Fifth Third Bank 2009 Annual Report Download - page 118

ANNUAL REPORT ON FORM 10-K
116 Fifth Third Bancorp
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 bank to fund its activities, including the payment of
dividends and its subsidiary bank 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.”
Prior to September 30, 2009, the Bancorp owned two state
banks, Fifth Third Bank and Fifth Third Bank (Michigan),
chartered under the laws of Ohio and Michigan, respectively
and one national bank, Fifth Third Bank, N.A. On September
30, 2009 Fifth Third Bank, N.A., and Fifth Third Bank
(Michigan) merged with and into Fifth Third Bank, the Ohio
chartered bank (the “consolidation”). 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.
Prior to the consolidation, the Bancorp’s national
subsidiary bank, Fifth Third Bank, N.A. was 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 “DIF”). 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. The Bancorp fully
exhausted its assessment credits in the second quarter of 2008.
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 December 2008, the FDIC issued a final rule that
raised the then current assessment rates uniformly by 7 basis
points for the first quarter of 2009 assessment, which resulted in
annualized assessment rates for Risk Category I institutions
ranging from 12 to 14 basis points. In February 2009, the FDIC
issued final rules to amend the DIF restoration plan, change the
risk-based assessment system and set assessment rates for Risk
Category I institutions beginning in the second quarter of 2009.
For Risk Category I institutions that have long-term debt issuer
ratings, the FDIC determines the initial base assessment rate
using a combination of weighted-average CAMELS component
ratings, long-term debt issuer ratings (converted to numbers and
averaged) and the financial ratios method assessment rate (as
defined), each equally weighted. The initial base assessment
rates for Risk Category I institutions range from 12 to 16 basis
points, on an annualized basis. After the effect of potential
base-rate adjustments, total base assessment rates range from 7
to 24 basis points. The potential adjustments to a Risk
Category I institution’s initial base assessment rate, include (i) a
potential decrease of up to 5 basis points for long-term
unsecured debt, including senior and subordinated debt and
(ii) a potential increase of up to 8 basis points for secured
liabilities in excess of 25% of domestic deposits.
In May 2009, as part of its efforts to rebuild the DIF, the
FDIC issued a final rule which levied a special assessment
applicable to all insured depository institutions totaling 5 basis
points of each institution’s total assets less Tier 1 capital as of
June 30, 2009, not to exceed 10 basis points of domestic
deposits. In lieu of further special assessments, in November
2009, the FDIC issued a rule that required all insured depository
institutions, with limited exceptions, to prepay their estimated