Fifth Third Bank 2012 Annual Report Download - page 33

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
31 Fifth Third Bancorp
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. 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.
The results of Vantiv, LLC 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 its processing business, Vantiv, LLC (formerly Fifth
Third Processing Solutions). As a result of the Vantiv, Inc. IPO, the
Bancorp’s ownership of Vantiv Holding, LLC was reduced to
approximately 39% in the first quarter of 2012. In addition, Fifth
Third sold an approximate 6% interest during the fourth quarter of
2012. Based on Fifth Third’s current ownership share in Vantiv
Holding, LLC, of approximately 33%, Vantiv Holding, LLC is
accounted for under the equity method and is not consolidated.
Poor operating results of Vantiv, LLC could negatively affect the
operating results of Fifth Third. In addition, Fifth Third participates
in a multi lender credit facility to Vantiv Holding, LLC and
repayment of these loans is contingent on future cash flows from
Vantiv Holding, LLC.
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 borrowers’ ability to repay their loans.
RISKS RELATED TO THE LEGAL AND REGULATORY
ENVIRONMENT
As a regulated entity, the Bancorp is subject to certain capital
requirements that may limit its operations and potential
growth.
The Bancorp is a bank holding company and a financial holding
company. As such, it is subject to the comprehensive, consolidated
supervision and regulation of the FRB, including risk-based and
leverage capital requirements. The Bancorp 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 the Bancorp’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 the Bancorp’s ability to expand or
maintain present business levels.
Comprehensive revisions to the regulatory capital framework
were proposed by the FRB, OCC, and FDIC in June 2012. Included
within those revisions is the Basel III NPR, which incorporates
changes made by the Basel Committee on Banking Supervision to
the Basel Capital framework in addition to implementing relevant
provisions of the Dodd-Frank Act. The Basel III NPR specifically
revises what qualifies as regulatory capital, raises minimum
requirements and introduces the concept of additional capital
buffers. The need to maintain more and higher quality capital as well
as greater liquidity going forward could limit our business activities,
including lending, and our ability to expand, either organically or
through acquisitions. In addition, the new liquidity standards could
require us to increase our holdings of highly liquid short-term
investments, thereby reducing our ability to invest in longer-term
assets even if more desirable from a balance sheet management
perspective. Moreover, although these new requirements are being
phased in over time, U.S. Federal banking agencies have been taking
into account expectations regarding the ability of banks to meet
these new requirements, including under stressed conditions, in
approving actions that represent uses of capital, such as dividend
increases and share repurchases.
The Bancorp’s banking subsidiary must remain well-capitalized,
well-managed and maintain at least a “Satisfactory” CRA rating for
the Bancorp to retain its status as a financial holding company.
Failure to meet these requirements could result in the FRB placing
limitations or conditions on the Bancorp’s activities (and the
commencement of new activities) and could ultimately result in the
loss of financial holding company status. In addition, failure by the
Bancorp’s banking subsidiary 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.
Fifth Third’s business, financial condition and results of
operations could be adversely affected by new or changed
regulations and by the manner in which such regulations are
applied by regulatory authorities.
Current economic conditions, particularly in the financial markets,
have resulted in government regulatory agencies placing increased
focus on and scrutiny of the financial services industry. The U.S.
government has intervened on an unprecedented scale, responding
to what has been commonly referred to as the financial crisis, by
introducing various actions and passing legislations such as the
Dodd-Frank Act. Such programs and legislation subject Fifth Third
and other financial institutions to restrictions, oversight and/or
costs that may have an impact on Fifth Third’s business, financial
condition, results of operations or the price of its common stock.
New proposals for legislation and regulations continue to be
introduced that could further substantially increase regulation of the
financial services industry. Fifth Third cannot predict whether any
pending or future legislation will be adopted or the substance and
impact of any such new legislation on Fifth Third. Additional
regulation could affect Fifth Third in a substantial way and could
have an adverse effect on its business, financial condition and
results of operations.
During the third quarter of 2012, the OCC, a national bank
regulatory agency, issued interpretive guidance that requires Chapter
7 non-reaffirmed loans to be accounted for as nonperforming
TDRs and collateral dependent loans regardless of their payment
history and capacity to pay in the future. The Bancorp’s banking
subsidiary is a state chartered bank which therefore is not directly
subject to the guidance of the OCC. At December 31, 2012, the
Bancorp had loans with unpaid principal balances totaling
approximately $175 million that could potentially be impacted by
this guidance, of which approximately 87% are current with their
original contractual payments and approximately one third are
already classified as TDRs.
Fifth Third is subject to various regulatory requirements that
may limit its operations and potential growth.
Under federal and state laws and regulations pertaining to the safety
and soundness of insured depository institutions and their holding