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 March 31, 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 309,765,919 shares of the Registrant's Common Stock, without par
value, outstanding as of April 30, 2000.
2
FIFTH THIRD BANCORP
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
March 31, 2000 and 1999 and December 31, 1999 3
Consolidated Statements of Income -
Three Months Ended March 31, 2000 and 1999 4
Consolidated Statements of Cash Flows -
Three Months Ended March 31, 2000 and 1999 5
Consolidated Statements of Changes in Shareholders' Equity -
Three Months Ended March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7 - 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 11 - 14
Item 3. Quantitative and Qualitative Disclosures About Market Risk 15
Part II. Other Information 16
2
3
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
========================================================================================================================
MARCH 31, December 31, March 31,
($000'S) 2000 1999 1999
========================================================================================================================
ASSETS
- ------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks $ 947,525 1,213,089 901,638
Securities Available for Sale(a) 14,875,146 12,687,529 12,353,721
Securities Held to Maturity(b) 139,192 129,142 124,282
Other Short-Term Investments 353,197 355,447 143,534
Loans Held for Sale 522,088 297,277 458,171
Loans and Leases
Commercial Loans 6,624,190 6,206,712 5,712,747
Construction Loans 1,085,521 1,067,887 833,361
Commercial Mortgage Loans 2,506,964 2,651,378 2,221,944
Commercial Lease Financing 2,293,173 2,283,006 1,834,392
Residential Mortgage Loans 4,796,426 4,813,971 5,487,151
Consumer Loans 5,350,504 5,283,684 4,520,351
Consumer Lease Financing 3,674,307 3,579,600 2,772,445
Unearned Income (919,782) (922,618) (729,656)
Reserve for Credit Losses (373,337) (366,640) (336,377)
- ------------------------------------------------------------------------------------------------------------------------
Total Loans and Leases 25,037,966 24,596,980 22,316,358
Bank Premises and Equipment 489,918 481,531 453,133
Accrued Income Receivable 317,760 321,025 330,546
Other Assets 1,705,973 1,507,492 979,735
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $44,388,765 41,589,512 38,061,118
========================================================================================================================
LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------
Deposits
Demand $ 3,929,553 3,834,191 3,579,984
Interest Checking 4,369,433 4,176,537 3,628,988
Savings and Money Market 5,828,077 5,783,555 6,110,082
Time Deposits 14,858,634 12,289,277 11,349,261
- ------------------------------------------------------------------------------------------------------------------------
Total Deposits 28,985,697 26,083,560 24,668,315
Federal Funds Borrowed 5,279,410 2,971,855 2,333,692
Short-Term Bank Notes 15,000 1,317,400 615,200
Other Short-Term Borrowings 2,604,210 4,084,878 2,744,266
Accrued Taxes, Interest and Expenses 850,726 785,927 886,087
Other Liabilities 486,185 292,589 210,868
Long-Term Debt 1,842,986 1,803,772 2,542,160
Guaranteed Preferred Beneficial Interest in
Convertible Subordinated Debentures 172,500 172,500 172,500
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 40,236,714 37,512,481 34,173,088
- ------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY(c)
- ------------------------------------------------------------------------------------------------------------------------
Common Stock(d) 687,489 685,728 672,222
Capital Surplus 926,276 911,224 656,247
Retained Earnings 2,836,473 2,704,595 2,507,406
Unrealized Gains (Losses) on
Securities Available for Sale (298,187) (224,516) 81,455
Treasury Stock - - (29,300)
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 4,152,051 4,077,031 3,888,030
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $44,388,765 41,589,512 38,061,118
========================================================================================================================
(a) Amortized cost: March 31, 2000 - $15,340,052, December 31, 1999 -
$13,037,903 and March 31, 1999 - $12,243,194.
(b) Market value: March 31, 2000 - $138,866, December 31, 1999 - $129,142
and March 31, 1999 - $121,948.
(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
March 31, 2000 - 309,679,538, at December 31, 1999 - 308,886,592 and at
March 31, 1999 - 302,803,022 (excludes 466,111 treasury shares).
See Notes to Consolidated Financial Statements
3
4
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
========================================================================================
THREE MONTHS ENDED
MARCH 31,
--------------------------
($000'S) 2000 1999
========================================================================================
INTEREST INCOME
Interest and Fees on Loans and Leases $ 507,287 451,418
Interest on Securities
Taxable 247,465 177,826
Exempt from Income Taxes 9,373 9,146
- ----------------------------------------------------------------------------------------
Total Interest on Securities 256,838 186,972
Interest on Other Short-Term Investments 3,055 2,416
- ----------------------------------------------------------------------------------------
Total Interest Income 767,180 640,806
- ----------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits
Interest Checking 23,986 16,650
Savings and Money Market 50,339 45,876
Time Deposits 171,018 138,507
- ----------------------------------------------------------------------------------------
Total Interest on Deposits 245,343 201,033
Interest on Federal Funds Borrowed 72,072 32,761
Interest on Short-Term Bank Notes 15,207 6,560
Interest on Other Short-Term Borrowings 37,538 29,940
Interest on Long-Term Debt and Notes 33,576 31,417
- ----------------------------------------------------------------------------------------
Total Interest Expense 403,736 301,711
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME 363,444 339,095
Provision for Credit Losses 21,352 25,391
- ----------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 342,092 313,704
OTHER OPERATING INCOME
Investment Advisory Income 50,763 43,551
Service Charges on Deposits 47,655 39,497
Data Processing Income 50,920 38,396
Other Service Charges and Fees 90,303 83,518
Securities Gains 522 1,632
- ----------------------------------------------------------------------------------------
Total Other Operating Income 240,163 206,594
- ----------------------------------------------------------------------------------------
OPERATING EXPENSES
Salaries, Wages and Incentives 109,929 101,183
Employee Benefits 25,681 22,974
Equipment Expenses 12,685 12,039
Net Occupancy Expenses 19,143 17,401
Other Operating Expenses 106,462 100,714
- ----------------------------------------------------------------------------------------
Total Operating Expenses 273,900 254,311
- ----------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 308,355 265,987
Applicable Income Taxes 101,986 89,645
- ----------------------------------------------------------------------------------------
NET INCOME $ 206,369 176,342
========================================================================================
Per Share:
Earnings $ 0.67 0.58
Diluted Earnings $ 0.66 0.57
Cash Dividends $ 0.24 0.20
========================================================================================
Average Shares (000's):
Outstanding 309,187 303,151
Diluted 316,415 312,172
========================================================================================
See Notes to Consolidated Financial Statements
4
5
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
===========================================================================================================================
THREE MONTHS ENDED
MARCH 31,
-------------------------------
($000'S) 2000 1999
===========================================================================================================================
OPERATING ACTIVITIES
Net Income $ 206,369 176,342
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses 21,352 25,391
Depreciation, Amortization and Accretion 27,969 30,720
Provision for Deferred Income Taxes 21,120 11,208
Realized Securities Gains (599) (2,457)
Realized Securities Losses 78 825
Proceeds from Sales of Residential Mortgage Loans Held for Sale 677,962 1,047,633
Net Gains on Sales of Loans (2,137) (17,636)
Increase in Residential Mortgage Loans Held for Sale (900,636) (901,252)
Decrease in Accrued Income Receivable 3,265 13,273
Decrease (Increase) in Other Assets (100,571) 202,402
Increase in Accrued Taxes, Interest and Expenses 84,532 77,421
Decrease in Other Liabilities (60,455) (18,871)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES (21,751) 644,999
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from Sales of Securities Available for Sale 959,690 582,393
Proceeds from Calls, Paydowns and Maturities of Securities Available for Sale 350,130 1,038,481
Purchases of Securities Available for Sale (3,290,701) (2,648,141)
Proceeds from Calls, Paydowns and Maturities of Securities Held to Maturity 7 5,589
Purchases of Securities Held to Maturity (10,057) (5,606)
Decrease in Other Short-Term Investments 2,250 40,808
Increase in Loans and Leases (716,342) (400,477)
Purchases of Bank Premises and Equipment (25,743) (17,722)
Proceeds from Disposal of Bank Premises and Equipment 4,340 4,645
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (2,726,426) (1,400,030)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (Decrease) in Core Deposits 182,470 (657,488)
Increase in CDs - $100,000 and Over, including Foreign 2,869,667 692,585
Increase in Federal Funds Borrowed 2,307,555 195,781
Increase (Decrease) in Short-Term Bank Notes (1,302,400) 607,200
Increase (Decrease) in Other Short-Term Borrowings (1,846,186) 367,437
Proceeds from Issuance of Long-Term Debt and Notes 751,706 32,209
Repayment of Long-Term Debt (422,016) (554,299)
Payment of Cash Dividends (74,169) (62,495)
Exercise of Stock Options 13,903 9,842
Other 2,083 (19,471)
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,482,613 611,301
- ---------------------------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND DUE FROM BANKS (265,564) (143,730)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 1,213,089 1,045,368
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 947,525 901,638
===========================================================================================================================
See Notes to Consolidated Financial Statements
5
6
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
=========================================================================================================================
THREE MONTHS ENDED
MARCH 31,
--------------------------------
($000'S) 2000 1999
=========================================================================================================================
BALANCE AT DECEMBER 31 $ 4,077,031 3,795,054
Net Income 206,369 176,342
Nonowner Changes in Equity, Net of Tax:
Change in Unrealized Losses on Securities Available for Sale (73,671) (13,265)
- -------------------------------------------------------------------------------------------------------------------------
Net Income and Nonowner Changes in Equity 132,698 163,077
Cash Dividends Declared:
Fifth Third Bancorp (2000 - $.24 per share and 1999 - $.20 per share) (74,323) (53,475)
Pooled Companies Prior to Acquisition - (10,084)
Stock Options Exercised
Including Treasury Shares Issued 13,903 9,842
Other 2,742 (16,384)
- -------------------------------------------------------------------------------------------------------------------------
BALANCE AT MARCH 31 $ 4,152,051 3,888,030
=========================================================================================================================
See Notes to Consolidated Financial Statements
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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 March 31, 2000 and 1999, the results of operations for
the three months ended March 31, 2000 and 1999 and the statements of
cash flows for the three months ended March 31, 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 months ended March 31, 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. Financial data for the period ended March 31, 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
3.4 million shares and 30.4 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 month period ended
March 31, 1999, prior to the mergers were as follows:
THREE MONTHS ENDED MARCH 31, 1999
- -------------------------------------------------------------------------------------------------------------------
PEOPLES BANK
FIFTH CORPORATION CNB
THIRD OF BANCSHARES,
($000'S) BANCORP INDIANAPOLIS INC. OTHER COMBINED
- -------------------------------------------------------------------------------------------------------------------
Net Interest Income $270,194 $ 6,237 $ 60,122 $ 2,542 $339,095
Other Operating Income 174,966 1,788 29,807 33 206,594
Net Income 150,447 1,981 24,643 (729) 176,342
- -------------------------------------------------------------------------------------------------------------------
The combined results of operations 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. As
previously disclosed in the 1999 third quarter, the Registrant expects
to incur additional merger-related costs during the second quarter of
2000 in connection with the integration of CNB.
7
8
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. For the first three months of 2000, the Registrant paid $448,143,000 in
interest and no Federal income taxes. For the same period in 1999, the
Registrant paid $304,123,000 in interest and $8,571,000 in Federal
income taxes. During the first three months of 2000 and 1999, the
Registrant had noncash investing activities consisting of the
securitization of $254,004,000 and $289,300,000 of residential mortgage
loans, respectively.
4. 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.
5. 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 months ended March 31, 2000 and 1999 are as follows:
8
9
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
THREE MONTHS ENDED INVESTMENT GENERAL
MARCH 31, COMMERCIAL RETAIL ADVISORY DATA ACQUIRED CORPORATE
($000'S) BANKING BANKING SERVICES PROCESSING (a) ENTITIES AND OTHER ELIMINATIONS (a) TOTAL
- --------------------------------------------------------------------------------------------------------------------------------
2000
Total Revenues $152,966 $298,290 $ 62,366 $ 54,348 $ -- $ 39,280 $ (4,165) $603,085
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 61,364 $ 91,935 $ 18,853 $ 16,893 $ -- $ 17,324 $ -- $206,369
- --------------------------------------------------------------------------------------------------------------------------------
1999
Total Revenues $113,505 $239,638 $ 50,111 $ 40,121 $100,156 $ 3,730 $ (3,204) $544,057
- --------------------------------------------------------------------------------------------------------------------------------
Net Income $ 47,284 $ 81,021 $ 15,617 $ 11,753 $ 25,895 $ (5,228) $ -- $176,342
- --------------------------------------------------------------------------------------------------------------------------------
(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.
6. 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 three months
are as follows:
THREE MONTHS ENDED
MARCH 31,
($000'S) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
Reclassification Adjustments, Before Tax
- ---------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Losses Arising During Period $(114,532) (22,040)
Reclassification Adjustment for Gains Included in Net Income 522 1,632
- ---------------------------------------------------------------------------------------------------------------------------
Net Unrealized Losses on Securities Available for Sale $(114,010) (20,408)
- ---------------------------------------------------------------------------------------------------------------------------
Related Tax Effects
- ---------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Losses Arising During Period $ (40,522) (7,714)
Reclassification Adjustment for Gains Included in Net Income 183 571
- ---------------------------------------------------------------------------------------------------------------------------
Net Unrealized Losses on Securities Available for Sale $ (40,339) (7,143)
- ---------------------------------------------------------------------------------------------------------------------------
Reclassification Adjustments, Net of Tax
- ---------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Losses Arising During Period $ (74,010) (14,326)
Reclassification Adjustment for Gains Included in Net Income 339 1,061
- ---------------------------------------------------------------------------------------------------------------------------
Net Unrealized Losses on Securities Available for Sale $ (73,671) (13,265)
- ---------------------------------------------------------------------------------------------------------------------------
Accumulated Nonowner Changes in Equity
- ---------------------------------------------------------------------------------------------------------------------------
Beginning Balance-Unrealized Holding Gains (Losses) on
Securities Available for Sale $(224,516) 94,720
Current Period Change (73,671 (13,265)
- ---------------------------------------------------------------------------------------------------------------------------
Ending Balance-Unrealized Holding Gains (Losses) on Securities
Available for Sale $(298,187) 81,455
- ---------------------------------------------------------------------------------------------------------------------------
9
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ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. The reconciliation of earnings per share to diluted earnings per share
follows:
THREE MONTHS ENDED MARCH 31, 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
NET AVERAGE PER-SHARE NET AVERAGE PER-SHARE
($000'S) INCOME SHARES AMOUNT INCOME SHARES AMOUNT
- ---------------------------------------------------------------------------------------------------------------------------
EPS
Income Available to
Common Shareholders $ 206,369 309,187 $0.67 $176,342 303,151 $0.58
EFFECT OF DILUTIVE SECURITIES
Stock Options 4,284 6,077
Interest on 6% Convertible
Subordinated Debentures due 2028,
Net of Applicable Income Taxes 1,640 2,944 1,640 2,944
- ---------------------------------------------------------------------------------------------------------------------------
DILUTED EPS
Income Available to
Common Shareholders
Plus Assumed Conversions $ 208,009 316,415 $0.66 $177,982 312,172 $0.57
- ---------------------------------------------------------------------------------------------------------------------------
10
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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
Net income was $206.4 for the first three months of 2000, a 17 percent increase
over last year's $176.3 million. Diluted earnings per share was $.66 for the
first quarter, up 15.8 percent from $.57 for the same period last year.
Net interest income on a fully taxable equivalent basis for the first quarter of
2000 was $385.5 million, an 8 percent increase over $356.8 million for the same
period last year, resulting principally from a 16.3 percent growth in average
interest-earning assets. Net interest margin declined 32 basis points ("bp")
from 4.14 percent during first quarter 1999 to 3.82 percent in the first quarter
2000, reflecting a 125bp increase in the Federal Funds borrowing rate. The
effect of this rate increase was offset by strong deposit growth, a focus on
asset re-pricing and longer borrowing maturities.
Credit quality improved overall due to continued management initiatives to
proactively identify and resolve problem credits. The provision for credit
losses was $21.4 million in the 2000 first quarter compared to $25.4 million in
the same period last year. Net charge-offs declined 29.3 percent to $14.9
million from $21 million in the 1999 first quarter primarily due to a 12.4
percent improvement in loan and lease losses, coupled with a 31.6 percent
increase in recoveries. Net charge-offs as a percent of average loans and leases
outstanding declined 14bp to .24 percent from .38 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 March 31, 2000, down 6bp from .38 percent
at March 31, 1999. Underperforming assets were $160.8 million at March 31, 2000,
or .63 percent of total loans and leases and other real estate owned, down 15bp
from the $177.3 million, or .78 percent, at March 31, 1999.
11
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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.
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.
12
13
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
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, increased 16.9 percent
to $239.6 million in the first quarter of 2000 compared to $205 million in the
first quarter of 1999, with data processing income increasing 32.6 percent to
$50.9 million. Increases in electronic funds transfers ("EFT") and higher
transaction volume from increased debit and ATM card usage, coupled with
expansion of business-to-business e-commerce, contributed to the increase in
data processing income.
Investment advisory income increased 16.6 percent to $50.8 million in the first
quarter of 2000 compared to $43.6 million in the 1999 period. This growth was
attributable to double-digit increases in personal trust, employee benefits,
corporate trust and brokerage revenue, coupled with new sales volume. Service
charges on deposits increased 20.7 percent over the same period last year
primarily due to the success of new account campaigns, while other service fee
charges and fees grew 8.1 percent over the same quarter last year.
The overhead ratio (operating expenses divided by the sum of taxable equivalent
net interest income and other operating income) was 43.8 percent for the first
quarter of 2000, down from 45.1 percent in the same period last year. The
improvement in the 2000 overhead ratio was primarily due to increased revenues
during the first quarter. Total operating expenses increased to $273.9 million
in the 2000 first quarter, or 7.7 percent over the same period last year.
Salaries, incentives and benefits increased 9.2 percent in the first quarter of
2000 primarily due to additional compensation incurred to support improved
sales volume, coupled with an increase in the Registrant's profit sharing
contribution. Net occupancy expense increased to $19.1 million during the first
quarter primarily due to rent expense incurred, while total other operating
expenses increased 5.7 percent, to $106.5 million, for the quarter.
FINANCIAL CONDITION
The Registrant's balance sheet remains strong with high-quality assets and solid
capital levels. Total assets were $44.4 billion at March 31, 2000 compared to
assets of $41.6 billion at December 31, 1999 and $38.1 billion at March 31,
1999, an increase of 6.7 percent and 16.6 percent, respectively. Return on
average equity was 19.4 percent and return on average assets was 1.90 percent
for the first quarter of 2000 compared to 19.0 percent and 1.91 percent,
respectively, for the same quarter of last year.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS (CONTINUED)
Net interest income growth continues to be fueled by improved interest-earning
asset and deposit mix and interest-earning asset growth, partially offset by a
decline in net interest margin. Interest-earning assets increased to $41.3
billion for the first quarter of 2000, an increase of $5.6 billion, or 15.6
percent, over the same period last year and $2.9 billion, or 7.5 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 $29 billion at March 31, 2000, an increase of $4.3 billion, or
17.5 percent, over the same period last year and $2.9 billion, or 11.1 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 March 31, 2000, shareholders' equity was $4.152 billion compared to $3.888
billion at March 31, 1999, an increase of $264 million, or 6.8 percent.
Shareholders' equity as a percentage of total assets as of March 31, 2000 was
9.35 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 March 31, 2000 and 1999.
At March 31, 2000, the Registrant had a Tier 1 risk-based capital ratio of 13.05
percent, a total risk-based capital ratio of 14.89 percent and a leverage ratio
of 10.06 percent. At March 31, 1999, the Registrant had a Tier 1 risk-based
capital ratio of 12.56 percent, a total risk-based capital ratio of 14.51
percent and a leverage ratio of 10.04 percent.
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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 7.70 percent over one
year and decrease by 2.92 percent over two years. A 200 basis point immediate,
sustained downward shock in the yield curve would increase net interest income
by an estimated 4.10 percent over one year and decrease net interest income by
an estimated 4.67 percent over two years.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On March 21, 2000, the Registrant held its Annual Meeting of Stockholders for
which the Board of Directors solicited proxies. At the Annual Meeting, the
shareholders adopted all of the proposals stated in the Proxy Statement dated
February 9, 2000, which is incorporated herein by reference. The proposals voted
on and approved by the shareholders are as follows:
1. Election of eight (8) Class II Directors (John F. Barrett, Richard T.
Farmer, Robert B. Morgan, Brian H. Rowe, George A. Schaefer, Jr., John
J. Schiff, Jr., Donald B. Shackelford and Dudley S. Taft) to serve
until the Annual Meeting of Shareholders in 2003.
2. Approval of the proposal to amend Article Fourth of the Amended
Articles of Incorporation to Increase the authorized number of shares
of Common Stock, without par value, from 500,000,000 shares to
650,000,000 shares by a vote of 258,878,074 for 6,139,516 against and
1,568,639 withheld.
3. Approval of the proposal to appoint the firm of Deloitte & Touche LLP
to serve as independent auditors for the Registrant for the year 2000
by a vote of 263,406,981 for, 1,955,544 against and 1,223,704 withheld.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
(3)(i) Amended Articles of Incorporation, as amended
(3)(ii) Code of Regulation, as amended, incorporated by
reference to Registrant Registration Statement,
on Form S-4, Registration No. 33-63966
(27) Financial Data Schedules for the Three Months Ended
March 31, 2000
(b) There were no Reports on Form 8-K filed during the first quarter of
2000.
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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
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Registrant
Date: May 15, 2000 /s/ Neal E. Arnold
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Neal E. Arnold
Executive Vice President and
Chief Financial Officer
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