Edgar Filing: FIFTH THIRD BANCORP

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company

Form 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, 2015

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 794,331,190 shares of the Registrant’s common stock, without par value, outstanding as of October 31, 2015.

LOGO

FINANCIAL CONTENTS


Part I. Financial Information
Glossary of Abbreviations and Acronyms			2
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)
Selected Financial Data			3
Overview			4
Non-GAAP Financial Measures			9
Recent Accounting Standards			11
Critical Accounting Policies			11
Statements of Income Analysis			12
Balance Sheet Analysis			20
Business Segment Review			26
Risk Management—Overview			34
Credit Risk Management			35
Market Risk Management			49
Liquidity Risk Management			53
Operational Risk Management			54
Capital Management			55
Off-Balance Sheet Arrangements			57
Quantitative and Qualitative Disclosures about Market Risk (Item 3)			58
Controls and Procedures (Item 4)			58
Condensed Consolidated Financial Statements and Notes (Item 1)
Balance Sheets (unaudited)			59
Statements of Income (unaudited)			60
Statements of Comprehensive Income (unaudited)			61
Statements of Changes in Equity (unaudited)			62
Statements of Cash Flows (unaudited)			63
Notes to Condensed Consolidated Financial Statements (unaudited)			64

Part II. Other Information
Legal Proceedings (Item 1)			120
Risk Factors (Item 1A)			120
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			120
Exhibits (Item 6)			120
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 as updated by our Quarterly Reports on Form 10-Q. 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 and adequate sources of funding and liquidity 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 Fifth Third’s investment in, relationship with, and nature of the operations of Vantiv, LLC; (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) difficulties in separating the operations of any branches or other assets divested; (23) inability to achieve expected benefits from branch consolidations and planned sales within desired timeframes, if at all; (24) ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; and (25) the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity.

Glossary of Abbreviations and Acronyms

Fifth Third Bancorp provides the following list of abbreviations and acronyms as a tool for the reader that are used in Management’s Discussion and Analysis of Financial Condition and Results of Operations, the Condensed Consolidated Financial Statements and 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 ASU: Accounting Standards Update ATM: Automated Teller Machine BCBS: Basel Committee on Banking Supervision BHC: Bank Holding Company BOLI: Bank Owned Life Insurance BPO: Broker Price Opinion bps: Basis Points CCAR: Comprehensive Capital Analysis and Review CDC: Fifth Third Community Development Corporation CET1: Common Equity Tier 1 CFE: Collateralized Financing Entity CFPB: United States Consumer Financial Protection Bureau C&I: Commercial and Industrial DCF: Discounted Cash Flow DFA: Dodd-Frank Wall Street Reform & Consumer Protection Act DTCC: Depository Trust & Clearing Corporation 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 FFIEC: Federal Financial Institutions Examination Council FHA: Federal Housing Administration 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 FTE: Fully Taxable Equivalent FTP: Funds Transfer Pricing FTS: Fifth Third Securities GNMA: Government National Mortgage Association GSE: U.S. Government Sponsored Enterprise HAMP: Home Affordable Modification Program		HARP: Home Affordable Refinance Program HFS: Held for Sale HQLA: High Quality Liquid Assets HUD: Department of Housing and Urban Development IPO: Initial Public Offering IRC: Internal Revenue Code IRLC: Interest Rate Lock Commitment ISDA: International Swaps and Derivatives Association, Inc. LCR: Liquidity Coverage Ratio 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 MSA: Metro Statistical Area MSR: Mortgage Servicing Right N/A: Not Applicable NII: Net Interest Income NM: Not Meaningful NSFR: Net Stable Funding Ratio OAS: Option-Adjusted Spread OCC: Office of the Comptroller of the Currency OCI: Other Comprehensive Income (Loss) OREO: Other Real Estate Owned OTTI: Other-Than-Temporary Impairment PMI: Private Mortgage Insurance SBA: Small Business Administration SEC: United States Securities and Exchange Commission TBA: To Be Announced TDR: Troubled Debt Restructuring TRA: Tax Receivable Agreement TruPS: Trust Preferred Securities U.S.: United States of America U.S. GAAP: United States Generally Accepted Accounting Principles VA: U.S. Department of Veteran Affairs VIE: Variable Interest Entity VRDN: Variable Rate Demand Note

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

The following is Management’s Discussion and Analysis of Financial Condition and Results of Operations 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)	2015			2014		% Change			2015			2014		% Change
Income Statement Data
Net interest income^(a)	$	906			908		—		$	2,650			2,712		(2	)
Noninterest income		713			520		37			1,900			1,820		4
Total revenue^(a)		1,619			1,428		13			4,550			4,532		—
Provision for loan and lease losses		156			71		NM			305			216		41
Noninterest expense		943			888		6			2,814			2,792		1
Net income attributable to Bancorp		381			340		12			1,056			1,096		(4	)
Net income available to common shareholders		366			328		12			1,004			1,052		(5	)

Common Share Data
Earnings per share, basic	$	0.46			0.39		18		$	1.24			1.25		(1	)
Earnings per share, diluted		0.45			0.39		15			1.22			1.23		(1	)
Cash dividends declared per common share		0.13			0.13		—			0.39			0.38		3
Book value per share		18.22			16.87		8			18.22			16.87		8
Market value per share		18.91			20.02		(6	)		18.91			20.02		(6	)

Financial Ratios
Return on average assets		1.07	%		1.02		5			1.01	%		1.12		(10	)
Return on average common equity		10.0			9.2		9			9.3			10.0		(7	)
Return on average tangible common equity^(b)		12.0			11.1		9			11.1			12.2		(9	)
Dividend payout ratio		28.3			33.3		(15	)		31.5			30.4		4
Average total Bancorp shareholders’ equity as a percent of average assets		11.24			11.71		(4	)		11.35			11.61		(2	)
Tangible common equity^(b)		8.32			8.64		(4	)		8.32			8.64		(4	)
Net interest margin^(a)		2.89			3.10		(7	)		2.88			3.16		(9	)
Efficiency^(a)		58.2			62.1		(6	)		61.8			61.6		—

Credit Quality
Net losses charged-off	$	188			115		63		$	366			384		(5	)
Net losses charged-off as a percent of average portfolio loans and leases		0.80	%		0.50		60			0.53	%		0.57		(7	)
ALLL as a percent of portfolio loans and leases		1.35			1.56		(13	)		1.35			1.56		(13	)
Allowance for credit losses as a percent of portfolio loans and leases^(c)		1.49			1.71		(13	)		1.49			1.71		(13	)
Nonperforming assets as a percent of portfolio loans, leases and other assets, including OREO^(d)		0.65			0.88		(26	)		0.65			0.88		(26	)

Average Balances
Loans and leases, including held for sale	$	94,329			91,428		3		$	92,919			90,973		2
Total securities and other short-term investments		30,102			24,927		21			29,905			23,944		25
Total assets		140,739			132,220		6			139,472			130,717		7
Transaction deposits^(e)		94,660			89,360		6			95,100			88,807		7
Core deposits^(f)		98,717			93,160		6			99,151			92,511		7
Wholesale funding^(g)		21,718			19,787		10			19,672			19,084		3
Bancorp shareholders’ equity		15,815			15,486		2			15,826			15,170		4


	Basel III Transitional^(h)			Basel I⁽ⁱ⁾					Basel III Transitional^(h)			Basel I⁽ⁱ⁾
Regulatory Capital Ratios
CET1 capital		9.40	%		N/A		N/A			9.40	%		N/A		N/A
Tier I risk-based capital		10.49			10.83		N/A			10.49			10.83		N/A
Total risk-based capital		13.68			14.34		N/A			13.68			14.34		N/A
Tier I leverage		9.38			9.82		N/A			9.38			9.82		N/A

	Basel III Fully Phased-In								Basel III Fully Phased-In
CET1 capital^(b)		9.30			N/A		N/A			9.30			N/A		N/A

(a)

Amounts presented on an FTE basis. The FTE adjustment for the three months ended September 30, 2015 and 2014 was $5 and for the nine months ended September 30, 2015 and 2014 was $14 and $15, respectively.

(b)

The return on average tangible common equity, tangible common equity and CET1 capital (fully phased-in) ratios are non-GAAP measures. For further information, see the Non-GAAP Financial Measures section of 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.

(h)

Under the banking agencies’ Basel III Final Rule, assets and credit equivalent amounts of off-balance sheet exposures are calculated according to the standardized approach for risk-weighted assets. The resulting values are added together resulting in the Bancorp’s total risk-weighted assets.

(i)

These capital ratios were calculated under the Supervisory Agencies general risk-based capital rules (Basel I) which were in effect prior to January 1, 2015.

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, 2015, the Bancorp had $141.9 billion in assets, with 1,295 full-service banking centers, including 99 Bank Mart^® locations open seven days a week inside select grocery stores, and 2,650 ATMs in 12 states throughout the Midwestern and Southeastern regions of the U.S. The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors. The Bancorp also has an approximate 23% interest in Vantiv Holding, LLC. The carrying value of the Bancorp’s investment in Vantiv Holding, LLC was $422 million at September 30, 2015.

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 Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2014. Each of these items could have an impact on the Bancorp’s financial condition, results of operations and cash flows. In addition, refer to the Glossary of Abbreviations and Acronyms in this report for a list of terms included as a tool for the reader of this quarterly report on Form 10-Q. The abbreviations and acronyms identified therein are used throughout this MD&A, as well as the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements.

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, 2015, net interest income on an FTE basis and noninterest income provided 56% and 44% of total revenue, respectively. For the nine months ended September 30, 2015, net interest income on an FTE basis and noninterest income provided 58% and 42% of total revenue, respectively. The Bancorp derives the majority of its revenues within the U.S. from customers domiciled in the U.S. Revenue from foreign countries and external customers domiciled in foreign countries was immaterial to the 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 of MD&A, 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, other 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 from service charges on deposits, investment advisory revenue, corporate banking revenue, mortgage banking net revenue, card and processing revenue, securities gains, net and other noninterest income. Noninterest expense includes personnel costs, net occupancy expense, technology and communication costs, card and processing expense, equipment expense and other noninterest expense.

Branch Consolidation and Sales Plan

The Bancorp monitors changing customer preferences associated with the channels it uses for banking transactions to evaluate the efficiency, competitiveness and quality of the customer service experience in its consumer distribution network. As part of this ongoing assessment, the Bancorp may determine that it is no longer fully committed to maintaining full-service branches at certain of its existing banking center locations. Similarly, the Bancorp may also determine that it is no longer fully committed to building banking centers on certain parcels of land which had previously been held for future branch expansion. On June 16, 2015, the Bancorp’s Board of Directors authorized management to pursue a plan to further develop its distribution strategy, including a plan to consolidate and/or sell 105 operating branch locations and to sell an additional 31 parcels of undeveloped land that had been acquired by the Bancorp for future branch expansion (the “Branch Consolidation and Sales Plan”). The Bancorp expects to receive $65 million in annual savings from operating expenses upon completion of the Branch Consolidation and Sales Plan.

On September 3, 2015, the Bancorp announced the decision to enter into an agreement to sell branch banking locations, retail accounts, certain private banking deposits and related loan relationships in the Pittsburgh MSA to First National Bank of Pennsylvania. On September 30, 2015, the Bancorp announced the decision to enter into an agreement to sell its retail operations, including retail accounts, certain private banking deposits and related loan relationships in the St. Louis MSA to Great Southern Bank. Both transactions are part of the Branch Consolidation and Sales Plan and are expected to close in the first half of 2016, subject to regulatory review and approval.

The Bancorp performs assessments of the recoverability of long-lived assets when events or changes in circumstances indicate that their carrying values may not be recoverable. Impairment losses associated with such assessments and lower of cost or market adjustments were $2 million and $104 million for the three and nine months ended September 30, 2015, respectively.

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

The Bancorp did not recognize impairment losses during the three months ended September 30, 2014 and recognized $18 million of impairment losses during the nine months ended September 30, 2014. The recognized impairment losses were recorded in other noninterest income in the Condensed Consolidated Statements of Income. For more information on the Branch Consolidation and Sales Plan, refer to Note 7 of the Notes to Condensed Consolidated Financial Statements.

Accelerated Share Repurchase Transactions

During the nine months ended September 30, 2015, the Bancorp entered into or settled a number of accelerated share repurchase transactions. As part of these transactions, the Bancorp entered into forward contracts in which the final number of shares delivered at settlement was based generally on a discount to the average daily volume weighted-average price of the Bancorp’s common stock during the term of the repurchase agreements. For more information on the accelerated share repurchase program, refer to Note 16 of the Notes to Condensed Consolidated Financial Statements. For a summary of the Bancorp’s accelerated share repurchase transactions that were entered into or settled during the nine months ended September 30, 2015, refer to Table 2.

TABLE 2: Summary of Accelerated Share Repurchase Transactions


Repurchase Date	Amount ($ in millions)		Shares Repurchased on Repurchase Date		Shares Received from Forward Contract Settlement		Total Shares Repurchased		Settlement Date
October 23, 2014	$	180		8,337,875		794,245		9,132,120		January 8, 2015
January 27, 2015		180		8,542,713		1,103,744		9,646,457		April 28, 2015
April 30, 2015		155		6,704,835		842,655		7,547,490		July 31, 2015
August 3, 2015		150		6,039,792		1,346,314		7,386,106		September 3, 2015
September 9, 2015		150		6,538,462		1,446,613		7,985,075		October 23, 2015

Senior Notes Offerings

On July 27, 2015, the Bancorp issued and sold $1.1 billion of 2.875% senior fixed-rate notes, with a maturity of five years, due on July 27, 2020. These notes will be redeemable by the Bancorp, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date.

On August 20, 2015, the Bank issued and sold $1.3 billion in aggregate principal amount of unsecured senior bank notes. The bank notes consisted of $1.0 billion of 2.15% senior fixed-rate notes, with a maturity of three years, due on August 20, 2018; and $250 million of senior floating-rate notes, with a maturity of three years, due on August 20, 2018. The Bancorp entered into interest rate swaps to convert the fixed-rate notes to floating-rate, which resulted in an effective rate of three-month LIBOR plus 90 bps. Interest on the floating-rate notes is 3-month LIBOR plus 91 bps. These bank notes will be redeemable by the Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding the redemption date.

Tax Receivable Agreement Termination

On October 23, 2015, the Bancorp entered into an agreement with Vantiv, Inc. under which a portion of its TRA with Vantiv, Inc. was terminated and settled in full for consideration of a cash payment in the amount of approximately $49 million from Vantiv, Inc. Under the agreement, the Bancorp sold certain TRA cash flows it expected to receive from 2017 to 2030, totaling an estimated $140 million. Approximately half of the sold TRA cash flows related to 2025 and later. This sale does not impact the TRA payment expected to be recognized in the fourth quarter of 2015 or the TRA payment expected to be recognized in the fourth quarter of 2016. Additionally, the Bancorp will recognize the gain of approximately $49 million in the Condensed Consolidated Statements of Income during the fourth quarter of 2015.

Legislative and Regulatory Developments

The FDIC published a notice of proposed rulemaking in October of 2015 which would implement a 4.5 bps surcharge on the quarterly FDIC insurance assessments of insured depository institutions with consolidated total assets of $10 billion or more. The surcharge would take effect at the same time the FDIC is required to lower the regular FDIC insurance assessments by 2 bps under the existing regulations that are triggered by the deposit insurance fund reserve ratio reaching 1.15%. The FDIC estimates the deposit insurance fund reserve ratio will reach 1.15% in 2016 and the surcharge would be sufficient to raise the deposit insurance fund reserve ratio to the 1.35% minimum mandated by the DFA in approximately eight quarters. Fifth Third estimates the proposed changes to the FDIC assessments would result in a net increase in its FDIC insurance expense of approximately $25 million on an annual basis.

On September 30, 2015, the Bancorp agreed to pay approximately $85 million to cover losses on approximately 500 loans for which HUD had paid FHA insurance claims, and an additional $2 million to HUD, in connection with the Bancorp’s entry into a Stipulation and Order of Settlement and Dismissal with the Department of Justice and HUD, which was approved by the U.S. District Court for the Southern District of New York on October 5, 2015, and a related Settlement Agreement with HUD. The total amount is within the amount the Bancorp had previously included in its accrual for this matter. The Bancorp has also agreed to indemnify HUD for any losses related to approximately 900 loans which have not been the subject of mortgage insurance claims. The settlement resulted in part from the Bancorp’s voluntary disclosure of approximately 1,400 mortgages that it had previously certified as eligible for FHA insurance but which were later determined to be ineligible for such insurance.

On September 28, 2015, the Bancorp entered into consent orders and agreed, without admitting or denying any of the findings of fact or conclusions of law (except to establish jurisdiction), to pay $18 million to consumers in a settlement with the Department of Justice and the CFPB related to an investigation into whether Fifth Third Bank engaged in any discriminatory practices in connection with the Bank’s indirect automobile loan portfolio.

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

This amount is within the amount included in the Bancorp’s accrual for this matter and is subject to a credit of between $5 million and $6 million for remediation the Bancorp has already paid. The consent orders also provide that the Bancorp will implement a new dealer compensation policy and that the Bancorp’s Board of Directors will oversee its compliance with the consent orders.

On September 28, 2015, the Bancorp agreed to pay an amount not less than $3 million in redress to consumers and a civil penalty of $500,000 to the CFPB in connection with its entry into a consent order with the CFPB related to the marketing and administration of the Bancorp’s debt protection credit card “add-on” product for those enrolled in the product from January 1, 2007, through November 11, 2013. This $3.5 million is within the amount the Bancorp had included in its accrual for this matter. As part of this settlement, the Bancorp has also agreed, without admitting or denying any findings of fact or conclusions of law (except to establish jurisdiction), to adopt a compliance plan with respect to the advertising, marketing, promotion, offering or sale of any credit card add-on products, the performance of any such products and the management of its vendors with respect to such products and not to market or sell similar debt protection add-on products without first securing a determination of non-objection from the CFPB.

On July 21, 2010, the DFA 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 established the 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, requires changes to rules governing regulatory capital ratios and requires enhanced liquidity standards.

The FRB launched the 2015 capital planning and stress testing program, CCAR, on October 23, 2014. The CCAR program requires BHCs with $50 billion or more of total consolidated assets to submit annual capital plans to the FRB for review and to conduct stress tests under a number of economic scenarios. The capital plan and stress testing results were submitted by the Bancorp to the FRB on January 5, 2015.

In March of 2015, the FRB disclosed its estimates of participating institutions results under the FRB supervisory stress scenario, including capital results, which assume all banks take certain consistently applied future capital actions. In addition, the FRB disclosed its estimates of participating institutions results under the FRB supervisory severe stress scenarios including capital results based on each company’s own base scenario capital actions.

On March 11, 2015, the Bancorp announced the results of its capital plan submitted to the FRB as part of the 2015 CCAR. The FRB indicated to the Bancorp that it did not object to the following capital actions for the period beginning April 1, 2015 and ending June 30, 2016:

•

The potential increase in the quarterly common stock dividend to $0.14 per share in 2016;

•

The potential repurchase of common shares in an amount up to $765 million;

•

The additional ability to repurchase shares in the amount of any after-tax gains from the sale of Vantiv, Inc. common stock.

For more information on the 2015 CCAR results, refer to the Capital Management section of MD&A.

The BHCs that participated in the 2015 CCAR, including the Bancorp, are required to conduct mid-cycle company-run stress tests using data as of March 31, 2015. The stress tests must be based on three BHC defined scenarios – baseline, adverse and severely adverse. The Bancorp submitted the results of its mid-cycle stress test to the FRB by the required July 6, 2015 submission date. For further information on the 2015 mid-cycle stress test, see the Capital Management section of MD&A.

Fifth Third offers qualified deposit customers a deposit advance product if they choose to avail themselves of this product to meet short-term, small-dollar financial needs. In April of 2013, the CFPB issued a “White Paper” which studied financial services industry offerings and customer use of deposit advance products as well as payday loans and is considering whether rules governing these products are warranted. At the same time, the OCC and FDIC each issued proposed supervisory guidance for public comment to institutions they supervise which supplements existing OCC and FDIC guidance, detailing the principles they expect financial institutions to follow in connection with deposit advance products and supervisory expectations for the use of deposit advance products. The Federal Reserve also issued a statement in April of 2013 to state member banks like Fifth Third for whom the Federal Reserve is the primary regulator. This statement encouraged state member banks to respond to customers’ small-dollar credit needs in a responsible manner; emphasized that they should take into consideration the risks associated with deposit advance products, including potential consumer harm and potential elevated compliance risk; and reminded them that these product offerings must comply with applicable laws and regulations.

Fifth Third’s deposit advance product was designed to fully comply with the applicable federal and state laws and use of this product is subject to strict eligibility requirements and advance restriction guidelines to limit dependency on this product as a borrowing source. The Bancorp’s deposit advance balances are included in other consumer loans and leases in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A and represent the majority of the revenue reported in interest and fees on other consumer loans and leases in the Condensed Consolidated Statements of Income and in Tables 7 and 8 in the Statements of Income Analysis section of MD&A. On January 17, 2014, given developments in industry practice, Fifth Third announced that it would no longer enroll new customers in its deposit advance product and expected to phase out the service to existing customers by the end of 2014. To avoid a disruption to its existing customers during the extension period while the banking industry awaits further regulatory guidance on the deposit advance product, on November 3, 2014, Fifth Third announced changes to its current deposit advance product for existing customers beginning January 1, 2015, including a lower transaction fee, an extended repayment period and a reduced maximum advance period. The Bancorp is continuing to offer the service to existing deposit advance customers until further regulatory guidance is finalized. The Bancorp currently expects these changes to the deposit advance product to negatively impact net interest income by approximately $95 million in 2015.

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

In December of 2010 and revised in June of 2011, the BCBS 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 redefining 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 CET1 capital ratio. In July of 2013, U.S. banking regulators approved final enhanced regulatory capital requirements (Basel III Final Rule), which included modifications to the proposed rules. The Basel III Final Rule provided for certain banks, including the Bancorp, to opt out of including AOCI in Tier I capital and also retained the treatment of residential mortgage exposures consistent with the current Basel I capital rules. The Basel III Final Rule phases out the inclusion of certain TruPS as a component of Tier I capital. The Bancorp became subject to the Basel III Final Rule on January 1, 2015. The Bancorp made a one-time permanent election not to include AOCI in CET1 capital in the March 31, 2015 FFIEC 031 and FR Y-9C filings. For more information on the impact of the regulatory capital enhancements, refer to the Capital Management section of MD&A.

On December 10, 2013, the U.S. Banking Agencies finalized section 619 of the DFA, known as the Volcker Rule, which became effective April 1, 2014. Though the Final Rule was effective April 1, 2014, the FRB granted the industry an extension of time until July 21, 2015 to conform certain of its activities related to proprietary trading to comply with the Volcker Rule. In addition, the FRB has granted the industry an extension of time until July 21, 2016, and announced its intention to grant a one year extension of the conformance period until July 21, 2017, to conform certain ownership interests in, sponsorship activities of and relationships with private equity or hedge funds as well as holding certain collateralized loan obligations that were in place as of December 31, 2013. It is possible that additional conformance period extensions could be granted either to the entire industry, or, upon request, to requesting banking organizations on a case-by-case basis. The Final Rule prohibits banks and bank holding companies from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments for their own account. The Volcker Rule also restricts banks and their affiliated entities from owning, sponsoring or having certain relationships with private equity and hedge funds, as well as holding certain collateralized loan obligations that are deemed to contain ownership interests. Exemptions are provided for certain activities such as underwriting, market making, hedging, trading in certain government obligations and organizing and offering a hedge fund or private equity fund. Fifth Third does not sponsor any private equity or hedge funds that, under the Final Rule, it is prohibited from sponsoring. At September 30, 2015, the Bancorp did not hold collateralized loan obligations. At September 30, 2015, the Bancorp had approximately $187 million in interests and approximately $39 million in binding commitments to invest in private equity funds that are affected by the Volcker Rule. It is expected that over time the Bancorp may need to sell or redeem these investments, however no formal plan to sell has been approved as of September 30, 2015. As a result of the announced conformance period extension, the Bancorp believes it is likely that these investments will be reduced over time in the ordinary course of events before compliance is required.

On October 10, 2014, the U.S. Banking Agencies published final rules implementing a quantitative liquidity requirement consistent with the LCR standard established by the BCBS for large internationally active banking organizations, generally those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure. In addition, a modified LCR requirement was implemented for BHCs with $50 billion or more in total consolidated assets but that are not internationally active, such as Fifth Third. The Modified LCR is effective January 1, 2016 and requires BHCs to calculate its LCR on a monthly basis. Refer to the Liquidity Risk Management section of MD&A for further discussion on these ratios.

On July 31, 2013, the U.S. District Court for the District of Columbia issued an order granting summary judgment to the plaintiffs in a case challenging certain provisions of the FRB’s rule concerning electronic debit card transaction fees and network exclusivity arrangements (the “Current Rule”) that were adopted to implement Section 1075 of the DFA, known as the Durbin Amendment. The Court held that, in adopting the Current Rule, the FRB violated the Durbin Amendment’s provisions concerning which costs are allowed to be taken into account for purposes of setting fees that are reasonable and proportional to the costs incurred by the issuer and therefore the Current Rule’s maximum permissible fees were too high. In addition, the Court held that the Current Rule’s network non-exclusivity provisions concerning unaffiliated payment networks for debit cards also violated the Durbin Amendment. The Court vacated the Current Rule, but stayed its ruling to provide the FRB an opportunity to replace the invalidated portions. The FRB appealed this decision and on March 21, 2014, the District of Columbia Circuit Court of Appeals reversed the District Court’s grant of summary judgment and remanded the case for further proceedings in accordance with its opinion. The merchants have filed a petition for writ of certiorari to the U.S. Supreme Court. However, on January 20, 2015, the U.S. Supreme Court declined to hear an appeal of the Circuit Court reversal, thereby largely upholding the Current Rule and substantially reducing uncertainty surrounding debit card interchange fees the Bancorp is permitted to charge. Refer to the Noninterest Income subsection of the Statements of Income Analysis section of MD&A for further information regarding the Bancorp’s debit card interchange revenue.

Earnings Summary

The Bancorp’s net income available to common shareholders for the third quarter of 2015 was $366 million, or $0.45 per diluted share, which was net of $15 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the third quarter of 2014 was $328 million, or $0.39 per diluted share, which was net of $12 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the nine months ended September 30, 2015 was $1.0 billion, or $1.22 per diluted share, which was net of $52 million in preferred stock dividends. For the nine months ended September 30, 2014, the Bancorp’s net income available to common shareholders was $1.1 billion, or $1.23 per diluted share, which was net of $44 million in preferred stock dividends. Pre-provision net revenue was $671 million and $1.7 billion for the three and nine months ended September 30, 2015, respectively, compared to $535 million and $1.7 billion for the same periods in 2014. Pre-provision net revenue is a non-GAAP measure. For further information, see the Non-GAAP Financial Measures section of MD&A.

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

Net interest income on an FTE basis was $906 million and $2.7 billion for the three and nine months ended September 30, 2015, respectively, a decrease of $2 million and $62 million compared to the same periods in the prior year. Net interest income was negatively impacted by decreases in net interest rate spreads, changes made to the Bancorp’s deposit advance product beginning January 1, 2015 and increases in average long-term debt of $742 million and $2.0 billion for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. These negative impacts were partially offset by increases in average taxable securities of $5.7 billion and $4.7 billion for the three and nine months ended September 30, 2015, respectively, and increases in average loans and leases of $2.9 billion and $1.9 billion for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. Net interest margin on an FTE basis was 2.89% and 2.88% for the three and nine months ended September 30, 2015, respectively, compared to 3.10% and 3.16%, respectively, for the same periods in the prior year.

Noninterest income increased $193 million for the three months ended September 30, 2015 compared to the same period in the prior year primarily due to increases in other noninterest income and mortgage banking net revenue. Noninterest income increased $80 million for the nine months ended September 30, 2015 compared to the same period in the prior year primarily due to increases in other noninterest income and mortgage banking net revenue partially offset by a decrease in corporate banking revenue. Other noninterest income increased $180 million and $78 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year driven by positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC. The positive valuation adjustment on the stock warrant associated with Vantiv Holding, LLC was $130 million for the three months ended September 30, 2015 compared to the negative valuation adjustment of $53 million during the three months ended September 30, 2014. The positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC were $215 million for the nine months ended September 30, 2015 compared to the negative valuation adjustments of $26 million during the nine months ended September 30, 2014. Mortgage banking net revenue increased $10 million and $26 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year primarily due to increases in origination fees and gains on loan sales. The increase for the nine months ended September 30, 2015 was also driven by an increase in net mortgage servicing revenue. Corporate banking revenue decreased $31 million for the nine months ended September 30, 2015 compared to the same period in the prior year primarily driven by impairment charges of $36 million related to certain operating lease equipment that was recognized during the nine months ended September 30, 2015.

Noninterest expense increased $55 million for the three months ended September 30, 2015 compared to the same period in the prior year primarily due to increases in personnel costs (salaries, wages and incentives plus employee benefits) and other noninterest expense. Noninterest expense increased $22 million for the nine months ended September 30, 2015 compared to the same period in the prior year primarily due to increases in personnel costs and card and processing expense partially offset by a decrease in other noninterest expense. Other noninterest expense increased $22 million for the three months ended September 30, 2015 compared to the same period in the prior year primarily due to increases in the provision for the reserve for unfunded commitments, FDIC insurance and other taxes, impairment on affordable housing investments and professional service fees partially offset by a decrease in losses and adjustments. Other noninterest expense decreased $48 million for the nine months ended September 30, 2015 compared to the same period in the prior year primarily due to a decrease in losses and adjustments partially offset by increases in the provision for the reserve for unfunded commitments, impairment on affordable housing investments and marketing expense. Personnel costs increased $27 million and $49 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year driven by increased executive retirement and severance costs as well as an increase in base compensation and an increase in incentive compensation, primarily in the commercial and mortgage businesses.

For more information on net interest income, noninterest income and noninterest expense, refer to the Statements of Income Analysis section of MD&A.

Credit Summary

The provision for loan and lease losses was $156 million and $305 million for the three and nine months ended September 30, 2015, respectively, compared to $71 million and $216 million during the same periods in 2014. Net charge-offs as a percent of average portfolio loans and leases increased to 0.80% during the three months ended September 30, 2015 compared to 0.50% during the same period in the prior year and decreased to 0.53% for the nine months ended September 30, 2015 compared to 0.57% for the nine months ended September 30, 2014. At September 30, 2015, nonperforming assets as a percent of portfolio loans, leases and other assets, including OREO (excluding nonaccrual loans held for sale) decreased to 0.65% compared to 0.82% at December 31, 2014. For further discussion on credit quality, see the Credit Risk Management section of MD&A.

Capital Summary

The Bancorp’s capital ratios exceed the “well-capitalized” guidelines as defined by the FRB. At September 30, 2015, the transitional CET1 capital ratio was 9.40%, the transitional Tier I risk-based capital ratio was 10.49%, the transitional Total risk-based capital ratio was 13.68% and the transitional Tier I leverage ratio was 9.38%.

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

NON-GAAP FINANCIAL MEASURES

The following are non-GAAP measures which are important to the reader of the Condensed Consolidated Financial Statements but should be supplemental to primary U.S. GAAP measures. The Bancorp considers many factors when determining the adequacy of its liquidity profile, including its LCR as defined by the U.S. Banking Agencies Basel III LCR Final Rule. Generally, the LCR is designed to ensure banks maintain an adequate level of unencumbered HQLA to satisfy the estimated net cash outflows under a 30-day stress scenario. The Bancorp will be subject to the Modified LCR whereby the net cash outflow under the 30-day stress scenario is multiplied by a factor of 0.7. The Final Rule is not effective for the Bancorp until January 1, 2016. The Bancorp believes there is no comparable U.S. GAAP financial measure to the LCR. The Bancorp believes providing an estimated Modified LCR is important for comparability to other financial institutions. For a further discussion on liquidity management and the LCR, refer to the Liquidity Risk Management section of MD&A.

TABLE 3: Non-GAAP Financial Measures—Modified Liquidity Coverage Ratio


As of ($ in millions)	September 30, 2015
Estimated HQLA	$	21,518
Estimated net cash outflow		20,182

Estimated Modified LCR		107	%

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 pre-tax earnings before the impact of provision expense.

The following table reconciles the non-GAAP financial measure of pre-provision net revenue to U.S. GAAP:

TABLE 4: Non-GAAP Financial Measures—Pre-Provision Net Revenue


	For the three months ended September 30,						For the nine months ended September 30,
($ in millions)	2015			2014			2015			2014
Net interest income (U.S. GAAP)	$	901			903			2,636			2,697
Add: Noninterest income		713			520			1,900			1,820
Less: Noninterest expense		(943	)		(888	)		(2,814	)		(2,792	)

Pre-provision net revenue	$	671			535			1,722			1,725

The Bancorp believes return on average tangible common equity is an important measure for comparative purposes with other financial institutions, but is not defined under U.S. GAAP, and therefore is considered a non-GAAP financial measure.

The following table reconciles the non-GAAP financial measure of return on average tangible common equity to U.S. GAAP:

TABLE 5: Non-GAAP Financial Measures—Return on Average Tangible Common Equity


	For the three months ended September 30,						For the nine months ended September 30,
($ in millions)	2015			2014			2015			2014
Net income available to common shareholders (U.S. GAAP)	$	366			328			1,004			1,052
Add: Intangible amortization, net of tax		—			1			1			2

Tangible net income available to common shareholders	$	366			329			1,005			1,054
Tangible net income available to common shareholders (annualized) (1)		1,452			1,305			1,340			1,405

Average Bancorp shareholders’ equity (U.S. GAAP)	$	15,815			15,486			15,826			15,170
Less: Average preferred stock		(1,331	)		(1,331	)		(1,331	)		(1,163	)
Average goodwill		(2,416	)		(2,416	)		(2,416	)		(2,416	)
Average intangible assets and other servicing rights		(14	)		(16	)		(15	)		(18	)

Average tangible common equity (2)	$	12,054			11,723			12,064			11,573

Return on average tangible common equity (1) / (2)		12.0	%		11.1			11.1			12.2

The Bancorp considers various measures when evaluating capital utilization and adequacy, including the tangible equity ratio and tangible 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. Additionally, the Bancorp became subject to the Basel III Final Rule on January 1, 2015. The CET1 capital ratio is a new measure defined by the banking regulatory agencies under the Basel III Final Rule. The CET1 capital ratio has transition provisions that will be phased out over time. The Bancorp is presenting the CET1 capital ratio on a fully phased-in basis for comparative purposes with other organizations. 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 encourages readers to consider its Condensed Consolidated Financial Statements in their entirety and not to rely on any single financial measure.

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

The following table reconciles non-GAAP capital ratios to U.S. GAAP:

TABLE 6: Non-GAAP Financial Measures—Capital Ratios


As of ($ in millions)	September 30, 2015			December 31, 2014
Total Bancorp shareholders’ equity (U.S. GAAP)	$	15,826			15,626
Less: Preferred stock		(1,331	)		(1,331	)
Goodwill		(2,416	)		(2,416	)
Intangible assets and other servicing rights		(13	)		(16	)

Tangible common equity, including unrealized gains / losses		12,066			11,863
Less: AOCI		(522	)		(429	)

Tangible common equity, excluding unrealized gains / losses (1)		11,544			11,434
Add: Preferred stock		1,331			1,331

Tangible equity (2)	$	12,875			12,765


Total assets (U.S. GAAP)	$	141,918			138,706
Less: Goodwill		(2,416	)		(2,416	)
Intangible assets and other servicing rights		(13	)		(16	)
AOCI, before tax		(803	)		(660	)

Tangible assets, excluding unrealized gains / losses (3)	$	138,686			135,614


Total Bancorp shareholders’ equity (U.S. GAAP)	$	N/A			15,626
Less: Goodwill and certain other intangibles		N/A			(2,476	)
Unrealized gains		N/A			(429	)
Add: Qualifying TruPS		N/A			60
Other		N/A			(17	)

Tier I risk-based capital		N/A			12,764
Less: Preferred stock		N/A			(1,331	)
Qualifying TruPS		N/A			(60	)
Qualified noncontrolling interests in consolidated subsidiaries		N/A			(1	)

Tier I common equity (4)	$	N/A			11,372


	Basel III Transitional			Basel I
Risk-weighted assets (5)^(a)	$	123,148			117,878

Ratios:
Tangible equity as a percent of tangible assets (2) / (3)		9.28	%		9.41
Tangible common equity as a percent of tangible assets (excluding unrealized gains/losses) (1) / (3)		8.32	%		8.43
Tier I common equity (4) / (5)^(b)		N/A	%		9.65


Basel III Final Rule—Transition to fully phased-in
CET1 capital (transitional)	$	11,574			N/A
Less: Adjustments to CET1 capital from transitional to fully phased-in^(c)		(11	)		N/A

CET1 capital (fully phased-in) (6)		11,563			N/A

Risk-weighted assets (transitional)		123,148			N/A
Add: Adjustments to risk-weighted assets from transitional to fully phased-in^(d)		1,136			N/A

Risk-weighted assets (fully phased-in) (7)	$	124,284			N/A

Estimated CET1 capital ratio under Basel III Final Rule (fully phased-in) (6) / (7)		9.30	%		N/A

(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)

The Bancorp became subject to the Basel III Final Rule on January 1, 2015. This codified in the federal banking regulations the risk-based capital ratios the Bancorp is now subject to, as such these ratios are no longer considered non-GAAP measures.

(c)

Primarily relates to disallowed intangible assets (other than goodwill and MSRs, net of associated deferred tax liabilities).

(d)

Primarily relates to higher risk weighting for MSRs.

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 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 Bancorp’s financial position, 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, goodwill and legal contingencies. 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, 2014. No material changes were made to the valuation techniques or models during the nine months ended September 30, 2015.

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 $100,000 and over, other deposits, federal funds purchased, other 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 7 and 8 present the components of net interest income, net interest margin and net interest rate spread for the three and nine months ended September 30, 2015 and 2014, 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 and other securities included in other assets.

Net interest income on an FTE basis was $906 million and $2.7 billion for the three and nine months ended September 30, 2015, respectively, a decrease of $2 million and $62 million compared to the same periods in the prior year. Net interest income was negatively impacted by decreases in net interest rate spreads, changes made to the Bancorp’s deposit advance product beginning January 1, 2015 and increases in average long-term debt of $742 million and $2.0 billion for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. These negative impacts were partially offset by increases in average taxable securities of $5.7 billion and $4.7 billion for the three and nine months ended September 30, 2015, respectively, and increases in average loans and leases of $2.9 billion and $1.9 billion for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The net interest rate spread decreased to 2.71% and 2.70% during the three and nine months ended September 30, 2015, respectively, from 2.93% and 2.99% in the same periods in the prior year due to a 20 bps and 25 bps decrease in yields on average interest-earning assets for the three and nine months ended September 30, 2015, respectively, and a 2 bps and 4 bps increase in the rates paid on average interest-bearing liabilities for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year.

Net interest margin on an FTE basis was 2.89% and 2.88% for the three and nine months ended September 30, 2015, respectively, compared to 3.10% and 3.16% for the three and nine months ended September 30, 2014, respectively. The decrease from both periods in 2014 was driven primarily by the previously mentioned decrease in net interest rate spreads coupled with an $8.1 billion and $7.9 billion increase in average interest-earning assets for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year partially offset by increases in average free funding balances. The increase in average free funding balances for both periods was driven by an increase in average demand deposits of $3.4 billion and $3.6 billion for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year as well as an increase in average shareholders’ equity of $322 million and $653 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year.

Interest income on an FTE basis from loans and leases decreased $32 million compared to the three months ended September 30, 2014 and decreased $122 million compared to the nine months ended September 30, 2014. The decrease for both the three and nine months ended September 30, 2015 was primarily the result of a decrease of 25 bps in yields on average loans and leases partially offset by increases of 3% and 2% in average loans and leases for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The decrease in yields for the three and nine months ended September 30, 2015 was primarily due to a $24 million and $71 million, respectively, decline in interest income on other consumer loans and leases due to changes made to the Bancorp’s deposit advance product beginning January 1, 2015. The decrease for the three and nine months ended September 30, 2015 also included a 14 bps and 15 bps, respectively, decrease in yields on average commercial and industrial loans and a 21 bps and 19 bps, respectively, decrease in yields on average residential mortgage loans compared to the same periods in the prior year. The increase in average loans and leases for both periods was driven primarily by increases in average commercial loans and leases and average residential mortgage loans. For more information on the Bancorp’s loan and lease portfolio, refer to the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A. Interest income from investment securities and other short-term investments increased $40 million and $100 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year primarily as a result of the aforementioned increases in average taxable securities.

Interest expense on core deposits decreased $8 million and $5 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year as a decline in the cost of average interest-bearing core deposits more than offset an increase in average interest-bearing core deposits. The cost of average interest-bearing core deposits decreased to 22 bps and 24 bps for the three and nine months ended September 30, 2015, respectively, from 28 bps and 26 bps for the three and nine months ended September 30, 2014, respectively. Average interest-bearing core deposits increased $2.1 billion and $3.1 billion for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increase from both the three and nine months ended September 30, 2014 was primarily due to increases in average money market deposits and average interest checking deposits partially offset by decreases in average savings deposits and average foreign office deposits. Refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s deposits.

For the three and nine months ended September 30, 2015, interest expense on average wholesale funding increased $18 million and $45 million, respectively, compared to the same periods in the prior year. The increase for the three and nine months ended September 30, 2015 was primarily the result of a $742 million and $2.0 billion, respectively, increase in average long-term debt coupled with a 35 bps and 17 bps, respectively, increase in the rates paid on average long-term debt compared to the same periods in the prior year. Refer to the Borrowings subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s borrowings.

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

During the three and nine months ended September 30, 2015, average wholesale funding represented 25% and 23%, respectively, of average interest-bearing liabilities compared to 24% during both the three and nine months ended September 30, 2014. 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.

TABLE 7: Condensed Average Balance Sheets and Analysis of Net Interest Income on an FTE basis


For the three months ended	September 30, 2015								September 30, 2014								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	$	43,162			339		3.11	%	$	41,525			340		3.25	%	$	14			(15	)		(1	)
Commercial mortgage loans		7,038			56		3.17			7,637			64		3.34			(5	)		(3	)		(8	)
Commercial construction loans		2,966			23		3.13			1,565			14		3.49			11			(2	)		9
Commercial leases		3,847			27		2.72			3,576			27		2.96			2			(2	)		—

Subtotal – commercial		57,013			445		3.09			54,303			445		3.25			22			(22	)		—

Residential mortgage loans		13,976			128		3.63			13,342			129		3.84			6			(7	)		(1	)
Home equity		8,521			78		3.61			9,009			84		3.69			(4	)		(2	)		(6	)
Automobile loans		11,881			79		2.62			12,105			83		2.72			(1	)		(3	)		(4	)
Credit card		2,277			60		10.38			2,295			57		9.87			—			3			3
Other consumer loans and leases		661			10		6.81			374			34		36.98			16			(40	)		(24	)

Subtotal – consumer		37,316			355		3.78			37,125			387		4.14			17			(49	)		(32	)

Total loans and leases	$	94,329			800		3.36	%	$	91,428			832		3.61	%	$	39			(71	)		(32	)
Securities:
Taxable		28,251			229		3.23			22,594			188		3.32			46			(5	)		41
Exempt from income taxes^(b)		52			1		5.20			50			1		5.34			—			—			—
Other short-term investments		1,799			1		0.23			2,283			2		0.26			(1	)		—			(1	)

Total interest-earning assets	$	124,431			1,031		3.29	%	$	116,355			1,023		3.49	%	$	84			(76	)		8
Cash and due from banks		2,503								2,862
Other assets		15,097								14,461
Allowance for loan and lease losses		(1,292	)							(1,458	)

Total assets	$	140,739								132,220

Liabilities and Equity
Interest-bearing liabilities:
Interest checking deposits	$	25,590			11		0.18	%	$	24,926			14		0.22	%	$	—			(3	)		(3	)
Savings deposits		14,868			2		0.05			15,759			4		0.09			(1	)		(1	)		(2	)
Money market deposits		18,253			10		0.21			15,222			14		0.37			3			(7	)		(4	)
Foreign office deposits		718			—		0.14			1,663			1		0.29			(1	)		—			(1	)
Other time deposits		4,057			12		1.19			3,800			10		1.07			1			1			2

Subtotal - interest-bearing core deposits		63,486			35		0.22			61,370			43		0.28			2			(10	)		(8	)

Certificates $100,000 and over		2,924			9		1.16			3,339			8		0.96			(1	)		2			1
Other deposits		222			—		0.16			—			—		—			—			—			—
Federal funds purchased		1,978			—		0.14			520			—		0.09			—			—			—
Other short-term borrowings		1,897			1		0.13			1,973			1		0.10			—			—			—
Long-term debt		14,697			80		2.15			13,955			63		1.80			4			13			17

Total interest-bearing liabilities	$	85,204			125		0.58	%	$	81,157			115		0.56	%	$	5			5			10
Demand deposits		35,231								31,790
Other liabilities		4,458								3,749

Total liabilities	$	124,893								116,696
Total equity	$	15,846								15,524

Total liabilities and equity	$	140,739								132,220

Net interest income (FTE)				$	906								908					79			(81	)		(2	)
Net interest margin (FTE)							2.89	%							3.10	%
Net interest rate spread (FTE)							2.71								2.93
Interest-bearing liabilities to interest-earning assets							68.47								69.75

(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 were $5 for both the three months ended September 30, 2015 and 2014.

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

TABLE 8: Condensed Average Balance Sheets and Analysis of Net Interest Income on an FTE basis


For the nine months ended	September 30, 2015								September 30, 2014								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	$	42,399			995		3.14	%	$	41,133			1,012		3.29	%	$	31			(48	)		(17	)
Commercial mortgage loans		7,144			172		3.22			7,834			198		3.39			(17	)		(9	)		(26	)
Commercial construction loans		2,574			61		3.17			1,351			35		3.50			30			(4	)		26
Commercial leases		3,780			80		2.82			3,580			81		3.03			5			(6	)		(1	)

Subtotal – commercial		55,897			1,308		3.13			53,898			1,326		3.29			49			(67	)		(18	)

Residential mortgage loans		13,624			378		3.71			13,283			388		3.90			9			(19	)		(10	)
Home equity		8,658			236		3.64			9,101			253		3.71			(12	)		(5	)		(17	)
Automobile loans		11,905			236		2.65			12,066			251		2.78			(3	)		(12	)		(15	)
Credit card		2,298			177		10.31			2,252			168		9.94			3			6			9
Other consumer loans/leases		537			34		8.45			373			105		37.48			33			(104	)		(71	)

Subtotal – consumer		37,022			1,061		3.83			37,075			1,165		4.20			30			(134	)		(104	)

Total loans and leases	$	92,919			2,369		3.41	%	$	90,973			2,491		3.66	%	$	79			(201	)		(122	)
Securities:
Taxable		26,251			635		3.24			21,570			537		3.33			113			(15	)		98
Exempt from income taxes^(b)		57			2		5.08			50			2		5.16			—			—			—
Other short-term investments		3,597			7		0.25			2,324			5		0.27			2			—			2

Total interest-earning assets	$	122,824			3,013		3.28	%	$	114,917			3,035		3.53	%	$	194			(216	)		(22	)
Cash and due from banks		2,655								2,853
Other assets		15,297								14,451
Allowance for loan and lease losses		(1,304	)							(1,504	)

Total assets	$	139,472								130,717

Liabilities and Equity
Interest-bearing liabilities:
Interest checking deposits	$	26,452			38		0.19	%	$	25,349			42		0.22	%	$	2			(6	)		(4	)
Savings deposits		15,065			7		0.06			16,386			12		0.10			—			(5	)		(5	)
Money market deposits		17,942			34		0.25			13,878			35		0.33			8			(9	)		(1	)
Foreign office deposits		844			1		0.16			1,959			4		0.29			(2	)		(1	)		(3	)
Other time deposits		4,051			36		1.20			3,704			28		1.03			3			5			8

Subtotal - interest-bearing core deposits		64,354			116		0.24			61,276			121		0.26			11			(16	)		(5	)

Certificates $100,000 and over		2,722			24		1.19			4,243			26		0.81			(12	)		10			(2	)
Other deposits		75			—		0.16			—			—		0.02			—			—			—
Federal funds purchased		832			—		0.13			558			—		0.09			—			—			—
Other short-term borrowings		1,736			2		0.12			2,006			2		0.10			—			—			—
Long-term debt		14,306			221		2.07			12,277			174		1.90			30			17			47

Total interest-bearing liabilities	$	84,025			363		0.58	%	$	80,360			323		0.54	%	$	29			11			40
Demand deposits		34,797								31,235
Other liabilities		4,788								3,913

Total liabilities	$	123,610								115,508
Total equity	$	15,862								15,209

Total liabilities and equity	$	139,472								130,717

Net interest income (FTE)				$	2,650								2,712					165			(227	)		(62	)
Net interest margin (FTE)							2.88	%							3.16	%
Net interest rate spread (FTE)							2.70								2.99
Interest-bearing liabilities to interest-earning assets							68.41								69.93

(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 were $14 and $15 for the nine months ended September 30, 2015 and 2014, respectively.

Provision for Loan and Lease Losses

The Bancorp provides as an expense an amount for probable 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, 2014. 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 and leases 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 $156 million and $305 million for the three and nine months ended September 30, 2015, respectively, compared to $71 million and $216 million during the same periods in the prior year. The increase for both periods relates to the restructuring of a student loan backed commercial credit originated in 2007, a broadening global economic slowdown, stress on capital markets and the prolonged softness in commodity prices. The ALLL declined $61 million from December 31, 2014 to $1.3 billion at September 30, 2015. At September 30, 2015, the ALLL as a percent of portfolio loans and leases decreased to 1.35%, compared to 1.47% at December 31, 2014.

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

Refer to the Credit Risk Management section of 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 and lease 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 $193 million, or 37%, for the three months ended September 30, 2015 compared to the same period in the prior year and increased $80 million, or 4%, for the nine months ended September 30, 2015 compared to the same period in the prior year.

The components of noninterest income for the three and nine months ended September 30, 2015 and 2014 are as follows:

TABLE 9: Noninterest Income


	For the three months ended September 30,							For the nine months ended September 30,
($ in millions)	2015		2014		% Change			2015		2014		% Change
Service charges on deposits	$	145		145		—		$	419		418		—
Investment advisory revenue		103		103		—			315		307		3
Corporate banking revenue		104		100		4			280		311		(10	)
Mortgage banking net revenue		71		61		16			274		248		10
Card and processing revenue		77		75		3			225		218		3
Other noninterest income		213		33		NM			378		300		26
Securities gains, net		—		3		(100	)		9		18		(50	)

Total noninterest income	$	713		520		37		$	1,900		1,820		4

Service charges on deposits

Service charges on deposits were flat for the three months ended September 30, 2015 and increased $1 million for the nine months ended September 30, 2015 compared to the same period in the prior year, primarily due to an increase in consumer overdraft fees.

Investment advisory revenue

Investment advisory revenue was flat for the three months ended September 30, 2015 and increased $8 million for nine months ended September 30, 2015, compared to the same periods in the prior year. The increase for the nine months ended September 30, 2015 was primarily driven by an increase of $6 million in recurring securities brokerage fees driven by higher sales volume. The nine months ended September 30, 2015 also included a $2 million increase in private client service fees due to an increase in personal asset management fees compared to the same period in the prior year. The Bancorp had approximately $297 billion and $303 billion in total assets under care at September 30, 2015 and 2014, respectively, and managed $25 billion and $26 billion in assets for individuals, corporations and not-for-profit organizations at September 30, 2015 and 2014, respectively.

Corporate banking revenue

Corporate banking revenue increased $4 million for the three months ended September 30, 2015, compared to the same period in the prior year primarily due to increases in institutional sales revenue and loan syndications revenue, partially offset by lower foreign exchange fees. Corporate banking revenue decreased $31 million for the nine months ended September 30, 2015 compared to the same period in the prior year, primarily driven by impairment charges of $36 million related to certain operating lease equipment that was recognized during the nine months ended September 30, 2015. Refer to Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information. The nine months ended September 30, 2015 also included an $18 million decrease in syndication fees as a result of decreased activity in the market. The decreases for the nine months ended September 30, 2015 were partially offset by higher institutional sales revenue, interest rate derivative fees, foreign exchange fees and business lending fees compared to the same period in the prior year.

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

Mortgage banking net revenue

Mortgage banking net revenue increased $10 million and $26 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year.

The components of mortgage banking net revenue are as follows:

TABLE 10: Components of Mortgage Banking Net Revenue


	For the three months ended September 30,						For the nine months ended September 30,
($ in millions)	2015			2014			2015			2014
Origination fees and gains on loan sales	$	46			34			134			117
Net mortgage servicing revenue:
Gross mortgage servicing fees		54			61			169			186
MSR amortization		(37	)		(33	)		(110	)		(88	)
Net valuation adjustments on MSRs and free-standing derivatives entered into to economically hedge MSRs		8			(1	)		81			33

Net mortgage servicing revenue		25			27			140			131

Mortgage banking net revenue	$	71			61			274			248

Origination fees and gains on loan sales increased $12 million and $17 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increase for the three and nine months ended September 30, 2015 was primarily the result of a 10% and 14% increase in residential mortgage loan originations from the same periods in the prior year. Residential mortgage loan originations increased to $2.3 billion and $6.6 billion during the three and nine months ended September 30, 2015, respectively, compared to $2.1 billion and $5.8 billion during the same periods in the prior year due to strong refinancing activity that occurred during the nine months ended September 30, 2015.

Net mortgage servicing revenue is comprised of gross mortgage servicing fees and related MSR 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 mortgage servicing revenue decreased $2 million for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 driven primarily by a decrease of $7 million in gross mortgage servicing fees and an increase of $4 million in MSR amortization, partially offset by an increase of $9 million in net valuation adjustments. Net mortgage servicing revenue increased $9 million for the nine months ended September 30, 2015 compared to the same period in the prior year driven primarily by an increase of $48 million in net valuation adjustments partially offset by an increase in MSR amortization of $22 million and a decrease in gross mortgage servicing fees of $17 million.

The components of net valuation adjustments on the MSR portfolio and the impact of the non-qualifying hedging strategy are as follows:

TABLE 11: Components of Net Valuation Adjustments on MSRs


	For the three months ended September 30,						For the nine months ended September 30,
($ in millions)	2015			2014			2015			2014
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio	$	85			(22	)		119			40
(Provision for) recovery of MSR impairment		(77	)		21			(38	)		(7	)

Net valuation adjustments on MSR and free-standing derivatives entered into to economically hedge MSRs	$	8			(1	)		81			33

Mortgage rates decreased during the three and nine months ended September 30, 2015 and during the nine months ended September 30, 2014 which caused modeled prepayment speeds to increase, which led to temporary impairment on servicing rights during the respective periods. Mortgage rates increased during the three months ended September 30, 2014 which caused modeled prepayment speeds to slow, which led to the recovery of temporary impairment on servicing rights during the period.

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 12 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. Refer to Note 13 of the Notes to Condensed Consolidated Financial Statements for more information on the free-standing derivatives used to economically hedge the MSR portfolio.

The Bancorp’s total residential loans serviced at September 30, 2015 and 2014 were $74.5 billion and $80.3 billion, respectively, with $60.3 billion and $66.8 billion, respectively, of residential mortgage loans serviced for others.

Card and processing revenue

Card and processing revenue increased $2 million and $7 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increase for the three and nine months ended September 30, 2015 was primarily the result of an increase in the number of actively used cards and an increase in customer spend volume. Debit card interchange revenue, included in card and processing revenue, was $35 million and $102 million for the three and nine months ended September 30, 2015, respectively, compared to $32 million and $95 million for the same periods in the prior year.

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 12: Components of Other Noninterest Income


	For the three months ended September 30,						For the nine months ended September 30,
($ in millions)	2015			2014			2015			2014
Valuation adjustments on the warrant associated with Vantiv Holding, LLC	$	130			(53	)		215			(26	)
Operating lease income		22			21			66			63
Equity method income from interest in Vantiv Holding, LLC		17			13			42			33
Gain (loss) on loan sales		(1	)		—			40			—
BOLI income		12			11			37			32
Cardholder fees		11			11			33			34
Private equity investment income		12			10			21			20
Consumer loan and lease fees		6			7			18			19
Banking center income		6			8			16			23
Insurance income		3			3			11			9
Gain on sale of Vantiv, Inc. shares		—			—			—			125
Net (losses) gains on disposition and impairment of bank premises and equipment		(1	)		1			(102	)		(16	)
Loss on swap associated with the sale of Visa, Inc. class B shares		(8	)		(3	)		(27	)		(19	)
Other, net		4			4			8			3

Total other noninterest income	$	213			33			378			300

Other noninterest income increased $180 million and $78 million, respectively, during the three and nine months ended September 30, 2015 compared to the same periods in the prior year, primarily driven by positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC. The positive valuation adjustment on the stock warrant associated with Vantiv Holding, LLC was $130 million for the three months ended September 30, 2015 compared to the negative valuation adjustment of $53 million during the three months ended September 30, 2014. The positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC were $215 million for the nine months ended September 30, 2015 compared to the negative valuation adjustments of $26 million during the nine months ended September 30, 2014. The fair value of the stock warrant is calculated using the Black-Scholes valuation model, which utilizes several key inputs (Vantiv, Inc. stock price, strike price of the warrant and several unobservable inputs). The positive valuation adjustments for the three and nine months ended September 30, 2015 were primarily due to increases of 18% and 32%, respectively, in Vantiv, Inc.’s share price from June 30, 2015 to September 30, 2015 and from December 31, 2014 to September 30, 2015, respectively. The negative valuation adjustments for the three and nine months ended September 30, 2014 were primarily due to decreases of 8% and 5%, respectively, in Vantiv, Inc.’s share price from June 30, 2014 to September 30, 2014 and from December 31, 2013 to September 30, 2014. For additional information on the valuation of the warrant, refer to Note 22 of the Notes to Condensed Consolidated Financial Statements.

In addition to the increases discussed above, gain on loan sales increased $40 million for the nine months ended September 30, 2015 compared to the same period in the prior year primarily due to a $37 million gain on the sale of certain residential mortgage loans classified as TDRs during the first quarter of 2015. Equity method earnings from the Bancorp’s interest in Vantiv Holding, LLC increased $4 million and $9 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The nine months ended September 30, 2014 included charges taken by Vantiv Holding, LLC during the second quarter of 2014 related to an acquisition.

The increases above for the nine months ended September 30, 2015 were partially offset by the impact of a gain of $125 million on the sale of Vantiv, Inc. shares in the second quarter of 2014. The nine months ended September 30, 2015 also included impairment losses associated with lower of cost or market adjustments on long-lived assets of $104 million compared to $18 million for the same period in the prior year. Refer to Note 7 of the Notes to Condensed Consolidated Financial Statements for additional information on bank premises and equipment.

Other noninterest income also included a $5 million and $8 million increase in the negative valuation adjustments related to the Visa total return swap for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B shares, refer to Note 22 of the Notes to Condensed Consolidated Financial Statements.

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

Noninterest Expense

Noninterest expense increased $55 million, or 6%, for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 primarily due to increases in personnel costs (salaries, wages and incentives plus employee benefits) and other noninterest expense. Noninterest expense increased $22 million, or 1%, for the nine months ended September 30, 2015 compared to the nine months ended September 30, 2014, primarily due to increases in personnel costs and card and processing expense partially offset by a decrease in other noninterest expense.

The major components of noninterest expense are as follows:

TABLE 13: Noninterest Expense


	For the three months ended September 30,								For the nine months ended September 30,
($ in millions)	2015			2014		% Change			2015			2014		% Change
Salaries, wages and incentives	$	387			357		8		$	1,139			1,083		5
Employee benefits		72			75		(4	)		248			255		(3	)
Net occupancy expense		77			78		(1	)		238			236		1
Technology and communications		56			53		6			165			158		4
Card and processing expense		40			37		8			114			104		10
Equipment expense		31			30		3			92			90		2
Other noninterest expense		280			258		9			818			866		(6	)

Total noninterest expense	$	943			888		6		$	2,814			2,792		1

Efficiency ratio on an FTE basis		58.2	%		62.1					61.8	%		61.6

Personnel costs increased $27 million and $49 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increase for both periods was driven by increased executive retirement and severance costs as well as an increase in base compensation and an increase in incentive compensation, primarily in the commercial and mortgage businesses. Full-time equivalent employees totaled 18,311 at September 30, 2015 compared to 18,503 at September 30, 2014.

Card and processing expense increased $3 million and $10 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increase for both periods was driven primarily by increased fraud prevention related expenses.

The major components of other noninterest expense are as follows:

TABLE 14: Components of Other Noninterest Expense


	For the three months ended September 30,					For the nine months ended September 30,
($ in millions)	2015		2014			2015		2014
Impairment on affordable housing investments	$	37		33			112		97
Loan and lease		30		29			90		88
Marketing		32		28			87		75
FDIC insurance and other taxes		28		22			72		76
Operating lease		18		16			54		49
Professional service fees		21		15			49		51
Travel		13		14			40		40
Losses and adjustments		9		21			38		158
Data processing		12		10			34		30
Postal and courier		11		12			34		36
Recruitment and education		9		7			24		20
Insurance		4		4			13		12
Intangible asset amortization		1		1			2		3
Provision for (benefit from) the reserve for unfunded commitments		2		(8	)		—		(28	)
Other, net		53		54			169		159

Total other noninterest expense	$	280		258			818		866

Other noninterest expense increased $22 million for the three months ended September 30, 2015 compared to the same period in the prior year primarily due to increases in the provision for the reserve for unfunded commitments, FDIC insurance and other taxes, impairment on affordable housing investments and professional service fees partially offset by a decrease in losses and adjustments. The provision for the reserve for unfunded commitments was $2 million for the three months ended September 30, 2015 compared to a benefit of $8 million for the same period in the prior year. The increase in the provision primarily reflects an increase in unfunded commitments for which the Bancorp holds reserves. FDIC insurance and other taxes increased $6 million for the three months ended September 30, 2015 compared to the same period in the prior year primarily driven by an increase in the assessment rate due to a change in asset mix as well as an increase in the assessment base. Impairment on affordable housing investments increased $4 million for the three months ended September 30, 2015 compared to the same period in the prior year primarily due to incremental losses resulting from previous growth in the portfolio. Professional service fees increased $6 million for the three months ended September 30, 2015 compared to the same period in the prior year primarily due to an increase in consulting fees. These increases were partially offset by a decrease in losses and adjustments of $12 million for the three months ended September 30, 2015 compared to the three months ended September 30, 2014 primarily due to a decrease in legal settlements and reserve expense.

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

Other noninterest expense decreased $48 million for the nine months ended September 30, 2015 compared to the same period in the prior year primarily due to a decrease in losses and adjustments partially offset by increases in the provision for the reserve for unfunded commitments, impairment on affordable housing investments and marketing expense. Losses and adjustments decreased $120 million for the nine months ended September 30, 2015 compared to the same period in the prior year primarily due to a decrease in legal settlements and reserve expense. The provision for the reserve for unfunded commitments increased $28 million for the nine months ended September 30, 2015 compared to the same period in the prior year primarily due to an increase in unfunded commitments for which the Bancorp holds reserves. Impairment on affordable housing investments increased $15 million for the nine months ended September 30, 2015 compared to the same period in the prior year primarily due to incremental losses resulting from previous growth in the portfolio. The increase for the nine months ended September 30, 2015 also included a $12 million increase in marketing expense compared to the same period in the prior year.

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 58.2% and 61.8% for the three and nine months ended September 30, 2015, respectively, compared to 62.1% and 61.6% for the three and nine months ended September 30, 2014, respectively.

Applicable Income Taxes

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

TABLE 15: Applicable Income Taxes


	For the three months ended September 30,					For the nine months ended September 30,
($ in millions)	2015			2014		2015		2014
Income before income taxes	$	515			464		1,417		1,509
Applicable income tax expense		134			124		367		411
Effective tax rate		26.0	%		26.7		25.9		27.2

Applicable income tax expense for all periods includes the benefit from tax-exempt income, tax-advantaged investments, and tax credits, partially offset by the effect of certain nondeductible expenses. The tax credits are associated with the Low-Income Housing Tax Credit program established under Section 42 of the IRC, the New Markets Tax Credit program established under Section 45D of the IRC, the Rehabilitation Investment Tax Credit program established under Section 47 of the IRC and the Qualified Zone Academy Bond program established under Section 1397E of the IRC.

The decrease in the effective tax rate for the three and nine months ended September 30, 2015 compared to the same periods in the prior year included the benefit from an increase in the amount of 2015 forecasted income tax credits.

As required under U.S. GAAP, the Bancorp established a deferred tax asset for stock-based awards granted to its employees and directors. 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 and where the Bancorp has not accumulated an excess tax benefit for previously exercised or released stock-based awards, the Bancorp is required to recognize a non-cash charge to income tax expense upon the write-off of the deferred tax asset previously established for these stock-based awards. Based on the accumulated excess tax benefit at September 30, 2015, the Bancorp was not required to recognize a non-cash charge to income tax expense related to stock-based awards for the three and nine months ended September 30, 2015.

Based on the Bancorp’s stock price at September 30, 2015 and the amount of the Bancorp’s accumulation of an excess tax benefit through the period ended September 30, 2015, the Bancorp believes it will be required to recognize a $1 million non-cash charge to income tax expense over the next twelve months related to stock-based awards, primarily in the second quarter of 2016. 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 the Bancorp may be required to recognize a non-cash charge to income tax expense greater than or less than $1 million over the next twelve months.

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

BALANCE SHEET ANALYSIS

Loans and Leases

The Bancorp classifies loans and leases based upon their primary purpose. Table 16 summarizes end of period loans and leases, including loans held for sale and Table 17 summarizes average total loans and leases, including loans held for sale.

TABLE 16: Components of Total Loans and Leases (includes held for sale)


	September 30, 2015				December 31, 2014
As of ($ in millions)	Carrying Value		% of Total		Carrying Value		% of Total
Commercial loans and leases:
Commercial and industrial loans	$	42,970		46	$	40,801		45
Commercial mortgage loans		7,084		7		7,410		8
Commercial construction loans		3,101		3		2,071		2
Commercial leases		3,901		4		3,721		4

Subtotal – commercial loans and leases		57,056		60		54,003		59

Consumer loans and leases:
Residential mortgage loans		14,197		15		13,582		15
Home equity		8,460		9		8,886		10
Automobile loans		11,829		13		12,037		13
Credit card		2,330		2		2,401		3
Other consumer loans and leases		696		1		436		—

Subtotal – consumer loans and leases		37,512		40		37,342		41

Total loans and leases	$	94,568		100	$	91,345		100

Total portfolio loans and leases (excludes loans held for sale)	$	93,574			$	90,084

Loans and leases, including loans held for sale, increased $3.2 billion, or 4%, from December 31, 2014. The increase from December 31, 2014 was the result of a $3.1 billion, or 6%, increase in commercial loans and leases and a $170 million increase in consumer loans and leases.

Commercial loans and leases increased from December 31, 2014 primarily due to increases in commercial and industrial loans and commercial construction loans partially offset by a decrease in commercial mortgage loans. Commercial and industrial loans increased $2.2 billion, or 5%, from December 31, 2014 and commercial construction loans increased $1.0 billion, or 50%, from December 31, 2014 primarily as a result of an increase in new loan origination activity resulting from an increase in demand and targeted marketing efforts. Commercial mortgage loans decreased $326 million, or 4%, from December 31, 2014 primarily due to a decline in new loan origination activity driven by increased competition and an increase in paydowns.

Consumer loans and leases increased from December 31, 2014 primarily due to increases in residential mortgage loans and other consumer loans and leases partially offset by decreases in home equity, automobile loans and credit card loans. Residential mortgage loans increased $615 million, or 5%, from December 31, 2014 primarily due to the continued retention of certain conforming ARMs and certain other fixed-rate loans originated during the nine months ended September 30, 2015. Other consumer loans and leases increased $260 million, or 60%, from December 31, 2014 primarily as a result of an increase in new loan origination activity. Home equity decreased $426 million, or 5%, from December 31, 2014 and automobile loans decreased $208 million, or 2%, from December 31, 2014 as payoffs exceeded new loan production. Credit card loans decreased $71 million, or 3%, from December 31, 2014 primarily due to seasonal trends from the paydown of year-end balances which were higher due to holiday spending.

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

TABLE 17: Components of Average Total Loans and Leases (includes held for sale)


	September 30, 2015				September 30, 2014
For the three months ended ($ in millions)	Carrying Value		% of Total		Carrying Value		% of Total
Commercial loans and leases:
Commercial and industrial loans	$	43,162		46	$	41,525		45
Commercial mortgage loans		7,038		7		7,637		8
Commercial construction loans		2,966		3		1,565		2
Commercial leases		3,847		4		3,576		4

Subtotal – commercial loans and leases		57,013		60		54,303		59

Consumer loans and leases:
Residential mortgage loans		13,976		15		13,342		15
Home equity		8,521		9		9,009		10
Automobile loans		11,881		13		12,105		13
Credit card		2,277		2		2,295		3
Other consumer loans and leases		661		1		374		—

Subtotal – consumer loans and leases		37,316		40		37,125		41

Total average loans and leases	$	94,329		100	$	91,428		100

Total average portfolio loans and leases (excludes loans held for sale)	$	93,373			$	90,799

Average loans and leases, including loans held for sale, increased $2.9 billion, or 3%, from September 30, 2014. The increase from September 30, 2014 was the result of a $2.7 billion, or 5%, increase in average commercial loans and leases and a $191 million, or 1%, increase in average consumer loans and leases.

Average commercial loans and leases increased from September 30, 2014 primarily due to increases in average commercial and industrial loans and average commercial construction loans partially offset by a decrease in average commercial mortgage loans. Average commercial and industrial loans increased $1.6 billion, or 4%, from September 30, 2014 and average commercial construction loans increased $1.4 billion, or 90%, from September 30, 2014 primarily as a result of an increase in new loan origination activity resulting from an increase in demand and targeted marketing efforts. Average commercial mortgage loans decreased $599 million, or 8%, from September 30, 2014 primarily due to a decline in new loan origination activity driven by increased competition and an increase in paydowns.

Average consumer loans and leases increased from September 30, 2014 primarily due to increases in average residential mortgage loans and average other consumer loans and leases partially offset by decreases in average home equity and average automobile loans. Average residential mortgage loans increased $634 million, or 5%, from September 30, 2014 primarily driven by the continued retention of certain conforming ARMs and certain other fixed-rate loans. Average other consumer loans and leases increased $287 million, or 77%, from September 30, 2014 primarily as a result of an increase in new loan origination activity. Average home equity decreased $488 million, or 5%, from September 30, 2014 and average automobile loans decreased $224 million, or 2%, from September 30, 2014 as payoffs exceeded new loan production.

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 $29.3 billion and $23.0 billion at September 30, 2015 and December 31, 2014, respectively. The taxable investment securities portfolio had an effective duration of 5.1 years at September 30, 2015 compared to 4.5 years at December 31, 2014.

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

At September 30, 2015, the Bancorp’s investment portfolio consisted primarily of AAA-rated available-for-sale securities. Securities classified as below investment grade were immaterial as of September 30, 2015 and December 31, 2014. 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 did not recognize OTTI on any of its available-for-sale and other debt securities and recognized $5 million of OTTI on its available-for-sale and other debt securities, included in securities gains, net, in the Condensed Consolidated Statements of Income, during the three and nine months ended September 30, 2015, respectively. During the three and nine months ended September 30, 2014, the Bancorp recognized $7 million and $24 million of OTTI on its available-for-sale and other debt securities, respectively. The Bancorp did not recognize OTTI on any of its available-for-sale equity securities or held-to-maturity debt securities during both the three and nine months ended September 30, 2015 and 2014.

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

TABLE 18: Components of Investment Securities


As of ($ in millions)	September 30, 2015		December 31, 2014
Available-for-sale and other: (amortized cost basis)
U.S. Treasury and federal agencies securities	$	1,077		1,545
Obligations of states and political subdivisions securities		137		185
Mortgage-backed securities:
Agency residential mortgage-backed securities^(a)		14,423		11,968
Agency commercial mortgage-backed securities		7,609		4,465
Non-agency commercial mortgage-backed securities		2,693		1,489
Asset-backed securities and other debt securities		1,345		1,324
Equity securities^(b)		702		701

Total available-for-sale and other securities	$	27,986		21,677

Held-to-maturity: (amortized cost basis)
Obligations of states and political subdivisions securities	$	155		186
Asset-backed securities and other debt securities		2		1

Total held-to-maturity securities	$	157		187

Trading: (fair value)
U.S. Treasury and federal agencies securities	$	8		14
Obligations of states and political subdivisions securities		18		8
Mortgage-backed securities:
Agency residential mortgage-backed securities		5		9
Non-agency residential mortgage-backed securities		1		—
Asset-backed securities and other debt securities		11		13
Equity securities^(b)		331		316

Total trading securities	$	374		360

(a)

Includes interest-only mortgage-backed securities of $53 and $175 as of September 30, 2015 and December 31, 2014, respectively, recorded at fair value with fair value changes recorded in securities gains, net in the Condensed Consolidated Financial Statements.

(b)

Equity 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.

On an amortized cost basis, available-for-sale and other securities increased $6.3 billion, or 29%, from December 31, 2014 primarily due to the repositioning of the portfolio for LCR purposes and included increases in agency residential mortgage-backed securities, agency commercial mortgage-backed securities and non-agency commercial mortgage-backed securities. Agency residential mortgage-backed securities increased $2.5 billion, or 21%, from December 31, 2014 primarily due to the purchase of $14.1 billion of agency residential mortgage-backed securities partially offset by sales of $9.8 billion and paydowns of $1.9 billion during the nine months ended September 30, 2015. Agency commercial mortgage-backed securities increased $3.1 billion, or 70%, from December 31, 2014 primarily due to $4.7 billion in purchases of agency commercial mortgage-backed securities partially offset by $1.5 billion in sales and $123 million in paydowns on the portfolio during the nine months ended September 30, 2015. Non-agency commercial mortgage-backed securities increased $1.2 billion, or 81%, from December 31, 2014 primarily due to $1.7 billion in purchases of non-agency commercial mortgage-backed securities partially offset by $380 million in sales and $75 million in paydowns on the portfolio during the nine months ended September 30, 2015.

On an amortized cost basis, available-for-sale and other securities were 22% and 18% of total interest-earning assets at September 30, 2015 and December 31, 2014, respectively. The estimated weighted-average life of the debt securities in the available-for-sale and other portfolio was 6.4 years at September 30, 2015 compared to 5.8 years at December 31, 2014. In addition, at September 30, 2015, the available-for-sale and other securities portfolio had a weighted-average yield of 3.23%, compared to 3.31% at December 31, 2014.

Information presented in Table 19 is on a weighted-average life basis, anticipating future prepayments. Yield information is presented on an FTE basis and is computed using amortized cost balances. Maturity and yield calculations for the total available-for-sale and other portfolio exclude equity securities that have no stated yield or maturity. Total net unrealized gains on the available-for-sale and other securities portfolio were $813 million at September 30, 2015 compared to $731 million at December 31, 2014. The increase from December 31, 2014 was primarily due to a decrease in interest rates during the nine months ended September 30, 2015. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally increases when interest rates decrease or when credit spreads contract.

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

TABLE 19: Characteristics of Available-for-Sale and Other Securities


As of September 30, 2015 ($ in millions)	Amortized Cost		Fair Value		Weighted-Average Life (in years)		Weighted-Average Yield
U.S. Treasury and federal agencies securities:
Average life of 1 year or less	$	274		280		0.8		3.31	%
Average life 1 – 5 years		803		843		1.5		4.04

Total	$	1,077		1,123		1.3		3.86	%
Obligations of states and political subdivisions securities:^(a)
Average life of 1 year or less		3		3		0.2		0.05
Average life 1 – 5 years		99		102		2.4		3.36
Average life 5 – 10 years		35		37		7.5		3.95

Total	$	137		142		3.6		3.43	%
Agency residential mortgage-backed securities:
Average life of 1 year or less		8		9		0.7		5.03
Average life 1 – 5 years		3,345		3,508		4.2		4.08
Average life 5 – 10 years		10,645		10,913		6.3		3.15
Average life greater than 10 years		425		449		12.7		3.53

Total	$	14,423		14,879		6.0		3.38	%
Agency commercial mortgage-backed securities:
Average life 1 – 5 years		1,199		1,248		4.5		3.08
Average life 5 – 10 years		6,332		6,510		8.3		2.97
Average life greater than 10 years		78		80		12.9		3.07

Total	$	7,609		7,838		7.8		2.99	%
Non-agency commercial mortgage-backed securities:
Average life of 1 year or less		132		133		0.7		3.01
Average life 1 – 5 years		295		304		2.4		3.24
Average life 5 – 10 years		2,266		2,320		8.0		3.28

Total	$	2,693		2,757		7.0		3.26	%
Asset-backed securities and other debt securities:
Average life of 1 year or less		95		94		0.2		2.11
Average life 1 – 5 years		584		593		2.8		2.71
Average life 5 – 10 years		198		197		6.9		2.20
Average life greater than 10 years		468		472		14.0		2.07

Total	$	1,345		1,356		7.1		2.37	%
Equity securities		702		704

Total available-for-sale and other securities	$	27,986		28,799		6.4		3.23	%

(a)

Taxable-equivalent yield adjustments included in the above table are 0.00%, 0.00%, 2.10% and 0.53% for securities with an average life of one year or less, 1-5 years, 5-10 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% and 71% of the Bancorp’s asset funding base at September 30, 2015 and December 31, 2014, respectively.

TABLE 20: Deposits


	September 30, 2015				December 31, 2014
As of ($ in millions)	Balance		% of Total		Balance		% of Total
Demand	$	34,832		34	$	34,809		34
Interest checking		24,832		25		26,800		26
Savings		14,632		14		15,051		15
Money market		18,887		19		17,083		17
Foreign office		754		1		1,114		1

Transaction deposits		93,937		93		94,857		93
Other time		4,041		4		3,960		4

Core deposits		97,978		97		98,817		97
Certificates $100,000 and over^(a)		2,915		3		2,895		3

Total deposits	$	100,893		100	$	101,712		100

(a)

Includes $1,419 and $1,483 of certificates $250,000 and over at September 30, 2015 and December 31, 2014, respectively.

Core deposits decreased $839 million, or 1%, from December 31, 2014 driven primarily by a decrease of $920 million, or 1%, in transaction deposits. Transaction deposits decreased from December 31, 2014 primarily due to decreases in interest checking deposits, savings deposits and foreign office deposits, partially offset by an increase in money market deposits. Interest checking deposits decreased $2.0 billion, or 7%, from December 31, 2014 driven primarily by lower balances per account for commercial customers and targeted pricing changes for retail promotional rates and commercial LCR punitive accounts. Savings deposits decreased $419 million, or 3%, from December 31, 2014 driven primarily by a promotional product offering causing a balance migration to money market deposits which increased $1.8 billion, or 11%, from December 31, 2014. The remaining increase in money market deposits is due to higher balances per account and the acquisition of new commercial customers. Foreign office deposits decreased $360 million, or 32%, from December 31, 2014 driven primarily by lower balances per account for commercial customers.

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

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

TABLE 21: Average Deposits


	September 30, 2015				September 30, 2014
($ in millions)	Balance		% of Total		Balance		% of Total
Demand	$	35,231		34	$	31,790		33
Interest checking		25,590		25		24,926		26
Savings		14,868		15		15,759		16
Money market		18,253		18		15,222		16
Foreign office		718		1		1,663		2

Transaction deposits		94,660		93		89,360		93
Other time		4,057		4		3,800		4

Core deposits		98,717		97		93,160		97
Certificates $100,000 and over^(a)		2,924		3		3,339		3
Other		222		—		—		—

Total average deposits	$	101,863		100	$	96,499		100

(a)

Includes $1,389 and $1,553 of average certificates $250,000 and over for the three months ended September 30, 2015 and 2014, respectively.

On an average basis, core deposits increased $5.6 billion, or 6%, from September 30, 2014 due to increases of $5.3 billion, or 6%, in average transaction deposits and $257 million, or 7%, in average other time deposits. The increase in average transaction deposits was driven by increases in average demand deposits, average money market deposits and average interest checking deposits, partially offset by decreases in average foreign office deposits and average savings deposits. Average demand deposits increased $3.4 billion, or 11%, from September 30, 2014 primarily due to an increase in average commercial account balances and new commercial customer accounts. Average money market deposits increased $3.0 billion, or 20%, primarily driven by a promotional product offering and an increase in the average commercial account balances and new commercial customer accounts. The remaining increase in average money market deposits was due to a balance migration from savings deposits which decreased $891 million, or 6%, from September 30, 2014. Average interest checking deposits increased $664 million, or 3%, from September 30, 2014 primarily due to an increase in average balances per account and new commercial customer accounts. Average foreign office deposits decreased $945 million, or 57%, from September 30, 2014 primarily due to lower average balances per account. Average other time deposits increased $257 million, or 7%, from September 30, 2014 primarily from the acquisition of new customers due to promotional interest rates since September 30, 2014. The Bancorp uses certificates $100,000 and over as a method to fund earning assets. Average certificates $100,000 and over decreased $415 million, or 12%, from September 30, 2014 primarily due to the maturity and run-off of retail and institutional certificates of deposit since September 30, 2014.

Contractual maturities

The contractual maturities of certificates $100,000 and over as of September 30, 2015 are summarized in the following table:

TABLE 22: Contractual Maturities of Certificates $100,000 and over


($ in millions)
3 months or less	$	586
After 3 months through 6 months		208
After 6 months through 12 months		436
After 12 months		1,685

Total certificates $100,000 and over	$	2,915

The contractual maturities of other time deposits and certificates $100,000 and over as of September 30, 2015 are summarized in the following table:

TABLE 23: Contractual Maturities of Other Time Deposits and Certificates $100,000 and over


($ in millions)
Next 12 months	$	2,565
13-24 months		1,467
25-36 months		948
37-48 months		677
49-60 months		1,272
After 60 months		27

Total other time deposits and certificates $100,000 and over	$	6,956

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

Borrowings

Borrowings increased $3.9 billion, or 23%, from December 31, 2014. Table 24 summarizes the end of period components of total borrowings. As of September 30, 2015, total borrowings as a percent of interest-bearing liabilities were 24% compared to 20% at December 31, 2014.

TABLE 24: Borrowings


As of ($ in millions)	September 30, 2015		December 31, 2014
Federal funds purchased	$	132		144
Other short-term borrowings		4,904		1,556
Long-term debt		15,527		14,967

Total borrowings	$	20,563		16,667

Other short-term borrowings increased $3.3 billion from December 31, 2014 primarily driven by an increase of $3.5 billion in FHLB short-term borrowings, partially offset by a decrease in commercial repurchase agreements. For further information on the components of other short-term borrowings, refer to Note 14 of the Notes to Condensed Consolidated Financial Statements. Long-term debt increased $560 million, or 4%, from December 31, 2014 primarily driven by issuances in the third quarter of 2015 of $1.1 billion of unsecured senior notes and $1.3 billion of unsecured senior bank notes, partially offset by the maturity of $500 million of subordinated fixed-rate bank notes and $1.3 billion of paydowns on long-term debt associated with automobile loan securitizations. For additional information regarding automobile securitizations and long-term debt, refer to Note 11 and Note 15, respectively, of the Notes to Condensed Consolidated Financial Statements.

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

TABLE 25: Average Borrowings


($ in millions)	September 30, 2015		September 30, 2014
Federal funds purchased	$	1,978		520
Other short-term borrowings		1,897		1,973
Long-term debt		14,697		13,955

Total average borrowings	$	18,572		16,448

Average borrowings increased $2.1 billion, or 13%, compared to September 30, 2014, due to increases in average long-term debt and average federal funds purchased partially offset by a decrease in average other short-term borrowings. The increase in average long-term debt of $742 million, or 5%, was driven by the issuance of asset-backed securities by consolidated VIEs of $1.0 billion related to an automobile loan securitization during the fourth quarter of 2014 and the previously mentioned unsecured senior note issuances in the third quarter of 2015. The impact of these issuances was partially offset by the aforementioned maturity of subordinated fixed-rate bank notes and paydowns on long-term debt associated with automobile loan securitizations since the third quarter of 2014. The level of average federal funds purchased and average other short-term borrowings can fluctuate significantly from period to period depending on funding needs and which sources are used to satisfy those needs. Information on the average rates paid on borrowings is discussed in the Net Interest Income subsection of the Statements of Income Analysis section of MD&A. In addition, refer to the Liquidity Risk Management section of MD&A 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 information on each business segment is included in Note 23 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 or businesses change.

The Bancorp manages interest rate risk centrally at the corporate level and employs an 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 and deposit products. 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 business 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 federal funds, U.S. swap curve or swap rate. The credit rates for several deposit products were reset January 1, 2015 to reflect the current market rates and updated duration assumptions. These rates were generally lower than those in place during 2014, thus net interest income for deposit providing businesses was negatively impacted for the three and nine months ended September 30, 2015.

The business segments are charged provision expense based on the actual net charge-offs experienced on the loans and leases owned by each business 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. 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.

The results of operations and financial position for the three and nine months ended September 30, 2014 were adjusted to reflect the transfer of certain customers and Bancorp employees from Commercial Banking to Branch Banking, effective January 1, 2015. In addition, the prior year balances were adjusted to reflect a change in internal allocation methodology.

Net income (loss) by business segment is summarized in the following table:

TABLE 26: Net Income by Business Segment


	For the three months ended September 30,				For the nine months ended September 30,
($ in millions)	2015		2014		2015			2014
Income Statement Data
Commercial Banking	$	153		212		519			580
Branch Banking		102		96		201			258
Consumer Lending		13		3		102			(18	)
Investment Advisors		15		13		40			40
General Corporate and Other		98		16		188			238

Net income		381		340		1,050			1,098
Less: Net income attributable to noncontrolling interests		—		—		(6	)		2

Net income attributable to Bancorp		381		340		1,056			1,096
Dividends on preferred stock		15		12		52			44

Net income available to common shareholders	$	366		328		1,004			1,052

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 27: Commercial Banking


	For the three months ended September 30,				For the nine months ended September 30,
($ in millions)	2015		2014		2015		2014
Income Statement Data
Net interest income (FTE)^(a)	$	418		416		1,221		1,227
Provision for loan and lease losses		138		47		208		184
Noninterest income:
Corporate banking revenue		104		99		276		311
Service charges on deposits		72		72		212		210
Other noninterest income		52		47		142		121
Noninterest expense:
Personnel costs		73		74		228		230
Other noninterest expense		269		249		828		756

Income before taxes		166		264		587		699
Applicable income tax expense^(a)(b)		13		52		68		119

Net income	$	153		212		519		580

Average Balance Sheet Data
Commercial loans and leases, including held for sale	$	53,824		51,069		52,705		50,591
Demand deposits		20,712		18,393		20,476		17,939
Interest checking deposits		8,996		7,593		9,170		7,970
Savings and money market deposits		6,838		5,601		6,479		5,700
Other time deposits and certificates $100,000 and over		1,161		1,544		1,256		1,398
Foreign office deposits		717		1,652		839		1,948

(a)

Includes FTE adjustments of $5 for both the three months ended September 30, 2015 and 2014 and $14 and $15 for the nine months ended September 30, 2015 and 2014, respectively.

(b)

Applicable income tax expense for all periods includes the tax benefit from tax-exempt income and business tax credits, partially offset by the effect of certain nondeductible expenses. Refer to the Applicable Income Taxes section of MD&A for additional information.

Net income was $153 million for the three months ended September 30, 2015 compared to net income of $212 million for the three months ended September 30, 2014. The decrease was driven by increases in the provision for loan and lease losses and noninterest expense partially offset by an increase in noninterest income. Net income was $519 million for the nine months ended September 30, 2015 compared to net income of $580 million for the nine months ended September 30, 2014. The decrease was driven by increases in noninterest expense and the provision for loan and lease losses as well as decreases in noninterest income and net interest income on an FTE basis.

Net interest income on an FTE basis increased $2 million and decreased $6 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increase for the three months ended September 30, 2015 was primarily driven by increases in FTP credits due to an increase in average core deposits. The increase for the three months ended September 30, 2015 was partially offset by a decline in yields of 22 bps on average commercial loans and leases compared to the same period in the prior year as well as increases in FTP charges on loans and leases and an increase in interest expense on savings and money market deposits both driven by increases in average balances. The decrease for the nine months ended September 30, 2015 was primarily driven by a decline in yields of 20 bps on average commercial loans and leases compared to the same period in the prior year as well as increases in FTP charges on loans and leases and an increase in interest expense on savings and money market deposits both driven by increases in average balances. The decrease for the nine months ended September 30, 2015 was partially offset by increases in FTP credits due to an increase in average demand deposits.

Provision for loan and lease losses increased $91 million and $24 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increase for both periods included a $102 million charge-off associated with the restructuring of a student loan backed commercial credit originated in 2007. The nine months ended September 30, 2014 included net charge-offs related to certain impaired commercial and industrial loans in the first and third quarters of 2014. Net charge-offs as a percent of average portfolio loans and leases increased to 101 bps for the three months ended September 30, 2015 compared to 36 bps for the same period in the prior year and increased to 53 bps for the nine months ended September 30, 2015 compared to 49 bps for the same period in the prior year.

Noninterest income increased $10 million and decreased $12 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increase for the three months ended September 30, 2015 was driven by increases in other noninterest income and corporate banking revenue. Other noninterest income increased $5 million for the three months ended September 30, 2015 from the same period in the prior year driven by increases in foreign exchange translation gains and operating lease income. Corporate banking revenue increased $5 million for the three months ended September 30, 2015 from the same period in the prior year primarily driven by increases in institutional sales revenue and loan syndications revenue partially offset by lower foreign exchange fees.

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

The decrease for the nine months ended September 30, 2015 was driven by a decrease in corporate banking revenue partially offset by an increase in other noninterest income. Corporate banking revenue decreased $35 million for the nine months ended September 30, 2015 from the same period in the prior year primarily driven by impairment charges of $36 million related to certain operating lease equipment that was recognized during the nine months ended September 30, 2015. Refer to Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information. The nine months ended September 30, 2015 also included an $18 million decrease in syndication fees as a result of decreased activity in the market. The decreases for the nine months ended September 30, 2015 were partially offset by higher institutional sales revenue, interest rate derivative fees, foreign exchange fees and business lending fees compared to the same period in the prior year. Other noninterest income increased $21 million for the nine months ended September 30, 2015 from the same period in the prior year driven by increases in gains on loan sales and operating lease income.

Noninterest expense increased $19 million and $70 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year as a result of an increase in other noninterest expense. The increase in other noninterest expense for both periods was primarily driven by increases in corporate overhead allocations, operating lease expense and impairment on affordable housing investments primarily due to incremental losses resulting from previous growth in the portfolio.

Average commercial loans increased $2.8 billion and $2.1 billion for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year primarily due to increases in average commercial and industrial loans and average commercial construction loans partially offset by a decrease in average commercial mortgage loans. Average commercial and industrial portfolio loans increased $1.6 billion and $1.3 billion for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year and average commercial construction portfolio loans increased $1.4 billion and $1.2 billion for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year primarily as a result of an increase in new loan origination activity resulting from an increase in demand and targeted marketing efforts. Average commercial mortgage portfolio loans decreased $527 million and $583 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year primarily due to a decline in new loan origination activity driven by increased competition and an increase in paydowns.

Average core deposits increased $4.0 billion and $3.4 billion for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increase for the three months ended September 30, 2015 was primarily driven by increases in average demand deposits, average interest checking deposits and average savings and money market deposits which increased $2.3 billion, $1.4 billion and $1.2 billion, respectively, compared to the same period in the prior year. This increase was partially offset by a decrease in average foreign deposits of $935 million for the three months ended September 30, 2015 compared to the same period in the prior year. The increase for the nine months ended September 30, 2015 was primarily driven by increases in average demand deposits, average interest checking deposits and average savings and money market deposits which increased $2.5 billion, $1.2 billion and $779 million, respectively, compared to the same period in the prior year. This increase was partially offset by a decrease in average foreign deposits of $1.1 billion for the nine months ended September 30, 2015 compared to the same period in the prior year.

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

Branch Banking

Branch Banking provides a full range of deposit and loan products to individuals and small businesses through 1,295 full-service banking centers. Branch Banking offers depository and loan products, such as checking and savings accounts, home equity loans and lines of credit, credit cards and loans for automobiles and other personal financing needs, as well as products designed to meet the specific needs of small businesses, including cash management services.

The following table contains selected financial data for the Branch Banking segment:

TABLE 28: Branch Banking


	For the three months ended September 30,				For the nine months ended September 30,
($ in millions)	2015		2014		2015			2014
Income Statement Data
Net interest income	$	395		396		1,148			1,171
Provision for loan and lease losses		39		50		122			142
Noninterest income:
Service charges on deposits		73		73		206			206
Card and processing revenue		60		59		176			168
Investment advisory revenue		40		40		120			115
Other noninterest income		24		22		(34	)		49
Noninterest expense:
Personnel costs		130		134		397			408
Net occupancy and equipment expense		63		62		186			185
Card and processing expense		38		35		108			98
Other noninterest expense		165		161		492			477

Income before taxes		157		148		311			399
Applicable income tax expense		55		52		110			141

Net income	$	102		96		201			258

Average Balance Sheet Data
Consumer loans, including held for sale	$	14,269		14,982		14,449			15,017
Commercial loans, including held for sale		1,963		2,137		1,994			2,208
Demand deposits		12,771		11,800		12,561			11,723
Interest checking deposits		9,003		8,992		9,096			9,107
Savings and money market deposits		25,155		24,487		25,448			23,703
Other time deposits and certificates $100,000 and over		5,202		4,732		5,141			4,620

Net income was $102 million for the three months ended September 30, 2015 compared to net income of $96 million for the three months ended September 30, 2014. The increase was driven by a decrease in the provision for loan and lease losses and an increase in noninterest income partially offset by an increase in noninterest expense. Net income was $201 million for the nine months ended September 30, 2015 compared to $258 million for the same period in the prior year. The decrease was driven by decreases in noninterest income and net interest income and an increase in noninterest expense partially offset by a decrease in the provision for loan and lease losses.

Net interest income decreased $1 million and $23 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The decreases for both periods were primarily driven by changes made to the Bancorp’s deposit advance product beginning January 1, 2015 and a decline in interest income on average home equity loans driven by a decrease in average balances compared to the same periods in the prior year. The decreases for both periods were partially offset by a decrease in FTP charges on loans and leases due to a decrease in average balances and a decrease in interest expense on average savings and money market deposits due to a decline in the rates paid. The decreases for both periods were also partially offset by increases in FTP credits for demand deposits and other time deposits driven by average deposit growth and an increase in FTP credits for interest checking deposits due to an increase in FTP credit rates for this product.

Provision for loan and lease losses decreased $11 million and $20 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year primarily due to improved credit trends. Net charge-offs as a percent of average portfolio loans and leases decreased to 97 bps for both the three and nine months ended September 30, 2015 compared to 116 bps and 110 bps for the three and nine months ended September 30, 2014, respectively.

Noninterest income increased $3 million and decreased $70 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increase for the three months ended was driven by an increase in other noninterest income and card and processing revenue. The decrease for the nine months ended was primarily driven by a decrease in other noninterest income partially offset by increases in card and processing revenue and investment advisory revenue. Other noninterest income decreased $83 million for the nine months ended September 30, 2015 compared to the same period in the prior year primarily driven by impairment losses associated with lower of cost or market adjustments on long-lived assets of $104 million compared to $18 million for the nine months ended September 30, 2014. Refer to Note 7 of the Notes to Condensed Consolidated Financial Statements for additional information on bank premises and equipment and the Branch Consolidation and Sales Plan. Card and processing revenue increased $8 million for the nine months ended September 30, 2015 compared to the same period in the prior year primarily due to an increase in the number of actively used cards and an increase in customer spend volume. Investment advisory revenue increased $5 million for the nine months ended September 30, 2015 compared to the same period in the prior year primarily due to an increase in recurring securities brokerage fees driven by higher sales volume as well as an increase in private client service fees due to an increase in personal asset management fees.

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

Noninterest expense increased $4 million and $15 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increases for both periods were due to increases in other noninterest expense and card and processing expense partially offset by a decrease in personnel costs. Other noninterest expense increased $4 million for the three months ended September 30, 2015 compared to the same period in the prior year primarily due to increases in corporate overhead allocations and higher operational losses. Other noninterest expense increased $15 million for the nine months ended September 30, 2015 compared to the same period in the prior year due to higher operational losses and increases in marketing expense and corporate overhead allocations. Card and processing expense increased $3 million and $10 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year driven by increased fraud prevention related expenses. These increases were partially offset by decreases of $4 million and $11 million in personnel costs for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year driven by a decrease in employee benefits expense due to changes in the Bancorp’s employee benefit plan implemented in 2015.

Average consumer loans decreased $713 million and $568 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. These decreases were primarily driven by decreases in average home equity portfolio loans of $427 million and $304 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year and decreases in average residential mortgage portfolio loans of $261 million and $265 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year as payoffs exceeded new loan production. Average commercial loans decreased $174 million and $214 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. These decreases were primarily driven by decreases in average commercial mortgage portfolio loans of $109 million and $135 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year and decreases in average commercial and industrial portfolio loans of $71 million and $87 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year as payoffs exceeded new loan production.

Average core deposits increased $1.9 billion and $2.9 billion for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. These increases were primarily driven by net growth in average savings and money market deposits of $668 million and $1.7 billion, respectively, and growth in average demand deposits of $971 million and $838 million, respectively, for the three and nine months ended September 30, 2015 compared to the same periods in the prior year. The net growth in average savings and money market deposits was driven by a promotional product offering and the growth in average demand deposits was driven by an increase in average account balances.

Consumer Lending

Consumer Lending includes the Bancorp’s mortgage, home equity, automobile and other indirect lending activities. Direct lending activities include the origination, retention and servicing of mortgage and home equity loans or lines of credit, sales and securitizations of those loans, pools of loans or lines of credit, and all associated hedging activities. Indirect lending activities include extending loans to consumers through correspondent lenders and automobile dealers.

The following table contains selected financial data for the Consumer Lending segment:

TABLE 29: Consumer Lending


	For the three months ended September 30,				For the nine months ended September 30,
($ in millions)	2015		2014		2015		2014
Income Statement Data
Net interest income	$	62		64		187		193
Provision for loan and lease losses		11		17		33		55
Noninterest income:
Mortgage banking net revenue		69		60		268		244
Other noninterest income		7		11		59		36
Noninterest expense:
Personnel costs		47		43		139		140
Other noninterest expense		59		71		183		306

Income (loss) before taxes		21		4		159		(28	)
Applicable income tax expense (benefit)		8		1		57		(10	)

Net income (loss)	$	13		3		102		(18	)

Average Balance Sheet Data
Residential mortgage loans, including held for sale	$	9,393		8,873		9,089		8,808
Home equity		414		486		433		504
Automobile loans		11,381		11,562		11,401		11,510
Other consumer loans, including held for sale		3		12		14		19

Net income was $13 million for the three months ended September 30, 2015 compared to net income of $3 million for the three months ended September 30, 2014. Net income was $102 million for the nine months ended September 30, 2015 compared to a net loss of $18 million for the nine months ended September 30, 2014. The increase for both periods was driven by decreases in noninterest expense and the provision for loan and lease losses and an increase in noninterest income partially offset by a decrease in net interest income.

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

Net interest income decreased $2 million and $6 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The decreases were primarily driven by lower yields on average residential mortgage loans and average automobile loans partially offset by decreases in FTP charges on loans and leases.

Provision for loan and lease losses decreased $6 million and $22 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year primarily due to improved delinquency metrics on residential mortgage loans and home equity loans. Net charge-offs as a percent of average portfolio loans and leases decreased to 22 bps for the three months ended September 30, 2015 compared to 33 bps for the same period in the prior year and decreased to 22 bps for the nine months ended September 30, 2015 compared to 36 bps for the same period in the prior year.

Noninterest income increased $5 million and $47 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increase for the three months ended September 30, 2015 was driven by an increase in mortgage banking net revenue partially offset by a decrease in other noninterest income. Mortgage banking net revenue increased $9 million for the three months ended September 30, 2015 from the same period in the prior year driven by a $12 million increase in mortgage origination fees and gains on loan sales partially offset by a $3 million decrease in net mortgage servicing revenue. Other noninterest income decreased $4 million for the three months ended September 30, 2015 from the same period in the prior year driven by a decrease in retail service fees. The increase for the nine months ended September 30, 2015 was driven by increases in mortgage banking net revenue and other noninterest income. Mortgage banking net revenue increased $24 million for the nine months ended September 30, 2015 compared to the same period in the prior year driven by a $14 million increase in mortgage origination fees and gains on loan sales and a $10 million increase in net mortgage servicing revenue. Refer to the Noninterest Income section of MD&A for additional information on the fluctuations in mortgage banking net revenue. Other noninterest income increased $23 million for the nine months ended September 30, 2015 from the same period in the prior year primarily driven by a $37 million gain on the sale of held for sale residential mortgage loans classified as TDRs in the first quarter of 2015. This increase was partially offset by a decrease in retail service fees.

Noninterest expense decreased $8 million and $124 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year driven by decreases in other noninterest expense of $12 million and $123 million, respectively. The decrease for both periods was primarily due to decreased legal expenses and operational losses. The decrease for the three months ended September 30, 2015 was partially offset by an increase of $4 million in personnel costs driven by increased compensation expense due to increases in incentive compensation, primarily in the mortgage business, and base compensation.

Average consumer loans and leases increased $258 million and $96 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. Average residential mortgage loans, including held for sale, increased $520 million and $281 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year primarily due to the continued retention of certain conforming ARMs and certain other fixed-rate loans. Average automobile loans decreased $181 million and $109 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year and average home equity loans decreased $72 million and $71 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year as payoffs exceeded new loan production.

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

Investment Advisors

Investment Advisors provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. Investment Advisors is made up of four main businesses: FTS, an indirect wholly-owned subsidiary of the Bancorp; ClearArc Capital, Inc., an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker dealer services to the institutional marketplace. ClearArc Capital, Inc. provides asset management services. Fifth Third Private Bank offers holistic strategies to affluent clients in wealth planning, investing, insurance and wealth protection. Fifth Third Institutional Services provides advisory services for institutional clients including states and municipalities.

The following table contains selected financial data for the Investment Advisors segment:

TABLE 30: Investment Advisors


	For the three months ended September 30,				For the nine months ended September 30,
($ in millions)	2015		2014		2015		2014
Income Statement Data
Net interest income	$	33		30		91		90
Provision for loan and lease losses		—		1		3		3
Noninterest income:
Investment advisory revenue		100		101		306		300
Other noninterest income		2		1		9		8
Noninterest expense:
Personnel costs		42		39		127		122
Other noninterest expense		70		72		215		211

Income before taxes		23		20		61		62
Applicable income tax expense		8		7		21		22

Net income	$	15		13		40		40

Average Balance Sheet Data
Loans and leases	$	2,982		2,216		2,732		2,233
Core deposits		8,944		9,524		9,489		9,473

Net income was $15 million for the three months ended September 30, 2015 compared to net income of $13 million for the same period in the prior year. The increase was driven primarily by an increase in net interest income. Net income was $40 million for both the nine months ended September 30, 2015 and 2014. Net income was flat as a result of an increase in noninterest income offset by an increase in noninterest expense.

Net interest income increased $3 million and $1 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increase for both periods was primarily due to an increase in interest income on loans and leases due to increases in average balances and an increase in FTP credits on interest checking deposits due to an increase in FTP credit rates partially offset by increases on FTP charges on loans and leases driven by increases in average balances.

Provision for loan and lease losses decreased $1 million and was flat for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year.

Noninterest income was flat and increased $7 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increase for the nine months ended was primarily due to a $6 million increase in investment advisory revenue as a result of higher recurring securities brokerage fees driven by higher sales volume.

Noninterest expense increased $1 million and $9 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increase for the three months ended September 30, 2015 was primarily driven by an increase in personnel costs partially offset by a decrease in other noninterest expense. The increase for the nine months ended September 30, 2015 was primarily driven by increases in personnel costs and other noninterest expense. Personnel costs increased $3 million and $5 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year primarily due to increased compensation expense driven by higher incentive compensation and base compensation. Other noninterest expense decreased $2 million for the three months ended September 30, 2015 compared to the same period in the prior year primarily due to a decrease in corporate overhead allocations. Other noninterest expense increased $4 million for the nine months ended September 30, 2015 compared to the same period in the prior year primarily due to an increase in third-party custodial expenses and higher operational losses.

Average loans and leases increased $766 million and $499 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increase for both the three and nine months ended September 30, 2015 was primarily due to increases in average residential mortgage loans and average other consumer loans primarily driven by increases in new loan origination activity. The increase for the nine months ended September 30, 2015 was partially offset by a decrease in average home equity loans as payoffs exceeded new loan production.

Average core deposits decreased $580 million for the three months ended September 30, 2015 compared to the same period in the prior year primarily due to a decline in average interest checking balances. Average core deposits increased $16 million for the nine months ended September 30, 2015 compared to the same period in the prior year.

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

General Corporate and Other

General Corporate and Other includes the unallocated portion of the investment securities portfolio, securities gains and losses, certain non-core deposit funding, unassigned equity, provision expense in excess of net charge-offs or a benefit from the reduction of the ALLL, the payment of preferred stock dividends and certain support activities and other items not attributed to the business segments.

Net interest income for the three months ended September 30, 2015 was a negative $2 million compared to net interest income of $2 million for the same period in the prior year. Net interest income for the nine months ended September 30, 2015 was $3 million compared to $31 million for the same period in the prior year. Decreases in net interest income for both periods were primarily due to increases in FTP credits on deposits allocated to business segments driven by increases in average deposits. The remaining decrease in net interest income was due to an increase in interest expense on long-term debt and a decrease in the benefit related to the FTP charges on loans and leases partially offset by an increase in interest income on taxable securities. Results for the three and nine months ended September 30, 2015 were impacted by a benefit of $32 million and $61 million, respectively, compared to a benefit of $44 million and $168 million for the three and nine months ended September 30, 2014, respectively, due to reductions in the ALLL.

Noninterest income increased $175 million and $112 million for the three and nine months ended September 30, 2015, respectively, compared to the same periods in the prior year. The increase in noninterest income for both periods was primarily driven by positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC. The positive valuation adjustment on the stock warrant associated with Vantiv Holding, LLC was $130 million for the three months ended September 30, 2015 compared to the negative valuation adjustment of $53 million during the three months ended September 30, 2014. The positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC were $215 million for the nine months ended September 30, 2015 compared to the negative valuation adjustments of $26 million during the nine months ended September 30, 2014. Additionally, equity method earnings from the Bancorp’s interest in Vantiv Holding, LLC increased $4 million compared to the three months ended September 30, 2014 and increased $9 million compared to the nine months ended September 30, 2014. The nine months ended September 30, 2014 included the impact of a gain of $125 million on the sale of Vantiv, Inc. shares in the second quarter of 2014. Noninterest income also included a $5 million increase in the negative valuation adjustment related to the Visa total return swap for the three months ended September 30, 2015 compared to the three months ended September 30, 2014. The nine months ended September 30, 2015 included an $8 million increase in the negative valuation adjustments related to the Visa total return swap compared to the same period in the prior year. For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B shares, refer to Note 22 of the Notes to Condensed Consolidated Financial Statements

Noninterest expense for both the three and nine months ended September 30, 2015 was an expense of $25 million compared to a benefit of $14 million and $31 million for the three and nine months ended September 30, 2014, respectively. The increase for the three months ended September 30, 2015 compared to the same period in the prior year was primarily due to increases in personnel costs, an increase in the provision for the reserve for unfunded commitments and an increase in FDIC insurance and other taxes partially offset by increased corporate overhead allocations from General Corporate and Other to the other business segments. The increase for the nine months ended September 30, 2015 compared to the same period in the prior year was primarily due to increases in personnel costs, an increase in the provision for the reserve for unfunded commitments and increased litigation and regulatory activity partially offset by increased corporate overhead allocations from General Corporate and Other to the other business segments.

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

RISK MANAGEMENT – OVERVIEW

Managing risk is an essential component of successfully operating a financial services company. The Bancorp’s risk management approach includes processes for identifying, assessing, managing, monitoring and reporting risks. The ERM division, led by the Bancorp’s Chief Risk Officer ensures the consistency and adequacy of the Bancorp’s risk management approach within the structure of the Bancorp’s operating model. In addition, the Internal Audit division provides an independent assessment of the Bancorp’s internal control structure and related systems and processes.

The assumption of risk requires robust and active risk management practices that comprise an integrated and comprehensive set of activities, measures and strategies that apply to the entire organization. The Bancorp has established a Risk Appetite Framework, approved by the Board, that provides the foundations of corporate risk capacity, risk appetite and risk tolerances. The Bancorp’s risk capacity is represented by its available financial resources. Risk capacity sets an absolute limit on risk-assumption in the Bancorp’s annual and strategic plans. The Bancorp understands that not all financial resources may persist as viable loss buffers over time. Further, consideration must be given to regulatory capital buffers required per Capital Policy Targets that would reduce risk capacity. Those factors take the form of capacity adjustments to arrive at an Operating Risk Capacity which represents the operating risk level the Bancorp can assume while maintaining its solvency standard. The Bancorp’s policy currently discounts its Operating Risk Capacity by a minimum of five percent to provide a buffer; as a result, the Bancorp’s risk appetite is limited by policy to, at most, 95% of its Operating Risk Capacity.

Economic capital is the amount of unencumbered financial resources required to support the Bancorp’s risks. The Bancorp measures economic capital under the assumption that it expects to maintain debt ratings at strong investment grade levels over time. The Bancorp’s capital policies require that the Operating Risk Capacity less the aforementioned buffer exceed the calculated economic capital required in its business.

Risk appetite is the aggregate amount of risk the Bancorp is willing to accept in pursuit of its strategic and financial objectives. By establishing boundaries around risk taking and business decisions, and by incorporating the needs and goals of its shareholders, regulators, rating agencies and customers, the Bancorp’s risk appetite is aligned with its priorities and goals. Risk tolerance is the maximum amount of risk applicable to each of the eight specific risk categories included in its Enterprise Risk Management Framework. This is expressed primarily in qualitative terms, however certain risk types also have quantitative metrics that are used to measure the Bancorp’s level of risk against its risk tolerances. The Bancorp’s risk appetite and risk tolerances are supported by risk targets and risk limits. Those limits are used to monitor the amount of risk assumed at a granular level. On a quarterly basis, the Risk and Compliance Committee of the Board reviews performance against key risk limits as well as current assessments of each of the eight risk types relative to the established tolerance. Any results over limits or outside of tolerance require the development of an action plan that describes actions to be taken to return the measure to within the limit or tolerance.

The risks faced by the Bancorp include, but are not limited to, credit, market, liquidity, operational, regulatory compliance, legal, reputational and strategic. Each of these risks is managed through the Bancorp’s risk program which includes the following key functions:

•

Enterprise Risk Management is responsible for developing and overseeing the implementation of risk programs and reporting that facilitate a broad integrated view of risk. The department also leads the continual fostering of a strong risk management culture and the framework, policies and committees that support effective risk governance, including the oversight of Sarbanes-Oxley compliance;

•

Commercial Credit Risk Management is responsible for overseeing the safety and soundness of the commercial loan portfolio within an independent portfolio management framework that supports the Bancorp’s commercial loan growth strategies and underwriting practices, ensuring portfolio optimization and appropriate risk controls;

•

Risk Strategies and Reporting is responsible for quantitative analysis needed to support the commercial dual rating methodology, ALLL methodology and analytics needed to assess credit risk and develop mitigation strategies related to that risk. The department also provides oversight, reporting and monitoring of commercial underwriting and credit administration processes. The Risk Strategies and Reporting department is also responsible for the economic capital program;

•

Consumer Credit Risk Management is responsible for overseeing the safety and soundness of the consumer portfolio within an independent management framework that supports the Bancorp’s consumer loan growth strategies, ensuring portfolio optimization, appropriate risk controls and oversight, reporting, and monitoring of underwriting and credit administration processes;

•

Operational Risk Management works with lines of business and regional management to maintain processes to monitor and manage all aspects of operational risk, including ensuring consistency in application of operational risk programs;

•

Bank Protection oversees and manages fraud prevention and detection and provides investigative and recovery services for the Bancorp;

•

Capital Markets Risk Management is responsible for instituting, monitoring, and reporting appropriate trading limits, monitoring liquidity, interest rate risk and risk tolerances within Treasury, Mortgage, and Capital Markets groups and utilizing a value at risk model for Bancorp market risk exposure;

•

Regulatory Compliance Risk Management ensures that processes are in place to monitor and comply with federal and state banking regulations, including processes related to fiduciary, CRA and fair lending compliance. The function also has the responsibility for maintenance of an enterprise-wide compliance framework; and

•

The ERM division creates and maintains other functions, committees or processes as are necessary to effectively oversee risk management throughout the Bancorp.

Risk management oversight and governance is provided by the Risk and Compliance Committee of the Board of Directors and through multiple management committees whose membership includes a broad cross-section of line-of-business, regional market and support representatives. The Risk and Compliance Committee of the Board of Directors consists of five outside directors and has the responsibility for the oversight of risk management for the Bancorp, as well as for the Bancorp’s overall aggregate risk profile.

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

The Risk and Compliance Committee of the Board of Directors has approved the formation of key management governance committees that are responsible for evaluating risks and controls. The primary committee responsible for the oversight of risk management is the ERMC. Committees accountable to the ERMC, which support the core risk programs, are the Corporate Credit Committee, the Operational Risk Committee, the Management Compliance Committee, the Asset/Liability Committee and the Enterprise Marketing Committee. Other committees accountable to the ERMC oversee the ALLL, capital, model risk and regulatory change management functions. There are also new products and initiatives processes applicable to every line of business to ensure an appropriate standard readiness assessment is performed before launching a new product or initiative. Significant risk policies approved by the management governance committees are also reviewed and approved by the Risk and Compliance Committee of the Board of Directors.

Credit Risk Review is an independent function responsible for evaluating the sufficiency of underwriting, documentation and approval processes for consumer and commercial credits, the accuracy of risk grades assigned to commercial credit exposure, nonaccrual status, specific reserves and monitoring for charge-offs. Credit Risk Review reports directly to the Risk and Compliance Committee of the Board of Directors and administratively to the Chief Auditor.

CREDIT RISK MANAGEMENT

The objective of the Bancorp’s credit risk management strategy is to quantify and manage credit risk on an aggregate portfolio basis, as well as to limit the risk of loss resulting from the failure of a borrower or counterparty to honor its financial or contractual obligations to the Bancorp. The Bancorp’s credit risk management strategy is based on three core principles: conservatism, diversification and monitoring. The Bancorp believes that effective credit risk management begins with conservative lending practices. These practices include conservative exposure and counterparty limits and conservative underwriting, documentation and collection standards. The Bancorp’s credit risk management strategy also emphasizes diversification on a geographic, industry and customer level as well as ongoing portfolio monitoring and timely management reviews of large credit exposures and credits experiencing deterioration of credit quality. Credit officers with the authority to extend credit are delegated specific authority amounts, the utilization of which is closely monitored. Underwriting activities are centrally managed, and ERM manages the policy and the authority delegation process directly. The Credit Risk Review function provides objective assessments of the quality of underwriting and documentation, the accuracy of risk grades and the charge-off, nonaccrual and reserve analysis process. The Bancorp’s credit review process and overall assessment of the adequacy of the allowance for credit losses is based on quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio. The Bancorp uses these assessments to promptly identify potential problem loans or leases within the portfolio, maintain an adequate reserve and take any necessary charge-offs. The Bancorp defines potential problem loans and leases as those rated substandard that do not meet the definition of a nonperforming asset or a restructured loan. Refer to Note 6 of the Notes to Condensed Consolidated Financial Statements for further information on the Bancorp’s credit grade categories, which are derived from standard regulatory rating definitions.

The following tables provide a summary of potential problem loans and leases:

TABLE 31: Potential Problem Loans and Leases

As of September 30, 2015 ($ in millions)

Carrying
Value

Unpaid
Principal
Balance

Exposure

Commercial and industrial loans

1,396

1,399

1,885

Commercial mortgage loans

194

195

196

Commercial construction loans

Commercial leases

Total potential problem loans and leases

1,635

1,639

2,130

TABLE 32: Potential Problem Loans and Leases


As of December 31, 2014 ($ in millions)	Carrying Value		Unpaid Principal Balance		Exposure
Commercial and industrial loans	$	1,022		1,028		1,344
Commercial mortgage loans		272		273		273
Commercial construction loans		7		7		11
Commercial leases		29		29		29

Total potential problem loans and leases	$	1,330		1,337		1,657

In addition to the individual review of larger commercial loans that exhibit probable or observed credit weaknesses, the commercial credit review process includes the use of two risk grading systems. The risk grading system currently utilized for reserve analysis purposes encompasses ten categories. The Bancorp also maintains a dual risk rating system for credit approval and pricing, portfolio monitoring and capital allocation that includes a “through-the-cycle” rating philosophy for modeling expected losses. The dual risk rating system includes thirteen probabilities of default grade categories and an additional six grade categories for estimating losses given an event of default. The probability of default and loss given default evaluations are not separated in the ten-category risk rating system. The Bancorp has completed significant validation and testing of the dual risk rating system as a commercial credit risk management tool. The Bancorp is assessing the necessary modifications to the dual risk rating system outputs to develop a U.S. GAAP compliant ALLL model and will make a decision on the use of modified dual risk ratings for purposes of determining the Bancorp’s ALLL once the FASB has issued a final standard regarding proposed methodology changes to the determination of credit impairment as outlined in the FASB’s Proposed ASU-Financial Instruments-Credit Losses (Subtopic 825-15) issued on December 20, 2012. Scoring systems, various analytical tools and portfolio performance monitoring are used to assess the credit risk in the Bancorp’s homogenous consumer and small business loan portfolios.

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

Overview

The outlook is for reasonably positive economic and employment growth in the U.S. during the remainder of 2015. The U.S. job market is slowly but steadily improving. Housing prices have largely stabilized and are increasing in many markets and there has been an increase in new loan origination activity resulting from an increase in demand and targeted marketing efforts. However, a weakness in the global economic conditions, stress on capital markets, a prolonged downturn in commodity prices and a relatively low interest rate environment may directly or indirectly impact the Bancorp’s growth and profitability.

Among consumer portfolios, residential mortgage and brokered home equity portfolios exhibited the most stress. As of September 30, 2015, consumer real estate loans originated from 2005 to 2008 represent approximately 21% of the consumer real estate portfolio and approximately 59% and 62% of total losses for the three and nine months ended September 30, 2015, respectively. Loss rates continue to improve as newer vintages are performing within expectations. Currently, the level of new commercial real estate fundings is slightly above the amortization and pay-off of the portfolio with growth in the commercial construction portfolio as those markets have rebounded. The Bancorp continues to engage in loss mitigation strategies such as reducing credit commitments, restructuring certain commercial and consumer loans, as well as utilizing commercial and consumer loan workout teams. For commercial and consumer loans owned by the Bancorp, loan modification strategies are developed that are workable for both the borrower and the Bancorp when the borrower displays a willingness to cooperate. These strategies typically involve either a reduction of the stated interest rate of the loan, an extension of the loan’s maturity date with a stated rate lower than the current market rate for a new loan with similar risk, or in limited circumstances, a reduction of the principal balance of the loan or the loan’s accrued interest. For residential mortgage loans serviced for FHLMC and FNMA, the Bancorp participates in the HAMP and HARP 2.0 programs. For loans refinanced under the HARP 2.0 program, the Bancorp strictly adheres to the underwriting requirements of the program and promptly sells the refinanced loan back to the agencies. Loan restructuring under the HAMP program is performed on behalf of FHLMC or FNMA and the Bancorp does not take possession of these loans during the modification process. Therefore, participation in these programs does not significantly impact the Bancorp’s credit quality statistics. The Bancorp participates in trial modifications in conjunction with the HAMP program for loans it services for FHLMC and FNMA. As these trial modifications relate to loans serviced for others, they are not included in the Bancorp’s TDRs as they are not assets of the Bancorp. In the event there is a representation and warranty violation on loans sold through the programs, the Bancorp may be required to repurchase the sold loan. As of September 30, 2015, repurchased loans restructured or refinanced under these programs were immaterial to the Condensed Consolidated Financial Statements. Additionally, as of September 30, 2015, $16 million of loans refinanced under HARP 2.0 were included in loans held for sale in the Condensed Consolidated Balance Sheets. For the three and nine months ended September 30, 2015, the Bancorp recognized $1 million and $5 million, respectively, of noninterest income in mortgage banking net revenue in the Condensed Consolidated Statements of Income related to the sale of loans restructured or refinanced under the HAMP and HARP 2.0 programs compared to $2 million and $10 million for the same periods in the prior year.

In the financial services industry, there has been heightened focus on foreclosure activity and processes. The Bancorp actively works with borrowers experiencing difficulties and has regularly modified or provided forbearance to borrowers where a workable solution could be found. Foreclosure is a last resort, and the Bancorp undertakes foreclosures only when it believes they are necessary and appropriate and is careful to ensure that customer and loan data are accurate.

At September 30, 2015, the Bancorp’s non-power producing energy portfolio balance was $1.6 billion, representing approximately 2% of total loans and leases. This portfolio continues to be an important part of the Bancorp’s commercial business strategy. Due to the sensitivity of this portfolio to downward movements in oil prices, the Bancorp has seen migration in the portfolio into criticized classifications during 2015. When establishing the ALLL, all portfolio and general economic factors are considered, including the level of criticized assets and the level of commodity prices.

Commercial Portfolio

The Bancorp’s credit risk management strategy includes minimizing concentrations of risk through diversification. The Bancorp has commercial loan concentration limits based on industry, lines of business within the commercial segment, geography and credit product type.

The risk within the commercial loan and lease portfolio is managed and monitored through an underwriting process utilizing detailed origination policies, continuous loan level reviews, monitoring of industry concentration and product type limits and continuous portfolio risk management reporting. The origination policies for commercial real estate outline the risks and underwriting requirements for owner and nonowner-occupied and construction lending. Included in the policies are maturity and amortization terms, maximum LTVs, minimum debt service coverage ratios, construction loan monitoring procedures, appraisal requirements, pre-leasing requirements (as applicable), sensitivity and pro-forma analysis requirements and interest rate sensitivity. The Bancorp requires a valuation of real estate collateral, which may include third-party appraisals, be performed at the time of origination and renewal in accordance with regulatory requirements and on an as needed basis when market conditions justify. Although the Bancorp does not back test these collateral value assumptions, the Bancorp maintains an appraisal review department to order and review third-party appraisals in accordance with regulatory requirements. Collateral values on criticized assets with relationships exceeding $1 million are reviewed quarterly to assess the appropriateness of the value ascribed in the assessment of charge-offs and specific reserves. In addition, the Bancorp applies incremental valuation adjustments to older appraisals that relate to collateral dependent loans, which can currently be up to 20-30% of the appraised value based on the type of collateral. These incremental valuation adjustments generally reflect the age of the most recent appraisal as well as collateral type. Trends in collateral values, such as home price indices and recent asset dispositions, are monitored in order to determine whether changes to the appraisal adjustments are warranted. Other factors such as local market conditions or location may also be considered as necessary.

The Bancorp assesses all real estate and non-real estate collateral securing a loan and considers all cross collateralized loans in the calculation of the LTV ratio. The following tables provide detail on the most recent LTV ratios for commercial mortgage loans greater than $1 million, excluding impaired commercial mortgage loans individually evaluated. The Bancorp does not typically aggregate the LTV ratios for commercial mortgage loans less than $1 million.

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

TABLE 33: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million

As of September 30, 2015 ($ in millions)

LTV > 100%

LTV 80-100%

LTV < 80%

Commercial mortgage owner-occupied loans

145

272

2,038

Commercial mortgage nonowner-occupied loans

139

209

2,015

Total

284

481

4,053

TABLE 34: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million


As of December 31, 2014 ($ in millions)	LTV > 100%		LTV 80-100%		LTV < 80%
Commercial mortgage owner-occupied loans	$	148		248		1,982
Commercial mortgage nonowner-occupied loans		243		333		2,423

Total	$	391		581		4,405

The following table provides detail on commercial loans and leases by industry classification (as defined by the North American Industry Classification System), by loan size and by state, illustrating the diversity and granularity of the Bancorp’s commercial loans and leases as of:

TABLE 35: Commercial Loan and Lease Portfolio (excluding loans held for sale)


	September 30, 2015							December 31, 2014
($ in millions)	Outstanding			Exposure		Nonaccrual		Outstanding		Exposure		Nonaccrual
By industry:
Manufacturing	$	11,035			20,710		74		10,315		20,496		55
Real estate		6,402			10,017		55		5,392		8,612		32
Financial services and insurance		5,840			13,108		13		6,097		13,557		20
Healthcare		4,662			6,589		25		4,133		6,322		20
Business services		4,438			6,747		33		4,644		7,109		79
Wholesale trade		4,353			8,191		23		4,314		8,004		62
Retail trade		3,895			7,597		13		3,754		7,190		22
Transportation and warehousing		3,165			4,751		—		3,012		4,276		1
Communication and information		3,070			5,086		2		2,409		4,140		3
Construction		1,956			3,375		11		1,864		3,352		25
Accommodation and food		1,936			3,249		7		1,712		2,945		9
Entertainment and recreation		1,724			2,981		7		1,451		2,321		10
Mining		1,525			2,755		—		1,862		3,323		3
Utilities		1,105			2,771		—		1,044		2,551		—
Other services		872			1,212		9		881		1,207		11
Public administration		523			620		—		567		658		—
Agribusiness		341			526		5		318		444		11
Individuals		159			209		3		170		201		4
Other		7			7		6		14		17		—

Total	$	57,008			100,501		286		53,953		96,725		367

By loan size:
Less than $200,000		1	%		1		9		1		1		6
$200,000 to $1 million		4			3		13		5		3		15
$1 million to $5 million		10			8		26		11		9		22
$5 million to $10 million		8			7		41		8		7		19
$10 million to $25 million		24			21		11		25		22		24
Greater than $25 million		53			60		—		50		58		14

Total		100	%		100		100		100		100		100

By state:
Ohio		16	%		17		12		17		20		11
Michigan		8			7		9		9		8		11
Illinois		8			7		12		7		8		6
Florida		7			7		19		7		6		17
Indiana		5			5		5		5		5		5
North Carolina		4			4		1		3		4		2
Kentucky		3			3		2		3		3		2
Tennessee		3			3		—		3		3		—
Pennsylvania		3			3		7		3		2		7
All other states		43			44		33		43		41		39

Total		100	%		100		100		100		100		100

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

The Bancorp has identified certain categories of loans which it believes represent a higher level of risk compared to the rest of the Bancorp’s commercial loan portfolio, due to economic or market conditions within the Bancorp’s key lending areas. The following tables provide analysis of nonowner-occupied commercial real estate loans (excludes loans held for sale):

TABLE 36: Nonowner-Occupied Commercial Real Estate^(a)


As of September 30, 2015									Net Charge-offs (Recoveries) for September 30, 2015
($ in millions) By state:	Outstanding		Exposure		90 Days Past Due		Nonaccrual		Three Months Ended		Nine Months Ended
Ohio	$	1,319		1,600		—		7		—		(1	)
Illinois		678		1,082		—		6		—		—
Florida		636		1,002		—		10		—		3
Michigan		612		673		—		14		3		3
North Carolina		354		597		—		—		—		(1	)
Indiana		288		409		2		—		—		—
All other states		2,396		4,373		—		26		7		12

Total	$	6,283		9,736		2		63		10		16

(a)

Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.

TABLE 37: Nonowner-Occupied Commercial Real Estate^(a)


As of September 30, 2014									Net Charge-offs (Recoveries) for September 30, 2014
($ in millions) By state:	Outstanding		Exposure		90 Days Past Due		Nonaccrual		Three Months Ended			Nine Months Ended
Ohio	$	1,224		1,646		1		10		(2	)		(2	)
Illinois		432		867		—		6		—			2
Florida		528		768		—		11		—			1
Michigan		762		825		—		12		—			5
North Carolina		350		521		—		2		—			(1	)
Indiana		238		333		—		2		—			—
All other states		1,678		3,047		—		6		2			2

Total	$	5,212		8,007		1		49		—			7

(a)

Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.

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

Consumer Portfolio

The Bancorp’s consumer portfolio is materially comprised of three categories of loans: residential mortgage loans, home equity and automobile loans. The Bancorp has identified certain categories within these loan types which it believes represent a higher level of risk compared to the rest of the consumer loan portfolio due to high loan amount to collateral value. The Bancorp does not update LTV ratios for the consumer portfolio subsequent to origination except as part of the charge-off process for real estate secured loans.

Residential Mortgage Portfolio

The Bancorp manages credit risk in the residential mortgage portfolio through conservative underwriting and documentation standards and geographic and product diversification. The Bancorp may also package and sell loans in the portfolio.

The Bancorp does not originate mortgage loans that permit customers to defer principal payments or make payments that are less than the accruing interest. The Bancorp originates both fixed and adjustable-rate residential mortgage loans. Resets of rates on ARMs are not expected to have a material impact on credit costs in the current interest rate environment, as $841 million of adjustable-rate residential mortgage loans will have rate resets during the next twelve months. Of these resets, 66% are expected to experience an increase in rate, with an average increase of approximately one fifth of a percent.

Certain residential mortgage products have contractual features that may increase credit exposure to the Bancorp in the event of a decline in housing values. These types of mortgage products offered by the Bancorp include loans with high LTV ratios, multiple loans on the same collateral that when combined result in a LTV greater than 80% and interest-only loans. The Bancorp has deemed residential mortgage loans with greater than 80% LTV ratios and no mortgage insurance as loans that represent a higher level of risk.

The following table provides an analysis of the residential mortgage portfolio loans outstanding by LTV at origination as of:

TABLE 38: Residential Mortgage Portfolio Loans by LTV at Origination


	September 30, 2015					December 31, 2014
($ in millions)	Outstanding		Weighted- Average LTV			Outstanding		Weighted- Average LTV
LTV £ 80%	$	10,075		65.5	%	$	9,220		65.1	%
LTV > 80%, with mortgage insurance		1,269		93.4			1,206		93.8
LTV > 80%, no mortgage insurance		2,048		96.2			1,963		96.2

Total	$	13,392		73.0	%	$	12,389		73.0	%

The following tables provide analysis of the residential mortgage portfolio loans outstanding with a greater than 80% LTV ratio and no mortgage insurance:

TABLE 39: Residential Mortgage Portfolio Loans, LTV Greater than 80%, No Mortgage Insurance


As of September 30, 2015							Net Charge-offs for September 30, 2015
($ in millions) By state:	Outstanding		90 Days Past Due		Nonaccrual		Three Months Ended		Nine Months Ended
Ohio	$	530		1		4		1		3
Illinois		348		—		1		—		1
Michigan		270		1		1		1		1
Florida		264		—		5		—		—
Indiana		139		—		1		—		—
North Carolina		110		—		1		—		—
Kentucky		81		1		—		—		—
All other states		306		1		1		—		—

Total	$	2,048		4		14		2		5

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

TABLE 40: Residential Mortgage Portfolio Loans, LTV Greater than 80%, No Mortgage Insurance

As of September 30, 2014

Net Charge-offs for September 30, 2014

($ in millions)

By state:

Outstanding

90 Days
Past Due

Nonaccrual

Three Months
Ended

Nine Months
Ended

Ohio

603