Fifth Third Bank 2014 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, 2014, the
Bancorp had $138.7 billion in assets, operated 15 affiliates with
1,302 full-service Banking Centers, including 101 Bank Mart®
locations open seven days a week inside select grocery stores, and
2,638 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
an approximate 23% interest in Vantiv Holding, LLC. The carrying
value of the Bancorp’s investment in Vantiv Holding, LLC was $394
million as of December 31, 2014.
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 a 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,
2014, net interest income, on a FTE basis, and noninterest income
provided 59% and 41% 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 was 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, other 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 from service charges on
deposits, corporate banking revenue, investment advisory revenue,
mortgage banking net revenue, card and processing revenue and
other noninterest income. Noninterest expense is primarily driven
by personnel costs, net occupancy expenses, technology and
communication costs and other noninterest expense.
Vantiv, Inc. Share Sale
The Bancorp’s ownership position in Vantiv Holding, LLC was
reduced in the second quarter of 2014 when the Bancorp sold an
approximate three percent interest and recognized a $125 million
gain. The Bancorp’s remaining approximate 23% ownership in
Vantiv Holding, LLC was accounted for as an equity method
investment in the Bancorp’s Consolidated Financial Statements and
had a carrying value of $394 million as of December, 31, 2014. For
more information, refer to Note 19 of the Notes to Consolidated
Financial Statements.
Accelerated Share Repurchase Transactions
During 2013 and 2014, 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, refer to Note 23 of the Notes to
Consolidated Financial Statements. For a summary of all accelerated
share repurchase transactions entered into or settled during 2013
and 2014 refer to Table 2. For further information on a subsequent
event related to capital actions refer to Note 31 of the Notes to
Consolidated Financial Statements.