Fifth Third Bank 2008 Annual Report Download - page 25

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 23
Fifth Third’s ability to pay or increase dividends on its
common stock or to repurchase its capital stock is restricted
by the terms of the U.S. Treasury’s preferred stock
investment in Fifth Third.
In December 2008, Fifth Third sold $3.4 billion of its Series F
Preferred Stock to the U.S. Treasury pursuant to the terms of the
CPP. For so long as any preferred stock issued under the CPP
remains outstanding, those terms prohibit Fifth Third from
increasing dividends on its common stock, and from making
certain repurchases of equity securities, including its common
stock, without the U.S. Treasury’s consent until the third
anniversary of the U.S. Treasury’s investment or until the U.S.
Treasury has transferred all of the preferred stock it purchased
under the CPP to third parties. Furthermore, as long as the
preferred stock issued to the U.S. Treasury is outstanding,
dividend payments and repurchases or redemptions relating to
certain equity securities, including Fifth Third’s common stock,
are prohibited until all accrued and unpaid dividends are paid on
such preferred stock, subject to certain limited exceptions.
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.
Material breaches in security of Fifth Third’s systems may
have a significant effect on Fifth Third’s business.
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.
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, which could supplement its capital by an estimated
additional $1 billion or more. 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 is exposed to operational and reputational risk.
Fifth Third is exposed to many types of operational risk, including
reputational risk, legal and compliance risk, the risk of fraud or
theft by employees, customers or outsiders, unauthorized
transactions by employees or operational errors.
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.
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 and other financial institutions have been the
subject of increased litigation which could result in legal
liability and damage to its reputation.
Fifth Third and certain of its directors and officers have been
named from time to time as defendants in various class actions
and other litigation relating to Fifth Third’s business and activities.
Past, present and future litigation have included or could include
claims for substantial compensatory and/or punitive damages or
claims for indeterminate amounts of damages. Fifth Third is also
involved from time to time in other reviews, investigations and
proceedings (both formal and informal) by governmental and self-
regulatory agencies regarding its business. These matters also
could result in adverse judgments, settlements, fines, penalties,
injunctions or other relief. Like other large financial institutions
and companies, Fifth Third is also subject to risk from potential
employee misconduct, including non-compliance with policies and
improper use or disclosure of confidential information.
Substantial legal liability or significant regulatory action against
Fifth Third could materially adversely affect its business, financial
condition or results of operations and/or cause significant
reputational harm to its business.