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 March 31, 2001 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 575,506,054 shares of the Registrant's Common Stock, without par value, outstanding as of April 30, 2001.
2 FIFTH THIRD BANCORP INDEX <TABLE> <S> <C> Part I. Financial Information Item 1. Financial Statements Consolidated Balance Sheets - March 31, 2001 and 2000 and December 31, 2000 3 Consolidated Statements of Income - Three Months Ended March 31, 2001 and 2000 4 Consolidated Statements of Cash Flows - Three Months Ended March 31, 2001 and 2000 5 Consolidated Statements of Changes in Shareholders' Equity - Three Months Ended March 31, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 - 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 11 - 14 Item 3. Quantitative and Qualitative Disclosures About Market Risk 15 Part II. Other Information 16 - 18 </TABLE> 2
3 FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) <TABLE> <CAPTION> - ------------------------------------------------------------------------------------------------------------------------ MARCH 31, December 31, March 31, ($000'S) 2001 2000 2000 - ------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> ASSETS - ------------------------------------------------------------------------------------------------------------------------ Cash and Due from Banks $ 754,924 984,729 947,525 Securities Available for Sale (a) 15,805,505 15,601,590 14,875,146 Securities Held to Maturity (b) 22,444 26,990 139,192 Other Short-Term Investments 121,068 198,013 353,197 Loans Held for Sale 893,905 553,264 522,088 Loans and Leases Commercial Loans 6,957,006 6,643,908 6,624,190 Construction Loans 1,570,206 1,483,768 1,085,521 Commercial Mortgage Loans 3,424,295 2,986,428 2,506,964 Commercial Lease Financing 2,874,810 2,751,987 2,293,173 Residential Mortgage Loans 3,745,237 4,034,150 4,796,426 Consumer Loans 6,174,437 6,079,216 5,350,504 Consumer Lease Financing 3,065,990 2,957,024 3,674,307 Unearned Income (1,044,895) (983,680) (919,782) Reserve for Credit Losses (395,693) (383,495) (373,337) - ------------------------------------------------------------------------------------------------------------------------ Total Loans and Leases 26,371,393 25,569,306 25,037,966 Bank Premises and Equipment 540,094 521,396 489,918 Accrued Income Receivable 372,311 390,169 317,760 Other Assets 2,133,103 2,011,449 1,705,973 - ------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 47,014,747 45,856,906 44,388,765 - ------------------------------------------------------------------------------------------------------------------------ LIABILITIES - ------------------------------------------------------------------------------------------------------------------------ Deposits Demand $ 4,698,410 4,705,062 3,929,553 Interest Checking 5,753,376 5,386,380 4,894,269 Savings and Money Market 5,880,858 5,463,609 5,303,241 Time Deposits 12,391,453 15,393,729 14,858,634 - ------------------------------------------------------------------------------------------------------------------------ Total Deposits 28,724,097 30,948,780 28,985,697 Federal Funds Borrowed 3,580,027 1,164,553 5,279,410 Short-Term Bank Notes - - 15,000 Other Short-Term Borrowings 2,756,828 3,094,738 2,604,210 Accrued Taxes, Interest and Expenses 1,481,585 1,374,950 850,726 Other Liabilities 375,315 348,596 486,185 Long-Term Debt 4,723,442 3,861,520 1,842,986 Guaranteed Preferred Beneficial Interest in Convertible Subordinated Debentures 172,500 172,500 172,500 - ------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES 41,813,794 40,965,637 40,236,714 - ------------------------------------------------------------------------------------------------------------------------ SHAREHOLDERS' EQUITY (c) - ------------------------------------------------------------------------------------------------------------------------ Common Stock (d) 1,046,875 1,033,747 1,031,233 Capital Surplus 683,429 590,683 582,532 Retained Earnings 3,421,127 3,241,975 2,836,473 Unrealized Gains (Losses) on Securities Available for Sale 49,522 25,977 (298,187) Treasury Stock - (1,113) - - ------------------------------------------------------------------------------------------------------------------------ TOTAL SHAREHOLDERS' EQUITY 5,200,953 4,891,269 4,152,051 - ------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY $ 47,014,747 45,856,906 44,388,765 - ------------------------------------------------------------------------------------------------------------------------ </TABLE> (a) Amortized cost: March 31, 2001 - $15,729,000, December 31, 2000 - $15,562,000 and March 31, 2000 - $15,340,000. (b) Market value: March 31, 2001 - $22,000, December 31, 2000 - $27,000 and March 31, 2000 - $139,000. (c) 500,000 shares of no par value preferred stock are authorized of which none had been issued as of March 31, 2001. (d) Stated value $2.22 per share; authorized at March 31, 2001 - 1,300,000,000, December 31, 2000 and March 31, 2000 - 650,000,000; outstanding at March 31, 2001 - 471,565,129, December 31, 2000 - 465,651,949 (excludes 21,875 treasury shares) and March 31, 2000 - 464,519,307. See Notes to Consolidated Financial Statements. 3
4 FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED) <TABLE> <CAPTION> - ---------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, ------------------------------ ($000'S) 2001 2000 - ---------------------------------------------------------------------------------------- <S> <C> <C> INTEREST INCOME Interest and Fees on Loans and Leases $ 554,029 507,287 Interest on Securities Taxable 252,355 247,465 Exempt from Income Taxes 9,007 9,373 - ---------------------------------------------------------------------------------------- Total Interest on Securities 261,362 256,838 Interest on Other Short-Term Investments 2,257 3,055 - ---------------------------------------------------------------------------------------- Total Interest Income 817,648 767,180 - ---------------------------------------------------------------------------------------- INTEREST EXPENSE Interest on Deposits Interest Checking 39,036 31,546 Savings and Money Market 53,664 42,779 Time Deposits 191,191 171,018 - ---------------------------------------------------------------------------------------- Total Interest on Deposits 283,891 245,343 Interest on Federal Funds Borrowed 33,145 72,072 Interest on Short-Term Bank Notes - 15,207 Interest on Other Short-Term Borrowings 37,005 37,538 Interest on Long-Term Debt and Notes 70,672 33,576 - ---------------------------------------------------------------------------------------- Total Interest Expense 424,713 403,736 - ---------------------------------------------------------------------------------------- NET INTEREST INCOME 392,935 363,444 Provision for Credit Losses 30,290 21,352 - ---------------------------------------------------------------------------------------- NET INTEREST INCOME AFTER PROVISION FOR CREDIT LOSSES 362,645 342,092 OTHER OPERATING INCOME Data Processing Income 66,745 50,920 Service Charges on Deposits 56,168 47,655 Investment Advisory Income 55,735 50,763 Other Service Charges and Fees 109,608 90,303 Securities Gains 4,236 522 - ---------------------------------------------------------------------------------------- Total Other Operating Income 292,492 240,163 - ---------------------------------------------------------------------------------------- OPERATING EXPENSES Salaries, Wages and Incentives 118,666 109,929 Employee Benefits 20,397 25,681 Equipment Expenses 13,042 12,685 Net Occupancy Expenses 21,193 19,143 Other Operating Expenses 120,360 106,462 - ---------------------------------------------------------------------------------------- Total Operating Expenses 293,658 273,900 - ---------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 361,479 308,355 Applicable Income Taxes 117,175 101,986 - ---------------------------------------------------------------------------------------- NET INCOME $ 244,304 206,369 - ---------------------------------------------------------------------------------------- Per Share: Earnings $ 0.52 0.45 Diluted Earnings $ 0.51 0.44 Cash Dividends $ 0.20 0.16 - ---------------------------------------------------------------------------------------- Average Shares (000's): Outstanding 467,532 463,780 Diluted 482,023 474,623 - ---------------------------------------------------------------------------------------- </TABLE> See Notes to Consolidated Financial Statements. 4
5 FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) <TABLE> <CAPTION> - --------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, ------------------------------- ($000'S) 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> OPERATING ACTIVITIES Net Income $ 244,304 206,369 Adjustments to Reconcile Net Income to Net Cash Provided by (Used in) Operating Activities Provision for Credit Losses 30,290 21,352 Depreciation Amortization and Accretion 32,633 27,969 Provision for Deferred Income Taxes 22,323 21,120 Realized Securities Gains (5,643) (599) Realized Securities Losses 1,407 78 Proceeds from Sales of Residential Mortgage Loans Held for Sale 1,076,938 677,962 Net Gains on Sales of Loans (8,654) (2,137) Increase in Residential Mortgage Loans Held for Sale (1,403,951) (900,636) Decrease in Accrued Income Receivable 23,554 3,265 Increase in Other Assets (79,158) (100,571) Increase in Accrued Taxes, Interest and Expenses 64,046 84,532 Increase (Decrease) in Other Liabilities 5,614 (60,455) - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES 3,703 (21,751) - --------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Proceeds from Sales of Securities Available for Sale 3,991,377 959,690 Proceeds from Calls, Paydowns and Maturities of Securities Available for Sale 1,153,877 350,130 Purchases of Securities Available for Sale (4,571,514) (3,290,701) Proceeds from Calls, Paydowns and Maturities of Securities Held to Maturity 4,546 7 Purchases of Securities Held to Maturity - (10,057) Decrease in Other Short-Term Investments 76,945 2,250 Increase in Loans and Leases (576,575) (716,342) Purchases of Bank Premises and Equipment (26,989) (25,743) Proceeds from Disposal of Bank Premises and Equipment 876 4,340 Net Cash Paid in Acquisitions (16,976) - - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 35,567 (2,726,426) - --------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Increase in Core Deposits 551,340 182,470 Increase (Decrease) in CDs - $100,000 and Over, including Foreign (3,605,054) 2,869,667 Increase in Federal Funds Borrowed 2,364,659 2,307,555 Decrease in Short-Term Bank Notes - (1,302,400) Decrease in Other Short-Term Borrowings (356,943) (1,846,186) Proceeds from Issuance of Long-Term Debt and Notes 2,076,263 751,706 Repayment of Long-Term Debt (1,233,202) (422,016) Payment of Cash Dividends (83,810) (74,169) Exercise of Stock Options 13,534 13,903 Other 4,138 2,083 - --------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (269,075) 2,482,613 - --------------------------------------------------------------------------------------------------------------------------- DECREASE IN CASH AND DUE FROM BANKS (229,805) (265,564) CASH AND DUE FROM BANKS AT BEGINNING OF PERIOD 984,729 1,213,089 - --------------------------------------------------------------------------------------------------------------------------- CASH AND DUE FROM BANKS AT END OF PERIOD $ 754,924 947,525 - --------------------------------------------------------------------------------------------------------------------------- </TABLE> See Notes to Consolidated Financial Statements. 5
6 FIFTH THIRD BANCORP AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (UNAUDITED) <TABLE> <CAPTION> - -------------------------------------------------------------------------------------------------------------------------- THREE MONTHS ENDED MARCH 31, -------------------------------------- ($000'S) 2001 2000 - -------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> BALANCE AT DECEMBER 31 $ 4,891,269 4,077,031 Net Income 244,304 206,369 Nonowner Changes in Equity, Net of Tax: Change in Unrealized Gain (Losses) on Securities Available for Sale 23,545 (73,671) - -------------------------------------------------------------------------------------------------------------------------- Net Income and Nonowner Changes in Equity 267,849 132,698 Cash Dividends Declared: Fifth Third Bancorp (2001 - $.20 per share and 2000 - $ .16 per share) (94,377) (74,323) Stock Options Exercised Including Treasury Shares Issued 13,534 13,903 Other 122,678 2,742 - -------------------------------------------------------------------------------------------------------------------------- BALANCE AT MARCH 31 $ 5,200,953 4,152,051 - -------------------------------------------------------------------------------------------------------------------------- </TABLE> See Notes to Consolidated Financial Statements. 6
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 March 31, 2001 and 2000, the results of operations for the three months ended March 31, 2001 and 2000 and the statements of cash flows for the three months ended March 31, 2001 and 2000. In accordance with accounting principles generally accepted in the United States of America for interim financial information, these statements do not include certain information and footnote disclosures required for complete annual financial statements. Financial information as of December 31, 2000 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 months ended March 31, 2001 and 2000 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, 2000, included in the Registrant's Annual Report on Form 10-K. Certain reclassifications have been made to prior periods' consolidated financial statements and related notes to conform with the current period presentation. 2. BUSINESS COMBINATIONS: On January 2, 2001, the Registrant completed the acquisition of Resource Management, Inc., d.b.a. Maxus Investment Group ("Maxus"), an Ohio corporation. Maxus was a privately held diversified financial services company that provides investment management and brokerage services, headquartered in Cleveland, Ohio. In connection with this acquisition, the Registrant issued 470,162 shares of Fifth Third common stock and paid $18,090,000 in cash for the outstanding capital stock of Maxus. This transaction was accounted for as a purchase transaction. On March 9, 2001, the Registrant completed the acquisition of Capital Holdings, Inc. ("Capital Holdings") and its subsidiary, Capital Bank N.A., headquartered in Sylvania, Ohio. At December 31, 2000, Capital Holdings had total assets of $1.1 billion and total deposits of $874 million. In connection with this acquisition, the Registrant issued 4,505,385 shares of Fifth Third common stock for the outstanding common shares of Capital Holdings. The accompanying Consolidated Financial Statements of the Registrant as of and for the period ending March 31, 2001, have not been restated for Capital Holdings due to immateriality. In the fourth quarter of 2000, the Registrant entered into a merger agreement with Old Kent Financial Corporation ("Old Kent"), a publicly-traded financial holding company headquartered in Grand Rapids, Michigan. At December 31, 2000, Old Kent had total assets of $23.8 billion and total deposits of $17.4 billion. This transaction was subsequently completed on April 2, 2001 and the Registrant issued 103,716,638 shares of Fifth Third common stock, 7,250 shares of Fifth Third series D perpetual preferred stock and 2,000 shares of Fifth Third series E perpetual preferred stock to the shareholders of Old Kent. The accompanying Consolidated Financial Statements of the Registrant as of and for the period ending March 31, 2001, excludes the financial results of Old Kent. 7
8 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) The Capital and Old Kent transactions are tax-free, stock-for-stock exchanges to be accounted for as poolings-of-interests. 3. 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 paid 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. 4. On December 19, 2000, the Registrant's Board of Directors rescinded the authorization dated June 20, 2000 to purchase in the open market up to five percent of the outstanding shares of Fifth Third common stock. 5. For the first three months of 2001, the Registrant paid $441,043,000 in interest and $7,500,000 in Federal income taxes. For the same period in 2000, the Registrant paid $448,143,000 in interest and paid no Federal income taxes. During the first three months of 2001 and 2000, the Registrant had noncash investing activities consisting of the securitization of $583,481,000 and $254,004,000 of residential mortgage loans, respectively. 6. In September 2000, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities." The statement is effective for transfers and servicing of financial assets occurring after March 31, 2001, with certain disclosure and reclassification requirements effective for financial statements for fiscal years ending after December 15, 2000. Included in SFAS No. 140, which replaced SFAS No. 125 of the same name, are the accounting and reporting standards related to securitizations and Qualifying Special Purpose Entities ("QSPE"). The adoption of SFAS No. 140 did not have a material effect on the Registrant. 7. Effective January 1, 2001, the Registrant adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended, which establishes accounting and reporting standards for derivative instruments and hedging activities and requires recognition of all derivatives as either assets or liabilities in the statement of financial condition and measurement of those instruments at fair value. The accounting for changes in the fair value of a derivative instruments depends on the intended use of the derivative and the resulting designation. Adoption of the standard did not have a material effect on the Registrant. 8. 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 8
9 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 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 months ended March 31, 2001 and 2000 are as follows: <TABLE> <CAPTION> THREE MONTHS ENDED INVESTMENT GENERAL MARCH 31, COMMERCIAL RETAIL ADVISORY DATA CORPORATE ($000'S) BANKING BANKING SERVICES PROCESSING (a) AND OTHER ELIMINATIONS (a) TOTAL - -------------------------------------------------------------------------------------------------------------------- 2001 <S> <C> <C> <C> <C> <C> <C> <C> Total Revenues $ 185,537 $ 319,131 $ 66,887 $ 72,436 $ 42,892 $ (5,692) $ 681,191 - -------------------------------------------------------------------------------------------------------------------- Net Income $ 70,600 $ 102,233 $ 18,929 $ 22,921 $ 29,621 $ - $ 244,304 - -------------------------------------------------------------------------------------------------------------------- 2000 Total Revenues $ 152,966 $ 299,564 $ 60,627 $ 54,348 $ 39,745 $ (4,165) $ 603,085 - -------------------------------------------------------------------------------------------------------------------- Net Income $ 61,364 $ 92,776 $ 17,705 $ 16,893 $ 17,631 - $ 206,369 - -------------------------------------------------------------------------------------------------------------------- </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, 2000 Annual Report on Form 10-K. 9
10 ITEM 1. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. 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 three months are as follows: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, ($000'S) 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Reclassification Adjustments, Before Tax - --------------------------------------------------------------------------------------------------------------------------- Change in Unrealized Gains (Losses) Arising During Period $ 41,026 (114,532) Reclassification Adjustment for Gains Included in Net Income 4,236 522 - --------------------------------------------------------------------------------------------------------------------------- Net Unrealized Gains (Losses) on Securities Available for Sale $ 36,790 (114,010) - --------------------------------------------------------------------------------------------------------------------------- Related Tax Effects - --------------------------------------------------------------------------------------------------------------------------- Change in Unrealized Gains (Losses) Arising During Period $ 14,545 (40,522) Reclassification Adjustment for Gains Included in Net Income 1,300 183 - --------------------------------------------------------------------------------------------------------------------------- Net Unrealized Gains (Losses) on Securities Available for Sale $ 13,245 (40,339) - --------------------------------------------------------------------------------------------------------------------------- Reclassification Adjustments, Net of Tax - --------------------------------------------------------------------------------------------------------------------------- Change in Unrealized Gains (Losses) Arising During Period $ 26,481 (74,010) Reclassification Adjustment for Gains Included in Net Income 2,936 339 - --------------------------------------------------------------------------------------------------------------------------- Net Unrealized Gains (Losses) on Securities Available for Sale $ 23,545 (73,671) - --------------------------------------------------------------------------------------------------------------------------- Accumulated Nonowner Changes in Equity - --------------------------------------------------------------------------------------------------------------------------- Beginning Balance-Unrealized Holding Gains (Losses) on Securities Available for Sale $ 25,977 (224,516) Current Period Change 23,545 (73,671) - --------------------------------------------------------------------------------------------------------------------------- Ending Balance-Unrealized Holding Gains (Losses) on Securities Available for Sale $ 49,522 (298,187) - --------------------------------------------------------------------------------------------------------------------------- </TABLE> 10. The reconciliation of earnings per share to earnings per diluted share follows: <TABLE> <CAPTION> THREE MONTHS ENDED MARCH 31, 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- 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 $ 244,304 467,532 $ 0.52 $ 206,369 463,780 $ 0.45 EFFECT OF DILUTIVE SECURITIES Stock Options 10,075 6,427 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 $ 245,944 482,023 $ 0.51 $ 208,009 474,623 $ 0.44 - --------------------------------------------------------------------------------------------------------------------------- </TABLE> 10
11 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 net income was $244.3 million for the first three months of 2001, an 18 percent increase over last year's $206.4 million. Earnings per diluted share were $.51 for the first quarter of 2001, up 16 percent from $.44 for the same period last year. Net interest income on a fully taxable equivalent basis for the first quarter of 2001 was $412.7 million, a 7 percent increase over $385.5 million for the same period last year, resulting principally from a 4 percent growth in average interest-earning assets and a 15 basis points ("bp") increase in net interest margin, from 3.82 percent during the first quarter of 2000 to 3.97 percent in the first quarter 2001. The positive effect of a 24bp improvement in the yield on average interest-earning assets was offset by a 25bp increase in funding costs due to the repricing of borrowed funds and higher year-over-year deposit rates on existing accounts. The provision for credit losses was $30.3 million in the 2001 first quarter compared to $21.4 million in the same period last year and $23.1 million last quarter. Net charge-offs for the quarter were $30.9 million compared to $14.9 million in the 2000 first quarter and $27.1 million last quarter. Net charge-offs as a percent of average loans and leases outstanding increased 23bp to .47 percent from .24 percent in the same period last year. Nonperforming assets as a percentage of total loans, leases and other real estate owned was .39 percent at March 31, 2001 compared to .32 percent at March 31, 2000 and .39 percent last quarter. Underperforming assets were $190.4 million at March 31, 2001, or .71 percent of total loans, leases and other real estate owned, up 8bp compared to the $160.8 million, or .63 percent, at March 31, 2000 and the $187.1 million or .72 percent last quarter. 11
12 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) The Registrant maintains a reserve to absorb probable loan and lease losses inherent in the portfolio. The reserve for credit losses is maintained at a level the Registrant considers to be adequate to absorb probable loan and lease losses inherent in the portfolio, based on evaluations of the collectibility and historical loss experience of loans and leases. Credit losses are charged and recoveries are credited to the reserve. Provisions for credit losses are based on the Registrant's review of the historical credit loss experience and such factors which, in management's judgement, deserve consideration under existing economic conditions in estimating probable credit losses. The reserve is based on ongoing quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio. In determining the appropriate level of reserves, the 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 Statement of Financial Accounting Standards 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 a loss accrual. Historical loss rates are applied to other commercial loans not subject to specific reserve allocations. The loss rates are derived from a migration analysis, which computes the net charge-off experience sustained on loans according to their internal 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. 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. An unallocated reserve is maintained to recognize the imprecision in estimating and measuring loss when evaluating reserves for individual loans or pools of loans. Reserves on individual loans and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and charge-off experience. 12
13 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Total other operating income, excluding securities gains, increased 20 percent to $288.3 million in the first quarter of 2001, compared to $239.6 million in the first quarter 2000, with data processing income increasing 31 percent, to $66.7 million. Increases in electronic funds transfers ("EFT") and higher transaction volume from increased debit and ATM card usage, coupled with expansion of business-to-business e-commerce, contributed to the increase in data processing income. Investment advisory income increased 10 percent to $55.7 million in the first quarter of 2001 compared to $50.8 million in the same period last year. Personal trust revenue increased 8 percent over first quarter last year and brokerage fees increased 21 percent on the strength of a more productive sales force and increased market activity. Revenue from foundation and endowment services and custody services remains strong with double-digit growth rates across the board. Service charges on deposits increased 18 percent over the same period last year primarily due to the success of new account campaigns, while other service charges and fees grew 21 percent over the same period last year, reflecting an increase in mortgage loan servicing fees, a 36 percent increase in commercial banking fees and advances in credit card fees and loan and lease fees. The efficiency ratio (operating expenses divided by the sum of taxable equivalent net interest income and other operating income) was 41.9 percent for the first quarter of 2001, down from 43.8 percent in the same period last year. The improvement in the 2001 efficiency ratio was primarily due to increased revenues during the first quarter. Total operating expenses increased to $293.7 million in the 2001 first quarter, or 7 percent over the same period last year. Salaries, incentives and benefits increased 3 percent in the first quarter of 2001 to $139.1 million. Net occupancy expense increased to $21.2 million during the first quarter primarily due to rent expense incurred, while total other operating expenses increased 13 percent, to $120.4 million for the quarter. FINANCIAL CONDITION The Registrant's balance sheet remains strong with high-quality assets and solid capital levels. Total assets were $47 billion at March 31, 2001 compared to $45.9 billion at December 31, 2000 and $44.4 billion at March 31, 2000, an increase of 3 percent and 6 percent, respectively. Return on average equity was 19.6 percent and return on average assets was 2.18 percent for the first quarter of 2001 compared to 19.4 percent and 1.90 percent, respectively, for the same quarter of last year. Net interest income growth continues to be fueled by interest-earning asset mix and growth and an increase in net interest margin. Average interest-earning assets increased to $42.1 billion for the first quarter of 2001, an increase of $1.5 billion, or 4 percent, over the same period last year and $715 million, or 2 percent, over 2000 year-end. Average 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. 13
14 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (CONTINUED) Transaction account deposits grew 16 percent, or $2.2 billion, over the same period last year and $778 million, or 5 percent, over 2000 year-end. Deposits 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 March 31, 2001, shareholders' equity was $5.2 billion compared to $4.2 billion at March 31, 2000, an increase of $1 billion, or 25 percent. Shareholders' equity as a percentage of total assets as of March 31, 2001 was 11.1 percent. The Federal Reserve Board has adopted risk-based capital guidelines which assign risk weightings to assets and off-balance sheet items and also define and set minimum capital requirements (risk-based capital ratios). The guidelines also define "well-capitalized" ratios of Tier 1, total capital and leverage as 6 percent, 10 percent and 5 percent, respectively. The Registrant exceeded these "well-capitalized" ratios at March 31, 2001 and 2000. At March 31, 2001, the Registrant had a Tier 1 risk-based capital ratio of 13.03 percent, a total risk-based capital ratio of 14.76 percent and a leverage ratio of 10.65 percent. At March 31, 2000, the Registrant had a Tier 1 risk-based capital ratio of 11.62 percent, a total risk-based capital ratio of 13.38 percent and a leverage ratio of 9.52 percent. 14
15 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Interest rate risk management focuses on maintaining consistent growth in net interest income within Board-approved policy limits. The Registrant uses an earnings simulation model to analyze net interest income sensitivity to movements in interest rates. Given an immediate, sustained 200 basis point upward shock to the yield curve used in the simulation model, it is estimated net interest income for the Registrant would increase by 1.00 percent over one year and increase by 1.62 percent over two years. A 200 basis point immediate, sustained downward shock in the yield curve would decrease net interest income by an estimated 2.46 percent over one year and decrease net interest income by an estimated 6.16 percent over two years. 15
16 PART II. OTHER INFORMATION ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS 2(c) On January 2, 2001, the Registrant issued 470,162 shares of Fifth Third common stock to the shareholders of Maxus in connection with the acquisition of Maxus. These securities were issued pursuant to the exemptions contained in section 4(2) of the Securities Act of 1933, as amended and Rule 506 of Regulation D promulgated thereunder. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On March 20, 2001, the Registrant held a Special Meeting of Shareholders and its Annual Meeting of Shareholders for which the Board of Directors solicited proxies. At the Special Meeting and Annual Meeting, the shareholders adopted and approved all of the proposals stated in the Proxy Statements dated January 25, 2001 and February 9, 2001, respectively, which are incorporated herein by reference. The proposal voted on and approved by shareholders at the Special Meeting was as follows: 1. Adoption of an amended and restated agreement and plan of merger dated January 16, 2001 by and among Old Kent Financial Corporation, the Registrant and Fifth Third Financial Corporation and approval of the issuance of shares of Fifth Third common stock to the shareholders of Old Kent in the merger of Old Kent with and into Fifth Third Financial pursuant to the amended and restated plan and agreement of merger by vote of 370,506,682 for, 2,177,329 against and 2,869,036 withheld. The proposals voted on and approved by shareholders at the Annual Meeting were as follows: 1. Election of six (6) Class III Directors (Darryl F. Allen, Gerald V. Dirvin, Joseph H. Head, Jr., Allen M. Hill, Dr. Mitchel D. Livingston, and James E. Rogers) to serve until the Annual Meeting in 2004. 2. Approval of the proposal to amend Article Fourth of the Amended Articles of Incorporation, as amended, to increase the authorized number of shares of Common Stock of the Registrant, without par value, to 1,300,000,000 shares by vote of 380,048,183 for, 9,143,225 against and 2,236,019 withheld. 3. Approval of the proposal to amend Article II Section 11 of the Code of Regulations, as amended, to allow Shareholders to grant proxies by electronic and telephonic means by vote of 385,837,413 for, 3,399,309 against and 2,190,705 withheld. 4. Approval of the proposal to amend the Fifth Third Bancorp 1998 Long-Term Incentive Stock Plan to increase the number of shares of the Registrant's Common Stock eligible for issuance under the Long-Term Plan to 37,733,020 shares by vote of 357,388,944 for, 30,675,900 against and 3,362,583 withheld. 16
17 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS (CONTINUED) - ------------------------------------------------------------------------ 5. Approval of the proposal to approve the Fifth Third Bancorp Stock Option Gain Deferral Plan, including the issuance of up to 1,000,000 shares of the Registrant's Common Stock thereunder by vote of 370,271,402 for, 16,981,847 against and 4,174,178 withheld. 6. Approval of the proposal to approve The Fifth Third Bancorp Nonqualified Deferred Compensation Plan, including the issuance of up to 1,000,000 shares of the Registrant's Common Stock thereunder by vote of 372,862,903 for, 14,565,664 against and 3,998,860 withheld. 7. Approval of the proposal to appoint the firm of Deloitte & Touche LLP to serve as independent auditors for the Registrant for the year 2001 by vote of 386,340,857 for, 3,075,273 against and 2,011,297 withheld. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) List of Exhibits (3)(i) Amended Articles of Incorporation, as amended. (3)(ii) Code of Regulations, as amended. (b) Reports on Form 8-K The Registrant filed a report on Form 8-K/A dated January 30, 2001 related to 1) the Amended and Restated Agreement and Plan of Merger with and between Old Kent Financial Corporation and the Registrant; and 2) unaudited pro forma condensed combined financial information of Fifth Third giving effect to Fifth Third's then-pending acquisitions of both Old Kent Financial Corporation and Capital Holdings, Inc. The Registrant filed a report on Form 8-K dated March 6, 2001 related to financial information prepared to further assist investors, financial analysts and other interested parties in determining the effect the then-pending transaction with Old Kent Financial Corporation will have on Fifth Third's future results, Fifth Third prepared unaudited condensed pro forma financial statement information and supplemental financial data for the year ended December 31, 2000 and for the three months ended December 31, September 30, June 30 and March 31, 2000. 17
18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (CONTINUED) The Registrant filed a report on Form 8-K dated March 9, 2001 related to Fifth Third Bancorp and the U. S. Justice Department agreement that, as a condition to approving the merger of Old Kent Financial Corporation with Fifth Third Financial Corporation, six banking locations in areas where the two banks overlap will be sold. The Registrant filed a report on Form 8-K dated March 14, 2001 related to 1) the March 12, 2001 approval by the Federal Reserve Board of the then-pending merger of Fifth Third Bancorp and Old Kent Financial Corporation; and (2) the approval at a special meeting of Old Kent shareholders, held March 13, 2001, of the then-pending merger of Fifth Third Bancorp and Old Kent Financial Corporation. The Registrant filed a report on Form 8-K dated March 20, 2001 related to 1) financial statements and exhibits that included the Registrant's discussion of financial trends; and 2) Regulation FD Disclosure to assist investors, financial analysts and other interested parties in their analysis of Fifth Third Bancorp. 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: May 15, 2001 /s/ Neal E. Arnold ------------------- Neal E. Arnold Executive Vice President and Chief Financial Officer 18