Fifth Third Bank 2013 Annual Report Download - page 170

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
168 Fifth Third Bancorp
30. BUSINESS SEGMENTS
The Bancorp reports on four business segments: Commercial
Banking, Branch Banking, Consumer Lending and Investment
Advisors. 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’s accounting
practices are improved and businesses change.
The Bancorp manages interest rate risk centrally at the
corporate level by employing an 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 U.S. 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.
The Bancorp adjusts the FTP charge and credit rates as
dictated by changes in interest rates for various interest-earning
assets and interest-bearing liabilities and by the review of the
estimated durations for the indeterminate-lived deposits. The credit
rate provided for demand deposit accounts is reviewed annually
based upon the account type, its estimated duration and the
corresponding fed funds, U.S. swap curve or swap rate. The credit
rates for several deposit products were reset January 1, 2013 to
reflect the current market rates and updated market assumptions.
These rates were generally higher than those in place during 2012,
thus net interest income for deposit providing businesses was
positively impacted during 2013
The business segments are charged provision expense based on
the actual net charge-offs experienced by the loans and leases
owned by each segment. Provision expense attributable to loan and
leases growth and changes in ALLL factors 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.