Fifth Third Bank 2009 Annual Report Download - page 27

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Fifth Third Bancorp 25
directive to increase capital, and the termination of deposit
insurance by the FDIC.
The Bancorp’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.
Current 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. In addition to the Bancorp’s participation in
Treasury’s CPP and CAP, the U.S. Government has taken steps
that include enhancing the liquidity support available to financial
institutions, establishing a commercial paper funding facility,
temporarily guaranteeing money market funds and certain types of
debt issuances, and increasing insured deposits. These programs
subject the Bancorp and other financial institutions who have
participated in these programs to additional restrictions, oversight
and/or costs that may have an impact on the Bancorp’s business,
financial condition, results of operations or the price of its
common stock.
Compliance with such regulation and scrutiny may
significantly increase the Bancorp’s costs, impede the efficiency of
its internal business processes, require it to increase its regulatory
capital and limit its ability to pursue business opportunities in an
efficient manner. The Bancorp also will be required to pay
significantly higher FDIC premiums because market
developments have significantly depleted the insurance fund of
the FDIC and reduced the ratio of reserves to insured deposits.
The increased costs associated with anticipated regulatory and
political scrutiny could adversely impact the Bancorp’s results of
operations.
New proposals for legislation continue to be introduced in
the U.S. Congress that could further substantially increase
regulation of the financial services industry. In January, the
Obama administration proposed a tax on the fifty largest bank
holding companies in the United States designed to recover losses
incurred as a result of the Treasury’s TARP program. The
proposal has not been finalized and the amount of the possible
tax has not been determined. Federal and state regulatory agencies
also frequently adopt changes to their regulations and/or change
the manner in which existing regulations are applied. The Bancorp
cannot predict whether any pending or future legislation will be
adopted or the substance and impact of any such new legislation
on the Bancorp. Additional regulation could affect the Bancorp in
a substantial way and could have an adverse effect on its business,
financial condition and results of operations.
Deposit insurance premiums levied against Fifth Third may
increase if the number of bank failures do not subside or the
cost of resolving failed banks increases.
The FDIC maintains a Deposit Insurance Fund (DIF) to resolve
the cost of bank failures. The DIF is funded by fees assessed on
insured depository institutions including Fifth Third. The
magnitude and cost of resolving an increased number of bank
failures have reduced the DIF. In 2009, the FDIC collected a
special assessment to replenish the DIF. In addition, a
prepayment of an estimated amount of future deposit insurance
premiums was made on December 30, 2009. Future deposit
premiums paid by Fifth Third depend on the level of the DIF and
the magnitude and cost of future bank failures.
Legislative or regulatory compliance, changes or actions or
significant litigation, could adversely impact the Bancorp or
the businesses in which the Bancorp is engaged.
The Bancorp is subject to extensive state and federal regulation,
supervision and legislation that govern almost all aspects of its
operations and limit the businesses in which the Bancorp may
engage. These laws and regulations may change from time to time
and are primarily intended for the protection of consumers,
depositors and the deposit insurance funds. The impact of any
changes to laws and regulations or other actions by regulatory
agencies may negatively impact the Bancorp or its ability to
increase the value of its business. Additionally, actions by
regulatory agencies or significant litigation against the Bancorp
could cause it to devote significant time and resources to
defending itself and may lead to penalties that materially affect the
Bancorp and its shareholders. Future changes in the laws,
including tax laws, or, as a participant in the Capital Purchase
Program under EESA, the rules and regulations promulgated
under EESA or ARRA, or regulations or their interpretations or
enforcement may also be materially adverse to the Bancorp and its
shareholders or may require the Bancorp to expend significant
time and resources to comply with such requirements.
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.
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.