<PAGE> 1
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
For the Quarter Ended June 30, 2000
Commission File Number 0-8076
FIFTH THIRD BANCORP
(Exact name of Registrant as specified in its charter)
Ohio 31-0854434
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification Number)
Fifth Third Center
Cincinnati, Ohio 45263
(Address of principal executive offices)
Registrant's telephone number, including area code: (513) 579-5300
Indicate by check mark whether the Registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the Registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
--- ---
There were 465,002,511 shares of the Registrant's Common Stock, without par
value, outstanding as of July 31, 2000.
<PAGE> 2
FIFTH THIRD BANCORP
INDEX
Part I. Financial Information
Item 1. Financial Statements
Consolidated Balance Sheets -
June 30, 2000 and 1999 and December 31, 1999 3
Consolidated Statements of Income -
Three and Six Months Ended June 30, 2000 and 1999 4
Consolidated Statements of Cash Flows -
Six Months Ended June 30, 2000 and 1999 5
Consolidated Statements of Changes in Shareholders' Equity -
Six Months Ended June 30, 2000 and 1999 6
Notes to Consolidated Financial Statements 7 - 11
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 12 - 16
Item 3. Quantitative and Qualitative Disclosures About Market Risk 17
Part II. Other Information 18
2
<PAGE> 3
<TABLE>
<CAPTION>
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS (UNAUDITED)
========================================================================================================================
JUNE 30, December 31, June 30,
($000'S) 2000 1999 1999
========================================================================================================================
<S> <C> <C> <C>
ASSETS
------------------------------------------------------------------------------------------------------------------------
Cash and Due from Banks $ 750,986 1,213,089 941,901
Securities Available for Sale (a) 15,152,145 12,687,529 12,638,561
Securities Held to Maturity (b) 45,967 129,142 101,687
Other Short-Term Investments 109,526 355,447 147,682
Loans Held for Sale 349,829 297,277 276,101
Loans and Leases
Commercial Loans 6,708,850 6,206,712 5,928,331
Construction Loans 1,144,088 1,067,887 957,495
Commercial Mortgage Loans 2,861,566 2,651,378 2,402,396
Commercial Lease Financing 2,414,646 2,283,006 1,923,653
Residential Mortgage Loans 4,562,250 4,813,971 5,330,096
Consumer Loans 5,593,722 5,283,684 4,843,395
Consumer Lease Financing 3,758,015 3,579,600 3,108,614
Unearned Income (964,883) (922,618) (793,124)
Reserve for Credit Losses (382,524) (366,640) (350,486)
------------------------------------------------------------------------------------------------------------------------
Total Loans and Leases 25,695,730 24,596,980 23,350,370
Bank Premises and Equipment 495,951 481,531 455,500
Accrued Income Receivable 343,804 321,025 331,704
Other Assets 1,779,994 1,507,492 1,743,509
------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $44,723,932 41,589,512 39,987,015
========================================================================================================================
LIABILITIES
------------------------------------------------------------------------------------------------------------------------
Deposits
Demand $ 4,026,773 3,834,191 3,877,834
Interest Checking 4,740,772 4,792,196 4,278,626
Savings and Money Market 5,259,724 5,167,896 5,524,039
Time Deposits 13,432,507 12,289,277 11,921,482
------------------------------------------------------------------------------------------------------------------------
Total Deposits 27,459,776 26,083,560 25,601,981
Federal Funds Borrowed 3,252,303 2,971,855 3,518,346
Short-Term Bank Notes 2,740,000 1,317,400 125,000
Other Short-Term Borrowings 3,071,321 4,084,878 3,074,416
Accrued Taxes, Interest and Expenses 980,426 785,927 815,020
Other Liabilities 435,654 292,589 204,046
Long-Term Debt 2,287,003 1,803,772 2,609,964
Guaranteed Preferred Beneficial Interest in
Convertible Subordinated Debentures 172,500 172,500 172,500
------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 40,398,983 37,512,481 36,121,273
------------------------------------------------------------------------------------------------------------------------
SHAREHOLDERS' EQUITY (C)
------------------------------------------------------------------------------------------------------------------------
Common Stock (d) 1,032,177 1,028,592 1,015,604
Capital Surplus 499,038 568,360 535,732
Retained Earnings 3,056,430 2,704,595 2,401,447
Unrealized Losses on Securities
Available for Sale (262,696) (224,516) (82,412)
Treasury Stock - - (4,629)
------------------------------------------------------------------------------------------------------------------------
TOTAL SHAREHOLDERS' EQUITY 4,324,949 4,077,031 3,865,742
------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $44,723,932 41,589,512 39,987,015
========================================================================================================================
</TABLE>
(a) Amortized cost: June 30, 2000 - $15,555,639, December 31, 1999 - $13,037,903
and June 30, 1999 - $12,767,240.
(b) Market value: June 30, 2000 - $45,967, December 31, 1999 - $129,142 and June
30, 1999 - $102,155.
(c) 500,000 shares of no par value preferred stock are authorized of which none
have been issued.
(d) Stated value $2.22 per share; authorized 650,000,000; outstanding at June
30, 2000 - 464,944,695, at December 31, 1999 - 463,329,888 and at June 30,
1999 - 457,479,144 (excludes 110,454 treasury shares). Outstanding and
treasury shares have been adjusted for the three-for-two stock split
effected in the form of a stock dividend declared June 20, 2000 and
distributed July 14, 2000 to shareholders of record as of June 30, 2000.
See Notes to Consolidated Financial Statements
3
<PAGE> 4
<TABLE>
<CAPTION>
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)
================================================================================= ===========================
THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- ---------------------------
($000'S) 2000 1999 2000 1999
================================================================================= ===========================
<S> <C> <C> <C> <C>
INTEREST INCOME
Interest and Fees on Loans and Leases $528,008 465,413 $1,035,295 916,831
Interest on Securities
Taxable 277,744 192,651 525,209 370,477
Exempt from Income Taxes 9,376 9,549 18,749 18,695
--------------------------------------------------------------------------------- ---------------------------
Total Interest on Securities 287,120 202,200 543,958 389,172
Interest on Other Short-Term Investments 2,788 983 5,843 3,399
--------------------------------------------------------------------------------- ---------------------------
Total Interest Income 817,916 668,596 1,585,096 1,309,402
--------------------------------------------------------------------------------- ---------------------------
INTEREST EXPENSE
Interest on Deposits
Interest Checking 41,155 25,229 65,141 47,638
Savings and Money Market 39,290 39,906 89,629 80,023
Time Deposits 219,964 137,559 390,982 276,066
--------------------------------------------------------------------------------- ---------------------------
Total Interest on Deposits 300,409 202,694 545,752 403,727
Interest on Federal Funds Borrowed 72,054 40,731 144,126 73,492
Interest on Short-Term Bank Notes 18,550 7,090 33,757 13,650
Interest on Other Short-Term Borrowings 32,647 31,164 70,185 61,104
Interest on Long-Term Debt and Notes 29,536 34,596 63,112 66,013
--------------------------------------------------------------------------------- ---------------------------
Total Interest Expense 453,196 316,275 856,932 617,986
--------------------------------------------------------------------------------- ---------------------------
NET INTEREST INCOME 364,720 352,321 728,164 691,416
Provision for Credit Losses 26,339 35,271 47,691 60,662
--------------------------------------------------------------------------------- ---------------------------
NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 338,381 317,050 680,473 630,754
OTHER OPERATING INCOME
Investment Advisory Income 49,471 47,290 100,234 90,841
Service Charges on Deposits 55,343 42,901 102,998 82,398
Data Processing Income 56,695 41,904 107,615 80,300
Other Service Charges and Fees 86,712 88,129 177,015 171,647
Securities (Losses) Gains (160) 988 362 2,620
--------------------------------------------------------------------------------- ---------------------------
Total Other Operating Income 248,061 221,212 488,224 427,806
--------------------------------------------------------------------------------- ---------------------------
OPERATING EXPENSES
Salaries, Wages and Incentives 108,964 110,361 218,893 211,544
Employee Benefits 23,666 23,350 49,347 46,324
Equipment Expenses 12,237 12,260 24,922 24,299
Net Occupancy Expenses 19,448 17,555 38,591 34,956
Other Operating Expenses 105,388 102,716 211,850 203,430
Merger-Related and Special Charges 33,548 - 33,548 -
--------------------------------------------------------------------------------- ---------------------------
Total Operating Expenses 303,251 266,242 577,151 520,553
--------------------------------------------------------------------------------- ---------------------------
INCOME BEFORE INCOME TAXES 283,191 272,020 591,546 538,007
Applicable Income Taxes 91,103 91,848 193,089 181,493
--------------------------------------------------------------------------------- ---------------------------
NET INCOME $192,088 180,172 $ 398,457 356,514
================================================================================= ===========================
Per Share:
Earnings $ 0.41 0.40 $ 0.86 0.78
Diluted Earnings $ 0.41 0.39 $ 0.85 0.77
Cash Dividends $ 0.18 0.13-1/3 $ 0.34 0.26-2/3
================================================================================= ===========================
Average Shares (000's):
Outstanding 464,740 456,295 464,260 455,515
Diluted 476,312 469,420 475,406 468,876
================================================================================= ===========================
</TABLE>
See Notes to Consolidated Financial Statements
4
<PAGE> 5
<TABLE>
<CAPTION>
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
===========================================================================================================================
SIX MONTHS ENDED
JUNE 30,
----------------------------
($000'S) 2000 1999
===========================================================================================================================
<S> <C> <C>
OPERATING ACTIVITIES
Net Income $ 398,457 356,514
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities:
Provision for Credit Losses 47,691 60,662
Depreciation, Amortization and Accretion 58,614 51,722
Provision for Deferred Income Taxes 103,237 64,758
Realized Securities Gains (1,876) (4,422)
Realized Securities Losses 1,514 1,802
Proceeds from Sales of Residential Mortgage Loans Held for Sale 1,496,305 1,884,725
Net Gains on Sales of Loans (4,352) (30,015)
Increase in Residential Mortgage Loans Held for Sale (1,544,505) (1,541,416)
Decrease (Increase) in Accrued Income Receivable (22,779) 9,045
Increase in Other Assets (294,694) (557,113)
Increase in Accrued Taxes, Interest and Expenses 106,202 66,958
Increase (Decrease) in Other Liabilities 142,672 (30,271)
---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 486,486 332,949
===========================================================================================================================
INVESTING ACTIVITIES
Proceeds from Sales of Securities Available for Sale 3,003,584 1,047,061
Proceeds from Calls, Paydowns and Maturities of Securities Available for Sale 736,794 1,978,220
Purchases of Securities Available for Sale (5,361,305) (4,433,962)
Proceeds from Calls, Paydowns and Maturities of Securities Held to Maturity 6,626 28,116
Purchases of Securities Held to Maturity (10,057) (7,923)
Decrease in Other Short-Term Investments 245,921 17,078
Increase in Loans and Leases (1,965,459) (1,733,497)
Purchases of Bank Premises and Equipment (48,209) (41,356)
Proceeds from Disposal of Bank Premises and Equipment 8,420 9,334
---------------------------------------------------------------------------------------------------------------------------
NET CASH USED IN INVESTING ACTIVITIES (3,383,685) (3,136,929)
===========================================================================================================================
FINANCING ACTIVITIES
Increase in Transaction Account Deposits 232,986 69,263
Decrease in Consumer Time Deposits (265,246) (331,845)
Increase in CDs - $100,000 and Over, including Foreign 1,408,476 1,368,779
Increase in Federal Funds Borrowed 280,448 1,380,435
Increase in Short-Term Bank Notes 1,422,600 125,000
Increase (Decrease) in Other Short-Term Borrowings (1,013,878) 697,691
Proceeds from Issuance of Long-Term Debt and Notes 1,851,741 443,807
Repayment of Long-Term Debt (1,368,683) (897,226)
Payment of Cash Dividends (158,027) (125,803)
Exercise of Stock Options 22,982 18,174
Other 21,697 (47,762)
---------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,435,096 2,700,513
===========================================================================================================================
DECREASE IN CASH AND DUE FROM BANKS (462,103) (103,467)
CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 1,213,089 1,045,368
---------------------------------------------------------------------------------------------------------------------------
CASH AND DUE FROM BANKS AT END OF PERIOD $ 750,986 941,901
===========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
5
<PAGE> 6
<TABLE>
<CAPTION>
FIFTH THIRD BANCORP AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED)
=========================================================================================================================
SIX MONTHS ENDED
JUNE 30,
------------------------------
($000'S) 2000 1999
=========================================================================================================================
<S> <C> <C>
BALANCE AT DECEMBER 31 $4,077,031 3,795,054
Net Income 398,457 356,514
Nonowner Changes in Equity, Net of Tax:
Change in Unrealized Losses on Securities Available for Sale (38,180) (177,132)
-------------------------------------------------------------------------------------------------------------------------
Net Income and Nonowner Changes in Equity 360,277 179,382
Cash Dividends Declared:
Fifth Third Bancorp (2000 - $.34 per share and 1999 - $ .26-2/3 per share) (158,027) (107,736)
Pooled Companies Prior to Acquisition - (18,928)
Stock Options Exercised including Treasury Shares Issued 22,982 18,174
Treasury Shares Purchased - -
Stock Issued in Acquisitions and Other 22,686 (204)
-------------------------------------------------------------------------------------------------------------------------
BALANCE AT JUNE 30 $4,324,949 3,865,742
=========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements
6
<PAGE> 7
FINANCIAL INFORMATION
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. In the opinion of management, the unaudited Consolidated Financial
Statements include all adjustments (which consist of normal recurring
accruals) necessary, to present fairly the consolidated financial
position as of June 30, 2000 and 1999, the results of operations for
the three and six months ended June 30, 2000 and 1999 and the
statements of cash flows for the six months ended June 30, 2000 and
1999. In accordance with generally accepted accounting principles for
interim financial information, these statements do not include certain
information and footnote disclosures required by generally accepted
accounting principles for complete annual financial statements.
Financial information as of December 31, 1999 has been derived from the
audited Consolidated Financial Statements of Fifth Third Bancorp (the
"Registrant"). The results of operations and statements of cash flows
for the three and six months ended June 30, 2000 and 1999 are not
necessarily indicative of the results to be expected for the full year.
For further information, refer to the Consolidated Financial Statements
and footnotes thereto for the year ended December 31, 1999, included in
the Registrant's Annual Report on Form 10-K.
2. On June 20, 2000, the Registrant's Board of Directors approved a
three-for-two stock split to be effected in the form of a stock
dividend. The additional shares resulting from the stock split were
distributed on July 14, 2000 to shareholders of record as of June 30,
2000. Share and per share amounts reflected throughout the consolidated
financial statements and notes thereto have been retroactively restated
for the stock split.
3. On June 20, 2000, the Registrant's Board of Directors authorized the
Registrant to purchase in the open market up to five percent of the
outstanding shares of Fifth Third common stock. The form and amount of
such repurchase will be at the discretion and final determination of
executive management. The authorization will remain in effect until all
shares authorized have been repurchased, unless sooner terminated by
the Registrant's Board of Directors. As of June 30, 2000 no shares had
yet been repurchased.
4. Financial data for the period ended June 30, 1999 has been restated to
reflect the fourth quarter 1999 mergers with Peoples Bank Corporation
of Indianapolis ("Peoples") and CNB Bancshares, Inc. ("CNB"), both
publicly-traded bank holding companies with $675 million and $7.9
billion in total assets, respectively. Both transactions were tax-free,
stock-for-stock exchanges accounted for as pooling-of-interests. In
connection with these acquisitions the Registrant issued approximately
5.1 million shares and 45.6 million shares of Fifth Third common stock
for all the outstanding shares of Peoples and CNB, respectively. The
contributions of Peoples and CNB to consolidated net interest income,
other operating income and net income for the three and six months
ended June 30, 1999, prior to the mergers, were as follows:
7
<PAGE> 8
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
=================================================================================================================
THREE MONTHS ENDED JUNE 30, 1999
PEOPLES BANK
FIFTH CORPORATION CNB
THIRD OF BANCSHARES,
($000'S) BANCORP INDIANAPOLIS INC. OTHER COMBINED
=================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Interest Income $280,473 $ 6,436 $ 63,843 $ 1,569 $352,321
Other Operating Income 187,352 2,553 31,515 (208) 221,212
Net Income 161,556 2,522 23,891 (7,797) 180,172
=================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
=================================================================================================================
PEOPLES BANK
FIFTH CORPORATION CNB
THIRD OF BANCSHARES,
($000'S) BANCORP INDIANAPOLIS INC. OTHER COMBINED
=================================================================================================================
<S> <C> <C> <C> <C> <C>
Net Interest Income $550,667 $12,673 $123,965 $ 4,111 $691,416
Other Operating Income 362,318 4,341 61,322 (175) 427,806
Net Income 312,003 4,503 48,534 (8,526) 356,514
=================================================================================================================
</TABLE>
The combined results are not necessarily indicative of the results that
would have occurred had the acquisitions been consummated in the past
or which might be attained in the future. During the second quarter of
2000, the Registrant incurred additional merger-related costs and
special charges in connection with the integration of CNB totaling
$33,548,000 ($23,057,000 after tax, or $.05 per diluted share). The
merger-related costs consist of net employee-related obligations and
conversion expenses, and the special charges relate to the
restructuring of certain investment securities.
5. For the first six months of 2000, the Registrant paid $883,740,000 in
interest and $15,000,000 in Federal income taxes. For the same period
in 1999, the Registrant paid $618,077,000 in interest and $99,806,000
in Federal income taxes. During the first six months of 2000 and 1999,
the Registrant had noncash investing activities consisting of the
securitization of $850,261,000 and $582,949,000 of residential mortgage
loans, respectively.
6. In June 1998, the Financial Accounting Standards Board issued Statement
of Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities," effective for all fiscal periods
beginning after June 15, 1999. In June 1999, the FASB issued SFAS No.
137, "Accounting for Derivative Instruments and Hedging
Activities-Deferral of the Effective Date of FASB Statement No. 133,"
to amend SFAS No. 133 to be effective for all fiscal years beginning
after June 15, 2000. SFAS No. 133 establishes accounting and reporting
standards for derivative instruments and hedging activities, requiring
recognition of all derivatives as either assets or liabilities in the
statement of financial condition and measurement of those instruments
at fair value. The adoption of SFAS No. 133 is not expected to have
a material effect on the Registrant's consolidated statement of
financial condition.
8
<PAGE> 9
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. In accordance with SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information," the Registrant has determined its
principal segments to be retail banking, commercial banking, investment
advisory services and data processing. Retail banking provides a full
range of deposit products and consumer loans and leases. Commercial
banking offers services to business, government and professional
customers. Investment advisory services provides a full range of
investment alternatives for individuals, companies and not-for-profit
organizations. Data processing, through Midwest Payment Systems
("MPS"), provides electronic funds transfer ("EFT") services, merchant
transaction processing, operates the Registrant's Jeanie ATM network
and provides other data processing services to affiliated and
unaffiliated customers. General corporate and other includes the
investment portfolio, certain non-deposit funding, unassigned equity,
the net effect of funds transfer pricing and other items not allocated
to operating segments.
Total revenues exclude securities gains and losses. Results of
operations and selected financial information by operating segment for
the three and six months ended June 30, 2000 and 1999 are as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED INVESTMENT GENERAL
JUNE 30, COMMERCIAL RETAIL ADVISORY DATA ACQUIRED CORPORATE
($000'S) BANKING BANKING SERVICES PROCESSING(a) ENTITIES AND OTHER ELIMINATIONS(a) TOTAL
================================================================================================================================
2000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Revenues $157,281 $315,601 $ 63,267 $ 60,672 $ -- $ 20,809 $(4,689) $ 612,941
--------------------------------------------------------------------------------------------------------------------------------
Net Income $ 60,649 $102,865 $ 21,025 $ 18,921 $ -- $(11,372) $ -- $ 192,088
================================================================================================================================
1999
Total Revenues $124,748 $238,755 $ 53,833 $ 44,389 $105,380 $ 9,141 $(3,701) $ 572,545
--------------------------------------------------------------------------------------------------------------------------------
Net Income $ 51,363 $ 76,218 $ 16,872 $ 14,456 $ 18,616 $ 2,647 $ -- $ 180,172
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
THREE MONTHS ENDED INVESTMENT GENERAL
JUNE 30, COMMERCIAL RETAIL ADVISORY DATA ACQUIRED CORPORATE
($000'S) BANKING BANKING SERVICES PROCESSING(a) ENTITIES AND OTHER ELIMINATIONS(a) TOTAL
================================================================================================================================
2000
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Total Revenues $310,247 $613,891 $125,633 $115,020 $ -- $ 60,089 $(8,854) $1,216,026
--------------------------------------------------------------------------------------------------------------------------------
Net Income $122,013 $194,800 $ 39,878 $ 35,814 $ -- $ 5,952 $ -- $ 398,457
================================================================================================================================
1999
Total Revenues $238,253 $478,393 $103,944 $ 84,510 $205,536 $ 12,871 $(6,905) $1,116,602
--------------------------------------------------------------------------------------------------------------------------------
Net Income $ 98,647 $157,239 $ 32,489 $ 26,209 $ 44,511 $ (2,581) $ -- $ 356,514
================================================================================================================================
</TABLE>
(a) Data Processing services revenues provided to the banking segments by MPS
are eliminated in the Consolidated Statements of Income.
There were no material changes in the identifiable assets that were
disclosed in the Registrant's December 31, 1999 Annual Report on Form
10-K.
9
<PAGE> 10
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. The Registrant has elected to present the disclosures required by
SFAS No. 130, "Reporting Comprehensive Income," in the Consolidated
Statement of Changes in Shareholders' Equity on page 6. The caption
"Net Income and Nonowner Changes in Equity" represents total
comprehensive income as defined in the statement. Disclosure of the
reclassification adjustments, related tax effects allocated to
nonowner changes in equity and accumulated nonowner changes in equity
for the six months are as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
($000'S) 2000 1999
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Reclassification Adjustments, Before Tax
---------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Losses Arising During Period $ (53,120) (274,712)
Reclassification Adjustment for Gains Included in Net Income 362 2,620
---------------------------------------------------------------------------------------------------------------------------
Net Unrealized Losses on Securities Available for Sale $ (52,758) (272,092)
---------------------------------------------------------------------------------------------------------------------------
Related Tax Effects
---------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Losses Arising During Period $ 14,705 95,874
Reclassification Adjustment for Gains Included in Net Income (127) (914)
---------------------------------------------------------------------------------------------------------------------------
Net Unrealized Losses on Securities Available for Sale $ 14,578 94,960
---------------------------------------------------------------------------------------------------------------------------
Reclassification Adjustments, Net of Tax
---------------------------------------------------------------------------------------------------------------------------
Change in Unrealized Losses Arising During Period $ (38,415) (178,838)
Reclassification Adjustment for Gains Included in Net Income 235 1,706
---------------------------------------------------------------------------------------------------------------------------
Net Unrealized Losses on Securities Available for Sale $ (38,180) (177,132)
---------------------------------------------------------------------------------------------------------------------------
Accumulated Nonowner Changes in Equity
---------------------------------------------------------------------------------------------------------------------------
Beginning Balance-Unrealized Holding Gains (Losses) on
Securities Available for Sale $(224,516) 94,720
Current Period Change (38,180) (177,132)
---------------------------------------------------------------------------------------------------------------------------
Ending Balance-Unrealized Holding Losses on Securities
Available for Sale $(262,696) (82,412)
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
10
<PAGE> 11
ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. The reconciliation of earnings per share to earnings per diluted share
follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JUNE 30, 2000 1999
===========================================================================================================================
NET AVERAGE PER-SHARE NET AVERAGE PER-SHARE
($000'S) INCOME SHARES AMOUNT INCOME SHARES AMOUNT
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
EPS
Income Available to
Common Shareholders $192,088 464,740 $0.41 $180,172 456,295 $0.40
EFFECT OF DILUTIVE SECURITIES
Stock Options 7,156 8,709
Interest on 6% Convertible
Subordinated Debentures due 2028,
Net of Applicable Income Taxes 1,640 4,416 1,640 4,416
---------------------------------------------------------------------------------------------------------------------------
EARNINGS PER DILUTED SHARE
Income Available to
Common Shareholders
Plus Assumed Conversions $193,728 476,312 $0.41 $181,812 469,420 $0.39
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 2000 1999
===========================================================================================================================
NET AVERAGE PER-SHARE NET AVERAGE PER-SHARE
($000'S) INCOME SHARES AMOUNT INCOME SHARES AMOUNT
===========================================================================================================================
<S> <C> <C> <C> <C> <C> <C>
EPS
Income Available to
Common Shareholders $398,457 464,260 $0.86 $356,514 455,515 $0.78
EFFECT OF DILUTIVE SECURITIES
Stock Options 6,730 8,945
Interest on 6% Convertible
Subordinated Debentures due 2028,
Net of Applicable Income Taxes 3,280 4,416 3,280 4,416
---------------------------------------------------------------------------------------------------------------------------
EARNINGS PER DILUTED SHARE
Income Available to
Common Shareholders
Plus Assumed Conversions $401,737 475,406 $0.85 $359,794 468,876 $0.77
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
11
<PAGE> 12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The following is management's discussion and analysis of certain significant
factors which have affected the Registrant's financial condition and results of
operations during the periods included in the Consolidated Financial Statements
which are a part of this filing.
This report includes forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended that involve inherent risks and
uncertainties. A number of important factors could cause actual results to
differ materially from those in the forward-looking statements. Those factors
include the economic environment, competition, products and pricing in
geographic and business areas in which the Registrant operates, prevailing
interest rates, changes in government regulations and policies affecting
financial services companies, credit quality and credit risk management, changes
in the banking industry including the effects of consolidation resulting from
possible mergers of financial institutions, acquisitions and integration of
acquired businesses. The Registrant undertakes no obligation to release
revisions to these forward-looking statements or reflect events or circumstances
after the date of this report.
RESULTS OF OPERATIONS
The Registrant's operating income was $215.1 million for the second quarter of
2000 and $ 421.5 million for the first six months of 2000, up 19.4 percent and
18.2 percent, respectively, compared to $180.2 million and $356.5 million for
the same periods last year. Operating income per diluted share was $.46 for the
second quarter, up 17.9 percent over last year's $.39, and $.89 for the six
months, up 15.6 percent over 1999's $.77.
Operating income, in 2000, excludes nonrecurring pretax charges of $33.5 million
resulting from the completion of systems integration of CNB Bancshares, Inc.
("CNB"). The effect of these charges was to reduce net income by $23.1 million,
or $.05 per diluted share. Including the nonrecurring charges, net income
totaled $192.1 million, or $.41 per diluted share, during the second quarter and
$398.5 million, or $.85 per diluted share, for the six-month period.
Net interest income on a fully taxable equivalent basis for the second quarter
of 2000 was $387.3 million, a 4.5 percent increase over $370.7 million for the
same period last year. For the six-month period, net interest income on a fully
taxable equivalent basis increased to $772.8 million, or 6.2 percent, from the
$727.5 million reported in the same period last year. The increase in both the
second quarter and the six-month period resulted principally from 14.7 percent
and 15.4 percent growth, respectively, in average interest-earning assets.
During the second quarter, net interest margin declined to 3.74 percent, or 35
basis points ("bp"), from 4.09 percent during the 1999 second quarter. For the
six-month period, net interest margin declined to 3.78 percent, or 34bp, from
4.12 percent in the same period in 1999. The yield on interest-earning assets
improved 53bp over the 1999 second quarter and 36bp over the first six months of
1999, as double-digit new loan growth at higher interest rates caused assets to
reprice upward. The positive effects of higher asset yields in both the three
and six months ended June 30, 2000 were offset by 93bp and 76bp increases,
respectively, in funding cost, resulting from faster repricing of borrowed funds
and higher deposit rates to retain accounts.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
Credit quality improved overall due to continued management initiatives to
proactively identify and resolve problem credits. The provision for credit
losses was $26.3 million in the 2000 second quarter compared to $35.3 million in
the same period last year. Net charge-offs declined 24.8 percent to $17.2
million from $22.9 million in the 1999 second quarter primarily due to a 29.4
percent improvement in loan and lease losses, partially offset by a 39.3 percent
decrease in recoveries. Net charge-offs for the 2000 second quarter, as a
percent of average loans and leases outstanding, declined 13bp to .27 percent
from .40 percent in the same period last year. Nonperforming assets as a
percentage of total loans, leases and other real estate owned was .30 percent at
June 30, 2000, down 7bp from .37 percent at June 30, 1999. Underperforming
assets were $167.5 million at June 30, 2000, or .64 percent of total loans,
leases and other real estate owned, down 7bp from the $168.7 million, or .71
percent, at June 30, 1999.
The Registrant maintains a reserve to absorb probable loan and lease losses
inherent in the portfolio. Credit losses are charged and recoveries are credited
to the reserve. Provisions for credit losses are credited to the reserve in an
amount that management considers necessary to maintain an appropriate level of
reserves given the estimated losses in the portfolio.
The reserve is based on ongoing quarterly assessments of the probable estimated
losses inherent in the loan and lease portfolio. In determining the appropriate
level of reserves, the Registrant estimates losses using a range derived from
"base" and "conservative" estimates. The Registrant's methodology for assessing
the appropriate reserve level consists of several key elements.
Larger commercial loans that exhibit potential or observed credit weaknesses are
subject to individual review. Where appropriate, reserves are allocated to
individual loans based on management's estimate of the borrower's ability to
repay the loan given the availability of collateral, other sources of cash flow
and legal options available to the Registrant.
Included in the review of individual loans are those that are impaired as
provided in SFAS No. 114, "Accounting by Creditors for Impairment of a Loan."
Any reserves for impaired loans are measured based on the present value of
expected future cash flows discounted at the loan's effective interest rate or
fair value of the underlying collateral. The Registrant evaluates the
collectibility of both principal and interest when assessing the need for loss
accrual.
Historical loss rates are applied to other commercial loans not subject to
specific reserve allocations. The loss rates are derived from a migration
analysis, which computes the net charge-offs experience sustained on loans
according to their internal risk grade. These grades encompass nine categories
that define a borrower's ability to repay their loan obligations.
Homogenous loans, such as consumer installment, residential mortgage loans and
automobile leases are not individually risk graded. Reserves are established for
each pool of loans based on the expected net-charge-offs for one year. Loss
rates are based on the average net charge-off history by loan category.
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
An unallocated reserve is maintained to recognize the imprecision in estimating
and measuring loss when evaluating reserves for individual loans or pools of
loans.
Historical loss rates for commercial and consumer loans may be adjusted for
significant factors that, in management's judgement, reflect the impact of any
current conditions on loss recognition. Factors which management considers in
the analysis include the effects of the national and local economies, trends in
the nature and volume of loans (delinquencies, charge-offs, nonaccrual and
problem loans), changes in the internal lending policies and credit standards,
collection practices and examination results from bank regulatory agencies and
the Registrant's internal credit examiners.
Reserves on individual loans and historical loss rates are reviewed quarterly
and adjusted as necessary based on changing borrower and/or collateral
conditions and actual collection and charge-off experience.
Total other operating income, excluding securities gains, for the second quarter
of 2000 increased 12.7 percent to $248.2 million compared to $220.2 million in
the second quarter of 1999, and increased to $487.9 million for the first six
months of 2000, or 14.7 percent over the same period last year. Compared to the
same periods in 1999, data processing income increased 35.3 percent, to $56.7
million, in the 2000 second quarter and 34 percent, to $107.6 million, in the
six-month period. This growth reflects increases in electronic funds transfers
("EFT"), higher transaction volume from increased debit and ATM card usage and
expansion of business-to-business e-commerce.
During the three and six months ended June 30, 2000, service charges on deposits
increased 29 percent, to $55.3 million, and 25 percent, to $103 million,
respectively, over the comparable 1999 periods, reflecting the success of new
account campaigns and treasury management services. Compared to the comparable
1999 periods, investment advisory income increased 4.6 percent, to $49.5
million, in the second quarter of 2000 and 10.3 percent, to $100.2 million, in
the six-month period. These increases reflect strong personal trust account
sales growth, coupled with the effects of lower equity market performance on
personal trust and brokerage revenue.
Operating expenses in the 2000 second quarter include a nonrecurring pretax
charge of $33.5 million for merger-related costs and special charges incurred in
connection with the integration of CNB. The merger-related costs consist of net
employee-related obligations and conversion expenses, and the special charges
relate to the restructuring of certain investment securities. Excluding this
nonrecurring charge, the overhead ratio (operating expenses divided by the sum
of taxable equivalent net interest income and other operating income) was 42.4
percent for the quarter and 43.1 percent for the six-month period. These ratios
represent a decrease from the 45.1 percent and 45.2 percent achieved in the
three and six months ended June 30, 1999, respectively, reflecting revenue
growth at a rate that outpaced expense increases. Total operating expenses,
excluding the merger-related and special charges, increased 1.3 percent, to
$269.7 million, during the quarter and increased 4.4 percent, to $543.6 million,
for the six-month period. Reflecting the completion of the systems and
processing integration of the CNB and Peoples Bank Corporation of Indianapolis
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
mergers, salaries, incentives and benefits decreased 0.8 percent in the second
quarter of 2000 and increased 4 percent during the six-month period.
Productivity gains from the merger integration offset sales force increases in
other markets and related variable compensation from successful sales results.
Net occupancy expense increased to $19.4 million and $38.6 million,
respectively, for the three and six months ended June 30, 2000, while total
other operating expenses increased 2.6 percent, to $105.4 million, for the
quarter and 4.1 percent, to $211.9 million, for the six-month period.
FINANCIAL CONDITION
The Registrant's balance sheet remains strong with high-quality assets and solid
capital levels. Total assets were $44.7 billion at June 30, 2000 compared to
assets of $41.6 billion at December 31, 1999 and $40 billion at June 30, 1999,
an increase of 7.5 percent and 11.8 percent, respectively. On an operating
basis, return on average equity was 20.8 percent and return on average assets
was 1.94 percent for the second quarter of 2000 compared to 18.6 percent and
1.86 percent, respectively, for the same quarter of last year.
Net interest income growth continues to be fueled by double-digit
interest-earning asset growth, partially offset by a decline in net interest
margin. Interest-earning assets increased to $41.7 billion for the second
quarter of 2000, an increase of $4.9 billion, or 13.2 percent, over the same
period last year and $3.3 billion, or 8.6 percent, over 1999 year-end.
Interest-earning assets increased primarily due to growth in securities
available for sale, coupled with growth in commercial loans and leases and
consumer loans and leases.
Deposits grew to $27.5 billion at June 30, 2000, an increase of $1.9 billion, or
7.3 percent, over the same period last year and $1.4 billion, or 5.3 percent,
over 1999 year-end. Deposit growth during the period is primarily attributable
to the success of campaigns emphasizing customer deposit accounts.
LIQUIDITY AND CAPITAL RESOURCES
The maintenance of an adequate level of liquidity is necessary to ensure
sufficient funds are available to meet customer loan demand and deposit
withdrawals. The banking subsidiaries' liquidity sources consist of short-term
marketable securities, maturing loans and federal funds loaned and selected
securitizable loan assets. Liquidity has also been obtained through liabilities
such as customer-related core deposits, funds borrowed, certificates of deposit
and public funds deposits.
At June 30, 2000, shareholders' equity was $4.325 billion compared to $3.866
billion at June 30, 1999, an increase of $459 million, or 11.9 percent.
Shareholders' equity as a percentage of total assets as of June 30, 2000 was
9.67 percent. The Federal Reserve Board has adopted risk-based capital
guidelines which assign risk weightings to assets and off-balance sheet items
and also define and set minimum capital requirements (risk-based capital
ratios). The guidelines also define "well-
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS (CONTINUED)
capitalized" ratios of Tier 1, total capital and leverage as 6 percent, 10
percent and 5 percent, respectively. The Registrant exceeded these
"well-capitalized" ratios at June 30, 2000 and 1999. At June 30, 2000, the
Registrant had a Tier 1 risk-based capital ratio of 12.59 percent, a total
risk-based capital ratio of 14.36 percent and a leverage ratio of 10.10 percent.
At June 30, 1999, the Registrant had a Tier 1 risk-based capital ratio of 12.98
percent, a total risk-based capital ratio of 14.97 percent and a leverage ratio
of 10.03 percent.
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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Interest rate risk management focuses on maintaining consistent growth in net
interest income within Board-approved policy limits. The Registrant uses an
earnings simulation model to analyze net interest income sensitivity to
movements in interest rates. Given an immediate, sustained 200 basis point
upward shock to the yield curve used in the simulation model, it is estimated
net interest income for the Registrant would decrease by 8.05 percent over one
year and decrease by 3.31 percent over two years. A 200 basis point immediate,
sustained downward shock in the yield curve would increase net interest income
by an estimated 6.21 percent over one year and decrease net interest income by
an estimated 1.34 percent over two years.
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PART II. OTHER INFORMATION
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) List of Exhibits
(3)(i) Amended Articles of Incorporation, as amended,
incorporated by reference to the Registrant's
Quarterly Report on Form 10-Q for the quarter ended
March 31, 2000
(3)(ii) Code of Regulations, as amended, incorporated by
reference to Registrant Registration Statement, on
Form S-4, Registration No. 33-63966
(27) Financial Data Schedules for the Six Months Ended
June 30, 2000
(b) Reports on Form 8-K
The Registrant filed a report on Form 8-K dated June 21, 2000 related
to its Board of Directors' June 20, 2000 declaration of 1) a
three-for-two stock split in the form of a stock dividend payable July
14, 2000 to shareholders of record as of June 30, 2000, and 2) an
increase in the quarterly cash dividend to $.18 per share on a
post-split basis.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Fifth Third Bancorp
-------------------
Registrant
Date: August 14, 2000 /s/ Neal E. Arnold
------------------
Neal E. Arnold
Executive Vice President and
Chief Financial Officer
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