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 September 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 897,467,318 shares of the Registrant’s common stock, without par value, outstanding as of September 30, 2012.

LOGO

FINANCIAL CONTENTS


Part I. Financial Information
Glossary of Terms			3
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)			4
Selected Financial Data			4
Overview			5
Non-GAAP Financial Measures			8
Recent Accounting Standards			10
Critical Accounting Policies			10
Statements of Income Analysis			11
Balance Sheet Analysis			19
Business Segment Review			25
Risk Management—Overview			32
Credit Risk Management			33
Market Risk Management			49
Liquidity Risk Management			52
Capital Management			54
Off-Balance Sheet Arrangements			56
Quantitative and Qualitative Disclosures about Market Risk (Item 3)			57
Controls and Procedures (Item 4)			57
Condensed Consolidated Financial Statements and Notes (Item 1)			58
Balance Sheets (unaudited)			58
Statements of Income (unaudited)			59
Statements of Comprehensive Income (unaudited)			60
Statements of Changes in Equity (unaudited)			61
Statements of Cash Flows (unaudited)			62
Notes to Condensed Consolidated Financial Statements (unaudited)			63

Part II. Other Information
Legal Proceedings (Item 1)			121
Risk Factors (Item 1A)			121
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			121
Exhibits (Item 6)			121
Signatures			122
Certifications

FORWARD-LOOKING STATEMENTS

This report contains statements that we believe are “forward-looking statements” 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. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language 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. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to the risk factors set forth in our most recent Annual Report on Form 10-K. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us. 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; (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 or the results of operations of Vantiv, 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

bps: Basis points

BPO: Broker Price Opinion

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

OCC: Office of the Comptroller of the Currency

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

VaR: Value-at-risk

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 September 30,								For the nine months ended September 30,
($ in millions, except for per share data)	2012			2011		% Change			2012			2011		% Change
Income Statement Data
Net interest income^(a)	$	907			902		1		$	2,709			2,655		2
Noninterest income		671			665		1			2,119			1,905		11
Total revenue^(a)		1,578			1,567		1			4,828			4,560		6
Provision for loan and lease losses		65			87		(25	)		227			368		(38	)
Noninterest expense		1,006			946		6			2,918			2,765		6
Net income attributable to Bancorp		363			381		(5	)		1,178			983		20
Net income available to common shareholders		354			373		(5	)		1,152			789		46

Common Share Data
Earnings per share, basic	$	0.39			0.41		(5	)	$	1.26			0.87		45
Earnings per share, diluted		0.38			0.40		(5	)		1.23			0.86		43
Cash dividends per common share		0.10			0.08		25			0.26			0.20		30
Book value per share		14.84			13.73		8			14.84			13.73		8
Market value per share		15.51			10.10		54			15.51			10.10		54

Financial Ratios (%)
Return on assets		1.23	%		1.34		(8	)		1.34	%		1.18		14
Return on average common equity		10.4			11.9		(12	)		11.6			8.8		32
Dividend payout ratio		25.6			19.5		31			20.6			23.0		(10	)
Average equity as a percent of average assets		11.82			11.33		4			11.65			11.41		2
Tangible common equity^(b)		9.10			8.63		5			9.10			8.63		5
Net interest margin^(a)		3.56			3.65		(2	)		3.58			3.66		(2	)
Efficiency^(a)		63.7			60.4		5			60.4			60.6		—

Credit Quality
Net losses charged off	$	156			262		(40	)	$	557			933		(40	)
Net losses charged off as a percent of average loans and leases^(d)		0.75	%		1.32		(43	)		0.90	%		1.60		(44	)
ALLL as a percent of portfolio loans and leases		2.32			3.08		(25	)		2.32			3.08		(25	)
Allowance for credit losses as a percent of portfolio loans and leases^(c)		2.53			3.32		(24	)		2.53			3.32		(24	)
Nonperforming assets as a percent of loans, leases and other assets, including other real estate owned^(d)		1.73			2.44		(29	)		1.73			2.44		(29	)

Average Balances
Loans and leases, including held for sale	$	84,829			80,013		6		$	84,367			79,517		6
Total securities and other short-term investments		16,588			18,142		(9	)		16,829			17,545		(4	)
Total assets		117,521			113,295		4			117,168			111,789		5
Transaction deposits^(e)		77,498			72,214		7			77,418			71,302		9
Core deposits^(f)		81,722			78,222		4			81,795			78,000		5
Wholesale funding^(g)		17,431			17,932		(3	)		17,188			16,936		2
Bancorp shareholders’ equity		13,887			12,841		8			13,650			12,752		7

Regulatory Capital Ratios (%)
Tier I risk-based capital		10.85	%		11.96		(9	)		10.85	%		11.96		(9	)
Total risk-based capital		14.76			16.25		(9	)		14.76			16.25		(9	)
Tier I leverage		10.09			11.08		(9	)		10.09			11.08		(9	)
Tier I common equity^(b)		9.67			9.33		4			9.67			9.33		4

(a)

Amounts presented on an FTE basis. The FTE adjustment for the three months ended September 30, 2012 and 2011 was $4, and for the nine months ended September 30, 2012 and 2011 was $13 and $14, respectively.

(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 September 30, 2012, the Bancorp had $117.5 billion in assets, operated 15 affiliates with 1,320 full-service Banking Centers, including 104 Bank Mart^® locations open seven days a week inside select grocery stores, and 2,404 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 as well as the 2011 Form 10-K. 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.

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.

The Bancorp’s revenues are dependent on both net interest income and noninterest income. For the three months ended September 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 borrower credit events, such as, loan defaults and inadequate collateral due to a weakened economy within the Bancorp’s footprint.

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 12 of the Notes to the Condensed Consolidated Financial Statements.

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.

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

The Bancorp resubmitted its capital plan to the FRB in the second quarter of 2012. 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. On August 21, 2012, the Bancorp announced the FRB did not object to the Bancorp’s resubmitted capital plan which included the potential increase of the quarterly common stock dividend to $0.10 in the third quarter of 2012 and the repurchases of common shares of up to $600 million through the first quarter of 2013, in addition to any incremental repurchase of common shares related to any after-tax gains realized by the Bancorp from the sale of Vantiv, Inc. common shares by either the Bancorp or Vantiv, Inc. As a result, the Board of Directors authorized the Bancorp to repurchase up to 100 million common shares in the open market or in privately negotiated transactions. As part of the authorization to acquire its shares, the Bancorp entered into a contract with a counterparty to repurchase up to $350 million of the Bancorp’s shares of common stock. See additional information on the accelerated share repurchases below. In addition, in the third quarter of 2012 the Bancorp declared a quarterly common dividend of $0.10 per share, an increase of $0.02 per share from the second quarter of 2012.

Accelerated Share Repurchase Transactions

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 to be 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.

On August 23, 2012, the Bancorp entered into an accelerated share repurchase transaction with a counterparty pursuant to which the Bancorp purchased 21,531,100 shares, or approximately $350 million, of its outstanding common stock. As part of this transaction, the Bancorp entered into a forward contract in which the final number of shares to be 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 October 24, 2012, the Bancorp received an additional 1,444,047 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, the Bancorp redeemed all $862.5 million of the outstanding TruPS issued by Fifth Third Capital Trust VI on August 8. These securities had a distribution rate of 7.25% and a scheduled maturity date of November 15, 2067. Pursuant to the terms of the TruPS, the securities of Fifth Third Capital Trust VI were redeemable within ninety days of a Capital Treatment Event. The Bancorp determined that a Capital Treatment Event occurred upon the authorization for publication in the Federal Register of a Joint Notice of Proposed Rulemaking by the Board of Governors of the Federal Reserve System, the FDIC and the Office of the Comptroller of the Currency addressing, among other matters, Section 171 of the Dodd-Frank Act of 2010 and providing detailed information regarding the cessation of Tier I capital treatment for outstanding TruPS. 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 was reflected in the Bancorp’s Condensed Consolidated Financial Statements for the quarter ended September 30, 2012.

Additionally, the Bancorp redeemed all $575 million of the outstanding TruPS issued by Fifth Third Capital Trust V on August 15, 2012. The Fifth Third Capital Trust V securities had a distribution rate of 7.25% and a scheduled maturity date of August 15, 2067, and were redeemable at any time on or after August 15, 2012. 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 $0.453125 per security. The Bancorp recognized a $17 million loss on extinguishment of these TruPS on August 15, 2012 which was reflected in the Bancorp’s Condensed Consolidated Financial Statements for the quarter ended September 30, 2012.

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 International and owned by certain funds managed by Advent International, acquired an approximate 51% interest in Vantiv Holding, LLC for cash and warrants. The Bancorp retained the remaining approximate 49% interest in Vantiv Holding, LLC.

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 Bancorp’s investment in Vantiv Holding, LLC was $651 million as of September 30, 2012. 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.

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

As of September 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.

Legislative Developments

On July 21, 2010, the Dodd-Frank Act was signed into federal 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 bps 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 fully implemented 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 third quarter of 2012 was $354 million, or $0.38 per diluted share, which was net of $9 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the third quarter of 2011 was $373 million, or $0.40 per diluted share, which was net of $8 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the nine months ended September 30, 2012 was $1.2 billion, or $1.23 per diluted share, which was net of $26 million in preferred stock dividends. For the nine months ended September 30, 2011, the Bancorp’s net income available to common shareholders was $789 million, or $0.86 per diluted share, which was net of $194 million in preferred stock dividends. The preferred stock dividends for the nine months ended September 30, 2011 included $153 million in discount accretion resulting from the Bancorp’s repurchase of Series F preferred stock.

Net interest income increased one percent to $907 million for the quarter ended September 30, 2012 compared to $902 million in the third quarter of 2011. Net interest income was positively impacted by a $4.8 billion increase in average loans and leases for the three months ended September 30, 2012 compared to the same period in 2011, a 19 bps decrease in the average rate paid on interest-bearing liabilities compared to the third quarter of 2011 and a mix shift to lower cost deposit products. These effects were partially offset by a 25 bps decrease in the average yield on interest-earning assets. Net interest income was $2.7 billion for both the nine months ended September 30, 2012 and 2011. Net interest income was positively impacted by a $4.9 billion increase in average loans and leases for the nine months ended September 30, 2012 compared to the same period in 2011, a 23 bps decrease in the average rate paid on interest-bearing liabilities compared to the nine months ended September 30, 2011 and a mix shift to lower cost deposit products. These effects were partially offset by a 27 bps decrease in the average yield on interest-earning assets. Net interest margin was 3.56% and 3.58% for the three and nine months ended September 30, 2012, respectively, compared to 3.65% and 3.66% for the same periods in the prior year.

Noninterest income increased $6 million, or one percent, in the third quarter of 2012 compared to the same period in the prior year. The increase from the third quarter of 2011 was primarily due to an increase in mortgage banking net revenue, corporate banking revenue and other noninterest income partially offset by a decrease in net securities gains and card and processing revenue. Mortgage banking net revenue increased $22 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. Corporate banking revenue increased $14 million, or 16%, primarily due to an increase in syndication fees and lease remarketing fees. Other noninterest income increased $14 million, or 22%, due to a gain recognized on the sale of certain FTAM funds, a decrease in the loss on sale

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

of OREO, an increase in equity method income related to the Bancorp’s ownership interest in Vantiv Holding, LLC and an increase in income related to the Visa total return swap. These benefits were partially offset by negative valuation adjustments on the warrants issued as part of the Bancorp’s sale of its processing business. Net securities gains decreased $24 million, or 92%, primarily due to lower gains on sale of available-for-sale securities in the third quarter of 2012 compared to the same period in 2011. Card and processing revenue decreased $13 million, or 17%, primarily as 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. Noninterest income increased $214 million, or 11%, for the nine months ended September 30, 2012 compared to the same period in 2011. The increase from the nine months ended September 30, 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 $146 million, or 33%, 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 $133 million, or 59%, primarily due to a $115 million gain from the Vantiv, Inc. IPO recognized in the first quarter of 2012 and a $58 million increase in gains on the valuation of warrants and put options issued as part of the Bancorp’s sale of its processing business. These impacts were partially offset by a $61 million decrease in card and processing revenue primarily as a result of the implementation of the Dodd-Frank Act’s debit card interchange fee cap in the fourth quarter of 2011.

Noninterest expense increased $60 million, or six percent, in the third quarter of 2012 and increased $153 million, or six percent, for the nine months ended September 30, 2012 compared to the same periods in 2011. The increase for both periods was primarily due to increases of $39 million and $134 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 recently, and as a result, the provision for loan and lease losses decreased to $65 million and $227 million for the three and nine months ended September 30, 2012 compared to $87 million and $368 million, respectively, for the same periods in 2011. In addition, net charge-offs as a percent of average loans and leases decreased to 0.75% during the third quarter of 2012 compared to 1.32% during the third quarter of 2011 and decreased to 0.90% for the nine months ended September 30, 2012 compared to 1.60% for the nine months ended September 30, 2011. At September 30, 2012, nonperforming assets as a percent of loans, leases and other assets, including OREO (excluding nonaccrual loans held for sale) decreased to 1.73%, compared to 2.23% at December 31, 2011 and 2.44% at September 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 September 30, 2012, the Tier I risk-based capital ratio was 10.85%, the Tier I leverage ratio was 10.09% and the total risk-based capital ratio was 14.76%.

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.

The banking regulators issued proposed capital rules (Basel III) in June of 2012 that would substantially amend the existing risk-based capital rules (Basel I) for banks. The Bancorp believes providing an estimate of its capital position based upon its interpretation of these proposed rules is important to complement the existing capital ratios and for comparability to other financial institutions. Since these rules are in proposal stage, they are considered non-GAAP measures and therefore are included in the following non-GAAP financial measures table.

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.

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

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

TABLE 2: Non-GAAP Financial Measures


($ in millions)	September 30, 2012			December 31, 2011			September 30, 2011
Income before income taxes (U.S. GAAP)	$	503			418			530
Add: Provision expense (U.S. GAAP)		65			55			87

Pre-provision net revenue		568			473			617
Net income available to common shareholders (U.S. GAAP)	$	354			305			373
Add: Intangible amortization, net of tax		2			3			3

Tangible net income available to common shareholders		356			308			376
Total Bancorp shareholders’ equity (U.S. GAAP)	$	13,718			13,201			13,029
Less: Preferred stock		(398	)		(398	)		(398	)
Goodwill		(2,417	)		(2,417	)		(2,417	)
Intangible assets		(30	)		(40	)		(45	)

Tangible common equity, including unrealized gains / losses		10,873			10,346			10,169
Less: Accumulated other comprehensive income		(468	)		(470	)		(542	)

Tangible common equity, excluding unrealized gains / losses (1)		10,405			9,876			9,627
Add: Preferred stock		398			398			398

Tangible equity (2)	$	10,803			10,274			10,025

Total assets (U.S. GAAP)	$	117,483			116,967			114,905
Less: Goodwill		(2,417	)		(2,417	)		(2,417	)
Intangible assets		(30	)		(40	)		(45	)
Accumulated other comprehensive income, before tax		(720	)		(723	)		(834	)

Tangible assets, excluding unrealized gains / losses (3)	$	114,316			113,787			111,609

Total Bancorp shareholders’ equity (U.S. GAAP)	$	13,718			13,201			13,029
Less: Goodwill and certain other intangibles		(2,504	)		(2,514	)		(2,514	)
Accumulated other comprehensive income		(468	)		(470	)		(542	)
Add: Qualifying trust preferred securities		810			2,248			2,273
Other		38			38			20

Tier I risk-based capital		11,594			12,503			12,266
Less: Preferred stock		(398	)		(398	)		(398	)
Qualifying TruPS		(810	)		(2,248	)		(2,273	)
Qualified noncontrolling interests in consolidated subsidiaries		(51	)		(50	)		(30	)

Tier I common equity (4)	$	10,335			9,807			9,565

Risk-weighted assets (5)^(a)	$	106,858			104,945			102,562
Ratios:
Tangible equity (2) / (3)		9.45	%		9.03			8.98
Tangible common equity (1) / (3)		9.10	%		8.68			8.63
Tier I common equity (4) / (5)		9.67	%		9.35			9.33

Basel III—Estimated Tier I common equity ratio
Tier I common equity (Basel I)	$	10,333
Add: Adjustment related to AOCI for AFS securities		507

Estimated Tier I common equity under Basel III rules^(b)		10,840
Estimated risk-weighted assets under Basel III rules^(c)		120,308

Estimated Tier I common equity ratio under Basel III rules		9.01	%

(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.

(b)

Tier I common equity under Basel III includes the unrealized gains and losses for AFS securities. Other adjustments include mortgage servicing rights and deferred tax assets subject to threshold limitations and deferred tax liabilities related to intangible assets.

(c)

Key differences under Basel III in the calculation of risk-weighted assets compared to Basel I include: (1) risk weighting for commitments under 1 year; (2) higher risk weighting for exposures to residential mortgage, home equity, past due loans, foreign banks and certain commercial real estate; (3) higher risk weighting for mortgage servicing rights and deferred tax assets that are under certain thresholds as a percent of Tier I capital; (4)incremental capital requirements for stress VaR; and (5) derivatives are differentiated between exchange clearing and over-the-counter and the 50% risk-weight cap is removed. The estimated Basel III risk-weighted assets are based upon the Bancorp’s interpretations of the three draft Federal Register notices proposing enhancements to the regulatory capital requirements that were published in June of 2012. These amounts are preliminary and subject to change depending on the adoption of final Basel III capital rules by the Regulatory Agencies.

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

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 nine months ended September 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 nine months ended September 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 $907 million for the third quarter of 2012, an increase of $5 million compared to the third quarter of 2011. Net interest income was $2.7 billion for the nine months ended September 30, 2012, an increase of $54 million from the nine months ended September 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 $6 million and $25 million during the three and nine months ended September 30, 2012, respectively, compared to $9 million and $32 million during the three and nine months ended September 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 potential prepayments, the Bancorp anticipates recognizing approximately $3 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. Exclusive of the impact of these items, net interest income increased $8 million compared to the third quarter of 2011 and $61 million for the nine months ended September 30, 2011.

For the three and nine months ended September 30, 2012, net interest income was positively impacted by an increase in average loans and leases of $4.8 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 the three and nine months ended September 30, 2012 was driven primarily by an increase of 15% and 16%, respectively, in average commercial and industrial loans and an increase of 20% 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. The decrease in interest expense for the three and nine months ended September 30, 2012 was primarily the result of decreases in the rates paid on interest-bearing liabilities of 19 bps and 23 bps, respectively, compared to the same periods in 2011, coupled with a continued mix shift to lower cost core deposits. For the three and nine months ended September 30, 2012, the net interest rate spread decreased to 3.36% and 3.37%, respectively, from 3.42% 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 25 bps and 27 bps decrease in yield on average interest-earnings assets for the three and nine months ended September 30, 2012, respectively, when compared to the same periods in 2011.

Net interest margin was 3.56% and 3.58% for the three and nine months ended September 30, 2012, respectively, compared to 3.65% and 3.66% for the three and nine months ended September 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 2 bps and 3 bps during the three and nine months ended September 30, 2012, respectively, compared to a 3 bps and 4 bps increase during the three and nine months ended September 30, 2011. Exclusive of these amounts, net interest margin decreased 8 bps and 7 bps for the three and nine months ended September 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 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.

Interest income from loans and leases decreased $6 million, or one percent, compared to the third quarter of 2011 and $17 million, or one percent, compared to the nine months ended September 30, 2011. The decrease from the three months and nine months ended September 30, 2011 was primarily the result of a decrease of 27 bps and 29 bps, respectively, in average loans and leases yields partially offset by an increase of six percent in average loans and leases for both periods. Interest income from investment securities and other short-term investments decreased $26 million, or 17%, compared to the three months ended September 30, 2011 primarily as the result of a 47 bps decrease in the average yield on taxable securities. Interest income from investment securities and other short-term investments decreased $53 million, or 11%, compared to the nine months ended September 30, 2011, primarily due to a 41 bps decrease in the average yield on taxable securities.

Average core deposits increased $3.5 billion, or four percent, compared to the third quarter of 2011 and increased $3.8 billion, or five percent, compared to the nine months ended September 30, 2011. The increase from both periods was primarily due to an increase in average interest checking deposits and average demand deposits partially offset by decreases in average foreign office deposits and average other time deposits. The cost of average core deposits decreased to 20 bps and 21 bps for the three and nine months ended September 30, 2012, respectively, from 33 bps and 39 bps for the three and nine months ended September 30, 2011. This decrease was primarily the result of a

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

mix shift to lower cost core deposits as a result of run-off of higher priced CDs combined with decreases of 10 bps and 16 bps in the rate paid on average savings deposits and decreases of 68 bps and 74 bps on average other time deposits compared to the three and nine months ended September 30, 2011, respectively.

For the three months ended September 30, 2012, interest expense on average wholesale funding decreased $12 million, or 13%, compared to the three months ended September 30, 2011 primarily as a result of a $1.3 billion decrease in average long-term debt coupled with a 60 bps decrease in the rate paid on average certificates $100,000 and over. During the nine months ended September 30, 2012, interest expense on average wholesale funding decreased $26 million, or nine percent, compared to the nine months ended September 30, 2011 primarily as a result of a $741 million decrease in average certificates $100,000 and over and a $872 million decrease in average long-term debt. During the three and nine months ended September 30, 2012, average wholesale funding represented 24% of average interest-bearing liabilities for both periods compared to 25% and 23%, respectively, during the three and nine months ended September 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	September 30, 2012								September 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	$	33,124		$	339		4.08	%	$	28,824		$	312		4.29	%	$	43			(16	)		27
Commercial mortgage		9,592			91		3.76			10,140			101		3.94			(6	)		(4	)		(10	)
Commercial construction		751			5		2.83			1,777			14		3.02			(8	)		(1	)		(9	)
Commercial leases		3,483			32		3.62			3,300			32		3.87			2			(2	)		—

Subtotal – commercial		46,950			467		3.96			44,041			459		4.13			31			(23	)		8
Residential mortgage loans		13,458			136		4.03			11,224			126		4.47			23			(13	)		10
Home equity		10,312			98		3.78			10,985			108		3.89			(7	)		(3	)		(10	)
Automobile loans		11,812			107		3.61			11,445			131		4.52			3			(27	)		(24	)
Credit card		1,971			49		9.82			1,864			45		9.49			2			2			4
Other consumer loans/leases		326			40		49.00			454			34		30.76			(11	)		17			6

Subtotal – consumer		37,879			430		4.52			35,972			444		4.90			10			(24	)		(14	)

Total loans and leases		84,829			897		4.21			80,013			903		4.48			41			(47	)		(6	)
Securities:
Taxable		15,005			129		3.41			15,790			154		3.88			(7	)		(18	)		(25	)
Exempt from income taxes^(b)		48			—		3.29			64			1		5.84			(1	)		—			(1	)
Other short-term investments		1,535			1		0.25			2,288			1		0.25			—			—			—

Total interest-earning assets		101,417			1,027		4.03			98,155			1,059		4.28			33			(65	)		(32	)
Cash and due from banks		2,368								2,362
Other assets		15,749								15,381
Allowance for loan and lease losses		(2,013	)							(2,603	)

Total assets	$	117,521							$	113,295

Liabilities and Equity
Interest-bearing liabilities:
Interest checking	$	22,967		$	12		0.21	%	$	18,322		$	12		0.25	%	$	1			(1	)		—
Savings		21,283			8		0.15			21,747			14		0.25			(1	)		(5	)		(6	)
Money market		4,776			3		0.22			5,213			4		0.27			—			(1	)		(1	)
Foreign office deposits		1,345			1		0.29			3,255			2		0.26			(1	)		—			(1	)
Other time deposits		4,224			17		1.59			6,008			34		2.27			(8	)		(9	)		(17	)
Certificates - $100,000 and over		3,016			11		1.49			3,376			18		2.09			(2	)		(5	)		(7	)
Other deposits		32			—		0.13			7			—		0.03			—			—			—
Federal funds purchased		664			—		0.13			376			—		0.10			—			—			—
Other short-term borrowings		4,856			3		0.19			4,033			1		0.10			—			2			2
Long-term debt		8,863			65		2.97			10,136			72		2.85			(9	)		2			(7	)

Total interest-bearing liabilities		72,026			120		0.67			72,473			157		0.86			(20	)		(17	)		(37	)
Demand deposits		27,127								23,677
Other liabilities		4,430								4,275

Total liabilities		103,583								100,425
Total equity		13,938								12,870

Total liabilities and equity	$	117,521							$	113,295

Net interest income				$	907							$	902				$	53			(48	)		5
Net interest margin							3.56	%							3.65	%
Net interest rate spread							3.36								3.42
Interest-bearing liabilities to interest-earning assets							71.02								73.83

(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 for both the three months ended September 30, 2012 and 2011.

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 nine months ended	September 30, 2012								September 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	$	32,440		$	1,004		4.13	%	$	28,071		$	916		4.36	%	$	138			(50	)		88
Commercial mortgage		9,846			283		3.84			10,480			315		4.02			(18	)		(14	)		(32	)
Commercial construction		881			19		2.98			1,936			44		3.06			(24	)		(1	)		(25	)
Commercial leases		3,499			97		3.69			3,337			101		4.04			5			(9	)		(4	)

Subtotal – commercial		46,666			1,403		4.02			43,824			1,376		4.20			101			(74	)		27
Residential mortgage loans		13,149			404		4.11			10,873			371		4.56			72			(39	)		33
Home equity		10,449			298		3.81			11,167			327		3.92			(20	)		(9	)		(29	)
Automobile loans		11,817			335		3.79			11,236			404		4.80			19			(88	)		(69	)
Credit card		1,937			141		9.72			1,850			137		9.94			7			(3	)		4
Other consumer loans/leases		349			115		44.02			567			98		23.01			(47	)		64			17

Subtotal – consumer		37,701			1,293		4.58			35,693			1,337		5.01			31			(75	)		(44	)

Total loans and leases		84,367			2,696		4.27			79,517			2,713		4.56			132			(149	)		(17	)
Securities:
Taxable		15,287			404		3.53			15,356			452		3.94			(1	)		(47	)		(48	)
Exempt from income taxes^(b)		56			1		3.42			119			5		5.41			(3	)		(1	)		(4	)
Other short-term investments		1,486			3		0.25			2,070			4		0.25			(1	)		—			(1	)

Total interest-earning assets		101,196			3,104		4.10			97,062			3,174		4.37			127			(197	)		(70	)
Cash and due from banks		2,326								2,329
Other assets		15,772								15,194
Allowance for loan and lease losses		(2,126	)							(2,796	)

Total assets	$	117,168							$	111,789

Liabilities and Equity
Interest-bearing liabilities:
Interest checking	$	22,941		$	37		0.22	%	$	18,520		$	37		0.27	%	$	8			(8	)		—
Savings		21,788			30		0.18			21,631			54		0.34			2			(26	)		(24	)
Money market		4,527			7		0.22			5,120			11		0.29			(2	)		(2	)		(4	)
Foreign office deposits		1,646			3		0.27			3,546			8		0.29			(5	)		—			(5	)
Other time deposits		4,377			53		1.61			6,698			118		2.35			(34	)		(31	)		(65	)
Certificates - $100,000 and over		3,108			35		1.51			3,849			59		2.04			(10	)		(14	)		(24	)
Other deposits		25			—		0.12			3			—		0.03			—			—			—
Federal funds purchased		481			—		0.13			344			—		0.12			—			—			—
Other short-term borrowings		4,142			6		0.17			2,434			2		0.14			3			1			4
Long-term debt		9,432			224		3.17			10,304			230		2.98			(20	)		14			(6	)

Total interest-bearing liabilities		72,467			395		0.73			72,449			519		0.96			(58	)		(66	)		(124	)
Demand deposits		26,516								22,485
Other liabilities		4,485								4,074

Total liabilities		103,468								99,008
Total equity		13,700								12,781

Total liabilities and equity	$	117,168							$	111,789

Net interest income				$	2,709							$	2,655				$	185			(131	)		54
Net interest margin							3.58	%							3.66	%
Net interest rate spread							3.37								3.41
Interest-bearing liabilities to interest-earning assets							71.61								74.64

(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 $13 and $14 for the nine months ended September 30, 2012 and 2011, respectively.

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.

The provision for loan and lease losses was $65 million and $227 million for the three and nine months ended September 30, 2012 compared to $87 million and $368 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

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

leases, and improvement in underlying loss trends. The ALLL declined $330 million from December 31, 2011 to September 30, 2012. The ALLL declined $514 million from $2.4 billion at September 30, 2011 to $1.9 billion at September 30, 2012. As of September 30, 2012, the ALLL as a percent of portfolio loans and leases decreased to 2.32%, compared to 2.78% at December 31, 2011 and 3.08% at September 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 $6 million, or one percent, for the third quarter of 2012 compared to the third quarter of 2011 and increased $214 million, or 11%, for the nine months ended September 30, 2012 compared to the same period in the prior year.

The components of noninterest income for the three and nine months ended September 30, 2012 and 2011 are as follows:

TABLE 5: Noninterest Income


	For the three months ended September 30,							For the nine months ended September 30,
($ in millions)	2012		2011		% Change			2012		2011		% Change
Mortgage banking net revenue	$	200		178		13		$	588		442		33
Service charges on deposits		128		134		(5	)		387		384		1
Corporate banking revenue		101		87		16			299		268		12
Investment advisory revenue		92		92		—			281		285		(1	)
Card and processing revenue		65		78		(17	)		187		248		(25	)
Other noninterest income		78		64		22			359		226		59
Securities gains, net		2		26		(92	)		13		40		(68	)
Securities gains, net - non-qualifying hedges on mortgage servicing rights		5		6		(24	)		5		12		(60	)

Total noninterest income	$	671		665		1		$	2,119		1,905		11

Mortgage banking net revenue

Mortgage banking net revenue increased $22 million and $146 million for the three and nine months ended September 30, 2012, respectively, compared to the three and nine months ended September 30, 2011.

The components of mortgage banking net revenue are as follows:

TABLE 6: Components of Mortgage Banking Net Revenue


	For the three months ended September 30,						For the nine months ended September 30,
($ in millions)	2012			2011			2012			2011
Origination fees and gains on loan sales	$	226			119		$	583			245
Net servicing revenue:
Gross servicing fees		62			59			186			175
Servicing rights amortization		(48	)		(34	)		(134	)		(88	)
Net valuation adjustments on servicing rights and free-standing derivatives entered into to economically hedge MSR		(40	)		34			(47	)		110

Net servicing revenue		(26	)		59			5			197

Mortgage banking net revenue	$	200			178		$	588			442

Origination fees and gains on loan sales increased $107 million and $338 million for the three and nine months ended September 30, 2012, respectively, compared to the three and nine months ended September 30, 2011. The increase from both periods in the prior year was primarily the result of a 30% and 58% increase in residential mortgage loan originations from the three and nine months ended September 30, 2011, respectively, coupled with an increase in profit margins on sold residential mortgage loans. Residential mortgage loan originations increased to $5.8 billion during the third quarter of 2012 compared to $4.5 billion during the third quarter of 2011 and increased to $18.2 billion during the nine months ended September 30, 2012 from $11.6 billion during the nine months ended September 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 $85 million and $192 million for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011, driven primarily by decreases of $74 million and $157 million, respectively, in net valuation adjustments. Additionally, servicing rights amortization increased $14 million and $46 million for the three and nine months ended September 30, 2012, respectively, compared to the three and nine months ended September 30, 2011 driven by higher prepayments due to declining market interest rates.

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

The net valuation adjustment loss of $40 million during the third quarter of 2012 included $72 million of temporary impairment on the MSRs partially offset by $32 million in gains from derivatives economically hedging the MSRs. The net valuation adjustment gain of $34 million during the third quarter of 2011 included $235 million in gains from derivatives economically hedging the MSRs partially offset by $201 million in temporary impairment on the MSR portfolio. The net valuation adjustment loss of $47 million for the nine months ended September 30, 2012 included $122 million of temporary impairment on the MSRs partially offset by $75 million in gains from derivatives economically hedging the MSRs. The net valuation adjustment of $110 million for the nine months ended September 30, 2011 included $338 million in gains from derivatives economically hedging the MSR portfolio partially offset by $228 million of temporary impairment on the MSR portfolio. Mortgage rates decreased during the three and nine months ended September 30, 2012. This caused modeled prepayments speeds to increase, which led to the temporary impairment on servicing rights during both periods. 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. Gross servicing fees increased $3 million from the third quarter of 2011 and $11 million from the nine months ended September 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 September 30, 2012, December 31, 2011 and September 30, 2011 were $75.9 billion, $70.6 billion and $68.4 billion, respectively, with $62.4 billion, $57.1 billion and $56.5 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 10 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 11 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. Net gains on sales of these securities of $5 million for both the three and nine months ended September 30, 2012 and $6 million and $12 million for the three and nine months ended September 30, 2011, respectively, 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 decreased $6 million for the three months ended September 30, 2012 and increased $3 million for the nine months ended September 30, 2012 compared to the same periods in the prior year. The decrease for the three months ended September 30, 2012 was primarily driven by consumer deposit revenue which decreased $11 million compared to the same period in the prior year due to the full quarter impact of the elimination of daily overdraft fees on continuing consumer overdraft positions which took effect late in the second quarter of 2012. The increase for the nine months ended September 30, 2012 was driven by commercial deposit revenue which increased $15 million compared to the same period in the prior year due to new customer relationships offset by a $12 million decrease in consumer deposit revenue primarily due to the aforementioned elimination of daily consumer overdraft fees.

Corporate banking revenue

Corporate banking revenue increased $14 million and $31 million for the three and nine months ended September 30, 2012, respectively, compared to the three and nine months ended September 30, 2011. The increase compared to the three months ended September 30, 2011 was primarily due to a $7 million increase in syndication fees and a $4 million increase in lease remarketing fees. The increase compared to the nine months ended September 30, 2011 was primarily due to a $16 million increase in syndication fees, a $4 million increase in lease remarketing fees and a $10 million increase in business lending fees.

Investment advisory revenue

Investment advisory revenue was relatively flat in the third quarter of 2012 compared to the same period in 2011, as a $2 million decrease in mutual fund fees due to the sale of certain FTAM funds during the third quarter of 2012 was offset by the positive impact of an overall increase in equity and bond market values. Investment advisory revenue decreased $4 million for the nine months ended September 30, 2012 compared to the same period in 2011, primarily driven by a $5 million decline in mutual fund fees. The Bancorp had approximately $299.8 billion and $272.6 billion in total assets under care as of September 30, 2012 and 2011, respectively, and managed $26.2 billion and $23.1 billion in assets, respectively, for individuals, corporations and not-for-profit organizations for the same comparative periods.

The Bancorp previously announced that FTAM entered into two agreements under which a third party would acquire assets of 16 mutual funds from FTAM and another third party would acquire certain assets relating to the management of Fifth Third money market funds. Both transactions were completed in the third quarter of 2012. Upon completion of the transactions, the Bancorp recognized a $13 million gain on sale within other noninterest income in the Bancorp’s Condensed Consolidated Statements of Income.

Card and processing revenue

Card and processing revenue decreased $13 million and $61 million for the three and nine months ended September 30, 2012 compared to the three and nine months ended September 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.

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

Other noninterest income

The major components of other noninterest income are as follows:

TABLE 7: Components of Other Noninterest Income


	For the three months ended September 30,						For the nine months ended September 30,
($ in millions)	2012			2011			2012			2011
Gain on Vantiv, Inc. IPO	$	—			—		$	115			—
Operating lease income		15			14			44			44
Cardholder fees		12			11			34			29
Equity method earnings from interest in Vantiv Holding, LLC		25			17			27			32
BOLI income		7			9			26			30
Banking center income		9			7			24			21
Insurance income		7			7			21			20
Gain on loan sales		7			3			21			28
Consumer loan and lease fees		2			8			16			23
Loss on sale of OREO		(11	)		(21	)		(47	)		(49	)
Other, net		5			9			78			48

Total other noninterest income	$	78			64		$	359			226

Other noninterest income increased $14 million, or 22%, in the third quarter of 2012 compared to the third quarter of 2011 and $133 million, or 59%, for the nine months ended September 30, 2012 compared to the same period in the prior year. The increase compared to the third quarter of 2011 included a $13 million gain recognized on the sale of certain FTAM funds recorded in the “other” caption above, a $10 million decrease in the loss on sale of OREO and an $8 million increase in equity method income recorded from the Bancorp’s ownership interest in Vantiv Holding, LLC. Additionally, other noninterest income included a $16 million increase in income related to the Visa total return swap which had a negative valuation adjustment of $1 million for the three months ended September 30, 2012 compared with a negative valuation adjustment of $17 million for the comparable prior year period. These impacts were partially offset by a $16 million negative valuation adjustment, recorded in the “other” caption above, on the warrants and put options issued as part of the Bancorp’s sale of its processing business sale business compared with a gain of $3 million in the third quarter of 2011. The increase compared to the nine months ended September 30, 2011 was primarily due to a $115 million gain from the Vantiv, Inc. IPO recognized in the first quarter of 2012 and a $56 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 $18 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 20 of the Notes to Condensed Consolidated Financial Statements.

Noninterest Expense

Total noninterest expense increased $60 million, or six percent, for the three months ended September 30, 2012, and $153 million, or six percent, for the nine months ended September 30, 2012 compared to the three and nine months ended September 30, 2011, respectively.

The major components of noninterest expense are as follows:

TABLE 8: Noninterest Expense


	For the three months ended September 30,									For the nine months ended September 30,
($ in millions)	2012			2011			% Change			2012			2011			% Change
Salaries, wages and incentives	$	399			369			8		$	1,191			1,085			10
Employee benefits		79			70			14			274			246			12
Net occupancy expense		76			75			2			227			226			—
Technology and communications		49			48			3			144			140			3
Card and processing expense		30			34			(13	)		90			92			(2	)
Equipment expense		28			28			(1	)		82			85			(3	)
Other noninterest expense		345			322			7			910			891			2

Total noninterest expense	$	1,006			946			6		$	2,918			2,765			6

Efficiency ratio		63.7	%		60.4	%					60.4	%		60.6	%

Total personnel costs increased $39 million and $134 million, respectively, for the three and nine months ended September 30, 2012 compared to the same periods in 2011. The increase from both periods in the prior year reflected an increase in base and incentive compensation primarily driven by higher compensation costs as a result of improved production levels, as well as higher employee benefits expense due to increases in medical costs under the Bancorp’s self-insured medical plan and an increase in other employee benefits. Full time equivalent employees totaled 20,789 at September 30, 2012 compared to 21,172 at September 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 ended September 30,						For the nine months ended September 30,
($ in millions)	2012			2011			2012			2011
Losses and adjustments	$	53			38		$	122			89
Loan and lease		45			49			136			143
Marketing		39			32			98			85
FDIC insurance and other taxes		32			50			77			152
Affordable housing investments impairment		22			16			68			66
Professional services fees		14			12			39			39
Travel		13			13			38			39
Postal and courier		12			12			36			37
Operating lease		11			10			31			31
Recruitment and education		7			7			21			22
OREO		6			7			16			25
Insurance		5			6			14			18
Intangible asset amortization		3			5			10			18
Provision for unfunded commitments and letters of credit		(2	)		(10	)		(5	)		(40	)
Other, net		85			75			209			167

Total other noninterest expense	$	345			322		$	910			891

Total other noninterest expense increased $23 million and $19 million, respectively, for the three and nine months ended September 30, 2012 compared to the same periods in 2011. The provision for representation and warranty claims, included in losses and adjustments, increased $17 million and $32 million, respectively, for the three and nine months ended September 30, 2012 compared to the same periods in the prior year primarily due to an increase in the reserve as a result of additional information obtained from FHLMC regarding future mortgage repurchase and file requests. As such, the Bancorp was able to better estimate the losses that are probable on loans sold to FHLMC with representation and warranty provisions. Marketing expense increased $7 million and $13 million, respectively, for the three and nine months ended September 30, 2012 compared to the same periods in the prior year primarily due to the Bancorp’s rebranding campaign in 2012. FDIC insurance and other taxes decreased $18 million and $75 million, respectively, for the three and nine months ended September 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. In addition, the provision for unfunded commitments and letters of credit was a benefit of $2 million and $5 million, respectively, for the three and nine months ended September 30, 2012 compared to a benefit of $10 million and $40 million, respectively, for the three and nine months ended September 30, 2011. The decrease in the benefit recorded in each period reflects an increase in unfunded commitments for which the Bancorp holds reserves for the three and nine months ended September 30, 2012 partially offset by a decline in estimated loss rates related to unfunded commitments and letters of credit due to improved credit trends. In addition, during the third quarter of 2012 the Bancorp incurred $26 million of debt extinguishment costs associated with the redemption of the outstanding TruPS issued by Fifth Third Capital Trust V and Fifth Third Capital Trust VI recorded in the “other” caption above. For additional information on the TruPS redemptions, see Note 12 of the Notes to Condensed Consolidated Financial Statements.

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 63.7% and 60.4% for the three and nine months ended September 30, 2012 compared to 60.4% and 60.6% for the three and nine months ended September 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 ended September 30,					For the nine months ended September 30,
($ in millions)	2012			2011		2012			2011
Income before income taxes	$	503			530	$	1,670			1,413
Applicable income tax expense		139			149		491			429
Effective tax rate		27.7	%		27.9		29.4	%		30.3

Applicable income tax expense for all periods includes the benefit from tax-exempt income, tax-advantaged investments, and 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.

As required under U.S. GAAP, the Bancorp established a deferred tax asset for stock-based awards granted to its employees. When the actual tax deduction for these stock-based awards is less than the expense previously recognized for financial reporting or when the awards expire unexercised, the Bancorp is required to write-off the deferred tax asset previously established for these stock-based awards. As a result of the Bancorp’s stock price as of September 30, 2012, it is probable that the Bancorp will be required to record an additional $12 million of income

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

tax expense during the next twelve months, primarily in the first quarter of 2013. However, the Bancorp cannot predict its stock price or whether its employees will exercise other stock-based awards with lower exercise prices in the future; therefore, it is possible that the total impact to income tax expense will be greater than or less than this amount.

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 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 Loans and Leases (includes held for sale)


	September 30, 2012				December 31, 2011				September 30, 2011
($ in millions)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Commercial:
Commercial and industrial loans	$	33,357		40		30,828		38		29,324		36
Commercial mortgage loans		9,368		11		10,214		12		10,435		13
Commercial construction loans		683		1		1,037		1		1,239		2
Commercial leases		3,549		4		3,531		4		3,368		4

Subtotal – commercial		46,957		56		45,610		55		44,366		55

Consumer:
Residential mortgage loans		13,449		16		13,474		16		11,878		15
Home equity		10,238		12		10,719		13		10,920		13
Automobile loans		11,912		14		11,827		14		11,593		14
Credit card		1,994		2		1,978		2		1,878		2
Other consumer loans and leases		311		—		364		—		421		1

Subtotal – consumer		37,904		44		38,362		45		36,690		45

Total loans and leases	$	84,861		100		83,972		100		81,056		100

Total portfolio loans and leases (excludes loans held for sale)	$	83,059				81,018				79,216

Loans and leases, including held for sale, increased $889 million, or one percent, from December 31, 2011 and increased $3.8 billion, or five percent, from September 30, 2011. The increase from December 31, 2011 was due to an increase of $1.3 billion, or three percent, in commercial loans and leases partially offset by a decrease of $458 million, or one percent, in consumer loans and leases. The increase from September 30, 2011 was due to an increase of $2.6 billion, or six percent, in commercial loans and leases and an increase of $1.2 billion, or three percent, in consumer loans and leases.

Commercial loans and leases increased from December 31, 2011 and September 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 $2.5 billion, or eight percent, from December 31, 2011 and $4.0 billion, or 14%, from September 30, 2011 due to an increase in new loan origination activity from an increase in demand due to a strengthening economy and increased sales personnel. Commercial mortgage loans decreased $846 million, or eight percent, from December 31, 2011 and $1.1 billion, or 10%, from September 30, 2011 and commercial construction loans decreased $354 million, or 34%, from December 31, 2011 and $556 million, or 45%, from September 30, 2011 due to continued runoff as the level of new originations was below the repayments of the current portfolio.

Consumer loans and leases decreased from December 31, 2011 primarily due to a decrease in home equity loans and other consumer loans partially offset by an increase in automobile loans. Home equity loans decreased $481 million, or four percent, from December 31, 2011 as payoffs exceeded new loan production. Other consumer loans and leases decreased $53 million, or 15%, due to the runoff of automobile leases as the Bancorp stopped originating automobile leases in 2008. Automobile loans increased $85 million, or one percent, from December 31, 2011 driven by strong origination volumes in the third quarter of 2012 due to competitive pricing.

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

Total consumer loans and leases increased from September 30, 2011 due to an increase in residential mortgage loans, automobile loans, and credit card loans partially offset by a decrease in home equity loans and other consumer loans. Residential mortgage loans increased $1.6 billion, or 13%, from September 30, 2011 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 strong originations due to continued refinancing activity associated with historically low interest rates. Automobile loans increased $319 million, or three percent, compared to September 30, 2011 due to strong origination volumes through consistent and competitive pricing, enhanced customer service with our dealership network, and disciplined sales execution. Credit card loans increased $116 million, or six percent, from September 30, 2011 driven by strong new account originations and modest attrition rates. Home equity loans decreased $682 million, or six percent, from September 30, 2011 as payoffs exceeded new loan production. Other consumer loans and leases decreased $110 million, or 26%, from September 30, 2011 due to the runoff of automobile leases as the Bancorp stopped originating automobile leases in 2008.

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


	September 30, 2012				December 31, 2011				September 30, 2011
For the three months ended ($ in millions)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Commercial:
Commercial and industrial loans	$	33,124		40		29,954		36		28,824		36
Commercial mortgage loans		9,592		11		10,350		13		10,140		13
Commercial construction loans		751		1		1,155		1		1,777		2
Commercial leases		3,483		4		3,352		4		3,300		4

Subtotal – commercial		46,950		56		44,811		54		44,041		55

Consumer:
Residential mortgage loans		13,458		16		12,638		16		11,224		14
Home equity		10,312		12		10,810		13		10,985		14
Automobile loans		11,812		14		11,696		14		11,445		14
Credit card		1,971		2		1,906		2		1,864		2
Other consumer loans and leases		326		—		417		1		454		1

Subtotal – consumer		37,879		44		37,467		46		35,972		45

Total average loans and leases	$	84,829		100		82,278		100		80,013		100

Total average portfolio loans and leases (excludes loans held for sale)	$	82,888				79,914				78,620

Average loans and leases, including held for sale, increased $2.6 billion, or three percent, from December 31, 2011 and increased $4.8 billion, or six percent, from September 30, 2011. The increase from December 31, 2011 was due to an increase of $2.1 billion, or five percent, in average commercial loans and leases and an increase of $412 million, or one percent, in average consumer loans and leases. The increase from September 30, 2011 was due to an increase of $2.9 billion, or seven percent, in average commercial loans and leases and an increase of $1.9 billion, or five percent, in average consumer loans and leases.

Average commercial loans and leases increased from December 31, 2011 due to an increase of $3.2 billion, or 11%, in average commercial and industrial loans, partially offset by a decrease of $758 million, or seven percent, in average commercial mortgage loans, and a decrease of $404 million, or 35%, in average commercial construction loans due to the reasons previously discussed. Average commercial loans and leases increased from September 30, 2011 due to an increase of $4.3 billion, or 15%, in average commercial and industrial loans, partially offset by a decrease of $1.0 billion, or 58%, in average commercial construction loans and a decrease of $548 million, or five percent, in average commercial mortgage loans due to the reasons previously discussed.

Average consumer loans increased from December 31, 2011 due to an increase of $820 million, or six percent, in average residential mortgage loans partially offset by a decrease of $498 million, or five percent, in average home equity loans. Average residential mortgage loans increased from December 31, 2011 due to strong originations from continued 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 consumer loans increased from September 30, 2011 due to an increase of $2.2 billion, or 20%, in average residential mortgage loans and an increase of $367 million, or three percent, in average automobile loans partially offset by a decrease of $673 million, or six percent, in average home equity loans and a decrease of $128 million, or 28%, 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 $15.9 billion at September 30, 2012 and December 31, 2011 and $16.8 billion at September 30, 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.

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

At September 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 $114 million of securities classified as below investment grade as of September 30, 2012, compared to $122 million as of December 31, 2011 and $136 million as of September 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 $23 million and $39 million of OTTI on its available-for-sale investment securities portfolio during the three and nine months ended September 30, 2012, respectively, and $9 million during the three and nine months ended September 30, 2011, respectively. The OTTI for the three and nine months ended September 30, 2012 was primarily related to interest-only mortgage-backed securities, as a decline in primary mortgage rates resulted in lower estimated cash flows and a decrease in fair value for certain securities. The Bancorp did not recognize any OTTI on any of its held-to-maturity investment securities during the three and nine months ended September 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)	September 30, 2012		December 31, 2011		September 30, 2011
Available-for-sale and other: (amortized cost basis)
U.S. Treasury and government agencies	$	41		171		201
U.S. Government sponsored agencies		1,730		1,782		1,808
Obligations of states and political subdivisions		203		96		101
Agency mortgage-backed securities		8,534		9,743		10,413
Other bonds, notes and debentures^(a)		3,055		1,792		1,567
Other securities^(b)		1,078		1,030		1,337

Total available-for-sale and other securities	$	14,641		14,614		15,427

Held-to-maturity: (amortized cost basis)
Obligations of states and political subdivisions	$	285		320		335
Other bonds, notes and debentures		2		2		2

Total held-to-maturity	$	287		322		337

Trading: (fair value)
Obligations of states and political subdivisions	$	11		9		12
Agency mortgage-backed securities		14		11		20
Other bonds, notes and debentures		13		13		15
Other securities		167		144		142

Total trading	$	205		177		189

(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 $27 million from December 31, 2011 primarily due to an increase in other bonds, notes, and debentures and obligations of states and political subdivisions securities partially offset by a decrease in agency mortgage-backed securities and U.S. Treasury and government agencies securities. Other bonds, notes, and debentures increased $1.3 billion, or 70%, from December 31, 2011 primarily due to $1.6 billion in purchases of commercial mortgage-backed securities, asset-backed securities, and corporate bonds during the nine months ended September 30, 2012. The increase of $107 million, or 111%, in obligations of states and political subdivisions securities was due to the reinvestment of maturities of U.S. Treasuries and government agencies securities into obligations of states and political subdivisions. U.S. Treasury and government agencies securities decreased $130 million, or 76%, from December 31, 2011. Agency mortgage-backed securities decreased $1.2 billion, or 12%, from December 31, 2011 primarily due to sales of collateralized mortgage obligations and mortgage-backed securities totaling $2.0 billion partially offset by purchases of agency mortgage-backed securities from the reinvestment of cash flows.

Available-for-sale securities on an amortized cost basis decreased $786 million, or five percent, from September 30, 2011 primarily due to a decrease in agency mortgage-backed securities and other securities partially offset by an increase in other bonds, notes and debentures. Agency mortgage-backed securities decreased $1.9 billion, or 18%, from September 30, 2011 primarily due to sales of collateralized mortgage obligations and mortgage-backed securities totaling $2.3 billion during the fourth quarter of 2011 and the nine months ended September 30, 2012. Other bonds, notes, and debentures increased $1.5 billion, or 95%, as principal pay downs on agency mortgage-backed securities were reinvested in other bonds, notes, and debentures. Other securities decreased $259 million, or 19%, from September 30, 2011 due to a decrease in the balance of money market funds.

Available-for-sale securities on an amortized cost basis were 14% of total interest-earning assets at September 30, 2012 and December 31, 2011 and 16% at September 30, 2011. The estimated weighted-average life of the debt securities in the available-for-sale portfolio was 3.5 years at September 30, 2012, compared to 3.6 years at both December 31, 2011 and September 30, 2011. In addition, at September 30, 2012, the available-for-sale securities portfolio had a weighted-average yield of 3.37%, compared to 3.66% at December 31, 2011 and 4.05% at September 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 $761

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

million at September 30, 2012, compared to $748 million at December 31, 2011 and $800 million at September 30, 2011. The increase from December 31, 2011 was due to a continued low interest rate environment while the decrease from September 30, 2011 was due to sales of agency mortgage-backed securities.

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


As of September 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	$	40		40		0.2		0.10	%
Average life 5 – 10 years		1		1		6.4		1.48

Total		41		41		0.3		0.12
U.S. Government sponsored agencies:
Average life of one year or less		204		207		0.8		2.50
Average life 1 – 5 years		1,416		1,593		4.2		3.68
Average life 5 – 10 years		110		122		5.1		2.95

Total		1,730		1,922		3.9		3.50
Obligations of states and political subdivisions:^(a)
Average life 1 – 5 years		91		92		3.0		1.39
Average life 5 – 10 years		96		101		6.6		4.37
Average life greater than 10 years		16		18		11.5		5.21

Total		203		211		5.3		3.10
Agency mortgage-backed securities:
Average life of one year or less		563		577		0.7		4.88
Average life 1 – 5 years		6,938		7,317		3.2		3.63
Average life 5 – 10 years		1,033		1,092		6.3		3.30

Total		8,534		8,986		3.4		3.67
Other bonds, notes and debentures:
Average life of one year or less		210		212		0.4		2.38
Average life 1 – 5 years		2,357		2,438		3.3		2.45
Average life 5 – 10 years		471		497		5.9		3.05
Average life greater than 10 years		17		17		18.5		3.15

Total		3,055		3,164		3.6		2.54
Other securities		1,078		1,078

Total available-for-sale and other securities	$	14,641		15,402		3.5		3.37	%

(a)

Taxable-equivalent yield adjustments included in the above table are 0.84%, 0.02%, 0.40%, 1.79% and 0.34% 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 September 30, 2012 and September 30, 2011 and 71% at December 31, 2011.

TABLE 15: Deposits


	September 30, 2012				December 31, 2011				September 30, 2011
			% of				% of				% of
($ in millions)	Balance		Total		Balance		Total		Balance		Total
Demand	$	27,606		33		27,600		32		24,547		30
Interest checking		22,891		27		20,392		24		18,616		23
Savings		20,624		24		21,756		25		21,673		26
Money market		5,285		6		4,989		6		5,448		7
Foreign office		1,059		1		3,250		4		3,139		3

Transaction deposits		77,465		91		77,987		91		73,423		89
Other time		4,167		5		4,638		5		5,439		7

Core deposits		81,632		96		82,625		96		78,862		96
Certificates-$100,000 and over		2,978		4		3,039		4		3,092		4
Other		78		—		46		—		93		—

Total deposits	$	84,688		100		85,710		100		82,047		100

Core deposits decreased $993 million, or one percent, from December 31, 2011, driven by a decrease of $522 million, or one percent, in transaction deposits and a decrease of $471 million, or 10%, in other time deposits. Total transaction deposits decreased from December 31, 2011 due to a decrease in foreign office deposits and savings deposits partially offset by an increase in money market deposits and interest checking deposits. Foreign office deposits decreased $2.2 billion, or 67%, from December 31, 2011 due to account migration to interest checking deposits which increased $2.5 billion, or 12%. Savings deposits decreased $1.1 billion, or five percent, from December 31, 2011 due to account migration to money market deposits. Money market deposits increased $296 million, or six percent, due to account migration

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

from savings deposits partially offset by account migration to interest checking. Excluding the previously mentioned account migration, interest checking deposits decreased from December 31, 2011 due to seasonality. The decrease in other time deposits from December 31, 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 $2.8 billion, or four percent, compared to September 30, 2011 driven by an increase of $4.0 billion, or six percent, in transaction deposits, partially offset by a decrease of $1.3 billion, or 23%, in other time deposits. The increase in transaction deposits was primarily due to an increase in demand deposits and interest checking deposits partially offset by a decrease in savings deposits and foreign office deposits. Demand deposits increased $3.1 billion, or 12%, 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. Interest checking deposits increased $4.3 billion, or 23%, from September 30, 2011 partially driven by account migration from foreign office deposits which decreased $2.1 billion, or 66% and account migration from money market deposits which decreased $163 million, or three percent. 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 early 2011. Saving deposits decreased $1.0 billion, or five percent, from September 30, 2011 due to account migration to money market deposits. 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 assets. At September 30, 2012, certificates $100,000 and over decreased $61 million, or two percent, compared to December 31, 2011 and decreased $114 million, or four percent, from September 30, 2011. The decrease for both prior year periods 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


	September 30, 2012				December 31, 2011				September 30, 2011
			% of				% of				% of
($ in millions)	Balance		Total		Balance		Total		Balance		Total
Demand	$	27,127		32		26,069		31		23,677		29
Interest checking		22,967		27		19,263		23		18,322		23
Savings		21,283		25		21,715		26		21,747		27
Money market		4,776		6		5,255		6		5,213		6
Foreign office		1,345		1		3,325		4		3,255		4

Transaction deposits		77,498		91		75,627		90		72,214		89
Other time		4,224		5		4,960		6		6,008		7

Core deposits		81,722		96		80,587		96		78,222		96
Certificates-$100,000 and over		3,016		4		3,085		4		3,376		4
Other		32		—		16		—		7		—

Total average deposits	$	84,770		100		83,688		100		81,605		100

On an average basis, core deposits increased $1.1 billion, or one percent, compared to December 31, 2011 due to an increase of $1.9 billion, or two percent, in average transaction deposits partially offset by a decrease of $736 million, or 15%, in other time deposits. The increase in average transaction deposits was driven by an increase in average demand deposits and average interest checking deposits partially offset by a decrease in average foreign office deposits, average money market deposits, and average savings deposits. Average demand deposits increased $1.1 billion, or four percent, from December 31, 2011 due to an increase in average balances per account. Average interest checking deposits increased $3.7 billion, or 19%, 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 $479 million, or nine percent, from December 31, 2011. The remaining increase in average interest checking deposits was due to continued growth in the preferred checking program introduced in early 2011 and growth from maturing certificates of deposits. Average savings deposits decreased $432 million, or two percent, from December 31, 2011 due to the previously mentioned account migration to money market deposits. The decrease in average other time deposits was due to the reasons discussed in the end of period section.

Average core deposits increased $3.5 billion, or four percent, from September 30, 2011 due to an increase of $5.3 billion, or seven percent, in average transaction deposits partially offset by a decrease of $1.8 billion, or 30%, in average other time deposits. Average transaction deposits increased due to an increase in average interest checking deposits and average demand deposits partially offset by a decrease in average foreign office deposits, average savings deposits, and average money market deposits due to the reasons discussed in the end of period year over year section. The decrease in average other time deposits was due to the reasons discussed in the end of period section.

Other time deposits and certificates $100,000 and over totaled $7.1 billion, $7.7 billion, and $8.5 billion at September 30, 2012, December 31, 2011, and September 30, 2011, respectively. All of these deposits were interest-bearing.

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

The contractual maturities of these deposits as of September 30, 2012 are summarized in the following table.

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


($ in millions)	September 30, 2012
Next 12 months	$	4,175
13-24 months		1,822
25-36 months		705
37-48 months		218
49-60 months		172
After 60 months		53

Total	$	7,145

The contractual maturities of certificates $100,000 and over as of September 30, 2012 are summarized in the following table.

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


($ in millions)	September 30, 2012
Three months or less	$	875
After three months through six months		416
After six months through 12 months		518
After 12 months		1,169

Total	$	2,978

Borrowings

Total borrowings increased $1.0 billion, or eight percent, from December 31, 2011 and decreased $805 million, or five percent, from September 30, 2011. Refer to the table below for the end of period components of total borrowings. As of September 30, 2012, total borrowings as a percentage of interest-bearing liabilities were 20% compared to 19% at December 31, 2011 and 21% at September 30, 2011.

TABLE 19: Borrowings


($ in millions)	September 30, 2012		December 31, 2011		September 30, 2011
Federal funds purchased	$	686		346		427
Other short-term borrowings		5,503		3,239		4,894
Long-term debt		8,127		9,682		9,800

Total borrowings	$	14,316		13,267		15,121

Federal funds purchased increased by $340 million, or 98%, 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 $2.3 billion, or 70%, from December 31, 2011 driven by an increase of $2.4 billion in short-term FHLB borrowings partially offset by a decrease of $191 million in securities sold under repurchase agreements which are accounted for as collateralized financing transactions. Long-term debt decreased by $1.6 billion, or 16%, from December 31, 2011 driven by the redemption of $1.4 billion of the outstanding TruPS in the third quarter of 2012. For additional information regarding long-term debt, see Note 12 of the Notes to the Condensed Consolidated Financial Statements.

Federal funds purchased increased by $259 million, or 61%, from September 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 $609 million, or 12%, from September 30, 2011 driven by an increase of $1.0 billion in short-term FHLB borrowings partially offset by a decrease of $424 million in securities sold under repurchase agreements. The level of these borrowings can fluctuate significantly period to period depending on funding needs and which sources are used to satisfy those needs. Long-term debt decreased $1.7 billion, or 17%, from September 30, 2011 primarily due to the termination of $375 million of structured repurchase agreements classified as long-term debt and the previously discussed redemption of $1.4 billion of outstanding TruPS.

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

TABLE 20: Average Borrowings


($ in millions)	September 30, 2012		December 31, 2011		September 30, 2011
Federal funds purchased	$	664		348		376
Other short-term borrowings		4,856		3,793		4,033
Long-term debt		8,863		9,707		10,136

Total average borrowings	$	14,383		13,848		14,545

Average total borrowings increased $535 million, or four percent, compared to December 31, 2011, primarily due to the increase in other short-term borrowings discussed above. Average total borrowings decreased $162 million, or one percent, compared to September 30, 2011, primarily due to the previously mentioned decrease in average long-term debt partially offset by increases in other short-term borrowings and federal funds purchased. 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 21 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 interest-bearing liabilities and by the review of the estimated durations for the indeterminate-lived deposits. The credit rate provided for demand deposit accounts 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 nine months ended September 30, 2012.

The business segments are charged provision expense based on the actual net charge-offs experienced on the loans and leases owned by each segment. Provision expense attributable to loan and lease growth and changes in ALLL factors 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 September 30,				For the nine months ended September 30,
($ in millions)	2012		2011		2012		2011
Income Statement Data
Commercial Banking	$	182		130	$	486		297
Branch Banking		46		57		125		131
Consumer Lending		54		41		136		46
Investment Advisors		16		—		32		18
General Corporate & Other		66		153		400		492

Net income		364		381		1,179		984
Less: Net income attributable to noncontrolling interests		1		—		1		1

Net income attributable to Bancorp		363		381		1,178		983
Dividends on preferred stock		9		8		26		194

Net income available to common shareholders	$	354		373	$	1,152		789

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 September 30,				For the nine months ended September 30,
($ in millions)	2012		2011		2012		2011
Income Statement Data
Net interest income (FTE)^(a)	$	358		345	$	1,062		1,015
Provision for loan and lease losses		45		104		181		402
Noninterest income:
Corporate banking revenue		96		82		286		254
Service charges on deposits		57		53		166

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