Fifth Third Bank 2010 Annual Report Download - page 28

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
26 Fifth Third Bancorp
accounting and reporting standards. Fifth Third may also not
realize the expected benefits of the acquisition due to lower
financial results pertaining to the acquired entity. For example,
Fifth Third could experience higher charge offs than originally
anticipated related to the acquired loan portfolio.
Fifth Third may sell or consider selling one or more of its
businesses. Should it determine to sell such a business, it
may not be able to generate gains on sale or related increase
in shareholders’ equity commensurate with desirable levels.
Moreover, if Fifth Third sold such businesses, the loss of
income could have an adverse effect on its earnings and
future growth.
Fifth Third owns several non-strategic businesses that are not
significantly synergistic with its core financial services businesses.
Fifth Third has, from time to time, considered the sale of such
businesses. If it were to determine to sell such businesses, Fifth
Third would be subject to market forces that may make
completion of a sale unsuccessful or may not be able to do so
within a desirable time frame. If Fifth Third were to complete the
sale of non-core businesses, it would suffer the loss of income
from the sold businesses, and such loss of income could have an
adverse effect on its future earnings and growth.
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 as well as additional significant costs for privacy
monitoring activities.
Fifth Third is exposed to operational and reputational risk.
Fifth Third is exposed to many types of operational risk, including
reputational risk, legal and compliance risk, environmental risks
from its properties, the risk of fraud or theft by employees,
customers or outsiders, unauthorized transactions by employees,
operating system disruptions 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. Negative public opinion has been
observed in relation to banks participating in the U.S. Treasury’s
TARP program, in which Fifth Third was a participant.
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 third party 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.
The inability of FTPS to succeed as a stand-alone entity
could have a negative impact on Fifth Third’s operating
results and financial condition.
During the second quarter of 2009, Fifth Third sold an
approximate 51% interest in FTPS to Advent International. Prior
to the sale, FTPS relied on Fifth Third to support its operating
and administrative functions. Fifth Third has entered into
agreements to provide FTPS certain services during the
deconversion period. Fifth Third’s operating results may suffer if
the cost of providing these services exceeds the amount received
from FTPS. As part of the sale, FTPS also assumed loans owed
Fifth Third. Repayment of these loans is contingent on future
cash flows and profitability at FTPS.
In connection with the sale, Fifth Third provided Advent
International with certain put rights that are exercisable in the
event of three unlikely circumstances. Based on Fifth Third’s
current ownership share in FTPS of approximately 49%, FTPS is
accounted for under the equity method and is not consolidated.
The exercise of the put rights would result in FTPS becoming a
wholly owned subsidiary of Fifth Third. As a result, FTPS would
be consolidated and would subject Fifth Third to the risks
inherent in integrating a business. Additionally, such a change in
the accounting treatment for FTPS may adversely impact Fifth
Third’s capital.
Weather related events or other natural disasters may have
an effect on the performance of Fifth Third’s loan portfolios,
especially in its coastal markets, thereby adversely impacting
its results of operations.
Fifth Third’s footprint stretches from the upper Midwestern to
lower Southeastern regions of the United States. This area has
experienced weather events including hurricanes and other natural
disasters. The nature and level of these events and the impact of
global climate change upon their frequency and severity cannot be
predicted. If large scale events occur, they may significantly impact
its loan portfolios by damaging properties pledged as collateral as
well as impairing its borrower’s ability to repay their loans.
RISKS RELATED TO THE LEGAL AND REGULATORY
ENVIRONMENT
As a regulated entity, Fifth Third must maintain certain
capital requirements that may limit its operations and
potential growth.
Fifth Third is a bank holding company and a financial holding
company. As such, Fifth Third is subject to the comprehensive,
consolidated supervision and regulation of the FRB, including
risk-based and leverage capital requirements. Fifth Third must
maintain certain risk-based and leverage capital ratios as required
by its banking regulators and which can change depending upon
general economic conditions and Fifth Third’s particular
condition, risk profile and growth plans. Compliance with the
capital requirements, including leverage ratios, may limit
operations that require the intensive use of capital and could
adversely affect Fifth Third’s ability to expand or maintain present
business levels.
Fifth Third’s subsidiary bank must remain well-capitalized,
well-managed and maintain at least a “Satisfactory” CRA rating
for Fifth Third to retain its status as a financial holding company.
Failure to meet these requirements could result in the FRB placing
limitations or conditions on Fifth Third’s activities (and the
commencement of new activities) and could ultimately result in