Fifth Third Bank 2014 Annual Report Download - page 34

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
32 Fifth Third Bancorp
of such attacks. Nevertheless, the occurrence of any failure,
interruption or security breach of our systems, or of our third-party
service providers, particularly if widespread or resulting in financial
losses to customers, could also seriously damage Fifth Third’s
reputation, result in a loss of customer business, subject it to
additional regulatory scrutiny, or expose it to civil litigation and
financial liability.
Fifth Third is exposed to operational and reputational risk.
Fifth Third is exposed to many types of operational risk, including
but not limited to, business continuity risk, information
management risk, fraud risk, model risk, third party service provider
risk, human resources risk, and process risk.
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 Holding, LLC could have a negative
impact on Fifth Third’s operating results and financial
condition.
In 2009, Fifth Third sold an approximate 51% interest in its
processing business, Vantiv Holding, LLC (formerly Fifth Third
Processing Solutions). As a result of additional share sales
completed by Fifth Third in 2012, 2013 and 2014 the Bancorp’s
current ownership share in Vantiv Holding, LLC is approximately
23%. The Bancorp’s investment in Vantiv Holding, LLC is
accounted for under the equity method of accounting and is not
consolidated based on Fifth Third’s remaining ownership share in
Vantiv Holding, LLC. Vantiv Holding, LLC’s operating results
could be poor or favorable and could 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, investment practices, dividend policy
and growth. The Bancorp must maintain certain risk-based and
leverage capital ratios as required by the FRB 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.
In June 2012, Federal banking agencies proposed
enhancements to the regulatory capital requirements for U.S.
banking organizations, which implemented aspects of Basel III,
such as re-defining the regulatory capital elements and minimum
capital ratios, introducing regulatory capital buffers above those
minimums, revising the agencies’ rules for calculating risk-weighted
assets and introducing a new Tier I common equity ratio. In July
2013, the Federal banking agencies issued final rules for the
enhanced regulatory capital requirements, which included
modifications to the proposed rules. The final rules provide the
option for certain banking organizations, including the Bancorp, to
opt out of including AOCI in Tier I capital and retain the treatment
of residential mortgage exposures consistent with the current Basel I
capital rules. The new capital rules are effective for the Bancorp on
January 1, 2015, subject to phase-in periods for certain components
and other provisions. 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. 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.
Previous 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 legislation such as the DFA.
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