Fifth Third Bank 2014 Annual Report Download - page 30

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
28 Fifth Third Bancorp
Changes in retail distribution strategies and consumer
behavior may adversely impact Fifth Third’s investments in its
bank premises and equipment and other assets and may lead
to increased expenditures to change its retail distribution
channel
Fifth Third has significant investments in bank premises and
equipment for its branch network including its 1,302 full service
banking centers, 93 parcels of land held for the development of
future banking centers, as well as its retail work force and other
branch banking assets. Advances in technology such as e-commerce,
telephone, internet and mobile banking, and in-branch self-service
technologies including automatic teller machines and other
equipment, as well as changing customer preferences for these other
methods of accessing Fifth Third’s products and services, could
decrease the value of Fifth Third’s branch network or other retail
distribution assets and may cause it to change its retail distribution
strategy, close and/or sell certain branches or parcels of land held
for development and restructure or reduce its remaining branches
and work force. These actions could lead to losses on these assets or
could adversely impact the carrying value of other long-lived assets
and may lead to increased expenditures to renovate and reconfigure
remaining branches or to otherwise reform its retail distribution
channel.
RISKS RELATING TO FIFTH THIRD’S GENERAL
BUSINESS
Deteriorating credit quality, particularly in real estate loans,
has adversely impacted Fifth Third in the past and may
adversely impact Fifth Third in the future.
When Fifth Third lends money or commits to lend money the
Bancorp incurs credit risk or the risk of loss if borrowers do not
repay their loans. The credit performance of the loan portfolios
significantly affects the Bancorp’s financial results and condition. If
the current economic environment were to deteriorate, more
customers may have difficulty in repaying their loans or other
obligations which could result in a higher level of credit losses and
reserves for credit losses. Fifth Third reserves for credit losses by
establishing reserves through a charge to earnings. The amount of
these reserves is based on Fifth Third’s assessment of credit losses
inherent in the loan portfolio (including unfunded credit
commitments). The process for determining the amount of the
ALLL and the reserve for unfunded commitments is critical to Fifth
Third’s financial results and condition. It requires difficult,
subjective and complex judgments about the environment, including
analysis of economic or market conditions that might impair the
ability of borrowers to repay their loans.
Fifth Third might underestimate the credit losses inherent in its
loan portfolio and have credit losses in excess of the amount
reserved. Fifth Third might increase the reserve because of changing
economic conditions, including falling home prices or higher
unemployment, or other factors such as changes in borrower’s
behavior. As an example, borrowers may "strategically default," or
discontinue making payments on their real estate-secured loans if
the value of the real estate is less than what they owe, even if they
are still financially able to make the payments.
Fifth Third believes that both the ALLL and the reserve for
unfunded commitments are adequate to cover inherent losses at
December 31, 2014; however, there is no assurance that they will be
sufficient to cover future credit losses, especially if housing and
employment conditions worsen. In the event of significant
deterioration in economic conditions, Fifth Third may be required
to increase reserves in future periods, which would reduce earnings.
For more information, refer to the "Risk Management - Credit
Risk Management," "Critical Accounting Policies - Allowance for
Loan and Leases,” and “Reserve for Unfunded Commitments”
sections of MD&A.
Fifth Third must maintain adequate sources of funding and
liquidity.
Fifth Third must maintain adequate funding sources in the normal
course of business to support its operations and fund outstanding
liabilities, as well as meet regulatory expectations. Fifth Third
primarily relies on bank deposits to be a low cost and stable source
of funding for the loans Fifth Third makes and the operations of
Fifth Third’s business. Core customer deposits, which include
transaction deposits and other time deposits, have historically
provided Fifth Third with a sizeable source of relatively stable and
low-cost funds (average core deposits funded 71% of average total
assets at December 31, 2014). In addition to customer deposits,
sources of liquidity include investments in the securities portfolio,
Fifth Third’s sale or securitization of loans in secondary markets
and the pledging of loans and investment securities to access
secured borrowing facilities through the FHLB and the FRB, and
Fifth Third’s ability to raise funds in domestic and international
money and capital markets.
Fifth Third’s liquidity and ability to fund and run the business
could be materially adversely affected by a variety of conditions and
factors, including financial and credit market disruptions and
volatility or a lack of market or customer confidence in financial
markets in general similar to what occurred during the financial
crisis in 2008 and early 2009, which may result in a loss of customer
deposits or outflows of cash or collateral and/or ability to access
capital markets on favorable terms.
Other conditions and factors that could materially adversely
affect Fifth Third’s liquidity and funding include a lack of market or
customer confidence in Fifth Third or negative news about Fifth
Third or the financial services industry generally which also may
result in a loss of deposits and/or negatively affect the ability to
access the capital markets; the loss of customer deposits to
alternative investments; inability to sell or securitize loans or other
assets, increased regulatory requirements, and reductions in one or
more of Fifth Third’s credit ratings. A reduced credit rating could
adversely affect Fifth Third’s ability to borrow funds and raise the
cost of borrowings substantially and could cause creditors and
business counterparties to raise collateral requirements or take other
actions that could adversely affect Fifth Third’s ability to raise
capital. Many of the above conditions and factors may be caused by
events over which Fifth Third has little or no control such as what
occurred during the financial crisis. While market conditions have
stabilized and, in many cases, improved, there can be no assurance
that significant disruption and volatility in the financial markets will
not occur in the future.
Recent regulatory changes relating to liquidity and risk
management may also negatively impact Fifth Third’s results of
operations and competitive position. Various regulations recently
adopted or proposed, and additional regulations under
consideration, impose or could impose more stringent liquidity
requirements for large financial institutions, including Fifth Third.
These regulations address, among other matters, liquidity stress
testing, minimum liquidity requirements and restrictions on short-
term debt issued by top-tier holding companies. Given the overlap
and complex interactions of these regulations with other regulatory
changes, including the resolution and recovery framework
applicable to Fifth Third, the full impact of the adopted and
proposed regulations will remain uncertain until their full
implementation.
If Fifth Third is unable to continue to fund assets through
customer bank deposits or access capital markets on favorable terms
or if Fifth Third suffers an increase in borrowing costs or otherwise