-----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, Er7Hr3DyiwqmHLsxyAIEpfn0LTdUh5JcajOGo+ELRnCbl7NQYaY4LPnUw64Fbno5 xzDymTrdqcTeDVjER2XCgg== 0000950152-99-006483.txt : 19990809 0000950152-99-006483.hdr.sgml : 19990809 ACCESSION NUMBER: 0000950152-99-006483 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19990630 FILED AS OF DATE: 19990806 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: 333-72465 FILM NUMBER: 99679867 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 10-Q 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 June 30, 1999 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 271,346,733 shares of the Registrant's Common Stock, without par value, outstanding as of July 31, 1999. 2 FIFTH THIRD BANCORP INDEX Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - June 30, 1999 and 1998 and December 31, 1998 3 Consolidated Statements of Income - Three and Six Months Ended June 30, 1999 and 1998 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1999 and 1998 5 Consolidated Statements of Changes in Shareholders' Equity - Six Months Ended June 30, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 - 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 - 18 Item 3. Quantitative and Qualitative Disclosures About Market Risk 19 Part II. Other Information 20
2 3 FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
======================================================================================================================== JUNE 30, DECEMBER 31, JUNE 30, ($000'S) 1999 1998 1998 ======================================================================================================================== ASSETS - ------------------------------------------------------------------------------------------------------------------------ Cash and Due from Banks $ 703,303 $ 819,862 $ 882,432 Securities Available for Sale (a) 9,497,834 8,334,625 7,890,292 Securities Held to Maturity (b) 63,505 86,013 100,510 Other Short-Term Investments 110,472 118,535 39,028 Loans Held for Sale 215,513 492,017 329,870 Loans and Leases Commercial Loans 5,117,889 4,822,992 4,562,990 Construction Loans 670,350 572,082 554,584 Commercial Mortgage Loans 1,332,052 1,178,752 1,239,497 Commercial Lease Financing 1,844,941 1,739,316 1,612,704 Residential Mortgage Loans 4,215,184 4,269,880 5,212,635 Consumer Loans 3,706,365 3,354,681 3,164,660 Consumer Lease Financing 3,108,614 2,530,535 2,275,574 Unearned Income (770,666) (689,215) (647,530) Reserve for Credit Losses (284,443) (266,860) (270,129) - ------------------------------------------------------------------------------------------------------------------------ Total Loans and Leases 18,940,286 17,512,163 17,704,985 Bank Premises and Equipment 335,396 330,838 316,588 Accrued Income Receivable 265,623 282,551 221,150 Other Assets 1,496,489 945,178 807,827 - ------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 31,628,421 $ 28,921,782 $ 28,292,682 ======================================================================================================================== LIABILITIES - ------------------------------------------------------------------------------------------------------------------------ Deposits Demand $ 3,209,577 $ 3,194,782 $ 2,992,603 Interest Checking 3,120,466 3,160,227 2,885,282 Savings and Money Market 4,517,651 4,418,523 4,349,236 Time Deposits 9,281,146 8,006,823 8,565,222 - ------------------------------------------------------------------------------------------------------------------------ Total Deposits 20,128,840 18,780,355 18,792,343 Federal Funds Borrowed 3,239,496 2,038,541 1,872,756 Short-Term Bank Notes 125,000 - 350,000 Other Short-Term Borrowings 2,013,637 1,655,386 1,712,296 Accrued Taxes, Interest and Expenses 784,111 710,772 651,217 Other Liabilities 180,753 270,055 199,439 Long-Term Debt 1,823,295 2,288,151 1,637,185 - ------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 28,295,132 25,743,260 25,215,236 ======================================================================================================================== SHAREHOLDERS' EQUITY (c) - ------------------------------------------------------------------------------------------------------------------------ Common Stock 602,140 592,559 594,729 Capital Surplus 538,774 495,067 484,359 Retained Earnings 2,249,743 2,066,407 1,907,147 Unrealized Gains (Losses) on Securities Available for Sale (46,758) 82,448 91,211 Non-Officer Employee Stock Grant (5,981) - - Treasury Stock (4,629) (57,959) - - ------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 3,333,289 3,178,522 3,077,446 - ------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 31,628,421 $ 28,921,782 $ 28,292,682 ========================================================================================================================
(a) Amortized cost: June 30, 1999 - $9,570,240, December 31, 1998 - $8,208,032 and June 30, 1998 - $7,749,882. (b) Market value: June 30, 1999 - $68,973, December 31, 1998 - $86,013 and June 30, 1998 - $100,514. (c) Preferred stock no par value; 500,000 shares authorized none issued; common stock, stated value $2.22 per share; authorized 500,000,000; outstanding June 30, 1999 - 271,234,131, (excludes 73,636 treasury shares) December 31, 1998 - 266,918,544 (excludes 922,028 treasury shares) and June 30, 1998 - 267,895,839. 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 Six Months Ended JUNE 30, June 30, ----------------------------------------------------------------- ($000's) 1999 1998 1999 1998 ============================================================================================================================ INTEREST INCOME Interest and Fees on Loans and Leases $ 367,854 $ 369,690 $ 720,870 $ 725,034 Interest on Securities Taxable 150,384 138,792 288,922 284,520 Exempt from Income Taxes 3,047 2,968 5,875 5,908 - --------------------------------------------------------------------------------------------------------------------------- Total Interest on Securities 153,431 141,760 294,797 290,428 Interest on Other Short-Term Investments 516 1,924 2,412 4,656 - --------------------------------------------------------------------------------------------------------------------------- Total Interest Income 521,801 513,374 1,018,079 1,020,118 - --------------------------------------------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on Deposits Interest Checking 17,357 16,790 32,330 32,581 Savings and Money Market 32,399 38,897 64,544 78,353 Time Deposits 100,983 120,001 200,680 242,896 - --------------------------------------------------------------------------------------------------------------------------- Total Interest on Deposits 150,739 175,688 297,554 353,830 Interest on Federal Funds Borrowed 38,980 31,881 70,107 59,091 Interest on Short-Term Bank Notes 7,038 10,061 13,461 22,527 Interest on Other Short-Term Borrowings 19,941 22,314 40,920 44,470 Interest on Long-Term Debt and Notes 24,630 23,847 45,370 47,763 - --------------------------------------------------------------------------------------------------------------------------- Total Interest Expense 241,328 263,791 467,412 527,681 - --------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME 280,473 249,583 550,667 492,437 Provision for Credit Losses 27,661 44,774 51,021 67,602 - --------------------------------------------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 252,812 204,809 499,646 424,835 OTHER OPERATING INCOME Investment Advisory Income 42,323 31,149 81,707 58,964 Service Charges on Deposits 34,025 32,747 65,570 61,263 Data Processing Income 40,881 32,327 78,549 62,157 Other Service Charges and Fees 69,463 51,562 134,573 101,366 Securities Gains 660 480 1,919 4,635 - --------------------------------------------------------------------------------------------------------------------------- Total Other Operating Income 187,352 148,265 362,318 288,385 OPERATING EXPENSES Salaries, Wages and Incentives 80,396 70,004 155,981 136,880 Employee Benefits 18,467 9,702 36,161 27,296 Equipment Expenses 8,782 8,216 17,552 16,219 Net Occupancy Expenses 13,529 12,623 26,660 24,681 Other Operating Expenses 74,220 70,815 151,840 139,567 Merger-Related Charges - 89,701 - 89,701 - --------------------------------------------------------------------------------------------------------------------------- Total Operating Expenses 195,394 261,061 388,194 434,344 - --------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 244,770 92,013 473,770 278,876 Applicable Income Taxes 83,214 34,253 161,767 96,885 - --------------------------------------------------------------------------------------------------------------------------- NET INCOME (b) $ 161,556 $ 57,760 $ 312,003 $ 181,991 ============================================================================================================================ Per Share (a): Basic Earnings $ 0.60 $ 0.22 $ 1.16 $ 0.69 Diluted Earnings $ 0.59 $ 0.22 $ 1.14 $ 0.68 Cash Dividends $ 0.20 $ 0.17 $ 0.40 $ 0.34 - --------------------------------------------------------------------------------------------------------------------------- Average Shares (000's) (a): Outstanding 269,367 264,988 268,264 263,836 Diluted 274,789 270,026 273,822 268,952 ============================================================================================================================ (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)
============================================================================================================================ SIX MONTHS ENDED JUNE 30, -------------------------------- ($000's) 1999 1998 ============================================================================================================================ OPERATING ACTIVITIES Net Income $ 312,003 $ 181,991 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Credit Losses 51,021 67,602 Depreciation, Amortization and Accretion 33,457 40,408 Provision for Deferred Income Taxes 65,235 6,213 Realized Securities Gains (2,368) (6,922) Realized Securities Losses 449 2,287 Proceeds from Sales of Residential Mortgage Loans Held for Sale 1,471,492 1,705,308 Net Gains on Sales of Loans (22,814) (14,278) Increase in Residential Mortgage Loans Held for Sale (1,183,249) (1,757,128) Decrease (Increase) in Accrued Income Receivable 16,928 (8,101) Increase in Other Assets (545,777) (65,987) Increase in Accrued Taxes, Interest and Expenses 73,339 80,890 Increase (Decrease) in Other Liabilities (36,339) 12,337 - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 233,377 244,620 ============================================================================================================================ INVESTING ACTIVITIES Proceeds from Sales of Securities Available for Sale 411,336 1,209,351 Proceeds from Calls, Paydowns and Maturities of Securities Available for Sale 1,370,162 1,310,853 Purchases of Securities Available for Sale (2,869,044) (2,194,182) Proceeds from Calls, Paydowns and Maturities of Securities Held to Maturity 28,116 28,824 Purchases of Securities Held to Maturity (5,608) (51,865) Decrease in Other Short-Term Investments 8,063 141,397 Increase in Loans and Leases (1,738,093) (793,197) Purchases of Bank Premises and Equipment (30,586) (31,399) Proceeds from Disposal of Bank Premises and Equipment 9,334 4,517 Net Cash Paid in Acquisitions (44) (15,000) - --------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (2,816,364) (390,701) ============================================================================================================================ FINANCING ACTIVITIES Increase (Decrease) in Core Deposits (77,013) 13,164 Increase (Decrease) in CDs - $100,000 and Over, including Foreign 1,425,498 (240,717) Increase in Federal Funds Borrowed 1,200,955 619,203 Increase (Decrease) in Short-Term Bank Notes 125,000 (205,000) Increase (Decrease) in Other Short-Term Borrowings 358,251 (130,082) Proceeds from Issuance of Long-Term Debt and Notes 170,000 1,102,869 Repayment of Long-Term Debt (635,029) (973,383) Payment of Cash Dividends (106,875) (76,627) Exercise of Stock Options 12,183 9,759 Proceeds from Sale of Common Stock - 178,125 Purchases of Treasury Stock - (45,896) Other (6,542) (280) - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,466,428 251,135 =========================================================================================================================== INCREASE (DECREASE) IN CASH AND DUE FROM BANKS (116,559) 105,054 CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 819,862 777,378 - --------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 703,303 $ 882,432 - ---------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements 5 6 FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
=========================================================================================================================== -------------------------------------- SIX MONTHS ENDED JUNE 30, -------------------------------------- ($000'S) 1999 1998 =========================================================================================================================== BALANCE AT DECEMBER 31 $ 3,178,522 $ 2,762,836 Net Income 312,003 181,991 Nonowner Changes in Equity, Net of Tax: Change in Unrealized Gains on Securities Available for Sale (129,206) (7,043) - -------------------------------------------------------------------------------------------------------------------------- Net Income and Nonowner Changes in Equity 182,797 174,948 Cash Dividends Declared (1999 - $.40 per share and 1998 - $.34 per share) (a) (107,736) (87,983) Shares Acquired for Treasury - (45,896) Non-Officer Employee Stock Grant (c) (5,981) - Earnings Adjustment of Pooled Entity (b) - (7,803) Stock Options Exercised Including Treasury Shares Issued 12,183 9,759 Stock Issued in Public Offering (44) 178,125 Stock Issued in Acquisitions and Other 73,548 93,460 - -------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30 $ 3,333,289 $ 3,077,446 ===========================================================================================================================
(a) Cash dividends per common share for the 1998 period are those of Fifth Third Bancorp declared prior to the second quarter 1998 mergers with CitFed Bancorp, Inc. and State Savings Company. (b) 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 shareholders' equity removes the effect of including CitFed's financial results in both periods. (c) See Note 7 to the Consolidated Financial Statements. 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 June 30, 1999 and 1998, the results of operations for the three and six months ended June 30, 1999 and 1998, and the statements of cash flows for the six months ended June 30, 1999 and 1998. In accordance with generally accepted accounting principles for interim financial information, these statements do not include certain information and footnote disclosures required by generally accepted accounting principles for complete annual financial statements. Financial information as of December 31, 1998 has been derived from the audited Consolidated Financial Statements of Fifth Third Bancorp (the "Registrant"). The results of operations and statements of cash flows for the three and six months ended June 30, 1999 and 1998 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, 1998, included in the Registrant's Annual Report on Form 10-K. 2. Pending Business Combinations: On August 6, 1999, the Registrant completed the acquisition of Emerald Financial Corp., a unitary saving and loan holding company based in Strongsville, Ohio. At March 31, 1999, Emerald Financial had total assets of $677.1 million and total deposits of $562.4 million. In connection with this acquisition, the Registrant exchanged approximately 3,430,000 shares of Fifth Third common stock with the shareholders of Emerald Financial Corp. On July 12, 1999, the Registrant agreed to acquire Peoples Bank Corporation and its subsidiary, Peoples Bank & Trust Company. As of June 30, 1999, Peoples Bank Corporation had total assets of $650 million and total deposits of $566 million. The merger agreement provides that 1.09 shares of the Fifth Third's common stock will be exchanged for each share of Peoples Bank Corporation common stock on a tax-free basis. The transaction is expected to close in the fourth quarter of 1999, pending regulatory and shareholder approval. In connection with this acquisition, the Registrant expects to exchange approximately 3,850,000 shares of Fifth Third common stock with the shareholders of Peoples Bank Corporation. On July 9, 1999, the Registrant acquired Vanguard Financial Co., a privately-held commercial mortgage banking company headquarted in Cincinnati, Ohio, which originated more than $400 million in financing and equity transactions in 1998, and has a loan servicing portfolio in excess of $700 million. The transaction was accounted for as a purchase. Pro forma effects of this acquisition were not material to the Registrant. 7 8 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED): On June 16, 1999, the Registrant agreed to acquire CNB Bancshares, Inc., a bank holding company based in Evansville, Indiana which owns Civitas Bank. As of June 30, 1999, CNB Bancshares, Inc. had total assets of $7.7 billion and deposits of $4.9 billion. The acquisition is expected to be completed in the fourth quarter of 1999, pending regulatory and shareholder approval. The merger agreement provides that .8825 shares of Fifth Third's common stock will be exchanged for each share of CNB Bancshares, Inc. common stock on a tax-free basis. In connection with this acquisition, the Registrant expects to exchange approximately 35,800,000 shares of Fifth Third common stock with the shareholders of CNB Bancshares, Inc. 3. Completed Business Combinations: On June 11, 1999, the Registrant completed the acquisition of South Florida Bank Holding Corporation, a bank holding company based in Ft. Myers, Florida, which owns South Florida Bank. As of March 31, 1999, South Florida had total assets of $92.5 million and deposits of $78.8 million. In connection with this acquisition, the Registrant exchanged 442,560 shares of Fifth Third common stock with the shareholders of South Florida. On May 14, 1999, the Registrant completed the acquisition of Enterprise Federal Bancorp, Inc., a savings and loan holding company based in West Chester, Ohio. As of March 31, 1999, Enterprise Federal Bancorp, Inc. had total assets of $539 million and total deposits of $323 million. In connection with this acquisition, the Registrant exchanged 1,676,596 shares of Fifth Third common stock with the shareholders of Enterprise Federal Bancorp, Inc. On April 16, 1999, the Registrant completed the acquisition of Ashland Bankshares, Inc., which owns the Bank of Ashland. Ashland Bankshares, Inc. is based in Ashland, Kentucky, with $168 million in assets and deposits of $152 million at March 31, 1999. In connection with the acquisition, the Registrant exchanged 1,224,860 shares of Fifth Third common stock with the shareholders of Ashland Bankshares, Inc. The Consolidated Financial Statements have not been restated to include the South Florida Bank, Enterprise Federal Bancorp, and Ashland Bankshares acquisitions, accounted for as pooling-of-interests, due to immateriality. 8 9 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED): 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 acquisition 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 The Ohio Company. 4. For the six months of 1999, the Registrant paid $476,974,000 in interest and $77,750,000 in Federal income taxes. For the first six months of 1998, the Registrant paid $533,868,000 in interest and $83,950,000 in Federal income taxes. During the first half of 1999 and 1998, the Registrant had noncash investing activities consisting of the securitization of $258,949,000 and $82,604,000 of residential mortgage loans, respectively. 5. In June 1998, the Financial Accounting Standards Board issued Statement of Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", effective for all fiscal periods beginning after June 15, 1999. In June 1999, the FASB issued Statement No. 137 "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133", to amend Statement No. 133 to be effective for all fiscal years beginning after June 15, 2000. Statement No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities. It requires recognition of all derivatives as either assets or liabilities in the statement of financial condition and measurement of those instruments at fair value. The adoption of Statement No. 133 is not expected to have a material effect on the Registrant's consolidated statement of financial condition. 6. In 1998, The Registrant adopted SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information", which requires financial disclosure and descriptive information about reportable operating segments, based on how chief decision makers manage the business. The Registrant's principal segments include retail banking, commercial banking, investment advisory services, and data processing. Retail banking 9 10 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED): provides a full range of deposit products and consumer loans and leases. Commercial banking offers services to business, government, and professional customers. Investment advisory services provide 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 the Registrant's Jeanie ATM network and provides other data processing services to affiliated and unaffiliated customers. General corporate and other includes the investment portfolio, certain non-deposit funding, unassigned equity, the net effect of funds transfer pricing and other items not allocated to operating segments. Total revenues exclude securities gains and losses. Results of operations and selected financial information by operating segment for the three and six months ended June 30, 1999 and 1998 are as follows:
Three Months Ended INVESTMENT GENERAL June 30, COMMERCIAL RETAIL ADVISORY DATA ACQUIRED CORPORATE ($000'S) BANKING BANKING SERVICES PROCESSING(a) ENTITIES AND OTHER ELIMINATIONS (a) TOTAL ============================================================================================================================ 1999 Total Revenues $124,748 $238,755 $ 53,833 $ 44,389 $ -- $ 9,141 $ (3,701) $467,165 - ---------------------------------------------------------------------------------------------------------------------------- Net Income $ 51,363 $ 76,218 $ 16,872 $ 14,456 $ -- $ 2,647 $ -- $161,556 ============================================================================================================================
1998 Total Revenues $ 92,707 $171,914 $ 38,219 $ 35,393 $ 34,320 $ 28,131 $ (3,316) $397,368 - ---------------------------------------------------------------------------------------------------------------------------- Net Income $ 28,675 $ 61,786 $ 13,016 $ 10,207 $(68,180) $ 12,256 $ -- $ 7,760 ============================================================================================================================
Six Months Ended INVESTMENT GENERAL June 30, COMMERCIAL RETAIL ADVISORY DATA ACQUIRED CORPORATE ($000'S) BANKING BANKING SERVICES PROCESSING(a) ENTITIES AND OTHER ELIMINATIONS (a) TOTAL ============================================================================================================================ 1999 Total Revenues $238,253 $478,393 $103,944 $ 84,510 $ -- $ 12,871 $ (6,905) $911,066 - ---------------------------------------------------------------------------------------------------------------------------- Net Income $ 98,647 $157,239 $ 32,489 $ 26,209 $ -- $ (2,581) $ -- $312,003 ============================================================================================================================
1998 Total Revenues $177,853 $334,304 $ 72,346 $ 67,931 $ 93,071 $ 36,885 $ (6,203) $776,187 - ---------------------------------------------------------------------------------------------------------------------------- Net Income $ 63,900 $114,274 $ 24,847 $ 19,176 $(52,930) $ 12,724 $ -- $181,991 ============================================================================================================================
(a)- Data Processing services revenues provided to the banking segments by MPS are eliminated in the Consolidated Statements of Income. There were no material changes in the identifiable assets that were disclosed in the Registrant's December 31, 1998 Annual Report on Form 10-K. 10 11 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED): - --------------------------------------------------------------- 7. On May 3, 1999, the Registrant issued 86,375 shares of common stock under the 1998 Long-Term Incentive Plan. These shares were awarded to non-officer employees with three or more years of service. The market value of these shares on the date of grant was approximately $6.5 million. This award is being recognized as compensation expense over the two-year vesting period. The unamortized cost is reported as a reduction of shareholders' equity. 8. In 1998, the Registrant adopted SFAS 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 Statement of Changes in Shareholders' 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 six months ended June 30, 1999 and 1998 are provided below ($000s).
1999 1998 =========================================================================================================================== Reclassification Adjustments, Before Tax =========================================================================================================================== Change in Unrealized Gains Arising During Period $(200,697) $(15,470) Reclassification Adjustment for Gains Included in Net Income 1,919 4,635 =========================================================================================================================== Net Unrealized Losses on Securities Available for Sale $(198,778) $(10,835) =========================================================================================================================== Related Tax Effects =========================================================================================================================== Change in Unrealized Gains Arising During Period $ 70,244 $ 5,414 Reclassification Adjustment for Gains Included in Net Income (672) (1,622) - --------------------------------------------------------------------------------------------------------------------------- Net Unrealized Losses on Securities Available for Sale $ 69,572 $ 3,792 =========================================================================================================================== Reclassification Adjustments, Net of Tax =========================================================================================================================== Change in Unrealized Gains Arising During Period $(130,453) $(10,056) Reclassification Adjustment for Gains Included in Net Income 1,247 3,013 - --------------------------------------------------------------------------------------------------------------------------- Net Unrealized Losses on Securities Available for Sale $(129,206) $ (7,043) =========================================================================================================================== Accumulated Nonowner Changes in Equity =========================================================================================================================== Beginning Balance-Unrealized Holding Gains on Securities Available for Sale $ 82,448 $ 98,254 Current Period Change (129,206) (7,043) - --------------------------------------------------------------------------------------------------------------------------- Ending Balance-Unrealized Holding Gains (Losses) on Securities Available for Sale $(46,758) $ 91,211 ===========================================================================================================================
11 12 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED): - --------------------------------------------------------------- 9. On May 12, 1998, the Registrant issued 3,600,000 shares of common stock through a public offering. The Registrant used the net proceeds from the sale of common stock 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. 10. Reconciliation of Earning Per Share to Diluted Earning Per Share:
THREE MONTHS ENDED JUNE 30, 1999 1998 ========================================================================================================================== NET AVERAGE PER-SHARE NET AVERAGE PER-SHARE ($000's) INCOME SHARES AMOUNT INCOME SHARES AMOUNT ========================================================================================================================== EPS Income available to Common shareholders $ 161,556 269,367 $ 0.60 $ 57,760 264,988 $ 0.22 EFFECT OF DILUTIVE SECURITIES Stock Options 5,422 5,038 - ------------------------------------------------------------------------------------------------------------------------- DILUTED EPS Income available to Common shareholders Plus assumed conversions $ 161,556 274,789 $ 0.59 $ 57,760 270,026 $ 0.22 ==========================================================================================================================
SIX MONTHS ENDED JUNE 30, 1999 1998 ========================================================================================================================== NET AVERAGE PER-SHARE NET AVERAGE PER-SHARE ($000's) INCOME SHARES AMOUNT INCOME SHARES AMOUNT ========================================================================================================================== EPS Income available to Common shareholders $ 312,003 268,264 $ 1.16 $181,991 263,836 $ .69 EFFECT OF DILUTIVE SECURITIES Stock Options 5,558 5,116 - ------------------------------------------------------------------------------------------------------------------------- DILUTED EPS Income available to Common shareholders Plus assumed conversions $ 312,003 273,822 $ 1.14 $181,991 268,952 $ 0.68 ==========================================================================================================================
12 13 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, 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. The Registrant 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 $312.0 million for the first six months of 1999 and $161.6 million for the second quarter, up 21 percent for both periods, compared to $257.6 million and $133.3 million for the same periods last year. Second quarter diluted operating earnings per share was $.59, up 18 percent over last year's $.50 and $1.14 for the first six months, up 18.8 percent over 1998's $.96. Operating earnings, in 1998, 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, in 1998, was $.22 for the second quarter with net income totaling $57.8 million. For the six month period ending June 30, 1998 including the nonrecurring charges, net income was $181.9 million, or $.68 per diluted share. Total assets were $31.6 billion at quarter end, compared to 1998's quarter-end assets of $28.3 billion. On an operating basis, return on average equity was 19.6 percent and return on average assets was 2.12 percent for the second quarter of 1999 compared to 18.4 percent and 1.86 percent, respectively, for the same quarter of last year. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Net interest income on a fully taxable equivalent basis for the second quarter of 1999 was $295 million, a 12.8 percent increase over $261.5 million for the same period of 1998. For the six month period net interest income on a fully taxable equivalent basis increased to $579.2 million, or 12.2 percent, from the $516.2 million reported in the same period last year. The increase during the quarter resulted principally from a 28 basis point increase in the net interest margin and a 5.3 percent growth in average interest earning-asset. For the six month period, the net interest margin improved 34 basis points to 4.19 percent from 3.85 percent. The improvement in both the three and six month periods was primarily attributable to an improved funding mix with growth in average transaction deposits and solid commercial and consumer loan growth. The net provision for credit losses was $27.7 million in the 1999 second quarter, compared to $44.7 million in the same 1998 quarter which included a $16.7 million provision to conform acquired companies to the Registrant's reserving and charge-off practices. Net charge-offs for the second quarter were .44 percent of average loans and leases, compared with .49 percent for the second quarter of 1998. Underperforming assets (UPA's) declined to .61 percent of total loans and leases and other real estate owned, or $117.5 million during the quarter compared to .70 percent, or $126.6 million last quarter and .76 percent, or $137.1 million in the second quarter of 1998. Nonperforming assets (NPA's) as a percentage of total loans, leases and other real estate owned was .23 percent at June 30, 1999, down from .25 percent last quarter and .49 percent for the same period last year. The Registrant maintains a reserve to absorb probable loan and lease losses inherent in the portfolio. Credit losses are charged and recoveries are credited to the reserve. Provisions for credit losses are credited to the reserve in an amount that management considers necessary to maintain an appropriate level of reserves given the estimated losses in the portfolio. The reserve is based on ongoing quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio. In determining the appropriate level of reserves, the Registrant estimates losses using a range derived from "base" and "conservative" estimates. The Registrant's methodology for assessing the appropriate reserve level consists of several key elements. Larger commercial loans that exhibit potential or observed credit weaknesses are subject to individual review. Where appropriate, reserves are allocated to individual loans based on management's estimate of the borrower's ability to repay the loan given the availability of collateral, other sources of cash flow and legal options available to the Registrant. 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Included in the review of individual loans are those that are impaired as provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan". Any reserves for impaired loans are measured based on the present value of expected future cash flows discounted at the loan's effective interest rate or fair value of the underlying collateral. The Registrant evaluates the collectibility of both principal and interest when assessing the need for loss accrual. Historical loss rates are applied to other commercial loans not subject to specific reserve allocations. The loss rates are derived from a migration analysis, which computes the net charge-offs experience sustained on loans according to their internal risk grade. These grades encompass nine categories that define a borrower's ability to repay their loan obligations. Homogenous loans, such as consumer installment, residential mortgage loans, and automobile leases are not individually risk graded. Reserves are established for each pool of loans based on the expected net-charge-offs for one year. Loss rates are based on the average net charge-off history by loan category. An unallocated reserve is maintained to recognize the imprecision in estimating and measuring loss when evaluating reserves for individual loans of pools of loans. Historical loss rates for commercial and consumer loans may be adjusted for significant factors that, in management's judgement, reflect the impact of any current conditions on loss recognition. Factors which management considers in the analysis include the effects of the national and local economies, trends in the nature and volume of loans (delinquencies, charge-offs, nonaccrual and problem loans), changes in the internal lending policies and credit standards, collection practices, and examination results from bank regulatory agencies and the Registrant's internal credit examiners. Reserves on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience. Total other operating income, excluding securities gains, for the second quarter increased 26.3 percent to $186.7 million compared to the second quarter of 1998 and increased to $360.4 million for the first six months of 1999, or 27 percent over the same period last year. Investment advisory income increased 35.9 percent in the quarter and 38.6 percent for the six month period, primarily due to double-digit growth in personal trust, employee benefits, corporate trust and brokerage revenue. Improved sales, favorable equity markets and expansion of brokerage through acquisitions and new products all contributed to the growth. Data processing income 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) increased 26.5 percent, to $40.9 million and to $78.5 million, or 26.4 percent from the three and six month periods of last year, respectively. Increases in electronic funds transfer (EFT) and merchant processing volume coupled with higher transaction volume from expanded debit and ATM card usage contributed to the increase in data processing income. Improvements in commercial banking income, credit card fees, and mortgage banking revenue contributed to the 34.7 percent increase during the quarter and the 32.8 percent increase in the six month period 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) was 40.5 percent for the quarter and 41.2 percent for the six month period. Excluding the 1998 merger-related charges of $89.7 million, the overhead ratio in 1998 was 41.8 percent for the second quarter of 1998 and 42.8 percent for six month period. Operating expenses in 1998 include a one-time, merger-related pretax charge of $89.7 million resulting directly from the acquisitions of CitFed Bancorp, Inc. and State Savings Company. The charges consist 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. The improvement in the overhead ratio was primarily due to increased revenues during the quarter and six month period. Total operating expenses, increased 14 percent, to $195.4 million, during the quarter and increased 12.6 percent, to $388 million, for the six month period. Salaries, wages, and incentives increased 14.8 percent in the quarter and 13.9 percent during the six month period, primarily due to additional compensation incurred to support improved sale volumes coupled with an increase in full-time-equivalent employees. Employee benefit expense increased to $18.5 million for the quarter and to $36.2 million for the six month period. The employee benefit expense increase is attributable primarily to modifications made to the Registrant's Pension and 401(K) plans. Total other operating expenses increased 4.8 percent, to $74.2 million, for the quarter and 8.8 percent, to $151.8 million, for the six month period. FINANCIAL CONDITION The Registrant's balance sheet remains strong with high-quality assets and solid capital levels. Net interest income growth continues to be fueled by improved interest earning-asset and deposit mix, interest earning-asset growth, and net interest margin improvement. Average demand deposits and interest checking accounts grew 15.5 percent and 17.4 percent, respectively, from the same period last year highlighting the success in emphasizing customer deposit accounts. Direct installment loan originations were $531.6 million this quarter, exceeding $454 million last quarter and $410 million in the second quarter last year. Residential mortgage originations surpassed $1 billion this quarter compared to $1.5 billion in the same quarter a year ago. Commercial loans and consumer loans and leases all benefited from double-digit growth, from the same period last year, led by a significant increase in commercial loans. 16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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 June 30, 1999, shareholders' equity was $3.333 billion, compared to $3.077 billion at June 30, 1998, an increase of $256 million, or 8.3 percent. Shareholders' equity as a percentage of total assets as of June 30, 1999 was 10.8 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 June 30, 1999 and 1998. At June 30, 1999, the Registrant had a Tier 1 risk-based capital ratio of 12.12 percent, a total risk-based capital ratio of 14.13 percent and a leverage ratio of 10.72 percent. At June 30, 1998, the Registrant had a Tier 1 risk-based capital ratio of 11.93 percent, a total risk-based capital ratio of 14.28 percent and a leverage ratio of 9.88 percent. 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 ("Y2K") and beyond. The Registrant began planning its Y2K 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 internal and external reviews. The Registrant's internal efforts address information technology systems and computer chip embedded functions such as vaults, elevators, security systems, building heating and cooling and other operating facilities. External efforts address critical business partners including customers, vendors, service suppliers, and utilities. The Registrants' efforts are being conducted in accordance with the Federal Financial Institutions Examinations Council (FFIEC) guidelines. The project management process as required by the FFIEC involves phases and facilitates the categorization of systems according to lost revenues or liability that would be incurred if the system failed. Senior management oversees the project and regularly reports to the Board of Directors. The Registrant identified critical systems as those where failure would result in at least $50,000 in losses per day or $1.5 million of total exposure. All five phases of the FFIEC have been completed with respect to critical systems and substantially 17 18 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) completed for the remaining internal systems. During 1999, the Registrant will conduct additional internal integration testing and interface testing with critical business partners. Although this testing is not required, the Registrant is taking steps to ensure its efforts are successful in addressing Y2K problems. Because internal staff is largely completing the Y2K compliance effort, the Registrant does not expect to incur any significant costs with outside contractors relative to the completion of this task. The Registrant anticipates a total compliance cost of under $10 million; however, no material incremental costs are projected to be incurred. All, but an immaterial amount, of these costs are internal costs related to the lost opportunity of allocating time of the internal staff elsewhere. 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 Y2K 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 the Registrant's Y2K 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 Y2K issues. Major risks associated with the Y2K issue as it applies to external parties 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 the Registrant has initiated projects to assess the Y2K preparedness of individual customers and material relationships and the impact on the Registrant in accordance with FFIEC guidelines. Contingency plans for critical business partners are being developed as their Y2K plans and procedures are analyzed. The Federal Reserve, which is the Registrant's primary bank regulator, includes a review of the risk assessments and contingency plans in its quarterly examinations of the Registrant's Y2K preparedness. 18 19 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 decrease by 4.39 percent over one year and increase by 2.10 percent over two years. A 200 basis point immediate, sustained downward shock in the yield curve would increase net interest income by an estimated 2.80 percent over one year and decrease net interest income by an estimated 8.31 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. 19 20 PART II. OTHER INFORMATION ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits (27)-Financial Data Schedules for the Six Months Ended June 30, 1999 (b) Reports on Form 8-K Reports on Form 8-K filed during second quarter: The Registrant filed a report on Form 8-K dated June 16, 1999, related to the execution of an agreement to acquire CNB Bancshares, Inc., pursuant to which CNB BancShares, Inc. will be merged with and into the Registrant. 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: August 6, 1999 /s/ Neal E. Arnold -------------------------------- Neal E. Arnold Senior Vice President and Chief Financial Officer 20 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 SIX MONTHS ENDED JUNE 30, 1999, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS. 0000035527 FIFTH THIRD BANCORP 1,000 6-MOS DEC-31-1999 JAN-01-1999 JUN-30-1999 703,303 85,697 24,775 0 9,497,834 63,505 68,973 19,224,729 284,443 31,628,421 20,128,840 5,378,133 964,864 1,823,295 0 0 602,140 2,731,149 31,628,421 720,870 294,797 2,412 1,018,079 297,554 467,412 550,667 51,021 1,919 388,194 473,770 312,003 0 0 312,003 1.16 1.14 4.19 36,114 73,735 0 0 261,580 55,738 15,685 284,443 284,443 0 0
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