-----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, MG1/OUvpetYSQqx675kls+VG2UaW2lYhl0D5q1m72zBpETdvBz4VQXkmO/wgSFDG d97AcQA/XJJnC4pezAI9aQ== 0000950152-98-008950.txt : 19981118 0000950152-98-008950.hdr.sgml : 19981118 ACCESSION NUMBER: 0000950152-98-008950 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981113 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-Q SEC ACT: SEC FILE NUMBER: 000-08076 FILM NUMBER: 98749511 BUSINESS ADDRESS: STREET 1: 38 FOUNTAIN SQ PLZ STREET 2: FIFTH THIRD CENTER CITY: CINCINNATI STATE: OH ZIP: 45263 BUSINESS PHONE: 5135795300 10-Q 1 FIFTH THIRD BANCORP 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the Quarter Ended September 30, 1998 Commission File Number 0-8076 FIFTH THIRD BANCORP (Exact name of Registrant as specified in its charter) Ohio 31-0854434 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification Number) Fifth Third Center Cincinnati, Ohio 45263 (Address of principal executive offices) Registrant's telephone number, including area code: (513) 579-5300 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 --- --- There were 266,765,002 shares of the Registrant's Common Stock, without par value, outstanding as of October 31, 1998. 2 FIFTH THIRD BANCORP INDEX Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - September 30, 1998 and 1997 and December 31, 1997 3 Consolidated Statements of Income - Three and Nine Months Ended September 30, 1998 and 1997 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1998 and 1997 5 Consolidated Statements of Changes in Shareowners' Equity - Nine Months Ended September 30, 1998 and 1997 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Part II. Other Information Item 6. Exhibits and Reports on Form 8-K 15
2 3
FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) - ------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30, ($000'S) 1998 1997 1997 - ------------------------------------------------------------------------------------------------------------- - ------------------------------------------------------------------------------------------------------------- ASSETS - ------------------------------------------------------------------------------------------------------------- Cash and Due from Banks $ 748,662 777,378 708,580 Securities Available for Sale (a) 8,426,893 8,139,465 8,018,249 Securities Held to Maturity (b) 85,175 85,010 334,967 Other Short-Term Investments 131,423 180,425 260,433 Loans Held for Sale 367,355 263,772 141,976 Loans and Leases Commercial Loans 4,682,028 4,363,289 4,244,173 Construction Loans 541,385 560,381 582,599 Commercial Mortgage Loans 1,185,160 1,273,885 1,298,799 Commercial Lease Financing 1,650,675 1,417,133 1,228,048 Residential Mortgage Loans 4,403,228 5,037,987 4,937,492 Consumer Loans 3,257,976 3,068,597 2,906,028 Consumer Lease Financing 2,386,936 2,165,598 2,083,690 Unearned Income (669,317) (573,927) (503,206) Reserve for Credit Losses (261,580) (250,950) (242,278) - ------------------------------------------------------------------------------------------------------------- Total Loans and Leases 17,176,491 17,061,993 16,535,345 Bank Premises and Equipment 324,192 301,029 294,351 Accrued Income Receivable 270,253 213,049 203,396 Other Assets 802,376 688,552 694,146 - ------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 28,332,820 27,710,673 27,191,443 - ------------------------------------------------------------------------------------------------------------- LIABILITIES - ------------------------------------------------------------------------------------------------------------- Deposits Demand $ 2,877,817 2,738,191 2,534,799 Interest Checking 2,800,954 2,555,108 2,364,534 Savings and Money Market 4,345,158 4,503,926 4,435,677 Time Deposits 8,615,557 9,222,671 9,367,337 - ------------------------------------------------------------------------------------------------------------- Total Deposits 18,639,486 19,019,896 18,702,347 Federal Funds Borrowed 2,023,793 1,253,553 1,130,637 Short-Term Bank Notes 60,000 555,000 675,000 Other Short-Term Borrowings 1,715,674 1,842,378 1,817,791 Accrued Taxes, Interest and Expenses 756,419 567,906 532,573 Other Liabilities 185,145 200,421 162,280 Long-Term Debt 1,842,663 1,508,683 1,560,236 - ------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 25,223,180 24,947,837 24,580,864 - ------------------------------------------------------------------------------------------------------------- SHAREOWNERS' EQUITY - ------------------------------------------------------------------------------------------------------------- Common Stock (c) 592,128 583,005 579,020 Capital Surplus 465,205 444,815 444,545 Retained Earnings 2,005,877 1,821,342 1,736,622 Unrealized Gains on Securities Available for Sale 117,700 98,254 51,137 Treasury Stock (71,270) (184,580) (200,745) - ------------------------------------------------------------------------------------------------------------- TOTAL SHAREOWNERS' EQUITY 3,109,640 2,762,836 2,610,579 - ------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 28,332,820 27,710,673 27,191,443 - ------------------------------------------------------------------------------------------------------------- (a) Amortized cost: September 30, 1998 - $8,246,066, December 31, 1997 - $7,988,085 and September 30, 1997 - $7,939,213. (b) Market value: September 30, 1998 - $85,170, December 31, 1997 - $85,375 and September 30, 1997 - $336,850. (c) Stated value $2.22 per share; authorized 300,000,000; outstanding September 30, 1998 - 266,724,258 (excludes 1,116,365 treasury shares), December 31, 1997 - 262,614,641 (excludes 5,424,885 treasury shares) and September 30, 1997 - 262,023,190 (excludes 5,931,702 treasury shares). Outstanding and treasury shares have been adjusted for the three- for-two stock split effected in the form of a stock dividend declared March 17, 1998 and distributed April 15, 1998.
See Notes to Consolidated Financial Statements 3 4
FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) - ------------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, --------------------------------------------------------------------------- ($000'S) 1998 1997 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST INCOME Interest and Fees on Loans and Leases $ 366,625 348,719 $ 1,091,659 1,010,857 Interest on Securities Taxable 130,175 128,374 414,695 391,404 Exempt from Income Taxes 3,097 3,189 9,005 10,831 - ------------------------------------------------------------------------------------------------------------------------------- Total Interest on Securities 133,272 131,563 423,700 402,235 Interest on Other Short-Term Investments 2,198 4,078 6,854 12,437 - ------------------------------------------------------------------------------------------------------------------------------- Total Interest Income 502,095 484,360 1,522,213 1,425,529 - ------------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on Deposits Interest Checking 18,036 15,069 50,617 42,318 Savings and Money Market 36,826 38,884 115,179 114,750 Time Deposits 118,262 129,055 361,158 380,315 - ------------------------------------------------------------------------------------------------------------------------------- Total Interest on Deposits 173,124 183,008 526,954 537,383 Interest on Federal Funds Borrowed 30,800 18,750 89,891 61,324 Interest on Short-Term Bank Notes 3,219 10,168 25,746 28,990 Interest on Other Short-Term Borrowings 20,783 19,443 65,253 57,929 Interest on Long-Term Debt and Notes 23,774 24,610 71,537 64,240 - ------------------------------------------------------------------------------------------------------------------------------- Total Interest Expense 251,700 255,979 779,381 749,866 - ------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 250,395 228,381 742,832 675,663 Provision for Credit Losses 15,234 18,929 82,836 59,290 - ------------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 235,161 209,452 659,996 616,373 OTHER OPERATING INCOME Investment Advisory Income 38,489 24,168 97,453 68,748 Service Charges on Deposits 32,936 27,849 94,199 81,126 Data Processing Income 35,412 29,778 97,569 79,090 Other Service Charges and Fees 58,264 45,273 159,630 133,196 Securities Gains 2,236 2,031 6,871 2,338 - ------------------------------------------------------------------------------------------------------------------------------- Total Other Operating Income 167,337 129,099 455,722 364,498 OPERATING EXPENSES Salaries, Wages and Incentives 75,226 62,084 212,106 179,080 Employee Benefits 15,053 13,568 42,349 40,016 Equipment Expenses 8,128 7,189 23,842 20,916 Net Occupancy Expenses 13,210 12,163 37,891 36,113 Other Operating Expenses 69,876 65,412 209,948 193,020 Merger-Related Charges - - 89,701 - - ------------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 181,493 160,416 615,837 469,145 - ------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 221,005 178,135 499,881 511,726 Applicable Income Taxes 76,932 59,529 173,817 170,880 - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME (a) $ 144,073 118,606 $ 326,064 340,846 - ------------------------------------------------------------------------------------------------------------------------------- Per Share (b): Earnings $ 0.54 0.45 $ 1.23 1.30 Diluted Earnings $ 0.53 0.45 $ 1.21 1.28 Cash Dividends $ 0.17 .14 2/3 $ 0.51 0.42 2/9 - ------------------------------------------------------------------------------------------------------------------------------- Average Shares (000's) (b): Outstanding 266,840 261,613 264,849 262,359 Diluted 272,128 266,163 269,976 266,443 - ------------------------------------------------------------------------------------------------------------------------------- (a) and (b) are described on Page 6.
See Notes to Consolidated Financial Statements 4 5
FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) - -------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, ------------------------------ ($000'S) 1998 1997 - -------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income $ 326,064 340,846 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Credit Losses 82,836 59,290 Depreciation, Amortization and Accretion 58,946 50,775 Provision for Deferred Income Taxes 38,191 22,180 Realized Securities Gains (8,905) (6,895) Realized Securities Losses 2,034 4,557 Proceeds from Sales of Residential Mortgage Loans Held for Sale 2,382,295 1,059,422 Net Gains on Sales of Loans (24,022) (7,656) Increase in Residential Mortgage Loans Held for Sale (2,444,211) (1,122,763) Decrease (Increase) in Accrued Income Receivable (57,204) 8,596 Decrease (Increase) in Other Assets (79,929) 48,916 Increase in Accrued Taxes, Interest and Expenses 112,113 74,331 Decrease in Other Liabilities (27,784) (256) - -------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 360,424 531,343 - -------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds from Sales of Securities Available for Sale 1,573,104 1,221,678 Proceeds from Calls, Paydowns and Maturities of Securities Available for Sale 1,732,458 868,849 Purchases of Securities Available for Sale (2,526,532) (1,791,974) Proceeds from Calls, Paydowns and Maturities of Securities Held to Maturity 39,356 207,559 Purchases of Securities Held to Maturity (52,058) (116,166) Increase in Other Short-Term Investments 49,002 16,719 Increase in Loans and Leases (1,172,629) (1,466,678) Purchases of Bank Premises and Equipment (50,128) (42,610) Proceeds from Disposal of Bank Premises and Equipment 7,621 4,106 Net Cash Paid in Acquisitions (15,000) (10,906) - -------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (414,806) (1,109,423) - -------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Purchases of Deposits - 128,927 Decrease in Core Deposits (424,913) (365,667) Increase in CDs - $100,000 and Over, including Foreign 44,503 651,689 Increase (Decrease) in Federal Funds Borrowed 770,240 (290,057) Decrease in Short-Term Bank Notes (495,000) (181,000) Increase (Decrease) in Other Short-Term Borrowings (126,704) 463,312 Proceeds from Issuance of Long-Term Debt 1,452,869 1,739,548 Repayment of Long-Term Debt (1,118,889) (1,378,603) Payment of Cash Dividends (122,597) (98,605) Exercise of Stock Options 14,728 14,209 Proceeds from Sale of Common Stock 178,125 - Purchases of Treasury Stock (143,890) (276,307) Other (2,806) 1,781 - -------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 25,666 409,227 - -------------------------------------------------------------------------------------------------------------------- DECREASE IN CASH AND DUE FROM BANKS (28,716) (168,853) CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 777,378 877,433 - -------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 748,662 708,580 - --------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 5 6
FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (UNAUDITED) - ----------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, ----------------------------------- ($000'S) 1998 1997 - ----------------------------------------------------------------------------------------------------------- BALANCE AT DECEMBER 31 $ 2,762,836 2,561,335 Net Income 326,064 340,846 Nonowner Changes in Equity, Net of Tax: Change in Unrealized Gains on Securities Available for Sale 19,446 39,820 - ----------------------------------------------------------------------------------------------------------- Net Income and Nonowner Changes in Equity 345,510 380,666 Cash Dividends Declared (1998 - $.51 per share and 1997 - $.42 2/9 per share) (b) (133,326) (101,963) Shares Acquired for Treasury (143,890) (276,307) Earnings Adjustment of Pooled Entity (a) (7,803) - Stock Options Exercised Including Treasury Shares Issued 14,728 14,209 Stock Issued in Public Offering 178,125 - Stock Issued in Acquisitions and Other 93,460 32,639 - ----------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30 $ 3,109,640 2,610,579 - ----------------------------------------------------------------------------------------------------------- (a) The restatement of the CitFed Bancorp, Inc. merger was accomplished by combining CitFed's March 31, 1998 fiscal year financial information with the Bancorp's December 31, 1997 calendar year financial information. In 1998, CitFed's fiscal year was conformed to the Bancorp's calendar year. As a result of conforming fiscal periods, the Bancorp's consolidated statements of income for the fourth quarter of 1997 and the first quarter of 1998 include CitFed's net income for the three months ended March 31, 1998 of $7,803. An adjustment to shareowners' equity removes the effect of including CitFed's financial results in both periods. (b) Average shares and per share amounts have been adjusted for the three-for-two stock split effected in the form of a stock dividend declared March 17, 1998 and distributed April 15, 1998. Cash dividends per common share are those of Fifth Third Bancorp declared prior to the mergers with CitFed Bancorp, Inc. and State Savings Company.
See Notes to Consolidated Financial Statements 6 7 FINANCIAL INFORMATION Item 1. Notes to Consolidated Financial Statements - --------------------------------------------------- 1. In the opinion of management, the unaudited consolidated financial statements include all adjustments (which consist of normal recurring accruals) necessary to present fairly the consolidated financial position as of September 30, 1998 and 1997, the results of operations for the three and nine months ended September 30, 1998 and 1997, and cash flows for the nine months ended September 30, 1998 and 1997. In accordance with generally accepted accounting principles for interim financial information, these statements do not include all of the information and footnotes required by generally accepted accounting principles for complete annual financial statements. Financial information as of December 31, 1997 has been derived from the audited consolidated financial statements of the Registrant. The results of operations for the three and nine months ended September 30, 1998 and 1997 and cash flows for the nine months ended September 30, 1998 and 1997 are not necessarily indicative of the results to be expected for the full year. For further information, refer to the consolidated financial statements and footnotes thereto for the year ended December 31, 1997, included in the Registrant's Annual Report on Form 10-K. 2. Financial data for all prior periods have been restated to reflect the second quarter 1998 mergers with CitFed Bancorp, Inc., a publicly-traded savings and loan holding company headquartered in Dayton, Ohio with $3.1 billion in assets, and State Savings Company, a privately-owned thrift holding company headquartered in Columbus, Ohio with $2.7 billion in assets. Both transactions were tax-free, stock-for-stock exchanges accounted for as poolings-of-interest. The Registrant exchanged 13,219,085 and 16,625,271 shares of Fifth Third Common Stock for all outstanding shares of CitFed Bancorp, Inc. and State Savings Company, respectively. The contributions of CitFed Bancorp, Inc. and State Savings Company to consolidated net interest income, other operating income and net income for the periods prior to the mergers were as follows (000's):
Three Months Three Months Nine Months Ended Ended Ended March 31, September 30, September 30, 1998 1997 1997 - --------------------------------------------------------------------------------------------------------- NET INTEREST INCOME - --------------------------------------------------------------------------------------------------------- Fifth Third Bancorp $ 197,900 186,366 552,497 CitFed Bancorp, Inc. 19,614 18,249 53,401 State Savings Company 25,340 23,766 69,765 - --------------------------------------------------------------------------------------------------------- Combined $ 242,854 228,381 675,663 - --------------------------------------------------------------------------------------------------------- OTHER OPERATING INCOME - --------------------------------------------------------------------------------------------------------- Fifth Third Bancorp $ 126,381 115,034 322,270 CitFed Bancorp, Inc. 7,804 8,925 25,690 State Savings Company 5,935 5,140 16,538 - --------------------------------------------------------------------------------------------------------- Combined $ 140,120 129,099 364,498 - ---------------------------------------------------------------------------------------------------------
7 8
NET INCOME - --------------------------------------------------------------------------------------------------------- Fifth Third Bancorp $ 108,981 103,424 294,001 CitFed Bancorp, Inc. 7,803 6,655 18,765 State Savings Company 7,447 8,527 28,080 - --------------------------------------------------------------------------------------------------------- Combined $ 124,231 118,606 340,846 - ---------------------------------------------------------------------------------------------------------
The combined consolidated results of operations are not necessarily indicative of the results that would have occurred had the acquisitions been consummated in the past or which may be attained in the future. 3. On June 12, 1998, the Registrant acquired The Ohio Company, a full-service broker-dealer for retail and institutional clients headquartered in Columbus, Ohio. The merger was accounted for as a purchase. In connection with the acquisition, the Registrant exchanged 1,862,765 shares of Fifth Third Common Stock for all of the outstanding shares of capital stock of The Ohio Company. The financial results of The Ohio Company, included in the results of operations subsequent to the date of acquisition, were not material to the Registrant's financial condition and operating results for the periods presented. 4. On April 9, 1998, the Registrant acquired W. Lyman Case & Company, a commercial mortgage banking firm based in Columbus, Ohio which originated more than $800 million in financing and equity transactions in 1997 and has a loan servicing portfolio of $2 billion. The transaction was accounted for as a purchase. The financial results of W. Lyman Case & Company, included in the results of operations subsequent to the date of acquisition, were not material to the Registrant's financial condition and operating results for the periods presented. 5. Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," establishes accounting and reporting standards for derivative instruments and hedging activities and requires recognition of all derivatives as either assets or liabilities measured at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the resulting designation. The statement is required for the year 2000. The Registrant has not determined whether it will adopt early the provisions of this statement or the impact implementation will have on the consolidated financial statements. 6. Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an Enterprise and Related Information," is required for 1998 and will be applied in the Registrant's 1998 annual financial statements. The statement requires financial disclosure and descriptive information about reportable operating segments. Upon its adoption, this statement may result in additional financial statement disclosures. 8 9 7. The Registrant's board of directors approved a three-for-two stock split on March 17, 1998. The additional shares resulting from the split were distributed on April 15, 1998 to shareowners of record as of March 31, 1998. The consolidated financial statements, notes and other references to share and per share data have been retroactively restated for the stock split. 8. In the first nine months of 1998, the Registrant paid $784,999,000 in interest and $112,650,000 in Federal income taxes. In the first nine months of 1997, the Registrant paid $764,144,000 in interest and $81,150,000 in Federal income taxes. In the first nine months of 1998, the Registrant had noncash investing activities consisting of the securitization of $942,600,000 of residential mortgage loans. There were $838,847,000 of residential mortgage loan securitizations during the first nine months of 1997. 9. In 1998, the Registrant adopted Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive Income." The statement establishes standards for the reporting and display of net income and nonowner changes in equity. The Registrant elected to present the required disclosures in the Consolidated Statements of Changes in Shareowners' Equity on page 6. The caption "Net Income and Nonowner Changes in Equity," represents total comprehensive income as defined in the statement. Disclosure of the reclassification adjustments, related tax effects allocated to nonowner changes in equity and accumulated nonowner changes in equity for the nine months ended September 30 is provided below (000's).
1998 1997 - ------------------------------------------------------------------------------------------------------------------------- Reclassification Adjustments, Before Tax - ------------------------------------------------------------------------------------------------------------------------- Change in Unrealized Gains Arising During Period $ 23,046 58,924 Reclassification Adjustment for Gains Included in Net Income 6,871 2,338 - ------------------------------------------------------------------------------------------------------------------------- Net Unrealized Gains on Securities Available for Sale $ 29,917 61,262 - ------------------------------------------------------------------------------------------------------------------------- Related Tax Effects - ------------------------------------------------------------------------------------------------------------------------- Change in Unrealized Gains Arising During Period $ (8,066) (20,624) Reclassification Adjustment for Gains Included in Net Income (2,405) (818) - ------------------------------------------------------------------------------------------------------------------------- Net Unrealized Gains on Securities Available for Sale $(10,471) (21,442) - ------------------------------------------------------------------------------------------------------------------------- Reclassification Adjustments, Net of Tax - ------------------------------------------------------------------------------------------------------------------------- Change in Unrealized Gains Arising During Period $ 14,980 38,300 Reclassification Adjustment for Gains Included in Net Income 4,466 1,520 - ------------------------------------------------------------------------------------------------------------------------- Net Unrealized Gains on Securities Available for Sale $ 19,446 39,820 - ------------------------------------------------------------------------------------------------------------------------- Accumulated Nonowner Changes in Equity - ------------------------------------------------------------------------------------------------------------------------- Beginning Balance-Unrealized Holding Gains on Securities Available for Sale $ 98,254 11,317 Current Period Change 19,446 9,820 - ------------------------------------------------------------------------------------------------------------------------- Ending Balance-Unrealized Holding Gains on Securities Available for Sale $117,700 51,137 - -------------------------------------------------------------------------------------------------------------------------
9 10 10. On May 12, 1998, the Registrant issued 3,600,000 shares of Common Stock through a public offering. The net proceeds from the sale of Common Stock were used by the Registrant for general corporate purposes. The issuance of the shares also facilitated the Registrant's ability to account for the acquisition of State Savings Company as a pooling-of-interests. 11. Reconciliation of Earnings Per Share to Diluted Earnings Per Share follows:
THREE MONTHS ENDED SEPTEMBER 30, 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- AVERAGE PER-SHARE AVERAGE PER-SHARE (000's) INCOME SHARES AMOUNT INCOME SHARES AMOUNT - ---------------------------------------------------------------------------------------------------------------------------------- EPS Income available to common shareowners $144,073 266,840 $ 0.54 $118,606 261,613 $ 0.45 EFFECT OF DILUTIVE SECURITIES Stock Options 5,288 4,550 - ---------------------------------------------------------------------------------------------------------------------------------- DILUTED EPS Income available to common shareowners plus assumed conversions $144,073 272,128 $ 0.53 $118,606 266,163 $ 0.45 - ---------------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, 1998 1997 - ---------------------------------------------------------------------------------------------------------------------------------- PER-SHARE PER-SHARE (000's) INCOME SHARES AMOUNT INCOME SHARES AMOUNT - ---------------------------------------------------------------------------------------------------------------------------------- EPS Income available to common shareowners $326,064 264,849 $ 1.23 $340,846 262,359 $ 1.30 EFFECT OF DILUTIVE SECURITIES Stock Options 5,127 4,084 - ---------------------------------------------------------------------------------------------------------------------------------- DILUTED EPS Income available to common shareowners plus assumed conversions $326,064 269,976 $ 1.21 $340,846 266,443 $ 1.28 - ----------------------------------------------------------------------------------------------------------------------------------
Item 2. Management's Discussion and Analysis of Financial Condition - ------------------------------------------------------------------- and Results of Operations ------------------------- The following is management's discussion and analysis of certain significant factors which have affected the Registrant's financial condition and results of operations during the periods included in the consolidated financial statements which are a part of this filing. This report includes forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended that involve inherent risks and uncertainties. A number of important factors could cause actual results to differ materially from those in the forward-looking statements. Those factors include the economic environment, competition, products and pricing in geographic and business areas in which the Registrant operates, prevailing interest rates, 10 11 changes in government regulations and policies affecting financial services companies, credit quality and credit risk management, changes in the banking industry including the effects of consolidation resulting from possible mergers of financial institutions, acquisitions and integration of acquired businesses. 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. Results of Operations - --------------------- The Registrant's operating income was $401.6 million for the first nine months of 1998 and $144.1 million for the third quarter, up 17.8 percent and 21.5 percent, respectively, compared to $340.8 million and $118.6 million for the same periods last year. Third quarter diluted operating earnings per share were $.53, up 17.8 percent over last year's $.45 and $1.49 for the first nine months, up 16.4 percent over 1997's $1.28. Operating earnings exclude nonrecurring pretax charges of $106.4 million resulting from mergers with CitFed Bancorp, Inc. and State Savings Company. The effect of these charges was to reduce net income by $75.6 million, or $.28 per diluted share. Including the nonrecurring charges, earnings per diluted share were $1.21 for the first nine months of 1998 with net income totaling $326.1 million. Total assets were $28.3 billion at quarter end, compared to 1997's quarter-end assets of $27.2 billion. For 1998's third quarter, return on average assets was 2.03 percent and return on average equity was 19.3 percent. The Registrant's net interest income on a fully taxable equivalent basis for the third quarter of 1998 was $262.3 million, a 9.6 percent increase over $239.2 million for the same 1997 period. This increase resulted principally from improved earning-asset and deposit mix and a 16 basis point increase in net interest margin. The net provision for credit losses was $15.2 million in the 1998 third quarter. The net provision for credit losses for the nine months ended September 30, 1998 included a $16.7 million provision to conform State Savings and CitFed to the Registrant's reserving and charge-off practices. Net charge-offs for the third quarter were .54 percent of average loans and leases, compared with .49 percent for last quarter and .42 percent for the third quarter of 1997. The net charge-off ratio remains near the Registrant's historical 10-year average of .50 percent and the reserve for credit losses is in excess of four times nonperforming assets. Nonperforming assets as a percentage of total loans, leases and other real estate owned was .34 percent at September 30, 1998, down from .51 percent at September 30, 1997. The reserve for credit losses as a percentage of total loans and leases was 1.50 percent at September 30, 1998 compared to 1.44 percent one year earlier. 11 12 Item 2. Management's Discussion and Analysis of Financial Condition - ------------------------------------------------------------------- and Results of Operations (continued) ------------------------------------- Total other operating income, excluding securities gains, for the third quarter increased 29.9 percent to $165.1 million compared to the third quarter of 1997. Investment advisory services posted a 59 percent increase featuring solid growth in all lines of business, especially retail brokerage. Midwest Payment Systems' continued success in attracting new EFT and merchant processing clients, the growing use of our expanding ATM network and the increased popularity of debit cards contributed to a 19 percent increase in data processing income. Service charges on deposits were up 18 percent from growth in transaction accounts. Mortgage banking revenue, consumer loan and lease fees and commercial banking income contributed to a 29 percent increase in other service charges and fees. The overhead ratio (operating expenses divided by the sum of taxable equivalent net interest income and other operating income) for the quarter was 42.4 percent, down from 43.6 percent for the third quarter of 1997. Acquisitions, growth in affiliate markets and Year 2000 efforts affected year-over-year compensation expense comparisons. Volume-related expenses of the Registrant's processing and fee businesses, along with higher loan and lease processing costs from record volumes, contributed mostly to the 7 percent increase in other operating expenses. Operating expenses for the nine months ended September 30, 1998 include a one-time, merger-related pretax charge of $89.7 million resulting directly from the acquisitions of CitFed and State Savings. The charge consists of employee-related obligations, including change-of-control benefits and severance, costs to eliminate duplicate facilities and equipment, contract terminations, conversion expenses and professional fees. Financial Condition - ------------------- The Registrant's balance sheet remains strong with high-quality assets and solid capital levels. Net interest income rose 10 percent over 1997's third quarter and was driven by an improved earning-asset and deposit mix and a 16 basis point increase in net interest margin. Fifth Third's net interest margin was 3.97 percent in the third quarter, up from 3.87 percent last quarter and 3.81 percent in the third quarter a year ago. To improve the performance of the entities acquired last quarter, the Registrant sold $973 million of lower-yielding securities, including those acquired in the CitFed and State Savings mergers, and reduced related higher-cost borrowings by $474 million. In addition, $863 million of residential mortgages acquired in the mergers were securitized. The reduction in total loans and leases from the securitization was offset by strong growth in commercial and consumer loans and leases. Despite the decline in total earning assets from last quarter, Fifth Third's success in aggressively improving mix resulted in an increase in net interest income compared to last quarter. Successful sales campaigns in Fifth Third's branch locations fueled over $417 million in direct installment loan originations this quarter, a 47 percent increase over the $284 million in the third quarter last year. Residential mortgage originations were $1.1 billion this quarter compared to 12 13 Item 2. Management's Discussion and Analysis of Financial Condition - ------------------------------------------------------------------- and Results of Operations (continued) ------------------------------------- $1.2 billion in the 1997 third quarter. Commercial loan and lease growth also remained strong highlighted by a 14 percent increase in commercial loans and leases, excluding the effect of securitizations over the past year, and a 13 percent increase in consumer loan and leases. Emphasis on transaction account promotions has continued to improve the Registrant's deposit cost and mix. Demand deposits and interest-bearing transaction account balances were up 16 percent over the third quarter of 1997. Liquidity and Capital Resources - ------------------------------- The maintenance of an adequate level of liquidity is necessary to ensure sufficient funds are available to meet customer loan demand and deposit withdrawals. The banking subsidiaries' liquidity sources consist of short-term marketable securities, maturing loans and federal funds loaned and selected securitizable loan assets. Liquidity has also been obtained through liabilities such as customer-related core deposits, funds borrowed, certificates of deposit and public funds deposits. At September 30, 1998, shareowners' equity was $3.110 billion, compared to $2.611 billion at September 30, 1997, an increase of $499 million, or 19.1 percent. Shareowners' equity as a percentage of total assets as of September 30, 1998 was 10.98 percent. The Federal Reserve Board has adopted risk-based capital guidelines which assign risk weightings to assets and off-balance sheet items and also define and set minimum capital requirements (risk-based capital ratios). The guidelines also define "well-capitalized" ratios of Tier 1, total capital and leverage as 6 percent, 10 percent and 5 percent, respectively. The Registrant exceeded these "well-capitalized" ratios at September 30, 1998 and 1997. At September 30, 1998, the Registrant had a Tier 1 risk-based capital ratio of 12.34 percent, a total risk-based capital ratio of 14.57 percent and a leverage ratio of 10.22 percent. At September 30, 1997, the Registrant had a Tier 1 risk-based capital ratio of 11.07 percent, a total risk-based capital ratio of 13.45 percent and a leverage ratio of 9.36 percent. In January 1998, the Registrant's board of directors rescinded Fifth Third Bancorp's stock repurchase programs. No shares were purchased under these programs from June 1997 to May 1998. In June 1998 following the closing of the State Savings Company acquisition, 843,500 shares were repurchased in the open market for $45.9 million, or an average purchase price of $54.41 per share, and were subsequently reissued in the acquisition of CitFed Bancorp on June 26, 1998. In July 1998, 1,559,000 shares of the Fifth Third Bancorp Common Stock issued in The Ohio Company acquisition were repurchased in the open market for $98 million, or an average purchase price of $62.86 per share, and remain available for reissuance in the Registrant's stock option and dividend reinvestment plans. The Registrant does not intend to repurchase any additional shares in 1998. 13 14 Item 2. Management's Discussion and Analysis of Financial Condition - ------------------------------------------------------------------- and Results of Operations (continued) ------------------------------------- Year 2000 - --------- As with other companies, the Registrant's computer programs were originally designed to recognize calendar years by their last two digits. Calculations performed using these truncated fields may not work properly with dates from the Year 2000 and beyond. The Registrant began planning its Year 2000 conversion early in 1996 and formed a project committee that meets biweekly to review the status of the conversion. The Registrant's project includes both information technology systems and computer chip embedded functions such as safes, elevators, security systems, building heating and cooling and other operating facilities. Senior management oversees the project and regularly reports to the Board of Directors. Senior management oversees the project and regularly reports to the Board of Directors. The Registrant expects to have its internal computer systems substantially Year 2000 compliant by the end of 1998 and management estimates that approximately 95 percent of this effort is complete through the third quarter of 1998 with 100 percent of the critical application effort completed. The project involves two phases. The first is the awareness and assessment phases of Fifth Third's Year 2000 effort which are complete. The second is the renovation, validation and implementation phases which are scheduled to be substantially complete for all systems by year-end 1998. In 1999, the Registrant will conduct internal integration testing and interface testing with critical business partners. Because the Year 2000 compliance effort is largely being completed by internal staff, Fifth Third does not expect to incur any significant costs with outside contractors relative to the completion of this task. Fifth Third anticipates a total compliance cost of under $10 million; however, no material incremental costs are projected to be incurred. The estimated cost includes all software, hardware and labor costs. The Registrant presently believes that with the planned modifications to existing systems and conversion to new systems, the Year 2000 compliance issues will be resolved on a timely basis, and that any related costs will not have a material impact on the operations, cash flows, or financial condition of future periods. The risks associated with Fifth Third's Year 2000 compliance relate primarily to its relationship with critical business partners, which include customers, vendors, service suppliers, and utilities and their ability to effectively address their own Year 2000 issues. Major risks associated with the Year 2000 issue include a shut down of voice and data communication systems due to failure by systems, satellites or telephone companies; excessive cash withdrawal activities; ATM failures; cash courier delays or non-availability; problems with international accounts or offices, including inaccurate or delayed information or inaccessibility to data; and government facilities or utility companies not opening or operating. Each division within Fifth Third has initiated projects to assess the Year 2000 preparedness of individual customers and material relationships and the impact on the Registrant in accordance with Federal Financial Institutions Examination Council guidelines. Contingency plans for critical business partners are being developed as their Year 2000 plans and procedures are analyzed. The Federal Reserve, which is Fifth Third's primary bank regulator, will be including a review of the risk assessments and contingency plans in its quarterly examinations of Fifth Third's Year 2000 preparedness. Item 3. Quantitative and Qualitative Disclosures About Market Risk - ------------------------------------------------------------------- Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Registrant uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. 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 Registrant would increase by 1.27 percent over one year and increase by 8.24 percent over two years. A 200 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 3.50 percent over one year and decrease net interest income by an estimated 8.22 percent over two years. All of these estimated changes in net interest income are within the policy guidelines established by the Registrant's board of directors. 14 15 PART II. OTHER INFORMATION Item 6. Exhibits and Reports on Form 8-K - ----------------------------------------- (a) List of Exhibits (27) - Financial Data Schedule for the Nine Months Ended September 30, 1998 (b) Reports on Form 8-K None SIGNATURES Pursuant to the requirements 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 Date: November 13, 1998 /s/ Neal E. Arnold ------------------ Neal E. Arnold Senior Vice President and Chief Financial Officer 15 EX-27 2 EXHIBIT 27
9 THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIFTH THIRD BANCORP'S QUARTERLY REPORT ON FORM 10-Q FOR THE NINE MONTHS ENDED SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000035527 FIFTH THIRD BANCORP 1,000 9-MOS DEC-31-1998 JAN-01-1998 SEP-30-1998 748,662 78,423 53,000 0 8,426,893 85,175 85,170 17,438,071 261,580 28,332,820 18,639,486 3,799,467 941,564 1,842,663 0 0 592,128 2,517,512 28,332,820 1,091,659 423,700 6,854 1,522,213 526,954 779,381 742,832 82,836 6,871 615,837 499,881 326,064 0 0 326,094 1.23 1.21 3.89 52,695 76,495 0 0 250,950 94,610 19,599 261,580 261,580 0 0
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