Fifth Third Bank 2007 Annual Report Download - page 25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 23
Fifth Third’s ability to maintain required capital levels and
adequate sources of funding and liquidity.
Fifth Third is required to maintain certain capital levels in
accordance with banking regulations. Fifth Third must also
maintain adequate funding sources in the normal course of
business to support its operations and fund outstanding liabilities.
Fifth Third’s ability to maintain capital levels, sources of funding
and liquidity could be impacted by changes in the capital markets
in which it operates.
Each of Fifth Third’s subsidiary banks must remain well-
capitalized for Fifth Third to retain its status as a financial holding
company. In addition, failure by Fifth Third’s bank subsidiaries to
meet applicable capital guidelines could subject the bank to a
variety of enforcement remedies available to the federal regulatory
authorities. These include limitations on the ability to pay
dividends, the issuance by the regulatory authority of a capital
directive to increase capital, and the termination of deposit
insurance by the FDIC.
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.
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.
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. If Fifth Third’s
allowance for loan and lease losses is not adequate, Fifth Third’s
business, financial condition, including its liquidity and capital, and
results of operations could be materially adversely affected.
Additionally, in the future, Fifth Third may increase its allowance
for loan and lease losses, which could have a material adverse
effect on its capital and results of operations. For more
information on the sensitivity of these estimates, please refer to
the Critical Accounting Policies section.
Fifth Third regularly reviews its litigation reserves for
adequacy considering its litigation risks and probability of
incurring losses related to litigation. However, Fifth Third cannot
be certain that its current litigation reserves will be adequate over
time to cover its losses in litigation due to higher than anticipated
settlement costs, prolonged litigation, adverse judgments, or other
factors that are largely outside of Fifth Third’s control. If Fifth
Third’s litigation reserves are not adequate, Fifth Third’s business,
financial condition, including its liquidity and capital, and results
of operations could be materially adversely affected. Additionally,
in the future, Fifth Third may increase its litigation reserves, which
could have a material adverse effect on its capital and results of
operations.
Changes in accounting standards could impact Fifth Third’s
reported earnings and financial condition.
The accounting standard setters, including FASB, U.S. Securities
and Exchange Commission (“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
cases, 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.
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 and/or the holders of its securities could be
adversely affected by unfavorable ratings from rating
agencies.
Fifth Third’s ability to access the capital markets is important to
its overall funding profile. This access is affected by the ratings
assigned by rating agencies to Fifth Third, certain of its affiliates
and particular classes of securities they issue. The interest rates
that Fifth Third pays on its securities are also influenced by,
among other things, the credit ratings that it, its affiliates and/or
its securities receive from recognized rating agencies. A