Fifth Third Bank 2006 Annual Report Download - page 25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 23
Fifth Third’s control, including general economic conditions and
the policies of various governmental and regulatory agencies (in
particular, the FRB). Changes in monetary policy, including
changes in interest rates, will influence the origination of loans, the
prepayment speed of loans, the purchase of investments, the
generation of deposits and the rates received on loans and
investment securities and paid on deposits or other sources of
funding. The impact of these changes may be magnified if Fifth
Third does not effectively manage the relative sensitivity of its
assets and liabilities to changes in market interest rates.
Fluctuations in these areas may adversely affect Fifth Third and its
shareholders.
If Fifth Third does not adjust to rapid changes in the
financial services industry, its financial performance may
suffer.
Fifth Third’s ability to deliver strong financial performance and
returns on investment to shareholders will depend in part on its
ability to expand the scope of available financial services to meet
the needs and demands of its customers. In addition to the
challenge of competing against other banks in attracting and
retaining customers for traditional banking services, Fifth Third’s
competitors also include securities dealers, brokers, mortgage
bankers, investment advisors, specialty finance and insurance
companies who seek to offer one-stop financial services that may
include services that banks have not been able or allowed to offer
to their customers in the past or may not be currently able or
allowed to offer. This increasingly competitive environment is
primarily a result of changes in regulation, changes in technology
and product delivery systems, as well as the accelerating pace of
consolidation among financial service providers.
Legislative or regulatory compliance, changes or actions or
significant litigation, could adversely impact Fifth Third or
the businesses in which Fifth Third is engaged.
Fifth Third is subject to extensive state and federal regulation,
supervision and legislation that govern almost all aspects of its
operations and limit the businesses in which Fifth Third may
engage. These laws and regulations may change from time to time
and are primarily intended for the protection of consumers,
depositors and the deposit insurance funds. The impact of any
changes to laws and regulations or other actions by regulatory
agencies may negatively impact Fifth Third or its ability to increase
the value of its business. Additionally, actions by regulatory
agencies or significant litigation against Fifth Third could cause it
to devote significant time and resources to defending itself and
may lead to penalties that materially affect Fifth Third and its
shareholders. Future changes in the laws, including tax laws, or
regulations or their interpretations or enforcement may also be
materially adverse to Fifth Third and its shareholders or may
require Fifth Third to expend significant time and resources to
comply with such requirements.
Fifth Third is exposed to operational risk.
Fifth Third is exposed to many types of operational risk, including
reputational risk, legal and compliance risk, the risk of fraud or
theft by employees, customers or outsiders, unauthorized
transactions by employees or operational errors.
Negative public opinion can result from Fifth Third’s actual
or alleged conduct in activities, such as lending practices, data
security, corporate governance and acquisitions, and may damage
Fifth Third’s reputation. Additionally, actions taken by
government regulators and community organizations may also
damage Fifth Third’s reputation. This negative public opinion can
adversely affect Fifth Third’s ability to attract and keep customers
and can expose it to litigation and regulatory action.
Fifth Third’s necessary dependence upon automated systems
to record and process its transaction volume poses the risk that
technical system flaws or employee errors, tampering or
manipulation of those systems will result in losses and may be
difficult to detect. Fifth Third may also be subject to disruptions of
its operating systems arising from events that are beyond its
control (for example, computer viruses or electrical or
telecommunications outages). Fifth Third is further exposed to the
risk that its outside service providers may be unable to fulfill their
contractual obligations (or will be subject to the same risk of fraud
or operational errors as Fifth Third). These disruptions may
interfere with service to Fifth Third’s customers and result in a
financial loss or liability.
Material breaches in security of Fifth Third’s systems may
have a significant effect on Fifth Third’s business.
Fifth Third collects, processes and stores sensitive consumer data
by utilizing computer systems and telecommunications networks
operated by both Fifth Third and third party service providers.
Fifth Third has security, backup and recovery systems in place, as
well as a business continuity plan to ensure the system will not be
inoperable. Fifth Third also has security to prevent unauthorized
access to the system. In addition, Fifth Third requires its third party
service providers to maintain similar controls. However, Fifth
Third cannot be certain that the measures will be successful. A
security breach in the system and loss of confidential information
such as credit card numbers and related information could result in
losing the customers’ confidence and thus the loss of their
business.
Changes and trends in the capital markets may affect Fifth
Third’s income and cash flows.
Fifth Third enters into and maintains trading and investment
positions in the capital markets on its own behalf and on behalf of
its customers. These investment positions also include derivative
financial instruments. The revenues and profits Fifth Third derives
from its trading and investment positions are dependent on market
prices. If it does not correctly anticipate market changes and
trends, Fifth Third may experience investment or trading losses
that may materially affect Fifth Third and its shareholders. Losses
on behalf of its customers could expose Fifth Third to litigation,
credit risks or loss of revenue from those customers. Additionally,
substantial losses in Fifth Third’s trading and investment positions
could lead to a loss with respect to those investments and may
adversely affect cash flows and funding costs.
Changes in accounting standards could impact reported
earnings.
The accounting standard setters, including the FASB, SEC and
other regulatory bodies, periodically change the financial
accounting and reporting standards that govern the preparation of
Fifth Third’s consolidated financial statements. These changes can
be hard to predict and can materially impact how Fifth Third
records and reports its financial condition and results of
operations. In some changes, Fifth Third could be required to
apply a new or revised standard retroactively, which would result in
the restatement of Fifth Third’s prior period financial statements.
The preparation of Fifth Third’s financial statements requires
the use of estimates that may vary from actual results.
The preparation of consolidated financial statements in conformity
with accounting principles generally accepted in the United States
of America requires management to make significant estimates that
affect the financial statements. Two of Fifth Third’s most critical
estimates are the level of the allowance for loan and lease losses
and the valuation of mortgage servicing rights. Due to the inherent
nature of these estimates, Fifth Third cannot provide absolute
assurance that it will not significantly increase the allowance for
loan and lease losses and/or sustain credit losses that are
significantly higher than the provided allowance, nor that it will not
recognize a significant provision for impairment of its mortgage
servicing rights. For more information on the sensitivity of these
estimates, please refer to the Critical Accounting Policies section.