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 June 30, 2017

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 ☒ 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 ☒ No ☐

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


Large accelerated filer	☒	Accelerated filer	☐
Non-accelerated filer	☐ (Do not check if a smaller reporting company)	Smaller reporting company	☐
		Emerging growth company	☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

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

There were 736,725,835 shares of the Registrant’s common stock, without par value, outstanding as of July 31, 2017.

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			6
Recent Accounting Standards			8
Critical Accounting Policies			8
Statements of Income Analysis			9
Balance Sheet Analysis			17
Business Segment Review			22
Risk Management—Overview			28
Credit Risk Management			29
Market Risk Management			42
Liquidity Risk Management			46
Operational Risk Management			48
Compliance Risk Management			48
Capital Management			49
Off-Balance Sheet Arrangements			51
Quantitative and Qualitative Disclosures about Market Risk (Item 3)			52
Controls and Procedures (Item 4)			52
Condensed Consolidated Financial Statements and Notes (Item 1)
Balance Sheets (unaudited)			53
Statements of Income (unaudited)			54
Statements of Comprehensive Income (unaudited)			55
Statements of Changes in Equity (unaudited)			56
Statements of Cash Flows (unaudited)			57
Notes to Condensed Consolidated Financial Statements (unaudited)			58
Part II. Other Information
Legal Proceedings (Item 1)			111
Risk Factors (Item 1A)			111
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			111
Exhibits (Item 6)			111
Signatures			112
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. 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) changes in customer preferences or information technology systems; (12) effects of critical accounting policies and judgments; (13) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (FASB) or other regulatory agencies; (14) 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; (15) ability to maintain favorable ratings from rating agencies; (16) failure of models or risk management systems or controls; (17) fluctuation of Fifth Third’s stock price; (18) ability to attract and retain key personnel; (19) ability to receive dividends from its subsidiaries; (20) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (21) declines in the value of Fifth Third’s goodwill or other intangible assets; (22) effects of accounting or financial results of one or more acquired entities; (23) difficulties from Fifth Third’s investment in, relationship with, and nature of the operations of Vantiv Holding, LLC; (24) loss of income from any sale or potential sale of businesses; (25) difficulties in separating the operations of any branches or other assets divested; (26) losses or adverse impacts on the carrying values of branches and long-lived assets in connection with their sales or anticipated sales; (27) inability to achieve expected benefits from branch consolidations and planned sales within desired timeframes, if at all; (28) ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; (29) the negotiation and (if any) implementation by Vantiv, Inc. and/or Worldpay Group plc of the potential acquisition of Worldpay Group plc by Vantiv, Inc. and such other actions as Vantiv, Inc. and Worldpay Group plc may take in furtherance thereof; and (30) the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity.

Glossary of Abbreviations and Acronyms

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

ALCO: Asset Liability Management Committee

ALLL: Allowance for Loan and Lease Losses

AOCI: Accumulated Other Comprehensive Income

APR: Annual Percentage Rate

ARM: Adjustable Rate Mortgage

ASF: Available Stable Funding

ASU: Accounting Standards Update

ATM: Automated Teller Machine

BCBS: Basel Committee on Banking Supervision

BHC: Bank Holding Company

BOLI: Bank Owned Life Insurance

BPO: Broker Price Opinion

bps: Basis Points

CCAR: Comprehensive Capital Analysis and Review

CDC: Fifth Third Community Development Corporation

CET1: Common Equity Tier 1

CFPB: Consumer Financial Protection Bureau

C&I: Commercial and Industrial

DCF: Discounted Cash Flow

DFA: Dodd-Frank Wall Street Reform & Consumer Protection Act

DTCC: Depository Trust & Clearing Corporation

ERM: Enterprise Risk Management

ERMC: Enterprise Risk Management Committee

EVE: Economic Value of Equity

FASB: Financial Accounting Standards Board

FDIC: Federal Deposit Insurance Corporation

FHA: Federal Housing Administration

FHLB: Federal Home Loan Bank

FHLMC: Federal Home Loan Mortgage Corporation

FICO: Fair Isaac Corporation (credit rating)

FINRA: Financial Industry Regulatory Authority

FNMA: Federal National Mortgage Association

FRB: Federal Reserve Bank

FTE: Fully Taxable Equivalent

FTP: Funds Transfer Pricing

FTS: Fifth Third Securities

GDP: Gross Domestic Product

GNMA: Government National Mortgage Association

GSE: United States Government Sponsored Enterprise

HQLA: High Quality Liquid Assets

IPO: Initial Public Offering

IRC: Internal Revenue Code

IRLC: Interest Rate Lock Commitment

ISDA: International Swaps and Derivatives Association, Inc.

LCR: Liquidity Coverage Ratio

LIBOR: London Interbank Offered Rate

LLC: Limited Liability Company

LTV: Loan-to-Value

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

MSA: Metropolitan Statistical Area

MSR: Mortgage Servicing Right

N/A: Not Applicable

NII: Net Interest Income

NM: Not Meaningful

NSFR: Net Stable Funding Ratio

OAS: Option-Adjusted Spread

OCI: Other Comprehensive Income (Loss)

OREO: Other Real Estate Owned

OTTI: Other-Than-Temporary Impairment

PCA: Prompt Corrective Action

RCC: Risk Compliance Committee

RSF: Required Stable Funding

SARs: Stock Appreciation Rights

SBA: Small Business Administration

SEC: United States Securities and Exchange Commission

TBA: To Be Announced

TDR: Troubled Debt Restructuring

TILA: Truth in Lending Act

TRA: Tax Receivable Agreement

U.S.: United States of America

U.S. GAAP: United States Generally Accepted Accounting Principles

VA: United States Department of Veteran Affairs

VIE: Variable Interest Entity

VRDN: Variable Rate Demand Note

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

The following is Management’s Discussion and Analysis of Financial Condition and Results of Operations of certain significant factors that have affected Fifth Third Bancorp’s (the “Bancorp” or “Fifth Third”) financial condition and results of operations during the periods included in the Condensed Consolidated Financial Statements, which are a part of this filing. Reference to the Bancorp incorporates the parent holding company and all consolidated subsidiaries. The Bancorp’s banking subsidiary is referred to as the Bank.

TABLE 1: Selected Financial Data



		For the three months ended June 30,		%			For the six months ended June 30,		%
($ in millions, except for per share data)		2017	2016^(h)	Change			2017	2016^(h)	Change

Income Statement Data
Net interest income (U.S. GAAP)	$	939	902		4	$	1,872	1,805		4
Net interest income (FTE)^(a)(b)		945	908		4		1,884	1,817		4
Noninterest income		564	599		(6)		1,087	1,235		(12)
Total revenue^(a)		1,509	1,507		-		2,971	3,052		(3)
Provision for loan and lease losses		52	91		(43)		126	210		(40)
Noninterest expense		957	983		(3)		1,943	1,968		(1)
Net income attributable to Bancorp		367	328		12		672	654		3
Net income available to common shareholders		344	305		13		634	616		3

Common Share Data
Earnings per share - basic	$	0.46	0.40		15	$	0.84	0.80		5
Earnings per share - diluted		0.45	0.39		15		0.83	0.79		5
Cash dividends declared per common share		0.14	0.13		8		0.28	0.26		8
Book value per share		20.42	20.09		2		20.42	20.09		2
Market value per share		25.96	17.59		48		25.96	17.59		48

Financial Ratios
Return on average assets		1.05 %	0.92		14		0.97 %	0.92		5
Return on average common equity		9.0	8.0		13		8.4	8.2		2
Return on average tangible common equity^(b)		10.7	9.6		11		10.0	9.8		2
Dividend payout ratio		30.4	32.5		(6)		33.3	32.5		2
Average total Bancorp shareholders’ equity as a percent of average assets		11.84	11.60		2		11.78	11.59		2
Tangible common equity as a percent of tangible assets^(b)		9.02	8.64		4		9.02	8.64		4
Net interest margin^(a)(b)		3.01	2.88		5		3.01	2.89		4
Efficiency^(a)(b)		63.4	65.3		(3)		65.4	64.5		1

Credit Quality
Net losses charged-off	$	64	87		(26)	$	153	183		(16)
Net losses charged-off as a percent of average portfolio loans and leases		0.28 %	0.37		(24)		0.34 %	0.39		(13)
ALLL as a percent of portfolio loans and leases		1.34	1.38		(3)		1.34	1.38		(3)
Allowance for credit losses as a percent of portfolio loans and leases^(c)		1.52	1.54		(1)		1.52	1.54		(1)
Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO		0.72	0.86		(16)		0.72	0.86		(16)

Average Balances
Loans and leases, including held for sale	$	92,653	94,807		(2)	$	92,721	94,443		(2)
Total securities and other short-term investments		33,481	32,040		4		33,329	31,808		5
Total assets		140,344	142,920		(2)		140,243	142,251		(1)
Transaction deposits^(d)		95,825	94,929		1		96,419	94,806		2
Core deposits^(e)		99,570	98,973		1		100,205	98,845		1
Wholesale funding^(f)		20,665	23,084		(10)		19,900	22,509		(12)
Bancorp shareholders’ equity		16,615	16,584		-		16,522	16,479		-

Regulatory Capital and Liquidity Ratios
CET1 capital^(g)		10.63 %	9.94		7		10.63 %	9.94		7
Tier I risk-based capital^(g)		11.76	11.03		7		11.76	11.03		7
Total risk-based capital^(g)		15.22	14.66		4		15.22	14.66		4
Tier I leverage		10.07	9.64		4		10.07	9.64		4
CET1 capital (fully phased-in)^(b)(g)		10.52	9.86		7		10.52	9.86		7
Modified LCR		115	110		5		115	110		5

(a)

Amounts presented on an FTE basis. The FTE adjustment for both the three months ended June 30, 2017 and 2016 was $6, and for both the six months

ended June 30, 2017 and 2016 was $12.

(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)

Net tax deficiencies of $5 and $6 were reclassified from capital surplus to applicable income tax expense and average common shares outstanding – diluted were adjusted for the three and six months ended June 30, 2016, respectively, related to the early adoption of ASU 2016-09 during the fourth quarter of 2016, with an effective date of January 1, 2016.

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

OVERVIEW

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At June 30, 2017, the Bancorp had $141.1 billion in assets and operated 1,157 full-service banking centers, including 91 Bank Mart® locations open seven days a week, inside select grocery stores, and 2,461 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 $438 million at June 30, 2017.

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, 2016. Each of these items could have an impact on the Bancorp’s financial condition, results of operations and cash flows. In addition, refer to the Glossary of Abbreviations and Acronyms in this report for a list of terms included as a tool for the reader of this quarterly report on Form 10-Q. The abbreviations and acronyms identified therein are used throughout this MD&A, as well as the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements.

Net interest income, net interest margin and the efficiency ratio are presented in MD&A on an FTE basis. The FTE basis adjusts for the tax-favored status of income from certain loans and securities held by the Bancorp that are not taxable for federal income tax purposes. The Bancorp believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable and non-taxable amounts. The 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 both the three and six months ended June 30, 2017, net interest income on an FTE basis and noninterest income provided 63% and 37% 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 six months ended June 30, 2017. 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.

Noninterest income is derived from service charges on deposits, wealth and asset management revenue, corporate banking revenue, card and processing revenue, mortgage banking net revenue, net securities gains 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.

Accelerated Share Repurchase Transactions

During the six months ended June 30, 2017, the Bancorp entered into or settled 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 six months ended June 30, 2017, 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 20, 2016	$	155		4,843,750		1,044,362		5,888,112		February 6, 2017
May 1, 2017		342		11,641,971		2,248,250		13,890,221		July 31, 2017

Senior Notes Offering

On June 15, 2017, the Bancorp issued and sold $700 million of 2.60% senior fixed-rate notes, with a maturity of five years, due on June 15, 2022. These notes will be redeemable by the Bancorp, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest thereon to, but excluding, the redemption date.

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

Earnings Summary

The Bancorp’s net income available to common shareholders for the second quarter of 2017 was $344 million, or $0.45 per diluted share, which was net of $23 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the second quarter of 2016 was $305 million, or $0.39 per diluted share, which was net of $23 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the six months ended June 30, 2017 was $634 million, or $0.83 per diluted share, which was net of $38 million in preferred stock dividends. For the six months ended June 30, 2016, the Bancorp’s net income available to common shareholders was $616 million, or $0.79 per diluted share, which was net of $38 million in preferred stock dividends.

Net interest income on an FTE basis (non-GAAP) was $945 million and $1.9 billion for the three and six months ended June 30, 2017, respectively, an increase of $37 million and $67 million compared to the same periods in the prior year. For both the three and six months ended June 30, 2017, net interest income was positively impacted by increases in yields on average loans and leases, increases in average taxable securities and decreases in average long-term debt. Additionally, net interest income was positively impacted by the decisions of the Federal Open Market Committee in December 2016 and March 2017 to raise the target range of federal funds rate 25 bps coupled with an increase in the net interest rate spread. These positive impacts were partially offset by decreases in average loans and leases and increases in the rates paid on average long-term debt and average interest-bearing core deposits during both the three and six months ended June 30, 2017. Net interest margin on an FTE basis (non-GAAP) was 3.01% for both the three and six months ended June 30, 2017 compared to 2.88% and 2.89%, respectively, for the same periods in the prior year.

Noninterest income decreased $35 million for the three months ended June 30, 2017 compared to the same period in the prior year primarily due to decreases in mortgage banking net revenue and corporate banking revenue. Mortgage banking net revenue decreased $20 million for the three months ended June 30, 2017 compared to the three months ended June 30, 2016 primarily due to a $17 million decrease in origination fees and gains on loan sales. Corporate banking revenue decreased $16 million for the three months ended June 30, 2017 compared to the three months ended June 30, 2016 driven by decreases in syndication fees and foreign exchange fees. Noninterest income decreased $148 million for the six months ended June 30, 2017 compared to the same period in the prior year primarily due to decreases in other noninterest income, mortgage banking net revenue and corporate banking revenue. Other noninterest income decreased $55 million during the six months ended June 30, 2017 compared to the same period in the prior year primarily due to the impact of certain transactions that occurred during the six months ended June 30, 2016 which included valuation adjustments on the warrant associated with Vantiv Holding, LLC, gains on the sales of certain retail branch operations and gains on loan sales. These items were partially offset by a decrease in negative valuation adjustments on the swap associated with Visa, Inc. Class B Shares, and increases in private equity investment income. Mortgage banking net revenue decreased $46 million for the six months ended June 30, 2017 primarily due to decreases of $29 million in origination fees and gains on loan sales and decreases of $17 million in net mortgage servicing revenue. Corporate banking revenue decreased $44 million for the six months ended June 30, 2017 primarily due to a decrease in lease remarketing fees which included the impact of a $31 million impairment charge related to certain operating lease assets that was recognized during the first quarter of 2017 and a decrease in foreign exchange fees.

Noninterest expense decreased $26 million for the three months ended June 30, 2017 compared to the same period in the prior year primarily due to decreases in personnel costs, net occupancy expense, card and processing expense and other noninterest expense. Personnel costs decreased $9 million for the three months ended June 30, 2017 compared to the three months ended June 30, 2016 primarily driven by decreases in long-term incentive compensation. Net occupancy costs decreased $5 million for the three months ended June 30, 2017 compared to the same period in the prior year primarily due to lower rent expense. Card and processing expense decreased $4 million for the three months ended June 30, 2017 compared to the same period in the prior year primarily due to the impact of renegotiated service contracts. Other noninterest expense decreased $4 million for the three months ended June 30, 2017 compared to the three months ended June 30, 2016 primarily due to decreases in losses and adjustments, impairment on affordable housing investments and the provision for the reserve for unfunded commitments, partially offset by increases in professional fees, marketing expense and FDIC insurance and other taxes. Noninterest expense decreased $25 million for the six months ended June 30, 2017 compared to the same period in the prior year primarily due to decreases in other noninterest expense, card and processing expense and net occupancy expense, partially offset by an increase in personnel costs. Other noninterest expense decreased $18 million for the six months ended June 30, 2017 compared to the same period in the prior year primarily due to decreases in losses and adjustments, the provision for the reserve for unfunded commitments and impairment on affordable housing investments, partially offset by an increase in professional service fees. Card and processing expense decreased $9 million for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 primarily due to the impact of renegotiated service contracts. Net occupancy expense decreased $4 million for the six months ended June 30, 2017 compared to the six months ended June 30, 2016 primarily due to lower rent expense. These items were partially offset by an increase in personnel costs of $9 million for the six months ended June 30, 2017 driven by increases in variable compensation and long-term incentive compensation, partially offset by a decrease in severance costs related to the voluntary early retirement program in 2016.

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 $52 million and $126 million for the three and six months ended June 30, 2017, respectively, compared to $91 million and $210 million for the comparable periods in 2016. Net losses charged-off as a percent of average portfolio loans and leases decreased to 0.28% during the three months ended June 30, 2017 compared to 0.37% during the same period in the prior year and decreased to 0.34% for the six months ended June 30, 2017 compared to 0.39% for the same period in the prior year. At June 30, 2017, nonperforming portfolio assets as a percent of portfolio loans and leases and OREO decreased to 0.72% compared to 0.80% at December 31, 2016. For further discussion on credit quality refer to the Credit Risk Management subsection of the Risk Management section of MD&A.

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

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 June 30, 2017, as calculated under the Basel III transition provisions, the CET1 capital ratio was 10.63%, the Tier I risk-based capital ratio was 11.76%, the Total risk-based capital ratio was 15.22% and the Tier I leverage ratio was 10.07%.

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, net interest margin and the efficiency ratio on an FTE basis to U.S. GAAP:

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



		For the three months ended June 30,				For the six months ended June 30,
($ in millions)		2017		2016		2017		2016

Net interest income (U.S. GAAP)	$		939		902		1,872		1,805
Add: FTE adjustment			6		6		12		12

Net interest income on an FTE basis (1)	$		945		908		1,884		1,817
Net interest income on an FTE basis (annualized) (2)			3,790		3,652		3,768		3,634

Noninterest income (3)	$		564		599		1,087		1,235
Noninterest expense (4)			957		983		1,943		1,968
Average interest-earning assets (5)			126,134		126,847		126,050		126,251

Ratios:
Net interest margin on an FTE basis (2) / (5)			3.01 %		2.88		3.01		2.89
Efficiency ratio on an FTE basis (4) / (1) + (3)			63.4		65.3		65.4		64.5

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 June 30,				For the six months ended June 30,
($ in millions)		2017		2016		2017		2016

Income before income taxes (U.S. GAAP)	$		494		427		890		862
Add: FTE adjustment			6		6		12		12

Income before income taxes on an FTE basis	$		500		433		902		874

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.

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

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



		For the three months ended June 30,		For the six months ended June 30,
($ in millions)		2017	2016^(a)	2017	2016^(a)

Net income available to common shareholders (U.S. GAAP)	$	344	305	634	616
Add: Intangible amortization, net of tax		-	-	1	1

Tangible net income available to common shareholders	$	344	305	635	617
Tangible net income available to common shareholders (annualized) (1)		1,380	1,227	1,270	1,234
Average Bancorp shareholders’ equity (U.S. GAAP)	$	16,615	16,584	16,522	16,479
Less: Average preferred stock		(1,331)	(1,331)	(1,331)	(1,331)
Average goodwill		(2,424)	(2,416)	(2,420)	(2,416)
Average intangible assets and other servicing rights		(18)	(11)	(14)	(12)

Average tangible common equity (2)	$	12,842	12,826	12,757	12,720

Return on average tangible common equity (1) / (2)		10.7 %	9.6	10.0	9.8

(a)

Net tax deficiencies of $5 and $6 were reclassified from capital surplus to applicable income tax expense for the three and six months ended June 30, 2016, respectively, related to the early adoption of ASU 2016-09 during the fourth quarter of 2016, with an effective date of January 1, 2016.

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

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.

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

TABLE 6: Non-GAAP Financial Measures - Capital Ratios


As of ($ in millions)	June 30, 2017			December 31, 2016
Total Bancorp Shareholders’ Equity (U.S. GAAP)	$	16,419			16,205
Less: Preferred stock		(1,331	)		(1,331)
Goodwill		(2,423	)		(2,416)
Intangible assets		(18	)		(10)
Tangible common equity, including unrealized gains / losses (1)		12,647			12,448
Less: AOCI		(163	)		(59)
Tangible common equity, excluding unrealized gains / losses (2)		12,484			12,389
Add: Preferred stock		1,331			1,331
Tangible equity (3)	$	13,815			13,720

Total Assets (U.S. GAAP)	$	141,067			142,177
Less: Goodwill		(2,423	)		(2,416)
Intangible assets		(18	)		(10)
AOCI, before tax		(251	)		(91)
Tangible assets, excluding unrealized gains / losses (4)	$	138,375			139,660

Common shares outstanding (5)		739			750

Ratios:
Tangible equity as a percentage of tangible assets (3) / (4)		9.98	%		9.82
Tangible common equity as a percentage of tangible assets (2) / (4)		9.02			8.87

Tangible book value per share (1) / (5)	$	17.11			16.60

Basel III Final Rule - Transition to Fully Phased-In
CET1 capital (transitional)	$	12,522			12,426
Less: Adjustments to CET1 capital from transitional to fully phased-in^(a)		(4	)		(4)
CET1 capital (fully phased-in) (6)		12,518			12,422
Risk-weighted assets (transitional)^(b)		117,761			119,632
Add: Adjustments to risk-weighted assets from transitional to fully phased-in^(c)		1,274			1,115
Risk-weighted assets (fully phased-in) (7)	$	119,035			120,747
CET1 capital ratio under Basel III Final Rule (fully phased-in) (6) / (7)		10.52	%		10.29

(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.

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

RECENT ACCOUNTING STANDARDS

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

CRITICAL ACCOUNTING POLICIES

The Bancorp’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. Certain accounting policies require management to exercise judgment in determining methodologies, economic assumptions and estimates that may materially affect the 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, 2016. Effective January 1, 2017, the Bancorp elected to adopt the fair value method of measuring all existing classes of its residential mortgage servicing rights as described below. Previously, the Bancorp had measured its servicing rights subsequent to initial recognition using the amortization method. There have been no other material changes to the valuation techniques or models during the six months ended June 30, 2017.

Valuation of Servicing Rights

When the Bancorp sells loans through either securitizations or individual loan sales in accordance with its investment policies, it often obtains servicing rights. The Bancorp may also purchase servicing rights from time to time. Effective January 1, 2017, the Bancorp elected to prospectively adopt the fair value method for all existing classes of its residential mortgage servicing rights portfolio. Upon this election, all servicing rights are measured at fair value at each reporting date and changes in the fair value of servicing rights are reported in earnings in the period in which the changes occur. Servicing rights are valued using internal OAS models. Significant management judgment is necessary to identify key economic assumptions used in estimating the fair value of the servicing rights including the prepayment speeds of the underlying loans, the weighted-average life, the OAS spread and the weighted-average coupon rate, as applicable. The primary risk of material changes to the value of the servicing rights resides in the potential volatility in the economic assumptions used, particularly the prepayment speeds. In order to assist in the assessment of the fair value of servicing rights, the Bancorp obtains external valuations of the servicing rights portfolio from third parties and participates in peer surveys that provide additional confirmation of the reasonableness of key assumptions utilized in the internal OAS model.

Prior to the election of the fair value method, servicing rights were initially recorded at fair value and subsequently amortized in proportion to, and over the period of, estimated net servicing revenue. Servicing rights were assessed for impairment monthly, based on fair value, with temporary impairment recognized through a valuation allowance and other-than-temporary impairment recognized through a write-off of the servicing asset and related valuation allowance.

For additional information on servicing rights, refer to Note 11 of the Notes to Condensed Consolidated Financial Statements.

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 7 and 8 present the components of net interest income, net interest margin and net interest rate spread for the three and six months ended June 30, 2017 and 2016, 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 $945 million and $1.9 billion for the three and six months ended June 30, 2017, respectively, an increase of $37 million and $67 million compared to the same periods in the prior year. Net interest income was positively impacted by an increase in yields on average loans and leases of 29 bps for the three months ended June 30, 2017 and an increase of 26 bps for the six months ended June 30, 2017 which included the impact of a $12 million benefit in interest income related to a revised estimate of refunds to be offered to certain bankcard customers. Net interest income also benefited from increases in average taxable securities of $2.1 billion for both the three and six months ended June 30, 2017 and decreases in average long-term debt of $2.1 billion and $1.6 billion for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. Additionally, net interest income was positively impacted by the decisions of the Federal Open Market Committee in December 2016 and March 2017 to raise the target range of the federal funds rate 25 bps coupled with an increase in the net interest rate spread to 2.75% and 2.77% during the three and six months ended June 30, 2017, respectively, from 2.67% and 2.68% in the same periods in the prior year. Yields on average interest-earning assets increased 20 bps and 19 bps for the three and six months ended June 30, 2017, respectively, partially offset by a 12 bps and 10 bps increase in rates paid on average interest-bearing liabilities for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. These positive impacts were partially offset by decreases in average loans and leases and increases in the rates paid on average long term debt and interest-bearing core deposits for both the three and six months ended June 30, 2017 compared to the same periods in the prior year. Average loans and leases decreased $2.2 billion and $1.7 billion for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. The rates paid on average long-term debt increased 40 bps and 42 bps, respectively, and the rates paid on average interest-bearing core deposits increased 8 bps and 7 bps, respectively, for the three and six months ended June 30, 2017 compared to the same periods in the prior year.

Net interest margin on an FTE basis (non-GAAP) was 3.01% for both the three and six months ended June 30, 2017 compared to 2.88% and 2.89% for the three and six months ended June 30, 2016, respectively. The increase for both periods was driven primarily by the previously mentioned increases in the net interest rate spread coupled with a decrease in average interest-earning assets of $713 million and $201 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year partially offset by a decrease in average free funding balances. The decrease in average free funding balances for both periods was driven by a decrease in average demand deposits of $997 million and $558 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year partially offset by an increase in average shareholders’ equity of $26 million and $38 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year.

Interest income on an FTE basis from loans and leases (non-GAAP) increased $50 million and $83 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. The increase for both periods was driven by the previously mentioned increases in yields on average loans and leases, partially offset by decreases in average loans and leases. Average loans and leases decreased for both periods primarily due to decreases in average commercial and industrial loans and average automobile loans partially offset by an increase in average residential mortgage loans. For more information on the Bancorp’s loan and lease portfolio, refer to the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A. Interest income from investment securities and other short-term investments increased $10 million and $24 million for the three and six months ended June 30, 2017, 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 $14 million and $25 million for the three and six months ended June 30, 2017, 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 34 bps and 33 bps for the three and six months ended June 30, 2017, respectively, from 26 bps for both the three and six months ended June 30, 2016. 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 and 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 $9 million and $15 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily due to the previously mentioned increases in the rates paid on average long-term debt partially offset by the aforementioned decreases in average long-term debt. Refer to the Borrowings subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s borrowings. During the three and six months ended June 30, 2017, average wholesale funding represented 24% and 23% of average interest-bearing liabilities, respectively, compared to 27% and 26% during the three and six months ended June 30, 2016, respectively. For more information on the Bancorp’s interest rate risk management, including estimated earnings sensitivity to changes in market interest rates, see the Market Risk Management subsection of the Risk Management section of MD&A.

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


TABLE 7: Condensed Average Balance Sheets and Analysis of Net Interest Income on an FTE Basis
For the three months ended	June 30, 2017							June 30, 2016							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	$	41,656		374		3.60	%	$	43,878		354		3.25	%	$	(17)		37		20
Commercial mortgage loans		6,861		63		3.65			6,835		55		3.28			2		6		8
Commercial construction loans		4,306		43		4.01			3,551		30		3.36			7		6		13
Commercial leases		4,039		27		2.73			3,904		27		2.71			-		-		-
Total commercial loans and leases		56,862		507		3.57			58,168		466		3.22			(8)		49		41
Residential mortgage loans		16,024		141		3.54			14,842		132		3.57			10		(1)		9
Home equity		7,385		77		4.20			8,059		76		3.81			(7)		8		1
Automobile loans		9,410		67		2.87			10,887		73		2.68			(11)		5		(6)
Credit card		2,080		57		10.95			2,198		57		10.47			(3)		3		-
Other consumer loans and leases		892		15		6.63			653		10		6.36			5		-		5
Total consumer loans and leases		35,791		357		4.01			36,639		348		3.82			(6)		15		9
Total loans and leases	$	92,653		864		3.74	%	$	94,807		814		3.45	%	$	(14)		64		50
Securities:
Taxable		32,092		244		3.05			30,002		235		3.16			17		(8)		9
Exempt from income taxes^(b)		68		1		5.10			85		1		4.09			-		-		-
Other short-term investments		1,321		3		0.99			1,953		2		0.43			(1)		2		1
Total interest-earning assets	$	126,134		1,112		3.54	%	$	126,847		1,052		3.34	%	$	2		58		60
Cash and due from banks		2,175							2,228
Other assets		13,272							15,140
Allowance for loan and lease losses		(1,237)							(1,295)
Total assets	$	140,344						$	142,920
Liabilities and Equity:
Interest-bearing liabilities:
Interest checking deposits	$	26,014		25		0.38	%	$	24,714		14		0.22	%	$	1		10		11
Savings deposits		14,238		2		0.06			14,576		2		0.05			-		-		-
Money market deposits		20,278		17		0.34			19,243		13		0.26			-		4		4
Foreign office deposits		380		-		0.18			484		-		0.15			-		-		-
Other time deposits		3,745		11		1.23			4,044		12		1.24			(1)		-		(1)
Total interest-bearing core deposits		64,655		55		0.34			63,061		41		0.26			-		14		14
Certificates $100,000 and over		2,623		9		1.36			2,819		9		1.29			-		-		-
Other deposits		264		1		0.98			467		-		0.40			-		1		1
Federal funds purchased		311		1		0.94			693		1		0.39			(1)		1		-
Other short-term borrowings		4,194		10		0.93			3,754		3		0.36			1		6		7
Long-term debt		13,273		91		2.76			15,351		90		2.36			(13)		14		1
Total interest-bearing liabilities	$	85,320		167		0.79	%	$	86,145		144		0.67	%	$	(13)		36		23
Demand deposits		34,915							35,912
Other liabilities		3,467							4,247
Total liabilities	$	123,702						$	126,304
Total equity	$	16,642						$	16,616
Total liabilities and equity	$	140,344						$	142,920
Net interest income (FTE)^(c)			$	945						$	908				$	15		22		37
Net interest margin (FTE)^(c)						3.01	%						2.88	%
Net interest rate spread (FTE)						2.75							2.67
Interest-bearing liabilities to interest-earning assets						67.64							67.91

(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 for both the three months ended June 30, 2017 and 2016.

(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.

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

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


For the six months ended	June 30, 2017							June 30, 2016							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	$	41,773		732		3.53	%	$	43,503		701		3.24	%	$	(31)		62		31
Commercial mortgage loans		6,903		123		3.60			6,871		112		3.28			-		11		11
Commercial construction loans		4,147		80		3.89			3,424		57		3.37			13		10		23
Commercial leases		3,972		54		2.71			3,889		53		2.74			2		(1)		1
Total commercial loans and leases		56,795		989		3.51			57,687		923		3.22			(16)		82		66
Residential mortgage loans		15,912		280		3.55			14,623		262		3.60			21		(3)		18
Home equity		7,482		152		4.09			8,150		154		3.80			(13)		11		(2)
Automobile loans		9,597		135		2.84			11,086		147		2.66			(21)		9		(12)
Credit card		2,111		125		11.95			2,238		118		10.56			(8)		15		7
Other consumer loans and leases		824		27		6.57			659		21		6.31			5		1		6
Total consumer loans and leases		35,926		719		4.04			36,756		702		3.83			(16)		33		17
Total loans and leases	$	92,721		1,708		3.72	%	$	94,443		1,625		3.46	%	$	(32)		115		83
Securities:
Taxable		31,954		488		3.08			29,811		467		3.15			31		(10)		21
Exempt from income taxes^(b)		61		2		5.41			82		1		4.20			1		-		1
Other short-term investments		1,314		6		0.86			1,915		4		0.42			(1)		3		2
Total interest-earning assets	$	126,050		2,204		3.53	%	$	126,251		2,097		3.34	%	$	(1)		108		107
Cash and due from banks		2,190							2,282
Other assets		13,248							15,002
Allowance for loan and lease losses		(1,245)							(1,284)
Total assets	$	140,243						$	142,251
Liabilities and Equity:
Interest-bearing liabilities:
Interest checking deposits	$	26,385		45		0.34	%	$	25,227		28		0.23	%	$	2		15		17
Savings deposits		14,178		4		0.05			14,589		4		0.05			-		-		-
Money market deposits		20,440		34		0.33			18,949		24		0.25			2		8		10
Foreign office deposits		417		-		0.15			484		-		0.15			-		-		-
Other time deposits		3,786		23		1.23			4,039		25		1.23			(2)		-		(2)
Total interest-bearing core deposits		65,206		106		0.33			63,288		81		0.26			2		23		25
Certificates $100,000 and over		2,601		17		1.36			2,817		18		1.29			(2)		1		(1)
Other deposits		213		1		0.85			234		-		0.40			1		-		1
Federal funds purchased		474		2		0.78			651		1		0.37			-		1		1
Other short-term borrowings		3,050		12		0.81			3,659		7		0.37			(2)		7		5
Long-term debt		13,562		182		2.71			15,148		173		2.29			(20)		29		9
Total interest-bearing liabilities	$	85,106		320		0.76	%	$	85,797		280		0.66	%	$	(21)		61		40
Demand deposits		34,999							35,557
Other liabilities		3,589							4,386
Total liabilities	$	123,694						$	125,740
Total equity	$	16,549						$	16,511
Total liabilities and equity	$	140,243						$	142,251
Net interest income (FTE)^(c)			$	1,884						$	1,817				$	20		47		67
Net interest margin (FTE)^(c)						3.01	%						2.89	%
Net interest rate spread (FTE)						2.77							2.68
Interest-bearing liabilities to interest-earning assets						67.52							67.96

(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 $12 for both the six months ended June 30, 2017 and 2016.

(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.

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, 2016. 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.

The provision for loan and lease losses was $52 million and $126 million for the three and six months ended June 30, 2017, respectively, compared to $91 million and $210 million during the same periods in the prior year. The decrease in provision expense for both periods was primarily due to the decrease in the level of commercial criticized assets, which reflected improvement in the national economy and stabilization of commodity prices, and a decrease in outstanding loan balances. The ALLL decreased $27 million from December 31, 2016 to $1.2 billion at June 30, 2017. At June 30, 2017, the ALLL as a percent of portfolio loans and leases decreased to 1.34% compared to 1.36% at December 31, 2016.

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

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 decreased $35 million and $148 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year.

The following table presents the components of noninterest income:

TABLE 9: Components of Noninterest Income


		For the three months ended June 30,							For the six months ended June 30,
($ in millions)		2017		2016		% Change			2017		2016		% Change
Service charges on deposits	$		139		138		1	$		277		274		1
Wealth and asset management revenue			103		101		2			211		203		4
Corporate banking revenue			101		117		(14)			175		219		(20)
Card and processing revenue			79		82		(4)			153		161		(5)
Mortgage banking net revenue			55		75		(27)			108		154		(30)
Other noninterest income			85		80		6			160		215		(26)
Securities gains, net			-		6		(100)			1		9		(89)
Securities gains, net, non-qualifying hedges on MSRs			2		-		NM			2		-		NM
Total noninterest income	$		564		599		(6)	$		1,087		1,235		(12)

Wealth and asset management revenue

Wealth and asset management revenue increased $2 million and $8 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. The increase for both the three and six months ended June 30, 2017 compared to the same periods in the prior year was primarily due to increases of $1 million and $6 million, respectively, in private client service fees driven by an increase in assets under management as a result of strong market performance and increased asset production. The increase for the six months ended June 30, 2017 compared to the same period in the prior year also included a $2 million increase in securities and brokerage fees. The Bancorp’s trust and registered investment advisory businesses had approximately $330 billion and $305 billion in total assets under care at June 30, 2017 and 2016, respectively, and managed $34 billion and $30 billion in assets for individuals, corporations and not-for-profit organizations at June 30, 2017 and 2016, respectively.

Corporate banking revenue

Corporate banking revenue decreased $16 million and $44 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. The decrease for the three months ended June 30, 2017 compared to the same period in the prior year was primarily driven by an $8 million decrease in syndication fees and an $8 million decrease in foreign exchange fees. The decrease for the six months ended June 30, 2017 compared to the same period in the prior year was primarily driven by a decrease in lease remarketing fees which included the impact of a $31 million impairment charge related to certain operating lease assets that was recognized during the first quarter of 2017. The decrease for the six months ended June 30, 2017 compared to the same period in the prior year also included a $10 million decrease in foreign exchange fees.

Card and processing revenue

Card and processing revenue decreased $3 million and $8 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. The decreases for both the three and six months ended June 30, 2017 compared to the same periods in the prior year were primarily driven by higher reward costs. The decrease for the six months ended June 30, 2017 compared to the same period in the prior year also included the impact of the sale of the agent bankcard portfolio during the second quarter of 2016.

Mortgage banking net revenue

Mortgage banking net revenue decreased $20 million and $46 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year.

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

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

TABLE 10: Components of Mortgage Banking Net Revenue



		For the three months ended June 30,				For the six months ended June 30,
($ in millions)		2017			2016	2017	2016

Origination fees and gains on loan sales	$		37		54	66	95
Net mortgage servicing revenue:
Gross mortgage servicing fees			49		50	97	102
MSR amortization			-		(35)	-	(61)
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs			(31	)	6	(55)	18

Net mortgage servicing revenue			18		21	42	59

Mortgage banking net revenue	$		55		75	108	154

Origination fees and gains on loan sales decreased $17 million for the three months ended June 30, 2017 compared to the same period in the prior year driven by a decrease in originations. Origination fees and gains on loan sales decreased $29 million for the six months ended June 30, 2017 driven by lower margins due to the interest rate environment.

Effective January 1, 2017, the Bancorp elected to prospectively adopt the fair value method for all existing classes of its residential mortgage servicing rights portfolio. Upon this election, all servicing rights are measured at fair value at each reporting date and changes in the fair value of servicing rights are reported in mortgage banking net revenue in the Condensed Consolidated Statements of Income in the period in which the changes occur.

Net mortgage servicing revenue decreased $3 million and $17 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. The decreases for the three and six months ended June 30, 2017 compared to the same periods in the prior year were primarily due to decreases in net valuation adjustments (including MSR amortization) of $2 million and $12 million, respectively, and decreases in gross mortgage servicing fees of $1 million and $5 million, respectively. Refer to Table 11 for the components of net valuation adjustments on the MSR portfolio and the impact of the non-qualifying hedging strategy:

TABLE 11: Components of Net Valuation Adjustments on MSRs



			For the three months ended June 30,				For the six months ended June 30,
($ in millions)		2017		2016		2017		2016
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio	$		16		51		15		149
Changes in fair value:
Due to changes in inputs or assumptions			(17)		-		(13)		-
Other changes in fair value			(30)		-		(57)		-
Provision for MSR impairment			-		(45)		-		(131)

Net valuation adjustments on MSR and free-standing derivatives purchased to economically hedge MSRs	$		(31)		6		(55)		18

Mortgage rates decreased during both the three and six months ended June 30, 2017 which caused modeled prepayment speeds to increase, which led to fair value adjustments on servicing rights. The fair value of the MSR decreased $17 million and $13 million, respectively, due to changes to inputs to the valuation model including prepayment speeds and OAS spread assumptions and decreased $30 million and $57 million, respectively, due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs for the three and six months ended June 30, 2017. Mortgage rates also decreased during both the three and six months ended June 30, 2016 which caused modeled prepayment speeds to increase which led to temporary impairment of $45 million and $131 million, respectively, on servicing rights. Previously, servicing rights were deemed temporarily impaired when a borrower’s loan rate was distinctly higher than prevailing rates. Temporary impairment on servicing rights was reversed when the prevailing rates returned 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 of 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.

In addition to the derivative positions used to economically hedge the MSR portfolio, the Bancorp acquires various securities as a component of its non-qualifying hedging strategy. The Bancorp recognized net gains of $2 million during the three and six months ended June 30, 2017, recorded in securities gains, net, non-qualifying hedges on mortgage servicing rights in the Bancorp’s Condensed Consolidated Statements of Income. The Bancorp did not hold any securities as economic hedges on MSRs during the three and six months ended June 30, 2016.

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

The Bancorp’s total residential loans serviced at June 30, 2017 and 2016 were $78.0 billion and $71.3 billion, respectively, with $61.8 billion and $56.2 billion, respectively, of residential mortgage loans serviced for others.

Other noninterest income

The following table presents the components of other noninterest income:

TABLE 12: Components of Other Noninterest Income


		For the three months ended June 30,					For the six months ended June 30,
($ in millions)		2017			2016		2017		2016
Operating lease income	$		24			25		49		49
Cardholder fees			13			10		27		21
Private equity investment income			12			6		26		10
BOLI income			13			14		25		27
Equity method income from interest in Vantiv Holding, LLC			12			18		24		31
Consumer loan and lease fees			6			6		11		11
Banking center income			5			5		10		10
Insurance income			2			3		3		6
Loss on swap associated with the sale of Visa, Inc. class B Shares			(9	)		(50)		(22)		(50)
Net (losses) gains on disposition and impairment of bank premises and equipment			(1	)		2		(2)		2
Net (losses) gains on loan sales			-			10		(2)		8
Valuation adjustments on the warrant associated with Vantiv Holding, LLC			-			19		-		66
Gains on sales of certain retail branches			-			11		-		19
Other, net			8			1		11		5
Total other noninterest income	$		85			80		160		215

Other noninterest income increased $5 million during the three months ended June 30, 2017 compared to the same period in the prior year primarily due to a decrease in the negative valuation adjustment on the swap associated with Visa, Inc. Class B Shares and an increase in private equity investment income. These benefits were partially offset by the impact of certain transactions that occurred during the second quarter of 2016 which included a valuation adjustment on the warrant associated with Vantiv Holding, LLC, gains on the sale of certain retail branch operations, and gains on loan sales.

The Bancorp recognized a $9 million negative valuation adjustment related to the Visa total return swap for the three months ended June 30, 2017 compared to a negative valuation adjustment of $50 million for the three months ended June 30, 2016. The prior year adjustment was primarily attributable to the decision of the United States 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. Private equity investment income increased $6 million for the three months ended June 30, 2017 compared to the same period in the prior year primarily due to gains on the sale of certain private equity funds. During the second quarter of 2016, the Bancorp recognized a $19 million positive valuation adjustment on the stock warrant associated with Vantiv Holding, LLC. The stock warrant was not outstanding during 2017 as the Bancorp exercised the remaining warrant in Vantiv Holding, LLC during the fourth quarter of 2016. During the second quarter of 2016, the Bancorp recognized an $11 million gain on the sale of its retail branch operations in the Pittsburgh MSA to First National Bank of Pennsylvania as part of the previously announced Branch Consolidation and Sales Plan. The Bancorp recognized an immaterial amount of net gains on loan sales during the three months ended June 30, 2017 compared to $10 million during the same period in the prior year.

Other noninterest income decreased $55 million during the six months ended June 30, 2017 compared to the same period in the prior year primarily due to the impact of certain transactions that occurred during the six months ended June 30, 2016 which included valuation adjustments on the warrant associated with Vantiv Holding, LLC, gains on the sales of certain retail branch operations and gains on loan sales. These items were partially offset by a decrease in negative valuation adjustments on the swap associated with Visa, Inc. Class B Shares, and increases in private equity investment income.

The six months ended June 30, 2016 included positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC of $66 million. During the six months ended June 30, 2016, the Bancorp recognized $19 million of gains on the sales of its retail branch operations in the St. Louis MSA to Great Southern Bank and Pittsburgh MSA to First National Bank of Pennsylvania as part of the previously announced Branch Consolidation and Sales Plan. The Bancorp recognized net losses on loan sales of $2 million during the six months ended June 30, 2017 compared to $8 million of net gains on loan sales during the same period in the prior year. As discussed above, during the six months ended June 30, 2016, the Bancorp recognized $50 million in negative valuation adjustments compared with $22 million for the six months ended June 30, 2017 related to the Visa total return swap. Private equity investment income increased $16 million for the six months ended June 30, 2017 compared to the same period in the prior year primarily due to gains on the sales of certain private equity funds.

For additional information on the valuation of the warrant associated with the sale of Vantiv Holding, LLC and the valuation of the swap associated with the sale of Visa, Inc. Class B Shares, and the related Visa litigation matters, refer to Note 16, Note 17, and Note 21 of the Notes to Condensed Consolidated Financial Statements.

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

Noninterest Expense

Noninterest expense decreased $26 million for the three months ended June 30, 2017 compared to the same period in the prior year primarily due to decreases in personnel costs (salaries, wages and incentives plus employee benefits), net occupancy expense, card and processing expense and other noninterest expense. Noninterest expense decreased $25 million for the six months ended June 30, 2017 compared to the same period in the prior year primarily due to decreases in other noninterest expense, card and processing expense and net occupancy expense, partially offset by an increase in personnel costs.

The following table presents the components of noninterest expense:

TABLE 13: Components of Noninterest Expense


		For the three months ended June 30,							For the six months ended June 30,
($ in millions)		2017			2016		% Change		2017			2016		% Change
Salaries, wages and incentives	$		397			407	(2)	$		808			810	-
Employee benefits			86			85	1			196			185	6
Net occupancy expense			70			75	(7)			148			152	(3)
Technology and communications			57			60	(5)			116			116	-
Card and processing expense			33			37	(11)			63			72	(13)
Equipment expense			29			30	(3)			57			60	(5)
Other noninterest expense			285			289	(1)			555			573	(3)
Total noninterest expense	$		957			983	(3)	$		1,943			1,968	(1)
Efficiency ratio on an FTE basis^(a)			63.4	%		65.3				65.4	%		64.5

(a)

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

Personnel costs decreased $9 million for the three months ended June 30, 2017, compared to the same period in the prior year. The decrease was primarily driven by a decrease in long-term incentive compensation as a result of the Bancorp issuing non-executive grants in the first quarter of 2017 where they have historically been issued in the second quarter. Personnel costs increased $9 million for the six months ended June 30, 2017, compared to the same period in the prior year. The increase was driven by increases in variable compensation and long-term incentive compensation, partially offset by a decrease in severance costs related to the voluntary early retirement program in 2016. Full-time equivalent employees totaled 17,744 at June 30, 2017 compared to 18,051 at June 30, 2016.

Net occupancy expense decreased $5 million and $4 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily due to lower rent expense driven by a reduction in the number of full-service banking centers and ATM locations.

Card and processing expense decreased $4 million and $9 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily due to the impact of renegotiated service contracts.

The following table presents the components of other noninterest expense:

TABLE 14: Components of Other Noninterest Expense


		For the three months ended June 30,			For the six months ended June 30,
($ in millions)		2017		2016	2017	2016
Impairment on affordable housing investments	$		38	43	77	85
FDIC insurance and other taxes			32	28	65	62
Marketing			30	26	49	51
Loan and lease			24	28	46	51
Operating lease			21	21	46	41
Professional service fees			22	15	44	30
Data processing			15	12	28	24
Losses and adjustments			11	20	26	43
Travel			12	11	23	23
Postal and courier			11	12	23	23
Recruitment and education			9	9	17	18
Supplies			4	4	7	7
Insurance			3	4	6	8
Donations			3	3	6	6
Provision for the reserve for unfunded commitments			3	7	1	13
Other, net			47	46	91	88
Total other noninterest expense	$		285	289	555	573

Other noninterest expense decreased $4 million for the three months ended June 30, 2017 compared to the same period in the prior year primarily due to decreases in losses and adjustments, impairment on affordable housing investments and the provision for the reserve for unfunded commitments, partially offset by increases in professional service fees, marketing expense and FDIC insurance and other taxes. Losses and adjustments decreased $9 million for the three months ended June 30, 2017 compared to the same period in the prior year primarily due to the impact of legal reserves established during the second quarter of 2016 and favorable legal settlements during the three months ended June 30, 2017. Impairment on affordable housing investments decreased $5 million for the three months ended June 30, 2017 compared to the same period in the prior year primarily due to a decrease in the number of investments.

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

The provision for the reserve for unfunded commitments decreased $4 million for the three months ended June 30, 2017 compared to the same period in the prior year primarily due to a decrease in total unfunded commitments outstanding. Professional service fees increased $7 million for the three months ended June 30, 2017 compared to the same period in the prior year primarily due to investments in the NorthStar strategy and other strategic initiatives. Marketing expense increased $4 million for the three months ended June 30, 2017 compared to the same period in the prior year primarily due to the new brand campaign. FDIC insurance and other taxes increased $4 million for the three months ended June 30, 2017 compared to the three months ended June 30, 2016 primarily due to the implementation of the FDIC surcharge in the third quarter of 2016.

Other noninterest expense decreased $18 million for the six months ended June 30, 2017 compared to the same period in the prior year primarily due to decreases in losses and adjustments, the provision for the reserve for unfunded commitments and impairment on affordable housing investments, partially offset by an increase in professional service fees. Losses and adjustments decreased $17 million for the six months ended June 30, 2017 compared to the same period in the prior year primarily due to the impact of legal reserves established during the six months ended June 30, 2016 and the impact of favorable legal settlements during the six months ended June 30, 2017. The provision for the reserve for unfunded commitments decreased $12 million for the six months ended June 30, 2017 compared to the same period in the prior year primarily due to a decrease in total unfunded commitments outstanding. Impairment on affordable housing investments decreased $8 million for the six months ended June 30, 2017 compared to the same period in the prior year primarily due to a decrease in the number of investments. Professional service fees increased $14 million for the six months ended June 30, 2017 compared to the same period in the prior year primarily due to investments in the NorthStar strategy and other strategic initiatives.

Applicable Income Taxes

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

TABLE 15: Applicable Income Taxes


		For the three months ended June 30,		For the six months ended June 30,
($ in millions)		2017	2016^(a)	2017	2016^(a)
Income before income taxes	$	494	427	890	862
Applicable income tax expense		127	103	218	212
Effective tax rate		25.9%	23.9	24.5	24.5

(a)

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

The increase in the effective tax rate for the three months ended June 30, 2017 compared to the same period in the prior year is primarily the result of a tax benefit that was recorded in the second quarter of 2016 related to a change in the estimated deductibility of a prior expense.

For stock-based awards, U.S. GAAP requires that the tax consequences for the difference between the expense recognized for financial reporting and the Bancorp’s actual tax deduction for the stock-based awards be recognized through income tax expense in the interim periods in which they occur. In 2017, the Bancorp transitioned to granting its non-executive stock based compensation awards in the first quarter of the calendar year rather than the second quarter as it had done in previous years. In light of this change to the timing of these annual grants, the Bancorp expects to recognize the excess tax benefits or deficiencies associated with its restricted stock awards primarily in the first and second quarters of 2018, 2019, 2020 and in the first quarter of 2021 as these annual awards vest.

The Bancorp cannot predict its stock price or whether and when its employees will exercise stock-based awards in the future. Based on its stock price at June 30, 2017, the Bancorp estimates that it may be necessary to recognize $12 million of additional income tax benefit over the next twelve months related to the settlement of stock-based awards primarily in the first half of 2018. However, the amount of income tax expense or benefit recognized upon settlement may vary significantly from expectations based on the Bancorp’s stock price and the number of SARs exercised by employees.

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 16 summarizes end of period loans and leases, including loans held for sale and Table 17 summarizes average total loans and leases, including loans held for sale.

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


		June 30, 2017			December 31, 2016
As of ($ in millions)		Carrying Value		% of Total	Carrying Value		% of Total
Commercial loans and leases:
Commercial and industrial loans	$		40,923	44	$	41,736		46
Commercial mortgage loans			6,876	7		6,904		7
Commercial construction loans			4,366	5		3,903		4
Commercial leases			4,157	5		3,974		4
Total commercial loans and leases	$		56,322	61	$	56,517		61
Consumer loans and leases:
Residential mortgage loans			16,209	18		15,737		17
Home equity			7,301	8		7,695		8
Automobile loans			9,318	10		9,983		11
Credit card			2,117	2		2,237		2
Other consumer loans and leases			945	1		680		1
Total consumer loans and leases	$		35,890	39	$	36,332		39
Total loans and leases	$		92,212	100	$	92,849		100
Total portfolio loans and leases (excluding loans held for sale)	$		91,446		$	92,098

Loans and leases, including loans held for sale, decreased $637 million, or 1%, from December 31, 2016. The decrease from December 31, 2016 was the result of a $442 million, or 1%, decrease in consumer loans and leases and a $195 million decrease in commercial loans and leases.

Consumer loans and leases decreased from December 31, 2016 primarily due to decreases in automobile loans, home equity and credit card, partially offset by an increase in residential mortgage loans. Automobile loans decreased $665 million, or 7%, from December 31, 2016 as payoffs exceeded new loan production due to a strategic shift focusing on improving risk-adjusted returns. Home equity decreased $394 million, or 5%, from December 31, 2016 as payoffs exceeded new loan production. Credit card decreased $120 million, or 5%, from December 31, 2016 primarily due to seasonal trends from the paydown of year-end balances which were higher due to holiday spending. Residential mortgage loans increased $472 million, or 3%, from December 31, 2016 primarily due to the continued retention of certain conforming ARMs and certain other fixed-rate loans originated during the six months ended June 30, 2017.

Commercial loans and leases decreased from December 31, 2016 primarily due to a decrease in commercial and industrial loans, partially offset by an increase in commercial construction loans and commercial leases. Commercial and industrial loans decreased $813 million, or 2%, from December 31, 2016 primarily as a result of deliberate exits from certain loans that did not meet the Bancorp’s risk-adjusted profitability targets and softer loan demand. Commercial construction loans increased $463 million, or 12%, from December 31, 2016 primarily as a result of draw levels outpacing attrition. Commercial leases increased $183 million, or 5%, from December 31, 2016 primarily as a result of an increase in origination activity.

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



		June 30, 2017			June 30, 2016
For the three months ended ($ in millions)		Carrying Value		% of Total	Carrying Value		% of Total
Commercial loans and leases:
Commercial and industrial loans	$		41,656	45	$	43,878		46
Commercial mortgage loans			6,861	7		6,835		7
Commercial construction loans			4,306	5		3,551		4
Commercial leases			4,039	4		3,904		4
Total commercial loans and leases	$		56,862	61	$	58,168		61
Consumer loans and leases:
Residential mortgage loans			16,024	18		14,842		16
Home equity			7,385	8		8,059		9
Automobile loans			9,410	10		10,887		11
Credit card			2,080	2		2,198		2
Other consumer loans and leases			892	1		653		1
Total consumer loans and leases	$		35,791	39	$	36,639		39
Total average loans and leases	$		92,653	100	$	94,807		100
Total average portfolio loans and leases (excluding loans held for sale)	$		91,972		$	93,931

Average loans and leases, including loans held for sale, decreased $2.2 billion, or 2%, from June 30, 2016. The decrease from June 30, 2016 was the result of a $1.3 billion, or 2%, decrease in average commercial loans and leases and an $848 million, or 2%, decrease in average consumer loans and leases.

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

Average commercial loans and leases decreased from June 30, 2016 primarily due to a decrease in average commercial and industrial loans, partially offset by an increase in average commercial construction loans. Average commercial and industrial loans decreased $2.2 billion, or 5%, from June 30, 2016 primarily as a result of deliberate exits from certain loans that did not meet the Bancorp’s risk-adjusted profitability targets and softer loan demand. Average commercial construction loans increased $755 million, or 21%, from June 30, 2016 primarily as a result of an increase in new loan origination activity resulting from an increase in demand.

Average consumer loans and leases decreased from June 30, 2016 primarily due to decreases in average automobile loans and average home equity, partially offset by an increase in average residential mortgage loans. Average automobile loans decreased $1.5 billion, or 14%, from June 30, 2016 as payoffs exceeded new loan production due to a strategic shift focusing on improving risk-adjusted returns. Average home equity decreased $674 million, or 8%, from June 30, 2016 as payoffs exceeded new loan production. Average residential mortgage loans increased $1.2 billion, or 8%, from June 30, 2016 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 both liquidity support and collateral for pledging purposes. Total investment securities were $32.7 billion and $31.6 billion at June 30, 2017 and December 31, 2016, respectively. The taxable available-for-sale securities portfolio had an effective duration of 4.9 years at June 30, 2017 compared to 5.0 years at December 31, 2016.

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. Securities are classified as trading when bought and held principally for the purpose of selling them in the near term. At June 30, 2017, the Bancorp’s investment portfolio consisted primarily of AAA-rated available-for-sale securities. Securities classified as below investment grade were immaterial at both June 30, 2017 and December 31, 2016. 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 18: Components of OTTI by Security Type


		For the three months ended June 30,		For the six months ended June 30,
($ in millions)		2017	2016	2017	2016
Available-for-sale and other debt securities	$	(14)	(3)	(24)	(4)
Available-for-sale equity securities		-	-	-	(1)
Total OTTI^(a)	$	(14)	(3)	(24)	(5)

(a)

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

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

TABLE 19: Components of Investment Securities


As of ($ in millions)	June 30, 2017		December 31, 2016
Available-for-sale and other securities (amortized cost basis):
U.S. Treasury and federal agencies securities	$	69		547
Obligations of states and political subdivisions securities		43		44
Mortgage-backed securities:
Agency residential mortgage-backed securities^(a)		16,009		15,525
Agency commercial mortgage-backed securities		9,165		9,029
Non-agency commercial mortgage-backed securities		3,315		3,076
Asset-backed securities and other debt securities		2,192		2,106
Equity securities^(b)		699		697
Total available-for-sale and other securities	$	31,492		31,024
Held-to-maturity securities (amortized cost basis):
Obligations of states and political subdivisions securities	$	24		24
Asset-backed securities and other debt securities		2		2
Total held-to-maturity securities	$	26		26
Trading securities (fair value):
U.S. Treasury and federal agencies securities	$	20		23
Obligations of states and political subdivisions securities		27		39
Agency residential mortgage-backed securities		413		8
Asset-backed securities and other debt securities		30		15
Equity securities		352		325
Total trading securities	$	842		410

(a)

Includes interest-only mortgage-backed securities of $39 and $60 as of June 30, 2017 and December 31, 2016, 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, $360 and $2, respectively, at June 30, 2017 and $248, $358, and $1, respectively, at December 31, 2016, that are carried at cost, and certain mutual fund and equity security holdings.

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

On an amortized cost basis, available-for-sale and other securities increased $468 million, or 2%, from December 31, 2016 primarily due to increases in agency residential mortgage-backed securities, non-agency commercial mortgage-backed 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 25% of total interest-earning assets at June 30, 2017 compared to 24% at December 31, 2016. The estimated weighted-average life of the debt securities in the available-for-sale and other securities portfolio was 6.6 years at June 30, 2017 compared to 6.7 years at December 31, 2016. In addition, at June 30, 2017, the available-for-sale and other securities portfolio had a weighted-average yield of 3.11%, compared to 3.19% at December 31, 2016.

Trading securities increased $432 million from December 31, 2016 primarily due to an increase in agency residential mortgage-backed securities purchased as part of the Bancorp’s non-qualifying hedging strategy to economically hedge a portion of the risk associated with the MSR portfolio.

Information presented in Table 20 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 $331 million at June 30, 2017 compared to $159 million at December 31, 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.

TABLE 20: Characteristics of Available-for-Sale and Other Securities


As of June 30, 2017 ($ 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	$	-		-		0.6		2.24 %
Average life 1 – 5 years		69		69		4.0		1.85
Total	$	69		69		4.0		1.85 %
Obligations of states and political subdivisions securities:^(a)
Average life of 1 year or less		9		9		0.8		0.02
Average life 1 – 5 years		13		14		4.8		4.26
Average life 5 – 10 years		21		22		6.4		3.74
Total	$	43		45		4.7		3.13 %
Agency residential mortgage-backed securities:
Average life of 1 year or less		54		56		0.7		3.90
Average life 1 – 5 years		4,023		4,084		4.0		3.32
Average life 5 – 10 years		11,158		11,249		6.8		3.11
Average life greater than 10 years		774		788		11.6		3.15
Total	$	16,009		16,177		6.3		3.17 %
Agency commercial mortgage-backed securities:
Average life of 1 year or less		16		16		0.7		2.88
Average life 1 – 5 years		2,711		2,714		3.6		2.79
Average life 5 – 10 years		6,156		6,252		7.3		3.03
Average life greater than 10 years		282		280		13.0		2.96
Total	$	9,165		9,262		6.4		2.96 %
Non-agency commercial mortgage-backed securities:
Average life of 1 year or less		46		46		0.6		3.51
Average life 1 – 5 years		122		125		2.5		3.37
Average life 5 – 10 years		3,147		3,193		7.4		3.24
Total	$	3,315		3,364		7.1		3.25 %
Asset-backed securities and other debt securities:
Average life of 1 year or less		18		18		0.3		3.80
Average life 1 – 5 years		533		538		3.1		3.44
Average life 5 – 10 years		321		325		7.6		3.01
Average life greater than 10 years		1,320		1,325		15.4		3.08
Total	$	2,192		2,206		11.2		3.17 %
Equity securities		699		700
Total available-for-sale and other securities	$	31,492		31,823		6.6		3.11 %

(a)

Taxable-equivalent yield adjustments included in the above table are 0.00%, 2.29%, 2.04% and 1.69% for securities with an average life of 1 year or less, 1-5 years, 5-10 years and in total, respectively.

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

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 70% and 71% of the Bancorp’s average asset funding base at June 30, 2017 and December 31, 2016, respectively.

The following table presents the end of period components of deposits:

TABLE 21: Components of Deposits


		June 30, 2017				December 31, 2016
As of ($ in millions)		Balance		% of Total		Balance		% of Total
Demand	$		34,965		34	$	35,782		34
Interest checking			25,436		25		26,679		26
Savings			14,068		14		13,941		13
Money market			20,191		20		20,749		20
Foreign office			395		-		426		1
Transaction deposits			95,055		93		97,577		94
Other time			3,692		4		3,866		4
Core deposits			98,747		97		101,443		98
Certificates $100,000 and over^(a)			2,633		3		2,378		2
Other			500		-		-		-
Total deposits	$		101,880		100	$	103,821		100

(a)

Includes $1,204 and $1,280 of certificates $250,000 and over at June 30, 2017 and December 31, 2016, respectively.

Core deposits decreased $2.7 billion, or 3%, from December 31, 2016 driven by a decrease of $2.5 billion in transaction deposits. Transaction deposits decreased from December 31, 2016 primarily due to decreases in interest checking deposits, demand deposits and money market deposits. Interest checking deposits and demand deposits decreased $1.2 billion, or 5%, and $817 million, or 2%, respectively, from December 31, 2016 driven primarily by lower balances per account for commercial customers. Money market deposits decreased $558 million, or 3%, from December 31, 2016 driven primarily by lower balances per account for commercial customers partially offset by a promotional product offering which drove consumer customer acquisition.

Other deposits increased $500 million from December 31, 2016 due to an increase in Eurodollar trade deposits. Certificates $100,000 and over increased $255 million, or 11%, primarily due to the issuance of institutional certificates of deposit since December 31, 2016.

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

TABLE 22: Components of Average Deposits


		June 30, 2017				June 30, 2016
($ in millions)		Balance		% of Total		Balance		% of Total
Demand	$		34,915		34	$	35,912		35
Interest checking			26,014		25		24,714		24
Savings			14,238		14		14,576		14
Money market			20,278		20		19,243		19
Foreign office			380		-		484		1
Transaction deposits			95,825		93		94,929		93
Other time			3,745		4		4,044		4
Core deposits			99,570		97		98,973		97
Certificates $100,000 and over^(a)			2,623		3		2,819		3
Other			264		-		467		-
Total average deposits	$		102,457		100	$	102,259		100

(a)

Includes $1,226 and $1,302 of average certificates $250,000 and over for the three months ended June 30, 2017 and 2016, respectively.

On an average basis, core deposits increased $597 million, or 1%, from June 30, 2016 primarily due to an increase of $896 million in average transaction deposits. The increase in average transaction deposits was driven by increases in average interest checking deposits and average money market deposits, partially offset by decreases in average demand deposits and average savings deposits. Average interest checking deposits increased $1.3 billion, or 5%, from June 30, 2016, primarily due to higher average customer balances per commercial customer account. Average money market deposits increased $1.0 billion, or 5%, from June 30, 2016, primarily due to a promotional product offering which drove customer acquisition and balance migration from savings deposits, which decreased $338 million, or 2%, compared to June 30, 2016. Average demand deposits decreased $997 million, or 3%, from June 30, 2016 primarily due to lower average balances per commercial customer and institutional accounts. The increase in average core deposits from June 30, 2016 included the impact of the sale of $292 million of deposits as part of the branches sold in the Pittsburgh MSA during the three months ended June 30, 2016.

Average other deposits decreased $203 million, or 43%, from June 30, 2016 due to a decrease in average Eurodollar trade deposits. Average certificates $100,000 and over decreased $196 million, or 7%, from June 30, 2016 primarily due to the maturity and run-off of institutional certificates of deposit since June 30, 2016.

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

Contractual maturities

The contractual maturities of certificates $100,000 and over as of June 30, 2017 are summarized in the following table:

TABLE 23: Contractual Maturities of Certificates $100,000 and Over



($ in millions)

Next 3 months	$	583
3-6 months		181
6-12 months		662
After 12 months		1,207
Total certificates $100,000 and over	$	2,633

The contractual maturities of other time deposits and certificates $100,000 and over as of June 30, 2017 are summarized in the following table:

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



($ in millions)

Next 12 months	$	2,777
13-24 months		1,159
25-36 months		1,761
37-48 months		531
49-60 months		85
After 60 months		12
Total other time deposits and certificates $100,000 and over	$	6,325

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. As of June 30, 2017, total borrowings as a percent of average interest-bearing liabilities were 22% compared to 21% at December 31, 2016.

The following table summarizes the end of period components of borrowings:

TABLE 25: Components of Borrowings


As of ($ in millions)	June 30, 2017		December 31, 2016
Federal funds purchased	$	117		132
Other short-term borrowings		5,389		3,535
Long-term debt		13,456		14,388
Total borrowings	$	18,962		18,055

Total borrowings increased $907 million, or 5%, from December 31, 2016 primarily due to an increase in other short-term borrowings, partially offset by a decrease in long-term debt. Other short-term borrowings increased $1.9 billion from December 31, 2016 driven by an increase of $1.9 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 decreased $932 million from December 31, 2016 primarily driven by the maturity of $650 million of unsecured senior bank notes and $500 million of unsecured subordinated debt and $478 million of pay downs on long-term debt associated with automobile loan securitizations during the six months ended June 30, 2017. These decreases were partially offset by the issuance of $700 million of senior notes in the second quarter of 2017. For additional information regarding automobile securitizations and long-term debt, refer to Note 10 and Note 14 of the Notes to Condensed Consolidated Financial Statements.

The following table summarizes components of borrowings for the three months ended:

TABLE 26: Components of Average Borrowings


($ in millions)	June 30, 2017		June 30, 2016
Federal funds purchased	$	311		693
Other short-term borrowings		4,194		3,754
Long-term debt		13,273		15,351
Total average borrowings	$	17,778		19,798

Total average borrowings decreased $2.0 billion, or 10%, compared to June 30, 2016, primarily due to decreases in average long-term debt. The decrease in average long-term debt of $2.1 billion was driven primarily by the maturities of unsecured senior notes and subordinated debt and pay downs on long-term debt associated with automobile loan securitizations, partially offset by issuances of long-term debt since June 30, 2016. 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. Additional information on each business segment is included in Note 22 of the Notes to Condensed Consolidated Financial Statements. Results of the Bancorp’s business segments are presented based on its management structure and management accounting practices. The structure and accounting practices are specific to the Bancorp; therefore, the financial results of the Bancorp’s business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as management’s accounting practices or businesses change.

The Bancorp manages interest rate risk centrally at the corporate level. By employing an FTP methodology, the business segments are insulated from most benchmark interest rate volatility, enabling them to focus on serving customers through the origination of loans and acceptance of deposits. The FTP methodology assigns charge rates and credit rates to classes of assets and liabilities, respectively, based on the estimated amount and timing of cash flows for each transaction. Assigning the FTP rate based on matching the duration of cash flows allocates interest income and interest expense to each business segment so its resulting net interest income is insulated from future changes in benchmark interest rates. The Bancorp’s FTP methodology also allocates the contribution to net interest income of the asset-generating and deposit-providing businesses on a duration-adjusted basis to better attribute the driver of the performance. As the asset and liability durations are not perfectly matched, the residual impact of the FTP methodology is captured in General Corporate and Other. The charge and credit rates are determined using the FTP rate curve, which is based on an estimate of Fifth Third’s marginal borrowing cost in the wholesale funding markets. The FTP rate curve is constructed using the U.S. swap curve, brokered CD pricing and unsecured debt pricing.

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 behavioural assumptions, such as prepayment rates on interest-earning assets and the estimated durations for indeterminate-lived deposits. Key assumptions, including the credit rates provided for deposit accounts, are reviewed annually. Credit rates for deposit products and charge rates for loan products may be reset more frequently in response to changes in market conditions. The credit rates for several deposit products were reset January 1, 2017 to reflect the current market rates and updated market assumptions. These rates were generally higher than those in place during 2016, thus net interest income for deposit-providing business segments was positively impacted during 2017. 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 business segments during 2017.

The Bancorp’s methodology for allocating provision for loan and lease losses expense to the business segments includes 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. Provision for loan and lease losses expense attributable to loan and lease growth and changes in ALLL factors is 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 following table summarizes net income (loss) by business segment:

TABLE 27: Net Income (Loss) by Business Segment


		For the three months ended June 30,		For the six months ended June 30,
($ in millions)		2017	2016^(a)	2017	2016^(a)
Income Statement Data
Commercial Banking	$	227	226	437	438
Branch Banking		122	132	233	240
Consumer Lending		(6)	7	(17)	16
Wealth and Asset Management		19	23	37	48
General Corporate and Other		5	(64)	(18)	(92)
Net income		367	324	672	650
Less: Net income attributable to noncontrolling interests		-	(4)	-	(4)
Net income attributable to Bancorp		367	328	672	654
Dividends on preferred stock		23	23	38	38
Net income available to common shareholders	$	344	305	634	616

(a)

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 28: Commercial Banking


		For the three months ended June 30,		For the six months ended June 30,
($ in millions)		2017	2016	2017	2016
Income Statement Data
Net interest income (FTE)^(a)	$	421	466	851	923
Provision for loan and lease losses		22	72	29	137
Noninterest income:
Corporate banking revenue		100	117	173	218
Service charges on deposits		73	72	146	145
Other noninterest income		55	47	110	94
Noninterest expense:
Personnel costs		69	74	154	153
Other noninterest expense		276	281	560	563
Income before income taxes (FTE)		282	275	537	527
Applicable income tax expense^(a)(b)		55	49	100	89
Net income	$	227	226	437	438
Average Balance Sheet Data
Commercial loans and leases, including held for sale	$	53,747	55,072	53,703	54,571
Demand deposits		19,227	20,622	19,555	20,518
Interest checking deposits		8,821	8,372	9,030	8,673
Savings and money market deposits		5,533	6,690	5,942	6,711
Other time deposits and certificates $100,000 and over		927	1,061	947	1,094
Foreign office deposits		379	483	391	482

(a)

Includes FTE adjustments of $6 for both the three months ended June 30, 2017 and 2016 and $12 for both the six months ended June 30, 2017 and 2016. 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 subsection of the Statements of Income Analysis section of MD&A for additional information.

Net income was $227 million for the three months ended June 30, 2017 compared to net income of $226 million for the three months ended June 30, 2016. The increase for the three months ended June 30, 2017 was driven by decreases in the provision for loan and lease losses and noninterest expense partially offset by decreases in net interest income on an FTE basis and noninterest income. Net income was $437 million for the six months ended June 30, 2017 compared to net income of $438 million for the six months ended June 30, 2016. The decrease for the six months ended June 30, 2017 was driven by decreases in net interest income on an FTE basis and noninterest income partially offset by decreases in the provision for loan and lease losses and noninterest expense.

Net interest income on an FTE basis decreased $45 million and $72 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily driven by increases in FTP charge rates on loans and leases and increases in the rates paid on core deposits. These decreases in net interest income were partially offset by increases in yields on average commercial loans and leases of 38 bps and 32 bps for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year.

Provision for loan and lease losses decreased $50 million and $108 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. The decrease for both periods was primarily due to decreases in criticized commercial loans and net charge-offs on commercial and industrial loans. Net charge-offs as a percent of average portfolio loans and leases decreased to 14 bps for the three months ended June 30, 2017 compared to 32 bps for the same period in the prior year and decreased to 20 bps for the six months ended June 30, 2017 compared to 35 bps for the same period in the prior year.

Noninterest income decreased $8 million and $28 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily due to decreases in corporate banking revenue partially offset by increases in other noninterest income. Corporate banking revenue decreased $17 million and $45 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. The decrease in corporate banking revenue for the three months ended June 30, 2017 was primarily driven by decreases in syndication fees and foreign exchange fees. The decrease in corporate banking revenue for the six months ended June 30, 2017 was primarily driven by a decrease in lease remarketing fees which included the impact of a $31 million impairment charge related to certain operating lease assets that was recognized during the first quarter of 2017, as well as a decrease in foreign exchange fees. Other noninterest income increased $8 million and $16 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year driven by an increase in private equity investment income primarily due to gains on the sale of certain private equity investments.

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

Noninterest expense decreased $10 million and $2 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily as a result of decreases in other noninterest expense for both periods and a decrease in personnel costs for the three months ended June 30, 2017. Other noninterest expense decreased $5 million and $3 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily due to decreases in impairment on affordable housing investments and lower operational losses partially offset by increases in corporate overhead allocations and consulting expense. Personnel costs decreased $5 million for the three months ended June 30, 2017 compared to the same period in the prior year primarily due to lower incentive compensation.

Average commercial loans decreased $1.3 billion and $868 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily due to a decrease in average commercial and industrial loans partially offset by an increase in average commercial construction loans. Average commercial and industrial loans decreased $2.3 billion and $1.7 billion for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily as a result of deliberate exits from certain loans that did not meet the Bancorp’s risk-adjusted profitability targets and softer loan demand. Average commercial construction loans increased $759 million and $722 million for the three and six months ended June 30, 2017, 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.

Average core deposits decreased $2.2 billion and $1.5 billion for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. The decrease for the three and six months ended June 30, 2017 was primarily driven by decreases in average demand deposits of $1.4 billion and $963 million, respectively, and average savings and money market deposits of $1.2 billion and $769 million, respectively, compared to the same periods in the prior year. These decreases were partially offset by an increase in average interest checking deposits of $449 million and $357 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year.

Branch Banking

Branch Banking provides a full range of deposit and loan products to individuals and small businesses through 1,157 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 29: Branch Banking


		For the three months ended June 30,				For the six months ended June 30,
($ in millions)		2017		2016		2017		2016
Income Statement Data
Net interest income	$		437		433		867		859
Provision for loan and lease losses			39		35		80		69
Noninterest income:
Service charges on deposits			66		66		130		129
Card and processing revenue			64		66		122		126
Wealth and asset management revenue			35		36		71		71
Other noninterest income			24		46		51		75
Noninterest expense:
Personnel costs			130		130		261		261
Net occupancy and equipment expense			56		59		116		117
Card and processing expense			33		36		62		70
Other noninterest expense			180		184		362		372
Income before income taxes			188		203		360		371
Applicable income tax expense			66		71		127		131
Net income	$		122		132		233		240
Average Balance Sheet Data
Consumer loans, including held for sale	$		12,966		13,602		13,069		13,752
Commercial loans			1,942		1,893		1,934		1,920
Demand deposits			13,980		13,416		13,820		13,274
Interest checking deposits			10,304		9,660		10,233		9,545
Savings and money market deposits			27,778		25,935		27,472		25,631
Other time deposits and certificates $100,000 and over			4,945		5,229		4,992		5,220

Net income was $122 million for the three months ended June 30, 2017 compared to net income of $132 million for the three months ended June 30, 2016. Net income was $233 million for the six months ended June 30, 2017 compared to $240 million for the same period in the prior year. The decrease for both periods was driven by decreases in noninterest income and increases in the provision for loan and lease losses partially offset by decreases in noninterest expense and increases in net interest income.

Net interest income increased $4 million and $8 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. The increase for both periods was primarily due to an increase in FTP credits on core deposits driven by higher average balances. The increase for the six months ended June 30, 2017 also included an increase in interest income on credit card which included the impact of a $12 million benefit related to a revised estimate of refunds offered to certain bankcard customers in the first quarter of 2017. These benefits for both periods were partially offset by increases in FTP charge rates on loans and leases and increases in the rates paid on core deposits.

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

Provision for loan and lease losses increased $4 million and $11 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year as net charge-offs as a percent of average portfolio loans and leases increased to 104 bps and 106 bps for the three and six months ended June 30, 2017, respectively, compared to 89 bps for both the three and six months ended June 30, 2016.

Noninterest income decreased $25 million and $27 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily as a result of decreases in other noninterest income. Other noninterest income decreased $22 million for the three months ended June 30, 2017 compared to the same period in the prior year primarily as a result of the impact of a gain of $11 million on the sale of certain branches in the Pittsburgh MSA in the second quarter of 2016 and a gain of $11 million on the sale of the agent bankcard loan portfolio during the second quarter of 2016. Other noninterest income decreased $24 million for the six months ended June 30, 2017 compared to the same period in the prior year primarily due to the previously mentioned gains on the sale of certain branches and the agent bankcard loan portfolio in the second quarter of 2016 as well as the impact of a gain of $8 million on the sale of certain branches in the St. Louis MSA in the first quarter of 2016. The decreases in other noninterest income were partially offset by increases of $4 million and $7 million in ATM transaction fees for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year.

Noninterest expense decreased $10 million and $19 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily driven by decreases in other noninterest expense and card and processing expense. Other noninterest expense decreased $4 million and $10 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily driven by a decline in corporate overhead allocations. The decrease for the six months ended was also driven by decreases in operational losses. Card and processing expense decreased $3 million and $8 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily due to the impact of renegotiated service contracts.

Average consumer loans decreased $636 million and $683 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. The decrease for both periods was primarily driven by decreases in average home equity loans of $536 million and $533 million for the three and six months ended June 30, 2017, respectively, and decreases in average residential mortgage loans of $216 million and $220 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year as payoffs exceeded new loan production.

Average core deposits increased $2.8 billion for both the three and six months ended June 30, 2017 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 $1.8 billion, growth in average interest checking deposits of $644 million and $688 million, respectively, and growth in average demand deposits of $564 million and $546 million, respectively, for the three and six months ended June 30, 2017 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.

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 30: Consumer Lending


		For the three months ended June 30,					For the six months ended June 30,
($ in millions)		2017			2016		2017			2016
Income Statement Data
Net interest income	$		59			62		120			122
Provision for loan and lease losses			7			9		22			21
Noninterest income:
Mortgage banking net revenue			54			73		105			151
Other noninterest income			8			7		11			13
Noninterest expense:
Personnel costs			50			50		97			98
Other noninterest expense			73			72		144			142
Income (loss) before income taxes			(9	)		11		(27	)		25
Applicable income tax (benefit) expense			(3	)		4		(10	)		9
Net income (loss)	$		(6	)		7		(17	)		16
Average Balance Sheet Data
Residential mortgage loans, including held for sale	$		11,429			10,277		11,296			10,057
Home equity			301			365		307			375
Automobile loans			8,921			10,365		9,080			10,568

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

Consumer Lending incurred net losses of $6 million and $17 million for the three and six months ended June 30, 2017, respectively, compared to net income of $7 million and $16 million for the three and six months ended June 30, 2016, respectively. The decrease for both periods was primarily driven by decreases in noninterest income.

Net interest income decreased $3 million and $2 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. The decrease for both periods was primarily driven by increases in FTP charge rates on loans and leases partially offset by increases in yields on average consumer loans.

Provision for loan and lease losses decreased $2 million and increased $1 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. Net charge-offs as a percent of average portfolio loans and leases decreased to 14 bps for the three months ended June 30, 2017 compared to 17 bps for the same period in the prior year and increased to 22 bps for the six months ended June 30, 2017 compared to 20 bps for the same period in the prior year.

Noninterest income decreased $18 million and $48 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily due to decreases in mortgage banking net revenue. The decrease in mortgage banking net revenue for the three and six months ended June 30, 2017 compared to the same periods in the prior year was primarily driven by decreases in mortgage origination fees and gains on loan sales of $16 million and $30 million, respectively, and decreases in net mortgage servicing revenue of $3 million and $16 million, respectively. 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.

Average consumer loans decreased $356 million and $317 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. Average automobile loans decreased $1.4 billion and $1.5 billion for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year as payoffs exceeded new loan production due to a strategic shift focusing on improving risk-adjusted returns. Average residential mortgage loans increased $1.2 billion for both the three and six months ended June 30, 2017, 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.

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 31: Wealth and Asset Management


			For the three months ended June 30,					For the six months ended June 30,
($ in millions)			2017			2016		2017		2016
Income Statement Data
Net interest income		$		37			44		75		87
Provision for (benefit from) loan and lease losses				(1	)		1		3		1
Noninterest income:
Wealth and asset management revenue				100			98		205		197
Other noninterest income				1			2		4		5
Noninterest expense:
Personnel costs				44			42		92		87
Other noninterest expense				66			66		132		128
Income before income taxes				29			35		57		73
Applicable income tax expense				10			12		20		25
Net income	$			19			23		37		48
Average Balance Sheet Data
Loans and leases, including held for sale	$			3,266			3,113		3,252		3,090
Core deposits				8,577			8,357		8,810		8,611

Net income was $19 million for the three months ended June 30, 2017 compared to net income of $23 million for the three months ended June 30, 2016. Net income was $37 million for the six months ended June 30, 2017 compared to $48 million for the six months ended June 30, 2016. The decreases for both periods were driven primarily by decreases in net interest income. The decrease for the six months ended was also driven by an increase in noninterest expense partially offset by an increase in noninterest income.

Net interest income decreased $7 million and $12 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily due to increases in FTP charge rates on loans and leases as well as increases in FTP charges due to increases in average loan balances. Additionally, net interest income was negatively impacted by increases in the rates paid on interest checking deposits and decreases in FTP credit rates on interest checking deposits. These negative impacts were partially offset by increases in yields on average loans and leases as well as increases in interest income on loans and leases due to increases in average balances.

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

Provision for loan and lease losses decreased $2 million and increased $2 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily driven by fluctuations in criticized assets.

Noninterest income increased $7 million for the six months ended June 30, 2017 compared to the same period in the prior year. Wealth and asset management revenue increased $8 million for the six months ended June 30, 2017 compared to the same period in the prior year primarily due to increases in private client service fees and securities and brokerage fees. These increases were driven by an increase in assets under management as a result of strong market performance and increased asset production.

Noninterest expense increased $9 million for the six months ended June 30, 2017 compared to the same period in the prior year. Personnel costs increased $5 million for the six months ended June 30, 2017 compared to the same period in the prior year primarily driven by higher incentive compensation. Other noninterest expense increased $4 million for the six months ended June 30, 2017 compared to the same period in the prior year primarily driven by an increase in corporate overhead allocations.

Average loans and leases increased $153 million and $162 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year driven by increases in average residential mortgage loans due to increases in new loan origination activity. These increases were partially offset by a decline in average home equity balances.

Average core deposits increased $220 million and $199 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year primarily due to increases in average interest checking deposits and 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 for loan and lease losses 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 increased $88 million and $145 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. The increase for both periods was primarily driven by an increase in the benefit related to the FTP charges on loans and leases as well as an increase in interest income on taxable securities. These positive impacts were partially offset by an increase in interest expense on long-term debt as well as an increase in FTP credits on deposits allocated to business segments due to increases in FTP credit rates and average deposits.

The benefit from the provision for loan and lease losses decreased $11 million and $10 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year due to decreases in the allocation of provision expense to the business segments.

Noninterest income increased $14 million and decreased $52 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. Both periods were positively impacted by a decrease in the negative valuation adjustments related to the Visa total return swap which were $9 million and $22 million for the three and six months ended June 30, 2017, respectively, compared with $50 million for both periods in the prior year. The three and six months ended June 30, 2016 included positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC of $19 million and $66 million, respectively. The stock warrant was not outstanding during 2017 as the Bancorp exercised the remaining warrant in Vantiv Holding, LLC during the fourth quarter of 2016. Additionally, equity method earnings from the Bancorp’s interest in Vantiv Holding, LLC decreased $6 million and $7 million compared to the three and six months ended June 30, 2016, respectively.

Noninterest expense decreased $10 million and $14 million for the three and six months ended June 30, 2017, respectively, compared to the same periods in the prior year. The decrease for both periods was primarily due to increases in corporate overhead allocations from General Corporate and Other to the other business segments and decreases in the provision for the reserve for unfunded commitments partially offset by increases in personnel costs and marketing expense.

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

RISK MANAGEMENT – OVERVIEW

Risk management is critical for effectively serving customers’ financial needs while protecting the Bancorp and achieving strategic goals. It is also essential to reducing the volatility of earnings and safeguarding our brand and reputation. Further, risk management is integral to the Bancorp’s strategic and capital planning processes. It is essential that the Bancorp’s business strategies consistently align to its overall risk appetite and capital considerations. Maintaining risks within the Bancorp’s risk appetite requires that risks are understood by all employees across the enterprise, and appropriate risk mitigants and controls are in place to limit risk to within the risk appetite. To achieve this, the Bancorp implements a framework for managing risk that encompasses business as usual activities and the utilization of a risk process for identifying, assessing, managing, monitoring and reporting risks.

Fifth Third uses a structure consisting of three lines of defense in order to clarify the roles and responsibilities for effective risk management.

The risk taking functions within the lines of business comprise the first line of defense. The first line of defense originates risk through normal business as usual activities; therefore, it is essential that they monitor, assess and manage the risks being taken, implement controls necessary to mitigate those risks and take responsibility for managing their business within the Bancorp’s risk appetite.

Control functions, such as the Risk Management organization, are the second line of defense and are responsible for providing challenge, oversight and governance of activities performed by the first line.

The Credit Risk Review division provides an independent assessment of credit risk, which includes 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.

The Audit division is the third line of defense and provides an independent assessment of the Bancorp’s internal control structure and related systems and processes.

Fifth Third’s core values and culture provide a foundation for supporting sound risk management practices by setting expectations for appropriate conduct and accountability across the organization.

All employees are expected to conduct themselves in alignment with Fifth Third’s core values and Code of Conduct and Business Ethics while carrying out their responsibilities. Prudent risk management is a responsibility that is expected from all employees across the first, second and third lines of defense and is a foundational element of Fifth Third’s culture.

Below are the Bancorp’s core principles of risk management that are used to ensure the Bancorp is operating in a safe and sound manner:

●

Understand the risks taken as a necessary part of business; however, the Bancorp ensures risks taken are in alignment with its strategy and risk appetite.

●

Provide transparency and escalate risks and issues as necessary.

●

Ensure Fifth Third’s products and services are designed, delivered and maintained to provide value and benefit to its customers and to Fifth Third, and that potential opportunities remain aligned to the core customer base. The Bancorp does not offer products or services that are not appropriate for its customers.

●

Avoid risks that cannot be understood, managed and monitored.

●

Act with integrity in all activities.

●

Focus on providing operational excellence by providing reliable, accurate and efficient services to meet customer’s needs.

●

Maintain a strong financial position to ensure that the Bancorp meets its strategic objectives through all economic cycles and are able to access the capital markets at all times, even under stressed conditions.

●

Protect the Bancorp’s reputation by thoroughly understanding the consequences of business strategies, products and processes.

●

Conduct business in compliance with all applicable laws, rules and regulations and in alignment with internal policies and procedures.

Fifth Third’s success is dependent on effective risk management and understanding and controlling the risks taken in order to deliver sustainable returns for employees and shareholders. The Bancorp’s goal is to ensure that aggregate risks do not exceed its risk capacity, and that risks taken are supportive of the Bancorp’s portfolio diversification and profitability objectives.

Fifth Third’s Risk Management Framework, states its risk appetite and the linkage to strategic and capital planning, defines and sets the tolerance for each of the eight risk types, explains the process used to manage risk across the enterprise and sets forth its risk governance structure.

●

The Board of Directors (the “Board”) and executive management define the risk appetite, which is considered in the development of business strategies, and forms the basis for enterprise risk management. The Bancorp’s risk appetite is set annually in alignment with the strategic, capital and financial plans, and is reviewed by the Board on an annual basis.

●

The Risk Management Process provides a consistent and integrated approach for managing risks and ensuring appropriate risk mitigants and controls are in place, and risks and issues are appropriately escalated. Five components are utilized for effective risk management; identifying, assessing, managing, monitoring and reporting risks.

●

The Board and executive management have identified eight risk types for monitoring the overall risk of the Bancorp; Credit Risk, Market Risk, Liquidity Risk, Operational Risk, Regulatory Compliance Risk, Legal Risk, Reputation Risk and Strategic Risk, and have also qualitatively established a risk tolerance, which is defined as the maximum amount of risk the Bancorp is willing to take for each of the eight risk types. These risk types are assessed on an ongoing basis and reported to the board each quarter, or more frequently, if necessary. In addition, each business and operational function (first line of defense) is accountable for proactively identifying and managing risk using its risk management process.

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

Risk tolerances and risk limits are also established, where appropriate, in order to ensure that businesses and operational functions across the enterprise are able to monitor and manage risks at a more granular level, while ensuring that aggregate risks across the enterprise do not exceed the overall risk appetite.

●

The Bancorp’s risk governance structure includes management committees operating under delegation from, and providing information directly or indirectly to, the Board. The Bancorp Board delegates certain responsibilities to Board sub-committees, including the RCC as outlined in each respective Committee Charter, which may be found on https://www.53.com. The ERMC, which reports to the RCC, comprises senior management from across the Bancorp and reviews and approves risk management frameworks and policies, oversees the management of all risk types to ensure that aggregated risks remain within the Bancorp’s risk appetite, and fosters a risk culture to ensure appropriate escalation and transparency of risks.

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, which are described below. These practices include the use of intentional risk-based limits for single name exposures and counterparty selection criteria designed to reduce or eliminate exposure to borrowers who have higher than average default risk and defined weaknesses in financial performance. The Bancorp carefully designed and monitors 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 allowance for credit losses 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. In addition, stress testing is performed on various commercial and consumer portfolios using the CCAR model and for certain portfolios, such as real estate and leveraged lending, the stress testing is performed by Credit department personnel at the individual loan level during credit underwriting.

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


TABLE 32: Potential Problem Portfolio Loans and Leases
As of June 30, 2017 ($ in millions)		Carrying Value		Unpaid Principal Balance		Exposure
Commercial and industrial loans	$		1,024		1,025		1,531
Commercial mortgage loans			155		155		159
Commercial leases			28		28		28
Total potential problem portfolio loans and leases	$		1,207		1,208		1,718

TABLE 33: Potential Problem Portfolio Loans and Leases
As of December 31, 2016 ($ in millions)		Carrying Value		Unpaid Principal Balance		Exposure
Commercial and industrial loans	$		1,108		1,110		1,807
Commercial mortgage loans			102		102		104
Commercial leases			22		22		22
Total potential problem portfolio loans and leases	$		1,232		1,234		1,933

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 allowance for credit loss 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. A “through-the-cycle” rating philosophy uses a grading scale that assigns ratings based on average default rates through an entire business cycle for borrowers with similar financial performance. The dual risk rating system includes thirteen probabilities of default grade categories and an additional eleven 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 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)

Overview

Economic growth continues to improve as data has been broadly positive. There have been steady gains in the job market and real GDP is expected to expand at a moderate pace in 2017. Household spending continues to be the strongest driver of the U.S. economy. Inflation continues to run below the FRB’s stated objective. Improving global conditions are supporting U.S. manufacturing activity and housing prices continue to increase across the country. With regard to commercial real estate, the credit market has become somewhat more selective even though market data and vacancies remain positive. Credit department personnel are monitoring potential increased risks in the Retail sector as a result of profitability declines among many large retailers and a continued shift to online purchasing; in addition the Healthcare sector is being watched closely due to potential regulatory changes that may impact some companies in this industry.

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 34: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million
As of June 30, 2017 ($ in millions)	LTV > 100%		LTV 80-100%		LTV < 80%
Commercial mortgage owner-occupied loans	$	78		163	2,087
Commercial mortgage nonowner-occupied loans		17		146	2,522
Total	$	95		309	4,609

TABLE 35: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million
As of December 31, 2016 ($ in millions)	LTV > 100%		LTV 80-100%		LTV < 80%
Commercial mortgage owner-occupied loans	$	106		178	1,953
Commercial mortgage nonowner-occupied loans		22		100	2,598
Total	$	128		278	4,551

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 36: Commercial Loan and Lease Portfolio (excluding loans held for sale)
	June 30, 2017						December 31, 2016
($ in millions)	Outstanding		Exposure		Nonaccrual		Outstanding		Exposure		Nonaccrual
By Industry:
Manufacturing	$	9,960		18,642		78		10,070		19,646		50
Real estate		7,716		12,417		28		7,206		11,919		26
Financial services and insurance		5,628		11,402		2		5,648		11,522		2
Healthcare		4,534		6,390		4		4,649		6,450		23
Business services		4,170		6,530		71		4,599		6,996		65
Retail trade		4,089		7,681		3		4,048		7,598		6
Wholesale trade		3,290		5,878		14		3,482		6,249		24
Accommodation and food		3,256		4,976		5		3,051		4,817		5
Transportation and warehousing		3,009		4,438		63		3,059		4,473		38
Communication and information		2,957		4,980		1		2,901		4,726		-
Construction		2,297		4,190		2		2,025		3,786		3
Entertainment and recreation		1,788		3,050		8		1,736		2,979		3
Mining		1,277		2,600		183		1,312		2,621		246
Utilities		834		2,276		-		1,168		2,799		-
Other services		696		909		16		729		945		24
Public administration		428		521		-		417		463		-
Agribusiness		298		458		1		284		426		2
Individuals		40		57		1		66		83		1
Other		38		38		5		2		2		5
Total	$	56,305		97,433		485		56,452		98,500		523
By Loan Size:
Less than $200,000		1%		1		3		1		1		3
$200,000 - $1 million		3		2		6		3		3		5
$1 million - $5 million		8		7		12		9		7		16
$5 million - $10 million		6		5		9		7		6		13
$10 million - $25 million		22		19		47		23		20		54
Greater than $25 million		60		66		23		57		63		9
Total		100 %		100		100		100		100		100
By State:
Ohio		14%		16		5		15		16		4
Florida		8		8		7		8		7		5
Michigan		7		7		5		7		7		5
Illinois		7		6		6		7		7		9
Indiana		4		4		4		4		4		2
North Carolina		4		3		1		4		4		-
Tennessee		3		3		-		3		3		1
Kentucky		3		3		2		3		3		2
Pennsylvania		3		3		4		3		3		4
All other states		47		47		66		46		46		68
Total		100 %		100		100		100		100		100

The Bancorp’s non-power producing energy and nonowner-occupied commercial real estate portfolios have been identified by the Bancorp as loans which it believes represent a higher level of risk compared to the rest of the Bancorp’s commercial loan portfolio due to economic or market conditions within the Bancorp’s key lending areas.

Due to the sensitivity of the non-power producing energy portfolio to downward movements in oil prices, the Bancorp saw a migration into criticized classifications during 2015 through the second quarter of 2016. However, in the second half of 2016 and continuing into 2017, this portfolio stabilized with some signs of improvement, however, recent declines in oil prices could increase the volatility of the portfolio. The reserve-based energy loans that the Bancorp holds are senior secured loans with a borrowing base that is re-determined on a semi-annual basis. In addition to the non-power producing energy lending exposure shown in Table 37, the Bancorp has approximately $192 million of operating lease assets, recorded in operating lease equipment in the Condensed Consolidated Balance Sheets, that are leased to customers in non-power producing energy industries.

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

The following tables provide an analysis of the non-power producing energy loan portfolio:

TABLE 37: Non-Power Producing Energy Portfolio


As of June 30, 2017 ($ in millions)													Net Charge-offs for June 30, 2017
	Pass		Criticized		Outstanding		Exposure		90 Days Past Due		Nonaccrual		Three Months Ended	Six Months Ended
Reserve-based lending	$	529		212		741		1,617		-		130	-	-
Midstream		298		-		298		891		-		-	-	-
Oil field services		137		71		208		307		-		35	-	1
Oil and gas		32		57		89		367		-		16	-	-
Refining		44		-		44		398		-		-	-	-
Total	$	1,040		340		1,380		3,580		-		181	-	1

TABLE 38: Non-Power Producing Energy Portfolio
As of June 30, 2016 ($ in millions)

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