EXHIBIT 13
strength
Over the past 143 years, Fifth Third has become one of the strongest, most
financially sound banks in the nation.
stability
Fifth Third Bancorp is one of a handful of U.S. bank holding companies with
Moody's Aa3 credit rating.
performance
2001 marks Fifth Third's 28th year of consecutive increased earnings and the
23rd year of double-digit earnings growth.
[GRAPHIC] Fifth Third Bancorp
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2001 Annual Report
FIFTH THIRD BANCORP AND SUBSIDIARIES
Corporate Profile
[GRAPHIC]
Fifth Third Bancorp is a diversified financial services company headquartered in
Cincinnati, Ohio. It operates 16 affiliates in Ohio, Kentucky, Indiana,
Michigan, Illinois, Florida and West Virginia, and provides a broad array of
products and services through four primary businesses: Commercial Banking,
Retail Banking, Investment Advisors and Midwest Payment Systems, our electronic
payment processing subsidiary. With $71 billion in assets, Fifth Third is the
14th largest bank holding company in the nation and the ninth largest in market
capitalization.
Investment Qualities
Fifth Third Bancorp shareholders have:
. Received a 25-year annualized return in excess of 26%, a 10-year
compounded annual dividend growth rate of nearly 18%, and seen an
investment of $10,000 in 1976 increase to more than $3.6 million by
December 31, 2001;
. Seen a single share of stock purchased in 1980 grow to nearly 77 shares;
. Seen their investment outperform the Standard & Poor's average 14-fold
over a 25-year period;
. Enjoyed 28 years of consecutive earnings increases and for the past 23
years, a growth rate of 10% or more; and
. Invested in one of only a handful of bank holding companies to hold
Moody's Aa3 senior debt rating for safety and soundness.
2001 ANNUAL REPORT
President's Letter
Record revenue & earnings. Four accretive acquisitions completed smoothly.
2
The Year in Review
Operating style explained in detail. Continued focus on growing deposits and
intensified cross-selling efforts.
4
Financial Presentation
Includes consolidated financial statements and notes audited by Deloitte &
Touche LLP; five-year financial record and management's discussion & analysis.
15
Directors and Officers
Fifth Third's director and officer ranks are expanded following the Old Kent
merger.
48
Investor Information
Price range of stock. Outstanding ratings by Moody's of Aa3 on senior debt and
Prime-1 on its commercial paper.
49
Financial Highlights
Percent
For the years ended December 31 2001 2000 Change
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$ in millions, except per share data
Earnings and Dividends
Operating Earnings (a) $ 1,393 $ 1,207 15.4
Net Income 1,094 1,141 (4.2)
Cash Dividends Declared 460 325 41.4
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Per Share
Diluted Operating Earnings (a) $ 2.37 $ 2.10 12.9
Earnings 1.90 2.02 (5.9)
Diluted Earnings 1.86 1.98 (6.1)
Cash Dividends Declared .83 .70 18.6
Year-End Book Value 13.11 11.71 12.0
Year-End Market Price 61.33 59.75 2.6
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At Year-End
Assets $ 71,026 $ 69,658 2.0
Loans and Leases 41,548 42,530 (2.3)
Deposits 45,854 48,360 (5.2)
Shareholders' Equity 7,639 6,662 14.7
Market Capitalization 35,735 34,001 5.1
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Key Ratios
Return on Average Assets (a) 1.97% 1.81% 8.8
Return on Average Equity (a) 19.2 20.2 (5.0)
Overhead Ratios (a) (b) 46.9 48.5 (3.3)
Net Interest Margin 3.82 3.74 2.1
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Number of Shares 582,674,580 569,056,843 2.4
Number of Shareholders 58,203 60,172 (3.3)
Number of Banking Locations 933 963 (3.1)
Number of Full-Time Equivalent Employees 18,373 20,468 (10.2)
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(a) For comparability, certain ratios and statistics exclude nonrecurring merger
charges and a nonrecurring accounting principle change of $394.5 million
pretax ($300.3 million after tax, or $.51 per diluted share) for 2001 and
nonrecurring merger charges of $99 million pretax ($66.6 million after tax,
or $.12 per diluted share) for 2000.
(b) Operating expenses divided by the sum of fully taxable equivalent net
interest income and other operating income, including $142.9 million of
realized gains in 2001 on securities sales from the mortgage servicing
rights non-qualifying hedging program.
1
FIFTH THIRD BANCORP AND SUBSIDIARIES
Dear Shareholders and Friends:
We achieved record earnings for the 28th year in a row, despite a weak economy,
while we simultaneously integrated the largest and most successful acquisition
in our history. We have one of the strongest balance sheets in the industry,
proven expense discipline and considerable market share growth potential.
[PHOTO]
George A. Schaefer, Jr.
President & CEO
We continued to grow throughout 2001 by adding to and expanding
relationships with customers in our existing markets and by taking advantage of
our opportunities in new markets provided by four acquisitions. Our employees
are to be commended for their focus and dedication in carefully completing the
integration of these acquisitions while maintaining our performance track
record. This year's financial performance was marked by continued strong revenue
growth, improved efficiency, stable credit quality despite the challenges of an
uncertain environment and the successful integration of Old Kent. Compared to
the year 2000,
. Operating earnings increased 15% to $1.4 billion, or $2.37 per diluted
share;
. Revenue increased 12% to $4.2 billion;
. Transaction deposits rose 28% to $31.1 billion;
. Service revenues increased on double-digit growth from nearly each of our
four main lines of business--Retail and Commercial Banking, Investment
Advisors and Midwest Payment Systems (MPS), our electronic payment
processing subsidiary. MPS led the growth with an annual increase in
revenues of 38%. The successful sales of Retail and Commercial deposit
relationships fueled an annual increase in deposit service revenues of 23%.
Investment Advisors service revenues increased nine percent, while total
revenues grew 11%, despite equity market weakness for much of 2001;
. The quality ratings on our senior debt and commercial paper remained at an
all-time high. Moody's awarded our senior debt an Aa3 rating, while our
commercial paper received ratings of Prime-1 from Moody's and A-1+ from
Standard & Poors, which attest to our safety and stability;
. Quarterly cash dividends, which have been paid for 105 consecutive
quarters, were increased twice in 2001- from $.18 per share to $.20 per
share last March and then to $.23 per share last December, a 19% increase
for the year;
. Our capital ratio improved to 10.28%, representing an additional billion
dollars in shareholder equity and one of the best capitalized balance
sheets in the industry; and
. Return on average equity was 19.2% on an expanded capital base and our
return on average assets was 1.97%.
Growth Opportunities Continue
. Our four main lines of business continue to provide diverse income sources,
and customer and revenue growth momentum is as strong as at any time in our
history.
. We are also at the strongest capital position in our history as a result of
acquiring only companies that quickly contribute to corporate earnings, a
disciplined credit policy, productive expense controls and a fierce,
competitive drive to win new customers- basic
2
2001 ANNUAL REPORT
operating principles that are the foundation of our corporate culture.
. We expect to increase market share by taking advantage of the
significant momentum building in our larger markets. Presently, only
one in 16 residents in our market areas banks with us. Further, our
current 5.1 million customer base provides us ample room to grow
profitably through the cross-sell of additional banking products.
. Finally, customers traditionally seek strong institutions in a weak
economy. No other bank in our markets has a better record for strength
or for delivering financial solutions.
[CHART]
Market Capitalization
(in billions)
28% Five Year Compound Growth Rate
96 97 98 99 00 01
----- ----- ----- ----- ----- -----
$10.5 $20.2 $26.5 $27.7 $34.0 $35.7
Operating Model
Unlike most in our industry, we continue to execute a basic, yet proven,
operating model that strives to make decisions closer to the customer. We remain
a collection of decentralized banking operations centered in each of our major
metropolitan markets. The challenges to grow and the competition are different
in each of our markets, so the authority, responsibility and accountability for
growth are placed in the hands of local managers. No matter how large we become,
we believe this operating philosophy is the primary reason we consistently
achieve the highest overall performance in the banking industry.
[CHART]
Operating Earnings Per
Diluted Share*
15% Five Year Compound Growth Rate
96 97 98 99 00 01
---- ---- ---- ---- ---- ----
1.20 1.37 1.63 1.83 2.10 2.37
*Excludes SAIF and Merger Charges
Acquisitions
We made four acquisitions last year: a money management firm, an electronic
payment processor, and two bank holding companies. By far, the largest
acquisition was Old Kent Financial, which was about half our size. Apart from
acquiring many new customers and deposits, we obtained a formidable presence
throughout Michigan, a stronger base in Chicago, greater market share across
northern Indiana, and access to approximately 16 million potential new
customers.
[CHART]
Total Equity
(in billions)
10% Five Year Compound Growth Rate
96 97 98 99 00 01
---- ---- ---- ---- ---- ----
$4.7 $5.0 $5.4 $5.6 $6.7 $7.6
We are well on our way to achieving the financial objectives from these
transactions and look forward to their continued earnings opportunities. More
importantly, the 2001 results prove that we are unwilling to compromise the
performance and balance sheet quality our shareholders have come to expect.
Directors
We welcomed three new members to our Board from Old Kent: James P. Hackett,
President, CEO and Director of Steelcase, Inc.; Hendrik G. Meijer, Co-Chairman
of Meijer, Inc.; and David J. Wagner, formerly Chairman, President and CEO of
Old Kent and now Chairman of Fifth Third Bank Michigan.
Gerald V. Dirvin, former Executive Vice President of The Procter & Gamble
Company, and Brian H. Rowe, former President and CEO of GE Aircraft Engines,
retired from our Board last year, after 12 and 21 years of service,
respectively. Their guidance and leadership were outstanding, and we will miss
them greatly.
Conclusion
I would like to thank our Board members and employees for their hard work in
producing another rewarding year for our shareholders. Their accomplishments
created an even stronger growth company. The recognized financial strength of
our balance sheet, the flexibility provided by $7.6 billion in equity capital,
sales opportunities in both our new and existing markets and a culture of simply
executing better on the basics serve to effectively position us to continue to
deliver consistent earnings growth in the future. I look forward to the
challenges that lie ahead in 2002.
Sincerely,
/s/ George A. Schaefer, Jr.
George A. Schaefer, Jr.
President & CEO
January 2002
3
FIFTH THIRD BANCORP AND SUBSIDIARIES
The Year in Review
Fifth Third's operating style is different. It adapts to the reality of our
capitalist economy. It rewards swift, decisive action, increased efficiency,
flawless execution, and competitive drive. This is how Fifth Third outperforms
other banks.
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"Continuing our growth momentum while simultaneously integrating Old Kent
smoothly and ahead of schedule was the decisive achievement of 2001. Our ability
to pull off the largest merger in our history without disrupting our ongoing
operations is a skill we've learned and then honed from the more than 50
acquisitions we've made in the past 10 years." --George A. Schaefer, Jr.
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Our unmatched record of increased revenue and earnings for the past 28
consecutive years illustrates our consistency, regardless of economic or credit
cycles. When other banks were losing deposits to money market centers and mutual
funds, we increased our transaction deposits. When other banks were struggling
with their acquisitions and posting huge losses, we integrated ours smoothly and
derived increased earnings from each in the first year we acquired them. When
many banks reported enormous write-offs during last year's slumping economy, we
solidified existing business relationships - and forged new ones - to maintain a
high level of service and record strong profits.
Inasmuch as every bank's cost of money is approximately equal, and the same
potential customers are available to every bank in a given market, the principal
difference that distinguishes one bank from another is how they operate. And
Fifth Third operates much differently from others.
We embrace American capitalism and adapt to its realities. We hustle day in
and day out. We outsell competitors by providing superior financial products
that meet the needs of the market and return a profit to us. Our operating
principles are simple and firm.
. We focus on building deposits as they are the prime source for new
customers.
. We call on customers every day. We don't wait for business to come to us.
. We have a disciplined acquisition strategy focused on metropolitan markets
and future growth potential--carefully evaluating every opportunity as
owners.
. We focus on outstanding credit quality as one of the bases for consistent
earnings growth.
. We give broad authority to our 16 bank presidents and hold them
accountable for their performance.
. We set very short-term goals that enable us to make incremental progress
every day rather than relying on "home runs" to boost earnings.
. We focus on flawless execution.
. We're frugal and know how to do more with less.
. We recognize the wisdom of rewarding performance.
. We pay generous profit sharing bonuses and award stock option incentives to
retain highly productive employees. This pays off. Each full-time
equivalent employee produced average operating earnings of $72,000 last
year, up from $58,000 in 2000. No other bank equals this performance. Stock
options, particularly, motivate employees to think like shareholders, i.e.,
to work hard, watch our pennies and get additional customers to improve
earnings.
[CHART]
Revenue
($ in billions)
97 98 99 00 01
---- ---- ---- ---- ----
$2.9 $3.2 $3.5 $3.8 $4.2
Operating Earnings
($ in millions)
97 98 99 00 01
---- ---- ----- ------ ------
$776 $925 1,048 $1,207 $1,393
4
2001 ANNUAL REPORT
[GRAPHIC]
Last year's acquisition of Old Kent materially enhanced our presence in Chicago.
We now have 102 full-service Banking Centers in Chicagoland to serve its
approximate eight million residents. Our convenient locations clearly
demonstrate that at Fifth Third, we're "working hard to be the only bank you'll
ever need(R)!"
5
FIFTH THIRD BANCORP AND SUBSIDIARIES
We think small. We operate as 16 affiliate banks instead of one, unwieldy
entity. By dividing our bank into 16 operating units, we avoid the stifling
bureaucracy of a huge monolith and unleash the entrepreneurial talents of our
bank presidents and their employees.
Deposit/Customer Growth
Last year, we continued our focus on building transaction deposits and had great
success. Account openings and balances within the former Old Kent franchise
accelerated to more than three times the prior year rate. Our existing affiliate
banks continued to gain market share through the success of new product
introductions and direct marketing efforts. In 2001, transaction deposits
increased 28 percent over the prior year.
The resulting balances and customers they represent provide a stable and
increasing core funding base, fuel service income growth and represent an
important
[LOGO] FIFTH THIRD
. A Fifth Third Bank Mart(R) in Cincinnati. These full-service Banking
Centers, located in more than 140 grocery stores, offer evening and
weekend hours, seven days a week.
The Bank Mart brings convenience to customers and simultaneously
affords Fifth Third employees an opportunity to sell to more
potential customers in a grocery store than they would at a
freestanding bank location.
[GRAPHIC]
6
2001 ANNUAL REPORT
platform from which we can cross-sell additional products and services. This
unrelenting focus defines our growth strategy.
Driving Revenue Growth
Total revenues increased 12 percent to $4.2 billion in 2001 compared with $3.8
billion in 2000. The hallmark of our revenue growth is a commitment to
maximizing operating leverage, or the allocation of resources to projects and
investments that produce immediate returns and drive revenues at a rate faster
than the incremental expense impact.
[GRAPHIC]
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TOTAL
REVENUE PERCENT
$ IN MILLIONS 2001 2000 CHANGE
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RETAIL BANKING $ 1,971 $ 1,676 18
COMMERCIAL BANKING 1,158 997 16
INVESTMENT ADVISORS 402 362 11
MIDWEST PAYMENT SYSTEMS 343 249 38
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Cross-selling
Successful sales and promotional campaigns produced a record number of new
accounts in 2001, evidenced by 21 percent year-over-year growth in average
interest checking account balances. This performance was fueled by the
introduction and expansion of products and services to new and existing markets,
plus a sharp focus on cross-selling.
Defined, cross-selling is the broadening of existing Retail, Commercial,
Investment Advisors and MPS relationships. We work hard to retain relationships
and win new ones - and harder still on growing the relationships to incorporate
additional products and services.
Consumer relationships often begin with a checking account, so we offer both
an interest-bearing checking account paying a money market rate, as well as a
Totally Free account with no minimum balance. This strategy gives our sales
force the perfect platform for adding new customers and selling additional
products.
Fifth Third's business, investment and payment processing sales personnel
share this same philosophy. Our Commercial customers derive benefit from Midwest
Payment Systems' automated back-office solutions and Investment Advisors'
corporate pension products. Communication and referrals remain paramount to
growing these key relationships.
[PHOTO]
Retail Banking
Robert P. Niehaus, Executive Vice President. Fifth Third delivers retail banking
through full-service Banking Centers, Jeanie(R) Automated Teller Machines, our
toll-free customer service line and on the web at www.53.com. Our grocery store
locations feature evening and weekend hours, and provide an endless source of
new relationships. The Retail Banking and Consumer Lending Group comprise 54
percent of Fifth Third's net income and 47 percent of its revenue.
7
FIFTH THIRD BANCORP AND SUBSIDIARIES
Fifth Third offers banking and investment convenience at its full-service
Banking Centers, Bank Mart(R) locations, Jeanie(R) ATMs, Jeanie Telephone
Banking and with Fifth Third Online(SM) on the Web at www.53.com.
. Retail Banking.
The combination of our convenience, strong selling efforts and an ability to
reach more potential customers through our 933 full-service Banking Centers
produced another outstanding year.
Retail Banking remained our greatest source of revenue, at 47 percent. We
view our Banking Centers as an integral part of our business, and we empower
Banking Center Managers, those closest to the customer, to make lending and
account decisions as well as to become a visible presence in their communities.
Average consumer demand deposit balances increased 51 percent and interest
checking balances grew by 21 percent in 2001. The related deposit service
revenue from these efforts increased 18 percent over last year and continues to
accelerate. Retail loan and checking account campaigns help identify and reward
the best performers and produce remarkable results in all of our markets.
These gains illustrate our ability to leverage our extensive in-footprint
bricks and mortar presence with a superior product set, delivered by an
aggressive sales force.
. Commercial Banking.
Fifth Third is committed to helping business customers operate more efficiently
by offering a full-range of services for small, middle-market and large
corporate clients.
Whether a company needs help with cash management solutions, investments or
foreign exchange, Fifth Third will tailor a solution that helps businesses focus
more time and energy on growing their business. We are committed to helping
customers operate more efficiently and we demonstrate this commitment every day
by get-
[PHOTO]
Kevin T. Kabat, President & CEO of Fifth Third Bank in Western Michigan (left),
calls on Cascade Engineering's Chairman & CEO, Fred T. Keller, at his plant in
Grand Rapids.
Mr. Keller's company is known globally as a developer and manufacturer of
injection-molded products for the automotive, container and home and office
markets. Cascade's 9,000-ton injection molding press, the largest in North
America, made headlines in 1997 when it produced Chrysler's Composite Concept
Vehicle, the world's first all-plastic automobile body.
Fifth Third Bank, Western Michigan, encompassing Grand Rapids, Muskegon and
Holland, has deposits of $5.7 billion and a market-leading 40 percent share.
[PHOTO]
8
2001 ANNUAL REPORT
ting out from behind our desks and observing the inner-workings of their
companies.
For example, we developed a unique set of cash management products in
response to the evolving demands of today's business customer. These products
deliver functional access through a single integrated platform to multiple bank
products and services. As a result, our cash management service revenues are
growing faster than those of our competitors among the top 20 U.S. bank holding
companies, according to an annual survey of Cash Management Services by Ernst &
Young LLP. In addition, we are one of the few Midwest-based banks that can
support companies with operations in Europe and Asia. As a result, our cash
management and international service revenues increased 36 percent over last
year.
. Officer Call Program--Commercial
[PHOTO]
James R. Gaunt (left), President & CEO of Fifth Third Bank in Louisville, enjoys
a quick lunch at Wendy's with bank customer, Ulysses L. "Junior" Bridgeman.
Junior's company, Bridgeman Foods, started with five restaurants in Milwaukee 11
years ago. Presently, it operates more than 135 Wendy's restaurants in a three-
state region, including 30 locations in the Louisville area.
Mr. Bridgeman's success is legendary within the Wendy's franchise organization.
He and his partner, Paul Thompson, are inspirational mentors to their employees,
often working side by side with them during rush hours. Their close association
with their employees has paid off handsomely: virtually no manager has ever
quit, allowing Bridgeman Foods to maintain a continuity of service that few can
equal.
9
FIFTH THIRD BANCORP AND SUBSIDIARIES
Interest and fees on commercial loans and leases was $1.7 billion and
commercial banking service revenue rose 46 percent to $125 million in 2001.
Commercial demand deposits increased 18 percent to $5.3 billion in 2001.
. Investment Advisors.
During a challenging year in the markets, our Investment Advisors group
significantly increased its client relationships. Total Investment Advisors
revenues grew by 11 percent over the prior year to $402 million.
Declines in market sensitive service income were mitigated by double-digit
increases in both Private Client services across all product lines and in Retail
Brokerage, driven by Fifth Third Banking Center annuity sales. Fifth Third
remains committed to investing in and broadening the sales efforts to take
advantage of our strong investment performance. We will continue to focus our
sales efforts on integrating services across business lines to take advantage of
an expanding customer base. The prospects for the future remain excellent due to
an increased distribution network, continued strong investment performance and
the addition of more than 150 seasoned sales professionals throughout the year.
Fifth Third significantly expanded its mutual fund family and investment
styles in 2001 with the merger of the Kent and Maxus Funds. Since its inception
in 1988, the Fifth Third Funds(R) family has grown from $100 million in assets
to $12 billion today. The family now offers four investment styles: Quality
Growth, Disciplined Value, Broadly Diversified and Fixed Income and features 31
nationally recognized stock, bond and money market mutual funds.* At year-end
2001, we had $188 billion in assets under care and $34 billion under management
for our 200,000 personal, corporate and not-for-profit clients.
. Midwest Payment Systems.
Our electronic payment processing unit, MPS, is our fastest growing operation.
MPS provided net service revenues of $347 million in 2001, an increase of 38
percent. Midwest Payment Systems acquires, authorizes, switches, captures and
settles virtually all types of electronic payment transactions for financial
institutions and merchants throughout all 50 states. MPS operates two principal
businesses including Merchant Services and
[PHOTO]
Investment Advisors
Bradlee F. Stamper, President & CEO of Fifth Third Bank in Chicago, updates
investment client, Mrs. Barbara Gunther, at her home in north suburban Chicago.
Despite last year's stock market decline, Fifth Third added a record number of
new investment clients.
[GRAPHIC]
Barnes & Noble, the nation's largest book retailer with more than 1,000 stores
throughout the Midwest, chose MPS to process its customers' credit card
transactions because of its unmatched ability to develop custom sales floor and
back office solutions.
10
2001 ANNUAL REPORT
Electronic Funds Transfer (EFT) Services.
Our Merchant Services group provides more than 160,000 retail locations
nationwide with debit, credit and stored value payment processing, which
represents an increase of 88 percent over 2000. Nationally, MPS ranks among the
largest processors in merchant transaction volumes.
Our EFT Services group provides automated teller machine (ATM) processing,
debit card management and debit network access principally for over 1,100
financial institutions nationwide and in 23 countries throughout the Americas,
Asia and Europe. Our reputation and ability to deliver innovative processing
solutions has earned us many distinctions, including a #1 ranking among EFT
processors, as well as VISA(R), and Star(R) Network quality awards.
Since 1973, MPS has provided innovative transaction processing solutions for
its customers, handling more than 6.6 billion ATM, point-of-sale and electronic
commerce transactions this year. MPS acts as a business advisor to its clients,
forging strategic partnerships and creating processing solutions that enable
them to enhance revenue while simultaneously reducing their costs. MPS' complete
service offering provides us with a revenue and income stream that few of our
Midwest banking competitors possess.
Acquisitions--2001
The four acquisitions we completed last year--Old Kent Financial Corporation,
Maxus Investment Group, Capital Bank NA, and Universal Companies--played a major
role in our growth as each brought us new customers and increased market
opportunities.
Old Kent Conversion In Less Than One Year. This acquisition enabled us, in one
transaction, to accomplish what would have normally taken four separate
purchases. As a result of this acquisition, we received:
. Over one million new customers;
. The opportunity to market to 16 million potential customers in Michigan,
Illinois and Indiana;
. A stronger presence in Michigan, a state ranked #1 for new or expanded
business facilities, #2 in new manufacturing plant construction and #10 for
deposits in the United States; and
. $16.8 billion in deposits.
[GRAPHIC]
. Fifth Third helped the Lexington Clinic buy itself back from a management
company by arranging a loan through our Real Estate Capital Markets Group. We
also provided equipment financing and a working capital line of credit for the
transaction.
Founded in 1920, the clinic boasts one of the largest medical practices in
Kentucky. Fifth Third cash management and credit card processing services help
keep the clinic's back office running smoothly, while physicians and
administrators trust our Investment Advisors Group for private banking
expertise.
Lexington Clinic President Andrew H. Henderson, M.D. (left) and CEO Michael
P. Fizgerald (right), meet with Samuel G. Barnes, President & CEO of Fifth Third
Bank in Lexington (center).
[GRAPHIC]
Fifth Third Bank Eastern Michigan President & CEO Patrick J. Fehring, Jr. (left)
confers with John R.Green, CFO, John E. Green Co., at a State of Michigan
facility in Lansing. The John E. Green Co. provides plumbing, heating, process
piping and fire protection solutions to many companies throughout the Midwest.
11
FIFTH THIRD BANCORP AND SUBSIDIARIES
TRACK RECORD OF SUCCESSFUL ACQUISITIONS
Fifth Third has a proven ability to integrate acquired financial
institutions quickly - and to increase their
profitability. A few highlights include:
YEAR RETURN ON ASSETS (ROA) 2001 BRANCHES
AFFILIATE ACQUIRED AT PURCHASE ROA GROWN TO
- -------------------------------------------------------------------------------------------------
Lexington 1989 .70% 2.18% 19
Louisville 1994 .85% 2.08% 43
Western Ohio 1998 .87% 1.87% 63
Central Ohio 1998 1.26% 2.25% 56
Central Indiana 1999 1.38% 1.73% 77
Southern Indiana 1999 1.42% 1.68% 57
Northern Indiana 1999 1.00% 1.43% 102
Despite its size, we were able to integrate its entire operation in less than
one year, on budget and two months ahead of schedule. In fact, success in the
levels of deposit growth and balance sheet improvement has exceeded our initial
projections by nine months.
The one-time pre-tax merger cost to integrate Old Kent was $384 million. This
sum was expensed in 2001, and we expect to more than recoup these costs from
earnings generated by the former Old Kent.
Maxus Investment Group, a Cleveland-based money management firm with $1.4
billion under management, was acquired on January 2, 2001, and integrated into
Fifth Third Bank in Northeastern Ohio.
Capital Bank of Sylvania, Ohio, a bank holding company with $1.1 billion in
assets, was acquired on March 9, 2001, and quickly integrated into our Fifth
Third Bank in Northwestern Ohio. The former Capital Bank Chairman, John Szuch,
now serves as Chairman, Fifth Third Bank in Northwestern Ohio, and Bob Sullivan,
the former Capital Bank President, became the President of Fifth Third Bank in
Northwestern Ohio.
Universal Companies, an electronic payment processor serving over 61,000
merchant locations with over $4 billion in annual transaction volume, was
acquired on October 31, 2001. Universal's technology platforms enhance Midwest
Payment Systems' service offering for small and medium sized merchants. In
addition, Universal's broader sales distribution programs, utilizing in-house
sales as well as third-party resellers, provide further opportunities for rapid
revenue growth and geographic expansion.
Profitability
Operating earnings, exclusive of nonrecurring after-tax merger charges of $294
million, increased 15 percent to $1.4 billion, compared to $1.2 billion in 2000.
Earnings this year were driven by strong revenue growth, an improved net
interest margin, and stable credit quality that remains among the best in the
industry despite the challenges of an uncertain external environment.
Our efficiency ratio, the expense associated with each dollar of revenue,
improved to 46.9 percent in 2001 (inclusive of securities transactions
associated with non-qualifying hedging activity related to the mortgage
servicing portfolio) from 48.5 percent last year.
Fifth Third's ability to operate more efficiently than its peers is a product
of the disciplined expense control that comes from a culture of ownership,
profit and loss accountability throughout the organization, and the synergies
across business lines provided from a single integrated computer platform.
Balance Sheet Data
We continued our commitment to maintaining a strong, flexible balance sheet. Our
capital ratio improved throughout 2001 to 10.28 percent, comparing favorably to
8.98 percent in 2000. The strength of our low-risk balance sheet has been
recognized by all of the major rating agencies and is an important determinant
to our business customers and vendors alike. In 2001, we increased our equity
base by over a billion dollars, despite a 19 percent increase in the annual
dividend and various integration charges incurred in the year.
Honors/Awards
Fifth Third's performance continued to be recognized in various trade
publications and the financial news media. Last May, a Harris Poll ranked Fifth
Third as the number one commercial bank in the nation for quality and
consistency, as well as first for reputation, name recognition, and customer
service. Mergent's Dividend Achievers ranked us third among 28,000 publicly-held
corporations for dividend growth and consistency. In the April 23rd issue of
Barron's, we were ranked eighth among the top 500 performing companies in the
nation and first among all banks. In addition, Moody's gave us an Aa3 rating for
safety and soundness for investors. These rankings are a testament to our
competitive drive, sound
12
2001 ANNUAL REPORT
financial footings and innovative solutions we bring to all phases of banking.
Outlook
We cannot control the trend of the economy, but we most certainly can control
how we operate within it. We remain focused on providing outstanding customer
service and delivering innovative banking and investment solutions that will
fuel continued growth.
We have a great opportunity to continue cross-selling in our existing and new
markets. We will continue to build on the momentum realized in 2001 for our
Retail and Commercial lines of business by striving to meet all the financial
service needs of our customers. Increasing the contribution of our Investment
Advisors business line remains a priority as we expand our product offerings and
continue to deliver strong investment performance. Our acquisition of Universal
Companies will allow our electronic payment processing business to better serve
and expand our capabilities within the small merchant market, complementing our
demonstrated strength in other areas.
Finally, with less than 10 percent market share in our footprint, we have
ample room for expansion. We expect our competitive operating style and ability
to operate as 16 separate growth units will allow us to deliver the continued
growth that our shareholders have come to expect.[_]
.Fifth Third's Operations Group, led by Executive Vice President Michael D.
Baker, Senior Vice President Diane L. Dewbrey (shown, right) and Senior Vice
President David J. Rhodes, processed 96 million customer payments, settled 1.5
million securities trades and fielded 41 million customer calls in 2001 at five
sites throughout Fifth Third's footprint, including the newly constructed
Madisonville Operations Center pictured here in Cincinnati. Fifth Third invested
$70 million to renovate and expand a facility in one of the oldest neighborhoods
in the city. Built to accommodate 2,500 employees, the 500,000 square foot
facility provided a smart work-flow plan and the capacity we needed to continue
to support our own growing customer base, as well as national firms, like Sprint
and Federated Department Stores, for whom we offer lockbox and treasury
management services.
[GRAPHIC]
13
FIFTH THIRD BANCORP AND SUBSIDIARIES
Community Relations
We believe that if you build a stronger community, you build a better bank.
Fifth Third made $3.8 billion available in loans and investments last year and
$2.9 billion in 2000 as part of a $9 billion three-year pledge to fund community
development in its market areas.
United Way Giving ($ in millions)
(includes employee and corporate contributions)
[CHART]
1997 $2.9
1998 $3.7
1999 $4.6
2000 $5.5
2001 $6.5
Fifth Third Philanthropy Tops $20 Million in 2001
Over $20 million was awarded to various community organizations in 2001 through
Fifth Third Bank Foundation and the charitable foundations for which the bank is
privileged to serve as trustee. Contributions, which rose 43% over last year,
were made in the area of arts and culture, education and social services, and
community development.
Highlights of Fifth Third's philanthropy include:
OHIO
$1 million to Cincinnati Children's Hospital Medical Center; $125,000 to Clinton
Memorial Hospital; $100,000 to the Girl Scouts of Maumee Valley in Toledo;
$100,000 to help build a new school in Shaker Heights; $50,000 to the Catholic
Diocese of Columbus to develop housing for senior citizens and $36,000 to South
Community, Inc. in Dayton to support emotionally disturbed children.
KENTUCKY
$100,000 to The Wave Foundation of the Newport Aquarium; $100,000 to the Urban
League of Lexington Fayette County and $15,000 to West Point Independent
Schools in Louisville.
INDIANA
$50,000 to Children's Bureau of Indianapolis for the development of a new
multi-purpose facility; $33,000 to Henderson Community College in Southern
Indiana for various programs, including library improvements.
MICHIGAN
$100,000 to Grand Valley State University to construct a new Health Education
Professions Center; $50,000 to Northwestern Michigan College for its West Bay
Campus Project; and $20,000 to Pontiac Neighborhood Housing Services to support
housing projects.
ILLINOIS
$50,000 to Habitat for Humanity. Fifth Third employees also helped build the
house.
SOUTHWESTERN FLORIDA
$25,000 was awarded to International College in support of its capital
campaign.[_]
[GRAPHIC]
Fifth Third's River Bank Run in Grand Rapids, the largest 25K run in America,
attracts thousands of participants and fans each year and gives the bank a
strong identity within the Western Michigan community.
14
FIFTH THIRD BANCORP AND SUBSIDIARIES
Consolidated Statements of Income
- --------------------------------------------------------------------------------
For the Years Ended December 31 ($ in millions, except per share data) 2001 2000 1999
- -----------------------------------------------------------------------------------------------------------------
Interest Income
Interest and Fees on Loans and Leases............................................. $3,420 3,590 3,096
- -----------------------------------------------------------------------------------------------------------------
Interest on Securities
Taxable......................................................................... 1,213 1,271 1,009
Exempt from Income Taxes........................................................ 66 73 76
- -----------------------------------------------------------------------------------------------------------------
Total Interest on Securities...................................................... 1,279 1,344 1,085
- -----------------------------------------------------------------------------------------------------------------
Interest on Other Short-Term Investments.......................................... 10 13 18
- -----------------------------------------------------------------------------------------------------------------
Total Interest Income............................................................. 4,709 4,947 4,199
- -----------------------------------------------------------------------------------------------------------------
Interest Expense
Interest on Deposits
Interest Checking............................................................... 311 316 211
Savings......................................................................... 174 194 188
Money Market.................................................................... 38 37 50
Other Time...................................................................... 745 760 698
Certificates-$100,000 and Over.................................................. 187 260 210
Foreign Office.................................................................. 97 251 49
- -----------------------------------------------------------------------------------------------------------------
Total Interest on Deposits........................................................ 1,552 1,818 1,406
Interest on Federal Funds Borrowed................................................ 153 300 217
Interest on Short-Term Bank Notes................................................. -- 69 55
Interest on Other Short-Term Borrowings........................................... 204 202 140
Interest on Long-Term Debt........................................................ 367 303 204
- -----------------------------------------------------------------------------------------------------------------
Total Interest Expense............................................................ 2,276 2,692 2,022
- -----------------------------------------------------------------------------------------------------------------
Net Interest Income............................................................... 2,433 2,255 2,177
Provision for Credit Losses....................................................... 236 138 169
- -----------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Credit Losses............................. 2,197 2,117 2,008
- -----------------------------------------------------------------------------------------------------------------
Other Operating Income
Electronic Payment Processing Income.............................................. 347 252 189
Service Charges on Deposits....................................................... 367 298 252
Mortgage Banking Revenue.......................................................... 63 256 290
Investment Advisory Income........................................................ 307 281 262
Other Service Charges and Fees.................................................... 542 389 338
Securities Gains, Net............................................................. 28 6 8
Securities Gains, Net - Non-Qualifying Hedges on Mortgage Servicing............... 143 -- --
- -----------------------------------------------------------------------------------------------------------------
Total Other Operating Income...................................................... 1,797 1,482 1,339
- -----------------------------------------------------------------------------------------------------------------
Operating Expenses
Salaries, Wages and Incentives.................................................... 845 783 763
Employee Benefits................................................................. 148 145 142
Equipment Expenses................................................................ 97 100 98
Net Occupancy Expenses............................................................ 146 138 131
Other Operating Expenses.......................................................... 756 666 650
Merger-Related Charges............................................................ 349 87 108
- -----------------------------------------------------------------------------------------------------------------
Total Operating Expenses.......................................................... 2,341 1,919 1,892
- -----------------------------------------------------------------------------------------------------------------
Income Before Income Taxes, Minority Interest and Cumulative Effect............... 1,653 1,680 1,455
Applicable Income Taxes........................................................... 550 539 507
- -----------------------------------------------------------------------------------------------------------------
Income Before Minority Interest and Cumulative Effect............................. 1,103 1,141 948
Minority Interest, Net of Tax..................................................... 2 -- --
- -----------------------------------------------------------------------------------------------------------------
Income Before Cumulative Effect................................................... 1,101 1,141 948
Cumulative Effect of Change in Accounting Principle, Net of Tax................... 7 -- --
- -----------------------------------------------------------------------------------------------------------------
Net Income........................................................................ 1,094 1,141 948
Dividends on Preferred Stock...................................................... 1 1 1
- -----------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders....................................... $1,093 1,140 947
- -----------------------------------------------------------------------------------------------------------------
Earnings Per Share................................................................ $ 1.90 2.02 1.68
Earnings Per Diluted Share........................................................ $ 1.86 1.98 1.66
- -----------------------------------------------------------------------------------------------------------------
Cash Dividends Declared Per Share................................................. $ .83 .70 .59
- -----------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements.
15
FIFTH THIRD BANCORP AND SUBSIDIARIES
Consolidated Balance Sheets
- --------------------------------------------------------------------------------
December 31 ($ in millions) 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Assets
Cash and Due from Banks....................................................................... $ 2,031 1,707
Securities Available-for-Sale (amortized cost 2001-$20,479 and 2000-$18,986).................. 20,507 19,029
Securities Held-to-Maturity (fair value 2001-$16 and 2000-$557)............................... 16 553
Other Short-Term Investments.................................................................. 225 232
Loans Held for Sale........................................................................... 2,180 1,655
Loans and Leases
Commercial Loans............................................................................ 10,839 10,675
Construction Loans.......................................................................... 3,356 3,223
Commercial Mortgage Loans................................................................... 6,085 6,227
Commercial Lease Financing.................................................................. 3,151 3,158
Residential Mortgage Loans.................................................................. 4,505 5,635
Consumer Loans.............................................................................. 12,565 11,551
Consumer Lease Financing.................................................................... 1,958 3,007
Unearned Income............................................................................. (911) (946)
Reserve for Credit Losses................................................................... (624) (609)
- --------------------------------------------------------------------------------------------------------------------
Total Loans and Leases........................................................................ 40,924 41,921
Bank Premises and Equipment................................................................... 833 835
Accrued Income Receivable..................................................................... 618 558
Other Assets.................................................................................. 3,692 3,168
- --------------------------------------------------------------------------------------------------------------------
Total Assets.................................................................................. $71,026 69,658
====================================================================================================================
Liabilities
Deposits
Demand...................................................................................... $ 9,243 7,152
Interest Checking........................................................................... 13,474 10,320
Savings..................................................................................... 7,065 5,991
Money Market................................................................................ 1,352 923
Other Time.................................................................................. 11,301 14,231
Certificates-$100,000 and Over.............................................................. 2,197 5,049
Foreign Office.............................................................................. 1,222 4,694
- --------------------------------------------------------------------------------------------------------------------
Total Deposits................................................................................ 45,854 48,360
Federal Funds Borrowed........................................................................ 2,544 2,178
Short-Term Bank Notes......................................................................... 34 --
Other Short-Term Borrowings................................................................... 4,875 4,166
Accrued Taxes, Interest and Expenses.......................................................... 1,963 1,695
Other Liabilities............................................................................. 666 358
Long-Term Debt................................................................................ 7,030 6,066
Guaranteed Preferred Beneficial Interests in Convertible Subordinated Debentures.............. -- 173
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities............................................................................. 62,966 62,996
- --------------------------------------------------------------------------------------------------------------------
Minority Interest............................................................................. 421 --
- --------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
Common Stock (a).............................................................................. 1,294 1,263
Preferred Stock (b)........................................................................... 9 9
Capital Surplus............................................................................... 1,495 1,140
Retained Earnings............................................................................. 4,837 4,225
Accumulated Nonowner Changes in Equity........................................................ 8 28
Treasury Stock................................................................................ ( 4) ( 1)
Other......................................................................................... -- ( 2)
- --------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity.................................................................... 7,639 6,662
- --------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity.................................................... $71,026 69,658
====================================================================================================================
(a) Stated value $2.22 per share; authorized 1,300,000,000; outstanding at
2001-- 582,674,580 (excludes 80,000 treasury shares) and 2000 --
569,056,843 (excludes 21,875 treasury shares).
(b) 490,750 shares of no par value preferred stock are authorized of which none
have been issued; 7,250 shares of 8.0% cumulative Series D convertible (at
$23.5399 per share) perpetual preferred stock with a stated value of $1,000
were authorized, issued and outstanding; 2,000 shares of 8.0% cumulative
Series E perpetual preferred stock with a stated value of $1,000 were
authorized, issued and outstanding.
See Notes to Consolidated Financial Statements.
16
FIFTH THIRD BANCORP AND SUBSIDIARIES
Consolidated Statements of Changes in Shareholders' Equity
- --------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------------------------------------------------
Accumulated
Nonowner
Common Preferred Capital Retained Changes Treasury
($ in millions) Stock Stock Surplus Earnings in Equity Stock Other Total
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1998.............. $1,238 9 786 3,261 135 (58) -- 5,371
Net Income and Nonowner Changes in Equity,
Net of Tax:
Net Income................................ 948 948
Change in Unrealized Losses on Securities
Available-for-Sale, Net................. (437) (437)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income and Nonowner Changes in Equity 511
Cash Dividends Declared
Fifth Third Bancorp:
Common Stock at $.59 per share......... (248) (248)
Pooled Companies Prior to Acquisition:
Common Stock........................... (145) (145)
Preferred Stock........................ (1) (1)
Shares Acquired for Treasury or Retired... (7) (170) (2) (179)
Stock Options Exercised,
Including Treasury Shares Issued....... 7 7 58 72
Corporate Tax Benefit Related to Exercise
of Non-Qualified Stock Options......... 18 18
Pooled Operations for the Year Ended
December 31, 1999...................... (66) (66)
Stock Issued in Acquisitions and Other.... 17 322 (105) (4) 230
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1999.............. 1,255 9 897 3,708 (302) -- (4) 5,563
Net Income and Nonowner Changes
in Equity, Net of Tax:
Net Income................................ 1,141 1,141
Change in Unrealized Gains on Securities
Available-for-Sale, Net................ 330 330
- ------------------------------------------------------------------------------------------------------------------------------
Net Income and Nonwner Changes in Equity 1,471
Cash Dividends Declared
Fifth Third Bancorp:
Common Stock at $.70 per share......... (325) (325)
Pooled Companies Prior to Acquisition:
Common Stock........................... (118) (118)
Preferred Stock........................ (1) (1)
Shares Acquired for Treasury or Retired... (3) (58) (181) (242)
Stock Options Exercised,
Including Treasury Shares Issued....... 8 106 114
Corporate Tax Benefit Related to Exercise
of Non-Qualified Stock Options......... 15 15
Stock Issued in Acquisitions and Other.... 3 180 (180) 180 2 185
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000.............. 1,263 9 1,140 4,225 28 (1) (2) 6,662
Net Income and Nonowner Changes
in Equity, Net of Tax:
Net Income................................ 1,094 1,094
Change in Unrealized Losses on Securities
Available-for-Sale, Net................ (10) (10)
Change in Unrealized Losses on Qualifying
Cash Flow Hedges, Net of Tax of $6..... (10) (10)
- ------------------------------------------------------------------------------------------------------------------------------
Net Income and Nonowner Changes in Equity 1,074
Cash Dividends Declared
Fifth Third Bancorp:
Common Stock at $.83 per share......... (460) (460)
Preferred Stock........................ (1) (1)
Pooled Companies Prior to Acquisition:
Common Stock........................... (51) (51)
Conversion of Subordinated Debentures
to Common Stock........................ 10 158 168
Shares Acquired for Treasury.............. (15) (15)
Stock Options Exercised,
Including Treasury Shares Issued....... 9 99 11 119
Corporate Tax Benefit Related to Exercise
of Non-Qualified Stock Options......... 22 22
Stock Issued in Acquisitions and Other.... 12 76 30 1 2 121
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001.............. $1,294 9 1,495 4,837 8 (4) -- 7,639
==============================================================================================================================
See Notes to Consolidated Financial Statements.
17
FIFTH THIRD BANCORP AND SUBSIDIARIES
Consolidated Statements of Cash Flows
- --------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31 ($ in millions) 2001 2000 1999
- -------------------------------------------------------------------------------------------------------------------
Operating Activities
Net Income......................................................................... $ 1,094 1,141 948
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses..................................................... 236 138 169
Minority Interest in Net Income................................................. 2 -- --
Depreciation, Amortization and Accretion........................................ 236 180 172
Provision for Deferred Income Taxes............................................. 254 308 269
Realized Securities Gains....................................................... (43) (7) (19)
Realized Securities Gains - Non-Qualifying Hedges on Mortgage Servicing......... (151) -- --
Realized Securities Losses...................................................... 15 1 11
Realized Securities Losses - Non-Qualifying Hedges on Mortgage Servicing........ 8 -- --
Proceeds from Sales of Residential Mortgage Loans Held for Sale................. 8,957 12,411 16,249
Net Gains on Sales of Loans..................................................... (197) (161) (216)
Increase in Residential Mortgage Loans Held for Sale............................ (9,281) (12,850) (14,610)
Decrease (Increase) in Accrued Income Receivable................................ (43) (91) 21
Increase in Other Assets........................................................ (388) (519) (242)
Increase (Decrease) in Accrued Taxes, Interest and Expenses..................... 27 130 (238)
Increase in Other Liabilities................................................... 230 106 86
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities.......................................... 956 787 2,600
===================================================================================================================
Investing Activities
Proceeds from Sales of Securities Available-for-Sale............................... 10,177 7,042 5,355
Proceeds from Calls, Paydowns and Maturities of Securities Available-for-Sale...... 14,419 2,299 4,255
Purchases of Securities Available-for-Sale......................................... (23,771) (10,786) (8,305)
Proceeds from Calls, Paydowns and Maturities of Securities Held-to-Maturity........ 17 112 342
Purchases of Securities Held-to-Maturity........................................... -- (12) (152)
Decrease (Increase) in Other Short-Term Investments................................ 7 160 (113)
Decrease (Increase) in Loans and Leases............................................ 255 (3,767) (6,758)
Purchases of Bank Premises and Equipment........................................... (128) (132) (141)
Proceeds from Disposal of Bank Premises and Equipment.............................. 15 22 33
Net Cash (Paid) Received in Acquisitions........................................... (218) 155 48
- -------------------------------------------------------------------------------------------------------------------
Net Cash Provided by (Used in) Investing Activities................................ 773 (4,907) (5,436)
===================================================================================================================
Financing Activities
Purchases of Deposits.............................................................. -- -- 120
Increase (Decrease) in Core Deposits............................................... 3,421 504 (1,583)
Increase (Decrease) in CDs-- $100,000 and Over, including Foreign Office........... (6,815) 4,948 2,079
Increase (Decrease) in Federal Funds Borrowed...................................... 314 (925) 1,628
Increase (Decrease) in Short-Term Bank Notes....................................... 34 (2,729) (290)
Increase (Decrease) in Other Short-Term Borrowings................................. 661 (1,219) 1,690
Proceeds from Issuance of Long-Term Debt........................................... 6,466 5,951 2,672
Proceeds from Issuance of Preferred Stock of Subsidiary............................ 425 -- --
Repayment of Long-Term Debt........................................................ (5,555) (2,015) (2,830)
Payment of Cash Dividends.......................................................... (461) (436) (378)
Exercise of Stock Options.......................................................... 141 129 90
Proceeds from Sale of Common Stock................................................. -- 16 --
Purchases of Treasury Stock........................................................ (15) (242) (179)
Other.............................................................................. (21) (47) (95)
- -------------------------------------------------------------------------------------------------------------------
Net Cash (Used in) Provided by Financing Activities................................ (1,405) 3,935 2,924
===================================================================================================================
Increase (Decrease) in Cash and Due from Banks..................................... 324 (185) 88
Cash and Due from Banks at Beginning of Year....................................... 1,707 1,892 1,804
- -------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks at End of Year............................................. $ 2,031 1,707 1,892
===================================================================================================================
Note: The Bancorp paid Federal income taxes of $139 million, $160 million and
$241 million in 2001, 2000 and 1999, respectively.
The Bancorp paid interest of $2,334 million, $2,642 million and $1,988
million in 2001, 2000 and 1999, respectively.
The Bancorp had noncash investing activities consisting of the
securitization and transfer to securities of $1.4 billion, $1.6 billion
and $2.1 billion of residential mortgage loans in 2001, 2000 and 1999,
respectively.
The Bancorp had noncash financing activities consisting of the conversion
of trust preferred securities to common stock of $172 million in 2001.
See Notes to Consolidated Financial Statements.
18
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
1. SUMMARY OF SIGNIFICANT ACCOUNTING AND REPORTING POLICIES
Nature of Operations
Fifth Third Bancorp (Bancorp), an Ohio corporation, conducts its principal
activities through its banking and non-banking subsidiaries from 933 offices
located throughout Ohio, Indiana, Kentucky, Michigan, Illinois, Florida and West
Virginia. Principal activities include commercial and retail banking, investment
advisory services and electronic payment processing.
Basis of Presentation
The Consolidated Financial Statements include the accounts of the Bancorp and
its subsidiaries. All material intercompany transactions and balances have been
eliminated. Certain prior period data has been reclassified to conform to
current period presentation.
Financial data for all prior periods has been restated to reflect the 2001
merger with Old Kent Financial Corporation (Old Kent). This merger was tax-free
and was accounted for as a pooling of interests. Certain reclassifications were
made to Old Kent's financial statements to conform presentation. Cash dividends
per common share are those the Bancorp declared prior to the merger with Old
Kent.
The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the amounts reported in
the financial statements and accompanying notes. Actual results could differ
from those estimates.
Securities
Securities are classified as held-to-maturity, available-for-sale or trading on
the date of purchase. Only those securities classified as held-to-maturity, and
which management has the intent and ability to hold to maturity, are reported at
amortized cost. Available-for-sale and trading securities are reported at fair
value with unrealized gains and losses, net of related deferred income taxes,
included in accumulated nonowner changes in equity and income, respectively.
Realized securities gains or losses are reported in the Consolidated Statements
of Income. The cost of securities sold is based on the specific identification
method.
Loans and Leases
Interest income on loans is based on the principal balance outstanding, with the
exception of interest on discount basis loans, computed using a method which
approximates the effective interest rate. The accrual of interest income for
commercial, construction and mortgage loans is discontinued when there is a
clear indication the borrower's cash flow may not be sufficient to meet payments
as they become due. Such loans are also placed on nonaccrual status when the
principal or interest is past due ninety days or more, unless the loan is well
secured and in the process of collection. Consumer loans and revolving lines of
credit for equity lines and credit cards that have principal and interest
payments that become past due one hundred and twenty days and one hundred and
eighty days or more, respectively, are charged off to the allowance for credit
losses. When a loan is placed on nonaccrual status, all previously accrued and
unpaid interest is charged against income.
Loan and lease origination and commitment fees and certain direct loan
origination costs are deferred and the net amount amortized over the estimated
life of the related loans or commitments as a yield adjustment.
Interest income on direct financing leases is recognized to achieve a
constant periodic rate of return on the outstanding investment. Interest income
on leveraged leases is recognized to achieve a constant rate of return on the
outstanding investment in the lease, net of the related deferred income tax
liability, in the years in which the net investment is positive.
Residential mortgage loans held for sale are valued at the lower of aggregate
cost or fair value. The Bancorp generally has commitments to sell residential
mortgage loans held for sale in the secondary market. Gains or losses on sales
are recognized in Other Service Charges and Fees upon delivery.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or the fair value of
the underlying collateral. The Bancorp evaluates the collectibility of both the
interest and principal when assessing the need for a loss accrual.
Reserve for Credit Losses
The Bancorp maintains a reserve to absorb probable loan and lease losses
inherent in the portfolio. The reserve for credit losses is maintained at a
level the Bancorp considers to be adequate to absorb probable loan and lease
losses inherent in the portfolio, based on evaluations of the collectibility and
historical loss experience of loans and leases. Credit losses are charged and
recoveries are credited to the reserve. Provisions for credit losses are based
on the Bancorp's review of the historical credit loss experience and such
factors which, in management's judgment, deserve consideration under existing
economic conditions in estimating probable credit losses.
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 Bancorp estimates losses using a range
derived from "base" and "conservative" estimates. The Bancorp's methodology for
assessing the appropriate reserve level consists of several key elements.
Larger commercial loans that exhibit probable 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 Bancorp.
Included in the review of individual loans are those that are impaired as
provided in Statement of Financial Accounting Standards (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 loans' effective interest rate or fair value of the underlying
collateral. The Bancorp 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-off experience sustained on loans
according to their internal credit risk grade. These grades encompass ten
categories that define a borrower's estimated 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.
19
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
An unallocated reserve is maintained to recognize the imprecision
in estimating and measuring loss when evaluating reserves for individual loans
or pools of loans. 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.
Historical loss rates for commercial and consumer loans may be adjusted for
significant factors that, in management's judgment, 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 Bancorp's internal credit examiners.
The Bancorp has not substantively changed any aspect of its overall
approach in the determination of the allowance for loan losses. There have been
no material changes in assumptions or estimation techniques as compared to prior
years that impacted the determination of the current year allowance.
Loan Sales
When the Bancorp sells loans through either securitizations or individual loan
sales in accordance with its investment policies, it may retain one or more
subordinated tranches, servicing rights and in some cases a cash reserve
account, all of which are retained interests in the securitized or sold loans.
Gain or loss on sale of the loans depends in part on the previous carrying
amount of the financial assets involved in the sale, allocated between the
assets sold and the retained interests based on their relative fair value at the
date of sale. To obtain fair values, quoted market prices are used if available.
If quotes are not available for retained interests, the Bancorp calculates fair
value based on the present value of future expected cash flows using
management's best estimates of the key assumptions -- credit losses, prepayment
speeds, forward yield curves and discount rates commensurate with the risks
involved.
Servicing rights resulting from loan sales are amortized in proportion to,
and over the period of estimated net servicing revenues. Servicing rights are
assessed for impairment periodically, based on fair value, with any impairment
recognized through a valuation allowance. For purposes of measuring impairment,
the rights are stratified based on interest rate and original maturity. Fees
received for servicing mortgage loans owned by investors are based on a
percentage of the outstanding monthly principal balance of such loans and are
included in income as loan payments are received. Costs of servicing loans are
charged to expense as incurred.
Bank Premises and Equipment
Bank premises and equipment, including leasehold improvements, are stated at
cost less accumulated depreciation and amortization. Depreciation is calculated
using the straight-line method based on estimated useful lives of the assets for
book purposes, while accelerated depreciation is used for income tax purposes.
Amortization of leasehold improvements is computed using the straight-line
method over the lives of the related leases or useful lives of the related
assets, whichever is shorter. Maintenance, repairs and minor improvements are
charged to operating expenses as incurred.
In June 2001, the Financial Accounting Standards Board (FASB) issued SFAS
No. 143, "Accounting for Asset Retirement Obligations." This Statement addresses
financial accounting and reporting for obligations associated with the
retirement of tangible long-lived assets and the associated asset retirement
costs. This Statement amends SFAS No. 19, "Financial Accounting and Reporting by
Oil and Gas Producing Companies," and is effective for financial statements
issued for fiscal years beginning after June 15, 2002. Adoption of this standard
is not expected to have a material effect on the Bancorp's Consolidated
Financial Statements.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment and Disposal of Long-Term Assets." This Statement eliminates the
allocation of goodwill to long-lived assets to be tested for impairment and
details both a probability-weighted and "primary-asset" approach to estimate
cash flows in testing for impairment of a long-lived asset. This Statement
supersedes SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and
for Long-Lived Assets to Be Disposed Of," and the accounting and reporting
provisions of the Accounting Principles Board (APB) Opinion No. 30, "Reporting
the Results of Operations-Reporting the Effects of Disposal of a Segment of a
Business, and Extraordinary, Unusual and Infrequently Occurring Events and
Transactions." This Statement also amends Accounting Research Bulletin (ARB) No.
51, "Consolidated Financial Statements." SFAS No. 144 is effective for financial
statements issued for fiscal years beginning after December 15, 2001. The
Bancorp has not yet determined the impact of adopting this standard.
Intangible Assets
Goodwill and other intangibles are amortized on a straight-line basis, generally
over a period of up to 25 years. Intangible assets, net of accumulated
amortization, included in Other Assets in the Consolidated Balance Sheets at
December 31, 2001 and 2000 were $949.8 million and $767.5 million, respectively.
Management reviews intangible assets for possible impairment if there is a
significant event that detrimentally affects operations. Impairment is measured
using estimates of the discounted future earnings potential of the entity or
assets acquired.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets." SFAS No. 142 discontinues the practice of amortizing goodwill and
indefinite lived intangible assets and initiates an annual review for
impairment. Impairment would be examined more frequently if certain indicators
are encountered. Intangible assets with a determinable useful life will continue
to be amortized over that period. The amortization provisions apply to goodwill
and intangible assets acquired after June 30, 2001.
Goodwill and intangible assets recorded at June 30, 2001 will be affected when
the Bancorp adopts the Statement. The Bancorp is currently in the process of
finalizing the determination of the impact of the new FASB pronouncement
concerning goodwill and other intangible assets. The Bancorp currently has
approximately $682.3 million of unamortized goodwill included in other assets in
the December 31, 2001 Consolidated Balance Sheet that generates approximately
$13.8 million in quarterly pretax amortization expense. Pending final
implementation guidance, other related interpretations, and the determination of
any newly identified intangible assets, the Bancorp expects the quarterly
diluted earnings per share impact to be minimal and in the range of
approximately $.01 to $.02 per share.
Derivative Financial Instruments
Effective January 1, 2001, the Bancorp adopted SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," as
20
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
amended, which establishes accounting and reporting standards for derivative
instruments and hedging activities and requires recognition of all derivatives
as either assets or liabilities in the statement of financial condition and
measurement of those instruments at fair value. On the date the Bancorp enters
into a derivative contract, the Bancorp designates the derivative instrument as
either a fair value hedge, cash flow hedge or as a free-standing derivative
instrument. For a fair value hedge, changes in the fair value of the derivative
instrument and changes in the fair value of the hedged asset or liability or of
an unrecognized firm commitment attributable to the hedged risk are recorded in
current period net income. For a cash flow hedge, changes in the fair value of
the derivative instrument, to the extent that it is effective, are recorded in
accumulated nonowner changes in equity within shareholders' equity and
subsequently reclassified to net income in the same period(s) that the hedged
transaction impacts net income. For free-standing derivative instruments,
changes in the fair values are reported in current period net income.
Prior to entering a hedge transaction, the Bancorp formally documents the
relationship between hedging instruments and hedged items, as well as the risk
management objective and strategy for undertaking various hedge transactions.
This process includes linking all derivative instruments that are designated as
fair value or cash flow hedges to specific assets and liabilities on the balance
sheet or to specific forecasted transactions along with a formal assessment at
both inception of the hedge and on an ongoing basis as to the effectiveness of
the derivative instrument in offsetting changes in fair values or cash flows of
the hedged item. If it is determined that the derivative instrument is not
highly effective as a hedge, hedge accounting is discontinued and the adjustment
to fair value of the derivative instrument is recorded in net income.
The Bancorp maintains an overall interest rate risk management strategy that
incorporates the use of derivative instruments to minimize significant unplanned
fluctuations in earnings and cash flows caused by interest rate volatility. The
Bancorp's interest rate risk management strategy involves modifying the
repricing characteristics of certain assets and liabilities so that changes in
interest rates do not adversely affect the net interest margin and cash flows.
Derivative instruments that the Bancorp may use as part of its interest rate
risk management strategy include interest rate and principal only swaps,
interest rate floors, forward contracts and both futures contracts and options
on futures contracts. Interest rate swap contracts are exchanges of interest
payments, such as fixed-rate payments for floating-rate payments, based on a
common notional amount and maturity date. Forward contracts are contracts in
which the buyer agrees to purchase and the seller agrees to make delivery of a
specific financial instrument at a predetermined price or yield. Principal only
("PO") swaps are total return swaps based on changes in value of an underlying
PO trust. Futures contracts represent the obligation to buy or sell a
predetermined amount of debt subject to the contract's specific delivery
requirements at a predetermined date and a predetermined price. Options on
futures contracts represent the right but not the obligation to buy or sell. The
Bancorp also enters into foreign exchange contracts for the benefit of
customers. Generally, the Bancorp hedges the exposure of these free-standing
derivatives, entered into for the benefit of customers, by entering into
offsetting third-party forward contracts with approved reputable counterparties
with matching terms and currencies that are generally settled daily. Risks arise
from the possible inability of counterparties to meet the terms of their
contracts and from any resultant exposure to movement in foreign currency
exchange rates, limiting the Bancorp's exposure to the replacement value of the
contracts rather than the notional principal of contract amounts. Free-standing
derivatives also include derivative transactions entered into for risk
management purposes that do not otherwise qualify for hedge accounting. The
Bancorp will hedge its interest rate exposure on customer transactions by
executing offsetting swap agreements with primary dealers.
Upon adoption of this statement on January 1, 2001, the Bancorp recorded a
cumulative effect of change in accounting principle of approximately $7 million,
net of tax.
Fair Value Hedges
The Bancorp enters into interest rate swaps to convert its nonprepayable,
fixed-rate long-term debt to floating-rate debt. The Bancorp's practice is to
convert fixed-rate debt to floating-rate debt. Decisions to convert fixed-rate
debt to floating are made primarily by consideration of the asset/liability mix
of the Bancorp, the desired asset/liability sensitivity and by interest rate
levels. For the year ended December 31, 2001, the Bancorp met the criteria
required to qualify for shortcut method accounting on its fair value hedges of
this type. Based on this shortcut method accounting treatment, no
ineffectiveness is assumed and fair value changes in the interest rate swaps are
recorded as changes in the value of both swap and long-term debt. The Bancorp
has approximately $13.6 million of fair value hedges included in other assets in
the December 31, 2001 Consolidated Balance Sheet. Additionally, the Bancorp
enters into forward contracts to hedge the forecasted sale of its mortgage
loans. For the year ended December 31, 2001, the Bancorp met certain criteria to
qualify for matched terms accounting on the hedged loans for sale. Based on this
treatment, fair value changes in the forward contracts are recorded as changes
in the value of both the forward contract and loans held for sale in the
Consolidated Balance Sheets. The Bancorp has approximately $9.8 million of fair
value hedges included in loans held for sale in the December 31, 2001
Consolidated Balance Sheet.
As of December 31, 2001, there were no instances of designated hedges no longer
qualifying as fair value hedges.
Cash Flow Hedges
The Bancorp enters into interest rate swaps to convert floating-rate liabilities
to fixed rates and to hedge certain forecasted transactions. The liabilities are
typically grouped and share the same risk exposure for which they are being
hedged. As of December 31, 2001, $10.1 million in deferred losses, net of tax,
related to existing hedges were recorded in accumulated nonowner changes in
equity. Gains and losses on derivative contracts that are reclassified from
accumulated nonowner changes in equity to current period earnings are included
in the line item in which the hedged item's effect in earnings is recorded. As
of December 31, 2001, the $10.1 million in deferred losses on derivative
instruments included in accumulated nonowner changes in equity are expected to
be reclassified into earnings during the next twelve months. All components of
each derivative instrument's gain or loss are included in the assessment of
hedge effectiveness.
For the year ended December 31, 2001, there were no cash flow hedges that
were discontinued related to forecasted transactions deemed not probable of
occurring. The maximum term over which the Bancorp is hedging its exposure to
the variability of future cash flows for all forecasted transactions, excluding
those forecasted transactions related to the payments of variable interest in
existing financial instruments, is five years for hedges converting
floating-rate
21
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
loans to fixed. The Bancorp has approximately $15.6 million in deferred losses
related to existing cash flow hedges on floating-rate liabilities included in
other short-term borrowings in the December 31, 2001 Consolidated Balance Sheet.
Free-Standing Derivative Instruments
The Bancorp enters into various derivative contracts which primarily focus on
providing derivative products to customers. These derivative contracts are not
linked to specific assets and liabilities on the balance sheet or to forecasted
transactions and, therefore, do not qualify for hedge accounting. Interest rate
lock commitments issued on residential mortgage loans intended to be held for
resale are also considered free-standing derivative instruments. The interest
rate exposure on these commitments is economically hedged primarily with forward
contracts. Additionally, the Bancorp enters into a combination of free-standing
derivative instruments (PO swaps, floors, forward contracts and interest rate
swaps) to hedge changes in fair value of its fixed rate mortgage servicing
rights portfolio. The commitments and free-standing derivative instruments are
marked to market and recorded as a component of mortgage banking revenue in the
Consolidated Statements of Income. For the year ended December 31, 2001, the
Bancorp recorded gains of $23.1 million on foreign exchange contracts for
customers, gains of $2.4 million on the net change in interest rate locks and
forward contracts and gains of $5.8 million on free-standing derivatives related
to mortgage servicing rights. The Bancorp has approximately $3.7 million of
free-standing derivatives related to customer transactions included in accrued
income receivable, a net $2.1 million of free-standing derivatives related to
interest rate locks and forward commitments to sell included in other assets and
$18.3 million related to mortgage servicing rights included in other assets in
the December 31, 2001 Consolidated Balance Sheet.
Earnings Per Share
In accordance with SFAS No. 128, "Earnings Per Share," basic earnings per share
are computed by dividing net income available to common shareholders by the
weighted average number of shares of common stock outstanding during the period.
Earnings per diluted share are computed by dividing adjusted net income
available to common shareholders by the weighted average number of shares of
common stock and common stock equivalents outstanding during the period.
Dilutive common stock equivalents represent the assumed conversion of
convertible subordinated debentures, convertible preferred stock and the
exercise of stock options.
Other
In September 2000, the FASB issued SFAS No. 140, "Accounting for Transfer and
Servicing of Financial Assets and Extinguishments of Liabilities." This
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 did
not have a material effect on the Bancorp.
SFAS No. 141, "Business Combinations," was issued in June 2001 and eliminates
the pooling of interests method of accounting for business combinations with
limited exceptions for combinations initiated prior to July 1, 2001. In
addition, it further clarifies the criteria for recognition of intangible assets
separately from goodwill. This statement is effective for business combinations
completed after June 30, 2001.
Securities and other property held by Fifth Third Investment Advisors, a
division of the Bancorp's banking subsidiaries, in a fiduciary or agency
capacity are not included in the Consolidated Balance Sheets because such items
are not assets of the subsidiaries. Investment advisory income in the
Consolidated Statements of Income is recognized on the accrual basis. Investment
advisory services revenues are recognized monthly based on a fee charged per
transaction processed and a fee charged on the market value of ending account
balances associated with individual contracts.
The Bancorp recognizes revenue from its electronic payment processing
services as such services are performed, recording revenues net of certain costs
(primarily interchange fees charged by credit card associations) not controlled
by the Bancorp.
Treasury stock is carried at cost.
2. SECURITIES
Securities available-for-sale as of December 31:
- ------------------------------------------------------------------------------------
2001
-------------------------------------------------------
Amortized Unrealized Unrealized Fair
($ in millions) Cost Gains Losses Value
- ------------------------------------------------------------------------------------
U.S. Government
and agencies
obligations.............. $ 1,950.1 17.6 (80.5) 1,887.2
Obligations of
states and political
subdivisions............. 1,144.9 35.4 (4.7) 1,175.6
Agency mortgage-backed
securities............... 14,611.5 175.0 (171.0) 14,615.5
Other bonds,
notes and
debentures............... 2,113.0 34.6 (13.2) 2,134.4
Other securities........... 659.5 35.5 (1.1) 693.9
- ------------------------------------------------------------------------------------
Total securities........... $ 20,479.0 298.1 (270.5) 20,506.6
- ------------------------------------------------------------------------------------
- ------------------------------------------------------------------------------------
2000
-------------------------------------------------------
Amortized Unrealized Unrealized Fair
($ in millions) Cost Gains Losses Value
- ------------------------------------------------------------------------------------
U.S. Government
and agencies
obligations............. $ 1,446.7 13.2 (22.0) 1,437.9
Obligations of
states and political
subdivisions............ 888.8 19.6 (4.9) 903.5
Agency mortgage-backed
securities.............. 13,897.3 113.6 (70.9) 13,940.0
Other bonds,
notes and
debentures.............. 1,977.8 5.9 (27.1) 1,956.6
Other securities.......... 775.7 25.3 (10.2) 790.8
- ------------------------------------------------------------------------------------
Total securities.......... $ 18,986.3 177.6 (135.1) 19,028.8
- ------------------------------------------------------------------------------------
22
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
Securities held-to-maturity as of December 31:
- --------------------------------------------------------------------------------
2001
---------------------------------------------------
Amortized Unrealized Unrealized Fair
($ in millions) Cost Gains Losses Value
- --------------------------------------------------------------------------------
Obligations of
states and political
subdivisions............ $ -- -- -- --
Other bonds,
notes and
debentures.............. -- -- -- --
Other securities.......... 16.4 -- -- 16.4
- --------------------------------------------------------------------------------
Total securities.......... $16.4 -- -- 16.4
================================================================================
- --------------------------------------------------------------------------------
2000
---------------------------------------------------
Amortized Unrealized Unrealized Fair
($ in millions) Cost Gains Losses Value
- --------------------------------------------------------------------------------
Obligations of
states and political
subdivisions............ $475.4 8.9 (4.8) 479.5
Other bonds,
notes and
debentures.............. 44.7 .8 (.2) 45.3
Other securities.......... 32.5 -- -- 32.5
- --------------------------------------------------------------------------------
Total securities.......... $552.6 9.7 (5.0) 557.3
================================================================================
The amortized cost and approximate fair value of securities at December 31,
2001, by contractual maturity, are shown in the following table. Actual
maturities may differ from contractual maturities when there exists a right to
call or prepay obligations with or without call or prepayment penalties.
- --------------------------------------------------------------------------------
Available-for-Sale Held-to-Maturity
----------------------- --------------------------
Amortized Fair Amortized Fair
($ in millions) Cost Value Cost Value
- --------------------------------------------------------------------------------
Debt securities:
Under 1 year............ $ 44.9 149.9 $ -- --
1-5 years............... 2,294.4 2,216.2 -- --
6-10 years.............. 2,723.2 2,685.6 -- --
Over 10 years........... 145.5 145.5 -- --
Agency mortgage-
backed securities....... 14,611.5 14,615.5 -- --
Other securities.......... 659.5 693.9 16.4 16.4
- --------------------------------------------------------------------------------
Total securities.......... $20,479.0 20,506.6 $16.4 16.4
================================================================================
At December 31, 2001 and 2000, securities with a book value of $11.0 billion
and $9.4 billion, respectively, were pledged to secure short-term borrowings,
public deposits, trust funds and for other purposes as required or permitted by
law. Of the amount pledged by the Bancorp at December 31, 2001, $1.2 billion
represents encumbered securities for which the secured party has the right to
repledge.
3. RESERVE FOR CREDIT LOSSES
Transactions in the reserve for credit losses for the years ended December 31:
- -------------------------------------------------------------------------------
($ in millions) 2001 2000 1999
- -------------------------------------------------------------------------------
Balance at January 1................. $ 609.3 572.9 532.2
Losses charged off................... (308.6) (175.8) (209.3)
Recoveries of losses previously
charged off.......................... 81.5 67.1 67.7
- -------------------------------------------------------------------------------
Net charge-offs...................... (227.1) (108.7) (141.6)
Provision charged to operations...... 200.6 125.7 143.2
Merger-related provision
charged to operations.............. 35.4 12.0 26.2
Reserve of acquired institutions
and other.......................... 5.9 7.4 12.9
- -------------------------------------------------------------------------------
Balance at December 31............... $ 624.1 609.3 572.9
===============================================================================
Impaired loan information, under SFAS No. 114, at December 31:
- -------------------------------------------------------------------------------
($ in millions) 2001 2000
- -------------------------------------------------------------------------------
Impaired loans with a valuation reserve........ $128.3 41.0
Impaired loans with no valuation reserve....... 30.6 113.5
- -------------------------------------------------------------------------------
Total impaired loans........................... $158.9 154.5
- -------------------------------------------------------------------------------
Valuation reserve on impaired loans............ $ 27.2 17.9
- -------------------------------------------------------------------------------
Average impaired loans, net of valuation reserves, were $141.6 million in
2001, $140.0 million in 2000 and $116.9 million in 1999. Cash basis interest
income recognized on those loans during each of the years was immaterial.
4. LEASE FINANCING
A summary of the gross investment in lease financing at December 31:
- -------------------------------------------------------------------------------
($ in millions) 2001 2000
- -------------------------------------------------------------------------------
Direct financing leases............... $4,000.2 5,216.2
Leveraged leases...................... 1,109.1 949.2
- -------------------------------------------------------------------------------
Total lease financing...... $5,109.3 6,165.4
===============================================================================
The components of the investment in lease financing at December 31:
- -------------------------------------------------------------------------------
($ in millions) 2001 2000
- -------------------------------------------------------------------------------
Rentals receivable, net of principal and
interest on nonrecourse debt..................... $3,332.9 3,931.3
Estimated residual value of leased assets.......... 1,776.4 2,234.1
- -------------------------------------------------------------------------------
Gross investment in lease financing................ 5,109.3 6,165.4
Unearned income.................................... (879.9) (940.4)
- -------------------------------------------------------------------------------
Total net investment in lease financing............ $4,229.4 5,225.0
===============================================================================
At December 31, 2001, the minimum future lease payments receivable for each of
the years 2002 through 2006 were $828.0 million, $768.9 million, $792.8 million,
$712.4 million and $431.9 million, respectively.
23
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
5. BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment at December 31:
- --------------------------------------------------------------------------------
Estimated
($ in millions) Useful Life 2001 2000
- --------------------------------------------------------------------------------
Land and improvements............... $ 214.7 232.0
Buildings........................... 18 to 50 yrs. 705.8 623.3
Equipment........................... 3 to 20 yrs. 608.0 653.9
Leasehold improvements.............. 6 to 25 yrs. 113.3 111.0
Accumulated depreciation
and amortization.................. (809.1) (785.3)
- --------------------------------------------------------------------------------
Total bank premises and
equipment......................... $ 832.7 834.9
================================================================================
Depreciation and amortization expense related to bank premises and equipment
was $99.4 million in 2001, $103.2 million in 2000 and $101.9 million in 1999.
Occupancy expense has been reduced by rental income from leased premises of
$16.0 million in 2001, $14.6 million in 2000 and $14.4 million in 1999.
The Bancorp's subsidiaries have entered into a number of noncancelable lease
agreements with respect to bank premises and equipment. A summary of the minimum
annual rental commitments under noncancelable lease agreements for land and
buildings at December 31, 2001, exclusive of income taxes and other charges
payable by the lessee:
Land and
($ in millions) Buildings
- --------------------------------------------------------------------------------
2002 .............................................. $ 34.2
2003 .............................................. 29.7
2004 .............................................. 24.3
2005 .............................................. 19.7
2006 .............................................. 17.0
2007 and subsequent years ......................... 85.8
- --------------------------------------------------------------------------------
Total ............................................. $210.7
================================================================================
Rental expense for cancelable and noncancelable leases was $56.5 million for
2001, $55.6 million for 2000 and $50.6 million for 1999.
Through December 31, 2001, the Bancorp has sold, subject to credit recourse
and with servicing retained, a total of approximately $2.4 billion in leased
autos to an unrelated asset-backed special purpose entity that have subsequently
been leased back to the Bancorp. As of December 31, 2001, the outstanding
balance of these leases was $2.1 billion and pursuant to this sale-leaseback,
the Bancorp has future operating lease payments (and corresponding scheduled
annual lease receipts from the underlying lessee) as follows: $727.3 million in
2002, $720.1 million in 2003, $450.3 million in 2004, $162.6 million in 2005 and
$63.7 million in 2006. No significant gain or loss was recognized on this sale.
6. MORTGAGE SERVICING RIGHTS
Changes in capitalized mortgage servicing rights for the years ended
December 31:
- --------------------------------------------------------------------------------
($ in millions) 2001 2000
- --------------------------------------------------------------------------------
Balance at January 1 ................................... $ 428.9 376.4
Amount capitalized ..................................... 309.6 252.5
Amortization ........................................... (111.8) ( 49.4)
Sales .................................................. ( 1.2) (141.2)
Change in valuation reserve ............................ (199.2) ( 9.4)
- --------------------------------------------------------------------------------
Balance at December 31 ................................. $ 426.3 428.9
================================================================================
Changes in the mortgage servicing rights valuation reserve for the years
ended December 31:
- --------------------------------------------------------------------------------
($ in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Balance at January 1 .............................. $ (9.4) -- .1
Servicing valuation provision ..................... (199.2) (9.4) (.1)
- --------------------------------------------------------------------------------
Balance at December 31 ............................ $(208.6) (9.4) --
================================================================================
The fair value of capitalized mortgage servicing rights was $435.6 million at
December 31, 2001 and $450.3 million at December 31, 2000. The Bancorp serviced
$31.6 billion of residential mortgage loans for other investors at December 31,
2001 and $28.8 billion at December 31, 2000.
During 2001, the Bancorp began an on-balance sheet non-qualifying hedging
strategy to manage a portion of the risk associated with impairment losses on
the mortgage servicing rights portfolio. This strategy included the purchase of
various securities classified as available-for-sale on the Consolidated Balance
Sheet as of December 31, 2001. Throughout the year certain of these securities
were sold resulting in net realized gains of $142.9 million.
7. SHORT-TERM BORROWINGS
A summary of short-term borrowings and rates at December 31:
- --------------------------------------------------------------------------------
($ in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Federal funds borrowed:
Balance ............................... $ 2,543.8 2,177.7 3,243.4
Rate .................................. 1.25% 6.16% 5.69%
================================================================================
Short-term bank notes:
Balance ............................... $ 33.9 -- 1,817.4
Rate .................................. 3.57% -- 5.92%
================================================================================
Securities sold under
agreements to repurchase:
Balance ............................... $ 4,854.4 3,939.7 4,493.7
Rate .................................. 1.76% 5.70% 4.98%
================================================================================
Other:
Balance ............................... $ 20.6 226.6 540.9
Rate .................................. 3.65% 6.70% 5.72%
================================================================================
Total short-term
borrowings:
Balance ............................... $ 7,452.7 6,344.0 10,095.4
Rate .................................. 1.60% 5.89% 5.42%
================================================================================
Average outstanding ..................... $ 8,799.1 9,724.7 8,572.8
Maximum month-end
balance ............................... $10,113.0 11,002.0 10,434.0
Weighted average
interest rate ......................... 4.06% 5.87% 4.81%
================================================================================
At December 31, 1999, short-term senior notes were outstanding with
maturities ranging from 30 days to one year, were obligations of five of the
Bancorp's subsidiary banks and are included in the above table as short-term
bank notes. In addition, medium-term senior notes and subordinated bank notes
with maturities ranging from five years to 30 years can be issued by the five
subsidiary banks, none of which were outstanding as of December 31, 2001 or
2000.
At December 31, 2001, the Bancorp had issued $20.6 million in commercial
paper, with unused lines of credit of $79.4 million available to support
commercial paper transactions and other corporate requirements.
24
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
8. LONG-TERM BORROWINGS
A summary of long-term borrowings at December 31:
- --------------------------------------------------------------------------------
($ in millions) 2001 2000
- --------------------------------------------------------------------------------
Bancorp:
Capital Securities, 8.136%, due 2027 $ 214.9 200.0
Subsidiaries:
Capital Securities, three month LIBOR
plus .80%, due 2027 .................................. 100.0 100.0
Subordinated notes,
6.625%, due 2005 ..................................... 100.0 100.0
Subordinated notes, 6.75%, due 2005 ................... 248.7 248.5
Subordinated notes, three month LIBOR
plus .75%, due 2005 .................................. 100.0 100.0
Subordinated notes, years 1-5: 7.75%;
Years 6-10: one month LIBOR plus
1.16%, due 2010 ...................................... 150.0 149.8
Federal Home Loan Bank advances ....................... 5,779.9 4,847.9
Securities sold under agreements
to repurchase ........................................ 325.0 304.9
Other ................................................. 11.4 14.5
- --------------------------------------------------------------------------------
Total long-term borrowings ............................ $ 7,029.9 6,065.6
================================================================================
In March 1997, Fifth Third Capital Trust 1 (FTCT1), a wholly-owned finance
subsidiary of the Bancorp, issued 8.136% Capital Securities due in 2027. The
Bancorp has fully and unconditionally guaranteed all of FTCT1's obligations
under the Capital Securities. The Capital Securities qualify as Tier 1 capital
for regulatory capital purposes.
In connection with the merger of Old Kent, the Bancorp assumed three-month
LIBOR plus .80% Capital Securities due in 2027 through Old Kent Capital Trust 1
(OKCT1), an indirect wholly owned finance subsidiary of the Bancorp. The Bancorp
has fully and unconditionally guaranteed all of OKCT1's obligations under the
Capital Securities. The Capital Securities qualify as Tier 1 capital for
regulatory capital purposes.
The 6.625% Subordinated Notes due in 2005 are unsecured obligations of a
subsidiary bank. Interest is payable semi-annually and the notes qualify as
total capital for regulatory capital purposes.
The 6.75% Subordinated Notes due in 2005 are unsecured obligations of a
subsidiary bank. Interest is payable semi-annually and the notes qualify as
total capital for regulatory capital purposes.
The LIBOR + .75% Subordinated Notes due in 2005 are unsecured obligations of
a subsidiary bank. Interest is payable quarterly and the notes may also be
redeemed on the quarterly interest payment date. The notes qualify as total
capital for regulatory capital purposes.
The 7.75% (years 1-5); 1 month LIBOR + 1.16% (years 6-10) Subordinated Notes
due 2010 are unsecured obligations of a subsidiary bank. Interest is payable
semi-annually and the notes may also be redeemed on the semi-annual interest
payment date. The notes qualify as total capital for regulatory capital
purposes.
At December 31, 2001, Federal Home Loan Bank advances have rates ranging from
2.00% to 8.34%, with interest payable monthly. The advances were secured by
certain mortgage loans and securities totaling $9.7 billion. The advances mature
as follows: $422 million in 2002, $372 million in 2003, $247 million in 2004,
$1,407 million in 2005, $302 million in 2006 and $3,030 million in 2007 and
thereafter.
At December 31, 2001, securities sold under agreements to repurchase have
rates ranging from 5.08% to 5.36%, with interest payable monthly. The repurchase
agreements mature as follows: $300 million in 2002 and $25 million in 2004.
9. GUARANTEED PREFERRED BENEFICIAL INTERESTS IN
CONVERTIBLE SUBORDINATED DEBENTURES
In connection with the merger of CNB Bancshares, Inc. (CNB), the Bancorp assumed
$172.5 million of trust preferred securities through CNB Capital Trust I, a
Delaware statutory business trust. Effective December 31, 2001, the Bancorp
announced that it would redeem all of the outstanding 6.0% convertible
subordinated debentures due 2028, thereby causing a redemption of all of the
issued and outstanding 6.0% trust preferred securities. The trust preferred
securities were redeemable at a price of $25 per share plus accumulated, accrued
and unpaid distributions through the redemption date. Prior to the redemption
date the holders of the trust preferred securities had the option to convert
each trust preferred security for .6401 shares of common stock of the Bancorp
(equivalent to a conversion price of $39.056). The holders elected to convert
all but 2,800 shares of the trust preferred securities into Bancorp common
stock.
10. MINORITY INTEREST
During 2001, a subsidiary of the Bancorp issued $425 million of preferred stock
through a private placement. The preferred stock qualifies as Tier 1 capital for
regulatory capital purposes. The preferred stock will be exchanged for trust
preferred securities in 2031 and, in certain circumstances, the preferred stock
can be exchanged for trust preferred securities or cash prior to the automatic
exchange in 2031. Annual dividend returns to the preferred stock holder are
reflected as minority interest expense in the Consolidated Statements of Income.
11. INCOME TAXES
The Bancorp and its subsidiaries file a consolidated Federal income tax return.
A summary of applicable income taxes included in the Consolidated Statements of
Income at December 31:
- --------------------------------------------------------------------------------
($ in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Current U.S. income taxes ......................... $ 264.8 214.3 213.3
State and local income taxes ...................... 31.5 16.5 25.3
- --------------------------------------------------------------------------------
Total ............................................. 296.3 230.8 238.6
- --------------------------------------------------------------------------------
Deferred U.S. income taxes
resulting from temporary
differences ...................................... 253.7 308.3 268.8
- --------------------------------------------------------------------------------
Applicable income taxes ........................... $ 550.0 539.1 507.4
================================================================================
Deferred income taxes are included in the caption Accrued Taxes, Interest and
Expenses in the Consolidated Balance Sheets and are comprised of the following
temporary differences at December 31:
- --------------------------------------------------------------------------------
($ in millions) 2001 2000
- --------------------------------------------------------------------------------
Lease financing ........................................ $ 1,290.4 1,028.1
Reserve for credit losses .............................. (247.2) (213.4)
Bank premises and equipment ............................ 25.1 21.4
Net unrealized gains on securities
available-for-sale and hedging instruments ............ 3.9 14.4
Mortgage servicing and other ........................... 122.5 101.0
- --------------------------------------------------------------------------------
Total net deferred tax liability ....................... $ 1,194.7 951.5
================================================================================
25
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
A reconciliation between the statutory U.S. income tax rate and the Bancorp's
effective tax rate for the years ended December 31:
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
Statutory tax rate .............................. 35.0% 35.0% 35.0%
Increase (Decrease) resulting from:
Tax-exempt income ............................... (3.0) (2.6) (2.4)
Other-net ....................................... 1.3 (.3) 2.3
- --------------------------------------------------------------------------------
Effective tax rate .............................. 33.3% 32.1% 34.9%
================================================================================
Retained earnings at December 31, 2001 includes $157.3 million in allocations
of earnings for bad debt deductions of former thrift subsidiaries for which no
income tax has been provided. Under current tax law, if certain of the Bancorp's
subsidiaries use these bad debt reserves for purposes other than to absorb bad
debt losses, they will be subject to Federal income tax at the current corporate
tax rate.
12. RELATED PARTY TRANSACTIONS
At December 31, 2001 and 2000, certain directors, executive officers, principal
holders of Bancorp common stock and associates of such persons were indebted to
the banking subsidiaries in the aggregate amount, net of participations, of
$469.9 million and $359.4 million, respectively. Such indebtedness was incurred
in the ordinary course of business on substantially the same terms as those
prevailing at the time of comparable transactions with unrelated parties.
13. STOCK OPTIONS AND EMPLOYEE STOCK GRANT
The Bancorp has historically emphasized employee stock ownership. Accordingly,
the Bancorp encourages further ownership through granting stock options to
approximately 24% of its employees. Share grants represented approximately 1.2%,
1.4% and 1.4% of average outstanding shares in 2001, 2000 and 1999,
respectively.
Options are eligible for issuance under the Bancorp's 1998 Stock Option Plan
to key employees and directors of the Bancorp and its subsidiaries for up to
37.7 million shares of the Bancorp's common stock. Options granted generally
have up to ten year terms and vest and become fully exercisable at the end of
three years of continued employment. A summary of option transactions during the
years ended December 31:
- --------------------------------------------------------------------------------
2001 2000 1999
---------------- ---------------- ----------------
Average Average Average
Shares Option Shares Option Shares Option
(000's) Price (000's) Price (000's) Price
- --------------------------------------------------------------------------------
Outstanding
beginning
of year ............... 33,034 $32.90 29,287 $30.40 24,586 $22.87
Exercised .............. (4,010) 31.39 (3,616) 24.48 (2,956) 15.62
Expired ................ (565) 45.43 (871) 43.83 (538) 37.09
Granted ................ 8,276 51.94 8,234 39.81 8,195 48.46
- --------------------------------------------------------------------------------
Outstanding
end of
year .................. 36,735 $36.27 33,034 $32.90 29,287 $30.40
- --------------------------------------------------------------------------------
Exercisable
end of
year .................. 27,568 $32.59 25,101 $29.73 21,172 $26.11
================================================================================
Included in the total options granted during 2001 are approximately 1,180,000
shares that were issued to convert then existing outstanding options of
companies acquired in 2001 and assumed by the Bancorp.
As of December 31, 2001, options outstanding have exercise prices between
$2.65 and $64.43 and a weighted average remaining contractual life of 6.7 years.
The majority of options outstanding have exercise prices ranging from $10.32 to
$50.81 with a weighted average remaining contractual life of 6.7 years.
At December 31, 2001, there were 14 million incentive options and 22.7
million nonqualified options outstanding, and 14 million shares were available
for granting additional options. Options outstanding represent 6.3% of the
Bancorp's issued shares at December 31, 2001.
- ------------------------------------------------------------------------------------------------
Outstanding Stock Options Exercisable Options
Weighted Average Weighted
Number of Average Remaining Average
Exercise Price Lowest Highest Options at Exercise Contractual Number of Exercise
per Share Price Price Year End Price Life (yrs) Options Price
- ------------------------------------------------------------------------------------------------
Under $ 11 $ 2.65 $ 10.88 1,980,709 $ 10.20 2.2 1,972,597 $ 10.20
$11-$25 11.06 24.90 9,053,646 18.27 4.8 8,714,672 18.26
$25-$40 25.22 39.96 6,747,003 36.06 6.7 6,717,946 36.06
$40-$55 40.17 54.92 18,196,420 47.17 8.3 10,099,420 46.88
Over $55 55.50 64.43 757,299 59.61 9.3 62,916 57.73
- ------------------------------------------------------------------------------------------------
All Options $2.65 $ 64.43 36,735,077 $ 36.27 6.7 27,567,551 $ 32.59
================================================================================================
As permitted by SFAS No. 123, "Accounting for Stock-Based Compensation," the
Bancorp has elected to disclose pro forma net income and earnings per share
amounts as if the fair-value based method had been applied in measuring
compensation costs.
The Bancorp's as reported and pro forma information for the years ended
December 31:
- --------------------------------------------------------------------------------
2001 2000 1999
- --------------------------------------------------------------------------------
As reported net income ($ in millions) ........... $ 1,093.0 1,140.4 946.6
Pro forma net income ($ in millions) ............. $ 994.2 1,054.3 886.6
As reported earnings per share ................... $ 1.90 2.02 1.68
Pro forma earnings per share ..................... $ 1.73 1.86 1.58
As reported earnings per diluted share ........... $ 1.86 1.98 1.66
Pro forma earnings per diluted share ............. $ 1.68 1.82 1.54
================================================================================
Compensation expense in the pro forma disclosures is not indicative of future
amounts, as options vest over several years and additional grants are generally
made each year.
The weighted average fair value of options granted was $18.79, $14.81 and
$18.02 in 2001, 2000 and 1999, respectively. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions used for grants in 2001, 2000 and 1999: expected
option lives of nine years for all three years; expected dividend yield of 1.8%
for 2001 and 1% for 2000 and 1999; expected volatility of 28%, 27% and 25% and
risk-free interest rates of 5.1%, 5.2% and 5.9%, respectively.
On May 3, 1999, the Bancorp issued 129,563 shares of common stock under the
1998 Long-Term Incentive Plan. These shares were awarded to non-officer
employees with three or more years of service. The market value of these shares
on the date of grant was approximately $6.5 million. This award was recognized
as compensation expense over the two-year vesting period.
26
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
14. COMMITMENTS AND CONTINGENT LIABILITIES
The Bancorp, in the normal course of business, uses derivatives to manage its
interest rate risk to help manage the risk of the mortgage servicing rights
portfolio and to meet the financing needs of its customers in Ohio, Kentucky,
Indiana, Michigan, Illinois, Florida and West Virginia. These financial
instruments primarily include commitments to extend credit, standby and
commercial letters of credit, foreign exchange contracts, interest rate swap
agreements, interest rate floors and caps, purchased options and commitments to
sell residential mortgage loans. These instruments involve, to varying degrees,
elements of credit risk, counterparty risk and market risk in excess of the
amounts recognized in the Consolidated Balance Sheets. The contract or notional
amounts of these instruments reflect the extent of involvement the Bancorp has
in particular classes of financial instruments.
Creditworthiness for all instruments is evaluated on a case-by-case basis in
accordance with the Bancorp credit policies. Collateral, if deemed necessary, is
based on management's credit evaluation of the counterparty and may include
business assets of commercial borrowers, as well as personal property and real
estate of individual borrowers and guarantors.
A summary of significant commitments and other financial instruments at
December 31:
- --------------------------------------------------------------------------------
Contract or
Notional Amount
----------------------
($ in millions) 2001 2000
- --------------------------------------------------------------------------------
Commitments to extend credit ......................... $18,168.6 16,612.1
Letters of credit (including
standby letters of credit) ......................... 2,597.6 2,399.3
Foreign exchange contracts:
Commitments to purchase ............................ 662.2 553.5
Commitments to sell ................................ 681.0 562.4
Interest rate swap agreements ........................ 3,805.5 417.3
Interest rate floors ................................. 48.1 1042.9
Interest rate caps ................................... 123.4 109.5
Put options sold ..................................... 333.2 553.5
Purchased options .................................... 1,150.4 2,361.0
Commitments to sell ..................................
residential mortgage loans ......................... 2,158.9 1,102.3
================================================================================
Commitments to extend credit are agreements to lend, generally having fixed
expiration dates or other termination clauses that may require payment of a fee.
Since many of the commitments to extend credit may expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash flow
requirements. The Bancorp's exposure to credit risk in the event of
nonperformance by the other party is the contract amount. Fixed-rate commitments
are subject to market risk resulting from fluctuations in interest rates and the
Bancorp's exposure is limited to the replacement value of those commitments.
Standby and commercial letters of credit are conditional commitments issued
to guarantee the performance of a customer to a third party. At December 31,
2001, approximately $244.3 million of standby letters of credit expire within
one year, $2,216.5 million expire between one to five years and $136.8 million
expire thereafter. At December 31, 2001, letters of credit of approximately
$16.4 million were issued to commercial customers for a duration of one year or
less to facilitate trade payments in domestic and foreign currency transactions.
The amount of credit risk involved in issuing letters of credit in the event of
nonperformance by the other party is the contract amount.
Foreign exchange forward contracts are for future delivery or purchase of
foreign currency at a specified price. Risks arise from the possible inability
of counterparties to meet the terms of their contracts and from any resultant
exposure to movement in foreign currency exchange rates, limiting the Bancorp's
exposure to the replacement value of the contracts rather than the notional
principal or contract amounts. The Bancorp generally reduces its market risk for
foreign exchange contracts by entering into offsetting third-party forward
contracts. The foreign exchange contracts outstanding at December 31, 2001
primarily mature in one year or less.
The Bancorp enters into forward contracts for future delivery of residential
mortgage loans at a specified yield to reduce the interest rate risk associated
with fixed-rate residential mortgages held for sale and commitments to fund
residential mortgage loans. Credit risk arises from the possible inability of
the other parties to comply with the contract terms. The majority of the
Bancorp's contracts are with U.S. government-sponsored agencies (FNMA, FHLMC).
The Bancorp manages a portion of the risk of the mortgage servicing rights
portfolio with a combination of derivatives. Throughout 2001 the Bancorp entered
into interest rate swaps and purchased and sold various options on interest rate
swaps. As of December 31, 2001, the Bancorp was receiving fixed rates ranging
from 4.925% to 5.98% and paying three-month LIBOR on interest rate swaps with
notional amounts of $589 million. In addition, the Bancorp was paying fixed
rates ranging from 6.85% to 7.37% and receiving three-month LIBOR on options
with notional amounts of $1.15 billion.
In 1997, the Bancorp entered into an interest rate swap agreement with a
notional principal amount of $200 million in connection with the issuance of
$200 million of long-term, fixed-rate capital-qualifying securities. The Bancorp
receives fixed-rate payments at 8.136% and pays a variable interest rate based
upon the three-month LIBOR plus 50 basis points. In 2001, the Bancorp entered
into an interest rate swap agreement with a notional principal amount of $250
million in order to convert a portion of the Bancorp's outstanding debt from a
fixed rate to a floating rate. The Bancorp receives a fixed rate of 6.75% and
pays a variable interest rate of three-month LIBOR plus 168.75 basis points. As
of December 31, 2001, the Bancorp had entered into interest rate swap agreements
with commercial clients with an aggregate notional principal amount of $553
million. The agreements generally provide for the Bancorp to receive a fixed
rate and pay a variable rate that resets periodically. The Bancorp has hedged
its interest rate exposure on transactions with commercial clients by executing
offsetting swap agreements with primary dealers. These transactions involve the
exchange of fixed and floating interest rate payments without the exchange of
the underlying principal amounts. Therefore, while notional principal amounts
are typically used to express the volume of these transactions, they do not
represent the much smaller amounts that are potentially subject to credit risk.
Entering into interest rate swap agreements involves the risk of dealing with
counterparties and their ability to meet the terms of the contract. The Bancorp
manages the credit risk of these transactions through adherence to a derivative
products policy, credit approval policies and monitoring procedures.
In 2000, the Bancorp sold a one time put option to bondholders in conjunction
with a jumbo residential mortgage securitization. The option was granted to
enhance the liquidity and marketability of the securitization and may be put
back to the Bancorp on August 20, 2002 at par, based on the occurrence of
certain criteria.
27
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
There are claims pending against the Bancorp and its subsidiaries which have
arisen in the normal course of business. Based on a review of such litigation
with legal counsel, management believes any resulting liability would not have a
material effect upon the Bancorp's consolidated financial position or results of
operations.
15. OTHER SERVICE CHARGES AND FEES AND OTHER OPERATING EXPENSES
The major components of other service charges and fees and other operating
expenses for the years ended December 31:
- ------------------------------------------------------------------------------
($ in millions) 2001 2000 1999
- ------------------------------------------------------------------------------
Other Service Charges and Fees:
Cardholder fees................................. $ 49.7 41.8 41.5
Consumer loan and lease fees.................... 58.9 48.9 57.4
Commercial banking.............................. 125.1 86.0 67.2
Bank owned life insurance
income........................................ 52.2 43.2 15.7
Insurance income................................ 49.1 47.8 45.0
Gain on sale of branches........................ 42.7 -- --
Other........................................... 164.5 121.3 111.6
- ------------------------------------------------------------------------------
Total other service charges
and fees........................................ $542.2 389.0 338.4
==============================================================================
Other Operating Expenses:
Marketing and
communications................................ $135.7 128.8 125.5
Bankcard........................................ 103.2 72.1 67.7
Intangibles amortization........................ 71.2 60.3 55.9
Franchise taxes................................. 17.9 27.7 26.6
Loan and lease.................................. 62.4 38.9 32.3
Printing and supplies........................... 40.4 40.9 44.2
Travel.......................................... 33.5 33.7 31.9
Data processing and operations.................. 70.1 86.4 98.9
Corporate insurance............................. 27.0 16.9 8.1
Other........................................... 194.2 160.8 158.5
- ------------------------------------------------------------------------------
Total other operating expenses.................... $755.6 666.5 649.6
==============================================================================
16. RETIREMENT AND BENEFIT PLANS
A combined summary of the defined benefit retirement plans at and for the years
ended December 31:
- ------------------------------------------------------------------------------
($ in millions) 2001 2000
- ------------------------------------------------------------------------------
Change in benefit obligation:
Projected benefit obligation at beginning of year.... $242.5 245.6
Service cost......................................... 11.8 10.4
Interest cost........................................ 18.3 17.0
Curtailment.......................................... ( 8.7) ( 16.2)
Settlement........................................... ( 6.0) --
Termination benefit.................................. -- 1.8
Acquisition/divestiture.............................. -- 2.7
Amendments........................................... -- .9
Actuarial loss....................................... 42.0 12.3
Benefits paid........................................ ( 37.1) ( 32.0)
- ------------------------------------------------------------------------------
Projected benefit obligation at end of year............ $262.8 242.5
==============================================================================
Change in plan assets:
Fair value of plan assets at beginning of year ...... $312.1 318.2
Actual return on assets.............................. ( 12.8) 15.4
Contributions........................................ 9.3 4.7
Acquired plan........................................ -- 5.8
Settlement........................................... ( 7.2) --
Benefits paid........................................ ( 37.1) ( 32.0)
- ------------------------------------------------------------------------------
Fair value of plan assets at end of year............... $264.3 312.1
==============================================================================
- ------------------------------------------------------------------------------
($ in millions) 2001 2000
- ------------------------------------------------------------------------------
Funded status.......................................... $ 1.5 69.6
Unrecognized transition amount......................... ( 6.5) ( 8.9)
Unrecognized prior service cost........................ 8.1 11.3
Unrecognized actuarial loss (gain)..................... 40.0 ( 36.0)
- ------------------------------------------------------------------------------
Net amount recognized.................................. $ 43.1 36.0
==============================================================================
Amounts recognized in the Consolidated
Balance Sheets consist of:
Prepaid benefit cost................................... $ 89.6 77.8
Accrued benefit liability.............................. ( 46.7) ( 42.0)
Accumulated nonowner changes in equity................. .2 .2
- ------------------------------------------------------------------------------
Net amount recognized.................................. $ 43.1 36.0
==============================================================================
- ------------------------------------------------------------------------------
($ in millions) 2001 2000 1999
- ------------------------------------------------------------------------------
Components of net periodic pension
cost (benefit):
Service cost..................................... $11.8 10.4 14.9
Interest cost.................................... 18.3 17.0 17.0
Curtailment...................................... 1.8 (12.7) --
Expected return on assets........................ (29.1) (28.5) (25.4)
Amortization and deferral of transition
amount......................................... ( 2.3) ( 2.4) ( 2.4)
Amortization of actuarial gain................... ( 1.4) ( 5.4) ( 2.1)
Amortization of unrecognized prior
service cost................................... 1.3 1.3 1.3
Settlement....................................... 1.9 ( 1.4) --
Termination benefit.............................. -- 1.8 --
- ------------------------------------------------------------------------------
Net periodic pension cost (benefit)................ $ 2.3 (19.9) 3.3
==============================================================================
In connection with the merger of CNB, the CNB defined benefit pension plan
was curtailed and the resulting curtailment gain was recorded against the merger
charge in 2000. Recognition of the gain had no impact on operating earnings.
Plan assets consist primarily of common trust and mutual funds managed by
Fifth Third Bank, an affiliate of the Bancorp, listed stocks and U.S. bonds.
- ------------------------------------------------------------------------------
2001 2000 1999
- ------------------------------------------------------------------------------
Weighted-average assumptions:
For disclosure:
Discount rate................................. 7.25% 7.80% 7.66%
Rate of compensation increase................. 4.86 4.77 4.81
For measuring net periodic pension
cost (benefit):
Discount rate................................. 7.80 7.66 6.80
Rate of compensation increase................. 4.77 4.81 4.67
Expected return on plan assets................ 9.52 9.36 9.59
==============================================================================
For the Bancorp's nonqualified supplemental defined benefit plans, with an
accumulated benefit obligation exceeding assets, the total projected benefit
obligation, accumulated benefit obligation and fair value of plan assets were
$33.3 million, $25.4 million and $0, respectively, as of December 31, 2001 and
$33.4 million, $25.9 million and $0, respectively, as of December 31, 2000. The
Bancorp's profit sharing plan contribution was $33.5 million for 2001, $37.9
million for 2000 and $34.1 million for 1999.
28
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
17. REGULATORY MATTERS
The principal source of income and funds for the Bancorp (parent company) are
dividends from its subsidiaries. During 2002, the amount of dividends the
subsidiaries can pay to the Bancorp without prior approval of regulatory
agencies is limited to their 2002 eligible net profits, as defined, and the
adjusted retained 2001 and 2000 net income of the subsidiaries.
The affiliate banks must maintain noninterest-bearing cash balances on
reserve with the Federal Reserve Bank (FRB). In 2001 and 2000, the banks were
required to maintain average reserve balances of $554.6 million and $445.3
million, respectively.
The FRB adopted quantitative measures which assign risk weightings to assets
and off-balance-sheet items and also define and set minimum regulatory capital
requirements (risk-based capital ratios). All banks are required to have core
capital (Tier 1) of at least 4% of risk-weighted assets, total capital of at
least 8% of risk-weighted assets and a minimum Tier 1 leverage ratio of 3% of
adjusted quarterly average assets. Tier 1 capital consists principally of
shareholders' equity including capital-qualifying subordinated debt but
excluding unrealized gains and losses on securities available for sale, less
goodwill and certain other intangibles. Total capital consists of Tier 1 capital
plus certain debt instruments and the reserve for credit losses, subject to
limitation. Failure to meet certain capital requirements can initiate certain
actions by regulators that, if undertaken, could have a direct material effect
on the Consolidated Financial Statements of the Bancorp. The regulations also
define well-capitalized levels of Tier 1, total capital and Tier 1 leverage as
6%, 10% and 5%, respectively. The Bancorp and each of its subsidiaries had Tier
1, total capital and leverage ratios above the well-capitalized levels at
December 31, 2001 and 2000. As of December 31, 2001, the most recent
notification from the FRB categorized the Bancorp and each of its subsidiary
banks as well-capitalized under the regulatory framework for prompt corrective
action.
Capital and risk-based capital and leverage ratios for the Bancorp and its
significant subsidiaries at December 31:
- ----------------------------------------------------------------------------------
2001
----------------------
($ in millions) Amount Ratio
- ----------------------------------------------------------------------------------
Total Capital (to Risk-Weighted Assets):
Fifth Third Bancorp (Consolidated).................... $8,575.8 14.42%
Fifth Third Bank (Ohio)............................... 3,916.5 12.08
Fifth Third Bank, Michigan............................ 2,205.3 11.06
Fifth Third Bank, Indiana............................. 1,087.9 20.63
Fifth Third Bank, Kentucky, Inc. ..................... 218.6 11.33
Fifth Third Bank, Northern Kentucky................... 118.2 11.04
Tier 1 Capital (to Risk-Weighted Assets):
Fifth Third Bancorp (Consolidated).................... 7,351.7 12.36
Fifth Third Bank (Ohio)............................... 3,117.5 9.62
Fifth Third Bank, Michigan............................ 1,762.5 8.84
Fifth Third Bank, Indiana............................. 1,034.8 19.62
Fifth Third Bank, Kentucky, Inc. ..................... 200.9 10.41
Fifth Third Bank, Northern Kentucky................... 88.4 8.26
Tier 1 Leverage Capital (to Average Assets):
Fifth Third Bancorp (Consolidated).................... 7,351.7 10.53
Fifth Third Bank (Ohio)............................... 3,117.5 8.09
Fifth Third Bank, Michigan............................ 1,762.5 7.43
Fifth Third Bank, Indiana............................. 1,034.8 11.97
Fifth Third Bank, Kentucky, Inc. ..................... 200.9 8.36
Fifth Third Bank, Northern Kentucky................... 88.4 6.98
==================================================================================
- ----------------------------------------------------------------------------------
2000
----------------------
($ in millions) Amount Ratio
- ----------------------------------------------------------------------------------
Total Capital (to Risk-Weighted Assets):
Fifth Third Bancorp (Consolidated).................. $ 7,494.2 13.40%
Fifth Third Bank (Ohio)............................. 3,010.7 11.11
Fifth Third Bank, Michigan.......................... 2,089.8 10.02
Fifth Third Bank, Indiana........................... 834.6 15.47
Fifth Third Bank, Kentucky, Inc. ................... 211.3 12.21
Fifth Third Bank, Northern Kentucky................. 113.8 11.29
Tier 1 Capital (to Risk-Weighted Assets):
Fifth Third Bancorp (Consolidated).................. 6,317.3 11.29
Fifth Third Bank (Ohio)............................. 2,193.6 8.09
Fifth Third Bank, Michigan.......................... 1,611.7 7.73
Fifth Third Bank, Indiana........................... 781.8 14.49
Fifth Third Bank, Kentucky, Inc. ................... 193.9 11.21
Fifth Third Bank, Northern Kentucky................. 84.0 8.33
Tier 1 Leverage Capital (to Average Assets):
Fifth Third Bancorp (Consolidated).................. 6,317.3 9.40
Fifth Third Bank (Ohio)............................. 2,193.6 6.85
Fifth Third Bank, Michigan.......................... 1,611.7 6.54
Fifth Third Bank, Indiana........................... 781.8 10.12
Fifth Third Bank, Kentucky, Inc. ................... 193.9 9.21
Fifth Third Bank, Northern Kentucky................. 84.0 7.06
==================================================================================
18. NONOWNER CHANGES IN EQUITY
Reclassification adjustments, related tax effects allocated to nonowner changes
in equity and accumulated nonowner changes in equity as of and for the years
ended December 31:
- -------------------------------------------------------------------------------------------
($ in millions) 2001 2000 1999
- -------------------------------------------------------------------------------------------
Reclassification adjustment, pretax:
Change in unrealized gains (losses)
arising during year.................................. $ 156.2 496.5 (650.5)
Reclassification adjustment for
gains in net income.................................. (171.1) (6.2) (8.4)
- -------------------------------------------------------------------------------------------
Change in unrealized gains (losses)
on securities available-for-sale..................... $ (14.9) 490.3 (658.9)
===========================================================================================
Related tax effects:
Change in unrealized gains (losses)
arising during year.................................. $ 60.6 162.5 (218.4)
Reclassification adjustment for
gains in net income.................................. (65.4) (2.0) (3.0)
- -------------------------------------------------------------------------------------------
Change in unrealized gains (losses)
on securities available-for-sale..................... $ (4.8) 160.5 (221.4)
===========================================================================================
Reclassification adjustment, net of tax:
Change in unrealized gains (losses)
arising during year.................................. $ 95.6 334.0 (432.1)
Reclassification adjustment for
gains in net income.................................. (105.7) (4.2) (5.4)
- -------------------------------------------------------------------------------------------
Change in unrealized gains (losses)
on securities available-for-sale..................... $ (10.1) 329.8 (437.5)
===========================================================================================
Accumulated nonowner changes in equity:
Beginning balance--
Unrealized gains (losses) on
securities available-for-sale........................ $ 28.0 (301.8) 135.7
Current period change.................................. (10.1) 329.8 (437.5)
- -------------------------------------------------------------------------------------------
Ending balance--
Unrealized gains (losses) on
securities available-for-sale........................ $ 17.9 28.0 (301.8)
Unrealized losses on qualifying
cash flow hedges..................................... (10.1) -- --
===========================================================================================
Accumulated nonowner
changes in equity.................................... $ 7.8 28.0 (301.8)
===========================================================================================
29
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
19. SALES AND TRANSFERS OF LOANS
During 2001 and 2000, the Bancorp sold fixed rate and adjustable residential
mortgage loans in securitization transactions. In all those sales, the Bancorp
retained servicing responsibilities. The Bancorp receives annual servicing fees
at a percentage of the outstanding balance and rights to future cash flows
arising after the investors in the securitization trust have received the return
for which they contracted. The investors and the securitization trust have no
recourse to the Bancorp's other assets for failure of debtors to pay when due.
The Bancorp's retained interests are subordinate to investor's interests. Their
value is subject to credit, prepayment and interest rate risks on the sold
financial assets. In 2001 and 2000, the Bancorp recognized pretax gains of
$197.1 million and $160.7 million, respectively, on the sales of residential
mortgage loans. Total proceeds from residential mortgage loan sales in 2001 and
2000 were $9.0 billion and $12.4 billion, respectively.
Key economic assumptions used in measuring the retained interests at the date
of securitization resulting from securitizations completed during 2001 and 2000
were as follows:
- --------------------------------------------------------------------------------
2001
- --------------------------------------------------------------------------------
Residential Mortgage Loans
-----------------------------
Fixed-Rate Adjustable
- --------------------------------------------------------------------------------
Prepayment speed................................ 13.9% 23.1%
Weighted-average life (in years)................ 7.2 4.0
Residual servicing cash flows
discounted at................................. 10.5% 15.2%
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2000
- --------------------------------------------------------------------------------
Residential Mortgage Loans
-----------------------------
Fixed-Rate Adjustable
- --------------------------------------------------------------------------------
Prepayment speed................................ 23.5% 24.6%
Weighted-average life (in years)................ 4.6 4.1
Residual servicing cash flows
discounted at................................. 10.4% 11.4%
- --------------------------------------------------------------------------------
Based on historical credit experience, expected credit losses and the effect
of an unfavorable change in credit losses have been deemed to not be material.
At December 31, 2001 and 2000, key economic assumptions and the sensitivity
of the current fair value of residual cash flows to immediate 10 percent and 20
percent adverse changes in those assumptions are as follows:
- --------------------------------------------------------------------------------
2001
- --------------------------------------------------------------------------------
Residential Mortgage Loans
-----------------------------
($ in millions) Fixed-Rate Adjustable
- --------------------------------------------------------------------------------
Fair value of retained servicing interests....... $ 211.1 $ 7.9
Weighted-average life (in years)................. 7.2 4.0
Prepayment speed assumption
(annual rate).................................. 13.9% 23.1%
Impact on fair value of 10% adverse change....... $ 9.9 $ .5
Impact on fair value of 20% adverse change....... $ 18.1 $ .9
Residual cash flows discount rate
(annual)....................................... 10.5% 15.2%
Impact on fair value of 10% adverse change....... $ 7.2 $ .2
Impact on fair value of 20% adverse change....... $ 13.9 $ .4
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
2000
- --------------------------------------------------------------------------------
Residential Mortgage Loans
-----------------------------
($ in millions) Fixed-Rate Adjustable
- --------------------------------------------------------------------------------
Fair value of retained servicing interests....... $ 96.1 $ 24.2
Weighted-average life (in years)................. 4.6 4.1
Prepayment speed assumption
(annual rate).................................. 23.5% 24.6%
Impact on fair value of 10% adverse change....... $ 5.6 $ 1.4
Impact on fair value of 20% adverse change....... $ 10.2 $ 2.4
Residual cash flows discount rate
(annual)....................................... 10.4% 11.4%
Impact on fair value of 10% adverse change....... $ 2.7 $ .7
Impact on fair value of 20% adverse change....... $ 5.0 $ 1.4
- --------------------------------------------------------------------------------
These sensitivities are hypothetical and should be used with caution. As the
figures indicate, changes in fair value based on a 10 percent variation in
assumptions generally cannot be extrapolated because the relationship of the
change in assumption to the change in fair value may not be linear. Also, in the
above table, the effect of a variation in a particular assumption on the fair
value of the retained interest is calculated without changing any other
assumption; in reality, changes in one factor may result in changes in another
(for example, increases in market interest rates may result in lower prepayments
and increased credit losses), which might magnify or counteract the
sensitivities.
During 2001 and 2000, the Bancorp transferred, subject to recourse, certain
commercial loans to an unconsolidated QSPE that is wholly owned by an
independent third party. At December 31, 2001 and 2000, the outstanding balance
of loans transferred was $2.0 billion and $1.9 billion, respectively. The
commercial loans transferred to the QSPE are primarily fixed-rate and short-term
investment grade in nature. The commercial loans are transferred at par with no
gain or loss recognized. The Bancorp receives rights to future cash flows
arising after the investors in the securitization trust have received the return
for which they contracted. Due to the relatively short-term nature of the loans
transferred, no value has been assigned to this retained future stream of fees
to be received. As of December 31, 2001, the $2.0 billion balance of outstanding
loans had a weighted average remaining maturity of 19 days.
The Bancorp had the following cash flows with the unconsolidated QSPE during
2001 and 2000:
- --------------------------------------------------------------------------------
($ in millions) 2001 2000
- --------------------------------------------------------------------------------
Proceeds from transfers................... $ 203.0 678.8
Transfers received from QSPE.............. $ 178.5 --
Fees received............................. $ 22.6 12.6
- --------------------------------------------------------------------------------
30
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
20. ACQUISITIONS
- --------------------------------------------------------------------------------
Consideration
--------------------------
Common
Date Cash Shares Method of
Completed (in millions) Issued Accounting
- -------------------------------------------------------------------------------------------------------------
Universal Companies (USB), 10/31/01 $ 220.0 -- Purchase
Milwaukee, Wisconsin
Old Kent Financial 4/2/01 -- 103,716,638 Pooling
Corporation,
Grand Rapids, Michigan
Capital Holdings, Inc. (Capital), 3/9/01 -- 4,505,385 Pooling
Sylvania, Ohio
Resource Management, Inc., 1/2/01 18.1 470,162 Purchase
Cleveland, Ohio
Ottawa Financial 12/8/00 .1 3,658,125 Purchase
Corporation (Ottawa),
Grand Rapids, Michigan
Grand Premier Financial, Inc. 4/1/00 -- 6,990,743 Pooling
(Grand Premier),
Wauconda, Illinois
Merchants Bancorp, Inc. 2/11/00 -- 3,235,680 Pooling
(Merchants),
Aurora, Illinois
Peoples Bank Corporation 11/19/99 -- 5,071,830 Pooling
of Indianapolis (Peoples),
Indianapolis, Indiana
CNB Bancshares, Inc. (CNB), 10/29/99 -- 45,556,118 Pooling
Evansville, Indiana
Pinnacle Banc Group, Inc. 9/3/99 -- 4,122,074 Pooling
(Pinnacle), Oak Brook,
Illinois
Emerald Financial Corp., 8/6/99 -- 5,069,309 Pooling
Strongsville, Ohio
Vanguard Financial Co., 7/9/99 .1 108,123 Purchase
Cincinnati, Ohio
CFSB Bancorp, Inc. (CFSB), 7/9/99 -- 4,085,533 Pooling
Lansing, Michigan
South Florida Bank 6/11/99 -- 663,840 Purchase
Holding Corporation,
Ft. Myers, Florida
Enterprise Federal 5/14/99 -- 2,514,894 Purchase
Bancorp, Inc.,
Cincinnati, Ohio
Ashland Bankshares, Inc., 4/16/99 -- 1,837,290 Purchase
Ashland, Kentucky
- -------------------------------------------------------------------------------------------------------------
The assets, liabilities and shareholders' equity of the pooled entities were
recorded on the books of the Bancorp at their values as reported on the books of
the pooled entities immediately prior to the consummation of the merger with the
Bancorp. This presentation required the restatements for material acquisitions
of prior periods as if the companies had been combined for all years presented.
On April 2, 2001, the Bancorp acquired Old Kent, a publicly-traded financial
holding company headquartered in Grand Rapids, Michigan. The contribution of Old
Kent to consolidated net interest income, other operating income and net income
available to common shareholders for the periods prior to the merger were as
follows:
- ---------------------------------------------------------------------------------------------
Years Ended
Three Months Ended December 31,
($ in millions) March 31, 2001 2000 1999
- ---------------------------------------------------------------------------------------------
Net Interest Income:
Bancorp..................................... $ 392.9 1,470.3 1,404.6
Old Kent.................................... 195.5 784.2 773.1
- ---------------------------------------------------------------------------------------------
Combined.................................... $ 588.4 2,254.5 2,177.7
- ---------------------------------------------------------------------------------------------
Other Operating Income:
Bancorp..................................... $ 292.5 1,012.7 877.7
Old Kent.................................... 120.7 469.6 461.4
- ---------------------------------------------------------------------------------------------
Combined.................................... $ 413.2 1,482.3 1,339.1
- ---------------------------------------------------------------------------------------------
Net Income Available to
Common Shareholders:
Bancorp..................................... $ 244.3 862.9 668.2
Old Kent.................................... 55.1 277.5 278.4
- ---------------------------------------------------------------------------------------------
Combined.................................... $ 299.4 1,140.4 946.6
- ---------------------------------------------------------------------------------------------
During 1999 as a direct result of the Peoples, CNB, CFSB and Pinnacle
acquisitions and the related formally developed integration plans, the Bancorp
recorded merger-related charges of $134.4 million ($101.4 million after tax), of
which $108.1 million was recorded as operating expense and $26.3 million was
recorded as additional provision for credit losses. The charge to operating
expenses consisted of employee severance and benefit obligations, costs to
eliminate duplicate facilities and equipment, contract terminations, conversion
expenses and professional fees. The additional provision for credit losses was
charged in connection with a change in the management of Peoples and CNB problem
loans and to conform Peoples and CNB to the Bancorp's reserve and charge-off
practices.
During 2000, as a direct result of the Grand Premier, Merchants and CNB
acquisitions and the related formally developed integration plans, the Bancorp
recorded merger-related charges of $99.0 million ($66.6 million after tax) of
which $87 million was recorded as operating expense and $12 million was recorded
as additional provision for credit losses. The charge to operating expenses
consisted of employee severance and benefit obligations including recognition of
a $10 million curtailment gain on CNB's defined benefit plan, costs to eliminate
duplicate facilities and equipment, contract terminations, conversion expenses,
professional fees and securities losses realized in realigning the balance
sheet.
In the second and third quarters of 2001, as a result of the Old Kent
acquisition and a formally developed integration plan, the Bancorp recorded
merger-related charges of $384 million ($293.6 million after tax) of which
$348.6 million was recorded as operating expense and $35.4 million was recorded
as additional provision for credit losses. The charge to operating expenses
consisted of employee severance and benefit obligations, professional fees,
costs to eliminate duplicate facilities and equipment, conversion expenses, gain
on sale of six branches required to be divested as a condition for regulatory
approval, loss incurred on sale of Old Kent's subprime mortgage lending
portfolio in order to align Old Kent with the Bancorp's asset/ liability
management policies and a loss on sale of the out-of-market mortgage operations.
Employee severance includes the packages negotiated with approximately 1,400
people (including all levels of the previous Old Kent organization from the
executive management level to back office support staff) and the
change-in-control payments made pursuant to pre-existing employment agreements.
Employee-related payments made in 2001 totaled $63 million, including payment to
the approximate 1,250 people that have been terminated as of December 31, 2001.
Credit quality charges relate to conforming Old Kent
31
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
commercial and consumer loans to the Bancorp's credit policies. Specifically,
these loans were conformed to the Bancorp's credit rating and review systems, as
documented in the Bancorp's credit policies.
The merger-related charges consist of:
- --------------------------------------------------------------------------------
($ in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Employee severance and benefit
obligations..................................... $ 77.4 17.4 40.4
Duplicate facilities and equipment................ 95.1 4.1 14.4
Conversion expenses............................... 50.9 14.8 4.6
Professional fees................................. 45.8 5.9 20.0
Contract termination costs........................ 19.9 19.8 16.7
Loss on portfolio sales........................... 28.7 21.6 4.1
Net loss on sales of subsidiaries and out-
of-market line of business operations........... 15.2 2.6 1.7
Other............................................. 15.6 .8 6.2
- --------------------------------------------------------------------------------
Merger-related charges............................ $ 348.6 87.0 108.1
================================================================================
In 1999, other merger-related charges consisted of $3.6 million in charges to
conform CNB to established Bancorp revenue recognition and cost deferral
accounting policies, $1.0 million to conform CNB's deferred compensation program
and $1.6 million in various other miscellaneous charges. In 2001, other
merger-related charges consisted of $13.1 million of charges to conform Bancorp
and Old Kent accounting policies for cost deferral and revenue recognition and
$2.5 million in various other miscellaneous charges.
Summary of merger-related accrual activity at December 31:
- --------------------------------------------------------------------------------
($ in millions) 2001 2000
- --------------------------------------------------------------------------------
Balance, January 1............................ $ 13.0 41.5
Merger-related charges........................ 348.6 87.0
Cash payments................................. (229.4) (96.2)
Noncash writedowns............................ ( 77.7) (19.3)
- --------------------------------------------------------------------------------
Balance, December 31.......................... $ 54.5 13.0
================================================================================
In 2000, non-cash writedowns consisted of $19.3 million of duplicate fixed
asset writedowns related to Grand Premier, Merchants and CNB. In 2001, non-cash
writedowns consisted of $51.3 million of duplicate equipment and duplicate data
processing software writedowns, $18.4 million of goodwill and fixed asset
writedowns necessary as a result of the sale of the out-of-market mortgage
operations and $8.0 million to conform Bancorp and Old Kent accounting policies
for cost deferral and revenue recognition.
The pro forma effect and the financial results of Ottawa and Capital,
respectively, included in the results of operations subsequent to the date of
the acquisitions were not material to the Bancorp's financial condition and
operating results for the periods presented.
21. EARNINGS PER SHARE
Reconciliation of Earnings Per Share to Earnings Per Diluted Share for the years
ended December 31:
- -------------------------------------------------------------------------------------------
2001
-------------------------------------
Average Per Share
($ in millions, except per share amounts) Income Shares Amount
- -------------------------------------------------------------------------------------------
EPS
Net income available to
common shareholders.............................. $ 1,093.0 575,254 $ 1.90
Effect of Dilutive Securities
Stock options...................................... 11,350
Interest on 6% convertible
subordinated debentures
due 2028, net of applicable
income taxes..................................... 4.9 4,404
Dividends on convertible
preferred stock.................................. .6 308
- -------------------------------------------------------------------------------------------
Diluted EPS
Net income available to
common shareholders
plus assumed conversions......................... $ 1,098.5 591,316 $ 1.86
===========================================================================================
- -------------------------------------------------------------------------------------------
2000
------------------------------------
Average Per Share
($ in millions, except per share amounts) Income Shares Amount
- -------------------------------------------------------------------------------------------
EPS
Net income available to
common shareholders.............................. $ 1,140.4 565,686 $ 2.02
Effect of Dilutive Securities
Stock options...................................... 8,563
Interest on 6% convertible
subordinated debentures
due 2028, net of applicable
income taxes..................................... 6.7 4,416
Dividends on convertible
preferred stock.................................. .6 308
- -------------------------------------------------------------------------------------------
Diluted EPS
Net income available to
common shareholders
plus assumed conversions......................... $ 1,147.7 578,973 $ 1.98
===========================================================================================
- -------------------------------------------------------------------------------------------
1999
---------------------------------------
Average Per Share
($ in millions, except per share amounts) Income Shares Amount
- -------------------------------------------------------------------------------------------
EPS
Net income available to
common shareholders.............................. $ 946.6 562,041 $ 1.68
Effect of Dilutive Securities
Stock options...................................... 9,130
Interest on 6% convertible
subordinated debentures
due 2028, net of applicable
income taxes..................................... 6.7 4,416
Dividends on convertible
preferred stock.................................. .6 308
- -------------------------------------------------------------------------------------------
Diluted EPS
Net income available to
common shareholders
plus assumed conversions......................... $ 953.9 575,895 $ 1.66
===========================================================================================
32
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
The diluted per share impact of the change in accounting principle in 2001
was $.01. Options to purchase .6 million shares were outstanding at December 31,
2001 and were not included in the computation of net income per diluted share
because the exercise price of these options was greater than the average market
price of the common shares, and therefore, the effect would be antidilutive.
22. FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values for financial instruments at December
31:
- ------------------------------------------------------------------------------
2001
------------------------
Carrying Fair
($ in millions) Amount Value
- ------------------------------------------------------------------------------
Financial Assets
Cash and due from banks........................... $ 2,031.0 $ 2,031.0
Securities available-for-sale..................... 20,506.6 20,506.6
Securities held-to-maturity....................... 16.4 16.4
Other short-term investments...................... 224.7 224.7
Loans held for sale............................... 2,180.1 2,184.0
Loans and leases.................................. 41,547.9 42,812.1
Accrued income receivable......................... 617.9 617.9
Financial Liabilities
Deposits.......................................... 45,854.1 45,905.6
Federal funds borrowed............................ 2,543.8 2,543.8
Short-term bank notes............................. 33.9 33.9
Other short-term borrowings....................... 4,875.0 4,959.6
Accrued interest payable.......................... 194.6 194.6
Long-term debt.................................... 7,029.9 7,444.8
Financial Instruments
Commitments to extend credit...................... -- 20.4
Letters of credit................................. -- 31.0
Interest rate swap agreements..................... (15.1) (15.1)
Interest rate floors.............................. -- (.9)
Interest rate caps................................ -- .2
Purchased options................................. 31.4 31.4
Interest rate lock commitments.................... 3.9 3.9
Forward contracts:
Commitments to sell loans....................... 13.6 13.6
Foreign exchange contracts:
Commitments to purchase....................... (1.4) (1.4)
Commitments to sell........................... 5.1 5.1
==============================================================================
- ------------------------------------------------------------------------------
2000
----------------------
Carrying Fair
($ in millions) Amount Value
- ------------------------------------------------------------------------------
Financial Assets
Cash and due from banks........................... $ 1,706.5 1,706.5
Securities available-for-sale..................... 19,028.8 19,028.8
Securities held-to-maturity....................... 552.6 557.3
Other short-term investments...................... 232.4 232.4
Loans held for sale............................... 1,655.0 1,683.3
Loans and leases.................................. 42,530.4 43,065.0
Accrued income receivable......................... 558.4 558.4
Financial Liabilities
Deposits.......................................... 48,359.5 47,731.6
Federal funds borrowed............................ 2,177.7 2,194.8
Short-term bank notes............................. -- --
Other short-term borrowings....................... 4,166.3 4,204.8
Accrued interest payable.......................... 252.5 252.5
Long-term debt.................................... 6,065.6 6,180.6
Guaranteed preferred beneficial
interests in convertible subordinated
debentures...................................... 172.5 284.6
Financial Instruments
Commitments to extend credit...................... 1.8 17.6
Letters of credit................................. 2.9 19.2
Purchased options................................. -- 3.1
Interest rate swap agreements..................... -- 17.4
Interest rate floors.............................. 15.5 16.8
Interest rate caps................................ -- .2
Interest rate lock commitments.................... -- 3.1
Forward contracts:
Commitments to sell loans....................... -- (10.8)
Foreign exchange contracts:
Commitments to purchase....................... -- 5.6
Commitments to sell........................... -- ( 1.2)
==============================================================================
Fair values for financial instruments, which were based on various
assumptions and estimates as of a specific point in time, represent liquidation
values and may vary significantly from amounts that will be realized in actual
transactions. In addition, certain non-financial instruments were excluded from
the fair value disclosure requirements. Therefore, the fair values presented in
the adjacent table should not be construed as the underlying value of the
Bancorp.
The following methods and assumptions were used in determining the fair value
of selected financial instruments:
Short-term financial assets and liabilities-for financial instruments with a
short or no stated maturity, prevailing market rates and limited credit risk,
carrying amounts approximate fair value. Those financial instruments include
cash and due from banks, other short-term investments, accrued income
receivable, certain deposits (demand, interest checking, savings and money
market), Federal funds borrowed, short-term bank notes, other short-term
borrowings and accrued interest payable.
Securities, available-for-sale and held-to-maturity-fair values were based on
prices obtained from an independent nationally recognized pricing service.
Loans-fair values were estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
Loans held for sale-the fair value of loans held for sale was estimated based
on outstanding commitments from investors or current investor yield
requirements.
Deposits-fair values for other time, certificates of deposit-$100,000 and
over and foreign office were estimated using a discounted cash flow calculation
that applies interest rates currently being offered for deposits of similar
remaining maturities.
Long-term debt-fair value of long-term debt was based on quoted market
prices, when available, and a discounted cash flow calculation using prevailing
market rates for borrowings of similar terms.
Commitments and letters of credit-fair values of loan commitments, letters of
credit and commitments to sell loans, representing assets to the Bancorp, were
based on fees currently charged to enter into similar agreements with similar
maturities.
Interest rate swap agreements-fair value was based on the estimated amount
the Bancorp would receive or pay to terminate the swap agreements, taking into
account the current interest rates and the creditworthiness of the swap
counterparties. The fair values represent a liability at December 31, 2001.
Purchased options and interest rate floors and caps-fair values were based on
the estimated amounts the Bancorp would receive from terminating the contracts
at the reporting date.
Foreign exchange contracts-fair values were based on quoted market prices of
comparable instruments and represent a net liability to the Bancorp.
33
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
23. PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial statements of the Bancorp ($ in millions):
- --------------------------------------------------------------------------------
Condensed Statements of Income (Parent Company Only)
For the Years Ended December 31 2001 2000 1999
- --------------------------------------------------------------------------------
Income
Dividends from Subsidiaries.................... $ 214.4 636.4 507.2
Interest on Loans to
Subsidiaries................................. 38.9 40.8 34.9
Other.......................................... 24.4 .9 3.2
- --------------------------------------------------------------------------------
Total Income................................... 277.7 678.1 545.3
- --------------------------------------------------------------------------------
Expenses
Interest....................................... 25.1 19.7 23.8
Other.......................................... 36.5 8.5 30.8
- --------------------------------------------------------------------------------
Total Expenses................................. 61.6 28.2 54.6
- --------------------------------------------------------------------------------
Income Before Taxes and
Change in Undistributed
Earnings of Subsidiaries..................... 216.1 649.9 490.7
Applicable Income Taxes (Benefit) ............. (5.6) 2.7 (3.3)
- --------------------------------------------------------------------------------
Income Before Change in
Undistributed Earnings of
Subsidiaries................................. 221.7 647.2 494.0
Increase in Undistributed
Earnings of Subsidiaries..................... 872.0 493.9 453.3
- --------------------------------------------------------------------------------
Net Income..................................... $1,093.7 1,141.1 947.3
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Condensed Balance Sheets (Parent Company Only)
December 31 2001 2000
- --------------------------------------------------------------------------------
Assets
Cash...................................................... $ .1 6.7
Interest-Bearing Deposits................................. -- 11.5
Securities Available-for-Sale............................. 1.1 1.1
Loans to Subsidiaries..................................... 985.5 1,236.6
Investment in Subsidiaries................................ 6,897.8 5,758.9
Goodwill.................................................. 138.0 144.4
Other Assets.............................................. 26.3 22.9
- --------------------------------------------------------------------------------
Total Assets.............................................. $8,048.8 7,182.1
================================================================================
Liabilities
Commercial Paper.......................................... $ 20.6 10.3
Accrued Expenses and Other Liabilities.................... 188.9 131.6
Long-Term Debt............................................ 200.0 200.0
Guaranteed Preferred Beneficial Interest
in Convertible Subordinated Debentures.................. -- 177.8
- --------------------------------------------------------------------------------
Total Liabilities......................................... 409.5 519.7
- --------------------------------------------------------------------------------
Shareholders' Equity...................................... 7,639.3 6,662.4
- --------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity.................................... $8,048.8 7,182.1
================================================================================
- --------------------------------------------------------------------------------
Condensed Statements of Cash Flows (Parent Company Only)
December 31 2001 2000 1999
- --------------------------------------------------------------------------------
Operating Activities
Net Income................................. $1,093.7 1,141.1 947.3
Adjustments to Reconcile Net
Income to Net Cash Provided
by Operating Activities:
Amortization/Depreciation.............. 6.4 5.9 .8
(Benefit) Provision for
Deferred Income Taxes................ (8.0) 2.3 1.6
(Increase) Decrease in
Other Assets......................... (3.4) 29.1 (23.3)
Increase in Accrued Expenses
and Other Liabilities................ 65.2 7.0 58.6
Increase in Undistributed
Earnings of Subsidiaries............. (872.0) (493.9) (453.3)
- --------------------------------------------------------------------------------
Net Cash Provided by
Operating Activities..................... 281.9 691.5 531.7
- --------------------------------------------------------------------------------
Investing Activities
Proceeds from Sales of
Securities Available-for-Sale............ -- -- 2.7
Decrease in Interest-
Bearing Deposits......................... 11.5 -- 103.4
Decrease (Increase) in Loans
to Subsidiaries.......................... 251.1 (124.6) (274.4)
Capital Contributions to Subsidiaries...... (254.8) (86.1) (13.4)
- --------------------------------------------------------------------------------
Net Cash Provided by (Used in)
Investing Activities..................... 7.8 (210.7) (181.7)
- --------------------------------------------------------------------------------
Financing Activities
Increase (Decrease) in Other
Short-Term Borrowings.................... 10.3 8.0 (27.7)
Payment of Cash Dividends.................. (460.1) (317.5) (269.0)
Purchases of Treasury Stock................ (14.7) (180.9) --
Exercise of Stock Options.................. 97.7 39.0 53.7
Other...................................... 70.5 (23.5) (109.8)
- --------------------------------------------------------------------------------
Net Cash Used in
Financing Activities..................... (296.3) (474.9) (352.8)
- --------------------------------------------------------------------------------
(Decrease) Increase in Cash................ (6.6) 5.9 (2.8)
Cash at Beginning of Year.................. 6.7 .8 3.6
- --------------------------------------------------------------------------------
Cash at End of Year........................ $ 0.1 6.7 .8
================================================================================
24. SEGMENTS
The Bancorp's principal activities include Retail Banking, Commercial Banking,
Investment Advisory Services and Electronic Payment Processing. Retail Banking
provides a full range of deposit products and consumer loans and leases.
Commercial Banking offers banking, cash management and financial 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. Electronic Payment Processing, through Midwest
Payment Systems (MPS), provides electronic funds transfer (EFT) services,
merchant transaction processing, operates the 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.
The financial information for each operating segment is reported on the basis
used internally by the Bancorp's management to evaluate performance and allocate
resources. The allocation has been consistently applied for all periods
presented. Revenues from affiliated transactions, principally EFT services from
MPS to the
34
FIFTH THIRD BANCORP AND SUBSIDIARIES
Notes to Consolidated Financial Statements
- --------------------------------------------------------------------------------
banking segments, are generally charged at rates available to and transacted
with unaffiliated customers.
The measurement of the performance of the operating segments is based on the
management structure of the Bancorp and is not necessarily comparable with
similar information for any other financial institution. The information
presented is also not necessarily indicative of the segments' financial
condition and results of operations if they were independent entities.
Results of operations and selected financial information by operating segment
for each of the three years ended December 31:
Investment Electronic General
Commercial Retail Advisory Payment Corporate Elimina-
($ in millions) Banking Banking Services Processing (a) and Other tions (a) Total
- ---------------------------------------------------------------------------------------------------------------------------------
2001
Results of Operations
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income (Expense)......... $ 929.2 1,386.4 95.6 ( 4.8) 26.6 -- 2,433.0
Provision for Credit Losses........... 90.9 104.1 5.6 -- 35.4 -- 236.0
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income (Expense)
After Provision for Credit Losses... 838.3 1,282.3 90.0 ( 4.8) ( 8.8) -- 2,197.0
Other Operating Income................ 228.5 584.9 306.5 372.2 330.1 (24.8) 1,797.4
Merger-Related Charges................ -- -- -- -- 348.6 -- 348.6
Operating Expenses.................... 389.6 981.7 235.2 200.1 211.0 (24.8) 1,992.8
- ---------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes, Minority
Interest and Cumulative Effect...... 677.2 885.5 161.3 167.3 ( 238.3) -- 1,653.0
Applicable Income Taxes............... 225.3 294.6 53.7 55.7 ( 79.3) -- 550.0
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income Available to
Common Shareholders................. $ 451.9 590.9 107.6 111.6 ( 169.0) -- 1,093.0
- ---------------------------------------------------------------------------------------------------------------------------------
Selected Financial Information
- ---------------------------------------------------------------------------------------------------------------------------------
Identifiable Assets................... $19,506.0 25,087.7 1,305.9 494.1 24,632.6 -- 71,026.3
Depreciation and Amortization......... $ 1.5 19.7 1.4 2.0 74.8 -- 99.4
- ---------------------------------------------------------------------------------------------------------------------------------
2000
Results of Operations
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income (Expense)......... $ 820.1 1,223.1 81.0 ( 2.9) 133.2 -- 2,254.5
Provision for Credit Losses........... 55.3 67.1 3.3 -- 12.0 -- 137.7
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income (Expense)
After Provision for Credit Losses... 764.8 1,156.0 77.7 ( 2.9) 121.2 -- 2,116.8
Other Operating Income................ 176.5 452.9 281.0 271.9 320.2 (20.2) 1,482.3
Merger-Related Charges................ -- -- -- -- 87.0 -- 87.0
Operating Expenses.................... 383.7 826.6 211.4 142.5 287.9 (20.2) 1,831.9
- ---------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes,
Minority Interest and
Cumulative Effect................... 557.6 782.3 147.3 126.5 66.5 -- 1,680.2
Applicable Income Taxes............... 178.9 251.0 47.2 40.6 21.4 -- 539.1
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income Available to
Common Shareholders................. $ 378.7 531.3 100.1 85.9 44.4 -- 1,140.4
- ---------------------------------------------------------------------------------------------------------------------------------
Selected Financial Information
- ---------------------------------------------------------------------------------------------------------------------------------
Identifiable Assets................... $19,097.2 24,927.5 1,103.5 146.0 24,384.1 -- 69,658.3
Depreciation and Amortization......... $ 1.6 28.7 1.5 1.3 70.1 -- 103.2
- ---------------------------------------------------------------------------------------------------------------------------------
1999
Results of Operations
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income (Expense)......... $ 747.7 1,130.3 80.6 ( 1.9) 220.7 -- 2,177.4
Provision for Credit Losses........... 57.5 82.1 3.6 -- 26.2 -- 169.4
- ---------------------------------------------------------------------------------------------------------------------------------
Net Interest Income (Expense)
After Provision for Credit Losses... 690.2 1,048.2 77.0 ( 1.9) 194.5 -- 2,008.0
Other Operating Income................ 157.2 393.5 261.5 203.9 338.2 (15.2) 1,339.1
Merger-Related Charges................ -- -- -- -- 108.1 -- 108.1
Operating Expenses.................... 312.4 715.8 208.9 100.2 462.1 (15.2) 1,784.2
- ---------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes, Minority
Interest and Cumulative Effect...... 535.0 725.9 129.6 101.8 ( 37.5) -- 1,454.8
Applicable Income Taxes............... 186.6 253.2 45.2 35.5 ( 13.1) -- 507.4
- ---------------------------------------------------------------------------------------------------------------------------------
Net Income Available to
Common Shareholders................. $ 348.4 472.7 84.4 66.3 ( 25.2) -- 946.6
- ---------------------------------------------------------------------------------------------------------------------------------
Selected Financial Information
- ---------------------------------------------------------------------------------------------------------------------------------
Identifiable Assets................... $17,157.4 23,727.2 758.9 93.5 20,419.7 -- 62,156.7
Depreciation and Amortization......... $ 1.6 31.6 1.7 1.1 65.9 -- 101.9
- ---------------------------------------------------------------------------------------------------------------------------------
(a) Electronic payment processing service revenues provided to the banking
segments by MPS are eliminated in the Consolidated Statements of Income.
35
FIFTH THIRD BANCORP AND SUBSIDIARIES
Independent Auditors' Report
- --------------------------------------------------------------------------------
Independent Auditors' Report
To the Shareholders and Board of Directors of Fifth Third Bancorp:
We have audited the consolidated balance sheets of Fifth Third Bancorp and
subsidiaries ("Bancorp") as of December 31, 2001 and 2000, and the related
consolidated statements of income, changes in shareholders' equity, and cash
flows for each of the three years in the period ended December 31, 2001. These
financial statements are the responsibility of the Bancorp's management. Our
responsibility is to express an opinion on the financial statements based on our
audits. The consolidated financial statements give retroactive effect to the
merger of the Bancorp and Old Kent Financial Corporation ("Old Kent"), which has
been accounted for as a pooling of interests as described in Note 20 to the
consolidated financial statements. We did not audit the balance sheet of Old
Kent as of December 31, 2000, or the related statements of income, changes in
shareholders' equity, and cash flows of Old Kent for the years ended December
31, 2000 and 1999, which statements reflect total assets of $23,842,289,000 as
of December 31, 2000, and total interest income and other income of
$2,129,369,000 and $1,918,093,000 for the years ended December 31, 2000 and
1999, respectively. Those statements were audited by other auditors whose report
has been furnished to us, and our opinion, insofar as it relates to the amounts
included for Old Kent for 2000 and 1999, is based solely on the report of such
other auditors.
We conducted our audits in accordance with auditing standards generally
accepted in the United States of America. Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits and the report of
the other auditors provide a reasonable basis for our opinion.
In our opinion, based on our audits and the report of the other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Fifth Third Bancorp and
subsidiaries at December 31, 2001 and 2000, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 2001 in conformity with accounting principles generally accepted in the
United States of America.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
January 15, 2002
================================================================================
Fifth Third Funds(R) Performance Disclosure
*Investments in the Fifth Third Funds are: NOT INSURED BY THE FDIC or any
other government agency, are not deposits or obligations of, or guaranteed by,
any bank, the distributor or any of their affiliates, and involve investment
risks, including the possible loss of the principal amount invested. For more
information on the Fifth Third Funds, including charges and expenses, call
1-888-889-1025 for a prospectus. Read it carefully before you invest or send
money. Fifth Third Funds Distributor, Inc. is the distributor for the funds.
There are risks associated with investing in small cap companies, which tend to
be more volatile and less liquid than stocks of large companies, including
increased risk of price fluctuations. International investing involves increased
risk and volatility. A portion of income may be subject to some state and/or
local taxes and for certain investors, a portion may be subject to the federal
alternative minimum tax. Past performance is no guarantee of future results.
36
FIFTH THIRD BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
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 Bancorp 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. Fifth Third Bancorp undertakes no obligation to release revisions to
these forward-looking statements or reflect events or circumstances after the
date of this report.
The data presented in the following pages should be read in conjunction with
the audited Consolidated Financial Statements on pages 15 to 36 of this report.
TABLE 1-CONSOLIDATED AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
For the Years Ended December 31 (Taxable Equivalent Basis)
- -----------------------------------------------------------------------------------------------------------------------------------
2001 2000 1999
-------------------------------- ------------------------------- -------------------------------
Average Average Average Average Average Average
Out- Revenue/ Yield/ Out- Revenue/ Yield/ Out- Revenue/ Yield/
($ in millions) standing Cost Rate standing Cost Rate standing Cost Rate
- -----------------------------------------------------------------------------------------------------------------------------------
Assets
Interest-Earning Assets
Loans and Leases.............. $44,888.2 $3,434.5 7.65% $42,690.5 $3,605.2 8.44% $38,652.1 $ 3,103.9 8.03%
Securities
Taxable..................... 18,481.4 1,213.2 6.56 17,245.9 1,270.8 7.37 15,389.9 1,008.7 6.55
Exempt from Income Taxes.... 1,254.8 96.8 7.71 1,383.8 105.5 7.63 1,511.0 107.3 7.10
Other Short-Term Investments.. 201.2 9.8 4.88 200.3 13.2 6.59 327.2 18.4 5.63
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets... 64,825.6 4,754.3 7.33 61,520.5 4,994.7 8.12 55,880.2 4,238.3 7.58
- -----------------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks......... 1,482.4 1,455.7 1,628.1
Other Assets.................... 4,980.4 4,227.8 3,343.8
Reserve for Credit Losses....... ( 624.9) ( 594.1) ( 559.8)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Assets.................... $70,663.5 $66,609.9 $60,292.3
===================================================================================================================================
Liabilities
Interest-Bearing Liabilities
Interest Checking............. $11,489.0 $ 311.1 2.71% $ 9,531.2 $ 316.4 3.32% $ 8,553.1 $ 211.2 2.47%
Savings....................... 4,928.4 174.3 3.54 5,798.8 194.0 3.35 6,206.6 187.5 3.02
Money Market.................. 2,551.5 37.5 1.47 939.1 36.8 3.92 1,327.6 50.5 3.80
Other Time Deposits........... 13,473.0 745.3 5.53 13,716.3 760.1 5.54 13,858.0 697.6 5.03
Certificates-$100,000
and Over.................... 3,821.0 187.0 4.89 4,283.0 260.5 6.08 4,196.8 209.5 4.99
Foreign Office Deposits....... 1,992.2 96.4 4.84 3,895.5 251.1 6.45 952.3 49.4 5.19
Federal Funds Borrowed........ 3,681.7 152.6 4.14 4,800.6 299.8 6.24 4,442.6 216.8 4.88
Short-Term Bank Notes......... 9.8 .2 2.13 1,102.5 68.6 6.22 1,053.2 54.7 5.19
Other Short-Term Borrowings... 5,107.6 204.1 4.00 3,821.6 202.3 5.29 3,077.0 140.6 4.57
Long-Term Debt................ 6,301.1 367.3 5.83 4,706.5 303.3 6.44 3,487.3 203.9 5.85
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest-Bearing
Liabilities................... 53,355.3 2,275.8 4.27 52,595.1 2,692.9 5.12 47,154.5 2,021.7 4.29
- -----------------------------------------------------------------------------------------------------------------------------------
Demand Deposits................. 7,394.5 6,257.3 6,078.8
Other Liabilities............... 2,623.0 1,776.3 1,591.5
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities............... 63,372.8 60,628.7 54,824.8
- -----------------------------------------------------------------------------------------------------------------------------------
Minority Interest............... 30.0 -- --
- -----------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity............ 7,260.7 5,981.2 5,467.5
- -----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity.......... $70,663.5 $66,609.9 $60,292.3
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income Margin on
a Taxable Equivalent Basis.... $2,478.5 3.82% $2,301.8 3.74% $2,216.6 3.97%
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Rate Spread........ 3.06% 3.00% 3.29%
- -----------------------------------------------------------------------------------------------------------------------------------
Interest-Bearing Liabilities
to Interest-Earning Assets.... 82.30% 85.49% 84.39%
- -----------------------------------------------------------------------------------------------------------------------------------
37
FIFTH THIRD BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
The following table shows changes in tax-equivalent interest income, interest
expense, and net interest income due to volume and rate variances for major
categories of earning assets and interest bearing liabilities. The change in
interest, not solely due to changes in volume or rates, has been consistently
allocated in proportion to the absolute dollar amount of the change in each.
TABLE 2-ANALYSIS OF NET INTEREST INCOME CHANGES (TAXABLE EQUIVALENT BASIS)
- -----------------------------------------------------------------------------------------------------------------------------------
2001 Compared to 2000 2000 Compared to 1999
------------------------------------------ ----------------------------------------
($ in millions) Volume Yield/Rate Mix Total Volume Yield/Rate Mix Total
- ----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Interest Income
Loans and Leases..................... $ 185.5 $(338.8) $(17.4) $(170.7) 324.3 160.4 16.6 501.3
Securities
Taxable............................ 91.1 (138.7) (10.0) ( 57.6) 121.6 125.3 15.2 262.1
Tax Exempt......................... ( 9.8) 1.2 ( 0.1) ( 8.7) ( 9.0) 7.9 ( 0.7) ( 1.8)
Other Interest-Earning Assets........ 0.1 ( 3.5) -- ( 3.4) ( 7.1) 3.1 ( 1.2) ( 5.2)
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Income Change........... 266.9 (479.8) (27.5) (240.4) 429.8 296.7 29.9 756.4
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Interest Expense
Interest Checking.................... 65.0 ( 58.4) (11.9) ( 5.3) 24.2 72.7 8.3 105.2
Savings.............................. ( 29.2) 11.2 ( 1.7) ( 19.7) ( 12.3) 20.1 ( 1.3) 6.5
Money Market......................... 63.2 ( 23.0) (39.5) 0.7 ( 14.8) 1.6 ( 0.5) ( 13.7)
Other Time Deposits.................. ( 13.5) ( 1.3) -- ( 14.8) ( 7.1) 70.3 ( 0.7) 62.5
CDs greater than $100,000............ ( 28.1) ( 50.9) 5.5 ( 73.5) 4.3 45.8 0.9 51.0
Foreign Deposits..................... (122.8) ( 62.5) 30.6 (154.7) 152.8 11.8 37.1 201.7
Federal Funds Borrowed............... ( 69.8) (100.9) 23.5 (147.2) 17.5 60.6 4.9 83.0
Short-Term Bank Notes................ ( 68.0) ( 45.1) 44.7 ( 68.4) 2.6 10.8 0.5 13.9
Other Short-Term Borrowings.......... 68.0 ( 49.6) (16.6) 1.8 34.0 22.3 5.4 61.7
Long-Term Debt....................... 102.7 ( 29.0) ( 9.7) 64.0 71.3 20.9 7.2 99.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense Change.......... ( 32.5) (409.5) 24.9 (417.1) 272.5 336.9 61.8 671.2
- -----------------------------------------------------------------------------------------------------------------------------------
Increase (Decrease) in Net Interest
Income on a Taxable Equivalent
Basis................................ $ 299.4 $ ( 70.3) $(52.4) $ 176.7 157.3 ( 40.2) (31.9) 85.2
===================================================================================================================================
Increase (Decrease) in Taxable
Equivalent Adjustment................ ( 1.8) 8.5
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income Change............. $ 174.9 93.7
===================================================================================================================================
RESULTS OF OPERATIONS
Summary
On April 2, 2001, the Bancorp acquired Old Kent. Financial data for all prior
periods has been restated to reflect this merger. Compared to the prior year,
net income decreased by 4% in 2001 and increased 20% in 2000. The Bancorp's net
income to average assets, referred to as return on average assets (ROA), and
return on average shareholders' equity (ROE) follow:
- --------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------
Net income ($ in millions).. $1,093.0 1,140.4 946.6 806.9 776.5
Earnings per share (a)...... $ 1.90 2.02 1.68 1.44 1.39
Earnings per diluted
share (a)................. $ 1.86 1.98 1.66 1.42 1.37
ROA (b)..................... 1.97% 1.81 1.74 1.64 1.46
ROE (b)..................... 19.2% 20.2 19.2 18.1 16.6
Efficiency ratio(b) (c)..... 46.9% 48.5 50.3 51.3 51.2
- --------------------------------------------------------------------------------
(a) Per share amounts have been adjusted for the three-for-two stock splits
effected in the form of stock dividends paid July 14, 2000, April 15, 1998
and July 15, 1997.
(b) For comparability, certain financial ratios exclude the impact of 2001
merger charges and a nonrecurring accounting principle change of $394.5
million pretax ($300.3 million after tax, or $.51 per diluted share), 2000
merger-related items of $99 million pretax ($66.6 million after tax, or $.12
per diluted share), 1999 merger-related items of $134.4 million pretax
($101.4 million after tax, or $.18 per diluted share) and 1998 merger-
related items of $166.5 million pretax ($118.4 million after tax, or $.21
per diluted share).
(c) Includes $142.9 million of net realized gains in 2001 on securities sales
from the mortgage servicing rights non-qualifying hedging program.
Net Interest Income
Net interest income is the difference between interest income on earning assets
such as loans, leases and securities, and interest expense paid on liabilities
such as deposits and borrowings, and continues to be the Bancorp's largest
revenue source. Net interest income is affected by the general level of interest
rates, changes in interest rates and by changes in the amount and composition of
interest-earning assets and interest-bearing liabilities. The relative
performance of the lending and deposit-raising functions is frequently measured
by two statistics - net interest margin and net interest rate spread. The net
interest margin is determined by dividing fully-taxable equivalent net interest
income by average interest-earning assets. The net interest rate spread is the
difference between the average fully-taxable equivalent yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities. The net interest margin is generally greater than the net interest
rate spread due to the additional income earned on those assets funded by
non-interest-bearing liabilities, or free funding, such as demand deposits and
shareholders' equity.
Table 1 on page 37, Consolidated Average Balance Sheets and Analysis of Net
Interest Income, presents the net interest income, net interest margin, and net
interest rate spread for the three years 1999 through 2001, comparing interest
income, average interest-bearing liabilities and average free funding
outstanding. Each of these measures is reported on a fully-taxable equivalent
basis. Nonaccrual loans and leases and loans held for sale have been included in
the average loans and lease balances. Average outstanding securities balances
are based upon amortized cost excluding any unrealized gains or losses on
securities available-for-sale.
38
FIFTH THIRD BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
- ----------------------------------------------------------------------------------------------------------
($ in millions) 2001 2000 1999 1998 1997
- ----------------------------------------------------------------------------------------------------------
Electronic payment processing income......................... $ 347.5 251.8 188.7 146.5 115.4
Service charges on deposits.................................. 367.4 298.4 252.4 230.2 198.9
Mortgage banking revenue..................................... 62.7 256.0 289.5 248.3 161.0
Investment advisory income................................... 306.5 281.0 261.5 221.4 174.1
Other service charges and fees............................... 542.2 389.0 338.4 269.3 230.1
- ----------------------------------------------------------------------------------------------------------
Subtotal..................................................... 1,626.3 1,476.2 1,330.5 1,115.7 879.5
- ----------------------------------------------------------------------------------------------------------
Securities gains, net........................................ 28.2 6.2 8.5 49.5 25.3
- ----------------------------------------------------------------------------------------------------------
Securities gains, net: non-qualifying hedges on mortgage
servicing.................................................. 142.9 -- -- -- --
- ----------------------------------------------------------------------------------------------------------
Total........................................................ $1,797.4 1,482.4 1,339.0 1,165.2 904.8
- ----------------------------------------------------------------------------------------------------------
After-tax securities gains, net.............................. $ 21.4 4.2 5.4 32.2 16.5
==========================================================================================================
After-tax securities gains, net: non-qualifying hedges on
mortgage servicing......................................... $ 94.4 -- -- -- --
==========================================================================================================
Net interest income rose 8% to $2.5 billion in 2001 from $2.3 billion in
2000. The improvement in 2001's net interest income was attributable to 5%
growth in average interest-earning assets and an 8 basis points (bps) increase
in net interest margin to 3.82% in 2001 from 3.74% in 2000. This increase in net
interest margin in 2001 compares to a 23 bps decline from 1999 to 2000. The
yield on interest-earning assets declined 79 bps from 2000 due to new loan
growth at lower interest rates and continued asset repricing. The average yield
on loans and leases was down 79 bps and the yield on taxable securities was down
81 bps. The negative effects of lower asset yields was offset by an 85 bps
decrease in the cost of interest-bearing liabilities resulting from faster
repricing of borrowed funds at lower interest rates and an improvement in the
mix of interest-bearing liabilities from 2000. The cost of borrowed funds,
including foreign office deposits, federal funds borrowed, short-term bank
notes, other short-term borrowings and long-term debt decreased by 134 bps in
2001, to 4.8%, from 6.1% in 2000. The positive contribution of free funding to
the net interest margin was 76 bps in 2001 versus 74 bps in 2000, largely as a
result of a $1.1 billion increase in average demand deposits.
Average interest-earning assets increased by 5% to $64.8 billion in 2001, an
increase of $3.3 billion from 2000. During 2000, interest-earning assets grew by
10% over the prior year. In 2001, sales (including branch divestitures) of loans
and leases totaled approximately $11.6 billion compared to $13.4 billion in
2000. Additionally, the Bancorp securitized $1.4 billion and $1.6 billion of
residential mortgage loans in 2001 and 2000, respectively. The Bancorp continues
to use loan sales and securitizations to manage the composition of the balance
sheet and to improve balance sheet liquidity. Sales and securitizations permit
the Bancorp to grow the origination and servicing functions and to increase fee
income without increasing capital leverage.
Average interest-bearing liabilities grew to $53.4 billion during 2001, an
increase of 1% over the $52.6 billion average in 2000.
- --------------------------------------------------------------------------------
($ in millions) 2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------
Salaries, wages and incentives... $ 845.2 783.2 763.0 693.3 610.0
Employee benefits................ 148.5 144.7 142.3 131.6 126.2
Equipment expenses............... 97.3 99.8 98.3 91.2 81.6
Net occupancy expenses........... 146.2 137.6 131.2 120.4 113.6
Other operating expenses......... 755.6 666.5 649.6 585.1 532.3
- --------------------------------------------------------------------------------
Total operating expenses......... 1,992.8 1,831.8 1,784.4 1,621.6 1,463.7
- --------------------------------------------------------------------------------
Merger-related charges........... 348.6 87.0 108.1 146.3 --
- --------------------------------------------------------------------------------
Total............................ $2,341.4 1,918.8 1,892.5 1,767.9 1,463.7
- --------------------------------------------------------------------------------
OTHER OPERATING INCOME ($ in millions)
Five Year Growth Rate 19%
[CHART]
1997 1998 1999 2000 2001
$904.8 $1,165.2 $1,339.0 $1,482.4 $1,797.4
OPERATING EARNINGS PER EMPLOYEE*
($ in thousands)
Five Year Growth Rate 14%
[CHART]
1997 1998 1999 2000 2001
$39.31 $45.41 $49.22 $58.98 $75.84
EFFICIENCY RATIO*
[CHART]
1997 1998 1999 2000 2001**
51.2% 51.3% 50.3% 48.5% 46.9%
* For comparability, certain financial ratios and statistics exclude the impact
of the 2001 merger-related charges and nonrecurring accounting principle change
of $394.5 million pretax ($300.3 million after tax, or $.51 per diluted share),
2000 merger-related charges of $99 million pretax ($66.6 after tax, or $.12 per
diluted share), 1999 merger-related charges of $134.4 million pretax ($101.4
million after tax, or $.18 per diluted share), 1998 merger-related charges of
$166.5 million pretax ($118.4 million after tax, or $.21 per diluted share).
**Includes $142.9 million of net realized gains in 2001 on securities sales from
the mortgage servicing rights non-qualifying hedging program.
39
FIFTH THIRD BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Core deposits (which excludes time deposits, certificates of deposit with
balances greater than $100,000 and foreign office deposits) increased $3.8
billion, or 17%, over 2000 and remain the Bancorp's most important and lowest
cost source of funding.
Other Operating Income
The table at the top of page 39 shows the components of other operating income
for the five years ended December 31, 2001. Total other operating income,
excluding securities gains, increased 10% in 2001 and 11% in 2000, reflecting
solid growth across both traditional and non-banking business lines.
Electronic payment processing income increased 38% in 2001 and 33% in 2000
due to higher electronic transfer volume from debit and ATM card usage,
expansion of business-to-business e-commerce, new sales and the acquisition of
USB, a merchant processor. Excluding the impact of the USB acquisition,
electronic payment processing revenue increased 32%. Merchant processing
revenues increased 32% this year and 30% in 2000 due to the addition of new
customers and resulting increases in merchant transaction volumes coupled with
the $15 million in revenues added by the acquisition of USB. Electronic funds
transfer revenues grew by 44% this year and 38% in 2000 fueled by higher debit
and ATM card usage. MPS handled over 6.6 billion electronic transactions in 2001
compared to 4.8 billion in 2000, and its world-class capabilities as a
transaction processor position the Bancorp well to take advantage of the
opportunities of e-commerce.
Service charges on deposits reached $367.4 million in 2001, an increase of
23% over 2000's $298.4 million. Service charges on deposits increased 18% in
2000. The growth in both years was fueled by the expansion of delivery systems,
successful sales campaigns promoting retail and commerical deposit accounts and
the introduction of new cash management products for commercial customers.
Retail service charges on deposits increased 18% while commercial service
charges increased 25% in 2001.
Investment advisory service income was $306.5 million in 2001, up from $281.0
million in 2000. Fifth Third continues to be one of the largest money managers
in the Midwest and as of December 31, 2001, had over $188 billion in assets
under care, $34 billion in assets under management and $12 billion in its
proprietary Fifth Third Funds. Overcoming the weak market conditions of 2001
which adversely affected the fees generated based on market value, investment
advisory service income grew 9% primarily as a result of increasing brokerage
revenues and growth in private client services. Growth in Fifth Third
Securities, corporate trust and institutional services led to 7% investment
advisory income growth in 2000.
Mortgage banking revenue was $62.7 million in 2001, a 75% decrease from 2000.
This decline in revenue between years was due to continued declines in interest
rates during 2001 and corresponding anticipated increases in prepayment speeds
that resulted in $199.2 million in impairment to the mortgage servicing rights
portfolio compared to $9.4 million in 2000. The Bancorp hedged the interest rate
risk on mortgage servicing rights primarily through an on-balance sheet strategy
that included the purchase of various securities classified as available-for-
sale on the Consolidated Balance Sheet as of December 31, 2001. Throughout the
year, certain of these securities were sold resulting in net realized gains of
$142.9 million. Including these gains, mortgage banking revenue was $205.6
million for 2001 representing a 20% decline from 2000. In-footprint residential
mortgage loan originations increased to $8.5 billion in 2001, or 105% from 2000,
primarily due to changes in the interest rate environment, and gains on sales of
residential mortgages, including the portion related to servicing rights,
increased 23% from 2000. Out-of-footprint residential mortgage loan originations
also contributed to 2001 mortgage banking revenue and increased to $9.3 billion
from $8.2 billion in 2000. Mortgage banking revenue in future periods is
expected to remain at levels below prior periods due to the divestiture in the
third quarter of 2001 of out-of-market origination capacity. Fifth Third's total
residential mortgage loan servicing portfolio was $36.1 billion at year-end
2001, with $31.6 billion of loans serviced for other investors, compared to
$34.5 billion, with $28.8 billion serviced for other investors at the end of
2000.
In 2000, mortgage banking revenue declined 12% to $256 million due to lower
residential mortgage loan originations primarily caused by changes in the
interest rate environment and a decrease in the gain on sales of residential
mortgage loans.
Total other service charges and fees climbed to $542.2 million in 2001, an
increase of 39% over 2000. Commercial banking income, cardholder fees, consumer
loan and lease fees and bank owned life insurance (BOLI) represent the majority
of other service charges and fees.
The commercial banking revenue component of other service charges and fees
grew 46% to $125.1 million in 2001, led by international department revenue
which included foreign currency exchange, letters of credit and trade financing.
Commercial revenues continued to increase as a result of successful sales of
commercial deposit relationships and the introduction of new products. Consumer
loan and lease fees contributed $58.9 million, up 21%
Loan and Lease Portfolio (includes Loans Held for Sale)
- --------------------------------------------------------------------------------
- -----------------------------------------------------------------------------------------------------------------
2001 2000 1999 1998 1997
----------------- ----------------- ----------------- ----------------- -----------------
($ in millions) Amount % Amount % Amount % Amount % Amount %
- -----------------------------------------------------------------------------------------------------------------
Commercial:
Commercial...... $10,908.5 24.9% $10,734.3 24.3% $10,001.8 25.0% $ 9,151.4 24.7% $ 8,858.0 25.0%
Mortgage........ 6,085.1 13.9 6,226.8 14.1 5,640.0 14.1 4,424.5 12.0 3,948.1 11.1
Construction.... 3,356.2 7.7 3,222.6 7.3 2,272.2 5.7 1,662.0 4.5 1,465.6 4.1
Leases.......... 2,487.1 5.7 2,571.3 5.8 2,105.7 5.2 1,629.8 4.4 1,382.6 3.9
- -----------------------------------------------------------------------------------------------------------------
Subtotal.......... 22,836.9 52.2 22,755.0 51.5 20,019.7 50.0 16,867.7 45.6 15,654.3 44.1
- -----------------------------------------------------------------------------------------------------------------
Consumer:
Installment..... 12,138.1 27.8 11,249.5 25.5 8,757.1 21.9 6,931.1 18.8 6,616.2 18.6
Mortgage........ 6,562.5 15.0 7,166.6 16.2 7,749.9 19.3 10,569.6 28.6 10,907.9 30.7
Credit Card..... 448.2 1.0 360.6 .8 318.0 .8 344.7 .9 379.6 1.1
Leases.......... 1,742.3 4.0 2,653.7 6.0 3,190.3 8.0 2,263.6 6.1 1,938.5 5.5
- -----------------------------------------------------------------------------------------------------------------
Subtotal.......... 20,891.1 47.8 21,430.4 48.5 20,015.3 50.0 20,109.0 54.4 19,842.2 55.9
- -----------------------------------------------------------------------------------------------------------------
Total............. $43,728.0 100.0% $44,185.4 100.0% $40,035.0 100.0% $36,976.7 100.0% $35,496.5 100.0%
- -----------------------------------------------------------------------------------------------------------------
40
FIFTH THIRD BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
due to an increase in direct installment loan originations; cardholder fees from
the credit card portfolio provided $49.7 million, an increase of 19% over 2000
due to an overall increase in credit card accounts; and income from BOLI
provided $52.2 million and $43.2 million in 2001 and 2000, respectively. In
addition, other service charges and fees in 2001 included a gain of $42.7
million on the sale of eleven branches in Arizona. Other service charges and
fees were $164.5 million in 2001, compared to $121.3 million in 2000, an
increase of 36%.
The commercial banking revenue component of other service charges and fees of
$86.0 million in 2000 represented an increase of 28% over 1999 and resulted
primarily from growth in international department revenue. Consumer loan and
lease fees decreased 15% to $48.9 million in 2000, compared to $57.4 million in
1999 and cardholder fees provided $41.8 million, up 1%. Other service charges
and fees were $121.3 million in 2000, compared to $111.6 million in 1999, an
increase of 9%.
Operating Expenses
The Bancorp's proven expense discipline continues to drive its efficiency ratio
to levels well below its peer group and the banking industry through the
consistent generation of revenue at a rate faster than expenses. The Bancorp's
success in controlling operating expenses comes from efficient staffing, a
constant focus on process improvement and centralization of various internal
functions such as data processing, loan servicing and corporate overhead
functions.
Operating expense levels are often measured using an efficiency ratio
(operating expenses divided by the sum of taxable equivalent net interest income
and other operating income including securities gains from the mortgage
servicing rights non-qualifying hedging program). As the chart on page 39
illustrates, the Bancorp's ratio has remained well below our peers, at 46.9% for
2001 and 48.5% for 2000. Total operating expenses increased 9% in 2001 and 3% in
2000, excluding merger-related charges of $348.6 million and $87.0 million,
respectively. Salaries, wages and incentives comprised 42% and 43% of total
operating expenses, excluding merger-related charges, in 2001 and 2000,
respectively. Compensation increased 8% in 2001 and 3% in 2000 as a result of
more variable compensation for increased sales production, acquisitions and
additional personnel to support sales and volume-related business. The Bancorp's
productivity ratios, which measure the degree of efficiency of our employees,
have shown improvement since 1997. Operating earnings per employee were $71.8
thousand for 2001, compared to $40.4 thousand in 1997, a compounded annual
growth rate of 14% as the chart on page 39 illustrates. Employee benefits
expense increased 3% in 2001 resulting primarily from the increased expense from
retirement plans. Full-time-equivalent (FTE) employees were 18,373 at December
31, 2001, down from a peak of 21,290 at December 31, 1999 and 20,468 at December
31, 2000.
Equipment expense decreased 3% in 2001 due to dispositions related to the Old
Kent acquisition, while the addition of ATMs and software and processing
technology upgrades led to an increase of 1% in equipment expense in 2000. Net
occupancy expenses increased 6% in 2001 and 5% in 2000. Contributing to net
occupancy expense growth was the utilization of additional office rental space
to support growth and repairs and maintenance expense to the existing branch
network.
Volume-related expenses and higher loan and lease processing costs from
strong origination volumes in our processing and fee businesses contributed to
the increases in 2001 and 2000 other operating expenses. Other operating
expenses increased to $755.6 million in 2001, up $89.1 million or 13% over 2000
and increased $16.8 million or 3% in 2000 over 1999. This increase was primarily
due to the increase in loan and lease expense, bankcard expense, and marketing
and communication expense. Loan and lease and bankcard expense increased $54.7
million or 49% in 2001 and $10.9 million or 11% in 2000 due to strong
origination volumes. Marketing and communications expense increased $6.9 million
to $135.7 million in 2001 and increased $3.3 million in 2000, primarily due to
the continued promotion of the Bancorp's diversified loan, investment and
deposit products.
Total operating expenses for 2001 and 2000 include pretax merger-related
charges of $348.6 million and $87.0 million, respectively. For 2001, the merger
charge relates directly to the acquisition of Old Kent. These charges consist of
employee severance and benefit obligations, professional fees, costs to
eliminate duplicate facilities and equipment, conversion expenses and
divestiture and shutdown charges (including losses incurred on the sale of Old
Kent's out-of-market mortgage operations and a loss incurred on the sale of Old
Kent's subprime mortgage lending portfolio in order to align Old Kent with the
Bancorp's asset/liability management policies). For 2000, the merger charge
relates to Grand Premier, Merchants and additional charges incurred in
connection with the integration of CNB. These charges consist primarily of
employee severance and benefit obligations, costs to eliminate duplicate
facilities and equipment, contract terminations, conversion expenses,
professional
RESERVE FOR CREDIT LOSSES FIVE YEAR HISTORY
- ------------------------------------------------------------------------------------------------------------------------------
($ in millions) 2001 2000 1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
Balance at January 1 ................................. $ 609.3 572.9 532.2 509.2 483.6
Provision for credit losses .......................... 200.6 125.7 143.2 156.2 176.6
Merger-related provision for credit losses ........... 35.4 12.0 26.2 20.2 --
Losses charged off ................................... (308.6) (175.8) (209.3) (204.6) (196.5)
Recoveries of losses previously charged off .......... 81.5 67.1 67.7 54.9 48.8
Reserve of acquired institutions and other ........... 5.9 7.4 12.9 (3.7) (3.3)
- ------------------------------------------------------------------------------------------------------------------------------
Balance at December 31 ............................... $ 624.1 609.3 572.9 532.2 509.2
==============================================================================================================================
Loans and leases outstanding at December 31 .......... $41,547.9 $42,530.4 $38,836.6 $34,115.4 $33,906.1
Reserve as a percent of loans and leases
outstanding ........................................ 1.50% 1.43% 1.48% 1.56% 1.50%
Average loans and leases (a) ......................... $42,339.1 $41,303.0 $36,542.7 $33,930.0 $32,790.0
Net charge-offs as a percent of average loans
and leases outstanding (b) ......................... .45% .23% .32% .38% .45%
Reserve as a percent of total nonperforming assets ... 265% 304% 371% 301% 250%
Reserve as a percent of total underperforming
assets ............................................. 156% 185% 241% 189% 183%
==============================================================================================================================
(a) Average loans and leases exclude loans held for sale.
(b) Excludes merger-related provision for credit losses.
41
FIFTH THIRD BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
fees and securities losses realized in realigning the balance sheet. See Note 20
of the Notes to Consolidated Financial Statements for additional discussion. In
addition, the Bancorp incurred $35.4 million and $12.0 million of credit quality
charges in 2001 and 2000, respectively, to conform acquired entities commercial
and consumer loans to the Bancorp's credit policies.
Financial Condition
Loans and Leases
The table on page 40 shows the history of commercial and consumer loans and
leases by major category at December 31.
On-balance sheet loan and leases decreased 1% and increased 10%,
respectively, in 2001 and 2000. In 2001, the level of outstandings was affected
considerably by sales and securitizations (including branch divestitures) of
approximately $13.0 billion. Although in-footprint residential mortgage loan
originations were $8.5 billion for 2001, the related loans decreased 8% because
$13.0 billion of the respective origination volume was sold or securitized.
Installment loan balances grew 8% during 2001 and 28% during 2000, as a result
of successful direct installment loan sales in the Bancorp's Banking Centers.
Consumer leases decreased 34% during 2001, reflecting the effect of selling,
with servicing retained, $1.4 billion of leases during the year. Consumer leases
decreased 17% in 2000, due to the sale, with servicing retained, of $1 billion
of leases during the year, and represent 4% and 6% of total loans and leases at
December 31, 2001 and 2000, respectively.
Commercial loan and lease outstandings were up .4% in 2001 and 14% in 2000.
To maintain balance sheet flexibility and to serve as a source of fee income,
the Bancorp, during 2001 and 2000 transferred, with servicing retained, certain
fixed-rate, short-term investment grade commercial loans to an unconsolidated
QSPE. The outstanding balances of these loans were $2.0 billion and $1.9 billion
at December 31, 2001 and 2000, respectively.
In addition to the loan and lease portfolio, the Bancorp serviced loans and
leases for others totaling approximately $38.0 billion and $33.9 billion at
December 31, 2001 and 2000, respectively.
Securities
The investment portfolio consists largely of fixed and floating-rate mortgage-
related securities, predominantly underwritten to the standards of and
guaranteed by the government-sponsored agencies of FHLMC, FNMA and GNMA. These
securities differ from traditional debt securities primarily in that they have
uncertain maturity dates and are priced based on estimated prepayment rates on
the underlying mortgages. The estimated average life of the portfolio is 6.1
years based on current prepayment expectations.
SECURITIES PORTFOLIO AT DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------
($ in millions) 2001 2000 1999 1998 1997
- ---------------------------------------------------------------------------------------------------------------------
Securities Available-for-Sale:
U.S. Treasury........................................ $ 124.8 197.9 368.0 918.2 1,178.2
- ---------------------------------------------------------------------------------------------------------------------
U.S. Government agencies and corporations............ 1,762.4 1,240.0 1,020.4 815.9 979.3
- ---------------------------------------------------------------------------------------------------------------------
States and political subdivisions.................... 1,175.6 903.5 934.2 967.3 563.7
- ---------------------------------------------------------------------------------------------------------------------
Agency mortgage-backed securities.................... 14,615.5 13,940.0 11,409.8 11,033.0 9,373.8
- ---------------------------------------------------------------------------------------------------------------------
Other bonds, notes and debentures.................... 2,134.4 1,956.6 1,866.7 1,308.8 998.1
- ---------------------------------------------------------------------------------------------------------------------
Other securities..................................... 693.9 790.8 326.2 541.0 461.9
- ---------------------------------------------------------------------------------------------------------------------
Securities Held-to-Maturity:
U.S. Treasury........................................ -- -- 3.0 26.3 85.9
- ---------------------------------------------------------------------------------------------------------------------
U.S. Government agencies and corporations............ -- -- 27.5 156.0 381.1
- ---------------------------------------------------------------------------------------------------------------------
States and political subdivisions.................... -- 475.4 599.4 526.1 503.1
- ---------------------------------------------------------------------------------------------------------------------
Agency mortgage-backed securities.................... -- -- 87.1 154.2 924.1
- ---------------------------------------------------------------------------------------------------------------------
Other bonds, notes and debentures.................... -- 44.7 10.9 28.9 135.3
- ---------------------------------------------------------------------------------------------------------------------
Other securities..................................... 16.4 32.5 10.5 34.2 36.5
=====================================================================================================================
MATURITIES OF SECURITIES AT DECEMBER 31, 2001
- ----------------------------------------------------------------------------------------------------------------------------------
Maturity 1-5 Year 6-10 Year Over 10
Under 1 Year Maturity Maturity Year Maturity Total
---------------- ------------------ ----------------- -------------------------------------
($ in millions) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- ----------------------------------------------------------------------------------------------------------------------------------
Securities Available-for-Sale:
U.S. Treasury................. $-- --% $118.0 4.46% $6.8 5.62% $-- --% $124.8 4.52%
- ----------------------------------------------------------------------------------------------------------------------------------
U.S. Government agencies
and corporations............ -- -- 30.6 4.73 1,693.2 5.78 38.6 7.20 1,762.4 5.86
- ----------------------------------------------------------------------------------------------------------------------------------
States and political
subdivisions (a)............ 23.8 8.46 72.8 8.37 985.4 7.75 93.6 7.81 1,175.6 7.81
- ----------------------------------------------------------------------------------------------------------------------------------
Agency mortgage-backed
securities (b).............. 198.0 5.67 11,281.9 6.45 3,135.6 5.95 -- -- 14,615.5 6.33
- ----------------------------------------------------------------------------------------------------------------------------------
Other bonds, notes and
debentures (c).............. 126.1 6.56 1,994.8 6.52 -- -- 13.5 5.53 2,134.4 6.52
==================================================================================================================================
Maturities of mortgage-backed securities were estimated based on historical and
predicted prepayment trends.
(a) Taxable-equivalent yield using the statutory rate in effect.
(b) Included in agency mortgage-backed securities available-for-sale are
floating-rate securities totaling $794.1 million.
(c) Included in other bonds, notes and debentures available-for-sale are
floating-rate securities totaling $58.2 million.
42
FIFTH THIRD BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
The Bancorp securitized $1.4 billion of fixed and adjustable-rate residential
mortgages in 2001 and $1.6 billion in 2000. These securitizations improve
liquidity, reduce interest rate risk and the reserve for credit losses and
preserve capital. Further securitizations in 2002 are expected.
Underperforming Assets
Underperforming assets consist of (1) nonaccrual loans and leases on which the
ultimate collectibility of the full amount of interest is uncertain, (2) loans
and leases which have been renegotiated to provide for a reduction or deferral
of interest or principal because of a deterioration in the financial position of
the borrower, (3) loans and leases past due 90 days or more as to principal or
interest and (4) other real estate owned. A summary of underperforming assets at
December 31 follows:
- --------------------------------------------------------------------------------
($ in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Nonaccrual loans and leases............................ $216.0 174.2 133.2
Renegotiated loans and leases.......................... -- 1.6 2.2
Other real estate owned................................ 19.1 24.7 19.1
- --------------------------------------------------------------------------------
Total nonperforming assets............................. 235.1 200.5 154.5
Ninety days past due loans and leases.................. 163.7 128.5 83.1
- --------------------------------------------------------------------------------
Total underperforming assets........................... $398.8 329.0 237.6
================================================================================
Nonperforming assets as a percent
of total loans, leases and other
real estate owned................................... .57% .47 .40
Underperforming assets as a
percent of total loans, leases
and other real estate owned......................... .96% .77 .61
================================================================================
The portfolio breakout of nonaccrual loans and leases and ninety days past
due loans and leases as of December 31 follows:
- --------------------------------------------------------------------------------
($ in millions) 2001 2000 1999
- --------------------------------------------------------------------------------
Commercial loans and leases........................... $122.2 73.6 52.9
Commercial mortgages.................................. 57.3 42.0 24.9
Construction and land development..................... 25.8 10.9 4.0
Residential mortgages................................. 10.6 41.9 48.3
Installment loans..................................... .1 5.8 3.1
- --------------------------------------------------------------------------------
Total non-accrual loans and leases.................... $216.0 174.2 133.2
================================================================================
Commercial loans and leases........................... $25.0 30.7 21.1
Commercial mortgages.................................. 24.1 6.0 5.0
Credit card receivables............................... 7.3 5.5 4.9
Residential mortgages................................. 56.1 49.4 36.6
Installment loans and consumer leases................. 51.2 36.9 15.5
- --------------------------------------------------------------------------------
Total ninety days past due
loans and leases................................... $163.7 128.5 83.1
================================================================================
Of the total underperforming assets at December 31, 2001, $208.2 million are
to borrowers or projects in the Ohio market area, $69.0 million in the Illinois
market area, $62.9 million in the Michigan market area, $40.7 million in the
Indiana market area, $16.1 million in the Kentucky market area, and $1.9 million
in the Florida market area.
The Bancorp's long history of low exposure limits, avoidance of national or
subprime lending businesses, centralized risk management and diversified
portfolio provide an effective position to weather an economic downturn and
reduce the likelihood of significant future unexpected credit quality losses.
Provision And Reserve For Credit Losses
The Bancorp provides as an expense an amount for expected credit losses which is
based on the growth of the loan and lease portfolio and on recent loss
experience. The expected credit loss expense is included in the Consolidated
Statements of Income in provision for credit losses. Actual losses on loans and
leases are charged against the reserve for credit losses on the Consolidated
Balance Sheets through the provision for credit losses. The amount of loans and
leases actually removed as assets from the Consolidated Balance Sheets is
referred to as charge-offs and, after netting out recoveries on previously
charged off assets, becomes net charge-offs. See Note 1 of the Notes to the
Consolidated Financial Statements for additional discussion.
Net charge-offs increased $118.4 million from 2000 due to higher charge-offs
on commercial loans and leases and consumer loans and leases. This increase in
net charge-offs was directly attributable to the challenges of an uncertain
economic environment during 2001 which caused an increase in underperforming
assets. Net charge-offs as a percent of average loans and leases outstanding
were .45%, .23% and .32% for 2001, 2000 and 1999, respectively. The reserve for
credit losses as a percentage of total loans and leases was 1.50% and 1.43% at
December 31, 2001 and 2000, respectively.
The table on page 41 presents credit loss data for the most recent five-year
period.
Deposits
Interest-earning assets are funded primarily by core deposits. The accompanying
tables show the relative composition of the Bancorp's average deposits and the
change in average deposit sources during the last five years. Other time
deposits are comprised of consumer certificates of deposit. Foreign office
deposits are denominated in amounts greater than $100,000.
The Bancorp continued its focus on growing Retail and Commercial transaction
deposits in 2001. Average interest checking and demand deposit balances rose 21%
and 18%, respectively, from 2000 average balances. Overall, the new e53 Checking
product along with existing Totally Free Checking, Platinum One, MaxSaver and
Business 53 products produced a 26% increase in average transaction account
balances from 2000 average balances.
Distribution of Average Deposits
- --------------------------------------------------------------------------------
2001 2000 1999 1998 1997
- --------------------------------------------------------------------------------
Demand................................ 16.2% 14.1 14.8 14.2 12.7
Interest checking..................... 25.2 21.5 20.8 17.7 16.0
Savings............................... 10.8 13.1 15.1 15.9 11.8
Money market.......................... 5.5 2.1 3.2 3.7 6.5
Other time............................ 29.5 30.9 33.7 38.1 41.1
Certificates-$100,000 and over........ 8.4 9.5 10.1 9.7 10.8
Foreign office........................ 4.4 8.8 2.3 .7 1.1
================================================================================
Total 100.0% 100.0 100.0 100.0 100.0
================================================================================
Change in Average Deposit Sources
- -------------------------------------------------------------------------------------------------
($ in millions) 2001 2000 1999 1998 1997
- -------------------------------------------------------------------------------------------------
Demand............................ $1,137.2 178.5 452.0 694.9 439.3
Interest checking................. 1,957.8 978.1 1,522.5 821.7 650.4
Savings........................... (870.4) (407.9) (125.0) 1,783.7 311.2
Money market...................... 1,612.4 (388.5) (143.4) (1,037.2) (400.6)
Other time........................ (243.3) (141.7) (1,258.9) (770.3) 716.6
Certificates-$100,000 and over.... (462.0) 86.2 340.5 (316.9) (13.1)
Foreign office.................... (1,903.3) 2,943.2 682.5 (170.8) (128.5)
- -------------------------------------------------------------------------------------------------
Total change...................... $1,228.4 3,247.9 1,470.2 1,005.1 1,575.3
=================================================================================================
43
FIFTH THIRD BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
Short-Term Borrowings
Short-term borrowings consist primarily of short-term excess funds from
correspondent banks, securities sold under agreements to repurchase, short-term
bank notes and commercial paper issuances. Short-term borrowings primarily fund
short-term, rate-sensitive earning-asset growth. Average short-term borrowings
as a percentage of average interest-earning assets decreased from 16% in 2000 to
14% in 2001, reflecting the Bancorp's continued success in attracting deposit
accounts and utilizing them to fund a relatively higher proportion of
interest-earning assets. As the following table of average short-term borrowings
and average Federal funds loaned indicates, the Bancorp was a net borrower of
$8.7 billion in 2001, down from $9.6 billion in 2000.
Average Short-Term Borrowings
- ----------------------------------------------------------------------------------
($ in millions) 2001 2000 1999 1998 1997
==================================================================================
Federal funds
borrowed ........... $3,681.7 4,800.6 4,442.6 3,401.3 2,398.0
Short-term
bank notes .......... 9.8 1,102.5 1,053.2 1,184.6 1,249.0
Other short-term
borrowings .......... 5,107.6 3,821.6 3,077.0 2,509.5 2,466.1
- ----------------------------------------------------------------------------------
Total short-term
borrowings .......... 8,799.1 9,724.7 8,572.8 7,095.4 6,113.1
- ----------------------------------------------------------------------------------
Federal funds
loaned .............. 68.8 117.5 223.4 241.0 326.9
- ----------------------------------------------------------------------------------
Net funds
borrowed ............ $8,730.3 9,607.2 8,349.4 6,854.4 5,786.2
==================================================================================
Capital Resources
The Bancorp maintains a relatively high level of capital as a margin of safety
for its depositors and shareholders. At December 31, 2001, shareholders' equity
was $7.6 billion compared to $6.7 billion at December 31, 2000, an increase of
$977 million, or 15%.
The Bancorp and each of its subsidiaries had Tier 1, total capital and
leverage ratios above the well-capitalized levels at December 31, 2001 and 2000.
The Bancorp expects to maintain these ratios above the well capitalized levels
in 2002.
The following table shows several capital and liquidity ratios for the last
three years:
- -----------------------------------------------------------------------
2001 2000 1999
=======================================================================
Average shareholders' equity to
Average assets .......................... 10.28% 8.98 9.07
Average deposits ........................ 15.91% 13.47 13.28
Average loans and leases ................ 16.18% 14.01 14.15
=======================================================================
Liquidity and Market Risk
The objective of the Bancorp's asset/liability management function is to
maintain consistent growth in net interest income within the Bancorp's policy
limits. This objective is accomplished through management of the Bancorp's
balance sheet composition, liquidity, and interest rate risk exposures arising
from changing economic conditions, interest rates and customer preferences.
The goal of liquidity management is to provide adequate funds to meet
changes in loan and lease demand or unexpected deposit withdrawals. This is
accomplished by maintaining liquid assets in the form of investment securities,
maintaining sufficient unused borrowing capacity in the national money markets
and delivering consistent growth in core deposits. As of December 31, 2001, the
Bancorp had approximately $1.2 billion in securities and other short-term
investments maturing or repricing within one year. Additional asset-driven
liquidity is provided by the remainder of the securities portfolio and
securitizable loan and lease assets. These sources, in addition to the Bancorp's
10% average equity capital base, provide a stable funding base.
In addition to core deposit funding, the Bancorp also accesses a variety of
other short-term and long-term funding sources. The Bancorp also uses the
Federal Home Loan Bank (FHLB) as a funding source, issuing notes payable through
its FHLB member subsidiaries. The Bancorp also has significant unused funding
capacity in the national money markets. The Bancorp's A-1+/Prime-1 ratings on
its commercial paper and AA-/Aa3 ratings for its senior debt, along with the
AA-/Aa2 long-term deposit ratings of Fifth Third Bank (Ohio); Fifth Third Bank,
Michigan; Fifth Third Bank, Indiana; Fifth Third Bank, Kentucky, Inc.; and Fifth
Third Bank, Northern Kentucky, continue to be among the best in the industry.
The continued confidence of the rating agencies has been demonstrated by the
affirmation of our ratings by all major rating agencies following the completion
of the Old Kent acquisition. These ratings, along with capital ratios
significantly above regulatory guidelines, provide the Bancorp with additional
liquidity. Management does not rely on any one source of liquidity and manages
availability in response to changing balance sheet needs. Given the continued
strength of the balance sheet, stable credit quality, risk management policies
and revenue growth trends, management does not expect any downgrade in the
credit ratings in the upcoming year.
Management considers interest rate risk the Bancorp's most significant
market risk. Interest rate risk is the exposure to adverse changes in net
interest income due to changes in interest rates. Consistency of the Bancorp's
net interest revenue is largely dependent upon the effective management of
interest rate risk.
The Bancorp employs a variety of measurement techniques to identify and
manage its interest rate risk including the use of an earnings simulation model
to analyze net interest income sensitivity to changing interest rates. The model
is based on actual cash flows and repricing characteristics for on and off-
balance sheet instruments and incorporates market-based assumptions regarding
the effect of changing interest rates on the prepayment rates of certain assets
and liabilities. The model also includes senior management projections for
activity levels in each of the product lines offered by the Bancorp. Assumptions
based on the historical behavior of deposit rates and balances in relation to
changes in interest rates are also incorporated into the model. These
assumptions are inherently uncertain, and as a result, the model cannot
precisely measure net interest income or precisely predict the impact of
fluctuations in interest rates on net interest income. Actual results will
differ from simulated results due to timing, magnitude, and frequency of
interest rate changes as well as changes in market conditions and management
strategies.
The Bancorp's Asset/Liability Management Committee (ALCO), which includes
senior management representatives and reports to the Board of Directors,
monitors and manages interest rate risk within Board-approved policy limits. The
Bancorp's current interest rate risk policy limits are determined by measuring
the anticipated change in net interest income over a 12- and 24-month horizon
assuming a 200 basis point linear increase or decrease in all interest rates.
Current policy limits this exposure to plus or minus 7% of net interest income
for a 12-month and a 24-month horizon.
44
FIFTH THIRD BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
The following table shows the Bancorp's estimated earnings sensitivity
profile as of December 31, 2001:
Change in Percentage Change in
Interest Rates Net Interest Income
(basis points) 12 Months 24 Months
- --------------------------------------------------------------------------------
+200 (0.1)% 1.2%
-175 (1.0)% (6.5)%
- --------------------------------------------------------------------------------
Given a linear 200 bp increase in the yield curve used in the simulation
model, it is estimated net interest income for the Bancorp would decrease by .1%
over one year and increase by 1.2% over two years. A 175 bp linear decrease in
interest rates would decrease net interest income by 1.0% over one year and an
estimated 6.5% over two years. Given the current fed funds rate of 1.75% at
December 31, 2001, a linear 175 bp decrease was modeled in the estimated
earnings sensitivity profile in place of the linear 200 bp decrease in
accordance with the Bancorp's interest rate risk policy. All of these estimated
changes in net interest income are within the policy guidelines established by
the Board of Directors. Management does not expect any significant adverse
effect to net interest income in 2002 based on the composition of the portfolio
and anticipated trends in rates.
In order to reduce the exposure to interest rate fluctuations and to manage
liquidity, the Bancorp has developed securitization and sale procedures for
several types of interest-sensitive assets. All long-term, fixed-rate single
family residential mortgage loans underwritten according to Federal Home Loan
Mortgage Corporation or Federal National Mortgage Association guidelines are
sold for cash upon origination. Periodically, additional assets such as
adjustable-rate residential mortgages, certain consumer leases and certain
short-term commercial loans are also securitized, sold or transferred off
balance sheet. In 2001 and 2000, a total of $12.0 billion and $15.6 billion,
respectively, were sold, securitized, or transferred off balance sheet
(excluding $1.2 billion of divestiture related sales in 2001).
Management focuses its efforts on consistent net interest revenue and net
interest margin growth through each of the retail and wholesale business lines.
Foreign Currency Exposure
At December 31, 2001 and 2000, the Bancorp maintained foreign office deposits of
$1.2 billion and $4.7 billion, respectively. These foreign deposits represent
U.S. dollar denominated deposits in the Bancorp's foreign branch located in the
Cayman Islands. Balances decreased from the prior year as the Bancorp utilized
the increase in core deposits and fed funds at lower rates to improve net
interest margin. In addition, the Bancorp enters into foreign exchange
derivative contracts for the benefit of customers involved in international
trade to hedge their exposure to foreign currency fluctuations. Generally, the
Bancorp enters into offsetting third-party forward contracts with approved
reputable counter-parties with matching terms and currencies that are generally
settled daily.
Off-Balance Sheet and Certain Trading Activities
The Bancorp does not participate in any trading activities involving commodity
contracts that are accounted for at fair value. In addition, the Bancorp has no
fair value contracts for which a lack of marketplace quotations necessitates the
use of fair value estimation techniques. The Bancorp's off balance sheet
derivative product policy and investment policies provide a framework within
which the Bancorp and its affiliates may use certain authorized financial
derivatives as an asset/liability management tool in meeting ALCO capital
planning directives, to hedge changes in fair value of its fixed rate mortgage
servicing rights portfolio or to provide qualifying customers access to the
derivative products market. These policies are reviewed and approved annually by
the Audit Committee and the Board of Directors.
As part of the Bancorp's ALCO management, the Bancorp may transfer, subject
to credit recourse, certain types of individual financial assets to a non-
consolidated QSPE that is wholly owned by an independent third party. In 2001
and 2000, certain primarily fixed-rate short-term investment grade commercial
loans were transferred to the QSPE. These individual loans are transferred at
par with no gain or loss recognized and qualify as sales, as set forth in SFAS
No. 140. At December 31, 2001, the outstanding balance of loans transferred was
$2.0 billion. During 2001, the Bancorp, subject to the recourse provision,
received from the QSPE $178.5 million in loans. Given the investment grade
nature of the loans transferred, the Bancorp does not expect this recourse
feature to result in a significant use of funds in future periods.
Through December 31, 2001, the Bancorp has sold, subject to credit recourse
and with servicing retained, a total of approximately $2.3 billion in leased
autos to an unrelated asset-backed special purpose entity that have subsequently
been leased back to the Bancorp. No significant gain or loss has been recognized
on these transactions and the Bancorp has established a loss reserve for
estimated future losses based on historical loss experience. As of December 31,
2001, the outstanding balance of these leases was $2.1 billion and pursuant to
this sale-leaseback, the Bancorp has future operating lease payments and
corresponding scheduled annual lease receipts from the underlying lessee
totaling $2.1 billion.
Finally, the Bancorp utilizes securitization trusts formed by independent
third parties to facilitate the securitization process of residential mortgage
loans. The cash flows to and from the securitization trusts are principally
limited to the initial proceeds from the securitization trust at the time of
sale. Although the Bancorp's securitization policy permits the retention of
subordinated tranches, servicing rights, and in some cases a cash reserve, the
Bancorp has historically only retained mortgage servicing rights interests in
these sales.
Contractual Obligations and Commercial Commitments
As disclosed in the footnotes to the Consolidated Financial Statements, the
Bancorp has certain obligations and commitments to make future payments under
contracts. At December 31, 2001, the aggregate contractual obligations and
commercial commitments are:
- --------------------------------------------------------------------------------
Payments Due by Period
Contractual Obligations Less than 2-5 After 5
($ in millions) Total 1 Year Years Years
- --------------------------------------------------------------------------------
Long-Term Debt $ 7,029.9 722.0 3,054.2 3,253.7
Annual Rental Commitments
Under Non-Cancellable Leases 210.7 34.2 90.7 85.8
Consumer Auto Leases 2,124.0 727.3 1,396.7 --
- --------------------------------------------------------------------------------
Total $ 9,364.6 1,483.5 4,541.6 3,339.5
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
Other Commercial Amount of Commitment - Expiration by Period
Commitments Less than 2-5 After 5
($ in millions) Total 1 Year Years Years
- --------------------------------------------------------------------------------
Stand By Letters of Credit $ 2,597.6 244.3 2,216.5 136.8
Commitments to Lend 18,168.6 18,168.6 -- --
- --------------------------------------------------------------------------------
Total $20,766.2 18,412.9 2,216.5 136.8
- --------------------------------------------------------------------------------
45
FIFTH THIRD BANCORP AND SUBSIDIARIES
Management's Discussion and Analysis of
Financial Condition and Results of Operations
- --------------------------------------------------------------------------------
CONSOLIDATED SIX YEAR SUMMARY OF OPERATIONS
- -------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31 ($ in millions,
except per share data) 2001 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Interest Income................................... $4,708.8 4,947.4 4,199.4 4,052.2 3,933.4 3,621.0
Interest Expense.................................. 2,275.8 2,692.9 2,021.7 2,042.0 2,026.1 1,852.2
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income............................... 2,433.0 2,254.5 2,177.7 2,010.2 1,907.3 1,768.8
Provision for Credit Losses....................... 200.6 125.7 143.2 156.2 176.6 123.6
Merger-Related Loan Loss Provision................ 35.4 12.0 26.2 20.2 -- --
- -------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for
Credit Losses................................... 2,197.0 2,116.8 2,008.3 1,833.8 1,730.7 1,645.2
Other Operating Income............................ 1,797.4 1,482.4 1,339.0 1,165.2 904.8 748.8
Operating Expenses................................ 1,992.8 1,831.8 1,784.4 1,621.6 1,463.7 1,369.3
SAIF Assessment................................... -- -- -- -- -- 49.6
Merger-Related Charges............................ 348.6 87.0 108.1 146.3 -- --
- -------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes, Minority Interest
and Cumulative Effect........................... 1,653.0 1,680.2 1,454.8 1,231.1 1,171.8 975.1
Applicable Income Taxes........................... 550.0 539.1 507.5 423.5 394.6 320.5
- -------------------------------------------------------------------------------------------------------------------------
Income Before Minority Interest and
Cumulative Effect............................... 1,103.0 1,141.1 947.3 807.6 777.2 654.6
Minority Interest, Net of Tax..................... 2.5 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Income Before Cumulative Effect................... 1,100.5 1,141.1 947.3 807.6 777.2 654.6
Cumulative Effect of Change in Accounting
Principle, Net of Tax........................... 6.8 -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------
Net Income........................................ 1,093.7 1,141.1 947.3 807.6 777.2 654.6
Dividends on Preferred Stock...................... .7 .7 .7 .7 .7 .9
- -------------------------------------------------------------------------------------------------------------------------
Net Income Available to Common Shareholders....... $1,093.0 1,140.4 946.6 806.9 776.5 653.7
- -------------------------------------------------------------------------------------------------------------------------
Earnings Per Share (a)............................ $ 1.90 2.02 1.68 1.44 1.39 1.16
Earnings Per Diluted Share (a).................... $ 1.86 1.98 1.66 1.42 1.37 1.14
- -------------------------------------------------------------------------------------------------------------------------
Cash Dividends Declared Per Share (a)............. $ .83 .70 .58 2/3 .47 1/3 .37 9/10 .32 4/7
- -------------------------------------------------------------------------------------------------------------------------
CONDENSED CONSOLIDATED BALANCE SHEET INFORMATION
- -------------------------------------------------------------------------------------------------------------------------
As of December 31 ($ in millions) 2001 2000 1999 1998 1997 1996
- -------------------------------------------------------------------------------------------------------------------------
Securities........................................ $20,523.0 19,581.4 16,663.7 16,509.9 15,620.9 15,332.2
Loans and Leases.................................. 41,547.9 42,530.4 38,836.6 34,115.4 33,906.1 31,597.4
Loans Held for Sale............................... 2,180.1 1,655.0 1,198.4 2,861.3 1,590.3 682.5
Assets............................................ 71,026.3 69,658.3 62,156.7 58,201.9 55,260.1 51,937.0
Deposits.......................................... 45,854.1 48,359.5 41,855.8 41,014.0 39,609.0 38,531.5
Short-Term Borrowings............................. 7,452.7 6,344.0 10,095.4 6,214.0 6,541.5 5,444.7
Long-Term Debt and Convertible
Subordinated Debentures......................... 7,029.9 6,238.1 3,278.7 4,285.2 2,952.8 2,342.7
Shareholders' Equity.............................. 7,639.3 6,662.4 5,562.8 5,371.4 5,004.6 4,694.9
=========================================================================================================================
SUMMARIZED QUARTERLY FINANCIAL INFORMATION
- -------------------------------------------------------------------------------------------------------------------------
2001 2000
(Unaudited) -----------------------------------------------------------------------------------------------
($ in millions, except Fourth Third Second First Fourth Third Second First
per share data) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- -------------------------------------------------------------------------------------------------------------------------
Interest Income............ $1,065.7 1,155.5 1,228.4 1,259.2 1,292.0 1,275.6 1,231.1 1,148.7
Net Interest Income........ 629.0 608.0 607.7 588.4 571.8 567.0 560.6 555.1
Provision for Credit
Losses................... 61.6 47.5 25.6 65.9 31.5 26.8 35.3 32.0
Merger-Related Loan Loss
Provision................ -- -- 35.4 -- -- -- 8.0 4.0
Merger-Related Charges..... -- 129.4 219.2 -- -- -- 64.8 22.1
Income Before Income
Taxes.................... 557.0 406.6 239.2 450.3 465.8 456.4 365.0 393.1
Net Income Available to
Common Shareholders...... 385.5 279.4 128.7 299.4 319.1 309.5 247.6 264.3
Earnings Per Share (a)..... .67 .48 .22 .52 .56 .55 .44 .47
Earnings Per Diluted
Share (a)................ .65 .47 .22 .51 .55 .54 .43 .46
=========================================================================================================================
(a) Per share amounts have been adjusted for the three-for-two stock splits
effected in the form of stock dividends paid July 14, 2000, April 15, 1998,
July 15, 1997 and January 12, 1996.
46
FIFTH THIRD BANCORP AND SUBSIDIARIES
Consolidated Ten Year Comparison
- --------------------------------------------------------------------------------
AVERAGE ASSETS ($ IN MILLIONS)
- --------------------------------------------------------------------------------------------------------------------------------
Interest-Earning Assets
--------------------------------------------------------------------------
Federal Interest-Bearing Cash and Total
Loans and Funds Deposits Due from Other Average
Year Leases Loaned (a) in Banks (a) Securities Total Banks Assets Assets
- --------------------------------------------------------------------------------------------------------------------------------
2001 $44,888.2 $ 68.8 $132.4 $19,736.2 $64,825.6 $1,482.4 $4,980.4 $70,663.5
2000 42,690.5 117.5 82.8 18,629.7 61,520.5 1,455.7 4,227.8 66,609.9
1999 38,652.1 223.4 103.8 16,900.9 55,880.2 1,628.1 3,343.8 60,292.3
1998 36,013.8 241.0 134.8 16,090.7 52,480.3 1,565.8 2,781.7 56,305.6
1997 33,850.4 326.9 185.8 15,425.0 49,788.1 1,366.6 2,495.0 53,161.5
1996 30,742.2 324.9 211.6 14,958.5 46,237.2 1,401.5 2,212.1 49,366.6
1995 27,598.3 493.6 182.0 12,714.7 40,988.6 1,364.8 1,715.1 43,607.8
1994 22,848.9 340.2 133.6 11,595.5 34,918.2 1,256.3 1,491.2 37,426.9
1993 20,476.5 292.8 263.4 10,529.4 31,562.1 1,213.3 1,318.4 33,943.6
1992 18,265.5 436.9 263.3 10,112.9 29,078.6 1,093.9 1,280.5 31,282.6
================================================================================================================================
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS ($ IN MILLIONS)
- --------------------------------------------------------------------------------------------------------------------------------
Deposits
-----------------------------------------------------------------------------------------------
Certificates- Short-
Interest Money Other $100,000 Foreign Term
Year Demand Checking Savings Market Time and Over Office Total Borrowings Total
- --------------------------------------------------------------------------------------------------------------------------------
2001 $7,394.5 $11,489.0 $4,928.4 $2,551.5 $13,473.0 $3,821.0 $1,992.2 $45,649.6 $8,799.1 $54,448.7
2000 6,257.3 9,531.2 5,798.8 939.1 13,716.3 4,283.0 3,895.5 44,421.2 9,724.7 54,145.9
1999 6,078.8 8,553.1 6,206.6 1,327.6 13,858.0 4,196.8 952.3 41,173.2 8,572.8 49,746.0
1998 5,626.7 7,030.6 6,331.7 1,471.0 15,116.9 3,856.3 269.8 39,703.0 7,095.5 46,798.5
1997 4,931.9 6,208.9 4,548.0 2,508.1 15,887.2 4,173.3 440.5 38,697.9 6,113.0 44,810.9
1996 4,492.5 5,558.6 4,236.8 2,908.8 15,170.6 4,186.4 569.1 37,122.8 4,836.6 41,959.4
1995 4,049.7 5,017.5 3,373.8 2,949.5 12,597.1 3,943.6 1,006.5 32,937.7 4,582.4 37,520.1
1994 3,584.6 3,520.8 4,062.3 4,092.7 10,283.7 2,371.1 814.4 28,729.6 3,543.0 32,272.6
1993 3,172.6 3,241.2 4,213.7 3,914.8 9,699.3 2,004.7 485.5 26,731.8 2,361.0 29,092.8
1992 1,940.6 2,847.4 3,506.4 3,754.2 9,899.4 1,903.7 301.5 24,153.2 2,102.5 26,255.7
================================================================================================================================
INCOME ($ IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------------------------------------------------------
Per Share (b)
----------------------------------------------------
Originally Reported
----------------------------
Other Dividend
Interest Interest Operating Operating Net Diluted Dividends Diluted Payout
Year Income Expense Income Expense Income Earnings Earnings Declared Earnings Earnings Ratio
- --------------------------------------------------------------------------------------------------------------------------------
2001 $4,708.8 $2,275.8 $1,797.4 $2,341.4 $1,093.0 $1.90 $1.86 $ .83 $1.90 $1.86 44.7%
2000 4,947.4 2,692.9 1,482.4 1,918.8 1,140.4 2.02 1.98 .70 1.86 1.83 38.2
1999 4,199.4 2,021.7 1,339.0 1,892.5 946.6 1.68 1.66 .58 2/3 1.46 1.43 40.9
1998 4,052.2 2,042.0 1,165.2 1,767.9 806.9 1.44 1.42 .47 1/3 1.20 1.17 40.3
1997 3,933.4 2,026.1 904.8 1,463.7 776.5 1.39 1.37 .37 9/10 1.15 1.13 33.6
1996 3,621.0 1,852.2 748.8 1,418.8 653.7 1.16 1.14 .32 4/7 .95 .93 34.9
1995 3,238.8 1,673.2 616.9 1,222.4 592.5 1.09 1.07 .28 4/9 .86 .84 33.8
1994 2,519.9 1,120.9 520.2 1,096.4 497.8 .96 .94 .23 7/10 .75 .73 32.3
1993 2,314.3 1,002.2 497.0 1,024.0 475.0 .92 .91 .20 1/7 .65 .63 31.8
1992 2,349.0 1,132.8 438.3 927.3 393.4 .78 .78 .17 7/9 .54 .54 33.0
==============================================================================================================================
MISCELLANEOUS AT DECEMBER 31 ($ IN MILLIONS, EXCEPT PER SHARE DATA)
- --------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
--------------------------------------------------------------------------------------------
Accumulated
Number of Nonowner Reserve
Shares of Stock Common Preferred Capital Retained Changes in Treasury Per for Credit
Year Outstanding (b) Stock Stock Surplus Earnings Equity Stock Total Share (b) Losses
- --------------------------------------------------------------------------------------------------------------------------------
2001 582,674,580 $1,293.5 $ 9.3 $1,495.4 $4,837.4 $ 7.8 $ (4.1) $7,639.3 $13.11 $624.1
2000(c) 569,056,843 1,263.3 9.3 1,139.7 4,225.0 27.9 (1.1) 6,662.4 11.71 609.3
1999(c) 565,425,468 1,255.2 9.3 896.3 3,708.1 (301.8) -- 5,562.8 9.84 572.9
1998 557,438,774 1,237.5 9.3 786.5 3,261.3 135.8 ( 58.0) 5,371.4 9.64 532.2
1997 556,356,059 1,235.1 9.3 771.8 3,033.2 139.9 (184.6) 5,004.6 9.00 509.2
1996 564,561,419 1,253.3 9.3 739.5 2,676.2 16.8 ( .2) 4,694.9 8.32 483.6
1995 548,266,213 1,217.2 14.3 522.3 2,400.4 46.0 -- 4,200.2 7.66 474.0
1994 520,876,043 1,156.3 14.3 255.5 2,086.6 (66.9) ( .2) 3,445.6 6.62 427.4
1993 518,275,600 1,150.6 14.3 183.4 1,818.4 24.1 ( .2) 3,190.5 6.16 382.2
1992 504,666,911 1,120.4 14.3 114.4 1,492.2 -- ( 5.6) 2,735.7 5.42 326.2
================================================================================================================================
(a) Federal funds loaned and interest-bearing deposits in banks are combined in
other short-term investments in the Consolidated Financial Statements.
(b) Number of shares outstanding and per share data have been adjusted for stock
splits in 2000, 1998, 1997, 1996 and 1992.
(c) Excludes the unamortized portion of the 1999 non-officer employee stock
grant totaling $2.7 million in 2000 and $4.3 million in 1999.
47
FIFTH THIRD BANCORP AND SUBSIDIARIES
Directors and Officers
Fifth Third Bancorp Directors
George A. Schaefer, Jr.
President & CEO
Fifth Third Bancorp and Fifth Third Bank
Darryl F. Allen
Retired Chairman
President & CEO
Aeroquip-Vickers, Inc.
John F. Barrett
President & CEO
The Western & Southern Life Insurance Company
Thomas B. Donnell
Chairman Emeritus Fifth Third Bank
Northwestern Ohio
Richard T. Farmer
Chairman
Cintas Corporation
James P. Hackett
President, CEO & Director
Steelcase, Inc.
Joseph H. Head, Jr.
Chairman
Atkins & Pearce, Inc.
Joan R. Herschede
President & CEO
The Frank Herschede Company
Allen M. Hill
President & CEO
DPL, Inc.
William G. Kagler
Former Chairman of the Executive Committee of the Board of Directors
Skyline Chili, Inc.
James D. Kiggen
Chairman
Broadwing, Inc.
Robert L. Koch II
President & CEO
Koch Enterprises, Inc.
Mitchel D. Livingston, Ph.D.
Vice President for Student Affairs & Human Resources
University of Cincinnati
Hendrik G. Meijer
Co-Chairman
Meijer, Inc.
Robert B. Morgan
Executive Counselor
Cincinnati Financial Corp.
David E. Reese
Former Chairman
Fifth Third Bank
Southwest F.S.B.
James E. Rogers
Chairman
President & CEO
Cinergy Corporation
John J. Schiff, Jr.
Chairman, President & CEO
Cincinnati Financial Corporation
Donald B. Shackelford
Chairman
Fifth Third Bank
Central Ohio
Dennis J. Sullivan, Jr.
Former President & CEO
Gaylord Entertainment
Dudley S. Taft
President
Taft Broadcasting Company
Thomas W. Traylor
Chairman & CEO
Traylor Bros., Inc.
David J. Wagner
Chairman
Fifth Third Bank
Michigan
Directors Emeriti
Neil A. Armstrong
Philip G. Barach
Vincent H. Beckman
J. Kenneth Blackwell
Milton C. Boesel, Jr.
Douglas G. Cowan
Thomas L. Dahl
Ronald A. Dauwe
Gerald V. Dirvin
Nicholas M. Evans
Louis R. Fiore
John D. Geary
Ivan W. Gorr
William A. Hopple III
William J. Keating
Jerry L. Kirby
Michael H. Norris
Brian H. Rowe
C. Wesley Rowles
David B. Sharrock
Stephen Stranahan
N. Beverley Tucker, Jr.
Alton C. Wendzel
Fifth Third Bancorp Officers
George A. Schaefer, Jr.
President & CEO
Neal E. Arnold
Executive Vice President & Chief Financial Officer
Michael D. Baker
Executive Vice President
Barry L. Boerstler
Executive Vice President
David J. DeBrunner
Vice President & Controller
Diane L. Dewbrey
Senior Vice President
James R. Gaunt
Executive Vice President
R. Mark Graf
Treasurer
James J. Hudepohl
Executive Vice President
Robert J. King, Jr.
Executive Vice President
Robert P. Niehaus
Executive Vice President
Daniel T. Poston
Senior Vice President & Auditor
Paul L. Reynolds
Executive Vice President,
Secretary & General Counsel
Stephen J. Schrantz
Executive Vice President
Gerald L. Wissel
Executive Vice President
Affiliate Presidents & CEOs
Michael J. Alley
Central Indiana
Samuel G. Barnes
Lexington, Kentucky
John N. Daniel
Southern Indiana
Patrick J. Fehring, Jr.
Eastern Michigan
James R. Gaunt
Louisville, Kentucky
Stewart M. Greenlee
Ohio Valley
Kevin T. Kabat
Colleen M. Kvetko Florida
Timothy T. O'Dell
Central Ohio
John E. Pelizzari
Northern Michigan
Timothy P. Rawe
Northern Kentucky
R. Daniel Sadlier
Western Ohio
Bradlee F. Stamper
Chicago
Robert A. Sullivan
Northwestern Ohio
Affiliate Chairmen
John S. Szuch, Chairman
Northwestern Ohio
Donald B. Shackelford
Central Ohio
William A. Stinnett III
Ohio Valley
Jerry L. Kirby
Western Ohio
H. Lee Cooper
Southern Indiana
James B. Sturges
Central Indiana
David J. Wagner
Michigan
48
2001 ANNUAL REPORT
- --------------------------------------------------------------------------------
Investor Information
Corporate Office
Fifth Third Center
Cincinnati, Ohio 45263
(513) 579-5300
Website
www.53.com
Investor Relations
Neal E. Arnold
Executive Vice President & Chief Financial Officer
(513) 579-4356
(513) 579-6246 (fax)
Bradley S. Adams
Investor Relations Officer
(513) 534-0983
(513) 579-6246 (fax)
Independent Auditor
Deloitte & Touche LLP
250 East Fifth Street
Cincinnati, OH 45202
Transfer Agent/Shareholder Relations
Fifth Third Bank
Corporate Trust Services
Mail Drop 10AT66-3212
Fifth Third Center
Cincinnati, Ohio 45263
(800) 837-2755
(513) 579-5320 (outside continental U.S.)
8:00 am to 5:00 pm EST
Stock Trading
The common stock of Fifth Third Bancorp is traded in the over-the-counter
market and is listed under the symbol "FITB" on the Nasdaq National Market.
Press Releases
For copies of current press releases, please visit our website at www.53.com.
Stock Data
2001 2000
--------------------------------------------------------------------
Dividends Dividends
Paid Per Paid Per
High Low Share High Low Share
- ----------------------------------------------------------------------------------------
Fourth Quarter $63.07 $53.30 $.23 $60.88 $43.31 $.18
Third Quarter $64.77 $50.69 $.20 $54.75 $40.94 $.18
Second Quarter $63.00 $48.88 $.20 $48.00 $37.75 $.18
First Quarter $61.31 $45.69 $.20 $48.50 $29.33 $.16
Debt Ratings
Moody's Standard & Poor's
- ------------------------------------------------------------------------------------------------------------
Fifth Third Bancorp
Commercial Paper Prime-1 A-1+
Senior Debt Aa3 AA-
Fifth Third Bank and Fifth Third Banks of Michigan; Indiana;
Kentucky, Inc. and Northern Kentucky
Short-Term Deposit Prime-1 A-1+
Long-Term Deposit Aa2 AA-
(C)Fifth Third Bank 2002
Member F.D.I.C. - Federal Reserve System
(R)Reg. U.S. Pat. & T.M. Office
49
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