<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 1998
Commission File Number 0-8076
FIFTH THIRD BANCORP
(Exact name of Registrant as specified in its charter)
Ohio 31-0854434
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
Fifth Third Center
Cincinnati, Ohio 45263
(Address of principal executive offices)
Registrant's telephone number, including area code: (513) 579-5300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
There were 267,895,839 shares of the Registrant's Common Stock, without par
value, outstanding as of June 30, 1998.
<PAGE> 2
FIFTH THIRD BANCORP
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 1998 and 1997 and December 31, 1997 3
Consolidated Statements of Income -
Three and Six Months Ended June 30, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 1998 and 1997 5
Consolidated Statements of Changes in Shareowners' Equity -
Six Months Ended June 30, 1998 and 1997 6
Notes to Consolidated Financial Statements 7
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 14
Part II. Other Information
Item 6. Exhibits 14
2
<PAGE> 3
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------
JUNE 30, December 31, June 30,
($000'S) 1998 1997 1997
- ------------------------------------------------------------------------------------------------------------------------
ASSETS
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and Due from Banks $ 882,432 777,378 899,340
Securities Available for Sale (a) 7,890,292 8,139,465 7,380,068
Securities Held to Maturity (b) 100,510 85,010 330,724
Other Short-Term Investments 39,028 180,425 219,748
Loans Held for Sale 329,870 263,772 101,361
Loans and Leases
Commercial Loans 4,562,990 4,363,289 4,120,917
Construction Loans 554,584 560,381 589,988
Commercial Mortgage Loans 1,239,497 1,273,885 1,275,172
Commercial Lease Financing 1,612,704 1,417,133 1,152,307
Residential Mortgage Loans 5,212,635 5,037,987 5,255,670
Consumer Loans 3,164,660 3,068,597 2,804,457
Consumer Lease Financing 2,275,574 2,165,598 2,023,350
Unearned Income (647,530) (573,927) (480,976)
Reserve for Credit Losses (270,129) (250,950) (238,292)
- ------------------------------------------------------------------------------------------------------------------------
Total Loans and Leases 17,704,985 17,061,993 16,502,593
Bank Premises and Equipment 316,588 301,029 278,105
Accrued Income Receivable 221,150 213,049 198,744
Other Assets 807,827 688,552 775,290
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 28,292,682 27,710,673 26,685,973
========================================================================================================================
LIABILITIES
- ------------------------------------------------------------------------------------------------------------------------
Deposits
Demand $ 2,992,603 2,738,191 2,654,953
Interest Checking 2,885,282 2,555,108 2,321,099
Savings and Money Market 4,349,236 4,503,926 4,317,846
Time Deposits 8,565,222 9,222,671 8,659,254
- ------------------------------------------------------------------------------------------------------------------------
Total Deposits 18,792,343 19,019,896 17,953,152
Federal Funds Borrowed 1,872,756 1,253,553 1,570,905
Short-Term Bank Notes 350,000 555,000 780,000
Other Short-Term Borrowings 1,712,296 1,842,378 1,834,231
Accrued Taxes, Interest and Expenses 651,217 567,906 463,507
Other Liabilities 199,439 200,421 207,082
Long-Term Debt 1,637,185 1,508,683 1,417,919
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 25,215,236 24,947,837 24,226,796
========================================================================================================================
SHAREOWNERS' EQUITY
- ------------------------------------------------------------------------------------------------------------------------
Common Stock (c) 594,729 583,005 579,020
Capital Surplus 484,359 444,815 444,412
Retained Earnings 1,907,147 1,821,342 1,653,600
Unrealized Gains
on Securities Available for Sale 91,211 98,254 21,159
Treasury Stock - (184,580) (239,014)
- ------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREOWNERS' EQUITY 3,077,446 2,762,836 2,459,177
- ------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 28,292,682 27,710,673 26,685,973
- ------------------------------------------------------------------------------------------------------------------------
<FN>
(a) Amortized cost: June 30, 1998 - $7,749,882, December 31, 1997 - $7,988,085
and June 30, 1997 - $7,347,356.
(b) Market value: June 30, 1998 - $100,514, December 31, 1997 - $85,375 and
June 30, 1997 - $332,432.
(c) Stated value $2.22 per share; authorized 300,000,000; outstanding June 30,
1998 - 267,895,839, December 31, 1997 - 262,614,641 (excludes 5,424,885
treasury shares) and June 30, 1997 - 260,819,656 (excludes 7,116,629
treasury shares). Outstanding and treasury shares have been adjusted for
the three-for-two stock split effected in the form of a stock dividend
declared March 17, 1998 and distributed April 15, 1998.
</TABLE>
3
<PAGE> 4
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-----------------------------------------------------------------
($000'S) 1998 1997 1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans and Leases $ 369,690 335,551 $ 725,034 662,138
Interest on Securities
Taxable 138,792 131,886 284,520 263,030
Exempt from Income Taxes 2,968 3,268 5,908 7,642
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest on Securities 141,760 135,154 290,428 270,672
Interest on Other Short-Term Investments 1,924 3,885 4,656 8,359
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Income 513,374 474,590 1,020,118 941,169
- ---------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits
Interest Checking 16,790 14,150 32,581 27,249
Savings and Money Market 38,897 37,991 78,353 75,866
Time Deposits 120,001 127,987 242,896 251,260
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest on Deposits 175,688 180,128 353,830 354,375
Interest on Federal Funds Borrowed 31,881 17,605 59,091 42,574
Interest on Short-Term Bank Notes 10,061 9,457 22,527 18,822
Interest on Other Short-Term Borrowings 22,314 20,682 44,470 38,485
Interest on Long-Term Debt and Notes 23,847 21,387 47,763 39,631
- ---------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 263,791 249,259 527,681 493,887
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 249,583 225,331 492,437 447,282
Provision for Credit Losses 44,774 21,013 67,602 40,361
- ---------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 204,809 204,318 424,835 406,921
OTHER OPERATING INCOME
Investment Advisory Income 31,149 22,960 58,964 44,580
Service Charges on Deposits 32,747 27,388 61,263 53,277
Data Processing Income 32,327 26,573 62,157 49,312
Other Service Charges and Fees 51,562 44,576 101,366 87,923
Securities Gains 480 135 4,635 307
- ---------------------------------------------------------------------------------------------------------------------------
Total Other Operating Income 148,265 121,632 288,385 235,399
OPERATING EXPENSES
Salaries, Wages and Incentives 70,004 59,308 136,880 116,995
Employee Benefits 9,702 13,296 27,296 26,448
Equipment Expenses 8,216 7,542 16,219 14,586
Net Occupancy Expenses 12,623 11,739 24,681 23,689
Other Operating Expenses 70,815 66,283 139,567 127,011
Merger-Related Charges 89,701 - 89,701 -
- ---------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 261,061 158,168 434,344 308,729
- ---------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 92,013 167,782 278,876 333,591
Applicable Income Taxes 34,253 56,510 96,885 111,351
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME (b) $ 57,760 111,272 $ 181,991 222,240
===========================================================================================================================
Per Share (a):
Earnings $ 0.22 0.43 $ 0.69 0.85
Diluted Earnings $ 0.22 0.42 $ 0.68 0.83
Cash Dividends $ 0.17 .14 2/3 $ 0.34 .27 9/16
===========================================================================================================================
Average Shares (000's) (a):
Outstanding 264,988 260,979 263,836 262,738
Diluted 270,026 264,784 268,952 267,374
===========================================================================================================================
<FN>
(a) and (b) are described on Page 6.
</TABLE>
4
<PAGE> 5
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
------------------------------
($000'S) 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 181,991 222,240
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses 67,602 40,361
Depreciation, Amortization and Accretion 40,408 35,072
Provision for Deferred Income Taxes 6,213 14,846
Realized Securities Gains (6,922) (3,687)
Realized Securities Losses 2,287 3,380
Proceeds from Sales of Residential Mortgage Loans Held for Sale 1,705,308 454,247
Net Gains on Sales of Loans (14,278) (5,051)
Increase in Residential Mortgage Loans Held for Sale (1,757,128) (477,343)
Decrease (Increase) in Accrued Income Receivable (8,101) 12,283
Increase in Other Assets (65,987) (59,323)
Increase in Accrued Taxes, Interest and Expenses 80,890 13,828
Increase in Other Liabilities 12,337 64,657
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 244,620 315,510
=========================================================================================================================
INVESTING ACTIVITIES
Proceeds from Sales of Securities Available for Sale 1,209,351 660,294
Proceeds from Calls, Paydowns and Maturities of Securities Available for Sale 1,310,853 523,252
Purchases of Securities Available for Sale (2,194,182) (1,152,819)
Proceeds from Calls, Paydowns and Maturities of Securities Held to Maturity 28,824 164,195
Purchases of Securities Held to Maturity (51,865) (69,629)
Decrease in Other Short-Term Investments 141,397 57,404
Decrease (Increase) in Loans and Leases (793,197) (742,442)
Purchases of Bank Premises and Equipment (31,399) (24,627)
Proceeds from Disposal of Bank Premises and Equipment 4,517 2,747
Net Cash Paid in Acquisitions (15,000) -
- -------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (390,701) (581,625)
=========================================================================================================================
FINANCING ACTIVITIES
Increase (Decrease) in Core Deposits 13,164 (308,889)
Increase (Decrease) in CDs - $100,000 and Over, including Foreign (240,717) 100,714
Increase in Federal Funds Borrowed 619,203 150,211
Decrease in Short-Term Bank Notes (205,000) (26,000)
Increase (Decrease) in Other Short-Term Borrowings (130,082) 479,752
Proceeds from Issuance of Long-Term Debt and Notes 1,102,869 705,291
Repayment of Long-Term Debt (973,383) (482,052)
Payment of Cash Dividends (76,627) (63,285)
Exercise of Stock Options 9,759 8,784
Proceeds from Sale of Common Stock 178,125 -
Purchases of Treasury Stock (45,896) (276,307)
Other (280) (197)
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 251,135 288,022
=========================================================================================================================
INCREASE IN CASH AND DUE FROM BANKS 105,054 21,907
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 777,378 877,433
- -------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD 882,432 899,340
=========================================================================================================================
</TABLE>
5
<PAGE> 6
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (UNAUDITED)
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
JUNE 30,
--------------------------------------
($000'S) 1998 1997
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT DECEMBER 31 $ 2,762,836 2,561,335
Net Income 181,991 222,240
Nonowner Changes in Equity, Net of Tax:
Change in Unrealized Gains on Securities Available for Sale (7,043) 9,842
- --------------------------------------------------------------------------------------------------------------------------
Net Income and Nonowner Changes in Equity 174,948 232,082
Cash Dividends Declared (1998 - $.34 per share
and 1997 - $.27 9/16 per share) (a) (87,983) (66,538)
Shares Acquired for Treasury (45,896) (276,307)
Earnings Adjustment of Pooled Entity (b) (7,803) -
Stock Options Exercised
Including Treasury Shares Issued 9,759 8,784
Stock Issued in Public Offering 178,125 -
Stock Issued in Acquisitions and Other 93,460 (179)
- --------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30 $ 3,077,446 2,459,177
==========================================================================================================================
<FN>
(a) Average shares and per share amounts have been adjusted for the
three-for-two stock split effected in the form of a stock dividend declared
March 17, 1998 and distributed April 15, 1998. Cash dividends per common
share are those of Fifth Third Bancorp declared prior to the mergers with
CitFed Bancorp, Inc. and State Savings Company.
(b) The restatement of the CitFed Bancorp, Inc. merger was accomplished by
combining CitFed's March 31, 1998 fiscal year financial information with
the Bancorp's December 31, 1997 calendar year financial information. In
1998, CitFed's fiscal year was conformed to the Bancorp's calendar year. As
a result of conforming fiscal periods, the Bancorp's consolidated
statements of income for the fourth quarter of 1997 and the first quarter
of 1998 include CitFed's net income for the three months ended March 31,
1998 of $7,803. An adjustment to shareowners' equity removes the effect of
including CitFed's financial results in both periods.
</TABLE>
6
<PAGE> 7
FINANCIAL INFORMATION
Item 1. Notes to Consolidated Financial Statements
- ---------------------------------------------------
1. In the opinion of management, the unaudited consolidated financial
statements include all adjustments (which consist of normal recurring
accruals) necessary to present fairly the consolidated financial
position as of June 30, 1998 and 1997, the results of operations for
the three and six months ended June 30, 1998 and 1997, and cash flows
for the six months ended June 30, 1997. In accordance with generally
accepted accounting principles for interim financial information, these
statements do not include all of the information and footnotes required
by generally accepted accounting principles for complete annual
financial statements. Financial information as of December 31, 1997 has
been derived from the audited consolidated financial statements of the
Registrant. The results of operations for the three and six months
ended June 30, 1998 and 1997 and cash flows for the six months ended
June 30, 1998 and 1997 are not necessarily indicative of the results to
be expected for the full year. For further information, refer to the
consolidated financial statements and footnotes thereto for the year
ended December 31, 1997, included in the Registrant's Annual Report on
Form 10-K.
2. Financial data for all prior periods have been restated to reflect the
second quarter 1998 mergers with CitFed Bancorp, Inc., a
publicly-traded savings and loan holding company headquartered in
Dayton, Ohio with $3.1 billion in assets, and State Savings Company, a
privately-owned thrift holding company headquartered in Columbus, Ohio
with $2.7 billion in assets. Both transactions were tax-free,
stock-for-stock exchanges accounted for as poolings-of-interest. The
Registrant exchanged 13,219,085 and 16,625,271 shares of Fifth Third
Common Stock for all outstanding shares of CitFed Bancorp, Inc. and
State Savings Company, respectively. The contributions of CitFed
Bancorp, Inc. and State Savings Company to consolidated net interest
income, other operating income and net income for the periods prior to
the mergers were as follows:
<TABLE>
<CAPTION>
Three Months Three Months Six Months
Ended Ended Ended
(000's) March 31, 1998 June 30, 1997 June 30, 1997
----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net Interest Income:
Fifth Third Bancorp $ 197,900 184,815 366,131
CitFed Bancorp, Inc. 19,614 17,361 35,152
State Savings Company 25,340 23,155 45,999
----------------------------------------------------------------------------------------------------------
Combined $ 242,854 225,331 447,282
----------------------------------------------------------------------------------------------------------
Other Operating Income:
Fifth Third Bancorp $ 126,381 108,676 207,236
CitFed Bancorp, Inc. 7,804 8,500 16,765
State Savings Company 5,935 4,456 11,398
----------------------------------------------------------------------------------------------------------
Combined $ 140,120 121,632 235,399
----------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
<TABLE>
<S> <C> <C> <C>
Net Income:
Fifth Third Bancorp $ 108,981 96,081 190,577
CitFed Bancorp, Inc. 7,803 6,224 12,110
State Savings Company 7,447 8,967 19,553
----------------------------------------------------------------------------------------------------------
Combined $ 124,231 111,272 222,240
----------------------------------------------------------------------------------------------------------
</TABLE>
The combined consolidated results of operations are not necessarily
indicative of the results that would have occurred had the acquisition
been consummated in the past or which may be attained in the future.
3. On June 12, 1998, the Registrant acquired The Ohio Company, a
full-service broker-dealer for retail and institutional clients
headquartered in Columbus, Ohio. The merger was accounted for as a
purchase. In connection with the acquisition, the Registrant exchanged
1,862,765 shares of Fifth Third Common Stock for all of the outstanding
shares of capital stock of The Ohio Company. The financial results of
The Ohio Company, included in the results of operations subsequent to
the date of acquisition, were not material to the Registrant's
financial condition and operating results for the quarter.
4. On April 9, 1998, the Registrant acquired W. Lyman Case & Company, a
commercial mortgage banking firm based in Columbus, Ohio which
originated more than $800 million in financing and equity transactions
in 1997 and has a loan servicing portfolio in excess of $2 billion. The
transaction was accounted for as a purchase. The financial results of
W. Lyman Case & Company, included in the results of operations
subsequent to the date of acquisition, were not material to the
Registrant's financial condition and operating results for the quarter.
5. Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative Instruments and Hedging Activities," establishes accounting
and reporting standards for derivative instruments and hedging
activities and requires recognition of all derivatives as either assets
or liabilities measured at fair value. The accounting for changes in
the fair value of a derivative depends on the intended use of the
derivative and the resulting designation. The statement is required for
the year 2000. The Registrant has not determined whether it will adopt
early the provisions of this statement or the impact on the
consolidated financial statements.
6. Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information," is required for
1998 and will be applied in the Registrant's 1998 annual financial
statements. The statement requires financial disclosure and descriptive
information about reportable operating segments. Upon its adoption,
this statement may result in additional financial statement
disclosures.
8
<PAGE> 9
7. The Registrant's board of directors approved a three-for-two stock
split on March 17, 1998. The additional shares resulting from the split
were distributed on April 15, 1998 to shareowners of record as of March
31, 1998. The consolidated financial statements, notes and other
references to share and per share data have been retroactively restated
for the stock split.
8. In the first half of 1998, the Registrant paid $533,868,000 in interest
and $83,950,000 in Federal income taxes. In the first six months of
1997, the Registrant paid $503,005,000 in interest and $66,250,000 in
Federal income taxes. In the first half of 1998, the Registrant had
noncash investing activities consisting of the securitization of
$82,604,000 of residential mortgage loans. There were no loan
securitizations during the first six months of 1997.
9. In 1998, the Registrant adopted SFAS No. 130, "Reporting Comprehensive
Income." The statement establishes standards for the reporting and
display of net income and nonowner changes in equity. The Registrant
elected to present the required disclosures in the Consolidated
Statement of Changes in Shareowners' Equity on page 6. The caption "Net
income and nonowner changes in equity," represents total comprehensive
income as defined in the statement. Disclosure of the reclassification
adjustments, related tax effects allocated to nonowner changes in
equity and accumulated nonowner changes in equity for the six months
ended June 30 is provided below ($000s).
<TABLE>
<CAPTION>
1998 1997
<S> <C> <C>
- ------------------------------------------------------------------------------------------------------------
Reclassification Adjustments, Before Tax
- ------------------------------------------------------------------------------------------------------------
Change in Unrealized Gains Arising During Period $(15,470) 14,835
Reclassification Adjustment for Gains Included in Net Income 4,635 307
- ------------------------------------------------------------------------------------------------------------
Net Unrealized Losses on Securities Available for Sale $(10,835) 15,142
============================================================================================================
Related Tax Effects
- ------------------------------------------------------------------------------------------------------------
Change in Unrealized Gains Arising During Period $ 5,414 (5,193)
Reclassification Adjustment for Gains Included in Net Income (1,622) (107)
- ------------------------------------------------------------------------------------------------------------
Net Unrealized Losses on Securities Available for Sale $ 3,792 (5,300)
============================================================================================================
Reclassification Adjustments, Net of Tax
- ------------------------------------------------------------------------------------------------------------
Change in Unrealized Gains Arising During Period $(10,056) 9,642
Reclassification Adjustment for Gains Included in Net Income 3,013 200
- ------------------------------------------------------------------------------------------------------------
Net Unrealized Losses on Securities Available for Sale $ (7,043) 9,842
============================================================================================================
Accumulated Nonowner Changes in Equity
- ------------------------------------------------------------------------------------------------------------
Beginning Balance-Unrealized Holding Gains on Securities Available for Sale $ 98,254 11,317
Current Period Change (7,043) 9,842
- ------------------------------------------------------------------------------------------------------------
Ending Balance-Unrealized Holding Gains on Securities Available for Sale $ 91,211 21,159
============================================================================================================
</TABLE>
9
<PAGE> 10
10. On May 12, 1998, the Registrant issued 3,600,000 shares of Common
Stock through a public offering. The net proceeds from the sale of
Common Stock were used by the Registrant for general corporate
purposes. The issuance of the shares also facilitated the Registrant's
ability to account for the acquisition of State Savings Company as a
pooling-of-interests.
Item 2. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations
-------------------------
The following is management's discussion and analysis of certain significant
factors which have affected the Registrant's financial condition and results of
operations during the periods included in the consolidated financial statements
which are a part of this filing.
This report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended, that involve
inherent risks and uncertainties. A number of important factors could
cause actual results to differ materially from those in the
forward-looking statements. Those factors include the economic
environment, competition, products and pricing in geographic and
business areas in which the Registrant operates, prevailing interest
rates, changes in government regulations and policies affecting
financial services companies, credit quality and credit risk
management, charges 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.
Results of Operations
- ---------------------
The Registrant's operating income was $257.6 million for the first six months of
1998 and $133.3 million for the second quarter, up 15.9 percent and 19.8
percent, respectively, compared to $222.2 million and $111.3 million for the
same periods last year. Second quarter diluted operating earnings per share was
$.50, up 19 percent over last year's $.42 and $.96 for the first six months, up
15.7 percent over 1997's $.83.
Operating earnings exclude nonrecurring pretax charges of $106.4 million
resulting from mergers with CitFed Bancorp, Inc. and State Savings Company. The
effect of these charges was to reduce net income by $75.6 million, or $.28 per
diluted share. Including the nonrecurring charges, earnings per diluted share
was $.22 for the second quarter with net income totaling $57.8 million.
Total assets were $28.3 billion at quarter end, compared to 1997's quarter-end
assets of $26.7 billion. On an operating basis, return on average equity was
18.4 percent and return on average assets was 1.86 percent for the second
quarter of 1998 compared to 18.5 percent and 1.71 percent, respectively, for the
same quarter of last year.
10
<PAGE> 11
Item 2. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations (continued)
-------------------------------------
The Registrant's net interest income on a fully taxable equivalent basis for the
second quarter of 1998 was $261.5 million, a 10.9 percent increase over $235.9
million for the same period of 1997. This increase resulted principally from
improved earning-asset and deposit mix, earning-asset growth and net interest
margin improvement.
The net provision for credit losses was $44.8 million in the 1998 second
quarter, including a $16.7 million provision to conform State Savings and CitFed
to the Registrant's reserving and charge-off practices, compared to $21 million
in the same 1997 quarter. Net charge-offs for the second quarter were .49
percent of average loans and leases, compared with .55 percent for last quarter
and .42 percent for the second quarter of 1997. The net charge-off ratio remains
near the Registrant's historical 10-year average of .50 percent and the reserve
for credit losses is in excess of three times nonperforming assets.
Nonperforming assets as a percentage of total loans, leases and other real
estate owned was .49 percent at June 30, 1998, down from .54 percent at June 30,
1997. The reserve for credit losses as a percentage of total loans and leases
was 1.50 percent at June 30, 1998 compared to 1.42 percent one year earlier.
Total other operating income, excluding securities gains, for the second quarter
increased 21.6 percent to $147.8 million compared to the second quarter of 1997.
Investment advisory income increased 35.7 percent due to a larger customer base
and higher fees resulting from more assets under management. Increased EFT and
merchant processing volume along with higher transaction volume from expanded
debit and ATM card usage led to the 21.7 percent increase in data processing
income. Commercial banking income, credit card fees and mortgage banking revenue
contributed to the 15.7 percent increase in service charges and other fees.
The overhead ratio (operating expenses divided by the sum of taxable equivalent
net interest income and other operating income) for the quarter, excluding
merger-related charges, was 41.8 percent, down from 44.2 percent for the second
quarter of 1997. Total operating expenses were up only 8.3 percent from 1997's
second quarter despite higher than customary spending for technology upgrades
and Year 2000 efforts. Salaries, wages, incentives and employee benefits
increased 9.8 percent compared to last year. Equipment expenses increased 8.9
percent over 1997's second quarter primarily as the result of processing
technology upgrades and the addition of more than 350 ATMs during the past year.
Volume-driven expenses of the Registrant's processing and fee businesses
principally contributed to the 6.8 percent increase in other operating expenses.
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations (continued)
-------------------------------------
Operating expenses include a one-time, merger-related pretax charge of $89.7
million resulting directly from the acquisitions of CitFed Bancorp, Inc. and
State Savings Company. The charge consists of employee-related obligations,
including change-of-control benefits and severance, costs to eliminate duplicate
facilities and equipment, contract terminations, conversion expenses and
professional fees.
Financial Condition
- -------------------
The Registrant's balance sheet remains strong with high-quality assets and solid
capital levels. Net interest income growth continues to be fueled by improved
earning-asset and deposit mix, earning-asset growth and net interest margin
improvement. Although Fifth Third's net interest margin was affected by the
addition of over $5.8 billion in lower-margin assets from the quarter's
acquisitions, the Registrant's enhanced product mix and focus on deposit
accounts improved the results of the acquired entities. Demand deposits and
interest checking accounts grew 13 percent and 24 percent, respectively,
highlighting Fifth Third's success in emphasizing customer deposit accounts.
Direct installment loan originations were $410 million this quarter, far
exceeding $361 million last quarter and $291 million in the second quarter last
year. Residential mortgage originations surpassed $1.5 billion this quarter
compared to $1 billion in the same quarter a year ago. Commercial loans and
commercial and consumer leases all benefited from double-digit growth, led by a
40 percent increase in commercial leases. Fifth Third sold or securitized more
than $1.3 billion of loans during the second quarter, including $201 million of
commercial loans, which improved the mix of earning-assets and permitted further
expansion of origination and servicing capability without increasing balance
sheet leverage.
Liquidity and Capital Resources
- -------------------------------
The maintenance of an adequate level of liquidity is necessary to ensure
sufficient funds are available to meet customer loan demand and deposit
withdrawals. The banking subsidiaries' liquidity sources consist of short-term
marketable securities, maturing loans and federal funds loaned and selected
securitizable loan assets. Liquidity has also been obtained through liabilities
such as customer-related core deposits, funds borrowed, certificates of deposit
and public funds deposits.
At June 30, 1998, shareowners' equity was $3.077 billion, compared to $2.459
billion at June 30, 1997, an increase of $618 million, or 25.1 percent.
Shareowners' equity as a percentage of total assets as of June 30, 1998 was 10.9
percent. The Federal Reserve Board has adopted risk-based capital guidelines
which assign risk weightings to assets and off-balance sheet items and also
define and set minimum capital requirements (risk-based capital ratios). The
guidelines also define "well-capitalized" ratios of Tier 1, total capital and
leverage as 6 percent, 10 percent and 5
12
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations (continued)
-------------------------------------
percent, respectively. The Registrant exceeded these "well-capitalized" ratios
at June 30, 1998 and 1997. At June 30, 1998, the Registrant had a Tier 1
risk-based capital ratio of 11.93 percent, a total risk-based capital ratio of
14.28 percent and a leverage ratio of 9.88 percent. At June 30, 1997, the
Registrant had a Tier 1 risk-based capital ratio of 11.04 percent, a total
risk-based capital ratio of 13.52 percent and a leverage ratio of 9.05 percent.
In January 1998, the Registrant's board of directors rescinded Fifth Third
Bancorp's stock repurchase programs. No shares were purchased under these
programs from June 1997 to May 1998. In June 1998 following the closing of the
State Savings Company acquisition, 843,500 shares were repurchased in the open
market for $45.9 million, or an average purchase price of $54.41 per share, and
were subsequently reissued in the acquisition of CitFed Bancorp on June 26,
1998. In July 1998, 1,559,000 shares of the Fifth Third Bancorp Common Stock
were repurchased in the open market for $98 million, or an average purchase
price of $62.86 per share, to replace shares issued in The Ohio Company
acquisition and remain available for reissuance in the Registrant's stock option
and dividend reinvestment plans. The Registrant does not intend to repurchase
any additional shares in 1998.
Year 2000
- ---------
As with other companies, the Bancorp's computer programs were originally
designed to recognize calendar years by their last two digits. Calculations
performed using these truncated fields will not work properly with dates from
the Year 2000 and beyond. The Bancorp began planning its Year 2000 conversion
early in 1996 and formed a project committee that meets biweekly to review the
status of the conversion. Senior management oversees the project and regularly
reports to the Board of Directors. The Registrant expects to have its internal
computer systems Year 2000 compliant by the end of 1998 and management estimates
that approximately 70 percent of this effort is complete through the second
quarter of 1998 with 87 percent of the critical application effort completed.
The awareness and assessment phases of Fifth Third's Year 2000 effort are
complete and the renovation, validation and implementation phases are scheduled
to be complete for all systems by year-end 1998. Many of the Registrant's
systems are vendor-supplied, and all vendors have provided Fifth Third with
certification or a delivery commitment letter. Testing of those certifications
or following delivery by outside vendors will occur in 1999. Because the Year
2000 compliance effort is largely being completed by internal staff, Fifth Third
does not expect to incur any significant costs with outside contractors relative
to the completion of this task. Fifth Third anticipates a total compliance cost
of $10 million; however, no material incremental costs are projected to be
incurred. The Registrant presently believes that with the planned modifications
to existing systems and conversion to new systems, the Year 2000 compliance
issues will be resolved on a timely basis, and that any related costs will not
have a material impact on the operations, cash flows, or financial condition of
future periods.
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations (continued)
-------------------------------------
The risks associated with Fifth Third's Year 2000 compliance relate primarily to
its relationship with critical business partners, which include customers and
service suppliers, and their ability to effectively address their own Year 2000
issues. Each division within Fifth Third has initiated projects to assess the
Year 2000 preparedness of individual customers and material relationships and
the impact on the Registrant in accordance with Federal Financial Institutions
Examination Council guidelines. Contingency plans for critical business partners
are being developed as their Year 2000 plans and procedures are analyzed.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
- -------------------------------------------------------------------
Interest rate risk management focuses on maintaining consistent growth in net
interest income within Board-approved policy limits. The Registrant uses an
earnings simulation model to analyze net interest income sensitivity to
movements in interest rates. Given an immediate, sustained 200 basis point
upward shock to the yield curve used in the simulation model, it is estimated
net interest income for the Registrant would increase by 1.25 percent over one
year and increase by 7.96 percent over two years. A 200 basis point immediate,
sustained downward shock in the yield curve would decrease net interest income
by an estimated 2.41 percent over one year and decrease net interest income by
an estimated 8.46 percent over two years. All of these estimated changes in net
interest income are within the policy guidelines established by the Registrant's
board of directors.
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
(a) List of Exhibits
(11) - Computation of Consolidated Earnings Per Share for the Three
and Six Months Ended June 30, 1998 and 1997
(27) - Financial Data Schedules for the Six Months Ended June 30,
1998
(b) Reports on Form 8-K
None
14
<PAGE> 15
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fifth Third Bancorp
Registrant
Date: August 14, 1998 /s/ Neal E. Arnold
-------------------
Neal E. Arnold
Senior Vice President and
Chief Financial Officer
15
<PAGE> 1
EXHIBIT 11
----------
FIFTH THIRD BANCORP
COMPUTATION OF CONSOLIDATED EARNINGS PER SHARE
($000'S, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
FOR THE THREE MONTHS FOR THE SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
--------------------------------------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
NET INCOME $57,760 111,272 181,991 222,240
======= ======= ======= =======
EARNINGS PER SHARE:
WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING (a) 264,988 260,979 263,836 262,738
======= ======= ======= =======
PER SHARE (NET INCOME DIVIDED BY THE WEIGHTED
AVERAGE NUMBER OF SHARES OUTSTANDING) $ 0.22 0.43 0.69 0.85
======= ======= ======= =======
DILUTED EARNINGS PER SHARE:
NET INCOME $57,760 111,272 181,991 222,240
======= ======= ======= =======
ADJUSTED WEIGHTED AVERAGE NUMBER OF SHARES
OUTSTANDING - AFTER GIVING EFFECT TO THE
CONVERSION OF STOCK OPTIONS (a) 270,026 264,784 268,952 267,374
======= ======= ======= =======
PER SHARE (ADJUSTED NET INCOME DIVIDED BY
THE ADJUSTED WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING) $ 0.22 0.42 0.68 0.83
======= ======= ======= =======
<FN>
- -------------------
(a) Per share amounts and average shares outstanding have been adjusted for
the three-for-two stock splits effected in the form of stock dividends
paid April 15, 1998 and July 15, 1997.
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIFTH THIRD
BANCORP'S QUARTERLY REPORT ON FORM 10-Q FOR THE SIX MONTHS ENDED JUNE 30, 1998,
AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<CIK> 0000035527
<NAME> FIFTH THIRD BANCORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> JUN-30-1998
<CASH> 882,432
<INT-BEARING-DEPOSITS> 38,328
<FED-FUNDS-SOLD> 700
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 7,890,292
<INVESTMENTS-CARRYING> 100,510
<INVESTMENTS-MARKET> 100,514
<LOANS> 17,975,114
<ALLOWANCE> 270,129
<TOTAL-ASSETS> 28,292,682
<DEPOSITS> 18,792,343
<SHORT-TERM> 3,935,052
<LIABILITIES-OTHER> 850,656
<LONG-TERM> 1,637,185
0
0
<COMMON> 594,729
<OTHER-SE> 2,482,717
<TOTAL-LIABILITIES-AND-EQUITY> 28,292,682
<INTEREST-LOAN> 725,034
<INTEREST-INVEST> 290,428
<INTEREST-OTHER> 4,656
<INTEREST-TOTAL> 1,020,118
<INTEREST-DEPOSIT> 353,830
<INTEREST-EXPENSE> 527,681
<INTEREST-INCOME-NET> 492,437
<LOAN-LOSSES> 67,602
<SECURITIES-GAINS> 4,635
<EXPENSE-OTHER> 434,344
<INCOME-PRETAX> 278,876
<INCOME-PRE-EXTRAORDINARY> 181,991
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 181,991
<EPS-PRIMARY> .69
<EPS-DILUTED> .68
<YIELD-ACTUAL> 3.85
<LOANS-NON> 80,743
<LOANS-PAST> 48,700
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 250,950
<CHARGE-OFFS> 64,629
<RECOVERIES> 13,375
<ALLOWANCE-CLOSE> 270,129
<ALLOWANCE-DOMESTIC> 270,129
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
