Fifth Third Bank 2012 Annual Report Download - page 32

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
30 Fifth Third Bancorp
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 or interpretations could
impact Fifth Third’s reported earnings and financial
condition.
The accounting standard setters, including the FASB, the SEC and
other regulatory agencies, 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 recasting of
Fifth Third’s prior period financial statements.
Future acquisitions may dilute current shareholders’
ownership of Fifth Third and may cause Fifth Third to
become more susceptible to adverse economic events.
Future business acquisitions could be material to Fifth Third and it
may issue additional shares of stock to pay for those acquisitions,
which would dilute current shareholders’ ownership interests.
Acquisitions also could require Fifth Third to use substantial cash or
other liquid assets or to incur debt. In those events, Fifth Third
could become more susceptible to economic downturns and
competitive pressures.
Difficulties in combining the operations of acquired entities
with Fifth Third’s own operations may prevent Fifth Third
from achieving the expected benefits from its acquisitions.
Inherent uncertainties exist when integrating the operations of an
acquired entity. Fifth Third may not be able to fully achieve its
strategic objectives and planned operating efficiencies in an
acquisition. In addition, the markets and industries in which Fifth
Third and its potential acquisition targets operate are highly
competitive. Fifth Third may lose customers or the customers of
acquired entities as a result of an acquisition. Future acquisition and
integration activities may require Fifth Third to devote substantial
time and resources and as a result Fifth Third may not be able to
pursue other business opportunities.
After completing an acquisition, Fifth Third may find certain
items are not accounted for properly in accordance with financial
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.
Fifth Third relies on its systems and certain service providers,
and certain failures could materially adversely affect
operations.
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’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.
Fifth Third is exposed to cyber-security risks, including denial
of service, hacking, and identity theft.
Recently, there has been a well-publicized series of apparently
related distributed denial of service attacks on large financial
services companies, including Fifth Third Bank. Distributed denial
of service attacks are designed to saturate the targeted online
network with excessive amounts of network traffic, resulting in slow
response times, or in some cases, causing the site to be temporarily
unavailable. To date these attacks hare not been intended to steal
financial data, but meant to interrupt or suspend a company’s
Internet service. These events did not result in a breach of Fifth
Third’s client data and account information remained secure;
however, the attacks did adversely affect the performance of Fifth
Third’s website and in some instances prevented customers from
accessing Fifth Third’s website. While the event was resolved in a
timely fashion and primarily resulted in inconvenience to our
customers, future cyber-attacks could be more disruptive and
damaging. Hacking and identity theft risks, in particular, could cause
serious reputational harm. Cyber threats are rapidly evolving and
Fifth Third may not be able to anticipate or prevent all such attacks.
Fifth Third may incur increasing costs in an effort to minimize these
risks and could be held liable for any security breach or loss.
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.