Fifth Third Bank 2007 Annual Report Download - page 92

ANNUAL REPORT ON FORM 10-K
Fifth Third Bancorp
90
Permitted activities include securities underwriting and dealing,
insurance underwriting and brokerage, merchant banking and
other activities that are declared by the FRB, in cooperation
with the Treasury Department, to be “financial in nature or
incidental thereto” or are declared by the FRB unilaterally to be
“complementary” to financial activities. In addition, a FHC is
allowed to conduct permissible new financial activities or
acquire permissible non-bank financial companies with after-
the-fact notice to the FRB. A bank holding company may elect
to become a FHC if each of its subsidiary banks is “well
capitalized,” is “well managed” and has at least a “Satisfactory”
rating under the Federal Community Reinvestment Act
(“CRA”). In 2000, the Bancorp elected and qualified for FHC
status under the GLBA.
Unless a bank holding company becomes a FHC under
GLBA, the BHCA also prohibits a bank holding company from
acquiring a direct or indirect interest in or control of more than
5% of any class of the voting shares of a company that is not a
bank or a bank holding company and from engaging directly or
indirectly in activities other than those of banking, managing or
controlling banks or furnishing services to its subsidiary banks,
except that it may engage in and may own shares of companies
engaged in certain activities the FRB has determined to be so
closely related to banking or managing or controlling banks as
to be proper incident thereto.
The FRB has authority to prohibit bank holding companies
from paying dividends if such payment is deemed to be an
unsafe or unsound practice. The FRB has indicated generally
that it may be an unsafe or unsound practice for bank holding
companies to pay dividends unless a bank holding company’ s
net income is sufficient to fund the dividends and the expected
rate of earnings retention is consistent with the organization’ s
capital needs, asset quality and overall financial condition. The
Bancorp depends in part upon dividends received from its
subsidiary banks to fund its activities, including the payment of
dividends. Each of the subsidiary banks is subject to regulatory
limitations on the amount of dividends it may declare and pay.
Under FRB policy, a bank holding company is expected to
act as a source of financial and managerial strength to each of
its subsidiary banks and to commit resources to their support.
This support may be required at times when the bank holding
company may not have the resources to provide it. Similarly,
under the cross-guarantee provisions of the Federal Deposit
Insurance Act (“FDIA”), the FDIC can hold any FDIC-insured
depository institution liable for any loss suffered or anticipated
by the FDIC in connection with (1) the “default” of a
commonly controlled FDIC-insured depository institution; or
(2) any assistance provided by the FDIC to a commonly
controlled FDIC-insured depository institution “in danger of
default.”
The Bancorp owns two state banks, Fifth Third Bank and
Fifth Third Bank (Michigan), chartered under the laws of Ohio
and Michigan, respectively. These banks are subject to
extensive state regulation and examination by the appropriate
state banking agency in the particular state or states where each
state bank is chartered, by the FRB, and by the FDIC, which
insures the deposits of each of the state banks to the maximum
extent permitted by law. The federal and state laws and
regulations that are applicable to banks regulate, among other
matters, the scope of their business, their investments, their
reserves against deposits, the timing of the availability of
deposited funds, the amount of loans to individual and related
borrowers and the nature, amount of and collateral for certain
loans, and the amount of interest that may be charged on loans.
Various state consumer laws and regulations also affect the
operations of the state banks.
The Bancorp’ s national subsidiary bank, Fifth Third Bank,
N.A. is subject to regulation and examination primarily by the
Office of the Comptroller of the Currency (“OCC”) and
secondarily by the FRB and the FDIC, which insures the
deposits to the maximum extent permitted by law. The federal
laws and regulations that are applicable to national banks
regulate, among other matters, the scope of their business, their
investments, their reserves against deposits, the timing of the
availability of deposited funds, the amount of loans to
individual and related borrowers and the nature, amount of and
collateral for certain loans, and the amount of interest that may
be charged on loans.
In 2006, the Federal Deposit Insurance Reform Act of
2005 was signed into law (“FDIRA”). Pursuant to the FDIRA,
the Bank Insurance Fund and Savings Association Fund were
merged to create the Deposit Insurance Fund. The FDIC was
granted broader authority in adjusting deposit insurance
premium rates and more flexibility in establishing the
designated reserve ratio. FDIRA provided assessment credits to
insured depository institutions that could be used to offset 100%
of insurance premiums in 2007 and 90% of premiums in 2008-
2010 or until they are fully exhausted. Insured depository
institutions are placed into one of four risk categories under
FDIRA, with the vast majority qualifying for Risk Category I.
Risk Category I institutions insurance premiums are based upon
CAMELS ratings, long term debt issuer ratings (if applicable)
and various financial ratios derived from the Consolidated
Report of Condition and Income (“Call Report”). In 2007, the
FDIC set the Deposit Insurance Fund’ s designated reserve ratio
at 1.25% and the Risk Category I assessment rates range from 5
to 7 basis points. The Bancorp expects to fully exhaust its
assessment credits in the second quarter of 2008 and anticipates
incurring $27 million of FDIC insurance premium for 2008.
Federal law, Sections 23A and 23B of the Federal Reserve
Act, restricts transactions between a bank and an affiliated
company, including a parent bank holding company. The
subsidiary banks are subject to certain restrictions on loans to
affiliated companies, on investments in the stock or securities
thereof, on the taking of such stock or securities as collateral for
loans to any borrower, and on the issuance of a guarantee or
letter of credit on their behalf. Among other things, these
restrictions limit the amount of such transactions, require
collateral in prescribed amounts for extensions of credit,
prohibit the purchase of low quality assets and require that the
terms of such transactions be substantially equivalent to terms
of similar transactions with non-affiliates. One result of these
restrictions is a limitation on the subsidiary banks to fund the
Bancorp. Generally, each subsidiary bank is limited in its
extensions of credit to any affiliate to 10% of the subsidiary
bank’ s capital and its extension of credit to all affiliates to 20%
of the subsidiary bank’ s capital.
The CRA generally requires insured depository institutions
to identify the communities they serve and to make loans and
investments and provide services that meet the credit needs of
these communities. Furthermore, the CRA requires the FRB to
evaluate the performance of each of the subsidiary banks in
helping to meet the credit needs of their communities. As a part
of the CRA program, the subsidiary banks are subject to
periodic examinations by the FRB, and must maintain
comprehensive records of their CRA activities for this purpose.
During these examinations, the FRB rates such institutions’
compliance with CRA as “Outstanding,” “Satisfactory,” “Needs
to Improve" or "Substantial Noncompliance.” Failure of an