<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 September 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 266,765,002 shares of the Registrant's Common Stock, without par
value, outstanding as of October 31, 1998.
<PAGE> 2
FIFTH THIRD BANCORP
INDEX
<TABLE>
<S> <C> <C>
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
September 30, 1998 and 1997 and December 31, 1997 3
Consolidated Statements of Income -
Three and Nine Months Ended September 30, 1998 and 1997 4
Consolidated Statements of Cash Flows -
Nine Months Ended September 30, 1998 and 1997 5
Consolidated Statements of Changes in Shareowners' Equity -
Nine Months Ended September 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 15
Part II. Other Information
Item 6. Exhibits and Reports on Form 8-K 15
</TABLE>
2
<PAGE> 3
<TABLE>
<CAPTION>
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------
SEPTEMBER 30, DECEMBER 31, SEPTEMBER 30,
($000'S) 1998 1997 1997
- -------------------------------------------------------------------------------------------------------------
- -------------------------------------------------------------------------------------------------------------
ASSETS
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash and Due from Banks $ 748,662 777,378 708,580
Securities Available for Sale (a) 8,426,893 8,139,465 8,018,249
Securities Held to Maturity (b) 85,175 85,010 334,967
Other Short-Term Investments 131,423 180,425 260,433
Loans Held for Sale 367,355 263,772 141,976
Loans and Leases
Commercial Loans 4,682,028 4,363,289 4,244,173
Construction Loans 541,385 560,381 582,599
Commercial Mortgage Loans 1,185,160 1,273,885 1,298,799
Commercial Lease Financing 1,650,675 1,417,133 1,228,048
Residential Mortgage Loans 4,403,228 5,037,987 4,937,492
Consumer Loans 3,257,976 3,068,597 2,906,028
Consumer Lease Financing 2,386,936 2,165,598 2,083,690
Unearned Income (669,317) (573,927) (503,206)
Reserve for Credit Losses (261,580) (250,950) (242,278)
- -------------------------------------------------------------------------------------------------------------
Total Loans and Leases 17,176,491 17,061,993 16,535,345
Bank Premises and Equipment 324,192 301,029 294,351
Accrued Income Receivable 270,253 213,049 203,396
Other Assets 802,376 688,552 694,146
- -------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 28,332,820 27,710,673 27,191,443
- -------------------------------------------------------------------------------------------------------------
LIABILITIES
- -------------------------------------------------------------------------------------------------------------
Deposits
Demand $ 2,877,817 2,738,191 2,534,799
Interest Checking 2,800,954 2,555,108 2,364,534
Savings and Money Market 4,345,158 4,503,926 4,435,677
Time Deposits 8,615,557 9,222,671 9,367,337
- -------------------------------------------------------------------------------------------------------------
Total Deposits 18,639,486 19,019,896 18,702,347
Federal Funds Borrowed 2,023,793 1,253,553 1,130,637
Short-Term Bank Notes 60,000 555,000 675,000
Other Short-Term Borrowings 1,715,674 1,842,378 1,817,791
Accrued Taxes, Interest and Expenses 756,419 567,906 532,573
Other Liabilities 185,145 200,421 162,280
Long-Term Debt 1,842,663 1,508,683 1,560,236
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 25,223,180 24,947,837 24,580,864
- -------------------------------------------------------------------------------------------------------------
SHAREOWNERS' EQUITY
- -------------------------------------------------------------------------------------------------------------
Common Stock (c) 592,128 583,005 579,020
Capital Surplus 465,205 444,815 444,545
Retained Earnings 2,005,877 1,821,342 1,736,622
Unrealized Gains
on Securities Available for Sale 117,700 98,254 51,137
Treasury Stock (71,270) (184,580) (200,745)
- -------------------------------------------------------------------------------------------------------------
TOTAL SHAREOWNERS' EQUITY 3,109,640 2,762,836 2,610,579
- -------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREOWNERS' EQUITY $ 28,332,820 27,710,673 27,191,443
- -------------------------------------------------------------------------------------------------------------
(a) Amortized cost: September 30, 1998 - $8,246,066, December 31, 1997 - $7,988,085 and September 30, 1997 -
$7,939,213.
(b) Market value: September 30, 1998 - $85,170, December 31, 1997 - $85,375 and September 30, 1997 -
$336,850.
(c) Stated value $2.22 per share; authorized 300,000,000; outstanding September 30, 1998 - 266,724,258
(excludes 1,116,365 treasury shares), December 31, 1997 - 262,614,641 (excludes 5,424,885 treasury
shares) and September 30, 1997 - 262,023,190 (excludes 5,931,702 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>
See Notes to Consolidated Financial Statements
3
<PAGE> 4
<TABLE>
<CAPTION>
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
- -------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------------------------
($000'S) 1998 1997 1998 1997
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans and Leases $ 366,625 348,719 $ 1,091,659 1,010,857
Interest on Securities
Taxable 130,175 128,374 414,695 391,404
Exempt from Income Taxes 3,097 3,189 9,005 10,831
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest on Securities 133,272 131,563 423,700 402,235
Interest on Other Short-Term Investments 2,198 4,078 6,854 12,437
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest Income 502,095 484,360 1,522,213 1,425,529
- -------------------------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits
Interest Checking 18,036 15,069 50,617 42,318
Savings and Money Market 36,826 38,884 115,179 114,750
Time Deposits 118,262 129,055 361,158 380,315
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest on Deposits 173,124 183,008 526,954 537,383
Interest on Federal Funds Borrowed 30,800 18,750 89,891 61,324
Interest on Short-Term Bank Notes 3,219 10,168 25,746 28,990
Interest on Other Short-Term Borrowings 20,783 19,443 65,253 57,929
Interest on Long-Term Debt and Notes 23,774 24,610 71,537 64,240
- -------------------------------------------------------------------------------------------------------------------------------
Total Interest Expense 251,700 255,979 779,381 749,866
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME 250,395 228,381 742,832 675,663
Provision for Credit Losses 15,234 18,929 82,836 59,290
- -------------------------------------------------------------------------------------------------------------------------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 235,161 209,452 659,996 616,373
OTHER OPERATING INCOME
Investment Advisory Income 38,489 24,168 97,453 68,748
Service Charges on Deposits 32,936 27,849 94,199 81,126
Data Processing Income 35,412 29,778 97,569 79,090
Other Service Charges and Fees 58,264 45,273 159,630 133,196
Securities Gains 2,236 2,031 6,871 2,338
- -------------------------------------------------------------------------------------------------------------------------------
Total Other Operating Income 167,337 129,099 455,722 364,498
OPERATING EXPENSES
Salaries, Wages and Incentives 75,226 62,084 212,106 179,080
Employee Benefits 15,053 13,568 42,349 40,016
Equipment Expenses 8,128 7,189 23,842 20,916
Net Occupancy Expenses 13,210 12,163 37,891 36,113
Other Operating Expenses 69,876 65,412 209,948 193,020
Merger-Related Charges - - 89,701 -
- -------------------------------------------------------------------------------------------------------------------------------
Total Operating Expenses 181,493 160,416 615,837 469,145
- -------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES 221,005 178,135 499,881 511,726
Applicable Income Taxes 76,932 59,529 173,817 170,880
- -------------------------------------------------------------------------------------------------------------------------------
NET INCOME (a) $ 144,073 118,606 $ 326,064 340,846
- -------------------------------------------------------------------------------------------------------------------------------
Per Share (b):
Earnings $ 0.54 0.45 $ 1.23 1.30
Diluted Earnings $ 0.53 0.45 $ 1.21 1.28
Cash Dividends $ 0.17 .14 2/3 $ 0.51 0.42 2/9
- -------------------------------------------------------------------------------------------------------------------------------
Average Shares (000's) (b):
Outstanding 266,840 261,613 264,849 262,359
Diluted 272,128 266,163 269,976 266,443
- -------------------------------------------------------------------------------------------------------------------------------
(a) and (b) are described on Page 6.
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
<TABLE>
<CAPTION>
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
- --------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
------------------------------
($000'S) 1998 1997
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 326,064 340,846
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses 82,836 59,290
Depreciation, Amortization and Accretion 58,946 50,775
Provision for Deferred Income Taxes 38,191 22,180
Realized Securities Gains (8,905) (6,895)
Realized Securities Losses 2,034 4,557
Proceeds from Sales of Residential Mortgage Loans Held for Sale 2,382,295 1,059,422
Net Gains on Sales of Loans (24,022) (7,656)
Increase in Residential Mortgage Loans Held for Sale (2,444,211) (1,122,763)
Decrease (Increase) in Accrued Income Receivable (57,204) 8,596
Decrease (Increase) in Other Assets (79,929) 48,916
Increase in Accrued Taxes, Interest and Expenses 112,113 74,331
Decrease in Other Liabilities (27,784) (256)
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 360,424 531,343
- --------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from Sales of Securities Available for Sale 1,573,104 1,221,678
Proceeds from Calls, Paydowns and Maturities of Securities Available for Sale 1,732,458 868,849
Purchases of Securities Available for Sale (2,526,532) (1,791,974)
Proceeds from Calls, Paydowns and Maturities of Securities Held to Maturity 39,356 207,559
Purchases of Securities Held to Maturity (52,058) (116,166)
Increase in Other Short-Term Investments 49,002 16,719
Increase in Loans and Leases (1,172,629) (1,466,678)
Purchases of Bank Premises and Equipment (50,128) (42,610)
Proceeds from Disposal of Bank Premises and Equipment 7,621 4,106
Net Cash Paid in Acquisitions (15,000) (10,906)
- --------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (414,806) (1,109,423)
- --------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Purchases of Deposits - 128,927
Decrease in Core Deposits (424,913) (365,667)
Increase in CDs - $100,000 and Over, including Foreign 44,503 651,689
Increase (Decrease) in Federal Funds Borrowed 770,240 (290,057)
Decrease in Short-Term Bank Notes (495,000) (181,000)
Increase (Decrease) in Other Short-Term Borrowings (126,704) 463,312
Proceeds from Issuance of Long-Term Debt 1,452,869 1,739,548
Repayment of Long-Term Debt (1,118,889) (1,378,603)
Payment of Cash Dividends (122,597) (98,605)
Exercise of Stock Options 14,728 14,209
Proceeds from Sale of Common Stock 178,125 -
Purchases of Treasury Stock (143,890) (276,307)
Other (2,806) 1,781
- --------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 25,666 409,227
- --------------------------------------------------------------------------------------------------------------------
DECREASE IN CASH AND DUE FROM BANKS (28,716) (168,853)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 777,378 877,433
- --------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 748,662 708,580
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE> 6
<TABLE>
<CAPTION>
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREOWNERS' EQUITY (UNAUDITED)
- -----------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------------------
($000'S) 1998 1997
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C>
BALANCE AT DECEMBER 31 $ 2,762,836 2,561,335
Net Income 326,064 340,846
Nonowner Changes in Equity, Net of Tax:
Change in Unrealized Gains on Securities Available for Sale 19,446 39,820
- -----------------------------------------------------------------------------------------------------------
Net Income and Nonowner Changes in Equity 345,510 380,666
Cash Dividends Declared (1998 - $.51 per share
and 1997 - $.42 2/9 per share) (b) (133,326) (101,963)
Shares Acquired for Treasury (143,890) (276,307)
Earnings Adjustment of Pooled Entity (a) (7,803) -
Stock Options Exercised
Including Treasury Shares Issued 14,728 14,209
Stock Issued in Public Offering 178,125 -
Stock Issued in Acquisitions and Other 93,460 32,639
- -----------------------------------------------------------------------------------------------------------
BALANCE AT SEPTEMBER 30 $ 3,109,640 2,610,579
- -----------------------------------------------------------------------------------------------------------
(a) 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.
(b) 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.
</TABLE>
See Notes to Consolidated Financial Statements
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 September 30, 1998 and 1997, the results of operations
for the three and nine months ended September 30, 1998 and 1997, and
cash flows for the nine months ended September 30, 1998 and 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 nine months ended September 30, 1998 and
1997 and cash flows for the nine months ended September 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 (000's):
<TABLE>
<CAPTION>
Three Months Three Months Nine Months
Ended Ended Ended
March 31, September 30, September 30,
1998 1997 1997
- ---------------------------------------------------------------------------------------------------------
NET INTEREST INCOME
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fifth Third Bancorp $ 197,900 186,366 552,497
CitFed Bancorp, Inc. 19,614 18,249 53,401
State Savings Company 25,340 23,766 69,765
- ---------------------------------------------------------------------------------------------------------
Combined $ 242,854 228,381 675,663
- ---------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME
- ---------------------------------------------------------------------------------------------------------
Fifth Third Bancorp $ 126,381 115,034 322,270
CitFed Bancorp, Inc. 7,804 8,925 25,690
State Savings Company 5,935 5,140 16,538
- ---------------------------------------------------------------------------------------------------------
Combined $ 140,120 129,099 364,498
- ---------------------------------------------------------------------------------------------------------
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
NET INCOME
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Fifth Third Bancorp $ 108,981 103,424 294,001
CitFed Bancorp, Inc. 7,803 6,655 18,765
State Savings Company 7,447 8,527 28,080
- ---------------------------------------------------------------------------------------------------------
Combined $ 124,231 118,606 340,846
- ---------------------------------------------------------------------------------------------------------
</TABLE>
The combined consolidated results of operations are not necessarily
indicative of the results that would have occurred had the acquisitions
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 periods presented.
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 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 periods
presented.
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 implementation
will have 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 nine months of 1998, the Registrant paid $784,999,000 in
interest and $112,650,000 in Federal income taxes. In the first nine
months of 1997, the Registrant paid $764,144,000 in interest and
$81,150,000 in Federal income taxes. In the first nine months of 1998,
the Registrant had noncash investing activities consisting of the
securitization of $942,600,000 of residential mortgage loans. There
were $838,847,000 of residential mortgage loan securitizations during
the first nine months of 1997.
9. In 1998, the Registrant adopted Statement of Financial Accounting
Standards 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 Statements 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 nine months ended September 30 is
provided below (000's).
<TABLE>
<CAPTION>
1998 1997
- -------------------------------------------------------------------------------------------------------------------------
Reclassification Adjustments, Before Tax
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Change in Unrealized Gains Arising During Period $ 23,046 58,924
Reclassification Adjustment for Gains Included in Net Income 6,871 2,338
- -------------------------------------------------------------------------------------------------------------------------
Net Unrealized Gains on Securities Available for Sale $ 29,917 61,262
- -------------------------------------------------------------------------------------------------------------------------
Related Tax Effects
- -------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Gains Arising During Period $ (8,066) (20,624)
Reclassification Adjustment for Gains Included in Net Income (2,405) (818)
- -------------------------------------------------------------------------------------------------------------------------
Net Unrealized Gains on Securities Available for Sale $(10,471) (21,442)
- -------------------------------------------------------------------------------------------------------------------------
Reclassification Adjustments, Net of Tax
- -------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Gains Arising During Period $ 14,980 38,300
Reclassification Adjustment for Gains Included in Net Income 4,466 1,520
- -------------------------------------------------------------------------------------------------------------------------
Net Unrealized Gains on Securities Available for Sale $ 19,446 39,820
- -------------------------------------------------------------------------------------------------------------------------
Accumulated Nonowner Changes in Equity
- -------------------------------------------------------------------------------------------------------------------------
Beginning Balance-Unrealized Holding Gains on Securities Available for Sale $ 98,254 11,317
Current Period Change 19,446 9,820
- -------------------------------------------------------------------------------------------------------------------------
Ending Balance-Unrealized Holding Gains on Securities Available for Sale $117,700 51,137
- -------------------------------------------------------------------------------------------------------------------------
</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.
11. Reconciliation of Earnings Per Share to Diluted Earnings Per Share
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED SEPTEMBER 30, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
AVERAGE PER-SHARE AVERAGE PER-SHARE
(000's) INCOME SHARES AMOUNT INCOME SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
EPS
Income available to
common shareowners $144,073 266,840 $ 0.54 $118,606 261,613 $ 0.45
EFFECT OF DILUTIVE SECURITIES
Stock Options 5,288 4,550
- ----------------------------------------------------------------------------------------------------------------------------------
DILUTED EPS
Income available to
common shareowners
plus assumed conversions $144,073 272,128 $ 0.53 $118,606 266,163 $ 0.45
- ----------------------------------------------------------------------------------------------------------------------------------
NINE MONTHS ENDED SEPTEMBER 30, 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
PER-SHARE PER-SHARE
(000's) INCOME SHARES AMOUNT INCOME SHARES AMOUNT
- ----------------------------------------------------------------------------------------------------------------------------------
EPS
Income available to
common shareowners $326,064 264,849 $ 1.23 $340,846 262,359 $ 1.30
EFFECT OF DILUTIVE SECURITIES
Stock Options 5,127 4,084
- ----------------------------------------------------------------------------------------------------------------------------------
DILUTED EPS
Income available to
common shareowners
plus assumed conversions $326,064 269,976 $ 1.21 $340,846 266,443 $ 1.28
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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,
10
<PAGE> 11
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.
Results of Operations
- ---------------------
The Registrant's operating income was $401.6 million for the first nine months
of 1998 and $144.1 million for the third quarter, up 17.8 percent and 21.5
percent, respectively, compared to $340.8 million and $118.6 million for the
same periods last year. Third quarter diluted operating earnings per share were
$.53, up 17.8 percent over last year's $.45 and $1.49 for the first nine months,
up 16.4 percent over 1997's $1.28.
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
were $1.21 for the first nine months of 1998 with net income totaling $326.1
million.
Total assets were $28.3 billion at quarter end, compared to 1997's quarter-end
assets of $27.2 billion. For 1998's third quarter, return on average assets was
2.03 percent and return on average equity was 19.3 percent.
The Registrant's net interest income on a fully taxable equivalent basis for the
third quarter of 1998 was $262.3 million, a 9.6 percent increase over $239.2
million for the same 1997 period. This increase resulted principally from
improved earning-asset and deposit mix and a 16 basis point increase in net
interest margin.
The net provision for credit losses was $15.2 million in the 1998 third quarter.
The net provision for credit losses for the nine months ended September 30, 1998
included a $16.7 million provision to conform State Savings and CitFed to the
Registrant's reserving and charge-off practices. Net charge-offs for the third
quarter were .54 percent of average loans and leases, compared with .49 percent
for last quarter and .42 percent for the third 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 four times
nonperforming assets. Nonperforming assets as a percentage of total loans,
leases and other real estate owned was .34 percent at September 30, 1998, down
from .51 percent at September 30, 1997. The reserve for credit losses as a
percentage of total loans and leases was 1.50 percent at September 30, 1998
compared to 1.44 percent one year earlier.
11
<PAGE> 12
Item 2. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations (continued)
-------------------------------------
Total other operating income, excluding securities gains, for the third quarter
increased 29.9 percent to $165.1 million compared to the third quarter of 1997.
Investment advisory services posted a 59 percent increase featuring solid growth
in all lines of business, especially retail brokerage. Midwest Payment Systems'
continued success in attracting new EFT and merchant processing clients, the
growing use of our expanding ATM network and the increased popularity of debit
cards contributed to a 19 percent increase in data processing income. Service
charges on deposits were up 18 percent from growth in transaction accounts.
Mortgage banking revenue, consumer loan and lease fees and commercial banking
income contributed to a 29 percent increase in other service charges and fees.
The overhead ratio (operating expenses divided by the sum of taxable equivalent
net interest income and other operating income) for the quarter was 42.4
percent, down from 43.6 percent for the third quarter of 1997. Acquisitions,
growth in affiliate markets and Year 2000 efforts affected year-over-year
compensation expense comparisons. Volume-related expenses of the Registrant's
processing and fee businesses, along with higher loan and lease processing costs
from record volumes, contributed mostly to the 7 percent increase in other
operating expenses.
Operating expenses for the nine months ended September 30, 1998 include a
one-time, merger-related pretax charge of $89.7 million resulting directly from
the acquisitions of CitFed and State Savings. 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 rose 10 percent over 1997's third quarter
and was driven by an improved earning-asset and deposit mix and a 16 basis point
increase in net interest margin. Fifth Third's net interest margin was 3.97
percent in the third quarter, up from 3.87 percent last quarter and 3.81 percent
in the third quarter a year ago. To improve the performance of the entities
acquired last quarter, the Registrant sold $973 million of lower-yielding
securities, including those acquired in the CitFed and State Savings mergers,
and reduced related higher-cost borrowings by $474 million. In addition, $863
million of residential mortgages acquired in the mergers were securitized. The
reduction in total loans and leases from the securitization was offset by strong
growth in commercial and consumer loans and leases. Despite the decline in total
earning assets from last quarter, Fifth Third's success in aggressively
improving mix resulted in an increase in net interest income compared to last
quarter.
Successful sales campaigns in Fifth Third's branch locations fueled over $417
million in direct installment loan originations this quarter, a 47 percent
increase over the $284 million in the third quarter last year. Residential
mortgage originations were $1.1 billion this quarter compared to
12
<PAGE> 13
Item 2. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations (continued)
-------------------------------------
$1.2 billion in the 1997 third quarter. Commercial loan and lease growth also
remained strong highlighted by a 14 percent increase in commercial loans and
leases, excluding the effect of securitizations over the past year, and a 13
percent increase in consumer loan and leases. Emphasis on transaction account
promotions has continued to improve the Registrant's deposit cost and mix.
Demand deposits and interest-bearing transaction account balances were up 16
percent over the third quarter of 1997.
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 September 30, 1998, shareowners' equity was $3.110 billion, compared to
$2.611 billion at September 30, 1997, an increase of $499 million, or 19.1
percent. Shareowners' equity as a percentage of total assets as of September 30,
1998 was 10.98 percent. The Federal Reserve Board has adopted risk-based capital
guidelines which assign risk weightings to assets and off-balance sheet items
and also define and set minimum capital requirements (risk-based capital
ratios). The guidelines also define "well-capitalized" ratios of Tier 1, total
capital and leverage as 6 percent, 10 percent and 5 percent, respectively. The
Registrant exceeded these "well-capitalized" ratios at September 30, 1998 and
1997. At September 30, 1998, the Registrant had a Tier 1 risk-based capital
ratio of 12.34 percent, a total risk-based capital ratio of 14.57 percent and a
leverage ratio of 10.22 percent. At September 30, 1997, the Registrant had a
Tier 1 risk-based capital ratio of 11.07 percent, a total risk-based capital
ratio of 13.45 percent and a leverage ratio of 9.36 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
issued in The Ohio Company acquisition were repurchased in the open market for
$98 million, or an average purchase price of $62.86 per share, 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.
13
<PAGE> 14
Item 2. Management's Discussion and Analysis of Financial Condition
- -------------------------------------------------------------------
and Results of Operations (continued)
-------------------------------------
Year 2000
- ---------
As with other companies, the Registrant's computer programs were originally
designed to recognize calendar years by their last two digits. Calculations
performed using these truncated fields may not work properly with dates from the
Year 2000 and beyond. The Registrant began planning its Year 2000 conversion
early in 1996 and formed a project committee that meets biweekly to review the
status of the conversion. The Registrant's project includes both information
technology systems and computer chip embedded functions such as safes,
elevators, security systems, building heating and cooling and other operating
facilities. Senior management oversees the project and regularly reports to the
Board of Directors. Senior management oversees the project and regularly reports
to the Board of Directors. The Registrant expects to have its internal computer
systems substantially Year 2000 compliant by the end of 1998 and management
estimates that approximately 95 percent of this effort is complete through the
third quarter of 1998 with 100 percent of the critical application effort
completed.
The project involves two phases. The first is the awareness and assessment
phases of Fifth Third's Year 2000 effort which are complete. The second is the
renovation, validation and implementation phases which are scheduled to be
substantially complete for all systems by year-end 1998. In 1999, the Registrant
will conduct internal integration testing and interface testing with critical
business partners.
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 under $10 million; however, no material incremental
costs are projected to be incurred. The estimated cost includes all software,
hardware and labor costs. 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.
The risks associated with Fifth Third's Year 2000 compliance relate primarily to
its relationship with critical business partners, which include customers,
vendors, service suppliers, and utilities and their ability to effectively
address their own Year 2000 issues. Major risks associated with the Year 2000
issue include a shut down of voice and data communication systems due to failure
by systems, satellites or telephone companies; excessive cash withdrawal
activities; ATM failures; cash courier delays or non-availability; problems with
international accounts or offices, including inaccurate or delayed information
or inaccessibility to data; and government facilities or utility companies not
opening or operating. 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. The Federal Reserve, which is Fifth Third's primary
bank regulator, will be including a review of the risk assessments and
contingency plans in its quarterly examinations of Fifth Third's Year 2000
preparedness.
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 1.27 percent over one
year and increase by 8.24 percent over two years. A 200 basis point immediate,
sustained downward shock in the yield curve would decrease net interest income
by an estimated 3.50 percent over one year and decrease net interest income by
an estimated 8.22 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.
14
<PAGE> 15
PART II. OTHER INFORMATION
Item 6. Exhibits and Reports on Form 8-K
- -----------------------------------------
(a) List of Exhibits
(27) - Financial Data Schedule for the Nine Months Ended
September 30, 1998
(b) Reports on Form 8-K
None
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fifth Third Bancorp
-------------------
Registrant
Date: November 13, 1998 /s/ Neal E. Arnold
------------------
Neal E. Arnold
Senior Vice President and
Chief Financial Officer
15
<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 NINE MONTHS ENDED SEPTEMBER 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> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<CASH> 748,662
<INT-BEARING-DEPOSITS> 78,423
<FED-FUNDS-SOLD> 53,000
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,426,893
<INVESTMENTS-CARRYING> 85,175
<INVESTMENTS-MARKET> 85,170
<LOANS> 17,438,071
<ALLOWANCE> 261,580
<TOTAL-ASSETS> 28,332,820
<DEPOSITS> 18,639,486
<SHORT-TERM> 3,799,467
<LIABILITIES-OTHER> 941,564
<LONG-TERM> 1,842,663
0
0
<COMMON> 592,128
<OTHER-SE> 2,517,512
<TOTAL-LIABILITIES-AND-EQUITY> 28,332,820
<INTEREST-LOAN> 1,091,659
<INTEREST-INVEST> 423,700
<INTEREST-OTHER> 6,854
<INTEREST-TOTAL> 1,522,213
<INTEREST-DEPOSIT> 526,954
<INTEREST-EXPENSE> 779,381
<INTEREST-INCOME-NET> 742,832
<LOAN-LOSSES> 82,836
<SECURITIES-GAINS> 6,871
<EXPENSE-OTHER> 615,837
<INCOME-PRETAX> 499,881
<INCOME-PRE-EXTRAORDINARY> 326,064
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 326,094
<EPS-PRIMARY> 1.23
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<LOANS-NON> 52,695
<LOANS-PAST> 76,495
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