Fifth Third Bank 2009 Annual Report Download - page 34

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
32 Fifth Third Bancorp
BUSINESS SEGMENT REVIEW
At December 31, 2009, the Bancorp reports on four business
segments: Commercial Banking, Branch Banking, Consumer
Lending and Investment Advisors. Further detailed financial
information on each business segment is included in Note 30 of
the Notes to Consolidated Financial Statements.
Results of the Bancorp’s business segments are presented
based on its management structure and management accounting
practices. The structure and accounting practices are specific to
the Bancorp; therefore, the financial results of the Bancorp’s
business segments are not necessarily comparable with similar
information for other financial institutions. The Bancorp refines
its methodologies from time to time as management accounting
practices are improved and businesses change.
On June 30, 2009, the Bancorp completed the Processing
Business Sale, which represented the sale of a majority interest in
the Bancorp’s merchant acquiring and financial institutions
processing businesses. Financial data for the merchant acquiring
and financial institutions processing businesses was originally
reported in the former Processing Solutions segment through
June 30, 2009. As a result of the sale, the Bancorp no longer
presents Processing Solutions as a segment and therefore,
historical financial information for the merchant acquiring and
financial institutions processing businesses has been reclassified
under General Corporate and Other for all periods presented.
Interchange revenue previously recorded in the Processing
Solutions segment and associated with cards currently included in
Branch Banking is now included in the Branch Banking segment
for all periods presented. Additionally, the Bancorp retained its
retail credit card and commercial multi-card service businesses,
which were also originally reported in the former Processing
Solutions segment through June 30, 2009, and are now included in
the Consumer Lending and Commercial Banking segments,
respectively, for all periods presented. Revenue from the
remaining ownership interest in the Processing Business is
recorded in General Corporate and Other as noninterest income.
The Bancorp manages interest rate risk centrally at the
corporate level by employing a funds transfer pricing (FTP)
methodology. This methodology insulates the business segments
from interest rate volatility, enabling them to focus on serving
customers through loan originations and deposit taking. The FTP
system assigns charge rates and credit rates to classes of assets and
liabilities, respectively, based on expected duration and the
London Interbank Offered Rate (LIBOR) swap curve. Matching
duration allocates interest income and interest expense to each
segment so its resulting net interest income is insulated from
interest rate risk. In a rising rate environment, the Bancorp
benefits from the widening spread between deposit costs and
wholesale funding costs. However, the Bancorp’s FTP system
credits this benefit to deposit-providing businesses, such as
Branch Banking and Investment Advisors, on a duration-adjusted
basis. The net impact of the FTP methodology is captured in
General Corporate and Other.
Management made changes to the FTP methodology during
2009 to update the calculation of FTP charges and credits to each
of the Bancorp’s business segments. Changes to the FTP
methodology were applied retroactively to the year ended
December 31, 2008 and included updating rates to reflect
significant increases in the Bancorp’s liquidity premiums. The
increased spreads reflect the Bancorp’s liability structure and are
more weighted towards retail product pricing spreads.
Management reviews FTP spreads periodically based on the
extent of changes in market spreads.
The business segments are charged provision expense based
on the actual net charge-offs experienced by the loans owned by
each segment. Provision expense in excess of net charge-offs are
captured in General Corporate and Other. The financial results of
the business segments include allocations for shared services and
headquarters expenses. Even with these allocations, the financial
results are not necessarily indicative of the business segments’
financial condition and results of operations as if they existed as
independent entities. Additionally, the business segments form
synergies by taking advantage of cross-sell opportunities and when
funding operations by accessing the capital markets as a collective
unit. Net income (loss) available to common shareholders by
business segment is summarized in Table 13.
TABLE 13: BUSINESS SEGMENT NET INCOME (LOSS)
A
VAILABLE TO COMMON SHAREHOLDERS
For the years ended December 31
($ in millions) 2009 2008 2007
Income Statement Data
Commercial Banking ($120) (733) 714
Branch Banking 324 632 642
Consumer Lending 23 (148) 120
Investment Advisors 53 98 99
General Corporate and Other 457 (1,962) (499)
Net income (loss) 737 (2,113) 1,076
Dividends on preferred stock 226 67 1
Net income (loss) available to common
shareholders $511 (2,180) 1,075