Fifth Third Bank 2009 Annual Report Download - page 121

ANNUAL REPORT ON FORM 10-K
Fifth Third Bancorp 119
accounting measures for public companies (including publicly-
held bank holding companies such as the Bancorp) designed to
promote honesty and transparency in corporate America.
Sarbanes-Oxley’s principal provisions, many of which have
been interpreted through regulations, provide for and include,
among other things: (i) the creation of an independent
accounting oversight board; (ii) auditor independence
provisions that restrict non-audit services that accountants may
provide to their audit clients; (iii) additional corporate
governance and responsibility measures, including the
requirement that the chief executive officer and chief financial
officer of a public company certify financial statements; (iv) the
forfeiture of bonuses or other incentive-based compensation and
profits from the sale of an issuer’s securities by directors and
senior officers in the twelve month period following initial
publication of any financial statements that later require
restatement; (v) an increase in the oversight of, and
enhancement of certain requirements relating to, audit
committees of public companies and how they interact with the
Bancorp’s independent auditors; (vi) requirements that audit
committee members must be independent and are barred from
accepting consulting, advisory or other compensatory fees from
the issuer; (vii) requirements that companies disclose whether at
least one member of the audit committee is a ‘financial expert’
(as such term is defined by the SEC) and if not discussed, why
the audit committee does not have a financial expert; (viii)
expanded disclosure requirements for corporate insiders,
including accelerated reporting of stock transactions by insiders
and a prohibition on insider trading during pension blackout
periods; (ix) a prohibition on personal loans to directors and
officers, except certain loans made by insured financial
institutions on nonpreferential terms and in compliance with
other bank regulatory requirements; (x) disclosure of a code of
ethics and filing a Form 8-K for a change or waiver of such
code; (xi) requirements that management assess the
effectiveness of internal control over financial reporting and the
Bancorp’s Independent Registered Public Accounting Firm
attest to the assessment; and (xii) a range of enhanced penalties
for fraud and other violations.
Additional information regarding regulatory matters is
included in Note 28 of the Notes to Consolidated Financial
Statements.
Emergency Economic Stabilization Act of 2008
On October 3, 2008, in response to the stresses experienced in
the financial markets, the Emergency Economic Stabilization
Act (EESA) was enacted. EESA authorizes the Secretary of the
Treasury to purchase up to $700 billion in troubled assets from
financial institutions under the Troubled Asset Relief Program
or TARP. Troubled assets include residential or commercial
mortgages and related instruments originated prior to March 14,
2008 and any other financial instrument that the Secretary
determines, after consultation with the Chairman of the Board
of Governors of the Federal Reserve System, the purchase of
which is necessary to promote financial stability. In December
2009, Treasury extended TARP, scheduled to expire on
December 31, 2009, to October 3, 2010.
Capital Purchase Program
Pursuant to its authority under EESA, Treasury created the
TARP Capital Purchase Program (CPP) under which the
Treasury Department will invest up to $250 billion in senior
preferred stock of U.S. banks and savings associations or their
holding companies. Qualifying financial institutions may issue
senior preferred stock with a value equal to not less than 1% of
risk-weighted assets and not more than the lesser of $25 billion
or 3% of risk-weighted assets. The senior preferred stock will
pay dividends at the rate of 5% per annum until the fifth
anniversary of the investment and thereafter at the rate of
9% per annum. Under the original terms of the CPP purchase
agreement, CPP recipients were prohibited from redeeming the
senior preferred stock for three years, unless they earlier
completed a qualified equity offering of Tier 1 capital
qualifying securities in an amount equal to the liquidation
preference of the CPP investment. Under the American
Recovery and Reinvestment Act of 2009, the Secretary of
Treasury shall permit any recipient of funds under the TARP to
repay such funds without regard to the source of the funds or
any waiting period, subject to consultation with the appropriate
federal banking agency. Until the third anniversary of the
issuance of the senior preferred, the consent of the U.S.
Treasury will be required for any increase in the dividends on
the common stock or for any stock repurchases unless the
senior preferred has been redeemed in its entirety or the
Treasury has transferred the senior preferred to third parties.
The senior preferred will not have voting rights other than the
right to vote as a class on the issuance of any preferred stock
ranking senior, any change in its terms or any merger, exchange
or similar transaction that would adversely affect its rights. The
senior preferred will also have the right to elect two directors if
dividends have not been paid for six periods. The senior
preferred will be freely transferable and participating
institutions will be required to file a shelf registration statement
covering the senior preferred. The issuing institution must grant
the Treasury piggyback registration rights. Prior to issuance, the
financial institution and its senior executive officers must
modify or terminate all benefit plans and arrangements to
comply with EESA. Senior executives must also waive any
claims against the Department of Treasury.
In connection with the issuance of the senior preferred,
participating institutions must issue to Treasury immediately
exercisable 10-year warrants to purchase common stock with an
aggregate market price equal to 15% of the amount of senior
preferred. The exercise price of the warrants will equal the
average closing price of the common stock for the 20 trading
days prior to the date of the Treasury’s approval. Treasury may
only exercise or transfer one-half of the warrants prior to the
earlier of December 31, 2009 or the date the issuing financial
institution has received proceeds equal to the senior preferred
investment from one or more offerings of common or preferred
stock qualifying as Tier 1 capital. Treasury will not exercise
voting rights with respect to any shares of common stock
acquired through exercise of the warrants. The financial
institution must file a shelf registration statement covering the
warrants and underlying common stock as soon as practicable
after issuance and grant piggyback registration rights. The
number of warrants will be reduced by one-half if the financial
institution raises capital equal to the amount of the senior
preferred through one or more offerings of common stock or
preferred stock qualifying as Tier 1 capital. If the financial
institution does not have sufficient authorized shares of
common stock available to satisfy the warrants or their issuance
otherwise requires shareholder approval, the financial
institution must call a meeting of shareholders for that purpose
as soon as practicable after the date of investment. The exercise
price of the warrants will be reduced by 15% for each six
months that lapse before shareholder approval subject to a
maximum reduction of 45%.
On December 31, 2008, Bancorp entered into a Letter
Agreement (including the Securities Purchase Agreement—