Fifth Third Bank 2009 Annual Report Download - page 95

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Fifth Third Bancorp 93
17. LEGAL AND REGULATORY PROCEEDINGS
During April 2006, the Bancorp was added as a defendant in a
consolidated antitrust class action lawsuit originally filed against
Visa®, MasterCard® and several other major financial institutions
in the United States District Court for the Eastern District of
New York. The plaintiffs, merchants operating commercial
businesses throughout the U.S. and trade associations, claim that
the interchange fees charged by card-issuing banks are
unreasonable and seek injunctive relief and unspecified damages.
In addition to being a named defendant, the Bancorp is also
subject to a possible indemnification obligation of Visa as
discussed in Note 16. Accordingly, prior to the sale of its Class B
shares during 2009, the Bancorp had recorded a litigation reserve
of $243 million to account for its potential exposure in this and
related litigation. Additionally, the Bancorp had also recorded its
proportional share of $199 million of the Visa escrow account
funded with proceeds from the Visa IPO along with several
subsequent fundings. Upon the Bancorp’s sale of its Visa, Inc.
Class B shares during 2009, and the recognition of the total return
swap that transfers conversion risk of the Class B shares back to
the Bancorp, the Bancorp reversed the remaining net litigation
reserve. Refer to Note 16 for further information regarding the
Bancorp’s net litigation reserve and ownership interest in Visa.
This antitrust litigation is still in the pre-trial phase.
In September 2007, Ronald A. Katz Technology Licensing,
L.P. (Katz) filed a suit in the United States District Court for the
Southern District of Ohio against the Bancorp and it’s Ohio
banking subsidiary. In the suit, Katz alleges that the Bancorp and
its Ohio bank are infringing on Katz’s patents for interactive call
processing technology by offering certain automated telephone
banking and other services. This lawsuit is one of many related
patent infringement suits brought by Katz in various courts
against numerous other defendants. Katz is seeking unspecified
monetary damages and penalties as well as injunctive relief in the
suit. Management believes there are substantial defenses to these
claims and intends to defend them vigorously. The impact of the
final disposition of this lawsuit cannot be assessed at this time.
In 2008, five putative securities class action complaints were
filed against the Bancorp and its Chief Executive Officer, among
other parties. The five cases have been consolidated, and are
currently pending in the United States District Court for the
Southern District of Ohio. The lawsuits allege violations of federal
securities laws related to disclosures made by the Bancorp in press
releases and filings with the SEC regarding its quality and
sufficiency of capital, credit losses and related matters, and seeking
unquantified damages on behalf of putative classes of persons
who either purchased the Bancorp’s securities, or acquired the
Bancorp’s securities pursuant to the First Charter Corporation
Acquisition. In addition to the foregoing, two cases were filed in
the United States District Court for the Southern District of Ohio
against the Bancorp and certain officers alleging violations of
ERISA based on allegations similar to those set forth in the
securities class action cases filed during the same period of time.
The two cases alleging violations of ERISA have also been
consolidated. These cases remain in the early stages of litigation.
The impact of the final disposition of these lawsuits cannot be
assessed at this time.
The Bancorp and its subsidiaries are not parties to any other
material litigation. However, there are other litigation matters that
arise in the normal course of business. While it is impossible to
ascertain the ultimate resolution or range of financial liability with
respect to these contingent matters, management believes any
resulting liability from these other actions would not have a
material effect upon the Bancorp’s consolidated financial position,
results of operations or cash flows.
18. PROCESSING BUSINESS SALE
On June 30, 2009, the Bancorp completed the sale of a majority
interest in its merchant acquiring and financial institutions
processing businesses (Processing Business). Under the terms of
the sale, an unrelated third party, Advent, acquired an
approximate 51% interest in the Processing Business for cash and
warrants. The Bancorp retained the remaining approximate 49%
interest in the Processing Business and, as part of the sale, the
Processing Business assumed loans totaling $1.25 billion owed to
the Bancorp.
As a result of the sale, the Bancorp recognized a pre-tax gain
of approximately $1.8 billion ($1.1 billion after-tax), which was
recorded in other noninterest income. Of the $1.8 billion gain,
approximately $848 million was the result of marking the
Bancorp’s retained interest in the Processing Business to fair
value.
At the time of the sale, the initial fair value of the warrants
was determined to be $62 million. The initial fair value of the
warrants was calculated using a Black-Scholes option valuation
model using probability weighted scenarios, assuming expected
terms of 10 to 20 years, expected volatilities of 37.5% to 44.4%,
risk free rates of 4.03% to 4.33%, and expected dividend rates of
0%. The expected volatilities were based on historical and implied
volatilities of comparable companies assuming similar expected
terms. Refer to Notes 12 and 27 for further information regarding
the current fair value of these warrants.
In connection with the sale, the Bancorp provided Advent
with certain put rights that are exercisable in the event of three
unlikely circumstances. At the time of the sale, the Bancorp
initially valued the put rights at approximately $14 million. The
initial fair value of the put rights was calculated using a Black-
Scholes option valuation model using probability weighted
scenarios, assuming expected terms of 1 to 4.5 years, expected
volatilities of 39.6% to 56.9%, risk free rates of 0.48% to 2.34%,
and expected dividend rates of 0%. The expected volatilities were
based on historical and implied volatilities of comparable
companies assuming similar expected terms. Refer to Notes 12
and 27 for further information regarding the current fair value of
these put rights.
The fair value of the Bancorp’s retained noncontrolling
interest in the Processing Business at the time of sale, exclusive of
the warrants, was $524 million, and was based on the price
Advent paid for its ownership interest in the Processing Business.
The Bancorp has deemed the Processing Business to be a related
party and prospectively accounts for its retained noncontrolling
interest in the Processing Business under the equity method of
accounting. Refer to Note 19 for further details regarding the
Bancorp’s involvement with related parties.
19. RELATED PARTY TRANSACTIONS
The Bancorp maintains written policies and procedures covering
related party transactions to principal shareholders, directors and
executives of the Bancorp. These procedures cover transactions
such as employee-stock purchase loans, personal lines of credit,
residential secured loans, overdrafts, letters of credit and increases
in indebtedness. Such transactions are subject to the Bancorp’s
normal underwriting and approval procedures. Prior to the closing
of a loan to a related party, Compliance Risk Management must
approve and determine whether the transaction requires approval
from or a post notification be sent to the Bancorp’s Board of
Directors. At December 31, 2009 and 2008, certain directors,
executive officers, principal holders of Bancorp common stock,