10-Q 1 e10-q.txt 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, 2000 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 465,002,511 shares of the Registrant's Common Stock, without par value, outstanding as of July 31, 2000. 2 FIFTH THIRD BANCORP INDEX Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - June 30, 2000 and 1999 and December 31, 1999 3 Consolidated Statements of Income - Three and Six Months Ended June 30, 2000 and 1999 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2000 and 1999 5 Consolidated Statements of Changes in Shareholders' Equity - Six Months Ended June 30, 2000 and 1999 6 Notes to Consolidated Financial Statements 7 - 11 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 12 - 16 Item 3. Quantitative and Qualitative Disclosures About Market Risk 17 Part II. Other Information 18 2 3
FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) ======================================================================================================================== JUNE 30, December 31, June 30, ($000'S) 2000 1999 1999 ======================================================================================================================== ASSETS ------------------------------------------------------------------------------------------------------------------------ Cash and Due from Banks $ 750,986 1,213,089 941,901 Securities Available for Sale (a) 15,152,145 12,687,529 12,638,561 Securities Held to Maturity (b) 45,967 129,142 101,687 Other Short-Term Investments 109,526 355,447 147,682 Loans Held for Sale 349,829 297,277 276,101 Loans and Leases Commercial Loans 6,708,850 6,206,712 5,928,331 Construction Loans 1,144,088 1,067,887 957,495 Commercial Mortgage Loans 2,861,566 2,651,378 2,402,396 Commercial Lease Financing 2,414,646 2,283,006 1,923,653 Residential Mortgage Loans 4,562,250 4,813,971 5,330,096 Consumer Loans 5,593,722 5,283,684 4,843,395 Consumer Lease Financing 3,758,015 3,579,600 3,108,614 Unearned Income (964,883) (922,618) (793,124) Reserve for Credit Losses (382,524) (366,640) (350,486) ------------------------------------------------------------------------------------------------------------------------ Total Loans and Leases 25,695,730 24,596,980 23,350,370 Bank Premises and Equipment 495,951 481,531 455,500 Accrued Income Receivable 343,804 321,025 331,704 Other Assets 1,779,994 1,507,492 1,743,509 ------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $44,723,932 41,589,512 39,987,015 ======================================================================================================================== LIABILITIES ------------------------------------------------------------------------------------------------------------------------ Deposits Demand $ 4,026,773 3,834,191 3,877,834 Interest Checking 4,740,772 4,792,196 4,278,626 Savings and Money Market 5,259,724 5,167,896 5,524,039 Time Deposits 13,432,507 12,289,277 11,921,482 ------------------------------------------------------------------------------------------------------------------------ Total Deposits 27,459,776 26,083,560 25,601,981 Federal Funds Borrowed 3,252,303 2,971,855 3,518,346 Short-Term Bank Notes 2,740,000 1,317,400 125,000 Other Short-Term Borrowings 3,071,321 4,084,878 3,074,416 Accrued Taxes, Interest and Expenses 980,426 785,927 815,020 Other Liabilities 435,654 292,589 204,046 Long-Term Debt 2,287,003 1,803,772 2,609,964 Guaranteed Preferred Beneficial Interest in Convertible Subordinated Debentures 172,500 172,500 172,500 ------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 40,398,983 37,512,481 36,121,273 ------------------------------------------------------------------------------------------------------------------------ SHAREHOLDERS' EQUITY (C) ------------------------------------------------------------------------------------------------------------------------ Common Stock (d) 1,032,177 1,028,592 1,015,604 Capital Surplus 499,038 568,360 535,732 Retained Earnings 3,056,430 2,704,595 2,401,447 Unrealized Losses on Securities Available for Sale (262,696) (224,516) (82,412) Treasury Stock - - (4,629) ------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 4,324,949 4,077,031 3,865,742 ------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $44,723,932 41,589,512 39,987,015 ========================================================================================================================
(a) Amortized cost: June 30, 2000 - $15,555,639, December 31, 1999 - $13,037,903 and June 30, 1999 - $12,767,240. (b) Market value: June 30, 2000 - $45,967, December 31, 1999 - $129,142 and June 30, 1999 - $102,155. (c) 500,000 shares of no par value preferred stock are authorized of which none have been issued. (d) Stated value $2.22 per share; authorized 650,000,000; outstanding at June 30, 2000 - 464,944,695, at December 31, 1999 - 463,329,888 and at June 30, 1999 - 457,479,144 (excludes 110,454 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 June 20, 2000 and distributed July 14, 2000 to shareholders of record as of June 30, 2000. 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) 2000 1999 2000 1999 ================================================================================= =========================== INTEREST INCOME Interest and Fees on Loans and Leases $528,008 465,413 $1,035,295 916,831 Interest on Securities Taxable 277,744 192,651 525,209 370,477 Exempt from Income Taxes 9,376 9,549 18,749 18,695 --------------------------------------------------------------------------------- --------------------------- Total Interest on Securities 287,120 202,200 543,958 389,172 Interest on Other Short-Term Investments 2,788 983 5,843 3,399 --------------------------------------------------------------------------------- --------------------------- Total Interest Income 817,916 668,596 1,585,096 1,309,402 --------------------------------------------------------------------------------- --------------------------- INTEREST EXPENSE Interest on Deposits Interest Checking 41,155 25,229 65,141 47,638 Savings and Money Market 39,290 39,906 89,629 80,023 Time Deposits 219,964 137,559 390,982 276,066 --------------------------------------------------------------------------------- --------------------------- Total Interest on Deposits 300,409 202,694 545,752 403,727 Interest on Federal Funds Borrowed 72,054 40,731 144,126 73,492 Interest on Short-Term Bank Notes 18,550 7,090 33,757 13,650 Interest on Other Short-Term Borrowings 32,647 31,164 70,185 61,104 Interest on Long-Term Debt and Notes 29,536 34,596 63,112 66,013 --------------------------------------------------------------------------------- --------------------------- Total Interest Expense 453,196 316,275 856,932 617,986 --------------------------------------------------------------------------------- --------------------------- NET INTEREST INCOME 364,720 352,321 728,164 691,416 Provision for Credit Losses 26,339 35,271 47,691 60,662 --------------------------------------------------------------------------------- --------------------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 338,381 317,050 680,473 630,754 OTHER OPERATING INCOME Investment Advisory Income 49,471 47,290 100,234 90,841 Service Charges on Deposits 55,343 42,901 102,998 82,398 Data Processing Income 56,695 41,904 107,615 80,300 Other Service Charges and Fees 86,712 88,129 177,015 171,647 Securities (Losses) Gains (160) 988 362 2,620 --------------------------------------------------------------------------------- --------------------------- Total Other Operating Income 248,061 221,212 488,224 427,806 --------------------------------------------------------------------------------- --------------------------- OPERATING EXPENSES Salaries, Wages and Incentives 108,964 110,361 218,893 211,544 Employee Benefits 23,666 23,350 49,347 46,324 Equipment Expenses 12,237 12,260 24,922 24,299 Net Occupancy Expenses 19,448 17,555 38,591 34,956 Other Operating Expenses 105,388 102,716 211,850 203,430 Merger-Related and Special Charges 33,548 - 33,548 - --------------------------------------------------------------------------------- --------------------------- Total Operating Expenses 303,251 266,242 577,151 520,553 --------------------------------------------------------------------------------- --------------------------- INCOME BEFORE INCOME TAXES 283,191 272,020 591,546 538,007 Applicable Income Taxes 91,103 91,848 193,089 181,493 --------------------------------------------------------------------------------- --------------------------- NET INCOME $192,088 180,172 $ 398,457 356,514 ================================================================================= =========================== Per Share: Earnings $ 0.41 0.40 $ 0.86 0.78 Diluted Earnings $ 0.41 0.39 $ 0.85 0.77 Cash Dividends $ 0.18 0.13-1/3 $ 0.34 0.26-2/3 ================================================================================= =========================== Average Shares (000's): Outstanding 464,740 456,295 464,260 455,515 Diluted 476,312 469,420 475,406 468,876 ================================================================================= ===========================
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) 2000 1999 =========================================================================================================================== OPERATING ACTIVITIES Net Income $ 398,457 356,514 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Credit Losses 47,691 60,662 Depreciation, Amortization and Accretion 58,614 51,722 Provision for Deferred Income Taxes 103,237 64,758 Realized Securities Gains (1,876) (4,422) Realized Securities Losses 1,514 1,802 Proceeds from Sales of Residential Mortgage Loans Held for Sale 1,496,305 1,884,725 Net Gains on Sales of Loans (4,352) (30,015) Increase in Residential Mortgage Loans Held for Sale (1,544,505) (1,541,416) Decrease (Increase) in Accrued Income Receivable (22,779) 9,045 Increase in Other Assets (294,694) (557,113) Increase in Accrued Taxes, Interest and Expenses 106,202 66,958 Increase (Decrease) in Other Liabilities 142,672 (30,271) --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 486,486 332,949 =========================================================================================================================== INVESTING ACTIVITIES Proceeds from Sales of Securities Available for Sale 3,003,584 1,047,061 Proceeds from Calls, Paydowns and Maturities of Securities Available for Sale 736,794 1,978,220 Purchases of Securities Available for Sale (5,361,305) (4,433,962) Proceeds from Calls, Paydowns and Maturities of Securities Held to Maturity 6,626 28,116 Purchases of Securities Held to Maturity (10,057) (7,923) Decrease in Other Short-Term Investments 245,921 17,078 Increase in Loans and Leases (1,965,459) (1,733,497) Purchases of Bank Premises and Equipment (48,209) (41,356) Proceeds from Disposal of Bank Premises and Equipment 8,420 9,334 --------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (3,383,685) (3,136,929) =========================================================================================================================== FINANCING ACTIVITIES Increase in Transaction Account Deposits 232,986 69,263 Decrease in Consumer Time Deposits (265,246) (331,845) Increase in CDs - $100,000 and Over, including Foreign 1,408,476 1,368,779 Increase in Federal Funds Borrowed 280,448 1,380,435 Increase in Short-Term Bank Notes 1,422,600 125,000 Increase (Decrease) in Other Short-Term Borrowings (1,013,878) 697,691 Proceeds from Issuance of Long-Term Debt and Notes 1,851,741 443,807 Repayment of Long-Term Debt (1,368,683) (897,226) Payment of Cash Dividends (158,027) (125,803) Exercise of Stock Options 22,982 18,174 Other 21,697 (47,762) --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 2,435,096 2,700,513 =========================================================================================================================== DECREASE IN CASH AND DUE FROM BANKS (462,103) (103,467) CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 1,213,089 1,045,368 --------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 750,986 941,901 ===========================================================================================================================
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) 2000 1999 ========================================================================================================================= BALANCE AT DECEMBER 31 $4,077,031 3,795,054 Net Income 398,457 356,514 Nonowner Changes in Equity, Net of Tax: Change in Unrealized Losses on Securities Available for Sale (38,180) (177,132) ------------------------------------------------------------------------------------------------------------------------- Net Income and Nonowner Changes in Equity 360,277 179,382 Cash Dividends Declared: Fifth Third Bancorp (2000 - $.34 per share and 1999 - $ .26-2/3 per share) (158,027) (107,736) Pooled Companies Prior to Acquisition - (18,928) Stock Options Exercised including Treasury Shares Issued 22,982 18,174 Treasury Shares Purchased - - Stock Issued in Acquisitions and Other 22,686 (204) ------------------------------------------------------------------------------------------------------------------------- BALANCE AT JUNE 30 $4,324,949 3,865,742 =========================================================================================================================
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, 2000 and 1999, the results of operations for the three and six months ended June 30, 2000 and 1999 and the statements of cash flows for the six months ended June 30, 2000 and 1999. 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, 1999 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, 2000 and 1999 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, 1999, included in the Registrant's Annual Report on Form 10-K. 2. On June 20, 2000, the Registrant's Board of Directors approved a three-for-two stock split to be effected in the form of a stock dividend. The additional shares resulting from the stock split were distributed on July 14, 2000 to shareholders of record as of June 30, 2000. Share and per share amounts reflected throughout the consolidated financial statements and notes thereto have been retroactively restated for the stock split. 3. On June 20, 2000, the Registrant's Board of Directors authorized the Registrant to purchase in the open market up to five percent of the outstanding shares of Fifth Third common stock. The form and amount of such repurchase will be at the discretion and final determination of executive management. The authorization will remain in effect until all shares authorized have been repurchased, unless sooner terminated by the Registrant's Board of Directors. As of June 30, 2000 no shares had yet been repurchased. 4. Financial data for the period ended June 30, 1999 has been restated to reflect the fourth quarter 1999 mergers with Peoples Bank Corporation of Indianapolis ("Peoples") and CNB Bancshares, Inc. ("CNB"), both publicly-traded bank holding companies with $675 million and $7.9 billion in total assets, respectively. Both transactions were tax-free, stock-for-stock exchanges accounted for as pooling-of-interests. In connection with these acquisitions the Registrant issued approximately 5.1 million shares and 45.6 million shares of Fifth Third common stock for all the outstanding shares of Peoples and CNB, respectively. The contributions of Peoples and CNB to consolidated net interest income, other operating income and net income for the three and six months ended June 30, 1999, prior to the mergers, were as follows: 7 8 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
================================================================================================================= THREE MONTHS ENDED JUNE 30, 1999 PEOPLES BANK FIFTH CORPORATION CNB THIRD OF BANCSHARES, ($000'S) BANCORP INDIANAPOLIS INC. OTHER COMBINED ================================================================================================================= Net Interest Income $280,473 $ 6,436 $ 63,843 $ 1,569 $352,321 Other Operating Income 187,352 2,553 31,515 (208) 221,212 Net Income 161,556 2,522 23,891 (7,797) 180,172 =================================================================================================================
SIX MONTHS ENDED JUNE 30, 1999 ================================================================================================================= PEOPLES BANK FIFTH CORPORATION CNB THIRD OF BANCSHARES, ($000'S) BANCORP INDIANAPOLIS INC. OTHER COMBINED ================================================================================================================= Net Interest Income $550,667 $12,673 $123,965 $ 4,111 $691,416 Other Operating Income 362,318 4,341 61,322 (175) 427,806 Net Income 312,003 4,503 48,534 (8,526) 356,514 =================================================================================================================
The combined results are not necessarily indicative of the results that would have occurred had the acquisitions been consummated in the past or which might be attained in the future. During the second quarter of 2000, the Registrant incurred additional merger-related costs and special charges in connection with the integration of CNB totaling $33,548,000 ($23,057,000 after tax, or $.05 per diluted share). The merger-related costs consist of net employee-related obligations and conversion expenses, and the special charges relate to the restructuring of certain investment securities. 5. For the first six months of 2000, the Registrant paid $883,740,000 in interest and $15,000,000 in Federal income taxes. For the same period in 1999, the Registrant paid $618,077,000 in interest and $99,806,000 in Federal income taxes. During the first six months of 2000 and 1999, the Registrant had noncash investing activities consisting of the securitization of $850,261,000 and $582,949,000 of residential mortgage loans, respectively. 6. 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 SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities-Deferral of the Effective Date of FASB Statement No. 133," to amend SFAS No. 133 to be effective for all fiscal years beginning after June 15, 2000. SFAS No. 133 establishes accounting and reporting standards for derivative instruments and hedging activities, requiring 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 SFAS No. 133 is not expected to have a material effect on the Registrant's consolidated statement of financial condition. 8 9 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. In accordance with SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information," the Registrant has determined its principal segments to be retail banking, commercial banking, investment advisory services and data processing. Retail banking provides a full range of deposit products and consumer loans and leases. Commercial banking offers services to business, government and professional customers. Investment advisory services provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. Data processing, through Midwest Payment Systems ("MPS"), provides electronic funds transfer ("EFT") services, merchant transaction processing, operates 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, 2000 and 1999 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 ================================================================================================================================ 2000 Total Revenues $157,281 $315,601 $ 63,267 $ 60,672 $ -- $ 20,809 $(4,689) $ 612,941 -------------------------------------------------------------------------------------------------------------------------------- Net Income $ 60,649 $102,865 $ 21,025 $ 18,921 $ -- $(11,372) $ -- $ 192,088 ================================================================================================================================ 1999 Total Revenues $124,748 $238,755 $ 53,833 $ 44,389 $105,380 $ 9,141 $(3,701) $ 572,545 -------------------------------------------------------------------------------------------------------------------------------- Net Income $ 51,363 $ 76,218 $ 16,872 $ 14,456 $ 18,616 $ 2,647 $ -- $ 180,172 ================================================================================================================================
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 ================================================================================================================================ 2000 Total Revenues $310,247 $613,891 $125,633 $115,020 $ -- $ 60,089 $(8,854) $1,216,026 -------------------------------------------------------------------------------------------------------------------------------- Net Income $122,013 $194,800 $ 39,878 $ 35,814 $ -- $ 5,952 $ -- $ 398,457 ================================================================================================================================ 1999 Total Revenues $238,253 $478,393 $103,944 $ 84,510 $205,536 $ 12,871 $(6,905) $1,116,602 -------------------------------------------------------------------------------------------------------------------------------- Net Income $ 98,647 $157,239 $ 32,489 $ 26,209 $ 44,511 $ (2,581) $ -- $ 356,514 ================================================================================================================================
(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, 1999 Annual Report on Form 10-K. 9 10 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. The Registrant has elected to present the disclosures required by SFAS No. 130, "Reporting Comprehensive Income," 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 are as follows:
SIX MONTHS ENDED JUNE 30, ($000'S) 2000 1999 --------------------------------------------------------------------------------------------------------------------------- Reclassification Adjustments, Before Tax --------------------------------------------------------------------------------------------------------------------------- Change in Unrealized Losses Arising During Period $ (53,120) (274,712) Reclassification Adjustment for Gains Included in Net Income 362 2,620 --------------------------------------------------------------------------------------------------------------------------- Net Unrealized Losses on Securities Available for Sale $ (52,758) (272,092) --------------------------------------------------------------------------------------------------------------------------- Related Tax Effects --------------------------------------------------------------------------------------------------------------------------- Change in Unrealized Losses Arising During Period $ 14,705 95,874 Reclassification Adjustment for Gains Included in Net Income (127) (914) --------------------------------------------------------------------------------------------------------------------------- Net Unrealized Losses on Securities Available for Sale $ 14,578 94,960 --------------------------------------------------------------------------------------------------------------------------- Reclassification Adjustments, Net of Tax --------------------------------------------------------------------------------------------------------------------------- Change in Unrealized Losses Arising During Period $ (38,415) (178,838) Reclassification Adjustment for Gains Included in Net Income 235 1,706 --------------------------------------------------------------------------------------------------------------------------- Net Unrealized Losses on Securities Available for Sale $ (38,180) (177,132) --------------------------------------------------------------------------------------------------------------------------- Accumulated Nonowner Changes in Equity --------------------------------------------------------------------------------------------------------------------------- Beginning Balance-Unrealized Holding Gains (Losses) on Securities Available for Sale $(224,516) 94,720 Current Period Change (38,180) (177,132) --------------------------------------------------------------------------------------------------------------------------- Ending Balance-Unrealized Holding Losses on Securities Available for Sale $(262,696) (82,412) ---------------------------------------------------------------------------------------------------------------------------
10 11 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. The reconciliation of earnings per share to earnings per diluted share follows:
THREE MONTHS ENDED JUNE 30, 2000 1999 =========================================================================================================================== NET AVERAGE PER-SHARE NET AVERAGE PER-SHARE ($000'S) INCOME SHARES AMOUNT INCOME SHARES AMOUNT =========================================================================================================================== EPS Income Available to Common Shareholders $192,088 464,740 $0.41 $180,172 456,295 $0.40 EFFECT OF DILUTIVE SECURITIES Stock Options 7,156 8,709 Interest on 6% Convertible Subordinated Debentures due 2028, Net of Applicable Income Taxes 1,640 4,416 1,640 4,416 --------------------------------------------------------------------------------------------------------------------------- EARNINGS PER DILUTED SHARE Income Available to Common Shareholders Plus Assumed Conversions $193,728 476,312 $0.41 $181,812 469,420 $0.39 ---------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2000 1999 =========================================================================================================================== NET AVERAGE PER-SHARE NET AVERAGE PER-SHARE ($000'S) INCOME SHARES AMOUNT INCOME SHARES AMOUNT =========================================================================================================================== EPS Income Available to Common Shareholders $398,457 464,260 $0.86 $356,514 455,515 $0.78 EFFECT OF DILUTIVE SECURITIES Stock Options 6,730 8,945 Interest on 6% Convertible Subordinated Debentures due 2028, Net of Applicable Income Taxes 3,280 4,416 3,280 4,416 --------------------------------------------------------------------------------------------------------------------------- EARNINGS PER DILUTED SHARE Income Available to Common Shareholders Plus Assumed Conversions $401,737 475,406 $0.85 $359,794 468,876 $0.77 ---------------------------------------------------------------------------------------------------------------------------
11 12 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 $215.1 million for the second quarter of 2000 and $ 421.5 million for the first six months of 2000, up 19.4 percent and 18.2 percent, respectively, compared to $180.2 million and $356.5 million for the same periods last year. Operating income per diluted share was $.46 for the second quarter, up 17.9 percent over last year's $.39, and $.89 for the six months, up 15.6 percent over 1999's $.77. Operating income, in 2000, excludes nonrecurring pretax charges of $33.5 million resulting from the completion of systems integration of CNB Bancshares, Inc. ("CNB"). The effect of these charges was to reduce net income by $23.1 million, or $.05 per diluted share. Including the nonrecurring charges, net income totaled $192.1 million, or $.41 per diluted share, during the second quarter and $398.5 million, or $.85 per diluted share, for the six-month period. Net interest income on a fully taxable equivalent basis for the second quarter of 2000 was $387.3 million, a 4.5 percent increase over $370.7 million for the same period last year. For the six-month period, net interest income on a fully taxable equivalent basis increased to $772.8 million, or 6.2 percent, from the $727.5 million reported in the same period last year. The increase in both the second quarter and the six-month period resulted principally from 14.7 percent and 15.4 percent growth, respectively, in average interest-earning assets. During the second quarter, net interest margin declined to 3.74 percent, or 35 basis points ("bp"), from 4.09 percent during the 1999 second quarter. For the six-month period, net interest margin declined to 3.78 percent, or 34bp, from 4.12 percent in the same period in 1999. The yield on interest-earning assets improved 53bp over the 1999 second quarter and 36bp over the first six months of 1999, as double-digit new loan growth at higher interest rates caused assets to reprice upward. The positive effects of higher asset yields in both the three and six months ended June 30, 2000 were offset by 93bp and 76bp increases, respectively, in funding cost, resulting from faster repricing of borrowed funds and higher deposit rates to retain accounts. 12 13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Credit quality improved overall due to continued management initiatives to proactively identify and resolve problem credits. The provision for credit losses was $26.3 million in the 2000 second quarter compared to $35.3 million in the same period last year. Net charge-offs declined 24.8 percent to $17.2 million from $22.9 million in the 1999 second quarter primarily due to a 29.4 percent improvement in loan and lease losses, partially offset by a 39.3 percent decrease in recoveries. Net charge-offs for the 2000 second quarter, as a percent of average loans and leases outstanding, declined 13bp to .27 percent from .40 percent in the same period last year. Nonperforming assets as a percentage of total loans, leases and other real estate owned was .30 percent at June 30, 2000, down 7bp from .37 percent at June 30, 1999. Underperforming assets were $167.5 million at June 30, 2000, or .64 percent of total loans, leases and other real estate owned, down 7bp from the $168.7 million, or .71 percent, at June 30, 1999. 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. 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. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) An unallocated reserve is maintained to recognize the imprecision in estimating and measuring loss when evaluating reserves for individual loans or 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 of 2000 increased 12.7 percent to $248.2 million compared to $220.2 million in the second quarter of 1999, and increased to $487.9 million for the first six months of 2000, or 14.7 percent over the same period last year. Compared to the same periods in 1999, data processing income increased 35.3 percent, to $56.7 million, in the 2000 second quarter and 34 percent, to $107.6 million, in the six-month period. This growth reflects increases in electronic funds transfers ("EFT"), higher transaction volume from increased debit and ATM card usage and expansion of business-to-business e-commerce. During the three and six months ended June 30, 2000, service charges on deposits increased 29 percent, to $55.3 million, and 25 percent, to $103 million, respectively, over the comparable 1999 periods, reflecting the success of new account campaigns and treasury management services. Compared to the comparable 1999 periods, investment advisory income increased 4.6 percent, to $49.5 million, in the second quarter of 2000 and 10.3 percent, to $100.2 million, in the six-month period. These increases reflect strong personal trust account sales growth, coupled with the effects of lower equity market performance on personal trust and brokerage revenue. Operating expenses in the 2000 second quarter include a nonrecurring pretax charge of $33.5 million for merger-related costs and special charges incurred in connection with the integration of CNB. The merger-related costs consist of net employee-related obligations and conversion expenses, and the special charges relate to the restructuring of certain investment securities. Excluding this nonrecurring charge, the overhead ratio (operating expenses divided by the sum of taxable equivalent net interest income and other operating income) was 42.4 percent for the quarter and 43.1 percent for the six-month period. These ratios represent a decrease from the 45.1 percent and 45.2 percent achieved in the three and six months ended June 30, 1999, respectively, reflecting revenue growth at a rate that outpaced expense increases. Total operating expenses, excluding the merger-related and special charges, increased 1.3 percent, to $269.7 million, during the quarter and increased 4.4 percent, to $543.6 million, for the six-month period. Reflecting the completion of the systems and processing integration of the CNB and Peoples Bank Corporation of Indianapolis 14 15 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) mergers, salaries, incentives and benefits decreased 0.8 percent in the second quarter of 2000 and increased 4 percent during the six-month period. Productivity gains from the merger integration offset sales force increases in other markets and related variable compensation from successful sales results. Net occupancy expense increased to $19.4 million and $38.6 million, respectively, for the three and six months ended June 30, 2000, while total other operating expenses increased 2.6 percent, to $105.4 million, for the quarter and 4.1 percent, to $211.9 million, for the six-month period. FINANCIAL CONDITION The Registrant's balance sheet remains strong with high-quality assets and solid capital levels. Total assets were $44.7 billion at June 30, 2000 compared to assets of $41.6 billion at December 31, 1999 and $40 billion at June 30, 1999, an increase of 7.5 percent and 11.8 percent, respectively. On an operating basis, return on average equity was 20.8 percent and return on average assets was 1.94 percent for the second quarter of 2000 compared to 18.6 percent and 1.86 percent, respectively, for the same quarter of last year. Net interest income growth continues to be fueled by double-digit interest-earning asset growth, partially offset by a decline in net interest margin. Interest-earning assets increased to $41.7 billion for the second quarter of 2000, an increase of $4.9 billion, or 13.2 percent, over the same period last year and $3.3 billion, or 8.6 percent, over 1999 year-end. Interest-earning assets increased primarily due to growth in securities available for sale, coupled with growth in commercial loans and leases and consumer loans and leases. Deposits grew to $27.5 billion at June 30, 2000, an increase of $1.9 billion, or 7.3 percent, over the same period last year and $1.4 billion, or 5.3 percent, over 1999 year-end. Deposit growth during the period is primarily attributable to the success of campaigns emphasizing customer deposit accounts. 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, 2000, shareholders' equity was $4.325 billion compared to $3.866 billion at June 30, 1999, an increase of $459 million, or 11.9 percent. Shareholders' equity as a percentage of total assets as of June 30, 2000 was 9.67 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- 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) 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, 2000 and 1999. At June 30, 2000, the Registrant had a Tier 1 risk-based capital ratio of 12.59 percent, a total risk-based capital ratio of 14.36 percent and a leverage ratio of 10.10 percent. At June 30, 1999, the Registrant had a Tier 1 risk-based capital ratio of 12.98 percent, a total risk-based capital ratio of 14.97 percent and a leverage ratio of 10.03 percent. 16 17 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 8.05 percent over one year and decrease by 3.31 percent over two years. A 200 basis point immediate, sustained downward shock in the yield curve would increase net interest income by an estimated 6.21 percent over one year and decrease net interest income by an estimated 1.34 percent over two years. 17 18 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 (3)(i) Amended Articles of Incorporation, as amended, incorporated by reference to the Registrant's Quarterly Report on Form 10-Q for the quarter ended March 31, 2000 (3)(ii) Code of Regulations, as amended, incorporated by reference to Registrant Registration Statement, on Form S-4, Registration No. 33-63966 (27) Financial Data Schedules for the Six Months Ended June 30, 2000 (b) Reports on Form 8-K The Registrant filed a report on Form 8-K dated June 21, 2000 related to its Board of Directors' June 20, 2000 declaration of 1) a three-for-two stock split in the form of a stock dividend payable July 14, 2000 to shareholders of record as of June 30, 2000, and 2) an increase in the quarterly cash dividend to $.18 per share on a post-split basis. 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 14, 2000 /s/ Neal E. Arnold ------------------ Neal E. Arnold Executive Vice President and Chief Financial Officer 18