10-Q 1 l84962ae10-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 September 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 461,898,260 shares of the Registrant's Common Stock, without par value, outstanding as of October 31, 2000. 2 FIFTH THIRD BANCORP INDEX Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - September 30, 2000 and 1999 and December 31, 1999 3 Consolidated Statements of Income - Three and Nine Months Ended September 30, 2000 and 1999 4 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 2000 and 1999 5 Consolidated Statements of Changes in Shareholders' Equity - Nine Months Ended September 30, 2000 and 1999 6 Notes to Consolidated Financial Statements 7 - 12 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 13 - 17 Item 3. Quantitative and Qualitative Disclosures About Market Risk 18 Part II. Other Information 19 2 3 FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED)
----------------------------------------------------------------------------------------------------------------------------------- SEPTEMBER 30, December 31, September 30, ($000'S) 2000 1999 1999 ----------------------------------------------------------------------------------------------------------------------------------- ASSETS ----------------------------------------------------------------------------------------------------------------------------------- Cash and Due from Banks $ 779,589 1,213,089 891,346 Securities Available for Sale (a) 14,847,612 12,687,529 12,761,330 Securities Held to Maturity (b) 44,110 129,142 132,207 Other Short-Term Investments 200,381 355,447 394,831 Loans Held for Sale 437,466 297,277 189,827 Loans and Leases Commercial Loans 6,572,227 6,206,712 6,123,536 Construction Loans 1,220,328 1,067,887 1,023,419 Commercial Mortgage Loans 2,877,651 2,651,378 2,614,915 Commercial Lease Financing 2,608,536 2,283,006 2,064,190 Residential Mortgage Loans 4,860,877 4,813,971 5,781,461 Consumer Loans 5,799,465 5,283,684 5,114,346 Consumer Lease Financing 2,978,860 3,579,600 3,386,144 Unearned Income (1,056,219) (922,618) (857,053) Reserve for Credit Losses (383,923) (366,640) (373,242) ----------------------------------------------------------------------------------------------------------------------------------- Total Loans and Leases 25,477,802 24,596,980 24,877,716 Bank Premises and Equipment 498,990 481,531 467,243 Accrued Income Receivable 348,414 321,025 320,217 Other Assets 1,761,536 1,507,492 1,411,771 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 44,395,900 41,589,512 41,446,488 =================================================================================================================================== LIABILITIES ----------------------------------------------------------------------------------------------------------------------------------- Deposits Demand $ 4,041,285 3,834,191 3,913,375 Interest Checking 4,814,869 4,792,196 4,427,958 Savings and Money Market 5,047,826 5,167,896 5,494,370 Time Deposits 11,570,601 12,289,277 11,170,891 ----------------------------------------------------------------------------------------------------------------------------------- Total Deposits 25,474,581 26,083,560 25,006,594 Federal Funds Borrowed 3,598,709 2,971,855 3,591,383 Short-Term Bank Notes 2,900,536 1,317,400 467,000 Other Short-Term Borrowings 1,695,180 4,084,878 4,921,572 Accrued Taxes, Interest and Expenses 1,157,945 785,927 631,130 Other Liabilities 238,478 292,589 377,328 Long-Term Debt 4,721,842 1,803,772 2,371,239 Guaranteed Preferred Beneficial Interest in Convertible Subordinated Debentures 172,500 172,500 172,500 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 39,959,771 37,512,481 37,538,746 ----------------------------------------------------------------------------------------------------------------------------------- SHAREHOLDERS' EQUITY (C) ----------------------------------------------------------------------------------------------------------------------------------- Common Stock (d) 1,033,188 1,028,592 1,027,911 Capital Surplus 620,893 568,360 336,966 Retained Earnings 3,102,851 2,704,595 2,733,001 Unrealized Losses on Securities Available for Sale (156,031) (224,516) (190,136) Treasury Stock (164,772) -- -- ----------------------------------------------------------------------------------------------------------------------------------- TOTAL SHAREHOLDERS' EQUITY 4,436,129 4,077,031 3,907,742 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 44,395,900 41,589,512 41,446,488 ===================================================================================================================================
(a) Amortized cost: September 30, 2000 - $15,088,645, December 31, 1999 - $13,037,903 and September 30, 1999 - $13,305,252. (b) Market value: September 30, 2000 - $44,110, December 31, 1999 - $129,142 and September 30, 1999 - $131,990. (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 September 30, 2000 - 461,799,811 (excludes 3,600,000 treasury shares), December 31, 1999 - 463,329,888 and at September 30, 1999 - 463,023,074. Outstanding and treasury shares have been adjusted for the three-for-two stock split effected in the form of a stock dividend paid July 14, 2000. See Notes to Consolidated Financial Statements 3 4
FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) ------------------------------------------------------------------------------------------------- ------------------------------- THREE MONTHS ENDED NINE MONTHS ENDED SEPTEMBER 30, SEPTEMBER 30, ---------------------------- ------------------------------ ($000'S) 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------- ------------------------------ INTEREST INCOME Interest and Fees on Loans and Leases $ 556,262 492,136 $1,591,557 1,408,967 Interest on Securities Taxable 274,598 197,910 799,807 568,387 Exempt from Income Taxes 9,315 9,440 28,064 28,135 ------------------------------------------------------------------------------------------------- ---------------------------- Total Interest on Securities 283,913 207,350 827,871 596,522 Interest on Other Short-Term Investments 2,085 3,336 7,928 6,735 ------------------------------------------------------------------------------------------------- ---------------------------- Total Interest Income 842,260 702,822 2,427,356 2,012,224 ------------------------------------------------------------------------------------------------- ---------------------------- INTEREST EXPENSE Interest on Deposits Interest Checking 36,695 26,550 101,836 74,188 Savings and Money Market 48,218 41,917 137,847 121,940 Time Deposits 208,787 148,740 599,769 424,806 ------------------------------------------------------------------------------------------------- ---------------------------- Total Interest on Deposits 293,700 217,207 839,452 620,934 Interest on Federal Funds Borrowed 66,316 54,080 210,442 127,572 Interest on Short-Term Bank Notes 16,676 3,001 50,433 16,651 Interest on Other Short-Term Borrowings 36,715 36,900 106,900 98,004 Interest on Long-Term Debt and Notes 57,859 34,347 120,971 100,360 ------------------------------------------------------------------------------------------------- ---------------------------- Total Interest Expense 471,266 345,535 1,328,198 963,521 ------------------------------------------------------------------------------------------------- ---------------------------- NET INTEREST INCOME 370,994 357,287 1,099,158 1,048,703 Provision for Credit Losses 18,235 29,648 65,926 90,310 ------------------------------------------------------------------------------------------------- ---------------------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 352,759 327,639 1,033,232 958,393 OTHER OPERATING INCOME Investment Advisory Income 49,037 47,787 149,271 138,628 Service Charges on Deposits 57,633 45,317 160,631 127,715 Data Processing Income 62,037 46,214 169,652 126,514 Other Service Charges and Fees 85,255 85,744 262,270 257,391 Securities Gains (Losses) 416 (3,003) 778 (383) ------------------------------------------------------------------------------------------------- ---------------------------- Total Other Operating Income 254,378 222,059 742,602 649,865 ------------------------------------------------------------------------------------------------- ---------------------------- OPERATING EXPENSES Salaries, Wages and Incentives 105,767 107,474 324,660 319,018 Employee Benefits 21,090 18,209 70,437 64,533 Equipment Expenses 12,409 12,005 37,331 36,304 Net Occupancy Expenses 18,914 18,797 57,505 53,753 Other Operating Expenses 111,036 100,017 322,886 303,447 Merger-Related and Special Charges -- -- 33,548 -- ------------------------------------------------------------------------------------------------- ---------------------------- Total Operating Expenses 269,216 256,502 846,367 777,055 ------------------------------------------------------------------------------------------------- ---------------------------- INCOME BEFORE INCOME TAXES 337,921 293,196 929,467 831,203 Applicable Income Taxes 109,895 97,748 302,984 279,241 ------------------------------------------------------------------------------------------------- ---------------------------- NET INCOME $ 228,026 195,448 $ 626,483 551,962 ================================================================================================= ============================ Per Share: Earnings $ 0.49 0.42 $ 1.35 1.21 Diluted Earnings $ 0.48 0.42 $ 1.33 1.19 Cash Dividends $ 0.18 0.16 $ 0.52 0.42 2/3 ================================================================================================= ============================ Average Shares (000's) Outstanding 464,086 461,016 464,202 457,369 Diluted 476,125 473,598 475,625 471,157 ================================================================================================= ============================
See Notes to Consolidated Financial Statements 4 5
FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) ----------------------------------------------------------------------------------------------------------------------------------- NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- ($000'S) 2000 1999 ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net Income $ 626,483 551,962 Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities: Provision for Credit Losses 65,926 90,310 Depreciation, Amortization and Accretion 82,319 82,571 Provision for Deferred Income Taxes 136,649 122,171 Realized Securities Gains (2,862) (7,523) Realized Securities Losses 2,084 7,906 Proceeds from Sales of Residential Mortgage Loans Held for Sale 2,408,438 2,296,947 Net Gains on Sales of Loans (25,863) (35,270) Increase in Residential Mortgage Loans Held for Sale (2,522,764) (1,871,059) Decrease (Increase) in Accrued Income Receivable (27,389) 22,623 Increase in Other Assets (244,004) (244,183) Increase (Decrease) in Accrued Taxes, Interest and Expenses 194,513 (58,583) Increase (Decrease) in Other Liabilities (54,504) 136,307 ----------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 639,026 1,094,179 =================================================================================================================================== INVESTING ACTIVITIES Proceeds from Sales of Securities Available for Sale 4,506,048 1,905,349 Proceeds from Calls, Paydowns and Maturities of Securities Available for Sale 1,161,024 2,407,482 Purchases of Securities Available for Sale (6,823,362) (5,571,062) Proceeds from Calls, Paydowns and Maturities of Securities Held to Maturity 8,483 30,526 Purchases of Securities Held to Maturity (10,057) (32,513) Decrease (Increase) in Other Short-Term Investments 155,066 (225,276) Increase in Loans and Leases (1,804,694) (3,758,232) Purchases of Bank Premises and Equipment (66,698) (67,593) Proceeds from Disposal of Bank Premises and Equipment 10,475 13,969 ----------------------------------------------------------------------------------------------------------------------------------- NET CASH USED IN INVESTING ACTIVITIES (2,863,715) (5,297,350) =================================================================================================================================== FINANCING ACTIVITIES Increase in Transaction Account Deposits 109,697 224,567 Increase in Consumer Time Deposits 76,865 12,258 Increase (Decrease) in CDs - $100,000 and Over, including Foreign (795,541) 274,085 Increase in Federal Funds Borrowed 626,854 1,453,472 Increase in Short-Term Bank Notes 1,583,136 467,000 Increase (Decrease) in Other Short-Term Borrowings (2,390,019) 2,544,453 Proceeds from Issuance of Long-Term Debt and Notes 4,872,936 594,380 Repayment of Long-Term Debt (1,955,125) (1,286,619) Payment of Cash Dividends (234,440) (200,705) Exercise of Stock Options 31,826 29,308 Purchase of Treasury Stock (164,772) -- Other 29,772 (62,950) ----------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 1,791,189 4,049,149 =================================================================================================================================== DECREASE IN CASH AND DUE FROM BANKS (433,500) (154,022) CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 1,213,089 1,045,368 ----------------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 779,589 891,346 ===================================================================================================================================
See Notes to Consolidated Financial Statements 5 6 FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
=================================================================================================================================== NINE MONTHS ENDED SEPTEMBER 30, --------------------------------- ($000'S) 2000 1999 =================================================================================================================================== BALANCE AT DECEMBER 31 $ 4,077,031 3,795,054 Net Income 626,483 551,962 Nonowner Changes in Equity, Net of Tax: Change in Unrealized Losses on Securities Available for Sale 68,485 (284,856) ----------------------------------------------------------------------------------------------------------------------------------- Net Income and Nonowner Changes in Equity 694,968 267,106 Cash Dividends Declared: Fifth Third Bancorp (2000 - $.52 per share and 1999 - $ .42 2/3 per share) (241,135) (173,719) Pooled Companies Prior to Acquisition -- (36,694) Stock Options Exercised including Treasury Shares Issued 31,826 29,308 Treasury Shares Purchased (164,772) -- Stock Issued in Acquisitions and Other 38,211 26,687 ----------------------------------------------------------------------------------------------------------------------------------- BALANCE AT SEPTEMBER 30 $ 4,436,129 3,907,742 ===================================================================================================================================
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 September 30, 2000 and 1999, the results of operations for the three and nine months ended September 30, 2000 and 1999 and the statements of cash flows for the nine months ended September 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 nine months ended September 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. Certain reclassifications have been made to prior periods' consolidated financial statements and related notes to conform with the current period presentation. 2. PENDING BUSINESS COMBINATIONS: On October 25, 2000, the Registrant agreed to acquire Capital Holdings, Inc. ("Capital") and its subsidiary, Capital Bank N.A., headquartered in Sylvania, Ohio. As of September 30, 2000, Capital had total assets of $1.1 billion and total deposits of $874 million. The merger agreement provides that .638 shares of Fifth Third's common stock will be exchanged for each share of Capital's common stock on a tax-free basis. The transaction is expected to close in the first quarter of 2001, pending regulatory and shareholder approval, and be accounted for as a pooling-of-interests. In connection with this acquisition, the Registrant expects to exchange approximately 5.0 million shares of Fifth Third common stock with the shareholders of Capital. On August 31, 2000, the Registrant agreed to acquire Ottawa Financial Corporation ("Ottawa") and its subsidiary, AmeriBank, headquartered in Holland, Michigan. As of September 30, 2000, Ottawa had total assets of $1.1 billion and total deposits of $733 million. The merger agreement provides that .54 shares of Fifth Third's common stock will be exchanged for each share of Ottawa's common stock on a tax-free basis, subject to adjustment based on the average closing price per share of Fifth Third's common stock for the 20 consecutive trading days ending on the fifth day before the effective time of the merger. The transaction is expected to be completed in December 2000, pending regulatory and shareholder approval, and be accounted for as a purchase. In connection with this acquisition, the Registrant expects to exchange approximately 4.0 million shares of Fifth Third common stock with the shareholders of Ottawa. 7 8 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. 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 paid 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. 4. 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 September 30, 2000, the Registrant had repurchased 3.6 million shares of Fifth Third common stock under this authorization. 5. Financial data for the period ended September 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 nine months ended September 30, 1999, prior to the mergers, were as follows:
THREE MONTHS ENDED SEPTEMBER 30, 1999 =================================================================================================================================== PEOPLES BANK FIFTH CORPORATION CNB THIRD OF BANCSHARES, ($000'S) BANCORP INDIANAPOLIS INC. OTHER COMBINED =================================================================================================================================== Net Interest Income $285,157 $ 6,723 $ 65,407 $ -- $ 357,287 Other Operating Income 197,143 1,584 23,332 -- 222,059 Net Income 173,504 2,297 19,647 -- 195,448 =================================================================================================================================== NINE MONTHS ENDED SEPTEMBER 30, 1999 =================================================================================================================================== PEOPLES BANK FIFTH CORPORATION CNB THIRD OF BANCSHARES, ($000'S) BANCORP INDIANAPOLIS INC. OTHER COMBINED =================================================================================================================================== Net Interest Income $835,824 $19,396 $189,372 $ 4,111 $1,048,703 Other Operating Income 559,461 5,925 84,654 (175) 649,865 Net Income 485,507 6,800 68,181 (8,526) 551,962 ===================================================================================================================================
8 9 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 consisted of net employee-related obligations and conversion expenses and special charges related to the restructuring of certain investment securities. 6. For the first nine months of 2000, the Registrant paid $1,334,531,000 in interest and $15,000,000 in Federal income taxes. For the same period in 1999, the Registrant paid $1,043,983,000 in interest and $114,713,000 in Federal income taxes. During the first nine months of 2000 and 1999, the Registrant had noncash investing activities consisting of the securitization of $864,629,000 and $1,190,978,000 of residential mortgage loans, respectively. 7. In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The statement is effective for transfers and servicing of financial assets occurring after March 31, 2001, with certain disclosure and reclassification requirements effective for financial statements for fiscal years ending after December 15, 2000. Included in SFAS No. 140, which replaced SFAS No. 125 of the same name, are the accounting and reporting standards related to securitizations and Qualifying Special Purpose Entities ("QSPE"). The adoption of SFAS No. 140 is not expected to have a material effect on the Registrant. 8. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." As amended, SFAS No. 133 is effective for all fiscal years beginning after June 15, 2000 and 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. A substantial portion of the Registrant's derivative instruments are interest rate swaps, for which it is believed hedge accounting will be attained, and contracts entered into on behalf of customers, on which the Registrant maintains an offsetting position. As such, the adoption of SFAS No. 133 is not expected to have a material effect on the Registrant. 9. 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 9 10 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 nine months ended September 30, 2000 and 1999 are as follows:
Three Months Ended Investment General September 30, Commercial Retail Advisory Data Acquired Corporate ($000's) Banking Banking Services Processing (a) Entities And Other Eliminations (a) Total ----------------------------------------------------------------------------------------------------------------------------------- 2000 Total Revenues $164,726 $322,824 $ 58,736 $ 67,042 $ -- $ 17,211 $ (5,583) $ 624,956 ----------------------------------------------------------------------------------------------------------------------------------- Net Income $ 68,140 $110,109 $ 17,456 $ 21,345 $ -- $ 10,976 $ -- $ 228,026 =================================================================================================================================== 1999 Total Revenues $121,599 $252,875 $ 53,269 $ 48,732 $102,014 $ 7,941 $ (4,081) $ 582,349 ----------------------------------------------------------------------------------------------------------------------------------- Net Income $ 52,439 $ 87,680 $ 17,107 $ 15,590 $ 21,944 $ 688 $ -- $ 195,448 =================================================================================================================================== Nine Months Ended Investment General September 30, Commercial Retail Advisory Data Acquired Corporate ($000's) Banking Banking Services Processing (a) Entities And Other Eliminations (a) Total ----------------------------------------------------------------------------------------------------------------------------------- 2000 Total Revenues $474,973 $939,784 $179,166 $182,062 $ -- $ 79,434 $(14,437) $1,840,982 ----------------------------------------------------------------------------------------------------------------------------------- Net Income $190,153 $306,935 $ 53,900 $ 57,159 $ -- $ 18,336 $ -- $ 626,483 =================================================================================================================================== 1999 Total Revenues $359,852 $731,268 $157,213 $133,242 $307,550 $ 20,812 $(10,986) $1,698,951 ----------------------------------------------------------------------------------------------------------------------------------- Net Income $151,086 $244,919 $ 49,596 $ 41,799 $ 66,455 $ (1,893) $ -- $ 551,962 ===================================================================================================================================
(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. 10 11 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. 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 nine months are as follows:
NINE MONTHS ENDED SEPTEMBER 30, ($000'S) 2000 1999 =================================================================================================================================== Reclassification Adjustments, Before Tax =================================================================================================================================== Change in Unrealized Gains (Losses) Arising During Period $ 110,119 (384,940) Reclassification Adjustment for Gains (Losses) Included in Net Income 778 (383) ----------------------------------------------------------------------------------------------------------------------------------- Net Unrealized Gains (Losses) on Securities Available for Sale $ 109,341 (384,557) =================================================================================================================================== Related Tax Effects =================================================================================================================================== Change in Unrealized Gains (Losses) Arising During Period $ 41,128 (99,835) Reclassification Adjustment for Gains (Losses) Included in Net Income 272 (134) ----------------------------------------------------------------------------------------------------------------------------------- Net Unrealized Gains (Losses) on Securities Available for Sale $ 40,856 (99,701) =================================================================================================================================== Reclassification Adjustments, Net of Tax =================================================================================================================================== Change in Unrealized Gains (Losses) Arising During Period $ 68,991 (285,105) Reclassification Adjustment for Gains (Losses) Included in Net Income 506 (249) ----------------------------------------------------------------------------------------------------------------------------------- Net Unrealized Gains (Losses) on Securities Available for Sale $ 68,485 (284,856) =================================================================================================================================== Accumulated Nonowner Changes in Equity =================================================================================================================================== Beginning Balance-Unrealized Holding Gains (Losses) on Securities Available for Sale $(224,516) 94,720 Current Period Change 68,485 (284,856) ----------------------------------------------------------------------------------------------------------------------------------- Ending Balance-Unrealized Holding Losses on Securities Available for Sale $(156,031) (190,136) ===================================================================================================================================
11 12 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. The reconciliation of earnings per share to earnings per diluted share follows:
THREE MONTHS ENDED SEPTEMBER 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 $228,026 464,086 $ 0.49 $195,448 461,016 $ 0.42 EFFECT OF DILUTIVE SECURITIES Stock Options 7,623 8,166 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 $229,666 476,125 $ 0.48 $197,088 473,598 $ 0.42 =================================================================================================================================== NINE MONTHS ENDED SEPTEMBER 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 $626,483 464,202 $ 1.35 $551,962 457,369 $ 1.21 EFFECT OF DILUTIVE SECURITIES Stock Options 7,007 9,372 Interest on 6% Convertible Subordinated Debentures due 2028, Net of Applicable Income Taxes 4,920 4,416 4,920 4,416 ------------------------------------------------------------------------------------------------------------------------------------ EARNINGS PER DILUTED SHARE Income Available to Common Shareholders Plus Assumed Conversions $631,403 475,625 $ 1.33 $556,882 471,157 $ 1.19 ===================================================================================================================================
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 net income was $228.0 million for the third quarter of 2000 and $649.5 million on an operating basis for the first nine months of 2000, up 16.7 percent and 17.7 percent, respectively, compared to $195.4 million and $552.0 million for the same periods last year. Earnings per diluted share were $.48 for the third quarter, up 14.3 percent over last year's $.42. For the first nine months of 2000, operating earnings per diluted share were $1.38, up 16 percent over 1999's $1.19. Operating income for the nine months ended September 30, 2000, excludes nonrecurring pretax charges of $33.5 million resulting from the completion of systems integration of CNB Bancshares, Inc. ("CNB") during the second quarter. 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 $626.5 million, or $1.33 per diluted share, during the nine-month period. Net interest income on a fully taxable equivalent basis for the third quarter of 2000 was $394.7 million, a 4.9 percent increase over $376.3 million for the same period last year. For the nine-month period, net interest income on a fully taxable equivalent basis increased to $1,167.4 million, or 5.8 percent, from the $1,103.8 million reported in the same period last year. The increase in both the third quarter and the nine-month period resulted principally from 10.4 percent and 13.7 percent growth, respectively, in average interest-earning assets. During the third quarter, net interest margin declined to 3.74 percent, or 19 basis points ("bp"), from 3.93 percent during the 1999 third quarter. For the nine-month period, net interest margin declined to 3.77 percent, or 28bp, from 4.05 percent in the same period in 1999. The yield on interest-earning assets improved 67bp over the 1999 third quarter and 46bp over the first nine months of 1999, as new loan growth at higher interest rates caused assets to reprice upward. The positive effects of higher asset yields in both the three and nine months ended September 30, 2000 were offset by 100bp and 84bp increases, respectively, in funding cost, resulting from faster repricing of borrowed funds and higher deposit rates to retain accounts. 13 14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Credit quality remained at strong levels due to continued management initiatives to proactively identify and resolve problem credits. The provision for credit losses was $18.2 million in the 2000 third quarter compared to $29.6 million in the same period last year. Net charge-offs declined to $18.2 million from the $19.0 million in the same period last year, reflecting a 6.2 percent improvement in loan and lease losses and a 10.1 percent decrease in recoveries. Net charge-offs for the 2000 third quarter, as a percent of average loans and leases outstanding, declined 4bp to .27 percent from .31 percent in the same period last year. Nonperforming assets as a percentage of total loans, leases and other real estate owned was .32 percent at September 30, 2000, down 6bp from .38 percent at September 30, 1999. Underperforming assets were $168.1 million at September 30, 2000, or .65 percent of total loans, leases and other real estate owned, down 8bp from the $184.5 million, or .73 percent, at September 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. 14 15 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 third quarter of 2000 increased 12.8 percent to $254.0 million compared to $225.1 million in the third quarter of 1999, and increased to $741.8 million for the first nine months of 2000, or 14.1 percent over the same period last year. Compared to the same periods in 1999, data processing income increased 34.2 percent, to $62.0 million, in the 2000 third quarter and 34.1 percent, to $169.7 million, in the nine-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 nine months ended September 30, 2000, service charges on deposits increased 27.2 percent, to $57.6 million, and 25.8 percent, to $160.6 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 2.6 percent, to $49.0 million, in the third quarter of 2000 and 7.7 percent, to $149.3 million, in the nine-month period. These increases reflect solid personal trust account sales growth, coupled with the effects of lower equity market performance on personal trust and brokerage revenue. During the 2000 third quarter, the overhead ratio (operating expenses divided by the sum of taxable equivalent net interest income and other operating income) was 41.5 percent, an improvement from 42.9 percent in the 1999 third quarter. Excluding the $33.5 million nonrecurring pretax charge for merger-related costs and special charges incurred in the second quarter in connection with the integration of CNB, the overhead ratio for the nine-month period was 42.6 percent compared to 44.3 percent in the 1999 period. The merger-related costs consisted of net employee-related obligations and conversion expenses and special charges related to the restructuring of certain investment securities. The improvement in these ratios over 1999 reflects revenue growth at a rate that has outpaced expenses. Total operating expenses increased 5 percent, to $269.2 million during the third quarter and to $812.8 million, excluding the nonrecurring charge, during the nine-month period ended September 30, 2000. Reflecting the full benefits of 15 16 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) completing the systems and processing integration of the CNB and Peoples Bank Corporation of Indianapolis mergers, salaries, incentives and benefits increased .9 percent in the third quarter of 2000 and 3 percent during the nine-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 $18.9 million and $57.5 million, respectively, for the three and nine months ended September 30, 2000. Total other operating expenses increased 11 percent, to $111.0 million, for the quarter and 6.4 percent, to $322.9 million, for the nine-month period. FINANCIAL CONDITION The Registrant's balance sheet remains strong with high-quality assets and solid capital levels. Total assets were $44.4 billion at September 30, 2000 compared to assets of $41.6 billion at December 31, 1999 and $41.4 billion at September 30, 1999, an increase of 6.7 percent and 7.1 percent, respectively. Return on average equity was 20.5 percent and return on average assets was 2.02 percent for the third quarter of 2000 compared to 19.2 percent and 1.90 percent, respectively, for the same quarter of last year. Net interest income growth continues to be fueled by interest-earning asset growth, partially offset by a decline in net interest margin. Interest-earning assets increased to $41.4 billion for the third quarter of 2000, an increase of $2.7 billion, or 6.9 percent, over the same period last year and $3.0 billion, or 7.7 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. During the third quarter of 2000, the Registrant sold, with servicing retained, $958 million in consumer leases. Excluding the effect of this sale, total consumer lease financing balances increased 16.3 percent over September 30, 1999 and 10 percent over year-end. Reflecting the success of campaigns emphasizing customer deposit accounts, demand deposit and interest-bearing checking account balances increased 6.2 percent and 2.7 percent over September 30, 1999 and December 31, 1999, respectively. 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. 16 17 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) At September 30, 2000, shareholders' equity was $4.436 billion compared to $3.908 billion at September 30, 1999, an increase of $528 million, or 13.5 percent. Shareholders' equity as a percentage of total assets as of September 30, 2000 was 10 percent. The Federal Reserve Board has adopted risk-based capital guidelines which assign risk weightings to assets and off-balance sheet items and also define and set minimum capital requirements (risk-based capital ratios). The guidelines also define "well-capitalized" ratios of Tier 1, total capital and leverage as 6 percent, 10 percent and 5 percent, respectively. The Registrant exceeded these "well-capitalized" ratios at September 30, 2000 and 1999. At September 30, 2000, the Registrant had a Tier 1 risk-based capital ratio of 12.88 percent, a total risk-based capital ratio of 14.72 percent and a leverage ratio of 9.99 percent. At September 30, 1999, the Registrant had a Tier 1 risk-based capital ratio of 13.15 percent, a total risk-based capital ratio of 15.12 percent and a leverage ratio of 10.15 percent. 17 18 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 4.97 percent over one year and decrease by 3.08 percent over two years. A 200 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated .68 percent over one year and decrease net interest income by an estimated 7.43 percent over two years. 18 19 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 Nine Months Ended September 30, 2000 (b) Reports on Form 8-K The Registrant filed a report on Form 8-K dated July 17, 2000 related to 1) its three-for-two stock split effected in the form of a stock dividend paid July 14, 2000; 2) the increase in the quarterly cash dividend paid July 14, 2000 to $.18 per share; and 3) the authorization of the Registrant to purchase in the open market up to five percent of its outstanding shares of Common Stock. SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. Fifth Third Bancorp ------------------- Registrant Date: November 14, 2000 /s/ Neal E. Arnold ------------------ Neal E. Arnold Executive Vice President and Chief Financial Officer 19