MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS The preparation of Fifth Third’s financial statements  requires the use of estimates that may vary from actual  results.  Fifth Third could suffer if it fails to attract and retain skilled  personnel.  The preparation of consolidated financial statements in conformity with U.S. GAAP requires management to make  significant estimates that affect the financial statements. Two of  Fifth Third’s most critical estimates are the level of the ALLL and  the valuation of mortgage servicing rights. Due to the uncertainty  of estimates involved, Fifth Third may have to significantly  increase the ALLL and/or sustain credit losses that are significantly higher than the provided allowance and could  recognize a significant provision for impairment of its mortgage  servicing rights. If Fifth Third’s ALLL is not adequate, Fifth  Third’s business, financial condition, including its liquidity and  capital, and results of operations could be materially adversely  affected. As Fifth Third continues to grow, its success depends, in large  part, on its ability to attract and retain key individuals.  Competition for qualified candidates in the activities and markets  that Fifth Third serves is great and Fifth Third may not be able to  hire these candidates and retain them. If Fifth Third is not able to  hire or retain these key individuals, Fifth Third may be unable to  execute its business strategies and may suffer adverse consequences to its business, operations and financial condition.  Pursuant to the standardized terms of the CPP, among other  things, Fifth Third has agreed to institute certain restrictions on  the compensation of certain senior management positions, which  could have an adverse effect on Fifth Third’s ability to hire or  retain the most qualified senior management. It is possible that  the U.S. Treasury may, as it is permitted to do, impose further  requirements on Fifth Third. In June 2010, the federal banking  agencies issued joint guidance on executive compensation intended to ensure that a bank organization’s incentive compensation policies don’t encourage excessive risk taking. In  addition, the Dodd-Frank Act requires those agencies to adopt  guidance or rules to enhance the reporting of incentive compensation and to prohibit certain compensation arrangements.  Also in 2010, the FDIC issued a request for comments on  whether banks with compensation plans that encourage excessive  risk taking should be charged at higher deposit assessment rates  than such banks would otherwise be charged. If Fifth Third is  unable to attract and retain qualified employees, or do so at rates  necessary to maintain its competitive position, or if compensation  costs required to attract and retain employees become more  expensive, Fifth Third’s performance, including its competitive  position, could be materially adversely affected. Fifth Third regularly reviews its litigation reserves for  adequacy considering its litigation risks and probability of  incurring losses related to litigation. However, Fifth Third cannot  be certain that its current litigation reserves will be adequate over  time to cover its losses in litigation due to higher than anticipated  settlement costs, prolonged litigation, adverse judgments, or other  factors that are largely outside of Fifth Third’s control. If Fifth  Third’s litigation 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.  The accounting standard setters, including the FASB, the SEC and  other regulatory bodies, 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.  Fifth Third earns revenue from the fees it receives for originating  mortgage loans and for servicing mortgage loans. When rates rise,  the demand for mortgage loans tends to fall, reducing the revenue  Fifth Third receives from loan originations. At the same time,  revenue from MSRs can increase through increases in fair value.  When rates fall, mortgage originations tend to increase and the  value of MSRs tends to decline, also with some offsetting revenue  effect. Even though they can act as a “natural hedge,” the hedge is  not perfect, either in amount or timing. For example, the negative  effect on revenue from a decrease in the fair value of residential  MSRs is immediate, but any offsetting revenue benefit from more  originations and the MSRs relating to the new loans would accrue  over time. It is also possible that, because of the recession and  deteriorating housing market, even if interest rates were to fall,  mortgage originations may also fall or any increase in mortgage  originations may not be enough to offset the decrease in the  MSRs value caused by the lower rates. 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.  Fifth Third typically uses derivatives and other instruments to  hedge its mortgage banking interest rate risk. Fifth Third generally  does not hedge all of its risks, and the fact that Fifth Third  attempts to hedge any of the risks does not mean Fifth Third will  be successful. Hedging is a complex process, requiring sophisticated models and constant monitoring, and is not a  perfect science. Fifth Third may use hedging instruments tied to  U.S. Treasury rates, LIBOR or Eurodollars that may not perfectly  correlate with the value or income being hedged. Fifth Third  could incur significant losses from its hedging activities. There  may be periods where Fifth Third elects not to use derivatives and  other instruments to hedge mortgage banking interest rate risk. 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  Fifth Third Bancorp 25  Difficulties incombining the operations of acquired entities  with Fifth Third’s own operations may prevent Fifth Third  from achieving the expected benefits from its acquisitions.  Future acquisitions may dilute current shareholders’ ownership of Fifth Third and may cause Fifth Third to  become more susceptible to adverse economic events.  Fifth Third’s mortgage banking revenue can bevolatile from  quarter to quarter.  Changes in accounting standards could impact Fifth Third’s  reported earnings and financial condition. 