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 March 31, 2018

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 685,495,676 shares of the Registrant’s common stock, without par value, outstanding as of April 30, 2018.

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			15
Business Segment Review			20
Risk Management—Overview			26
Credit Risk Management			27
Market Risk Management			40
Liquidity Risk Management			44
Operational Risk Management			47
Compliance Risk Management			47
Capital Management			48
Off-Balance Sheet Arrangements			50
Quantitative and Qualitative Disclosures about Market Risk (Item 3)			51
Controls and Procedures (Item 4)			51
Condensed Consolidated Financial Statements and Notes (Item 1)
Balance Sheets (unaudited)			52
Statements of Income (unaudited)			53
Statements of Comprehensive Income (unaudited)			54
Statements of Changes in Equity (unaudited)			55
Statements of Cash Flows (unaudited)			56
Notes to Condensed Consolidated Financial Statements (unaudited)			57
Part II. Other Information
Legal Proceedings (Item 1)			106
Risk Factors (Item 1A)			106
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			106
Exhibits (Item 6)			106
Signature			107

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 the Risk Factors section in Item 1A 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) deteriorating credit quality; (2) loan concentration by location or industry of borrowers or collateral; (3) problems encountered by other financial institutions; (4) inadequate sources of funding or liquidity; (5) unfavorable actions of rating agencies; (6) inability to maintain or grow deposits; (7) limitations on the ability to receive dividends from subsidiaries; (8) cyber-security risks; (9) Fifth Third’s ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; (10) failures by third-party service providers; (11) inability to manage strategic initiatives and/or organizational changes; (12) inability to implement technology system enhancements; (13) failure of internal controls and other risk management systems; (14) losses related to fraud, theft or violence; (15) inability to attract and retain skilled personnel; (16) adverse impacts of government regulation; (17) governmental or regulatory changes or other actions; (18) failures to meet applicable capital requirements; (19) regulatory objections to Fifth Third’s capital plan; (20) regulation of Fifth Third’s derivatives activities; (21) regulatory objections to Fifth Third’s resolution plan; (22) deposit insurance premiums; (23) assessments for the orderly liquidation fund; (24) changes in LIBOR; (25) weakness in the national or local economies; (26) global political and economic uncertainty or negative actions; (27) changes in interest rates; (28) changes and trends in capital markets; (29) fluctuation of Fifth Third’s stock price; (30) volatility in mortgage banking revenue; (31) litigation, investigations, and enforcement proceedings by governmental authorities; (32) breaches of contractual covenants, representations and warranties; (33) competition and changes in the financial services industry; (34) changing retail distribution strategies, customer preferences and behavior; (35) difficulties in identifying, acquiring or integrating suitable strategic partnerships, investments or acquisitions; (36) potential dilution from future acquisitions; (37) loss of income and/or difficulties encountered in the sale and separation of businesses, investments or other assets; (38) results of Vantiv Holding, LLC, a subsidiary of Worldpay, Inc. or other investments or acquired entities; (39) difficulties from or changes in Fifth Third’s investment in, relationship with, and nature of the operations of Vantiv Holding, LLC, a subsidiary of Worldpay, Inc.; (40) changes in accounting standards or interpretation or declines in the value of Fifth Third’s goodwill or other intangible assets; (41) inaccuracies or other failures from the use of models; (42) effects of critical accounting policies and judgments or the use of inaccurate estimates; (43) weather related events or other natural disasters; and (44) the impact of reputational risk created by these or other 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 (Loss)

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

DFAST: Dodd-Frank Act Stress Test

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

FOMC: Federal Open Market Committee

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

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

SAR: Stock Appreciation Right

SBA: Small Business Administration

SCB: Stress Capital Buffer

SEC: United States Securities and Exchange Commission

SLB: Stress Leverage Buffer

TBA: To Be Announced

TCJA: Tax Cuts and Jobs Act

TDR: Troubled Debt Restructuring

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 March 31,					%
($ in millions, except for per share data)		2018			2017		Change
Income Statement Data
Net interest income (U.S. GAAP)	$		996			933		7
Net interest income (FTE)^(a)(b)			999			939		6
Noninterest income			909			523		74
Total revenue^(a)			1,908			1,462		31
Provision for loan and lease losses			23			74		(69	)
Noninterest expense			1,046			986		6
Net income attributable to Bancorp			704			305		131
Net income available to common shareholders			689			290		138
Common Share Data
Earnings per share - basic	$		0.99			0.38		161
Earnings per share - diluted			0.97			0.38		155
Cash dividends declared per common share			0.16			0.14		14
Book value per share			21.68			20.13		8
Market value per share			31.75			25.40		25
Financial Ratios
Return on average assets			2.02	%		0.88		130
Return on average common equity			18.6			7.8		138
Return on average tangible common equity^(b)			22.4			9.3		141
Dividend payout ratio			16.2			36.8		(56	)
Average total Bancorp shareholders’ equity as a percent of average assets			11.52			11.72		(2	)
Tangible common equity as a percent of tangible assets^(b)(h)			9.14			9.15		-
Net interest margin^(a)(b)			3.18			3.02		5
Net interest rate spread ^(a)(b)			2.88			2.78		4
Efficiency^(a)(b)			54.8			67.4		(19	)
Credit Quality
Net losses charged-off	$		81			89		(9	)
Net losses charged-off as a percent of average portfolio loans and leases			0.36	%		0.40		(10	)
ALLL as a percent of portfolio loans and leases			1.24			1.35		(8	)
Allowance for credit losses as a percent of portfolio loans and leases^(c)			1.40			1.52		(8	)
Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO			0.55			0.79		(30	)
Average Balances
Loans and leases, including held for sale	$		92,869			92,791		-
Total securities and other short-term investments			34,677			33,177		5
Total assets			141,565			140,140		1
Transaction deposits^(d)			97,018			97,018		-
Core deposits^(e)			100,874			100,845		-
Wholesale funding^(f)			20,558			19,129		7
Bancorp shareholders’ equity			16,313			16,429		(1	)
Regulatory Capital and Liquidity Ratios
CET1 capital^(g)			10.82	%		10.76		1
Tier I risk-based capital^(g)			11.95			11.90		-
Total risk-based capital^(g)			15.25			15.45		(1	)
Tier I leverage			10.11			10.15		-
Modified LCR			113			119		(5	)

(a)

Amounts presented on an FTE basis. The FTE adjustment for the three months ended March 31, 2018 and 2017 was $3 and $6, respectively.

(b)

These are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

(c)

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

(d)

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

(e)

Includes transaction deposits and other time deposits.

(f)

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

(g)

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

(h)

Excludes unrealized gains and losses.

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 March 31, 2018, the Bancorp had $141.5 billion in assets and operated 1,153 full-service banking centers and 2,459 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 4.9% interest in Vantiv Holding, LLC. The carrying value of the Bancorp’s investment in Vantiv Holding, LLC was $632 million at March 31, 2018.

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, 2017. 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, net interest rate spread and the efficiency ratio are presented in MD&A on an FTE basis. The FTE basis adjusts for the tax-favored status of income from certain loans and securities held by the Bancorp that are not taxable for federal income tax purposes. The Bancorp believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable and non-taxable amounts. The FTE basis for presenting net interest income is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

The Bancorp’s revenues are dependent on both net interest income and noninterest income. For the three months ended March 31, 2018, net interest income on an FTE basis and noninterest income provided 52% and 48% 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 the three months ended March 31, 2018. 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 or losses and other noninterest income. Noninterest expense includes personnel costs, net occupancy expense, technology and communication costs, equipment expense, card and processing expense and other noninterest expense.

Vantiv, Inc. and Vantiv Holding, LLC Transactions

On January 16, 2018, Vantiv, Inc. completed its previously announced acquisition of Worldpay Group plc. with the resulting combined company named Worldpay, Inc. As a result of this transaction, the Bancorp recognized a gain of $414 million in other noninterest income during the first quarter of 2018 associated with the dilution in its ownership interest in Vantiv Holding, LLC from approximately 8.6% to approximately 4.9%. The Bancorp’s remaining interest in Vantiv Holding, LLC of $632 million continues to be accounted for as an equity method investment given the nature of Vantiv Holding, LLC’s structure as a limited liability company and contractual arrangements between Vantiv Holding, LLC and the Bancorp.

Accelerated Share Repurchase Transactions

During the three months ended March 31, 2018, 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 14 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 three months ended March 31, 2018, refer to Table 2.

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

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 19, 2017	$	273		7,727,273		824,367		8,551,640		March 19, 2018
February 12, 2018		318		8,691,318		1,015,731		9,707,049		March 26, 2018

Senior Notes Offering

On March 14, 2018, the Bancorp issued and sold $650 million of 3.95% senior fixed-rate notes, with a maturity of ten years, due on March 14, 2028. 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 of the notes to be redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption date.

Earnings Summary

The Bancorp’s net income available to common shareholders for the first quarter of 2018 was $689 million, or $0.97 per diluted share, which was net of $15 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the first quarter of 2017 was $290 million, or $0.38 per diluted share, which was net of $15 million in preferred stock dividends.

Net interest income on an FTE basis (non-GAAP) was $999 million and $939 million for the three months ended March 31, 2018 and 2017, respectively. Net interest income was positively impacted by an increase in yields on average loans and leases of 42 bps and an increase in average taxable securities of $1.3 billion for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. Additionally, net interest income was positively impacted by the decisions of the FOMC to raise the target range of the federal funds rate 25 bps in June 2017, December 2017 and March 2018. These positive impacts were partially offset by increases in the rates paid on average interest-bearing core deposits, average long-term debt and average other short-term borrowings for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. Net interest margin on an FTE basis (non-GAAP) was 3.18% and 3.02% for the three months ended March 31, 2018 and 2017, respectively.

Noninterest income increased $386 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily due to an increase in other noninterest income. Other noninterest income increased $383 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily due to the gain related to Vantiv, Inc’s acquisition of Worldpay Group plc. and an increase in private equity investment income, partially offset by an increase in the loss on the swap associated with the sale of Visa, Inc. Class B Shares, a reduction in equity method income from the Bancorp’s interest in Vantiv Holding, LLC and an increase in the losses on disposition and impairment of bank premises and equipment.

Noninterest expense increased $60 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily due to increases in personnel costs, technology and communications expense and other noninterest expense. Personnel costs increased $35 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily driven by increases in base compensation, variable compensation and severance costs, partially offset by a decrease in medical expenses. Technology and communications expense increased $10 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 driven primarily by increased investment in regulatory, compliance and growth initiatives. Other noninterest expense increased $16 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily due to increases in marketing expense and impairment on affordable housing investments, partially offset by a decrease in professional service fees and an increase in the benefit from the reserve for unfunded commitments.

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 $23 million and $74 million for the three months ended March 31, 2018 and 2017, respectively. Net losses charged-off as a percent of average portfolio loans and leases were 0.36% during the first quarter of 2018 compared to 0.40% during the first quarter of 2017. At March 31, 2018, nonperforming portfolio assets as a percent of portfolio loans and leases and OREO increased to 0.55% compared to 0.53% at December 31, 2017. For further discussion on credit quality, refer to the Credit Risk Management subsection of the Risk Management section of MD&A.

Capital Summary

The Bancorp’s capital ratios exceed the “well-capitalized” guidelines as defined by the PCA requirements of the U.S. banking agencies. As of March 31, 2018, as calculated under the Basel III standardized approach, the CET1 capital ratio was 10.82%, the Tier I risk-based capital ratio was 11.95%, the Total risk-based capital ratio was 15.25% and the Tier I leverage ratio was 10.11%.

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

NON-GAAP FINANCIAL MEASURES

The following are non-GAAP measures which provide useful insight to the reader of the Condensed Consolidated Financial Statements but should be supplemental to primary U.S. GAAP measures and should not be read in isolation or relied upon as a substitute for the primary U.S. GAAP measures.

The FTE basis adjusts for the tax-favored status of income from certain loans and securities held by the Bancorp that are not taxable for federal income tax purposes. The Bancorp believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable and non-taxable amounts.

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

TABLE 3: Non-GAAP Financial Measures - Financial Measures and Ratios on an FTE basis



		For the three months ended March 31,
($ in millions)			2018	2017

Net interest income (U.S. GAAP)	$		996	933
Add: FTE adjustment			3	6
Net interest income on an FTE basis (1)	$		999	939
Net interest income on an FTE basis (annualized) (2)			4,052	3,808

Interest income (U.S. GAAP)	$		1,206	1,086
Add: FTE adjustment			3	6

Interest income on an FTE basis	$		1,209	1,092
Interest income on an FTE basis (annualized) (3)			4,903	4,429

Interest expense (annualized) (4)	$		852	621
Noninterest income (5)			909	523
Noninterest expense (6)			1,046	986
Average interest-earning assets (7)			127,546	125,968
Average interest-bearing liabilities (8)			87,607	84,890

Ratios:
Net interest margin on an FTE basis (2) / (7)			3.18 %	3.02
Net interest spread on an FTE basis (3) / (7) - (4) / (8)			2.88	2.78
Efficiency ratio on an FTE basis (6) / (1) + (5)			54.8	67.4

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 March 31,
($ in millions)			2018	2017

Income before income taxes (U.S. GAAP)	$		836	396
Add: FTE adjustment			3	6

Income before income taxes on an FTE basis	$		839	402

The Bancorp believes return on average tangible common equity is an important measure for comparative purposes with other financial institutions, but is not defined under U.S. GAAP, and therefore is considered a non-GAAP financial measure. This measure is useful for evaluating the performance of a business as it calculates the return available to common shareholders without the impact of intangible assets and their related amortization.

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

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

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


($ in millions)	March 31, 2018		March 31, 2017
Net income available to common shareholders (U.S. GAAP)	$	689		290
Add: Intangible amortization, net of tax		1		-
Tangible net income available to common shareholders	$	690		290
Tangible net income available to common shareholders (annualized) (1)		2,798		1,176

Average Bancorp’s shareholders’ equity (U.S. GAAP)	$	16,313		16,429
Less: Average preferred stock		(1,331)		(1,331)
Average goodwill		(2,455)		(2,416)
Average intangible assets		(27)		(10)
Average tangible common equity (2)	$	12,500		12,672

Return on average tangible common equity (1) / (2)		22.4 %		9.3

The Bancorp considers various measures when evaluating capital utilization and adequacy, including the tangible equity ratio and tangible common equity ratio, in addition to capital ratios defined by 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. 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)	March 31, 2018			December 31, 2017
Total Bancorp Shareholders’ Equity (U.S. GAAP)	$	16,184			16,365
Less: Preferred stock		(1,331	)		(1,331)
Goodwill		(2,462	)		(2,445)
Intangible assets		(30	)		(27)
AOCI		389			(73)
Tangible common equity, excluding unrealized gains / losses (1)		12,750			12,489
Add: Preferred stock		1,331			1,331
Tangible equity (2)	$	14,081			13,820

Total Assets (U.S. GAAP)	$	141,500			142,193
Less: Goodwill		(2,462	)		(2,445)
Intangible assets		(30	)		(27)
AOCI, before tax		492			(92)
Tangible assets, excluding unrealized gains / losses (3)	$	139,500			139,629

Ratios:
Tangible equity as a percentage of tangible assets (2) / (3)		10.09	%		9.90
Tangible common equity as a percentage of tangible assets (1) / (3)		9.14			8.94

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, 2017. There have been no material changes to the valuation techniques or models during the three months ended March 31, 2018.

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.

Table 7 presents the components of net interest income, net interest margin and net interest rate spread for the three months ended March 31, 2018 and 2017, 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 and leases 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 included in other assets.

Net interest income on an FTE basis (non-GAAP) was $999 million and $939 million for the three months ended March 31, 2018 and March 31, 2017, respectively. Net interest income was positively impacted by an increase in yields on average loans and leases of 42 bps and an increase in average taxable securities of $1.3 billion for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. Additionally, net interest income was positively impacted by the decisions of the FOMC to raise the target range of the federal funds rate 25 bps in June 2017, December 2017 and March 2018. These positive impacts were partially offset by increases in the rates paid on average interest-bearing core deposits, average long-term debt and average other short-term borrowings for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The rates paid on both average interest-bearing core deposits and average long-term debt increased 21 bps and the rates paid on average other short-term borrowings increased 79 bps for the three months ended March 31, 2018 compared to the same period in the prior year.

Net interest rate spread on an FTE basis (non-GAAP) was 2.88% during the three months ended March 31, 2018 compared to 2.78% in the same period in 2017. Yields on average interest-earning assets increased 34 bps, partially offset by a 24 bps increase in the rates paid on average interest-bearing liabilities for the three months ended March 31, 2018 compared to the three months ended March 31, 2017.

Net interest margin on an FTE basis (non-GAAP) was 3.18% for the three months ended March 31, 2018 compared to 3.02% for the three months ended March 31, 2017. The increase from March 31, 2017 was driven primarily by the previously mentioned increase in the net interest rate spread, partially offset by a decrease in average free funding balances. The decrease in average free funding balances was driven by a decrease in average demand deposits of $1.3 billion for the three months ended March 31, 2018 compared to the three months ended March 31, 2017.

Interest income on an FTE basis from loans and leases (non-GAAP) increased $96 million during the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase was primarily due to an increase in yields on average commercial and industrial loans, average construction loans, average commercial mortgage loans and average home equity 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 $21 million during the three months ended March 31, 2018 compared to the three months ended March 31, 2017 driven by the aforementioned increases in average taxable securities and yields on average taxable securities.

Interest expense on core deposits increased $36 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily due to an increase in the cost of average interest-bearing core deposits to 52 bps for the three months ended March 31, 2018 from 31 bps for the three months ended March 31, 2017. The increase in the cost of average interest-bearing core deposits was primarily due to an increase 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 $21 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily due to the aforementioned increase in the rates paid on average other short-term borrowings and average long-term debt coupled with an increase 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 both the three months ended March 31, 2018 and 2017, average wholesale funding represented 23% of average interest-bearing liabilities. 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	March 31, 2018							March 31, 2017							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	$	41,799		409		3.96	%	$	41,892		359		3.47	%	$(1)	51	50
Commercial mortgage loans		6,588		68		4.20			6,946		61		3.54		(4)	11	7
Commercial construction loans		4,671		53		4.59			3,987		37		3.77		7	9	16
Commercial leases		3,960		27		2.78			3,904		26		2.70		-	1	1
Total commercial loans and leases		57,018		557		3.96			56,729		483		3.45		2	72	74
Residential mortgage loans		16,086		143		3.60			15,800		140		3.57		2	1	3
Home equity		6,889		78		4.62			7,581		74		3.98		(7)	11	4
Automobile loans		9,064		70		3.12			9,786		68		2.81		(5)	7	2
Credit card		2,224		68		12.36			2,141		68		12.92		3	(3)	-
Other consumer loans		1,588		25		6.58			754		12		6.49		13	-	13
Total consumer loans		35,851		384		4.35			36,062		362		4.07		6	16	22
Total loans and leases	$	92,869		941		4.11	%	$	92,791		845		3.69	%	$8	88	96
Securities:
Taxable		33,133		263		3.21			31,815		244		3.11		11	8	19
Exempt from income taxes^(b)		73		-		1.40			55		1		5.79		-	(1)	(1)
Other short-term investments		1,471		5		1.37			1,307		2		0.73		1	2	3
Total interest-earning assets	$	127,546		1,209		3.85	%	$	125,968		1,092		3.51	%	$20	97	117
Cash and due from banks		2,175							2,205
Other assets		13,039							13,220
Allowance for loan and lease losses		(1,195)							(1,253)
Total assets	$	141,565						$	140,140
Liabilities and Equity:
Interest-bearing liabilities:
Interest checking deposits	$	28,403		44		0.63	%	$	26,760		20		0.31	%	$1	23	24
Savings deposits		13,546		3		0.07			14,117		2		0.05		-	1	1
Money market deposits		20,750		27		0.53			20,603		16		0.32		-	11	11
Foreign office deposits		494		-		0.13			454		-		0.13		-	-	-
Other time deposits		3,856		12		1.25			3,827		12		1.23		-	-	-
Total interest-bearing core deposits		67,049		86		0.52			65,761		50		0.31		1	35	36
Certificates $100,000 and over		2,284		8		1.49			2,579		9		1.35		(2)	1	(1)
Other deposits		379		1		1.44			162		-		0.64		1	-	1
Federal funds purchased		692		2		1.43			639		1		0.70		-	1	1
Other short-term borrowings		2,423		8		1.34			1,893		3		0.55		-	5	5
Long-term debt		14,780		105		2.86			13,856		90		2.65		8	7	15
Total interest-bearing liabilities	$	87,607		210		0.97	%	$	84,890		153		0.73	%	$8	49	57
Demand deposits		33,825							35,084
Other liabilities		3,800							3,710
Total liabilities	$	125,232						$	123,684
Total equity	$	16,333						$	16,456
Total liabilities and equity	$	141,565						$	140,140
Net interest income (FTE)^(c)			$	999						$	939				$12	48	60
Net interest margin (FTE)^(c)						3.18	%						3.02	%
Net interest rate spread (FTE)^(c)						2.88							2.78
Interest-bearing liabilities to interest-earning assets						68.69							67.39

(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 $3 and $6 for the three months ended March 31, 2018 and 2017, respectively.

(c)

Net interest income (FTE), net interest margin (FTE) and net interest rate spread (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, 2017. 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 $23 million and $74 million for the three months ended March 31, 2018 and 2017, respectively. The decrease in provision expense for the three months ended March 31, 2018 compared to the same period in the prior year was primarily due to a decrease in the level of commercial criticized assets combined with overall improved credit quality. The ALLL decreased $58 million from December 31, 2017 to $1.1 billion at March 31, 2018. At March 31, 2018, the ALLL as a percent of portfolio loans and leases decreased to 1.24%, compared to 1.30% at December 31, 2017.

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 portfolio composition, nonperforming assets, net charge-offs and other factors considered by the Bancorp in assessing the credit quality of the loan and lease portfolio and the ALLL.

Noninterest Income

Noninterest income increased $386 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017.

The following table presents the components of noninterest income:

TABLE 8: Components of Noninterest Income


		For the three months ended March 31,
($ in millions)		2018		2017		% Change
Service charges on deposits	$		137		138		(1	)
Wealth and asset management revenue			113		108		5
Corporate banking revenue			88		74		19
Card and processing revenue			79		74		7
Mortgage banking net revenue			56		52		8
Other noninterest income			460		77		497
Securities losses, net			(11)		-		NM
Securities losses, net, non-qualifying hedges on MSRs			(13)		-		NM
Total noninterest income	$		909		523		74

Wealth and asset management revenue

Wealth and asset management revenue increased $5 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase from the prior year was primarily due to an increase of $5 million in private client service fees driven by an increase in assets under management as a result of strong market performance and the impact of an acquisition in the second quarter of 2017. The Bancorp’s trust and registered investment advisory business had approximately $363 billion and $323 billion in total assets under care as of March 31, 2018 and 2017, respectively, and managed $37 billion and $33 billion in assets for individuals, corporations and not-for-profit organizations as of March 31, 2018 and 2017, respectively.

Corporate banking revenue

Corporate banking revenue increased $14 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017. The increase from the prior year was primarily driven by an increase in lease remarketing fees of $28 million 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 increase was partially offset by a decrease in business lending fees, syndication fees and letter of credit fees of $6 million, $5 million and $2 million, respectively.

Card and processing revenue

Card and processing revenue increased $5 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily driven by an increase in the number of actively used cards and customer spend volume.

Mortgage banking net revenue

Mortgage banking net revenue increased $4 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017.

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

TABLE 9: Components of Mortgage Banking Net Revenue


		For the three months ended March 31,
($ in millions)		2018			2017
Origination fees and gains on loan sales	$		24			29
Net mortgage servicing revenue:
Gross mortgage servicing fees			53			47
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs			(21	)		(24)
Net mortgage servicing revenue			32			23
Mortgage banking net revenue	$		56			52

Origination fees and gains on loan sales decreased $5 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 due to a decrease in originations and lower margins due to the interest rate environment. Residential mortgage loan originations decreased to $1.6 billion for the three months ended March 31, 2018 from $1.9 billion for the three months ended March 31, 2017.

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

Net mortgage servicing revenue increased $9 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily due to an increase in gross mortgage servicing fees of $6 million and a decrease in net negative valuation adjustments of $3 million. Refer to Table 10 for the components of net valuation adjustments on the MSR portfolio and the impact of the non-qualifying hedging strategy:

TABLE 10: Components of Net Valuation Adjustments on MSRs


		For the three months ended March 31,
($ in millions)		2018	2017
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio	$	(49)	(1)
Changes in fair value:
Due to changes in inputs or assumptions		57	4
Other changes in fair value		(29)	(27)
Net valuation adjustments on MSR and free-standing derivatives purchased to economically hedge MSRs	$	(21)	(24)

Mortgage rates increased during the three months ended March 31, 2018 which caused modeled prepayment speeds to slow. The fair value of the MSR increased $57 million due to changes to inputs to the valuation model including prepayment speeds and OAS spread assumptions and decreased $29 million due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs during the three months ended March 31, 2018. Mortgage rates also increased during the three months ended March 31, 2017 which caused modeled prepayment speeds to slow. The fair value of the MSR increased $4 million due to changes to inputs to the valuation model including prepayment speeds and OAS spread assumptions and decreased $27 million due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs during the three months ended March 31, 2017.

Further detail on the valuation of MSRs can be found in Note 10 of the Notes to Condensed Consolidated Financial Statements. The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in the valuation of the MSR portfolio. Refer to Note 11 of the Notes to Condensed Consolidated Financial Statements for more information on the free-standing derivatives used to economically hedge the MSR portfolio.

In addition to the derivative positions used to economically hedge the MSR portfolio, the Bancorp may acquire various securities as a component of its non-qualifying hedging strategy. The Bancorp recognized net losses of $13 million during the three months ended March 31, 2018, recorded in securities losses, net, non-qualifying hedges on MSRs in the Bancorp’s Condensed Consolidated Statements of Income. The Bancorp did not sell any securities related to the non-qualifying hedging strategy during the three months ended March 31, 2017.

The Bancorp’s total residential mortgage loans serviced as of March 31, 2018 and 2017 were $77.2 billion and $71.4 billion, respectively, with $61.0 billion and $55.4 billion, respectively, of residential mortgage loans serviced for others.

Other noninterest income

The following table presents the components of other noninterest income:

TABLE 11: Components of Other Noninterest Income


		For the three months ended March 31,
($ in millions)		2018	2017
Gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc.	$	414	-
Operating lease income		23	25
Private equity investment income		20	15
Cardholder fees		14	14
BOLI income		13	12
Insurance income		6	1
Consumer loan and lease fees		5	5
Banking center income		5	5
Loss on swap associated with the sale of Visa, Inc. Class B Shares		(39)	(13)
Net losses on disposition and impairment of bank premises and equipment		(8)	(1)
Net losses on loan sales		(1)	(2)
Equity method (loss) income from interest in Vantiv Holding, LLC		(1)	11
Other, net		9	5
Total other noninterest income	$	460	77

Other noninterest income increased $383 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily due to the gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc. and an increase in private equity investment income, partially offset by an increase in the loss on the swap associated with the sale of Visa, Inc. Class B Shares, a reduction in equity method income from the Bancorp’s interest in Vantiv Holding, LLC and an increase in the losses on disposition and impairment of bank premises and equipment.

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

The Bancorp recognized a $414 million gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc. during the three months ended March 31, 2018. For additional information, refer to Note 17 of the Notes to Condensed Consolidated Financial Statements. Private equity investment income increased $5 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to the recognition of positive net valuation adjustments on certain private equity investments in the first quarter of 2018. For additional information on the valuation of private equity investments, refer to Note 21 of the Notes to Condensed Consolidated Financial Statements.

The Bancorp recognized negative valuation adjustments of $39 million and $13 million related to the Visa total return swap for the three months ended March 31, 2018 and 2017, respectively. The increase from the prior year was primarily attributable to litigation developments during the quarter and an increase in Visa, Inc’s share price. For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B Shares, refer to Note 21 of the Notes to Condensed Consolidated Financial Statements. Equity method income from the Bancorp’s interest in Vantiv Holding, LLC decreased $12 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 due to a decrease in the Bancorp’s ownership interest in Vantiv Holding, LLC from approximately 17.8% as of March 31, 2017 to approximately 4.9% as of March 31, 2018 and the impact of Worldpay, Inc.’s acquisition and integration costs. Net losses on disposition and impairment of bank premises and equipment increased $7 million compared to the same period in the prior year. The increase was driven by the impact of impairment charges of $8 million during the three months ended March 31, 2018 compared to $3 million during the three months ended March 31, 2017.

Noninterest Expense

Noninterest expense increased $60 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily due to increases in personnel costs (salaries, wages and incentives plus employee benefits), technology and communications expense and other noninterest expense. The following table presents the components of noninterest expense:

TABLE 12: Components of Noninterest Expense


		For the three months ended March 31,
($ in millions)		2018			2017		% Change
Salaries, wages and incentives	$		447			411		9
Employee benefits			110			111		(1)
Net occupancy expense			75			78		(4)
Technology and communications			68			58		17
Equipment expense			31			28		11
Card and processing expense			29			30		(3)
Other noninterest expense			286			270		6
Total noninterest expense	$		1,046			986		6
Efficiency ratio on an FTE basis^(a)			54.8	%		67.4

(a)

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

Personnel costs increased $35 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily driven by increases in base compensation, variable compensation and severance costs, partially offset by a decrease in medical expenses. The increase in base compensation was primarily due to personnel additions in information technology as well as an increase in the Bancorp’s minimum wage as a result of benefits received from the TCJA. Full-time equivalent employees totalled 18,344 at March 31, 2018 compared to 17,763 at March 31, 2017.

Technology and communications expense increased $10 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 driven primarily by increased investment in regulatory, compliance and growth initiatives.

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

The following table presents the components of other noninterest expense:

TABLE 13: Components of Other Noninterest Expense


		For the three months ended March 31,
($ in millions)		2018			2017
Impairment on affordable housing investments	$		48			39
FDIC insurance and other taxes			32			33
Marketing			32			19
Loan and lease			26			22
Operating lease			21			25
Losses and adjustments			17			15
Data processing			14			13
Professional service fees			13			22
Travel			13			11
Postal and courier			9			12
Recruitment and education			8			8
Supplies			3			3
Donations			3			2
Insurance			3			3
Benefit from the reserve for unfunded commitments			(10	)		(2	)
Other, net			54			45
Total other noninterest expense	$		286			270

Other noninterest expense increased $16 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily due to increases in marketing expense and impairment on affordable housing investments, partially offset by a decrease in professional service fees and an increase in the benefit from the reserve for unfunded commitments.

Marketing expense increased $13 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily due to an increase in advertising volume related to the brand campaign and promotional offers. Impairment on affordable housing investments increased $9 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily driven by the change in the federal statutory corporate tax rate pursuant to the TCJA. Professional service fees decreased $9 million for the three months ended March 31, 2018 compared to the three months ended March 31, 2017 primarily due to a decrease in legal fees and consulting fees. The benefit from the reserve for unfunded commitments was $10 million for the three months ended March 31, 2018 compared to $2 million for the same period in the prior year as a result of a decrease in total unfunded commitments outstanding as of March 31, 2018 combined with overall improved credit quality.

Applicable Income Taxes

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

TABLE 14: Applicable Income Taxes


		For the three months ended March 31,
($ in millions)		2018			2017
Income before income taxes	$		836			396
Applicable income tax expense			132			91
Effective tax rate			15.8	%		22.9

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

The decrease in the effective tax rate for the three months ended March 31, 2018 compared to the same period in the prior year was primarily related to the reduction in the federal statutory corporate tax rate partially offset by changes to previously deductible items associated with the enactment of the TCJA.

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. 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 March 31, 2018, 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 second quarter 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 based upon product or collateral. Table 15 summarizes end of period loans and leases, including loans and leases held for sale and Table 16 summarizes average total loans and leases, including loans and leases held for sale.

TABLE 15: Components of Total Loans and Leases (including loans and leases held for sale)


		March 31, 2018			December 31, 2017
As of ($ in millions)		Carrying Value		% of Total	Carrying Value		% of Total
Commercial loans and leases:
Commercial and industrial loans	$		41,678	45	$	41,170		45
Commercial mortgage loans			6,515	7		6,610		7
Commercial construction loans			4,766	5		4,553		5
Commercial leases			3,919	4		4,068		4
Total commercial loans and leases			56,878	61		56,401		61
Consumer loans:
Residential mortgage loans			16,231	18		16,077		17
Home equity			6,757	7		7,014		8
Automobile loans			9,018	10		9,112		10
Credit card			2,188	2		2,299		2
Other consumer loans			1,615	2		1,559		2
Total consumer loans			35,809	39		36,061		39
Total loans and leases	$		92,687	100	$	92,462		100
Total portfolio loans and leases (excluding loans and leases held for sale)	$		91,970		$	91,970

Loans and leases, including loans and leases held for sale, increased $225 million from December 31, 2017. The increase from December 31, 2017 was the result of a $477 million, or 1%, increase in commercial loans and leases, partially offset by a $252 million, or 1%, decrease in consumer loans.

Commercial loans and leases increased from December 31, 2017 primarily due to increases in commercial and industrial loans and commercial construction loans, partially offset by decreases in commercial leases and commercial mortgage loans. Commercial and industrial loans increased $508 million, or 1%, from December 31, 2017 primarily as a result of increased draw levels on existing commitments and a decrease in payoffs. Commercial construction loans increased $213 million, or 5%, from December 31, 2017 primarily due to increases in demand and draw levels on existing commitments. Commercial leases decreased $149 million, or 4%, from December 31, 2017 primarily as a result of a decrease in syndication and participation origination activity. Commercial mortgage loans decreased $95 million, or 1%, from December 31, 2017 primarily due to a decline in new loan origination activity driven by increased competition and an increase in paydowns.

Consumer loans decreased from December 31, 2017 primarily due to decreases in home equity, credit card and automobile loans, partially offset by increases in residential mortgage loans and other consumer loans. Home equity decreased $257 million, or 4%, from December 31, 2017 as payoffs exceeded new loan production. Credit card decreased $111 million, or 5%, from December 31, 2017 primarily due to seasonal trends from the paydown of year-end balances which were higher due to holiday spending. Automobile loans decreased $94 million, or 1%, from December 31, 2017 as payoffs exceeded new loan production due to a strategic shift focusing on improving risk-adjusted returns. Residential mortgage loans increased $154 million, or 1%, from December 31, 2017 primarily due to the continued retention of certain agency conforming ARMs and certain other fixed-rate loans originated during the three months ended March 31, 2018. Other consumer loans increased $56 million, or 4%, from December 31, 2017 primarily due to growth in point-of-sale loan originations.

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


		March 31, 2018				March 31, 2017
For the three months ended ($ in millions)		Carrying Value		% of Total		Carrying Value		% of Total
Commercial loans and leases:
Commercial and industrial loans	$		41,799	45	$		41,892		45
Commercial mortgage loans			6,588	7			6,946		7
Commercial construction loans			4,671	5			3,987		4
Commercial leases			3,960	4			3,904		4
Total commercial loans and leases			57,018	61			56,729		60
Consumer loans:
Residential mortgage loans			16,086	18			15,800		18
Home equity			6,889	7			7,581		8
Automobile loans			9,064	10			9,786		11
Credit card			2,224	2			2,141		2
Other consumer loans			1,588	2			754		1
Total consumer loans			35,851	39			36,062		40
Total average loans and leases	$		92,869	100	$		92,791		100
Total average portfolio loans and leases (excluding loans and leases held for sale)	$		92,334		$		92,146

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

Average loans and leases, including loans and leases held for sale, increased $78 million from March 31, 2017. The increase from March 31, 2017 was the result of a $289 million, or 1%, increase in average commercial loans and leases, partially offset by a $211 million, or 1%, decrease in average consumer loans.

Average commercial loans and leases increased from March 31, 2017 primarily due to an increase in average commercial construction loans, partially offset by a decrease in average commercial mortgage loans. Average commercial construction loans increased $684 million, or 17%, from March 31, 2017 primarily due to increases in demand and draw levels on existing commitments. Average commercial mortgage loans decreased $358 million, or 5%, primarily due to a decline in new loan origination activity driven by increased competition and an increase in paydowns.

Average consumer loans decreased from March 31, 2017 primarily due to decreases in average automobile loans and average home equity, partially offset by increases in average other consumer loans and average residential mortgage loans. Average automobile loans decreased $722 million, or 7%, from March 31, 2017 as payoffs exceeded new loan production due to a strategic shift focusing on improving risk-adjusted returns. Average home equity decreased $692 million, or 9%, from March 31, 2017 as payoffs exceeded new loan production. Average other consumer loans increased $834 million primarily due to growth in point-of-sale loan originations. Average residential mortgage loans increased $286 million, or 2%, from March 31, 2017 primarily driven by the continued retention of certain agency 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 collateral for pledging purposes and liquidity for satisfying regulatory requirements. Total investment securities were $32.8 billion and $32.7 billion at March 31, 2018 and December 31, 2017, respectively. The taxable investment securities portfolio had an effective duration of 5.2 years at March 31, 2018 compared to 4.7 years at December 31, 2017.

Debt 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. Debt securities are classified as trading when bought and held principally for the purpose of selling them in the near term. At March 31, 2018, the Bancorp’s investment portfolio consisted primarily of AAA-rated available-for-sale debt securities. The Bancorp did not hold any securities classified as below investment grade at March 31, 2018 and an immaterial amount as of December 31, 2017. The Bancorp did not recognize OTTI on its available-for-sale debt and other securities, included in securities gains, net, in the Condensed Consolidated Statements of Income, during the three months ended March 31, 2018 and recognized $10 million during the three months ended March 31, 2017.

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

TABLE 17: Components of Investment Securities


As of ($ in millions)	March 31, 2018		December 31, 2017
Available-for-sale debt and other securities (amortized cost basis):
U.S. Treasury and federal agencies securities	$	98	98
Obligations of states and political subdivisions securities		43	43
Mortgage-backed securities:
Agency residential mortgage-backed securities^(a)		15,456	15,281
Agency commercial mortgage-backed securities		10,612	10,113
Non-agency commercial mortgage-backed securities		3,219	3,247
Asset-backed securities and other debt securities		2,190	2,183
Other securities^(b)		612	612
Total available-for-sale debt and other securities	$	32,230	31,577
Held-to-maturity securities (amortized cost basis):
Obligations of states and political subdivisions securities	$	21	22
Asset-backed securities and other debt securities		2	2
Total held-to-maturity securities	$	23	24
Trading debt securities (fair value):
U.S. Treasury and federal agencies securities	$	21	12
Obligations of states and political subdivisions securities		52	22
Agency residential mortgage-backed securities		364	395
Asset-backed securities and other debt securities		134	63
Total trading debt securities	$	571	492
Total equity securities	$	418	439

(a)

Includes interest-only mortgage-backed securities of $34 as of December 31, 2017 recorded at fair value with fair value changes recorded in securities gains, net in the Condensed Consolidated Statements of Income.

(b)

Other securities consist of FHLB, FRB and DTCC restricted stock holdings of $248, $362 and $2, respectively, at both March 31, 2018 and December 31, 2017, that are carried at cost.

On an amortized cost basis, available-for-sale debt and other securities increased $653 million from December 31, 2017 primarily due to increases in agency commercial mortgage-backed securities and agency residential mortgage-backed securities.

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

On an amortized cost basis, available-for-sale debt and other securities were 25% of total interest-earning assets at both March 31, 2018 and December 31, 2017. The estimated weighted-average life of the debt securities in the available-for-sale debt and other securities portfolio was 6.8 years at March 31, 2018 compared to 6.5 years at December 31, 2017. In addition, at March 31, 2018, the debt securities in the available-for-sale debt and other securities portfolio had a weighted-average yield of 3.15%, compared to 3.18% at December 31, 2017.

Trading debt securities increased $79 million from December 31, 2017 primarily due to an increase in asset-backed securities and other debt securities.

Information presented in Table 18 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 debt and other securities portfolio exclude other securities that have no stated yield or maturity. Total net unrealized losses on the available-for-sale debt and other securities portfolio were $411 million at March 31, 2018 compared to net unrealized gains of $174 million at December 31, 2017. 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 decreases when interest rates increase or when credit spreads expand.

TABLE 18: Characteristics of Available-for-Sale Debt and Other Securities


As of March 31, 2018 ($ 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	$	-		-		-		3.40 %
Average life 1 – 5 years		98		96		4.8		2.16
Total	$	98		96		4.8		2.16 %
Obligations of states and political subdivisions securities:^(a)
Average life of 1 year or less		14		14		0.3		1.70
Average life 1 – 5 years		27		28		1.1		5.01
Average life 5 – 10 years		2		2		6.4		-
Total	$	43		44		1.1		3.73 %
Agency residential mortgage-backed securities:
Average life of 1 year or less		1		1		0.2		4.48
Average life 1 – 5 years		5,774		5,693		3.8		3.34
Average life 5 – 10 years		8,160		8,037		7.4		3.11
Average life greater than 10 years		1,521		1,477		11.5		3.11
Total	$	15,456		15,208		6.5		3.20 %
Agency commercial mortgage-backed securities:
Average life of 1 year or less		208		200		1.0		2.44
Average life 1 – 5 years		2,437		2,414		3.6		3.07
Average life 5 – 10 years		5,783		5,715		7.8		3.05
Average life greater than 10 years		2,184		2,126		11.9		3.10
Total	$	10,612		10,455		7.6		3.05 %
Non-agency commercial mortgage-backed securities:
Average life of 1 year or less		-		-		0.5		4.04
Average life 1 – 5 years		134		135		4.1		3.44
Average life 5 – 10 years		3,085		3,055		6.7		3.28
Total	$	3,219		3,190		6.6		3.29 %
Asset-backed securities and other debt securities:
Average life of 1 year or less		31		31		0.6		4.23
Average life 1 – 5 years		833		830		3.4		3.53
Average life 5 – 10 years		1,117		1,141		7.1		3.29
Average life greater than 10 years		209		212		10.7		3.25
Total	$	2,190		2,214		5.9		3.39 %
Other securities		612		612
Total available-for-sale debt and other securities	$	32,230		31,819		6.8		3.15 %

(a)

Taxable-equivalent yield adjustments included in the above table are 0.35%, 1.05%, 0.00% and 0.78% 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. Average core deposits represented 71% of the Bancorp’s average asset funding base at both March 31, 2018 and December 31, 2017.

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

TABLE 19: Components of Deposits


		March 31, 2018				December 31, 2017
As of ($ in millions)		Balance		% of Total		Balance		% of Total
Demand	$		34,066		33	$	35,276		34
Interest checking			29,627		28		27,703		27
Savings			13,751		13		13,425		13
Money market			21,540		20		20,097		19
Foreign office			374		-		484		1
Transaction deposits			99,358		94		96,985		94
Other time			3,945		4		3,775		4
Core deposits			103,303		98		100,760		98
Certificates $100,000 and over^(a)			2,042		2		2,402		2
Other			116		-		-		-
Total deposits	$		105,461		100	$	103,162		100

(a)

Includes $1.0 billion and $1.3 billion of institutional, retail and wholesale certificates $250,000 and over at March 31, 2018 and December 31, 2017, respectively.

Core deposits increased $2.5 billion, or 3%, from December 31, 2017 driven by an increase of $2.4 billion in transaction deposits. Transaction deposits increased from December 31, 2017 primarily due to increases in interest checking deposits, money market deposits and savings deposits, partially offset by a decrease in demand deposits. Interest checking deposits increased $1.9 billion, or 7%, from December 31, 2017 driven primarily by higher balances per account for commercial customers and balance migration from demand deposits accounts. Money market deposits increased $1.4 billion, or 7%, from December 31, 2017 driven primarily by promotional product offerings which drove consumer customer acquisition. Savings deposits increased $326 million, or 2%, from December 31, 2017 primarily due to consumer customer seasonality. Demand deposits decreased $1.2 billion, or 3%, from December 31, 2017 driven primarily by the aforementioned commercial customer balance migration into interest checking deposits, partially offset by higher balances per consumer customer account due to consumer customer seasonality.

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

TABLE 20: Components of Average Deposits


		March 31, 2018				March 31, 2017
($ in millions)		Balance		% of Total		Balance		% of Total
Demand	$		33,825		34	$	35,084		34
Interest checking			28,403		27		26,760		26
Savings			13,546		13		14,117		14
Money market			20,750		20		20,603		20
Foreign office			494		-		454		-
Transaction deposits			97,018		94		97,018		94
Other time			3,856		4		3,827		4
Core deposits			100,874		98		100,845		98
Certificates $100,000 and over^(a)			2,284		2		2,579		2
Other			379		-		162		-
Total average deposits	$		103,537		100	$	103,586		100

(a)

Includes $878 million and $1.3 billion of average institutional, retail and wholesale certificates $250,000 and over for the three months ended March 31, 2018 and 2017, respectively.

On an average basis, core deposits increased $29 million from March 31, 2017 driven by an increase in average other time deposits. Average other time deposits increased $29 million, or 1%, from March 31, 2017 as a result of promotional rate offers facilitated by the rising-rate environment. Average transaction deposits were flat from March 31, 2017. Average interest checking deposits increased $1.6 billion, or 6%, from March 31, 2017, primarily due to an increase in average balances per commercial customer account and balance migration from demand deposit accounts. Average demand deposits decreased $1.3 billion, or 4%, from March 31, 2017 primarily due to commercial customer balance migration into interest checking deposits and a decrease in average balances per commercial customer account.

Average other deposits increased $217 million from March 31, 2017 primarily due to an increase in average Eurodollar trade deposits. Average certificates $100,000 and over decreased $295 million from March 31, 2017 primarily due to the maturity and run-off of commercial certificates of deposit since March 31, 2017.

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 March 31, 2018 are summarized in the following table:

TABLE 21: Contractual Maturities of Certificates $100,000 and Over


($ in millions)
Next 3 months	$	302
3-6 months		289
6-12 months		384
After 12 months		1,067
Total certificates $100,000 and over	$	2,042

The contractual maturities of other time deposits and certificates $100,000 and over as of March 31, 2018 are summarized in the following table:

TABLE 22: Contractual Maturities of Other Time Deposits and Certificates $100,000 and Over


($ in millions)
Next 12 months	$	2,952
13-24 months		1,852
25-36 months		887
37-48 months		243
49-60 months		43
After 60 months		10
Total other time deposits and certificates $100,000 and over	$	5,987

Borrowings

The Bancorp accesses a variety of 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 March 31, 2018, average total borrowings as a percent of average interest-bearing liabilities were 20% compared to 21% at December 31, 2017.

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

TABLE 23: Components of Borrowings


As of ($ in millions)	March 31, 2018		December 31, 2017
Federal funds purchased	$	178		174
Other short-term borrowings		1,335		4,012
Long-term debt		14,800		14,904
Total borrowings	$	16,313		19,090

Total borrowings decreased $2.8 billion, or 15%, from December 31, 2017 primarily due to a decrease in other short-term borrowings. Other short-term borrowings decreased $2.7 billion from December 31, 2017 driven by a decrease in FHLB advances. 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 12 of the Notes to Condensed Consolidated Financial Statements. Long-term debt decreased $104 million from December 31, 2017 primarily driven by the maturity of $600 million of unsecured senior bank notes, $68 million of paydowns on long-term debt associated with automobile loan securitizations and $64 million of fair value adjustments on interest rate swaps related to long-term debt during the three months ended March 31, 2018. These decreases were partially offset by the issuance of $650 million of senior notes. For additional information regarding the senior notes debt issuance, refer to Note 13 of the Notes to Condensed Consolidated Financial Statements.

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

TABLE 24: Components of Average Borrowings


($ in millions)		March 31, 2018	March 31, 2017
Federal funds purchased	$	692	639
Other short-term borrowings		2,423	1,893
Long-term debt		14,780	13,856
Total average borrowings	$	17,895	16,388

Total average borrowings increased $1.5 billion, or 9%, compared to March 31, 2017, primarily due to increases in average long-term debt and average other short-term borrowings. Average long-term debt increased $924 million compared to March 31, 2017. The increase was primarily driven by the issuance of $700 million of senior notes and $1.1 billion of unsecured senior fixed-rate bank notes during the second and fourth quarters of 2017, respectively. Average other short-term borrowings increased $530 million compared to March 31, 2017, primarily driven by the increase in FHLB advances. 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 and 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 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 behavioral 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, 2018 to reflect the current market rates and updated market assumptions. These rates were generally higher than those in place during 2017, thus net interest income for deposit-providing business segments was positively impacted during 2018. 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 2018.

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 results of operations and financial position for the three months ended March 31, 2017 were adjusted to reflect changes in internal expense allocation methodologies.

The following table summarizes net income (loss) by business segment:

TABLE 25: Net Income (Loss) by Business Segment


		For the three months ended March 31,
($ in millions)		2018	2017
Income Statement Data
Commercial Banking	$	259	217
Branch Banking		134	103
Consumer Lending		(10)	(3)
Wealth and Asset Management		9	15
General Corporate and Other		312	(27)
Net income		704	305
Less: Net income attributable to noncontrolling interests		-	-
Net income attributable to Bancorp		704	305
Dividends on preferred stock		15	15
Net income available to common shareholders	$	689	290

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 26: Commercial Banking


		For the three months ended March 31,
($ in millions)		2018			2017
Income Statement Data
Net interest income (FTE)^(a)	$		422			431
(Benefit from) provision for loan and lease losses			(20	)		6
Noninterest income:
Corporate banking revenue			86			73
Service charges on deposits			71			73
Other noninterest income			62			56
Noninterest expense:
Personnel costs			88			85
Other noninterest expense			296			275
Income before income taxes (FTE)			277			267
Applicable income tax expense^(a)(b)			18			50
Net income	$		259			217
Average Balance Sheet Data
Commercial loans and leases, including held for sale	$		53,953			53,733
Demand deposits			18,131			19,944
Interest checking deposits			10,273			9,245
Savings and money market deposits			4,443			6,363
Other time deposits and certificates $100,000 and over			611			966
Foreign office deposits			492			403

(a)

Includes FTE adjustments of $3 and $6 for the three months ended March 31, 2018 and 2017, respectively.

(b)

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

Net income was $259 million for the three months ended March 31, 2018 compared to $217 million for the same period in the prior year. The increase was primarily due to a decrease in the provision for loan and lease losses and an increase in noninterest income partially offset by an increase in noninterest expense and a decrease in net interest income.

Net interest income on an FTE basis decreased $9 million for the three months ended March 31, 2018 compared to the same period in the prior year driven primarily by an increase in FTP charge rates on loans and leases and an increase in the rates paid on core deposits. These decreases in net interest income were partially offset by an increase in yields on average commercial loans and leases and an increase in FTP credits on interest checking deposits due to an increase in FTP credit rates.

Provision for loan and lease losses decreased $26 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to a decrease in net charge-offs on commercial and industrial loans and commercial mortgage loans as well as a decrease in criticized asset levels. Net charge-offs as a percent of average portfolio loans and leases decreased to 14 bps for the three months ended March 31, 2018 compared to 26 bps for the same period in the prior year.

Noninterest income increased $17 million for the three months ended March 31, 2018 compared to the same period in the prior year driven primarily by increases in corporate banking revenue and other noninterest income. Corporate banking revenue increased $13 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily driven by an increase in lease remarketing fees of $28 million 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 increase was partially offset by a decrease in business lending fees, syndication fees and letter of credit fees of $6 million, $5 million and $2 million, respectively. Other noninterest income increased $6 million for the three months ended March 31, 2018 compared to the same period in the prior year driven by an increase in private equity investment income.

Noninterest expense increased $24 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily driven by an increase other noninterest. Other noninterest expense increased $21 million for the three months ended March 31, 2018 compared to the same period in the prior year due primarily due to increases in corporate overhead allocations, impairment on certain affordable housing investments and equipment expense partially offset by a decrease in operating lease expense.

Average commercial loans and leases increased $220 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to an increase in average commercial construction loans partially offset by decreases in average commercial mortgage loans and average commercial and industrial loans. Average commercial construction loans increased $697 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to increases in demand and draw levels on existing commitments.

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

Average commercial mortgage loans decreased $319 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to a decline in new loan origination activity driven by increased competition and an increase in paydowns. Average commercial and industrial loans decreased $215 million for the three months ended March 31, 2018 compared to the same period 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 core deposits decreased $2.6 billion for the three months ended March 31, 2018 compared to the same period in the prior year. The decrease was primarily driven by decreases in average savings and money market deposits and average demand deposits which decreased $1.9 billion and $1.8 billion, respectively, for the three months ended March 31, 2018 compared to the same period in the prior year due to lower average balances per account. These decreases were partially offset by an increase in average interest checking deposits of $1.0 billion for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to an increase of average balances per account.

Branch Banking

Branch Banking provides a full range of deposit and loan products to individuals and small businesses through 1,153 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 27: Branch Banking


		For the three months ended March 31,
($ in millions)		2018		2017
Income Statement Data
Net interest income	$		466		430
Provision for loan and lease losses			44		42
Noninterest income:
Service charges on deposits			66		65
Card and processing revenue			64		59
Wealth and asset management revenue			37		36
Other noninterest income			17		24
Noninterest expense:
Personnel costs			136		131
Net occupancy and equipment expense			56		60
Card and processing expense			29		29
Other noninterest expense			216		193
Income before income taxes			169		159
Applicable income tax expense			35		56
Net income	$		134		103
Average Balance Sheet Data
Consumer loans	$		13,036		13,177
Commercial loans			1,873		1,852
Demand deposits			14,055		13,601
Interest checking deposits			10,315		10,157
Savings and money market deposits			28,427		27,156
Other time deposits and certificates $100,000 and over			5,031		5,039

Net income was $134 million for the three months ended March 31, 2018 compared to net income of $103 million for the same period in the prior year. The increase in net income was primarily due to an increase in net interest income partially offset by an increase in noninterest expense.

Net interest income increased $36 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to an increase in FTP credit rates on core deposits as well as an increase in interest income on other consumer loans driven by higher average balances. These benefits were partially offset by an increase in FTP charge rates on loans and leases, an increase in the rates paid on money market deposits and the impact of a $12 million benefit in the first quarter of 2017 related to a revised estimate of refunds to be offered to certain bankcard customers.

Provision for loan and lease losses increased $2 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to an increase in net charge-offs on credit card and other consumer loans as well as the impact of the benefit from lower criticized asset levels. Net charge-offs as a percent of average portfolio loans and leases increased to 121 bps for the three months ended March 31, 2018 compared to 109 bps for the same period in the prior year.

Noninterest income was flat for the three months ended March 31, 2018 compared to the same period in the prior year as a decrease in other noninterest income was partially offset by an increase in card and processing revenue. The decrease in other noninterest income was due to the impact of impairment charges on bank premises and equipment of $8 million for the three months ended March 31, 2018. The increase in card and processing revenue for the three months ended March 31, 2018 compared to the same period in the prior year was driven by an increase in the number of actively used cards and customer spend volume.

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

Noninterest expense increased $24 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to an increase in other noninterest expense driven by increases in corporate overhead allocations, marketing expense and loan and lease expense.

Average consumer loans decreased $141 million for the three months ended March 31, 2018 compared to the same period in the prior year. The decrease was primarily driven by decreases in average home equity loans, average residential mortgage loans and average automobile loans of $533 million, $318 million and $180, respectively, for the three months ended March 31, 2018 compared to the same period in the prior year as payoffs exceeded new loan production. These decreases were partially offset by an increase of $890 million in other consumer loans for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to growth in point-of-sale loan originations.

Average core deposits increased $1.9 billion for the three months ended March 31, 2018 compared to the same period in the prior year primarily driven by growth in average savings and money market deposits, average demand deposits and average interest checking deposits of $1.3 billion, $454 million and $158 million, respectively, due to 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 28: Consumer Lending


		For the three months ended March 31,
($ in millions)		2018			2017
Income Statement Data
Net interest income	$		59			61
Provision for loan and lease losses			12			15
Noninterest income:
Mortgage banking net revenue			55			51
Other noninterest income			(9	)		4
Noninterest expense:
Personnel costs			50			48
Other noninterest expense			56			58
Loss before income taxes			(13	)		(5)
Applicable income tax benefit			(3	)		(2)
Net loss	$		(10	)		(3)
Average Balance Sheet Data
Residential mortgage loans, including held for sale	$		11,678			11,161
Home equity			261			314
Automobile loans			8,702			9,241

Consumer Lending incurred a net loss of $10 million for the three months ended March 31, 2018 compared to a net loss of $3 million for the same period in the prior year driven by a decrease in noninterest income.

Provision for loan and lease losses decreased $3 million for the three months ended March 31, 2018 compared to the same period in the prior year. Net charge-offs as a percent of average portfolio loans and leases decreased to 24 bps for the three months ended March 31, 2018 compared to 31 bps for the same period in the prior year.

Noninterest income decreased $9 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to a decrease in other noninterest income partially offset by an increase in mortgage banking net revenue. Other noninterest income decreased $13 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to an increase in losses on securities related to non-qualifying hedges on MSRs resulting from increased mortgage rates. Mortgage banking net revenue increased $4 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to an increase of $8 million in net mortgage servicing revenue, partially offset by a decrease of $4 million in mortgage origination fees and gains on loan sales. Refer to the Noninterest Income subsection of the Statements of Income Analysis section of the MD&A for additional information on the fluctuations in mortgage banking net revenue.

Average consumer loans and leases decreased $75 million for the three months ended March 31, 2018 compared to the same period in the prior year as a decrease in average automobile loans was partially offset by an increase in average residential mortgage loans. Average automobile loans decreased $539 million for the three months ended March 31, 2018 compared to the same period 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, including held for sale, increased $517 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily driven by the continued retention of certain conforming ARMs and certain other fixed-rate loans.

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

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 five main businesses: FTS; ClearArc Capital, Inc.; Fifth Third Insurance Agency, Inc.; 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 Insurance Agency, Inc. assists clients with their financial and risk management needs. 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 29: Wealth and Asset Management


		For the three months ended March 31,
($ in millions)		2018		2017
Income Statement Data
Net interest income	$		43		38
Provision for loan and lease losses			16		4
Noninterest income:
Wealth and asset management revenue			109		105
Other noninterest income			7		1
Noninterest expense:
Personnel costs			54		48
Other noninterest expense			77		69
Income before income taxes			12		23
Applicable income tax expense			3		8
Net income	$		9		15
Average Balance Sheet Data
Loans and leases, including held for sale	$		3,335		3,240
Core deposits			9,649		9,045

Net income was $9 million for the three months ended March 31, 2018 compared to net income of $15 million for the same period in the prior year. The decrease in net income was primarily due to increases in noninterest expense and the provision for loan and lease losses partially offset by increases in net interest income and noninterest income.

Net interest income increased $5 million for the three months ended March 31, 2018 compared to the same period in the prior year due to an increase in FTP credit rates on interest checking deposits as well as increases in yields on average loans and leases. These positive impacts were partially offset by increases in the rates paid on interest checking deposits as well as an increase in FTP charge rates on loans and leases.

Provision for loan and lease losses increased $12 million for the three months ended March 31, 2018 compared to the same period in the prior year driven by an increase in net charge-offs on commercial and industrial loans as well as an increase in criticized assets.

Noninterest income increased $10 million for the three months ended March 31, 2018 compared to the same period in the prior year driven by increases in other noninterest income and wealth and asset management revenue. Other noninterest income increased $6 million for the three months ended March 31, 2018 compared to the same period in the prior year driven by an increase in insurance income as a result of acquisitions in the first and fourth quarters of 2017. Wealth and asset management revenue increased $4 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to an increase in private client service fees driven by an increase in assets under management as a result of strong market performance and the impact of an acquisition in the second quarter 2017.

Noninterest expense increased $14 million for the three months ended March 31, 2018 compared to the same period in the prior year driven by increases in both other noninterest expense and personnel costs. Other noninterest expense increased $8 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily driven by an increase in corporate overhead allocations as a result of the aforementioned acquisitions in 2017 as well as increased operational losses. Personnel costs increased $6 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily driven by higher base and incentive compensation as a result of the aforementioned acquisitions in 2017.

Average loans and leases increased $95 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to increases in average residential mortgage loans and average other consumer loans driven by increases in new loan origination activity. This increase was partially offset by a decline in average home equity balances.

Average core deposits increased $604 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to increases in average interest checking deposits and average saving deposits.

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

General Corporate and Other

General Corporate and Other includes the unallocated portion of the investment securities portfolio, securities gains and losses, certain non-core deposit funding, unassigned equity, 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 $30 million for the three months ended March 31, 2018 compared to the same period in the prior year. The increase 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 increases in FTP credit rates on deposits allocated to the business segments and an increase in interest expense on long-term debt.

Provision for loan and lease losses decreased $36 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily due to a an increase in the benefit from the reduction in the ALLL.

Noninterest income increased $368 million for the three months ended March 31, 2018 compared to the same period in the prior year primarily driven by the recognition of a $414 million gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc. during the three months ended March 31, 2018. This benefit was partially offset by a $39 million negative valuation adjustment related to the Visa total return swap for the three months ended March 31, 2018 compared to a negative valuation adjustment of $13 million for the three months ended March 31, 2017. The increase in noninterest income was also offset by a $12 million decrease in equity method earnings from the Bancorp’s interest in Vantiv Holding, LLC for the three months ended March 31, 2018 compared to the same period primarily due to a decrease in the Bancorp’s ownership percentage in Vantiv Holding, LLC and the impact of Worldpay, Inc’s acquisition and integration costs.

Noninterest expense decreased $2 million for the three months ended March 31, 2018 compared to the same period in the prior year. The decrease was primarily due to increases in corporate overhead allocations from General Corporate and Other to the other business segments and an increase in the benefit from the reserve for unfunded commitments partially offset by increases in personnel and technology and communications 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 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. 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.

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 Business Conduct & Ethics, which may be found on www.53.com, while carrying out their responsibilities. Fifth Third’s Corporate Responsibility and Reputation Committee provides oversight of business conduct policies, programs and strategies and monitors reporting of potential misconduct, trends or themes across the enterprise. 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.

●

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 is 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. 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.

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

●

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 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 30: Potential Problem Portfolio Loans and Leases
As of March 31, 2018 ($ in millions)		Carrying Value		Unpaid Principal Balance		Exposure
Commercial and industrial loans	$		806		806		1,149
Commercial mortgage loans			97		97		97
Commercial leases			55		55		55
Total potential problem portfolio loans and leases	$		958		958		1,301

TABLE 31: Potential Problem Portfolio Loans and Leases
As of December 31, 2017 ($ in millions)		Carrying Value		Unpaid Principal Balance		Exposure
Commercial and industrial loans	$		911		912		1,370
Commercial mortgage loans			138		138		138
Commercial leases			70		70		70
Total potential problem portfolio loans and leases	$		1,119		1,120		1,578

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 model and will evaluate the use of modified dual risk ratings for purposes of determining the Bancorp’s ALLL as part of the Bancorp’s adoption of ASU 2016-13 “Measurement of Credit Losses on Financial Instruments,” which will be effective for the Bancorp on January 1, 2020. Scoring systems, various analytical tools and portfolio performance monitoring are used to assess the credit risk in the Bancorp’s homogenous consumer and small business loan portfolios.

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

Overview

Inflationary expectations by market professionals have increased and average hourly earnings growth in the U.S. overall remained strong while the U.S. labor market appears to have continued to shrink, based on publicly-available information. In light of higher inflationary expectations and a strong employment outlook, the FOMC enacted a 25 bp increase in the target rate for Federal Funds target rate and indicated positive outlook on the economy. The Federal Reserve median forecast for change in real GDP was raised to 2.7%.

The TCJA was enacted at a point in the cycle where the economy appeared to be growing, the unemployment rate was low and market professionals believed that it was likely to continue falling and there was increasing confidence in the market that inflation may move to 2% over the medium term.

The Bancorp maintains a focus on commercial real estate exposure. Market data and vacancies remain positive; however credit markets in commercial real estate are becoming more selective around certain asset types and geographies. The Bancorp is also monitoring potential increased risks in the Retail sector as a result changes in distribution models with increasing levels of online purchasing and recent weakness in certain specialty retailers.

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 32: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million
As of March 31, 2018 ($ in millions)		LTV > 100%	LTV 80-100%	LTV < 80%
Commercial mortgage owner-occupied loans	$	75	111	2,236
Commercial mortgage nonowner-occupied loans		13	152	2,187
Total	$	88	263	4,423

TABLE 33: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million
As of December 31, 2017 ($ in millions)		LTV > 100%	LTV 80-100%	LTV < 80%
Commercial mortgage owner-occupied loans	$	79	110	2,222
Commercial mortgage nonowner-occupied loans		14	169	2,208
Total	$	93	279	4,430

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 34: Commercial Loan and Lease Portfolio (excluding loans and leases held for sale)
		March 31, 2018			December 31, 2017
($ in millions)		Outstanding	Exposure	Nonaccrual	Outstanding	Exposure	Nonaccrual
By Industry:
Manufacturing	$	10,080	19,224	84	10,044	18,948	74
Real estate		7,813	12,387	18	7,713	12,493	25
Financial services and insurance		5,725	11,911	1	5,792	11,933	1
Healthcare		4,523	6,322	32	4,712	6,486	35
Business services		4,102	6,636	34	4,147	6,512	42
Retail trade		3,419	7,147	3	3,617	7,950	3
Accommodation and food		3,413	5,407	23	3,268	5,321	4
Communication and information		3,367	5,538	6	3,322	5,308	-
Wholesale trade		3,295	5,413	4	3,017	5,363	6
Transportation and warehousing		3,012	4,530	29	3,012	4,621	29
Construction		2,447	4,449	3	2,374	4,449	2
Entertainment and recreation		1,661	2,909	2	1,624	2,911	7
Mining		1,635	3,098	70	1,454	3,001	56
Utilities		861	2,264	-	869	2,333	-
Other services		713	998	11	714	1,017	16
Public administration		420	578	-	370	474	-
Agribusiness		312	489	2	304	478	2
Individuals		31	63	-	27	57	-
Other		-	-	-	15	15	4
Total	$	56,829	99,363	322	56,395	99,670	306
By Loan Size:
Less than $200,000		1 %	1	4	1	1	5
$200,000 - $1 million		3	2	6	3	2	8
$1 million - $5 million		7	6	14	7	6	15
$5 million - $10 million		6	5	15	6	5	10
$10 million - $25 million		21	18	36	21	18	57
Greater than $25 million		62	68	25	62	68	5
Total		100 %	100	100	100	100	100
By State:
Ohio		14 %	15	7	14	15	7
Florida		8	7	11	8	8	6
Michigan		7	7	9	7	7	13
Illinois		7	6	7	7	6	9
Indiana		4	4	2	4	4	3
Georgia		4	5	-	4	5	2
North Carolina		3	3	1	3	3	1
Tennessee		3	3	-	3	3	8
Kentucky		3	3	-	3	3	1
Other		47	47	63	47	46	50
Total		100 %	100	100	100	100	100

The Bancorp’s 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.

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

The following tables provide an analysis of nonowner-occupied commercial real estate loans by state (excluding loans held for sale):

TABLE 35: Nonowner-Occupied Commercial Real Estate (excluding loans held for sale)^(a)


As of March 31, 2018 ($ in millions)					For the three months ended March 31, 2018
	Outstanding	Exposure	90 Days Past Due	Nonaccrual	Net Charge-Offs
By State:
Ohio	$ 1,609	2,058	-	1	-
Florida	1,011	1,512	-	-	-
Illinois	806	1,000	-	-	-
Michigan	573	740	-	-	-
Indiana	552	800	-	-	-
North Carolina	538	793	-	-	-
All other states	2,661	4,447	-	3	1
Total	$ 7,750	11,350	-	4	1
(a) Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.

*TABLE 36: Nonowner-Occupied Commercial Real Estate (excluding loans held for sale)^(a)***
As of March 31, 2017 ($ in millions)					For the three months ended March 31, 2017
	Outstanding	Exposure	90 Days Past Due	Nonaccrual	Net Charge-Offs
By State:
Ohio	$ 1,516	1,947	-	3	3
Florida	901	1,478	-	1	-
Illinois	692	1,216	-	-	-
Michigan	603	796	-	2	-
Indiana	648	1,071	-	-	-
North Carolina	580	838	-	-	-
All other states	2,658	4,510	-	3	-
Total	$ 7,598	11,856	-	9	3

(a)

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

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

Consumer Portfolio

Consumer credit risk management utilizes a framework that encompasses consistent processes for identifying, assessing, managing, monitoring and reporting credit risk. These processes are supported by a credit risk governance structure that includes Board oversight, policies, risk limits and risk committees.

The Bancorp’s consumer portfolio is materially comprised of five categories of loans: residential mortgage loans, home equity loans, automobile loans, credit card and other consumer. The Bancorp has identified certain credit characteristics within these five categories of loans which it believes represent a higher level of risk compared to the rest of the consumer loan portfolio. The Bancorp does not update LTV ratios for the consumer portfolio subsequent to origination except as part of the charge-off process for real estate secured loans. Among consumer portfolios, legacy underwritten residential mortgage and brokered home equity portfolios exhibited the most stress during the past credit crisis. As of March 31, 2018, consumer real estate loans, consisting of residential mortgage loans and home equity loans, originated from 2005 through 2008 represent approximately 14% of the consumer real estate portfolio. These loans accounted for 53% of total consumer real estate secured losses for the three months ended March 31, 2018. Current loss rates in the residential mortgage and home equity portfolios are below pre-crisis levels. In addition to the consumer real estate portfolio, credit risk management continues to closely monitor the automobile portfolio performance. The automobile market has exhibited industry-wide gradual loosening of credit standards such as lower FICOs, longer terms and higher LTVs. Fifth Third has adjusted credit standards focused on improving risk-adjusted returns while maintaining credit risk tolerance. Fifth Third actively manages the automobile portfolio through concentration limits, which mitigates credit risk through limiting the exposure to lower FICO scores, higher advance rates and extended term originations.

Residential mortgage portfolio

The Bancorp manages credit risk in the residential mortgage portfolio through underwriting guidelines that limit exposure to higher LTV ratios and lower FICO scores. Additionally, the portfolio is governed by concentration limits that ensure geographic, product and channel diversification. The Bancorp may also package and sell loans in the portfolio.

The Bancorp does not originate mortgage loans that permit customers to defer principal payments or make payments that are less than the accruing interest. The Bancorp originates both fixed-rate and ARM loans. Within the ARM portfolio, approximately $634 million of ARM loans will have rate resets during the next twelve months. Of these resets, 90% are expected to experience an increase in rate, with an average increase of approximately one percent.

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

Portfolio residential mortgage loans from 2010 and later vintages represented 91% of the portfolio as of March 31, 2018 and had a weighted-average LTV of 72% and a weighted-average origination FICO of 760.

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

TABLE 37: Residential Mortgage Portfolio Loans by LTV at Origination


		March 31, 2018					December 31, 2017
($ in millions)		Outstanding		Weighted- Average LTV			Outstanding		Weighted- Average LTV
LTV £ 80%	$		11,704		66.4 %	$		11,767		66.4	%
LTV > 80%, with mortgage insurance^(a)			1,926		94.8			1,890		94.8
LTV > 80%, no mortgage insurance			1,933		94.7			1,934		94.7
Total	$		15,563		73.8 %	$		15,591		73.7	%

(a)

Includes loans with both borrower and lender paid mortgage insurance.

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

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

TABLE 38: Residential Mortgage Portfolio Loans, LTV Greater than 80%, No Mortgage Insurance


As of March 31, 2018 ($ in millions)					For the three months ended March 31, 2018
		Outstanding	90 Days Past Due	Nonaccrual	Net Charge-offs
By State:
Ohio	$	435	3	3	-
Illinois		384	1	3	-
Florida		285	4	4	-
Michigan		222	1	-	-
Indiana		140	1	1	-
North Carolina		87	-	1	-
Kentucky		77	1	-	-
All other states		303	2	1	-
Total	$	1,933	13	13	-

TABLE 39: Residential Mortgage Portfolio Loans, LTV Greater than 80%, No Mortgage Insurance
As of March 31, 2017 ($ in millions)					For the three months ended March 31, 2017
		Outstanding	90 Days Past Due	Nonaccrual	Net Charge-offs
By State:
Ohio	$	554	2	4	-
Illinois		464	-	1	-
Florida		338	2	2	1
Michigan		271	-	1	-
Indiana		159	1	1	-
North Carolina		113	-	1	-
Kentucky		91	1	-	-
All other states		376	-	-	-
Total	$	2,366	6	10	1

Home equity portfolio

The Bancorp’s home equity portfolio is primarily comprised of home equity lines of credit. Beginning in the first quarter of 2013, the Bancorp’s newly originated home equity lines of credit have a 10-year interest-only draw period followed by a 20-year amortization period. The home equity line of credit previously offered by the Bancorp was a revolving facility with a 20-year term, minimum payments of interest-only and a balloon payment of principal at maturity. Peak maturity years for the balloon home equity lines of credit are 2025 to 2028 and approximately 26% of the balances mature before 2025.

The ALLL provides coverage for probable and estimable losses in the home equity portfolio. The allowance attributable to the portion of the home equity portfolio that has not been restructured in a TDR is calculated on a pooled basis with senior lien and junior lien categories segmented in the determination of the probable credit losses in the home equity portfolio. The modeled loss factor for the home equity portfolio is based on the trailing twelve month historical loss rate for each category, as adjusted for certain prescriptive loss rate factors and certain qualitative adjustment factors to reflect risks associated with current conditions and trends. The prescriptive loss rate factors include adjustments for delinquency trends, LTV trends and refreshed FICO score trends. The qualitative factors include adjustments for changes in policies or procedures in underwriting, monitoring or collections, economic conditions, portfolio mix, lending and risk management personnel, results of internal audit and quality control reviews, collateral values and geographic concentrations. The Bancorp considers home price index trends when determining the collateral value qualitative factor.

The home equity portfolio is managed in two primary groups: loans outstanding with a combined LTV greater than 80% and those loans with a LTV of 80% or less based upon appraisals at origination. For additional information on these loans, refer to Table 41 and Table 42. Of the total $6.8 billion of outstanding home equity loans:

•

88% reside within the Bancorp’s Midwest footprint of Ohio, Michigan, Kentucky, Indiana and Illinois as of March 31, 2018;

•

37% are in senior lien positions and 63% are in junior lien positions at March 31, 2018;

•

82% of non-delinquent borrowers made at least one payment greater than the minimum payment during the three months ended March 31, 2018; and

•

The portfolio had an average refreshed FICO score of 744 at March 31, 2018.

The Bancorp actively manages lines of credit and makes adjustments in lending limits when it believes it is necessary based on FICO score deterioration and property devaluation. The Bancorp does not routinely obtain appraisals on performing loans to update LTV ratios after origination. However, the Bancorp monitors the local housing markets by reviewing various home price indices and incorporates the impact of the changing market conditions in its ongoing credit monitoring processes. For junior lien home equity loans which become 60 days or more past due, the Bancorp tracks the performance of the senior lien loans in which the Bancorp is the servicer and utilizes consumer credit bureau attributes to monitor the status of the senior lien loans that the Bancorp does not service.

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

If the senior lien loan is found to be 120 days or more past due, the junior lien home equity loan is placed on nonaccrual status unless both loans are well-secured and in the process of collection. Additionally, if the junior lien home equity loan becomes 120 days or more past due and the senior lien loan is also 120 days or more past due, the junior lien home equity loan is assessed for charge-off. Refer to the Analysis of Nonperforming Assets subsection of the Risk Management section of MD&A for more information.

The following table provides an analysis of home equity portfolio loans outstanding disaggregated based upon refreshed FICO score as of:

TABLE 40: Home Equity Portfolio Loans Outstanding by Refreshed FICO Score


			March 31, 2018				December 31, 2017
($ in millions)			Outstanding	% of Total			Outstanding	% of Total
Senior Liens:
FICO £ 659	$		235	4	%	$	246	4	%
FICO 660-719			344	5			358	5
FICO ³ 720			1,901	28			1,976	28
Total senior liens			2,480	37			2,580	37
Junior Liens:
FICO £ 659			528	8			541	8
FICO 660-719			826	12			853	12
FICO ³ 720			2,923	43			3,040	43
Total junior liens			4,277	63			4,434	63
Total		$	6,757	100	%	$	7,014	100	%

The Bancorp believes that home equity loans with a greater than 80% combined LTV ratio present a higher level of risk. The following table provides an analysis of the home equity loans outstanding in a senior and junior lien position by LTV at origination:

TABLE 41: Home Equity Portfolio Loans Outstanding by LTV at Origination
			March 31, 2018				December 31, 2017
($ in millions)			Outstanding	Weighted- Average LTV			Outstanding	Weighted- Average LTV
Senior Liens:
LTV £ 80%		$	2,173	54.8	%	$	2,266	54.9	%
LTV > 80%			307	88.9			314	88.9
Total senior liens			2,480	59.3			2,580	59.3
Junior Liens:
LTV £ 80%			2,500	67.4			2,603	67.5
LTV > 80%			1,777	90.4			1,831	90.4
Total junior liens			4,277	78.3			4,434	78.3
Total		$	6,757	70.9	%	$	7,014	70.9	%

The following tables provide an analysis of home equity portfolio loans by state with a combined LTV greater than 80%:

TABLE 42: Home Equity Portfolio Loans Outstanding with a LTV Greater than 80%


As of March 31, 2018 ($ in millions)						For the three months ended March 31, 2018
		Outstanding	Exposure	90 Days Past Due	Nonaccrual	Net Charge-offs
By State:
Ohio	$	1,034	1,968	-	8	1
Michigan		339	550	-	5	1
Illinois		219	349	-	4	1
Indiana		148	256	-	3	-
Kentucky		136	250	-	2	-
Florida		66	95	-	2	-
All other states		142	210	-	3	-
Total	$	2,084	3,678	-	27	3

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

TABLE 43: Home Equity Portfolio Loans Outstanding with a LTV Greater than 80%


As of March 31, 2017 ($ in millions)						For the three months ended March 31, 2017
		Outstanding	Exposure	90 Days Past Due	Nonaccrual	Net Charge-offs
By State:
Ohio	$	1,026	1,848	-	8	2
Michigan		413	643	-	5	-
Illinois		253	391	-	3	1
Indiana		177	293	-	2	-
Kentucky		163	285	-	2	-
Florida		78	110	-	2	-
All other states		174	248	-	4	-
Total	$	2,284	3,818	-	26	3

Automobile portfolio

The Bancorp’s automobile portfolio balances have declined since December 31, 2017 as payoffs exceeded new loan production due to a strategic shift focusing on improving risk-adjusted returns. Additionally, the concentration of lower FICO (<690) origination balances remained within targeted credit risk tolerance during the three months ended March 31, 2018. All concentration and guideline changes are monitored monthly to ensure alignment with original credit performance and return projections.

The following table provides an analysis of automobile portfolio loans outstanding disaggregated based upon FICO score as of:

TABLE 44: Automobile Portfolio Loans Outstanding by FICO Score at Origination


		March 31, 2018				December 31, 2017
($ in millions)		Outstanding	% of Total			Outstanding	% of Total
FICO £ 690	$	1,569	17	%	$	1,563	17	%
FICO > 690		7,449	83			7,549	83
Total	$	9,018	100	%	$	9,112	100	%

The automobile portfolio is characterized by direct and indirect lending products to consumers. As of March 31, 2018, 44% of the automobile loan portfolio is comprised of loans collateralized by new automobiles. It is a common industry practice to advance on automobile loans an amount in excess of the automobile value due to the inclusion of negative equity trade-in, maintenance/warranty products, taxes, title and other fees paid at closing. The Bancorp monitors its exposure to these higher risk loans. The following table provides an analysis of automobile portfolio loans outstanding by LTV at origination as of:
TABLE 45: Automobile Portfolio Loans Outstanding by LTV at Origination
		March 31, 2018				December 31, 2017

($ in millions)		Outstanding	Weighted- Average LTV			Outstanding	Weighted- Average LTV
LTV £ 100%	$	5,702	82.3	%	$	5,814	82.1	%
LTV > 100%		3,316	112.6			3,298	112.4
Total	$	9,018	93.8	%	$	9,112	93.5	%

The following table provides an analysis of the Bancorp’s automobile portfolio loans with a LTV at origination greater than 100%:

TABLE 46: Automobile Portfolio Loans Outstanding with a LTV Greater than 100%


As of ($ in millions)		Outstanding	90 Days Past Due and Accruing	Nonaccrual	Net Charge-offs for the Three Months Ended
March 31, 2018	$	3,316	5	1	8
March 31, 2017		3,266	4	2	6

Credit card portfolio

The credit card portfolio consists of predominately prime accounts with 97% of loan balances existing within the Bancorp’s footprint as of both March 31, 2018 and December 31, 2017. At March 31, 2018 and December 31, 2017, 75% and 76%, respectively, of the outstanding balances were originated through branch-based relationships with the remainder coming from direct mail campaigns and online acquisitions.

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

The following table provides an analysis of credit card portfolio loans outstanding disaggregated based upon FICO score as of:

TABLE 47: Credit Card Portfolio Loans Outstanding by FICO Score at Origination


		March 31, 2018					December 31, 2017
($ in millions)		Outstanding		% of Total			Outstanding		% of Total
FICO £ 659	$		60		3 %	$		61		3 %
FICO 660-719			574		26			581		25
FICO ³ 720			1,554		71			1,657		72
Total	$		2,188		100 %	$		2,299		100 %

Other consumer loans portfolio

The other consumer loans portfolio is comprised of secured and unsecured loans originated through the Bancorp’s branch network as well as point-of-sale loans originated in connection with third-party financial technology companies. Outstanding balances for other consumer loans increased approximately $56 million, or 4%, from December 31, 2017 primarily due to an increase in originations in connection with third-party financial technology companies. Additionally, the Bancorp has approximately $224 million in unfunded commitments associated with loans originated in connection with third-party financial technology companies as of March 31, 2018. Fifth Third closely monitors the credit performance of these point-of-sale loans which is impacted by the credit loss protection coverage provided by the third-party financial technology companies.

The following table provides an analysis of other consumer portfolio loans outstanding by product type at origination as of:

TABLE 48: Other Consumer Portfolio Loans Outstanding by Product Type at Origination


		March 31, 2018					December 31, 2017
($ in millions)		Outstanding		% of Total			Outstanding		% of Total
Unsecured	$		434		27 %	$		461		30 %
Other secured			475		29			482		31
Point-of-sale			706		44			616		39
Total	$		1,615		100 %	$		1,559		100 %

Analysis of Nonperforming Assets

Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is uncertain; restructured commercial and credit card loans which have not yet met the requirements to be classified as a performing asset; restructured consumer loans which are 90 days past due based on the restructured terms unless the loan is both well-secured and in the process of collection; and certain other assets, including OREO and other repossessed property. A summary of nonperforming assets is included in Table 49. For further information on the Bancorp’s policies related to accounting for delinquent and nonperforming loans and leases, refer to the Nonaccrual Loans and Leases section of Note 1 of the Notes to the Consolidated Financial Statements included in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2017.

Nonperforming assets were $528 million at March 31, 2018 compared to $495 million at December 31, 2017. At March 31, 2018, $24 million of nonaccrual loans were held for sale, compared to $6 million at December 31, 2017.

Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO were 0.55% as of March 31, 2018 compared to 0.53% as of December 31, 2017. Nonaccrual loans and leases secured by real estate were 26% of nonaccrual loans and leases as of March 31, 2018 compared to 33% as of December 31, 2017.

Commercial portfolio nonaccrual loans and leases were $322 million at March 31, 2018, an increase of $16 million from December 31, 2017. Consumer portfolio nonaccrual loans and leases were $130 million at March 31, 2018, a decrease of $1 million from December 31, 2017. Refer to Table 50 for a rollforward of the nonaccrual loans and leases.

OREO and other repossessed property was $52 million at both March 31, 2018 and December 31, 2017. The Bancorp recognized $3 million and $4 million in losses on the sale or write-down of OREO properties for the three months ended March 31, 2018 and 2017, respectively.

For the three months ended March 31, 2018 and 2017, approximately $8 million and $9 million, respectively, of interest income would have been recognized if the nonaccrual and renegotiated loans and leases on nonaccrual status had been current in accordance with their original terms. Although these values help demonstrate the costs of carrying nonaccrual credits, the Bancorp does not expect to recover the full amount of interest as nonaccrual loans and leases are generally carried below their principal balance.

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

TABLE 49: Summary of Nonperforming Assets and Delinquent Loans


As of ($ in millions)		March 31, 2018		December 31, 2017
Nonaccrual portfolio loans and leases:
Commercial and industrial loans	$		155		144
Commercial mortgage loans			9		12
Commercial leases			4		-
Residential mortgage loans			16		17
Home equity			55		56
Other consumer loans			1		-
Nonaccrual portfolio restructured loans and leases:
Commercial and industrial loans			144		132
Commercial mortgage loans			6		14
Commercial leases			4		4
Residential mortgage loans			12		13
Home equity			19		18
Automobile loans			1		1
Credit card			26		26
Total nonaccrual portfolio loans and leases^(b)			452		437
OREO and other repossessed property			52		52
Total nonperforming portfolio assets			504		489
Nonaccrual loans held for sale			5		5
Nonaccrual restructured loans held for sale			19		1
Total nonperforming assets	$		528		495
Loans and leases 90 days past due and still accruing
Commercial and industrial loans	$		7		3
Commercial mortgage loans			1		-
Residential mortgage loans^(a)			62		57
Automobile loans			9		10
Credit card			28		27
Total loans and leases 90 days past due and still accruing	$		107		97
Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO			0.55 %		0.53
ALLL as a percent of nonperforming portfolio assets			226		245

(a)

Information for all periods presented excludes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. These advances were $317 as of March 31, 2018 and $290 as of December 31, 2017. The Bancorp recognized losses of $2 for both the three months ended March 31, 2018 and 2017.

(b)

Includes $5 and $3 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at March 31, 2018 and December 31, 2017, respectively, of which $2 and $3 were restructured nonaccrual government insured commercial loans at March 31, 2018 and December 31, 2017, respectively.

The following tables provide a rollforward of portfolio nonaccrual loans and leases, by portfolio segment:

TABLE 50: Rollforward of Portfolio Nonaccrual Loans and Leases


For the three months ended March 31, 2018 ($ in millions)		Commercial			Residential Mortgage			Consumer			Total
Balance, beginning of period	$		306			30			101			437
Transfers to nonaccrual status			100			10			33			143
Transfers to accrual status			-			(7	)		(14	)		(21	)
Transfers to held for sale			(24	)		-			-			(24	)
Loan paydowns/payoffs			(45	)		(1	)		(8	)		(54	)
Transfers to OREO			(2	)		(4	)		(1	)		(7	)
Charge-offs			(35	)		-			(9	)		(44	)
Draws/other extensions of credit			22			-			-			22
Balance, end of period	$		322			28			102			452
TABLE 51: Rollforward of Portfolio Nonaccrual Loans and Leases
For the three months ended March 31, 2017 ($ in millions)		Commercial			Residential Mortgage			Consumer			Total
Balance, beginning of period	$		523			34			103			660
Transfers to nonaccrual status			128			11			31			170
Transfers to accrual status			-			(5	)		(14	)		(19	)
Transfers to held for sale			(3	)		-			-			(3	)
Loan paydowns/payoffs			(80	)		(2	)		(8	)		(90	)
Transfers to OREO			(2	)		(2	)		(2	)		(6	)
Charge-offs			(46	)		(1	)		(11	)		(58	)
Draws/other extensions of credit			3			-			-			3
Balance, end of period	$		523			35			99			657

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

Troubled Debt Restructurings

If a borrower is experiencing financial difficulty, the Bancorp may consider, in certain circumstances, modifying the terms of their loan to maximize collection of amounts due. Typically, these modifications reduce the loan interest rate, extend the loan term, reduce the accrued interest or in limited circumstances, reduce the principal balance of the loan. These modifications are classified as TDRs.

At the time of modification, the Bancorp maintains certain consumer loan TDRs (including residential mortgage loans, home equity loans, and other consumer loans) on accrual status, provided there is reasonable assurance of repayment and performance according to the modified terms based upon a current, well-documented credit evaluation. Commercial loans modified as part of a TDR are maintained on accrual status provided there is a sustained payment history of six months or greater prior to the modification in accordance with the modified terms and all remaining contractual payments under the modified terms are reasonably assured of collection. TDRs of commercial loans and credit card loans that do not have a sustained payment history of six months or greater in accordance with the modified terms remain on nonaccrual status until a six-month payment history is sustained.

Consumer restructured loans on accrual status totaled $916 million and $927 million at March 31, 2018 and December 31, 2017, respectively. As of March 31, 2018, the percent of restructured residential mortgage loans, home equity loans and credit card loans that were past due 30 days or more from their modified terms were 25%, 11% and 34%, respectively.

The following tables summarize portfolio TDRs by loan type and delinquency status:

TABLE 52: Accruing and Nonaccruing Portfolio TDRs

Accruing

30-89 Days

90 Days or

As of March 31, 2018 ($ in millions)

Current

Past Due

More Past Due

Nonaccruing

Total

Commercial loans^(b)

249

154

403

Residential mortgage loans^(a)

500

117

666

Home equity

227

256

Automobile loans

Credit card

Total

998

117

212

1,377

(a) Information includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. As of March 31, 2018, these advances represented $302 of current loans, $30 of 30-89 days past due loans and $102 of 90 days or more past due loans.

(b) Excludes restructured nonaccrual loans held for sale.

TABLE 53: Accruing and Nonaccruing Portfolio TDRs

Accruing

30-89 Days

90 Days or

As of December 31, 2017 ($ in millions)

Current

Past Due

More Past Due

Nonaccruing

Total

Commercial loans^(b)

249