Fifth Third Bank 2013 Annual Report Download - page 18

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
16 Fifth Third Bancorp
OVERVIEW
Fifth Third Bancorp is a diversified financial services company
headquartered in Cincinnati, Ohio. At December 31, 2013, the
Bancorp had $130.4 billion in assets, operated 17 affiliates with
1,320 full-service Banking Centers, including 104 Bank Mart®
locations open seven days a week inside select grocery stores, and
2,586 ATMs in 12 states throughout the Midwestern and
Southeastern regions of the U.S. The Bancorp reports on four
business segments: Commercial Banking, Branch Banking,
Consumer Lending and Investment Advisors. The Bancorp also has
a 25% interest in Vantiv Holding, LLC. The carrying value of the
Bancorp’s investment in Vantiv Holding, LLC was $423 million as
of December 31, 2013.
This overview of MD&A highlights selected information in the
financial results of the Bancorp and may not contain all of the
information that is important to you. For a more complete
understanding of trends, events, commitments, uncertainties,
liquidity, capital resources and critical accounting policies and
estimates, you should carefully read this entire document. Each of
these items could have an impact on the Bancorp’s financial
condition, results of operations and cash flows. In addition, see the
Glossary of Abbreviations and Acronyms in this report for a list of
terms included as a tool for the reader of this annual report on
Form 10-K. The abbreviations and acronyms identified therein are
used throughout this MD&A, as well as the Consolidated Financial
Statements and Notes to Consolidated Financial Statements.
The Bancorp believes that banking is first and foremost a
relationship business where the strength of the competition and
challenges for growth can vary in every market. The Bancorp
believes its affiliate operating model provides a competitive
advantage by emphasizing individual relationships. Through its
affiliate operating model, individual managers at all levels within the
affiliates are given the opportunity to tailor financial solutions for
their customers.
Net interest income, net interest margin and the efficiency ratio
are presented in MD&A on an FTE basis. The FTE basis adjusts
for the tax-favored status of income from certain loans and
securities held by the Bancorp that are not taxable for federal
income tax purposes. The Bancorp believes this presentation to be
the preferred industry measurement of net interest income as it
provides a relevant comparison between taxable and non-taxable
amounts.
The Bancorp’s revenues are dependent on both net interest
income and noninterest income. For the year ended December 31,
2013, net interest income, on a FTE basis, and noninterest income
provided 53% and 47% of total revenue, respectively. The Bancorp
derives the majority of its revenues within the U.S. from customers
domiciled in the United States. Revenue from foreign countries and
external customers domiciled in foreign countries is immaterial to
the Bancorp’s Consolidated Financial Statements. Changes in
interest rates, credit quality, economic trends and the capital markets
are primary factors that drive the performance of the Bancorp. As
discussed later in the Risk Management section, risk identification,
measurement, monitoring, control and reporting are important to
the management of risk and to the financial performance and capital
strength of the Bancorp.
Net interest income is the difference between interest income
earned on assets such as loans, leases and securities, and interest
expense incurred on liabilities such as deposits, short-term
borrowings and long-term debt. Net interest income is affected by
the general level of interest rates, the relative level of short-term and
long-term interest rates, changes in interest rates and changes in the
amount and composition of interest-earning assets and interest-
bearing liabilities. Generally, the rates of interest the Bancorp earns
on its assets and pays on its liabilities are established for a period of
time. The change in market interest rates over time exposes the
Bancorp to interest rate risk through potential adverse changes to
net interest income and financial position. The Bancorp manages
this risk by continually analyzing and adjusting the composition of
its assets and liabilities based on their payment streams and interest
rates, the timing of their maturities and their sensitivity to changes
in market interest rates. Additionally, in the ordinary course of
business, the Bancorp enters into certain derivative transactions as
part of its overall strategy to manage its interest rate and prepayment
risks. The Bancorp is also exposed to the risk of losses on its loan
and lease portfolio as a result of changing expected cash flows
caused by borrower credit events, such as loan defaults and
inadequate collateral due to a weakened economy within the
Bancorp’s footprint.
Noninterest income is derived primarily from mortgage
banking net revenue, service charges on deposits, corporate banking
revenue, investment advisory revenue, card and processing revenue
and other noninterest income. Noninterest expense is primarily
driven by personnel costs, net occupancy expenses, and technology
and communication costs.
Vantiv, Inc. Share Sales
The Bancorp’s ownership position in Vantiv Holding, LLC was
reduced in the second quarter of 2013 when the Bancorp sold an
approximate five percent interest and recognized a $242 million
gain. The Bancorp’s ownership position was further reduced in the
third quarter of 2013 when the Bancorp sold an approximate three
percent interest and recognized an $85 million gain. The Bancorp’s
remaining approximate 25% ownership in Vantiv Holding, LLC
continues to be accounted for as an equity method investment in
the Bancorp’s Consolidated Financial Statements and had a carrying
value of $423 million as of December, 31, 2013.
As of December 31, 2013, the Bancorp continued to hold
approximately 48.8 million Class B units of Vantiv Holding, LLC
and a warrant to purchase approximately 20.4 million Class C non-
voting units of Vantiv Holding, LLC, both of which may be
exchanged for Class A Common Stock of Vantiv, Inc. on a one for
one basis or at Vantiv, Inc.’s option for cash. In addition, the
Bancorp holds approximately 48.8 million Class B common shares
of Vantiv, Inc. The Class B common shares give the Bancorp voting
rights, but no economic interest in Vantiv, Inc. The voting rights
attributable to the Class B common shares are limited to 18.5% of
the voting power in Vantiv, Inc. at any time other than in
connection with a stockholder vote with respect to a change in
control in Vantiv, Inc. These securities are subject to certain terms
and restrictions.
Redemption of TruPS
The Bancorp redeemed all $750 million of the outstanding TruPS
issued by Fifth Third Capital Trust IV on December 30, 2013. For
more information on the redemption of these instruments, see the
Capital Management section of MD&A.
Accelerated Share Repurchase Transactions
During 2013 and 2012, the Bancorp entered into a number of
accelerated share repurchase transactions. As part of these
transactions, the Bancorp entered into forward contracts in which
the final number of shares to be delivered at settlement was or will
be based generally on a discount to the average daily volume-
weighted average price of the Bancorp’s common stock during the
term of the Repurchase Agreement. For more information on the
accounting for these instruments, see the Capital Management
section of MD&A. For a summary of all accelerated share
repurchase transactions during 2013 and 2012 refer to Table 2.