Edgar Filing: FIFTH THIRD BANCORP

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, 2016

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):


Large accelerated filer x	Accelerated filer	¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company	¨

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 755,613,518 shares of the Registrant’s common stock, without par value, outstanding as of October 31, 2016.

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			12
Critical Accounting Policies			12
Statements of Income Analysis			13
Balance Sheet Analysis			22
Business Segment Review			28
Risk Management—Overview			35
Credit Risk Management			36
Market Risk Management			50
Liquidity Risk Management			54
Operational Risk Management			56
Compliance Risk Management			56
Capital Management			57
Off-Balance Sheet Arrangements			59
Quantitative and Qualitative Disclosures about Market Risk (Item 3)			60
Controls and Procedures (Item 4)			60
Condensed Consolidated Financial Statements and Notes (Item 1)
Balance Sheets (unaudited)			61
Statements of Income (unaudited)			62
Statements of Comprehensive Income (unaudited)			63
Statements of Changes in Equity (unaudited)			64
Statements of Cash Flows (unaudited)			65
Notes to Condensed Consolidated Financial Statements (unaudited)			66
Part II. Other Information
Legal Proceedings (Item 1)			122
Risk Factors (Item 1A)			122
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			122
Exhibits (Item 6)			122
Signatures			124
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,” “potential,” “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 or real estate market conditions, either nationally or in the states in which Fifth Third, one or more acquired entities and/or the combined company do business, weaken or 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 (22) difficulties in separating the operations of any branches or other assets divested; (23) losses or adverse impacts on the carrying values of branches and long-lived assets in connection with their sales or anticipated sales; (24) inability to achieve expected benefits from branch consolidations and planned sales within desired timeframes, if at all; (25) ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; and (26) 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		GSE: United States Government Sponsored Enterprise
ALLL: Allowance for Loan and Lease Losses		HAMP: Home Affordable Modification Program
AOCI: Accumulated Other Comprehensive Income		HARP: Home Affordable Refinance Program
ARM: Adjustable Rate Mortgage		HFS: Held for Sale
ASF: Available Stable Funding		HQLA: High Quality Liquid Assets
ASU: Accounting Standards Update		IPO: Initial Public Offering
ATM: Automated Teller Machine		IRC: Internal Revenue Code
BCBS: Basel Committee on Banking Supervision		IRLC: Interest Rate Lock Commitment
BHC: Bank Holding Company		ISDA: International Swaps and Derivatives Association, Inc.
BOLI: Bank Owned Life Insurance		LCR: Liquidity Coverage Ratio
BPO: Broker Price Opinion		LIBOR: London Interbank Offered Rate
bps: Basis Points		LLC: Limited Liability Company
CCAR: Comprehensive Capital Analysis and Review		LTV: Loan-to-Value
CDC: Fifth Third Community Development Corporation		MD&A: Management’s Discussion and Analysis of Financial
CET1: Common Equity Tier 1		Condition and Results of Operations
CFE: Collateralized Financing Entity		MSA: Metro Statistical Area
CFPB: Consumer Financial Protection Bureau		MSR: Mortgage Servicing Right
C&I: Commercial and Industrial		N/A: Not Applicable
CRA: Community Reinvestment Act		NII: Net Interest Income
DCF: Discounted Cash Flow		NM: Not Meaningful
DFA: Dodd-Frank Wall Street Reform & Consumer Protection Act		NSFR: Net Stable Funding Ratio
DIF: Deposit Insurance Fund		OAS: Option-Adjusted Spread
DTCC: Depository Trust & Clearing Corporation		OCI: Other Comprehensive Income (Loss)
ERISA: Employee Retirement Income Security Act		OREO: Other Real Estate Owned
ERM: Enterprise Risk Management		OTTI: Other-Than-Temporary Impairment
ERMC: Enterprise Risk Management Committee		PCA: Prompt Corrective Action
EVE: Economic Value of Equity		PMI: Private Mortgage Insurance
FASB: Financial Accounting Standards Board		RSF: Required Stable Funding
FDIC: Federal Deposit Insurance Corporation		SARs: Stock Appreciation Rights
FFIEC: Federal Financial Institutions Examination Council		SBA: Small Business Administration
FHA: Federal Housing Administration		SEC: United States Securities and Exchange Commission
FHLB: Federal Home Loan Bank		TBA: To Be Announced
FHLMC: Federal Home Loan Mortgage Corporation		TDR: Troubled Debt Restructuring
FICO: Fair Isaac Corporation (credit rating)		TILA: Truth in Lending Act
FINRA: Financial Industry Regulatory Authority		TRA: Tax Receivable Agreement
FNMA: Federal National Mortgage Association		TruPS: Trust Preferred Securities
FRB: Federal Reserve Bank		U.S.: United States of America
FTE: Fully Taxable Equivalent		U.S. GAAP: United States Generally Accepted Accounting
FTP: Funds Transfer Pricing		Principles
FTS: Fifth Third Securities		VA: United States Department of Veteran Affairs
GDP: Gross Domestic Product		VIE: Variable Interest Entity
GNMA: Government National Mortgage Association		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. The Bancorp’s banking subsidiary is referred to as the Bank.

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)		2016	2015	Change			2016	2015	Change

Income Statement Data
Net interest income (U.S. GAAP)	$	907	901		1	$	2,712	2,636		3
Net interest income (FTE)^(a)(b)		913	906		1		2,730	2,650		3
Noninterest income		840	713		18		2,075	1,900		9
Total revenue^(a)		1,753	1,619		8		4,805	4,550		6
Provision for loan and lease losses		80	156		(49)		289	305		(5)
Noninterest expense		973	943		3		2,942	2,814		5
Net income attributable to Bancorp		516	381		35		1,175	1,056		11
Net income available to common shareholders		501	366		37		1,123	1,004		12

Common Share Data
Earnings per share – basic	$	0.66	0.46		43	$	1.46	1.24		18
Earnings per share – diluted		0.65	0.45		44		1.45	1.22		19
Cash dividends declared per common share		0.13	0.13		-		0.39	0.39		-
Book value per share		20.44	18.22		12		20.44	18.22		12
Market value per share		20.46	18.91		8		20.46	18.91		8

Financial Ratios
Return on average assets		1.44 %	1.07		35		1.10 %	1.01		9
Return on average common equity		12.8	10.0		28		9.8	9.3		5
Return on average tangible common equity^(b)		15.2	12.0		27		11.7	11.1		5
Dividend payout ratio		19.7	28.3		(30)		26.7	31.5		(15)
Average total Bancorp shareholders’ equity as a percent of average assets		11.83	11.24		5		11.67	11.35		3
Tangible common equity as a percent of tangible assets^(b)(h)		8.78	8.32		6		8.78	8.32		6
Net interest margin^(a)(b)		2.88	2.89		-		2.88	2.88		-
Efficiency^(a)(b)		55.5	58.2		(5)		61.2	61.8		(1)

Credit Quality
Net losses charged-off	$	107	188		(43)	$	289	366		(21)
Net losses charged-off as a percent of average portfolio loans and leases		0.45 %	0.80		(44)		0.41 %	0.53		(23)
ALLL as a percent of portfolio loans and leases		1.37	1.35		1		1.37	1.35		1
Allowance for credit losses as a percent of portfolio loans and leases^(c)		1.54	1.49		3		1.54	1.49		3
Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO		0.75	0.65		15		0.75	0.65		15

Average Balances
Loans and leases, including held for sale	$	94,417	94,329		-	$	94,434	92,919		2
Total securities and other short-term investments		31,675	30,102		5		31,763	29,905		6
Total assets^(j)		142,726	140,706		1		142,410	139,439		2
Transaction deposits^(d)		94,855	94,660		-		94,821	95,100		-
Core deposits^(e)		98,875	98,717		-		98,854	99,151		-
Wholesale funding^(f)(j)		22,236	21,685		3		22,418	19,638		14
Bancorp shareholders’ equity		16,883	15,815		7		16,615	15,826		5

Regulatory Capital and Liquidity Ratios
CET1 capital^(g)		10.17 %	9.40⁽ⁱ⁾		8		10.17 %	9.40⁽ⁱ⁾		8
Tier I risk-based capital^(g)		11.27	10.49⁽ⁱ⁾		7		11.27	10.49⁽ⁱ⁾		7
Total risk-based capital^(g)		14.88	13.68⁽ⁱ⁾		9		14.88	13.68⁽ⁱ⁾		9
Tier I leverage^(g)		9.80	9.38⁽ⁱ⁾		4		9.80	9.38⁽ⁱ⁾		4
CET1 capital (fully phased-in)^(b)(g)		10.09	9.30⁽ⁱ⁾		8		10.09	9.30⁽ⁱ⁾		8
Modified LCR		115	N/A		N/A		115	N/A		N/A

(a)

Amounts presented on an FTE basis. The FTE adjustment for the three months ended September 30, 2016 and 2015 was $6 and $5, respectively, and for the nine months ended September 30, 2016 and 2015 was $18 and $14, respectively.

(b)

These are non-GAAP measures. For further information, refer to 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)

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

(e)

Includes transaction deposits and other time deposits.

(f)

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

(g)

Under the U.S. 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 in the Bancorp’s total risk-weighted assets.

(h)

Excludes unrealized gains and losses.

(i)

Ratios not restated for the adoption of the amended guidance of ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs.” Refer to Note 3 of the Notes to Condensed Consolidated Financial Statements for further information.

(j)

Upon adoption of ASU 2015-03 on January 1, 2016, the September 30, 2015 Condensed Consolidated Balance Sheet was adjusted to reflect the reclassification of $33 of average debt issuance costs from average other assets to average long-term debt. For further information, refer to Note 3 of the Notes to Condensed Consolidated Financial Statements.

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, 2016, the Bancorp had $143.3 billion in assets and operated 1,191 full-service banking centers, including 94 Bank Mart^® locations, open seven days a week, inside select grocery stores, and 2,497 ATMs in ten 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 Wealth and Asset Management. The Bancorp also has an approximate 18% interest in Vantiv Holding, LLC. The carrying value of the Bancorp’s investment in Vantiv Holding, LLC was $404 million at September 30, 2016.

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, 2015. 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 the 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 FTE basis for presenting net interest income is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

The Bancorp’s revenues are dependent on both net interest income and noninterest income. For the three months ended September 30, 2016, net interest income on an FTE basis and noninterest income provided 52% and 48% of total revenue, respectively. For the nine months ended September 30, 2016, net interest income on an FTE basis and noninterest income provided 57% and 43% of total revenue, respectively. The Bancorp derives the majority of its revenues within the 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 for both the three and nine months ended September 30, 2016. 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 loss 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, corporate banking revenue, wealth and asset management revenue, card and processing revenue, mortgage banking net 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 Consolidations and Sales Activity

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 certain operating branch locations and certain parcels of undeveloped land that had been acquired by the Bancorp for future branch expansion (the “Branch Consolidation and Sales Plan”). In addition, the Bancorp announced on September 13, 2016 that it had identified an additional 44 branch locations and 5 parcels of undeveloped land that it planned to consolidate or sell.

On January 29, 2016, the Bancorp closed the previously announced sale in the St. Louis MSA to Great Southern Bank and recorded a gain on the sale of $8 million which was recorded in other noninterest income in the Condensed Consolidated Statements of Income. Additionally, on April 22, 2016, the Bancorp closed the previously announced sale in the Pittsburgh MSA to First National Bank of Pennsylvania and recorded a gain on the sale of $11 million which was recorded in other noninterest income in the Condensed Consolidated Statements of Income. Both transactions were part of the Branch Consolidation and Sales Plan.

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

As of September 30, 2016, the Bancorp had 72 branch locations and 37 parcels of undeveloped land that had been acquired for future branch expansion that it intended to consolidate or sell. These branch locations and parcels of undeveloped land, which include unsold properties from the Branch Consolidation and Sales Plan as well as properties included in the September 13, 2016 announcement, represent $45 million, $17 million and $2 million of land and improvements, buildings and equipment, respectively, included in bank premises and equipment in the Condensed Consolidated Balance Sheets as of September 30, 2016, of which $34 million, $10 million and $1 million, respectively, were classified as held for sale. The Bancorp expects to receive approximately $72 million in annual savings from operating expenses upon completion of the Branch Consolidation and Sales Plan and the consolidation and/or sale of properties included in the September 13, 2016 announcement. For further information, refer to Note 7 of the Notes to Condensed Consolidated Financial Statements.

On September 29, 2016, the Bancorp closed on the sale of an office complex. The sale also included all of the Bancorp’s rights, title and interest as a landlord under existing leases in the complex. Under the terms of the transaction, the Bancorp received proceeds of approximately $31 million and entered into a lease agreement whereby the Bancorp leased-back approximately 25% of the office complex. In conjunction with the transaction, which qualified as a sale-leaseback under U.S. GAAP, the Bancorp retired assets with a net book value of approximately $10 million, recognized a deferred gain of $10 million, which will be amortized as a reduction of rent expense over the 15 year lease term, and recorded a gain on the transaction of $11 million which was recorded in other noninterest income in the Condensed Consolidated Statements of Income.

Vantiv, Inc. TRA Transactions

On July 27, 2016, the Bancorp entered into an agreement with Vantiv, Inc. under which a portion of its TRAs with Vantiv, Inc. was terminated and settled in full for consideration of a cash payment in the amount of $116 million from Vantiv, Inc. Under the agreement, the Bancorp terminated and settled certain TRA cash flows it expected to receive in the years 2019 to 2035, totaling an estimated $331 million. The Bancorp recognized a pre-tax gain of $116 million in other noninterest income in the Condensed Consolidated Statements of Income from this settlement in the third quarter of 2016.

Additionally, the agreement provides that Vantiv, Inc. may be obligated to pay up to a total of approximately $171 million to the Bancorp to terminate and settle certain remaining TRA cash flows, totaling an estimated $394 million, upon the exercise of certain call options by Vantiv, Inc. or certain put options by the Bancorp. If the associated call options or put options are exercised, 10% of the obligations would be settled with respect to each quarter in 2017 and 15% of the obligations would be settled with respect to each quarter in 2018. The Bancorp recognized a pre-tax gain of $164 million in other noninterest income in the Condensed Consolidated Statements of Income in the third quarter of 2016 associated with these options.

This agreement does not impact the TRA payments expected to be recognized in the fourth quarter of 2016 and the fourth quarter of 2017 which are expected to be received in the first quarter of 2017 and the first quarter of 2018, respectively.

Accelerated Share Repurchase Transactions

During the nine months ended September 30, 2016, 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 15 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, 2016, 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

December 14, 2015	$	215		9,248,482		1,782,477		11,030,959		January 14, 2016
March 4, 2016		240		12,623,762		1,868,379		14,492,141		April 11, 2016
August 5, 2016		240		10,979,548		1,099,205		12,078,753		November 7, 2016

Open Market Share Repurchase Transactions

Between June 17, 2016 and June 20, 2016, the Bancorp repurchased 1,436,100 shares, or approximately $26 million, of its outstanding common stock through open market repurchase transactions.

Senior and Subordinated Notes Offerings

On March 15, 2016, the Bank issued and sold $1.5 billion in aggregate principal amount of unsecured bank notes. The bank notes consisted of $750 million of 2.30% senior fixed-rate notes, with a maturity of three years, due on March 15, 2019; and $750 million of 3.85% subordinated fixed-rate notes, with a maturity of ten years, due on March 15, 2026. 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.

On June 14, 2016, the Bank issued and sold $1.3 billion of 2.25% unsecured senior fixed-rate notes, with a maturity of five years, due on June 14, 2021. 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.

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

On September 2, 2016, the Bank submitted a redemption notice to the Issuing and Paying Agent to redeem $1.0 billion of 1.15% senior fixed-rate notes and $750 million of senior floating-rate notes at three-month LIBOR plus 51 bps. Pursuant to the terms and conditions of the notes, the Bank redeemed the notes on October 19, 2016, which was 30 days prior to their scheduled maturity on November 18, 2016.

On September 27, 2016, the Bank issued and sold $1.0 billion in aggregate principal amount of unsecured senior bank notes, with a maturity of three years, due on September 27, 2019. The bank notes consisted of $750 million of 1.625% senior fixed-rate notes and $250 million of senior floating-rate notes at three-month LIBOR plus 59 bps. The Bancorp entered into interest rate swaps to convert the fixed-rate notes to a floating-rate, which resulted in an effective interest rate of three-month LIBOR plus 53 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.

Legislative and Regulatory Developments

During the first quarter of 2016, the FDIC issued a final rule implementing a 4.5 bps surcharge on the quarterly FDIC insurance assessments of insured depository institutions with total consolidated assets of $10 billion or more. The surcharge will take effect at the same time the FDIC is required to lower the regular FDIC insurance assessments by approximately 2 bps under a rule adopted by the FDIC in 2011, which is triggered by the DIF reserve ratio reaching 1.15% of insured deposits. In August of 2016, the FDIC announced the DIF reserve ratio reached 1.17% of insured deposits as of June 30, 2016. Therefore, on July 1, 2016, the Bancorp became subject to the FDIC surcharge and reduced regular FDIC insurance assessments. The surcharges will continue through the quarter that the DIF reserve ratio first reaches or exceeds 1.35% of insured deposits, but not later than December 31, 2018. If the reserve ratio does not reach 1.35% by December 31, 2018, the FDIC will impose a shortfall assessment on March 31, 2019, on insured depository institutions with total consolidated assets of $10 billion or more. The FDIC projects the surcharges will be sufficient to raise the DIF reserve ratio to 1.35% in 2018. Fifth Third estimates the announced changes to the FDIC assessments will result in a net increase in its FDIC insurance expense of approximately $23 million on an annual basis.

The FRB launched the 2016 stress testing program and CCAR on January 28, 2016, with submissions of stress test results and capital plans to the FRB due on April 5, 2016, which the Bancorp submitted as required.

On June 29, 2016, the Bancorp announced the results of its capital plan submitted to the FRB as part of the 2016 CCAR. For BHCs that proposed capital distributions in their plans, the FRB either objected to the plan or provided a non-objection whereby the FRB permitted the proposed capital distributions. The FRB indicated to the Bancorp that it did not object to the following capital actions for the period beginning July 1, 2016 and ending June 30, 2017:

•

The potential increase in the quarterly common stock dividend to $0.14 in the fourth quarter of 2016;

•

The potential repurchase of common shares in an amount up to $660 million, which includes $84 million in repurchases related to share issuances under employee benefit plans;

•

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

•

The additional ability to repurchase shares in the amount of any realized after-tax gains from the termination and settlement of any portion of the TRA with Vantiv, Inc., if executed.

For more information on the 2016 CCAR results refer to the Capital Management subsection of the Risk 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. Fifth Third’s deposit advance product is 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 in Table 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. On June 2, 2016, the CFPB issued proposed rules to create additional consumer protections for certain consumer credit products such as payday loans, vehicle title loans and certain high-cost installment loans. Fifth Third is continuing to offer the service to existing deposit advance product customers and will address how best to meet customers’ need for a small dollar, short-term credit product when the rules are finalized.

In December 2013, the U.S. banking agencies issued final rules to implement section 619 of the DFA, known as the Volcker Rule, which places limitations on banking organizations’ ability to (i) engage in short-term proprietary trading and (ii) own, sponsor or have certain relationships with certain private equity funds, hedge funds, and other private funds (collectively “covered funds”). On July 7, 2016, the FRB announced a third extension of the conformance period, providing the industry until July 21, 2017, to conform investments in and relationships with covered funds that were in place prior to December 31, 2013. The extension does not apply to investments in and relationships with a covered fund made after December 31, 2013 or to short-term proprietary trading activities. The Volcker Rule prohibits banking organizations 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 banking organizations from owning, sponsoring or having certain relationships with covered funds, as well as holding certain collateralized loan obligations that are deemed to contain ownership interests. The Volcker Rule provides several exclusions and exemptions for certain activities, such as underwriting, market making, hedging, trading in certain government obligations and organizing and offering a private fund.

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

Fifth Third does not sponsor any private funds that, under the Volcker Rule, it is prohibited from sponsoring. At September 30, 2016, the Bancorp had approximately $147 million in interests and approximately $30 million in binding commitments to invest in private equity funds that are affected by the Volcker Rule. The Bancorp recognized $9 million of OTTI primarily associated with certain nonconforming investments affected by the Volcker Rule during the third quarter of 2016. Refer to Note 22 of the Notes to Condensed Consolidated Financial Statements for further information.

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 became effective January 1, 2016 and requires BHCs to calculate its LCR on a monthly basis. Refer to the Liquidity Risk Management subsection of the Risk Management section of MD&A for further discussion on these ratios.

The FRB conducted a regularly scheduled examination covering 2011 through 2013 to determine the Bank’s compliance with the CRA. This CRA examination resulted in a rating of “Needs to Improve.” The Bank believes that the “Needs to Improve” rating reflects legacy issues that have been remediated during the intervening three years. While the Bank’s CRA rating is “Needs to Improve” the Bancorp and the Bank face limitations and conditions on certain activities, including the commencement of new activities and merger with or acquisitions of other financial institutions. The Bank’s next CRA examination is expected to commence during the fourth quarter of 2016.

Earnings Summary

The Bancorp’s net income available to common shareholders for the third quarter of 2016 was $501 million, or $0.65 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 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 nine months ended September 30, 2016 was $1.1 billion, or $1.45 per diluted share, which was net of $52 million in preferred stock dividends. For the nine months ended September 30, 2015, the Bancorp’s net income available to common shareholders was $1.0 billion, or $1.22 per diluted share, which was net of $52 million in preferred stock dividends. Pre-provision net revenue was $774 million and $1.8 billion for the three and nine months ended September 30, 2016, respectively, compared to $671 million and $1.7 billion for the same periods in 2015. Pre-provision net revenue is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

Noninterest income increased $127 million for the three months ended September 30, 2016 compared to the same period in the prior year primarily due to an increase in other noninterest income. Noninterest income increased $175 million for the nine months ended September 30, 2016 compared to the same period in the prior year primarily due to increases in other noninterest income and corporate banking revenue partially offset by a decrease in mortgage banking net revenue. Other noninterest income increased $123 million and $174 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The increase for both periods included the impact of a $280 million gain, which was recognized during the third quarter of 2016, from the termination and settlement of gross cash flows from existing Vantiv, Inc. TRAs and the expected obligation to terminate and settle the remaining Vantiv, Inc. TRA cash flows upon the exercise of put or call options. The increase for both periods also included the impact of impairment charges on bank premises and equipment of $28 million and $31 million that were recognized during the three and nine months ended September 30, 2016, respectively, compared to impairment charges of $2 million and $104 million which were recognized during the three and nine months ended September 30, 2015, respectively.

The increase in other noninterest income for both periods was partially offset by a negative valuation adjustment on the stock warrant associated with Vantiv Holding, LLC of $2 million for the three months ended September 30, 2016 compared to a positive valuation adjustment of $130 million for the three months ended September 30, 2015. The nine months ended September 30, 2016 included positive valuation adjustments on the stock warrant of $64 million compared to $215 million for the nine months ended September 30, 2015. Additionally, the increase in other noninterest income for the three and nine months ended September 30, 2016 was partially offset by the recognition of $9 million of OTTI on certain private equity investments in the third quarter of 2016. Refer to Note 22 of the Notes to Condensed Consolidated Financial Statements for further information.

The nine months ended September 30, 2016 also included the impact of gains of $19 million on the sale of certain branches and the $11 million gain on the sale of the agent bankcard loan portfolio during the second quarter of 2016. Additionally, the increase in other noninterest income for the nine months ended September 30, 2016 was partially offset by $61 million of negative valuation adjustments related to the Visa total return swap compared to $27 million for the nine months ended September 30, 2015 as well as by the impact of a $37 million gain on the sale of residential mortgage loans classified as TDRs during the first quarter of 2015.

Mortgage banking net revenue decreased $55 million for the nine months ended September 30, 2016 compared to the same period in the prior year primarily due to a decrease in net mortgage servicing revenue partially offset by an increase in origination fees and gains on loan sales. Corporate banking revenue increased $50 million for the nine months ended September 30, 2016 compared to the same period in the prior year primarily driven by increases in lease remarketing fees and syndication fees partially offset by decreases in foreign exchange fees and business lending fees.

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

Noninterest expense increased $30 million and $128 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year primarily due to increases in personnel costs (salaries, wages and incentives plus employee benefits) technology and communications and other noninterest expense partially offset by a decrease in card and processing expense. Personnel costs increased $19 million and $85 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The increase for both periods was driven by increased base compensation, primarily due to personnel additions in risk and compliance and information technology, and increased variable compensation. The increase for the nine months ended September 30, 2016 was also driven by higher retirement and severance costs related to the Bancorp’s voluntary early retirement program. Technology and communications expense increased $6 million and $13 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year driven by increased investment in information technology associated with regulatory and compliance initiatives, system maintenance and other growth initiatives.

Card and processing expense decreased $10 million and $13 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year primarily due to the impact of renegotiated service contracts.

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 $80 million and $289 million for the three and nine months ended September 30, 2016, respectively, compared to $156 million and $305 million for the same periods in 2015. Net losses charged-off as a percent of average portfolio loans and leases decreased to 0.45% during the three months ended September 30, 2016 compared to 0.80% during the same period in the prior year and decreased to 0.41% for the nine months ended September 30, 2016 compared to 0.53% for the same period in the prior year. At September 30, 2016, nonperforming portfolio assets as a percent of portfolio loans and leases and OREO increased to 0.75% compared to 0.70% at December 31, 2015. For further discussion on credit quality refer to the Credit Risk Management subsection of the Risk Management section of MD&A.

Capital Summary

The Bancorp’s capital ratios exceed the “well-capitalized” guidelines as defined by the PCA requirements of the U.S. banking agencies. As of September 30, 2016, as calculated under the Basel III transition provisions, the CET1 capital ratio was 10.17%, the Tier I risk-based capital ratio was 11.27%, the Total risk-based capital ratio was 14.88% and the Tier I leverage ratio was 9.80%.

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 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 following table reconciles the non-GAAP financial measures of net interest income on an FTE basis, net interest margin and the efficiency ratio to U.S. GAAP:

TABLE 3: Non-GAAP Financial Measures - Net Interest Income on an FTE Basis, Net Interest Margin and Efficiency Ratio



	For the three months ended September 30,					For the nine months ended September 30,
($ in millions)	2016			2015		2016		2015

Net interest income (U.S. GAAP)	$	907			901		2,712		2,636
Add: FTE adjustment		6			5		18		14

Net interest income on an FTE basis (1)	$	913			906		2,730		2,650
Net interest income on an FTE basis (annualized) (2)		3,632			3,594		3,640		3,533

Noninterest income (3)	$	840			713		2,075		1,900
Noninterest expense (4)		973			943		2,942		2,814
Average interest-earning assets (5)		126,092			124,431		126,197		122,824

Ratios:
Net interest margin (2) / (5)		2.88	%		2.89		2.88		2.88
Efficiency ratio (4) / (1) + (3)		55.5			58.2		61.2		61.8

The following table reconciles the non-GAAP financial measure of income before income taxes on an FTE basis to U.S. GAAP:

TABLE 4: Non-GAAP Financial Measure - Income Before Income Taxes on an FTE Basis



	For the three months ended September 30,				For the nine months ended September 30,
($ in millions)	2016		2015		2016		2015

Income before income taxes (U.S. GAAP)	$	694		515		1,556		1,417
Add: FTE adjustment		6		5		18		14

Income before income taxes on an FTE basis	$	700		520		1,574		1,431

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 5: Non-GAAP Financial Measure - Pre-Provision Net Revenue



	For the three months ended September 30,						For the nine months ended September 30,
($ in millions)	2016			2015			2016			2015

Net interest income (U.S. GAAP)	$	907			901			2,712			2,636
Add: Noninterest income		840			713			2,075			1,900
Less: Noninterest expense		(973	)		(943	)		(2,942	)		(2,814)

Pre-provision net revenue	$	774			671			1,845			1,722

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. This measure is useful for evaluating the performance of a business as it calculates the return available to common shareholders without the impact of intangible assets and their related amortization.

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

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

TABLE 6: Non-GAAP Financial Measure - Return on Average Tangible Common Equity



	For the three months ended September 30,						For the nine months ended September 30,
($ in millions)	2016			2015			2016			2015

Net income available to common shareholders (U.S. GAAP)	$	501			366			1,123			1,004
Add: Intangible amortization, net of tax		-			-			1			1

Tangible net income available to common shareholders	$	501			366			1,124			1,005
Tangible net income available to common shareholders (annualized) (1)		1,993			1,452			1,499			1,340

Average Bancorp shareholders’ equity (U.S. GAAP)	$	16,883			15,815			16,615			15,826
Less: Average preferred stock		(1,331	)		(1,331	)		(1,331	)		(1,331)
Average goodwill		(2,416	)		(2,416	)		(2,416	)		(2,416)
Average intangible assets and other servicing rights		(10	)		(14	)		(10	)		(15)

Average tangible common equity (2)	$	13,126			12,054			12,858			12,064

Return on average tangible common equity (1) / (2)		15.2	%		12.0			11.7			11.1

The Bancorp considers various measures when evaluating capital utilization and adequacy, including the tangible equity ratio, tangible common equity ratio and tangible book value per share, in addition to capital ratios defined by the U.S. banking agencies. These calculations are intended to complement the capital ratios defined by the U.S. banking agencies 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 which defined various regulatory capital ratios including the CET1 ratio. 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. The Bancorp considers the fully phased-in CET1 ratio a non-GAAP measure since it is not the CET1 ratio in effect for the periods presented. Since analysts and the U.S. banking agencies 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 7: Non-GAAP Financial Measures - Capital Ratios


As of ($ in millions)	September 30, 2016			December 31, 2015
Total Bancorp Shareholders’ Equity (U.S. GAAP)	$	16,776			15,839
Less: Preferred stock		(1,331)			(1,331)
Goodwill		(2,416)			(2,416)
Intangible assets and other servicing rights		(10)			(13)
Tangible common equity, including unrealized gains / losses (1)		13,019			12,079
Less: AOCI		(755)			(197)
Tangible common equity, excluding unrealized gains / losses (2)		12,264			11,882
Add: Preferred stock		1,331			1,331
Tangible equity (3)	$	13,595			13,213

Total Assets (U.S. GAAP)	$	143,279			141,048	^(f)
Less: Goodwill		(2,416)			(2,416)
Intangible assets and other servicing rights		(10)			(13)
AOCI, before tax		(1,162)			(303)
Tangible assets, excluding unrealized gains / losses (4)	$	139,691			138,316

Common shares outstanding (5)		756			785

Ratios:
Tangible equity as a percentage of tangible assets (3) / (4)^(d)		9.73	%		9.55
Tangible common equity as a percentage of tangible assets (2) / (4)^(d)		8.78			8.59
Tangible book value per share (1) / (5)		17.22			15.39

Basel III Final Rule - Transition to Fully Phased-In
CET1 capital (transitional)	$	12,299			11,917
Less: Adjustments to CET1 capital from transitional to fully phased-in^(a)		(4)			(8)
CET1 capital (fully phased-in) (6)		12,295			11,909
Risk-weighted assets (transitional)^(b)		120,954			121,290	^(e)
Add: Adjustments to risk-weighted assets from transitional to fully phased-in^(c)		929			1,178
Risk-weighted assets (fully phased-in) (7)	$	121,883			122,468	^(e)
CET1 capital ratio under Basel III Final Rule (fully phased-in) (6) / (7)		10.09	%		9.72	^(e)

(a)

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

(b)

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.

(c)

Primarily relates to higher risk weighting for MSRs.

(d)

Excludes unrealized gains and losses.

(e)

Balances not restated for the adoption of the amended guidance of ASU 2015-03 “Simplifying the Presentation of Debt Issuance Costs.” Refer to Note 3 of the Notes to Condensed Consolidated Financial Statements for further information.

(f)

Upon adoption of ASU 2015-03 on January 1, 2016, the December 31, 2015 Condensed Consolidated Balance Sheet was adjusted to reflect the reclassification of $34 of debt issuance costs from other assets to long-term debt. For further information, refer to Note 3 of the Notes to Condensed Consolidated Financial Statements for further information.

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 the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2015. No material changes were made to the valuation techniques or models during the nine months ended September 30, 2016.

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 loans and leases (including yield-related fees), securities and other short-term investments 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 8 and 9 present the components of net interest income, net interest margin and net interest rate spread for the three and nine months ended September 30, 2016 and 2015, 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 (non-GAAP) was $913 million and $2.7 billion for the three and nine months ended September 30, 2016, respectively, an increase of $7 million and $80 million compared to the same periods in the prior year. Net interest income was positively impacted by increases in average taxable securities of $1.5 billion and $3.5 billion for the three and nine months ended September 30, 2016, respectively, and increases in yields on average loans and leases of 10 bps and 5 bps for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. Additionally, net interest income was positively impacted by the decision of the Federal Open Market Committee in December 2015 to raise the target range of the federal funds rate 25 bps. The nine months ended September 30, 2016 also included the positive impact of an increase in average loans and leases of $1.5 billion compared to the same period in the prior year. These positive impacts were partially offset by increases in average long-term debt of $1.4 billion and $1.2 billion for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year coupled with decreases in the net interest rate spread to 2.66% and 2.68% during the three and nine months ended September 30, 2016, respectively, from 2.71% and 2.70% in the same periods in the prior year. The decreases in the net interest rate spread were due to a 12 bps and 9 bps increase in the rates paid on average interest-bearing liabilities for the three and nine months ended September 30, 2016, respectively, partially offset by a 7 bps increase in yields on average interest-earning assets for both the three and nine months ended September 30, 2016 compared to the same periods in the prior year.

Net interest margin on an FTE basis (non-GAAP) was 2.88% for both the three and nine months ended September 30, 2016 compared to 2.89% and 2.88% for the three and nine months ended September 30, 2015, respectively. The decrease from the three months ended September 30, 2015 was driven primarily by the aforementioned decrease in net interest rate spread coupled with an increase of $1.7 billion in average interest-earning assets partially offset by an increase in average free funding balances. The nine months ended September 30, 2016 was positively impacted by an increase in average free funding balances compared to the same period in the prior year offset by an increase of $3.4 billion in average interest-earning assets as well as the aforementioned decrease in net interest rate spread. The increase in average free funding balances for both periods was driven by an increase in average demand deposits of $687 million and $881 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year as well as an increase in average shareholders’ equity of $1.1 billion and $784 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year.

Interest income on an FTE basis from loans and leases (non-GAAP) increased $22 million and $78 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The increase for the three months ended September 30, 2016 was driven by an increase in yields on average loans and leases of 10 bps compared to the same period in the prior year primarily due to an increase in yields on average commercial and industrial loans. The increase for the nine months ended September 30, 2016 was primarily due to an increase in average loans and leases coupled with an increase in yields on average loans and leases. Average loans and leases increased $1.5 billion for the nine months ended September 30, 2016 compared to the same period in the prior year driven primarily by increases in average residential mortgage loans, average commercial construction loans and average commercial and industrial loans partially offset by a decrease in average automobile loans. Yields on average loans and leases increased 5 bps for the nine months ended September 30, 2016 compared to the same period in the prior year primarily driven by an increase in yields on average commercial and industrial 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 $10 million and $69 million for the three and nine months ended September 30, 2016, 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 increased $7 million for both the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. These increases were primarily due to increases in the cost of average interest-bearing core deposits to 26 bps for both the three and nine months ended September 30, 2016 from 22 bps and 24 bps for the three and nine months ended September 30, 2015, respectively. The increase in the cost of average interest-bearing core deposits for both periods was primarily due to increases in the cost of average interest checking deposits. The increase for the three months ended September 30, 2016 compared to the same period in the prior year was also due to an increase in the cost of average money market deposits. Refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s deposits.

Interest expense on average wholesale funding increased $18 million and $60 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The increases for the three and nine months ended September 30, 2016 were primarily due to increases of 24 bps and 25 bps, respectively, in the rates paid on average long-term debt coupled with the aforementioned increases in average long-term debt.

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

Refer to the Borrowings subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s borrowings. During both the three and nine months ended September 30, 2016, average wholesale funding represented 26% of average interest-bearing liabilities compared to 25% and 23% during the three and nine months ended September 30, 2015, respectively. For more information on the Bancorp’s interest rate risk management, including estimated earnings sensitivity to changes in market interest rates, refer to the Market Risk Management section of MD&A.

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


For the three months ended	September 30, 2016								September 30, 2015								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	$	43,125			356		3.28	%	$	43,162			339		3.11	%	$	(2)		19		17
Commercial mortgage loans		6,891			57		3.31			7,038			56		3.17			(1)		2		1
Commercial construction loans		3,848			33		3.43			2,966			23		3.13			8		2		10
Commercial leases		3,963			26		2.64			3,847			27		2.72			-		(1)		(1	)
Total commercial loans and leases		57,827			472		3.25			57,013			445		3.09			5		22		27
Residential mortgage loans		15,346			136		3.51			13,976			128		3.63			12		(4)		8
Home equity		7,918			75		3.76			8,521			78		3.61			(6)		3		(3	)
Automobile loans		10,508			72		2.71			11,881			79		2.62			(10)		3		(7	)
Credit card		2,165			56		10.34			2,277			60		10.38			(4)		-		(4	)
Other consumer loans and leases		653			11		6.90			661			10		6.81			1		-		1
Total consumer loans and leases		36,590			350		3.80			37,316			355		3.78			(7)		2		(5	)
Total loans and leases	$	94,417			822		3.46	%	$	94,329			800		3.36	%	$	(2)		24		22
Securities:
Taxable		29,772			238		3.18			28,251			229		3.23			12		(3)		9
Exempt from income taxes^(b)		76			1		4.91			52			1		5.20			-		-		-
Other short-term investments		1,827			2		0.44			1,799			1		0.23			-		1		1
Total interest-earning assets	$	126,092			1,063		3.36	%	$	124,431			1,031		3.29	%	$	10		22		32
Cash and due from banks		2,289								2,503
Other assets		15,644								15,064	^(d)
Allowance for loan and lease losses		(1,299	)							(1,292	)
Total assets	$	142,726							$	140,706	^(d)
Liabilities and Equity:
Interest-bearing liabilities:
Interest checking deposits	$	24,475			14		0.23	%	$	25,590			11		0.18	%	$	-		3		3
Savings deposits		14,232			2		0.04			14,868			2		0.05			-		-		-
Money market deposits		19,706			13		0.27			18,253			10		0.21			-		3		3
Foreign office deposits		524			-		0.17			718			-		0.14			-		-		-
Other time deposits		4,020			13		1.24			4,057			12		1.19			1		-		1
Total interest-bearing core deposits		62,957			42		0.26			63,486			35		0.22			1		6		7
Certificates $100,000 and over		2,768			8		1.28			2,924			9		1.16			(2)		1		(1	)
Other deposits		749			1		0.41			222			-		0.16			1		-		1
Federal funds purchased		446			-		0.40			1,978			-		0.14			(1)		1		-
Other short-term borrowings		2,171			2		0.30			1,897			1		0.13			-		1		1
Long-term debt		16,102			97		2.40			14,664	^(d)		80		2.16			8		9		17
Total interest-bearing liabilities	$	85,193			150		0.70	%	$	85,171	^(d)		125		0.58	%	$	7		18		25
Demand deposits		35,918								35,231
Other liabilities		4,704								4,458
Total liabilities	$	125,815							$	124,860	^(d)
Total equity	$	16,911							$	15,846
Total liabilities and equity	$	142,726							$	140,706	^(d)
Net interest income (FTE)^(c)				$	913							$	906				$	3		4		7
Net interest margin (FTE)^(c)							2.88	%							2.89	%
Net interest rate spread (FTE)							2.66								2.71
Interest-bearing liabilities to interest-earning assets							67.56								68.45

(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 $6 and $5 for the three months ended September 30, 2016 and 2015, respectively.

(c)

Net interest income (FTE) and net interest margin (FTE) are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

(d)

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


TABLE 9: Condensed Average Balance Sheets and Analysis of Net Interest Income on an FTE Basis
For the nine months ended	September 30, 2016								September 30, 2015								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	$	43,376			1,057		3.25	%	$	42,399			995		3.14	%	$	25		37		62
Commercial mortgage loans		6,878			169		3.29			7,144			172		3.22			(7)		4		(3	)
Commercial construction loans		3,567			91		3.39			2,574			61		3.17			25		5		30
Commercial leases		3,914			79		2.71			3,780			80		2.82			2		(3)		(1	)
Total commercial loans and leases		57,735			1,396		3.23			55,897			1,308		3.13			45		43		88
Residential mortgage loans		14,866			397		3.57			13,624			378		3.71			34		(15)		19
Home equity		8,072			229		3.79			8,658			236		3.64			(16)		9		(7	)
Automobile loans		10,892			219		2.68			11,905			236		2.65			(20)		3		(17	)
Credit card		2,213			174		10.48			2,298			177		10.31			(6)		3		(3	)
Other consumer loans and leases		656			32		6.51			537			34		8.45			7		(9)		(2	)
Total consumer loans and leases		36,699			1,051		3.82			37,022			1,061		3.83			(1)		(9)		(10	)
Total loans and leases	$	94,434			2,447		3.46	%	$	92,919			2,369		3.41	%	$	44		34		78
Securities:
Taxable		29,798			705		3.16			26,251			635		3.24			85		(15)		70
Exempt from income taxes^(b)		80			2		4.43			57			2		5.08			-		-		-
Other short-term investments		1,885			6		0.43			3,597			7		0.25			(4)		3		(1	)
Total interest-earning assets	$	126,197			3,160		3.35	%	$	122,824			3,013		3.28	%	$	125		22		147
Cash and due from banks		2,284								2,655
Other assets		15,218								15,264	^(d)
Allowance for loan and lease losses		(1,289	)							(1,304	)
Total assets	$	142,410							$	139,439	^(d)
Liabilities and Equity:
Interest-bearing liabilities:
Interest checking deposits	$	24,974			42		0.23	%	$	26,452			38		0.19	%	$	(3)		7		4
Savings deposits		14,469			5		0.05			15,065			7		0.06			(1)		(1)		(2	)
Money market deposits		19,203			37		0.26			17,942			34		0.25			2		1		3
Foreign office deposits		497			1		0.16			844			1		0.16			-		-		-
Other time deposits		4,033			38		1.23			4,051			36		1.20			1		1		2
Total interest-bearing core deposits		63,176			123		0.26			64,354			116		0.24			(1)		8		7
Certificates $100,000 and over		2,801			27		1.28			2,722			24		1.19			1		2		3
Other deposits		407			1		0.41			75			-		0.16			1		-		1
Federal funds purchased		582			2		0.38			832			-		0.13			1		1		2
Other short-term borrowings		3,160			8		0.36			1,736			2		0.12			1		5		6
Long-term debt		15,468			269		2.33			14,273	^(d)		221		2.08			20		28		48
Total interest-bearing liabilities	$	85,594			430		0.67	%	$	83,992	^(d)		363		0.58	%	$	23		44		67
Demand deposits		35,678								34,797
Other liabilities		4,492								4,788
Total liabilities	$	125,764							$	123,577	^(d)
Total equity	$	16,646							$	15,862
Total liabilities and equity	$	142,410							$	139,439	^(d)
Net interest income (FTE)^(c)				$	2,730							$	2,650				$	102		(22)		80
Net interest margin (FTE)^(c)							2.88	%							2.88	%
Net interest rate spread (FTE)							2.68								2.70
Interest-bearing liabilities to interest-earning assets							67.83								68.38

(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 $18 and $14 for the nine months ended September 30, 2016 and 2015, respectively.

(c)

Net interest income (FTE) and net interest margin (FTE) are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

(d)

Provision for Loan and Lease Losses

The Bancorp provides as an expense an amount for probable loan and lease losses within the loan and lease portfolio that is based on factors previously discussed in the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2015. 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 are referred to as charge-offs. Net charge-offs include current period charge-offs less recoveries on previously charged-off loans and leases.

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

The provision for loan and lease losses was $80 million and $289 million for the three and nine months ended September 30, 2016, respectively, compared to $156 million and $305 million during the same periods in the prior year. The decrease in provision expense for both periods was primarily due to the impact of the restructuring of a student loan backed commercial credit originated in 2007 during the third quarter of 2015 partially offset by prolonged softness in commodity prices, slow global economic growth and appreciation of the U.S. dollar. The ALLL was $1.3 billion at both September 30, 2016 and December 31, 2015. At both September 30, 2016 and December 31, 2015, the ALLL as a percent of portfolio loans and leases was 1.37%.

Refer to the Credit Risk Management subsection of the 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 $127 million and $175 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year.

The following table presents the components of noninterest income:

TABLE 10: Components of Noninterest Income


		For the three months ended September 30,							For the nine months ended September 30,
($ in millions)		2016		2015		% Change			2016		2015		% Change
Service charges on deposits	$		143		145		(1)	$		417		419		-
Corporate banking revenue			111		104		7			330		280		18
Wealth and asset management revenue			101		103		(2)			304		315		(3)
Card and processing revenue			79		77		3			240		225		7
Mortgage banking net revenue			66		71		(7)			219		274		(20)
Other noninterest income			336		213		58			552		378		46
Securities gains, net			4		-		100			13		9		44
Total noninterest income	$		840		713		18	$		2,075		1,900		9

Service charges on deposits

Service charges on deposits decreased $2 million for both the three and nine months ended September 30, 2016 compared to the same periods in the prior year. The decrease for the three and nine months ended September 30, 2016 compared to the same periods in the prior year was due to a $3 million and $8 million, respectively, decrease in consumer deposit fees driven by a decrease in consumer checking fees partially offset by a $1 million and $6 million, respectively, increase in commercial deposit fees driven by new customer acquisition.

Corporate banking revenue

Corporate banking revenue increased $7 million and $50 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The increase for both the three and nine months ended September 30, 2016 compared to the same periods in the prior year was primarily driven by increases in lease remarketing fees and syndication fees. The increase for the nine months ended September 30, 2016 was partially offset by decreases in foreign exchange fees and letter of credit fees. The increase in lease remarketing fees of $5 million and $35 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year included an $11 million gain on certain commercial lease terminations partially offset by $6 million of impairment charges related to certain operating lease equipment that were recognized during the third quarter of 2016. The increase in lease remarketing fees for the nine months ended September 30, 2016 compared to the same period in the prior year also included the impact of $36 million of impairment charges related to operating lease equipment that was recognized during the nine months ended September 30, 2015. Syndication fees increased $4 million and $31 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year as a result of increased activity in the market. Foreign exchange fees decreased $11 million for the nine months ended September 30, 2016 compared to the same period in the prior year primarily driven by lower volume coupled with lower volatility. Letter of credit fees decreased $7 million for the nine months ended September 30, 2016 compared to the same period in the prior year primarily driven by a decrease in outstanding VRDNs.

Wealth and asset management revenue

Wealth and asset management revenue (formerly investment advisory revenue) decreased $2 million and $11 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The decrease for both the three and nine months ended September 30, 2016 compared to the same periods in the prior year was primarily due to decreases of $4 million and $13 million, respectively, in transactional securities and brokerage fees driven by lower sales and trading volume. These decreases were partially offset by a $2 million increase in private client service fees and institutional fees for both the three and nine months ended September 30, 2016 compared to the same periods in the prior year. The Bancorp had approximately $314 billion and $297 billion in total assets under care at September 30, 2016 and 2015, respectively, and managed $27 billion and $25 billion in assets for individuals, corporations and not-for-profit organizations at September 30, 2016 and 2015, respectively.

Card and processing revenue

Card and processing revenue increased $2 million and $15 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year primarily driven by an increase in the number of actively used cards and customer spend volume.

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

Mortgage banking net revenue

Mortgage banking net revenue decreased $5 million and $55 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year.

The following table presents the components of mortgage banking net revenue:

TABLE 11: Components of Mortgage Banking Net Revenue



		For the three months ended September 30,					For the nine months ended September 30,
($ in millions)		2016			2015		2016			2015

Origination fees and gains on loan sales	$		61			46		156			134
Net mortgage servicing revenue:
Gross mortgage servicing fees			49			54		151			169
MSR amortization			(35	)		(37)		(96	)		(110)
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs			(9	)		8		8			81

Net mortgage servicing revenue			5			25		63			140

Mortgage banking net revenue	$		66			71		219			274

Origination fees and gains on loan sales increased $15 million and $22 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year driven by an increase in saleable residential mortgage loan originations. Residential mortgage loan originations increased to $2.9 billion and $7.3 billion during the three and nine months ended September 30, 2016, respectively, compared to $2.3 billion and $6.6 billion during the same periods in the prior year.

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 $20 million and $77 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The decreases for the three and nine months ended September 30, 2016 compared to the same periods in the prior year were driven by decreases of $17 million and $73 million in net valuation adjustments, respectively, as well as decreases of $5 million and $18 million in gross mortgage servicing fees, respectively. These decreases were partially offset by decreases in MSR amortization of $2 million and $14 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year.

The following table presents the components of net valuation adjustments on the MSR portfolio and the impact of the non-qualifying hedging strategy:

TABLE 12: Components of Net Valuation Adjustments on MSRs



		For the three months ended September 30,					For the nine months ended September 30,
($ in millions)		2016			2015		2016			2015

Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio	$		(16	)		85		133			119
(Provision for) recovery of MSR impairment			7			(77)		(125	)		(38)

Net valuation adjustments on MSR and free-standing derivatives purchased to economically hedge MSRs	$		(9	)		8		8			81

Mortgage rates increased during the three months ended September 30, 2016. Actual prepayment speeds also increased during the three months ended September 30, 2016, but were associated with the interest rate decline at the end of the second quarter of 2016 as there is a natural lag between interest rate movements and prepayments. The increase in mortgage rates caused modeled prepayment speeds to decrease, which led to a recovery of temporary impairment on servicing rights during the period. Mortgage rates decreased during the nine months ended September 30, 2016. Mortgage rates were also lower during both the three and nine months ended September 30, 2015 which caused actual prepayments on the servicing portfolio to increase. Lower mortgage rates caused modeled prepayment speeds to increase, which led to temporary impairment on servicing rights during the periods.

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 11 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 12 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, 2016 and 2015 were $70.2 billion and $74.5 billion, respectively, with $54.6 billion and $60.3 billion, respectively, of residential mortgage loans serviced for others.

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

Other noninterest income

The following table presents the components of other noninterest income:

TABLE 13: Components of Other Noninterest Income


		For the three months ended September 30,					For the nine months ended September 30,
($ in millions)		2016			2015		2016			2015
Income from the TRA associated with Vantiv, Inc.	$		280			-		280			-
Operating lease income			27			22		76			66
Valuation adjustments on the warrant associated with Vantiv Holding, LLC			(2	)		130		64			215
Equity method income from interest in Vantiv Holding, LLC			21			17		51			42
BOLI income			12			12		39			37
Cardholder fees			12			11		33			33
Gains on sale of branches			-			-		19			-
Consumer loan and lease fees			7			6		17			18
Banking center income			5			6		15			16
Insurance income			3			3		9			11
Net gains (losses) on loan sales			1			(1)		8			40
Private equity investment income			(5	)		12		5			21
Loss on swap associated with the sale of Visa, Inc. class B shares			(12	)		(8)		(61	)		(27)
Net losses on disposition and impairment of bank premises and equipment			(17	)		(1)		(14	)		(102)
Other, net			4			4		11			8
Total other noninterest income	$		336			213		552			378

Other noninterest income increased $123 million during the three months ended September 30, 2016 compared to the same period in the prior year primarily due to an increase in the income from the TRA associated with Vantiv, Inc. partially offset by decreases in positive valuation adjustments on the warrant associated with Vantiv Holding, LLC and private equity investment income as well as an increase in net losses on disposition and impairment of bank premises and equipment. Other noninterest income increased $174 million during the nine months ended September 30, 2016 compared to the same period in the prior year primarily due to increases in the income from the TRA associated with Vantiv, Inc. and gains on sale of branches as well as a decrease in the net losses on disposition and impairment of bank premises and equipment. These increases were partially offset by decreases in positive valuation adjustments on the warrant associated with Vantiv Holding, LLC, net gains on loan sales and private equity investment income as well as an increase in the loss on the swap associated with the sale of Visa, Inc. class B shares.

The increase for both periods included the impact of a $280 million gain, which was recognized during the third quarter of 2016, from the termination and settlement of gross cash flows from existing Vantiv, Inc. TRAs and the expected obligation to terminate and settle the remaining Vantiv, Inc. TRA cash flows upon the exercise of put or call options. The increase for the three and nine months ended September 30, 2016 compared to the same periods in the prior year also included the impact of impairment charges of $28 million and $31 million, respectively, included in net losses on disposition and impairment of bank premises and equipment, compared to impairment charges of $2 million and $104 million which were recognized during the three and nine months ended September 30, 2015, respectively. The impairment charges for both the three and nine months ended September 30, 2016 were partially offset by a gain of $11 million on the sale-leaseback of an office complex during the third quarter of 2016. For further information, refer to Note 7 of the Notes to Condensed Consolidated Financial Statements.

Gains on sale of branches of $19 million for the nine months ended September 30, 2016 included an $11 million gain on the sale of the Bancorp’s retail operations in the Pittsburgh MSA to First National Bank of Pennsylvania during the second quarter of 2016 and an $8 million gain on the sale of the Bancorp’s retail operations in the St. Louis MSA to Great Southern Bank during the first quarter of 2016.

The Bancorp recognized a negative valuation adjustment on the stock warrant associated with Vantiv Holding, LLC of $2 million and a positive valuation adjustment of $130 million for the three months ended September 30, 2016 and 2015, respectively. The nine months ended September 30, 2016 and 2015 included positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC of $64 million and $215 million, respectively. The fair value of the stock warrant is calculated using the Black-Scholes option-pricing model, which utilizes several key inputs (Vantiv, Inc. stock price, strike price of the warrant and several unobservable inputs). The negative valuation adjustment for the three months ended September 30, 2016 was primarily due to a decrease of 1% in Vantiv, Inc.’s share price from June 30, 2016 to September 30, 2016. The positive valuation adjustment for the three months ended September 30, 2015 was primarily due to an increase of 18% in Vantiv, Inc.’s share price from June 30, 2015 to September 30, 2015. The positive valuation adjustments for the nine months ended September 30, 2016 and 2015 were primarily due to increases of 19% and 32%, respectively, in Vantiv, Inc.’s share price from December 31, 2015 to September 30, 2016 and from December 31, 2014 to September 30, 2015. The changes in the valuation adjustments for the three and nine months ended September 30, 2016 compared to the same periods in the prior year included the impact of the sale and exercise of a portion of the warrant during the fourth quarter of 2015. For additional information on the valuation of the warrant, refer to Note 22 of the Notes to Condensed Consolidated Financial Statements.

Private equity investment income decreased $17 million and $16 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The decrease for both periods was primarily driven by the recognition of $9 million of OTTI on certain private equity investments in the third quarter of 2016. Refer to Note 22 of the Notes to Condensed Consolidated Financial Statements for further information.

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

Net gains on loan sales decreased $32 million for the nine months ended September 30, 2016 compared to the same period in the prior year as the prior period included the impact of a $37 million gain on the sale of residential mortgage loans classified as TDRs during the first quarter of 2015 which was partially offset by the $11 million gain on the sale of the agent bankcard loan portfolio during the second quarter of 2016.

During the nine months ended September 30, 2016, the Bancorp recognized a $61 million negative valuation adjustment related to the Visa total return swap compared to $27 million during the nine months ended September 30, 2015. The adjustment for the nine months ended September 30, 2016 was primarily attributable to the decision of the U.S. Court of Appeals for the Second Circuit to vacate and reverse the district court’s approval of the settlement of an interchange antitrust class action litigation matter on June 30, 2016. For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B shares and the related litigation matters, refer to Note 16, Note 17 and Note 22 of the Notes to Condensed Consolidated Financial Statements.

Noninterest Expense

The following table presents the components of noninterest expense:

TABLE 14: Components of Noninterest Expense


		For the three months ended September 30,								For the nine months ended September 30,
($ in millions)		2016			2015		% Change			2016			2015		% Change
Salaries, wages and incentives	$		400			387		3	$		1,209			1,139		6
Employee benefits			78			72		8			263			248		6
Net occupancy expense			73			77		(5)			226			238		(5)
Technology and communications			62			56		11			178			165		8
Card and processing expense			30			40		(25)			101			114		(11)
Equipment expense			29			31		(6)			89			92		(3)
Other noninterest expense			301			280		8			876			818		7
Total noninterest expense	$		973			943		3	$		2,942			2,814		5
Efficiency ratio on an FTE basis^(a)			55.5	%		58.2					61.2	%		61.8

(a)

This is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

Personnel costs increased $19 million and $85 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The increase for both periods was driven by increased base compensation, primarily due to personnel additions in risk and compliance and information technology, and increased variable compensation. The increase for the nine months ended September 30, 2016 was also driven by higher retirement and severance costs related to the Bancorp’s voluntary early retirement program. Full-time equivalent employees totaled 18,072 at September 30, 2016 compared to 18,311 at September 30, 2015.

Technology and communications expense increased $6 million and $13 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year driven by increased investment in information technology associated with regulatory and compliance initiatives, system maintenance and other growth initiatives.

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

The following table presents the components of other noninterest expense:

TABLE 15: Components of Other Noninterest Expense



		For the three months ended September 30,				For the nine months ended September 30,
($ in millions)		2016		2015		2016		2015

Impairment on affordable housing investments	$		42		37		128		112
FDIC insurance and other taxes			33		28		95		72
Marketing			30		32		81		87
Loan and lease			30		30		81		90
Operating lease			22		18		64		54
Losses and adjustments			8		9		51		38
Professional service fees			14		21		43		49
Data processing			14		12		37		34
Postal and courier			12		11		35		34
Travel			11		13		34		40
Recruitment and education			10		9		28		24
Provision for the reserve for unfunded commitments			11		2		24		-
Donations			9		5		15		15
Insurance			4		4		11		13
Supplies			4		4		11		12
Other, net			47		45		138		144

Total other noninterest expense	$		301		280		876		818

Other noninterest expense increased $21 million for the three months ended September 30, 2016 compared to the same period in the prior year primarily due to increases in the provision for the reserve for unfunded commitments, impairment on affordable housing investments and FDIC insurance and other taxes. The provision for the reserve for unfunded commitments increased $9 million for the three months ended September 30, 2016 compared to the same period in the prior year primarily due to an increase in estimated loss rates related to unfunded commitments. Impairment on affordable housing investments increased $5 million for the three months ended September 30, 2016 compared to the same period in the prior year primarily due to incremental losses resulting from previous growth in the portfolio. FDIC insurance and other taxes increased $5 million for the three months ended September 30, 2016 compared to the three months ended September 30, 2015 primarily due to the implementation of the FDIC surcharge in the third quarter of 2016. For further information on the FDIC surcharge, refer to the Legislative and Regulatory Developments subsection of the Overview section of MD&A.

Other noninterest expense increased $58 million for the nine months ended September 30, 2016 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, losses and adjustments and operating lease expense partially offset by a decrease in loan and lease expense. The provision for the reserve for unfunded commitments increased $24 million for the nine months ended September 30, 2016 compared to the same period in the prior year primarily due to an increase in estimated loss rates related to unfunded commitments. FDIC insurance and other taxes increased $23 million for the nine months ended September 30, 2016 compared to the same period in the prior year primarily due to the implementation of the FDIC surcharge in the third quarter of 2016 as well as an increase in the FDIC insurance assessment base and a favorable settlement of a tax liability related to prior years during the first quarter of 2015. Impairment on affordable housing investments increased $16 million for the nine months ended September 30, 2016 compared to the same period in the prior year primarily due to incremental losses resulting from previous growth in the portfolio. Losses and adjustments increased $13 million for the nine months ended September 30, 2016 compared to the same period in the prior year primarily due to the impact of favorable legal settlements for the nine months ended September 30, 2015. Additionally, operating lease expense increased $10 million for the nine months ended September 30, 2016 compared to the same period in the prior year. The decrease in loan and lease expense of $9 million for the nine months ended September 30, 2016 compared to the same period in the prior year included lower loan closing and appraisal costs driven by a decline in automobile loan originations.

The Bancorp continues to focus on efficiency initiatives as part of its core emphasis on operating leverage and expense control. The efficiency ratio was 55.5% and 61.2% for the three and nine months ended September 30, 2016, respectively, compared to 58.2% and 61.8% for the three and nine months ended September 30, 2015, respectively. The efficiency ratio is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

Applicable Income Taxes

The following table presents the Bancorp’s income before income taxes, applicable income tax expense and effective tax rate:

TABLE 16: Applicable Income Taxes



		For the three months ended September 30,					For the nine months ended September 30,
($ in millions)		2016			2015		2016		2015

Income before income taxes	$		694			515		1,556		1,417
Applicable income tax expense			178			134		385		367
Effective tax rate			25.6	%		26.0		24.6		25.9

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.

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

The decrease in the effective tax rate for the nine months ended September 30, 2016 compared to the same period in the prior year was primarily related to gains on sales of certain leveraged leases that are exempt from federal taxation partially offset by Vantiv, Inc. related gains.

The Bancorp establishes 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 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 Bancorp’s stock price at September 30, 2016, the Bancorp believes it will recognize a $7 million non-cash charge to income tax expense over the next twelve months related to stock-based awards, primarily in the second quarter of 2017. 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 recognize a non-cash charge to income tax expense greater than or less than $7 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 its commercial loans and leases based upon primary purpose and consumer loans and leases based upon product or collateral. Table 17 summarizes end of period loans and leases, including loans held for sale and Table 18 summarizes average total loans and leases, including loans held for sale.

TABLE 17: Components of Loans and Leases (including loans held for sale)


		September 30, 2016				December 31, 2015
As of ($ in millions)		Carrying Value		% of Total		Carrying Value		% of Total
Commercial loans and leases:
Commercial and industrial loans	$		42,829		46	$	42,151		46
Commercial mortgage loans			6,860		7		6,991		7
Commercial construction loans			3,905		4		3,214		3
Commercial leases			3,995		4		3,854		4
Total commercial loans and leases			57,589		61		56,210		60
Consumer loans and leases:
Residential mortgage loans			15,597		17		14,424		15
Home equity			7,864		8		8,336		9
Automobile loans			10,349		11		11,497		12
Credit card			2,169		2		2,360		3
Other consumer loans and leases			643		1		658		1
Total consumer loans and leases			36,622		39		37,275		40
Total loans and leases	$		94,211		100	$	93,485		100
Total portfolio loans and leases (excluding loans held for sale)	$		93,151			$	92,582

Loans and leases, including loans held for sale, increased $726 million, or 1%, from December 31, 2015. The increase from December 31, 2015 was the result of a $1.4 billion, or 2%, increase in commercial loans and leases, partially offset by a $653 million, or 2%, decrease in consumer loans and leases.

Commercial loans and leases increased from December 31, 2015 primarily due to increases in commercial construction loans, commercial and industrial loans and commercial leases, partially offset by a decrease in commercial mortgage loans. Commercial construction loans increased $691 million, or 21%, from December 31, 2015 primarily as a result of an increase in new loan origination activity resulting from an increase in demand and targeted marketing efforts. Commercial and industrial loans increased $678 million, or 2%, from December 31, 2015 primarily as a result of increases in new loan origination activity and line utilization. Commercial leases increased $141 million, or 4%, from December 31, 2015 primarily as a result of an increase in syndication and participation origination activity. Commercial mortgage loans decreased $131 million, or 2%, from December 31, 2015 primarily due to a decline in new loan origination activity driven by increased competition and an increase in paydowns.

Consumer loans and leases decreased from December 31, 2015 primarily due to decreases in automobile loans, home equity and credit card, partially offset by an increase in residential mortgage loans. Automobile loans decreased $1.1 billion, or 10%, from December 31, 2015 and home equity decreased $472 million, or 6%, from December 31, 2015 as payoffs exceeded new loan production. Credit card decreased $191 million, or 8%, from December 31, 2015 primarily due to the sale of the agent bankcard loan portfolio during the second quarter of 2016 and seasonal trends from the paydown of year-end balances which were higher due to holiday spending. Residential mortgage loans increased $1.2 billion, or 8%, from December 31, 2015 primarily due to the continued retention of certain conforming ARMs and certain other fixed-rate loans originated during the nine months ended September 30, 2016.

TABLE 18: Components of Average Loans and Leases (including loans held for sale)


		September 30, 2016				September 30, 2015
For the three months ended ($ in millions)		Carrying Value		% of Total		Carrying Value		% of Total
Commercial loans and leases:
Commercial and industrial loans	$		43,125		46	$	43,162		46
Commercial mortgage loans			6,891		7		7,038		7
Commercial construction loans			3,848		4		2,966		3
Commercial leases			3,963		4		3,847		4
Total commercial loans and leases			57,827		61		57,013		60
Consumer loans and leases:
Residential mortgage loans			15,346		17		13,976		15
Home equity			7,918		8		8,521		9
Automobile loans			10,508		11		11,881		13
Credit card			2,165		2		2,277		2
Other consumer loans and leases			653		1		661		1
Total consumer loans and leases			36,590		39		37,316		40
Total average loans and leases	$		94,417		100	$	94,329		100
Total average portfolio loans and leases (excluding loans held for sale)	$		93,511			$	93,373

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

Average loans and leases, including loans held for sale, increased $88 million from September 30, 2015 as a result of an $814 million, or 1%, increase in average commercial loans and leases, partially offset by a $726 million, or 2%, decrease in average consumer loans and leases.

Average commercial loans and leases increased from September 30, 2015 primarily due to increases in average commercial construction loans and average commercial leases, partially offset by a decrease in average commercial mortgage loans. Average commercial construction loans increased $882 million, or 30%, from September 30, 2015 primarily as a result of an increase in new loan origination activity resulting from an increase in demand and targeted marketing efforts. Average commercial leases increased $116 million, or 3%, from September 30, 2015 primarily as a result of an increase in syndication and participation origination activity. Average commercial mortgage loans decreased $147 million, or 2%, from September 30, 2015 primarily due to a decline in new loan origination activity driven by increased competition and an increase in paydowns.

Average consumer loans and leases decreased from September 30, 2015 primarily due to decreases in average automobile loans, average home equity and average credit card, partially offset by an increase in average residential mortgage loans. Average automobile loans decreased $1.4 billion, or 12%, from September 30, 2015 and average home equity decreased $603 million, or 7%, from September 30, 2015 as payoffs exceeded new loan production. Average credit card decreased $112 million, or 5%, primarily due to the sale of the agent bankcard loan portfolio during the second quarter of 2016. Average residential mortgage loans increased $1.4 billion, or 10%, from September 30, 2015 primarily driven by the continued retention of certain conforming ARMs and certain other fixed-rate loans.

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 $31.2 billion and $29.5 billion at September 30, 2016 and December 31, 2015, respectively. The taxable investment securities portfolio had an effective duration of 4.0 years at September 30, 2016 compared to 5.1 years at December 31, 2015.

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, 2016, the Bancorp’s investment portfolio consisted primarily of AAA-rated available-for-sale securities. Securities classified as below investment grade were immaterial at both September 30, 2016 and December 31, 2015. 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 following table provides a summary of OTTI by security type:

TABLE 19: Components of OTTI by Security Type


		For the three months ended September 30,					For the nine months ended September 30,
($ in millions)		2016			2015		2016	2015
Available-for-sale and other debt securities	$		(2	)		-	(7)		(5)
Available-for-sale equity securities			-			-	(1)		-
Total OTTI^(a)	$		(2	)		-	(8)		(5)

(a)

Included in securities gains, net, in the Condensed Consolidated Statements of Income.

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

The following table summarizes the end of period components of investment securities:

TABLE 20: Components of Investment Securities


As of ($ in millions)	September 30, 2016		December 31, 2015
Available-for-sale and other securities (amortized cost basis):
U.S. Treasury and federal agencies securities	$	866		1,155
Obligations of states and political subdivisions securities		49		50
Mortgage-backed securities:
Agency residential mortgage-backed securities^(a)		14,671		14,811
Agency commercial mortgage-backed securities		8,449		7,795
Non-agency commercial mortgage-backed securities		2,683		2,801
Asset-backed securities and other debt securities		2,069		1,363
Equity securities^(b)		699		703
Total available-for-sale and other securities	$	29,486		28,678
Held-to-maturity securities (amortized cost basis):
Obligations of states and political subdivisions securities	$	55		68
Asset-backed securities and other debt securities		1		2
Total held-to-maturity securities	$	56		70
Trading securities (fair value):
U.S. Treasury and federal agencies securities	$	9		19
Obligations of states and political subdivisions securities		42		9
Agency residential mortgage-backed securities		13		6
Asset-backed securities and other debt securities		30		19
Equity securities		337		333
Total trading securities	$	431		386

(a)

Includes interest-only mortgage-backed securities of $33 and $50 as of September 30, 2016 and December 31, 2015, respectively, recorded at fair value with fair value changes recorded in securities gains, net in the Condensed Consolidated Statements of Income.

(b)

Equity securities consist of FHLB, FRB and DTCC restricted stock holdings of $248, $357 and $1, respectively, at September 30, 2016 and $248, $355, and $1, respectively, at December 31, 2015, that are carried at cost, and certain mutual fund and equity security holdings.

On an amortized cost basis, available-for-sale and other securities increased $808 million, or 3%, from December 31, 2015 primarily due to increases in asset-backed securities and other debt securities and agency commercial mortgage-backed securities partially offset by a decrease in U.S. Treasury and federal agencies securities.

On an amortized cost basis, available-for-sale and other securities were 23% of total interest-earning assets at both September 30, 2016 and December 31, 2015. The estimated weighted-average life of the debt securities in the available-for-sale and other securities portfolio was 5.6 years at September 30, 2016 compared to 6.4 years at December 31, 2015. In addition, at September 30, 2016, the available-for-sale and other securities portfolio had a weighted-average yield of 3.35%, compared to 3.19% at December 31, 2015.

Information presented in Table 21 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 securities 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 $1.2 billion at September 30, 2016 compared to $366 million at December 31, 2015. The increase from December 31, 2015 was primarily due to a decrease in interest rates during the nine months ended September 30, 2016. 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 21: Characteristics of Available-for-Sale and Other Securities


As of September 30, 2016 ($ 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	$	790		803		0.4		4.12 %
Average life 1 – 5 years		76		78		4.3		1.80
Total	$	866		881		0.8		3.92 %
Obligations of states and political subdivisions securities:^(a)
Average life of 1 year or less		15		15		-		0.11
Average life 5 – 10 years		34		37		6.5		3.93
Total	$	49		52		4.6		2.79 %
Agency residential mortgage-backed securities:
Average life of 1 year or less		53		53		0.8		4.44
Average life 1 – 5 years		10,053		10,383		3.8		3.65
Average life 5 – 10 years		4,361		4,538		6.0		3.39
Average life greater than 10 years		204		214		11.5		2.99
Total	$	14,671		15,188		4.5		3.56 %
Agency commercial mortgage-backed securities:
Average life 1 – 5 years		1,606		1,690		3.7		3.10
Average life 5 – 10 years		6,539		6,943		7.7		3.01
Average life greater than 10 years		304		317		12.0		2.99
Total	$	8,449		8,950		7.1		3.03 %
Non-agency commercial mortgage-backed securities:
Average life of 1 year or less		112		113		0.7		4.18
Average life 1 – 5 years		294		305		3.1		3.43
Average life 5 – 10 years		2,277		2,416		7.6		3.34
Total	$	2,683		2,834		6.8		3.39 %
Asset-backed securities and other debt securities:
Average life of 1 year or less		203		207		0.2		2.58
Average life 1 – 5 years		790		800		3.1		3.11
Average life 5 – 10 years		237		237		7.8		2.77
Average life greater than 10 years		839		839		13.3		2.62
Total	$	2,069		2,083		7.5		2.82 %
Equity securities		699		701
Total available-for-sale and other securities	$	29,486		30,689		5.6		3.35 %

(a)

Taxable-equivalent yield adjustments included in the above table are 0.00%, 2.14% and 1.49% for securities with an average life of 1 year or less, 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, 2016 and December 31, 2015, respectively.

TABLE 22: Components of Deposits


		September 30, 2016				December 31, 2015
As of ($ in millions)		Balance		% of Total		Balance		% of Total
Demand	$		35,625		34	$	36,267		35
Interest checking			24,483		24		26,768		26
Savings			14,019		14		14,601		14
Money market			19,910		20		18,494		18
Foreign office			518		1		464		-
Transaction deposits			94,555		93		96,594		93
Other time			3,971		4		4,019		4
Core deposits			98,526		97		100,613		97
Certificates $100,000 and over^(a)			2,745		3		2,592		3
Total deposits	$		101,271		100	$	103,205		100

(a)

Includes $1,267 and $1,449 of certificates $250,000 and over at September 30, 2016 and December 31, 2015, respectively.

Core deposits decreased $2.1 billion, or 2%, from December 31, 2015 driven primarily by a decrease of $2.0 billion, or 2%, in transaction deposits. The decrease from December 31, 2015 included the sale of $511 million of deposits as part of the branches sold in the St. Louis MSA and Pittsburgh MSA during 2016. Transaction deposits decreased from December 31, 2015 primarily due to decreases in interest checking deposits, demand deposits and savings deposits, partially offset by an increase in money market deposits. Interest checking deposits decreased $2.3 billion, or 9%, from December 31, 2015 driven primarily by lower balances per account for commercial customers. Demand deposits decreased $642 million, or 2%, from December 31, 2015 driven primarily by consumer customer seasonality. Money market deposits increased $1.4 billion, or 8%, from December 31, 2015 driven primarily by a promotional product offering during 2016 which drove balance migration from savings deposits, which decreased $582 million, or 4%, compared to December 31, 2015. Money market deposits also increased due to higher balances for existing customers. Certificates $100,000 and over increased $153 million, or 6%, from December 31, 2015 primarily due to the issuance of institutional certificates of deposit during the nine months ended September 30, 2016.

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

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

TABLE 23: Components of Average Deposits


		September 30, 2016				September 30, 2015
($ in millions)		Balance		% of Total		Balance		% of Total
Demand	$		35,918		34	$	35,231		34
Interest checking			24,475		24		25,590		25
Savings			14,232		14		14,868		15
Money market			19,706		19		18,253		18
Foreign office			524		1		718		1
Transaction deposits			94,855		92		94,660		93
Other time			4,020		4		4,057		4
Core deposits			98,875		96		98,717		97
Certificates $100,000 and over^(a)			2,768		3		2,924		3
Other			749		1		222		-
Total average deposits	$		102,392		100	$	101,863		100

(a)

Includes $1,270 and $1,389 of average certificates $250,000 and over for the three months ended September 30, 2016 and 2015, respectively.

On an average basis, core deposits increased $158 million from September 30, 2015 primarily due to an increase of $195 million in average transaction deposits. The increase in average transaction deposits was driven by increases in average money market deposits and average demand deposits, partially offset by decreases in average interest checking deposits, average savings deposits and average foreign office deposits. Average money market deposits and average demand deposits increased $1.5 billion, or 8%, and $687 million, or 2%, respectively, from September 30, 2015 due to the acquisition of new commercial customers and higher average customer balances per commercial customer account. Average money market deposits also increased due to a promotional product offering which drove balance migration from savings deposits, which decreased $636 million, or 4%, compared to September 30, 2015. Average interest checking deposits and average foreign office deposits decreased $1.1 billion, or 4%, and $194 million, or 27%, respectively, from September 30, 2015 primarily due to a decrease in average commercial customer balances per account. Average other deposits increased $527 million from September 30, 2015 primarily due to an increase in Eurodollar trade deposits. Average certificates $100,000 and over decreased $156 million, or 5%, from September 30, 2015 primarily due to the maturity and run-off of institutional certificates of deposit since September 30, 2015.

Contractual maturities

The contractual maturities of certificates $100,000 and over as of September 30, 2016 are summarized in the following table:

TABLE 24: Contractual Maturities of Certificates $100,000 and Over



($ in millions)

Next 3 months	$	493
3-6 months		135
6-12 months		341
After 12 months		1,776
Total certificates $100,000 and over	$	2,745

The contractual maturities of other time deposits and certificates $100,000 and over as of September 30, 2016 are summarized in the following table:

TABLE 25: Contractual Maturities of Other Time Deposits and Certificates $100,000 and Over



($ in millions)

Next 12 months	$	2,302
13-24 months		1,864
25-36 months		810
37-48 months		1,307
49-60 months		415
After 60 months		18
Total other time deposits and certificates $100,000 and over	$	6,716

Borrowings

The Bancorp accesses a variety of other short-term and long-term funding sources. Borrowings with original maturities of one year or less are classified as short-term and include federal funds purchased and other short-term borrowings. Table 26 summarizes the end of period components of total borrowings. As of September 30, 2016, total borrowings as a percent of interest-bearing liabilities were 24% compared to 21% at December 31, 2015.

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

TABLE 26: Components of Borrowings


As of ($ in millions)	September 30, 2016		December 31, 2015
Federal funds purchased	$	126		151
Other short-term borrowings		3,494		1,507
Long-term debt		16,890		15,810 ^(a)
Total borrowings	$	20,510		17,468

(a)

Total borrowings increased $3.0 billion, or 17%, from December 31, 2015 primarily due to increases in other short-term borrowings and long-term debt. Other short-term borrowings increased $2.0 billion from December 31, 2015 primarily driven by an increase of $2.0 billion in FHLB short-term borrowings. The level of other short-term borrowings can fluctuate significantly from period to period depending on funding needs and which sources are used to satisfy those needs. For further information on the components of other short-term borrowings, refer to Note 13 of the Notes to Condensed Consolidated Financial Statements. Long-term debt increased $1.1 billion from December 31, 2015 primarily driven by issuances during the nine months ended September 30, 2016 of $2.8 billion of unsecured senior fixed-rate bank notes, $250 million of unsecured senior floating-rate bank notes and $750 million of unsecured subordinated fixed-rate bank notes, partially offset by the maturity of $1.7 billion of unsecured senior bank notes and $1.1 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 10 and Note 14, respectively, of the Notes to Condensed Consolidated Financial Statements.

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

TABLE 27: Components of Average Borrowings


($ in millions)	September 30, 2016		September 30, 2015
Federal funds purchased	$	446		1,978
Other short-term borrowings		2,171		1,897
Long-term debt		16,102		14,664 ^(a)
Total average borrowings	$	18,719		18,539

(a)

Total average borrowings increased $180 million, or 1%, compared to September 30, 2015, primarily due to an increase in average long-term debt partially offset by a decrease in average federal funds purchased. The increase in average long-term debt of $1.4 billion was primarily driven by the issuance of asset-backed securities by a consolidated VIE of $750 million related to an automobile loan securitization in the fourth quarter of 2015 and the previously mentioned unsecured note issuances during 2016. The impact of these issuances was partially offset by the aforementioned maturity of unsecured senior bank notes and paydowns on long-term debt associated with automobile loan securitizations since the third quarter of 2015. Average federal funds purchased decreased $1.5 billion compared to September 30, 2015. The level of average federal funds purchased 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 subsection of the 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 Wealth and Asset Management (formerly 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. In the second quarter of 2016, the Investment Advisors segment name was changed to Wealth and Asset Management to better reflect the services provided by the business segment.

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 Wealth and Asset Management, 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, 2016 to reflect the current market rates and updated market assumptions. These rates were generally higher than those in place during 2015, thus net interest income for deposit-providing businesses was positively impacted during 2016. FTP charge rates on assets were affected by the prevailing level of interest rates and by the duration and repricing characteristics of the portfolio. As overall market rates increased, the FTP charge increased for asset-generating businesses, thus negatively affecting net interest income during 2016. Credit rates for deposit products and charge rates for loan products may be reset periodically in response to changes in market conditions.

During the first quarter of 2016, the Bancorp refined its methodology for allocating provision expense to the business segments to include charges or benefits associated with changes in criticized commercial loan levels in addition to actual net charge-offs experienced by the loans and leases owned by each business segment. The results of operations and financial position for the three and nine months ended September 30, 2015 were adjusted to reflect this change. 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, 2015 were adjusted to reflect changes in internal expense allocation methodologies.

The following table summarizes net income by business segment:

TABLE 28: Net Income by Business Segment


		For the three months ended September 30,		For the nine months ended September 30,
($ in millions)		2016	2015	2016	2015
Income Statement Data
Commercial Banking	$	279	121	715	492
Branch Banking		91	98	330	190
Consumer Lending		3	13	18	100
Wealth and Asset Management		23	14	73	40
General Corporate and Other		120	135	35	228
Net income		516	381	1,171	1,050
Less: Net income attributable to noncontrolling interests		-	-	(4)	(6)
Net income attributable to Bancorp		516	381	1,175	1,056
Dividends on preferred stock		15	15	52	52
Net income available to common shareholders	$	501	366	1,123	1,004

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 29: Commercial Banking


		For the three months ended September 30,		For the nine months ended September 30,
($ in millions)		2016	2015	2016	2015
Income Statement Data
Net interest income (FTE)^(a)	$	462	418	1,385	1,221
Provision for (benefit from) loan and lease losses		(18)	195	119	271
Noninterest income:
Corporate banking revenue		110	104	328	276
Service charges on deposits		75	72	218	212
Other noninterest income		43	52	137	142
Noninterest expense:
Personnel costs		69	73	222	228
Other noninterest expense		280	261	843	803
Income before income taxes (FTE)		359	117	884	549
Applicable income tax expense (benefit)^(a)(b)		80	(4)	169	57
Net income	$	279	121	715	492
Average Balance Sheet Data
Commercial loans and leases, including held for sale	$	54,798	53,824	54,648	52,705
Demand deposits		20,798	20,712	20,612	20,476
Interest checking deposits		8,284	8,996	8,543	9,170
Savings and money market deposits		6,655	6,838	6,692	6,479
Other time deposits and certificates $100,000 and over		1,008	1,161	1,065	1,256
Foreign office deposits		523	717	496	839

(a)

Includes FTE adjustments of $6 and $5 for the three months ended September 30, 2016 and 2015, respectively, and $18 and $14 for the nine months ended September 30, 2016 and 2015, respectively. This is a non-GAAP measure.

(b)

Applicable income tax expense for all periods includes the tax benefit from tax-exempt income, tax-advantaged investments and 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 $279 million for the three months ended September 30, 2016 compared to net income of $121 million for the three months ended September 30, 2015. Net income was $715 million for the nine months ended September 30, 2016 compared to net income of $492 million for the nine months ended September 30, 2015. The increase for both the three and nine months ended September 30, 2016 was driven by an increase in net interest income and a decrease in the provision for loan and lease losses partially offset by an increase in noninterest expense. The increase for the nine months ended September 30, 2016 was also driven by an increase in noninterest income.

Net interest income on an FTE basis increased $44 million and $164 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The increase in net interest income for both periods was primarily driven by an increase in FTP credit rates on core deposits and an increase in average commercial loan and lease balances as well as an increase in their yields of 22 bps and 15 bps for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The increase in net interest income for both periods was partially offset by an increase in FTP charge rates on loans and leases.

Provision for loan and lease losses decreased $213 million and $152 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The decrease for both periods was primarily due to a $102 million charge-off during the third quarter of 2015 associated with the restructuring of a student loan backed commercial credit originated in 2007 as well as a decrease in criticized commercial loans during the three and nine months ended September 30, 2016. The decrease for the nine months ended September 30, 2016 compared to the same period in the prior year was partially offset by an increase in charge-offs of commercial and industrial loans, primarily in the energy portfolio related to oil field services loans. Net charge-offs as a percent of average portfolio loans and leases decreased to 43 bps for the three months ended September 30, 2016 compared to 101 bps for the same period in the prior year and decreased to 37 bps for the nine months ended September 30, 2016 compared to 53 bps for the same period in the prior year.

Noninterest income was flat and increased $53 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The increase for the nine months ended September 30, 2016 was primarily driven by an increase in corporate banking revenue of $52 million driven by increases in lease remarketing fees and syndication fees partially offset by decreases in foreign exchange fees and business lending fees. This increase was partially offset by a decrease in other noninterest income of $5 million primarily driven by the recognition of $9 million of OTTI on certain private equity investments in the third quarter of 2016.

Noninterest expense increased $15 million and $34 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year primarily 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 and impairment on affordable housing investments. The increase for the nine months ended September 30, 2016 was partially offset by a decrease in loan and lease expense.

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

Average commercial loans increased $974 million and $1.9 billion for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year primarily due to increases in average commercial and industrial loans, average commercial construction loans and average commercial leases partially offset by a decrease in average commercial mortgage loans. Average commercial and industrial loans increased $1.0 billion for the nine months ended September 30, 2016 compared to the same period in the prior year and average commercial construction loans increased $886 million and $987 million for the three and nine months ended September 30, 2016, 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 leases increased $120 million and $136 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year primarily as a result of an increase in syndication and participation origination activity. Average commercial mortgage loans decreased $53 million and $195 million for the three and nine months ended September 30, 2016, 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 decreased $1.0 billion and $626 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The decrease for the three months ended September 30, 2016 was primarily driven by decreases in average interest checking deposits, average foreign deposits and average savings and money market deposits which decreased $712 million, $194 million and $183 million, respectively, compared to the same period in the prior year. The decrease for the nine months ended September 30, 2016 was primarily driven by decreases in average interest checking deposits and average foreign deposits which decreased $627 million and $343 million, respectively, compared to the same period in the prior year. This decrease was partially offset by an increase in average savings and money market deposits of $213 million for the nine months ended September 30, 2016 compared to the same period in the prior year.

Branch Banking

Branch Banking provides a full range of deposit and loan products to individuals and small businesses through 1,191 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 30: Branch Banking


		For the three months ended September 30,					For the nine months ended September 30,
($ in millions)		2016			2015		2016		2015
Income Statement Data
Net interest income	$		414			395		1,272		1,148
Provision for loan and lease losses			34			37		104		116
Noninterest income:
Service charges on deposits			68			73		198		206
Card and processing revenue			64			60		190		176
Wealth and asset management revenue			35			40		107		120
Other noninterest income			(4	)		24		71		(34)
Noninterest expense:
Personnel costs			130			130		392		397
Net occupancy and equipment expense			59			63		177		186
Card and processing expense			29			38		98		108
Other noninterest expense			184			173		556		516
Income before income taxes			141			151		511		293
Applicable income tax expense			50			53		181		103
Net income	$		91			98		330		190
Average Balance Sheet Data
Consumer loans, including held for sale	$		13,428			14,269		13,658		14,449
Commercial loans, including held for sale			1,849			1,963		1,896		1,994
Demand deposits			13,300			12,771		13,283		12,561
Interest checking deposits			9,699			9,003		9,597		9,096
Savings and money market deposits			26,084			25,155		25,783		25,448
Other time deposits and certificates $100,000 and over			5,225			5,202		5,221		5,141

Net income was $91 million for the three months ended September 30, 2016 compared to net income of $98 million for the three months ended September 30, 2015. The decrease was driven by a decrease in noninterest income partially offset by an increase in net interest income and decreases in the provision for loan and lease losses and noninterest expense. Net income was $330 million for the nine months ended September 30, 2016 compared to $190 million for the same period in the prior year. The increase was driven by increases in net interest income and noninterest income as well as a decrease in the provision for loan and lease losses, partially offset by an increase in noninterest expense.

Net interest income increased $19 million and $124 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The increase for both periods was primarily driven by an increase in FTP credit rates on core deposits partially offset by a decrease in interest income on residential mortgage loans, home equity loans, credit card loans and other consumer loans driven by a decline in average balances. Additionally, net interest income for both periods was negatively impacted by an increase in FTP charge rates on loans and leases.

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

Provision for loan and lease losses decreased $3 million and $12 million for the three and nine months ended September 30, 2016, 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 93 bps and 90 bps for the three and nine months ended September 30, 2016, respectively, compared to 97 bps for both the three and nine months ended September 30, 2015.

Noninterest income decreased $34 million and increased $98 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The decrease for the three months ended September 30, 2016 was primarily driven by decreases in other noninterest income, service charges on deposits and wealth and asset management revenue. Other noninterest income decreased $28 million for the three months ended September 30, 2016 compared to the same period in the prior year primarily driven by impairment charges on bank premises and equipment of $28 million recognized during the three months ended September 30, 2016 compared to $2 million recognized during the three months ended September 30, 2015. Service charges on deposits decreased $5 million for the three months ended September 30, 2016 compared to the same period in the prior year primarily due to a decrease in consumer deposit fees driven by a decrease in consumer checking fees. Wealth and asset management revenue decreased $5 million for the three months ended September 30, 2016 compared to the same period in the prior year primarily due to a decrease in transactional securities and brokerage fees driven by lower sales and trading volume. The increase for the nine months ended September 30, 2016 was due to an increase in other noninterest income of $105 million primarily driven by impairment charges on bank premises and equipment of $31 million recognized during the nine months ended September 30, 2016 compared to $104 million recognized during the nine months ended September 30, 2015. Additionally, the increase in other noninterest income for the nine months ended September 30, 2016 included a gain of $19 million on the sale of certain branches in the St. Louis and Pittsburgh MSAs in the first and second quarters of 2016 as well as a gain of $11 million on the sale of the agent bankcard loan portfolio during the second quarter of 2016.

Noninterest expense decreased $2 million and increased $16 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The decrease for the three months ended was driven by decreases in card and processing expense and net occupancy and equipment expense partially offset by an increase in other noninterest expense. The increase for the nine months ended September 30, 2016 was primarily driven by an increase in other noninterest expense partially offset by decreases in card and processing expense and net occupancy and equipment expense. Card and processing expense decreased $9 million and $10 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year primarily due to the impact of renegotiated service contracts. Net occupancy and equipment expense decreased $4 million and $9 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year primarily due to a decrease in rent expense driven by a reduction in the number of full-service banking centers and ATM locations. Other noninterest expense increased $11 million and $40 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year primarily driven by an increase in corporate overhead allocations.

Average consumer loans decreased $841 million and $791 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The decrease for both periods was primarily driven by a decrease in average home equity loans of $477 million and $473 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year and a decrease in average residential mortgage loans of $273 million and $262 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year as payoffs exceeded new loan production. Average commercial loans decreased $114 million and $98 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The decrease for both periods was primarily driven by a decrease in average commercial mortgage loans of $83 million and $66 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year and a decrease in average commercial and industrial loans of $25 million for both the three and nine months ended September 30, 2016 compared to the same periods in the prior year as payoffs exceeded new loan production.

Average core deposits increased $2.1 billion and $1.5 billion for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The increase for both periods was primarily driven by growth in average savings and money market deposits of $929 million and $335 million, respectively, growth in average interest checking deposits of $696 million and $501 million, respectively, and growth in average demand deposits of $529 million and $722 million, respectively, for the three and nine months ended September 30, 2016 compared to the same periods in the prior year. The growth in average savings and money market deposits, average interest checking deposits and average demand deposits was driven by an increase in average balances per customer account and acquisition of new customers.

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

Consumer Lending

Consumer Lending includes the Bancorp’s residential mortgage, home equity, automobile and other indirect lending activities. Lending activities include the origination, retention and servicing of residential 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 31: Consumer Lending


		For the three months ended September 30,				For the nine months ended September 30,
($ in millions)		2016		2015		2016		2015
Income Statement Data
Net interest income	$		63		62		185		187
Provision for loan and lease losses			12		11		32		33
Noninterest income:
Mortgage banking net revenue			64		69		214		268
Other noninterest income			7		7		20		59
Noninterest expense:
Personnel costs			48		47		147		139
Other noninterest expense			69		60		211		186
Income before income taxes			5		20		29		156
Applicable income tax expense			2		7		11		56
Net income	$		3		13		18		100
Average Balance Sheet Data
Residential mortgage loans, including held for sale	$		10,795		9,393		10,304		9,089
Home equity			348		414		365		433
Automobile loans			9,967		11,381		10,366		11,401
Other consumer loans, including held for sale			-		3		-		14

Net income was $3 million for the three months ended September 30, 2016 compared to net income of $13 million for the three months ended September 30, 2015. Net income was $18 million for the nine months ended September 30, 2016 compared to net income of $100 million for the nine months ended September 30, 2015. The decrease for both periods was primarily driven by a decrease in noninterest income as well as an increase in noninterest expense.

Net interest income increased $1 million and decreased $2 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The increase for the three months ended September 30, 2016 compared to the same period in the prior year was primarily driven by an increase in FTP credit rates on demand deposits. The decrease for the nine months ended September 30, 2016 compared to the same period in the prior year was primarily driven by an increase in FTP charge rates on loans and leases partially offset by an increase in FTP credit rates on demand deposits. Net interest income for both periods was impacted by an increase in average residential mortgage loan balances partially offset by a decline in average automobile loan balances.

Provision for loan and lease losses increased $1 million for the three months ended September 30, 2016 compared to the same period in the prior year primarily due to an increase in net charge-offs on automobile loans partially offset by a decline in net charge-offs on residential mortgage loans and home equity loans. The provision for loan and lease losses decreased $1 million for the nine months ended September 30, 2016 compared to the same period in the prior year primarily due to a decline in net charge-offs on residential mortgage loans and home equity loans partially offset by an increase in net charge-offs on automobile loans. Net charge-offs as a percent of average portfolio loans and leases increased to 23 bps for the three months ended September 30, 2016 compared to 22 bps for the same period in the prior year and decreased to 21 bps for the nine months ended September 30, 2016 compared to 22 bps for the same period in the prior year.

Noninterest income decreased $5 million and $93 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The decrease for the three months ended September 30, 2016 was driven by a decrease in mortgage banking net revenue of $5 million from the same period in the prior year primarily driven by a $20 million decrease in net mortgage servicing revenue partially offset by an increase of $15 million in mortgage origination fees and gains on loan sales. The decrease for the nine months ended September 30, 2016 was driven by decreases in mortgage banking net revenue and other noninterest income. Mortgage banking net revenue decreased $54 million for the nine months ended September 30, 2016 compared to the same period in the prior year primarily driven by a $76 million decrease in net mortgage servicing revenue partially offset by a $22 million increase in mortgage origination fees and gains on loan sales. Refer to the Noninterest Income subsection of the Statements of Income Analysis of MD&A for additional information on the fluctuations in mortgage banking net revenue. Other noninterest income decreased $39 million for the nine months ended September 30, 2016 from the same period in the prior year primarily due to a $37 million gain on the sale of residential mortgage loans held for sale classified as TDRs in the first quarter of 2015.

Noninterest expense increased $10 million and $33 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year driven by increases in other noninterest expense and personnel costs. Other noninterest expense increased $9 million and $25 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year primarily driven by increases in operational losses and corporate overhead allocations. Personnel costs increased $1 million and $8 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year primarily driven by increases in base compensation and variable compensation.

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

Average consumer loans and leases decreased $81 million and increased $98 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. Average residential mortgage loans, including held for sale, increased $1.4 billion and $1.2 billion for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year primarily driven by the continued retention of certain conforming ARMs and certain other fixed-rate loans. Average automobile loans decreased $1.4 billion and $1.0 billion for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year as payoffs exceeded new loan production.

Wealth and Asset Management

Wealth and Asset Management provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. Wealth and Asset Management 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 Wealth and Asset Management segment:

TABLE 32: Wealth and Asset Management


			For the three months ended				For the nine months ended
			September 30,				September 30,
($ in millions)			2016		2015		2016		2015
Income Statement Data
Net interest income		$		40		33		127		91
Provision for loan and lease losses				-		-		1		3
Noninterest income:
Wealth and asset management revenue				98		100		294		306
Other noninterest income				1		2		8		9
Noninterest expense:
Personnel costs				41		42		127		127
Other noninterest expense				62		70		190		215
Income before income taxes				36		23		111		61
Applicable income tax expense				13		9		38		21
Net income	$			23		14		73		40
Average Balance Sheet Data
Loans and leases, including held for sale	$			3,148		2,982		3,109		2,732
Core deposits				8,159		8,944		8,459		9,489

Net income was $23 million for the three months ended September 30, 2016 compared to net income of $14 million for the same period in the prior year. Net income was $73 million for the nine months ended September 30, 2016 compared to $40 million for the nine months ended September 30, 2015. The increases for both periods were driven primarily by increases in net interest income as well as decreases in noninterest expense partially offset by decreases in noninterest income.

Net interest income increased $7 million and $36 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The increase for both periods was primarily due to an increase in FTP credit rates on core deposits and an increase in interest income on loans and leases driven by an increase in average balances and higher yields on average commercial and industrial loans and average other consumer loans and leases. The increase in net interest income for both periods was partially offset by an increase in FTP charge rates on loans and leases and the increase for the nine months ended was also partially offset by an increase in FTP charges due to an increase in average loan balances.

Provision for loan and lease losses was flat and decreased $2 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year.

Noninterest income decreased $3 million and $13 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The decrease for both periods was primarily due to a $2 million and $12 million decrease in wealth and asset management revenue for the three and nine months ended September 30, 2016, respectively, driven by a decrease of $4 million and $14 million in transactional securities and brokerage fees as a result of lower sales and trading volume. The decrease for both periods was partially offset by a $2 million increase in private client service fees and institutional fees compared to the same periods in the prior year.

Noninterest expense decreased $9 million and $25 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The decrease for both periods was primarily driven by decreases in other noninterest expense of $8 million and $25 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year primarily due to a decrease in corporate overhead allocations partially offset by an increase in operational losses.

Average loans and leases increased $166 million and $377 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year primarily due to increases in average residential mortgage loans and average other consumer loans driven by increases in new loan origination activity.

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

Average core deposits decreased $785 million and $1.0 billion for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year primarily due to a decline in average interest checking balances partially offset by an increase in average savings and money market deposits.

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, unallocated provision expense 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, 2016 was a negative $66 million compared to negative $2 million for the same period in the prior year. Net interest income for the nine months ended September 30, 2016 was a negative $239 million compared to net interest income of $3 million for the same period in the prior year. The decreases for both periods were primarily driven by an increase in FTP credits on deposits allocated to business segments due to increases in FTP credit rates and average deposits as well as an increase in interest expense on long-term debt. The decreases in net interest income were partially offset by an increase in interest income on taxable securities and an increase in the benefit related to the FTP charges on loans and leases. The provision for loan and lease losses for the three and nine months ended September 30, 2016 was $52 million and $33 million, respectively, compared to a benefit of $87 million and $118 million for the three and nine months ended September 30, 2015, respectively, due to decreases in the allocation of provision expense to the business segments.

Noninterest income increased $164 million and $116 million for the three and nine months ended September 30, 2016, respectively, compared to the same periods in the prior year. The increase for both periods included the impact of a $280 million gain recognized during the third quarter of 2016 from the termination and settlement of gross cash flows from existing Vantiv, Inc. TRAs and the expected obligation to terminate and settle the remaining Vantiv, Inc. TRA cash flows upon the exercise of put or call options. Additionally, equity method earnings from the Bancorp’s interest in Vantiv Holding, LLC increased $4 million and $9 million compared to the three and nine months ended September 30, 2015, respectively. The increase in noninterest income was partially offset by negative valuation adjustments related to the Visa total return swap of $12 million and $61 million for the three and nine months ended September 30, 2016, respectively, compared with $8 million and $27 million, respectively, for the same periods in the prior year. In addition, the negative valuation adjustment on the stock warrant associated with Vantiv Holding, LLC was $2 million for the three months ended September 30, 2016 compared to the positive valuation adjustment of $130 million during the three months ended September 30, 2015. The positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC were $64 million for the nine months ended September 30, 2016 compared to the positive valuation adjustments of $215 million during the nine months ended September 30, 2015. The increase in noninterest income for the three and nine months ended September 30, 2016 also included a gain of $11 million on the sale-leaseback of an office complex during the third quarter of 2016.

Noninterest expense was $35 million and $79 million for the three and nine months ended September 30, 2016, respectively, compared to $24 million and $23 million for the same periods in the prior year. The increase for both periods was primarily due to increases in personnel costs and the provision for the reserve for unfunded commitments partially offset by an increase in 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. Management within the lines of business and support functions assess and manage risks associated with their activities and determine if actions need to be taken to strengthen risk management or reduce risk given their risk profile. They are responsible for considering risk when making business decisions and for integrating risk management into business processes. 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 5% 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 current assessments of each of the eight risk types relative to the established tolerance. Information supporting these assessments, including policy limits, key risk indicators and qualitative factors, is also reported to the Risk and Compliance Committee of the Board. Any results outside of tolerance require the development of an action plan that describes actions to be taken to return the measure to within the 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:

•

ERM 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;

•

Credit Risk Management is responsible for overseeing the safety and soundness of the commercial and consumer loan portfolio within an independent portfolio management framework that supports the Bancorp’s loan growth strategies and underwriting practices, ensuring portfolio optimization and appropriate risk controls. Credit Risk Management is also responsible for the economic capital program and quantitative analytics to support the commercial portfolio and risk rating models, 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 and consumer 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 vendors and information security to ensure 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 within the Capital Markets groups and monitoring liquidity, interest rate risk and risk tolerances resulting from management of Fifth Third’s overall balance sheet;

•

Compliance Risk Management provides independent oversight to ensure that an enterprise-wide framework, including processes and procedures, are in place to comply with applicable laws, regulations, rules and other regulatory requirements; internal policies and procedures; and principles of integrity and fair dealing applicable to the Bancorp’s activities and functions. The Bancorp focuses on managing regulatory compliance risk in accordance with the Bancorp’s integrated risk management framework, which ensures consistent processes for identifying, assessing, managing, monitoring and reporting risks; 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. 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.

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

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 is also a risk assessment process applicable to every line of business to ensure an appropriate standard readiness assessment is performed before launching a new or changing 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 independent and 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 nonaccrual loan 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 portfolio loans and leases:


TABLE 33: Potential Problem Portfolio Loans and Leases
As of September 30, 2016 ($ in millions)		Carrying Value		Unpaid Principal Balance		Exposure
Commercial and industrial loans	$		1,186		1,188		1,829
Commercial mortgage loans			115		115		117
Commercial leases			36		36		36
Total potential problem portfolio loans and leases	$		1,337		1,339		1,982

TABLE 34: Potential Problem Portfolio Loans and Leases
As of December 31, 2015 ($ in millions)		Carrying Value		Unpaid Principal Balance		Exposure
Commercial and industrial loans	$		1,383		1,384		1,922
Commercial mortgage loans			170		171		172
Commercial construction loans			6		6		7
Commercial leases			36		36		39
Total potential problem portfolio loans and leases	$		1,595		1,597		2,140

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 assessing a borrower’s creditworthiness. 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 evaluate the use of modified dual risk ratings for purposes of determining the Bancorp’s ALLL as part of the Bancorp’s adoption of ASU 2016-13 “Measurement of Credit Losses on Financial Instruments,” which will be effective for the Bancorp on January 1, 2020. 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)

Economic Overview

Economic growth continues to improve, and GDP is expected to maintain its modest expansionary pattern. The U.S. job market and wages are slowly but steadily improving. Household spending continues to be the strongest driver of the U.S. economy. Tepid business investment and lackluster global economic growth continue to be the weights keeping economic growth in check. Inflation continues to run below the FRB’s stated objective, but has increased over the past several months. Energy prices and the dollar have stabilized and are moving in a pattern that may continue the improvement in inflation and manufacturing. Housing prices have largely stabilized and are increasing in many markets. However, overall current economic and competitive conditions are causing weaker than desired qualified loan growth that combined with a weakness in global economic conditions and a relatively low interest rate environment, may directly or indirectly impact the Bancorp’s growth and profitability. In the U.S., loan growth has continued to slow. Economic weakness in developed economies continues, growth has slowed in China and other developing economies and the British vote to exit the European Union has created market volatility and additional economic uncertainty. The FRB noted asymmetric risks to the downside in their latest assessment of the risks to their economic outlook. With regard to commercial real estate, the credit market has become somewhat more selective even though market data and vacancies remain positive.

Commercial Portfolio

The Bancorp’s credit risk management strategy seeks to minimize 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 Bancorp provides loans to a variety of customers ranging from large multi-national firms to middle market businesses, sole proprietors and high net worth individuals. The origination policies for commercial and industrial loans outline the risks and underwriting requirements for loans to businesses in various industries. Included in the policies are maturity and amortization terms, collateral and leverage requirements, cash flow coverage measures and hold limits. The Bancorp aligns credit and sales teams with specific industry expertise to better monitor and manage different industry segments of the portfolio.

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.

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.

TABLE 35: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million

As of September 30, 2016 ($ in millions)

LTV > 100%

LTV 80-100%

LTV < 80%

Commercial mortgage owner-occupied loans

114

193

1,997

Commercial mortgage nonowner-occupied loans

106

166

2,298

Total

220

359

4,295

TABLE 36: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million

As of December 31, 2015 ($ in millions)

LTV > 100%

LTV 80-100%

LTV < 80%

Commercial mortgage owner-occupied loans

119

216

2,063

Commercial mortgage nonowner-occupied loans

120

194

2,032

Total

239

410

4,095

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

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 37: Commercial Loan and Lease Portfolio (excluding loans held for sale)
	September 30, 2016							December 31, 2015
($ in millions)	Outstanding		Exposure		Nonaccrual			Outstanding		Exposure		Nonaccrual
By Industry:
Manufacturing	$	10,524		20,259		52			10,572		20,422		70
Real estate		7,207		11,816		24			6,494		10,293		40
Financial services and insurance		6,053		12,176		3			5,896		13,021		3
Healthcare		4,660		6,608		34			4,676		6,879		22
Business services		4,513		6,922		50			4,471		6,765		96
Retail trade		4,032		7,649		13			3,764		7,391		8
Wholesale trade		3,759		6,596		19			4,082		7,254		23
Transportation and warehousing		3,134		4,555		3			3,111		4,619		1
Communication and information		3,119		5,091		1			2,913		5,052		2
Accommodation and food		2,917		4,596		5			2,507		4,104		6
Construction		1,869		3,372		11			1,871		3,403		8
Entertainment and recreation		1,626		2,900		3			1,210		2,066		4
Mining		1,330		2,376		211			1,499		2,695		36
Utilities		1,123		2,748		-			1,217		2,854		-
Other services		799		1,025		24			864		1,188		10
Public administration		467		513		-			495		562		-
Agribusiness		265		423		2			368		527		4
Individuals		73		97		1			139		187		2
Other		13		18		4			7		6		6
Total	$	57,483		99,740		460	*^(a)*		56,156		99,288		341
By Loan Size:
Less than $200,000		1 %		1		4			1		1		7
$200,000 - $1 million		3		3		5			4		3		10
$1 million - $5 million		9		7		20			10		8		25
$5 million - $10 million		7		6		21			8&nbs

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