<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF
THE SECURITIES EXCHANGE ACT OF 1934
For fiscal year ended December 31, 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 of (I.R.S. Employer
incorporation or organization) Identification Number)
38 Fountain Square Plaza
Cincinnati, Ohio 45263
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (513) 579-5300
Securities registered pursuant to Section 12(g) of the Act:
Common Stock Without Par Value
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: / /
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. /X/
The Aggregate Market Value of the Voting Stock held by non-affiliates of the
Registrant was $12,846,228,056 as of February 1, 1999. (1)
There were 267,147,048 shares of the Registrant's Common Stock, without par
value, outstanding as of February 1, 1999.
DOCUMENTS INCORPORATED BY REFERENCE
1998 Annual Report to Shareholders: Parts I, II and IV
Proxy Statement for 1999 Annual Meeting of Shareholders: Parts III and IV
(1) In calculating the market value of securities held by non-affiliates of
Registrant as disclosed on the cover page of this Form 10-K, Registrant has
treated as securities held by affiliates as of December 31, 1998, voting stock
owned of record by its directors and principal executive officers, shareholders
owning greater than 10% of the voting stock and voting stock held by
Registrant's trust departments in a fiduciary capacity.
<PAGE> 2
FIFTH THIRD BANCORP
1998 FORM 10-K ANNUAL REPORT
TABLE OF CONTENTS
PART I
<TABLE>
<CAPTION>
Page
----
<S> <C>
Item 1. Business 3
Item 2. Properties 14
Item 3. Legal Proceedings 14
Item 4. Submission of Matters to a Vote of Security Holders 14
PART II
Item 5. Market For Registrant's Common Equity and Related
Shareholder Matters 17
Item 6. Selected Financial Data 17
Item 7. Management's Discussion and Analysis of Financial Condition
and Results of Operations 17
Item 7A. Quantitative and Qualitative Disclosures About Market Risk 17
Item 8. Financial Statements and Supplementary Data 17
Item 9. Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 17
PART III
Item 10. Directors and Executive Officers of the Registrant 17
Item 11. Executive Compensation 18
Item 12. Security Ownership of Certain Beneficial Owners and Management 18
Item 13. Certain Relationships and Related Transactions 18
PART IV
Item 14. Exhibits, Financial Statement Schedules, and
Reports on Form 8-K 18
</TABLE>
2
<PAGE> 3
PART I
ITEM 1. BUSINESS
- -----------------
ORGANIZATION
Fifth Third Bancorp (the "Company") is an Ohio corporation organized in 1975 as
a bank holding company registered under the Bank Holding Company Act of 1956, as
amended (the "Act"), and subject to regulation by the Federal Reserve Board. The
Company, with its principal office located in Cincinnati, is a multi-bank
holding company as defined in the Act and is registered as such with the Board
of Governors of the Federal Reserve System and has 17 wholly-owned subsidiaries:
Fifth Third Bank; Fifth Third Bank, Central Ohio; Fifth Third Bank, Northwestern
Ohio, N.A.; Fifth Third Bank, Ohio Valley; Fifth Third Bank, Western Ohio; Fifth
Third Bank, Florida; Fifth Third Bank, Northern Kentucky, Inc.; Fifth Third
Bank, Kentucky, Inc.; Fifth Third Bank, Indiana; Fifth Third Bank, Southwest,
F.S.B.; Fifth Third Community Development Company; Fifth Third Investment
Company; Fountain Square Insurance Company; Calvin Hotel Co.; Fifth Third/The
Ohio Company; State Savings Mortgage Company and Heartland Capital Management,
Inc.
At December 31, 1998, the Company, its affiliated banks and other subsidiaries
had consolidated total assets of $28.9 billion, consolidated total deposits of
$18.8 billion and consolidated total shareholders' equity of $3.2 billion.
The Company, through its subsidiaries, engages primarily in commercial, retail
and trust banking, investment services and leasing activities and also provides
credit life, accident and health insurance, discount brokerage services and
property management for its properties. Those subsidiaries consist of The Fifth
Third Company, Fifth Third Securities, Inc., The Fifth Third Leasing Company,
Midwest Payment Systems, Inc. ("MPS"), Fifth Third International Company and
Fifth Third/W. Lyman Case & Company. Fifth Third's affiliates provide a full
range of financial products and services to the retail, commercial, financial,
governmental, educational and medical sectors, including a wide variety of
checking, savings and money market accounts, and credit products such as credit
cards, installment loans, mortgage loans and leasing. Each of the banking
affiliates has deposit insurance provided by the Federal Deposit Insurance
Corporation ("FDIC") through the Bank Insurance Fund ("BIF") and the Savings
Association Insurance Fund ("SAIF").
The Company, through its banking subsidiaries, operates for itself and other
financial institutions a proprietary automated teller machine ("ATM") network,
Jeanie(R). The Jeanie system participates in a shared ATM network called "Money
Station(R)," which includes several Ohio bank holding companies and over 5,000
ATM's. The "Money Station" network participates in another shared ATM network
called "PLUS System(R)," which is a nationwide network with over 170,000
participating ATM's. Fifth Third Bank, through its wholly-owned subsidiary, MPS,
also provides electronic switch services for several regional banks and bank
holding companies in Ohio, Kentucky and Illinois.
3
<PAGE> 4
Fifth Third International Company has a 99.9 percent owned subsidiary: Fifth
Third Trade Services Limited. Fifth Third Investment Company owns the remaining
.01 percent.
The Fifth Third Leasing Company has a 100 percent owned subsidiary: Fifth Third
Auto Leasing Trust.
ACQUISITIONS
The Company is the result of mergers and acquisitions over the years involving
financial institutions throughout Ohio, Indiana, Kentucky, Arizona and Florida.
The Company made the following acquisitions during 1998:
On April 9, 1998, the Company acquired W. Lyman Case & Company, a commercial
mortgage banking company headquartered in Columbus, Ohio, for $15 million. W.
Lyman Case & Company originated more than $680 million in financing and equity
transactions since acquisition and has a loan servicing portfolio of $2 billion
at year-end 1998. On June 12, 1998, the Company acquired The Ohio Company, a
full-service broker-dealer for retail and institutional clients headquartered in
Columbus, Ohio, for consideration consisting of 1,862,765 shares of the
Company's common stock. These transactions were accounted for as purchases.
On June 19, 1998, the Company acquired State Savings Company ("State"), a
privately-owned thrift holding company headquartered in Columbus, Ohio with $2.7
billion in assets. On June 26, 1998, the Company acquired CitFed Bancorp, Inc.
("CitFed"), a publicly-traded savings and loan holding company headquartered in
Dayton, Ohio with $3.1 billion in assets. These transactions were tax-free,
stock-for-stock exchanges accounted for as poolings-of-interests. The Company
exchanged 16,625,271 shares of the Company's common stock for all outstanding
shares of State. The Company exchanged 13,222,869 shares of the Company's common
stock for each outstanding share of CitFed.
Financial data for all prior periods has been restated to reflect the second
quarter 1998 mergers with CitFed and State. Cash dividends per common share are
those of the Company declared prior to the mergers with CitFed and State.
The restatement of the CitFed merger was accomplished by combining CitFed's
March 31, 1998 fiscal year financial information with the Company's December 31,
1997 calendar year financial information. In 1998, CitFed's fiscal year was
conformed to the Company's calendar year. As a result of conforming fiscal
periods, the Company'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 $7.8 million. An adjustment to shareholders'
equity removes the effect of including CitFed's financial results in both
periods.
COMPETITION
There are hundreds of commercial banks, savings and loans and other financial
services providers in Ohio, Kentucky, Indiana, Arizona and Florida and
nationally, which provide strong
4
<PAGE> 5
competition to the Company's banking subsidiaries. As providers of a full range
of financial services, these subsidiaries compete with national and state banks,
savings and loan associations, securities dealers, brokers, mortgage bankers,
finance and insurance companies, and other financial service companies. With
respect to data processing services, the Bank's data processing subsidiary,
Midwest Payment Systems, Inc., competes with other electronic fund transfer
(EFT) service providers such as Electronic Payment Systems, Deluxe Corporation
and Electronic Data Systems and other merchant processing providers such as
First Data Corporation, National Processing, Inc. and First USA Paymentech, Inc.
The earnings of the Company are affected by general economic conditions as well
as by the monetary policies of the Federal Reserve Board. Such policies, which
include regulating the national supply of bank reserves and bank credit, can
have a major effect upon the source and cost of funds and the rates of return
earned on loans and investments. The Federal Reserve influences the size and
distribution of bank reserves through its open market operations and changes in
cash reserve requirements against member bank deposits.
REGULATION AND SUPERVISION
The Company, as a bank holding company, is subject to the restrictions of the
Act. The Act provides that the acquisition of control of a bank is subject to
the prior approval of the Board of Governors of the Federal Reserve System. The
Company is required to obtain the prior approval of the Federal Reserve Board
before it can acquire control of more than 5 percent of the voting shares of
another bank. The Act does not permit the Federal Reserve Board to approve an
acquisition by the Company, or any of its subsidiaries, of any bank located in a
state other than Ohio, unless the acquisition is specifically authorized by the
law of the state in which such bank is located.
On September 29, 1994, the Act was amended by The Interstate Banking and Branch
Efficiency Act of 1994 which authorizes interstate bank acquisitions anywhere in
the country effective one year after the date of enactment, and interstate
branching by acquisition and consolidation effective June 1, 1997, in those
states that have not opted out by that date.
The Company's subsidiary state banks are primarily subject to the laws of the
state in which each is located, the Board of Governors of the Federal Reserve
System and/or the Federal Deposit Insurance Corporation. The subsidiary bank
which is organized under the laws of the United States is primarily subject to
regulation by the Comptroller of the Currency and the Federal Deposit Insurance
Corporation. The Company's savings and loan subsidiary is subject to regulation
by the Office of Thrift Supervision.
The Company and its subsidiaries are subject to certain restrictions on
intercompany loans and investments. The Company and its subsidiaries are also
subject to certain restrictions with respect to engaging in the underwriting and
public sale and distribution of securities. In addition,
5
<PAGE> 6
the Company and its subsidiaries are subject to examination at the discretion of
supervisory authorities.
The Act limits the activities which may be engaged in by the Company and its
subsidiaries to ownership of banks and those activities which the Federal
Reserve Board has deemed or may in the future find to be so closely related to
banking as to be a proper incident thereto.
The Financial Reform, Recovery and Enforcement Act of 1989 (FIRREA) provides
that a holding company's controlled insured depository institutions are liable
for any loss incurred by the Federal Deposit Insurance Corporation in connection
with the default of, or any FDIC-assisted transaction involving, an affiliated
insured bank or savings association.
The Federal Deposit Insurance Corporation Improvement Act of 1991 (the "FDIC
Improvement Act") covers a wide expanse of banking regulatory issues. The FDIC
Improvement Act deals with the recapitalization of the Bank Insurance Fund, with
deposit insurance reform, including requiring the FDIC to establish a risk-based
premium assessment system, and with a number of other regulatory and supervisory
matters.
EMPLOYEES
As of December 31, 1998, there were no employees of the Company. Subsidiaries of
the Company employed 8,761 employees -- 1,383 were officers and 1,568 were
part-time employees. There were 8,330 full-time equivalent employees as of
December 31, 1998.
STATISTICAL INFORMATION
Pages 6 to 13 contain statistical information on the Company and its
subsidiaries. Information about the Company's business segments is incorporated
herein by reference to pages 28 and 29 of Registrant's 1998 Annual Report to
Shareholders attached to this filing as Exhibit 13.
6
<PAGE> 7
SECURITIES PORTFOLIO
The securities portfolio as of December 31 for each of the last five years, and
the maturity distribution and weighted average yield of securities as of
December 31, 1998, are incorporated herein by reference to the securities tables
on page 36 of the Company's 1998 Annual Report to Shareholders attached to this
filing as Exhibit 13.
The weighted average yields for the securities portfolio are yields to maturity
weighted by the par values of the securities. The weighted average yields on
securities exempt from income taxes are computed on a taxable-equivalent basis.
The taxable-equivalent yields are net after-tax yields to maturity divided by
the complement of the full corporate tax rate (35 percent). In order to express
yields on a taxable-equivalent basis, yields on obligations of states and
political subdivisions (municipal securities) have been increased as follows:
<TABLE>
<S> <C>
Under 1 year 2.70%
1 - 5 years 2.46%
6 - 10 years 2.55%
Over 10 years 2.83%
Total municipal securities 2.52%
</TABLE>
AVERAGE BALANCE SHEETS
The average balance sheets are incorporated herein by reference to Table 1 on
pages 30 and 31 of the Company's 1998 Annual Report to Shareholders attached to
this filing as Exhibit 13.
ANALYSIS OF NET INTEREST INCOME AND NET INTEREST INCOME CHANGES
The analysis of net interest income and the analysis of net interest income
changes are incorporated herein by reference to Table 1 and Table 2 and the
related discussion on pages 30 through 32 of the Company's 1998 Annual Report to
Shareholders attached to this filing as Exhibit 13.
7
<PAGE> 8
TYPES OF LOANS AND LEASES
A summary of loans and leases by major category as of December 31 ($000's):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ---
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural loans $ 4,822,992 4,363,289 4,093,432 3,663,973 3,104,599
Real estate - construction loans 572,082 560,381 593,276 530,940 438,073
Real estate - mortgage loans 5,448,632 6,311,872 5,884,557 5,425,989 5,443,570
Consumer loans 3,354,681 3,068,597 2,837,742 3,235,003 2,546,688
Lease financing 4,269,851 3,582,731 3,095,894 2,297,125 1,703,492
------------------------------------ ---------------- ---------------- ---------------
Loans and leases, gross 18,468,238 17,886,870 16,504,901 15,153,030 13,236,422
Unearned income (689,215) (573,927) (470,378) (339,833) (243,648)
Reserve for credit losses (266,860) (250,950) (233,803) (224,134) (202,009)
------------------------------------ ---------------- ---------------- ---------------
Loans and leases, net $ 17,512,163 17,061,993 15,800,720 14,589,063 12,790,765
==================================== ================ ================ ===============
Loans held for sale $ 492,017 263,772 74,916 139,484 41,723
==================================== ================ ================ ===============
</TABLE>
MATURITIES AND SENSITIVITY OF LOANS TO CHANGES IN INTEREST RATES
The remaining maturities of the loan portfolio distributed to reflect cash flows
(excluding residential mortgage and consumer loans) at December 31, 1998, based
on scheduled repayments and the sensitivity of loans to interest rate changes
for loans due after one year ($000's):
<TABLE>
<CAPTION>
Commercial,
Financial and Real Estate Real Estate
Agricultural Construction Commercial
Loans Loans Loans Total
------------------------------------ ---------------- ----------------
<S> <C> <C> <C> <C>
Due in one year or less $ 2,219,859 332,350 476,777 $ 3,028,986
Due after one year through
five years 1,795,744 155,026 582,166 2,532,936
Due after five years 807,389 84,706 119,809 1,011,904
------------------------------------ ---------------- ----------------
Total $ 4,822,992 572,082 1,178,752 $ 6,573,826
==================================== ================ ================
Loans due after one year:
Predetermined interest rate $ 2,075,132 154,495 531,405 $ 2,761,032
==================================== ================ ================
Floating or adjustable
interest rate $ 528,001 85,237 170,570 $ 783,808
==================================== ================ ================
</TABLE>
8
<PAGE> 9
RISK ELEMENTS
Interest on loans is normally accrued at the rate agreed upon at the time each
loan was negotiated. It is the Company's policy to discontinue accrual of
interest on commercial, construction and mortgage loans when there is a clear
indication the borrower's cash flow may not be sufficient to meet payments as
they become due. Such loans, other than consumer loans, are also placed on
nonaccrual status when principal or interest is past due ninety days or more,
unless the loan is well secured and in the process of collection. The following
table presents data concerning loans and leases at risk at December 31 ($000's):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Nonaccrual loans and leases $ 42,760 71,667 66,745 76,281 39,253
Loans and leases contractually
past due ninety days or more as
to interest, principal or rental
payments but still accruing
interest 79,233 46,281 38,053 20,455 13,237
Loans and leases renegotiated to
provide a reduction or deferral of
interest, principal or rental payments
because of the financial position
deterioration of the borrower - 128 1,121 506 443
</TABLE>
As of December 31, 1998, there were $46,742,000 of loans and leases currently
performing in accordance with contractual terms where there are serious doubts
as to the ability of the borrower to comply with such terms.
For the years 1998, 1997 and 1996, interest income of $789,000, $714,000 and
$807,000, respectively was recorded on nonaccrual and renegotiated loans and
leases. Additional interest income of $2,837,000, $5,482,000 and $6,329,000
would have been recorded if the nonaccrual and renegotiated loans and leases had
been current in accordance with their original terms.
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<PAGE> 10
SUMMARY OF CREDIT LOSS EXPERIENCE
A summary of the activity in the reserve for credit losses arising from
provisions charged to operations, losses charged off and recoveries of losses
previously charged off ($000's):
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Loans and leases outstanding at
December 31: $ 17,779,023 17,312,943 16,034,523 14,813,197 12,992,774
================= ================ ================ ================ ================
Loans held for sale $ 492,017 263,772 74,916 139,484 41,723
================= ================ ================ ================ ================
Average loans and leases
outstanding $ 17,664,000 16,583,000 15,612,000 13,929,000 12,195,000
================= ================ ================ ================ ================
Reserve for credit losses,
January 1 $ 250,950 233,803 224,134 202,009 185,416
----------------- ---------------- ---------------- ---------------- ----------------
Losses charged off:
Commercial, financial and
agricultural loans (35,335) (8,952) (11,349) (6,950) (9,321)
Real estate - construction loans (953) (5) (147) (69) -
Real estate - mortgage loans (7,562) (8,348) (7,602) (7,776) (4,894)
Consumer loans (51,267) (61,177) (54,216) (26,967) (17,105)
Lease financing (28,570) (23,034) (13,284) (5,084) (2,252)
----------------- ---------------- ---------------- ---------------- ----------------
Total losses (123,687) (101,516) (86,598) (46,846) (33,572)
----------------- ---------------- ---------------- ---------------- ----------------
Recoveries of losses previously
charged off:
Commercial, financial and
agricultural loans 1,313 2,461 2,915 1,607 1,864
Real estate - construction loans 75 293 - 61 -
Real estate - mortgage loans 2,096 2,017 2,866 2,845 4,229
Consumer loans 17,824 15,777 13,400 8,652 9,041
Lease financing 5,612 6,315 2,866 1,393 773
----------------- ---------------- ---------------- ---------------- ----------------
Total recoveries 26,920 26,863 22,047 14,558 15,907
----------------- ---------------- ---------------- ---------------- ----------------
Net losses charged off:
Commercial, financial and
agricultural loans (34,022) (6,491) (8,434) (5,343) (7,457)
Real estate - construction loans (878) 288 (147) (8) -
Real estate - mortgage loans (5,466) (6,331) (4,736) (4,931) (665)
Consumer loans (33,443) (45,400) (40,816) (18,315) (8,064)
Lease financing (22,958) (16,719) (10,418) (3,691) (1,479)
----------------- ---------------- ---------------- ---------------- ----------------
Total net losses charged off (96,767) (74,653) (64,551) (32,288) (17,665)
----------------- ---------------- ---------------- ---------------- ----------------
Letter of credit - - - - (7,800)
Reserve of acquired
institutions and other 3,506 1,705 5,838 8,479 875
Provision charged to operations 109,171 90,095 68,382 45,934 41,183
----------------- ---------------- ---------------- ---------------- ----------------
Reserve for credit losses,
December 31 $ 266,860 250,950 233,803 224,134 202,009
================= ================ ================ ================ ================
Reserve as a percent of
loans and leases outstanding 1.50% 1.45 1.46 1.51 1.55
================= ================ ================ ================ ================
</TABLE>
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<PAGE> 11
SUMMARY OF CREDIT LOSS EXPERIENCE, CONTINUED
<TABLE>
<CAPTION>
Reserve for credit losses,
December 31: 1998 1997 1996 1995 1994
----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Commercial, financial and
agricultural loans $ 95,924 20,034 28,636 35,120 79,315
Real estate - construction loans 920 342 552 733 813
Real estate - mortgage loans 12,448 18,209 11,273 26,397 10,205
Consumer loans 96,199 155,526 151,355 134,170 94,535
Lease financing 61,369 53,839 41,987 27,714 17,141
-------------- --------------- -------------- ----------------------------
Total reserve for credit losses $ 266,860 250,950 233,803 224,134 202,009
============== =============== ============== ============================
</TABLE>
The analysis above is for analytical purposes. The reserve for credit losses is
general in nature and is available to absorb losses from any portion of the loan
and lease portfolio.
The distribution of loans and leases by type and the ratio of net charge-offs to
average loans and leases outstanding:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
----- ----- ----- ----- ----
<S> <C> <C> <C> <C> <C>
Percentage of loans and leases to total
loans and leases at December 31:
Commercial, financial and
agricultural loans 26.2% 24.6 25.2 24.4 23.7
Real estate - construction loans 3.1 3.2 3.7 3.5 3.3
Real estate - mortgage loans 32.2 37.4 37.0 37.1 42.0
Consumer loans 18.7 17.5 17.6 21.6 19.6
Lease financing 19.8 17.3 16.5 13.4 11.4
-------------- --------------- -------------- ---------------- ------------
Total 100.0% 100.0 100.0 100.0 100.0
============== =============== ============== ============================
</TABLE>
<TABLE>
<S> <C> <C> <C> <C> <C>
Ratio of net charge-offs during year
to average loans and leases outstanding
during year:
Commercial, financial and
agricultural loans 0.74% 0.15 0.22 0.16 0.24
Real estate - construction loans 0.16 (0.05) 0.03 0.00 0.00
Real estate - mortgage loans 0.09 0.10 0.08 0.09 0.01
Consumer loans 1.04 1.54 1.34 0.63 0.32
Lease financing 0.69 0.58 0.45 0.21 0.10
Weighted Average Ratio 0.55 0.45 0.41 0.23 0.14
</TABLE>
11
<PAGE> 12
RESERVE FOR CREDIT LOSSES
The reserve is maintained at a level management considers to be adequate to
absorb probable loan and lease losses inherent in the portfolio. Credit losses
are charged and recoveries are credited to the reserve. Provisions for credit
losses are based on management's review of the historical credit loss experience
and such other factors which, in management's judgment, deserve consideration
under existing economic conditions in estimating potential credit losses. Based
on the procedures discussed below, management is of the opinion the reserve of
$266,860,000 at December 31, 1998 was adequate.
In determining the adequacy of the reserve for credit losses, management of each
affiliate bank, on a quarterly basis, specifically evaluates the necessity of a
reserve for individual loans classified by management. The specifically
allocated reserve for a classified loan is determined based on management's
estimate of the borrower's ability to repay the loan given the availability of
collateral, other sources of cash flow, and legal options available to the
Company. Once a review is completed, the need for a specific reserve is
determined by senior management and allocated to the loan. Other loans not
specifically reviewed by management are evaluated using a rolling five-year
average historical charge-off experience ratio calculated by type of loan. The
historical charge-off ratio factors into account the homogeneous nature of the
loans, the geographical lending areas involved, regulatory examination findings,
specific grading systems applied and any other known factors which may impact
the ratios used. Specific reserves on individual loans and historical ratios are
reviewed quarterly and adjusted as necessary based on subsequent collections,
loan upgrades or downgrades, nonperforming trends or actual principal
charge-offs. The Company's primary market area for lending is Ohio, Kentucky and
Indiana. When evaluating the adequacy of reserves, consideration is given to
this regional geographic concentration and the closely-associated effect
changing economic conditions has on the Company's customers.
MATURITY DISTRIBUTION OF DOMESTIC CERTIFICATES OF DEPOSIT OF
$100,000 AND OVER AT DECEMBER 31, 1998 ($000'S)
<TABLE>
<S> <C>
Three months or less $ 782,236
Over three months through six months 192,588
Over six months through twelve months 183,535
Over twelve months 125,221
-------------
Total certificates - $100,000 and over $ 1,283,580
=============
</TABLE>
Foreign office deposits totaling $353,824 are denominated in amounts greater
than $100,000.
12
<PAGE> 13
RETURN ON EQUITY AND ASSETS
The following table presents certain operating ratios:
<TABLE>
<CAPTION>
1998(1) 1997 1996(2)
------- ---- -------
<S> <C> <C> <C>
Return on assets (a) 1.67% 1.74 1.55
Return on equity (b) 16.2% 18.4 16.3
Dividend payout ratio (c) 40.3% 33.6 34.8
Equity to assets ratio (d) 10.33% 9.48 9.46
</TABLE>
- ---------------------------------------------------------------
(a) net income divided by average assets
(b) net income divided by average equity
(c) dividends declared per share divided by diluted earnings per share, as
originally reported
(d) average equity divided by average assets
(1) Certain 1998 ratios and statistics include merger-related items of $106.4
million pretax ($75.6 million after tax or $.28 per share). For
comparability, excluding the merger-related items, return on average assets,
return on average equity and the dividend payout ratio for 1998 would have
been 1.93%, 18.7% and 34.8%, respectively.
(2) Certain 1996 ratios include the special SAIF assessment of $37.9 million
pretax ($24.6 million after tax or $.09 per share). For comparability,
excluding the impact of this assessment, return on average assets, return on
average equity and the dividend payout ratio for 1996 would have been 1.64%,
17.4% and 33.8%, respectively.
13
<PAGE> 14
ITEM 2. PROPERTIES
- -------------------
The Company's executive offices and the main office of the Bank are located on
Fountain Square Plaza in downtown Cincinnati, Ohio, located in a 32-story office
tower and a 5-story office building and parking garage known as the Fifth Third
Center and the William S. Rowe Building, respectively. One of the Bank's
subsidiaries owns 100 percent of these buildings.
At December 31, 1998, the Company, through its subsidiary banks, five located in
Ohio, two in Kentucky, one in Indiana, one in Arizona and one in Florida,
operated 468 banking centers, of which 253 were owned and 215 were leased. The
properties owned are free from mortgages and encumbrances.
ITEM 3. LEGAL PROCEEDINGS
- --------------------------
The Company and its subsidiaries are not parties to any material legal
proceedings other than routine litigation incidental to its business.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
- ------------------------------------------------------------
None.
EXECUTIVE OFFICERS OF THE REGISTRANT
------------------------------------
The names, ages and positions of the Executive Officers of the Company as of
February 1, 1999 are listed below along with their business experience during
the past 5 years. Officers are appointed annually by the Board of Directors at
the meeting of Directors immediately following the Annual Meeting of
Shareholders.
CURRENT POSITION AND
NAME AND AGE BUSINESS EXPERIENCE DURING PAST 5 YEARS
- ------------ ---------------------------------------
George A. Schaefer, Jr., 53 PRESIDENT AND CEO. President and Chief Executive
Officer of the Company and the Bank.
Neal E. Arnold, 38 EXECUTIVE VICE PRESIDENT, CHIEF FINANCIAL
OFFICER AND TREASURER. Executive Vice President of
the Company and the Bank since December, 1998.
Chief Financial Officer of the Company and the
Bank since June, 1997. Mr. Arnold has been the
Treasurer of the Company and the Bank. Previously,
Mr. Arnold was Treasurer and Senior Vice President
of the Bank.
14
<PAGE> 15
CURRENT POSITION AND
NAME AND AGE BUSINESS EXPERIENCE DURING PAST 5 YEARS
- ------------ ---------------------------------------
Michael D. Baker, 48 EXECUTIVE VICE PRESIDENT. Executive Vice President
of the Company and the Bank since August, 1995.
Previously, Mr. Baker was Senior Vice President of
the Company since March, 1993, and of the Bank.
P. Michael Brumm, 51 EXECUTIVE VICE PRESIDENT. Executive Vice President
of the Company and the Bank since August, 1995.
Until June, 1997, Mr. Brumm was Chief Financial
Officer of the Company and the Bank. Previously,
Mr. Brumm was Senior Vice President and CFO of the
Company and the Bank.
James J. Hudepohl, 46 EXECUTIVE VICE PRESIDENT. Executive Vice President
of the Company and the Bank since January, 1997.
Previously, Mr. Hudepohl was Senior Vice President
of the Bank.
Michael K. Keating, 43 EXECUTIVE VICE PRESIDENT, GENERAL COUNSEL AND
SECRETARY. Executive Vice President of the Company
and the Bank since August, 1995 and Secretary of
the Company and the Bank since January, 1994.
Previously, Mr. Keating was Senior Vice President
and General Counsel of the Company since March,
1993, and Senior Vice President and Counsel of the
Bank.
Robert P. Niehaus, 52 EXECUTIVE VICE PRESIDENT. Executive Vice President
of the Company and the Bank since August, 1995.
Previously, Mr. Niehaus was Senior Vice President
of the Company since March, 1993, and Senior Vice
President of the Bank.
Stephen J. Schrantz, 49 EXECUTIVE VICE PRESIDENT. Executive Vice President
of the Company and the Bank.
Gerald L. Wissel, 42 EXECUTIVE VICE PRESIDENT. Executive Vice President
of the Bank since January, 1997. Auditor of the
Company and the Bank. Previously, Mr. Wissel was
Senior Vice President of the Bank.
15
<PAGE> 16
CURRENT POSITION AND
NAME AND AGE BUSINESS EXPERIENCE DURING PAST 5 YEARS
- ------------ ---------------------------------------
Robert J. King, Jr., 43 EXECUTIVE VICE PRESIDENT. Executive Vice President
of the Company since June, 1997. Vice Chairman of
Fifth Third Bank, Northwestern Ohio, N.A.
Previously, Mr. King was President and CEO of
Fifth Third Bank, Northwestern Ohio, N.A. Mr. King
was Senior Vice President of the Company since
March, 1995.
James R. Gaunt, 53 EXECUTIVE VICE PRESIDENT. Executive Vice President
of the Company since June, 1997. Senior Vice
President of the Company since March, 1994, and
President and CEO of Fifth Third Bank of Kentucky,
Inc. since August, 1994. Previously, Mr. Gaunt was
Senior Vice President of the Company and the Bank.
Roger W. Dean, 36 CONTROLLER. Senior Vice President of the Company
and of the Bank since March, 1997. Controller of
the Company and the Bank since June 1993.
Previously, Mr. Dean was Vice President of the
Company and the Bank. Prior to June 1993, Mr. Dean
was with Deloitte & Touche LLP, independent
public accountants.
Paul L. Reynolds, 37 ASSISTANT SECRETARY. Senior Vice President of the
Company and the Bank since March, 1997. Assistant
Secretary of the Company since March, 1995,
General Counsel and Assistant Secretary of the
Bank since January, 1995. Previously, Mr. Reynolds
was Vice President, Counsel and Assistant
Secretary of the Bank since 1990.
Regina G. Livers, 41 COMMUNITY AFFAIRS OFFICER. Community Affairs
Officer of the Company since March 1997.
Previously, Ms. Livers was Vice President and
Community Affairs Officer of the Bank.
16
<PAGE> 17
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
- ------------------------------------------------------------------------------
The information required by this item is incorporated herein by reference to
Page 1 of Registrant's 1998 Annual Report to Shareholders attached to this
filing as Exhibit 13.
ITEM 6. SELECTED FINANCIAL DATA
- --------------------------------
The information required by this item is incorporated herein by reference to
page 39 of Registrant's 1998 Annual Report to Shareholders attached to this
filing as Exhibit 13.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
- -------------------------------------------------------------------------
RESULTS OF OPERATIONS
- ---------------------
The information required by this item is incorporated herein by reference to
pages 30 through 39 of Registrant's 1998 Annual Report to Shareholders attached
to this filing as Exhibit 13.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
- --------------------------------------------------------------------
The information required by this item is incorporated herein by reference to
pages 37 and 38 of Registrant's 1998 Annual Report to Shareholders attached to
this filing as Exhibit 13.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
- ----------------------------------------------------
The information required by this item is incorporated herein by reference to
pages 13 through 29 and page 39 of Registrant's 1998 Annual Report to
Shareholders attached to this filing as Exhibit 13.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
- -------------------------------------------------------------------------
FINANCIAL DISCLOSURE
- --------------------
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
- ------------------------------------------------------------
The information required by this item concerning Directors is incorporated
herein by reference under the caption "ELECTION OF DIRECTORS" of the
Registrant's 1998 Proxy Statement.
17
<PAGE> 18
ITEM 11. EXECUTIVE COMPENSATION
- --------------------------------
The information required by this item is incorporated herein by reference under
the caption "EXECUTIVE COMPENSATION" of the Registrant's 1999 Proxy Statement.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------------------------------------------------------------------------
The information required by this item is incorporated herein by reference under
the captions "CERTAIN BENEFICIAL OWNERS, ELECTION OF DIRECTORS AND EXECUTIVE
COMPENSATION" of the Registrant's 1999 Proxy Statement.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- --------------------------------------------------------
The information required by this item is incorporated herein by reference under
the caption "CERTAIN TRANSACTIONS" of the Registrant's 1999 Proxy Statement.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
- --------------------------------------------------------------------------
<TABLE>
<CAPTION>
a) Documents Filed as Part of the Report Page
----
<S> <C>
1. Index to Financial Statements
Consolidated Statements of Income for the
Years Ended December 31, 1998, 1997 and 1996 *
Consolidated Balance Sheets, December 31, 1998
and 1997 *
Consolidated Statements of Changes in
Shareholders' Equity for the Years Ended
December 31, 1998, 1997 and 1996 *
Consolidated Statements of Cash Flows for the
Years Ended December 31, 1998, 1997 and 1996 *
Notes to Consolidated Financial Statements *
* Incorporated by reference to pages 13 through 29 of Registrant's
1998 Annual Report to Shareholders attached to this filing as
Exhibit 13.
2. Financial Statement Schedules
</TABLE>
18
<PAGE> 19
The schedules for Registrant and its subsidiaries are omitted
because of the absence of conditions under which they are
required, or because the information is set forth in the
consolidated financial statements or the notes thereto.
3. Exhibits
Exhibit No.
-----------
3 Amended Articles of Incorporation and Code of
Regulations (a)
4(a) Junior Subordinated Indenture, dated as of March
20, 1997 between Fifth Third Bancorp and
Wilmington Trust Company, as Debenture Trustee (b)
4(b) Certificate Representing the 8.136% Junior
Subordinated Deferrable Interest Debentures,
Series A, of Fifth Third Bancorp (b)
4(c) Amended and Restated Trust Agreement, dated as of
March 20, 1997 of Fifth Third Capital Trust II,
among Fifth Third Bancorp, as Depositor,
Wilmington Trust Company, as Property Trustee, and
the Administrative Trustees name therein (b)
4(d) Certificate Representing the 8.136% Capital
Securities, Series A, of Fifth Third Capital Trust
I (b)
4(e) Guarantee Agreement, dated as of March 20, 1997
between Fifth Third Bancorp, as Guarantor, and
Wilmington Trust Company, as Guarantee Trustee (b)
4(f) Agreement as to Expense and Liabilities, dated as
of March 20, 1997 between Fifth Third Bancorp, as
the holder of the Common Securities of Fifth Third
Capital Trust I and Fifth Third Capital Trust II
(b)
10(a) Fifth Third Bancorp Unfunded Deferred Compensation
Plan for Non-Employee Directors (c)
10(b) Fifth Third Bancorp 1990 Stock Option Plan (d)
10(c) Fifth Third Bancorp 1987 Stock Option Plan (e)
19
<PAGE> 20
10(d) Indenture effective November 19, 1992 between
Fifth Third Bancorp, Issuer and NBD Bank, N.A.,
Trustee (f)
10(e) Fifth Third Bancorp 1993 Discount Stock Purchase
Plan (g)
10(f) Fifth Third Bancorp Amended and Restated Stock
Incentive Plan for selected Executive Officers,
Employees and Directors of The Cumberland Federal
Bancorporation, Inc. (h)
10(g) Fifth Third Bancorp Master Profit Sharing Plan (i)
10(h) Fifth Third Bancorp Amended and Restated Stock
Option and Incentive Plan for Selected Executive
Officers, Employees and Directors of Falls
Financial, Inc. (j)
10(i) Fifth Third Bancorp Amended 1993 Discount Stock
Purchase Plan (k)
10(j) Fifth Third Bancorp 1998 Long-Term Incentive Stock
Plan (l)
10(k) Fifth Third Bancorp Variable Compensation Plan (m)
10(l) CitFed Bancorp, Inc. Amended and Restated 1991
Stock Option and Incentive Plan (n)
11 Computation of Consolidated Earnings Per Share for
the Years Ended December 31, 1998, 1997, 1996,
1995 and 1994
13 Fifth Third Bancorp 1998 Annual Report to
Shareholders
21 Fifth Third Bancorp Subsidiaries
23 Independent Auditors' Consent
27 Financial Data Schedules for the Years Ended
December 31, 1998, 1997 and 1996
27.1 Financial Data Schedules for the Three Months
Ended March 31, 1998, Six Months Ended June 30,
1998 and Nine Months Ended September 30, 1998
27.2 Financial Data Schedules for the Three Months
Ended March 31, 1997, Six Months Ended June 30,
1997 and Nine Months Ended September 30, 1997
20
<PAGE> 21
b) Reports on Form 8-K
None.
- ------------------------
(a) Incorporated by reference to Registrant's Registration Statement,
Exhibits 3.1 and 3.2, on Form S-4, Registration No. 33-19965.
(b) Incorporated by reference to Registrant's filing with the Securities
and Exchange Commission on March 26, 1997, a Form 8-K Current Report.
(c) Incorporated in this Form 10-K Annual Report by reference to Form 10-K
filed for fiscal year ended December 31, 1985.
(d) Incorporated by reference to Registrant's filing with the Securities
and Exchange Commission as an exhibit to a Registration Statement on
Form S-8, Registration No. 33-34075.
(e) Incorporated by reference to Registrant's filing with the Securities
and Exchange Commission as an exhibit to a Registration Statement on
Form S-8, Registration No. 33-13252.
(f) Incorporated by reference to Registrant's filing with the Securities
and Exchange Commission on November 18, 1992, a Form 8-K Current
Report dated November 16, 1992 and as Exhibit 4.1 to a Registration
Statement on Form S-3, Registration No. 33-54134.
(g) Incorporated by reference to Registrant's filing with the Securities
and Exchange Commission as an exhibit to a Registration Statement on
Form S-8, Registration No. 33-60474.
(h) Incorporated by reference to Registrant's filing with the Securities
and Exchange Commission as an exhibit to a Registration Statement on
Form S-8, Registration No. 33-55223.
(i) Incorporated by reference to Registrant's filing with the Securities
and Exchange Commission as an exhibit to a Registration Statement on
Form S-8, Registration No. 33-55553.
(j) Incorporated by reference to Registrant's filing with the Securities
and Exchange Commission as an exhibit to a Registration Statement on
Form S-8, Registration No. 33-61149.
(k) Incorporated by reference to Registrant's filing with the Securities
and Exchange Commission as Exhibit 10 to the Quarterly Report on Form
10-Q for the quarter ended June 30, 1996.
21
<PAGE> 22
(l) Incorporated by reference to Registrant's filing with the Securities
and Exchange Commission as an exhibit to a Registration Statement on
Form S-8, Registration No. 333-58249.
(m) Incorporated by reference to Registrant's Proxy Statement dated
February 9, 1998.
(n) Incorporated by reference to Registrant's filing with the Securities
and Exchange Commission as an exhibit to a Registration Statement on
Form S-8, Registration No. 333-48049 and by reference to CitFed
Bancorp's Form 10-K for the fiscal year ended March 31, 1996.
22
<PAGE> 23
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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)
/s/George A. Schaefer, Jr. February 12, 1999
- -------------------------
George A. Schaefer, Jr.
President and CEO
(Principal Executive Officer)
Pursuant to requirements of the Securities Exchange Act of 1934, this report has
been signed on February 12, 1999 by the following persons on behalf of the
Registrant and in the capacities indicated.
<TABLE>
<S> <C> <C>
/s/Neal E. Arnold /s/Roger W. Dean /s/Robert B. Morgan
- -------------------------------- ------------------------------ ------------------------------
Neal E. Arnold Roger W. Dean Robert B. Morgan
Executive Vice President and CFO Controller Director
(Principal Financial Officer) (Principal Accounting Officer)
/s/Darryl F. Allen /s/Joan R. Herschede /s/David E. Reese
- -------------------------------- ------------------------------ ------------------------------
Darryl F. Allen Joan R. Herschede David E. Reese
Director Director Director
/s/John F. Barrett /s/Allen M. Hill
- -------------------------------- ------------------------------ ------------------------------
John F. Barrett Allen M. Hill James E. Rogers
Director Director Director
/s/Gerald V. Dirvin /s/Brian H. Rowe
- -------------------------------- ------------------------------ ------------------------------
Gerald V. Dirvin William G. Kagler Brian H. Rowe
Director Director Director
/s/James D. Kiggen
- -------------------------------- ------------------------------ ------------------------------
Thomas B. Donnell James D. Kiggen Donald B. Schackelford
Director Director Director
/s/Richard T. Farmer /s/Jerry L. Kirby /s/George A. Schaefer, Jr.
- -------------------------------- ------------------------------ ------------------------------
Richard T. Farmer Jerry L. Kirby George A. Schaefer, Jr.
Director Director Director, President and CEO
(Principal Executive Officer)
/s/Joseph H. Head, Jr. /s/Mitchel D. Livingston, Ph. D. /s/John J. Schiff, Jr.
- -------------------------------- ------------------------------ ------------------------------
Joseph H. Head, Jr. Mitchel D. Livingston, Ph. D. John J. Schiff, Jr.
Director Director Director
</TABLE>
23
<PAGE> 24
/s/Dennis J. Sullivan, Jr.
- --------------------------------
Dennis J. Sullivan, Jr.
Director
/s/Dudley S. Taft
- --------------------------------
Dudley S. Taft
Director
24
<PAGE> 1
EXHIBIT 11
FIFTH THIRD BANCORP
COMPUTATION OF CONSOLIDATED EARNINGS PER SHARE
FOR THE YEARS ENDED DECEMBER 31
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Net Income $476,128 460,858 382,344 330,447 275,625
======== ======= ======= ======= =======
Earnings per share:
Weighted average number of shares outstanding (a) 265,338 262,338 263,523 251,863 246,722
======== ======= ======= ======= =======
Per share (net income divided by the weighted
average number of shares outstanding) $ 1.80 1.76 1.45 1.31 1.21
======== ======= ======= ======= =======
Diluted earnings per share:
Net income $476,128 460,858 382,344 330,447 275,625
Add - Interest on 4 1/4% convertible subordinated
notes due 1998, net of applicable income taxes -- -- 1,637 4,257 4,332
-------- ------- ------- ------- -------
Adjust net income $476,128 460,858 383,981 334,704 279,957
======== ======= ======= ======= =======
Adjusted weighted average number of shares
outstanding - after giving effect to the
conversion of stock options and convertible
subordinated notes (a) 270,674 266,680 269,444 260,867 255,581
======== ======= ======= ======= =======
Per share (adjusted net income divided by
the adjusted weighted average number of
shares outstanding) $ 1.76 1.73 1.42 1.27 1.08
======== ======= ======= ======= =======
</TABLE>
- ------------------------
(a) Per share amounts and average shares outstanding 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.
<PAGE> 1
Exhibit 13
Financial Highlights
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
1998 1997 % Change
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Earnings and Dividends ($000's)
Operating Earnings (a) .................................................. $ 551,701 460,858 19.7
Net Income ............................................................. 476,128 460,858 3.3
Cash Dividends Declared ................................................. 186,710 137,288 36.0
- ---------------------------------------------------------------------------------------------------------------------------
Per Share
Diluted Operating Earnings (a) ........................................... $ 2.04 1.73 17.9
Earnings ................................................................. 1.80 1.76 2.3
Diluted Earnings ......................................................... 1.76 1.73 1.7
Cash Dividends Declared .................................................. .71 .56 8/9 24.8
Year-End Book Value ...................................................... 11.91 10.52 13.2
Year-End Market Price .................................................... 71.31 54.50 30.8
- ---------------------------------------------------------------------------------------------------------------------------
At Year End ($ in millions)
Assets .................................................................. $ 28,922 27,710 4.4
Loans and Leases ......................................................... 17,779 17,312 2.7
Deposits ................................................................. 18,780 19,020 (1.3)
Shareholders' Equity ..................................................... 3,179 2,763 15.1
Market Capitalization .................................................... 19,035 12,690 50.0
- ---------------------------------------------------------------------------------------------------------------------------
Key Ratios
Return on Average Assets (a) ............................................. 1.93% 1.74 10.9
Return on Average Equity (a) ............................................. 18.7 18.4 1.6
Overhead Ratio (a)(b) .................................................... 42.3 43.3 (2.3)
Net Interest Margin ..................................................... 3.94 3.84 2.6
- ---------------------------------------------------------------------------------------------------------------------------
Number of Shares ......................................................... 266,918,544 262,614,641 1.6
Number of Shareholders ................................................... 19,190 16,386 17.1
Number of Banking Locations .............................................. 468 410 14.1
Number of Full-Time Equivalent Employees ................................. 8,330 6,787 22.7
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) For comparability, certain 1998 ratios and statistics exclude merger-related
items of $106.4 million pretax ($75.6 million after tax or $.28 per share).
(b) Operating expenses divided by the sum of fully taxable equivalent net
interest income and other operating income.
Fifth Third Bancorp Shareholder And Corporate Information
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Stock Data Dividends
Paid Per
Year Period High Low Share
- ------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1998 Fourth Quarter ......... $74.13 $50.31 $.17
Third Quarter ......... 67.25 49.25 .17
Second Quarter ......... 63.13 47.50 .17
First Quarter ......... 58.83 49.50 .14 2/3
- ------------------------------------------------------------------------
1997 Fourth Quarter ......... $55.67 $41.08 $.14 2/3
Third Quarter ......... 44.33 36.33 .14 2/3
Second Quarter ......... 38.06 30.94 .12 7/8
First Quarter ......... 39.78 27.00 .12 7/8
</TABLE>
- --------------------------------------------------------------------------------
The common stock of Fifth Third Bancorp is traded in the over-the-counter market
and is listed under the symbol "FITB" on the Nasdaq National Market.
- --------------------------------------------------------------------------------
<TABLE>
<CAPTION>
Ratings
Standard Duff &
Moody's & Poor's Fitch Phelps
- --------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fifth Third Bancorp
Commercial Paper ....... P1 A1+ F1+ Duff-1+
- --------------------------------------------------------------------------
Fifth Third Bank-Cincinnati
Short-Term Deposit ....... P1 A1+ F1+ Duff-1+
Long-Term Deposit ....... Aa2 AA- AA+ AA
- --------------------------------------------------------------------------
Fifth Third Banks of Northwestern Ohio, N.A., Western Ohio, Central Ohio,
Indiana, Kentucky, Inc., and Northern Kentucky
Short-Term Deposit ....... P1 A1+ F1+ Duff-1+
Long-Term Deposit ....... Aa3 AA- AA+ AA
</TABLE>
CORPORATE OFFICE
Fifth Third Center, Cincinnati, Ohio 45263
(513) 579-5300
ANNUAL MEETING
The Annual Meeting of Shareholders will be held at 11:30 a.m. on Tuesday, March
16, 1999 on the fifth floor of the Corporate Office.
FORM 10-K
The Bancorp's 1998 Annual Report on Form 10-K (to be filed with the Securities
and Exchange Commission before March 31, 1999) will be provided without charge
to shareholders upon request. Send requests to the Investor Relations Department
at the Corporate Office.
INVESTOR RELATIONS/ANALYST CONTACT
Neal E. Arnold, Executive Vice President and Chief Financial Officer
(513) 579-4356
(513) 579-6246 (facsimile)
[email protected]
TRANSFER AGENT/SHAREHOLDER RELATIONS
Fifth Third Bank
Corporate Trust Services, Mail Drop 10AT66-3212
Fifth Third Center, Cincinnati, Ohio 45263
(800) 837-2755
(513) 579-5320 (outside the continental U.S.)
8 a.m.-5 p.m. Eastern Standard Time
DIVIDEND REINVESTMENT AND DIRECT DEPOSIT
For the convenience of shareholders, the Bancorp has established a plan whereby
shareholders may have their dividends automatically reinvested in Fifth Third
Bancorp common stock or the dividends may be deposited directly into your bank
account. To take advantage of these options, return the card on the back page or
contact Shareholder Relations.
<PAGE> 2
<TABLE>
<CAPTION>
============================================================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
============================================================================================================
- ------------------------------------------------------------------------------------------------------------
For the Years Ended December 31 ($000's, except per share data) 1998 1997 1996
- ------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans and Leases ......................... $1,451,573 1,365,511 1,271,569
- ------------------------------------------------------------------------------------------------------------
Interest on Securities
Taxable .................................................... 547,435 523,231 466,685
Exempt from Income Taxes ................................... 12,021 13,889 21,336
- ------------------------------------------------------------------------------------------------------------
Total Interest on Securities .................................. 559,456 537,120 488,021
- ------------------------------------------------------------------------------------------------------------
Interest on Other Short-Term Investments ...................... 7,648 16,452 12,820
- ------------------------------------------------------------------------------------------------------------
Total Interest Income ......................................... 2,018,677 1,919,083 1,772,410
- ------------------------------------------------------------------------------------------------------------
INTEREST EXPENSE
Interest on Deposits
Interest Checking .......................................... 65,940 57,919 43,665
Savings .................................................... 116,010 80,722 64,803
Money Market ............................................... 33,845 74,621 85,502
Other Time ................................................. 378,084 414,094 413,625
Certificates-$100,000 and Over ............................. 81,168 71,462 63,831
Foreign Office ............................................. 12,708 22,212 28,407
- ------------------------------------------------------------------------------------------------------------
Total Interest on Deposits .................................... 687,755 721,030 699,833
Interest on Federal Funds Borrowed ............................ 115,940 81,196 64,942
Interest on Short-Term Bank Notes ............................. 26,033 36,852 30,278
Interest on Other Short-Term Borrowings ....................... 89,025 81,048 63,541
Interest on Long-Term Debt and Notes .......................... 97,100 86,707 72,783
- ------------------------------------------------------------------------------------------------------------
Total Interest Expense ........................................ 1,015,853 1,006,833 931,377
- ------------------------------------------------------------------------------------------------------------
Net Interest Income ........................................... 1,002,824 912,250 841,033
Provision for Credit Losses ................................... 109,171 90,095 68,382
- ------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Credit Losses ......... 893,653 822,155 772,651
- ------------------------------------------------------------------------------------------------------------
OTHER OPERATING INCOME
Investment Advisory Income .................................... 134,872 93,557 77,404
Service Charges on Deposits ................................... 127,095 109,500 95,837
Data Processing Income ........................................ 138,154 112,506 88,195
Other Service Charges and Fees ................................ 226,230 180,404 151,289
Securities Gains .............................................. 9,843 5,802 6,182
- ------------------------------------------------------------------------------------------------------------
Total Other Operating Income .................................. 636,194 501,769 418,907
- ------------------------------------------------------------------------------------------------------------
OPERATING EXPENSES
Salaries, Wages and Incentives ................................ 286,274 242,972 225,052
Employee Benefits ............................................. 53,556 49,431 55,587
Equipment Expenses ............................................ 32,588 27,980 27,087
Net Occupancy Expenses ........................................ 50,756 48,530 45,964
Other Operating Expenses ...................................... 290,702 261,595 230,097
SAIF Assessment ............................................... -- -- 37,867
Merger-Related Charges ........................................ 89,701 -- --
- ------------------------------------------------------------------------------------------------------------
Total Operating Expenses ...................................... 803,577 630,508 621,654
- ------------------------------------------------------------------------------------------------------------
Income Before Income Taxes .................................... 726,270 693,416 569,904
Applicable Income Taxes ....................................... 250,142 232,558 187,560
- ------------------------------------------------------------------------------------------------------------
NET INCOME .................................................... $ 476,128 460,858 382,344
- ------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE ............................................ $ 1.80 1.76 1.45
DILUTED EARNINGS PER SHARE .................................... $ 1.76 1.73 1.42
- ------------------------------------------------------------------------------------------------------------
CASH DIVIDENDS DECLARED PER SHARE ............................. $ .71 .56 8/9 .48 8/9
- ------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements
</TABLE>
13
<PAGE> 3
<TABLE>
<CAPTION>
==================================================================================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
==================================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
December 31 ($000's) 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Cash and Due from Banks ......................................................................... $ 819,862 777,378
Securities Available for Sale (amortized cost 1998-$8,208,032 and 1997-$7,988,085) .............. 8,334,625 8,139,465
Securities Held to Maturity (fair value 1998-$86,015 and 1997-$85,375) .......................... 86,013 85,010
Other Short-Term Investments .................................................................... 118,535 180,425
Loans Held for Sale ............................................................................. 492,017 263,772
Loans and Leases
Commercial Loans ............................................................................. 4,822,992 4,363,289
Construction Loans ........................................................................... 572,082 560,381
Commercial Mortgage Loans .................................................................... 1,178,752 1,273,885
Commercial Lease Financing ................................................................... 1,739,316 1,417,133
Residential Mortgage Loans ................................................................... 4,269,880 5,037,987
Consumer Loans ............................................................................... 3,354,681 3,068,597
Consumer Lease Financing ..................................................................... 2,530,535 2,165,598
Unearned Income .............................................................................. (689,215) (573,927)
Reserve for Credit Losses .................................................................... (266,860) (250,950)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Loans and Leases .......................................................................... 17,512,163 17,061,993
Bank Premises and Equipment ..................................................................... 330,838 301,029
Accrued Income Receivable ....................................................................... 282,551 212,949
Other Assets .................................................................................... 945,178 688,652
- ----------------------------------------------------------------------------------------------------------------------------------
Total Assets .................................................................................... $28,921,782 27,710,673
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES
- ----------------------------------------------------------------------------------------------------------------------------------
Deposits
Demand ....................................................................................... $ 3,194,782 2,738,191
Interest Checking ............................................................................ 3,160,227 2,555,108
Savings ...................................................................................... 3,397,170 2,666,423
Money Market ................................................................................. 1,021,353 1,837,503
Other Time ................................................................................... 6,369,419 7,349,190
Certificates-$100,000 and Over ............................................................... 1,283,580 1,332,530
Foreign Office ............................................................................... 353,824 540,951
- ----------------------------------------------------------------------------------------------------------------------------------
Total Deposits .................................................................................. 18,780,355 19,019,896
Federal Funds Borrowed .......................................................................... 2,038,541 1,278,573
Short-Term Bank Notes ........................................................................... - 555,000
Other Short-Term Borrowings ..................................................................... 1,655,386 1,817,358
Accrued Taxes, Interest and Expenses ............................................................ 710,772 567,906
Other Liabilities ............................................................................... 270,055 200,421
Long-Term Debt .................................................................................. 2,288,151 1,508,683
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities ............................................................................... 25,743,260 24,947,837
- ----------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity (a)
- ----------------------------------------------------------------------------------------------------------------------------------
Common Stock (b) ................................................................................ 592,559 583,005
Capital Surplus ................................................................................. 495,067 481,036
Retained Earnings ............................................................................... 2,066,407 1,785,121
Accumulated Nonowner Changes in Equity .......................................................... 82,448 98,254
Treasury Stock .................................................................................. (57,959) (184,580)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Shareholders' Equity ...................................................................... 3,178,522 2,762,836
- ----------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity ...................................................... $28,921,782 27,710,673
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) 500,000 shares of no par value preferred stock are authorized of which none
have been issued
(b) Stated value $2.22 per share; authorized 300,000,000; outstanding 1998 -
266,918,544 (excludes 922,028 treasury shares) and 1997 - 262,614,641 (excludes
5,424,885 treasury shares).
See Notes to Consolidated Financial Statements.
14
<PAGE> 4
<TABLE>
<CAPTION>
==================================================================================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY
==================================================================================================================================
- ----------------------------------------------------------------------------------------------------------------------------------
COMMON STOCK ACCUMULATED
------------------------ NONOWNER
SHARES CAPITAL RETAINED CHANGES TREASURY
($000'S) OUTSTANDING AMOUNT SURPLUS EARNINGS IN EQUITY STOCK TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE AT DECEMBER 31, 1995 ............... 255,433,570 $ 567,063 320,078 1,198,040 17,557 - 2,102,738
Net Income and Nonowner Changes
in Equity, Net of Tax:
Net Income ................................. 382,344 382,344
Change in Unrealized Gains on Securities
Available for Sale ...................... (6,240) (6,240)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income and Nonowner Changes in Equity .. 376,104
Cash Dividends Declared at $.48 8/9 per share (118,477) (118,477)
Shares Acquired for Treasury ............... (103,622) (230) (2,866) (3,096)
Stock Options Exercised,
Including Treasury Shares Issued ........ 1,059,254 2,351 6,677 2,689 11,717
Corporate Tax Benefit Related to Exercise
of Non-Qualified Stock Options .......... 871 871
Stock Issued in Conversion of
Subordinated Notes ...................... 7,598,988 16,870 126,385 143,255
Stock Issued in Acquisitions and Other ..... 3,879,624 8,613 39,781 (171) 48,223
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1996 ............... 267,867,814 594,667 493,792 1,461,736 11,317 (177) 2,561,335
Net Income and Nonowner Changes
in Equity, Net of Tax:
Net Income ................................. 460,858 460,858
Change in Unrealized Gains on Securities
Available for Sale ...................... 86,937 86,937
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income and Nonowner Changes in Equity .. 547,795
Cash Dividends Declared at $.56 8/9 per share (137,288) (137,288)
Shares Acquired for Treasury ............... (7,787,140) (17,288) (259,019) (276,307)
Stock Options Exercised,
Including Treasury Shares Issued ........ 1,313,794 2,917 (20,082) 34,466 17,301
Corporate Tax Benefit Related to Exercise
of Non-Qualified Stock Options .......... 1,929 1,929
Fractional Shares Purchased in Stock Split
Effected in the Form of a Stock Dividend (5,364) (12) (185) (197)
Stock Issued in Acquisition and Other ...... 1,225,537 2,721 5,397 40,150 48,268
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1997 ............... 262,614,641 583,005 481,036 1,785,121 98,254 (184,580) 2,762,836
Net Income and Nonowner Changes
in Equity, Net of Tax:
Net Income ................................. 476,128 476,128
Change in Unrealized Gains on Securities
Available for Sale ...................... (15,806) (15,806)
- ----------------------------------------------------------------------------------------------------------------------------------
Net Income and Nonowner Changes in Equity .. 460,322
Cash Dividends Declared at $.71 per share .. (186,710) (186,710)
Shares Acquired for Treasury ............... (2,402,500) (5,334) (138,556) (143,890)
Earnings Adjustment of Pooled Entity (a) ... (7,803) (7,803)
Stock Options Exercised,
Including Treasury Shares Issued ........ 1,254,009 2,784 (43,402) 59,032 18,414
Corporate Tax Benefit Related to Exercise
of Non-Qualified Stock Options .......... 3,768 3,768
Fractional Shares Purchased in Stock Split
Effected in the Form of a Stock Dividend (6,751) (15) (329) (344)
Stock Issued in Public Offering ............ 3,600,000 7,992 47,644 122,489 178,125
Stock Issued in Acquisitions and Other ..... 1,859,145 4,127 6,021 83,656 93,804
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE AT DECEMBER 31, 1998 ............... 266,918,544 $ 592,559 495,067 2,066,407 82,448 (57,959) 3,178,522
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a)The restatement of the CitFed Bancorp, Inc. (CitFed) 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 $7,803,000.
An adjustment to shareholders' equity removes the effect of including
CitFed's financial results in both periods.
See Notes to Consolidated Financial Statements.
15
<PAGE> 5
<TABLE>
<CAPTION>
===========================================================================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
===========================================================================================================================
- ---------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31 ($000's) 1998 1997 1996
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income............................... $ 476,128 460,858 382,344
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses.................................................... 109,171 90,095 68,382
Depreciation, Amortization and Accretion....................................... 80,540 69,447 62,571
Provision for Deferred Income Taxes............................................ 83,859 90,857 80,417
Realized Securities Gains...................................................... (12,193) (12,508) (8,518)
Realized Securities Losses..................................................... 2,350 6,706 2,336
Proceeds from Sales of Loans Held for Sale..................................... 3,208,903 1,326,077 1,184,957
Net Gains on Sales of Loans.................................................... (30,275) (14,735) (15,862)
Increase in Loans Held for Sale................................................ (3,425,319) (1,501,898) (1,230,070)
Increase in Accrued Income Receivable.......................................... (69,422) (511) (47,913)
Decrease (Increase) in Other Assets............................................ (180,962) 83,152 (129,678)
Increase (Decrease) in Accrued Taxes, Interest and Expenses.................... 147,271 10,018 (21,069)
Increase (Decrease) in Other Liabilities....................................... 14,815 41,626 (7,165)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Provided by Operating Activities......................................... 404,866 649,184 320,732
- ---------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Proceeds from Sales of Securities Available for Sale.............................. 1,706,048 1,842,489 567,060
Proceeds from Calls, Paydowns and Maturities of Securities Available for Sale..... 2,597,141 1,256,298 1,047,848
Purchases of Securities Available for Sale........................................ (3,383,136) (2,379,583) (2,756,281)
Proceeds from Calls, Paydowns and Maturities of Securities Held to Maturity....... 39,356 264,805 339,084
Purchases of Securities Held to Maturity.......................................... (52,896) (124,766) (376,116)
Decrease (Increase) in Other Short-Term Investments............................... (59,793) 96,727 (63,265)
Purchases of Loans in Acquisitions................................................ (41,348) (186) (224,313)
Proceeds from Securitizations and Sales of Automobile Loans....................... -- -- 824,607
Increase in Loans and Leases...................................................... (1,577,395) (2,306,302) (2,513,494)
Purchases of Bank Premises and Equipment.......................................... (67,795) (60,726) (48,605)
Proceeds from Disposal of Bank Premises and Equipment............................. 9,124 6,649 5,676
Net Cash Received (Paid) in Acquisitions.......................................... 1,576 (15,159) (175,572)
- ---------------------------------------------------------------------------------------------------------------------------
Net Cash Used in Investing Activities............................................. (829,118) (1,419,754) (3,373,371)
- ---------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Purchases of Deposits............................................................. 116,648 128,927 1,921,019
Increase (Decrease) in Core Deposits.............................................. (117,185) (172,535) 713,955
Increase (Decrease) in CDs-- $100,000 and Over, including Foreign................. (239,004) 776,106 (780,775)
Increase (Decrease) in Federal Funds Borrowed .................................... 759,968 (157,848) 867,653
Increase (Decrease) in Short-Term Bank Notes...................................... (555,000) (301,000) 356,000
Increase (Decrease) in Other Short-Term Borrowings................................ (170,634) 478,606 288,785
Proceeds from Issuance of Long-Term Debt.......................................... 2,256,658 3,020,115 1,518,438
Repayment of Long-Term Debt....................................................... (1,473,067) (2,710,880) (1,536,532)
Payment of Cash Dividends......................................................... (167,896) (133,857) (113,869)
Exercise of Stock Options......................................................... 22,182 19,230 12,588
Proceeds from Sale of Common Stock................................................ 178,125 -- --
Purchases of Treasury Stock....................................................... (143,890) 276,307) (3,096)
Other............................................................................. (169) (42) 890
- ---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES......................................... 466,736 670,515 3,245,056
- ---------------------------------------------------------------------------------------------------------------------------
INCREASE (DECREASE) IN CASH AND DUE FROM BANKS.................................... 42,484 (100,055) 192,417
CASH AND DUE FROM BANKS AT BEGINNING OF YEAR...................................... 777,378 877,433 685,016
- ---------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF YEAR............................................ $ 819,862 777,378 877,433
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: The Bancorp paid Federal income taxes of $142,650,000, $116,150,000 and
$122,880,000 in 1998, 1997 and 1996, respectively.
The Bancorp paid interest of $1,018,824,000, $1,016,296,000 and
$934,152,000 in 1998, 1997 and 1996, respectively.
The Bancorp had noncash investing activities consisting of the
securitization and transfer to securities of $1,058,862,000,
$1,107,761,000 and $899,371,000 of residential mortgage loans in 1998,
1997 and 1996, respectively. In connection with the 1997 acquisition of
Suburban Bancorporation, the Bancorp acquired $178,021,000 of loans and
$18,509,000 of securities and assumed $126,071,000 of deposits.
See Notes to Consolidated Financial Statements.
16
<PAGE> 6
================================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
NOTE 1- SUMMARY OF SIGNIFICANT ACCOUNTING AND
REPORTING POLICIES
NATURE OF OPERATIONS
Fifth Third Bancorp (Bancorp) conducts its principal activities through its
banking and non-banking subsidiaries from 468 offices located throughout Ohio,
Indiana, Kentucky, Arizona and Florida. Principal activities include commercial
and retail banking, investment advisory services and data processing.
BASIS OF PRESENTATION
The Consolidated Financial Statements include the accounts of Fifth Third
Bancorp and its subsidiaries. All material intercompany transactions and
balances have been eliminated. Certain prior period data has been reclassified
to conform to current period presentation. Financial data for all prior periods
has been restated to reflect the second quarter 1998 mergers with CitFed
Bancorp, Inc. (CitFed) and State Savings Company (State). Both mergers were
accounted for as poolings-of-interests. Cash dividends per common share are
those of Fifth Third Bancorp declared prior to the mergers with CitFed and
State.
The restatement of the CitFed 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 $7,803,000. An adjustment to shareholders' equity
removes the effect of including CitFed's financial results in both periods.
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the amounts reported in the financial statements and accompanying notes.
Actual results could differ from those estimates.
SECURITIES
Securities are classified as held to maturity, available-for-sale or trading
on the date of purchase. Only those securities classified as held to maturity,
and which management has the intent and ability to hold to maturity, are
reported at amortized cost. Available-for-sale and trading securities are
reported at fair value with unrealized gains and losses, net of related deferred
income taxes, included in accumulated nonowner changes in equity or income,
respectively. Realized securities gains or losses are reported in the
Consolidated Statements of Income. The cost of securities sold is based on the
specific identification method.
LOANS AND LEASES
Interest income on loans is based on the principal balance outstanding, with
the exception of interest on discount basis loans which is computed using a
method which approximates the interest method. The accrual of interest for
commercial, construction and mortgage loans is discontinued when there is a
clear indication the borrower's cash flow may not be sufficient to meet payments
as they become due. Such loans are also placed on nonaccrual status when
principal or interest is past due ninety days or more, unless the loan is well
secured and in the process of collection. When a loan is placed on nonaccrual
status, all previously accrued and unpaid interest is charged against income.
Loan and lease origination and commitment fees and certain direct loan
origination costs are deferred and the net amount amortized over the estimated
life of the related loans or commitments as a yield adjustment.
Income on direct financing leases is recognized on a basis to achieve a
constant periodic rate of return on the outstanding investment. Income on
leveraged leases is recognized on a basis to achieve a constant rate of return
on the outstanding investment in the lease, net of the related deferred tax
liability, in the years in which the net investment is positive.
Residential mortgage loans held for sale are valued at the lower of aggregate
cost or fair value. The Bancorp generally has commitments to sell residential
mortgage loans held for sale in the secondary market. Gains or losses on sales
are recognized in Other Service Charges and Fees upon delivery.
Statement of Financial Accounting Standards (SFAS) No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities,"
was adopted for 1997 and provides accounting and reporting standards for
transfers and servicing of financial assets and extinguishments of liabilities.
The adoption of SFAS No. 125 did not have a material effect on the Consolidated
Financial Statements.
When the Bancorp sells or securitizes mortgage loans with servicing rights
retained, the total cost of the mortgage loans is allocated to the servicing
rights and the loans based on their relative fair values. The resulting
servicing rights are amortized in proportion to, and over the period of,
estimated net servicing revenues. Servicing rights are assessed for impairment
periodically based on fair value, with any impairment recognized through a
valuation allowance. For purposes of measuring impairment, the rights are
stratified based on interest rate and original maturity. Fees received for
servicing mortgage loans owned by investors are based on a percentage of the
outstanding monthly principal balance of such loans and are included in income
as loan payments are received. Costs of servicing loans are charged to expense
as incurred. Mortgage servicing rights, net of the valuation reserve, included
in Other Assets were $73,664,000 and $68,248,000 at December 31, 1998 and 1997,
respectively.
Impaired loans are measured based on the present value of expected future
cash flows discounted at the loan's effective interest rate or the fair value of
the underlying collateral. The Bancorp evaluates the collectibility of both the
interest and principal when assessing the need for a loss accrual.
RESERVE FOR CREDIT LOSSES
The reserve is maintained at a level management considers to be adequate to
absorb probable loan and lease losses inherent in the portfolio. Credit losses
are charged and recoveries are credited to the reserve. Provisions for credit
losses are based on management's review of the historical credit loss experience
and such other factors which, in management's judgment, deserve consideration
under existing economic conditions in estimating potential credit losses.
In determining the adequacy of the reserve for credit losses, management of
each affiliate bank, on a quarterly basis, specifically evaluates the necessity
of a reserve for individual loans classified by management. The specifically
allocated reserve for a classified loan is determined based on management's
estimate of the borrower's ability to repay the loan given the availability of
collateral, other sources of cash flow, and legal options available to the
Bancorp. Once a review is completed, the need for a specific reserve is
determined by senior management and allocated to the loan. Other loans not
specifically reviewed by management are evaluated using a rolling five-year
average historical charge-off experience ratio calculated by type of loan. The
historical charge-off ratio factors into account the homogeneous nature of the
loans, the geographical lending areas involved, regulatory examination findings,
specific grading systems applied and any other known factors which may impact
the ratios used. Specific reserves on individual loans and historical ratios are
reviewed quarterly and adjusted as necessary based on subsequent collections,
loan upgrades or downgrades, nonperforming trends or
17
<PAGE> 7
================================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
actual principal charge-offs. The Bancorp's primary market area for lending is
Ohio, Kentucky and Indiana. When evaluating the adequacy of reserves,
consideration is given to this regional geographic concentration and the
closely-associated effect changing economic conditions has on the Bancorp's
customers.
BANK PREMISES AND EQUIPMENT
Bank premises and equipment, including leasehold improvements, are stated at
cost less accumulated depreciation and amortization. Depreciation is computed on
the straight-line method over the estimated useful lives of the related assets.
Amortization of leasehold improvements is computed on the straight-line method
over the lives of the related leases or useful lives of the related assets,
whichever is shorter. Maintenance, repairs and minor improvements are charged to
operating expenses as incurred.
INTANGIBLE ASSETS
Goodwill and other intangibles are amortized on a straight-line basis
generally over a period of up to 15 years. Intangible assets, net of accumulated
amortization, included in Other Assets at December 31, 1998 and 1997 total
$370,734,000 and $323,289,000, respectively. Management reviews intangible
assets for possible impairment if there is a significant event that
detrimentally affects operations. Impairment is measured using estimates of the
discounted future earnings potential of the entity or assets acquired.
DERIVATIVE FINANCIAL INSTRUMENTS
The Bancorp enters into foreign exchange forward contracts primarily to
enable customers involved in international trade to hedge their exposure to
foreign currency fluctuations. The Bancorp generally hedges its exposure to
market rate fluctuations by entering into offsetting third-party forward
contracts, which are predominantly settled daily. Unrealized gains and losses on
forward contracts are insignificant and are recognized in Other Service Charges
and Fees when realized.
The Bancorp has purchased options and interest rate floors to hedge a portion
of the value of mortgage servicing rights against changes in prepayment rates.
Premiums are amortized over the option life on a straight-line basis. The
contracts are designated as hedges, with gains and losses recorded as basis
adjustments to the mortgage servicing rights.
The Bancorp has interest rate caps, floors and swaps to adjust the interest
rate sensitivity of long-term, fixed-rate capital-qualifying securities and
hedge the risk of future fluctuations in interest rates relating to hedging
transactions effected for commercial clients. The unamortized cost of acquiring
caps and floors is included in Other Assets and amortized over the term of the
agreements as interest expense. Interest rate swaps are linked through
designation with certain assets or liabilities of the Bancorp. Net interest
income (expense) resulting from the differential between exchanging floating and
fixed-rate interest payments is recorded on an accrual basis as an adjustment to
the interest (expense) income of the associated asset or liability.
The Bancorp does not hold or issue derivative financial instruments for
trading purposes.
EARNINGS PER SHARE
Earnings per share is calculated by dividing net income for the period by the
weighted average number of shares of common stock outstanding during the period.
The assumed conversion of convertible subordinated notes and the exercise of
stock options is included in the calculation of diluted earnings per share.
SFAS No. 128, "Earnings Per Share," was adopted for 1997 with all
prior-period earnings per share data restated. The statement requires dual
presentation of earnings per share and diluted earnings per share on the
Consolidated Statements of Income and other computational changes. The adoption
of SFAS No. 128 did not have a material effect on previously reported earnings
per share.
STOCK SPLIT
The Bancorp's board of directors approved a three-for-two stock split in
March 1998. The additional shares resulting from the split were distributed on
April 15, 1998 to shareholders 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.
OTHER
SFAS No. 130, "Reporting Comprehensive Income," was adopted for 1998. The
statement requires additional reporting of items that affect comprehensive
income but not net income. Examples relevant to the Bancorp include unrealized
gains and losses on securities available for sale. The Bancorp elected to
present the required disclosures in the Consolidated Statements of Shareholders'
Equity. The caption "Net Income and Nonowner Changes in Equity," represents
total comprehensive income as defined in SFAS No. 130. Because the statement
solely relates to disclosure requirements, it had no effect on the Bancorp's
financial results.
SFAS No. 131, "Disclosures About Segments of an Enterprise and Related
Information," was adopted for 1998. The statement requires financial disclosure
and descriptive information about reportable operating segments. This statement
resulted in additional financial statement disclosures upon adoption, however,
the Bancorp did not make material changes to its segment groupings.
SFAS 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 adoption
of SFAS No. 133 is not expected to have a material effect on the Consolidated
Financial Statements.
Securities and other property held by Fifth Third Investment Advisors, a
division of the Bancorp's banking subsidiaries, in a fiduciary or agency
capacity are not included in the Consolidated Balance Sheets because such items
are not assets of the subsidiaries. Investment advisory income is recognized on
the accrual basis.
Treasury stock is carried at cost.
NOTE 2-SECURITIES
Securities available for sale as of December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------
1998
--------------------------------------------------
AMORTIZED UNREALIZED UNREALIZED FAIR
($000'S) COST GAINS LOSSES VALUE
- --------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government
and agencies
obligations........... $ 276,216 5,756 (3) 281,969
Obligations of
states and political
subdivisions.......... 183,739 7,934 (338) 191,335
Agency mortgage-
backed
securities............ 6,728,501 123,335 (3,953) 6,847,883
Other bonds,
notes and
debentures............ 766,692 4,382 (25,064) 746,010
Other securities........ 252,884 14,994 (450) 267,428
- --------------------------------------------------------------------
Total securities $8,208,032 156,401 (29,808) 8,334,625
- --------------------------------------------------------------------
</TABLE>
18
<PAGE> 8
================================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
================================================================================
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
1997
------------------------------------------------
Amortized Unrealized Unrealized Fair
($000's) Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government
and agencies
obligations ............ $ 529,028 7,344 (230) 536,142
Obligations of
states and political
subdivisions ........... 187,308 7,105 (260) 194,153
Agency mortgage-
backed
securities ............. 6,465,597 75,654 (15,323) 6,525,928
Other bonds,
notes and
debentures ............. 609,685 6,267 (6,966) 608,986
Other securities ......... 196,467 77,791 (2) 274,256
- --------------------------------------------------------------------------------
Total securities ......... $7,988,085 174,161 (22,781) 8,139,465
- --------------------------------------------------------------------------------
</TABLE>
Securities held to maturity as of December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998
------------------------------------------------
Amortized Unrealized Unrealized Fair
($000's) Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of
states and political
subdivisions ........... $ 55,210 -- -- 55,210
Other bonds,
notes and
debentures ............. 1,660 2 -- 1,662
Other securities ......... 29,143 -- -- 29,143
- --------------------------------------------------------------------------------
Total securities ......... $ 86,013 2 -- 86,015
- --------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1997
------------------------------------------------
Amortized Unrealized Unrealized Fair
($000's) Cost Gains Losses Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Obligations of
states and political
subdivisions ........... $ 41,982 -- -- 41,982
Agency mortgage-
backed securities ...... 4,996 -- (134) 4,862
Other bonds,
notes and
debentures ............. 1,535 -- -- 1,535
Other securities ......... 36,497 499 -- 36,996
- --------------------------------------------------------------------------------
Total securities ......... $ 85,010 499 (134) 85,375
- --------------------------------------------------------------------------------
</TABLE>
The amortized cost and approximate fair value of securities at December 31,
1998, by contractual maturity, are shown in the following table. Actual
maturities may differ from contractual maturities when there exists a right to
call or prepay obligations with or without call or prepayment penalties.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
Available for Sale Held to Maturity
------------------ ----------------
Amortized Fair Amortized Fair
($000's) Cost Value Cost Value
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Debt securities:
Under 1 year ...... $ 153,462 157,686 $37,248 37,248
1-5 years ......... 849,455 841,623 14,624 14,624
6-10 years ........ 71,622 74,714 3,055 3,055
Over 10 years ..... 152,108 145,291 1,943 1,945
Agency mortgage-
backed securities . 6,728,501 6,847,883 -- --
Other securities .... 252,884 267,428 29,143 29,143
- --------------------------------------------------------------------------------
Total securities..... $8,208,032 8,334,625 $86,013 86,015
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1998 and 1997, securities with a book value of $4,952,486,000
and $4,251,089,000, respectively, were pledged to secure short-term borrowings,
public deposits, trust funds and for other purposes as required or permitted by
law.
NOTE 3-RESERVE FOR CREDIT LOSSES
Transactions in the reserve for credit losses for the years ended December
31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
($000's) 1998 1997 1996
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at January 1 ..................... $ 250,950 233,803 224,134
Losses charged off ....................... (123,687) (101,517) (86,598)
Recoveries of losses previously
charged off ............................ 26,920 26,864 22,047
- --------------------------------------------------------------------------------
Net charge-offs .......................... (96,767) (74,653) (64,551)
Provision charged to operations 109,171 90,095 68,382
Reserve of acquired institutions
and other .............................. 3,506 1,705 5,838
- --------------------------------------------------------------------------------
Balance at December 31 ................... $ 266,860 250,950 233,803
- --------------------------------------------------------------------------------
</TABLE>
Impaired loan information, under SFAS No. 114, at
December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
($000's) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Impaired loans with a valuation reserve...................... $27,285 38,782
Impaired loans with no valuation reserve..................... 3,725 7,577
- --------------------------------------------------------------------------------
Total impaired loans ........................................ $31,010 46,359
- --------------------------------------------------------------------------------
Valuation reserve on impaired loans ......................... $ 8,404 25,467
- --------------------------------------------------------------------------------
</TABLE>
Average impaired loans, net of valuation reserves, were $21,749,000 in 1998,
$18,093,000 in 1997 and $27,833,000 in 1996. Cash basis interest income
recognized on those loans during each of the years was immaterial.
NOTE 4-LEASE FINANCING
A summary of the gross investment in lease financing at December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
($000's) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Direct financing leases............................. $3,863,881 3,448,363
Leveraged leases.................................... 405,970 134,368
- --------------------------------------------------------------------------------
Total lease financing............................... $3,863,881 3,582,731
- --------------------------------------------------------------------------------
</TABLE>
The components of the investment in lease financing at December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
($000's) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Rentals receivable, net of principal and
interest on nonrecourse debt .................... $ 2,577,062 2,187,868
Estimated residual value of leased assets 1,692,789 1,394,863
- --------------------------------------------------------------------------------
Gross investment in lease financing ............... 4,269,851 3,582,731
Unearned income ................................... (653,360) (527,479)
- --------------------------------------------------------------------------------
Total net investment in lease financing ........... $ 3,616,491 3,055,252
- --------------------------------------------------------------------------------
</TABLE>
At December 31, 1998, the minimum future lease payments receivable for each
of the years 1999 through 2003 were $864,737,000, $906,013,000, $843,194,000,
$595,354,000 and $408,506,000, respectively.
19
<PAGE> 9
===============================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NOTE 5-BANK PREMISES AND EQUIPMENT
A summary of bank premises and equipment at December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Estimated
($000's) Useful Life 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Land and improvements .......... $ 64,866 56,030
Buildings ...................... 18 to 50 yrs. 219,256 196,226
Equipment ...................... 3 to 20 yrs. 223,916 208,995
Leasehold improvements ......... 6 to 25 yrs. 67,505 59,253
Accumulated depreciation
and amortization ............. (244,705) (219,475)
- -------------------------------------------------------------------------------
Total bank premises and
equipment .................... $330,838 301,029
- -------------------------------------------------------------------------------
</TABLE>
Depreciation and amortization expense related to bank premises and equipment
was $35,470,000 in 1998, $31,469,000 in 1997 and $27,373,000 in 1996.
Occupancy expense has been reduced by rental income from leased premises of
$8,436,000 in 1998, $7,936,000 in 1997 and $7,400,000 in 1996.
The Bancorp's subsidiaries have entered into a number of noncancelable lease
agreements with respect to bank premises and equipment. A summary of the minimum
annual rental commitments under these leases at December 31, 1998, exclusive of
taxes and other charges payable by the lessee:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
Land and
($000's) Buildings Equipment Total
===============================================================================
<S> <C> <C> <C>
1999 ................................ $ 18,893 201 19,094
2000 ................................ 18,035 179 18,214
2001 ................................ 16,228 42 16,270
2002 ................................ 14,629 30 14,659
2003 ................................ 13,759 -- 13,759
2004 and subsequent years ........... 49,069 -- 49,069
- -------------------------------------------------------------------------------
Total ............................... $130,613 452 131,065
===============================================================================
</TABLE>
Rental expense for cancelable and noncancelable leases was $20,813,000 for
1998, $20,283,000 for 1997 and $19,256,000 for 1996.
NOTE 6-LONG-TERM BORROWINGS
A summary of long-term borrowings at December 31:
<TABLE>
<CAPTION>
===============================================================================
($000's) 1998 1997
===============================================================================
<S> <C> <C>
Bancorp:
Capital Securities,
8.136%, due 2027 ...................... $ 200,000 200,000
Subordinated notes,
8.25%, repaid in 1998 ................. -- 36,321
Subsidiaries:
Subordinated notes,
6.75%, due 2005 ....................... 247,752 247,405
Federal Home Loan Bank advances ......... 790,399 399,836
Securities sold under agreements
to repurchase ......................... 1,050,000 497,000
Other ................................... -- 128,121
- ------------------------------------------------------------------------------
Total long-term borrowings .............. $2,288,151 1,508,683
==============================================================================
</TABLE>
In March 1997, Fifth Third Capital Trust 1 (FTCT1), a wholly-owned
subsidiary of the Bancorp, issued $200 million 8.136% Capital Securities due in
2027. The Bancorp has fully and unconditionally guaranteed all of FTCT1's
obligations under the Capital Securities. The Capital Securities qualify as Tier
1 capital for regulatory capital purposes.
The Subordinated Notes are unsecured obligations of a subsidiary bank.
Interest is payable semiannually and the notes qualify as total capital for
regulatory capital purposes.
At December 31, 1998, Federal Home Loan Bank advances have rates ranging
from 3.22% to 7.51%, with interest payable monthly. The advances were secured by
certain mortgage loans and securities. The advances mature as follows:
$4,420,000 in 1999, $16,044,000 in 2000, $4,911,000 in 2001, $550,087,000 in
2002, $27,618,000 in 2003 and $187,319,000 thereafter.
At December 31, 1998, securities sold under agreements to repurchase have
rates ranging from 4.37% to 5.07%, with interest payable monthly. The repurchase
agreements mature as follows: $500,000,000 in 2000, $200,000,000 in 2001 and
$350,000,000 in 2008.
The Bancorp issued notice of redemption effective May 31, 1996 for its 4.25%
convertible subordinated notes issued in 1992. As a result, 7.6 million common
shares were issued and $143.3 million was added to equity capital during 1996.
NOTE 7-SHORT-TERM BORROWINGS
A summary of short-term borrowings and rates at December 31:
<TABLE>
<CAPTION>
================================================================================
($000's) 1998 1997 1996
================================================================================
<S> <C> <C> <C>
Federal funds borrowed:
Balance ..................... $2,038,541 1,278,573 1,436,421
Rate ........................ 4.63% 5.65 5.39
- --------------------------------------------------------------------------------
Short-term bank notes:
Balance ..................... $ -- 555,000 806,000
Rate ........................ -- 5.85 5.41
Securities sold under
agreements to repurchase:
Balance ..................... $1,562,867 1,226,718 1,080,804
Rate ........................ 4.53% 4.73 4.89
- --------------------------------------------------------------------------------
Other:
Balance ..................... $ 92,519 590,640 257,948
Rate ........................ 4.27% 5.76 6.09
- --------------------------------------------------------------------------------
Total short-term
borrowings:
Balance ..................... $3,693,927 3,650,931 3,581,173
Rate ........................ 4.58% 5.39 5.30
- --------------------------------------------------------------------------------
Average outstanding ........... $4,399,248 3,730,665 3,048,557
Maximum month-end
balance ..................... $5,179,827 4,328,648 3,645,069
Weighted average
interest rate ............... 5.25% 5.34 5.21
================================================================================
</TABLE>
A $3 billion senior and subordinated bank note facility was established in
1996. Short-term senior notes are offered with maturities ranging from 30 days
to one year, are obligations of seven of the Bancorp's subsidiary banks and are
included in the above table as short-term bank notes. In addition, medium-term
senior notes with maturities ranging from one year to 30 years and subordinated
bank notes with maturities ranging from five years to 30 years can be issued by
the seven subsidiary banks, none of which are outstanding as of December 31,
1998 or 1997.
At December 31, 1998, the Bancorp had issued $45,995,000 in commercial
paper, with unused lines of credit of $40,000,000 available to support
commercial paper transactions and other corporate requirements.
20
===============================================================================
<PAGE> 10
===============================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NOTE 8-INCOME TAXES
The Bancorp and its subsidiaries file a consolidated Federal income tax
return. A summary of applicable income taxes included in the Consolidated
Statements of Income:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
($000's) 1998 1997 1996
================================================================================
<S> <C> <C> <C>
Current U.S. income taxes ......... $161,250 138,445 104,357
State and local income taxes ...... 5,033 3,256 2,786
- --------------------------------------------------------------------------------
Total ............................. 166,283 141,701 107,143
- --------------------------------------------------------------------------------
Deferred U.S. income taxes
resulting from temporary
differences ..................... 83,859 90,857 80,417
- --------------------------------------------------------------------------------
Applicable income taxes ........... $250,142 232,558 187,560
================================================================================
</TABLE>
Deferred income taxes are included in the caption Accrued Taxes, Interest
and Expenses in the Consolidated Balance Sheets and are comprised of the
following temporary differences at December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
($000's) 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C>
Lease financing ........................ $474,240 368,526
Reserve for credit losses .............. (88,908) (84,969)
Bank premises and equipment ............ 11,903 10,842
Unrealized gains on securities
available for sale ................... 44,145 53,126
Other .................................. 12,923 31,900
- --------------------------------------------------------------------------------
Total net deferred tax liability ....... $454,303 379,425
- --------------------------------------------------------------------------------
</TABLE>
A reconciliation between the statutory U.S. income tax rate and the
Bancorp's effective tax rate:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998 1997 1996
===============================================================================
<S> <C> <C> <C>
Statutory tax rate ....................... 35.0% 35.0 35.0
Increase (decrease) resulting from:
Tax-exempt interest .................... (1.4) (1.6) (2.1)
Other-net .............................. .8 .1 --
- -------------------------------------------------------------------------------
Effective tax rate ....................... 34.4% 33.5 32.9
===============================================================================
</TABLE>
Retained earnings at December 31, 1998 includes $116,996,000 in allocations
of earnings for bad debt deductions of former thrift subsidiaries for which no
income tax has been provided. Under current tax law, if certain of the Bancorp's
subsidiaries use these bad debt reserves for purposes other than to absorb bad
debt losses, they will be subject to federal income tax at the current corporate
tax rate.
NOTE 9-RELATED PARTY TRANSACTIONS
At December 31, 1998 and 1997, certain directors, executive officers,
principal holders of Bancorp common stock and associates of such persons were
indebted to the banking subsidiaries in the aggregate amount, net of
participations, of $122,002,000 and $139,451,000, respectively. During 1998, new
loans aggregating $62,688,000 were made to such parties and loans aggregating
$80,137,000 were repaid. Such indebtedness was incurred in the ordinary course
of business on substantially the same terms as those prevailing at the time of
comparable transactions with unrelated parties.
NOTE 10-STOCK OPTIONS
The Bancorp has historically emphasized employee stock ownership.
Accordingly, the Bancorp encourages further ownership through granting stock
options to approximately 17% of its employees. Share grants represented .9% to
1.6% of average outstanding shares in each of the last three years.
Options can be granted under the Bancorp's 1998 Stock Option Plan to key
employees and directors of the Bancorp and its subsidiaries for up to 15.16
million shares of the Bancorp's common stock. Options granted generally have up
to ten year terms and vest and become fully exercisable at the end of three
years of continued employment. A summary of option transactions during the years
ended December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
1998 1997 1996
------------------- ------------------- ------------------
Average Average Average
Shares Option Shares Option Shares Option
(000's) Price (000's) Price (000's) Price
==================================================================================
<S> <C> <C> <C> <C> <C> <C>
Outstanding,
beginning
of year .... 11,098 $22.78 8,964 $ 16.67 7,834 $ 13.85
Exercised .... (1,332) 17.15 (1,343) 13.68 (1,059) 11.04
Expired ...... (382) 41.57 (218) 24.12 (197) 16.99
Granted ...... 4,198 55.74 3,695 34.35 2,386 23.48
==================================================================================
Outstanding,
end of
year ....... 13,582 $33.01 11,098 $ 22.78 8,964 $ 16.67
==================================================================================
Exercisable,
end of
year ....... 8,472 $25.37 6,929 $ 18.75 5,266 $ 13.82
==================================================================================
</TABLE>
As of December 31, 1998, options outstanding have exercise prices between
$3.87 and $71.94 and a weighted average remaining contractual life of 7.4 years.
The majority of options outstanding have exercise prices ranging from $15.48 to
$55.29 with a weighted average remaining contractual life of 7.6 years
At December 31, 1998, there were 6,856,372 incentive options and 6,725,654
nonqualified options outstanding and 11,141,577 shares were available for
granting additional options. Options outstanding represent 5.1% of the Bancorp's
issued shares at December 31, 1998.
SFAS No. 123, "Accounting for Stock-Based Compensation," was adopted for
1996 and encourages, but does not require, adoption of a fair-value-based
accounting method for employee stock-based compensation arrangements. As
permitted by the statement, the Bancorp has elected to disclose pro forma net
income and earnings per share amounts as if the fair-value-based method had been
applied in measuring compensation costs.
The Bancorp's pro forma information for the years ended December 31:
<TABLE>
<CAPTION>
===============================================================================
1998 1997 1996
===============================================================================
<S> <C> <C> <C> <C>
Pro forma net income ($000's) $447,617 448,705 378,027
Pro forma earnings per share $ 1.69 1.71 1.43
Pro forma diluted earnings per share $ 1.65 1.68 1.40
===============================================================================
</TABLE>
Compensation expense in the pro forma disclosures is not indicative of future
amounts as options vest over several years and additional grants are generally
made each year.
The weighted average fair value of options granted was $20.44, $9.47 and
$5.93 in 1998, 1997 and 1996, respectively. The fair value of each option grant
is estimated on the date of grant using the Black-Scholes option-pricing model
with the following assumptions used for grants in 1998, 1997 and 1996: expected
option lives of nine years for all three years; expected dividend yield of 1%,
1% and 2%; expected volatility of 25%, 24% and 21% and risk-free interest rates
of 4.6%, 5.4% and 6.5%, respectively.
21
<PAGE> 11
===============================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NOTE 11-COMMITMENTS AND CONTINGENT LIABILITIES
The Bancorp, in the normal course of business, is a party to financial
instruments with off-balance-sheet risk to meet the financing needs of its
customers in Ohio, Kentucky, Indiana, Arizona and Florida, and to minimize
exposure to fluctuations in interest and foreign exchange rates. These financial
instruments primarily include commitments to extend credit, standby and
commercial letters of credit, foreign exchange contracts, interest rate swap
agreements, interest rate floors, interest rate caps, purchased options and
commitments to sell residential mortgage loans. These instruments involve, to
varying degrees, elements of credit risk, counterparty risk and market risk in
excess of the amounts recognized in the Consolidated Balance Sheets. The
contract or notional amounts of these instruments reflect the extent of
involvement the Bancorp has in particular classes of financial instruments.
Creditworthiness for all instruments is evaluated on a case-by-case basis in
accordance with Bancorp credit policies. Collateral, if deemed necessary, is
based on management's credit evaluation of the counterparty and may include
business assets of commercial borrowers as well as personal property and real
estate of individual borrowers and guarantors.
A summary of significant commitments and other off-balance-sheet items at
December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Contract or
Notional Amount
==============================
($000's) 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C>
Commitments to extend credit ............... $7,444,472 6,137,251
Letters of credit (including
standby letters of credit) ............... 1,198,767 863,462
Foreign exchange contracts:
Commitments to purchase .................. 97,388 202,499
Commitments to sell ...................... 99,730 203,742
Interest rate swap agreements .............. 398,265 356,250
Interest rate floors ....................... 267,000 267,000
Interest rate caps ......................... 30,000 80,000
Purchased options .......................... 106,000 75,000
Commitments to sell
residential mortgage loans ............... 319,700 473,168
=================================================================================
</TABLE>
Commitments to extend credit are agreements to lend. Commitments generally
have fixed expiration dates or other termination clauses that may require
payment of a fee. Since many of the commitments may expire without being drawn
upon, the total commitment amounts do not necessarily represent future cash
requirements. The Bancorp's exposure to credit risk in the event of
nonperformance by the other party is the contract amount. Fixed-rate commitments
are subject to market risk resulting from fluctuations in interest rates and the
Bancorp's exposure is limited to the replacement value of those commitments.
Standby and commercial letters of credit are conditional commitments issued
to guarantee the performance of a customer to a third party. At December 31,
1998, approximately $487,355,000 of standby letters of credit will expire within
one year, $635,807,000 expire between one to five years and $57,329,000 expire
thereafter. At December 31, 1998, letters of credit of approximately $18,276,000
were issued to commercial customers for a duration of one year or less to
facilitate trade payments in domestic and foreign transactions. The amount of
credit risk involved in issuing letters of credit in the event of nonperformance
by the other party is the contract amount.
Foreign exchange forward contracts are for future delivery or purchase of
foreign currency at a specified price. Risks arise from the possible inability
of counterparties to meet the terms of their contracts and from any resultant
exposure to movement in foreign exchange rates, limiting the Bancorp's exposure
to the replacement value of the contracts rather than the notional principal or
contract amounts. The Bancorp reduces its market risk for foreign exchange
contracts by generally entering into offsetting third-party forward contracts.
The foreign exchange contracts outstanding at December 31, 1998 primarily mature
in one year or less.
The Bancorp enters into forward contracts for future delivery of residential
mortgage loans at a specified yield to reduce the interest rate risk associated
with fixed-rate residential mortgages held for sale and commitments to fund
residential mortgages. Credit risk arises from the possible inability of the
other parties to comply with the contract terms. The majority of the Bancorp's
contracts are with U.S. government-sponsored agencies (FNMA, FHLMC).
At December 31, 1998, the Bancorp had purchased option contracts and
interest rate floor agreements with notional values of $75 million and $222
million, respectively, to hedge a portion of the value of mortgage servicing
rights against changes in value with changing prepayment rates. The options have
an original term of five years and give the Bancorp the right to receive
payments on fixed rates ranging from 5.15% to 6.15% and to make payments based
on the six-month London Interbank Offering Rate (LIBOR). The Bancorp may receive
a payment each quarter on the interest rate floor agreements if the reference
index is below the strike rate established at the outset of each transaction.
These contracts carry the risk of the counterparty's future ability to perform
under the agreements. A market exposure limit is approved for counterparties,
contracts are marked-to-market and exposures are collateralized in accordance
with Bancorp policy.
In 1997, the Bancorp entered into an interest rate swap agreement with a
notional principal amount of $200 million in connection with the issuance of
$200 million of long-term, fixed-rate capital-qualifying securities. The Bancorp
receives fixed-rate payments at 8.136% and pays a variable interest rate based
upon three-month LIBOR. As of December 31, 1998, the Bancorp had entered into
interest rate swap agreements with commercial clients and an unconsolidated
qualifying special-purpose entity with an aggregate notional principal amount of
$43.5 million and $111.3 million, respectively. The agreements generally provide
for the Bancorp to receive a fixed rate and pay a variable rate that resets
periodically.
The Bancorp has hedged its interest rate exposure on transactions with
commercial clients by executing offsetting swap agreements with primary dealers.
These transactions involve the exchange of fixed and floating interest rate
payments without the exchange of the underlying principal amounts. Therefore,
while notional principal amounts are typically used to express the volume of
these transactions, they do not represent the much smaller amounts that are
potentially subject to credit risk. Entering into interest rate swap agreements
involves the risk of dealing with counterparties and their ability to meet the
terms of the contract. The Bancorp controls the credit risk of these
transactions through adherence to a derivative products policy, credit approval
policies and monitoring procedures.
The Bancorp sells, subject to recourse, certain commercial loans to an
unconsolidated qualifying special-purpose entity. At December 31, 1998 and 1997,
the outstanding balance of these loans was $1.1 billion and $468.5 million,
respectively. The Bancorp did not repurchase any loans during 1998 or 1997.
There are claims pending against the Bancorp and its subsidiaries. Based on
a review of such litigation with legal counsel, management believes any
resulting liability would not have a material effect upon the Bancorp's
consolidated financial position or results of operations.
22
<PAGE> 12
===============================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NOTE 12-OTHER SERVICE CHARGES AND FEES AND OTHER OPERATING EXPENSES
The major components for the years ended December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
($000's) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Other Service Charges and Fees:
Cardholder fees .................... $ 29,572 28,084 25,283
Consumer loan and lease fees ....... 31,269 26,730 29,965
Commercial banking ................. 40,842 27,813 19,186
Mortgage banking ................... 72,412 46,098 47,290
Other .............................. 52,135 51,679 29,565
- -------------------------------------------------------------------------------
Total other service charges
and fees ........................... $226,230 180,404 151,289
- -------------------------------------------------------------------------------
Other Operating Expenses:
Marketing and
communications ................... $ 46,997 42,078 37,797
Bankcard ........................... 47,125 34,501 26,206
Intangibles amortization ........... 27,392 24,965 23,105
Franchise taxes .................... 26,064 27,172 21,606
Loan and lease ..................... 24,343 17,136 18,696
Printing and supplies .............. 16,323 16,345 16,188
FDIC insurance ..................... 6,518 6,387 13,371
Other .............................. 95,940 93,011 73,128
- -------------------------------------------------------------------------------
Total other operating expenses ....... $290,702 261,595 230,097
- -------------------------------------------------------------------------------
</TABLE>
NOTE 13-RETIREMENT AND BENEFIT PLANS
A combined summary of the defined benefit retirement plans at and for the
years ended December 31:
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
($000's) 1998 1997
<S> <C> <C>
- -------------------------------------------------------------------------------
Change in benefit obligation:
Projected benefit obligation at
beginning of year .......................... $ 67,956 60,383
Service cost ............................... 2,617 3,387
Interest cost .............................. 4,666 4,560
Curtailment ................................ (17,571) --
Acquisition/divestiture .................... 18,605 --
Amendments ................................. 6,210 (521)
Actuarial loss ............................. 9,774 9,382
Benefits paid .............................. (6,961) (9,235)
- -------------------------------------------------------------------------------
Projected benefit obligation at
end of year .................................. $ 85,296 67,956
- -------------------------------------------------------------------------------
Change in plan assets:
Fair value of plan assets at
beginning of year ......................... $ 97,333 74,496
Actual return on assets ................... 20,296 30,923
Employer contributions .................... 22,036 1,149
Benefits paid ............................. (6,961) (9,235)
- -------------------------------------------------------------------------------
Fair value of plan assets at end of year ....... $ 132,704 97,333
- -------------------------------------------------------------------------------
Funded status .................................. $ 47,408 29,377
Unrecognized transition amount ................. (1,322) (1,706)
Unrecognized actuarial gain .................... (26,055) (21,400)
Unrecognized prior service cost ................ 5,867 644
- -------------------------------------------------------------------------------
Net amount recognized .......................... $ 25,898 6,915
- -------------------------------------------------------------------------------
Amounts recognized in the Consolidated
Balance Sheets consist of:
Prepaid benefit cost ........................... $ 35,903 16,174
Accrued benefit liability ...................... (10,005) (9,908)
Intangible asset ............................... -- 649
- -------------------------------------------------------------------------------
Net amount recognized .......................... $ 25,898 6,915
- -------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
($000's) 1998 1997 1996
================================================================================
<S> <C> <C> <C>
Components of net periodic pension cost:
Service cost .......................... $ 2,617 3,387 3,278
Interest cost ......................... 4,666 4,560 4,057
Curtailment ........................... (12,230) -- --
Expected return on assets ............. (8,740) (6,518) (6,136)
Amortization and deferral of transition
amount .............................. (384) (384) (384)
Amortization of actuarial loss/(gain) . (1,266) 30 174
Amortization of unrecognized prior
service cost ........................ 253 65 (99)
- --------------------------------------------------------------------------------
Net periodic pension cost (benefit) ..... $(15,084) 1,140 890
================================================================================
</TABLE>
Plan assets consist primarily of common trust and mutual funds managed by
Fifth Third Bank, listed stocks and U.S. bonds.
<TABLE>
<CAPTION>
================================================================================
1998 1997 1996
================================================================================
<S> <C> <C> <C>
Weighted-average assumptions:
For disclosure:
Discount rate ................................ 6.75% 7.25 7.75
Rate of compensation increase ................ 5.18 5.34 5.33
For measuring net periodic pension cost:
Discount rate ................................ 7.25 7.75 7.25
Rate of compensation increase ................ 5.34 5.33 5.00
Expected return on plan assets ............... 9.00 9.00 9.00
- -------------------------------------------------------------------------------
</TABLE>
During 1998, to emphasize 401(k) and employee matching, the Bancorp froze
its defined benefit pension plan and all benefits earned to date became fully
vested.
For the Bancorp's nonqualified supplemental defined benefit plans with an
accumulated benefit obligation exceeding assets, the total projected benefit
obligation, accumulated benefit obligation and fair value of plan assets were
$10,759,000, $8,302,000 and $0, respectively as of December 31, 1998 and
$13,522,000, $6,670,000 and $0, respectively as of December 31, 1997. The
Bancorp's profit sharing plan contribution was $25,033,000 for 1998, $25,638,000
for 1997 and $23,788,000 for 1996.
NOTE 14-REGULATORY MATTERS
The principal source of income and funds for the Bancorp (parent company) are
dividends from its subsidiaries. During 1999, the amount of dividends the
subsidiaries can pay to the Bancorp without prior approval of regulatory
agencies is limited to their 1999 eligible net profits, as defined, and the
adjusted retained 1998 and 1997 net income of the subsidiaries.
The banks must maintain noninterest-bearing cash balances on reserve with
the Federal Reserve Bank. In 1998 and 1997, the banks were required to maintain
average reserve balances of $267,731,000 and $232,666,000, respectively.
The Federal Reserve Board adopted quantitative measures which assign risk
weightings to assets and off-balance-sheet items and also define and set minimum
regulatory capital requirements (risk-based capital ratios). All banks are
required to have core capital (Tier 1) of at least 4% of risk-weighted assets,
total capital of at least 8% of risk-weighted assets and a minimum Tier 1
leverage ratio of 3% of adjusted quarterly average assets. Tier 1 capital
consists principally of shareholders' equity including capital-qualifying
subordinated debt but excluding unrealized gains and losses on securities
available for sale, less goodwill and certain other intangibles. Total capital
consists of Tier 1 capital plus certain debt instruments and the reserve for
credit losses, subject to limitation. Failure to meet certain capital
requirements can initiate certain actions by regulators that, if undertaken,
could have a direct material effect on the Consolidated Financial Statements.
The regulations also define well-capitalized levels of Tier 1, total capital and
Tier 1 leverage as 6%, 10% and 5%,
23
===============================================================================
<PAGE> 13
===============================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
respectively. The Bancorp and each of its subsidiaries had Tier 1, total
capital and leverage ratios above the well-capitalized levels at December 31,
1998 and 1997. The risk-based capital ratios of certain affiliates have been
computed on a pro forma basis to include inter-affiliate mergers which were
approved by the appropriate regulatory agencies prior to year end and occurred
in the following January. As of December 31, 1998, the most recent notification
from the Federal Reserve Bank categorized the Bancorp and each of its subsidiary
banks as well capitalized under the regulatory framework for prompt corrective
action.
Capital and risk-based capital and leverage ratios for the Bancorp and its
significant subsidiaries at December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1998
---------------------
($000's) Amount Ratio
- -------------------------------------------------------------------------------
<S> <C> <C>
Total Capital (to Risk-Weighted Assets):
Fifth Third Bancorp (Consolidated) .................... $3,440,000 14.22%
Fifth Third Bank, Cincinnati .......................... 1,221,000 10.71
Fifth Third Bank, Northwestern Ohio, N.A........ ...... 434,000 13.75
Fifth Third Bank, Kentucky, Inc. ...................... 199,000 14.59
Fifth Third Bank, Western Ohio ........................ 366,000 10.29
Fifth Third Bank, Central Ohio ........................ 303,000 12.04
Tier 1 Capital (to Risk-Weighted Assets):
Fifth Third Bancorp (Consolidated) .................... 2,925,000 12.09
Fifth Third Bank, Cincinnati .......................... 787,000 6.90
Fifth Third Bank, Northwestern Ohio, N.A............... 299,000 9.46
Fifth Third Bank, Kentucky, Inc. ...................... 182,000 13.35
Fifth Third Bank, Western Ohio ........................ 302,000 8.49
Fifth Third Bank, Central Ohio ........................ 272,000 10.77
Tier 1 Leverage Capital (to Average Assets):
Fifth Third Bancorp (Consolidated) .................... 2,925,000 10.39
Fifth Third Bank, Cincinnati .......................... 787,000 7.46
Fifth Third Bank, Northwestern Ohio,................... 299.000 5.95
Fifth Third Bank, Kentucky, Inc. ...................... 182,000 8.55
Fifth Third Bank, Western Ohio ........................ 302,000 6.39
Fifth Third Bank, Central Ohio ........................ 272,000 7.69
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
1997
--------------------
($000's) Amount Ratio
- -------------------------------------------------------------------------------
<S> <C> <C>
Total Capital (to Risk-Weighted Assets):
Fifth Third Bancorp (Consolidated) .................... $3,076,000 13.54%
Fifth Third Bank, Cincinnati .......................... 1,084,000 13.80
Fifth Third Bank, Northwestern Ohio, N.A............... 411,000 12.12
Fifth Third Bank, Kentucky, Inc. ...................... 179,000 11.88
Fifth Third Bank, Western Ohio ........................ 378,000 12.00
Fifth Third Bank, Central Ohio ........................ 298,000 11.68
Tier 1 Capital (to Risk-Weighted Assets):
Fifth Third Bancorp (Consolidated) .................... 2,541,000 11.19
Fifth Third Bank, Cincinnati .......................... 681,000 8.67
Fifth Third Bank, Northwestern Ohio, N.A............... 270,000 7.96
Fifth Third Bank, Kentucky, Inc. ...................... 160,000 10.63
Fifth Third Bank, Western Ohio ........................ 316,000 10.02
Fifth Third Bank, Central Ohio ........................ 266,000 10.43
Tier 1 Leverage Capital (to Average Assets):
Fifth Third Bancorp (Consolidated) .................... 2,541,000 9.50
Fifth Third Bank, Cincinnati .......................... 681,000 7.64
Fifth Third Bank, Northwestern Ohio, N.A............... 270,000 5.47
Fifth Third Bank, Kentucky, Inc. ...................... 160,000 7.90
Fifth Third Bank, Western Ohio ........................ 316,000 5.80
Fifth Third Bank, Central Ohio ........................ 266,000 7.32
================================================================================
</TABLE>
NOTE 15-NONOWNER CHANGES IN EQUITY
Reclassification adjustments, related tax effects allocated to nonowner
changes in equity and accumulated nonowner changes in equity as of and for the
years ended December 31:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
($000's) 1998 1997 1996
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Reclassification adjustment, pretax:
Change in unrealized gains
arising during year ................... $(34,274) 128,528 (15,938)
Reclassification adjustment for
gains in net income ................... 9,843 5,802 6,182
- -------------------------------------------------------------------------------
Change in unrealized gains on
securities available for sale ......... $(24,431) 134,330 (9,756)
- -------------------------------------------------------------------------------
Related tax effects:
Change in unrealized gains
arising during year ................... $(12,100) 45,346 (5,744)
Reclassification adjustment for
gains in net income ................... 3,475 2,047 2,228
- -------------------------------------------------------------------------------
Change in unrealized gains on
securities available for sale ......... $ (8,625) 47,393 (3,516)
- -------------------------------------------------------------------------------
Reclassification adjustment, net of tax:
Change in unrealized gains
arising during year ................... $(22,174) 83,182 (10,194)
Reclassification adjustment for
gains in net income ................... 6,368 3,755 3,954
- -------------------------------------------------------------------------------
Change in unrealized gains on
securities available for sale ......... $(15,806) 86,937 (6,240)
- -------------------------------------------------------------------------------
Accumulated nonowner changes in equity:
Beginning balance --
Unrealized gains on
securities available for sale ......... $ 98,254 11,317 17,557
Current period change (15,806) 86,937 (6,240)
- -------------------------------------------------------------------------------
Ending balance --
Unrealized gains on
securities available for sale ......... $ 82,448 98,254 11,317
================================================================================
</TABLE>
NOTE 16-ACQUISITIONS
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
Consideration
--------------------
Common
Date Cash Shares Method of
Completed ($000's) Issued Accounting
- ----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
CitFed Bancorp, Inc. 6/26/1998 $ 51 13,222,869 Pooling
Dayton, Ohio
State Savings Company 6/19/1998 4 16,625,271 Pooling
Columbus, Ohio
The Ohio Company 6/12/1998 2 1,862,765 Purchase
Columbus, Ohio
W. Lyman Case 4/9/1998 15,000 -- Purchase
and Company
Columbus, Ohio
Heartland Capital 11/24/1997 -- 351,004 Purchase
Management, Inc.
Indianapolis, Indiana
Suburban 7/25/1997 11 870,218 Purchase
Bancorporation, Inc.
Cincinnati, Ohio
Kentucky Enterprise 3/15/1996 36 3,884,142 Pooling
Bancorp, Inc.
Newport, Kentucky
=================================================================================
</TABLE>
In June 1998, the Bancorp acquired CitFed, a publicly-traded savings and loan
holding company headquartered in Dayton, Ohio with $3.1 billion in assets, and
State, 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-interests. Accordingly, the assets,
liabilities and shareholders' equity of CitFed and State were recorded
24
<PAGE> 14
===============================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
on the books of the Bancorp at their values as reported on the books of CitFed
and State immediately prior to the consummation of the merger with the Bancorp.
This presentation required the restatements of prior periods as if the companies
had been combined for all years presented. The contributions of CitFed and State
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
Ended
March 31, Years Ended
1998 December 31,
($000's) (unaudited) 1997 1996
Net Interest Income
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Fifth Third Bancorp ............. $197,900 744,962 689,244
CitFed Bancorp, Inc. ............ 19,614 73,015 66,919
State Savings Company ........... 25,340 94,273 84,870
- --------------------------------------------------------------------------------
Combined ........................ $242,854 912,250 841,033
- --------------------------------------------------------------------------------
Other Operating Income
- --------------------------------------------------------------------------------
Fifth Third Bancorp ............. $126,381 445,461 368,415
CitFed Bancorp, Inc. ............ 7,804 33,494 28,275
State Savings Company ........... 5,935 22,814 22,217
- --------------------------------------------------------------------------------
Combined ........................ $140,120 501,769 418,907
- --------------------------------------------------------------------------------
Net Income
- --------------------------------------------------------------------------------
Fifth Third Bancorp ............. $108,981 401,237 335,059
CitFed Bancorp, Inc. ............ 7,803 26,568 15,162
State Savings Company ........... 7,447 33,053 32,123
- --------------------------------------------------------------------------------
Combined ........................ $124,231 460,858 382,344
- --------------------------------------------------------------------------------
</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.
In the second quarter of 1998 as a direct result of the CitFed and State
acquisitions, the Bancorp recorded merger-related costs of $106.4 million ($75.6
million after tax), of which $89.7 million was recorded as operating expense and
$16.7 million was recorded as additional provision for credit losses. The charge
to operating expenses consisted of employee benefit obligations, costs to
eliminate duplicate facilities and equipment, contract terminations, conversion
expenses and professional fees. The additional provision for credit losses
conformed CitFed and State to the Bancorp's reserving and charge-off practices.
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------
($000's) 1998
- --------------------------------------------------------------------------------
<S> <C>
Employee benefit obligations ................................ $49,179
Duplicate facilities and equipment .......................... 16,610
Conversion expenses and
professional fees ......................................... 13,014
Contract termination costs .................................. 2,947
Other ....................................................... 7,951
- --------------------------------------------------------------------------------
Merger-related charge ....................................... $89,701
- --------------------------------------------------------------------------------
</TABLE>
During 1998, merger-related costs incurred and charged against the accrual
were $60.6 million. As of December 31, 1998, the merger-related reserve was
$29.1 million, which is primarily associated with disposition of duplicate
facilities and certain employee benefit obligations.
On June 12, 1998, the Bancorp acquired The Ohio Company, a full-service
broker-dealer for retail and institutional clients headquartered in Columbus,
Ohio. On April 9, 1998, the Bancorp acquired W. Lyman Case & Company, a
commercial mortgage banking firm based in Columbus, Ohio which originated more
than $680 million in financing and equity transactions in 1998 and has a loan
servicing portfolio of $2 billion. The transactions were accounted for as
purchases. The financial results of The Ohio Company and W. Lyman Case &
Company, included in the results of operations subsequent to the date of the
acquisitions, were not material to the Bancorp's financial condition and
operating results for the periods presented.
The pro forma effect of acquisitions accounted for as purchases was not
material.
NOTE 17-EARNINGS PER SHARE
Reconciliation of Earnings Per Share to Diluted Earnings Per Share for the
Years Ended December 31:
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1998
------------------------------------
Average Per-Share
($000's) Income Shares Amount
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
EPS
Income available to
common shareholders ................ $476,128 265,338 $1.80
Effect of Dilutive Securities
Stock Options ........................ 5,336
- ---------------------------------------------------------------------------------
Diluted EPS
Income available to
common shareholders
plus assumed conversions ........... $476,128 270,674 $1.76
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1997
------------------------------------
Average Per-Share
($000's) Income Shares Amount
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
EPS
Income available to
common shareholders ................ $460,858 262,338 $1.76
Effect of Dilutive Securities
Stock Options ........................ 4,342
- ---------------------------------------------------------------------------------
Diluted EPS
Income available to
common shareholders
plus assumed conversions ........... $460,858 266,680 $1.73
- ---------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------
1996
------------------------------------
Average Per-Share
($000's) Income Shares Amount
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
EPS
Income available to
common shareholders ................ $382,344 263,523 $1.45
Effect of Dilutive Securities
Stock Options ........................ 2,810
Interest on 4 1/4% convertible
subordinated notes due 1998,
net of applicable
income taxes ....................... 1,637 3,111
- --------------------------------------------------------------------------------
Diluted EPS
Income available to
common shareholders
plus assumed conversions ........... $383,981 269,444 $1.42
- --------------------------------------------------------------------------------
</TABLE>
25
================================================================================
<PAGE> 15
===============================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NOTE 18-FAIR VALUE OF FINANCIAL INSTRUMENTS
Carrying amounts and estimated fair values for financial instruments at
December 31:
<TABLE>
<CAPTION>
===============================================================================
1998
-------------------------
Carrying Fair
($000's) Amount Value
===============================================================================
<S> <C> <C>
FINANCIAL ASSETS
Cash and due from banks ..................... $ 819,862 819,862
Securities available for sale ............... 8,334,625 8,334,625
Securities held to maturity ................. 86,013 86,015
Other short-term investments ................ 118,535 118,535
Loans held for sale ......................... 492,017 497,335
Loans, net .................................. 13,895,672 14,079,156
Accrued interest receivable ................. 282,551 282,551
FINANCIAL LIABILITIES
Deposits .................................... 18,780,355 17,815,852
Federal funds borrowed ...................... 2,038,541 2,038,541
Other short-term borrowings ................. 1,655,386 1,655,386
Accrued interest payable .................... 80,929 80,929
Long-term debt .............................. 2,288,151 2,358,612
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit ................ 607 8,848
Letters of credit ........................... 2,936 12,946
Purchased options ........................... 3,660 3,670
Interest rate swap agreements ............... -- 34,065
Interest rate floors ........................ 3,629 3,684
Interest rate caps .......................... 170 6
Forward contracts:
Commitments to sell loans ................. -- 795
Foreign exchange contracts:
Commitments to purchase ................. -- 2,486
Commitments to sell ..................... -- (2,087)
===============================================================================
</TABLE>
<TABLE>
<CAPTION>
1997
---------------------------
Carrying Fair
($000's) Amount Value
================================================================================
<S> <C> <C>
FINANCIAL ASSETS
Cash and due from banks ................... $ 777,378 777,378
Securities available for sale ............. 8,139,465 8,139,465
Securities held to maturity ............... 85,010 85,375
Other short-term investments .............. 180,425 180,425
Loans held for sale ....................... 263,772 265,113
Loans, net ................................ 14,006,741 14,098,628
Accrued interest receivable ............... 212,949 212,949
FINANCIAL LIABILITIES
Deposits .................................... 19,019,896 19,034,149
Federal funds borrowed ...................... 1,278,573 1,278,573
Short-term bank notes ....................... 555,000 555,000
Other short-term borrowings ................. 1,817,358 1,817,358
Accrued interest payable .................... 83,900 83,900
Long-term debt .............................. 1,508,683 1,659,878
OFF-BALANCE-SHEET FINANCIAL INSTRUMENTS
Commitments to extend credit ................ 127 5,304
Letters of credit ........................... 3,225 9,777
Purchased options ........................... 2,185 2,185
Interest rate swap agreements ............... 1 18,849
Interest rate floors ........................ 1,482 1,503
Interest rate caps .......................... 527 159
Forward contracts:
Commitments to sell loans ................. -- 608
Foreign exchange contracts:
Commitments to purchase ................. -- (7,076)
Commitments to sell ..................... -- 7,271
================================================================================
</TABLE>
Fair values for financial instruments were based on various assumptions and
estimates as of a specific point in time, represent liquidation values and may
vary significantly from amounts that will be realized in actual transactions. In
addition, certain financial instruments and all non-financial instruments were
excluded from the fair value disclosure requirements. Therefore, the fair values
presented above should not be construed as the underlying value of the Bancorp.
The following methods and assumptions were used in determining the fair
value of selected financial instruments:
SHORT-TERM FINANCIAL ASSETS AND LIABILITIES-for financial instruments with a
short or no stated maturity, prevailing market rates and limited credit risk,
carrying amounts approximate fair value. Those financial instruments include
cash and due from banks, other short-term investments, accrued interest
receivable, certain deposits (demand, interest checking, savings and money
market), Federal funds borrowed, short-term bank notes, other short-term
borrowings and accrued interest payable.
SECURITIES, AVAILABLE FOR SALE AND HELD TO MATURITY-fair values were based
on quoted market prices, dealer quotes and prices obtained from independent
pricing services.
LOANS-fair values were estimated by discounting the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
credit ratings and for the same remaining maturities.
LOANS HELD FOR SALE-the fair value of loans held for sale is estimated based
on outstanding commitments from investors or current investor yield
requirements.
DEPOSITS-fair values for other time, certificates of deposit-$100,000 and
over and foreign office were estimated using a discounted cash flow calculation
that applies interest rates currently being offered for deposits of similar
remaining maturities.
LONG-TERM DEBT-fair value of long-term debt was based on quoted market
prices, when available, and a discounted cash flow calculation using prevailing
market rates for borrowings of similar terms.
COMMITMENTS AND LETTERS OF CREDIT-fair values of loan commitments, letters
of credit and commitments to sell loans, representing assets to the Bancorp,
were based on fees currently charged to enter into similar agreements with
similar maturities.
INTEREST RATE SWAP AGREEMENTS-fair value was based on the estimated amount
the Bancorp would receive or pay to terminate the swap agreements, taking into
account the current interest rates and the creditworthiness of the swap
counterparties. The fair values represent an asset at December 31, 1998.
PURCHASED OPTIONS AND INTEREST RATE FLOORS AND CAPS-fair values were based
on the estimated amounts the Bancorp would receive from terminating the
contracts at the reporting date.
FOREIGN EXCHANGE CONTRACTS-fair values were based on quoted market prices of
comparable instruments and represent a net asset to the Bancorp.
26
===============================================================================
<PAGE> 16
===============================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NOTE 19-PARENT COMPANY FINANCIAL STATEMENTS
The condensed financial statements
of the Bancorp ($000's):
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------
Condensed Statements of Income (Parent Company Only)
For the Years Ended December 31 1998 1997 1996
- --------------------------------------------------------------------------------------
<S> <C> <C> <C>
Income
Dividends from Subsidiaries ........ $ 442,427 562,909 367,008
Interest on Loans to
Subsidiaries ..................... 26,969 8,135 3,932
Securities Gains (Losses) .......... -- (248) 215
Other .............................. 1,644 2,805 2,381
======================================================================================
Total Income ....................... 471,040 573,601 373,536
======================================================================================
Expenses
Interest ........................... 15,618 13,793 6,240
Other .............................. 25,201 11,622 5,438
Total Expenses ..................... 40,819 25,415 11,678
- --------------------------------------------------------------------------------------
Income Before Taxes and
Change in Undistributed
Earnings of Subsidiaries ......... 430,221 548,186 361,858
Applicable Income Tax Benefit ...... (2,879) (3,606) (1,428)
======================================================================================
Income Before Change in
Undistributed Earnings of
Subsidiaries ..................... 433,100 551,792 363,286
Increase (Decrease) in Undistributed
Earnings of Subsidiaries ......... 43,028 (90,934) 19,058
- --------------------------------------------------------------------------------------
Net Income ......................... $ 476,128 460,858 382,344
======================================================================================
</TABLE>
<TABLE>
<CAPTION>
=================================================================================
Condensed Balance Sheets (Parent Company Only)
December 31 1998 1997
=================================================================================
<S> <C> <C>
Assets
Cash ........................................... $ 151 1,459
Interest-Bearing Deposits ...................... 11,860 70,085
Securities Available for Sale .................. -- 3,435
Loans to Subsidiaries .......................... 832,646 533,122
Investment in Subsidiaries ..................... 2,627,273 2,431,283
Goodwill ....................................... 9,874 10,629
Other Assets ................................... 6,495 18,252
- ---------------------------------------------------------------------------------
Total Assets ................................... $3,488,299 3,068,265
=================================================================================
Liabilities
Commercial Paper ............................... $ 45,995 28,314
Accrued Expenses and Other Liabilities ......... 63,782 40,794
Long-Term Debt ................................. 200,000 236,321
- ---------------------------------------------------------------------------------
Total Liabilities .............................. 309,777 305,429
- ---------------------------------------------------------------------------------
Shareholders' Equity ........................... 3,178,522 2,762,836
- ---------------------------------------------------------------------------------
Total Liabilities and
Shareholders' Equity ......................... $3,488,299 3,068,265
=================================================================================
</TABLE>
<TABLE>
<CAPTION>
================================================================================
Condensed Statements of Cash Flows (Parent Company Only)
For the Years Ended December 31 1998 1997 1996
================================================================================
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net Income ........................... $ 476,128 460,858 382,344
Adjustments to Reconcile Net
Income to Net Cash Provided
by Operating Activities:
Amortization ..................... 755 949 1,931
Provision for Deferred
Income Taxes ................... (3,226) 1,599 (169)
Securities (Gains) Losses ........ -- 248 (215)
Decrease (Increase) in
Other Assets ................... 11,757 (5,868) (10,056)
Increase (Decrease) in Accrued
Expenses and Other Liabilities . 7,400 5,709 (3,416)
Decrease (Increase) in
Undistributed Earnings of
Subsidiaries ................... (43,028) 90,934 (19,058)
- ---------------------------------------------------------------------------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES ............... 449,786 554,429 351,361
- ---------------------------------------------------------------------------------
Investing Activities
Proceeds from Sales of
Securities Available for Sale ...... 3,435 8,074 11,117
Net Decrease (Increase) in
Interest-Bearing Deposits .......... 58,225 (37,898) (28,555)
Decrease (Increase) in Loans
to Subsidiaries .................... (299,524) (229,090) 73,027
Capital Contributions to Subsidiaries (80,067) (105,015) (266,775)
- ---------------------------------------------------------------------------------
NET CASH USED IN
INVESTING ACTIVITIES ............... (317,931) (363,929) (211,186)
================================================================================
FINANCING ACTIVITIES
Increase (Decrease) in Other
Short-Term Borrowings .............. 17,681 1,037 (40,285)
Proceeds from Issuance
of Long-Term Debt .................. -- 200,000 --
Repayment of Long-Term Debt .......... (36,321) (3,729) (230)
Payment of Cash Dividends ............ (167,896) (133,857) (113,869)
Purchases of Treasury Stock .......... (143,890) (276,307) (3,096)
Exercise of Stock Options ............ 22,182 19,230 12,588
Proceeds from Sale of
Common Stock ....................... 178,125 -- --
Other ................................ (3,044) 3,922 4,416
================================================================================
NET CASH USED IN
FINANCING ACTIVITIES ............... (133,163) (189,704) (140,476)
================================================================================
INCREASE (DECREASE) IN CASH .......... (1,308) 796 (301)
CASH AT BEGINNING OF YEAR ............ 1,459 663 964
================================================================================
CASH AT END OF YEAR .................. $ 151 1,459 663
================================================================================
</TABLE>
27
<PAGE> 17
===============================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
NOTE 20-SEGMENTS
The Bancorp's principal activities include Retail Banking, Commercial
Banking, Investment Advisory Services and Data Processing. Retail Banking
provides a full range of deposit products and consumer loans and leases.
Commercial Banking offers services to business, government and professional
customers. Investment Advisory Services provides a full range of investment
alternatives for individuals, companies and not-for-profit organizations. Data
Processing, through Midwest Payment Systems (MPS), provides electronic funds
transfer (EFT) services, merchant transaction processing, operates our Jeanie
ATM network and provides other data processing services to affiliated and
unaffiliated customers. General Corporate and Other includes a portion of the
investment portfolio, certain long-term funding, the associated interest income
and expense and other items not allocated to the operating segments.
Results of operations and selected financial information by operating
segment for each of the three years ended December 31:
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------------
INVESTMENT DATA GENERAL
COMMERCIAL RETAIL ADVISORY PROCESS- ACQUIRED CORPORATE ELIMINA-
($000'S) BANKING BANKING SERVICES ING (a) ENTITIES AND OTHER TIONS (a) TOTAL
- -----------------------------------------------------------------------------------------------------------------------------------
1998
RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Net Interest Income (Expense)....... $ 373,121 560,290 16,676 -- 68,402 (15,665) -- 1,002,824
Provision for Credit Losses......... 48,464 37,142 -- -- 23,565 -- -- 109,171
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Credit Losses................. 324,657 523,148 16,676 -- 44,837 (15,665) -- 893,653
Other Operating Income.............. 109,941 220,525 133,064 152,697 24,667 9,843 (14,543) 636,194
Merger-Related Charges.............. -- -- -- -- 89,701 -- -- 89,701
Operating Expenses.................. 175,280 350,644 66,148 83,414 52,933 -- (14,543) 713,876
===================================================================================================================================
Income Before Income Taxes.......... 259,318 393,029 83,592 69,283 (73,130) (5,822) -- 726,270
Applicable Income Taxes............. 89,314 135,367 28,791 22,863 (20,476) (5,717) -- 250,142
===================================================================================================================================
Net Income.......................... $ 170,004 257,662 54,801 46,420 (52,654) (105) -- 476,128
===================================================================================================================================
SELECTED FINANCIAL INFORMATION
===================================================================================================================================
Identifiable Assets................. $7,713,305 16,925,852 374,716 86,888 -- 3,821,021 28,921,782
Capital Expenditures................ $ 6,110 49,650 977 7,849 3,209 -- 67,795
Depreciation and Amortization....... $ 972 24,518 1,358 5,231 3,391 -- 35,470
===================================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
1997
RESULTS OF OPERATIONS
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income................. $ 289,305 438,424 16,722 -- 167,288 511 -- 912,250
Provision for Credit Losses......... 15,814 64,254 -- -- 9,753 274 -- 90,095
===================================================================================================================================
Net Interest Income After Provision
for Credit Losses................. 273,491 374,170 16,722 -- 157,535 237 -- 822,155
Other Operating Income.............. 83,925 152,532 90,169 120,011 56,308 6,329 (7,505) 501,769
Operating Expenses.................. 137,604 261,715 45,970 68,374 124,350 -- (7,505) 630,508
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes.......... 219,812 264,987 60,921 51,637 89,493 6,566 -- 693,416
Applicable Income Taxes............. 73,769 88,931 20,445 17,040 29,872 2,501 -- 232,558
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income.......................... $ 146,043 176,056 40,476 34,597 59,621 4,065 -- 460,858
===================================================================================================================================
SELECTED FINANCIAL INFORMATION
===================================================================================================================================
Identifiable Assets................. $6,414,176 12,090,061 330,119 73,431 6,335,619 2,467,267 27,710,673
Capital Expenditures................ $ 3,368 34,089 1,652 3,490 18,127 -- 60,726
Depreciation and Amortization....... $ 663 19,630 1,075 2,638 7,463 -- 31,469
===================================================================================================================================
- -----------------------------------------------------------------------------------------------------------------------------------
1996
RESULTS OF OPERATIONS
===================================================================================================================================
Net Interest Income................. $ 274,543 387,117 13,599 -- 151,789 13,985 -- 841,033
Provision for Credit Losses......... 18,923 47,563 -- -- 4,368 (2,472) -- 68,382
- -----------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision
for Credit Losses................. 255,620 339,554 13,599 -- 147,421 16,457 -- 772,651
Other Operating Income.............. 55,831 145,793 74,032 94,936 50,492 4,564 (6,741) 418,907
SAIFAssessment...................... -- -- -- -- 21,255 16,612 -- 37,867
Operating Expenses.................. 133,858 253,949 39,435 56,217 107,069 -- (6,741) 583,787
- -----------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes.......... 177,593 231,398 48,196 38,719 69,589 4,409 -- 569,904
Applicable Income Taxes............. 58,659 76,431 15,919 12,777 22,304 1,470 -- 187,560
- -----------------------------------------------------------------------------------------------------------------------------------
Net Income.......................... $ 118,934 154,967 32,277 25,942 47,285 2,939 -- 382,344
===================================================================================================================================
SELECTED FINANCIAL INFORMATION
===================================================================================================================================
Identifiable Assets ................ $5,856,505 11,559,492 308,445 62,447 5,527,599 2,762,109 26,076,597
Capital Expenditures................ $ 3,801 30,409 1,714 4,403 8,278 -- 48,605
Depreciation and Amortization....... $ 528 17,644 892 2,625 5,684 -- 27,373
===================================================================================================================================
</TABLE>
(a) Data processing service revenues provided to the banking segments by MPS are
eliminated in the Consolidated Statements of Income.
28
<PAGE> 18
===============================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
===============================================================================
The financial information for each operating segment is reported on the
basis used internally by the Bancorp's management to evaluate performance and
allocate resources. The allocation has been consistently applied for all periods
presented. Revenues from affiliated transactions, principally EFT data
processing services from MPS to the banking segments, are charged generally at
rates available to and transacted with unaffiliated customers.
The measurement of the performance of the operating segments is based on the
management structure of the Bancorp and is not necessarily comparable with
similar information for any other financial institution. The information
presented is also not necessarily indicative of the segments' financial
condition and results of operations if they were independent entities.
During the second quarter of 1998, the Bancorp acquired CitFed and State.
The operations of Citfed and State, primarily attracting deposits and
originating residential and commercial real estate loans, were mainly retail in
nature. Prior to acquisition, the Bancorp's management did not allocate
resources to or assess the ongoing operating performance of the acquired
entities. Therefore, financial information prior to acquisition is shown
separately. Following acquisition, results of operations are included in the
Bancorp's segment information.
Capital expenditures consisted primarily of investments in data processing
equipment, including new mainframe and network computer technology, software,
operations equipment and the Retail Banking distribution network. Much of the
Bancorp's efficiency is attributable to the fact each of the operating segments
share the benefits of improvements in data processing technology and equipment
improvements. Most of these capital expenditures were separated or divided among
individual segments. The cost of centralized data processing and operations is
allocated to each operating segment based on various measures of usage and the
corresponding expense is included in the determination of segment operating
results as disclosed on the previous page.
INDEPENDENT AUDITORS' REPORT
To the Shareholders and Board of Directors of Fifth Third Bancorp:
We have audited the accompanying consolidated balance sheets of Fifth Third
Bancorp and subsidiaries as of December 31, 1998 and 1997, and the related
consolidated statements of income, changes in shareholders' equity and cash
flows for each of the three years in the period ended December 31, 1998. These
financial statements are the responsibility of the Companies' management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Companies at December
31, 1998 and 1997, and the results of their operations and their cash flows for
each of the three years in the period ended December 31, 1998 in conformity with
generally accepted accounting principles.
/s/ Deloitte & Touche LLP
Cincinnati, Ohio
January 15, 1999
29
<PAGE> 19
================================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
===============================================================================
This report includes forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended that involve inherent
risks and uncertainties. A number of important factors could cause actual
results to differ materially from those in the forward-looking statements. Those
factors include the economic environment, competition, products and pricing in
geographic and business areas in which the Bancorp operates, prevailing interest
rates, changes in government regulations and policies affecting financial
services companies, credit quality and credit risk management, changes in the
banking industry including the effects of consolidation resulting from possible
mergers of financial institutions, acquisitions and integration of acquired
businesses. Fifth Third Bancorp undertakes no obligation to release revisions to
these forward-looking statements or reflect events or circumstances after the
date of this report.
The data presented in the following pages should be read in conjunction with
the audited Consolidated Financial Statements on pages 13 to 29 of this report.
RESULTS OF OPERATIONS
SUMMARY
Net income advanced by 3.3% in 1998 and 20.5% in 1997. The Bancorp's net
income to average assets, referred to as return on average assets (ROA), and
return on average shareholders' equity (ROE) follow:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
===========================================================================================
<S> <C> <C> <C> <C> <C>
Net income ($000's) .... $ 476,128 460,858 382,344 330,447 275,625
Earnings per share (a) . $ 1.80 1.76 1.45 1.31 1.12
Diluted earnings per
share (a) ............ $ 1.76 1.73 1.42 1.27 1.08
ROA (b) ................ 1.93% 1.74 1.64 1.58 1.54
ROE (b) ................ 18.7% 18.4 17.4 17.0 16.9
Overhead ratio (b) ..... 42.3% 43.3 45.0 46.6 49.2
Originally reported (c):
ROA .................. 1.93% 1.96 1.78 1.78 1.77
ROE .................. 18.7% 19.6 17.8 18.1 18.6
Overhead ratio (b) ... 42.3% 41.0 43.5 43.9 46.6
============================================================================================
</TABLE>
TABLE 1-CONSOLIDATED AVERAGE BALANCE SHEETS AND ANALYSIS OF NET INTEREST INCOME
For the Years Ended December 31 (Taxable Equivalent Basis)
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1998 1997
=================================== ===================================
Average Average Average Average
Out- Revenue/ Yield/ Out- Revenue/ Yield/
($000's) standing Cost Rate standing Cost Rate
==============================================================================================================================
Assets
Interest-Earning Assets
<S> <C> <C> <C> <C> <C> <C>
Loans and Leases $17,952,333 $1,494,945 8.33% $16,724,010 $1,402,087 8.38%
Securities
Taxable 8,282,131 547,435 6.61 7,622,291 523,231 6.86
Exempt from Income Taxes 261,224 17,804 6.82 276,058 20,730 7.51
Other Short-Term Investments 199,578 7,648 3.83 292,663 16,452 5.62
- ------------------------------------------------------------------------------------------------------------------------------
Total Interest-Earning Assets 26,695,266 2,067,832 7.75 24,915,022 1,962,500 7.88
==============================================================================================================================
Cash and Due from Banks 710,596 599,468
Other Assets 1,369,789 1,149,927
Reserve for Credit Losses (257,173) (237,159)
- ------------------------------------------------------------------------------------------------------------------------------
Total Assets $28,518,478 $26,427,258
==============================================================================================================================
Liabilities
Interest-Bearing Liabilities
Interest Checking $ 2,777,460 65,940 2.37 $ 2,347,010 57,919 2.47
Savings 3,382,032 116,010 3.43 2,449,128 80,722 3.30
Money Market 1,085,910 33,845 3.12 1,969,670 74,621 3.79
Other Time Deposits 6,936,533 378,084 5.45 7,407,317 414,094 5.59
Certificates-$100,000 and Over 1,474,693 81,168 5.50 1,256,952 71,462 5.69
Foreign Office Deposits 232,381 12,708 5.47 401,741 22,212 5.53
Federal Funds Borrowed 2,208,493 115,940 5.25 1,464,945 81,196 5.54
Short-Term Bank Notes 461,795 26,033 5.64 658,140 36,852 5.60
Other Short-Term Borrowings 1,728,960 89,025 5.15 1,607,580 81,048 5.04
Long-Term Debt and Convertible
Subordinated Notes 1,751,926 97,100 5.54 1,410,182 86,707 6.15
==============================================================================================================================
Total Interest-Bearing Liabilities 22,040,183 1,015,853 4.61 20,972,665 1,006,833 4.80
- ------------------------------------------------------------------------------------------------------------------------------
Demand Deposits 2,728,211 2,329,135
Other Liabilities 803,905 619,627
==============================================================================================================================
Total Liabilities 25,572,299 23,921,427
- ------------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity 2,946,179 2,505,831
- ------------------------------------------------------------------------------------------------------------------------------
Total Liabilities and Shareholders' Equity $28,518,478 $26,427,258
==============================================================================================================================
Net Interest Income
Margin on a Taxable Equivalent Basis $1,051,979 3.94% $ 955,667 3.84%
==============================================================================================================================
Net Interest Rate Spread 3.14% 3.08%
==============================================================================================================================
Interest-Bearing Liabilities
to Interest-Earning Assets 82.56% 84.18%
==============================================================================================================================
</TABLE>
31
================================================================================
<PAGE> 20
================================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
===============================================================================
(a) Per share amounts have been adjusted for the three-for-two stock splits
effected in the form of stock dividends paid April 15, 1998, July 15, 1997
and January 12, 1996.
(b) For comparability, certain financial ratios exclude the impact of 1998
merger-related items of $106.4 million pretax ($75.6 million after tax or
$.28 per share) and the impact of the 1996 special SAIF assessment of $37.9
million pretax ($24.6 million after tax or $.09 per share).
(c) Excludes the results of the Citfed Bancorp, Inc. and State Savings Company
poolings prior to 1998.
NET INTEREST INCOME
Net interest income is the difference between interest income on earning
assets such as loans, leases and securities, and interest expense paid on
liabilities such as deposits and borrowings, and continues to be the Bancorp's
largest revenue source. Net interest income is affected by the general level of
interest rates, changes in interest rates and by changes in the amount and
composition of interest-earning assets and interest-bearing liabilities. The
relative performance of the lending and deposit-raising functions is frequently
measured by two statistics--net interest margin and net interest rate spread.
The net interest margin is determined by dividing fully-taxable equivalent net
interest revenue by average earning assets. The net interest rate spread is the
difference between the average fully-taxable equivalent yield earned on
interest-earning assets and the average rate paid on interest-bearing
liabilities. The net interest margin is generally greater than the net interest
rate spread due to the additional income earned on those assets funded by
non-interest-bearing liabilities, or free funding, such as demand deposits and
shareholders' equity.
Table 1, Consolidated Average Balance Sheets and Analysis of Net Interest
Income, presents the net interest income, net interest margin, and net interest
rate spread for the five years 1994 through 1998, comparing interest revenue,
average interest-bearing liabilities and average free funding outstanding. Each
of these measures is reported on a fully-taxable equivalent basis. Nonaccrual
loans and leases and loans held for sale have been included in the average loan
and lease balances. Average outstanding securities balances are based upon
amortized cost excluding any unrealized gains or losses on securities available
for sale.
Net interest income rose 10.1% to $1.1 billion in 1998 from $956 million in
1997. The improvement in 1998's net interest income was attributable to a higher
level of average interest-earning assets, improvement in the funding mix and the
favorable
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------
1996 1995 1994
===================================== ======================================== =====================================
Average Average Average Average Average Average
Out- Revenue/ Yield/ Out- Revenue/ Yield/ Out- Revenue/ Yield/
standing Cost Rate standing Cost Rate standing Cost Rate
==============================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C>
$15,699,665 $1,299,930 8.28% $14,021,458 $1,171,561 8.36% $12,349,791 $ 942,188 7.63%
6,916,744 466,685 6.75 5,041,021 332,242 6.59 3,973,669 242,491 6.10
436,477 31,708 7.26 471,338 34,248 7.27 359,830 24,568 6.83
246,877 12,820 5.19 214,239 13,182 6.15 229,563 10,730 4.67
- ------------------------------------------------------------------------------------------------------------------------------
23,299,763 1,811,143 7.77 19,748,056 1,551,233 7.86 16,912,853 1,219,977 7.21
==============================================================================================================================
589,368 614,961 592,644
1,087,111 698,831 583,356
(232,217) (212,564) (197,525)
- ------------------------------------------------------------------------------------------------------------------------------
$24,744,025 $20,849,284 $17,891,328
==============================================================================================================================
$ 2,020,938 43,665 2.16 $ 1,691,474 34,486 2.04 $ 1,776,304 31,228 1.76
2,103,604 64,803 3.08 1,135,754 28,683 2.53 1,402,160 33,459 2.39
2,313,994 85,502 3.69 2,263,282 83,063 3.67 1,893,337 49,991 2.64
7,387,527 413,625 5.60 6,140,721 359,793 5.86 5,374,960 267,421 4.98
1,164,915 63,831 5.48 921,631 54,720 5.94 439,808 19,154 4.36
522,216 28,407 5.44 780,475 46,646 5.98 529,434 24,165 4.56
1,230,219 64,942 5.28 1,071,792 63,492 5.92 848,217 34,925 4.12
553,924 30,278 5.47 769,000 47,956 6.24 429,642 20,285 4.72
1,264,414 63,541 5.03 1,011,671 52,244 5.16 901,387 38,385 4.26
1,239,316 72,783 5.87 913,077 54,414 5.96 738,507 39,078 5.29
==============================================================================================================================
19,801,067 931,377 4.70 16,698,877 825,497 4.94 14,333,756 558,091 3.89
- ------------------------------------------------------------------------------------------------------------------------------
2,051,763 1,770,395 1,551,296
549,428 439,286 375,199
==============================================================================================================================
22,402,258 18,908,558 16,260,251
- ------------------------------------------------------------------------------------------------------------------------------
2,341,767 1,940,726 1,631,077
$24,744,025 $20,849,284 $17,891,328
==============================================================================================================================
$ 879,766 3.78% $ 725,736 3.67% $ 661,886 3.91%
==============================================================================================================================
3.07% 2.92% 3.32%
==============================================================================================================================
84.98% 84.56% 84.75%
====================================================================================================================================
</TABLE>
31
===============================================================================
<PAGE> 21
================================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
===============================================================================
TABLE 2-ANALYSIS OF NET INTEREST INCOME CHANGES (TAXABLE EQUIVALENT BASIS)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 Compared to 1997 1997 Compared to 1996
==================================== =====================================
($000's) Volume Yield/Rate Mix Total Volume Yield/Rate Mix Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Increase (Decrease) in Interest Income
Loans and Leases ........................ $102,933 $ (8,362) $(1,713) $ 92,858 $ 84,816 $15,700 $1,641 $102,157
Securities
Taxable ............................... 45,265 (19,056) (2,005) 24,204 47,624 7,608 1,314 56,546
Exempt from Income Taxes .............. (1,114) (1,905) 93 (2,926) (11,646) 1,091 (423) (10,978)
Other Short-Term Investments ............ (5,231) (5,239) 1,666 (8,804) 2,376 1,062 194 3,632
===========================================================================================================================
Total Interest Income Change .............. 141,853 (34,562) (1,959) 105,332 123,170 25,461 2,726 151,357
===========================================================================================================================
Increase (Decrease) in Interest Expense
Interest Checking ....................... 10,632 (2,347) (264) 8,021 7,043 6,265 946 14,254
Savings ................................. 30,786 3,184 1,318 35,288 10,642 4,628 649 15,919
Money Market ............................ (33,495) (13,197) 5,916 (40,776) (12,706) 2,314 (489) (10,881)
Other Time Deposits ..................... (26,317) (10,370) 677 (36,010) 1,108 (739) 100 469
Certificates-$100,000 and Over .......... 12,389 (2,388) (295) 9,706 5,044 2,446 141 7,631
Foreign Office Deposits ................. (9,366) (241) 103 (9,504) (6,554) 470 (111) (6,195)
Federal Funds Borrowed .................. 41,193 (4,248) (2,201) 34,744 12,394 3,199 661 16,254
Short-Term Bank Notes ................... (10,995) 263 (87) (10,819) 5,701 720 153 6,574
Other Short-Term Borrowings ............. 6,118 1,768 91 7,977 17,261 126 120 17,507
Long-Term Debt and Convertible
Subordinated Notes ..................... 21,017 (8,602) (2,022) 10,393 10,030 3,471 423 13,924
===========================================================================================================================
Total Interest Expense Change ............. 41,962 (36,178) 3,236 9,020 49,963 22,900 2,593 75,456
===========================================================================================================================
Increase (Decrease) in Net Interest
Income on a Taxable Equivalent Basis .... $ 99,891 $ 1,616 $(5,195) 96,312 $ 73,207 $ 2,561 $ 133 75,901
===========================================================================================================================
Increase in Taxable
Equivalent Adjustment ................... (5,738) (4,684)
===========================================================================================================================
Net Interest Income Change ................ $ 90,574 $ 71,217
===========================================================================================================================
</TABLE>
repricing of interest-bearing liabilities. The net interest margin
improved by 10 basis points (bps) to 3.94% in 1998 from 3.84% in 1997. The 1998
improvement follows a six bps improvement in 1997's net interest margin.
Declining rates and mortgage asset refinancing reduced the yield on
interest-earning assets by 13 bps to 7.75% in 1998. The average yield on loans
and leases was down 5 bps, while the yield on securities was down 27 bps. Solid
growth in interest-bearing transaction deposits and lower short-term borrowing
costs reduced the cost of interest-bearing liabilities by 19 bps, in 1998, to
4.61% from 1997's 4.80%. The cost of borrowed funds, including federal funds
borrowed, short-term bank notes, other short-term borrowings and long-term debt
decreased by 23 bps to 5.33% in 1998, from 5.56% in 1997. The
positive contribution of free funding to the net interest margin increased
from 76 bps in 1997 to 80 bps in 1998, due primarily to more than 17% growth in
non-interest-bearing demand deposits over 1997.
Average interest-earning assets increased by 7.1% to $26.7 billion in 1998,
an increase of nearly $1.8 billion from 1997. During 1997, average
interest-earning assets grew 6.9% over 1996. The acquisition of CitFed and
State, in addition to strong residential mortgage lending, led to the
securitization of over $1 billion of residential mortgages during 1998, and the
prepayment of over $474 million of higher-cost borrowings previously on the
books of CitFed and State. The Bancorp continues to use loan securitizations and
sales to manage the composition of the balance sheet and to improve balance
sheet liquidity. Securitizations and sales permit the Bancorp to grow the
origination and servicing functions and increase fee income without increasing
balance sheet leverage. Sales and securitizations of loans totaled $4.3 billion
in 1998 and $2.8 billion in 1997.
Average interest-bearing liabilities grew to $22 billion during 1998, an
increase of 5.1% over the $21 billion average in 1997. Core deposits (which
excludes certificates of deposits greater than $100,000 and foreign office
deposits) remain the Bancorp's most important and lowest cost source of funding.
OPERATING INCOME
The table at the top of the following page shows the components of other
operating income for the five years ended December 31, 1998. Total other
operating income, excluding securities gains, increased 26.3% in 1998 and was up
20.2% in 1997. There was strong growth across both traditional and non-banking
business lines.
Investment advisory income was $134.9 million in 1998, up from $93.6 million
in 1997. The 44.2% advance in revenue was driven by robust growth in all product
lines and The Ohio Company acquisition. Investment advisory fees, a portion of
which are based on the market value of managed trust assets, benefited from
asset growth of 33.6% in 1998. Successful new sales efforts and strength in
equity markets led to 20.9% investment advisory revenue growth in 1997. Fifth
Third is one of the leading money managers in the Midwest and as of December 31,
1998, had $148.4 billion in assets under care, a 24.8% increase over last year
end, $18.1 billion in assets under management and $4.8 billion in its
proprietary Fifth Third Funds.
Service charges on deposits reached $127.1 million in 1998 and $109.5 million
in 1997, increases of 16.1% and 14.3%, respectively. The growth in both years
was fueled by an expanding retail delivery system and sales campaigns promoting
checking and savings accounts. Commercial transaction account balances continued
to grow and contributed to the increase in fee income.
Data processing income was up 22.8% in 1998 and 27.6% in 1997. Merchant
processing revenues, approximately 46% of total data processing revenues,
increased 23.7% in 1998 and 44% in 1997, due entirely to new customers and
resulting increases in merchant transaction volumes. Electronic Funds Transfer,
the other portion of data processing income, increased 22% in 1998 and 16.4% in
1997, the result of success in attracting new customers, the growing use of our
expanding ATM network and the increased popularity of debit cards.
32
===============================================================================
<PAGE> 22
================================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
===============================================================================
<TABLE>
<CAPTION>
- ----------------------------------------------------------------------------------------------------------
($000's) 1998 1997 1996 1995 1994
==========================================================================================================
<S> <C> <C> <C> <C> <C>
Investment advisory income .......... $134,872 93,557 77,404 64,497 57,063
Service charges on deposits ......... 127,095 109,500 95,837 75,785 68,106
Data processing income .............. 138,154 112,506 88,195 75,311 64,394
Other service charges and fees ...... 226,230 180,404 151,289 124,173 100,224
- ----------------------------------------------------------------------------------------------------------
Subtotal ............................ 626,351 495,967 412,725 339,766 289,787
Securities gains (losses) ........... 9,843 5,802 6,182 5,625 (5,173)
Total ............................... $636,194 501,769 418,907 345,391 284,614
After-tax securities gains (losses) . $ 6,368 3,755 3,954 3,650 (3,365)
==========================================================================================================
</TABLE>
Other service charges and fees climbed to $226.2 million in 1998, compared
to $180.4 million in 1997. Mortgage banking revenue, commercial banking income,
cardholder fees and consumer loan and lease fees represent the majority of other
service charges and fees. Mortgage banking revenue topped $72.4 million in 1998,
a 57.1% increase over 1997. Strong originations in 1998 boosted the increased
level of mortgage banking activity. Sales and securitizations of residential
mortgage loans approached $4.2 billion in 1998, up from $2.7 billion in 1997.
Fifth Third's total loan servicing portfolio increased to $31.3 billion at
year-end 1998, with $13.1 billion of loans serviced for other investors,
compared to $27.5 billion with $9.9 billion serviced for others at the end of
1997. Commercial banking income rose 46.8% to $40.8 million in 1998, led by
International department revenue and credit enhancement fees. Cardholder fees
from our credit card portfolio provided $29.6 million and consumer loan and
lease fees contributed $31.3 million to other service charges and fees.
Other service charges and fees were $180.4 million in 1997, compared to
$151.3 million in 1996, an increase of $29.1 million, or 19.2%. Commercial
banking income of $27.8 million in 1997 represented an increase of 45% over 1996
and resulted from International department revenue and credit enhancement fee
growth. Similar levels of mortgage-banking activity between years contributed
revenue of $46.1 million in 1997, down slightly from $47.3 million in 1996.
Consumer loan and lease fees of $26.7 million declined from 1996 due to lower
originations and 1996 auto loan sales and securitizations. Our credit card
portfolio contributed to an 11.1% increase in cardholder fees.
OPERATING EXPENSES
The Bancorp continues to lead the banking industry in driving its overhead
ratio to record levels by consistently generating revenue at a rate faster than
expenses. The Bancorp's success in controlling operating expenses comes from
efficient staffing, a constant focus on improving productivity and the
centralization of various internal functions such as data processing and loan
servicing.
Operating expense levels are often measured using an overhead ratio
(operating expenses divided by the sum of taxable equivalent net interest income
and other operating income). As the chart below illustrates, the Bancorp's ratio
has remained well
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------
($000's) 1998 1997 1996 1995 1994
==============================================================================================================
<S> <C> <C> <C> <C> <C>
Salaries, wages and incentives ........ $286,274 242,972 225,052 193,015 181,558
Employee benefits ..................... 53,556 49,431 55,587 48,119 45,953
Equipment expenses .................... 32,588 27,980 27,087 23,511 22,588
Net occupancy expenses ................ 50,756 48,530 45,964 38,827 34,703
Other operating expenses .............. 290,702 261,595 230,097 196,092 180,921
==============================================================================================================
Total operating expenses .............. 713,876 630,508 583,787 499,564 465,723
==============================================================================================================
Merger-related charges ................ 89,701 -- -- -- --
SAIF assessment ....................... -- -- 37,867 -- --
- --------------------------------------------------------------------------------------------------------------
Total ................................. $803,577 630,508 621,654 499,564 465,723
==============================================================================================================
</TABLE>
<TABLE>
<S> <C> <C>
$600 70 70%
$500 60 60%
$400 50 50%
$300 40 40%
$200 30 30%
$100
(illegible) (illegible) (illegible)
[GRAPH] [GRAPH] [GRAPH]
</TABLE>
* For comparability, certain financial ratios and statistics exclude the impact
of the 1998 merger-related items of $106.4 million pretax ($75.6 million after
tax or $.28 per share) and the 1996 special SAIF assessment of $37.9 million
pretax ($24.6 million after tax or $.09 per share).
33
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<PAGE> 23
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FIFTH THIRD BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
===============================================================================
below our peers, at 42.3% for 1998 and 43.3% in 1997 and under 50% since 1993.
Total operating expenses increased 13.2% in 1998, excluding $89.7 million of
merger-related charges and 8% in 1997 over 1996. Fifth Third's expense growth
over 1997 was higher than customary as we used strong revenue growth to invest
in technology upgrades and Year 2000 efforts. Salaries, wages and incentives
comprised 47.6% and 46.4% of total operating expenses, excluding the 1998
merger-related charges, in 1998 and 1997, respectively. Compensation expense
increased in 1998 as a result of more variable compensation for increased sales
production, higher staffing costs related to computer programming, a tighter
labor market and additional personnel to support sales and our volume-related
businesses. The Bancorp's productivity ratios, which measure the degree of
efficiency of our employees, have shown improvement since 1993. Net income per
employee was $66,200 for 1998, compared to $37,600 for 1993, an increase of 76%
as the chart on the previous page illustrates. Benefits expense was lowered in
both 1998 and 1997. During 1998, to emphasize 401(k) and employee matching, the
Bancorp froze its defined benefit pension plan and all benefits earned to date
became fully vested. A curtailment gain was recognized as a reduction of
employee benefits expense. Lower benefits expense in 1997 is primarily due to
changes in our profit-sharing plan to incorporate new alternatives for employees
such as flex dollars and 401(k) plan matching.
Equipment and net occupancy expenses increased 8.9% in 1998 and 4.7% in
1997. The addition of nearly 400 ATMs and software and processing technology
upgrades primarily led to the rise in equipment expense over 1997. Upgrades of
equipment to support growth and processing technology and the addition of ATMs
also contributed to the increase in 1997.
Volume-related expenses of our processing and fee businesses, along with
higher loan and lease processing costs from strong origination volumes,
principally contributed to the 11.1% increase in 1998's other operating
expenses. Other operating expenses increased to $261.6 million in 1997, up $31.5
million or 13.7% over 1996. Volume-related expenses of our card processing
business accounted for $8.3 million or 26.3% of the increase. Franchise tax
expense was up $5.6 million primarily as a result of growth in shareholders'
equity. Marketing expense also increased over 1996 principally due to the
continued promotion of the Bancorp's diversified loan, investment and deposit
products. Additional recruiting and training costs were incurred in 1997 as we
added more sales personnel.
Operating expenses for 1998 include a one-time, merger-related pretax charge
of $89.7 million resulting directly from the acquisitions of CitFed and State.
The charge consists of employee benefit obligations, costs to eliminate
duplicate facilities and equipment, contract terminations, conversion expenses
and professional fees.
FINANCIAL CONDITION
LOANS AND LEASES
The table below shows the history of commercial and consumer loans and
leases by major category at December 31. On-balance-sheet loan and lease
balances increased 4% and 9.1%, respectively, in 1998 and 1997. In both years,
the growth in outstandings was affected considerably by sales and
securitizations of residential and commercial loans, which allows the Bancorp to
be selective in how much of the expanding origination volume is retained in the
loan and lease portfolio. Although residential mortgage loan originations were
$5.4 billion for 1998, the related loans decreased 11.2% because $4.2 billion of
the respective origination volume was sold or securitized. Installment loan
balances grew 14% during 1998 and 10.9% during 1997, the result of successful
direct installment loan sales in the Bancorp's Banking Centers. Consumer leases
grew 17.3%and 8% during 1998 and 1997, respectively, and represent 12.1% and
10.7% of total loans and leases at December 31, 1998 and 1997, respectively.
Commercial loan and lease outstandings were up 8.3% in 1998 and 6.6% in
1997. Commercial leasing contributed increases of 20% and 27.1%, respectively,
consisting largely of credits within our market areas of Ohio, Kentucky, Indiana
and Arizona. Commercial mortgages represent 6.5% of our total loan and lease
portfolio and include primarily financing of owner-occupied properties--loans on
properties occupied by the principal borrower. To maintain balance sheet
flexibility and to serve as a source of fee income, the Bancorp during 1998 and
1997 sold with servicing retained certain floating-rate commercial loans to a
commercial paper funding corporation. The outstanding balances of these loans
were $1.1 billion and $468.5 million at December 31, 1998 and 1997,
respectively.
In addition to the loan and lease porfolio discussed above, the Bancorp
serviced loans for others of approximately $13.1 billion, $9.9 billion and $8.3
billion at December 31, 1998, 1997 and 1996, respectively.
<TABLE>
<CAPTION>
LOAN AND LEASE PORTFOLIO
- -----------------------------------------------------------------------------------------------------------------------------------
1998 1997 1996 1995 1994
----------------- ----------------- ----------------- ----------------- ---------------------
($ in millions) Amount % Amount % Amount % Amount % Amount %
===================================================================================================================================
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Commercial:
Commercial ............ $ 4,787 26.2% $ 4,330 24.6% $ 4,067 25.2% $ 3,642 24.4% $ 3,092 23.7%
Mortgage .............. 1,179 6.5 1,274 7.3 1,297 8.1 1,318 8.8 1,286 9.9
Construction .......... 572 3.1 560 3.2 593 3.7 531 3.5 438 3.3
Leases ................ 1,402 7.7 1,168 6.6 919 5.7 696 4.7 479 3.7
===================================================================================================================================
Subtotal ................ 7,940 43.5 7,332 41.7 6,876 42.7 6,187 41.4 5,295 40.6
- -----------------------------------------------------------------------------------------------------------------------------------
Consumer:
Installment ........... 3,084 16.9 2,706 15.4 2,441 15.2 2,884 19.3 2,248 17.3
Mortgage .............. 4,696 25.7 5,288 30.1 4,649 28.9 4,233 28.3 4,187 32.1
Credit Card ........... 337 1.8 363 2.1 395 2.4 350 2.3 297 2.3
Leases ................ 2,214 12.1 1,887 10.7 1,748 10.8 1,298 8.7 1,007 7.7
- -----------------------------------------------------------------------------------------------------------------------------------
Subtotal ................ 10,331 56.5 10,244 58.3 9,233 57.3 8,765 58.6 7,739 59.4
- -----------------------------------------------------------------------------------------------------------------------------------
Total ................... $18,271 100.0% $17,576 100.0% $16,109 100.0% $14,952 100.0% $13,034 100.0%
===================================================================================================================================
</TABLE>
34
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<PAGE> 24
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FIFTH THIRD BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
===============================================================================
RESERVE FOR CREDIT LOSSES FIVE YEAR HISTORY
<TABLE>
<CAPTION>
===========================================================================================================================
($000's) 1998 1997 1996 1995 1994
===========================================================================================================================
<S> <C> <C> <C> <C> <C>
Balance at January 1.............................. $ 250,950 233,803 224,134 202,009 185,416
Provision for credit losses....................... 109,171 90,095 68,382 45,934 41,183
Losses charged off................................ (123,687) (101,517) (86,598) (46,846) (33,572)
Recoveries of losses previously charged off....... 26,920 26,864 22,047 14,558 15,907
Letter of credit.................................. -- -- -- -- (7,800)
Reserve of acquired institutions and other........ 3,506 1,705 5,838 8,479 875
===========================================================================================================================
Balance at December 31............................ $ 266,860 250,950 233,803 224,134 202,009
===========================================================================================================================
Loans and leases outstanding at December 31....... $17,779,023 $17,312,943 $16,034,523 $14,813,197 $12,992,774
Reserve as a percent of loans and leases
outstanding..................................... 1.50% 1.45% 1.46% 1.51% 1.55%
Average loans and leases.......................... $17,664,000 $16,583,000 $15,612,000 $13,929,000 $12,195,000
Net charge-offs as a percent of average
loans and leases outstanding.................... .55% .45% .41% .23% .14%
Reserve as a percent of total nonperforming assets 517.04% 318.95% 279.94% 248.70% 345.11%
Reserve as a percent of total underperforming assets 203.95% 200.82% 192.32% 202.69% 281.46%
===========================================================================================================================
</TABLE>
PROVISION AND RESERVE FOR CREDIT LOSSES
The Bancorp provides as an expense an amount for expected credit losses. This
provision is based on the growth of the loan and lease portfolio and on recent
loss experience and is called the provision for credit losses in the
Consolidated Statements of Income. Actual losses on loans and leases are charged
against the reserve created on the Consolidated Balance Sheets through the
provision for credit losses. The amount of loans and leases actually removed as
assets from the Consolidated Balance Sheets is referred to as charge-offs and,
after netting out recoveries on previously charged off assets, becomes net
charge-offs.
Charge-offs, net of recoveries, increased $22.1 million over 1997 due to
higher losses on commercial loans. Net charge-offs as a percent of average loans
and leases outstanding were .55%, .45% and .41% for 1998, 1997 and 1996,
respectively. Although net charge-offs have risen in 1998, the net charge-off
ratio remains near the Bancorp's historical 10-year average of .50%. The reserve
for credit losses as a percentage of total loans and leases was 1.50% and 1.45%
at December 31, 1998 and 1997, respectively.
The table above presents credit loss data for the most recent five year
period.
UNDERPERFORMING ASSETS
Underperforming assets consist of (1) nonaccrual loans and leases on which
the ultimate collectibility of the full amount of interest is uncertain, (2)
loans and leases which have been renegotiated to provide for a reduction or
deferral of interest or principal because of a deterioration in the financial
position of the borrower, (3) loans and leases past due ninety days or more as
to principal or interest and (4) other real estate owned. A summary of
underperforming assets at December 31 follows:
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
($000's) 1998 1997 1996
================================================================================
<S> <C> <C> <C>
Nonaccrual loans and leases ............... $ 42,760 71,667 66,745
Renegotiated loans and leases ............. -- 128 1,121
Other real estate owned ................... 8,853 6,886 15,652
================================================================================
Total nonperforming assets ................ 51,613 78,681 83,518
Ninety days past due loans and leases ..... 79,233 46,281 38,053
- --------------------------------------------------------------------------------
Total underperforming assets .............. $130,846 124,962 121,571
================================================================================
Nonperforming assets as a percent
of total loans, leases and other
real estate owned ....................... .29% .45 .52
Underperforming assets as a
percent of total loans, leases
and other real estate owned ............. .74% .72 .76
================================================================================
</TABLE>
Nonperforming assets as a percentage of total loans, leases and other real
estate owned was .29% at December 31, 1998, a decrease from .45% at December 31,
1997. Of the total underperforming assets at December 31, 1998, $53,653,000 are
to borrowers or projects in the Cincinnati-Dayton market area, $7,614,000 in the
Toledo market area, $36,719,000 in the Columbus market area, $751,000 in the
Louisville market area, $11,248,000 in the Cleveland market area, $13,807,000
distributed in the market areas of our smaller affiliate banks and $7,054,000
outside of the Ohio-Kentucky-Indiana area. A decrease in residential mortgage
loans was the primary reason for the decrease in nonaccrual loans and leases
during 1998. At December 31, 1998, 1997 and 1996, nonaccrual loans and leases
included residential mortgage loans of $11,381,000, $26,552,000 and $21,683,000,
respectively, and commercial loans and leases of $22,337,000, $33,230,000 and
$20,511,000, respectively. An increase in residential mortgage loans was the
primary reason for the increase in loans and leases ninety days past due. At
December 31, 1998, 1997, and 1996, loans and leases 90 days past due included
residential mortgage loans of $34,424,000, $12,068,000 and $9,529,000,
respectively, installment loans and consumer leases of $24,778,000, $15,871,000
and $15,195,000, respectively, and commercial loans and leases of $7,678,000,
$10,710,000 and $8,092,000, respectively. At December 31, 1998, 1997 and 1996,
credit card receivables of $6,872,000, $5,431,000 and $5,075,000, respectively,
were ninety days past due.
Of the total nonperforming assets at December 31, 1998, $9,741,000, or 18.9%,
were related to commercial real estate. Nonaccrual commercial real estate loans
were $8,169,000, an increase of 17% from 1997's $6,980,000. At December 31,
1998, there were no renegotiated loans. At December 31, 1998, other real estate
owned included $2,570,000 of residential mortgage loans and $3,471,000 for a
repossessed commercial lease asset.
SECURITIES
The investment portfolio consists largely of fixed and floating-rate
mortgage-related securities, predominantly underwritten to the standards of and
guaranteed by the government-sponsored agencies of FHLMC, FNMA and GNMA. These
securities differ from traditional debt securities primarily in that they have
uncertain maturity dates and are priced based on estimated prepayment rates on
the underlying mortgages. The estimated average life of the portfolio is 3.4
years based on current prepayment expectations.
The Bancorp securitized $1.1 billion of fixed and adjustable-rate residential
mortgages in both 1998 and 1997. These
35
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<PAGE> 25
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FIFTH THIRD BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
===============================================================================
<TABLE>
<CAPTION>
SECURITIES PORTFOLIO AT DECEMBER 31
- ---------------------------------------------------------------------------------------------------------------------------
($000's) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Treasury .................................. $ 255,879 232,381 276,283 316,415 249,902
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Government agencies and corporations ...... 26,090 303,761 124,641 173,451 97,005
- ---------------------------------------------------------------------------------------------------------------------------
States and political subdivisions .............. 191,335 194,153 296,847 300,787 --
- ---------------------------------------------------------------------------------------------------------------------------
Agency mortgage-backed securities .............. 6,847,883 6,525,928 5,676,252 3,580,863 1,147,949
- ---------------------------------------------------------------------------------------------------------------------------
Other bonds, notes and debentures .............. 746,010 608,986 891,751 861,990 34,085
- ---------------------------------------------------------------------------------------------------------------------------
Other securities ............................... 267,428 274,256 134,581 57,888 6,572
- ---------------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
U.S. Treasury .................................. -- -- -- -- 161,709
- ---------------------------------------------------------------------------------------------------------------------------
U.S. Government agencies and corporations ...... -- -- 189,098 152,981 146,686
- ---------------------------------------------------------------------------------------------------------------------------
States and political subdivisions .............. 55,210 41,982 150,432 168,242 464,613
- ---------------------------------------------------------------------------------------------------------------------------
Agency mortgage-backed securities .............. -- 4,996 4,996 4,996 2,343,594
- ---------------------------------------------------------------------------------------------------------------------------
Other bonds, notes and debentures .............. 1,660 1,535 1,805 1,505 193,545
- ---------------------------------------------------------------------------------------------------------------------------
Other securities ............................... 29,143 36,497 80,111 64,180 79,445
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MATURITIES OF SECURITIES AT DECEMBER 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
Maturity 1-5 Year 6-10 Year Over 10
Under 1 Year Maturity Maturity Year Maturity Total
-------------------- ------------------- --------------- ---------------- -----------------
($000's) Amount Yield Amount Yield Amount Yield Amount Yield Amount Yield
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Securities Available for Sale:
U.S. Treasury .............. $136,491 7.29% $ 116,825 6.66% $ 2,101 5.79% $ 462 8.63% $ 255,879 6.99%
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Government agencies
and corporations ......... 2,775 6.45 22,820 7.10 -- -- 495 8.54 26,090 7.06
- -----------------------------------------------------------------------------------------------------------------------------------
States and political
subdivisions (a) ......... 13,500 8.24 122,898 7.57 42,066 7.77 12,871 7.67 191,335 7.67
- -----------------------------------------------------------------------------------------------------------------------------------
Agency mortgage-
backed securities (b) .... 532,985 7.15 5,707,033 6.90 161,563 7.14 446,252 6.88 6,847,833 6.92
- -----------------------------------------------------------------------------------------------------------------------------------
Other bonds, notes and
debentures (c) ........... 4,920 8.87 579,080 6.47 30,547 7.40 131,463 6.39 746,010 6.51
- -----------------------------------------------------------------------------------------------------------------------------------
Securities Held to Maturity:
States and political
subdivisions (a) ........ 36,748 4.62 13,774 5.16 2,770 5.40 1,918 5.80 55,210 4.83
- -----------------------------------------------------------------------------------------------------------------------------------
Other bonds, notes and
debentures ............... 500 8.00 850 7.36 285 6.75 25 6.75 1,660 7.44
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Maturities of mortgage-backed securities were estimated based on historical and
predicted prepayment trends.
(a) taxable-equivalent yield using the statutory rate in effect.
(b) included in agency mortgage-backed securities available for sale are
floating-rate securities totalling $1,450,326,000.
(c) included in other bonds, notes and debentures available for sale are
floating-rate securities totalling $154,325,000.
securitizations improve liquidity, reduce interest rate risk and the reserve for
credit losses and preserve capital. Further securitizations in 1999 are
expected.
DEPOSITS
Interest-earning assets are funded primarily by core deposits. The
accompanying tables show the relative composition of the Bancorp's average
deposits and the change in average deposit sources during the last five years.
Other time deposits are comprised of consumer certificates of deposit. Foreign
office deposits are denominated in amounts greater than $100,000.
The Bancorp's continued focus on Banking Center sales campaigns for
transaction accounts throughout 1998 sustained strong growth in core deposits.
Average demand, interest checking and saving balances rose 24.7% in 1998 and
15.4% in 1997. Our MaxSaver product contributed to the growth in savings
balances, while the Platinum One and Business 53 products and promotional
campaigns drove the increase in demand and interest checking.
The Bancorp acquired deposits of $116.6 million from Bank One Corporation in
1998. During 1997, the Bancorp acquired deposits of $128.9 million from Great
Lakes National Bank Ohio and $126.1 million of deposits through the acquisition
of Suburban Bancorporation, Inc.
DISTRIBUTION OF AVERAGE DEPOSITS
<TABLE>
<CAPTION>
===============================================================================
1998 1997 1996 1995 1994
===============================================================================
<S> <C> <C> <C> <C> <C>
Demand .......... 14.7% 12.8 11.7 12.0 12.0
Interest checking. 14.9 12.9 11.5 11.5 13.7
Savings........... 18.2 13.5 12.0 7.7 10.8
Money market...... 5.8 10.9 13.2 15.4 14.6
Other time ....... 37.3 40.8 42.1 41.8 41.4
Certificates-
$100,000
and over ....... 7.9 6.9 6.6 6.3 3.4
Foreign office ... 1.2 2.2 2.9 5.3 4.1
===============================================================================
Total ............ 100.0% 100.0 100.0 100.0 100.0
===============================================================================
</TABLE>
36
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<PAGE> 26
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FIFTH THIRD BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
===============================================================================
<TABLE>
<CAPTION>
CHANGE IN AVERAGE DEPOSIT SOURCES
- --------------------------------------------------------------------------------
($000's) 1998 1997 1996 1995 1994
===============================================================================
<S> <C> <C> <C> <C> <C>
Demand ............... $399,076 277,372 281,368 219,099 124,433
Interest checking..... 430,450 326,072 329,464 (84,830) 195,936
Savings .............. 932,904 345,524 967,850 (266,406) (50,482)
Money market ......... (883,760) (344,324) 50,712 369,945 106,223
Other time ........... (470,784) 19,790 1,246,806 765,761 518,698
Certificates-
$100,000
and over ........... 217,741 92,037 243,284 481,823 (70,407)
Foreign office ....... (169,360) (120,475) (258,259) 251,041 287,189
- --------------------------------------------------------------------------------
Total change ......... $456,267 595,996 2,861,225 1,736,433 1,111,590
===============================================================================
</TABLE>
SHORT-TERM BORROWINGS
These primarily consist of short-term excess funds from correspondent banks,
securities sold under agreements to repurchase, short-term bank notes and
commercial paper issuances. Short-term borrowings primarily fund short-term,
rate-sensitive earning-asset growth. Average short-term borrowings as a
percentage of average earning assets increased from 15% in 1997 to 16.5% in
1998. Although the Bancorp was successful in attracting transaction accounts in
both 1998 and 1997, the overall funding mix shifted with short-term borrowings
supporting a relatively higher proportion of earning assets. During 1998 and
1997, the Bancorp increased its reliance on short-term borrowings as loan and
lease growth outpaced core deposit growth. As the following table of average
short-term borrowings and average Federal funds loaned indicates, the Bancorp
was a net borrower of funds of $4.3 billion in 1998, up from $3.6 billion in
1997:
<TABLE>
<CAPTION>
AVERAGE SHORT-TERM BORROWINGS
- --------------------------------------------------------------------------------
($000's) 1998 1997 1996 1995 1994
- --------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Federal funds
borrowed .......... $2,208,493 1,464,945 1,230,219 1,071,792 848,217
Short-term
bank notes ........ 461,795 658,140 553,924 769,000 429,642
Other short-term
borrowings ........ 1,728,960 1,607,580 1,264,414 1,011,671 901,387
- ----------------------------------------------------------------------------------
Total short-term
borrowings ........ 4,399,248 3,730,665 3,048,557 2,852,463 2,179,246
Federal funds loaned 98,100 140,451 101,397 143,151 157,864
Net funds borrowed $4,301,148 3,590,214 2,947,160 2,709,312 2,021,382
- ----------------------------------------------------------------------------------
</TABLE>
CAPITAL RESOURCES
The Bancorp maintains a relatively high level of capital as a margin of
safety for its depositors and shareholders. At December 31, 1998, shareholders'
equity was $3.2 billion compared to $2.8 billion at December 31, 1997, an
increase of $415.7 million, or 15%. This increase in capital resulted primarily
from the retention of earnings and upward market adjustments on
available-for-sale securities offset in part by dividend declarations and the
repurchase of Fifth Third Bancorp common stock.
The following table shows several capital and liquidity ratios for the last
three years:
<TABLE>
<CAPTION>
============================================================================
1998 1997 1996
============================================================================
<S> <C> <C> <C>
Average shareholders' equity to
Average assets ............... 10.33% 9.48 9.46
Average deposits .............. 15.83 13.80 13.33
Average loans and leases ...... 16.41 14.98 14.92
- ---------------------------------------------------------------------------
</TABLE>
In mid-1997, the Bancorp completed the repurchase of $250 million of its
common stock under a plan authorized in January 1997. In December 1996, the
Bancorp approved the repurchase of common stock to fund employee stock option
and dividend reinvestment plans. During 1997, the Bancorp approved the continued
repurchase of up to 11.3 million shares under the December 1996 plan. Through
the repurchase programs, the Bancorp during 1997 repurchased 7,787,140 shares of
Fifth Third Bancorp common stock on the open market for $276.3 million, or an
average purchase price of $35.48. In January 1998, the Bancorp's board of
directors rescinded Fifth Third Bancorp's stock repurchase programs. No shares
were purchased under these programs from June 1997 through May 1998. In May
1998, the Bancorp 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
Bancorp for general corporate purposes. The issuance of the shares also
facilitated the Bancorp's ability to account for the acquisition of State
Savings Company as a pooling-of-interests. 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 became
available for reissuance in the Bancorp's stock option and dividend reinvestment
plans.
LIQUIDITY AND MARKET RISK
The objective of the Bancorp's Asset/Liability management function is to
maintain consistent growth in net interest income within the Bancorp's policy
limits. This objective is accomplished through management of the Bancorp's
balance sheet composition, liquidity, and interest rate risk exposures arising
from changing economic conditions, interest rates and customer preferences.
The goal of liquidity management is to provide adequate funds to meet changes
in loan and lease demand or unexpected deposit withdrawals. This is accomplished
by maintaining liquid assets in the form of investment securities, maintaining
sufficient unused borrowing capacity in the national money markets and
delivering consistent growth in core deposits. As of December 31, 1998, the
Bancorp had approximately $3 billion in securities and other short-term
investments maturing or repricing within one year. Additional asset-driven
liquidity is provided by the remainder of the securities portfolio and
securitizable loan and lease assets. These sources, in addition to the Bancorp's
10% average equity capital base, provide a stable funding base.
In addition to core deposit funding, the Bancorp also accesses a variety of
other short-term and long-term funding sources. The Bancorp also uses the
Federal Home Loan Bank as a funding source, issuing notes payable through its
FHLB member subsidiaries. The Bancorp also has significant unused funding
capacity in the national money markets. The Bancorp's A1+/P-1 ratings on its
commercial paper, along with an AA-/Aa2 ratings for long-term deposits at Fifth
Third Bank, its lead bank, continue to be among the best in the industry. Six of
the Bancorp's other subsidiaries, Fifth Third Bank, Northwestern Ohio, N.A.;
Fifth Third Bank, Central Ohio; Fifth Third Bank, Western Ohio; Fifth Third
Bank, Indiana; Fifth Third Bank, Northern Kentucky, Inc.; and Fifth Third Bank,
Kentucky, Inc. maintain current deposit ratings of A1+/P-1 and AA-/Aa3 on their
short-term and long-term deposits, respectively. These ratings, along with
capital ratios significantly above the current
37
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<PAGE> 27
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FIFTH THIRD BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
===============================================================================
regulatory guidelines, provide the Bancorp with additional liquidity.
Management does not rely on any one source of liquidity and manages
availability in response to changing balance sheet needs.
Management considers interest rate risk the Bancorp's most significant market
risk. Interest rate risk is the exposure to adverse changes in net interest
income due to changes in interest rates. Consistency of the Bancorp's net
interest revenue is largely dependent upon the effective management of interest
rate risk.
The Bancorp employs a variety of measurement techniques to identify and
manage its interest rate risk including the use of an earnings simulation model
to analyze net interest income sensitivity to changing interest rates. The model
is based on actual cash flows and repricing characteristics for on and
off-balance sheet instruments and incorporates market-based assumptions
regarding the effect of changing interest rates on the prepayment rates of
certain assets and liabilities. The model also includes senior management
projections for activity levels in each of the product lines offered by the
Bancorp. Assumptions based on the historical behavior of deposit rates and
balances in relation to changes in interest rates are also incorporated into the
model. These assumptions are inherently uncertain, and as a result, the model
cannot precisely measure net interest income or precisely predict the impact of
fluctuations in interest rates on net interest income. Actual results will
differ from simulated results due to timing, magnitude, and frequency of
interest rate changes as well as changes in market conditions and management
strategies.
The Bancorp's Asset/Liability Management Committee (ALCO), which includes
senior management representatives and reports to the Board of Directors,
monitors and manages interest rate risk within Board-approved policy limits. The
Bancorp's current interest rate risk policy limits are determined by measuring
the anticipated change in net interest income over a twelve and twenty-four
month horizon assuming a 200 basis point immediate and sustained increase or
decrease in all interest rates. Current policy limits this exposure to plus or
minus 5% of net interest income for a twelve-month horizon and plus or minus 9%
of net interest income over a twenty-four month horizon.
The following table shows the Bancorp's estimated earnings sensitivity
profile as of December 31, 1998:
<TABLE>
<CAPTION>
- ------------------------------------------------------------
Change in Percentage Change in
Interest Rates Net Interest Income
(basis points) 12 Months 24 Months
- ------------------------------------------------------------
<S> <C> <C> <C>
+200 (1.61)% 7.77 %
-200 4.26 % (6.08)%
- ------------------------------------------------------------
</TABLE>
Given an immediate and sustained 200 basis point increase in the yield curve
used in the simulation model, it is estimated net interest income for the
Bancorp would decrease by 1.61% over one year and increase by 7.77% over two
years. A 200 basis point immediate and sustained decrease in interest rates
would increase net interest income by 4.26% over one year and would decrease net
interest income by an estimated 6.08% over two years. All of these estimated
changes in net interest income are within the policy guidelines established by
the Board of Directors.
In order to reduce the exposure to interest rate fluctuations and to manage
liquidity, the Bancorp has developed securitization and sale procedures for
several types of interest-sensitive assets. All long-term, fixed-rate single
family residential mortgage loans underwritten according to Federal Home Loan
Mortgage Corporation or Federal National Mortgage Association guidelines are
sold for cash upon origination. Periodically, additional assets such as
adjustable-rate residential mortgages and certain short-term commercial loans
are also securitized or sold. In 1998 and 1997, $4.2 billion and $2.7 billion,
respectively, of fixed and adjustable-rate residential mortgages were
securitized or sold. In addition in 1998 and 1997, certain primarily fixed-rate,
short-term commercial loans were sold to a commercial paper funding conduit.
Management focuses its efforts on consistent net interest revenue and net
interest margin growth through each of the retail and wholesale business lines.
The Bancorp does not currently engage in trading activities.
YEAR 2000
As with other companies, many of the Bancorp'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 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. The Bancorp's project includes both
internal and external reviews. The Bancorp's internal efforts address
information technology systems and computer chip embedded functions such as
vaults, elevators, security systems, building heating and cooling and other
operating facilities. External efforts address critical business partners
including customers, vendors, service suppliers and utilities. The Bancorp's
efforts are being conducted in accordance with Federal Financial Institutions
Examination Council (FFIEC) guidelines. Senior management oversees the project
and regularly reports to the Board of Directors.
The project management process as required by the FFIEC involves five phases:
awareness (recognizing the problems and developing resources to address them);
assessment (determining the magnitude of the problem and assessing necessary
effort); renovation (conducting enhancements to hardware and software and
associated necessary changes); validation (testing and verifying changes); and
implementation (certification and acceptance by the business users). Through
this process, the Bancorp categorized systems according to the lost revenues or
liability that would be incurred if the system failed. The Bancorp identified
critical systems as those where failure would result in either at least $50,000
in losses per day or $1.5 million of total exposure. All five phases have been
completed with respect to those systems determined to be critical. The
awareness, assessment and renovation phases are complete with respect to the
remaining systems and the validation and implementation phases are substantially
complete for those remaining internal systems. The FFIEC guidelines require that
these systems must be completed by June 30, 1999. The Bancorp expects to be
completed with these remaining existing systems by March 31, 1999 and new
systems will be certified as they are implemented. In 1999, the Bancorp will
conduct internal integration testing and interface testing with critical
business partners. Although this testing is not one of the five phases discussed
above, the Bancorp is taking this step to help ensure its efforts are successful
in addressing Year 2000 problems.
Because the Year 2000 compliance effort is largely being completed by
internal staff, the Bancorp does not expect to incur any significant costs with
outside contractors relative to the completion of this task. The Bancorp
anticipates a total compliance cost of under $10 million. All but an immaterial
amount of these costs are internal costs related to the lost opportunity of
allocating the time of the internal staff elsewhere. The estimated cost also
includes all software, hardware and labor costs. The Bancorp presently believes
with the planned modifications to existing systems and conversion to new
systems, as discussed above, the remaining Year 2000 compliance issues will be
resolved on a timely basis and any related costs will not
38
===============================================================================
<PAGE> 28
================================================================================
FIFTH THIRD BANCORP AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
===============================================================================
have a material impact on the operations, cash flows or financial condition of
future periods.
The risks associated with the Bancorp'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. Critical parties were designated using the
same standard as used to identify critical systems. Each business line division
within the Bancorp has initiated projects to assess the Year 2000 preparedness
of individual customers and material relationships and the impact on the Bancorp
in accordance with FFIEC guidelines. In reviewing customers and the impact their
failure to address Year 2000 issues would have, materiality has been determined
by analyzing loss to the Bancorp if the Year 2000 problem affects the customer's
creditworthiness.
Major risks associated with the Year 2000 issue as it applies to external
parties include a shutdown 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. Major risks associated with internal systems include
inability to properly process data and information; inability to complete
transactions; failure of time locks and security systems; inability to meet
customer demands for cash; and inability to process electronic transactions for
the Bancorp and its customers.
Contingency plans for critical business partners are being developed as their
Year 2000 plans and procedures are analyzed. The Bancorp does not have a need
for remedial contingency plans for its own systems because it has met and
expects to continue to meet FFIEC deadlines. The Bancorp is preparing event
contingency plans which address plans for handling the period before, during and
after the changeover to the year 2000. These plans address system failures,
third-party failures (in the nature of those noted above) and staffing needs
during the period. All contingency plans must be complete by June 30, 1999, but
the Bancorp believes it will be completed by March 31, 1999. The Federal
Reserve, which is Fifth Third's primary bank regulator, includes a review of the
risk assessments and contingency plans in its quarterly examinations of Fifth
Third's Year 2000 preparedness.
CONSOLIDATED SIX YEAR SUMMARY OF OPERATIONS
<TABLE>
<CAPTION>
- --------------------------------------------------------------------------------------------------------------------------------
For the Years Ended December 31 ($000's) 1998 1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Interest Income---------------------------- $2,018,677 1,919,083 1,772,410 1,518,713 1,195,401 1,069,532
Interest Expense--------------------------- 1,015,853 1,006,833 931,377 825,497 558,091 472,380
- --------------------------------------------------------------------------------------------------------------------------------
Net Interest Income------------------------ 1,002,824 912,250 841,033 693,216 637,310 597,152
Provision for Credit Losses---------------- 109,171 90,095 68,382 45,934 41,183 61,990
- --------------------------------------------------------------------------------------------------------------------------------
Net Interest Income After Provision for Credit Losses-- 893,653 822,155 772,651 647,282 596,127 535,162
Other Operating Income--------------------- 636,194 501,769 418,907 345,391 284,614 267,502
Operating Expenses------------------------- 713,876 630,508 583,787 499,564 465,723 443,510
SAIF Assessment---------------------------- -- -- 37,867 -- -- --
Merger-Related Charges--------------------- 89,701 -- -- -- -- --
- --------------------------------------------------------------------------------------------------------------------------------
Income Before Income Taxes----------------- 726,270 693,416 569,904 493,109 415,018 359,154
Applicable Income Taxes-------------------- 250,142 232,558 187,560 162,662 139,393 112,717
- --------------------------------------------------------------------------------------------------------------------------------
Net Income--------------------------------- $ 476,128 460,858 382,344 330,447 275,625 246,437
- --------------------------------------------------------------------------------------------------------------------------------
Earnings Per Share (a)--------------------- $ 1.80 1.76 1.45 1.31 1.12 1.02
Diluted Earnings Per Share (a)------------- $ 1.76 1.73 1.42 1.27 1.08 .98
- --------------------------------------------------------------------------------------------------------------------------------
Cash Dividends Declared Per Share (a)------ $ .71 .56 8/9 .48 8/9 .42 2/3 .35 5/9 .30 2/9
</TABLE>
(a) Per share amounts have been adjusted for the three-for-two stock splits
effected in the form of stock dividends paid April 15, 1998, July 15, 1997 and
January 12, 1996.
CONDENSED CONSOLIDATED BALANCE SHEET INFORMATION
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
As of December 31 ($000's) 1998 1997 1996 1995 1994 1993
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Securities---------------------------- $ 8,420,638 8,224,475 7,826,797 5,683,298 4,925,105 3,917,540
Loans and Leases---------------------- 17,779,023 17,312,943 16,034,523 14,813,197 12,992,774 11,495,361
Loans Held for Sale------------------- 492,017 263,772 74,916 139,484 41,723 364,343
Assets-------------------------------- 28,921,782 27,710,673 26,076,597 22,110,700 19,399,912 17,070,942
Deposits------------------------------ 18,780,355 19,019,896 18,161,327 16,090,989 13,931,299 12,425,955
Short-Term Borrowings----------------- 3,693,927 3,650,931 3,581,173 2,064,095 2,703,054 1,762,390
Long-Term Debt and Convertible Subordinated Notes-- 2,288,151 1,508,683 1,199,101 1,364,438 665,791 961,059
Shareholders' Equity------------------ 3,178,522 2,762,836 2,561,335 2,102,738 1,727,115 1,586,266
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
SUMMARIZED QUARTERLY FINANCIAL INFORMATION
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
1998 1997
- ---------------------------------------------------------------------------------------------------------------------------
Fourth Third Second First Fourth Third Second First
(Unaudited)($000's) Quarter Quarter Quarter Quarter Quarter Quarter Quarter Quarter
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Interest Income---------------- $496,464 502,095 513,374 506,744 493,554 484,360 474,590 466,579
Net Interest Income------------ 259,992 250,395 249,583 242,854 236,587 228,381 225,331 221,951
Provision for Credit Losses---- 26,335 15,234 44,774 22,828 30,805 18,929 21,013 19,348
Income Before Income Taxes----- 226,389 221,005 92,013 186,863 181,690 178,135 167,782 165,809
Net Income--------------------- 150,064 144,073 57,760 124,231 120,012 118,606 111,272 110,968
Earnings Per Share------------- .57 .54 .22 .47 .46 .45 .43 .42
Diluted Earnings Per Share----- .55 .53 .22 .46 .45 .45 .42 .41
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
39
<PAGE> 29
- --------------------------------------------------------------------------------
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED TEN YEAR COMPARISON
- --------------------------------------------------------------------------------
AVERAGE ASSETS ($000'S)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Interest-Earning Assets
Federal Interest-Bearing
----------------------------------------------------------------- Cash and Total
Loans and Funds Deposits Due from Other Average
Year Leases Loaned (a) in Banks (a) Securities Total Banks Assets Assets
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $17,952,333 $ 98,100 $101,478 $8,543,355 $26,695,266 $710,596 $1,369,789 $28,518,478
1997 16,724,010 140,451 152,212 7,898,349 24,915,022 599,468 1,149,927 26,427,258
1996 15,699,665 101,397 145,480 7,353,221 23,299,763 589,368 1,087,111 24,744,025
1995 14,021,458 143,151 71,088 5,512,359 19,748,056 614,961 698,831 20,849,284
1994 12,349,791 157,864 71,699 4,333,499 16,912,853 592,644 583,356 17,891,328
1993 11,095,382 113,259 97,130 3,591,147 14,896,918 550,750 576,727 15,850,052
1992 9,298,111 184,619 124,380 3,738,362 13,345,472 486,311 590,862 14,283,359
1991 8,383,985 345,587 153,148 3,453,688 12,336,408 433,856 530,251 13,178,764
1990 8,109,179 422,829 139,234 2,983,206 11,654,448 448,275 585,850 12,575,527
1989 7,910,295 334,634 169,909 2,545,182 10,960,020 431,213 575,946 11,857,356
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
AVERAGE DEPOSITS AND SHORT-TERM BORROWINGS ($000'S)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------------
Deposits
-----------------------------------------------------------------------------------------------
Certificates- Short-
Interest Money Other $100,000 Foreign Term
Year Demand Checking Savings Market Time and Over Office Total Borrowings Total
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $2,728,211 $2,777,460 $3,382,032 $1,085,910 $6,936,533 $1,474,693 $232,381 $18,617,220 $4,399,248 $23,016,468
1997 2,329,135 2,347,010 2,449,128 1,969,670 7,407,317 1,256,952 401,741 18,160,953 3,730,665 21,891,618
1996 2,051,763 2,020,938 2,103,604 2,313,994 7,387,527 1,164,915 522,216 17,564,957 3,048,557 20,613,514
1995 1,770,395 1,691,474 1,135,754 2,263,282 6,140,721 921,631 780,475 14,703,732 2,852,463 17,556,195
1994 1,551,296 1,776,304 1,402,160 1,893,337 5,374,960 439,808 529,434 12,967,299 2,179,246 15,146,545
1993 1,426,863 1,580,368 1,452,642 1,787,114 4,856,262 510,215 242,245 11,855,709 1,440,147 13,295,856
1992 1,216,999 1,334,540 1,267,195 1,727,550 4,751,733 570,147 48,200 10,916,364 1,253,075 12,169,439
1991 995,395 997,542 1,159,707 1,530,607 4,711,594 993,490 13,079 10,401,414 933,725 11,335,139
1990 899,091 890,994 1,031,552 1,459,964 4,711,419 1,122,645 2,313 10,117,978 712,675 10,830,653
1989 886,921 785,125 753,173 1,543,942 4,320,913 1,140,586 5,596 9,436,256 769,127 10,205,383
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
INCOME ($000'S, EXCEPT PER SHARE)
<TABLE>
<CAPTION>
- -----------------------------------------------------------------------------------------------------------------------------
Per Share (b)
--------------------------------------------------------
Originally Reported
---------------------------------
Other Dividend
Interest Interest Operating Operating Net Diluted Dividends Diluted Payout
Year Income Expense Income Expense Income Earnings Earnings Declared Earnings Earnings Ratio
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 $2,018,677 $1,015,853 $636,194 $803,577 $476,128 $1.80 $1.76 $.71 $1.80 $1.76 40.3%
1997 1,919,083 1,006,833 501,769 630,508 460,858 1.76 1.73 .56 8/9 1.73 1.69 33.6
1996 1,772,410 931,377 418,907 621,654 382,344 1.45 1.42 .48 8/9 1.43 1.40 34.8
1995 1,518,713 825,497 345,391 499,564 330,447 1.31 1.27 .42 2/3 1.29 1.26 33.8
1994 1,195,401 558,091 284,614 465,723 275,625 1.12 1.08 .35 5/9 1.13 1.10 32.3
1993 1,069,532 472,380 267,502 443,510 246,437 1.02 .98 .30 2/9 .97 .95 31.8
1992 1,059,393 512,424 235,266 399,233 196,010 .83 .82 .26 2/3 .81 .81 33.0
1991 1,138,452 676,511 213,678 362,867 160,790 .68 .68 .23 1/9 .69 .69 33.6
1990 1,170,270 770,894 133,491 330,179 92,934 .41 .41 .20 1/7 .61 .61 33.2
1989 1,123,078 753,125 171,762 317,188 123,182 .55 .55 .17 7/9 .55 .55 32.4
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
MISCELLANEOUS AT DECEMBER 31 ($000'S, EXCEPT SHARE INFORMATION)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------------
Shareholders' Equity
----------------------------------------------------------------------------------------
Accumulated
Number of Nonowner Reserve
Shares of Stock Common Capital Retained Changes in Treasury Per for Credit
Year Outstanding (b) Stock Surplus Earnings Equity Stock Total Share (b) Losses
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
1998 266,918,544 $592,559 495,067 2,066,407 $ 82,448 $ (57,959) $3,178,522 $11.91 $266,860
1997 262,614,641 583,005 481,036 1,785,121 98,254 (184,580) 2,762,836 10.52 250,950
1996 267,867,814 594,667 493,792 1,461,736 11,317 ( 177) 2,561,335 9.56 233,803
1995 255,433,570 567,063 320,078 1,198,040 17,557 -- 2,102,738 8.23 224,134
1994 247,724,070 549,947 263,175 967,545 (53,552) -- 1,727,115 6.97 202,009
1993 245,836,622 545,757 253,736 773,987 12,786 -- 1,586,266 6.45 185,416
1992 237,016,930 526,178 207,299 595,663 -- ( 404) 1,328,736 5.61 153,776
1991 235,472,477 522,749 194,485 458,258 -- ( 404) 1,175,088 4.99 121,256
1990 225,123,782 499,775 181,110 347,490 -- -- 1,028,375 4.57 112,040
1989 223,881,321 497,017 180,576 296,432 -- -- 974,025 4.35 103,883
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
(a) Federal funds loaned and interest-bearing deposits in banks are combined in
other short-term investments in the Consolidated Financial Statements.
(b) Number of shares outstanding and per share data have been adjusted for stock
splits in 1998, 1997, 1996, 1992 and 1990.
40
<PAGE> 30
DIRECTORS AND OFFICERS
- --------------------------------------------------------------------------------
Fifth Third Bancorp Directors
- --------------------------------------------------------------------------------
GEORGE A. SCHAEFER, JR.,
President & CEO
Fifth Third Bancorp and
Fifth Third Bank
DARRYL F. ALLEN,
Chairman, President & CEO
Aeroquip-Vickers, Inc.
JOHN F. BARRETT,
President & CEO
The Western & Southern Life
Insurance Company
GERALD V. DIRVIN,
Former Executive Vice President
The Procter & Gamble Company
THOMAS B. DONNELL,
Chairman
Fifth Third Bank, Northwestern
Ohio, National Association
RICHARD T. FARMER,
Chairman
Cintas Corporation
JOSEPH H. HEAD, JR.,
Chairman & Director
Atkins & Pearce, Inc.
JOAN R. HERSCHEDE,
President & CEO
The Frank Herschede Company
ALLEN M. HILL,
President & CEO
DPL, Inc.
WILLIAM G. KAGLER,
Former Chairman of the Executive
Committee of the
Board of Directors
Skyline Chili, Inc.
JAMES D. KIGGEN,
Chairman & Director
Xtek, Inc.
Chairman & Director
Cincinnati Bell Inc.
JERRY L. KIRBY
Chairman
Fifth Third Bank, Western Ohio
MITCHEL D. LIVINGSTON, PH.D.,
Vice President for Student Affairs & Human Resources
University of Cincinnati
ROBERT B. MORGAN,
President & CEO
Cincinnati Financial Corporation
DAVID E. REESE
Chairman
Fifth Third Bank,
Southwest F.S.B.
JAMES E. ROGERS,
Vice Chairman, President & CEO
Cinergy Corporation
BRIAN H. ROWE,
Chairman Emeritus
GE Aircraft Engines
DONALD B. SCHACKELFORD
Chairman
Fifth Third Bank, Central Ohio
JOHN J. SCHIFF, JR.,
Former Chairman
John J. & Thomas R. Schiff & Co., Inc.
DENNIS J. SULLIVAN, JR.,
Executive Counselor
Dan Pinger Public Relations
DUDLEY S. TAFT,
President
Taft Broadcasting Company
DIRECTORS EMERITI
- --------------------------------------------------------------------------------
Neil A. Armstrong
Philip G. Barach
Vincent H. Beckman
J. Kenneth Blackwell
Milton C. Boesel, Jr.
Richard G. Brierley
Clement L. Buenger
Douglas G. Cowan
Thomas L. Dahl
Ronald A. Dauwe
Nicholas M. Evans
Louis R. Fiore
John D. Geary
Ivan W. Gorr
Don R. Hinkley
William A. Hopple, III
Paul W. Huenefeld
William J. Keating
Charles L. McKelvy, Jr.
Michael H. Norris
David Pollak
C. Wesley Rowles
David B. Sharrock
Stephen Stranahan
N. Beverley Tucker, Jr.
Richard E. Wagner
FIFTH THIRD BANCORP OFFICERS
- --------------------------------------------------------------------------------
GEORGE A. SCHAEFER, JR.,
President & CEO
NEAL E. ARNOLD,
Executive Vice President
Treasurer, CFO
MICHAEL D. BAKER,
Executive Vice President
P. MICHAEL BRUMM,
Executive Vice President
JAMES R. GAUNT,
Executive Vice President
JAMES J. HUDEPOHL,
Executive Vice President
MICHAEL K. KEATING,
Executive Vice President,
General Counsel, Secretary
ROBERT J. KING, JR.,
Executive Vice President
ROBERT P. NIEHAUS,
Executive Vice President
STEPHEN J. SCHRANTZ,
Executive Vice President
GERALD L. WISSEL,
Executive Vice President,
Auditor
BARRY L. BOERSTLER,
Senior Vice President
ROGER W. DEAN,
Senior Vice President,
Controller
PAUL L. REYNOLDS,
Senior Vice President,
Assistant Secretary
REGINA G. LIVERS,
Vice President,
Community Affairs Officer
AFFILIATE BANKS' CHAIRMEN, PRESIDENTS, CEOS
- --------------------------------------------------------------------------------
SAMUEL G. BARNES,
President & CEO
Fifth Third Bank, Kentucky, Inc.-
Lexington
THOMAS B. DONNELL,
Chairman
ROBERT J. KING, JR.,
Vice Chairman
DONALD H. KINCADE,
President & CEO
Fifth Third Bank, Northwestern
Ohio, National Association
Toledo, Ohio
JERRY L. KIRBY,
Chairman
R. DANIEL SADLIER,
President & CEO
Fifth Third Bank, Western Ohio
Dayton, Ohio
JAMES R. GAUNT,
President & CEO
Fifth Third Bank, Kentucky, Inc.-
Louisville
STEWART M. GREENLEE,
President & CEO
Fifth Third Bank, Ohio Valley
Hillsboro, Ohio
COLLEEN M. KVETKO,
President & CEO
Fifth Third Bank, Florida
Naples, Florida
ROBERT J. KING, JR.,
President & CEO
Fifth Third Bank,
Northeastern Ohio
Cleveland, Ohio
DAVID E. REESE,
Chairman
WILLIAM A. ROBERT,
President & CEO
Fifth Third Bank,
Southwest F.S.B.
Scottsdale, Arizona
DONALD B. SHACKELFORD,
Chairman
PATRICK J. FEHRING, JR.,
President & CEO
Fifth Third Bank, Central Ohio
Columbus, Ohio
JAMES B. STURGES,
Chairman
MICHAEL J. ALLEY,
President & CEO
Fifth Third Bank, Indiana
Indianapolis, Indiana
WILLIAM J. WILLIAMS,
Chairman
BRADLEE F. STAMPER,
President & CEO
Fifth Third Bank,
Northern Kentucky, Inc.
Florence, Kentucky
ROBERT L. ERNST,
President
Fifth Third Bank, Butler County
(C)Fifth Third Bank 1999
Member F.D.I.C. - Federal Reserve System
(R)Reg. U.S. Pat. & T.M. Office
<PAGE> 1
EXHIBIT 21
----------
FIFTH THIRD BANCORP SUBSIDIARIES
<TABLE>
<CAPTION>
Jurisdiction
of
Name Incorporation
- ---- -------------
<S> <C>
Fifth Third Bank Ohio
The Fifth Third Company Ohio
The Fifth Third Leasing Company Ohio
Fifth Third Auto Leasing Trust Delaware
Fifth Third Securities, Inc. Ohio
Midwest Payment Systems, Inc. Ohio
Fifth Third International Company Kentucky
Fifth Third Trade Services Limited Hong Kong
Fifth Third/W. Lyman Case & Company Ohio
Fifth Third Bank, Kentucky, Inc. Kentucky
Fifth Third Bank, Northern Kentucky, Inc. Kentucky
Fifth Third Bank, Central Ohio Ohio
Fidelity Calvin Corporation Ohio
American Home Foundation Ohio
Fifth Third Bank, Northwestern Ohio, National Association Federal
Fifth Third Mortgage Insurance/Reinsurance Company Vermont
Fifth Third Insurance Agency, Inc. Ohio
Fifth Third Bank, Ohio Valley Ohio
Fifth Third Bank, Western Ohio Ohio
Fifth Third Mortgage Company Ohio
CF Property Management Company Ohio
</TABLE>
<PAGE> 2
<TABLE>
<S> <C>
Fifth Third Bank, Indiana Indiana
Fifth Third Bank, Southwest, F.S.B. Federal
Calvin Securities, Incorporated Arizona
Fifth Third Bank, Florida Florida
Fifth Third Community Development Company Ohio
Fifth Third Investment Company Ohio
Fountain Square Insurance Company Arizona
Heartland Capital Management, Inc. Indiana
Fifth Third/The Ohio Company Ohio
State Savings Mortgage Company Ohio
Calvin Hotel Co. Arizona
</TABLE>
<PAGE> 1
Exhibit 23
INDEPENDENT AUDITORS' CONSENT
We consent to the incorporation by reference in Registration Statements No.
33-34075, 33-13252, 33-60474, 33-55223, 33-555553, 333-58249, 333-48049 and
33-61149, of Fifth Third Bancorp on Form S-8 and in Registration Statements No.
33-19965 on Form S-4 and No. 33-54134, 333-58265, and 333-42379 on Form S-3 of
our report dated January 15, 1999 incorporated by reference in this Annual
Report on Form 10-K of Fifth Third Bancorp for the year ended December 31, 1998.
February 12, 1999
Cincinnati, Ohio
<TABLE> <S> <C>
<ARTICLE>9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIFTH THIRD
BANCORP'S ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 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> YEAR
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> DEC-31-1998
<CASH> 819,862
<INT-BEARING-DEPOSITS> 118,535
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,334,625
<INVESTMENTS-CARRYING> 86,013
<INVESTMENTS-MARKET> 86,015
<LOANS> 17,779,023
<ALLOWANCE> 266,860
<TOTAL-ASSETS> 28,921,782
<DEPOSITS> 18,780,355
<SHORT-TERM> 3,693,927
<LIABILITIES-OTHER> 980,827
<LONG-TERM> 2,288,151
0
0
<COMMON> 592,559
<OTHER-SE> 2,585,963
<TOTAL-LIABILITIES-AND-EQUITY> 28,921,782
<INTEREST-LOAN> 1,451,573
<INTEREST-INVEST> 559,456
<INTEREST-OTHER> 7,648
<INTEREST-TOTAL> 2,018,677
<INTEREST-DEPOSIT> 687,755
<INTEREST-EXPENSE> 1,015,853
<INTEREST-INCOME-NET> 1,002,824
<LOAN-LOSSES> 109,171
<SECURITIES-GAINS> 9,843
<EXPENSE-OTHER> 803,577
<INCOME-PRETAX> 726,270
<INCOME-PRE-EXTRAORDINARY> 476,128
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 476,128
<EPS-PRIMARY> 1.80
<EPS-DILUTED> 1.76
<YIELD-ACTUAL> 3.94
<LOANS-NON> 42,760
<LOANS-PAST> 79,233
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 46,742
<ALLOWANCE-OPEN> 250,950
<CHARGE-OFFS> 123,687
<RECOVERIES> 26,920
<ALLOWANCE-CLOSE> 266,860
<ALLOWANCE-DOMESTIC> 266,860
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
<TABLE> <S> <C>
<ARTICLE>9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIFTH THIRD
BANCORP'S QUARTERLY REPORTS ON FORM 10-Q FOR THE QUARTERS ENDED MARCH 31, 1998,
JUNE 30, 1998 AND SEPTEMBER 30, 1998, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000035527
<NAME> FIFTH THIRD BANCORP
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998<F1>
<PERIOD-START> JAN-01-1998
<PERIOD-END> MAR-31-1998
<CASH> 734,594
<INT-BEARING-DEPOSITS> 64,238
<FED-FUNDS-SOLD> 0
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 8,998,778
<INVESTMENTS-CARRYING> 92,917
<INVESTMENTS-MARKET> 93,223
<LOANS> 17,461,563
<ALLOWANCE> 252,799
<TOTAL-ASSETS> 28,983,753
<DEPOSITS> 18,829,066
<SHORT-TERM> 4,697,971
<LIABILITIES-OTHER> 828,326
<LONG-TERM> 1,796,211
0
0
<COMMON> 583,656
<OTHER-SE> 2,248,523
<TOTAL-LIABILITIES-AND-EQUITY> 28,983,753
<INTEREST-LOAN> 355,344
<INTEREST-INVEST> 148,668
<INTEREST-OTHER> 2,732
<INTEREST-TOTAL> 506,744
<INTEREST-DEPOSIT> 178,142
<INTEREST-EXPENSE> 263,890
<INTEREST-INCOME-NET> 242,854
<LOAN-LOSSES> 22,828
<SECURITIES-GAINS> 4,155
<EXPENSE-OTHER> 173,283
<INCOME-PRETAX> 186,863
<INCOME-PRE-EXTRAORDINARY> 124,231
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 124,231
<EPS-PRIMARY> .47
<EPS-DILUTED> .46
<YIELD-ACTUAL> 3.87
<LOANS-NON> 82,930
<LOANS-PAST> 41,861
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 0
<ALLOWANCE-OPEN> 250,950
<CHARGE-OFFS> 30,001
<RECOVERIES> 6,370
<ALLOWANCE-CLOSE> 252,799
<ALLOWANCE-DOMESTIC> 252,799
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
<FN>
<F1> FINANCIAL DATA HAS BEEN RESTATED TO REFLECT THE SECOND QUARTER 1998 MERGERS
WITH CITFED BANCORP, INC. AND STATE SAVINGS COMPANY.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE>9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIFTH THIRD
BANCORP'S QUARTERLY REPORTS ON FORM 10-Q FOR THE QUARTERS ENDED MARCH 31, 1997,
JUNE 30, 1997 AND SEPTEMBER 30, 1997, AND IS QUALIFIED IN ITS ENTIRETY BY
REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000035527
<NAME> FIFTH THIRD BANCORP
<MULTIPLIER> 1,000
<S> <C> <C> <C>
<PERIOD-TYPE> 3-MOS 6-MOS 9-MOS
<FISCAL-YEAR-END> DEC-31-1997<F1> DEC-31-1997<F1> DEC-31-1997<F1>
<PERIOD-START> JAN-01-1997 JAN-01-1997 JAN-01-1997
<PERIOD-END> MAR-31-1997 JUN-30-1997 SEP-30-1997
<CASH> 551,027 899,340 708,580
<INT-BEARING-DEPOSITS> 261,378 219,748 260,433
<FED-FUNDS-SOLD> 0 0 0
<TRADING-ASSETS> 0 0 0
<INVESTMENTS-HELD-FOR-SALE> 7,640,535 7,380,068 8,018,249
<INVESTMENTS-CARRYING> 338,242 330,724 334,967
<INVESTMENTS-MARKET> 338,165 332,432 336,850
<LOANS> 16,184,256 16,740,885 16,777,623
<ALLOWANCE> 234,419 238,292 242,278
<TOTAL-ASSETS> 25,910,452 26,685,973 27,191,443
<DEPOSITS> 17,802,628 17,953,152 18,702,347
<SHORT-TERM> 3,829,061 4,185,136 3,623,428
<LIABILITIES-OTHER> 562,243 670,589 694,853
<LONG-TERM> 1,365,645 1,417,919 1,560,236
0 0 0
0 0 0
<COMMON> 579,547 579,020 581,691
<OTHER-SE> 1,771,328 1,880,157 2,028,888
<TOTAL-LIABILITIES-AND-EQUITY> 25,910,452 26,685,973 27,191,443
<INTEREST-LOAN> 326,587 662,138 1,010,857
<INTEREST-INVEST> 135,518 270,672 402,235
<INTEREST-OTHER> 4,474 8,359 12,437
<INTEREST-TOTAL> 466,579 941,169 1,425,529
<INTEREST-DEPOSIT> 174,247 354,375 537,383
<INTEREST-EXPENSE> 244,628 493,887 749,866
<INTEREST-INCOME-NET> 221,951 447,282 675,663
<LOAN-LOSSES> 19,348 40,361 59,290
<SECURITIES-GAINS> 172 307 2,338
<EXPENSE-OTHER> 150,561 308,729 469,145
<INCOME-PRETAX> 165,809 333,591 511,726
<INCOME-PRE-EXTRAORDINARY> 110,968 222,240 340,846
<EXTRAORDINARY> 0 0 0
<CHANGES> 0 0 0
<NET-INCOME> 110,968 222,240 340,846
<EPS-PRIMARY> .42 .85 1.30
<EPS-DILUTED> .41 .83 1.28
<YIELD-ACTUAL> 3.85 3.84 3.83
<LOANS-NON> 78,395 76,174 75,432
<LOANS-PAST> 35,287 40,634 43,354
<LOANS-TROUBLED> 0 0 0
<LOANS-PROBLEM> 0 0 0
<ALLOWANCE-OPEN> 233,803 233,803 233,803
<CHARGE-OFFS> 25,359 48,801 73,081
<RECOVERIES> 6,627 12,929 19,561
<ALLOWANCE-CLOSE> 234,419 238,292 242,278
<ALLOWANCE-DOMESTIC> 234,419 238,292 242,278
<ALLOWANCE-FOREIGN> 0 0 0
<ALLOWANCE-UNALLOCATED> 0 0 0
<FN>
<F1> FINANCIAL DATA HAS BEEN RESTATED TO REFLECT THE SECOND QUARTER 1998 MERGERS
WITH CITFED BANCORP, INC. AND STATE SAVINGS COMPANY.
</FN>
</TABLE>
<TABLE> <S> <C>
<ARTICLE>9
<LEGEND>
THIS SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM FIFTH THIRD
BANCORP'S ANNUAL REPORT ON FORM 10-K FOR THE YEARS ENDED DECEMBER 31, 1997
AND 1996, AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<RESTATED>
<CIK> 0000035527
<NAME> FIFTH THIRD BANCORP
<MULTIPLIER> 1,000
<S> <C> <C>
<PERIOD-TYPE> YEAR YEAR
<FISCAL-YEAR-END> DEC-31-1997<F1> DEC-31-1996<F1>
<PERIOD-START> JAN-01-1997 JAN-01-1996
<PERIOD-END> DEC-31-1997 DEC-31-1996
<CASH> 777,378 877,433
<INT-BEARING-DEPOSITS> 180,425 277,152
<FED-FUNDS-SOLD> 0 0
<TRADING-ASSETS> 0 0
<INVESTMENTS-HELD-FOR-SALE> 8,139,465 7,400,355
<INVESTMENTS-CARRYING> 85,010 426,442
<INVESTMENTS-MARKET> 85,375 424,553
<LOANS> 17,312,943 16,034,523
<ALLOWANCE> 250,950 233,803
<TOTAL-ASSETS> 27,710,673 26,076,597
<DEPOSITS> 19,019,896 18,161,327
<SHORT-TERM> 3,650,931 3,581,173
<LIABILITIES-OTHER> 768,327 573,661
<LONG-TERM> 1,508,683 1,199,101
0 0
0 0
<COMMON> 583,005 594,667
<OTHER-SE> 2,179,831 1,966,668
<TOTAL-LIABILITIES-AND-EQUITY> 27,710,673 26,076,597
<INTEREST-LOAN> 1,365,511 1,271,569
<INTEREST-INVEST> 537,120 488,021
<INTEREST-OTHER> 16,452 12,820
<INTEREST-TOTAL> 1,919,083 1,772,410
<INTEREST-DEPOSIT> 721,030 699,833
<INTEREST-EXPENSE> 1,006,833 931,377
<INTEREST-INCOME-NET> 912,250 841,033
<LOAN-LOSSES> 90,095 68,382
<SECURITIES-GAINS> 5,802 6,182
<EXPENSE-OTHER> 630,508 621,654
<INCOME-PRETAX> 693,416 569,904
<INCOME-PRE-EXTRAORDINARY> 460,858 382,344
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> 460,858 382,344
<EPS-PRIMARY> 1.76 1.45
<EPS-DILUTED> 1.73 1.42
<YIELD-ACTUAL> 3.84 3.78
<LOANS-NON> 71,667 66,745
<LOANS-PAST> 46,281 38,053
<LOANS-TROUBLED> 0 0
<LOANS-PROBLEM> 29,145 43,097
<ALLOWANCE-OPEN> 233,803 224,134
<CHARGE-OFFS> 101,517 86,598
<RECOVERIES> 26,864 22,047
<ALLOWANCE-CLOSE> 250,950 233,803
<ALLOWANCE-DOMESTIC> 250,950 233,803
<ALLOWANCE-FOREIGN> 0 0
<ALLOWANCE-UNALLOCATED> 0 0
<FN>
<F1>FINANCIAL DATA HAS BEEN RESTATED TO REFLECT THE SECOND QUARTER 1998 MERGERS
WITH CITFED BANCORP, INC. AND STATE SAVINGS COMPANY.
</FN>
</TABLE>
