Edgar Filing: FIFTH THIRD BANCORP

10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 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	¨	(Do not check if a smaller reporting company)	Smaller reporting company	¨

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

There were 919,778,512 shares of the Registrant’s common stock, without par value, outstanding as of September 30, 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			9 9 10
Balance Sheet Analysis			19
Business Segment Review			25
Quantitative and Qualitative Disclosures about Market Risk (Item 3)
Risk Management – Overview			32
Credit Risk Management			34
Market Risk Management			47
Liquidity Risk Management			50
Capital Management			51
Off-Balance Sheet Arrangements			53
Controls and Procedures (Item 4)			55
Condensed Consolidated Financial Statements and Notes (Item 1)
Balance Sheets (unaudited)			56
Statements of Income (unaudited)			57
Statements of Changes in Equity (unaudited)			58
Statements of Cash Flows (unaudited)			59
Notes to Condensed Consolidated Financial Statements (unaudited)			60

Part II. Other Information
Legal Proceedings (Item 1)			114
Risk Factors (Item 1A)			114
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			114
Exhibits (Item 6)			114
Signatures			115
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 Vantiv, LLC, formerly Fifth Third Processing Solutions, LLC 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

ATM: Automated Teller Machine

BOLI: Bank Owned Life Insurance

bp: Basis point(s)

CDC: Fifth Third Community Development Corporation

C&I: Commercial and Industrial

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

GAAP: Generally Accepted Accounting Principles

GNMA: Government National Mortgage Association

GSE: Government Sponsored Enterprise

IFRS: International Financial Reporting Standards

IPO: Initial Public Offering

IRC: Internal Revenue Code

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

NM: Not Meaningful

OCI: Other Comprehensive Income

OREO: Other Real Estate Owned

OTTI: Other-Than-Temporary Impairment

PMI: Private Mortgage Insurance

SEC: United States Securities and Exchange Commission

SCAP: Supervisory Capital Assessment Program

TARP: Troubled Asset Relief Program

TBA: To Be Announced

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							For the nine months
	ended September 30,							ended September 30,
($ in millions, except per share data)	2011		2010		% Change			2011		2010		% Change
Income Statement Data
Net interest income^(a)	$	902		916		(2	)	$	2,655		2,703		(2	)
Noninterest income		665		827		(20	)		1,905		2,074		(8	)
Total revenue^(a)		1,567		1,743		(10	)		4,560		4,777		(5	)
Provision for loan and lease losses		87		457		(81	)		368		1,372		(73	)
Noninterest expense		946		979		(3	)		2,765		2,869		(4	)
Net income attributable to Bancorp		381		238		60			983		420		134
Net income available to common shareholders		373		175		112			789		233		239

Common Share Data
Earnings per share, basic	$	0.41		0.22		86		$	0.87		0.29		200
Earnings per share, diluted		0.40		0.22		82			0.86		0.29		197
Cash dividends per common share		0.08		0.01		700			0.20		0.03		567
Book value per share		13.73		12.86		7			13.73		12.86		7
Market value per share		10.10		12.03		(16	)		10.10		12.03		(16	)

Financial Ratios (%)
Return on assets		1.34		0.84		60			1.18		0.50		136
Return on average common equity		11.9		6.8		75			8.8		3.1		184
Return on average tangible common equity^(b)		14.9		9.4		59			11.3		4.5		151
Average equity as a percent of average assets		11.33		12.38		(8	)		11.41		12.12		(6	)
Tangible common equity^(b)		8.63		6.70		29			8.63		6.70		29
Net interest margin^(a)		3.65		3.70		(1	)		3.66		3.63		1
Efficiency^(a)		60.4		56.2		7			60.6		60.1		1

Credit Quality
Net losses charged off	$	262		956		(73	)	$	933		1,972		(52	)
Net losses charged off as a percent of average loans and leases		1.32		4.95		(73	)		1.60		3.41		(53	)
ALLL as a percent of loans and leases		3.08		4.20		(27	)		3.08		4.20		(27	)
Allowance for credit losses as a percent of loans and leases^(c)		3.32		4.51		(26	)		3.32		4.51		(26	)
Nonperforming assets as a percent of loans, leases and other assets, including other real estate owned^(d)		2.44		2.72		(10	)		2.44		2.72		(10	)

Average Balances
Loans and leases, including held for sale	$	80,013		78,854		1		$	79,517		79,262		—
Total securities and other short-term investments		18,142		19,309		(6	)		17,545		20,248		(13	)
Total assets		113,295		111,854		1			111,789		112,628		(1	)
Transaction deposits^(e)		72,214		64,941		11			71,302		64,887		10
Core deposits^(f)		78,222		75,202		4			78,000		76,099		2
Wholesale funding^(g)		17,932		19,236		(7	)		16,936		19,473		(13	)
Bancorp shareholders’ equity		12,841		13,852		(7	)		12,752		13,646		(7	)

Regulatory Capital Ratios (%)
Tier I capital		11.96		13.85		(14	)		11.96		13.85		(14	)
Total risk-based capital		16.25		18.28		(11	)		16.25		18.28		(11	)
Tier I leverage		11.08		12.54		(12	)		11.08		12.54		(12	)
Tier I common equity^(b)		9.33		7.34		27			9.33		7.34		27

(a)

Amounts presented on an FTE basis. The FTE adjustment for the three months ended September 30, 2011 and 2010 was $4 and for the nine months ended September 30, 2011 and 2010 was $14 and $13, respectively.

(b)

The return on average tangible common 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 $100,000 and over, other deposits, federal funds purchased, short-term borrowings and long-term debt.

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

OVERVIEW

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At September 30, 2011, the Bancorp had $115 billion in assets, operated 15 affiliates with 1,314 full-service Banking Centers, including 103 Bank Mart^® locations open seven days a week inside select grocery stores, and 2,437 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 Vantiv, LLC, formerly 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 September 30, 2011, net interest income, on an FTE basis, and noninterest income provided 58% and 42% of total revenue, respectively. The Bancorp derives the majority of its revenues within the 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 mortgage banking net revenue, service charges on deposits, corporate banking 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.

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, enacts new limitations on proprietary trading, broadens the scope of derivative instruments subject to regulation, requires on-going stress tests and the submission of annual capital plans for certain organizations and requires changes to regulatory capital ratios . This act also calls for federal regulatory agencies to 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.

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

Earnings Summary

The Bancorp’s net income available to common shareholders for the third quarter of 2011 was $373 million, net of $8 million in preferred stock dividends or, $0.40 per diluted share. For the third quarter of 2010, the Bancorp’s net income available to common shareholders was $175 million, net of $63 million in preferred stock dividends, or $0.22 per diluted share. The Bancorp’s net income available to common shareholders for the nine months ended September 30, 2011 was $789 million, net of $194 million in preferred stock dividends, or $0.86 per diluted share. The preferred stock dividends for the nine months ended September 30, 2011 included $153 million in discount accretion resulting from the Bancorp’s repurchase of Series F preferred stock. For the nine months ended September 30, 2010, the Bancorp’s net income available to common shareholders was $233 million, net of $187 million in preferred stock dividends, or $0.29 per diluted share.

Net interest income (FTE) decreased two percent in the third quarter of 2011 to $902 million, compared to $916 million in the same period last year. The decrease from the third quarter of 2010 was primarily due to a 37 bp decrease in the average yield on loans and leases from the third quarter of 2010 partially offset by a 27 bp decrease in the average rate paid on interest-bearing liabilities primarily driven by a continued mix shift from higher cost term deposits to lower cost core deposits, coupled with a three percent decrease in average interest-bearing liabilities. Net interest income (FTE) was $2.7 billion for the nine months ended September 30, 2011 and 2010. Net interest income for the nine months ended September 30, 2011 compared to the same period in the prior year was impacted by a 20 bp decrease in average yield on average interest earning assets and a $2.4 billion decrease in average interest bearing assets offset by 26 bp decrease in the average rate paid on interest bearing liabilities and a $3.9 billion decrease in average interest bearing liabilities. Net interest margin was 3.65% and 3.66% for the three and nine months ended September 30, 2011, respectively, compared to 3.70% and 3.63% for the same periods in the prior year.

Noninterest income decreased 20% to $665 million in the third quarter of 2011 compared to the same period last year. Noninterest income decreased eight percent to $1.9 billion for the nine months ended September 30, 2011 compared to the same period in the prior year. The decrease from both periods in the prior year was primarily the result of $152 million litigation settlement related to one of the Bancorp’s BOLI policies during the third quarter of 2010. Additionally, mortgage banking net revenue decreased $54 million from the third quarter of 2010 and $56 million from the nine months ended September 30, 2010 due to a decrease in origination fees and gains on loan sales.

Noninterest expense decreased three percent to $946 million in the third quarter of 2011 and decreased four percent to $2.8 billion for the nine months ended September 30, 2011 compared to the same periods in the prior year. The decrease from the third quarter of 2010 and the nine months ended September 30, 2010 was primarily due to a decrease of $25 million and $58 million, respectively, in the provision for representation and warranty claims related to residential mortgage loans sold to third parties; a decrease of $26 million and $21 million, respectively, in professional services fees primarily driven by the litigation settlement related to the previously mentioned settlement of one of the Bancorp’s BOLI policies during the third quarter of 2010 and a decrease of $5 million and $38 million, respectively, in FDIC insurance and other taxes. Partially offsetting this activity was $27 million of expenses associated with the termination of two cash flow hedging transactions during the third quarter of 2011.

Credit Summary

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 81% to $87 million and 73% to $368 million for the three and nine months ended September 30, 2011 compared to $457 million and $1.4 billion, respectively, for the same periods in 2010. In addition, net charge-offs as a percent of average loans and leases decreased to 1.32% during the third quarter of 2011 compared to 4.95% during the third quarter of 2010 and decreased to 1.60% for the nine months ended September 30, 2011 compared to 3.41% for the same period in the prior year. At September 30, 2011, nonperforming assets as a percent of loans, leases and other assets, including OREO (excluding nonaccrual loans held for sale) decreased to 2.44%, compared to 2.79% at December 31, 2010 and 2.72% at September 30, 2010. For further discussion on credit quality, see the Credit Risk Management section.

Capital Summary

The Bancorp’s capital ratios exceed the “well-capitalized” guidelines as defined by the Board of Governors of the Federal Reserve System. As of September 30, 2011, the Tier I capital ratio was 11.96%, the Tier I leverage ratio was 11.08% and the total risk-based capital ratio was 16.25%. For additional information on the Bancorp’s capital ratios, see the Capital Management section.

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

NON-GAAP FINANCIAL MEASURES

The Bancorp considers various measures when evaluating capital utilization and adequacy, including the return on average tangible common equity ratio, 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. These ratios are not formally defined by U.S. GAAP or codified in the federal banking regulations and, therefore, are 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.

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

The following table reconciles non-GAAP financial measures to U.S. GAAP as of or for the three months ended:

TABLE 2: Non-GAAP Financial Measures


	September 30, 2011			December 31, 2010			September 30, 2010
As of ($ in millions)	September 30, 2011			December 31, 2010			September 30, 2010
Net income available to common shareholders (U.S. GAAP)	$	373			270			175
Add: Intangible amortization, net of tax		3			7			7

Tangible net income available to common shareholders		376			277			182
Tangible net income available to common shareholders (annualized) (1)		1,492			1,099			722

Average Bancorp shareholders’ equity (U.S. GAAP)		12,841			14,007			13,852
Less: Average preferred stock		(398	)		(3,648	)		(3,637	)
Average goodwill		(2,417	)		(2,417	)		(2,417	)
Average intangible assets		(47	)		(67	)		(78	)

Average tangible common equity (2)		9,979			7,875			7,720

Total Bancorp shareholders’ equity (U.S. GAAP)	$	13,029			14,051			13,884
Less: Preferred stock		(398	)		(3,654	)		(3,642	)
Goodwill		(2,417	)		(2,417	)		(2,417	)
Intangible assets		(45	)		(62	)		(72	)

Tangible common equity, including unrealized gains / losses		10,169			7,918			7,753
Less: Accumulated other comprehensive income		(542	)		(314	)		(432	)

Tangible common equity, excluding unrealized gains / losses (3)		9,627			7,604			7,321
Add: Preferred stock		398			3,654			3,642

Tangible equity (4)		10,025			11,258			10,963

Total assets (U.S. GAAP)	$	114,905			111,007			112,322
Less: Goodwill		(2,417	)		(2,417	)		(2,417	)
Intangible assets		(45	)		(62	)		(72	)
Accumulated other comprehensive income, before tax		(834	)		(483	)		(665	)

Tangible assets, excluding unrealized gains / losses (5)	$	111,609			108,045			109,168

Total Bancorp shareholders’ equity (U.S. GAAP)	$	13,029			14,051			13,884
Less: Goodwill and certain other intangibles		(2,514	)		(2,546	)		(2,525	)
Accumulated other comprehensive income		(542	)		(314	)		(432	)
Add: Qualifying trust preferred securities		2,273			2,763			2,763
Other		20			11			8

Tier I capital		12,266			13,965			13,698
Less: Preferred stock		(398	)		(3,654	)		(3,642	)
Qualifying trust preferred securities		(2,273	)		(2,763	)		(2,763	)
Qualified noncontrolling interest in consolidated subsidiaries		(30	)		(30	)		(30	)

Tier I common equity (6)	$	9,565			7,518			7,263

Risk-weighted assets (7) ^(a)	$	102,562			100,561			98,904

Ratios:
Return on average tangible common equity (1) / (2)		14.95	%		13.95			9.35
Tangible equity (4) / (5)		8.98	%		10.42			10.04
Tangible common equity (3) / (5)		8.63	%		7.04			6.70
Tier I common equity (6) / (7)		9.33	%		7.48			7.34

(a)

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

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 nine months ended September 30, 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 of deposit $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.

Tables 3 and 4 present the components of net interest income, net interest margin and net interest rate spread for the three and nine months ended September 30, 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 $902 million for the third quarter of 2011, a decrease of $14 million from the third quarter of 2010. Net interest income was $2.7 billion for the nine months ended September 30, 2011 a decrease of $48 million from the nine months ended September 30, 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 $9 million and $32 million during the three and nine months ended September 30, 2011, respectively, compared to $14 million and $52 million during the three and nine months ended September 30, 2010, respectively. The original purchase accounting discount reflected 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 $5 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 third quarter of 2010 and $28 million from the nine months ended September 30, 2010.

For the three and nine months ended September 30, 2011, net interest income was adversely impacted by lower yields on both the commercial and consumer loan portfolios partially offset by an increase in average consumer loans and a decrease in interest expense compared to the three and nine months ended September 30, 2010, respectively. Yields on the commercial and consumer loan portfolio have decreased throughout 2011 as the result of low interest rates during the year. Average consumer loans increased primarily as the result of increases in average residential mortgage loans and automobile loans partially offset by a decrease in home equity loans compared to the three and nine months ended September 30, 2010. The decreases in interest expense was primarily the result of a $2.6 billion and $3.9 billion decrease in average interest bearing liabilities from the three and nine months ended September 30, 2010, respectively, coupled with a continued mix shift to lower cost core deposits as well as the benefit of lower rates offered on savings account balances and other time deposits. The decrease in average interest bearing liabilities was the result of migration from certificates of deposit into demand accounts due to low interest rates during 2011. For the three months ended September 30, 2011, the net interest rate spread decreased to 3.42% from 3.44% primarily due to a 29 bp decrease on the yields on average total assets partially offset by a 27 bp decrease on the rates for average interest bearing liabilities. For the nine months ended September 30, 2011, the net interest rate spread increased to 3.41% from 3.35% primarily due to a 26 bp decrease in rates on interest bearing liabilities partially offset by a 20 bp decrease in yield on average interest earnings assets.

Net interest margin decreased to 3.65% for the third quarter of 2011 from 3.70% for the third quarter of 2010. Net interest margin increased to 3.66% for the nine months ended September 30, 2011 compared to 3.63% for the nine months ended September 30, 2010. Net interest margin was impacted by the amortization and accretion of premiums and discounts on acquired loans and deposits that resulted in a increases of 3 bp and 4 bp during the three and nine months ended September 30, 2011, respectively, compared to a 5 bp and 6 bp increase during the three and nine months ended September 30, 2010, respectively. Exclusive of these amounts, net interest margin decreased 3 bp for the third quarter of 2011 and increased 5 bp for the nine months ended September 30, 2011 compared to the same periods in the prior year. The decrease from the third quarter of 2010 was primarily the result of the previously mentioned decrease on the yield of average total loans and leases partially offset by the mix shift to lower cost core deposits and an increase in free funding balances. The increase from the nine months ended September 30, 2010 was primarily the result of the mix shift to lower cost core deposits during 2011, an increase in free funding balances and a decrease in average interest earnings assets partially offset by the previously mentioned decrease on the yield of average loans and leases.

Total average interest-earning assets for the third quarter of 2011 were relatively flat compared to the third quarter of 2010 as a $1.2 billion decrease in other short-term investments was offset by a $1.2 billion increase in average loans and leases. Total average interest-earning assets decreased two percent for the nine months ended September 30, 2011 compared to the same period in the prior year primarily as the result of a 13% decrease in the average investment portfolio and a two percent decrease in average commercial loans; partially offset by a three percent increase in average consumer loans.

Interest income from loans and leases decreased $62 million, or six percent, compared to the third quarter of 2010 and $169 million, or six percent, compared to the nine months ended September 30, 2010. The decrease from the third quarter of 2010 and nine months ended September 30, 2010 was primarily the result of a 37 bp and 30 bp decrease, respectively, in average loan yields partially offset by increases

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

of nine percent and seven percent, respectively, in commercial and industrial loans and a three percent increase in average consumer loans compared to both periods. 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 $57 million and $149 million compared to the three and nine months ended September 30, 2010, respectively. Interest income from investment securities and short-term investments decreased $9 million, or five percent, compared to the third quarter of 2010 and $55 million, or 11%, compared to the nine months ended September 30, 2010. The decrease from the third quarter of 2010 was primarily due to an 18 bp decrease in the yield on taxable securities and a six percent decrease in the average balance of investment securities. The decrease from the nine months ended September 30, 2010 was primarily due to a six percent decrease in the average balance of taxable securities and a 16 bp decrease in the yield on those securities.

Average core deposits increased $3.0 billion, or four percent, compared to the third quarter of 2010 and increased $1.9 billion, or two percent, compared to the nine months ended September 30, 2010. The increase from both periods was primarily due to an increase in average demand deposits and average savings deposits partially offset by a decrease in average time deposits; the third quarter of 2011 also had an increase in average interest checking deposits compared to the third quarter of 2010. The cost of average core deposits decreased to 33 bp and 39 bp for the three and nine months ended September 30, 2011, respectively, from 59 bp and 66 bp from the same respective periods in the prior year. This decrease was primarily the result of a mix shift to lower cost core deposits combined with a 23 bp and 24 bp decrease in rates on average savings deposits and a 30 bp and 35 bp decrease in rates on average time deposits compared to the three and nine months ended September 30, 2010, respectively.

Interest expense on wholesale funding for the third quarter of 2011 decreased $12 million, or 12%, compared to the third quarter of 2010, primarily as a result of a $1.3 billion decrease in the average balance and an 11 bp decrease in the rate. During the nine months ended September 30, 2011, interest expense on wholesale funding decreased $31 million, or 10%, compared to the nine months ended September 30, 2010 primarily as the result of a $2.5 billion decrease in the average balance partially offset by a 9 bp increase in rate. Refer to the Borrowings section of MD&A for additional information on the Bancorp’s change in average long-term debt. During the three and nine months ended September 30, 2011, wholesale funding represented 25% and 23%, respectively, of interest-bearing liabilities compared to 26% during the three and nine months ended September 30, 2010. 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	September 30, 2011								September 30, 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	$	28,824		$	312		4.29	%	$	26,348		$	319		4.81	%	$	29			(36	)		(7	)
Commercial mortgage		10,140			101		3.94			11,462			115		3.97			(13	)		(1	)		(14	)
Commercial construction		1,777			14		3.02			2,955			23		3.06			(9	)		—			(9	)
Commercial leases		3,300			32		3.87			3,257			35		4.34			1			(4	)		(3	)

Subtotal – commercial		44,041			459		4.13			44,022			492		4.44			8			(41	)		(33	)
Residential mortgage loans		11,224			126		4.47			9,897			120		4.81			15			(9	)		6
Home equity		10,985			108		3.89			11,897			120		3.99			(9	)		(3	)		(12	)
Automobile loans		11,445			131		4.52			10,517			151		5.71			14			(34	)		(20	)
Credit card		1,864			45		9.49			1,838			50		10.70			1			(6	)		(5	)
Other consumer loans/leases		454			34		30.76			683			32		18.59			(14	)		16			2

Subtotal – consumer		35,972			444		4.90			34,832			473		5.38			7			(36	)		(29	)

Total loans and leases		80,013			903		4.48			78,854			965		4.85			15			(77	)		(62	)
Securities:
Taxable		15,790			154		3.88			15,580			159		4.06			2			(7	)		(5	)
Exempt from income taxes^(b)		64			1		5.84			273			3		4.05			(3	)		1			(2	)
Other short-term investments		2,288			1		0.25			3,456			3		0.36			(1	)		(1	)		(2	)

Total interest-earning assets		98,155			1,059		4.28			98,163			1,130		4.57			13			(84	)		(71	)
Cash and due from banks		2,362								2,283
Other assets		15,381								15,088
Allowance for loan and lease losses		(2,603	)							(3,680	)

Total assets	$	113,295							$	111,854

Liabilities and Equity
Interest-bearing liabilities:
Interest checking	$	18,322		$	12		0.25	%	$	17,142		$	12		0.29	%	$	1			(1	)		—
Savings		21,747			14		0.25			19,905			24		0.48			2			(12	)		(10	)
Money market		5,213			4		0.27			4,940			5		0.39			—			(1	)		(1	)
Foreign office deposits		3,255			2		0.26			3,592			3		0.38			—			(1	)		(1	)
Other time deposits		6,008			34		2.27			10,261			67		2.57			(26	)		(7	)		(33	)
Certificates - $100,000 and over		3,376			18		2.09			6,096			30		1.95			(14	)		2			(12	)
Other deposits		7			—		0.03			4			—		0.09			—			—			—
Federal funds purchased		376			—		0.10			302			—		0.17			—			—			—
Other short-term borrowings		4,033			1		0.10			1,880			1		0.21			1			(1	)		—
Long-term debt		10,136			72		2.85			10,954			72		2.61			(6	)		6			—

Total interest-bearing liabilities		72,473			157		0.86			75,076			214		1.13			(42	)		(15	)		(57	)
Demand deposits		23,677								19,362
Other liabilities		4,275								3,544

Total liabilities		100,425								97,982
Total equity		12,870								13,872

Total liabilities and equity	$	113,295							$	111,854

Net interest income				$	902							$	916				$	55			(69	)		(14	)
Net interest margin							3.65	%							3.70	%
Net interest rate spread							3.42								3.44
Interest-bearing liabilities to interest-earning assets							73.83								76.48

(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 $4 for the three months ended September 30, 2011 and 2010.

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

TABLE 4: Condensed Average Balance Sheets and Analysis of Net Interest Income


For the nine months ended	September 30, 2011								September 30, 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	$	28,071		$	916		4.36	%	$	26,276		$	928		4.72	%	$	61			(73	)		(12	)
Commercial mortgage		10,480			315		4.02			11,689			358		4.09			(37	)		(6	)		(43	)
Commercial construction		1,936			44		3.06			3,328			76		3.04			(32	)		—			(32	)
Commercial leases		3,337			101		4.04			3,353			112		4.46			(1	)		(10	)		(11	)

Subtotal – commercial		43,824			1,376		4.20			44,646			1,474		4.41			(9	)		(89	)		(98	)
Residential mortgage loans		10,873			371		4.56			9,590			352		4.92			45			(26	)		19
Home equity		11,167			327		3.92			12,111			363		4.01			(27	)		(9	)		(36	)
Automobile loans		11,236			404		4.80			10,292			460		5.98			40			(96	)		(56	)
Credit card		1,850			137		9.94			1,879			152		10.79			(2	)		(13	)		(15	)
Other consumer loans/leases		567			98		23.01			744			81		14.54			(22	)		39			17

Subtotal – consumer		35,693			1,337		5.01			34,616			1,408		5.44			34			(105	)		(71	)

Total loans and leases		79,517			2,713		4.56			79,262			2,882		4.86			25			(194	)		(169	)
Securities:
Taxable		15,356			452		3.94			16,285			500		4.10			(29	)		(19	)		(48	)
Exempt from income taxes^(b)		119			5		5.41			333			10		3.82			(7	)		2			(5	)
Other short-term investments		2,070			4		0.25			3,630			6		0.25			(2	)		—			(2	)

Total interest-earning assets		97,062			3,174		4.37			99,510			3,398		4.57			(13	)		(211	)		(224	)
Cash and due from banks		2,329								2,231
Other assets		15,194								14,636
Allowance for loan and lease losses		(2,796	)							(3,749	)

Total assets	$	111,789							$	112,628

Liabilities and Equity
Interest-bearing liabilities:
Interest checking	$	18,520		$	37		0.27	%	$	18,433		$	40		0.29	%	$	—			(3	)		(3	)
Savings		21,631			54		0.34			19,279			84		0.58			8			(38	)		(30	)
Money market		5,120			11		0.29			4,748			15		0.42			1			(5	)		(4	)
Foreign office deposits		3,546			8		0.29			3,228			9		0.36			1			(2	)		(1	)
Other time deposits		6,698			118		2.35			11,212			225		2.68			(82	)		(25	)		(107	)
Certificates - $100,000 and over		3,849			59		2.04			6,496			101		2.08			(40	)		(2	)		(42	)
Other deposits		3			—		0.03			6			—		0.06			—			—			—
Federal funds purchased		344			—		0.12			262			—		0.16			—			—			—
Other short-term borrowings		2,434			2		0.14			1,604			3		0.22			1			(2	)		(1	)
Long-term debt		10,304			230		2.98			11,105			218		2.63			(16	)		28			12

Total interest-bearing liabilities		72,449			519		0.96			76,373			695		1.22			(127	)		(49	)		(176	)
Demand deposits		22,485								19,199
Other liabilities		4,074								3,404

Total liabilities		99,008								98,976
Total equity		12,781								13,652

Total liabilities and equity	$	111,789							$	112,628

Net interest income				$	2,655							$	2,703				$	114			(162	)		(48	)
Net interest margin							3.66	%							3.63	%
Net interest rate spread							3.41								3.35
Interest-bearing liabilities to interest-earning assets							74.64								76.75

(a)

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

(b)

The FTE adjustments included in the above table are $14 for the nine months ended September 30, 2011 and $13 for the nine months ended September 30, 2010.

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 $87 million and $368 million for the three and nine months ended September 30, 2011, respectively, compared to $457 million and $1.4 billion during the comparable periods in 2010. The decrease in provision expense compared to the same prior year periods was due to decreases in nonperforming loans and leases, improved delinquency metrics in commercial and consumer loans and leases, and improvement in underlying loss trends. As of September 30, 2011, the ALLL as a percent of loans and leases decreased to 3.08%, from 4.20% at September 30, 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 $162 million, or 20%, for the third quarter of 2011 compared to the third quarter of 2010 and decreased $169 million, or eight percent, for the nine months ended September 30, 2011 compared to the same period in the prior year. The components of noninterest income for the three and nine months ended September 30, 2011 and 2010 are as follows:

TABLE 5: Noninterest Income


	For the three months							For the nine months
	ended September 30,				Percent			ended September 30,				Percent
($ in millions)	2011		2010		Change			2011		2010		Change
Mortgage banking net revenue	$	178		232		(23	)	$	442		498		(11	)
Service charges on deposits		134		143		(6	)		384		435		(12	)
Investment advisory revenue		92		90		2			285		267		7
Corporate banking revenue		87		86		1			268		260		3
Card and processing revenue		78		77		2			248		235		6
Other noninterest income		64		195		(67	)		226		354		(36	)
Securities gains, net		26		4		550			40		25		60
Securities gains, net, non-qualifying hedges on mortgage servicing rights		6		—		NM			12		—		NM

Total noninterest income	$	665		827		(20	)	$	1,905		2,074		(8	)

NM: Not meaningful

Mortgage banking net revenue decreased $54 million during the third quarter of 2011 compared to third quarter of 2010 and decreased $56 million during the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. The components of mortgage banking net revenue are as follows:

TABLE 6: Components of Mortgage Banking Net Revenue


	For the three months ended September 30,						For the nine months ended September 30,
($ in millions)	2011			2010			2011			2010
Origination fees and gains on loan sales	$	119			173		$	245			332
Net servicing revenue:
Servicing fees		59			56			175			163
Servicing rights amortization		(34	)		(43	)		(88	)		(91	)
Net valuation adjustments on servicing rights and free-standing derivatives entered into to economically hedge MSR		34			46			110			94

Net servicing revenue		59			59			197			166

Mortgage banking net revenue	$	178			232		$	442			498

Origination fees and gains on loan sales decreased $54 million and $87 million for the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010. The decrease from both periods in the prior year was primarily the result of a 21% and 34% decrease in margins on sold residential mortgage loans due to a decrease in interest rates and a 20% and nine percent decrease in residential mortgage loan originations compared to the three and nine months ended September 30, 2010, respectively. Residential mortgage loan originations decreased to $4.5 billion during the third quarter of 2011 compared to $5.6 billion during the third quarter of 2010 and decreased to $11.6 billion during the nine months ended September 30, 2011 from $12.8 billion during the nine months

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

ended September 30, 2010. The decrease in originations from both periods is primarily due to a decrease in refinancing activity as many customers have taken advantage of the low interest rate environment in prior periods.

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 was flat for the third quarter of 2011 compared to the third quarter of 2010 as an increase in servicing fees and a decrease in servicing rights amortization was offset by a decrease in net valuation adjustments. Net servicing revenue increased $31 million for the nine months ended September 30, 2011 compared to the same period in 2010 driven primarily by an increase in servicing fees and an increase in net valuation adjustments. Servicing fees increased $3 million from third quarter of 2010 and $12 million from the nine months ended September 30, 2010 as a result of an increase in the size of the Bancorp’s servicing portfolio. The Bancorp’s total residential loans serviced as of September 30, 2011, December 31, 2010, and September 30, 2010 was $68.4 billion, $63.2 billion, and $62.4 billion, respectively, with $56.5 billion, $54.2 billion, and $52.4 billion, respectively, of residential mortgage loans serviced for others. The net valuation adjustment of $34 million during the third quarter of 2011 included $235 million in gains from derivatives economically hedging the MSRs partially offset by $201 million in temporary impairment on the MSR portfolio. The net valuation adjustment of $110 million for the nine months ended September 30, 2011 included $338 million in gains from derivatives economically hedging the MSR portfolio partially offset by $228 million of temporary impairment on the MSR portfolio. The gain in the net valuation adjustment is reflective of refinancing activity in recent years that has contributed to prepayments being less sensitive to lower mortgage rates due to customers taking advantage of lower rates in those earlier periods as well as the impact of tighter underwriting standards. Additionally, the net MSR/hedge position has benefited from the positive carry of the hedge and the widening spread between mortgage and swap rates.

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

In addition to the derivative positions used to economically hedge the MSR portfolio, the Bancorp acquires various securities as a component of its non-qualifying hedging strategy. Net gains on sales of these securities were $6 million and $12 million for the three and nine months ended September 30, 2011. There were no sales of securities related to the Bancorp’s non-qualifying hedging strategy during the three and nine months ended September 30, 2010.

Service charges on deposits decreased $9 million and $51 million for the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010. Consumer deposit revenue decreased $10 million and $55 million for the three and nine months ended September 30, 2011, respectively, compared to the same periods in the prior year primarily due to the impact of Regulation E and new overdraft policies that 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 FRB 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 increased $1 million and $4 million for the three and nine months ended September 30, 2011, respectively, compared to the same periods in the prior year. The increase from both periods in the prior year was primarily due to an increase in commercial account relationships and a decrease in earnings credits paid on customer balances as the result of a decrease in the crediting rate applied to balances. Commercial customers receive earnings credits to offset the fees charged for banking services on their deposit accounts such as account maintenance, lockbox, ACH transactions, wire transfers and other ancillary corporate treasury management services. Earnings credits are based on the customer’s average balance in qualifying deposits multiplied by the crediting rate. Qualifying deposits include demand deposits and interest-bearing checking accounts. The Bancorp has a standard crediting rate that is adjusted as necessary based on the competitive market conditions and changes in short-term interest rates.

Investment advisory revenue increased $2 million and $18 million for the three and nine months ended September 30, 2011 compared to the three and nine months ended September 30, 2010. The increases from both periods in the prior year were primarily due to improved market performance and sales force expansion that resulted in increased brokerage activity; the nine months ended September 30, 2011 also benefited from an increase in assets under care. As of September 30, 2011, the Bancorp had approximately $273 billion in total assets under care and managed $23 billion in assets for individuals, corporations and not-for-profit organizations.

Corporate banking revenue was relatively flat for the third quarter of 2011 compared to the third quarter of 2010 and increased $8 million for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. The increase compared to the nine months ended September 30, 2010 was primarily the result of increases in business lending fees, derivative sales, lease remarketing fees and syndication fees partially offset by decreases in institutional sales and international income.

Card and processing revenue for the third quarter of 2011 was relatively flat compared to the third quarter of 2010 and increased $13 million for the nine months ended September 30, 2011 compared to nine months ended September 30, 2010. Both comparative periods benefitted from an increase in revenue as the result of an increase in transaction volumes on debit and credit cards. This benefit was partially offset by an increase in costs associated with an increase in the redemption of points for cash based rewards.

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

The major components of other noninterest income are as follows:

TABLE 7: Components of Other Noninterest Income


	For the three months ended September 30,						For the nine months ended September 30,
($ in millions)	2011			2010			2011			2010
Operating lease income	$	14			15		$	44			46
Cardholder fees		11			8			29			27
BOLI income		9			165			30			188
Consumer loan and lease fees		8			9			23			24
Banking center income		7			6			21			16
Insurance income		7			10			20			26
TSA revenue		3			13			19			38
Net gain (loss) on loan sales		3			(1	)		28			30
Net loss on sale of OREO		(21	)		(29	)		(49	)		(59	)
Other		23			(1	)		61			18

Total other noninterest income	$	64			195		$	226			354

Other noninterest income decreased $131 million in the third quarter of 2011 compared to the third quarter of 2010 and decreased $128 million, for the nine months ended September 30, 2011 compared to the same period in the prior year. The decrease compared to both periods was primarily due to a $152 million litigation settlement related to one of the Bancorp’s BOLI policies in the third quarter of 2010. Excluding the impact of the litigation settlement, other noninterest income increased $21 million in the third quarter of 2011 and $24 million for the nine months ended September 30, 2011 compared to the same periods in the prior year. The increase from the third quarter in the prior year was primarily due to a $24 million increase in the “other” caption partially offset by a $10 million decrease in TSA revenue. The increase in the “other” caption included: a $10 million increase in equity method income from the Bancorp’s ownership interest in Vantiv, LLC; a $10 million increase in the valuation of warrants and put options issued as part of the Processing Business sale in 2009; a $9 million increase from venture capital investments partially offset by a $12 million increase in losses on the swap associated with the sale of Visa, Inc. Class B shares. The increase from the nine months ended September 30, 2010 was primarily due to a $43 million increase in the “other” caption partially offset by a $19 million decrease in revenue from TSA revenue. The increase in the “other” caption included: a $31 million increase in the previously mentioned valuation of warrants and put options, a $14 million increase from venture capital investments and a $14 million increase in equity method income from the Bancorp’s ownership interest in Vantiv, LLC partially offset by a $16 million increase in losses recognized on the swap associated with the sale of Visa, Inc. Class B shares.

As part of the Processing Business Sale in 2009, the Bancorp entered into a TSA. Servicing agreements with Vantiv, LLC resulted in the Bancorp recognizing approximately $3 million and $19 million in revenue during the three and nine months ended September 30, 2011, respectively, that were offset with expense from the servicing agreements recorded in noninterest expense.

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

Noninterest Expense

Total noninterest expense decreased $33 million, or three percent for the third quarter of 2011 compared to the third quarter of 2010 and decreased $104 million, or four percent, for the nine months ended September 30, 2011 compared to the nine months ended September 30, 2010. The decrease from both periods in the prior year was primarily due to a decrease in other noninterest expense partially offset by an increase in card and processing expense. For the nine months ended September 30, 2011 this decrease was partially offset by an increase in total personnel costs. The major components of noninterest expense are detailed in the following table:

TABLE 8: Noninterest Expense


	For the three months ended September 30,				Percent Change			For the nine months ended September 30,				Percent Change
($ in millions)	2011		2010		Percent Change			2011		2010		Percent Change
Salaries, wages and incentives	$	369		360		3		$	1,085		1,046		4
Employee benefits		70		82		(15	)		246		241		2
Net occupancy expense		75		72		3			226		222		2
Technology and communications		48		48		—			140		138		2
Card and processing expense		34		26		33			92		82		12
Equipment expense		28		30		(6	)		85		91		(6	)
Other noninterest expense		322		361		(11	)		891		1,049		(15	)

Total noninterest expense	$	946		979		(3	)	$	2,765		2,869		(4	)

Total personnel costs (salaries, wages and incentives plus employee benefits) were relatively flat for the third quarter of 2011 compared to the third quarter of 2010 and increased three percent for the nine months ended September 30, 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 21,172 at September 30, 2011 compared to 20,667 at September 30, 2010.

Card and processing expense increased $8 million and $10 million from the third quarter of 2010 and nine months ended September 30, 2010, respectively. The increase from both periods in the prior year was primarily the result of growth in debit and credit card transaction volumes and an increase in debit and credit card reward redemptions.

The major components of other noninterest expense are as follows:

TABLE 9: Components of Other Noninterest Expense


	For the three months ended September 30,						For the nine months ended September 30,
($ in millions)	2011			2010			2011			2010
FDIC insurance and other taxes	$	50			55		$	152			190
Loan and lease		49			57			143			152
Losses and adjustments		38			66			89			160
Marketing		32			27			85			75
Affordable housing investments impairment		16			25			66			72
Travel		13			14			39			38
Professional service fees		12			38			39			60
Postal and courier		12			12			37			36
Operating lease		10			9			31			31
OREO		7			9			25			23
Recruitment and education		7			8			22			23
Insurance		6			6			18			31
Intangible asset amortization		5			10			18			33
Provision for unfunded commitments and letters of credit		(10	)		(23	)		(40	)		(20	)
Other		75			48			167			145

Total other noninterest expense	$	322			361		$	891			1,049

Total other noninterest expense decreased $39 million and $158 million, respectively, for the three and nine months ended September 30, 2011 compared to the same periods in the prior year. The decrease from both periods in the prior year was primarily due to decreases in the provision for representation and warranty claims, recorded in losses and adjustments; professional service fees and FDIC insurance and other taxes partially offset by expenses recorded in the “other” caption associated with the termination of two cash flow hedging transactions during the third quarter of 2011.

The provision for representation and warranty claims decreased $25 million and $58 million for the three and nine months ended September 30, 2011 compared to the same periods in the prior year primarily due to a decrease in demand requests during 2011. The decrease in professional service fees of $26 million and $21 million for the three and nine months ended September 30, 2011 compared to the same periods in the prior year was primarily the result of legal expenses incurred from the litigation settlement related to one of the Bancorp’s BOLI policies during the third quarter of 2010. FDIC insurance and other taxes decreased $5 million and $38 million, respectively, for the

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

three and nine months ended September 30, 2011 compared to the same periods in the prior year due primarily to the FDIC’s implementation of amended regulations that revised the Federal Deposit Insurance Act effective April 1, 2011. The amended regulations modified the definition of an institution’s deposit insurance assessment base from domestic deposits to quarterly average total assets less quarterly average tangible equity as well as modified the assessment rate calculation; additionally, the nine months ended September 30, 2010 included expenses due to the Bancorp’s participation in the FDIC’s TLGP transaction account guarantee program, which was exited during the first quarter of 2010. During the third quarter of 2011 the Bancorp incurred approximately $27 million of expenses on two cash flow hedge transactions that were terminated during the quarter. See Note 11 of the Notes to Condensed Consolidated Financial Statements for more information on the Bancorp’s hedging activity.

The provision for unfunded commitments and letters of credit was a benefit of $10 million and $40 million for the three and nine months ended September 30, 2011, respectively, and a benefit of $23 million and $20 million for the three and nine months ended September 30, 2010, respectively. The benefit recorded in each period reflects lower estimates of inherent losses resulting from a decrease in delinquent loans as credit trends showed signs of moderation during 2011.

TSA related expenses decreased to approximately $3 million and $19 million, respectively, for the three and nine months ended September 30, 2011 compared to $13 million and $38 million in the same periods in the prior year due to Vantiv’s transition to their own supporting systems.

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 60.4% and 60.6% for the three and nine months ended September 30, 2011 compared to 56.2% and 60.1% for the three and nine months ended September 30, 2010, respectively.

Applicable Income Taxes

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

TABLE 10: Applicable Income Taxes


	For the three months ended September 30,						For the nine months ended September 30,
($ in millions)	2011			2010			2011			2010
Income before income taxes	$	530			303			1,413			523
Applicable income tax expense		149			65			429			103
Effective tax rate		27.9	%		21.5	%		30.3	%		19.7	%

Applicable income tax expense 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 tax credits are associated with the Low-Income Housing Tax Credit program established under Section 42 of the IRC, the New Markets Tax Credit program established under Section 45D of the IRC, the Rehabilitation Investment Tax Credit program established under Section 47 of the IRC, and the Qualified Zone Academy Bond program established under Section 1397E of the IRC. The increase in the effective tax rate for the three and nine months ended September 30, 2011 from the three and nine months ended September 30, 2010 was primarily due to higher actual and forecasted pre-tax income in 2011. The effective tax rate for the nine months ended September 30, 2010 included a $24 million tax benefit resulting from the settlement of certain uncertain tax positions with the IRS during the first quarter of 2010.

Deductibility of Executive Compensation

Certain sections of the IRC 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.

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

BALANCE SHEET ANALYSIS

Loans and Leases

The Bancorp classifies its loans and leases based upon the primary purpose of the loan. Table 11 summarizes end of period loans and leases, including loans held for sale and Table 12 summarizes average total loans and leases, including loans held for sale.

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


	September 30, 2011				December 31, 2010				September 30, 2010
($ in millions)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Commercial:
Commercial and industrial loans	$	29,324		36	$	27,275		34	$	26,502		34
Commercial mortgage loans		10,435		13		10,992		14		11,333		14
Commercial construction loans		1,239		2		2,111		3		2,500		3
Commercial leases		3,368		4		3,378		4		3,304		4

Subtotal – commercial		44,366		55		43,756		55		43,639		55

Consumer:
Residential mortgage loans		11,878		15		10,857		14		9,989		13
Home equity		10,920		13		11,513		14		11,774		15
Automobile loans		11,593		14		10,983		14		10,738		14
Credit card		1,878		2		1,896		2		1,832		2
Other consumer loans and leases		421		1		702		1		770		1

Subtotal – consumer		36,690		45		35,951		45		35,103		45

Total loans and leases	$	81,056		100	$	79,707		100	$	78,742		100

Total portfolio loans and leases (excludes loans held for sale)	$	79,216			$	77,491			$	76,009

Total loans and leases, including loans held for sale, increased $1.3 billion, or two percent, from December 31, 2010, and increased $2.3 billion, or three percent, from September 30, 2010. The increase in total loans and leases from December 31, 2010 was the result of a $610 million increase in commercial loans and a $739 million increase in consumer loans. The increase in total loans and leases from September 30, 2010 was the result of a $727 million increase in commercial loans and a $1.6 billion increase in consumer loans.

Total commercial loans and leases increased $610 million, or one percent, from December 31, 2010. The increase in commercial loans and leases was primarily due to an increase in commercial and industrial loans partially offset by decreases in commercial mortgage loans and commercial construction loans. Commercial and industrial loans increased $2.0 billion, or eight percent, driven by an increase in new loan origination activity. Commercial mortgage loans decreased $557 million, or five percent, and commercial construction loans decreased $872 million, or 41% from December 31, 2010 as the Bancorp experienced continued run-off in these loan categories. The decrease is primarily due to management’s decision to suspend new homebuilder and developer lending in 2007 and non-owner occupied real estate lending in 2008 combined with reduced customer demand for owner-occupied commercial mortgage loans.

Total commercial loans and leases increased $727 million, or two percent, compared to September 30, 2010. The increase in commercial loans and leases was primarily due to an increase in commercial and industrial loans partially offset by a decrease in commercial mortgage loans and commercial construction loans. Commercial and industrial loans increased $2.8 billion, or 11%, compared to September 30, 2010, driven by an increase in new loan origination activity, partially offset by an $845 million decrease in loans originally issued to Vantiv, LLC, in conjunction with the Processing Business Sale. Vantiv, LLC, refinanced the original loan balance of $1.25 billion into a larger syndicated structure in connection with an acquisition in the fourth quarter of 2010. Commercial mortgage loans decreased $898 million, or eight percent, compared to September 30, 2010, due to continued tighter underwriting standards on commercial real estate loans implemented in an effort to limit exposure to commercial real estate. Commercial construction loans decreased $1.3 billion, or 50%, compared to September 30, 2010, primarily due to management’s strategy to suspend new lending on commercial non-owner occupied real estate beginning in 2008.

Total consumer loans and leases increased $739 million, or two percent, from December 31, 2010 primarily due to an increase in residential mortgage loans and automobile loans partially offset by a decrease in home equity loans and other consumer loans and leases. Residential mortgage loans increased $1.0 billion, or nine percent, compared to December 31, 2010, primarily due to management’s decision in the third quarter of 2010 to retain certain shorter term residential mortgage loans originated through the Bancorp’s retail branches. Automobile loans increased $610 million, or six percent, compared to December 31, 2010, due to strong loan origination volumes through consistent and competitive pricing, enhanced customer service with our dealership network and disciplined sales execution. Home equity loans decreased $593 million, or five percent, due to tighter underwriting standards implemented in prior quarters and decreased customer demand. Other consumer loans and leases, primarily made up of automobile leases as well as student loans designated as held for sale, decreased $281 million, or 40%, compared to December 31, 2010 due to a decline in new originations driven by tighter underwriting standards implemented in prior quarters. Credit card loans remained relatively flat from December 31, 2010.

Total consumer loans and leases increased $1.6 billion, or five percent, compared to September 30, 2010 primarily due to increases in residential mortgage loans and automobile loans, partially offset by decreases in home equity loans and other consumer loans and leases.

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

Residential mortgage loans increased $1.9 billion, or 19%, from September 30, 2010, primarily due to management’s decision in the third quarter of 2010 to retain certain shorter term residential mortgage loans originated through the Bancorp’s retail branches. Automobile loans increased $855 million, or eight percent, from September 30, 2010, due to the previously mentioned strategic focus on increasing automobile lending during 2010 and throughout 2011. Home equity loans decreased $854 million, or seven percent, compared to September 30, 2010 as a result of tighter underwriting standards and decreased customer demand. Other consumer loans and leases decreased $349 million, or 45%, compared to September 30, 2010 due to a decline in new originations driven by tighter underwriting standards.

TABLE 12: Components of Average Total Loans and Leases (includes held for sale)


	September 30, 2011				December 31, 2010				September 30, 2010
($ in millions)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Commercial:
Commercial and industrial loans	$	28,824		36	$	26,509		34	$	26,348		33
Commercial mortgage loans		10,140		13		11,276		14		11,462		15
Commercial construction loans		1,777		2		2,289		3		2,955		4
Commercial leases		3,300		4		3,314		4		3,257		4

Subtotal – commercial		44,041		55		43,388		55		44,022		56

Consumer:
Residential mortgage loans		11,224		14		10,693		13		9,897		13
Home equity		10,985		14		11,655		15		11,897		15
Automobile loans		11,445		14		10,825		14		10,517		13
Credit card		1,864		2		1,844		2		1,838		2
Other consumer loans and leases		454		1		743		1		683		1

Subtotal – consumer		35,972		45		35,760		45		34,832		44

Total average loans and leases	$	80,013		100	$	79,148		100	$	78,854		100

Total portfolio loans and leases (excludes loans held for sale)	$	78,620			$	76,236			$	76,617

Average total commercial loans and leases increased $653 million, or two percent, compared to December 31, 2010 and remained flat compared to September 30, 2010. The increase in average total commercial loans and leases from December 31, 2010 was driven by an increase in commercial and industrial loans, partially offset by a decrease in commercial mortgage loans and commercial construction loans. Commercial and industrial loans increased $2.3 billion, or nine percent, commercial mortgage loans decreased $1.1 billion, or 10%, and commercial construction loans decreased $512 million, or 22% due to the reasons previously discussed.

Average total consumer loans and leases were relatively flat compared to December 31, 2010 and increased $1.1 billion, or three percent, compared to September 30, 2010. The increase in average total consumer loans and leases from September 30, 2010 was driven by increases in average residential mortgage loans and average automobile loans, partially offset by decreases in average home equity loans and average other consumer loans and leases. Average residential mortgage loans increased $1.3 billion, or 13%, average automobile loan balances increased $928 million, or nine percent, average home equity loans decreased $912 million, or eight percent, and average other consumer loans and leases decreased $229 million, or 34%, from September 30, 2010 due to the reasons previously discussed.

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 September 30, 2011, total investment securities were $16.8 billion, compared to $16.1 billion at December 31, 2010 and $16.6 billion at September 30, 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.

For all periods presented, the Bancorp’s investment portfolio consisted primarily 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 $136 million of securities classified as below investment grade as of September 30, 2011, compared to $137 million as of December 31, 2010 and $140 million as of September 30, 2010.

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

TABLE 13: Components of Investment Securities


($ in millions)	September 30, 2011		December 31, 2010		September 30, 2010
Available-for-sale and other: (amortized cost basis)
U.S. Treasury and Government agencies	$	201		225		300
U.S. Government sponsored agencies		1,808		1,564		1,691
Obligations of states and political subdivisions		101		170		191
Agency mortgage-backed securities		10,413		10,570		10,878
Other bonds, notes and debentures		1,567		1,338		995
Other securities		1,337		1,052		1,253

Total available-for-sale and other securities	$	15,427		14,919		15,308

Held-to-maturity: (amortized cost basis)
Obligations of states and political subdivisions	$	335		348		349
Other bonds, notes and debentures		2		5		5

Total held-to-maturity	$	337		353		354

Trading: (fair value)
Variable rate demand notes	$	2		106		114
Other securities		187		188		206

Total trading	$	189		294		320

Available-for-sale securities on an amortized basis increased $508 million, or three percent, from December 31, 2010 due to an increase in U.S. Government sponsored agencies, other bonds, notes and debentures, and other securities partially offset by a decrease in agency mortgage-backed securities. Available-for-sale securities increased $119 million, or one percent, from September 30, 2010 due to an increase in other bonds, notes and debentures and U.S. Government sponsored agencies partially offset by a decrease in agency mortgage backed securities.

At September 30, 2011 and 2010, available-for-sale securities were 16% of total interest-earning assets compared to 15% at December 31, 2010. The estimated weighted-average life of the debt securities in the available-for-sale portfolio was 3.6 years at September 30, 2011, compared to 4.4 years at December 31, 2010 and 3.4 years at September 30, 2010. In addition, at September 30, 2011, the fixed-rate securities within the available-for-sale securities portfolio had a weighted-average yield of 4.05%, compared to 4.24% at December 31, 2010 and 4.32% at September 30, 2010.

Information presented in Table 14 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 declined slightly in the third quarter of 2011 from the third and fourth quarter’s of 2010, resulting in an increase in net unrealized gains on agency mortgage-backed securities to $604 million at September 30, 2011, compared to $403 million in December 31, 2010 and $469 million at September 30, 2010. Total net unrealized gains on the available-for-sale securities portfolio were $800 million at September 30, 2011, compared to $495 million at December 31, 2010 and $667 million at September 30, 2010.

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

TABLE 14: Characteristics of Available-for-Sale and Other Securities


As of September 30, 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	$	200		201		0.5		0.25	%
Average life 5 – 10 years		1		1		7.4		1.51

Total		201		202		0.5		0.26
U.S. Government sponsored agencies:
Average life of one year or less		50		51		1.0		1.54
Average life 1 – 5 years		715		767		4.2		3.03
Average life 5 – 10 years		1,043		1,172		5.5		3.91

Total		1,808		1,990		4.8		3.50
Obligations of states and political subdivisions:^(a)
Average life of one year or less		11		12		0.2		7.41
Average life 1 – 5 years		53		53		3.4		0.14
Average life 5 – 10 years		26		28		8.6		6.01
Average life greater than 10 years		11		12		10.7		5.02

Total		101		105		5.2		2.99
Agency mortgage-backed securities:
Average life of one year or less		418		430		0.6		4.83
Average life 1 – 5 years		9,608		10,168		3.4		4.33
Average life 5 – 10 years		387		419		7.3		4.03

Total		10,413		11,017		3.5		4.34
Other bonds, notes and debentures:^(b)
Average life of one year or less		219		224		0.5		5.11
Average life 1 – 5 years		1,011		1,011		3.3		2.90
Average life 5 – 10 years		311		315		6.2		3.18
Average life greater than 10 years		26		23		16.4		4.84

Total		1,567		1,573		3.7		3.30
Other securities^(c)		1,337		1,340

Total available-for-sale and other securities	$	15,427		16,227		3.6		4.05	%

(a)

Taxable-equivalent yield adjustments included in the above table are 2.56%, 0.05%, 2.08%, 1.74% and 1.05% 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 $105 million, or 36%, compared to December 31, 2010 and decreased $131 million, or 41%, compared to September 30, 2010. The decreases from December 31, 2010 and September 30, 2010 were driven by the sale of VRDNs during the first quarter of 2011, which were held by the Bancorp in its trading securities portfolio. These securities were purchased from the market through FTS who was also the remarketing agent. Rates on these securities declined in 2010 and, as a result, 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 13 of the Notes to Condensed Consolidated Financial Statements.

Deposits

The Bancorp’s 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 69%, 70% and 68% of the Bancorp’s asset funding base at September 30, 2011, December 31, 2010 and September 30, 2010, respectively.

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

TABLE 15: Deposits


	September 30, 2011				December 31, 2010				September 30, 2010
($ in millions)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Demand	$	24,547		30		21,413		26		20,109		25
Interest checking		18,616		23		18,560		23		17,225		21
Savings		21,673		26		20,903		26		20,260		25
Money market		5,448		7		5,035		6		5,064		6
Foreign office		3,139		3		3,721		5		3,807		5

Transaction deposits		73,423		89		69,632		86		66,465		82
Other time		5,439		7		7,728		9		9,379		12

Core deposits		78,862		96		77,360		95		75,844		94
Certificates - $100,000 and over		3,092		4		4,287		5		5,515		6
Other		93		—		1		—		3		—

Total deposits	$	82,047		100		81,648		100		81,362		100

Core deposits increased $1.5 billion, or two percent, compared to December 31, 2010, driven by an increase in transaction deposits, partially offset by a decrease in other time deposits. Transaction deposits increased $3.8 billion, or five percent, driven by increases in demand deposits and saving deposits. Demand deposits increased $3.1 billion, or 15%, from December 31, 2010 due to an increase in new accounts, growth from maturing certificate of deposits, and commercial customers opting to hold money in demand deposit accounts rather than investing excess cash given current market conditions. Saving deposits increased $770 million, or four percent, from December 31, 2010 primarily due to growth from maturing certificate of deposits and the relationship savings program which offers customers double-interest bonus payments every month when an active checking account is held. Other time deposits decreased $2.3 billion, or 30%, compared to December 31, 2010, primarily as a result of continued runoff of CDs due to the low interest rate environment as customers have opted to maintain balances in more liquid transaction accounts.

Core deposits increased $3.0 billion, or four percent, compared to September 30, 2010, driven by an increase in transaction deposits partially offset by a decrease in other time deposits. Transaction deposits increased $7.0 billion, or 10%, driven by increases in demand deposits, saving deposits, and interest checking deposits. Demand deposits increased $4.4 billion, or 22%, from September 30, 2010 due to an increase in new accounts and growth from maturing certificate of deposits. Saving deposits increased $1.4 billion, or seven percent, primarily due to growth from the relationship savings program, an increase in new accounts in the Bancorp’s growth markets due to competitive interest rates, and growth due to maturing certificate of deposit accounts. Interest checking accounts increased $1.4 billion, or eight percent, from September 30, 2010 primarily due to an increase in new accounts and growth due to maturing certificate of deposit accounts. The increase in transaction deposits was offset by a decrease of $3.9 billion, or 42%, 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 primarily Eurodollar sweep accounts from the Bancorp’s commercial customers. These accounts bear interest rates at slightly higher than money market accounts and unlike repurchase agreements the Bancorp does not have to pledge collateral. Foreign office deposits decreased $582 million, or 16%, from December 31, 2010 and $668 million, or 18%, from September 30, 2010 due to a reduction in sweep activity to foreign office deposits.

The Bancorp uses certificates of deposit $100,000 and over, as a method to fund earning asset growth. At September 30, 2011, certificates $100,000 and over decreased $1.2 billion, or 28%, compared to December 31, 2010, and decreased $2.4 billion, or 44%, compared to September 30, 2010, due to continued runoff from the low rate environment.

The following table presents average deposits for the three months ending September 30, 2011, December 31, 2010, and September 30, 2010.

TABLE 16: Average Deposits


	September 30, 2011				December 31, 2010				September 30, 2010
($ in millions)	Balance		% of Total		Balance		% of Total		Balance		% of Total
Demand	$	23,677		29		21,066		26		19,362		24
Interest checking		18,322		23		17,578		22		17,142		21
Savings		21,747		27		20,602		25		19,905		25
Money market		5,213		6		4,985		6		4,940		6
Foreign office		3,255		4		3,733		5		3,592		4

Transaction deposits		72,214		89		67,964		84		64,941		80
Other time		6,008		7		8,490		10		10,261		13

Core deposits		78,222		96		76,454		94		75,202		93
Certificates - $100,000 and over		3,376		4		4,858		6		6,096		7
Other		7		—		9		—		4		—

Total average deposits	$	81,605		100		81,321		100		81,302		100

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

On an average basis, core deposits increased $1.8 billion, or two percent, compared to December 31, 2010 and increased $3.0 billion, or four percent, compared to September 30, 2010 due to the migration of certificates of deposits greater than $100K into transaction accounts, due to the impact of historically low rates and excess customer liquidity.

Borrowings

Total borrowings increased approximately $3.7 billion, or 33%, from December 31, 2010 and increased $2.0 billion, or 15%, compared to September 30, 2010. The increase in total borrowings from December 31, 2010 and September 30, 2010 was primarily due to an increase in other short-term borrowings, the increase from September 30, 2010 was partially offset by a decrease in long-term debt. As of September 30, 2011, total borrowings as a percentage of interest-bearing liabilities was 21% compared to 16% at December 31, 2010 and 18% at September 30, 2010.

TABLE 17: Borrowings


($ in millions)	September 30, 2011		December 31, 2010		September 30, 2010
Federal funds purchased	$	427		279		368
Other short-term borrowings		4,894		1,574		1,775
Long-term debt		9,800		9,558		10,953

Total borrowings	$	15,121		11,411		13,096

Short-term borrowings include securities sold under repurchase agreements which are accounted for as collateralized financing transactions and recorded at the amounts at which the securities were sold plus accrued interest. Other short-term borrowings increased $3.3 billion, or 211%, from December 31, 2010 driven by an increase of $2.9 billion in short-term FHLB borrowings. Long-term debt increased $242 million, or three percent from December 31, 2010 due to the issuance of $1.0 billion in senior notes during the first quarter of 2011 and a $375 million increase in structured repurchase agreements partially offset by the redemption of $492 million of certain trust preferred securities during the first nine months of 2011, and the redemption of a $500 million long-term FHLB advance during the third quarter of 2011.

Other short-term borrowings increased $3.1 billion, or 176%, from September 30, 2010 driven by the previously mentioned increase in FHLB borrowings. Long-term debt decreased $1.2 billion, or 11%, compared to September 30, 2010 due to the $1.0 billion repayment of long-term debt during the fourth quarter of 2010 and the previously mentioned issuances and redemptions above.

The following table presents average borrowings for the three months ending September 30, 2011, December 31, 2010, and September 30, 2010.

TABLE 18: Average Borrowings


($ in millions)	September 30, 2011		December 31, 2010		September 30, 2010
Federal funds purchased	$	376		376		302
Other short-term borrowings		4,033		1,728		1,880
Long-term debt		10,136		10,298		10,954

Total average borrowings	$	14,545		12,402		13,136

Average total borrowings increased $2.1 billion, or 17%, compared to December 31, 2010, primarily due to the previously mentioned $2.9 billion increase in short-term borrowings. Average total borrowings increased $1.4 billion, or 11%, compared to September 30, 2010 due to the previously mentioned increase in other short-term borrowings, partially offset by a decline in long term debt.

Information on the average rates paid on borrowings is discussed in the net interest income section of the 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 21 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 nine months of 2010, thus net interest income for deposit providing businesses was negatively impacted during the first nine 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 by business segment is summarized in the following table.

TABLE 19: Business Segment Results


	For the three months ended September 30,					For the nine months ended September 30,
($ in millions)	2011		2010			2011		2010
Commercial Banking	$	128		(145	)	$	302		23
Branch Banking		57		39			128		139
Consumer Lending		41		(27	)		46		(37	)
Investment Advisors		—		7			18		29
General Corporate & Other		155		364			490		266

Net income		381		238			984		420
Less: Net income attributable to noncontrolling interest		—		—			1		—

Net income attributable to Bancorp		381		238			983		420
Dividends on preferred stock		8		63			194		187

Net income available to common shareholders	$	373		175		$	789		233

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

Commercial Banking

Commercial Banking offers credit intermediation, cash management and financial services to large and middle-market businesses and government and professional customers. In addition to the traditional lending and depository offerings, Commercial Banking products and services include global cash management, foreign exchange and international trade finance, derivatives and capital markets services, asset-based lending, real estate finance, public finance, commercial leasing and syndicated finance. The following table contains selected financial data for the Commercial Banking segment.

TABLE 20: Commercial Banking


	For the three months ended September 30,					For the nine months ended September 30,
($ in millions)	2011		2010			2011			2010
Income Statement Data
Net interest income (FTE)^(a)	$	345		389		$	1,015			1,156
Provision for loan and lease losses		104		559			402			1,025
Noninterest income:
Corporate banking revenue		82		81			254			248
Service charges on deposits		53		50			154			145
Other noninterest income		24		8			89			72
Noninterest expense:
Salaries, incentives and benefits		69		59			205			185
Other noninterest expense		193		187			610			540

Income (loss) before taxes		138		(277	)		295			(129	)
Applicable income tax expense (benefit)^(b)		10		(132	)		(7	)		(152	)

Net income (loss)	$	128		(145	)	$	302			23

Average Balance Sheet Data
Commercial loans	$	38,304		38,057		$	38,126			38,565
Demand deposits		13,319		10,550			12,460			10,628
Interest checking		7,477		7,458			7,911			8,700
Savings and money market		2,804		2,967			2,815			2,812
Certificates over $100,000		1,509		3,094			1,789			3,107
Foreign office deposits		1,246		2,252			1,674			1,929

(a)

Includes FTE adjustments of $4 for the three months ended September 30, 2011 and 2010 and $12 and $10 for the nine months ended September 30, 2011 and 2010, respectively.

(b)

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

Net income was $128 million for the three months ended September 30, 2011, compared to a net loss of $145 million for the three months ended September 30, 2010. For the nine months ended September 30, 2011, net income was $302 million compared to $23 million for the same period of the prior year. The increases in net income were driven by a decrease in the provision for loan and lease losses and an increase in noninterest income, partially offset by lower net interest income and higher noninterest expense.

Net interest income decreased $44 million and $141 million for the three and nine months ended September 30, 2011, respectively, compared to the same periods of the prior year. The decreases in net interest income were primarily driven by declines in the FTP credits for DDA accounts and decreases in interest income. The decreases in interest income were driven primarily by declines in yields of 29 bp and 15 bp, respectively, on average loans.

Provision for loan and lease losses decreased $455 million and $623 million, respectively, for the three and nine months ended September 30, 2011 compared to the same periods of the prior year as a result of improved credit trends across all commercial loan types. Net charge-offs as a percent of average loans and leases decreased to 108 bp for the three months ended September 30, 2011 compared to 584 bp for the same period of the prior year and decreased to 142 bp for the nine months ended September 30, 2011 compared to 357 bp for the same period of the prior year, largely due to net charge-offs on commercial loans moved to held for sale during the third quarter of 2010.

Noninterest income increased $20 million compared to the third quarter of 2010, primarily due to an increase in other noninterest income due to an increase in gains on the sale of OREO of $7 million and a $9 million increase in venture capital gains. For the nine months ended September 30, 2011, noninterest income increased $32 million compared to the same period of the prior year due to increases in corporate banking revenue, service charges on deposits, and other noninterest income. The increase in corporate banking revenue of $6 million was primarily driven by increased business lending fees, partially offset by decreases in international income and institutional sales. The increase in service charges on deposits of $9 million was primarily driven by a decrease in earnings credits paid on customer balances. The increase in other noninterest income is primarily due to a $14 million increase in venture capital gains.

Noninterest expense increased $16 million and $90 million, respectively, for the three and nine months ended September 30, 2011 compared to the same periods of the prior year as a result of increases in salaries, incentives and benefits and FDIC insurance expense, which is recorded in other noninterest expense. The increases in salaries, incentives and benefits of $10 million and $20 million, respectively, for the

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

three and nine months ended September 30, 2011 compared to the same periods of the prior year was the result of increased incentive compensation due to higher corporate banking net revenue, as well as additions to the sales force. FDIC insurance expense increased $4 million and $10 million, respectively, for the three and nine months ended September 30, 2011 compared to the same periods of the prior year due to a change in the methodology in determining FDIC insurance premiums to one based on total assets as opposed to the previous method that was based on domestic deposits.

Average commercial loans increased $247 million and decreased $439 million for the three and nine months ended September 30, 2011, respectively, compared to the same periods of the prior year. Average commercial mortgage loans decreased $1.2 billion and $1.1 billion, respectively, for the three and nine months ended September 30, 2011 compared to the same periods of the prior year as a result of tighter underwriting standards implemented in prior quarters in an effort to limit exposure to commercial real estate. Average commercial construction loans decreased $1.1 billion and $1.3 billion, respectively, for the three and nine months ended September 30, 2011 compared to the same periods of the prior year, due to runoff as management suspended new lending on non-owner occupied real estate in 2008. The decreases in average commercial mortgage and construction loans were offset by growth in average commercial and industrial loans, which increased $2.7 billion and $2.1 billion, respectively, for the three and nine months ended September 30, 2011 compared to the same periods in the prior year as a result of an increase in new loan origination activity.

Average core deposits increased $1.6 billion and $780 million for the three and nine months ended September 30, 2011 compared to the same periods of 2010. The increases for both comparative periods were primarily driven by strong growth in demand deposit accounts, which increased $2.8 billion and $1.8 billion, respectively, for the three and nine months ended September 30, 2011 compared to the same periods of the prior year. The increase in demand deposit accounts was partially offset by decreases in interest bearing deposits of $1.2 billion and $1.1 billion for the three and nine months ended September 30, 2011, respectively, compared to the same periods of the prior year , as customers opted to maintain their balances in more liquid accounts due to interest rates remaining near historical lows.

Branch Banking

Branch Banking provides a full range of deposit and loan and lease products to individuals and small businesses through 1,314 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 21: Branch Banking

For the three months

For the nine months

ended September 30,

($ in millions)

2011

2010

2011

2010

Income Statement Data

Net interest income

359

384

1,057

1,155

Provision for loan and lease losses

153

300

436

Noninterest income:

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