Edgar Filing: FIFTH THIRD BANCORP

Quarterly Report

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, 2011

Commission File Number 001-33653

LOGO

(Exact name of Registrant as specified in its charter)

Ohio

31-0854434

(State or other jurisdiction

of incorporation or organization)

(I.R.S. Employer

Identification Number)

Fifth Third Center

Cincinnati, Ohio 45263

(Address of principal executive offices)

Registrant’s telephone number, including area code: (800) 972-3030

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes X No

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes X No

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


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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes No X

There were 918,728,008 shares of the Registrant’s common stock, without par value, outstanding as of March 31, 2011.

LOGO

FINANCIAL CONTENTS


Part I. Financial Information
Glossary of Terms			3
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)
Selected Financial Data			4
Overview			5
Non-GAAP Financial Measures			7
Recent Accounting Standards Critical Accounting Policies Statements of Income Analysis			8 8 9
Balance Sheet Analysis			14
Business Segment Review			21
Quantitative and Qualitative Disclosures about Market Risk (Item 3)
Risk Management – Overview			27
Credit Risk Management			28
Market Risk Management			38
Liquidity Risk Management			41
Capital Management			42
Off-Balance Sheet Arrangements			44
Controls and Procedures (Item 4)			45
Condensed Consolidated Financial Statements and Notes (Item 1)
Balance Sheets (unaudited)			46
Statements of Income (unaudited)			47
Statements of Changes in Equity (unaudited)			48
Statements of Cash Flows (unaudited)			49
Notes to Condensed Consolidated Financial Statements (unaudited)			50

Part II. Other Information
Legal Proceedings (Item 1)			93
Risk Factors (Item 1A)			93
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			93
Exhibits (Item 6)			93
Signatures			95
Certifications

This report may contain forward-looking statements about Fifth Third Bancorp and/or the company as combined acquired entities 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, that involve inherent risks and uncertainties. This report may contain certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Fifth Third Bancorp and/or the combined company including statements preceded by, followed by or that include the words or phrases such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general economic conditions and weakening in the economy, specifically the real estate market, either nationally or in the states in which Fifth Third, one or more acquired entities and/or the combined company do business, are less favorable than expected; (2) deteriorating credit quality; (3) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (4) changes in the interest rate environment reduce interest margins; (5) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; (6) Fifth Third’s ability to maintain required capital levels and adequate sources of funding and liquidity; (7) maintaining capital requirements may limit Fifth Third’s operations and potential growth; (8) changes and trends in capital markets; (9) problems encountered by larger or similar financial institutions may adversely affect the banking industry and/or Fifth Third; (10) competitive pressures among depository institutions increase significantly; (11) effects of critical accounting policies and judgments; (12) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (FASB) or other regulatory agencies; (13) legislative or regulatory changes or actions, or significant litigation, adversely affect Fifth Third, one or more acquired entities and/or the combined company or the businesses in which Fifth Third, one or more acquired entities and/or the combined company are engaged, including the recently enacted Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act); (14) ability to maintain favorable ratings from rating agencies; (15) fluctuation of Fifth Third’s stock price; (16) ability to attract and retain key personnel; (17) ability to receive dividends from its subsidiaries; (18) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (19) effects of accounting or financial results of one or more acquired entities; (20) difficulties in separating Fifth Third Processing Solutions from Fifth Third; (21) loss of income from any sale or potential sale of businesses that could have an adverse effect on Fifth Third’s earnings and future growth; (22) ability to secure confidential information through the use of computer systems and telecommunications networks; and (23) the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity. Additional information concerning factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements is available in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2010, filed with the United States Securities and Exchange Commission (SEC). Copies of this filing are available at no cost on the SEC’s Web site at www.sec.gov or on the Fifth Third Web site at www.53.com. Fifth Third undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this report.

Glossary of Terms

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

ALCO: Asset Liability Management Committee

ALLL: Allowance for Loan and Lease Losses

ARM: Adjustable Rate Mortgage

BOLI: Bank Owned Life Insurance

bp: Basis point(s)

CDC: Fifth Third Community Development Corporation

CPP: Capital Purchase Program

DCF: Discounted Cash Flow

DDA: Demand Deposit Account

ERISA: Employee Retirement Income Security Act

ERM: Enterprise Risk Management

ERMC: Enterprise Risk Management Committee

EVE: Economic Value of Equity

FASB: Financial Accounting Standards Board

FDIC: Federal Deposit Insurance Corporation

FHLB: Federal Home Loan Bank

FHLMC: Federal Home Loan Mortgage Corporation

FICO: Fair Isaac Corporation (credit rating)

FNMA: Federal National Mortgage Association

FRB: Federal Reserve Bank

FTAM: Fifth Third Asset Management, Inc.

FTE: Fully Taxable Equivalent

FTP: Funds Transfer Pricing

FTPS: Fifth Third Processing Solutions

FTS: Fifth Third Securities

GNMA: Government National Mortgage Association

IPO: Initial Public Offering

IRS: Internal Revenue Service

LIBOR: London InterBank Offered Rate

LTV: Loan-to-Value

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

MSR: Mortgage Servicing Right

NII: Net Interest Income

OCI: Other Comprehensive Income

OREO: Other Real Estate Owned

OTTI: Other-Than-Temporary Impairment

PMI: Private Mortgage Insurance

QSPE: Qualifying Special-Purpose Entity

SEC: United States Securities and Exchange Commission

SCAP: Supervisory Capital Assessment Program

TARP: Troubled Asset Relief Program

TDR: Troubled Debt Restructuring

TLGP: Temporary Liquidity Guarantee Program

TSA: Transition Service Agreement

U.S. GAAP: Accounting principles generally accepted in the United States of America

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 MD&A of certain significant factors that have affected Fifth Third Bancorp’s (the “Bancorp” or “Fifth Third”) financial condition and results of operations during the periods included in the Condensed Consolidated Financial Statements, which are a part of this filing. Reference to the Bancorp incorporates the parent holding company and all consolidated subsidiaries.

TABLE 1: Selected Financial Data


	For the three months ended March 31,						% Change
($ in millions, except per share data)	2011			2010			% Change
Income Statement Data
Net interest income^(a)	$	884			901			(2)
Noninterest income		584			627			(7)
Total revenue^(a)		1,468			1,528			(4)
Provision for loan and lease losses		168			590			(72)
Noninterest expense		918			956			(4)
Net income (loss) attributable to Bancorp		265			(10	)		NM
Net income (loss) available to common shareholders		88			(72	)		NM
Common Share Data
Earnings per share, basic	$	0.10			(0.09	)		NM
Earnings per share, diluted		0.10			(0.09	)		NM
Cash dividends per common share		0.06			0.01			500
Book value per share		12.80			12.31			4
Market value per share		13.89			13.56			2
Financial Ratios (%)
Return on assets		0.97	%		(0.04	)		NM
Return on average common equity		3.1			(3.0	)		NM
Average equity as a percent of average assets		11.77			11.92			(1)
Tangible equity^(b)		8.76			9.67			(9)
Tangible common equity^(b)		8.39			6.37			32
Net interest margin^(a)		3.71			3.63			2
Efficiency^(a)		62.5			62.6			-
Credit Quality
Net losses charged off	$	367			582			(32)
Net losses charged off as a percent of average loans and leases		1.92	%		3.01			(36)
ALLL as a percent of loans and leases		3.62			4.91			(26)
Allowance for credit losses as a percent of loans and leases^(c)		3.89			5.25			(26)
Nonperforming assets as a percent of loans, leases and other assets, including other real estate owned^(d)		2.73			4.02			(32)
Average Balances
Loans and leases, including held for sale	$	79,379			80,136			(1)
Total securities and other short-term investments		17,290			20,559			(16)
Total assets		110,844			113,433			(2)
Transaction deposits^(e)		70,161			64,203			9
Core deposits^(f)		77,524			76,262			2
Wholesale funding^(g)		16,430			20,215			(19)
Bancorp shareholders’ equity		13,052			13,518			(3)
Regulatory Capital Ratios (%)
Tier I capital		12.22	%		13.39			(12)
Total risk-based capital		16.30			17.54			(7)
Tier I leverage		11.21			12.00			(7)
Tier I common equity^(b)		9.01			6.96			29

(a)

Amounts presented on an FTE basis. The FTE adjustments for the three months ended March 31, 2011 and 2010 were $5 and $4, respectively.

(b)

The tangible equity, tangible common equity and Tier I common equity ratios are non-GAAP measures. For further information, see the Non-GAAP Financial Measures section of the MD&A.

(c)

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

(d)

Excludes nonaccrual loans held for sale.

(e)

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

(f)

Includes transaction deposits plus other time deposits.

(g)

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

NM:

Not meaningful

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, 2011, the Bancorp had $110 billion in assets, operated 15 affiliates with 1,310 full-service Banking Centers, including 101 Bank Mart^® locations open seven days a week inside select grocery stores, and 2,453 Jeanie^® ATMs in 12 states throughout the Midwestern and Southeastern regions of the United States. The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors. The Bancorp also has a 49% interest in Fifth Third Processing Solutions, LLC.

This overview of MD&A highlights selected information in the financial results of the Bancorp and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire document. Each of these items could have an impact on the Bancorp’s financial condition, results of operations and cash flows. In addition, see the Glossary of Terms on page 3 of this report for a list of acronyms included as a tool for the reader of this quarterly report on Form 10-Q. The acronyms identified therein are used throughout this MD&A, as well as the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements.

The Bancorp believes that banking is first and foremost a relationship business where the strength of the competition and challenges for growth can vary in every market. The Bancorp believes its affiliate operating model provides a competitive advantage by emphasizing individual relationships. Through its affiliate operating model, individual managers at all levels within the affiliates are given the opportunity to tailor financial solutions for their customers.

The Bancorp’s revenues are dependent on both net interest income and noninterest income. For the three months ended March 31, 2011, net interest income, on an FTE basis, and noninterest income provided 60% and 40% of total revenue, respectively. The Bancorp derives the majority of its revenues within the United States from customers domiciled in the United States. Revenue from foreign countries and external customers domiciled in foreign countries is immaterial to the Bancorp’s Condensed Consolidated Financial Statements. Changes in interest rates, credit quality, economic trends and the capital markets are primary factors that drive the performance of the Bancorp. As discussed later in the Risk Management section, risk identification, measurement, monitoring, control and reporting are important to the management of risk and to the financial performance and capital strength of the Bancorp.

Net interest income is the difference between interest income earned on assets such as loans, leases and securities, and interest expense incurred on liabilities such as deposits, short-term borrowings and long-term debt. Net interest income is affected by the general level of interest rates, the relative level of short-term and long-term interest rates, changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Generally, the rates of interest the Bancorp earns on its assets and pays on its liabilities are established for a period of time. The change in market interest rates over time exposes the Bancorp to interest rate risk through potential adverse changes to net interest income and financial position. The Bancorp manages this risk by continually analyzing and adjusting the composition of its assets and liabilities based on their payment streams and interest rates, the timing of their maturities and their sensitivity to changes in market interest rates. Additionally, in the ordinary course of business, the Bancorp enters into certain derivative transactions as part of its overall strategy to manage its interest rate and prepayment risks. The Bancorp is also exposed to the risk of losses on its loan and lease portfolio as a result of changing expected cash flows caused by loan defaults and inadequate collateral due to a weakened economy within the Bancorp’s footprint.

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

Noninterest income is derived primarily from service charges on deposits, corporate banking revenue, mortgage banking net revenue, fiduciary and investment management fees and card and processing revenue. Noninterest expense is primarily driven by personnel costs and occupancy expenses, costs incurred in the origination of loans and leases and insurance premiums paid to the FDIC.

Common Stock and Senior Notes Offerings

On January 25, 2011, the Bancorp raised $1.7 billion in new common equity through the issuance of 121,428,572 shares of common stock in an underwriting offering at an initial price of $14.00 per share. On January 24, 2011, the underwriters exercised their option to purchase an additional 12,142,857 shares at the offering price of $14.00 per share. In connection with this exercise, the Bancorp entered into a forward sale agreement which resulted in a final net payment of 959,821 shares on February 4, 2011.

On January 25, 2011, the Bancorp issued $1.0 billion of senior notes to third party investors, and entered into a Supplemental Indenture dated January 25, 2011 with Wilmington Trust Company, as Trustee, which modified the existing Indenture for Senior Debt Securities dated April 30, 2008 between the Bancorp and the Trustee. The Supplemental Indenture and the Indenture define the rights of the Senior Notes, which Senior Notes are represented by Global Securities dated as of January 25, 2011. The Senior Notes bear a fixed rate of interest of 3.625% per annum. The notes are unsecured, senior obligations of the Bancorp. Payment of the full principal amount of the notes will be due upon maturity on January 25, 2016. The notes will not be subject to redemption at the Bancorp’s option at any time prior to maturity.

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

Redemption of Preferred Shares, Series F

On February 2, 2011, the Bancorp redeemed all 136,320 shares of its Series F Preferred Stock held by the U.S. Treasury under the U.S. Treasury’s CPP. The net proceeds from the Bancorp’s January 2011 common stock and Senior Notes offerings previously discussed, and other funds were used to redeem the $3.4 billion of Series F Preferred Stock.

In connection with the redemption of the Series F Preferred Stock, the Bancorp accelerated the accretion of the remaining issuance discount on the Series F Preferred Stock and recorded a corresponding reduction in retained earnings of $153 million. This resulted in a one-time, noncash reduction in net income available to common shareholders and related basic and diluted earnings per share in the first quarter of 2011. In addition, dividends of $15 million were paid on February 2, 2011, when the Series F Preferred Stock was redeemed.

On March 16, 2011, the Bancorp repurchased the warrant issued to the U.S. Treasury in connection with the CPP preferred stock investment at an agreed upon price of $280 million, which was recorded as a reduction to capital surplus in the Bancorp’s Condensed Consolidated Financial Statements. The warrant gave the U.S Treasury the right to purchase 43,617,747 shares of the Bancorp’s common stock at $11.72 per share.

Recent Legislative Developments

On July 21, 2010, the Dodd-Frank Act was signed into law. This act implements changes to the financial services industry and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The legislation establishes a Bureau of Consumer Financial Protection responsible for implementing and enforcing compliance with consumer financial laws, changes the methodology for determining deposit insurance assessments, gives the Federal Reserve the ability to regulate and limit interchange rates charged to merchants for the use of debit cards, and excludes certain instruments currently included in determining Tier I regulatory capital. This act calls for federal regulatory agencies to adopt hundreds of new rules and conduct multiple studies over the next several years in order to implement its provisions. While the total impact of this legislation on Fifth Third is not currently known, the impact is expected to be substantial and may have an adverse impact on Fifth Third’s financial performance and growth opportunities.

Earnings Summary

The Bancorp’s net income available to common shareholders for the quarter ended March 31, 2011 was $88 million, or $0.10 per diluted share, which was net of $177 million in preferred stock dividends. The preferred stock dividends include $153 million of discount accretion resulting from the February repurchase of the Series F preferred stock. For the quarter ended March 31, 2010, the Bancorp’s net loss available to common shareholders was $72 million, or $0.09 per diluted share, which was net of $62 million in preferred stock dividends.

Net interest income (FTE) decreased two percent in the first quarter of 2011 to $884 million, compared to $901 million in the same period last year. The primary reason for the decrease in net interest income was due to a 20 bp decrease in the average yield on loans and leases from the first quarter of 2010, as well as a $4.0 billion, or four percent, decline in total average interest-earnings assets. Partially offsetting these items was a 27 bp decrease in the average rate paid on interest-bearing liabilities as a result of a mix shift from higher cost term deposits to lower cost deposit products, coupled with a seven percent decrease in average interest-bearing liabilities. First quarter 2011 and 2010 results included $13 million and $21 million, respectively, of net interest income due to the accretion of premiums and discounts on loans and deposits from acquisitions during 2008. Excluding these items, net interest income decreased $9 million, or one percent, from the first quarter of 2010. Net interest margin was 3.71% in the first quarter of 2011, an increase of 8 bp from the first quarter of 2010.

Noninterest income decreased seven percent to $584 million in the first quarter of 2011 compared to the same period last year driven by declines in mortgage banking net revenue and service charges on deposits. The decrease in mortgage banking net revenue of $50 million, or 33%, from the first quarter of 2010 was primarily due to reductions in gains on net valuation adjustments on MSRs and MSR derivatives, as well as a decline in origination fees and gains on loan sales. Service charges on deposits declined $18 million, or 12%, from the first quarter of 2010 primarily due to the impact of Regulation E. Partially offsetting these declines was an increase of $7 million in both investment advisory revenue and card and processing revenue, and a $5 million increase in corporate banking revenue.

Noninterest expense decreased $38 million, or four percent, compared to the first quarter of 2010, primarily driven by a $29 million decrease in expenses related to representations and warranties on residential mortgage loans sold to third-parties and a $24 million decline in the provision for unfunded commitments and letters of credit. In addition, FDIC insurance expense declined $9 million compared to the first quarter of 2010. Partially offsetting these declines was a $33 million increase in total personnel costs (salaries, wages and incentives plus employee benefits).

The Bancorp does not originate subprime mortgage loans, does not hold credit default swaps and does not hold asset-backed securities backed by subprime mortgage loans in its securities portfolio. However, the Bancorp has exposure to disruptions in the capital markets and weakened economic conditions. Throughout 2010 and into 2011, the Bancorp continued to be affected by high unemployment rates, weakened housing markets, particularly in the upper Midwest and Florida, and a challenging credit environment. Credit trends, however, continued to show signs of moderation and, as a result, the provision for loan and lease losses decreased 72% to $168 million for the three months ended March 31, 2011, compared to $590 million during the three months ended March 31, 2010. In addition, net charge-offs as a percent of average loans and leases decreased to 1.92% during the first quarter of 2011 compared to 3.01% during the first quarter of 2010. At March 31, 2011, nonperforming assets as a percent of loans, leases and other assets, including OREO (excluding nonaccrual loans held for sale) decreased to 2.73%, compared to 2.79% at December 31, 2010 and 4.02% at March 31, 2010. For further discussion on credit quality, see the Credit Risk Management section.

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

The Bancorp’s capital ratios exceed the “well-capitalized” guidelines as defined by the Board of Governors of the Federal Reserve System. As of March 31, 2011, the Tier I capital ratio was 12.22%, the Tier I leverage ratio was 11.21% and the total risk-based capital ratio was 16.30%. For additional information on the Bancorp’s capital ratios, see the Capital Management section.

NON-GAAP FINANCIAL MEASURES

The Bancorp considers various measures when evaluating capital utilization and adequacy, including the tangible equity ratio, tangible common equity ratio and tier I common equity ratio, in addition to capital ratios defined by banking regulators. These calculations are intended to complement the capital ratios defined by banking regulators for both absolute and comparative purposes. Because U.S. GAAP does not include capital ratio measures, the Bancorp believes there are no comparable U.S. GAAP financial measures to these ratios. Tier I common equity is not formally defined by U.S. GAAP or codified in the federal banking regulations and, therefore, is considered to be a non-GAAP financial measure. Since analysts and banking regulators may assess the Bancorp’s capital adequacy using these ratios, the Bancorp believes they are useful to provide investors the ability to assess its capital adequacy on the same basis.

The Bancorp believes these non-GAAP measures are important because they reflect the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures allows readers to compare certain aspects of the Bancorp’s capitalization to other organizations. However, because there are no standardized definitions for these ratios, the Bancorp’s calculations may not be comparable with other organizations, and the usefulness of these measures to investors may be limited. As a result, the Bancorp encourages readers to consider its Condensed Consolidated Financial Statements in their entirety and not to rely on any single financial measure.

The following table reconciles non-GAAP financial measures to U.S. GAAP as of:

TABLE 2: Non-GAAP Financial Measures


As of ($ in millions)	March 31, 2011			December 31, 2010		March 31, 2010
Total Bancorp shareholders’ equity (U.S. GAAP)	$	12,163			14,051		13,408
Less: Goodwill		(2,417	)		(2,417)		(2,417)
Intangible assets		(55	)		(62)		(94)
Accumulated other comprehensive income		(263	)		(314)		(288)
Tangible equity (1)		9,428			11,258		10,609
Less: Preferred stock		(398	)		(3,654)		(3,620)
Tangible common equity (2)	$	9,030			7,604		6,989

Total assets (U.S. GAAP)	$	110,485			111,007		112,651
Less: Goodwill		(2,417	)		(2,417)		(2,417)
Intangible assets		(55	)		(62)		(94)
Accumulated other comprehensive income, before tax		(405	)		(483)		(443)
Tangible assets, excluding unrealized gains / losses (3)	$	107,608			108,045		109,697

Total Bancorp shareholders’ equity (U.S. GAAP)	$	12,163			14,051		13,408
Goodwill and certain other intangibles		(2,546	)		(2,546)		(2,556)
Unrealized gains		(263	)		(314)		(288)
Qualifying trust preferred securities		2,763			2,763		2,763
Other		12			11		(30)
Tier I capital		12,129			13,965		13,297
Less: Preferred stock		(398	)		(3,654)		(3,620)
Qualifying trust preferred securities		(2,763	)		(2,763)		(2,763)
Qualified noncontrolling (minority) interest in consolidated subsidiaries		(30	)		(30)		-
Tier I common equity (4)	$	8,938			7,518		6,914

Risk-weighted assets (5) ^(a)	$	99,241			100,193		99,281

Ratios:
Tangible equity (1) / (3)		8.76	%		10.42		9.67
Tangible common equity (2) / (3)		8.39			7.04		6.37
Tier I common equity (4) / (5)		9.01			7.50		6.96

(a)

Under the banking agencies’ risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together, resulting in the Bancorp’s total risk-weighted assets.

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 complete discussion of the significant new accounting standards recently adopted by the Bancorp and the expected impact of significant accounting standards issued, but not yet required to be adopted.

CRITICAL ACCOUNTING POLICIES

The Bancorp’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. Certain accounting policies require management to exercise judgment in determining methodologies, economic assumptions and estimates that may materially affect the value of the Bancorp’s assets or liabilities and results of operations and cash flows. The Bancorp’s critical accounting policies include the accounting for the ALLL, reserve for unfunded commitments, income taxes, valuation of servicing rights, fair value measurements and goodwill. These accounting policies are discussed in detail in Management’s Discussion and Analysis - Critical Accounting Policies in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2010. No material changes have been made to the valuation techniques or models during the three months ended March 31, 2011.

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

STATEMENTS OF INCOME ANALYSIS

Net Interest Income

Net interest income is the interest earned on securities, loans and leases (including yield-related fees) and other interest-earning assets less the interest paid for core deposits (includes transaction deposits and other time deposits) and wholesale funding (includes certificates $100,000 and over, other deposits, federal funds purchased, 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 rate 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 3 presents the components of net interest income, net interest margin and net interest rate spread for the three months ended March 31, 2011 and 2010. Nonaccrual loans and leases and loans held for sale have been included in the average loan and lease balances. Average outstanding securities balances are based on amortized cost with any unrealized gains or losses on available-for-sale securities included in other assets.

Net interest income was $884 million for the first quarter of 2011, a decrease of $17 million from the first quarter of 2010. Included within net interest income are amounts related to the accretion of discounts on acquired loans and deposits, primarily as a result of the second quarter 2008 acquisition of First Charter Corporation, which increased net interest income $13 million during the three months ended March 31, 2011, compared to $21 million during the three months ended March 31, 2010. The purchase accounting accretion reflects the high discount rate in the market at the time of the acquisition; the total loan discounts are being accreted into net interest income over the remaining period to maturity of the loans acquired. Based upon the remaining period to maturity, and excluding the impact of prepayments, the Bancorp anticipates recognizing approximately $28 million in additional net interest income during the remainder of 2011 as a result of the amortization and accretion of premiums and discounts on acquired loans and deposits. Exclusive of the impact of these items, net interest income decreased $9 million compared to the first quarter of 2010.

For the three months ended March 31, 2011, net interest income was adversely impacted by lower average yields on both commercial and consumer loans partially offset by a decrease in interest expense compared to the three months ended March 31, 2010. The decrease in interest expense was primarily a result of the $5.3 billion decrease in average interest bearing liabilities coupled with a mix shift to lower cost core deposits as well as the benefit of lower rates offered on new time deposits. The shift in funding composition resulted in an increase in the net interest rate spread to 3.45% for the three months ended March 31, 2011, compared to 3.33% for the three months ended March 31, 2010.

Net interest margin increased to 3.71% for the three months ended March 31, 2011, compared to 3.63% for the three months ended March 31, 2010. Net interest margin increased by 5 bp during the three months ended March 31, 2011 compared to a 9 bp increase during the three months ended March 31, 2010, as the result of the amortization and accretion of premiums and discounts on acquired loans and deposits. Exclusive of these amounts, net interest margin increased 12 bp in the first quarter of 2011 compared to the first quarter of 2010 driven by the previously mentioned shift in funding composition to lower cost core deposits, an increase in free-funding balances and an increase in the net interest rate spread.

Total average interest-earning assets for the three months ended March 31, 2011 decreased four percent from the three months ended March 31, 2010 as a 16% decrease in the average investment portfolio and a four percent decrease in average commercial loans was partially offset by a one percent increase in average consumer loans compared to the first quarter of 2010. Further detail on the Bancorp’s investment securities portfolio and loan and lease portfolio can be found in the Investment Securities and Loan and Leases sections, respectively, of MD&A.

Interest income from loans and leases decreased $48 million, or five percent, compared to the first quarter of 2010 primarily due to a 20 bp decrease in average yields. Yields across much of the loan and lease portfolio decreased as the result of lower interest rates on newly originated loans and a decline in interest rates on automobile loans due to increased competition. Exclusive of the amortization and accretion of premiums and discounts on acquired loans, interest income from loans and leases decreased $40 million compared to the prior year first quarter. Interest income from investment securities and short-term investments decreased $34 million, or 18%, compared to the first quarter of 2010 due to 16% decrease in the average balance and a 9 bp decrease in the average yield.

Average core deposits increased $1.3 billion, or two percent, compared to the first quarter of 2010. The increase was primarily due to an increase in average savings, average money market funds and average foreign office deposits, partially offset by decreases in average time deposits and average interest checking. The cost of average core deposits decreased 26 bp from the first quarter of 2010 to 0.45% primarily as the result of a mix shift to lower cost core deposits and a 24 bp decrease in rates on average savings deposits.

During the first quarter of 2011, interest expense on wholesale funding decreased $16 million, or 15%, compared to the first quarter of 2010, primarily as a result of a 19% decline in average balances as well as lower rates on certificates of deposit $100,000 and over. During the three months ended March 31, 2011, wholesale funding represented 23% of interest-bearing liabilities compared to 26% during the three months ended March 31, 2010. The decline in wholesale funding balances is primarily a result of a decrease in long-term debt due to repayment activity during 2010, partially offset by issuance of $1.0 billion in long-term debt during the first quarter of 2011. Refer to the Borrowings section of MD&A for additional information on the Bancorp’s change in average long-term debt. For more information on the Bancorp’s interest rate risk management, including estimated earnings sensitivity to changes in market interest rates, see the Market Risk Management section of MD&A.

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

TABLE 3: Condensed Average Balance Sheets and Analysis of Net Interest Income


For the three months ended	March 31, 2011								March 31, 2010							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	$	27,404		$	301		4.45	%	$	26,299	$	299		4.61	%	$	13		(11)		2
Commercial mortgage		10,816			110		4.11			11,836		123		4.20			(11)		(2)		(13)
Commercial construction		2,085			16		3.15			3,781		27		2.92			(13)		2		(11)
Commercial leases		3,364			35		4.17			3,468		39		4.54			(1)		(3)		(4)
Subtotal – commercial		43,669			462		4.29			45,384		488		4.36			(12)		(14)		(26)
Residential mortgage loans		10,736			124		4.67			9,478		121		5.18			16		(13)		3
Home equity		11,376			111		3.96			12,338		122		4.02			(9)		(2)		(11)
Automobile loans		11,070			139		5.10			10,185		157		6.24			12		(30)		(18)
Credit card		1,852			48		10.43			1,940		51		10.76			(2)		(1)		(3)
Other consumer loans/leases		676			31		18.54			811		24		11.87			(5)		12		7
Subtotal – consumer		35,710			453		5.14			34,752		475		5.55			12		(34)		(22)
Total loans and leases		79,379			915		4.67			80,136		963		4.87			-		(48)		(48)
Securities:
Taxable		15,156			147		3.96			17,240		180		4.23			(20)		(13)		(33)
Exempt from income taxes^(b)		197			2		4.77			175		3		7.08			1		(2)		(1)
Other short-term investments		1,937			1		0.25			3,144		1		0.18			-		-		-
Total interest-earning assets		96,669			1,065		4.47			100,695		1,147		4.62			(19)		(63)		(82)
Cash and due from banks		2,268								2,247
Other assets		14,897								14,262
Allowance for loan and lease losses		(2,990	)							(3,771)
Total assets	$	110,844							$	113,433
Liabilities and Equity
Interest-bearing liabilities:
Interest checking	$	18,539		$	13		0.28	%	$	19,533	$	14		0.28	%	$	(1)		-		(1)
Savings		21,324			23		0.43			18,469		31		0.67			4		(12)		(8)
Money market		5,136			4		0.32			4,622		5		0.46			1		(2)		(1)
Foreign office deposits		3,580			3		0.31			2,757		2		0.34			1		-		1
Other time deposits		7,363			42		2.36			12,059		82		2.75			(30)		(10)		(40)
Certificates - $100,000 and over		4,226			21		1.99			7,049		37		2.16			(14)		(2)		(16)
Other deposits		1			-		0.05			8		-		0.02			-		-		-
Federal funds purchased		310			-		0.14			220		-		0.13			-		-		-
Other short-term borrowings		1,638			1		0.19			1,449		-		0.23			1		-		1
Long-term debt		10,255			74		2.95			11,489		75		2.64			(9)		8		(1)
Total interest-bearing liabilities		72,372			181		1.02			77,655		246		1.29			(47)		(18)		(65)
Demand deposits		21,582								18,822
Other liabilities		3,809								3,438
Total liabilities		97,763								99,915
Total equity		13,081								13,518
Total liabilities and equity	$	110,844							$	113,433
Net interest income				$	884						$	901				$	28		(45)		(17)
Net interest margin							3.71	%						3.63	%
Net interest rate spread							3.45							3.33
Interest-bearing liabilities to interest-earning assets							74.87							77.12

(a)

Changes in interest not solely due to volume or yield/rate are allocated in proportion to the absolute dollar amount of change in volume and yield/rate.

(b)

The FTE adjustments included in the above table are $5 and $4 for the three months ended March 31, 2011 and 2010, respectively.

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

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 discussed in the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2010. The provision is recorded to bring the ALLL to a level deemed appropriate by the Bancorp to cover losses inherent in the portfolio. Actual credit losses on loans and leases are charged against the ALLL. The amount of loans actually removed from the Condensed Consolidated Balance Sheets is referred to as charge-offs. Net charge-offs include current period charge-offs less recoveries on previously charged-off loans and leases.

The provision for loan and lease losses was $168 million for the three months ended March 31, 2011, compared to $590 million during the same period in 2010. The decrease in provision expense compared to the same prior year period was due to significant decreases in nonperforming loans and leases, improved delinquencies in commercial and consumer loans and leases, and improvement in underlying loss trends. As of March 31, 2011, the ALLL as a percent of loans and leases decreased to 3.62%, from 4.91% at March 31, 2010.

Refer to the Credit Risk Management section 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 decreased $43 million, or seven percent, compared to the three months ended March 31, 2010. The components of noninterest income for the three months ended March 31, 2011 and 2010 are as follows:


TABLE 4: Noninterest Income
	For the three months ended March 31,				Percent Change
($ in millions)	2011		2010		Percent Change
Service charges on deposits	$	124		142		(13)
Mortgage banking net revenue		102		152		(33)
Investment advisory revenue		98		91		8
Corporate banking revenue		86		81		6
Card and processing revenue		80		73		10
Other noninterest income		81		74		9
Securities gains, net		8		14		(43)
Securities gains, net, non-qualifying hedges on mortgage servicing rights		5		-		NM
Total noninterest income	$	584		627		(7)

NM: Not meaningful

Service charges on deposits decreased $18 million, or 13%, for the three months ended March 31, 2011 compared to the same period in the prior year. Consumer deposit revenue decreased $18 million compared to the three months ended March 31, 2010 as the impact of Regulation E and new overdraft policies resulted in a decrease in overdraft occurrences. Regulation E became effective on July 1, 2010 for new accounts and August 15, 2010 for existing accounts. Regulation E is a Federal Reserve Board rule that prohibits financial institutions from charging consumers fees for paying overdrafts on ATMs and one-time debit card transactions unless a consumer consents, or opts in, to the overdraft service for those types of transactions. Commercial deposit revenue was flat compared to the first quarter of 2010.

Mortgage banking net revenue decreased $50 million, or 33%, compared to the three months ended March 31, 2010. The components of mortgage banking net revenue are shown in Table 5.


TABLE 5: Components of Mortgage Banking Net Revenue
	For the three months ended March 31,
($ in millions)	2011		2010
Origination fees and gains on loan sales	$	62		71
Servicing revenue:
Servicing fees		58		53
Servicing rights amortization		(28)		(23)
Net valuation adjustments on servicing rights and free-standing derivatives entered into to economically hedge MSR		10		51
Net servicing revenue		40		81
Mortgage banking net revenue	$	102		152

Origination fees and gains on loan sales decreased $9 million compared to the first quarter of 2010 primarily as a result of a decrease in margins on sales due to an increase in mortgage rates during the first quarter of 2011 partially offset by the impact of an increase in residential mortgage loan originations. Residential mortgage loan originations increased to $3.9 billion during the first quarter of 2011 compared to $3.5 billion during the first quarter of 2010 as a result of lower origination volume during the first quarter of 2010 as many borrowers had already taken advantage of historically low interest rates in the second and third quarters of 2009.

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

Net servicing revenue is comprised of gross servicing fees and related servicing rights amortization as well as valuation adjustments on MSRs and mark-to-market adjustments on both settled and outstanding free-standing derivative financial instruments. Net servicing revenue decreased $41 million for the three months ended March 31, 2011, compared to the same period in the prior year driven by a $41 million decrease in net valuation adjustments. The net valuation adjustment of $10 million during the three months ended March 31, 2011 includes a $37 million recovery on temporary impairment partially offset by a $27 million loss from derivatives economically hedging the MSRs. This net valuation adjustment was primarily driven by the impact on MSR valuation due to a decrease in prepayment speeds along with the positive carry in the net hedge position. The net valuation adjustment of $51 million for the three months ended March 31, 2010 included gains from derivatives economically hedging MSRs of $58 million partially offset by a temporary impairment of $7 million. The Bancorp’s total residential loans serviced as of March 31, 2011, December 31, 2010, and March 31, 2010 was $66.0 billion, $63.2 billion, and $59.5 billion, respectively, with $55.4 billion, $54.2 billion, and $50.3 billion, respectively, of residential mortgage loans serviced for others.

Servicing rights are deemed impaired when a borrower’s loan rate is distinctly higher than prevailing rates. Impairment on servicing rights is reversed when the prevailing rates return to a level commensurate with the borrower’s loan rate. Further detail on the valuation of MSRs can be found in Note 9 of the Notes to Condensed Consolidated Financial Statements. The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in the valuation on the MSR portfolio. See Note 10 of the Notes to Condensed Consolidated Financial Statements for more information on the free-standing derivatives used to economically hedge the MSR portfolio.

In addition to the derivative positions used to economically hedge the MSR portfolio, the Bancorp acquires various securities as a component of its non-qualifying hedging strategy. Net gains on sales of these securities were $5 million for the three months ended March 31, 2011. There were no sales of securities related to the Bancorp’s non-qualifying hedging strategy during the three months ended March 31, 2010.

Investment advisory revenue increased $7 million, or eight percent, for the three months ended March 31, 2011 compared to the same period last year. This was the result of improved market performance and sales force expansion that resulted in increased brokerage activity and assets under management and care. As of March 31, 2011, the Bancorp had approximately $274 billion in assets under care and managed $26 billion in assets for individuals, corporations and not-for-profit organizations.

Corporate banking revenue increased $5 million, or six percent, compared to the first quarter of 2010 as growth in syndication fees, interest rate derivative sales and lease remarking fees was partially offset by a decrease in institutional sales revenue.

Card and processing revenue increased $7 million, or 10%, compared to the first quarter of 2010 due to growth in debit and credit card transaction volumes.

The major components of other noninterest income are as follows:


TABLE 6: Components of Other Noninterest Income
	For the three months ended March 31,
($ in millions)	2011			2010
Gain on loan sales	$	17			25
Operating lease income		15			16
BOLI income		11			11
Cardholder fees		9			11
Insurance income		8			9
Consumer loan and lease fees		7			6
Banking center income		7			5
Loss on sale of other real estate owned		(2	)		(16	)
Other		9			7
Total other noninterest income	$	81			74

Other noninterest income increased $7 million, or nine percent, compared to the first quarter of 2010 primarily as a result of the reduction in losses on sale of OREO of $14 million, partially offset by an $8 million decrease in gain on loan sales. As part of the Processing Business Sale in 2009, the Bancorp entered into a TSA that resulted in the Bancorp recognizing approximately $11 million in revenue during the three months ended March 31, 2011 and $13 million during the three months ended 2010, that were offset with expense from the TSA recorded in card and processing expense.

Net securities gains were $8 million for the three months ended March 31, 2011, compared to $14 million of net securities gains for the three months ended March 31, 2010.

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

Noninterest Expense

Total noninterest expense decreased $38 million, or four percent, for the three months ended March 31, 2011 compared to the same period last year due primarily to a decrease in other noninterest expense, partially offset by an increase in total personnel costs. In addition, the Bancorp incurred approximately $11 million and $13 million in operating expenses related to the TSA during the three months ended March 31, 2011 and March 31, 2010, respectively, that were largely offset with revenue from the TSA recorded in other noninterest income. The major components of noninterest expense are detailed in the following table.


TABLE 7: Noninterest Expense
	For the three months ended March 31,				Percent Change
($ in millions)	2011		2010		Percent Change
Salaries, wages and incentives	$	351		329		7
Employee benefits		97		86		13
Net occupancy expense		77		76		1
Technology and communications		45		45		-
Equipment expense		29		30		(3)
Card and processing expense		29		25		16
Other noninterest expense		290		365		(21)
Total noninterest expense	$	918		956		(4)

Total personnel costs (salaries, wages and incentives plus employee benefits) increased eight percent for the three months ended March 31, 2011, compared to the same period last year, due to an increase in base and incentive compensation driven by investments in the sales force beginning in mid-2010. Full time equivalent employees totalled 20,837 at March 31, 2011 compared to 20,038 at March 31, 2010.

Card and processing expense includes third-party processing expenses and card management expenses associated with the Bancorp’s debit and credit card programs. Card and processing expense increased $4 million for the three months ended March 31, 2011 compared to the same period last year due to costs associated with increased transaction volumes for debit and credit cards.

The major components of other noninterest expense are as follows:


TABLE 8: Components of Other Noninterest Expense
	For the three months ended March 31,
($ in millions)	2011		2010
FDIC insurance and other taxes	$	52		69
Loan and lease		46		48
Losses and adjustments		29		63
Affordable housing investments impairment		25		23
Marketing		22		21
Professional services fees		15		11
Postal and courier		13		12
OREO		13		6
Travel		12		12
Insurance		12		14
Operating lease		11		11
Intangible asset amortization		7		12
Recruitment and education		7		7
Provision for unfunded commitments and letters of credit		(16)		9
Other		42		47
Total other noninterest expense	$	290		365

Total other noninterest expense for the first quarter of 2011 decreased $75 million compared to the first quarter of 2010, primarily due to a decrease in provision expense for the representation and warranty reserve related to residential mortgage loans sold to third-parties, a decline in the provision for unfunded commitments and letters of credit and a decrease in FDIC insurance and other taxes. The provision for representation and warranty claims, included in losses and adjustments, decreased from $35 million during the first quarter of 2010 to $6 million during the first quarter of 2011 primarily due to a lower volume of expected repurchase demands. The provision for unfunded commitments and letters of credit was a benefit of $16 million during the first quarter of 2011 compared to an expense of $9 million during the first quarter of 2010 as a result of lower estimates of inherent losses resulting from a decrease in delinquent loans as general economic conditions continued to show signs of moderation in 2011. FDIC insurance and other taxes decreased from $69 million in the first quarter of 2010 to $52 million in the first quarter of 2011, primarily due to the Bancorp’s exit from the FDIC’s TLGP transaction account guarantee program in the first quarter of 2010.

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

The Bancorp continues to focus on efficiency initiatives as part of its core emphasis on operating leverage and expense control. The efficiency ratio (noninterest expense divided by the sum of net interest income (FTE) and noninterest income) was 62.5% and 62.6% for the first quarter of 2011 and 2010, respectively.

Applicable Income Taxes

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


TABLE 9: Applicable Income Taxes
	For the three months ended March 31,
($ in millions)	2011		2010
Income (loss) before income taxes	$	377		(22)
Applicable income tax expense (benefit)		112		(12)
Effective tax rate		29.7%		53.0 %

Applicable income tax expense (benefit) for all periods includes the tax benefit from tax-exempt income, tax-advantaged investments and general business tax credits, partially offset by the effect of certain nondeductible expenses. The decline in the effective tax rate for the three months ended March 31, 2011 from the prior year quarter was due to the three months ended March 31, 2010 including the impact of the pre-tax loss of $22 million, a $24 million tax benefit resulting from the settlement of certain uncertain tax positions with the IRS during the quarter and a $14 million non-cash charge relating to previously recognized tax benefits associated with stock-based awards that will not be realized.

Deductibility of Executive Compensation

Certain sections of the Internal Revenue Code limit the deductibility of compensation paid to or earned by certain executive officers of a public company. This has historically limited the deductibility of certain executive compensation to $1 million per executive officer, and the Bancorp’s compensation philosophy has been to position pay to ensure deductibility. However, both the amount of the executive compensation that is deductible for certain executive officers and the allowable compensation vehicles changed as a result of the Bancorp’s participation in TARP. In particular, the Bancorp was not permitted to deduct compensation earned by certain executive officers in excess of $500,000 per executive officer as a result of the Bancorp’s participation in TARP. Therefore, a portion of the compensation earned by certain executive officers was not deductible by the Bancorp for the period in which the Bancorp participated in TARP. Subsequent to ending its participation in TARP, certain limitations on the deductibility of executive compensation will continue to apply to some forms of compensation earned while under TARP. The Bancorp’s Compensation Committee determined that the underlying executive compensation programs are appropriate and necessary to attract, retain and motivate senior executives, and that failing to meet these objectives creates more risk for the Bancorp and its value than the financial impact of losing the tax deduction. For the year ended 2010, the total tax impact for non-deductible compensation was $6 million.

BALANCE SHEET ANALYSIS

Loans and Leases

The Bancorp classifies its loans and leases based upon the primary purpose of the loan. Table 10 summarizes end of period loans and leases, including loans held for sale, and Table 11 summarizes average total loans and leases, including loans held for sale.


TABLE 10: Components of Total Loans and Leases (includes held for sale)
	March 31, 2011				December 31, 2010				March 31, 2010
($ in millions)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Commercial:
Commercial and industrial loans	$	27,431		35	$	27,275		34	$	26,134		33
Commercial mortgage loans		10,617		14		10,992		14		11,865		15
Commercial construction loans		2,020		3		2,111		3		3,396		4
Commercial leases		3,367		4		3,378		4		3,389		4
Subtotal – commercial		43,435		56		43,756		55		44,784		56
Consumer:
Residential mortgage loans		10,556		13		10,857		14		9,239		12
Home equity		11,222		14		11,513		14		12,186		15
Automobile loans		11,129		14		10,983		14		10,180		13
Credit card		1,821		2		1,896		2		1,863		3
Other consumer loans and leases		593		1		702		1		778		1
Subtotal – consumer		35,321		44		35,951		45		34,246		44
Total loans and leases	$	78,756		100	$	79,707		100	$	79,030		100
Total portfolio loans and leases (excludes loans held for sale)	$	77,465			$	77,491			$	77,423

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

Total loans and leases, including loans held for sale, decreased $951 million, or one percent, compared to December 31, 2010, and were relatively flat compared to March 31, 2010, as decreases in total commercial loans were offset by increases in total consumer loans. The decrease in total loans and leases from December 31, 2010 was the result of a $321 million, or one percent, decline in total commercial loans and a $630 million, or two percent, decline in total consumer loans.

Total commercial loans and leases decreased $321 million, or one percent, from December 31, 2010 primarily due to declines in commercial mortgage loans and commercial construction loans partially offset by increases in commercial and industrial loans attributable to an increase in new loan origination activity. Commercial mortgage loans decreased $375 million, or three percent, from December 31, 2010 as a result of tighter underwriting standards implemented in prior quarters in an effort to limit exposure to commercial real estate. Commercial construction loans decreased $91 million, or four percent, from December 31, 2010 due to management’s decision to suspend new lending on commercial non-owner occupied real estate in 2008. Commercial and industrial loans increased $156 million, or one percent, from December 31, 2010, driven by the previously mentioned increase in new loan origination activity, despite the $852 million decrease in loans originally issued to FTPS in conjunction with the Processing Business Sale. FTPS refinanced the original $1.25 billion in loans into a larger syndicated loan structure in connection with an acquisition in the fourth quarter of 2010.

Total commercial loans and leases decreased $1.3 billion, or three percent, compared to March 31, 2010 due primarily to decreases in commercial construction and commercial mortgage loans, partially offset by an increase in commercial and industrial loans. Commercial construction loans decreased $1.4 billion, or 41%, compared to March 31, 2010, primarily due to management’s strategy to suspend new lending on commercial non-owner occupied real estate beginning in 2008 and the outflow of completed construction projects that were transitioned to commercial mortgage loans. Despite the inflow from completed construction projects, commercial mortgage loans decreased $1.2 billion, or 11%, compared to March 31, 2010 due to tighter underwriting standards on commercial real estate loans in a concerted effort to limit exposure to commercial real estate. Commercial and industrial loans increased $1.3 billion, or five percent, as the result of a higher volume of new loan origination activity attributable to increased demand and continued growth in the manufacturing and healthcare industries.

Total consumer loans and leases decreased $630 million, or two percent, from December 31, 2010 due primarily to declines in residential mortgage loans, home equity loans, credit card loans, and other consumer loans and leases, partially offset by an increase in automobile loans. Residential mortgage loans decreased $301 million, or three percent, as a result of a seasonally driven decrease in demand for new mortgage loan originations. Home equity loans decreased $291 million, or three percent, due to tighter underwriting standards implemented in prior quarters and decreased customer demand. Credit card loans decreased $75 million, or four percent, from December 31, 2010, primarily as a result of seasonal paydowns on existing balances. Other consumer loans and leases decreased $109 million, or 16%, from December 31, 2010 due to a decline in new originations driven by tighter underwriting standards implemented in prior quarters. Automobile loans increased $146 million, or one percent, from December 31, 2010 due to increased origination activity.

Total consumer loans and leases increased $1.1 billion, or three percent, compared to March 31, 2010 due primarily to increases in residential mortgage loans and automobile loans, partially offset by decreases in home equity loans, credit card loans, and other consumer loans and leases. Residential mortgage loans increased $1.3 billion, or 14%, compared to March 31, 2010 due to management’s decision in the third quarter of 2010 to retain certain mortgage loans originated through the Bancorp’s retail branches. Automobile loans increased $949 million, or nine percent, compared to March 31, 2010 as a result of a strategic focus to increase automobile lending during 2010 through consistent and competitive pricing, enhanced customer service with our dealership network and disciplined sales execution. Home equity loans decreased $964 million, or eight percent, compared to March 31, 2010 as a result of tighter underwriting standards and decreased customer demand. Credit card loans decreased $42 million, or two percent, compared to March 31, 2010 as a result of a decrease in new account origination activity throughout 2010. Other consumer loans and leases, primarily made up of student loans designated as held for sale and automobile leases, decreased $185 million, or 24%, compared to March 31, 2010 due to a decline in new originations driven by tighter underwriting standards.

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

TABLE 11: Components of Average Total Loans and Leases (includes held for sale)


	March 31, 2011				December 31, 2010				March 31, 2010
($ in millions)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Commercial:
Commercial and industrial loans	$	27,404		34	$	26,509		34	$	26,299		33
Commercial mortgage loans		10,816		14		11,276		14		11,836		15
Commercial construction loans		2,085		3		2,289		3		3,781		5
Commercial leases		3,364		4		3,314		4		3,468		4
Subtotal – commercial		43,669		55		43,388		55		45,384		57
Consumer:
Residential mortgage loans		10,736		14		10,693		13		9,478		12
Home equity		11,376		14		11,655		15		12,338		15
Automobile loans		11,070		14		10,825		14		10,185		13
Credit card		1,852		2		1,844		2		1,940		2
Other consumer loans and leases		676		1		743		1		811		1
Subtotal – consumer		35,710		45		35,760		45		34,752		43
Total average loans and leases	$	79,379		100	$	79,148		100	$	80,136		100
Total portfolio loans and leases (excludes loans held for sale)	$	77,636			$	76,236			$	78,381

Average total commercial loans and leases were relatively flat compared to December 31, 2010 and decreased $1.7 billion, or four percent, compared to March 31, 2010. The decrease in average total commercial loans from March 31, 2010 was driven by lower demand for new loans and tighter underwriting standards.

Average total consumer loans and leases were relatively flat compared to December 31, 2010 and increased $958 million, or three percent, compared to March 31, 2010. The increase in average total consumer loans and leases from March 31, 2010 was driven by increases in average residential mortgage loans and average automobile loans, partially offset by decreases in home equity loans, credit card loans, and other consumer loans and leases. Average residential mortgage loan balances increased $1.3 billion, or 13%, compared to March 31, 2010 due to the reasons previously discussed. Average automobile loan balances increased $885 million, or nine percent, compared to March 31, 2010 as a result of the reasons previously discussed. Average home equity loan balances decreased $962 million, or eight percent, compared to March 31, 2010 due to tighter underwriting standards and decreased customer demand. Credit card loans decreased $88 million, or five percent, compared to March 31, 2010 and other consumer loans and leases decreased $135 million, or 17%, compared to March 31, 2010, both of which were primarily due to decreased customer demand and tighter underwriting standards.

Investment Securities

The Bancorp uses investment securities as a means of managing interest rate risk, providing liquidity support and providing collateral for pledging purposes. As of March 31, 2011, total investment securities were $15.7 billion, compared to $16.1 billion at December 31, 2010 and $17.6 billion at March 31, 2010.

Securities are classified as trading when bought and held principally for the purpose of selling them in the near term. Securities are classified as available-for-sale when, in management’s judgment, they may be sold in response to, or in anticipation of, changes in market conditions. Securities that management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. The Bancorp’s management has evaluated the securities in an unrealized loss position in the available-for-sale and held-to-maturity portfolios for OTTI. See Note 4 of the Notes to Condensed Consolidated Financial Statements for further information on OTTI.

At March 31, 2011, December 31, 2010 and March 31, 2010, the Bancorp’s investment portfolio primarily consisted of AAA-rated agency mortgage-backed securities, and did not hold asset-backed securities backed by subprime mortgage loans in its investment portfolio. Additionally, there was approximately $134 million of securities classified as below investment grade as of March 31, 2011, compared to $137 million as of December 31, 2010 and $139 million as of March 31, 2010.

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

TABLE 12: Components of Investment Securities


($ in millions)	March 31, 2011		December 31, 2010		March 31, 2010
Available-for-sale and other: (amortized cost basis)
U.S. Treasury and Government agencies	$	225		225		474
U.S. Government sponsored agencies		1,669		1,564		2,141
Obligations of states and political subdivisions		152		170		221
Agency mortgage-backed securities		10,439		10,570		11,069
Other bonds, notes and debentures		1,177		1,338		1,186
Other securities		1,045		1,052		1,432
Total available-for-sale and other securities	$	14,707		14,919		16,523
Held-to-maturity: (amortized cost basis)
Obligations of states and political subdivisions	$	341		348		350
Other bonds, notes and debentures		5		5		5
Total held-to-maturity	$	346		353		355
Trading: (fair value)
Variable rate demand notes	$	2		106		189
Other securities		214		188		116
Total trading	$	216		294		305

As of March 31, 2011, available-for-sale securities on an amortized cost basis decreased $212 million from December 31, 2010 and decreased $1.8 billion from March 31, 2010. The decrease from December 31, 2010 was driven primarily by $798 million in paydowns of agency mortgage-backed securities and $156 million in paydowns of other bonds, notes, and debentures, partially offset by $675 million in purchases of agency mortgage-backed securities during the first quarter of 2011. In addition, U.S. government sponsored agency securities increased due to $185 million in purchases during the first quarter of 2011, partially offset by $80 million in maturities. The decrease from March 31, 2010 was due to the previously discussed activity, as well as approximately $1.1 billion in sales and paydowns on agency mortgage-backed securities throughout the remainder of 2010, primarily related to the FNMA and FHLMC delinquent loan buy-back programs in the second quarter of 2010. Due to the low market rate environment since those sales, management chose not to fully reinvest the cash flows in securities.

At March 31, 2011 and December 31, 2010, available-for-sale securities were 15% of total interest-earning assets, compared to 17% at March 31, 2010. The decrease compared to March 31, 2010 was due to the $1.8 billion, or 11%, decrease in the available-for-sale portfolio previously discussed, partially offset by the impact of a four percent decline in average interest earning assets. The estimated weighted-average life of the debt securities in the available-for-sale portfolio was 4.6 years at March 31, 2011, compared to 4.4 years at December 31, 2010 and 5.3 years at March 31, 2010. In addition, at March 31, 2011, the fixed-rate securities within the available-for-sale securities portfolio had a weighted-average yield of 4.30% compared to 4.24% at December 31, 2010 and 4.54% at March 31, 2010.

Information presented in Table 13 is on a weighted-average life basis, anticipating future prepayments. Yield information is presented on an FTE basis and is computed using historical cost balances. Maturity and yield calculations for the total available-for-sale portfolio exclude equity securities that have no stated yield or maturity. Market rates rose slightly in the first quarter of 2011 from 2010 levels, resulting in a decline in net unrealized gains on agency mortgage-backed securities to $346 million at March 31, 2011, compared to $403 million and $376 million as of December 31, 2010 and March 31, 2010, respectively. Total net unrealized gains on the available-for-sale securities portfolio were $428 million at March 31, 2011 compared to $495 million at December 31, 2010 and $412 million at March 31, 2010.

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

TABLE 13: Characteristics of Available-for-Sale and Other Securities


As of March 31, 2011 ($ in millions)	Amortized Cost		Fair Value		Weighted-Average Life (in years)		Weighted-Average Yield
U.S. Treasury and Government agencies:
Average life of one year or less	$	75		75		0.6		0.94%
Average life 1 – 5 years		50		51		1.5		1.45
Average life 5 – 10 years		100		102		8.6		3.58
Average life greater than 10 years		-		-		-		-
Total		225		228		4.4		2.22
U.S. Government sponsored agencies:
Average life 1 – 5 years		154		156		3.1		2.01
Average life 5 – 10 years		1,515		1,583		5.7		3.72
Total		1,669		1,739		5.5		3.56
Obligations of states and political subdivisions:^(a)
Average life of one year or less		59		59		0.2		7.33
Average life 1 – 5 years		21		21		3.6		1.45
Average life 5 – 10 years		56		57		7.0		2.25
Average life greater than 10 years		16		16		11.3		5.22
Total		152		153		4.4		4.43
Agency mortgage-backed securities:
Average life of one year or less		217		223		0.7		4.94
Average life 1 – 5 years		8,119		8,450		4.0		4.51
Average life 5 – 10 years		2,091		2,101		6.8		4.35
Average life greater than 10 years		12		11		10.5		4.03
Total		10,439		10,785		4.5		4.49
Other bonds, notes and debentures:^(b)
Average life of one year or less		132		132		0.6		1.17
Average life 1 – 5 years		609		613		2.7		4.05
Average life 5 – 10 years		367		366		5.8		4.50
Average life greater than 10 years		69		72		23.1		7.21
Total		1,177		1,183		4.6		4.05
Other securities^(c)		1,045		1,047
Total available-for-sale and other securities	$	14,707		15,135		4.6		4.30%

(a)

Taxable-equivalent yield adjustments included in the above table are 2.53%, 0.50%, 0.78%, 1.80% and 1.53% for securities with an average life of one year or less, 1-5 years, 5-10 years, greater than 10 years and in total, respectively.

(b)

Other bonds, notes, and debentures consist of non-agency mortgage backed securities, certain other asset backed securities (primarily automobile and commercial loan backed securities) and corporate bond securities.

(c)

Other securities consist of FHLB and FRB restricted stock holdings that are carried at par, FHLMC and FNMA preferred stock holdings and certain mutual fund holdings and equity security holdings.

Trading securities decreased $78 million, or 27%, compared to December 31, 2010 and decreased $89 million, or 29%, compared to March 31, 2010. The decreases from December 31, 2010 and March 31, 2010 were driven by the sale of VRDNs, which were held by the Bancorp in its trading securities portfolio. These securities were purchased from the market during 2008 and 2009 through FTS who was also the remarketing agent. Rates on these securities began to decline in the fourth quarter of 2009 and into 2010. As a result of the decline in rates, the Bancorp continued to sell the VRDNs, replacing them with higher-yielding agency mortgage-backed securities classified as available for sale. For more information on VRDNs, see Note 12 of the Notes to Condensed Consolidated Financial Statements.

Deposits

Deposit balances represent an important source of funding and revenue growth opportunity. The Bancorp is continuing to focus on core deposit growth in its retail and commercial franchises by improving customer satisfaction, building full relationships and offering competitive rates. Core deposits represented 71%, 70%, and 68% of the Bancorp’s asset funding base at March 31, 2011, December 31, 2010 and March 31, 2010, respectively.

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

TABLE 14: Deposits


	March 31, 2011				December 31, 2010				March 31, 2010
($ in millions)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Demand	$	22,066		27		21,413		26		19,482		23
Interest checking		18,597		23		18,560		23		19,126		23
Savings		21,697		26		20,903		26		19,099		23
Money market		5,184		6		5,035		6		4,782		6
Foreign office		3,569		4		3,721		5		2,844		3
Transaction deposits		71,113		86		69,632		86		65,333		78
Other time		7,043		9		7,728		9		11,643		14
Core deposits		78,156		95		77,360		95		76,976		92
Certificates – $100,000 and over		4,160		5		4,287		5		6,596		8
Other		1		-		1		-		2		-
Total deposits	$	82,317		100		81,648		100		83,574		100

Core deposits increased $796 million, or one percent, compared to December 31, 2010, driven by an increase in transaction deposits, partially offset by a decline in other time deposits. The first quarter growth of $1.5 billion, or two percent, in transaction deposit accounts was the result of increases in new accounts opened during the first quarter for demand deposit, interest checking, savings and money market accounts, as well as customer migration into more liquid accounts due to interest rates remaining near historical lows. The $685 million, or nine percent, decrease in other time deposits was the result of continued run-off of higher priced certificates of deposits, and customers declining to maintain balances in time deposit accounts due to the reasons discussed above.

Core deposits increased $1.2 billion, or two percent, compared to March 31, 2010, driven by an increase in transaction deposits, partially offset by a decline in other time deposits. The increase of $5.8 billion, or nine percent, in transaction deposit accounts was driven primarily by increases in demand deposit and savings accounts due to increased customer liquidity partially offset by a decline in interest checking due primarily to rate management actions on single product public funds in the second half of 2010. In addition, foreign office deposits increased $725 million due to an increase in commercial customer deposits due to increased customer liquidity, and those customers opting to sweep additional funds into these accounts for higher interest rates. These increases in transaction deposit accounts were partially offset by a decrease of $4.6 billion, or 40%, in other time deposits, as customers maintained their balances in more liquid accounts as interest rates remained near historical lows.

Included in core deposits are foreign office deposits, which are Eurodollar sweep accounts for the Bancorp’s commercial customers. These accounts bear interest at rates slightly higher than money market accounts, but the Bancorp does not have to pay FDIC insurance nor pledge collateral. The Bancorp uses certificates of deposit $100,000 and over, as a method to fund earning asset growth. At March 31, 2011, certificates $100,000 and over decreased $127 million, or three percent, compared to December 31, 2010, and decreased $2.4 billion, or 37%, compared to March 31, 2010, due to the reasons previously discussed.

TABLE 15: Average Deposits


	March 31, 2011				December 31, 2010				March 31, 2010
($ in millions)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Demand	$	21,582		27		21,066		26		18,822		23
Interest checking		18,539		23		17,578		22		19,533		23
Savings		21,324		26		20,602		25		18,469		22
Money market		5,136		6		4,985		6		4,622		6
Foreign office		3,580		4		3,733		5		2,757		3
Transaction deposits		70,161		86		67,964		84		64,203		77
Other time		7,363		9		8,490		10		12,059		14
Core deposits		77,524		95		76,454		94		76,262		91
Certificates - $100,000 and over		4,226		5		4,858		6		7,049		9
Other		1		-		9		-		8		-
Total average deposits	$	81,751		100		81,321		100		83,319		100

On an average basis, core deposits increased $1.1 billion, or one percent, compared to the fourth quarter of 2010, and increased $1.3 billion, or two percent, compared to the first quarter of 2010 due to migration of higher priced certificates into transaction accounts, due to the impact of historically low rates and excess customer liquidity.

Borrowings

Total borrowings increased $773 million, or seven percent, from December 31, 2010 and declined $393 million, or three percent, compared to March 31, 2010. The increase in total borrowings from December 31, 2010 was primarily the result of increases in long-term debt and federal funds purchased, partially offset by a decline in other short-term borrowings. The decrease in total borrowings compared to March 31, 2010 was driven primarily by declines in long-term debt and other short-term borrowings, partially offset by an increase in federal funds purchased. As of March 31, 2011, total borrowings as a percentage of interest-bearing liabilities were 17% compared to 16% at December 31, 2010 and March 31, 2010.

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

TABLE 16: Borrowings


($ in millions)	March 31, 2011		December 31, 2010		March 31, 2010
Federal funds purchased	$	332		279		271
Other short-term borrowings		1,297		1,574		1,359
Long-term debt		10,555		9,558		10,947
Total borrowings	$	12,184		11,411		12,577

Long-term debt increased $997 million, or 10%, compared to December 31, 2010 as a result of the issuance of $1.0 billion in senior notes in the first quarter of 2011. Federal funds purchased increased $53 million, or 19%, compared to December 31, 2010, driven by increases in deposits from correspondent banking customers. In order to meet its funding obligations, the Bancorp enters into repurchase agreements with customers, which are accounted for as collateralized financing transactions, where excess customer funds are borrowed overnight by the Bancorp, and later repurchased by the customers. Due to declines in customer repurchase sweep account balances from seasonally high levels in the fourth quarter of 2010, short-term borrowings declined $277 million, or 18% from December 31, 2010.

Long-term debt decreased $392 million, or four percent, compared to March 31, 2010 as the result of long-term debt payments and the repayment of $1.0 billion in FHLB advances during the fourth quarter of 2010. These decreases were partially offset by the first quarter 2011 issuance of the senior notes discussed above and the issuance of a $250 million structured repurchase agreement in the first quarter of 2011. Other short-term borrowings declined $62 million, or five percent, compared to March 31, 2010, due to a decline in derivative collateral of $127 million attributable to normal market movements, partially offset by an increase of $73 million in customer repurchase sweep account balances. Federal funds purchased increased $61 million, or 23%, driven by increases in deposits from correspondent banking customers and increases in demand deposit sweep accounts invested into federal funds.

TABLE 17: Average Borrowings


($ in millions)	March 31, 2011		December 31, 2010		March 31, 2010
Federal funds purchased	$	310		376		220
Other short-term borrowings		1,638		1,728		1,449
Long-term debt		10,255		10,298		11,489
Total average borrowings	$	12,203		12,402		13,158

Average total borrowings decreased $199 million, or two percent, compared to December 31, 2010, primarily due to declines in average federal funds purchased and other short-term borrowings. The decline in average total borrowings compared to December 31, 2010 was primarily the result of an increase in the Bancorp’s funding position, as average total deposits increased $430 million, or one percent. Average total borrowings decreased $955 million, or seven percent, compared to March 31, 2010 due to a $1.2 billion, or 11%, decline in average long-term debt, partially offset by an increase in average federal funds purchased and other short-term borrowings. The decrease in average long-term debt compared to March 31, 2010 was the result of the maturity of $800 million in long-term debt in the first quarter of 2010 and the repayment of $1.0 billion in FHLB advances during the fourth quarter of 2010, partially offset by the issuance of $1.0 billion in senior notes in the first quarter of 2011as discussed above. These repayments were made possible by the $757 million, or one percent, decline in average total loans and leases from March 31, 2010.

Information on the average rates paid on borrowings is discussed in the Statements of Income Analysis in MD&A. In addition, refer to the Liquidity Risk Management section for a discussion on the role of borrowings in the Bancorp’s liquidity management.

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

BUSINESS SEGMENT REVIEW

The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors. Additional detailed financial information on each business segment is included in Note 20 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 accounting practices are improved and businesses change.

The Bancorp manages interest rate risk centrally at the corporate level by employing a FTP methodology. This methodology insulates the business segments from interest rate volatility, enabling them to focus on serving customers through loan originations and deposit taking. The FTP system assigns charge rates and credit rates to classes of assets and liabilities, respectively, based on expected duration and the LIBOR swap curve. Matching duration allocates interest income and interest expense to each segment so its resulting net interest income is insulated from interest rate risk. In a rising rate environment, the Bancorp benefits from the widening spread between deposit costs and wholesale funding costs. However, the Bancorp’s FTP system credits this benefit to deposit-providing businesses, such as Branch Banking and Investment Advisors, on a duration-adjusted basis. The net impact of the FTP methodology is captured in General Corporate and Other.

The Bancorp adjusts the FTP charge and credit rates as dictated by changes in interest rates for various interest-earning assets and liabilities. The credit rate provided for DDA’s is reviewed annually based upon the account type, its estimated duration and the corresponding fed funds, LIBOR or swap rate. The credit rates for DDA’s were reset January 1, 2011 to reflect the current market rates. These rates were significantly lower than those in place during the first three months of 2010, thus net interest income for deposit providing businesses was negatively impacted during the first three months of 2011.

The business segments are charged provision expense based on the actual net charge-offs experienced by the loans owned by each segment. Provision expense attributable to loan growth and changes in factors in the ALLL are captured in General Corporate and Other. The financial results of the business segments include allocations for shared services and headquarters expenses. Even with these allocations, the financial results are not necessarily indicative of the business segments’ financial condition and results of operations as if they existed as independent entities. Additionally, the business segments form synergies by taking advantage of cross-sell opportunities and when funding operations, by accessing the capital markets as a collective unit. Net income (loss) by business segment is summarized in the following table.

TABLE 18: Business Segment Results


	For the three months ended March 31,
($ in millions)	2011			2010
Commercial Banking	$	89			51
Branch Banking		21			44
Consumer Lending		(29	)		6
Investment Advisors		9			13
General Corporate & Other		175			(124	)
Net income (loss)		265			(10	)
Less: Net income attributable to noncontrolling interest		-			-
Net income (loss) attributable to Bancorp		265			(10	)
Dividends on preferred stock		177			62
Net income (loss) available to common shareholders	$	88			(72	)

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

Commercial Banking

Commercial Banking offers banking, 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 19: Commercial Banking


	For the three months ended March 31,
($ in millions)	2011			2010
Income Statement Data
Net interest income (FTE)^(a)	$	333			377
Provision for loan and lease losses		152			278
Noninterest income:
Corporate banking revenue		81			76
Service charges on deposits		50			48
Other noninterest income		44			37
Noninterest expense:
Salaries, incentives and benefits		69			65
Other noninterest expense		205			172
Income before taxes		82			23
Applicable income tax benefit		(7	)		(28	)
Net income	$	89			51
Average Balance Sheet Data
Commercial loans	$	38,022			39,152
Demand deposits		11,981			10,522
Interest checking		8,300			10,010
Savings and money market		2,920			2,678
Certificates over $100,000		2,039			3,174
Foreign office deposits		1,934			1,518

(a)

Includes FTE adjustments of $4 and $3 for the three months ended March 31, 2011 and 2010, respectively.

Commercial Banking reported net income of $89 million for the three months ended March 31, 2011 compared to net income of $51 million for the three months ended March 31, 2010. This improvement was primarily due to a decrease in the provision for loan and lease losses and higher noninterest income partially offset by lower net interest income and higher noninterest expenses.

Net interest income decreased $44 million, or 12%, primarily due to a decrease in the FTP credit for DDA accounts compared to the three months ended March 31, 2010. Additionally, net interest income decreased due to a decline in average commercial loans during the current quarter compared to the same quarter last year. Provision for loan and lease losses decreased $126 million, or 45%, from the three months ended March 31, 2010. Net charge-offs as a percent of average loans and leases decreased to 162 bp from 289 bp during the three months ended March 31, 2010. The decreases in net charge-offs, nonperforming assets and delinquencies was driven by actions taken by the Bancorp in the third quarter of 2010 to address problem loans, which included transferring $876 million of commercial loans to held for sale. Tighter underwriting standards continue to be implemented across commercial loan product offerings.

Noninterest income increased $14 million from the three months ended March 31, 2010 primarily as a result of improvements in gains recognized on the sale of OREO, included in other noninterest income, and a $5 million, or seven percent, increase in corporate banking revenue. Gains on the sale of OREO were $7 million for the three months ended March 31, 2011, compared to a net loss of $9 million for the same quarter last year. Corporate banking revenue increased primarily due to an increase in syndication fees driven by refinancing activities in the current market environment.

Noninterest expense increased $37 million, or 16%, compared to the three months ended March 31, 2010 due to increases in salaries, incentives and benefits and other noninterest expense. Salaries, incentives and benefits increased $4 million, or six percent, due to higher compensation related to improved performance in the segment. OREO expense increased $7 million as a result of higher inventory compared to the same quarter last year.

Average commercial loans and leases decreased $1.1 billion, or three percent, compared to the prior year due to decreases in commercial construction loans of $1.7 billion, or 46%, and commercial mortgage loans of $841 million, or nine percent, partially offset by an increase in commercial and industrial loans of $1.5 billion, or seven percent. These decreases were the result of lower customer demand for new originations and tighter underwriting standards applied to both new commercial loan originations and renewals. Commercial and industrial loans increased despite the transfers of loans to held for sale due to an increase in originations compared to the same quarter last year.

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

Average core deposits increased $395 million, or two percent, compared to the three months ended March 31, 2010 due to the migration of higher priced certificates of deposit into transaction accounts, as well as the impact of historically low interest rates and excess customer liquidity.

Branch Banking

Branch Banking provides a full range of deposit and loan and lease products to individuals and small businesses through 1,310 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 20: Branch Banking
	For the three months ended March 31,
($ in millions)	2011		2010
Income Statement Data
Net interest income	$	336		382
Provision for loan and lease losses		113		153
Noninterest income:
Service charges on deposits		73		92
Card and processing revenue		74		67
Investment advisory revenue		28		25
Other noninterest income		26		29
Noninterest expense:
Salaries, incentives and benefits		147		134
Net occupancy and equipment expense		59		55
Card and processing expense		23		24
Other noninterest expense		163		161
Income before taxes		32		68
Applicable income tax expense		11		24
Net income	$	21		44
Average Balance Sheet Data
Consumer loans	$	13,593		13,037
Commercial loans		4,549		5,009
Demand deposits		7,735		6,652
Interest checking		7,300		7,325
Savings and money market		21,786		18,750
Other time		7,234		11,806

Branch Banking net income decreased $23 million, or 52%, compared to the three months ended March 31, 2010 driven by decreases in net interest income and service charges on deposits as well as an increase in salaries, incentives and benefits, partially offset by a decrease in the provision for loan and lease losses.

Net interest income decreased $46 million, or 12%, compared to the first quarter of 2010 due to a decrease in the FTP credit for DDA accounts, which was partially offset by a favorable shift in the segment’s deposit mix towards lower cost transaction deposits. Provision for loan and lease losses decreased $40 million, or 26%, from the three months ended March 31, 2010. Total net charge-offs as a percent of average loans and leases decreased from 345 bp to 252 bp during the three months ended March 31, 2011. Both commercial and consumer net charge-offs decreased compared to the three months ended March 31, 2010 due to a decrease in delinquencies, tighter underwriting standards and improving economic conditions. Consumer net charge-offs decreased from 313 bp to 239 bp. Commercial net charge-offs decreased from 443 bp to 294 bp.

Noninterest income decreased $12 million, or six percent, compared to the three months ended March 31, 2010, as a decrease in service charges on deposits was partially offset by an increase in card and processing revenue. Service charges on deposits decreased $19 million, or 21%, compared to the same quarter last year primarily as a result of Regulation E, which was implemented during 2010. This regulation negatively impacted revenue from overdrafts by $13 million during the three months ended March 31, 2011. Card and processing revenue increased $7 million, or 10%, from the same quarter last year primarily due to an increase in debit and credit card transactions that resulted in a 19% and 12% increase in both debit and card interchange revenue, respectively.

Noninterest expense increased $18 million, or five percent, for the three months ended March 31, 2011, primarily due to increases in salaries, incentives and benefits. Salaries, incentives and benefits increased $13 million, or 10%, from the prior year quarter as base compensation and incentive compensation increased 6% and 16%, respectively, from additional branch personnel related to expanded branch hours of operation and higher incentive accruals attributable to success in opening new deposit and brokerage accounts.

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

Average consumer loans increased $786 million, or six percent, and average commercial loans decreased $458 million, or nine percent compared to the three months ended March 31, 2010. The increase in average consumer loans was the result of a $1.4 billion increase in residential mortgage loans as the Bancorp has retained a certain portion of loans originated versus selling in the secondary market. This was partially offset by a decline in home equity loans of $472 million, or five percent, due to an overall decrease in demand and tighter underwriting standards that limited allowable loan to value ratios. The decrease in average commercial loans was due primarily to a decline in commercial and industrial loans from lower customer demand for new originations and tighter underwriting standards applied to both new commercial loan originations and renewals.

Average core deposits decline one percent compared to three months ended March 31, 2010 as runoff of higher priced consumer certificates of deposit, included in other time deposits, was replaced with growth in transaction accounts due to excess customer liquidity and low interest rates.

Consumer Lending

Consumer Lending includes the Bancorp’s mortgage, home equity, automobile and other indirect lending activities. Mortgage and home equity lending activities include the origination, retention and servicing of mortgage and home equity loans or lines of credit, sales and securitizations of those loans or pools of loans or lines of credit and all associated hedging activities. Other indirect lending activities include loans to consumers through mortgage brokers and automobile dealers. The following table contains selected financial data for the Consumer Lending segment.


TABLE 21: Consumer Lending
	For the three months ended March 31,
($ in millions)	2011			2010
Income Statement Data
Net interest income	$	93			109
Provision for loan and lease losses		97			137
Noninterest income:
Mortgage banking net revenue		99			145
Other noninterest income		17			10
Noninterest expense:
Salaries, incentives and benefits		45			38
Other noninterest expense		112			80
(Loss) income before taxes		(45	)		9
Applicable income tax (benefit) expense		(16	)		3
Net (loss) income	$	(29	)		6
Average Balance Sheet Data
Residential mortgage loans	$	9,273			9,187
Home equity		773			899
Automobile loans		10,384			9,461
Consumer leases		246			473

Consumer Lending reported a net loss of $29 million for the three months ended March 31, 2011, compared to net income of $6 million for the three months ended March 31, 2010, primarily due to decreases in net interest income and mortgage banking net revenue as well as an increase in noninterest expense partially offset by a decrease in the provision for loan and lease losses.

Net interest income decreased $16 million, or 15%, from the first quarter of 2010 primarily due to a decrease in yields on average interest earning assets and a $3 million decrease in the accretion of discounts on loans associated with the acquisition of First Charter in 2008. Provision for loan and lease losses decreased $40 million, or 29%, for the three months ended March 31, 2011. Net charge-offs as a percent of average loans and leases decreased to 203 bp during the current quarter from 293 bp during the same quarter last year. The net-charge off ratio for residential mortgage loans declined from 450 bp to 333 bp during the three months ended March 31, 2011. The decrease in provision for loan and lease losses from the prior year quarter and decline in net charge-offs was the result of improved economic conditions and actions taken by the Bancorp which included the sale of $228 million of portfolio loans during the third quarter of 2010.

Noninterest income decreased $39 million, or 25%, as the result of a decline in mortgage banking net revenue partially offset by an increase in other noninterest income. Mortgage banking net revenue decreased $46 million, or 32%, from the same quarter last year primarily due to a $41 million decrease in net servicing revenue. The decrease in net servicing revenue was driven by reductions in net valuation adjustments on MSR derivatives of $85 million partially offset by a $44 million impact related to the change in the impairment on servicing rights compared to the prior year quarter as there was a $37 million recovery during the current quarter and a $7 million temporary impairment during the same quarter last year. Revenue from originations and gains on loan sales decreased $4 million as sales margins declined due to an increase in mortgage rates and changes in pricing from government sponsored entities. Residential mortgage loans serviced for others at March 31, 2011 and 2010 were $55.4 billion and $50.3 billion, respectively. Other noninterest income increased $7 million primarily due to $5 million of securities gains related to mortgage servicing rights hedging activities compared to no securities sales during the prior year quarter.

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

Noninterest expense increased $39 million, or 33%, due to increases in salaries, incentives and benefits and other noninterest expense. Salaries, incentives and benefits increased $7 million, or 18%, from the same quarter last year due to higher mortgage loan originations in the current quarter compared to the same quarter last year. Other noninterest expense increased $32 million, or 40%, for the three months ended March 31, 2011 as losses and adjustments from lending activities and core operational and information technology expenses increased compared to the prior year quarter.

Average consumer loans increased $630 million, or three percent, compared to the three months ended March 31, 2010, as an increase in automobile loans was partially offset by a decrease in consumer leases and home equity loans. The increase in automobile loans of $923 million, or 10%, was due to a strategic focus to increase automobile lending during 2010 through consistent and competitive pricing, enhanced customer service with our dealership network and disciplined sales execution. Average consumer leases decreased $227 million, or 48%, due to a continued runoff of consumer leases, which were discontinued in the fourth quarter of 2008. Average home equity loans decreased $126 million, or 14% due to a continued run off of brokered home equity loans.

Investment Advisors

Investment Advisors provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. Investment Advisors is made up of four main businesses: FTS, an indirect wholly-owned subsidiary of the Bancorp; FTAM, an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker dealer services to the institutional marketplace. Fifth Third Asset Management, Inc. provides asset management services and also advises the Bancorp’s proprietary family of mutual funds. Fifth Third Private Banking offers holistic strategies to affluent clients in wealth planning, investing, insurance and wealth protection. Fifth Third Institutional Services provide advisory services for institutional clients including states and municipalities. The following table contains selected financial data for the Investment Advisors segment.


TABLE 22: Investment Advisors
	For the three months ended March 31,
($ in millions)	2011		2010
Income Statement Data
Net interest income	$	28		38
Provision for loan and lease losses		5		13
Noninterest income:
Investment advisory revenue		95		88
Other noninterest income		3		3
Noninterest expense:
Salaries, incentives and benefits		43		37
Other noninterest expense		64		59
Income before taxes		14		20
Applicable income tax expense		5		7
Net income	$	9		13
Average Balance Sheet Data
Loans and leases	$	2,130		2,731
Core deposits		6,455		5,706

Net income decreased $4 million, or 31%, for the three months ended March 31, 2011, as a decrease in net interest income and increases in salaries, incentives and benefits and other noninterest expense were partially offset by a decrease in provision for loan and lease losses and an increase in investment advisory revenue.

Net interest income decreased $10 million, or 26%, from the first quarter of 2010 due to a decrease in average loans and leases and a decrease in the yield on interest earning assets. Provision for loan and lease losses decreased $8 million, or 62%, compared to the three months ended March 31, 2010. Net charge-offs decreased to 94 bp during the three months ended March 31, 2011 compared to 190 bp during the same quarter last year.

Noninterest income increased $7 million, or eight percent, compared to the three months ended March 31, 2010, due to an increase in investment advisory revenue. Investment advisory revenue increased $7 million due to increases in all major types of revenue within this category. Private Bank income increased $3 million, or nine percent, due to increased insurance production in both the retail and private bank channels. Securities and broker income increased $1 million, or six percent, due to continued expansion of the sales force and effective sales management, resulting in strong net asset and account growth. Institutional income increased $2 million, or 12%, from the three months ended March 31, 2010 due to the overall improvement in the market. Assets under care were $274 billion at March 31, 2011 compared to $190 billion at March 31, 2010, and managed assets were $26 billion at March 31, 2011 compared to $25 billion at December 31, 2010.

Noninterest expense increased $11 million, or 11%, compared to the three months ended March 31, 2010, due to an increase in salaries, incentives and benefits and other noninterest expense. Salaries, incentives and benefits increased $6 million, or 16%, primarily due to the expansion of the sales force and compensation related to improved performance in investment advisory revenue related fees. Other noninterest expense increased $5 million, or eight percent, primarily due to an increase in expenses associated with the revenue sharing agreement between Investment Advisors and Branch Banking.

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

Average loans and leases decreased $601 million, or 22%, for the three months ended March 31, 2011, primarily due to a $368 million decline in home equity loans as a result of a decrease in demand among the Bancorp’s high net worth customers due to excess liquidity. Average core deposits increased $749 million, or 13%, compared to the three months ended March 31, 2010, primarily due to growth in interest checking and foreign deposits as customers have opted to maintain excess funds in liquid transaction accounts as rates continue to be near historic lows.

General Corporate and Other

General Corporate and Other includes the unallocated portion of the investment securities portfolio, securities gains and losses, certain non-core deposit funding, unassigned equity, provision expense in excess of net charge-offs or income 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.

The results for the three months ended March 31, 2011 were impacted by $199 million in income due to a reduction in the ALLL compared to $9 million of provision expense in excess of net charge-offs during the three months ended March 31, 2010. The decrease in provision expense was due to a decrease in nonperforming loans and leases, improved delinquencies in commercial and consumer loans and leases and continued improvement in credit trends as general economic conditions continued to show signs of moderation within the Bancorp’s footprint. The results were negatively impacted by the acceleration of $153 million in accretion of the remaining issuance discount on the Series F preferred stock in connection with the redemption of the preferred stock on March 2, 2011. This resulted in dividends on preferred stock of $177 million during the three months ended March 31, 2011, compared to $62 million during the three months ended March 31, 2010.

Quantitative and Qualitative Disclosures About Market Risk (Item 3)

RISK MANAGEMENT – OVERVIEW

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

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

Economic capital is the amount of unencumbered financial resources necessary to support the Bancorp’s risks. The Bancorp measures economic capital under the assumption that it expects to maintain debt ratings at strong investment grade levels over time. The Bancorp’s capital policies require that the economic capital necessary in its business not exceed its Operating Risk Capacity less the aforementioned buffer.

Risk appetite is the aggregate amount of risk the Bancorp is willing to accept in pursuit of its strategic and financial objectives. By establishing boundaries around risk taking and business decisions, and by incorporating the needs and goals of its shareholders, regulators, rating agencies and customers, the Bancorp’s risk appetite is aligned with its priorities and goals. Risk tolerance is the maximum amount of risk applicable to each of the eight specific risk categories included in its Enterprise Risk Management Framework. This is expressed primarily in qualitative terms. The Bancorp’s risk appetite and risk tolerances are supported by risk targets and risk limits. Those limits are used to monitor the amount of risk assumed at a granular level.

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

•

Enterprise Risk Management Programs is responsible for developing and overseeing the implementation of risk programs and reporting that facilitate a broad integrated view of risk. The department also leads the ongoing development of a strong risk management culture and the framework, policies and committees that support effective risk governance;

•

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

•

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

•

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

•

Operational Risk Management works with affiliates and lines of business to maintain processes to monitor and manage all aspects of operational risk including ensuring consistency in application of operational risk programs and Sarbanes-Oxley compliance;

•

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

•

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

•

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

•

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

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

Quantitative and Qualitative Disclosures About Market Risk (continued)

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

Finally, Credit Risk Review is an independent function responsible for evaluating the sufficiency of underwriting, documentation and approval processes for consumer and commercial credits, the accuracy of risk grades assigned to commercial credit exposure, appropriate accounting for charge-offs, and non-accrual status and specific reserves. Credit Risk Review reports directly to the Risk and Compliance Committee of the Board of Directors and administratively to the Director of Internal Audit.

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 an individual customer default. The Bancorp’s credit risk management strategy is based on three core principles: conservatism, diversification and monitoring. The Bancorp believes that effective credit risk management begins with conservative lending practices. These practices include conservative exposure and counterparty limits and conservative underwriting, documentation and collection standards. The Bancorp’s credit risk management strategy also emphasizes diversification on a geographic, industry and customer level as well as regular credit examinations and monthly management reviews of large credit exposures and credits experiencing deterioration of credit quality. Lending 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, which reports to the Risk and Compliance Committee of the Board of Directors, provides objective assessments of the quality of underwriting and documentation, the accuracy of risk grades and the charge-off, nonaccrual and reserve analysis process. The Bancorp’s credit review process and overall assessment of the adequacy of the allowance for credit losses is based on quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio. The Bancorp uses these assessments to promptly identify potential problem loans or leases within the portfolio, maintain an adequate reserve and take any necessary charge-offs. In addition to the individual review of larger commercial loans that exhibit probable or observed credit weaknesses, the commercial credit review process includes the use of two risk grading systems. The risk grading system currently utilized for reserve analysis purposes encompasses ten categories. The Bancorp also maintains a dual risk rating system that provides for thirteen probabilities of default grade categories and an additional six grade categories for estimating losses given an event of default. The probability of default and loss given default evaluations are not separated in the ten-grade risk rating system. The Bancorp has completed significant validation and testing of the dual risk rating system. Scoring systems, various analytical tools and delinquency monitoring are used to assess the credit risk in the Bancorp’s homogenous consumer and small business loan portfolios.

Overview

General economic conditions started to improve during 2010 and the economy continued showing signs of stabilization in the first quarter of 2011. Geographically, the Bancorp continues to experience the most stress in Michigan and Florida due to the decline in real estate values. Real estate value deterioration, as measured by the Home Price Index, was most prevalent in Florida due to past real estate price appreciation and related over-development, and in Michigan due in part to cutbacks in automobile manufacturing and the state’s economic downturn. Among commercial portfolios, the homebuilder and developer and the remaining non-owner occupied commercial real estate portfolios remained under stress throughout 2010 and into 2011.

Among consumer portfolios, residential mortgage and brokered home equity portfolios exhibited the most stress. Management suspended homebuilder and developer lending in the fourth quarter of 2007 and new commercial non-owner occupied real estate lending in the second quarter of 2008, discontinued the origination of brokered home equity products at the end of 2007 and tightened underwriting standards across both the commercial and consumer loan product offerings. Since the fourth quarter of 2008, in an effort to reduce loan exposure to the real estate and construction industries, the Bancorp has sold certain consumer loans and sold or transferred to held for sale certain commercial loans. Throughout 2010 and in the first quarter of 2011, the Bancorp continued to aggressively engage in other loss mitigation strategies such as reducing credit commitments, restructuring certain commercial and consumer loans, tightening underwriting standards on commercial loans and across the consumer loan portfolio, as well as utilizing expanded commercial and consumer loan workout teams. In the financial services industry, there has been heightened focus on foreclosure activity and processes. Fifth Third actively works with borrowers experiencing difficulties and has regularly modified or provided forbearance to borrowers where a workable solution could be found. Foreclosure is a last resort, and the Bancorp undertakes foreclosures only when it believes they are necessary and appropriate and are careful to ensure that customer and loan data are accurate. Reviews of the Bancorp’s foreclosure process and procedures conducted last year did not reveal any material deficiencies. These reviews have been expanded and extended in 2011 to improve our processes as additional aspects of the industry’s foreclosure practices have come under intensified scrutiny and criticism. These reviews are ongoing and the Bancorp may determine to amend its processes and procedures as a result of these reviews. While any impact to the Bancorp that ultimately results from continued reviews cannot yet be determined, management currently believes that such impact will not materially adversely affect the Bancorp’s results of operations, liquidity or capital resources.

Quantitative and Qualitative Disclosures About Market Risk (continued)

Commercial Portfolio

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

The risk within the commercial loan and lease portfolio is managed and monitored through an underwriting process utilizing detailed origination policies, continuous loan level reviews, monitoring of industry concentration and product type limits and continuous portfolio risk management reporting. The origination policies for commercial real estate outline the risks and underwriting requirements for owner and non-owner 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) and sensitivity and pro-forma analysis requirements. The Bancorp requires an appraisal of collateral be performed at origination and on an as-needed basis, in conformity with market conditions and regulatory requirements. Independent reviews are performed on appraisals to ensure the appraiser is qualified and consistency exists in the evaluation process.

The following table provides detail on commercial loan 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.


TABLE 23: Commercial Loan and Lease Portfolio (excluding loans held for sale)
	2011							2010
As of March 31 ($ in Millions)	Outstanding			Exposure		Nonaccrual		Outstanding			Exposure		Nonaccrual
By industry:
Real estate	$	8,090			9,281		345	$	9,648			11,174		761
Manufacturing		7,392			14,732		117		6,578			13,551		197
Financial services and insurance		3,782			8,423		65		4,332			8,762		94
Healthcare		3,406			5,123		29		3,135			5,146		61
Business services		3,397			5,253		67		2,663			4,740		56
Wholesale trade		3,059			5,709		76		2,415			4,708		46
Construction		2,611			3,868		224		3,453			4,951		570
Retail trade		2,379			5,300		49		2,691			5,463		82
Transportation and warehousing		2,043			2,537		14		2,480			2,968		58
Other services		1,078			1,457		44		1,067			1,660		34
Communication and information		1,061			1,688		7		788			1,397		8
Accommodation and food		1,026			1,579		61		1,004			1,490		59
Mining		912			1,647		-		772			1,186		20
Entertainment and recreation		794			1,044		18		728			936		16
Public administration		619			825		4		677			971		9
Utilities		604			1,684		-		505			1,400		-
Agribusiness		445			570		81		533			700		72
Individuals		418			473		8		715			890		23
Other		85			149		2		356			772		6
Total	$	43,201			71,342		1,211	$	44,540			72,865		2,172
By loan size:
Less than $200,000		3	%		2		7		3	%		2		5
$200,000 to $1 million		10			7		24		12			9		20
$1 million to $5 million		21			17		30		24			20		36
$5 million to $10 million		13			11		9		13			11		17
$10 million to $25 million		26			26		25		24			25		18
Greater than $25 million		27			37		5		24			33		4
Total		100	%		100		100		100	%		100		100
By state:
Ohio		25	%		29		15		27	%		30		16
Michigan		15			13		21		16			14		17
Florida		8			7		16		9			7		25
Illinois		8			8		13		8			9		9
Indiana		6			6		8		6			6		5
Kentucky		5			4		4		5			4		5
North Carolina		3			3		3		3			3		6
Tennessee		3			3		1		2			3		3
Pennsylvania		2			2		2		2			2		-
All other states		25			25		17		22			22		14
Total		100	%		100		100		100	%		100		100

The Bancorp has identified certain categories of loans which it believes represent a higher level of risk compared to the rest of the Bancorp’s loan portfolio, due to economic or market conditions within the Bancorp’s key lending areas. Tables 24 – 27 provide analysis of each of the categories of loans (excluding loans held for sale) by state as of and for the three months ended March 31, 2011 and 2010.

Quantitative and Qualitative Disclosures About Market Risk (continued)


TABLE 24: Non-Owner Occupied Commercial Real Estate
As of March 31, 2011 ($ in millions)									For the three months ended March 31, 2011
By State:	Outstanding		Exposure		90 Days Past Due		Nonaccrual		Net Charge-offs
Ohio	$	2,232		2,494		24		93		24
Michigan		1,627		1,736		-		72		11
Florida		930		985		2		105		5
Illinois		498		583		-		60		10
Indiana		375		438		-		22		2
North Carolina		359		410		1		31		1
All other states		677		747		-		28		6
Total	$	6,698		7,393		27		411		59


TABLE 25: Non-Owner Occupied Commercial Real Estate
As of March 31, 2010 ($ in millions)									For the three months ended March 31, 2010
By State:	Outstanding		Exposure		90 Days Past Due		Nonaccrual		Net Charge-offs
Ohio	$	2,871		3,126		12		177		21
Michigan		2,067		2,186		7		165		41
Florida		1,455		1,525		5		351		33
Illinois		779		895		13		80		14
Indiana		478		496		-		43		10
North Carolina		658		686		2		123		13
All other states		976		1,074		3		137		12
Total	$	9,284		9,988		42		1,076		144


TABLE 26: Home Builder and Developer
As of March 31, 2011 ($ in millions)									For the three months ended March 31, 2011
By State:	Outstanding		Exposure		90 Days Past Due		Nonaccrual		Net Charge-offs
Ohio	$	189		278		-		31		13
Michigan		146		190		-		16		2
Florida		97		109		-		37		3
North Carolina		66		80		-		13		-
Indiana		59		75		-		11		-
Illinois		29		50		-		11		1
All other states		65		89		1		11		3
Total	$	651		871		1		130		22

(a)

Home Builder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of $131 and a total exposure of $257 are also included in Table 24: Non-Owner Occupied Commercial Real Estate


TABLE 27: Home Builder and Developer
As of March 31, 2010 ($ in millions)									For the three months ended March 31, 2010
By State:	Outstanding		Exposure		90 Days Past Due		Nonaccrual		Net Charge-offs
Ohio	$	303		463		1		61		6
Florida		286		303		-		126		14
Michigan		223		289		2		64		28
North Carolina		192		208		2		80		7
Indiana		93		119		-		12		7
Illinois		65		103		-		12		6
All other states		162		210		1		57		13
Total	$	1,324		1,695		6		412		81

(a)

Home Builder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of $183 and a total exposure of $410 are also included in Table 25: Non-Owner Occupied Commercial Real Estate.

Quantitative and Qualitative Disclosures About Market Risk (continued)

Consumer Portfolio

The Bancorp’s consumer portfolio is materially comprised of three categories of loans: residential mortgage, home equity, and automobile. The Bancorp has identified certain categories within these loan types which it believes represent a higher level of risk compared to the rest of the consumer loan portfolio due to high loan amount to collateral value.

Residential Mortgage Portfolio

The Bancorp manages credit risk in the mortgage portfolio through conservative underwriting and documentation standards and geographic and product diversification. The Bancorp may also package and sell loans in the portfolio or may purchase mortgage insurance for the loans sold in order to mitigate credit risk.

The Bancorp does not originate mortgage loans that permit customers to defer principal payments or make payments that are less than the accruing interest. The Bancorp originates both fixed and adjustable rate residential mortgage loans. Resets of rates on adjustable rate mortgages are not expected to have a material impact on credit costs in the current interest rate environment, as approximately $1.3 billion of adjustable rate residential mortgage loans will have rate resets during the next 12 months, with less than one percent of those resets expected to experience an increase in monthly payments.

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 an LTV greater than 80% (80/20 loans) and interest-only loans. The Bancorp monitors residential mortgage loans with greater than 80% LTV ratio and no mortgage insurance as it believes these loans represent a higher level of risk. The following tables provide analysis of the residential mortgage loans outstanding with a greater than 80% LTV ratio and no mortgage insurance as of and for the three months ended March 31, 2011 and 2010.