Edgar Filing: FIFTH THIRD BANCORP

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10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2012

Commission File Number 001-33653

LOGO

(Exact name of Registrant as specified in its charter)

Ohio

31-0854434

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification Number)

Fifth Third Center

Cincinnati, Ohio 45263

(Address of principal executive offices)

Registrant’s telephone number, including area code: (800) 972-3030

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

There were 918,913,253 shares of the Registrant’s common stock, without par value, outstanding as of June 30, 2012.

FINANCIAL CONTENTS


Part I. Financial Information
Glossary of Terms			3
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)
Selected Financial Data			4
Overview			5
Non-GAAP Financial Measures			8
Recent Accounting Standards			9
Critical Accounting Policies			9
Statements of Income Analysis			10
Balance Sheet Analysis			18
Business Segment Review			25
Risk Management—Overview			32
Credit Risk Management			33
Market Risk Management			49
Liquidity Risk Management			53
Capital Management			54
Off-Balance Sheet Arrangements			56
Quantitative and Qualitative Disclosures about Market Risk (Item 3)			58
Controls and Procedures (Item 4)			58
Condensed Consolidated Financial Statements and Notes (Item 1)
Balance Sheets (unaudited)			59
Statements of Income (unaudited)			60
Statements of Comprehensive Income (unaudited)			61
Statements of Changes in Equity (unaudited)			62
Statements of Cash Flows (unaudited)			63
Notes to Condensed Consolidated Financial Statements (unaudited)			64

Part II. Other Information
Legal Proceedings (Item 1)			118
Risk Factors (Item 1A)			118
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			118
Exhibits (Item 6)			118
Signatures			119
Certifications

FORWARD-LOOKING STATEMENTS

This report may contain forward-looking statements about Fifth Third Bancorp and/or the company as combined acquired entities within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve inherent risks and uncertainties. This report may contain certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Fifth Third Bancorp and/or the combined company including statements preceded by, followed by or that include the words or phrases such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general economic conditions and weakening in the economy, specifically the real estate market, either nationally or in the states in which Fifth Third, one or more acquired entities and/or the combined company do business, are less favorable than expected; (2) deteriorating credit quality; (3) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (4) changes in the interest rate environment reduce interest margins; (5) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; (6) Fifth Third’s ability to maintain required capital levels and adequate sources of funding and liquidity; (7) maintaining capital requirements may limit Fifth Third’s operations and potential growth; (8) changes and trends in capital markets; (9) problems encountered by larger or similar financial institutions may adversely affect the banking industry and/or Fifth Third; (10) competitive pressures among depository institutions increase significantly; (11) effects of critical accounting policies and judgments; (12) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (FASB) or other regulatory agencies; (13) legislative or regulatory changes or actions, or significant litigation, adversely affect Fifth Third, one or more acquired entities and/or the combined company or the businesses in which Fifth Third, one or more acquired entities and/or the combined company are engaged, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act); (14) ability to maintain favorable ratings from rating agencies; (15) fluctuation of Fifth Third’s stock price; (16) ability to attract and retain key personnel; (17) ability to receive dividends from its subsidiaries; (18) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (19) effects of accounting or financial results of one or more acquired entities; (20) difficulties from the separation of Vantiv Holding, LLC from Fifth Third; (21) loss of income from any sale or potential sale of businesses that could have an adverse effect on Fifth Third’s earnings and future growth; (22) ability to secure confidential information through the use of computer systems and telecommunications networks; and (23) the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity.

Glossary of Terms

Fifth Third Bancorp provides the following list of acronyms as a tool for the reader. The acronyms identified below are used in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Condensed Consolidated Financial Statements and in the Notes to Condensed Consolidated Financial Statements.

ALCO: Asset Liability Management Committee

ALLL: Allowance for Loan and Lease Losses

AOCI: Accumulated Other Comprehensive Income

ARM: Adjustable Rate Mortgage

ATM: Automated Teller Machine

BOLI: Bank Owned Life Insurance

bp: Basis point(s)

CCAR: Comprehensive Capital Analysis and Review

CDC: Fifth Third Community Development Corporation

CFPB: United States Consumer Financial Protection Bureau

C&I: Commercial and Industrial

DCF: Discounted Cash Flow

DDAs: Demand Deposit Accounts

ERISA: Employee Retirement Income Security Act

ERM: Enterprise Risk Management

ERMC: Enterprise Risk Management Committee

EVE: Economic Value of Equity

FASB: Financial Accounting Standards Board

FDIC: Federal Deposit Insurance Corporation

FHLB: Federal Home Loan Bank

FHLMC: Federal Home Loan Mortgage Corporation

FICO: Fair Isaac Corporation (credit rating)

FNMA: Federal National Mortgage Association

FRB: Federal Reserve Bank

FTAM: Fifth Third Asset Management, Inc.

FTE: Fully Taxable Equivalent

FTP: Funds Transfer Pricing

FTS: Fifth Third Securities

GNMA: Government National Mortgage Association

GSE: Government Sponsored Enterprise

HAMP: Home Affordable Modification Program

HARP: Home Affordable Refinance Program

HFS: Held for Sale

IFRS: International Financial Reporting Standards

IPO: Initial Public Offering

IRC: Internal Revenue Code

IRLC: Interest Rate Lock Commitment

IRS: Internal Revenue Service

LIBOR: London InterBank Offered Rate

LLC: Limited Liability Company

LTV: Loan-to-Value

MD&A: Management’s Discussion and Analysis of Financial Condition and Results of Operations

MSR: Mortgage Servicing Right

NII: Net Interest Income

NM: Not Meaningful

OCI: Other Comprehensive Income

OREO: Other Real Estate Owned

OTTI: Other-Than-Temporary Impairment

PMI: Private Mortgage Insurance

SEC: United States Securities and Exchange Commission

TARP: Troubled Asset Relief Program

TBA: To Be Announced

TDR: Troubled Debt Restructuring

TruPS: Trust Preferred Securities

U.S. GAAP: Accounting principles generally accepted in the United States of America

VIE: Variable Interest Entity

VRDN: Variable Rate Demand Note

U.S.: United States of America

Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)

The following is MD&A of certain significant factors that have affected Fifth Third Bancorp’s (the “Bancorp” or “Fifth Third”) financial condition and results of operations during the periods included in the Condensed Consolidated Financial Statements, which are a part of this filing. Reference to the Bancorp incorporates the parent holding company and all consolidated subsidiaries.

TABLE 1: Selected Financial Data


	For the three months ended June 30,								For the six months ended June 30,
($ in millions, except for per share data)	2012			2011		% Change			2012			2011		% Change
Income Statement Data
Net interest income^(a)		$ 899			869		3		$	1,802			1,752		3
Noninterest income		678			656		3			1,448			1,240		17
Total revenue^(a)		1,577			1,525		3			3,250			2,992		9
Provision for loan and lease losses		71			113		(37	)		162			281		(42	)
Noninterest expense		937			901		4			1,911			1,819		5
Net income attributable to Bancorp		385			337		14			815			602		35
Net income available to common shareholders		376			328		15			797			417		91

Common Share Data
Earnings per share, basic		$0.41			0.36		14		$	0.87			0.46		89
Earnings per share, diluted		0.40			0.35		14			0.85			0.46		85
Cash dividends per common share		0.08			0.06		33			0.16			0.12		33
Book value per share		14.56			13.23		10			14.56			13.23		10
Market value per share		13.40			12.75		5			13.40			12.75		5

Financial Ratios (%)
Return on assets		1.32	%		1.22		8			1.40	%		1.09		28
Return on average common equity		11.4			11.0		4			12.2			7.2		69
Dividend payout ratio		19.5			16.7		17			18.4			26.1		(30	)
Average equity as a percent of average assets		11.58			11.12		4			11.54			11.44		1
Tangible common equity^(b)		9.15			8.64		6			9.15			8.64		6
Net interest margin^(a)		3.56			3.62		(2	)		3.59			3.66		(2	)
Efficiency^(a)		59.4			59.1		1			58.8			60.8		(3	)

Credit Quality
Net losses charged off		$ 181			304		(40	)	$	401			671		(40	)
Net losses charged off as a percent of average loans and leases		0.88	%		1.56		(44	)		0.98	%		1.74		(44	)
ALLL as a percent of loans and leases		2.45			3.35		(27	)		2.45			3.35		(27	)
Allowance for credit losses as a percent of loans and leases^(c)		2.66			3.61		(26	)		2.66			3.61		(26	)
Nonperforming assets as a percent of loans, leases and other assets, including other real estate owned^(d)		1.96			2.66		(26	)		1.96			2.66		(26	)

Average Balances
Loans and leases, including held for sale		$84,508			79,153		7		$	84,132			79,265		6
Total securities and other short-term investments		17,168			17,192		—			16,952			17,241		(2	)
Total assets		117,654			111,200		6			116,989			111,023		5
Transaction deposits^(e)		77,621			71,506		9			77,378			70,838		9
Core deposits^(f)		81,980			78,244		5			81,833			77,887		5
Wholesale funding^(g)		17,533			16,433		7			17,065			16,430		4
Bancorp shareholders’ equity		13,628			12,365		10			13,497			12,706		6

Regulatory Capital Ratios (%)
Tier I risk-based capital		12.31	%		11.93		3			12.31	%		11.93		3
Total risk-based capital		16.24			16.03		1			16.24			16.03		1
Tier I leverage		11.39			11.03		3			11.39			11.03		3
Tier I common equity^(b)		9.77			9.20		6			9.77			9.20		6

(a)

Amounts presented on an FTE basis. The FTE adjustment for the three months ended June 30, 2012 and 2011 was $4 and $5, respectively, and for the six months ended June 30, 2012 and 2011 was $9.

(b)

The tangible common equity and Tier I common equity ratios are non-GAAP measures. For further information, see the Non-GAAP Financial Measures section of the MD&A.

(c)

The allowance for credit losses is the sum of the ALLL and the reserve for unfunded commitments.

(d)

Excludes nonaccrual loans held for sale.

(e)

Includes demand, interest checking, savings, money market and foreign office deposits.

(f)

Includes transaction deposits plus other time deposits.

(g)

Includes certificates $100,000 and over, other deposits, federal funds purchased, other short-term borrowings and long-term debt.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

OVERVIEW

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At June 30, 2012, the Bancorp had $117.5 billion in assets, operated 15 affiliates with 1,322 full-service Banking Centers, including 105 Bank Mart^® locations open seven days a week inside select grocery stores, and 2,409 ATMs in 12 states throughout the Midwestern and Southeastern regions of the United States. The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors. The Bancorp also has an approximate 39% interest in Vantiv Holding, LLC.

This overview of MD&A highlights selected information in the financial results of the Bancorp and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire document. Each of these items could have an impact on the Bancorp’s financial condition, results of operations and cash flows. In addition, see the Glossary of Terms in this report for a list of acronyms included as a tool for the reader of this quarterly report on Form 10-Q. The acronyms identified therein are used throughout this MD&A, as well as the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements.

The Bancorp believes that banking is first and foremost a relationship business where the strength of the competition and challenges for growth can vary in every market. The Bancorp believes its affiliate operating model provides a competitive advantage by emphasizing individual relationships. Through its affiliate operating model, individual managers at all levels within the affiliates are given the opportunity to tailor financial solutions for their customers.

The Bancorp’s revenues are dependent on both net interest income and noninterest income. For the three months ended June 30, 2012, net interest income, on an FTE basis, and noninterest income provided 57% and 43% of total revenue, respectively. The Bancorp derives the majority of its revenues within the United States from customers domiciled in the United States. Revenue from foreign countries and external customers domiciled in foreign countries is immaterial to the Bancorp’s Condensed Consolidated Financial Statements. Changes in interest rates, credit quality, economic trends and the capital markets are primary factors that drive the performance of the Bancorp. As discussed later in the Risk Management section, risk identification, measurement, monitoring, control and reporting are important to the management of risk and to the financial performance and capital strength of the Bancorp.

Net interest income is the difference between interest income earned on assets such as loans, leases and securities, and interest expense incurred on liabilities such as deposits, short-term borrowings and long-term debt. Net interest income is affected by the general level of interest rates, the relative level of short-term and long-term interest rates, changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Generally, the rates of interest the Bancorp earns on its assets and pays on its liabilities are established for a period of time. The change in market interest rates over time exposes the Bancorp to interest rate risk through potential adverse changes to net interest income and financial position. The Bancorp manages this risk by continually analyzing and adjusting the composition of its assets and liabilities based on their payment streams and interest rates, the timing of their maturities and their sensitivity to changes in market interest rates. Additionally, in the ordinary course of business, the Bancorp enters into certain derivative transactions as part of its overall strategy to manage its interest rate and prepayment risks. The Bancorp is also exposed to the risk of losses on its loan and lease portfolio, as a result of changing expected cash flows caused by loan defaults and inadequate collateral due to a weakened economy within the Bancorp’s footprint.

Net interest income, net interest margin and the efficiency ratio are presented in MD&A on an FTE basis. The FTE basis adjusts for the tax-favored status of income from certain loans and securities held by the Bancorp that are not taxable for federal income tax purposes. The Bancorp believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable and non-taxable amounts.

Noninterest income is derived primarily from mortgage banking net revenue, service charges on deposits, corporate banking revenue, investment advisory revenue and card and processing revenue. Noninterest expense is primarily driven by personnel costs, net occupancy expenses, and technology and communications costs.

Senior Notes Offerings

On March 7, 2012, the Bancorp issued $500 million of Senior Notes to third party investors, and entered into a Supplemental Indenture with Wilmington Trust Company, as Trustee, which modified the existing Indenture for Senior Debt Securities dated as of April 30, 2008. The Supplemental Indenture and the Indenture define the rights of the Senior Notes, which Senior Notes are represented by a Global Security dated as of March 7, 2012. The Senior Notes bear a fixed rate of interest of 3.50% per annum. The notes are unsecured, senior obligations of the Bancorp. Payment of the full principal amount of the notes will be due upon maturity on March 15, 2022. The notes will not be subject to the redemption at the Bancorp’s option at any time until 30 days prior to maturity. For additional information regarding long-term debt, see Note 11 of the Notes to the Condensed Consolidated Financial Statements.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

CCAR Results

On March 13, 2012, the Bancorp announced the results of its capital plan submitted to the FRB as part of the 2012 CCAR. The FRB indicated to the Bancorp that it did not object to the following capital actions: a continuation of its quarterly common dividend of $0.08 per share; the redemption of up to $1.4 billion in certain TruPS; and the repurchase of common shares in an amount equal to any after-tax gains realized by the Bancorp from the sale of Vantiv, Inc. common shares by either the Bancorp or Vantiv, Inc.

The FRB indicated to the Bancorp that it did object to other elements of its capital plan, including increases in its quarterly common dividend and the initiation of common share repurchases other than those described in the paragraph above. The Bancorp resubmitted its capital plan to the FRB on June 8, 2012 and expects to receive a response within approximately 75 days of the resubmission date. The resubmitted plan included capital actions and distributions for the covered period through March 31, 2013 that were substantially similar to those included in the original submission, with adjustments primarily reflecting the change in the expected timing of capital actions and distributions relative to the timing assumed in the original submission.

Accelerated Share Repurchase

Based upon the FRB’s indication that it did not object to certain capital actions submitted by the Bancorp as part of the 2012 CCAR, on April 23, 2012, the Bancorp entered into an accelerated share repurchase transaction with a counterparty pursuant to which the Bancorp purchased 4,838,710 shares or approximately $75 million of its outstanding common stock on April 26, 2012. As part of this transaction, the Bancorp entered into a forward contract in which the final number of shares delivered at settlement of the accelerated share repurchase transaction was based on a discount to the average daily volume-weighted average price of the Bancorp’s common stock during the term of the Repurchase Agreement. The accelerated share repurchase was treated as two separate transactions (i) the acquisition of treasury shares on the acquisition date and (ii) a forward contract indexed to the Bancorp’s stock. At settlement of the forward contract on June 1, 2012, the Bancorp received an additional 631,986 shares which were recorded as an adjustment to the basis in the treasury shares purchased on the acquisition date.

Redemption of TruPS

In connection with the 2012 CCAR results, on July 2, 2012, the Bancorp announced that it submitted redemption notices to the trustee for redemption on August 15, 2012, of all $575 million of the outstanding TruPS issued by Fifth Third Capital Trust V. The Fifth Third Capital Trust V securities have a current distribution rate of 7.25% and a scheduled maturity date of August 15, 2067, although they may be redeemed at any time on or after August 15, 2012. The redemption price will be $25 per security, which reflects 100% of the liquidation amount, plus accrued and unpaid distributions to the actual redemption date of $0.453125 per security. The Bancorp will recognize an estimated loss on extinguishment of $17 million of these TruPS on August 15, 2012 which will be reflected in the Bancorp’s Condensed Consolidated Financial Statements for the quarter ending September 30, 2012.

Additionally, on August 8, 2012, the Bancorp redeemed all $862.5 million of the outstanding TruPS issued by Fifth Third Capital Trust VI. The Bancorp had previously announced on July 9, 2012, that it had submitted redemption notices to the trustee for redemption of the outstanding TruPS issued by Fifth Third Capital Trust VI with a distribution rate at redemption of 7.25% and a scheduled maturity date of November 15, 2067. The redemption price was $25 per security, which reflected 100% of the liquidation amount, plus accrued and unpaid distributions through the actual redemption date of $0.422917 per security. The Bancorp recognized a $9 million loss on extinguishment of these TruPS on August 8, 2012 which will be reflected in the Bancorp’s Condensed Consolidated Financial Statements for the quarter ending September 30, 2012. The redemptions were funded with available cash.

See Note 21 of the Notes to Condensed Consolidated Financial Statements for further information.

Vantiv, Inc. IPO

On June 30, 2009, the Bancorp completed the sale of a majority interest in its processing business to Advent International. As part of this transaction, the processing business was contributed into a partnership now known as Vantiv Holding, LLC. Vantiv, Inc., formed by Advent and owned by certain funds managed by Advent, acquired an approximate 51% interest in Vantiv Holding, LLC for cash and warrants. The Bancorp retained the remaining approximate 49% interest in Vantiv Holding.

During the first quarter of 2012, Vantiv, Inc. priced an IPO of its shares and contributed the net proceeds to Vantiv Holding, LLC for additional ownership interests. As a result of this offering, the Bancorp’s ownership of Vantiv Holding, LLC was reduced to approximately 39% and will continue to be accounted for as an equity method investment in the Condensed Consolidated Financial Statements. The impact of the capital contributions to Vantiv Holding, LLC and the resulting dilution in the Bancorp’s interest resulted in the recognition of a pre-tax gain of $115 million ($75 million after-tax) by the Bancorp in the first quarter of 2012.

As of June 30, 2012, the Bancorp continued to hold approximately 84 million units of Vantiv Holding, LLC and a warrant to purchase approximately 20 million incremental Vantiv Holding, LLC non-voting units, both of which may be exchanged for common stock of Vantiv, Inc. on a one for one basis or at Vantiv, Inc’s option for cash. In addition, the Bancorp holds approximately 84 million Class B common shares of Vantiv, Inc. The Class B common shares give the Bancorp voting rights, but no economic interest in Vantiv, Inc. The voting rights attributable to the Class B common shares are limited to 18.5% of the voting power in Vantiv, Inc. at any time other than in connection with a stockholder vote with respect to a change in control in Vantiv, Inc. These securities are subject to certain terms and restrictions.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Legislative Developments

On July 21, 2010, the Dodd-Frank Act was signed into law. This act implements changes to the financial services industry and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The legislation establishes a CFPB responsible for implementing and enforcing compliance with consumer financial laws, changes the methodology for determining deposit insurance assessments, gives the FRB the ability to regulate and limit interchange rates charged to merchants for the use of debit cards, enacts new limitations on proprietary trading, broadens the scope of derivative instruments subject to regulation, requires on-going stress tests and the submission of annual capital plans for certain organizations and requires changes to regulatory capital ratios. This act also calls for federal regulatory agencies to conduct multiple studies over the next several years in order to implement its provisions.

The Bancorp was impacted by a number of the components of the Dodd-Frank Act which were implemented during 2011. The CFPB began operations on July 21, 2011 and holds primary responsibility for regulating consumer protection by enforcing existing consumer laws, writing new consumer legislation, conducting bank examinations, monitoring and reporting on markets, as well as collecting and tracking consumer complaints. The FRB final rule implementing the Dodd-Frank Act’s “Durbin Amendment,” which limits debit card interchange fees, was issued on July 21, 2011 for transactions occurring after September 30, 2011. The final rule established a cap on the fees banks with more than $10 billion in assets can charge merchants for debit card transactions. The fee was set at $0.21 per transaction plus an additional 5 bp of the transaction amount and $0.01 to cover fraud losses. The FRB repealed Regulation Q as mandated by the Dodd-Frank Act on July 21, 2011. Regulation Q was implemented as part of the Glass-Steagall Act in the 1930’s and provided a prohibition against the payment of interest on demand deposits. While the total impact of the Dodd-Frank Act on the Bancorp is not currently known, the impact is expected to be substantial and may have an adverse impact on the Bancorp’s financial performance and growth opportunities.

In December of 2010 and revised in June of 2011, the Basel Committee on Banking Supervision issued Basel III, a global regulatory framework, to enhance international capital standards. In June of 2012, U.S. banking regulators proposed enhancements to the regulatory capital requirements for U.S. banks, which implement aspects of Basel III, such as re-defining the regulatory capital elements and minimum capital ratios, introducing regulatory capital buffers above those minimums, revising the agencies rules for calculating risk-weighted assets and introducing a new Tier I common equity ratio. The Bancorp continues to evaluate these proposals and their potential impact. For more information on the impact of the proposed regulatory capital enhancements, refer to the Capital Management section of the MD&A.

Earnings Summary

The Bancorp’s net income available to common shareholders for the second quarter of 2012 was $376 million, or $0.40 per diluted share, which was net of $9 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the second quarter of 2011 was $328 million, or $0.35 per diluted share, which was net of $9 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the six months ended June 30, 2012 was $797 million, or $0.85 per diluted share, which was net of $18 million in preferred stock dividends. For the six months ended June 30, 2011, the Bancorp’s net income available to common shareholders was $417 million, or $0.46 per diluted share, which was net of $185 million in preferred stock dividends. The preferred stock dividends for the six months ended June 30, 2011 included $153 million in discount accretion resulting from the Bancorp’s repurchase of Series F preferred stock.

Net interest income increased three percent to $899 million for the quarter ended June 30, 2012 compared to $869 million in the second quarter of 2011. Net interest income in the second quarter of 2012 was positively impacted by a $5.4 billion increase in average loans and leases, a 27 bp decrease in the average rate paid on interest-bearing liabilities compared to the second quarter of 2011 and a mix shift to lower cost deposit products. These effects were partially offset by a 29 bp decrease in the average yield on interest-earning assets. Net interest income was $1.8 billion for the six months ended June 30, 2012 and 2011. Net interest income in the first half of 2012 was positively impacted by a $4.9 billion increase in average loans and leases and a 25 bp decrease in the average rate paid on interest-bearing liabilities compared to the six months ended June 30, 2011 and a mix shift to lower cost deposit products. These effects were partially offset by a 29 bp decrease in the average yield on interest-earning assets. Net interest margin was 3.56% and 3.59% for the three and six months ended June 30, 2012, respectively, compared to 3.62% and 3.66% for the same periods in the prior year.

Noninterest income increased $22 million, or three percent, in the second quarter of 2012 compared to the same period in the prior year. The increase from the second quarter of 2011 was primarily due to an increase in mortgage banking net revenue and other noninterest income partially offset by a decrease in card and processing revenue. Mortgage banking net revenue increased $21 million, or 13%, primarily due to an increase in origination fees and gains on loan sales partially offset by an increase in losses on net valuation adjustments on servicing rights and free-standing derivatives entered into to economically hedge the MSR portfolio. Other noninterest income increased $20 million, or 25%, primarily due to an increase in positive valuation adjustments on the Vantiv, Inc. warrants. These impacts were partially offset by a $25 million decrease in card and processing revenue primarily as a result of the implementation of the Durbin Amendment. Noninterest income increased $208 million, or 17%, for the six months ended June 30, 2012 compared to the same period in 2011. The increase from the first half of 2011 was primarily due to an increase in mortgage banking net revenue and other noninterest income partially offset by a decrease in card and processing revenue. Mortgage banking net revenue increased $123 million, or 47%, primarily due to an increase in origination fees and gains on loan sales partially offset by an increase in losses on net valuation adjustments on servicing rights and free-standing derivatives entered into to economically hedge the MSR portfolio. Other noninterest income increased $115 million, or 71%, primarily due to a $115 million gain from the Vantiv, Inc. IPO. These impacts were partially offset by a $47 million decrease in card and processing revenue primarily as a result of the implementation of the Durbin Amendment.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Noninterest expense increased $36 million, or four percent, in the second quarter of 2012 and increased $92 million, or five percent, for the six months ended June 30, 2012 compared to the same periods in 2011. The increase for both periods was primarily due to increases of $33 million and $95 million, respectively, in total personnel costs.

Credit Summary

The Bancorp does not originate subprime mortgage loans and does not hold asset-backed securities backed by subprime mortgage loans in its securities portfolio. However, the Bancorp has exposure to disruptions in the capital markets and weakened economic conditions. Over the last few years, the Bancorp has continued to be negatively affected by high unemployment rates, weakened housing markets, particularly in Michigan and Florida, and a challenging credit environment. Credit trends have improved more recently, and as a result, the provision for loan and lease losses decreased to $71 million and $162 million for the three and six months ended June 30, 2012 compared to $113 million and $281 million, respectively, for the same periods in 2011. In addition, net charge-offs as a percent of average loans and leases decreased to 0.88% during the second quarter of 2012 compared to 1.56% during the second quarter of 2011 and decreased to 0.98% for the six months ended June 30, 2012 compared to 1.74% for the six months ended June 30, 2011. At June 30, 2012, nonperforming assets as a percent of loans, leases and other assets, including OREO (excluding nonaccrual loans held for sale) decreased to 1.96%, compared to 2.23% at December 31, 2011 and 2.66% at June 30, 2011. For further discussion on credit quality, see the Credit Risk Management section in MD&A.

Capital Summary

The Bancorp’s capital ratios exceed the “well-capitalized” guidelines as defined by the Board of Governors of the Federal Reserve System. As of June 30, 2012, the Tier I risk-based capital ratio was 12.31%, the Tier I leverage ratio was 11.39% and the total risk-based capital ratio was 16.24%.

NON-GAAP FINANCIAL MEASURES

The Bancorp considers various measures when evaluating capital utilization and adequacy, including the tangible equity ratio, tangible common equity ratio and Tier I common equity ratio, in addition to capital ratios defined by banking regulators. These calculations are intended to complement the capital ratios defined by banking regulators for both absolute and comparative purposes. Because U.S. GAAP does not include capital ratio measures, the Bancorp believes there are no comparable U.S. GAAP financial measures to these ratios. These ratios are not formally defined by U.S. GAAP or codified in the federal banking regulations and, therefore, are considered to be non-GAAP financial measures. Since analysts and banking regulators may assess the Bancorp’s capital adequacy using these ratios, the Bancorp believes they are useful to provide investors the ability to assess its capital adequacy on the same basis.

The Bancorp believes these non-GAAP measures are important because they reflect the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures allows readers to compare certain aspects of the Bancorp’s capitalization to other organizations. However, because there are no standardized definitions for these ratios, the Bancorp’s calculations may not be comparable with other organizations, and the usefulness of these measures to investors may be limited. As a result, the Bancorp encourages readers to consider its Condensed Consolidated Financial Statements in their entirety and not to rely on any single financial measure.

Pre-provision net revenue is net interest income plus noninterest income minus noninterest expense. The Bancorp believes this measure is important because it provides a ready view of the Bancorp’s earnings before the impact of provision expense.

The following table reconciles non-GAAP financial measures to U.S. GAAP as of or for the three months ended:

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

TABLE 2: Non-GAAP Financial Measures


($ in millions)	June 30, 2012			December 31, 2011			June 30, 2011
Income before income taxes (U.S. GAAP)	$	565			418			506
Add: Provision expense (U.S. GAAP)		71			55			113

Pre-provision net revenue		636			473			619
Net income available to common shareholders (U.S. GAAP)	$	376			305			328
Add: Intangible amortization, net of tax		2			3			4

Tangible net income available to common shareholders		378			308			332
Total Bancorp shareholders’ equity (U.S. GAAP)	$	13,773			13,201			12,572
Less: Preferred stock		(398	)		(398	)		(398	)
Goodwill		(2,417	)		(2,417	)		(2,417	)
Intangible assets		(33	)		(40	)		(49	)

Tangible common equity, including unrealized gains / losses		10,925			10,346			9,708
Less: Accumulated other comprehensive income		(454	)		(470	)		(396	)

Tangible common equity, excluding unrealized gains / losses (1)		10,471			9,876			9,312
Add: Preferred stock		398			398			398

Tangible equity (2)	$	10,869			10,274			9,710

Total assets (U.S. GAAP)	$	117,543			116,967			110,805
Less: Goodwill		(2,417	)		(2,417	)		(2,417	)
Intangible assets		(33	)		(40	)		(49	)
Accumulated other comprehensive income, before tax		(698	)		(723	)		(609	)

Tangible assets, excluding unrealized gains / losses (3)	$	114,395			113,787			107,730

Total Bancorp shareholders’ equity (U.S. GAAP)	$	13,773			13,201			12,572
Less: Goodwill and certain other intangibles		(2,512	)		(2,514	)		(2,536	)
Accumulated other comprehensive income		(454	)		(470	)		(396	)
Add: Qualifying trust preferred securities		2,248			2,248			2,312
Other		38			38			20

Tier I risk-based capital		13,093			12,503			11,972
Less: Preferred stock		(398	)		(398	)		(398	)
Qualifying TruPS		(2,248	)		(2,248	)		(2,312	)
Qualified noncontrolling interests in consolidated subsidiaries		(51	)		(50	)		(30	)

Tier I common equity (4)	$	10,396			9,807			9,232

Risk-weighted assets (5) ^(a)	$	106,398			104,945			100,320
Ratios:
Tangible equity (2) / (3)		9.50	%		9.03			9.01
Tangible common equity (1) / (3)		9.15	%		8.68			8.64
Tier I common equity (4) / (5)		9.77	%		9.35			9.20

(a)

Under the banking agencies’ risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together, along with the measure for market risk, resulting in the Bancorp’s total risk-weighted assets.

RECENT ACCOUNTING STANDARDS

Note 3 of the Notes to Condensed Consolidated Financial Statements provides a discussion of the significant new accounting standards applicable to the Bancorp and the expected impact of significant accounting standards issued, but not yet required to be adopted.

CRITICAL ACCOUNTING POLICIES

The Bancorp’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. Certain accounting policies require management to exercise judgment in determining methodologies, economic assumptions and estimates that may materially affect the value of the Bancorp’s assets or liabilities and results of operations and cash flows. The Bancorp’s critical accounting policies include the accounting for the ALLL, reserve for unfunded commitments, income taxes, valuation of servicing rights, fair value measurements and goodwill. These accounting policies are discussed in detail in Management’s Discussion and Analysis – Critical Accounting Policies in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2011. No material changes were made to the valuation techniques or models during the six months ended June 30, 2012.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

STATEMENTS OF INCOME ANALYSIS

Net Interest Income

Net interest income is the interest earned on securities, loans and leases (including yield-related fees) and other interest-earning assets less the interest paid for core deposits (includes transaction deposits and other time deposits) and wholesale funding (includes certificates of deposit $100,000 and over, other deposits, federal funds purchased, short-term borrowings and long-term debt). The net interest margin is calculated by dividing net interest income by average interest-earning assets. Net interest rate spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin is typically greater than net interest rate spread due to the interest income earned on those assets that are funded by noninterest-bearing liabilities, or free funding, such as demand deposits or shareholders’ equity.

Tables 3 and 4 present the components of net interest income, net interest margin and net interest rate spread for the three and six months ended June 30, 2012 and 2011, as well as the relative impact of changes in the balance sheet and changes in interest rates on net interest income. Nonaccrual loans and leases and loans held for sale have been included in the average loan and lease balances. Average outstanding securities balances are based on amortized cost with any unrealized gains or losses on available-for-sale securities included in other assets.

Net interest income was $899 million for the second quarter of 2012, an increase of $30 million compared to the second quarter of 2011. Net interest income was $1.8 billion for the six months ended June 30, 2012, an increase of $50 million from the six months ended June 30, 2011. Included within net interest income are amounts related to the accretion of discounts on acquired loans and deposits, primarily as a result of acquisitions in previous years, which increased net interest income by $11 million and $19 million during the three and six months ended June 30, 2012, respectively, compared to $10 million and $23 million during the three and six months ended June 30, 2011, respectively. The original purchase accounting discounts reflected the high discount rates in the market at the time of the acquisitions; the total loan discounts are being accreted into net interest income over the remaining period to maturity of the loans acquired. Based upon the remaining period to maturity, and excluding the impact of prepayments, the Bancorp anticipates recognizing approximately $8 million in additional net interest income during the remainder of 2012 as a result of the amortization and accretion of premiums and discounts on acquired loans and deposits.

For the three and six months ended June 30, 2012, net interest income was positively impacted by an increase in average loans and leases of $5.4 billion and $4.9 billion, respectively, as well as a decrease in interest expense compared to the same periods in 2011. These benefits were partially offset by lower yields on the Bancorp’s interest-earning assets. The increase in average loans and leases for both periods was driven primarily by increases in commercial and industrial loans and residential mortgage loans compared to the same periods in 2011. The decrease in interest expense for the three and six months ended June 30, 2012 was primarily the result of decreases in the rates paid on interest bearing liabilities of 27 bp and 25 bp, respectively, compared to the same periods in 2011, coupled with a continued mix shift to lower cost core deposits. For the three and six months ended June 30, 2012, the net interest rate spread decreased to 3.35% and 3.37%, respectively, from 3.37% and 3.41% in the same periods in 2011 as the benefit of the decrease in rates on interest bearing liabilities was more than offset by a 29 bp decrease in yield on average interest earnings assets in both periods when compared to the same periods in 2011.

Net interest margin was 3.56% and 3.59% for the three and six months ended June 30, 2012, respectively, compared to 3.62% and 3.66% for the three and six months ended June 30, 2011, respectively. Net interest margin was impacted by the amortization and accretion of premiums and discounts on acquired loans and deposits that resulted in an increase in net interest margin of 4 bp and 3 bp during the three and six months ended June 30, 2012, respectively, compared to a 4 bp and 8 bp increase during the three and six months ended June 30, 2011. Exclusive of these amounts, net interest margin decreased 6 bp and 2 bp for the three and six months ended June 30, 2012 compared to the same periods in the prior year. The decrease from both periods in 2011 was driven primarily by the previously mentioned decline in the yield on average interest-earning assets and securities and higher average balances on interest earning assets, partially offset by a mix shift to lower cost core deposits, the decline in rates paid on interest bearing liabilities and an increase in free funding balances.

Total average interest-earning assets for the three and six months ended June 30, 2012 increased six percent and five percent, respectively, compared to the three and six months ended June 30, 2011. The increase from the three and six months ended June 30, 2011 was primarily the result of an increase of 17% and 16%, respectively, in average commercial and industrial loans and an increase of 23% and 21%, respectively, in average residential mortgage loans. For more information on the Bancorp’s loan and lease portfolio, see the Loans and Leases section of the Balance Sheet analysis of MD&A.

Interest income from loans and leases decreased $2 million compared to the second quarter of 2011 and $13 million, or one percent, compared to the six months ended June 30, 2011. The decrease from the three months and six months ended June 30, 2011 was primarily the result of a decrease of 28 bp and 31 bp, respectively, in average loan yields partially offset by an increase of seven percent and six percent, respectively, in average loans. Interest income from investment securities and short-term investments decreased $17 million, or 11%, compared to the three months ended June 30, 2011 primarily as the result of a 49 bp decrease in the average yield on taxable securities. Interest income from investment securities and short-term investments decreased $25 million, or eight percent, compared to the six months ended June 30, 2011 primarily due to a 38 bp decrease in the average yield on taxable securities.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Average core deposits increased $3.7 billion, or five percent, compared to the second quarter of 2011 and increased $3.9 billion, or five percent, compared to the six months ended June 30, 2011. The increase from both periods was primarily due to an increase in average demand deposits and average interest checking deposits partially offset by decreases in average foreign office deposits and average other time deposits. The cost of average core deposits decreased to 21 bp and 22 bp for the three and six months ended June 30, 2012, respectively, from 39 bp and 42 bp for the three and six months ended June 30, 2011. This decrease was primarily the result of a mix shift to lower cost core deposits as a result of run-off of higher priced CDs combined with decreases of 14 bp and 18 bp in the rate paid on average savings deposits and decreases of 80 bp and 77 bp on average other time deposits compared to the three and six months ended June 30, 2011, respectively.

For the three months ended June 30, 2012, interest expense on wholesale funding decreased $15 million, or 14%, compared to the three months ended June 30, 2011 primarily as a result of an $825 million decrease in average certificates $100,000 and over and a $858 million decrease in long-term debt. In addition, the rate paid on average certificates $100,000 and over decreased by 55 bp. During the six months ended June 30, 2012, interest expense on wholesale funding decreased $16 million, or eight percent, compared to the six months ended June 30, 2011 as a result of a $936 million decrease in rates paid on average certificates $100,000 and over, a $670 million decrease in long-term debt and a 50 bp decrease in rates paid on average certificates $100,000 and over partially offset by a 21 bp increase in the rate paid on long-term debt. During the three and six months ended June 30, 2012, wholesale funding represented 24% and 23%, respectively, of interest bearing liabilities compared to 23% during the three and six months ended June 30, 2011. Refer to the Borrowings subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s borrowings. For more information on the Bancorp’s interest rate risk management, including estimated earnings sensitivity to changes in market interest rates, see the Market Risk Management section of MD&A.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

TABLE 3: Condensed Average Balance Sheets and Analysis of Net Interest Income


For the three months ended	June 30, 2012								June 30, 2011								Attribution of Change in Net Interest Income (a)
($ in millions)	Average Balance			Revenue/ Cost		Average Yield Rate			Average Balance			Revenue/ Cost		Average Yield Rate			Volume			Yield/Rate			Total
Assets
Interest-earning assets:
Loans and leases:^(b)
Commercial and industrial loans	$	32,770		$	337		4.13	%	$	27,970		$	304		4.35	%	$	49			(16	)		33
Commercial mortgage		9,873			93		3.81			10,491			105		4.00			(7	)		(5	)		(12	)
Commercial construction		886			7		3.05			1,950			15		3.01			(8	)		—			(8	)
Commercial leases		3,471			32		3.68			3,349			34		4.06			1			(3	)		(2	)

Subtotal – commercial		47,000			469		4.01			43,760			458		4.19			35			(24	)		11
Residential mortgage loans		13,059			134		4.12			10,655			120		4.54			26			(12	)		14
Home equity		10,430			98		3.80			11,144			109		3.91			(8	)		(3	)		(11	)
Automobile loans		11,755			110		3.76			11,188			134		4.81			6			(30	)		(24	)
Credit card		1,915			47		9.92			1,834			45		9.91			2			—			2
Other consumer loans/leases		349			37		42.87			572			31		22.02			(15	)		21			6

Subtotal – consumer		37,508			426		4.57			35,393			439		4.99			11			(24	)		(13	)

Total loans and leases		84,508			895		4.26			79,153			897		4.54			46			(48	)		(2	)
Securities:
Taxable		15,548			134		3.48			15,115			150		3.97			3			(19	)		(16	)
Exempt from income taxes^(b)		62			1		5.02			96			2		6.41			(1	)		—			(1	)
Other short-term investments		1,558			1		0.24			1,981			1		0.25			—			—			—

Total interest-earning assets		101,676			1,031		4.08			96,345			1,050		4.37			48			(67	)		(19	)
Cash and due from banks		2,264								2,356
Other assets		15,835								15,298
Allowance for loan and lease losses		(2,121	)							(2,799	)

Total assets	$	117,654							$	111,200

Liabilities and Equity
Interest-bearing liabilities:
Interest checking	$	23,548		$	12		0.22	%	$	18,701		$	12		0.26	%	$	2			(2	)		—
Savings		22,143			11		0.19			21,817			18		0.33			1			(8	)		(7	)
Money market		4,258			2		0.22			5,009			4		0.29			(1	)		(1	)		(2	)
Foreign office deposits		1,321			1		0.27			3,805			3		0.29			(2	)		—			(2	)
Other time deposits		4,359			17		1.60			6,738			40		2.40			(12	)		(11	)		(23	)
Certificates - $100,000 and over		3,130			12		1.50			3,955			20		2.05			(3	)		(5	)		(8	)
Other deposits		23			—		0.13			2			—		0.02			—			—			—
Federal funds purchased		408			—		0.15			344			—		0.11			—			—			—
Other short-term borrowings		4,303			2		0.17			1,605			1		0.16			1			—			1
Long-term debt		9,669			75		3.11			10,527			83		3.16			(7	)		(1	)		(8	)

Total interest-bearing liabilities		73,162			132		0.73			72,503			181		1.00			(21	)		(28	)		(49	)
Demand deposits		26,351								22,174
Other liabilities		4,462								4,129

Total liabilities		103,975								98,806
Total equity		13,679								12,394

Total liabilities and equity	$	117,654							$	111,200

Net interest income				$	899							$	869				$	69			(39	)		30
Net interest margin							3.56	%							3.62	%
Net interest rate spread							3.35								3.37
Interest-bearing liabilities to interest-earning assets							71.96								75.25

(a)

Changes in interest not solely due to volume or yield/rate are allocated in proportion to the absolute dollar amount of change in volume and yield/rate.

(b)

The FTE adjustments included in the above table are $4 and $5 for the three months ended June 30, 2012 and 2011, respectively.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

TABLE 4: Condensed Average Balance Sheets and Analysis of Net Interest Income


For the six months ended	June 30, 2012								June 30, 2011								Attribution of Change in Net Interest Income (a)
($ in millions)	Average Balance			Revenue/ Cost		Average Yield Rate			Average Balance			Revenue/ Cost		Average Yield Rate			Volume			Yield/Rate			Total
Assets
Interest-earning assets:
Loans and leases:^(b)
Commercial and industrial loans	$	32,095		$	665		4.16	%	$	27,689		$	605		4.40	%	$	94			(34	)		60
Commercial mortgage		9,975			192		3.88			10,652			214		4.06			(13	)		(9	)		(22	)
Commercial construction		947			14		3.05			2,017			31		3.08			(17	)		—			(17	)
Commercial leases		3,507			65		3.73			3,356			69		4.12			3			(7	)		(4	)

Subtotal – commercial		46,524			936		4.05			43,714			919		4.24			67			(50	)		17
Residential mortgage loans		12,994			268		4.15			10,695			244		4.60			50			(26	)		24
Home equity		10,518			200		3.82			11,259			220		3.94			(13	)		(7	)		(20	)
Automobile loans		11,819			228		3.87			11,130			273		4.95			18			(63	)		(45	)
Credit card		1,920			92		9.67			1,843			93		10.17			4			(5	)		(1	)
Other consumer loans/leases		357			74		41.46			624			62		20.14			(34	)		46			12

Subtotal – consumer		37,608			862		4.61			35,551			892		5.06			25			(55	)		(30	)

Total loans and leases		84,132			1,798		4.30			79,265			1,811		4.61			92			(105	)		(13	)
Securities:
Taxable		15,430			275		3.58			15,135			298		3.96			6			(29	)		(23	)
Exempt from income taxes^(b)		61			1		5.31			147			3		5.31			(2	)		—			(2	)
Other short-term investments		1,461			2		0.25			1,959			2		0.25			—			—			—

Total interest-earning assets		101,084			2,076		4.13			96,506			2,114		4.42			96			(134	)		(38	)
Cash and due from banks		2,304								2,313
Other assets		15,785								15,098
Allowance for loan and lease losses		(2,184	)							(2,894	)

Total assets	$	116,989							$	111,023

Liabilities and Equity
Interest-bearing liabilities:
Interest checking	$	22,928		$	25		0.22	%	$	18,621		$	25		0.27	%	$	4			(4	)		—
Savings		22,043			22		0.20			21,572			40		0.38			2			(20	)		(18	)
Money market		4,401			5		0.22			5,072			8		0.30			(1	)		(2	)		(3	)
Foreign office deposits		1,799			2		0.26			3,693			6		0.30			(3	)		(1	)		(4	)
Other time deposits		4,455			36		1.61			7,049			83		2.38			(25	)		(22	)		(47	)
Certificates-$100,000 and over		3,154			24		1.52			4,090			41		2.02			(8	)		(9	)		(17	)
Other deposits		21			—		0.11			2			—		0.03			—			—			—
Federal funds purchased		389			—		0.13			327			—		0.12			—			—			—
Other short-term borrowings		3,782			3		0.15			1,622			2		0.18			1			—			1
Long-term debt		9,719			157		3.26			10,389			157		3.05			(10	)		10			—

Total interest-bearing liabilities		72,691			274		0.76			72,437			362		1.01			(40	)		(48	)		(88	)
Demand deposits		26,207								21,880
Other liabilities		4,544								3,970

Total liabilities		103,442								98,287
Total equity		13,547								12,736

Total liabilities and equity	$	116,989							$	111,023

Net interest income				$	1,802							$	1,752				$	136			(86	)		50
Net interest margin							3.59	%							3.66	%
Net interest rate spread							3.37								3.41
Interest-bearing liabilities to interest-earning assets							71.91								75.06

(a)

Changes in interest not solely due to volume or yield/rate are allocated in proportion to the absolute dollar amount of change in volume and yield/rate.

(b)

The FTE adjustments included in the above table are $9 for the six months ended June 30, 2012 and 2011.

Provision for Loan and Lease Losses

The Bancorp provides as an expense an amount for probable loan and lease losses within the loan and lease portfolio that is based on factors previously discussed in the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2011. The provision is recorded to bring the ALLL to a level deemed appropriate by the Bancorp to cover losses inherent in the portfolio. Actual credit losses on loans and leases are charged against the ALLL. The amount of loans actually removed from the Condensed Consolidated Balance Sheets is referred to as charge-offs. Net charge-offs include current period charge-offs less recoveries on previously charged-off loans and leases.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

The provision for loan and lease losses was $71 million and $162 million for the three and six months ended June 30, 2012 compared to $113 million and $281 million during the same periods in 2011. The decrease in provision expense compared to the same periods in the prior year was due to decreases in nonperforming loans and leases, improved delinquency metrics in commercial and consumer loans and leases, and improvement in underlying loss trends. The ALLL declined $598 million from $2.6 billion at June 30, 2011 to $2.0 billion at June 30, 2012. The ALLL declined $239 million from December 31, 2011 to June 30, 2012. As of June 30, 2012, the ALLL as a percent of loans and leases decreased to 2.45%, compared to 2.78% at December 31, 2011 and 3.35% at June 30, 2011.

Refer to the Credit Risk Management section of the MD&A as well as Note 6 of the Notes to Condensed Consolidated Financial Statements for more detailed information on the provision for loan and lease losses, including an analysis of loan portfolio composition, nonperforming assets, net charge-offs, and other factors considered by the Bancorp in assessing the credit quality of the loan and lease portfolio and the ALLL.

Noninterest Income

Noninterest income increased $22 million, or three percent, for the second quarter of 2012 compared to the second quarter of 2011 and increased $208 million, or 17%, for the six months ended June 30, 2012 compared to the same period in the prior year. The components of noninterest income for the three and six months ended June 30, 2012 and 2011 are as follows:

TABLE 5: Noninterest Income


	For the three months							For the six months
	ended June 30,							ended June 30,
($ in millions)	2012		2011		% Change			2012		2011		% Change
Mortgage banking net revenue	$	183		162		13		$	387		264		47
Service charges on deposits		130		126		4			260		250		4
Corporate banking revenue		102		95		7			199		181		10
Investment advisory revenue		93		95		(2	)		190		193		(2	)
Card and processing revenue		64		89		(28	)		122		169		(28	)
Other noninterest income		103		83		25			279		164		71
Securities gains, net		3		6		(50	)		11		14		(21	)
Securities gains, net - non-qualifying hedges on mortgage servicing rights		—		—		NM			—		5		NM

Total noninterest income	$	678		656		3		$	1,448		1,240		17

Mortgage banking net revenue

Mortgage banking net revenue increased $21 million for the three months ended June 30, 2012 compared to the three months ended June 30, 2011 and increased $123 million during the six months ended June 30, 2012 compared to the six months ended June 30, 2011. The components of mortgage banking net revenue are as follows:

TABLE 6: Components of Mortgage Banking Net Revenue


	For the three months						For the six months
	ended June 30,						ended June 30,
($ in millions)	2012			2011			2012			2011
Origination fees and gains on loan sales	$	183			64		$	357			126
Net servicing revenue:
Gross servicing fees		63			58			124			116
Servicing rights amortization		(41	)		(25	)		(86	)		(53	)
Net valuation adjustments on servicing rights and free-standing derivatives entered into to economically hedge MSR		(22	)		65			(8	)		75

Net servicing revenue		—			98			30			138

Mortgage banking net revenue	$	183			162		$	387			264

Origination fees and gains on loan sales increased $119 million and $231 million for the three and six months ended June 30, 2012, respectively, compared to the three and six months ended June 30, 2011. The increase from both periods in the prior year was primarily the result of an 89% and 76% increase in residential mortgage loan originations from the three and six months ended June 30, 2011, respectively, coupled with an increase in profit margins on sold residential mortgage loans. Residential mortgage loan originations increased to $5.9 billion during the second quarter of 2012 compared to $3.1 billion during the second quarter of 2011 and increased to $12.4 billion during the six months ended June 30, 2012 from $7.1 billion during the six months ended June 30, 2011. The increase in originations is primarily due to strong refinancing activity as mortgage rates remain at historical lows coupled with an increase in refinancing activity under the HARP 2.0 program.

Net servicing revenue is comprised of gross servicing fees and related servicing rights amortization as well as valuation adjustments on MSRs and mark-to-market adjustments on both settled and outstanding free-standing derivative financial instruments used to economically hedge the MSR portfolio. Net servicing revenue decreased $98 million and $108 million for the three and six months ended June 30, 2012

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

compared to the three and six months ended June 30, 2011, driven primarily by decreases of $87 million and $83 million, respectively, in net valuation adjustments.

The net valuation adjustment loss of $22 million during the second quarter of 2012 included $60 million of temporary impairment on the MSRs partially offset by $38 million in gains from derivatives economically hedging the MSRs. Mortgage rates decreased slightly for the three months ended June 30, 2012. This caused modeled prepayments speeds to increase, which led to the temporary impairment on servicing rights during the three months ended June 30, 2012. The derivatives economically hedging the MSRs only partially offset the temporary impairment on servicing rights as a result of inefficiencies in the Bancorp’s non-qualifying hedging strategy. The net valuation adjustment of $65 million during the second quarter of 2011 included $129 million in gains from derivatives economically hedging the MSRs partially offset by $64 million in temporary impairment on the MSR portfolio. The net valuation adjustment loss of $8 million for the six months ended June 30, 2012 included $49 million of temporary impairment on the MSRs partially offset by $42 million in gains from derivatives economically hedging the MSRs. The net valuation adjustment of $75 million for the six months ended June 30, 2011 included $102 million in gains from derivatives economically hedging the MSR portfolio partially offset by $27 million of temporary impairment on the MSR portfolio. Gross servicing fees increased $5 million from the second quarter of 2011 and $8 million from the six months ended June 30, 2011 as a result of an increase in the size of the Bancorp’s servicing portfolio. The Bancorp’s total residential loans serviced as of June 30, 2012, December 31, 2011 and June 30, 2011 were $74.8 billion, $70.6 billion and $66.8 billion, respectively, with $61.6 billion, $57.1 billion and $56.0 billion, respectively, of residential mortgage loans serviced for others.

Servicing rights are deemed impaired when a borrower’s loan rate is distinctly higher than prevailing rates. Impairment on servicing rights is reversed when the prevailing rates return to a level commensurate with the borrower’s loan rate. Further detail on the valuation of MSRs can be found in Note 9 of the Notes to Condensed Consolidated Financial Statements. The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in the valuation on the MSR portfolio. See Note 10 of the Notes to Condensed Consolidated Financial Statements for more information on the free-standing derivatives used to economically hedge the MSR portfolio.

In addition to the derivative positions used to economically hedge the MSR portfolio, the Bancorp acquires various securities as a component of its non-qualifying hedging strategy. There were no sales of securities related to the Bancorp’s non-qualifying hedging strategy during the three months ended June 30, 2012 and 2011 and six months ended June 30, 2012. Net gains on sales of these securities were $5 million for the six months ended June 30, 2011, which were recorded in securities gains, net, non-qualifying hedges on mortgage servicing rights in the Bancorp’s Condensed Consolidated Statements of Income.

Service charges on deposits

Service charges on deposits increased $4 million and $10 million for the three and six months ended June 30, 2012, respectively, compared to the three and six months ended June 30, 2011. This increase was primarily driven by commercial deposit revenue which increased $5 million and $10 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in the prior year due to an increase in new customer relationships.

Corporate banking revenue

Corporate banking revenue increased $7 million and $18 million for the three and six months ended June 30, 2012, respectively, compared to the three and six months ended June 30, 2011. The increase compared to the three months ended June 30, 2011 was primarily due to increases in foreign exchange income, business lending fees and institutional sales. The increase compared to the six months ended June 30, 2011 included the impact of the previously mentioned factors coupled with a $9 million increase in syndication fees due to increased market and business activity.

Investment advisory revenue

Investment advisory revenue decreased $2 million and $3 million for the three and six months ended June 30, 2012, respectively, compared to the same periods in 2011. The decrease from both prior year periods was primarily driven by a decline in mutual fund fees. The Bancorp had approximately $291 billion and $276 billion in total assets under care as of June 30, 2012 and 2011, respectively, and managed $25 billion in assets for individuals, corporations and not-for-profit organizations for both comparative periods.

On April 5, 2012, the Bancorp announced that FTAM entered into two agreements under which a third party will acquire assets of 16 mutual funds from FTAM and another third party will acquire certain assets relating to the management of Fifth Third money market funds. The closings of the transactions are subject to certain conditions and approvals and are expected to be completed in the third quarter of 2012. The transactions are not expected to have a material impact on the Bancorp’s results.

Card and processing revenue

Card and processing revenue decreased $25 million and $47 million for the three and six months ended June 30, 2012 compared to the three and six months ended June 30, 2011. The decrease was primarily the result of the impact of the implementation of the Dodd-Frank Act’s debit card interchange fee cap in the fourth quarter of 2011. This impact was partially offset by increased debit and credit card transaction volumes.

Other noninterest income

The major components of other noninterest income are as follows:

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

TABLE 7: Components of Other Noninterest Income


	For the three months						For the six months
	ended June 30,						ended June 30,
($ in millions)	2012			2011			2012			2011
Gain on Vantiv, Inc. IPO	$	—			—		$	115			—
Operating lease income		15			14			29			30
Cardholder fees		12			9			22			18
BOLI income		9			11			18			21
Banking center income		8			7			15			14
Gain on loan sales		8			8			14			25
Insurance income		7			5			14			13
Consumer loan and lease fees		7			8			13			15
Loss on sale of OREO		(19	)		(26	)		(36	)		(28	)
Equity method earnings from interest in Vantiv Holding, LLC		26			6			2			15
Other, net		30			41			73			41

Total other noninterest income	$	103			83		$	279			164

Other noninterest income increased $20 million, or 25%, in the second quarter of 2012 compared to the second quarter of 2011 and $115 million, or 71%, for the six months ended June 30, 2012 compared to the same period in the prior year. The increase compared to the second quarter of 2011 was primarily due to a $28 million increase in positive valuation adjustments on the warrants issued as part of the Bancorp’s sale of its processing business sale, recorded in the “other” caption above. Additionally, other noninterest income included a $20 million increase in equity method income recorded from the Bancorp’s ownership interest in Vantiv Holding, LLC and a $7 million decrease in the loss on sale of OREO. These impacts were partially offset by a $7 million reduction in income related to the Visa total return swap and $17 million in lower of cost or market adjustments associated with bank premises held-for-sale. The increase compared to the six months ended June 30, 2011 was primarily due to a $115 million gain from the Vantiv, Inc. IPO recognized in the first quarter of 2012 and a $77 million increase in gains on the valuation of warrants and put options issued as part of the Bancorp’s sale of its processing business, recorded in the “other” caption. The increase was partially offset by $34 million in debt termination charges, included in equity method earnings, incurred in the first quarter of 2012 related to Vantiv Holding, LLC’s debt refinancing and $17 million in lower of cost or market adjustments associated with bank premises held-for-sale. For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B shares and the valuation of warrants and put options associated with the sale of the processing business, see Note 19 of the Notes to Condensed Consolidated Financial Statements.

Noninterest Expense

Total noninterest expense increased $36 million, or four percent, for the three months ended June 30, 2012, and $92 million, or five percent, for the six months ended June 30, 2012 compared to the three and six months ended June 30, 2011, respectively. The major components of noninterest expense are as follows:

TABLE 8: Noninterest Expense


	For the three months									For the six months
	ended June 30,									ended June 30,
($ in millions)	2012			2011			% Change			2012			2011			% Change
Salaries, wages and incentives	$	393			365			8		$	792			716			11
Employee benefits		84			79			6			195			176			11
Net occupancy expense		74			75			(1	)		151			152			(1	)
Technology and communications		48			48			1			95			93			2
Card and processing expense		30			29			4			60			58			4
Equipment expense		27			28			(2	)		55			57			(4	)
Other noninterest expense		281			277			1			563			567			(1	)

Total noninterest expense	$	937			901			4		$	1,911			1,819			5

Efficiency ratio		59.4	%		59.1	%					58.8	%		60.8	%

Total personnel costs increased $33 million and $95 million, respectively, for the three and six months ended June 30, 2012 compared to the same periods in 2011. The increase from both periods in the prior year was primarily due to an increase in base and incentive compensation driven by higher compensation costs reflecting improved production levels, as well as higher employee benefits expense due primarily to an increase in medical claims under the Bancorp’s self-insured medical plan and a seasonal increase in payroll tax expense. Full time equivalent employees totaled 20,888 at June 30, 2012 compared to 20,953 at June 30, 2011.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

TABLE 9: Components of Other Noninterest Expense


	For the three months						For the six months
	ended June 30,						ended June 30,
($ in millions)	2012			2011			2012			2011
Loan and lease	$	46			48		$	91			94
Marketing		36			31			59			53
Losses and adjustments		29			22			69			51
FDIC insurance and other taxes		27			50			45			101
Affordable housing investments impairment		19			26			46			50
Professional services fees		15			12			25			26
Travel		13			14			25			26
Postal and courier		12			12			25			25
Operating lease		10			10			21			21
Recruitment and education		7			8			14			15
OREO		5			6			10			18
Insurance		5			1			10			13
Intangible asset amortization		4			6			7			13
Provision for unfunded commitments and letters of credit		(1	)		(14	)		(3	)		(30	)
Other, net		54			45			119			91

Total other noninterest expense	$	281			277		$	563			567

Total other noninterest expense increased $4 million and decreased $4 million, respectively, for the three and six months ended June 30, 2012 compared to the same periods in 2011. The provision for representation and warranty claims, included in losses and adjustments, increased by $5 million and $14 million, respectively, for the three and six months ended June 30, 2012 compared to the same periods in the prior year primarily due to an increase in demand requests during the first half of 2012. FDIC insurance and other taxes decreased $23 million and $56 million, respectively, for the three and six months ended June 30, 2012 compared to the same periods in the prior year. The decrease in FDIC expense and other taxes is primarily attributable to a decrease in the assessment rate due to changes in the level and measurement of higher risk assets and improved credit quality metrics. These effects were partially offset by a decrease in the benefit from the provision for unfunded commitments and letters of credit of $13 million and $27 million, respectively, for the three and six months ended June 30, 2012 compared to the same periods in 2011. The reduction in the benefit was due to improving credit trends in the first half of 2012 as well as an increase in the unfunded commitments for which the Bancorp holds reserves as of June 30, 2012 compared to June 30, 2011.

The Bancorp continues to focus on efficiency initiatives as part of its core emphasis on operating leverage and expense control. The efficiency ratio (noninterest expense divided by the sum of net interest income (FTE) and noninterest income) was 59.4% and 58.8% for the three and six months ended June 30, 2012 compared to 59.1% and 60.8% for the three and six months ended June 30, 2011.

Applicable Income Taxes

The Bancorp’s income before income taxes, applicable income tax expense and effective tax rate are as follows:

TABLE 10: Applicable Income Taxes


	For the three months					For the six months
	ended June 30,					ended June 30,
($ in millions)	2012			2011		2012			2011
Income before income taxes	$	565			506	$	1,168			883
Applicable income tax expense		180			169		352			281
Effective tax rate		31.8	%		33.3		30.2	%		31.8

Applicable income tax expense for all periods includes the benefit from tax-exempt income, tax-advantaged investments, certain gains on sales of leases that are exempt from federal taxation and tax credits, partially offset by the effect of certain nondeductible expenses. The tax credits are associated with the Low-Income Housing Tax Credit program established under Section 42 of the IRC, the New Markets Tax Credit program established under Section 45D of the IRC, the Rehabilitation Investment Tax Credit program established under Section 47 of the IRC, and the Qualified Zone Academy Bond program established under Section 1397E of the IRC. The decrease in the effective tax rate for the three and six months ended June 30, 2012 from the comparable prior year periods was primarily due to a decrease in the amount of income tax expense associated with previously recognized tax benefits associated with stock-based awards that will not be realized.

Deductibility of Executive Compensation

Certain sections of the IRC limit the deductibility of compensation paid to or earned by certain executive officers of a public company. This has historically limited the deductibility of certain executive compensation to $1 million per executive officer, and the Bancorp’s compensation philosophy has been to position pay to ensure deductibility. However, both the amount of the executive compensation that is deductible for certain executive officers and the allowable compensation vehicles changed as a result of the Bancorp’s participation in TARP. In particular, the Bancorp was not permitted to deduct compensation earned by certain executive officers in excess of $500,000 per executive officer as a result of the Bancorp’s participation in TARP. Therefore, a portion of the compensation earned by certain executive officers was

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

not deductible by the Bancorp for the period in which the Bancorp participated in TARP. Subsequent to ending its participation in TARP, certain limitations on the deductibility of executive compensation will continue to apply to some forms of compensation earned while under TARP. The Bancorp’s Compensation Committee determined that the underlying executive compensation programs are appropriate and necessary to attract, retain and motivate senior executives, and that failing to meet these objectives creates more risk for the Bancorp and its value than the financial impact of losing the tax deduction. For the year ended 2011, the total tax impact for non-deductible compensation was $2 million.

BALANCE SHEET ANALYSIS

Loans and Leases

The Bancorp classifies its loans and leases based upon the primary purpose of the loan. Table 11 summarizes end of period loans and leases, including loans held for sale and Table 12 summarizes average total loans and leases, including loans held for sale.

TABLE 11: Components of Total Loans and Leases (includes held for sale)


	June 30, 2012				December 31, 2011				June 30, 2011
($ in millions)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Commercial:
Commercial and industrial loans	$	32,625		39		30,828		38		28,155		36
Commercial mortgage loans		9,697		12		10,214		12		10,331		13
Commercial construction loans		834		1		1,037		1		1,805		2
Commercial leases		3,471		4		3,531		4		3,326		4

Subtotal – commercial		46,627		56		45,610		55		43,617		55

Consumer:
Residential mortgage loans		13,217		15		13,474		16		10,838		14
Home equity		10,378		13		10,719		13		11,048		14
Automobile loans		11,739		14		11,827		14		11,315		14
Credit card		1,943		2		1,978		2		1,856		2
Other consumer loans and leases		318		—		364		—		478		1

Subtotal – consumer		37,595		44		38,362		45		35,535		45

Total loans and leases	$	84,222		100		83,972		100		79,152		100

Total portfolio loans and leases (excludes loans held for sale)	$	82,359				81,018				77,967

Total loans and leases, including held for sale, increased $250 million from December 31, 2011 and increased $5.1 billion, or six percent, from June 30, 2011. The increase from December 31, 2011 was due to an increase of $1.0 billion, or two percent, in commercial loans and leases partially offset by a decrease of $767 million, or two percent in consumer loans and leases. The increase from June 30, 2011 was due to an increase of $3.0 billion, or seven percent, in commercial loans and leases and $2.1 billion, or six percent, in consumer loans and leases.

Total commercial loans and leases increased from December 31, 2011 and June 30, 2011 primarily due to an increase in commercial and industrial loans partially offset by a decrease in commercial mortgage loans and commercial construction loans. Commercial and industrial loans increased $1.8 billion, or six percent, from December 31, 2011 and $4.5 billion, or 16%, from June 30, 2011 due to an increase in new loan origination activity from an increase in demand due to a strengthening economy and an increased sales force personnel. Commercial construction loans decreased $203 million, or 20%, from December 31, 2011 and $971 million, or 54%, from June 30, 2011 and commercial mortgage loans decreased $517 million, or five percent, from December 31, 2011 and $634 million, or six percent, from June 30, 2011 due to continued run-off in these loan categories. The run-off reflects weak customer demand and previous suspensions of new homebuilder and developer lending and non-owner occupied real estate lending.

Total consumer loans and leases decreased from December 31, 2011 primarily due to a decrease in residential mortgage loans and home equity loans. Residential mortgage loans decreased $257 million, or two percent, from December 31, 2011 due to a decrease in residential mortgage loans held for sale partially offset by an increase in portfolio residential mortgage loans. Residential mortgage loans held for sale decreased $1.0 billion from December 31, 2011 primarily due to strong refinancing in the fourth quarter of 2011 and the timing of delivery of loans. Portfolio residential mortgage loans increased $757 million from December 31, 2011 due to management’s decision to retain certain shorter term residential mortgage loans originated through the Bancorp’s retail branches. Home equity loans decreased $341 million, or three percent, from December 31, 2011 as payoffs exceeded new loan production.

Total consumer loans and leases increased from June 30, 2011 primarily due to an increase in residential mortgage loans and automobile loans partially offset by a decrease in home equity loans and other consumer loans and leases. Residential mortgage loans increased $2.4 billion, or 22%, from June 30, 2011 primarily due to management’s decision to retain certain shorter term residential mortgage loans originated through the Bancorp’s retail branches throughout 2011 and 2012 and stronger loan production in the first half of 2012 compared to the first half of 2011. Automobile loans increased $424 million, or four percent, compared to June 30, 2011 due to strong origination volumes through consistent and competitive pricing, enhanced customer service with our dealership network, and disciplined sales execution. Home equity loans decreased $670 million, or six percent, from June 30, 2011 as payoffs exceeded new loan production. Other consumer loans and

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

leases decreased $160 million, or 33%, from June 30, 2011 due to the runoff of automobile leases as the Bancorp stopped originating automobile leases in November of 2008.

TABLE 12: Components of Average Total Loans and Leases (includes held for sale)


	June 30, 2012				December 31, 2011				June 30, 2011
For the three months ended ($ in millions)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Commercial:
Commercial and industrial loans	$	32,770		39		29,954		36		27,970		36
Commercial mortgage loans		9,873		12		10,350		13		10,491		13
Commercial construction loans		886		1		1,155		1		1,950		2
Commercial leases		3,471		4		3,352		4		3,349		4

Subtotal – commercial		47,000		56		44,811		54		43,760		55

Consumer:
Residential mortgage loans		13,059		16		12,638		16		10,655		14
Home equity		10,430		12		10,810		13		11,144		14
Automobile loans		11,755		14		11,696		14		11,188		14
Credit card		1,915		2		1,906		2		1,834		2
Other consumer loans and leases		349		—		417		1		572		1

Subtotal – consumer		37,508		44		37,467		46		35,393		45

Total average loans and leases	$	84,508		100		82,278		100		79,153		100

Total average portfolio loans and leases (excludes loans held for sale)	$	82,586				79,914				77,937

Average total loans and leases, including held for sale, increased $2.2 billion, or three percent, from December 31, 2011 and increased $5.4 billion, or seven percent, from June 30, 2011. The increase from December 31, 2011 was primarily driven by an increase of $2.2 billion, or five percent, in average commercial loans and leases. The increase from June 30, 2011 was due to an increase of $3.2 billion, or seven percent, in average commercial loans and leases and an increase of $2.1 billion, or six percent, in average consumer loans and leases.

Average total commercial loans and leases increased from December 31, 2011 due to an increase of $2.8 billion, or nine percent, in average commercial and industrial loans, partially offset by a decrease of $477 million, or five percent, in average commercial mortgage loans, and a decrease of $269 million, or 23%, in average commercial construction loans due to the reasons previously discussed. Average commercial loans and leases increased from June 30, 2011 due to an increase of $4.8 billion, or 17%, in average commercial and industrial loans, partially offset by a decrease of $1.1 billion, or 55%, in average commercial construction loans and a decrease of $618 million, or six percent, in average commercial mortgage loans due to the reasons previously discussed.

Average total consumer loans increased $41 million from December 31, 2011 due to an increase of $421 million, or three percent, in average residential mortgage loans partially offset by a decrease of $380 million, or four percent, in average home equity loans. Average residential mortgage loans increased from December 31, 2011 due to continued strong refinancing activity associated with historically low interest rates as well as the continued retention of certain branch originated fixed-rate residential mortgages with shorter terms. Average home equity loans decreased from December 31, 2011 as payoffs exceeded new loan production.

Average total consumer loans increased from June 30, 2011 due to an increase of $2.4 billion, or 23%, in average residential mortgage loans and an increase of $567 million, or five percent, in average automobile loans partially offset by a decrease of $714 million, or six percent, in average home equity loans and a decrease of $223 million, or 39%, in average other consumer loans and leases due to the reasons previously discussed in the year-over-year end of period discussion above.

Investment Securities

The Bancorp uses investment securities as a means of managing interest rate risk, providing liquidity support and providing collateral for pledging purposes. Total investment securities were $16.1 billion at June 30, 2012 and 2011 and $15.9 billion at December 31, 2011.

Securities are classified as trading when bought and held principally for the purpose of selling them in the near term. Securities are classified as available-for-sale when, in management’s judgment, they may be sold in response to, or in anticipation of, changes in market conditions. Securities that management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost.

At June 30, 2012, the Bancorp’s investment portfolio consisted primarily of AAA-rated available-for-sale securities. The Bancorp did not hold asset-backed securities backed by subprime mortgage loans in its investment portfolio. Additionally, there was approximately $117 million of securities classified as below investment grade as of June 30, 2012, compared to $122 million as of December 31, 2011 and $131 million as of June 30, 2011. The Bancorp’s management has evaluated the securities in an unrealized loss position in the available-for-sale and held-to-maturity portfolios for OTTI. The Bancorp recognized $17 million of OTTI on its available-for-sale investment securities portfolio during the three and six months ended June 30, 2012 and an immaterial amount was recognized during the three and six months ended June 30, 2011. The Bancorp did not recognize any OTTI on any of its held to maturity investment securities during the three and six

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

months ended June 30, 2012 and 2011. See Note 4 of the Notes to the Condensed Consolidated Financial Statements for further information on OTTI.

TABLE 13: Components of Investment Securities


($ in millions)	June 30, 2012		December 31, 2011		June 30, 2011
Available-for-sale and other: (amortized cost basis)
U.S. Treasury and government agencies	$	51		171		199
U.S. Government sponsored agencies		1,781		1,782		2,141
Obligations of states and political subdivisions		205		96		113
Agency mortgage-backed securities		8,807		9,743		10,269
Other bonds, notes and debentures^(a)		2,743		1,792		1,135
Other securities^(b)		1,231		1,030		1,032

Total available-for-sale and other securities	$	14,818		14,614		14,889

Held-to-maturity: (amortized cost basis)
Obligations of states and political subdivisions	$	303		320		340
Other bonds, notes and debentures		2		2		4

Total held-to-maturity	$	305		322		344

Trading: (fair value)
Obligations of states and political subdivisions	$	14		9		38
Agency mortgage-backed securities		19		11		33
Other bonds, notes and debentures		11		13		11
Other securities		156		144		135

Total trading	$	200		177		217

(a)

Other bonds, notes, and debentures consist of non-agency mortgage backed securities, certain other asset backed securities (primarily automobile and commercial loan backed securities) and corporate bond securities.

(b)

Other securities consist of FHLB and FRB restricted stock holdings that are carried at par, FHLMC and FNMA preferred stock holdings and certain mutual fund holdings and equity security holdings.

Available-for-sale securities on an amortized cost basis increased $204 million, or 1%, from December 31, 2011 primarily due to an increase in other bonds, notes, and debentures and other securities partially offset by a decrease in agency-mortgage backed securities. Agency mortgage-backed securities decreased $936 million, or 10%, primarily due to sales of collateralized mortgage obligations and mortgage-backed securities totaling $814 million during the first half of 2012. The remaining decrease is due to principal and interest pay downs on agency mortgage-backed securities being reinvested in other bonds, notes, and debentures. Other bonds, notes, and debentures increased $951 million, or 53%, primarily due to $1.1 billion in purchases of commercial mortgage-backed securities, asset-backed securities, and corporate bonds during the first half of 2012. Other securities increased $201 million, or 20%, as excess cash from the runoff of agency mortgage-backed securities was invested in money market mutual funds.

Available-for-sale securities on an amortized cost basis decreased $71 million from June 30, 2011 primarily due to a decrease in agency mortgage-backed securities and U.S. Government sponsored agency securities partially offset by an increase in other bonds, notes, and debentures. Agency mortgage-backed securities decreased $1.5 billion, or 14%, primarily due to sales of collateralized mortgage obligations and mortgage-backed securities totaling $1.4 billion during the second half of 2011 and first half of 2012.The remaining decrease is due to principal and interest pay downs on agency mortgage-backed securities being reinvested in other bonds, notes, and debentures which increased $1.6 billion, or 142%. Government sponsored agency securities decreased $360 million, or 17%, due to sales in the second half of 2011.

At June 30, 2012 available-for-sale securities were 15% of total interest-earning assets compared to 14% at December 31, 2011 and 16% at June 30, 2011. The estimated weighted-average life of the debt securities in the available-for-sale portfolio was 4.0 years at June 30, 2012, 3.6 years at December 31, 2011, and 4.5 years at June 30, 2011. In addition, at June 30, 2012, the available-for-sale securities portfolio had a weighted-average yield of 3.64%, compared to 3.66% at December 31, 2011 and 4.28% at June 30, 2011.

Information presented in Table 14 is on a weighted-average life basis, anticipating future prepayments. Yield information is presented on an FTE basis and is computed using historical cost balances. Maturity and yield calculations for the total available-for-sale portfolio exclude equity securities that have no stated yield or maturity. Total net unrealized gains on the available-for-sale securities portfolio were $734 million at June 30, 2012, compared to $748 million at December 31, 2011 and $613 million at June 30, 2011. The increase from June 30, 2011 was due to a continued low interest rate environment.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

TABLE 14: Characteristics of Available-for-Sale and Other Securities


As of June 30, 2012 ($ in millions)	Amortized Cost		Fair Value		Weighted-Average Life (in years)		Weighted-Average Yield
U.S. Treasury and government agencies:
Average life of one year or less	$	50		50		0.2		1.43	%
Average life 5 – 10 years		1		1		6.6		1.48

Total		51		51		0.3		1.44
U.S. Government sponsored agencies:
Average life of one year or less		154		156		0.7		2.51
Average life 1 – 5 years		1,516		1,689		4.2		3.57
Average life 5 – 10 years		111		121		5.4		2.95

Total		1,781		1,966		4.0		3.44
Obligations of states and political subdivisions:^(a)
Average life of one year or less		1		1		0.2		8.05
Average life 1 – 5 years		91		91		3.0		1.40
Average life 5 – 10 years		111		117		6.7		4.56
Average life greater than 10 years		2		2		12.1		0.01

Total		205		211		5.2		3.14
Agency mortgage-backed securities:
Average life of one year or less		564		581		0.7		5.01
Average life 1 – 5 years		7,080		7,484		3.2		4.08
Average life 5 – 10 years		1,163		1,214		5.7		3.12

Total		8,807		9,279		3.4		4.01
Other bonds, notes and debentures:
Average life of one year or less		208		213		0.4		5.06
Average life 1 – 5 years		1,616		1,658		3.5		2.38
Average life 5 – 10 years		432		449		6.0		3.06
Average life greater than 10 years		487		491		16.7		2.25

Total		2,743		2,811		6.0		2.67
Other securities		1,231		1,234

Total available-for-sale and other securities	$	14,818		15,552		4.0		3.64	%

(a)

Taxable-equivalent yield adjustments included in the above table are 2.68%, 0.02%, 0.62%, 0.01% and 0.35% for securities with an average life of one year or less, 1-5 years, 5-10 years, greater than 10 years and in total, respectively.

Deposits

The Bancorp’s deposit balances represent an important source of funding and revenue growth opportunity. The Bancorp continues to focus on core deposit growth in its retail and commercial franchises by improving customer satisfaction, building full relationships and offering competitive rates. Core deposits represented 69% of the Bancorp’s asset funding base at June 30, 2012 and 2011 and 71% at December 31, 2011.

TABLE 15: Deposits


	June 30, 2012				December 31, 2011				June 30, 2011
($ in millions)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Demand	$	26,251		31		27,600		32		22,589		28
Interest checking		23,197		28		20,392		24		18,072		22
Savings		22,011		26		21,756		25		21,764		27
Money market		4,223		5		4,989		6		4,859		6
Foreign office		1,265		1		3,250		4		3,271		4

Transaction deposits		76,947		91		77,987		91		70,555		87
Other time		4,261		5		4,638		5		6,399		8

Core deposits		81,208		96		82,625		96		76,954		95
Certificates-$100,000 and over		3,065		4		3,039		4		3,642		5
Other		—		—		46		—		2		—

Total deposits	$	84,273		100		85,710		100		80,598		100

Core deposits decreased $1.4 billion, or two percent, from December 31, 2011, driven by a decrease of $1.0 billion, or one percent, in transaction deposits and a decrease of $377 million, or eight percent, in other time deposits. The decrease in transaction deposits is primarily due to a decrease in demand deposits, money market deposits, and foreign office deposits partially offset by an increase in interest checking deposits. Demand deposits decreased $1.3 billion, or five percent, due to seasonality as commercial customers opted to hold excess cash at December 31, 2011 and reinvest the cash during the first half of 2012. Interest checking deposits increased $2.8 billion, or 14%, from December 31, 2011 partially driven by account migration from foreign office deposits which decreased $2.0 billion, or 61%, and money market deposits which decreased $766 million, or 15%, from December 31, 2011. The decrease in other time deposits from December 31,

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

2011 was primarily the result of continued run-off of certificates of deposits due to the low interest rate environment, as customers have opted to maintain balances in more liquid transaction accounts.

Core deposits increased $4.3 billion, or six percent, compared to June 30, 2011 driven by an increase of $6.4 billion, or nine percent, in transaction deposits, partially offset by a decrease of $2.1 billion, or 33%, in other time deposits. The increase in transaction deposits was primarily due to an increase in interest checking deposits and demand deposits, partially offset by a decrease in foreign office deposits. Interest checking deposits increased $5.1 billion, or 28%, from June 30, 2011 partially driven by account migration from foreign office deposits which decreased $2.0 billion, or 61%, and money market deposits which decreased $636 million, or 13%. The remaining increase in interest checking deposits was due to growth from maturing certificates of deposits and continued growth from the preferred checking program which was introduced in February of 2011. Demand deposits increased $3.7 billion, or 16%, from June 30, 2011 primarily due to an increase in new accounts, growth from maturing certificates of deposits, and commercial customers opting to hold money in demand deposit accounts rather than investing excess cash given current market conditions. Other time deposits decreased primarily as a result of continued run-off of certificates of deposits due to the low interest rate environment, as customers have opted to maintain balances in more liquid transaction accounts.

The Bancorp uses certificates $100,000 and over, as a method to fund earning asset growth. At June 30, 2012, certificates $100,000 and over increased $26 million, or one percent, compared to December 31, 2011 and decreased $577 million, or 16%, from June 30, 2011. The decrease from June 30, 2011 was due to continued run-off attributable to the low rate environment.

The following table presents average deposits for the three months ending:

TABLE 16: Average Deposits


	June 30, 2012				December 31, 2011				June 30, 2011
($ in millions)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Demand	$	26,351		31		26,069		31		22,174		27
Interest checking		23,548		27		19,263		23		18,701		23
Savings		22,143		26		21,715		26		21,817		27
Money market		4,258		5		5,255		6		5,009		6
Foreign office		1,321		2		3,325		4		3,805		4

Transaction deposits		77,621		91		75,627		90		71,506		87
Other time		4,359		5		4,960		6		6,738		8

Core deposits		81,980		96		80,587		96		78,244		95
Certificates-$100,000 and over		3,130		4		3,085		4		3,955		5
Other		23		—		16		—		2		—

Total average deposits	$	85,133		100		83,688		100		82,201		100

On an average basis, core deposits increased $1.4 billion, or two percent, compared to December 31, 2011 due to an increase of $2.0 billion, or three percent, in average transaction deposits partially offset by a decrease of $601 million, or 12%, in other time deposits. The increase in average transaction deposits was driven by an increase in average interest checking deposits partially offset by a decrease in average foreign office deposits and average money market deposits. Average interest checking deposits increased $4.3 billion, or 22%, from December 31, 2011 partially driven by the account migration from average foreign office deposits mentioned above which decreased $2.0 billion, or 60%, from December 31, 2011 and from average money market deposits which decreased $997 million, or 19%, from December 31, 2011. The remaining increase in average interest checking deposits was due to continued growth in the preferred checking program which was introduced in February of 2011 and growth from maturing certificates of deposits. The decrease in average other time deposits was primarily the result of continued run-off of certificates of deposits due to the low interest rate environment, as customers have opted to maintain balances in more liquid transaction accounts.

Average core deposits increased $3.7 billion, or five percent, from June 30, 2011 due to an increase of $6.1 billion, or nine percent, in average transaction deposits partially offset by a decrease of $2.4 billion, or 35%, in average other time deposits. The increase in average core deposits was due to an increase in average demand deposits and average interest checking deposits partially offset by a decrease in foreign office deposits and money market deposits due to the reasons discussed above in the end of period year over year section. The decrease in average other time deposits was due to the impact of historically low interest rates and excess customer liquidity discussed above.

Other time deposits and certificates $100,000 and over totaled $7.3 billion, $7.7 billion, and $10.0 billion at June 30, 2012, December 31, 2011, and June 30, 2011, respectively. Substantially all of these deposits were interest bearing. The contractual maturities of these deposits as of June 30, 2012 are summarized in the following table.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

TABLE 17: Contractual Maturities of Other Time Deposits and Certificates $100,000 and over


($ in millions)	June 30, 2012
Next 12 months	$	3,785
13-24 months		2,199
25-36 months		852
37-48 months		213
49-60 months		224
After 60 months		53

Total	$	7,326

Certificates $100,000 and over were $3.1 billion, $3.0 billion, and $3.6 billion at June 30, 2012, December 31, 2011, and June 30, 2011, respectively. The contractual maturities of these deposits as of June 30, 2012 are summarized in the following table.

TABLE 18: Contractual Maturities of Certificates - $100,000 and over


($ in millions)	June 30, 2012
Three months or less	$	540
After three months through six months		575
After six months through 12 months		563
After 12 months		1,387

Total	$	3,065

Borrowings

Total borrowings increased $1.7 billion, or 13 percent, from both December 31, 2011 and June 30, 2011. The increase in total borrowings from December 31, 2011 was primarily due to an increase in other short-term borrowings and federal funds purchased and the increase from June 30, 2011 was primarily due to an increase in other short-term borrowings and federal funds purchased partially offset by a decrease in long-term debt. As of June 30, 2012, total borrowings as a percentage of interest-bearing liabilities were 20% compared to 19% at both December 31, 2011 and June 30, 2011.

TABLE 19: Borrowings


($ in millions)	June 30, 2012		December 31, 2011		June 30, 2011
Federal funds purchased	$	641		346		403
Other short-term borrowings		4,613		3,239		2,702
Long-term debt		9,685		9,682		10,152

Total borrowings	$	14,939		13,267		13,257

Federal funds purchased increased by $295 million, or 85%, from December 31, 2011 driven by an increase in excess balances in reserve accounts held at Federal Reserve Banks that the Bancorp purchased from other member banks on an overnight basis. Other short-term borrowings increased $1.4 billion, or 42%, from December 31, 2011 driven by an increase of $1.6 billion in short-term FHLB borrowings partially offset by a decrease of $293 million in securities sold under repurchase agreements which are accounted for as collateralized financing transactions.

Federal funds purchased increased by $238 million, or 59%, from June 30, 2011, driven by an increase in excess balances in reserve accounts held at Federal Reserve Banks that the Bancorp purchased from other member banks on an overnight basis. Other short-term borrowings increased $1.9 billion, or 71%, from June 30, 2011 driven by an increase of $1.9 billion in short-term FHLB borrowings, which replaced certificates of deposits greater than $100,000 as customers opted to maintain their balances in more liquid accounts. The increase in short-term FHLB borrowings was partially offset by the decline in demand deposits due to seasonality. Long-term debt decreased $467 million, or five percent, from June 30, 2011 primarily due to the termination of $375 million of structured repurchase agreements classified as long-term debt and the decrease of $503 million in long-term FHLB advances, partially offset by the issuance of $500 million of senior notes by the Bancorp to third party investors in the first quarter of 2012.

The following table presents average borrowings for the three months ending:

TABLE 20: Average Borrowings


($ in millions)	June 30, 2012		December 31, 2011		June 30, 2011
Federal funds purchased	$	408		348		344
Other short-term borrowings		4,303		3,793		1,605
Long-term debt		9,669		9,707		10,527

Total average borrowings	$	14,380		13,848		12,476

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Average total borrowings increased $532 million, or four percent, compared to December 31, 2011, primarily due to the previously mentioned increase in average other short-term borrowings. Average total borrowings increased $1.9 billion, or 15%, compared to June 30, 2011, primarily due to the previously mentioned increase in average other short-term borrowings partially offset by a decrease in average long-term debt.

Information on the average rates paid on borrowings is discussed in the Net Interest Income section of the MD&A. In addition, refer to the Liquidity Risk Management section for a discussion on the role of borrowings in the Bancorp’s liquidity management.

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

BUSINESS SEGMENT REVIEW

The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors. Additional detailed financial information on each business segment is included in Note 20 of the Notes to Condensed Consolidated Financial Statements. Results of the Bancorp’s business segments are presented based on its management structure and management accounting practices. The structure and accounting practices are specific to the Bancorp; therefore, the financial results of the Bancorp’s business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as management’s accounting practices are improved or businesses change.

The Bancorp manages interest rate risk centrally at the corporate level and employs a FTP methodology at the business segment level. This methodology insulates the business segments from interest rate volatility, enabling them to focus on serving customers through loan originations and deposit taking. The FTP system assigns charge rates and credit rates to classes of assets and liabilities, respectively, based on expected duration and the U.S. swap curve. Matching duration allocates interest income and interest expense to each segment so its resulting net interest income is insulated from interest rate risk. In a rising rate environment, the Bancorp benefits from the widening spread between deposit costs and wholesale funding costs. However, the Bancorp’s FTP system credits this benefit to deposit-providing businesses, such as Branch Banking and Investment Advisors, on a duration-adjusted basis. The net impact of the FTP methodology is captured in General Corporate and Other.

The Bancorp adjusts the FTP charge and credit rates as dictated by changes in interest rates for various interest-earning assets and liabilities and by the review of the estimated durations for the indeterminate-lived deposits. The credit rate provided for DDAs is reviewed annually based upon the account type, its estimated duration and the corresponding fed funds, U.S. swap curve or swap rate. The credit rates for several deposit products were reset January 1, 2012 to reflect the current market rates and updated duration assumptions. These rates were lower than those in place during 2011, thus net interest income for deposit providing businesses was negatively impacted for the three and six months ended June 30, 2012.

The business segments are charged provision expense based on the actual net charge-offs experienced by the loans owned by each segment. Provision expense attributable to loan growth and changes in factors in the ALLL are captured in General Corporate and Other. The financial results of the business segments include allocations for shared services and headquarters expenses. Even with these allocations, the financial results are not necessarily indicative of the business segments’ financial condition and results of operations as if they existed as independent entities. Additionally, the business segments form synergies by taking advantage of cross-sell opportunities and when funding operations, by accessing the capital markets as a collective unit. Net income by business segment is summarized in the following table.

TABLE 21: Business Segment Net Income Available to Common Shareholders


	For the three months ended June 30,				For the six months ended June 30,
($ in millions)	2012		2011		2012		2011
Income Statement Data
Commercial Banking	$	163		88	$	305		170
Branch Banking		50		54		79		73
Consumer Lending		33		30		81		5
Investment Advisors		8		10		16		18
General Corporate & Other		131		155		335		336

Net income		385		337		816		602
Less: Net income attributable to noncontrolling interest		—		—		1		—

Net income attributable to Bancorp		385		337		815		602
Dividends on preferred stock		9		9		18		185

Net income available to common shareholders	$	376		328	$	797		417

Management’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

Commercial Banking

Commercial Banking offers credit intermediation, cash management and financial services to large and middle-market businesses and government and professional customers. In addition to the traditional lending and depository offerings, Commercial Banking products and services include global cash management, foreign exchange and international trade finance, derivatives and capital markets services, asset-based lending, real estate finance, public finance, commercial leasing and syndicated finance. The following table contains selected financial data for the Commercial Banking segment.

TABLE 22: Commercial Banking


	For the three months ended June 30,					For the six months ended June 30,
($ in millions)	2012		2011			2012		2011
Income Statement Data
Net interest income (FTE)^(a)	$	352		339		$	705		671
Provision for loan and lease losses		61		147			137		299
Noninterest income:
Corporate banking revenue		97		90			190		172
Service charges on deposits		54		52			109		101
Other noninterest income		26		21			55		65
Noninterest expense:
Salaries, incentives and benefits		65		60			137		117
Other noninterest expense		204		216			420		427

Income before taxes		199		79			365		166
Applicable income tax expense (benefit)^{(a) (b)}		36		(9	)		60		(4	)

Net income	$	163		88

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