights," as superceded by SFAS No. 125, requires an entity that sells or securitizes mortgage loans with servicing rights retained to allocate the total cost of the mortgage loans to the servicing rights and the loans based on their relative fair values. The resulting servicing rights are amortized in proportion to, and over the period of, estimated net servicing revenues. Servicing rights are assessed for impairment periodically based on fair value, with any impairment recognized through a valuation allowance. For purposes of measuring impairment, the rights are stratified based on interest rate and original maturity. The effect of adopting SFAS No. 122 in the third quarter of 1995 was to increase gains on sales of residential mortgage loans by $2.5 million (pretax). The Bancorp adopted SFAS No. 114, "Accounting by Creditors for Impairment of a Loan," as amended, effective January 1, 1995. This statement requires that impaired loans be measured based on the present value of expected future cash flows discounted at the loan's effective interest rates or the fair value of the underlying collateral. For purposes of applying this standard, impaired loans have been defined as all nonaccrual loans. The Bancorp's policy for income recognition was not affected by adoption of the standard. The adoption of SFAS No. 114 did not have any effect on the total reserve for credit losses or related provision. RESERVE FOR CREDIT LOSSES The reserve is maintained at a level management considers to be adequate to absorb probable loan and lease losses. Credit losses are charged and recoveries are credited to the reserve. Provisions for credit losses are based on management's review of the historical credit loss experience and such other factors which, in management's judgment, deserve consideration under existing and anticipated economic conditions in estimating potential credit losses. BANK PREMISES AND EQUIPMENT Bank premises and equipment, including leasehold improvements, are stated at cost less accumulated depreciation and amortization. Depreciation is computed on the straight-line method over the estimated useful lives of the related assets. Amortization of leasehold improvements is computed on the straight-line method over the lives of the related leases or useful lives of the related assets, whichever is shorter. Maintenance, repairs and minor improvements are charged to operating expenses as incurred. INTANGIBLE ASSETS Goodwill and other intangibles are amortized on a straight-line basis generally over a period of up to 15 years. Intangible assets, net of accumulated amortization included in Other Assets at December 31, 1997 and 1996 total $305,870,000 and $287,987,000, respectively. Management reviews intangible assets for possible impairment if there is a significant event that detrimentally affects operations. Impairment is measured using estimates of the discounted future earnings potential of the entity or assets acquired. DERIVATIVE FINANCIAL INSTRUMENTS The Bancorp enters into foreign exchange forward contracts primarily to enable customers involved in international trade to hedge their exposure to foreign currency fluctuations. The Bancorp hedges its exposure to market rate fluctuations by entering into offsetting third party forward contracts. Unrealized gains and losses on forward contracts are insignificant and are recognized in Other Service Charges and Fees when realized. 17 7 Fifth Third Bancorp and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The Bancorp has purchased options to hedge the value of mortgage servicing rights against changes in prepayment rates. Option premiums are amortized over the option life on a straight-line basis. The contracts are designated as hedges, with gains and losses recorded as basis adjustments to the mortgage servicing rights. The Bancorp has interest rate swap agreements to adjust the interest rate sensitivity of long-term, fixed-rate capital-qualifying securities and hedge the risk of future fluctuations in interest rates relating to hedging transactions effected for commercial clients. Net interest income (expense) resulting from the differential between exchanging floating and fixed-rate interest payments is recorded on an accrual basis as an adjustment to the interest (expense) income of the associated asset or liability. The Bancorp does not hold or issue derivative financial instruments for trading purposes. EARNINGS PER SHARE Earnings per share is calculated by dividing net income for the period by the weighted average number of shares of common stock outstanding during the period. The assumed conversion of convertible subordinated notes and the exercise of stock options is included in the calculation of diluted earnings per share. SFAS No. 128, "Earnings Per Share," was adopted for 1997 with all prior-period earnings per share data restated. The statement requires dual presentation of earnings per share and diluted earnings per share on the Consolidated Statements of Income and other computational changes. The adoption of SFAS No. 128 did not have a material effect on previously reported earnings per share. STOCK SPLIT The Bancorp's board of directors approved a three-for-two stock split in June 1997. The additional shares resulting from the split were distributed on July 15, 1997 to stockholders of record as of June 30, 1997. The consolidated financial statements, notes and other references to share and per share data have been retroactively restated for the stock split. OTHER SFAS No. 130, "Reporting Comprehensive Income" was issued in June 1997 and is effective for fiscal years beginning after December 15, 1997. The statement requires additional reporting of items that affect comprehensive income but not net income. Examples relevant to the Bancorp include unrealized gains and losses on securities available for sale. This statement will result in additional financial statement disclosures upon adoption. SFAS No. 131, "Disclosures About Segments of an Enterprise and Related Information," was issued in June 1997 and is effective for fiscal years beginning after December 15, 1997. The statement requires financial disclosure and descriptive information about reportable operating segments. This statement may result in additional financial statement disclosures upon adoption, however, the Bancorp does not expect to make material changes to its current segment groupings. 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 income is recognized on the accrual basis. Treasury stock is carried at cost. NOTE 2-SECURITIES Securities available for sale as of December 31:
- -------------------------------------------------------------------------------- 1997 -------------------------------------------------- Amortized Unrealized Unrealized Market ($000's) Cost Gains Losses Value - -------------------------------------------------------------------------------- U.S. Government and agencies obligations .......... $ 294,047 5,551 (90) 299,508 Obligations of states and political subdivisions ......... 186,819 7,103 (260) 193,662 Agency mortgage- backed securities ........... 5,317,230 67,111 (9,177) 5,375,164 Other bonds, notes and debentures ........... 347,136 4,321 (6,819) 344,638 Other securities ....... 112,036 72,069 -- 184,105 - -------------------------------------------------------------------------------- Total securities ....... $6,257,268 156,155 (16,346) 6,397,077 - -------------------------------------------------------------------------------- 1996 -------------------------------------------------- Amortized Unrealized Unrealized Market ($000's) Cost Gains Losses Value - -------------------------------------------------------------------------------- U.S. Government and agencies obligations .......... $ 341,056 6,860 -- 347,916 Obligations of states and political subdivisions ......... 291,365 5,482 -- 296,847 Agency mortgage- backed securities ........... 4,913,277 20,472 (7,981) 4,925,768 Other bonds, notes and debentures ........... 595,933 5,257 (7,270) 593,920 Other securities ....... 56,715 2,740 (25) 59,430 - -------------------------------------------------------------------------------- Total securities ....... $6,198,346 40,811 (15,276) 6,223,881 - -------------------------------------------------------------------------------- Securities held to maturity as of December 31: - -------------------------------------------------------------------------------- 1997 -------------------------------------------------- Amortized Unrealized Unrealized Market ($000's) Cost Gains Losses Value - -------------------------------------------------------------------------------- Obligations of states and political subdivisions ......... $ 41,787 -- -- 41,787 Other bonds, notes and debentures ........... 1,535 -- -- 1,535 Other securities ....... 28,914 -- -- 28,914 - -------------------------------------------------------------------------------- Total securities ....... $ 72,236 -- -- 72,236 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 1996 -------------------------------------------------- Amortized Unrealized Unrealized Market ($000's) Cost Gains Losses Value - -------------------------------------------------------------------------------- Obligations of states and political subdivisions ......... $ 150,232 -- -- 150,232 Other bonds, notes and debentures 1,805 -- (6) 1,799 Other securities ....... 24,767 -- -- 24,767 - -------------------------------------------------------------------------------- Total securities ....... $ 176,804 -- (6) 176,798 - --------------------------------------------------------------------------------
18 8 Fifth Third Bancorp and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The amortized cost and approximate market value of securities at December 31, 1997, 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. Maturities of mortgage-backed securities were estimated based on historical and expected future prepayment trends.
- -------------------------------------------------------------------------------- Available for Sale Held to Maturity --------------------- ------------------- Amortized Market Amortized Market ($000's) Cost Value Cost Value - -------------------------------------------------------------------------------- Debt securities: Under 1 year ....... $ 219,178 221,900 $23,331 23,331 1-5 years .......... 5,419,033 5,477,799 15,219 15,219 6-10 years ......... 501,496 507,369 4,471 4,471 Over 10 years ...... 5,525 5,904 301 301 Other securities ..... 112,036 184,105 28,914 28,914 - -------------------------------------------------------------------------------- Total securities ..... $6,257,268 6,397,077 $72,236 72,236 - --------------------------------------------------------------------------------
At December 31, 1997 and 1996, securities with a book value of $3,451,135,000 and $2,819,040,000, respectively, were pledged to secure short-term borrowings, public deposits, trust funds and for other purposes as required or permitted by law. NOTE 3-RESERVE FOR CREDIT LOSSES Transactions in the reserve for credit losses for the years ended December 31:
- -------------------------------------------------------------------------------- (000's) 1997 1996 1995 - --------------------------------------------------------------------------------- Balance at January 1 ................. $187,278 177,388 155,918 Losses charged off ................... (91,801) (80,444) (41,707) Recoveries of losses previously charged off ........................ 23,407 20,482 11,846 - -------------------------------------------------------------------------------- Net charge-offs ...................... (68,394) (59,962) (29,861) Provision charged to operations ...... 80,342 64,014 42,962 Reserve of acquired institutions and other .......................... 1,705 5,838 8,369 - -------------------------------------------------------------------------------- Balance at December 31 ............... $200,931 187,278 177,388 - --------------------------------------------------------------------------------
For the years 1997, 1996 and 1995, interest income of $489,000, $569,000 and $1,066,000, respectively, was recorded on nonaccrual and renegotiated loans and leases. Additional interest income of $3,482,000, $3,805,000 and $2,271,000 would have been recorded if the nonaccrual and renegotiated loans and leases had been current in accordance with their original terms. Impaired loan information, under SFAS No. 114, at December 31:
- --------------------------------------------------------------------------- ($000's) 1997 1996 - --------------------------------------------------------------------------- Impaired loans with a valuation reserve ...... $32,536 22,432 Impaired loans with no valuation reserve ..... 4,865 6,614 - --------------------------------------------------------------------------- Total impaired loans ......................... $37,401 29,046 Valuation reserve on impaired loans .......... $21,594 16,395 Average impaired loans ....................... $33,224 33,048 - ---------------------------------------------------------------------------
Cash basis interest income recognized on those loans during both years was immaterial. NOTE 4-LEASE FINANCING A summary of the gross investment in lease financing at December 31:
- ------------------------------------------------------------ ($000's) 1997 1996 - ------------------------------------------------------------ Direct financing leases .......... $3,346,501 2,967,668 Leveraged leases ................. 134,368 59,166 - ------------------------------------------------------------ Total lease financing ............ $3,480,869 3,026,834 - ------------------------------------------------------------
The components of the investment in lease financing at December 31:
- -------------------------------------------------------------------------------- ($000's) 1997 1996 - -------------------------------------------------------------------------------- Rentals receivable, net of principal and interest on nonrecourse debt .......... $2,130,059 1,866,445 Estimated residual value of leased assets 1,350,810 1,160,389 - -------------------------------------------------------------------------------- Gross investment in lease financing ..... 3,480,869 3,026,834 Unearned income ......................... (513,671) (421,387) - -------------------------------------------------------------------------------- Total net investment in lease financing . $2,967,198 2,605,447 - --------------------------------------------------------------------------------
At December 31, 1997, the minimum future lease payments receivable for each of the years 1998 through 2002 were $787,270,000, $759,453,000, $674,650,000, $515,988,000 and $285,434,000, respectively. NOTE 5-BANK PREMISES AND EQUIPMENT A summary of bank premises and equipment at December 31:
- -------------------------------------------------------------------------------- Estimated ($000's) Useful Life 1997 1996 - -------------------------------------------------------------------------------- Land and improvements $ 45,875 42,963 Buildings ..................... 18 to 50 yrs. 175,874 159,519 Equipment 3 to 20 yrs. 153,037 136,410 Leasehold improvements ........ 6 to 25 yrs. 45,652 45,020 Accumulated depreciation and amortization ............ (168,540) (152,523) - -------------------------------------------------------------------------------- Total bank premises and equipment ................... $251,898 231,389 - --------------------------------------------------------------------------------
Depreciation and amortization expense related to bank premises and equipment was $24,006,000 in 1997, $21,689,000 in 1996 and $18,072,000 in 1995. Occupancy expense has been reduced by rental income from leased premises of $7,936,000 in 1997, $7,400,000 in 1996 and $8,145,000 in 1995. The Bancorp's subsidiaries have entered into a number of noncancelable lease agreements with respect to bank premises and equipment. A summary of the minimum annual rental commitments under these leases at December 31, 1997, exclusive of taxes and other charges payable by the lessee:
- ----------------------------------------------------------------- Land and ($000's) Buildings Equipment Total - ----------------------------------------------------------------- 1998 ......................... $12,915 193 13,108 1999 ......................... 12,208 176 12,384 2000 ......................... 11,526 156 11,682 2001 ......................... 10,242 26 10,268 2002 ......................... 9,366 26 9,392 2003 and subsequent years .... 35,625 -- 35,625 - ----------------------------------------------------------------- Total ........................ $91,882 577 92,459 - -----------------------------------------------------------------
Rental expense for cancelable and noncancelable leases was $15,767,000 for 1997, $14,947,000 for 1996, and $12,470,000 for 1995. 19 9 Fifth Third Bancorp and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 6-SHORT-TERM BORROWINGS A summary of short-term borrowings and rates at December 31:
- ------------------------------------------------------------------------------------------------ ($000's) 1997 1996 1995 - ------------------------------------------------------------------------------------------------ Federal funds borrowed: Balance ..................................... $1,253,553 1,420,694 553,041 Rate ........................................ 5.65% 5.39 4.59 - ------------------------------------------------------------------------------------------------ Short-term bank notes: Balance ..................................... $ 555,000 806,000 450,000 Rate ........................................ 5.85% 5.41 5.60 - ------------------------------------------------------------------------------------------------ Securities sold under agreements to repurchase: Balance ..................................... $1,126,516 924,290 835,773 Rate ........................................ 4.63% 4.77 4.96 - ------------------------------------------------------------------------------------------------ Other: Balance ..................................... $ 125,862 114,448 166,681 Rate ........................................ 5.51% 5.81 4.93 - ------------------------------------------------------------------------------------------------ Total short-term borrowings: Balance ..................................... $3,060,931 3,265,432 2,005,495 Rate ........................................ 5.31% 5.23 5.00 - ------------------------------------------------------------------------------------------------ Average outstanding ........................... $3,283,835 2,780,806 2,669,477 Maximum month-end balance ..................................... $3,676,148 3,265,432 2,984,427 Weighted average interest rate ............................... 5.29% 5.17 5.72 - ------------------------------------------------------------------------------------------------
A $3 billion senior and subordinated bank note facility was established in 1996. Short-term senior notes are offered with maturities ranging from 30 days to one year, are obligations of five of the Bancorp's subsidiary banks and are included in the above table as short-term bank notes. In addition, medium-term senior notes with maturities ranging from one year to 30 years and subordinated bank notes with maturities ranging from five years to 30 years can be issued by the five subsidiary banks, none of which are outstanding as of December 31, 1997 or 1996. At December 31, 1997, the Bancorp had issued $28,314,000 in commercial paper, with unused lines of credit of $40,000,000 available to support commercial paper transactions and other corporate requirements. NOTE 7-LONG-TERM BORROWINGS A summary of long-term borrowings at December 31:
- ----------------------------------------------------------- ($000's) 1997 1996 - ----------------------------------------------------------- Bancorp: Capital Securities, 8.136%, due 2027 ............ $200,000 -- Subsidiaries: Subordinated notes, 6.75%, due 2005 ............. 247,405 247,061 Federal Home Loan Bank advances 10,368 30,395 Other, 7% ..................... 105 205 - ----------------------------------------------------------- Total long-term debt .......... 257,878 277,661 - ----------------------------------------------------------- Total long-term borrowings .... $457,878 277,661 - -----------------------------------------------------------
In March 1997, Fifth Third Capital Trust 1 (FTCT1), a wholly-owned subsidiary of the Bancorp, issued $200 million 8.136% Capital Securities due in 2027. The Bancorp has fully and unconditionally guaranteed all of FTCT1's obligations under the Capital Securities. The Capital Securities qualify as Tier 1 capital for regulatory capital purposes. The Subordinated Notes are unsecured obligations of a subsidiary bank. Interest is payable semiannually and the notes qualify as total capital for regulatory capital purposes. At December 31, 1997, Federal Home Loan Bank advances have rates ranging from 3.22% to 7.51%, with interest payable monthly. The advances were secured by cash and certain securities with book values of $12,087,000 and $34,560,000 at December 31, 1997 and 1996, respectively. The advances mature as follows: $10,027,000 in 1998, $27,000 in each of the years 1999 through 2006, and $125,000 in 2016. Other promissory notes mature in 1998. The Bancorp issued notice of redemption effective May 31, 1996 for its 4.25% convertible subordinated notes issued in 1992. As a result, 5.1 million common shares were issued and $143.3 million was added to equity capital during 1996. NOTE 8-INCOME TAXES The Bancorp and its subsidiaries file a consolidated Federal income tax return. A summary of applicable income taxes included in the Consolidated Statements of Income:
- ---------------------------------------------------------------------- ($000's) 1997 1996 1995 - ---------------------------------------------------------------------- Current U.S. income taxes .. $121,780 87,584 75,162 State and local income taxes 3,256 2,786 2,566 - ---------------------------------------------------------------------- Total ...................... 125,036 90,370 77,728 - ---------------------------------------------------------------------- Deferred U.S. income taxes resulting from temporary differences .............. 77,650 74,886 65,155 - ---------------------------------------------------------------------- Applicable income taxes .... $202,686 165,256 142,883 - ----------------------------------------------------------------------
Deferred income taxes are included in the caption Accrued Taxes, Interest and Expenses in the Consolidated Balance Sheets and are comprised of the following temporary differences at December 31:
- -------------------------------------------------------------------- ($000's) 1997 1996 - -------------------------------------------------------------------- Lease financing ......................... $360,616 288,699 Reserve for credit losses ............... (67,414) (63,640) Bank premises and equipment ............. 10,867 10,099 Unrealized gains on securities available for sale .................... 48,933 8,937 Other ................................... 25,090 16,351 - -------------------------------------------------------------------- Total net deferred tax liability ........ $378,092 260,446 - --------------------------------------------------------------------
A reconciliation between the statutory U.S. income tax rate and the Bancorp's effective tax rate:
- ------------------------------------------------------------------------- 1997 1996 1995 - ------------------------------------------------------------------------- Statutory tax rate ............................. 35.0% 35.0 35.0 Increase (decrease) resulting from: Tax-exempt interest .......................... (1.8) (2.4) (2.6) Other-net .................................... .4 .4 .8 - ------------------------------------------------------------------------- Effective tax rate ............................. 33.6% 33.0 33.2 - -------------------------------------------------------------------------
Retained earnings at December 31, 1997 includes $39,624,000 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. 20 10 Fifth Third Bancorp and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 9-OTHER SERVICE CHARGES AND FEES AND OTHER OPERATING EXPENSES The major components for the years ended December 31:
- -------------------------------------------------------------------------- ($000's) 1997 1996 1995 - -------------------------------------------------------------------------- Other Service Charges and Fees: Cardholder fees ............. $ 26,621 23,936 16,422 Consumer loan and lease fees 26,229 29,629 15,899 Commercial banking .......... 27,727 19,150 18,368 Mortgage banking ............ 24,073 24,789 28,554 Other ....................... 37,336 20,531 18,273 - -------------------------------------------------------------------------- Total other service charges and fees .................... $141,986 118,035 97,516 - -------------------------------------------------------------------------- Other Operating Expenses: Marketing and communications ............ $ 36,112 33,494 28,544 Bankcard .................... 32,158 24,429 18,581 Intangibles amortization .... 22,065 20,205 5,349 Franchise taxes ............. 21,750 20,525 15,138 Loan and lease .............. 14,916 16,559 11,667 Printing and supplies ....... 13,533 13,939 12,501 FDIC insurance .............. 3,628 7,137 14,269 Other ....................... 66,855 54,353 49,199 - -------------------------------------------------------------------------- Total other operating expenses $211,017 190,641 155,248 - --------------------------------------------------------------------------
NOTE 10-STOCK OPTIONS Options can be granted under the Bancorp's Stock Option Plans to key employees and directors of the Bancorp and its subsidiaries for up to 10.95 million shares of the Bancorp's common stock. All options granted have up to ten year terms and vest and become fully exercisable at the end of three years of continued employment. A summary of option transactions during 1997, 1996 and 1995:
- ----------------------------------------------------------------------------------------- 1997 1996 1995 ------------------- ------------------- --------------------- Average Average Average Shares Option Shares Option Shares Option (000's) Price (000's) Price (000's) Price - ----------------------------------------------------------------------------------------- Outstanding, beginning of year .. 5,595 $26.20 4,751 $22.06 3,597 $20.17 Exercised .. (786) 22.13 (615) 17.62 (303) 12.29 Expired .... (145) 36.28 (131) 25.49 (141) 23.46 Granted .... 2,442 51.66 1,590 35.22 1,598 24.59 - ----------------------------------------------------------------------------------------- Outstanding, end of year ..... 7,106 $35.20 5,595 $26.20 4,751 $22.06 - ----------------------------------------------------------------------------------------- Exercisable, end of year ..... 4,340 $29.44 3,165 $22.21 3,042 $20.75 - -----------------------------------------------------------------------------------------
As of December 31, 1997, options outstanding have exercise prices between $4.95 and $80.25 and a weighted average remaining contractual life of 7.5 years. The majority of options outstanding have exercise prices ranging from $23.22 to $51.08 with a weighted average remaining contractual life of 8.2 years. At December 31, 1997, there were 4,006,227 incentive options and 3,100,065 nonqualified options outstanding and 2,103,565 shares were available for granting additional options. SFAS No. 123 "Accounting for Stock-Based Compensation," was adopted January 1, 1996 and encourages, but does not require, adoption of a fair-value-based accounting method for employee stock-based compensation arrangements. As permitted by the statement, the Bancorp has elected to only disclose pro forma net income and earnings per share amounts as if the fair-value-based method had been applied in measuring compensation costs. The Bancorp's pro forma information for the years ended December 31:
- --------------------------------------------------------------------------- 1997 1996 1995 - --------------------------------------------------------------------------- Pro forma net income ($000's) .......... $389,084 330,742 286,078 Pro forma earnings per share ........... $ 2.51 2.12 1.93 Pro forma diluted earnings per share ... $ 2.47 2.09 1.89 - ---------------------------------------------------------------------------
Compensation expense in the pro forma disclosures is not indicative of future amounts as options vest over several years and additional grants are generally made each year. The weighted average fair value of options granted was $14.13, $8.90 and $7.63 in 1997, 1996 and 1995, respectively. The fair value of each option grant is estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions used for grants in 1997, 1996 and 1995: expected option lives of nine years for all three years; expected dividend yield of 1%, 2% and 2%; expected volatility of 24%, 21% and 22% and risk-free interest rates of 5.4%, 6.5% and 5.9% respectively. NOTE 11-RETIREMENT PLAN AND BENEFIT PLANS The Bancorp maintains a noncontributory retirement plan covering substantially all regular full-time employees and providing defined benefits based on years of credited service and compensation level, partially offset by social security benefits. Contributions to the plan are based on the unit credit actuarial method and are limited to amounts currently deductible for federal income tax purposes. A summary of the qualified plan's funded status at December 31:
- ------------------------------------------------------------------------ ($000's) 1997 1996 - ------------------------------------------------------------------------ Vested benefit obligation ................ $ 19,796 21,671 Non-vested benefit obligation ............ 6,420 4,637 - ------------------------------------------------------------------------ Accumulated benefit obligation ........... $ 26,216 26,308 - ------------------------------------------------------------------------ Plan assets at fair value, primarily common trust and mutual funds managed by The Fifth Third Bank, listed stocks and U.S. bonds ........... $ 75,446 59,574 Projected benefit obligation for service rendered to date ....................... 35,566 34,548 - ------------------------------------------------------------------------ Plan assets in excess of projected benefit obligation ............................. 39,880 25,026 Unrecognized transition asset ............ (906) (1,151) Unrecognized prior service cost .......... (1,648) (1,891) Unrecognized net gain .................... (21,152) (7,056) - ------------------------------------------------------------------------ Prepaid pension cost ..................... $ 16,174 14,928 - ------------------------------------------------------------------------
A summary of the components of the provision for retirement cost for the qualified plan for the years ended December 31:
- ------------------------------------------------------------------------- ($000's) 1997 1996 1995 - ------------------------------------------------------------------------- Service cost for current year ....... $ 2,012 2,115 1,611 Interest cost ....................... 2,536 2,385 2,246 Actual return on plan assets ........ (24,236) (7,038) (10,395) Amortization, primarily of initial unrecognized asset and prior service cost ...................... (488) (625) (626) Net gain -- deferred ................ 18,930 2,072 6,161 - ------------------------------------------------------------------------- Net retirement income ............... $(1,246) (1,091) (1,003) - -------------------------------------------------------------------------
In determining the actuarial present value of the projected benefit obligation, the following weighted average rates were used:
- ----------------------------------------------------------------------- 1997 1996 - ----------------------------------------------------------------------- Discount rate ........................................ 7.25% 7.75 Rate of increase in compensation levels .............. 5.00 5.00 Expected long-term rate of return on assets .......... 9.00 9.00 - -----------------------------------------------------------------------
21 11 Fifth Third Bancorp and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The Bancorp also sponsors a nonqualified, unfunded Supplemental Retirement Income Plan (SERP) that provides certain officers with defined pension benefits in excess of the limits imposed on the qualified plan by federal tax law. A summary of the SERP's status at December 31:
- ----------------------------------------------------------- ($000's) 1997 1996 - ----------------------------------------------------------- Vested benefit obligation ............... $2,769 1,900 Non-vested benefit obligation ........... 789 500 - ----------------------------------------------------------- Accumulated benefit obligation .......... $3,558 2,400 - ----------------------------------------------------------- Projected benefit obligation for service rendered to date ...................... $9,345 6,884 Unrecognized transition asset ........... 50 63 Unrecognized prior service cost ......... 328 369 Unrecognized net loss ................... (3,888) (2,362) - ----------------------------------------------------------- Accrued pension cost .................... $5,835 4,954 - -----------------------------------------------------------
A summary of the components of the provision for SERP expense for the years ended December 31:
- --------------------------------------------------------------------- ($000's) 1997 1996 1995 - --------------------------------------------------------------------- Service cost for current year ......... $ 432 347 281 Interest cost ......................... 533 495 433 Amortization, primarily of initial unrecognized asset and prior service cost ........................ (54) 90 94 Net gain-- deferred ................... 159 102 32 - --------------------------------------------------------------------- Net SERP expense ...................... $1,070 1,034 840 - ---------------------------------------------------------------------
In determining the actuarial present value of the projected benefit obligation, the following weighted average rates were used:
- ---------------------------------------------------------------- 1997 1996 - ---------------------------------------------------------------- Discount rate .............................. 7.25% 7.75 Rate of increase in compensation levels .... 7.00 7.00 - ----------------------------------------------------------------
The Bancorp has a profit sharing plan covering substantially all employees. The contribution to the plan is an amount determined annually by the Board of Directors and was $23,761,000 for 1997, $22,101,000 for 1996 and $18,793,000 for 1995. NOTE 12-COMMITMENTS AND CONTINGENT LIABILITIES The Bancorp, in the normal course of business, is a party to financial instruments with off-balance-sheet risk to meet the financing needs of its customers in Ohio, Kentucky, Indiana and Florida, and to minimize exposure to fluctuations in interest and foreign exchange rates. These financial instruments primarily include commitments to extend credit, standby and commercial letters of credit, foreign exchange contracts, interest rate swap agreements, purchased options and commitments to sell residential mortgage loans. These instruments involve, to varying degrees, elements of credit risk, counterparty risk and market risk in excess of the amounts recognized in the Consolidated Balance Sheets. The contract or notional amounts of these instruments reflect the extent of involvement the Bancorp has in particular classes of financial instruments. Creditworthiness for all instruments is evaluated on a case-by-case basis in accordance with Bancorp credit policies. Collateral, if deemed necessary, is based on management's credit evaluation of the counterparty and may include business assets of commercial borrowers as well as personal property and real estate of individual borrowers and guarantors. A summary of significant commitments and other off-balance-sheet items at December 31:
- ------------------------------------------------------------- Contract or Notional Amount ------------------------ ($000's) 1997 1996 - ------------------------------------------------------------- Commitments to extend credit ...... $5,620,319 5,837,394 Letters of credit (including standby letters of credit) ...... 850,085 769,413 Foreign exchange contracts: Commitments to purchase ......... 182,094 73,404 Commitments to sell ............. 188,458 74,495 Interest rate swap agreements ..... 231,000 -- Purchased option contracts ........ 75,000 75,000 Commitments to sell residential mortgage loans ...... 136,081 130,072 - -------------------------------------------------------------
Commitments to extend credit are agreements to lend. Commitments generally have fixed expiration dates or other termination clauses that may require payment of a fee. Since many of the commitments may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash requirements. The Bancorp's exposure to credit risk in the event of nonperformance by the other party is the contract amount. Fixed-rate commitments are subject to market risk resulting from fluctuations in interest rates and the Bancorp's exposure is limited to the replacement value of those commitments. Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. At December 31, 1997, approximately $355,076,000 of standby letters of credit will expire within one year, $407,326,000 expire between one to five years and $55,459,000 expire thereafter. At December 31, 1997, letters of credit of approximately $32,224,000 were issued to commercial customers for a duration of one year or less to facilitate trade payments in domestic and foreign transactions. The amount of credit risk involved in issuing letters of credit in the event of nonperformance by the other party is the contract amount. Foreign exchange forward contracts are for future delivery or purchase of foreign currency at a specified price. Risks arise from the possible inability of counterparties to meet the terms of their contracts and from any resultant exposure to movement in foreign exchange rates, limiting the Bancorp's exposure to the replacement value of the contracts rather than the notional principal or contract amounts. The Bancorp reduces its market risk for foreign exchange contracts by entering into offsetting third party forward contracts. The foreign exchange contracts outstanding at December 31, 1997 mature in one year or less. The Bancorp enters into forward contracts for future delivery of residential mortgage loans at a specified yield to reduce the interest rate risk associated with fixed-rate residential mortgages held for sale and commitments to fund residential mortgages. Credit risk arises from the possible inability of the other parties to comply with the contract terms. The majority of the Bancorp's contracts are with U.S. government-sponsored agencies (FNMA, FHLMC). At December 31, 1997, the Bancorp had purchased option contracts with a total notional amount of $75,000,000 to hedge the value of mortgage servicing rights against changes in prepayment rates. The contracts have a five-year term and give the Bancorp the right to receive payments on fixed rates ranging from 5.15% to 6.15% and to make payments based on the six-month London Interbank Offering Rate (LIBOR). These contracts carry the risk of the counterparty's future ability to perform under the 22 12 Fifth Third Bancorp and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- agreement. A limit of market exposure is approved for counterparties, contracts are marked-to-market and exposures are collateralized by the counterparty in accordance with Bancorp policy. In 1997, the Bancorp entered into an interest rate swap agreement with a notional principal amount of $200 million in connection with the issuance of $200 million of long-term, fixed-rate capital-qualifying securities. The Bancorp receives fixed-rate payments at 8.136% and pays a variable interest rate based upon three-month LIBOR. In addition, the Bancorp has entered into an interest rate swap agreement with a commercial client with a notional principal amount of $15.5 million. The agreement provides for the Bancorp to receive a fixed rate for twenty years and pay a variable rate that resets weekly. The Bancorp has hedged its interest rate exposure to this transaction by executing an offsetting $15.5 million notional principal interest rate swap agreement with a primary dealer. These transactions involve the exchange of fixed and floating rate payments without the exchange of the underlying principal amounts. Therefore, while notional principal amounts are often used to express the volume of these transactions, they do not represent the much smaller amounts that are potentially subject to credit risk. Entering into interest rate swap agreements involves the risk of dealing with counterparties and their ability to meet the terms of the contract. The Bancorp controls the credit risk of these transactions through adherence to a derivative products policy, credit approval policies and monitoring procedures. During 1997, the Bancorp sold certain commercial loans with recourse to an unconsolidated qualifying special-purpose entity. At December 31, 1997, the outstanding balance of these loans was $468,470,000. The Bancorp did not repurchase any loans during 1997. There are claims pending against the Bancorp and its subsidiaries. Based on a review of such litigation with legal counsel, management believes any resulting liability would not have a material effect upon the Bancorp's consolidated financial position or results of operations. NOTE 13-ACQUISITIONS
- -------------------------------------------------------------------------------- Consideration ------------------ Common Date Cash Shares Method of Completed ($000's) Issued Accounting - -------------------------------------------------------------------------------- Heartland Capital Management, Inc. 11/24/97 $-- 234,003 Purchase Indianapolis, Indiana Suburban Bancorporation, Inc. 7/25/97 11 580,145 Purchase Cincinnati, Ohio Kentucky Enterprise 3/15/96 36 2,589,428 Pooling Bancorp, Inc. Newport, Kentucky Bank of Naples 9/08/95 6 399,046 Pooling Naples, Florida Falls Financial, Inc. 7/21/95 49 3,328,542 Pooling Cuyahoga Falls, Ohio Mutual Federal Savings 1/20/95 9 999,962 Pooling Bank of Miamisburg, A Stock Savings Bank Miamisburg, Ohio - --------------------------------------------------------------------------------
The Consolidated Financial Statements have not been restated to include the acquisitions accounted for as poolings due to immateriality. The pro forma effect of acquisitions accounted for as purchases was not material. In January 1998, the Bancorp entered into merger agreements with State Savings Company, a privately-owned thrift holding company headquartered in Columbus, Ohio with $2.8 billion in assets and CitFed Bancorp, Inc., a publicly-traded savings and loan holding company headquartered in Dayton, Ohio with $3.3 billion in assets. These transactions are tax-free, stock-for-stock exchanges accounted for as poolings of interests. The Bancorp will exchange 11,083,560 shares of Fifth Third Bancorp common stock for all outstanding shares of State Savings Company. The Bancorp will exchange .67 shares of Fifth Third Bancorp common stock for each outstanding share of CitFed Bancorp, Inc. Both transactions are expected to be completed in mid-1998 and are subject to approval by stockholders and appropriate regulatory agencies. In December 1997, the Bancorp entered into a merger agreement with The Ohio Company, a full-service broker-dealer for retail and institutional clients headquartered in Columbus, Ohio. The merger is expected to be completed in mid-1998, will be accounted for as a purchase and is subject to approval by stockholders and appropriate regulatory agencies. Suburban Bancorporation, Inc., a savings and loan holding company, had total assets of $200.3 million and deposits of $126.1 million at the date of acquisition. On September 26, 1997, the Bancorp purchased the Ohio branches and deposits of Great Lakes National Bank Ohio with $129 million in deposits and eight branches for $11.3 million. On June 6, 1997, the Bancorp acquired the net assets and operations of Gateway Leasing Corporation for $2.2 million. On February 23, 1996, the Bancorp acquired the Ohio operations of First Chicago NBD Corporation with $534 million in deposits, $222 million in loans and 25 offices in Columbus and Dayton for $39.5 million. On January 19, 1996, the Bancorp purchased the deposits of approximately $1.4 billion and the fixed assets of the 28 offices of 1st Nationwide Bank in the Cleveland, Ohio area for $136 million. NOTE 14-REGULATORY MATTERS The principal source of income and funds for the Bancorp (parent company) are dividends from its subsidiaries. During the year 1998, the amount of dividends the subsidiaries can pay to the Bancorp without prior approval of regulatory agencies is limited to their 1998 eligible net profits, as defined, and the adjusted retained 1997 and 1996 net income of the subsidiaries. The banks must maintain noninterest-bearing cash balances on reserve with the Federal Reserve Bank. In 1997 and 1996, the banks were required to maintain average reserve balances of $206,020,000 and $176,114,000, respectively. The Federal Reserve Board adopted quantitative measures which assign risk weightings to assets and off-balance-sheet items and also define and set minimum regulatory capital requirements (risk-based capital ratios). All banks are required to have core capital (Tier 1) of at least 4% of risk-weighted assets, total capital of at least 8% of risk-weighted assets and a minimum Tier 1 leverage ratio of 3% of adjusted quarterly average assets. Tier 1 capital consists principally of stockholders' equity including 23 13 Fifth Third Bancorp and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- capital-qualifying subordinated debt but excluding unrealized gains and losses on securities available for sale, less goodwill and certain other intangibles. Total capital consists of Tier 1 capital plus certain debt instruments and the reserve for credit losses, subject to limitation. Failure to meet certain capital requirements can initiate certain actions by regulators that, if undertaken, could have a direct material effect on the Consolidated Financial Statements. The regulations also define well capitalized levels of Tier 1, total capital and Tier 1 leverage as 6%, 10% and 5%, respectively. The Bancorp and each of its subsidiaries had Tier 1, total capital and leverage ratios above the well-capitalized levels at December 31, 1997 and 1996. The risk-based capital ratios of certain affiliates have been computed on a pro forma basis to include inter-affiliate mergers which were approved by the appropriate regulatory agencies prior to year end and occurred in the following January. As of December 31, 1997, the most recent notification from the Federal Reserve Bank categorized the Bancorp and each of its subsidiary banks as well capitalized under the regulatory framework for prompt corrective action. Capital and risk-based capital and leverage ratios for the Bancorp and its significant subsidiaries at December 31:
- ---------------------------------------------------------------------------- 1997 ------------------------ ($000's) Amount Ratio - ---------------------------------------------------------------------------- TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): Fifth Third Bancorp (Consolidated) ........... $2,529,000 14.70% The Fifth Third Bank, Cincinnati ............. 1,067,000 12.85 Fifth Third Bank of Northwestern Ohio, N.A. .. 411,000 11.89 Fifth Third Bank of Kentucky, Inc. ........... 180,000 10.94 The Fifth Third Bank of Western Ohio ......... 159,000 10.76 TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS): Fifth Third Bancorp (Consolidated) ........... 2,081,000 12.09 The Fifth Third Bank, Cincinnati ............. 662,000 7.98 Fifth Third Bank of Northwestern Ohio, N.A. .. 270,000 7.80 Fifth Third Bank of Kentucky, Inc. ........... 160,000 9.68 The Fifth Third Bank of Western Ohio ......... 113,000 7.63 TIER 1 LEVERAGE CAPITAL (TO AVERAGE ASSETS): Fifth Third Bancorp (Consolidated) ........... 2,081,000 10.16 The Fifth Third Bank, Cincinnati ............. 662,000 7.67 Fifth Third Bank of Northwestern Ohio, N.A. .. 270,000 5.47 Fifth Third Bank of Kentucky, Inc. ........... 160,000 7.79 The Fifth Third Bank of Western Ohio ......... 113,000 5.78 - ---------------------------------------------------------------------------- 1996 ------------------------ ($000's) Amount Ratio - ---------------------------------------------------------------------------- TOTAL CAPITAL (TO RISK-WEIGHTED ASSETS): Fifth Third Bancorp (Consolidated) ........... $2,275,000 14.06% The Fifth Third Bank, Cincinnati ............. 1,025,000 12.81 Fifth Third Bank of Northwestern Ohio, N.A. .. 341,000 11.12 Fifth Third Bank of Kentucky, Inc. ........... 181,000 13.67 The Fifth Third Bank of Western Ohio ......... 72,000 11.52 TIER 1 CAPITAL (TO RISK-WEIGHTED ASSETS): Fifth Third Bancorp (Consolidated) ........... 1,840,000 11.37 The Fifth Third Bank, Cincinnati ............. 699,000 8.73 Fifth Third Bank of Northwestern Ohio, N.A. .. 304,000 9.92 Fifth Third Bank of Kentucky, Inc. ........... 129,000 9.77 The Fifth Third Bank of Western Ohio ......... 64,000 10.27 TIER 1 LEVERAGE CAPITAL (TO AVERAGE ASSETS): Fifth Third Bancorp (Consolidated) ........... 1,840,000 9.22 The Fifth Third Bank, Cincinnati ............. 699,000 7.47 Fifth Third Bank of Northwestern Ohio, N.A. .. 304,000 6.36 Fifth Third Bank of Kentucky, Inc. ........... 129,000 6.86 The Fifth Third Bank of Western Ohio ......... 64,000 6.07 - ----------------------------------------------------------------------------
NOTE 15-EARNINGS PER SHARE Reconciliation of Earnings Per Share to Diluted Earnings Per Share for the Years Ended December 31:
1997 ----------------------------------- Per-Share (000's) Income Shares Amount - ---------------------------------------------------------------------------- EPS Income available to common stockholders ................. $401,237 155,103 $2.59 EFFECT OF DILUTIVE SECURITIES Stock Options ......................... 2,581 - ---------------------------------------------------------------------------- DILUTED EPS Income available to common stockholders plus assumed conversions ............ $401,237 157,684 $2.54 - ---------------------------------------------------------------------------- 1996 ----------------------------------- Per-Share (000's) Income Shares Amount - ---------------------------------------------------------------------------- EPS Income available to common stockholders ................. $335,059 155,991 $2.15 EFFECT OF DILUTIVE SECURITIES Stock Options ......................... 1,538 Interest on 4 1/4% convertible subordinated notes due 1998, net of applicable income taxes ........................ 1,637 2,074 - ---------------------------------------------------------------------------- DILUTED EPS Income available to common stockholders plus assumed conversions ............ $336,696 159,603 $2.11 - ---------------------------------------------------------------------------- 1995 ----------------------------------- Per-Share (000's) Income Shares Amount - ---------------------------------------------------------------------------- EPS Income available to common stockholders ................. $287,685 148,319 $1.94 EFFECT OF DILUTIVE SECURITIES Stock Options ......................... 1,208 Interest on 4 1/4% convertible subordinated notes due 1998, net of applicable income taxes ........................ 4,257 4,436 - ---------------------------------------------------------------------------- DILUTED EPS Income available to common stockholders plus assumed conversions ............ $291,942 153,963 $1.89 - ----------------------------------------------------------------------------
NOTE 16-RELATED PARTY TRANSACTIONS At December 31, 1997 and 1996, certain directors, executive officers, principal holders of Bancorp common stock and associates of such persons were indebted to the banking subsidiaries in the aggregate amount, net of participations, of $139,567,000 and $112,029,000, respectively. During 1997, new loans aggregating $56,812,000 were made to such parties and loans aggregating $29,274,000 were repaid. Such indebtedness was incurred in the ordinary course of business on substantially the same terms as those prevailing at the time of comparable transactions with unrelated parties. 24 14 Fifth Third Bancorp and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- NOTE 17-FAIR VALUE OF FINANCIAL INSTRUMENTS Carrying amounts and estimated fair values for financial instruments at December 31:
- --------------------------------------------------------------------------- 1997 -------------------------------- Carrying Fair ($000's) Amount Value - --------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and due from banks .............. $ 720,133 720,133 Securities available for sale ........ 6,397,077 6,397,077 Securities held to maturity .......... 72,236 72,236 Other short-term investments ......... 29,424 29,424 Loans, net ........................... 10,270,588 10,365,038 Mortgage servicing rights ............ 24,829 30,431 FINANCIAL LIABILITIES: Deposits ............................. 14,914,132 14,921,068 Federal funds borrowed ............... 1,253,553 1,253,553 Short-term bank notes ................ 555,000 555,000 Other short-term borrowings .......... 1,252,378 1,252,378 Long-term debt ....................... 457,878 600,255 OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: Commitments to extend credit ......... 127 5,358 Letters of credit .................... 3,225 9,777 Purchased options .................... 2,185 2,185 Interest rate swap agreements ........ -- 18,462 Forward contracts: Commitments to sell loans .......... -- 569 Foreign exchange contracts: Commitments to purchase .......... -- (7,076) Commitments to sell .............. -- 7,245 - --------------------------------------------------------------------------- 1996 -------------------------------- Carrying Fair ($000's) Amount Value - --------------------------------------------------------------------------- FINANCIAL ASSETS: Cash and due from banks .............. $ 808,926 808,926 Securities available for sale ........ 6,223,881 6,223,881 Securities held to maturity .......... 176,804 176,798 Other short-term investments ......... 44,579 44,579 Loans, net ........................... 9,722,067 9,750,386 Mortgage servicing rights ............ 18,639 23,382 FINANCIAL LIABILITIES: Deposits ............................. 14,374,656 14,429,081 Federal funds borrowed ............... 1,420,694 1,420,694 Short-term bank notes ................ 806,000 806,000 Other short-term borrowings .......... 1,038,738 1,038,738 Long-term debt ....................... 277,661 266,967 OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS: Commitments to extend credit ......... 484 4,147 Letters of credit .................... 2,462 9,233 Purchased options .................... 1,460 1,460 Forward contracts: Commitments to sell loans .......... -- 147 Foreign exchange contracts: Commitments to purchase .......... -- (939) Commitments to sell .............. -- 1,149 - ---------------------------------------------------------------------------
Fair values for financial instruments 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 financial instruments and all non-financial instruments were excluded from the fair value disclosure requirements. Therefore, the fair values presented above should not be construed as the underlying value of 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 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 and money market), Federal funds borrowed, short-term bank notes and other short-term borrowings. SECURITIES, AVAILABLE FOR SALE AND HELD TO MATURITY-fair values were based on quoted market prices, dealer quotes and prices obtained from independent pricing services. LOANS-fair values were estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities. MORTGAGE SERVICING RIGHTS-fair values were derived from a variety of sources indicative of servicing values, including values from previous sales of servicing rights and FNMA/FHLMC mortgage pricing. DEPOSITS-fair values for other time, certificates of deposit-$100,000 and over and foreign office were estimated using a discounted cash flow calculation that applies interest rates currently being offered for deposits of similar remaining maturities. LONG-TERM DEBT AND CONVERTIBLE SUBORDINATED NOTES-fair value of long-term debt was based on quoted market prices, when available, and a discounted cash flow calculation using prevailing market rates for borrowings of similar terms. INTEREST RATE SWAP AGREEMENTS-fair value was based on the estimated amount the Bancorp would receive or pay to terminate the swap agreements, taking into account the current interest rates and the creditworthiness of the swap counterparties. The fair values represent an asset at December 31, 1997. COMMITMENTS AND LETTERS OF CREDIT-fair values of loan commitments, letters of credit and commitments to sell loans, representing assets to the Bancorp, were based on fees currently charged to enter into similar agreements with similar maturities. PURCHASED OPTIONS-fair values were based on the estimated amounts the Bancorp would receive from terminating the contracts at the reporting date. The fair values represent an asset. FOREIGN EXCHANGE CONTRACTS-fair values were based on quoted market prices of comparable instruments and represent a net asset to the Bancorp. NOTE 18-SEGMENTS The Bancorp's principal activities include Retail Banking, Commercial Banking, Investment Advisory Services and Data Processing. Retail Banking provides a full range of deposit products and consumer loans and leases. Commercial Banking offers services to business, government and professional customers. Investment Advisory provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. Data Processing, through Midwest Payment Systems (MPS), provides electronic funds transfer (EFT) services, merchant transaction processing, operates our Jeanie ATM network and provides other data processing services to affiliated and unaffiliated customers. General Corporate and Other includes a portion of the investment portfolio, certain long-term funding, the associated interest income and expense and other items not allocated to the operating segments. The financial information for each business segment reflect those which are specifically identifiable or which are allocated based on an internal allocation method. The allocation has been consistently applied for all periods presented. Revenues from affiliated transactions, principally EFT data processing services from MPS to the banking segments, are charged generally at rates available to and transacted with unaffiliated customers. 25 15 Fifth Third Bancorp and Subsidiaries Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- The measurement of the performance of the business segments is based on the management structure of the Bancorp and is not necessarily comparable with similar information for any other financial institution. The information presented is also not necessarily indicative of the segments' financial condition and results of operations if they were independent entities. Selected financial information by business segment for each of the three years ended December 31:
- --------------------------------------------------------------------------------------- ($000's) 1997 1996 1995 - --------------------------------------------------------------------------------------- REVENUES: Commercial Banking ......... $ 373,230 330,375 287,849 Retail Banking ............. 590,959 532,910 426,662 Investment Advisory Services 106,891 87,631 73,108 Data Processing (a) ........ 120,011 94,936 80,139 General Corporate and Other 6,840 18,548 6,217 Eliminations (a) ........... (7,508) (6,741) (4,828) - --------------------------------------------------------------------------------------- TOTAL ........................ $ 1,190,423 1,057,659 869,147 - --------------------------------------------------------------------------------------- NET INCOME: Commercial Banking ......... $ 146,043 118,934 101,753 Retail Banking ............. 176,060 154,967 130,111 Investment Advisory Services 40,476 32,277 24,424 Data Processing (before cumulative effect of accounting change)(b) .... 34,597 25,942 23,873 General Corporate and Other 4,061 2,939 7,524 - --------------------------------------------------------------------------------------- TOTAL ........................ $ 401,237 335,059 287,685 - --------------------------------------------------------------------------------------- IDENTIFIABLE ASSETS: Commercial Banking ......... $ 6,414,176 5,856,505 5,182,514 Retail Banking ............. 12,090,061 11,559,492 9,174,350 Investment Advisory Services 330,119 308,445 206,563 Data Processing ............ 73,431 62,447 53,041 General Corporate and Other 2,467,267 2,762,109 2,436,415 - --------------------------------------------------------------------------------------- TOTAL ........................ $ 21,375,054 20,548,998 17,052,883 - --------------------------------------------------------------------------------------- CAPITAL EXPENDITURES: Commercial Banking ......... $ 2,326 2,010 2,145 Retail Banking ............. 23,541 16,080 21,844 Investment Advisory Services 1,652 1,714 1,126 Data Processing ............ 3,490 4,403 1,850 General Corporate and Other 11,590 16,120 6,229 - --------------------------------------------------------------------------------------- TOTAL ........................ $ 42,599 40,327 33,194 - --------------------------------------------------------------------------------------- DEPRECIATION AND AMORTIZATION: Commercial Banking ......... $ 461 368 305 Retail Banking ............. 13,644 12,299 10,225 Investment Advisory Services 1,075 892 622 Data Processing ............ 2,638 2,625 2,062 General Corporate and Other 6,188 5,505 4,858 - --------------------------------------------------------------------------------------- TOTAL ........................ $ 24,006 21,689 18,072 - ---------------------------------------------------------------------------------------
(a) Data processing service revenues provided to the banking segments by MPS are eliminated in the Consolidated Statements of Income. (b) In 1995, MPS changed its method of accounting for the cost of converting new merchant customers and financial institutions. The cumulative effect of change in accounting method totalling $2,680,000 in 1995 has been excluded. Capital expenditures consisted primarily of investments in data processing equipment, including new mainframe and network computer technology, software, operations equipment and the Retail distribution network. Much of the Bancorp's efficiency is attributable to the fact each of the business segments share the benefits of improvements in data processing technology and equipment improvements. Most of these capital expenditures were separated or divided among individual segments. The cost of centralized data processing and operations is allocated to each business segment based on various measures of usage and the corresponding expense is included in the determination of segment operating results as disclosed above. NOTE 19-PARENT COMPANY FINANCIAL STATEMENTS The condensed financial statements of the Bancorp ($000's):
- ------------------------------------------------------------------------------------- CONDENSED STATEMENTS OF INCOME (PARENT COMPANY ONLY) For the Years Ended December 31 1997 1996 1995 - ------------------------------------------------------------------------------------- INCOME Dividends from Subsidiaries ........ $ 515,962 360,470 140,307 Interest on Loans to Subsidiaries ..................... 8,135 3,932 19,442 Securities Gains ................... -- 215 -- Other .............................. 1,416 794 163 - ------------------------------------------------------------------------------------- TOTAL INCOME ....................... 525,513 365,411 159,912 - ------------------------------------------------------------------------------------- EXPENSES Interest ........................... 12,139 4,477 10,267 Other .............................. 2,110 2,796 2,471 - ------------------------------------------------------------------------------------- TOTAL EXPENSES ..................... 14,249 7,273 12,738 - ------------------------------------------------------------------------------------- INCOME BEFORE TAXES AND CHANGE IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES ......... 511,264 358,138 147,174 Applicable Income Taxes (Benefit) .. (1,196) (426) 2,771 - ------------------------------------------------------------------------------------- INCOME BEFORE CHANGE IN UNDISTRIBUTED EARNINGS OF SUBSIDIARIES ..................... 512,460 358,564 144,403 Increase (Decrease) in Undistributed Earnings of Subsidiaries ......... (111,223) (23,505) 143,282 - ------------------------------------------------------------------------------------- NET INCOME ......................... $ 401,237 335,059 287,685 - -------------------------------------------------------------------------------------
- ----------------------------------------------------------------------- CONDENSED BALANCE SHEETS (PARENT COMPANY ONLY) December 31 1997 1996 - ----------------------------------------------------------------------- ASSETS Cash ................................. $ 252 200 Interest-Bearing Deposits ............ 16,506 24,655 Loans to Subsidiaries ................ 512,522 285,394 Investment in Subsidiaries ........... 1,996,323 1,879,891 Goodwill ............................. 10,629 11,384 Other Assets ......................... 6,606 53 - ----------------------------------------------------------------------- TOTAL ASSETS ......................... $2,542,838 2,201,577 - ----------------------------------------------------------------------- LIABILITIES Commercial Paper ..................... $ 28,314 27,277 Accrued Expenses and Other Liabilities 37,113 30,175 Long-Term Debt ....................... 200,000 -- - ----------------------------------------------------------------------- TOTAL LIABILITIES .................... 265,427 57,452 - ----------------------------------------------------------------------- STOCKHOLDERS' EQUITY ................. 2,277,411 2,144,125 - ----------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY ............... $2,542,838 2,201,577 - -----------------------------------------------------------------------
26 16 Fifth Third Bancorp and Subsidiaries Notes to Consolidated Financial Statements - --------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------- CONDENSED STATEMENTS OF CASH FLOWS (PARENT COMPANY ONLY) For the Years Ended December 31 1997 1996 1995 - ---------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income ............................. $ 401,237 335,059 287,685 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Amortization ....................... 755 755 1,200 Provision for Deferred Income Taxes ..................... 652 (169) (93) Realized Securities Gains .......... -- (215) -- Decrease (Increase) in Other Assets ..................... (6,553) (9,145) 9,163 Increase (Decrease) in Accrued Expenses and Other Liabilities ... 2,671 (5,379) 226 Decrease (Increase) in Undistributed Earnings of Subsidiaries ......... 111,223 23,505 (143,282) - ---------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES ................. 509,985 344,411 154,899 - ---------------------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds from Sales of Securities Available for Sale ........ -- 11,117 -- Net Decrease (Increase) in Interest-Bearing Deposits ............ 8,149 (24,655) -- Decrease (Increase) in Loans to Subsidiaries ...................... (227,128) 77,611 20,221 Capital Contributions to Subsidiaries .. (105,015) (266,775) (108,800) Purchases of Subsidiaries .............. -- -- (64) - ---------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES ................. (323,994) (202,702) (88,643) - ---------------------------------------------------------------------------------------- FINANCING ACTIVITIES Increase (Decrease) in Other Short-Term Borrowings ................ 1,037 (40,285) 19,155 Proceeds from Issuance of Long-Term Debt .................... 200,000 -- -- Repayment of Long-Term Debt ............ -- (145) -- Payment of Cash Dividends .............. (128,725) (110,907) (89,131) Purchases of Treasury Stock ............ (276,307) (3,096) (73) Exercise of Stock Options .............. 18,253 11,769 4,047 Fractional Shares Purchased in Stock Split ....................... (197) -- (250) Other .................................. -- 951 -- - ---------------------------------------------------------------------------------------- NET CASH USED IN FINANCING ACTIVITIES ................. (185,939) (141,713) (66,252) - ---------------------------------------------------------------------------------------- INCREASE (DECREASE) IN CASH ............ 52 (4) 4 CASH AT BEGINNING OF YEAR .............. 200 204 200 - ---------------------------------------------------------------------------------------- CASH AT END OF YEAR .................... $ 252 200 204 - ----------------------------------------------------------------------------------------
INDEPENDENT AUDITORS' REPORT To the Stockholders and Board of Directors of Fifth Third Bancorp: We have audited the accompanying consolidated balance sheets of Fifth Third Bancorp and subsidiaries as of December 31, 1997 and 1996, and the related consolidated statements of income, changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 1997. These financial statements are the responsibility of the Companies' management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with generally accepted auditing standards. 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, the financial statements referred to above present fairly, in all material respects, the financial position of the Companies at December 31, 1997 and 1996, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 1997 in conformity with generally accepted accounting principles. /s/ Deloitte & Touche LLP Cincinnati, Ohio January 15, 1998 27 17 Fifth Third Bancorp and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------------- The Bancorp has made and will make certain forward-looking statements in the Annual Report and in other contexts relating to present or future trends or factors affecting the banking industry and specifically the operations, markets and products of the Bancorp. Actual results could differ materially from those projected. Fifth Third Bancorp undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this report. The data presented in the following pages should be read in conjunction with the audited Consolidated Financial Statements on pages 13 to 27 of this report. RESULTS OF OPERATIONS SUMMARY Net income advanced by 19.8% in 1997 and 16.5% in 1996. The Bancorp's net income to average assets, referred to as return on average assets (ROA), and return on average stockholders' equity (ROE) follow:
- ------------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------- Net income ($000's) .... $ 401,237 335,059 287,685 244,459 206,235 Earnings per share (a) . $ 2.59 2.15 1.94 1.69 1.46 Diluted earnings per share (a) ............ $ 2.54 2.11 1.89 1.65 1.43 ROA (b) ................ 1.96% 1.78 1.78 1.77 1.71 ROE (b) ................ 19.6% 17.8 18.1 18.6 17.8 Originally reported (c): ROA .................. 1.96% 1.78 1.78 1.77 1.80 ROE .................. 19.6% 17.8 18.1 18.6 18.2 - -------------------------------------------------------------------------------------------------------------
(a) Per share amounts have been adjusted for the three-for-two stock splits effected in the form of stock dividends paid July 15, 1997 and January 12, 1996. (b) For comparability, certain financial ratios exclude the impact of the 1996 special SAIF assessment of $16.6 million pretax ($10.8 million after tax, or $.06 per share). (c) Excludes the results of The Cumberland pooling prior to 1994. TABLE 1-CONSOLIDATED AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME For the Years Ended December 31 (Taxable Equivalent Basis)
- ---------------------------------------------------------------------------------------------------------------------------------- 1997 1996 ------------------------------------- -------------------------------------- Average Average Average Average Out- Revenue/ Yield/ Out- Revenue/ Yield/ ($000's) standing Cost Rate standing Cost Rate - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Interest-Earning Assets Loans and Leases ........................ $12,783,555 $1,079,678 8.45% $12,304,544 $1,020,768 8.30% Securities .............................. Taxable ............................... 6,078,977 419,216 6.90 5,468,864 369,851 6.76 Exempt from Income Taxes ............... 276,058 20,730 7.51 436,477 31,708 7.26 Other Short-Term Investments ............ 40,940 2,181 5.33 32,214 1,519 4.72 - ---------------------------------------------------------------------------------------------------------------------------------- Total Interest-Earning Assets ............. 19,179,530 1,521,805 7.93 18,242,099 1,423,846 7.81 - ---------------------------------------------------------------------------------------------------------------------------------- Cash and Due from Banks ................... 540,851 531,876 Other Assets .............................. 930,601 889,466 Reserve for Credit Losses ................. (190,522) (183,203) - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $20,460,460 $19,480,238 - ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES Interest-Bearing Liabilities Interest Checking ....................... $ 2,058,783 50,904 2.47 $ 1,747,280 37,309 2.14 Savings ................................. 2,071,515 70,937 3.42 1,692,134 54,317 3.21 Money Market ............................ 1,273,908 42,769 3.36 1,664,443 57,088 3.43 Other Time Deposits ..................... 5,415,820 296,881 5.48 5,569,023 305,682 5.49 Certificates-$100,000 and Over .......... 887,390 47,928 5.40 892,247 47,553 5.33 Foreign Office Deposits ................. 401,741 22,212 5.53 522,216 28,407 5.44 Federal Funds Borrowed ................. 1,464,945 81,196 5.54 1,230,219 64,942 5.28 Short-Term Bank Notes ................. 658,140 36,852 5.60 553,924 30,278 5.47 Other Short-Term Borrowings ............. 1,160,750 55,702 4.80 996,663 48,644 4.88 Long-Term Debt and Convertible Subordinated Notes .................... 417,823 28,045 6.71 342,187 21,649 6.33 - ---------------------------------------------------------------------------------------------------------------------------------- Total Interest-Bearing Liabilities 15,810,815 733,426 4.64 15,210,336 695,869 4.57 - ---------------------------------------------------------------------------------------------------------------------------------- Demand Deposits ........................... 2,083,915 1,872,843 Other Liabilities ......................... 513,649 450,624 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities ......................... 18,408,379 17,533,803 - ---------------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity ...................... 2,052,081 1,946,435 - ---------------------------------------------------------------------------------------------------------------------------------- Total Liabilities and Stockholders' Equity $20,460,460 $19,480,238 - ---------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME MARGIN ON A TAXABLE EQUIVALENT BASIS .... $ 788,379 4.11% $ 727,977 3.99% - ---------------------------------------------------------------------------------------------------------------------------------- NET INTEREST RATE SPREAD .................. 3.29% 3.24% - ---------------------------------------------------------------------------------------------------------------------------------- INTEREST-BEARING LIABILITIES TO INTEREST-EARNING ASSETS............... 82.44% 83.38% - ----------------------------------------------------------------------------------------------------------------------------------
28 18 Fifth Third Bancorp and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------------- NET INTEREST INCOME The largest source of the Bancorp's revenue is net interest income. Net interest income is the spread between interest income on interest-earning assets, such as loans and leases and securities, and the interest expense on liabilities used to fund those assets, such as interest-bearing deposits and borrowings. Net interest income is affected by both changes in the level of interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Changes in net interest income are frequently measured by two statistics--net interest margin and net interest rate spread. Net interest margin is expressed as net interest income divided by average interest-earning assets. Net interest rate spread is the difference between the average yield earned on interest-earning assets and the average rate incurred on interest-bearing liabilities. Both of these measures are reported on a taxable equivalent basis. Net interest margin is greater than net interest spread due to the interest income earned on interest-earning assets funded by non-interest-bearing, or free funding, sources, primarily demand deposits and stockholders' equity. Table 1, Consolidated Average Balance Sheets and Analysis of Net Interest Income, presents the net interest income, net interest margin and net interest rate spread for the five years 1993 through 1997, comparing interest revenue and average interest-earning assets outstanding with interest cost and average interest-bearing liabilities outstanding. All three of these measures are reported on a taxable equivalent basis. Nonaccrual loans and leases have been included in the average loan and lease balances. Average outstanding securities balances are based on amortized cost excluding unrealized gains or losses on securities available for sale. Net interest income rose 8.3% to $788.4 million in 1997 from $728 million in 1996. The improvement in 1997's net interest income was attributable to a higher level of average interest-earning assets and an improved funding mix. The net interest margin improved 12 basis points (bp) to 4.11% in 1997 from 3.99% in 1996. The 1997 margin expansion follows a 9 bp increase in 1996's net interest margin. Strong loan and lease volume, an emphasis on direct lending and higher interest rates improved average interest-earning asset yields by 12 bp in 1997, while the cost of interest-bearing liabilities increased 7 bps to 4.64%. The interest-bearing deposit cost was 4.39% in 1997, unchanged from 1996. The cost of borrowed funds, including
- ----------------------------------------------------------------------------------------------------------------------------------- 1995 1994 1993 ------------------------------------- ----------------------------------- ------------------------------------ Average Average Average Average Average Average Out- Revenue/ Yield/ Out- Revenue/ Yield/ Out- Revenue/ Yield/ standing Cost Rate standing Cost Rate standing Cost Rate - ----------------------------------------------------------------------------------------------------------------------------------- $10,960,757 $ 919,596 8.39% $ 9,902,901 $751,974 7.59% $ 8,869,432 $679,792 7.66% 3,809,435 250,590 6.58 2,741,490 169,316 6.18 2,098,650 134,387 6.40 471,338 34,248 7.27 359,830 24,568 6.83 267,247 18,797 7.03 25,084 1,251 4.99 23,988 1,019 4.25 10,426 319 3.06 - ----------------------------------------------------------------------------------------------------------------------------------- 15,266,614 1,205,685 7.90 13,028,209 946,877 7.27 11,245,755 833,295 7.41 - ----------------------------------------------------------------------------------------------------------------------------------- 552,534 526,007 494,141 511,677 428,266 435,966 (164,618) (153,141) (134,808) - ----------------------------------------------------------------------------------------------------------------------------------- $16,166,207 $13,829,341 $12,041,054 - ----------------------------------------------------------------------------------------------------------------------------------- $ 1,430,921 28,472 1.99 $ 1,512,670 25,572 1.69 $ 1,326,759 28,295 2.13 660,379 14,572 2.21 698,756 14,511 2.08 656,868 16,298 2.48 1,779,851 62,233 3.50 1,582,863 40,326 2.55 1,493,802 37,465 2.51 4,319,791 248,860 5.76 3,923,418 194,375 4.95 3,531,301 173,764 4.92 700,575 40,522 5.78 336,521 13,135 3.90 441,882 15,622 3.54 780,475 46,646 5.98 529,434 24,165 4.56 242,245 8,030 3.31 1,071,792 63,492 5.92 848,217 34,925 4.12 622,068 18,963 3.05 769,000 47,956 6.24 429,642 20,285 4.72 -- -- -- 828,685 41,136 4.96 689,960 25,818 3.74 743,002 24,326 3.27 290,824 15,844 5.45 249,612 12,436 4.98 343,617 16,636 4.84 - ----------------------------------------------------------------------------------------------------------------------------------- 12,632,293 609,733 4.83 10,801,093 405,548 3.75 9,401,544 339,399 3.61 - ----------------------------------------------------------------------------------------------------------------------------------- 1,585,256 1,414,048 1,268,371 361,936 299,859 213,727 - ----------------------------------------------------------------------------------------------------------------------------------- 14,579,485 12,515,000 10,883,642 - ----------------------------------------------------------------------------------------------------------------------------------- 1,586,722 1,314,341 1,157,412 - ----------------------------------------------------------------------------------------------------------------------------------- $16,166,207 $13,829,341 $12,041,054 - ----------------------------------------------------------------------------------------------------------------------------------- $ 595,952 3.90% $541,329 4.16% $493,896 4.39% - ----------------------------------------------------------------------------------------------------------------------------------- 3.07% 3.52% 3.80% - ----------------------------------------------------------------------------------------------------------------------------------- 82.74% 82.91% 83.60% - -----------------------------------------------------------------------------------------------------------------------------------
29 19 Fifth Third Bancorp and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations - ------------------------------------------------------------------------------- TABLE 2-ANALYSIS OF NET INTEREST INCOME CHANGES (TAXABLE EQUIVALENT BASIS)
- --------------------------------------------------------------------------------------------------------------------------------- 1997 Compared to 1996 1996 Compared to 1995 ---------------------------------- --------------------------------------- ($000's) Volume Yield/Rate Mix Total Volume Yield/Rate Mix Total - --------------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Interest Income Loans and Leases ................................ $39,758 $18,457 $ 695 $58,910 $112,743 $(10,308) $(1,263) $101,172 Securities Taxable ....................................... 41,244 7,656 465 49,365 109,160 7,036 3,065 119,261 Exempt from Income Taxes ...................... (11,646) 1,091 (423) (10,978) (2,533) (8) 1 (2,540) Other Short-Term Investments .................... 412 197 53 662 356 (69) (19) 268 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST INCOME CHANGE ...................... 69,768 27,401 790 97,959 219,726 (3,349) 1,784 218,161 - --------------------------------------------------------------------------------------------------------------------------------- Increase (Decrease) in Interest Expense Interest Checking ............................... 6,666 5,766 1,163 13,595 6,295 2,082 460 8,837 Savings ......................................... 12,178 3,553 889 16,620 22,767 6,626 10,352 39,745 Money Market .................................... (13,395) (1,165) 241 (14,319) (4,035) (1,187) 77 (5,145) Other Time Deposits ............................. (8,411) (557) 167 (8,801) 71,967 (11,748) (3,397) 56,822 Certificates-$100,000 and Over .................. (259) 625 9 375 11,087 (3,185) (871) 7,031 Foreign Office Deposits ......................... (6,554) 470 (111) (6,195) (15,436) (4,190) 1,387 (18,239) Federal Funds Borrowed .......................... 12,394 3,199 661 16,254 9,385 (6,913) (1,022) 1,450 Short-Term Bank Notes ........................... 5,701 720 153 6,574 (13,412) (5,922) 1,656 (17,678) Other Short-Term Borrowings ..................... 8,007 (797) (152) 7,058 8,338 (690) (140) 7,508 Long-Term Debt and Convertible Subordinated Notes 4,788 1,300 308 6,396 2,799 2,555 451 5,805 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL INTEREST EXPENSE CHANGE ..................... 21,115 13,114 3,328 37,557 99,755 (22,572) 8,953 86,136 - --------------------------------------------------------------------------------------------------------------------------------- INCREASE (DECREASE) IN NET INTEREST INCOME ON A TAXABLE EQUIVALENT BASIS ............ $48,653 $14,287 $(2,538) 60,402 $119,971 $19,223 $(7,169) 132,025 - --------------------------------------------------------------------------------------------------------------------------------- INCREASE IN TAXABLE EQUIVALENT ADJUSTMENT ........................... (4,684) (6,213) - --------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME CHANGE ........................ $55,718 $125,812 - ---------------------------------------------------------------------------------------------------------------------------------
federal funds borrowed, short-term bank notes, other short-term borrowings and long-term debt, increased 15 bps from 5.30% in 1996 to 5.45% in 1997. The effect of free funds on the net interest margin increased from 75 bps in 1996 to 82 bps in 1997, reflecting more than 11% growth in non-interest bearing demand deposits over 1996. This growth is attributable to successful checking account campaigns. The earning asset yield improved 12 bps in 1997 from 7.81% to 7.93% due to a 15 bp boost in the loan and lease portfolio yields, moderated in part by a 12 bp increase in securities and other short-term investment yields. For 1996, net interest income growth resulted from a significant increase in average interest-earning assets and an improvement in the net interest margin from lower funding costs. Average interest-earning assets increased to $19.2 billion in 1997, an increase of $937.4 million, or 5.1 percent, from 1996. Net interest income for 1996 increased 22.2% over 1995. During 1996, average interest-earning assets grew 19.5% over 1995. Loan production during both years contributed to this growth in average interest-earning assets. Securitizations and sales of residential loans in both 1997 and 1996 and consumer loans in 1996, combined with significant deposit acquisitions in early 1996 also affected the Bancorp's earning asset mix. The Bancorp continues to use loan securitizations and sales to provide further balance sheet flexibility. Sales and securitizations allow the Bancorp to expand origination and servicing, and increase the related fee income, faster than the balance sheet without increasing leverage. Sales and securitizations of residential mortgage loans totalled $1.4 billion in 1997 and $1.3 billion in 1996, with the majority of securitized loans retained in the securities portfolio. In 1996, the Bancorp securitized and sold $821.1 million in auto loans while retaining the servicing. Also in 1996, proceeds from deposit acquisitions were primarily invested in securities to provide liquidity to fund loan and lease growth in our Cleveland and Columbus markets. Average interest-bearing liabilities grew from $12.6 billion in 1995 to $15.2 billion in 1996 and $15.8 billion in 1997. Core deposits, (which exclude certificates $100,000 and over and foreign office deposits), remain our most important funding source because they are relatively lower cost and the basis for ongoing customer relationships. Although total consumer interest-bearing deposit growth slowed in 1997, the Bancorp benefited from strong growth in non-interest bearing demand deposits and a shift from higher-cost certificates of deposit to savings and checking products. In 1996, average core deposits increased $2.8 billion, or 28.3%, due to the Bancorp's focus on new transaction account products and promotions, and deposit acquisitions in early 1996 and late 1995. Acquisitions contributed approximately $2 billion of the total growth in core deposits during 1996. Average demand, interest checking and savings accounts comprised 48.2% of total core deposits in 1997, compared to 42.3% in 1996 and 37.6% in 1995, further demonstrating the success of growing lower cost core deposits during the last few years. OTHER OPERATING INCOME The table at the top of the following page shows the components of other operating income for the five years ending December 31, 1997. Total other operating income excluding securities gains increased 20.7% in 1997 and was up 20.9% in 1996. Our diverse lines of business consisting of both traditional and non-traditional banking activities fueled our ability to grow revenue at a double-digit pace. Investment advisory income was $90.2 million in 1997, an increase of 21.8% over 1996's $74 million. Successful new sales efforts and continued strength in the equity markets led to this revenue growth. Our proprietary Fountain Square Funds also performed well and during the fourth quarter exceeded $3 billion in assets, a 51.2% increase over 1996. Investment advisory fees, a portion of which are based on the market value of managed trust assets, benefited from asset growth of 33.7% to $13.1 billion in 1997. Increases in 1996's investment advisory income of 19.9% was due to strong equity markets, a 15.9% increase in managed 30 20 Fifth Third Bancorp and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations - --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------- ($000's) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------- Investment advisory income ..... $ 90,169 74,032 61,755 55,238 53,442 Service charges on deposits .... 94,474 83,590 66,344 60,905 57,212 Data processing income ......... 112,506 88,195 75,311 64,394 52,823 Other service charges and fees . 141,986 118,035 97,516 74,978 61,595 - -------------------------------------------------------------------------------------- Subtotal ....................... 439,135 363,852 300,926 255,515 225,072 - -------------------------------------------------------------------------------------- Securities gains ............... 6,326 4,563 4,789 393 6,078 - -------------------------------------------------------------------------------------- Total .......................... $445,461 368,415 305,715 255,908 231,150 - -------------------------------------------------------------------------------------- After-tax securities gains ..... $ 4,091 2,918 3,114 255 3,658 - --------------------------------------------------------------------------------------
trust assets and the success of our Fountain Square Funds. Service charges on deposits totaled $94.5 million in 1997 and $83.6 million in 1996, increases of 13% and 26%, respectively. The growth in both years was driven primarily by an expanding delivery system and successful product campaigns and promotions in our retail banking business. Our commercial transaction deposit accounts continued to grow in 1997 and were a source for additional commercial analysis fee income. Deposit acquisitions and pricing enhancements also contributed to the increase in 1996 service charges over 1995. Data processing income was up 27.6% in 1997 and 17.1% in 1996. Merchant processing revenues, approximately 43% of total data processing revenues, increased 44% in 1997 and 20.5% in 1996, due entirely to new customers and resulting increases in merchant transaction volumes. Electronic funds transfer (EFT), the other portion of data processing income, increased 7.2% in both 1997 and 1996, the result of the success of debit cards, increased popularity of ATMs, new products and an expanding customer base. Other service charges and fees reached $142 million in 1997, compared to $118 million in 1996, an increase of $24 million, or 20.3%. Commercial banking income, consumer loan fees and mortgage banking revenue represent the majority of other service charges and fees. Commercial banking income was $27.7 million in 1997, an increase of $8.4 million, led by Institutional Department revenue and credit enhancement fees. Cardholder fees rose 11.2% to $26.6 million. Consumer loan and lease fees of $26.2 million declined from 1996 due to lower originations and 1996 auto loan sales and securitizations. Similar levels of mortgage-banking activity between years contributed revenue of $24.1 million in 1997, down slightly from $24.6 million in 1996. In 1996, other service charges and fees increased by $20.5 million, or 21%. Total mortgage banking income, net of gains, increased 41.3%, aided by lower interest rates that fueled strong origination volume in the first half of 1996. Consumer loan and lease fees provided $13.7 million of the 1996 increase in other service charges and fees due to strong installment loan origination volume, coupled with the securitization and sale of more than $820 million in auto loans. Our growing credit card portfolio contributed to a $7.5 million, or 45.8%, increase in cardholder fees. OPERATING EXPENSES The Bancorp continues to lead the banking industry in driving its overhead ratio to record levels by consistently generating revenue at a rate faster than expenses. For the first time, our overhead ratio fell below 40% in 1997's fourth quarter. The Bancorp's success in controlling operating expenses comes from efficient staffing, a constant focus on improving productivity and the centralization of various internal functions such as data processing and loan servicing.
- -------------------------------------------------------------------------------------- ($000's) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------------- Salaries, wages and incentives . $199,696 185,793 156,545 148,039 134,680 Employee benefits .............. 36,888 44,682 38,648 36,710 36,436 Equipment expenses ............. 22,050 20,006 16,655 16,045 15,446 Net occupancy expenses ......... 36,507 35,596 28,521 26,137 26,014 Other operating expenses ....... 211,017 190,641 155,248 144,614 140,144 - -------------------------------------------------------------------------------------- Total operating expenses ....... 506,158 476,718 395,617 371,545 352,720 - -------------------------------------------------------------------------------------- SAIF assessment ................ -- 16,612 -- -- -- - -------------------------------------------------------------------------------------- Total .......................... $506,158 493,330 395,617 371,545 352,720 - --------------------------------------------------------------------------------------
[PLOT POINTS TO COME FROM CLIENT]
OTHER OPERATING INCOME GROWTH IN NET INCOME OVERHEAD RATIO ($ in millions) PER EMPLOYEE [ ] Fifth Third Five Year Growth Rate:16.6% 1992 Base Year=100 [ ] Peer Fifth Third Peer ----- ---- '92 206.308 '92 100 '92 48.6 62.57 '93 231.150 '93 112 '93 48.6 61.98 '94 255.908 '94 127 '94 46.6 63.05 '95 305.715 '95 138 '95 43.9 61.30 '96 368.415 '96 154 '96 43.5 58.71 '97 445.461 '97 173 '97 41.0 Not available for '97 *For comparability, certain financial ratios and statistics exclude the impact of the 1996 special SAIF assessment of $16.6 million pretax ($10.8 million after tax or $.06 per share).
31 21 Fifth Third Bancorp and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- Operating expense levels are often measured using an overhead ratio (operating expenses divided by the sum of taxable equivalent net interest income and other operating income). As the chart on the previous page illustrates, the Bancorp's ratio has remained well below our peers, at 41% for 1997 and 43.9% in 1996 and under 50% since 1992. Total operating expenses increased a modest 6.2% in 1997, excluding the 1996 impact of the SAIF assessment, and 20.5% in 1996 over 1995. Acquisitions and growth affected 1996's year-to-year operating expense comparison with expense growth slowing considerably in the last half of 1996 as acquisitions from early in the year were integrated. Excluding the 1996 SAIF assessment, salaries, wages, incentives and employee benefits comprised 46.7% and 48.3% of total operating expenses in 1997 and 1996, respectively. The number of full-time equivalent (FTE) employees was 6,787 at the end of 1997, an increase of 3.6% over year end 1996. The Bancorp's productivity ratios, which measure the degree of efficiency of our employees, have shown improvement since 1992. Net income per employee was $59,000 for 1997, compared to $34,000 for 1992, an increase of 73% as the chart on the previous page illustrates. Compensation expense rose in 1997 as a result of more variable compensation for sales production and additional FTEs to support sales and our volume-related businesses. Lower benefits expense is primarily due to changes in our profit-sharing plan to incorporate new alternatives for employees such as flex dollars and 401(k) plan matching. Equipment and net occupancy expenses increased 5.3% in 1997 and 23.1% in 1996. The increase in 1997's expense was due primarily to data processing technology upgrades and the addition of 208 ATMs. Increased costs in 1996 are associated with the net addition of 30 locations, primarily from acquisitions, and 131 new ATMs, including rental property costs, utilities, real estate taxes and depreciation. Upgrades of equipment to support growth and processing technology also contributed to the increase. Operating expenses for 1996 include a pretax charge of $16.6 million, or $.06 per share, mandated by federal legislation to recapitalize the Savings Association Insurance Fund (SAIF). Excluding the special assessment, FDIC insurance premiums were $3.6 million in 1997, down $3.5 million from 1996. Deposit insurance premiums in 1997 were 1.3 and 6.48 cents per $100 of deposits for Bank Insurance Fund (BIF) insured and SAIF insured deposits, respectively. During 1996, the Bancorp paid no insurance premiums on approximately 70% of deposits which are insured by the BIF of the FDIC and 23 cents per $100 on the portion of deposits acquired from thrifts over the years that remain insured by SAIF. During 1995, the FDIC lowered the deposit insurance premium on approximately 80% of deposits insured by the BIF from 23 cents to 4 cents per $100 of deposits. Other operating expenses increased to $211 million in 1997, up $20.4 million or 10.7% over 1996. Volume-related expenses of our card processing business accounted for $11.4 million of the increase. Marketing expense also increased over 1997 principally due to the continued promotion of the Bancorp's diversified loan, investment and deposit products. Additional recruiting and training costs were incurred in 1997 as we added more sales personnel. Other real estate owned expense was up $3.2 million primarily because of a 1996 gain recognized on disposition of real estate. Other operating expenses increased to $190.6 million, up $35.4, or 22.8% over 1995. Bankcard, loan and lease, and data processing expenses accounted for $15.7 million of the increase, which was directly related to increased volumes in these areas. Intangibles amortization was up approximately $14.9 million due to acquisition activity, and franchise tax expense was up $5.4 million primarily as a result of growth in stockholders' equity. These increases were partially offset by a $3.5 million decrease in other real estate owned expenses. - ------------------------------------------------------------------------------- FINANCIAL CONDITION SECURITIES The investment portfolio consists largely of fixed and floating rate mortgage related securities, predominantly underwritten to the standards of and guaranteed by the government-sponsored agencies of FHLMC, FNMA and GNMA. These securities differ from traditional debt securities primarily in that they have uncertain maturity dates and are priced based on estimated prepayment rates on the underlying mortgages. The estimated average life of the portfolio is 3.7 years based on current prepayment expectations. The Bancorp securitized $646.3 million and $829.1 million of fixed and adjustable rate residential mortgages in 1997 and 1996, respectively. These securitizations improve liquidity, reduce interest rate risk and the reserve for credit losses and preserve capital. Further securitizations in 1998 are expected.
SECURITIES PORTFOLIO AT DECEMBER 31 - ------------------------------------------------------------------------------------------------------------- ($000's) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------- Securities Available for Sale: U.S. Treasury ............................ $ 222,355 266,376 298,312 210,599 63,183 - ------------------------------------------------------------------------------------------------------------- U.S. Government agencies and corporations 77,153 81,540 86,746 18,458 136,303 - ------------------------------------------------------------------------------------------------------------- States and political subdivisions ........ 193,662 296,847 300,787 -- -- - ------------------------------------------------------------------------------------------------------------- Agency mortgage-backed securities ........ 5,375,164 4,925,768 2,774,041 895,931 595,133 - ------------------------------------------------------------------------------------------------------------- Other bonds, notes and debentures ........ 344,638 593,920 655,085 -- 96,369 - ------------------------------------------------------------------------------------------------------------- Other securities ......................... 184,105 59,430 36,207 4,504 7,086 - ------------------------------------------------------------------------------------------------------------- Securities Held to Maturity: U.S. Treasury ............................ -- -- -- 98,742 -- - ------------------------------------------------------------------------------------------------------------- U.S. Government agencies and corporations -- -- -- -- 13,189 - ------------------------------------------------------------------------------------------------------------- States and political subdivisions ........ 41,787 150,232 167,992 463,759 327,636 - ------------------------------------------------------------------------------------------------------------- Agency mortgage-backed securities ........ -- -- -- 1,750,549 1,249,465 - ------------------------------------------------------------------------------------------------------------- Other bonds, notes and debentures ........ 1,535 1,805 1,505 160,394 166,954 - ------------------------------------------------------------------------------------------------------------- Other securities ......................... 28,914 24,767 17,594 34,099 19,150 - -------------------------------------------------------------------------------------------------------------
32 22 Fifth Third Bancorp and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations - --------------------------------------------------------------------------------
MATURITIES OF SECURITIES AT DECEMBER 31, 1997 - ------------------------------------------------------------------------------------------------------------------------------------ Maturity 1-5 Year 6-10 Year Over 10 Under 1 Year Maturity Maturity Year Maturity Total --------------- ----------------- -------------- ---------------- ---------------- ($000's) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield - ------------------------------------------------------------------------------------------------------------------------------------ Securities Available for Sale: U.S. Treasury .............. $ 38,296 5.67% $ 182,475 6.93% $ 1,459 6.50% $ 125 8.47% $ 222,355 6.71% - ------------------------------------------------------------------------------------------------------------------------------------ U.S. Government agencies and corporations ......... 16,769 5.66 59,889 6.32 -- -- 495 8.26 77,153 6.19 - ------------------------------------------------------------------------------------------------------------------------------------ States and political subdivisions (a) ......... 19,242 8.26 118,550 7.05 51,683 7.05 4,187 7.59 193,662 7.18 - ------------------------------------------------------------------------------------------------------------------------------------ Agency mortgage- backed securities (b) .... 139,438 6.79 4,820,127 6.82 414,502 6.69 1,097 7.66 5,375,164 6.81 - ------------------------------------------------------------------------------------------------------------------------------------ Other bonds, notes and debentures (c) ........... 8,155 8.97 296,758 7.58 39,725 7.38 -- -- 344,638 7.59 - ------------------------------------------------------------------------------------------------------------------------------------ SECURITIES HELD TO MATURITY: States and political subdivisions (a) ......... 23,331 7.45 13,864 7.34 4,291 7.63 301 7.59 41,787 7.43 - ------------------------------------------------------------------------------------------------------------------------------------ Other bonds, notes and debentures ............... -- -- 1,355 7.93 180 7.39 -- -- 1,535 7.86 - ------------------------------------------------------------------------------------------------------------------------------------ Maturities of mortgage-backed securities were estimated based on historical and predicted prepayment trends. (a) taxable equivalent yield using the statutory rate in effect. (b) included in agency mortgage-backed securities available for sale are floating rate securities totalling $865,419,000. (c) included in other bonds, notes and debentures available for sale are floating rate securities totalling $209,992,000.
LOANS AND LEASES The following table shows the history of commercial and consumer loans and leases by major category at December 31. LOAN AND LEASE PORTFOLIO
- ------------------------------------------------------------------------------------------------------------------------------------ 1997 1996 1995 1994 1993 -------------- --------------- --------------- --------------- --------------- ($ in millions) Amount % Amount % Amount % Amount % Amount % - ------------------------------------------------------------------------------------------------------------------------------------ Commercial: Commercial ............ $4,235 31.5% $3,987 31.9% $3,563 30.5% $3,032 29.5% $2,680 28.0% Mortgage .............. 810 6.0 796 6.4 794 6.8 729 7.1 703 7.3 Construction .......... 360 2.7 376 3.0 312 2.7 286 2.8 342 3.6 Leases ................ 1,167 8.7 918 7.3 696 5.9 479 4.6 302 3.2 - ------------------------------------------------------------------------------------------------------------------------------------ 6,572 48.9 6,077 48.6 5,365 45.9 4,526 44.0 4,027 42.1 - ------------------------------------------------------------------------------------------------------------------------------------ Consumer: Installment ........... 2,441 18.2 2,236 17.9 2,737 23.4 2,131 20.7 1,881 19.7 Mortgage .............. 2,296 17.1 2,150 17.2 1,975 16.9 2,347 22.8 2,731 28.5 Credit Card ........... 329 2.4 364 2.9 325 2.8 275 2.7 207 2.2 Leases ................ 1,800 13.4 1,687 13.4 1,288 11.0 1,007 9.8 721 7.5 - ------------------------------------------------------------------------------------------------------------------------------------ 6,866 51.1 6,437 51.4 6,325 54.1 5,760 56.0 5,540 57.9 - ------------------------------------------------------------------------------------------------------------------------------------ Total ................... $13,438 100.0% $12,514 100.0% $11,690 100.0% $10,286 100.0% $9,567 100.0% - ------------------------------------------------------------------------------------------------------------------------------------
Loan and lease balances increased 7.4% and 7.0%, respectively, in 1997 and 1996. In both years, the growth in outstandings was affected considerably by sales and securitizations of residential and consumer loans, which allows the Bancorp to be selective in how much of the expanding origination volume is retained in the loan and lease portfolio. Although residential mortgage loan originations were $1.7 billion and $1.6 billion for 1997 and 1996, respectively, the related loans outstanding only increased 6.8% and 8.9%, respectively, because $1.4 billion and $1.3 billion of the respective origination volume was sold or securitized. Installment loan balances grew 9.2% during 1997, but installment loan balances actually declined during 1996 because the Bancorp securitized and sold $821.1 million in auto loans. Consumer leases grew 6.7% and 30.9% during 1997 and 1996, respectively, and represent 13.4% of total loans and leases at both December 31, 1997 and 1996. Commercial loan and lease outstandings were up 8.1% in 1997 and 13.3% in 1996. Commercial leasing contributed increases of 27.1% and 31.9%, respectively, consisting largely of credits within our market areas of Ohio, Kentucky and Indiana. Commercial mortgages represent 6.0% of our total loan and lease portfolio and include primarily financing of owner-occupied properties--loans on properties occupied by the principal borrower. To maintain balance sheet flexibility and to serve as a source of fee income, the Bancorp during 1997 sold with servicing retained certain floating rate commercial loans to a commercial paper funding corporation. The outstanding balance of these loans was $468.5 million at December 31, 1997. In addition to the loan and lease portfolio discussed above, the Bancorp serviced loans for others of approximately $4.6 billion, $3.9 billion and $2.7 billion at December 31, 1997, 1996 and 1995, respectively. 33 23 Fifth Third Bancorp and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations - --------------------------------------------------------------------------------
RESERVE FOR CREDIT LOSSES FIVE YEAR HISTORY - ------------------------------------------------------------------------------------------------------------------------------------ ($000's) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at January 1 ................................ $ 187,278 177,388 155,918 144,537 121,452 Provision for credit losses ......................... 80,342 64,014 42,962 35,780 48,037 Losses charged off .................................. (91,801) (80,444) (41,707) (30,946) (37,172) Recoveries of losses previously charged off ......... 23,407 20,482 11,846 13,472 10,098 Letter of credit .................................... -- -- -- (7,800) -- Reserve of acquired institutions and other .......... 1,705 5,838 8,369 875 2,122 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at December 31 .............................. $ 200,931 187,278 177,388 155,918 144,537 - ------------------------------------------------------------------------------------------------------------------------------------ Loans and leases outstanding at December 31 ......... $13,438,717 $12,514,792 $11,690,643 $10,286,457 $9,566,898 Reserve as a percent of loans and leases outstanding 1.50% 1.50% 1.52% 1.52% 1.51% Average loans and leases ............................ $12,783,555 $12,304,544 $10,960,757 $ 9,902,901 $8,869,432 Net charge-offs as a percent of average loans and leases outstanding ................................ .54% .49% .27% .18% .31% Reserve as a percent of total nonperforming assets .. 516.84% 531.48% 436.06% 570.50% 362.84% Reserve as a percent of total underperforming assets 235.95% 255.53% 290.16% 384.35% 287.47% - ------------------------------------------------------------------------------------------------------------------------------------
PROVISION AND RESERVE FOR CREDIT LOSSES The Bancorp provides as an expense an amount for expected credit losses. This provision is based on the growth of the loan and lease portfolio and on recent loss experience and is called the provision for credit losses in the Consolidated Statements of Income. Actual losses on loans and leases are charged against the reserve created on the Consolidated Balance Sheets through the provision for credit losses. The amount of loans and leases actually removed as assets from the Consolidated Balance Sheets is referred to as charge-offs and, after netting out recoveries on previously charged off assets, becomes net charge-offs. Charge-offs, net of recoveries, increased $8.4 million over 1996 due to higher losses on consumer loans and leases. Net charge-offs as a percent of average loans and leases outstanding were .54%, .49% and .27% for 1997, 1996 and 1995, respectively. Although net charge-offs have risen in 1997, the net charge-off ratio remains near the Bancorp's historical 10-year average of .50% and the reserve for credit losses is in excess of five times nonperforming assets. The reserve for credit losses as a percentage of total loans and leases was 1.50% at December 31, 1997 and 1996. The table above presents credit loss data for the most recent five-year period. UNDERPERFORMING ASSETS Underperforming assets consist of (1) nonaccrual loans and leases on which the ultimate collectibility of the full amount of interest is uncertain, (2) loans and leases which have been renegotiated to provide for a reduction or deferral of interest or principal because of a deterioration in the financial position of the borrower, (3) loans and leases past due ninety days or more as to principal or interest and (4) other real estate owned. A summary of underperforming assets at December 31 follows:
- ---------------------------------------------------------------------------- ($000's) 1997 1996 1995 - ---------------------------------------------------------------------------- Nonaccrual loans and leases ......... $37,401 29,046 37,049 Renegotiated loans and leases ....... 128 1,121 506 Other real estate owned ............. 1,348 5,070 3,125 - ---------------------------------------------------------------------------- Total nonperforming assets .......... 38,877 35,237 40,680 Ninety days past due loans and leases 46,281 38,053 20,455 - ---------------------------------------------------------------------------- Total underperforming assets ........ $85,158 73,290 61,135 - ---------------------------------------------------------------------------- Nonperforming assets as a percent of total loans, leases and other real estate owned ................. .29% .28 .35 Underperforming assets as a percent of total loans, leases and other real estate owned ....... .63% .59 .52 - ----------------------------------------------------------------------------
Nonperforming assets as a percentage of total loans, leases and other real estate owned was .29% at December 31, 1997, essentially unchanged from .28% at December 31, 1996. Of the total underperforming assets at December 31, 1997, $54,344,000 are to borrowers or projects in the Cincinnati-Dayton market area, $3,082,000 in the Toledo market area, $7,112,000 in the Columbus market area, $1,560,000 in the Louisville market area, $5,799,000 in the Cleveland market area, $7,825,000 distributed in the market areas of our smaller affiliate banks and $5,436,000 outside of the Ohio-Kentucky-Indiana area. At December 31, 1997, 1996 and 1995, loans and leases 90 days past due included installment loans and consumer leases of $15.9 million, $15.2 million and $9.4 million, respectively, and credit card receivables of $5.4 million, $5.1 million and $2.1 million, respectively. Of the total nonperforming assets at December 31, 1997, $3,613,000, or 9.3% were related to commercial real estate. Nonaccrual commercial real estate loans were $3,347,000, a decrease of 52.1% from 1996's $6,988,000. At December 31, 1997 and 1996, there were no renegotiated commercial real estate loans. Commercial other real estate owned decreased from $3,957,000 in 1996 to $266,000 in 1997, a decline of 93.3%. DEPOSITS Interest-earning assets are funded primarily by core deposits. The accompanying tables show the relative composition of the Bancorp's average deposits and the change in average deposit sources during the last five years. Other time deposits are comprised of consumer certificates of deposit. Foreign office deposits are denominated in amounts greater than $100,000. During 1997, the Bancorp acquired deposits of $128.9 million from Great Lakes National Bank Ohio and $126.1 million of deposits through the acquisition of Suburban Bancorporation, Inc. Average core deposits increased 28.3% in 1996 due to a renewed focus on transaction accounts and deposit acquisitions. Our new MaxSaver product fueled the increase in savings balances, while the new Platinum One product and promotional campaigns contributed to advances in demand and interest checking. Strong core deposit growth in 1996 resulted in a shift in the Bancorp's overall funding mix from borrowings to customer deposits. The acquisition of deposits from 1st Nationwide, NBD Ohio and Kentucky Enterprise Bancorp increased deposits by $2 billion in 1996. 34 24 Fifth Third Bancorp and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations - --------------------------------------------------------------------------------
DISTRIBUTION OF AVERAGE DEPOSITS - ------------------------------------------------------------------------------------------------------- 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- Demand .................. 14.7% 13.4 14.1 14.2 14.2 Interest checking ....... 14.5 12.5 12.7 15.1 14.8 Savings ................. 14.6 12.1 5.9 7.0 7.3 Money market ............ 9.0 11.9 15.8 15.8 16.7 Other time .............. 38.2 39.9 38.4 39.2 39.4 Certificates- $100,000 and over .............. 6.2 6.4 6.2 3.4 4.9 Foreign office .......... 2.8 3.8 6.9 5.3 2.7 - ------------------------------------------------------------------------------------------------------- Total ................... 100.0% 100.0 100.0 100.0 100.0 - ------------------------------------------------------------------------------------------------------- CHANGE IN AVERAGE DEPOSIT SOURCES - ------------------------------------------------------------------------------------------------------- ($000's) 1997 1996 1995 1994 1993 - ------------------------------------------------------------------------------------------------------- Demand .................. $ 211,072 287,587 171,208 145,677 197,984 Interest checking ....... 311,503 316,359 (81,749) 185,911 228,841 Savings ................. 379,381 1,031,755 (38,377) 41,888 116,871 Money market ............ (390,535) (115,408) 196,988 89,061 53,493 Other time .............. (153,203) 1,249,232 396,373 392,117 255,422 Certificates- $100,000 and over .............. (4,857) 191,672 364,054 (105,361) (48,411) Foreign office .......... (120,475) (258,259) 251,041 287,189 194,045 - ------------------------------------------------------------------------------------------------------- Total change ............ $ 232,886 2,702,938 1,259,538 1,036,482 998,245 - -------------------------------------------------------------------------------------------------------
SHORT-TERM BORROWINGS These primarily consist of short-term excess funds from correspondent banks, securities sold under agreements to repurchase, short-term bank notes and commercial paper issuances. Short-term borrowings primarily fund short-term, rate-sensitive earning asset growth. Average short-term borrowings as a percentage of average earning assets increased from 15.2% in 1996 to 17.1% in 1997. The Bancorp increased its reliance on short-term borrowings during 1997 as loan and lease growth outpaced core deposit growth. During 1996, borrowings supported a relatively smaller proportion of earning asset growth because of success in increasing core deposits. As the following table of average short-term borrowings and average Federal funds loaned indicates, the Bancorp was a net borrower of funds of $3.3 billion in 1997, up from $2.8 billion in 1996:
AVERAGE SHORT-TERM BORROWINGS - -------------------------------------------------------------------------------- ($000's) 1997 1996 1995 1994 1993 - -------------------------------------------------------------------------------- Federal funds borrowed ..... $1,464,945 1,230,219 1,071,792 848,217 622,068 Short-term bank notes ... 658,140 553,924 769,000 429,642 -- Other short-term borrowings ... 1,160,750 996,663 828,685 689,960 743,002 - -------------------------------------------------------------------------------- Total short-term borrowings ... 3,283,835 2,780,806 2,669,477 1,967,819 1,365,070 - -------------------------------------------------------------------------------- Federal funds loaned ....... 11,320 18,269 23,563 17,712 9,342 - -------------------------------------------------------------------------------- Net funds borrowed ..... $3,272,515 2,762,537 2,645,914 1,950,107 1,355,728 - --------------------------------------------------------------------------------
CAPITAL RESOURCES The Bancorp maintains a relatively high level of capital as a margin of safety for its depositors and stockholders. At December 31, 1997, stockholders' equity was $2.3 billion compared to $2.1 billion at December 31, 1996, an increase of $133.3 million or 6.2%. This increase in capital resulted primarily from the retention of earnings and upward market adjustments on available-for-sale securities offset in part by dividend declarations and the repurchase of Fifth Third Bancorp common stock. The following table shows several capital and liquidity ratios for the last three years:
- ------------------------------------------------------------------------------------ 1997 1996 1995 - ------------------------------------------------------------------------------------ Average stockholders' equity to Average assets ............................... 10.03% 9.99% 9.82% Average deposits ............................. 14.46 13.94 14.10 Average loans and leases ..................... 16.05 15.82 14.48 - ------------------------------------------------------------------------------------
In mid-1997, the Bancorp completed the repurchase of $250 million of its common stock under a plan authorized in January 1997. In December 1996, the Bancorp approved the repurchase of common stock to fund employee stock option and dividend reinvestment plans. During 1997, the Bancorp approved the continued repurchase of up to 7.5 million shares under the December 1996 plan. Through the repurchase programs, the Bancorp during 1997 repurchased 5,191,427 shares of Fifth Third Bancorp common stock on the open market for $276.3 million, or an average purchase price of $53.22. The Bancorp does not intend to repurchase any additional shares under these programs in 1998. LIQUIDITY AND MARKET RISK The objective of the Bancorp's Asset/Liability Management function is to maintain consistent growth in net interest income within the Bancorp's policy guidelines. This objective is accomplished through management of the Bancorp's balance sheet liquidity and interest rate risk exposures due to changes in economic conditions, interest rate levels and customer preferences. The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand or any potential unexpected deposit withdrawals. This goal is accomplished primarily by maintaining sufficient liquid assets in the form of investment securities along with consistent core deposit growth, and the availability of unused capacity to purchase funds in the national money markets. At December 31, 1997, the Bancorp had approximately $1.6 billion in securities and other short-term investments maturing or repricing within one year compared to $1.2 billion at year-end 1996. Additional asset liquidity is provided by the remainder of the securities portfolio and selected securitizable loan assets. The Bancorp has a practice of maintaining core deposits as the primary means of funding interest-earning assets. Average core deposits have funded approximately 70% of total average interest-earning assets over the last five years, with the ratio improving in 1997. This, in addition to the Bancorp's 10% average equity capital base, serves as a stable funding base. In addition to its core deposit funding, the Bancorp accesses a variety of other short-term and long-term funding sources. The Bancorp also uses the Federal Home Loan Bank (FHLB) as a funding source, issuing notes payable through its FHLB-member subsidiaries. The Bancorp has significant unused national money market funding capability. The Bancorp maintains A1+/P1 Standard & Poor's and Moody's ratings on its commercial paper, and its lead bank, The Fifth Third Bank in Cincinnati, Ohio, maintains an Aa2 Moody's rating for long-term deposits. Six of the Bancorp's subsidiaries, The Fifth Third Bank of Northwestern Ohio, N.A., The Fifth Third Bank of Columbus, The Fifth Third Bank of Western Ohio, The Fifth Third Bank of Central Indiana, Fifth Third Bank of Northern Kentucky and Fifth Third Bank of Kentucky, Inc. maintain P1 and Aa3 Moody's ratings on their short-term and long-term deposits, respectively. These ratings, 35 25 Fifth Third Bancorp and Subsidiaries Management's Discussion and Analysis of Financial Condition and Results of Operations - -------------------------------------------------------------------------------- along with capital ratios significantly above the current regulatory guidelines, provide the Bancorp additional liquidity. Management does not rely on any one source of liquidity and has managed these levels in response to other balance sheet factors. Management considers interest rate risk to be the Bancorp's most significant market risk. Interest rate risk is the exposure to adverse changes in the net interest income of the Bancorp as a result of changes in interest rates. Consistency in the Bancorp's earnings is largely dependent on the effective management of interest rate risk. The Bancorp employs a variety of measurement techniques to identify and manage its exposure to changing interest rates. The Bancorp uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. The model is based on actual cash flows and repricing characteristics for on and off balance sheet instruments and incorporates market-based assumptions regarding the impact of changing interest rates on the prepayment rate of certain assets and liabilities. The model also includes senior management projections for activity levels in product lines offered by the Bancorp. Assumptions based on the historical behavior of deposit rates and balances in relation to changes in interest rates are also incorporated into the model. These assumptions are inherently uncertain and, as a result, the model cannot precisely measure net interest income or precisely predict the impact of fluctuations in interest rates on net interest income. Actual results will differ from simulated results due to timing, magnitude, and frequency of interest rate changes as well as changes in market conditions and management strategies. Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Bancorp's Asset/Liability Management Committee (ALCO), which includes senior management representatives and reports to the Board of Directors, monitors and manages interest rate risk to maintain an acceptable level of change to net interest income as a result of changes in interest rates. Policy established for interest rate risk is stated in terms of the change in net interest income over a twelve and twenty-four month horizon given a 200 basis point immediate and sustained increase or decrease in interest rates. The current limits approved by the Board of Directors are plus or minus 5% for a twelve-month horizon and plus or minus 9% over a twenty-four month horizon. The following table shows the Bancorp's estimated earnings sensitivity profile as of December 31, 1997:
- ------------------------------------------------- CHANGE IN PERCENTAGE CHANGE IN INTEREST RATES NET INTEREST INCOME (BASIS POINTS) 12 MONTHS 24 MONTHS - ------------------------------------------------- +200 (3.24)% 3.98 % -200 3.72 % (6.66)% - -------------------------------------------------
Given an immediate, sustained 200 basis point upward shock to the yield curve used in the simulation model, it is estimated net interest income for the Bancorp would decrease by 3.24% over one year and increase by 3.98% over two years. A 200 basis point immediate, sustained downward shock in the yield curve would increase net interest income by an estimated 3.72% over one year and decrease net interest income by an estimated 6.66% over two years. All of these estimated changes in net interest income are within the policy guidelines established by the Board of Directors. In order to reduce the exposure to interest rate fluctuations and to manage liquidity, the Bancorp has developed securitization and sale strategies for interest-rate sensitive assets. All long-term, fixed-rate, single-family residential mortgage loans underwritten according to Federal Home Loan Mortgage Corporation or Federal National Mortgage Association guidelines are sold for cash upon origination. Periodically, adjustable-rate mortgages and fixed-rate installment loans are also securitized and sold. In 1997 and 1996, $1.4 billion and $1.3 billion, respectively, of fixed and adjustable-rate mortgages were securitized and sold. Fixed installment loans of $71.6 million and $894.3 million were securitized and sold in 1997 and 1996, respectively. In addition, in 1997 certain primarily fixed-rate, short-term commercial loans were sold to a maturity matched commercial paper funding conduit. As a primary means of funding interest-earning assets, the Bancorp maintains core transaction deposits which generally are more resistant to interest rate changes than other funding options. The Bancorp continually evaluates interest rate risk management opportunities, including the use of derivative financial instruments. Management believes that hedging instruments currently available are not cost effective for the Bancorp and, therefore, minimizes the use of derivatives. The Bancorp focuses its efforts on net interest margin growth and management through wholesale and retail product sales. The Bancorp does not currently engage in trading activities. YEAR 2000 As with other companies, many of the Bancorp's computer programs were originally designed to recognize calendar years by their last two digits. Calculations performed using these truncated fields will not work properly with dates from the year 2000 and beyond. The Bancorp began planning its year 2000 conversion early in 1996 and has formed a project committee that meets biweekly to review the status of the conversion. A comprehensive review to identify the systems affected by this issue was completed, estimated cost projections were determined and an implementation plan was compiled and is currently being executed. As a result of the procedures already completed, the Bancorp expects to either modify or upgrade existing systems or replace some systems altogether. Considerable progress has been made by Bancorp personnel and it is anticipated that this project will be largely completed by internal staff. The Bancorp does not expect to spend any significant amounts with outside contractors relative to the completion of this task. Therefore, cost estimates do not represent any material incremental costs, but rather will represent the redeployment of existing technology resources. Many of the Bancorp systems are vendor-supplied, and all vendors have provided the Bancorp with certification or a delivery commitment letter. The Bancorp presently believes with the planned modifications to existing systems, conversion to new systems, and vendor delivery of millennium-compliant systems, the year 2000 compliance issues will be resolved on a timely basis, and any related costs will not have a material impact on the operations, cash flows, or financial condition of future periods. 36 26 Fifth Third Bancorp and Subsidiaries - --------------------------------------------------------------------------------
CONSOLIDATED SIX YEAR SUMMARY OF OPERATIONS - ------------------------------------------------------------------------------------------------------------------------------------ For the Years Ended December 31 ($000's) 1997 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------------ Interest Income ..................................... $1,478,388 1,385,113 1,173,165 922,301 812,914 787,240 Interest Expense .................................... 733,426 695,869 609,733 405,548 339,399 359,370 - ------------------------------------------------------------------------------------------------------------------------------------ Net Interest Income ................................. 744,962 689,244 563,432 516,753 473,515 427,870 Provision for Credit Losses ......................... 80,342 64,014 42,962 35,780 48,037 66,100 - ------------------------------------------------------------------------------------------------------------------------------------ Net Interest Income After Provision for Credit Losses 664,620 625,230 520,470 480,973 425,478 361,770 Other Operating Income .............................. 445,461 368,415 305,715 255,908 231,150 206,308 Operating Expenses .................................. 506,158 476,718 395,617 371,545 352,720 316,315 SAIF Assessment ..................................... -- 16,612 -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Income Before Income Taxes .......................... 603,923 500,315 430,568 365,336 303,908 251,763 Applicable Income Taxes ............................. 202,686 165,256 142,883 120,877 97,673 79,742 - ------------------------------------------------------------------------------------------------------------------------------------ Net Income .......................................... $ 401,237 335,059 287,685 244,459 206,235 172,021 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings Per Share (a) .............................. $ 2.59 2.15 1.94 1.69 1.46 1.23 Diluted Earnings Per Share (a) ...................... $ 2.54 2.11 1.89 1.65 1.43 1.21 - ------------------------------------------------------------------------------------------------------------------------------------ Cash Dividends Declared Per Share (a) ............... $ .85 1/3 .73 1/3 .64 .53 1/3 .45 1/3 .40 - ------------------------------------------------------------------------------------------------------------------------------------ (a) Per share amounts have been adjusted for the three-for-two stock splits effected in the form of stock dividends paid July 15, 1997, January 12, 1996 and April 15, 1992.
CONDENSED CONSOLIDATED BALANCE SHEET INFORMATION - ------------------------------------------------------------------------------------------------------------------------------------ As of December 31 ($000's) 1997 1996 1995 1994 1993 1992 - ------------------------------------------------------------------------------------------------------------------------------------ Securities ...................................... $ 6,469,313 6,400,685 4,338,269 3,637,035 2,674,468 2,419,421 Loans and Leases ................................ 13,438,717 12,514,792 11,690,643 10,286,457 9,566,898 8,115,590 Assets .......................................... 21,375,054 20,548,998 17,052,883 14,957,009 13,128,544 11,390,289 Deposits ........................................ 14,914,132 14,374,656 12,485,780 10,630,878 9,477,306 8,447,812 Short-Term Borrowings ........................... 3,060,931 3,265,432 2,005,495 2,452,218 1,691,744 1,348,105 Long-Term Debt and Convertible Subordinated Notes 457,878 277,661 425,396 178,713 407,864 309,730 Stockholders' Equity ............................ 2,277,411 2,144,125 1,724,575 1,398,774 1,277,660 1,076,854 - ------------------------------------------------------------------------------------------------------------------------------------
SUMMARIZED QUARTERLY FINANCIAL INFORMATION
- -------------------------------------------------------------------------------------------------------------------- 1997 1996 -------------------------------------------------------------------------------------- FOURTH THIRD SECOND FIRST FOURTH THIRD SECOND FIRST (Unaudited)($000's) QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER QUARTER - -------------------------------------------------------------------------------------------------------------------- Interest Income ........... $378,251 $371,113 366,279 362,745 359,402 359,030 343,631 323,050 Net Interest Income ....... 192,465 186,366 184,815 181,316 178,988 177,099 171,529 161,628 Provision for Credit Losses 24,905 17,841 20,150 17,446 19,785 16,431 18,048 9,750 Income Before Income Taxes 162,079 154,845 145,544 141,455 138,808 118,355 124,845 118,307 Net Income ................ 107,236 103,424 96,081 94,496 93,615 79,055 83,249 79,140 Earnings Per Share ........ .69 .67 .62 .61 .59 .50 .53 .53 Diluted Earnings Per Share .68 .66 .61 .59 .58 .50 .52 .51 - --------------------------------------------------------------------------------------------------------------------
37 27 Fifth Third Bancorp and Subsidiaries Consolidated Ten Year Comparison - --------------------------------------------------------------------------------
AVERAGE ASSETS ($000'S) - -------------------------------------------------------------------------------------------------------------------------------- INTEREST-EARNING ASSETS ------------------------------------------------------------------- FEDERAL INTEREST-BEARING CASH AND TOTAL LOANS AND FUNDS DEPOSITS DUE FROM OTHER AVERAGE YEAR LEASES LOANED (a) IN BANKS (a) SECURITIES TOTAL BANKS ASSETS ASSETS - -------------------------------------------------------------------------------------------------------------------------------- 1997 $12,783,555 $ 11,320 $29,620 $6,355,035 $19,179,530 $540,851 $930,600 $20,460,460 1996 12,304,544 18,269 13,945 5,905,341 18,242,099 531,876 889,466 19,480,238 1995 10,960,757 23,563 1,521 4,280,773 15,266,614 552,534 511,677 16,166,207 1994 9,902,901 17,712 6,276 3,101,320 13,028,209 526,007 428,266 13,829,341 1993 8,869,432 9,342 1,084 2,365,897 11,245,755 494,141 435,966 12,041,054 1992 7,189,975 79,194 32,858 2,493,235 9,795,262 440,908 439,332 10,565,594 1991 6,246,679 227,754 35,090 2,373,916 8,883,439 378,185 368,909 9,534,199 1990 5,920,686 289,796 40,927 1,845,413 8,096,822 389,521 361,659 8,759,775 1989 5,450,876 245,017 35,610 1,520,720 7,252,223 374,155 310,550 7,858,542 1988 4,610,145 228,238 44,788 1,404,117 6,287,288 357,575 275,004 6,854,056 - --------------------------------------------------------------------------------------------------------------------------------
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS ($000'S) - --------------------------------------------------------------------------------------------------------------------- Deposits ------------------------------------------------------------------------------------------------------------- Certificates- Interest Money Other $100,000 Foreign Year Demand Checking Savings Market Time and Over Office Total - --------------------------------------------------------------------------------------------------------------------- 1997 $2,083,915 $2,058,783 $2,071,515 $1,273,908 $5,415,820 $887,390 $401,741 $14,193,072 1996 1,872,843 1,747,280 1,692,134 1,664,443 5,569,023 892,247 522,216 13,960,186 1995 1,585,256 1,430,921 660,379 1,779,851 4,319,791 700,575 780,475 11,257,248 1994 1,414,048 1,512,670 698,756 1,582,863 3,923,418 336,521 529,434 9,997,710 1993 1,268,371 1,326,759 656,868 1,493,802 3,531,301 441,882 242,245 8,961,228 1992 1,070,387 1,097,918 539,997 1,440,309 3,275,879 490,293 48,200 7,962,983 1991 892,906 830,723 438,708 1,277,134 3,087,476 876,369 13,079 7,416,395 1990 826,426 719,378 451,571 1,183,786 2,851,996 935,769 2,313 6,971,239 1989 821,388 605,081 458,849 1,094,001 2,280,222 889,802 5,596 6,154,939 1988 786,610 547,988 443,267 1,037,427 1,875,876 668,786 7,507 5,367,461 - ---------------------------------------------------------------------------------------------------------------------
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS ($000'S) - ----------------------------------- Short- Term Year Borrowings Total - ----------------------------------- 1997 $3,283,835 $17,476,907 1996 2,780,806 16,740,992 1995 2,669,477 13,926,725 1994 1,967,819 11,965,529 1993 1,365,070 10,326,298 1992 1,229,664 9,192,647 1991 913,608 8,330,003 1990 655,942 7,627,181 1989 676,627 6,831,566 1988 593,035 5,960,496 - -----------------------------------
INCOME ($000'S, EXCEPT PER SHARE) - ----------------------------------------------------------------------------------------------------------------------------------- Per Share (b) --------------------------------------------------- Originally Reported Other ------------------- Dividend Interest Interest Operating Operating Net Diluted Dividends Diluted Payout Year Income Expense Income Expense Income Earnings Earnings Declared Earnings Earnings Ratio - ----------------------------------------------------------------------------------------------------------------------------------- 1997 $1,478,388 $733,426 $445,461 $506,158 $401,237 $2.59 $2.54 $.85 1/3 $2.59 $2.54 33.6% 1996 1,385,113 695,869 368,415 493,330 335,059 2.15 2.11 .73 1/3 2.15 2.11 34.8 1995 1,173,165 609,733 305,715 395,617 287,685 1.94 1.89 .64 1.94 1.89 33.9 1994 922,301 405,548 255,908 371,545 244,459 1.69 1.65 .53 1/3 1.69 1.65 32.3 1993 812,914 339,399 231,150 352,720 206,235 1.46 1.43 .45 1/3 1.46 1.43 31.7 1992 787,240 359,370 206,308 316,315 172,021 1.23 1.21 .40 1.22 1.21 33.1 1991 829,628 466,381 189,002 282,844 142,954 1.03 1.01 .34 2/3 1.03 1.03 33.7 1990 822,593 504,950 141,490 246,588 121,026 .87 .87 .30 2/9 .91 .91 33.2 1989 756,749 460,376 129,580 226,205 113,337 .83 .83 .26 2/3 .83 .82 32.5 1988 610,819 353,053 110,850 196,736 97,816 .73 .73 .23 1/9 .78 .78 29.6 - -----------------------------------------------------------------------------------------------------------------------------------
MISCELLANEOUS AT DECEMBER 31 ($000'S, EXCEPT SHARE INFORMATION) - ------------------------------------------------------------------------------------------------------------------------- Stockholders' Equity --------------------------------------------------------------------------------------- Number of Reserve Shares of Stock Common Capital Retained Unrealized Treasury Per for Credit Year Outstanding (b) Stock Surplus Earnings Gains/(Losses) Stock Total Share (b) Losses - ------------------------------------------------------------------------------------------------------------------------- 1997 155,224,561 $344,599 $483,054 $1,548,451 $90,876 $(189,569) $2,277,411 $14.67 $200,931 1996 158,838,831 352,622 495,600 1,279,559 16,598 (254) 2,144,125 13.50 187,278 1995 150,634,494 334,409 315,179 1,060,185 14,802 -- 1,724,575 11.45 177,388 1994 145,595,934 323,223 253,352 870,417 (48,218) -- 1,398,774 9.61 155,918 1993 144,223,064 320,175 242,196 702,864 12,425 -- 1,277,660 8.86 144,537 1992 140,688,950 312,329 204,829 560,100 -- (404) 1,076,854 7.65 121,452 1991 139,662,329 310,050 191,299 443,746 -- (404) 944,691 6.77 97,319 1990 138,998,961 308,578 188,590 348,157 -- -- 845,325 6.08 90,242 1989 138,170,654 306,739 187,136 268,408 -- -- 762,283 5.52 85,664 1988 135,774,356 301,419 180,806 187,206 -- -- 669,431 4.93 73,008 - ------------------------------------------------------------------------------------------------------------------------- (a) Federal funds loaned and interest-bearing deposits in banks are combined in other short-term investments in the Consolidated Financial Statements. (b) Number of shares outstanding and per share data have been adjusted for stock splits in 1997, 1996, 1992 and 1990.
38 EX-21 4 EXHIBIT 21 1 EXHIBIT 21 FIFTH THIRD BANCORP SUBSIDIARIES
Jurisdiction of Name Incorporation - ---- ------------- The Fifth Third Bank Ohio The Fifth Third Company Ohio The Fifth Third Leasing Company Ohio Fifth Third Securities, Inc. Ohio Midwest Payment Systems, Inc. Ohio Fifth Third International Company Kentucky Fifth Third Trade Services Limited Hong Kong Fifth Third Bank of Kentucky, Inc. Kentucky Fifth Third Bank of Northern Kentucky, Inc. Kentucky The Fifth Third Bank of Columbus Ohio The Fifth Third Bank of Northwestern Ohio, National Association Federal The Fifth Third Bank of Southern Ohio Ohio The Fifth Third Bank of Western Ohio Ohio Fifth Third Bank of Northeastern Ohio Ohio The Fifth Third Bank of Central Indiana Indiana Fifth Third Bank of Florida Florida Fifth Third Community Development Company Ohio Fifth Third Investment Company Ohio Fountain Square Insurance Company Arizona Heartland Capital Management, Inc. Indiana
EX-23 5 EXHIBIT 23 1 EXHIBIT 23 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in Registration Statements No. 33-34075, 33-13252, 33-60474, 33-55223, 33-55553, and 33-61149, of Fifth Third Bancorp on Form S-8 and in Registration Statements No. 33-19965 on Form S-4 and No. 33-54134 on Form S-3 of our report dated January 15, 1998 incorporated by reference in this Annual Report on Form 10-K of Fifth Third Bancorp for the year ended December 31, 1997. /s/ Deloitte & Touche LLP March 10, 1998 Cincinnati, Ohio EX-27 6 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIFTH THIRD BANCORP'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 1,000 YEAR DEC-31-1997 JAN-01-1997 DEC-31-1997 720,133 27,224 2,200 0 6,397,077 72,236 72,236 13,438,717 200,931 21,375,054 14,914,132 3,060,931 664,702 457,878 0 0 344,599 1,932,812 21,375,054 1,043,102 433,105 2,181 1,478,388 531,631 733,426 744,962 80,342 6,326 506,158 603,923 401,237 0 0 401,237 2.59 2.54 4.11 37,401 46,281 128 29,145 187,278 91,801 23,407 200,931 200,931 0 0
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