Fifth Third Bancorp’s 2001 fourth quarter net income totaled $385,477,000, a 21 percent increase over fourth quarter 2000’s net income of $319,124,000. Fourth quarter earnings per diluted share were $.65, an increase of 18 percent over $.55 per share for the same period in 2000. For the year, operating income was $1,393,430,000, up 15 percent over 2000’s $1,207,126,000, resulting in operating earnings per diluted share of $2.37, an increase of 13 percent over last year’s $2.10. On an operating basis, 2001 return on average assets (ROA) was 1.97 percent and return on average equity (ROE) was 19.2 percent on an increased capital base, from 1.81 percent and 20.2 percent, respectively, in 2000. For the fourth quarter, ROA and ROE were 2.16 percent and 20.0 percent, respectively, compared to 1.87 percent and 20.4 percent in 2000’s fourth quarter. Fifth Third’s capital ratio improved throughout 2001 to 10.80 percent in the fourth quarter, comparing favorably to 9.18 percent in fourth quarter 2000.
“I would like to thank all of our employees for their hard work in producing another rewarding year for our shareholders. Their accomplishments have created an even stronger growth company for the future without interrupting our performance track record,” stated George A. Schaefer, Jr., President and CEO of Fifth Third Bancorp. “2001 was our 28th year of uninterrupted earnings increases, including the last 23 at double-digit growth rates. Earnings this quarter continued to be driven by strong revenue growth, an improved net interest margin and controlled credit quality that remains among the best in the industry despite the challenges of an uncertain external environment. The recognized financial strength of our balance sheet, the flexibility provided by $7.6 billion in equity capital, sales opportunities in both our new and existing markets and a culture of simply executing better on the basics serve to effectively position Fifth Third to continue to deliver consistent earnings growth.”
“In addition to delivering quality growth in our existing markets, our employees teamed up to execute flawlessly on several acquisitions in 2001, most notably Old Kent, the largest and most successful in our history. We are well on our way to achieving the financial objectives from these transactions and look forward to their continued earnings opportunities. More importantly, the fourth quarter and 2001 results prove that we are unwilling to compromise the financial performance and balance sheet quality that our shareholders expect in order to create these opportunities.”
Schaefer continued, “The last several months have brought a number of challenges to some of our competitors and the financial services industry in general. Hard work, a focused operating model and a conservative risk profile can never entirely insulate even the best performing companies. The foundation of our track record is not in operating with immunity from these challenges, but rather in maintaining the flexibility to respond without sacrificing the earnings our shareholders have come to expect. An investment in Fifth Third is defined by consistent, quality growth without regard for difficult credit cycles, a recessionary economy or other external factors. It is with a great deal of pride that we announce another year of record earnings and look forward to meeting the opportunities and challenges that 2002 will provide. We believe we made your company even stronger in terms of future growth prospects and safety.”
Operating earnings for 2001 and 2000 exclude nonrecurring pretax merger charges of $384 million and $99 million, respectively. The effect of these one-time charges in 2001 and 2000 was to reduce net income by $293.6 million, or $.50 per share, and $66.6 million, or $.12 per share, respectively. Operating earnings in 2001 also exclude an after tax charge for a nonrecurring change in accounting principle of $6.8 million or $.01 per share. Financial data for all prior periods have been restated for the acquisition of Old Kent Financial Corporation, accounted for as a pooling of interests. In general, the effects of the pooling lowered Fifth Third’s originally reported financial performance ratios and growth rates.
Outstanding Deposit Growth and Balance Sheet Trends
Successful sales and promotional campaigns for Retail and Commercial deposits produced a record number of new accounts in 2001 evidenced by 26 percent year-over-year growth in average transaction account balances. In Retail, the momentum begun by the highly successful Winter Wonderland and Spring Ahead consumer checking account campaigns and the expansion of products to new markets continued in the fourth quarter with the Rake In a Billion campaign featuring over 120,000 new account openings and $1.1 billion in new balances.
Overall, average demand deposit balances increased 29 percent and interest checking balances grew 27 percent versus last year’s fourth quarter, and 18 percent and 21 percent on the full year, respectively. In the fourth quarter, average consumer demand deposits posted 55 percent growth and commercial demand continued to exhibit positive growth with a 15 percent increase.
Loan and lease balances remained relatively stable this quarter with comparisons to prior periods affected by the numerous sales, divestitures, securitizations, and related off balance sheet movements of approximately $4.0 billion of loans and leases in 2001 and an additional $838 million in the latter part of last year’s fourth quarter. Adjusting for the impact of these transactions, average loans and leases increased approximately five percent on a comparative basis over the same quarter last year. Direct installment loan originations more than doubled last year’s production and exceeded $1.3 billion in the fourth quarter and $4.6 billion for the full year compared to $600 million in last year’s fourth quarter and $2.4 billion for the full year, driving increases in total installment loan balances of eight percent over last year’s fourth quarter and one percent sequentially.
Compared to the fourth quarter of 2000, net interest income on a fully- taxable equivalent basis increased nine percent due to three percent growth in average earning assets and a 24 basis point (bp) increase in the net interest margin. Sequentially, net interest income on a fully-taxable equivalent basis increased three percent on essentially flat earning assets and a 14 bp increase in the net interest margin. The net interest margin has improved steadily in 2001 due to a lower interest rate environment and the corresponding effect on funding costs.
In the fourth quarter, Fifth Third undertook risk management initiatives to effectively position the securities portfolio by selling $1.3 billion in short term securities at a gain of $17.9 million. The $12 million year-over- year increase in securities gains provided substantial year-end flexibility in addressing certain lower rated commercial credits above previously announced expectations.
Service Income Advances 25 Percent
Recent strong business line revenue growth trends continued in the fourth quarter with non-interest income up 25 percent over the same quarter last year and 20 percent for the full year excluding the impact of non-mortgage related securities gains. Data Processing once again led with 30 percent plus year- over-year growth. Even without the $15 million revenue added by the October 31st acquisition of Universal Companies (USB), a merchant processor headquartered in Milwaukee serving over 61,000 small business merchant locations, Data Processing revenue increased by 32 percent year-over-year. Overall, Data Processing posted 52 percent growth over last year’s fourth quarter and 38 percent over the full year on the addition of several significant new merchant and electronic funds transfer (EFT) customer relationships. Midwest Payment Systems (MPS), the bank’s data processing subsidiary, processed over 6.6 billion ATM, point of sale, and e-commerce transactions in 2001, a number that has more tha_ tripled in four years, for over 159,000 merchant locations and 1,100 financial institutions worldwide.
Successful sales of Retail and Commercial deposit accounts and corporate treasury management products fueled increases in deposit service income of 35 percent for the quarter and 23 percent for the full year. Overall fourth quarter Retail deposit revenues increased 27 percent year-over-year, driven by the success of sales campaigns and direct marketing programs in generating new account relationships in both new and existing markets. Similarly, Commercial deposit based revenues increased 49 percent over last year’s fourth quarter on the strength of product introduction and cross-sell as well as new customer relationships.
Investment Advisory revenues increased four percent over the same quarter last year and nine percent for the full year despite equity market weakness for much of the year. Declines in market sensitive service income were mitigated by double-digit increases in private client services across all product lines and in retail brokerage as annuity sales continue to increase through the Banking Centers. Fifth Third remains committed to investing in and broadening the sales efforts in order to take advantage of strong investment performance and continues to focus its sales efforts on integrating services across business lines to take advantage of an expanding customer base. Fifth Third Investment Advisors, among the largest money managers in the Midwest, has over $34 billion in assets under management, $188 billion in assets under care, and $12 billion in Fifth Third Funds, our nationally recognized family of 31 stock, bond and money market mutual funds. With eight affiliates delivering double digit revenue growth in 2001 and 10 funds awarded four or five-star ratings from Morningstar, Fifth Third looks forward to continuing to increase the revenue contribution from Investment Advisory in coming periods.
Mortgage net revenue in the fourth quarter totaled $50.4 million compared to $41.6 million last quarter and $64.3 million in 2000’s fourth quarter. The fourth quarter and future contribution of Mortgage Banking has been reduced from prior periods as a result of the previously disclosed divestiture of Old Kent’s out-of-market residential and subprime mortgage origination capabilities. Fifth Third remains committed to offering residential mortgages as part of its full financial services product offering to customers within its geographic footprint because of the importance of the resulting customer relationships and cross-sell opportunities. Fourth quarter mortgage net revenue was comprised of $77.8 million in total mortgage banking fees, plus $73.2 million of securities gains on the sale of balance sheet hedge investments, and less $100.6 million in amortization and valuation adjustments on mortgage servicing rights. The sale of these balance sheet instruments and the subsequent valuation adjustments were made necessary by declines in short- term interest rates, corresponding anticipated increases in prepayment speeds and the decreased origination capacity associated with the divestitures. Management will continue to evaluate alternatives related to the mortgage servicing portfolio. In-footprint mortgage origination totaled $8.5 billion in the twelve months ending December 31, 2001 versus $4.2 billion in 2000, an increase of 105 percent, with an additional $9.3 billion in origination contributed to 2001 results from divested operations. For the fourth quarter, mortgage origination totaled $2.5 billion versus $2.0 billion of in-footprint origination last quarter.
Other service charges and fees totaled $136.2 million in the fourth quarter and $542.2 million for the year, increases of 42 percent and 39 percent, respectively. The growth is primarily due to increases in loan fees across nearly all categories from continued steady loan demand. Other fourth quarter highlights include a 73 percent year-over-year and 16 percent sequential increase in Commercial banking revenues. Institutional fixed income trading and sales and card revenues also advanced 92 percent and 17 percent over the same quarter last year, respectively.
Controlled Credit Quality
With indicators mixed as to the depth and duration of the current economic downturn, we are realistic about the impact a protracted recession could have on credit quality throughout the industry and at Fifth Third. Fifth Third’s long history of low exposure limits, avoidance of national or sub-prime lending businesses, centralized risk management, and diversified portfolio position us well to effectively weather a downturn and reduce the likelihood of significant unexpected losses. While the amount of charge-offs has increased from prior periods, Fifth Third notes that it remains in line with historical ten-year averages and represents a small percentage of our total loan and lease portfolio.
Nonperforming assets (NPAs) now stand at 57 bp of total loans and leases and other real estate owned at December 31, 2001, relatively consistent with the 51 bp last quarter and in line with previously announced expectations. The fourth quarter provision for loan losses totaled $61.6 million, a 95 percent increase over last year’s fourth quarter and 30 percent increase over last quarter’s $47.5 million, remaining steady overall at 1.50 percent of total loans and leases outstanding. Net charge-offs for the quarter were $54.6 million, compared to $46.7 million last quarter and $34.9 million in the fourth quarter of 2000. As a percentage of total loans and leases, fourth quarter net charge-offs were 52 bp, compared to 33 bp in 2000’s fourth quarter and 44 bp last quarter.
Demonstrated Expense Control
Fourth quarter operating expenses increased nine percent over the same period last year versus a 15 percent increase in revenues, excluding non- mortgage related securities gains. Expense savings related to headcount reductions and divested businesses associated with the acquisition of Old Kent Financial Corp are partially mitigated by strong growth in all of our markets, the addition of sales officers in Investment Advisory, the purchase acquisition of USB and incremental expenses associated with traditionally higher fourth quarter transaction volumes. Demonstrating the ability to consistently grow revenues faster than expenses, Fifth Third’s fourth quarter efficiency ratio, inclusive of securities transactions associated with on balance sheet hedging activity related to the mortgage servicing portfolio, stands at 45.2 percent versus 45.3 percent last quarter on a comparable basis. Exclusive of all securities transactions, the fourth quarter efficiency ratio was 48.4 percent. Fifth Third expects a return to a more traditional level of operating expenses, relative to revenues, in the first quarter of 2002.
Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. The Company has $71 billion in assets, operates 16 affiliates with 933 full-service Banking Centers, including 142 Bank Mart(R)(R) locations open seven days a week inside select grocery stores and 1,847 Jeanie(R)(R) ATMs in Ohio, Kentucky, Indiana, Michigan, Illinois, Florida and West Virginia. The financial strength of Fifth Third’s affiliate banks continues to be recognized by rating agencies with deposit ratings of AA- and Aa2 from Standard & Poor’s and Moody’s, respectively. Additionally, Fifth Third Bancorp continues to maintain the highest short-term ratings available at A-1+ and Prime-1, and was recently recognized by Moody’s with one of the highest senior debt ratings for any U.S. bank holding company of Aa3. Fifth Third operates four main businesses: Retail, Commercial, Investment Advisors and Midwest Payment Systems, the Bank’s data processing subsidiary. Investor information and press releases can be viewed at [http://www.53.com] . The Company’s common stock is traded in the over-the-counter market through The NASDAQ National Market System under the symbol “FITB_”
For complete details on Fifth Third’s 4Q/01 results visit CardData ([www.carddata.com]).