Managements Discussion and Analysis of Financial Condition and Results of Operations (continued)
OVERVIEW
Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At March 31, 2019, the Bancorp had
$167.9 billion in assets and operated 1,207 full-service banking centers and 2,559 Fifth Third branded ATMs in ten 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 Wealth and Asset Management.
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 as well as the Bancorps Annual Report on Form
10-K
for the year ended December 31, 2018. Each of these items could have an impact on the
Bancorps financial condition, results of operations and cash flows. In addition, refer to the Glossary of Abbreviations and Acronyms in this report for a list of terms included as a tool for the reader of this quarterly report on Form
10-Q.
The abbreviations and acronyms identified therein are used throughout this MD&A, as well as the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements.
Net interest income, net interest margin, net interest rate spread 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 FTE basis for presenting net interest income is a
non-GAAP
measure. For further information, refer to the
Non-GAAP
Financial Measures section of MD&A.
The Bancorps revenues are dependent on both net interest income and noninterest income. For the three months ended March 31, 2019,
net interest income on an FTE basis and noninterest income each provided 50% of total revenue. The Bancorp derives the majority of its revenues within the U.S. from customers domiciled in the U.S. Revenue from foreign countries and external
customers domiciled in foreign countries was immaterial to the Condensed Consolidated Financial Statements for the three months ended March 31, 2019. 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 of MD&A, 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 loss 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.
Noninterest income is derived from service charges on deposits, wealth and asset management revenue, corporate banking revenue, card and
processing revenue, mortgage banking net revenue, net securities gains or losses and other noninterest income. Noninterest expense includes personnel costs, technology and communication costs, net occupancy expense, card and processing expense,
equipment expense and other noninterest expense.
Acquisition of MB Financial, Inc.
On March 22, 2019, Fifth Third Bancorp completed its acquisition of MB Financial, Inc. in a stock and cash transaction valued at
approximately $3.6 billion. MB Financial, Inc. was headquartered in Chicago, Illinois with reported assets of approximately $20 billion and 86 branches as of December 31, 2018 and is the holding company of MB Financial Bank, N.A.
Under the terms of the agreement, the Bancorp acquired 100% of the common stock of MB Financial, Inc. In exchange, common shareholders of MB Financial, Inc. received 1.45 shares of Fifth Third Bancorp common stock and $5.54 in cash for each share of
MB Financial, Inc. common stock, for a total value per share of $42.49, based on the $25.48 closing price of Fifth Third Bancorps common stock on March 21, 2019. Upon closing of the transaction, MB Financial, Inc. became a subsidiary of
the Bancorp. However, MB Financial, Inc.s preferred stock with a fair value of $197 million remains outstanding and is recognized as a noncontrolling interest on the Condensed Consolidated Balance Sheets. Through its ownership of all of
the common stock, the Bancorp controls 95% of the voting equity interests in MB Financial, Inc.
The acquisition of MB Financial, Inc.
constituted a business combination and was accounted for under the acquisition method of accounting. Accordingly, the assets acquired, liabilities assumed and noncontrolling interest recognized were recorded at their estimated fair values as of the
acquisition date. These fair value estimates are considered preliminary as of March 31, 2019 due to the timing of the close of the acquisition. For more information on the acquisition of MB Financial, Inc., refer to Note 3 of the Notes to
Condensed Consolidated Financial Statements.
Worldpay Holding, LLC Transactions
On March 18, 2019, the Bancorp exchanged its remaining 10,252,826 Class B Units of Worldpay Holding, LLC for 10,252,826 shares of
Class A common stock of Worldpay, Inc., and subsequently sold those shares. As a result of this transaction, the Bancorp recognized a gain of $562 million in other noninterest income during the first quarter of 2019. As a result of the
sale, the Bancorp no longer beneficially owns any of Worldpay, Inc.s equity securities.
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