Edgar Filing: FIFTH THIRD BANCORP

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Table of Contents

Form 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended June 30, 2014

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):

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 834,234,230 shares of the Registrant’s common stock, without par value, outstanding as of July 31, 2014.

LOGO

FINANCIAL CONTENTS


Part I. Financial Information
Glossary of Abbreviations and Acronyms			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			9
Recent Accounting Standards			11
Critical Accounting Policies			11
Statements of Income Analysis			12
Balance Sheet Analysis			21
Business Segment Review			26
Risk Management—Overview			33
Credit Risk Management			34
Market Risk Management			48
Liquidity Risk Management			51
Capital Management			53
Off-Balance Sheet Arrangements			56
Quantitative and Qualitative Disclosures about Market Risk (Item 3)			57
Controls and Procedures (Item 4)			57
Condensed Consolidated Financial Statements and Notes (Item 1)
Balance Sheets (unaudited)			58
Statements of Income (unaudited)			59
Statements of Comprehensive Income (unaudited)			60
Statements of Changes in Equity (unaudited)			61
Statements of Cash Flows (unaudited)			62
Notes to Condensed Consolidated Financial Statements (unaudited)			63

Part II. Other Information
Legal Proceedings (Item 1)			117
Risk Factors (Item 1A)			117
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			117
Exhibits (Item 6)			117
Signatures			119
Certifications

FORWARD-LOOKING STATEMENTS

This report contains statements that we believe are “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder. These statements relate to our financial condition, results of operations, plans, objectives, future performance or business. They usually can be identified by the use of forward-looking language such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. You should not place undue reliance on these statements, as they are subject to risks and uncertainties, including but not limited to the risk factors set forth in our most recent Annual Report on Form 10-K. When considering these forward-looking statements, you should keep in mind these risks and uncertainties, as well as any cautionary statements we may make. Moreover, you should treat these statements as speaking only as of the date they are made and based only on information then actually known to us. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general economic 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 Dodd-Frank Wall Street Reform and Consumer Protection Act; (14) ability to maintain favorable ratings from rating agencies; (15) fluctuation of Fifth Third’s stock price; (16) ability to attract and retain key personnel; (17) ability to receive dividends from its subsidiaries; (18) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (19) effects of accounting or financial results of one or more acquired entities; (20) difficulties from Fifth Third’s investment in, relationship with, and nature of the operations of Vantiv, LLC; (21) loss of income from any sale or potential sale of businesses that could have an adverse effect on Fifth Third’s earnings and future growth; (22) ability to secure confidential information and deliver products and services 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.

Glossary of Abbreviations and Acronyms

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

ABS: Asset-Backed Securities

ALCO: Asset Liability Management Committee

ALLL: Allowance for Loan and Lease Losses

AOCI: Accumulated Other Comprehensive Income

ARM: Adjustable Rate Mortgage

ATM: Automated Teller Machine

BCBS: Basel Committee on Banking Supervision

BHC: Bank Holding Company

BOLI: Bank Owned Life Insurance

BPO: Broker Price Opinion

bps: Basis points

CCAR: Comprehensive Capital Analysis and Review

CD: Certificate of Deposit

CDC: Fifth Third Community Development Corporation

CFPB: United States Consumer Financial Protection Bureau

C&I: Commercial and Industrial

CMBS: Commercial Mortgage-Backed Securities

DCF: Discounted Cash Flow

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

FTE: Fully Taxable Equivalent

FTP: Funds Transfer Pricing

FTS: Fifth Third Securities

GDP: Gross Domestic Product

GSE: Government Sponsored Enterprise

HAMP: Home Affordable Modification Program

HARP: Home Affordable Refinance Program

IPO: Initial Public Offering

IRC: Internal Revenue Code

IRLC: Interest Rate Lock Commitment

ISDA: International Swaps and Derivatives Association, Inc.

LCR: Liquidity Coverage Ratio

LIBOR: London InterBank Offered Rate

LLC: Limited Liability Company

LTV: Loan-to-Value

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

MSR: Mortgage Servicing Right

N/A: Not Applicable

NII: Net Interest Income

NM: Not Meaningful

NPR: Notice of Proposed Rulemaking

NSFR: Net Stable Funding Ratio

OCC: Office of the Comptroller of the Currency

OCI: Other Comprehensive Income

OREO: Other Real Estate Owned

OTTI: Other-Than-Temporary Impairment

PMI: Private Mortgage Insurance

SBA: Small Business Administration

SEC: United States Securities and Exchange Commission

TBA: To Be Announced

TDR: Troubled Debt Restructuring

TruPS: Trust Preferred Securities

U.S.: United States of America

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

VIE: Variable Interest Entity

VRDN: Variable Rate Demand Note

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

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

TABLE 1: Selected Financial Data


	For the three months ended June 30,								For the six months ended June 30,
($ in millions, except for per share data)	2014			2013		% Change			2014			2013		% Change
Income Statement Data
Net interest income^(a)	$	905			885		2		$	1,803			1,777		1
Noninterest income		736			1,060		(31	)		1,300			1,803		(28	)
Total revenue^(a)		1,641			1,945		(16	)		3,103			3,580		(13	)
Provision for loan and lease losses		76			64		20			146			126		16
Noninterest expense		954			1,035		(8	)		1,903			2,013		(5	)
Net income attributable to Bancorp		439			591		(26	)		756			1,013		(25	)
Net income available to common shareholders		416			582		(29	)		724			995		(27	)

Common Share Data
Earnings per share, basic	$	0.49			0.67		(27	)	$	0.85			1.14		(25	)
Earnings per share, diluted		0.49			0.65		(25	)		0.84			1.11		(23	)
Cash dividends per common share		0.13			0.12		8			0.25			0.23		9
Book value per share		16.74			15.56		8			16.74			15.56		8
Market value per share		21.35			18.05		18			21.35			18.05		18

Financial Ratios (%)
Return on average assets		1.34	%		1.94		(31	)		1.17	%		1.68		(30	)
Return on average common equity		11.9			17.3		(31	)		10.5			14.9		(30	)
Dividend payout ratio		26.5			17.9		48			29.4			20.2		46
Average Bancorp shareholders’ equity as a percent of average assets		11.57			11.64		(1	)		11.55			11.51		—
Tangible common equity^(b)		8.74			8.83		(1	)		8.74			8.83		(1	)
Net interest margin^(a)		3.15			3.33		(5	)		3.18			3.38		(6	)
Efficiency^(a)		58.2			53.2		9			61.4			56.2		9

Credit Quality
Net losses charged off	$	101			112		(9	)	$	270			245		10
Net losses charged off as a percent of average loans and leases^(d)		0.45	%		0.51		(12	)		0.60	%		0.57		6
ALLL as a percent of portfolio loans and leases		1.61			1.99		(19	)		1.61			1.99		(19	)
Allowance for credit losses as a percent of portfolio loans and leases^(c)		1.77			2.18		(19	)		1.77			2.18		(19	)
Nonperforming assets as a percent of portfolio loans, leases and other assets, including other real estate owned^(d)		0.92			1.32		(30	)		0.92			1.32		(30	)

Average Balances
Loans and leases, including held for sale	$	91,241			89,473		2		$	90,742			89,179		2
Total securities and other short-term investments		23,940			16,962		41			23,443			16,904		39
Total assets		130,965			122,212		7			129,953			121,668		7
Transaction deposits^(e)		89,148			81,678		9			88,526			81,311		9
Core deposits^(f)		92,841			85,537		9			92,181			85,231		8
Wholesale funding^(g)		19,204			17,508		10			18,726			17,595		6
Bancorp shareholders’ equity		15,157			14,221		7			15,011			14,001		7

Regulatory Capital Ratios (%)
Tier I risk-based capital		10.80	%		11.14		(3	)		10.80	%		11.14		(3	)
Total risk-based capital		14.30			14.43		(1	)		14.30			14.43		(1	)
Tier I leverage		9.86			10.45		(6	)		9.86			10.45		(6	)
Tier I common equity^(b)		9.61			9.49		1			9.61			9.49		1

(a)

Amounts presented on an FTE basis. The FTE adjustment for the three months ended June 30, 2014 and 2013 was $5 and for the six months ended June 30, 2014 and 2013 was $10 and $9, respectively.

(b)

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

(c)

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

(d)

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, other 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 June 30, 2014, the Bancorp had $132.6 billion in assets, operated 15 affiliates with 1,309 full-service Banking Centers, including 102 Bank Mart^® locations open seven days a week inside select grocery stores, and 2,619 ATMs in 12 states throughout the Midwestern and Southeastern regions of the U.S. The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors. The Bancorp also has a 23% interest in Vantiv Holding, LLC. The carrying value of the Bancorp’s investment in Vantiv Holding, LLC was $384 million as of June 30, 2014.

This overview of MD&A highlights selected information in the financial results of the Bancorp and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire document as well as the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2013. 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 Abbreviations and Acronyms in this report for a list of terms included as a tool for the reader of this quarterly report on Form 10-Q. The abbreviations and acronyms identified therein are used throughout this MD&A, as well as the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements.

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.

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

The Bancorp’s revenues are dependent on both net interest income and noninterest income. For the three months ended June 30, 2014, net interest income, on an FTE basis, and noninterest income provided 55% and 45% of total revenue, respectively. For the six months ended June 30, 2014, 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 U.S. from customers domiciled in the U.S. Revenue from foreign countries and external customers domiciled in foreign countries was 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 borrower credit events, such as, loan defaults and inadequate collateral due to a weakened economy within the Bancorp’s footprint.

Noninterest income is derived primarily from service charges on deposits, corporate banking revenue, investment advisory revenue, mortgage banking net revenue, card and processing revenue and other noninterest income. Noninterest expense is primarily driven by personnel costs, net occupancy expenses, and technology and communication costs.

Accelerated Share Repurchase Transactions

During 2013 and the six months ended June 30, 2014, the Bancorp entered into a number of accelerated share repurchase transactions. As part of these transactions, the Bancorp entered into forward contracts in which the final number of shares delivered at settlement was based generally on a discount to the average daily volume weighted average price of the Bancorp’s common stock during the term of the repurchase agreements. For more information on the accelerated share repurchase program, see Note 14 of the Notes to Condensed Consolidated Financial Statements. For a summary of the Bancorp’s accelerated share repurchase transactions that were entered into or settled during the six months ended June 30, 2014 refer to Table 2.

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

TABLE 2: Summary of Accelerated Share Repurchase Transactions


Repurchase Date	Amount ($ in millions)		Shares Repurchased on Repurchase Date		Shares Received from Forward Contract Settlement		Total Shares Repurchased		Settlement Date
November 18, 2013	$	200		8,538,423		1,132,495		9,670,918		March 5, 2014
December 13, 2013		456		19,084,195		2,294,932		21,379,127		March 31, 2014
January 31, 2014		99		3,950,705		602,109		4,552,814		March 31, 2014
May 1, 2014		150		6,216,480		1,016,514		7,232,994		July 21, 2014

Preferred Stock Offering

On June 5, 2014, the Bancorp issued in a registered public offering 300,000 depositary shares, representing 12,000 shares of 4.90% fixed-to-floating rate non-cumulative Series J perpetual preferred stock, for net proceeds of $297 million. The Series J preferred shares are not convertible into Bancorp common shares or any other securities. For additional information on the preferred stock offering, refer to Note 14 of the Notes to Condensed Consolidated Financial Statements.

Senior Notes Offerings

On February 28, 2014, the Bancorp issued and sold $500 million of 2.30% unsecured senior fixed rate notes, with a maturity of five years, due on March 1, 2019. These notes will be redeemable by the Bancorp, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding the redemption date.

On April 25, 2014, the Bank issued and sold $1.5 billion in aggregate principal amount of unsecured senior bank notes. The bank notes consisted of $850 million of 2.375% senior fixed rate notes, with a maturity of five years, due on April 25, 2019; and $650 million of 1.35% senior fixed rate notes with a maturity of three years, due on June 1, 2017. These bank notes will be redeemable by the Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date. For additional information on the senior notes offerings, refer to Note 13 of the Notes to Condensed Consolidated Financial Statements.

Automobile Loan Securitizations

During the six months ended June 30, 2014, the Bancorp transferred approximately $2.8 billion in fixed-rate consumer automobile loans to bankruptcy remote trusts which were deemed to be VIEs. The Bancorp concluded that it is the primary beneficiary of these VIEs and, therefore, has consolidated these VIEs. For additional information on the automobile loan securitizations, refer to Note 9 of the Notes to Condensed Consolidated Financial Statements.

Legislative Developments

On July 21, 2010, the Dodd-Frank Act was signed into federal 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 CFPB responsible for implementing and enforcing compliance with consumer financial laws, changes the methodology for determining deposit insurance assessments, gives the FRB 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 rules governing regulatory capital ratios. This act also calls for federal regulatory agencies to conduct multiple studies over several years in order to implement its provisions. While the total impact of the fully implemented Dodd-Frank Act on the Bancorp is not currently known, the impact is expected to be substantial and may have an adverse impact on the Bancorp’s financial performance and growth opportunities.

The FRB launched the 2014 capital planning and stress testing program, CCAR, on November 1, 2013. The CCAR program requires BHCs with $50 billion or more of total consolidated assets to submit annual capital plans to the FRB for review and to conduct stress tests under a number of economic scenarios. The capital plan and stress testing results were submitted by the Bancorp to the FRB on January 6, 2014.

In March of 2014, the FRB disclosed its estimates of participating institutions results under the FRB supervisory stress scenario, including capital results, which assume all banks take certain consistently applied future capital actions. In addition, the FRB disclosed its estimates of participating institutions results under the FRB supervisory severe stress scenarios including capital results based on each company’s own base scenario capital actions.

On March 26, 2014, the Bancorp announced the results of its capital plan submitted to the FRB as part of the 2014 CCAR. The FRB indicated to the Bancorp that it did not object to the following capital actions for the period beginning April 1, 2014 and ending March 31, 2015:

•

The potential increase in the quarterly common stock dividend to $0.13 per share;

•

The potential repurchase of common shares in an amount up to $669 million;

•

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

•

The issuance of $300 million in preferred stock

For more information on the 2014 CCAR results, refer to the Capital Management section of MD&A.

The Bancorp and other large bank holding companies are required to conduct a separate mid-year stress test using financial data as of March 31^st under three company-derived macro-economic scenarios (base, adverse and severely adverse). The Bancorp submitted the results of its mid-year stress test to the FRB in July of 2014. For further discussion on the 2014 mid-year stress test, see the Capital Management section of MD&A.

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

Fifth Third offers qualified deposit customers a deposit advance product if they choose to avail themselves of this product to meet short term, small-dollar financial needs. In April of 2013, the CFPB issued a “White Paper” which studied financial services industry offerings and customer use of deposit advance products as well as payday loans and is considering whether rules governing these products are warranted. At the same time, the OCC and FDIC each issued proposed supervisory guidance for public comment to institutions they supervise which supplements existing OCC and FDIC guidance, detailing the principles they expect financial institutions to follow in connection with deposit advance products and supervisory expectations for the use of deposit advance products. The Federal Reserve also issued a statement in April to state member banks like Fifth Third for whom the Federal Reserve is the primary regulator. This statement encouraged state member banks to respond to customers’ small-dollar credit needs in a responsible manner; emphasized that they should take into consideration the risks associated with deposit advance products, including potential consumer harm and potential elevated compliance risk; and reminded them that these product offerings must comply with applicable laws and regulations. Fifth Third’s deposit advance product is designed to fully comply with the applicable federal and state laws and use of this product is subject to strict eligibility requirements and advance restriction guidelines to limit dependency on this product as a borrowing source. Fifth Third believes this product provides customers with a relatively low-cost alternative for such needs. On January 17, 2014, given developments in industry practice, Fifth Third announced that it will no longer enroll new customers in its deposit advance product and will phase out the service to existing customers by the end of 2014. These advance balances are included in other consumer loans and leases in the Bancorp’s Condensed Consolidated Balance Sheets and represent substantially all of the revenue reported in interest and fees on other consumer loans and leases in the Bancorp’s Condensed Consolidated Statements of Income and in Tables 4 and 5 in the Statements of Income Analysis section of MD&A. Fifth Third has been monitoring industry developments and is working to develop and implement alternative products and services in order to address the needs of its customers. The Bancorp is currently in the process of evaluating the impact to the Bancorp’s Condensed Consolidated Financial Statements of both the phase out of the deposit advance product and the development of alternative products and services.

In December of 2010 and revised in June of 2011, the BCBS issued Basel III, a global regulatory framework, to enhance international capital standards. In June of 2012, U.S. banking regulators proposed enhancements to the regulatory capital requirements for U.S. banks, which implement aspects of Basel III, such as re-defining the regulatory capital elements and minimum capital ratios, introducing regulatory capital buffers above those minimums, revising the agencies’ rules for calculating risk-weighted assets and introducing a new Tier I common equity ratio. In July of 2013, U.S. banking regulators approved the final enhanced regulatory capital rules (Basel III Final Rule), which included modifications to the proposed rules. The Bancorp continues to evaluate the Basel III Final Rule and its potential impact. For more information on the impact of the regulatory capital enhancements, refer to the Capital Management section of MD&A. Refer to the Non-GAAP section of MD&A for an estimate of the Basel III Tier I common equity ratio.

On December 10, 2013, the banking agencies finalized section 619 of the Dodd-Frank Act, known as the Volcker Rule, which became effective April 1, 2014. Though the final rule was effective April 1, 2014, the Federal Reserve has granted the industry an extension of time until July 21, 2015 to conform activities to be in compliance with the Volcker Rule. It is possible that additional conformance period extensions could be granted either to the entire industry, or, upon request, to requesting banking organizations on a case-by-case basis. The final rule prohibits banks and bank holding companies from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments for their own account. The Volcker Rule also restricts banks and their affiliated entities from owning, sponsoring or having certain relationships with private equity and hedge funds, as well as holding certain collateralized loan obligations that are deemed to contain ownership interests. Exemptions are provided for certain activities such as underwriting, market making, hedging, trading in certain government obligations and organizing and offering a hedge fund or private equity fund. Fifth Third does not sponsor any private equity or hedge funds that, under the final rule, it is prohibited from sponsoring. As of June 30, 2014, the Bancorp held no collateralized loan obligations. As of June 30, 2014, the Bancorp had approximately $180 million in interests and approximately $72 million in binding commitments to invest in private equity funds that are affected by the Volcker Rule. It is expected that over time the Bancorp may need to sell or redeem these investments, however no formal plan to sell has been approved as of June 30, 2014. The Bancorp believes it is likely that these investments will be reduced over time in the ordinary course before compliance is required.

On January 7, 2013, the BCBS issued a final international standard for the LCR for large, internationally active banks. In addition, the BCBS plans on introducing the NSFR final standard in the next two years. On October 24, 2013, the U.S. banking agencies issued an NPR that would implement a LCR requirement for U.S. banks that is generally consistent with the international LCR standards for large, internationally active banking organizations, generally those with $250 billion or more in total consolidated assets or $10 billion or more in on-balance sheet foreign exposure, and a Modified LCR for BHCs with at least $50 billion in total consolidated assets that are not internationally active, like Fifth Third. The NPR was open for public comment until January 31, 2014. Refer to the Liquidity Risk Management section of MD&A for further discussion on these ratios.

On July 31, 2013, the U.S. District Court for the District of Columbia issued an order granting summary judgment to the plaintiffs in a case challenging certain provisions of the FRB’s rule concerning electronic debit card transaction fees and network exclusivity arrangements (the “Current Rule”) that were adopted to implement Section 1075 of the Dodd-Frank Act, known as the Durbin Amendment. The Court held that, in adopting the Current Rule, the FRB violated the Durbin Amendment’s provisions concerning which costs are allowed to be taken into account for purposes of setting fees that are reasonable and proportional to the costs incurred by the issuer and therefore the Current Rule’s maximum permissible fees were too high. In addition, the Court held that the Current Rule’s network non-exclusivity provisions concerning unaffiliated payment networks for debit cards also violated the Durbin Amendment. The Court vacated the Current Rule, but stayed its ruling to provide the FRB an opportunity to replace the invalidated portions. The FRB appealed this decision and on March 21, 2014, the D.C. Circuit Court of Appeals reversed the District Court’s grant of summary judgment and remanded the case for further proceedings in accordance with its opinion. If this decision is ultimately overturned and/or the FRB re-issues rules for purposes of implementing the Durbin Amendment in a manner consistent with the District Court decision, the amount of debit card interchange fees the Bancorp would be permitted to charge likely would be reduced. Refer to the Noninterest Income subsection of the Statements of Income Analysis section of MD&A for further information regarding the Bancorp’s debit card interchange revenue.

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

Earnings Summary

The Bancorp’s net income available to common shareholders for the second quarter of 2014 was $416 million, or $0.49 per diluted share, which was net of $23 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the second quarter of 2013 was $582 million, or $0.65 per diluted share, which was net of $9 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the six months ended June 30, 2014 was $724 million, or $0.84 per diluted share, which was net of $32 million in preferred stock dividends. For the six months ended June 30, 2013, the Bancorp’s net income available to common shareholders was $995 million, or $1.11 per diluted share, which was net of $18 million in preferred stock dividends. Pre-provision net revenue was $682 million and $1.2 billion for the three and six months ended June 30, 2014, respectively, compared to $905 million and $1.6 billion in the same periods in 2013. Pre-provision net revenue is a non-GAAP measure. For further information, see the Non-GAAP Financial Measures section of MD&A.

Net interest income was $905 million and $1.8 billion for the three and six months ended June 30, 2014, respectively, compared to $885 million and $1.8 billion for the three and six months ended June 30, 2013, respectively. For the three and six months ended June 30, 2014, net interest income was positively impacted by increases in average taxable securities of $6.4 billion and $5.8 billion, respectively, coupled with increases in yields on these securities of 25 bps and 30 bps for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year. Net interest income also included the impact of increases in average loans and leases of $1.8 billion and $1.6 billion for the three and six months ended June 30, 2014, respectively, as well as decreases in the rates paid on long-term debt compared to the same periods in the prior year. These benefits were partially offset by lower yields on loans and leases and increases in average long-term debt of $5.0 billion and $3.9 billion for the three and six months ended June 30, 2014, respectively. Net interest margin was 3.15% and 3.18% for the three and six months ended June 30, 2014, respectively, compared to 3.33% and 3.38% for the same periods in the prior year.

Noninterest income decreased $324 million and $503 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year due to decreases in mortgage banking net revenue and other noninterest income. Mortgage banking net revenue decreased $155 million and $266 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year primarily due to a decrease in origination fees and gains on loan sales and a decrease in positive net valuation adjustments on mortgage servicing rights and free standing derivatives entered into to economically hedge the MSR portfolio, partially offset by a decrease in MSR amortization. Other noninterest income decreased $188 million and $255 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year primarily due to a $125 million gain on the sale of Vantiv, Inc. shares recognized in the second quarter of 2014 compared to a gain of $242 million recognized during the second quarter of 2013. Additionally, other noninterest income decreased due to a decrease in the positive valuation adjustment on the stock warrant associated with Vantiv Holding LLC, a decrease in equity method earnings from Vantiv Holding, LLC, and an increase in the loss associated with the Visa total return swap.

Noninterest expense decreased $81 million and $110 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. The decreases were primarily due to decreases in total personnel costs and other noninterest expense. Total personnel costs decreased $40 million and $93 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year primarily due to a decrease in incentive compensation primarily in the mortgage business due to lower production levels and a decrease in base compensation and employee benefits as a result of a decline in the number of full-time equivalent employees. Other noninterest expense decreased $52 million for the three months ended June 30, 2014 compared to the same period in the prior year primarily due to decreases in the provision for representation and warranty claims, loan closing and appraisal costs, and FDIC insurance and other taxes partially offset by an increase in litigation expense. Other noninterest expense decreased $33 million for the six months ended June 30, 2014 compared to the same period in the prior year primarily due to decreases in loan closing and appraisal costs, provision for representation and warranty claims, and FDIC insurance and other taxes partially offset by an increase in impairment on affordable housing investments and litigation expense.

For more information on net interest income, noninterest income, and noninterest expense, refer to the Statements of Income Analysis section of MD&A.

Credit Summary

The Bancorp does not originate subprime mortgage loans 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. The provision for loan and lease losses was $76 million and $146 million for the three and six months ended June 30, 2014, respectively, compared to $64 million and $126 million during the same periods in 2013. Net charge-offs as a percent of average portfolio loans and leases decreased to 0.45% during the second quarter of 2014 compared to 0.51% during the second quarter of 2013 and increased to 0.60% for the six months ended June 30, 2014 compared to 0.57% for the six months ended June 30, 2013. At June 30, 2014, nonperforming assets as a percent of portfolio loans, leases and other assets, including OREO (excluding nonaccrual loans held for sale) decreased to 0.92%, compared to 1.10% at December 31, 2013. For further discussion on credit quality, see the Credit Risk Management section of MD&A.

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 June 30, 2014, the Tier I risk-based capital ratio was 10.80%, the Tier I leverage ratio was 9.86% and the Total risk-based capital ratio was 14.30%.

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 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 non-GAAP financial measures. 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.

U.S. banking regulators approved final capital rules (Basel III Final Rule) in July of 2013 that substantially amend the existing risk-based capital rules (Basel I) for banks. The Bancorp believes providing an estimate of its capital position based upon the final rules is important to complement the existing capital ratios and for comparability to other financial institutions. Since these rules are not effective for the Bancorp until January 1, 2015, they are considered non-GAAP measures and therefore are included in the following non-GAAP financial measures table.

Pre-provision net revenue is net interest income plus noninterest income minus noninterest expense. The Bancorp believes this measure is important because it provides a ready view of the Bancorp’s earnings before the impact of provision expense.

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:

TABLE 3: Non-GAAP Financial Measures


	For the three months ended June 30,				For the six months ended June 30,
($ in millions)	2014		2013		2014			2013
Income before income taxes (U.S. GAAP)	$	606		841		1,044			1,432
Add: Provision expense (U.S. GAAP)		76		64		146			126

Pre-provision net revenue		682		905		1,190			1,558
Net income available to common shareholders (U.S. GAAP)	$	416		582		724			995
Add: Intangible amortization, net of tax		1		1		1			2

Tangible net income available to common shareholders	$	417		583		725			997


As of					June 30, 2014			December 31, 2013
Total Bancorp shareholders’ equity (U.S. GAAP)					$	15,469			14,589
Less: Preferred stock						(1,331	)		(1,034	)
Goodwill						(2,416	)		(2,416	)
Intangible assets						(17	)		(19	)

Tangible common equity, including unrealized gains / losses						11,705			11,120
Less: Accumulated other comprehensive income						(382	)		(82	)

Tangible common equity, excluding unrealized gains / losses (1)						11,323			11,038
Add: Preferred stock						1,331			1,034

Tangible equity (2)					$	12,654			12,072

Total assets (U.S. GAAP)					$	132,562			130,443
Less: Goodwill						(2,416	)		(2,416	)
Intangible assets						(17	)		(19	)
Accumulated other comprehensive income, before tax						(588	)		(126	)

Tangible assets, excluding unrealized gains / losses (3)					$	129,541			127,882

Total Bancorp shareholders’ equity (U.S. GAAP)					$	15,469			14,589
Less: Goodwill and certain other intangibles						(2,484	)		(2,492	)
Accumulated other comprehensive income						(382	)		(82	)
Add: Qualifying TruPS						60			60
Other						(19	)		19

Tier I risk-based capital						12,644			12,094
Less: Preferred stock						(1,331	)		(1,034	)
Qualifying TruPS						(60	)		(60	)
Qualified noncontrolling interests in consolidated subsidiaries						(1	)		(37	)

Tier I common equity (4)					$	11,252			10,963

Risk-weighted assets^(a)(5)					$	117,117			115,969
Ratios:
Tangible equity (2) / (3)						9.77	%		9.44
Tangible common equity (1) / (3)						8.74	%		8.63
Tier I common equity (4) / (5)						9.61	%		9.45

Basel III Final Rule—Estimated Tier I common equity ratio
Tier I common equity (Basel I)					$	11,252			10,963
Add: Adjustment related to capital components^(b)						96			82

Estimated Tier I common equity under Basel III Final Rule without AOCI (opt out) (6)						11,348			11,045
Add: Adjustment related to AOCI^(c)						382			82

Estimated Tier I common equity under Basel III Final Rule with AOCI (non opt out) (7)						11,730			11,127

Estimated risk-weighted assets under Basel III Final Rule ^(d) (8)						122,465			122,074

Estimated Tier I common equity ratio under Basel III Final Rule (opt out) (6) / (8)						9.27	%		9.05
Estimated Tier I common equity ratio under Basel III Final Rule (non opt out) (7) / (8)						9.58	%		9.12

(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.

(b)

Adjustments related to capital components include MSRs and deferred tax assets subject to threshold limitations and deferred tax liabilities related to intangible assets, which were deductions to capital under Basel I capital rules.

(c)

Under final Basel III rules, non-advanced approach banks are permitted to make a one-time election to opt out of the requirement to include AOCI in Tier I common equity.

(d)

Key differences under Basel III in the calculation of risk-weighted assets compared to Basel I include: (1) Risk weighting for commitments under 1 year; (2) Higher risk weighting for exposures to securitizations, past due loans, foreign banks and certain commercial real estate; (3) Higher risk weighting for MSRs and deferred tax assets that are under certain thresholds as a percent of Tier I capital; and (4) Derivatives are differentiated between exchange clearing and over-the-counter and the 50% risk-weight cap is removed.

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

RECENT ACCOUNTING STANDARDS

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

CRITICAL ACCOUNTING POLICIES

The Bancorp’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. Certain accounting policies require management to exercise judgment in determining methodologies, economic assumptions and estimates that may materially affect the Bancorp’s financial position, results of operations and cash flows. The Bancorp’s critical accounting policies include the accounting for the ALLL, reserve for unfunded commitments, income taxes, valuation of servicing rights, fair value measurements 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, 2013. No material changes were made to the valuation techniques or models during the six months ended June 30, 2014.

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, other short-term borrowings and long-term debt). The net interest margin is calculated by dividing net interest income by average interest-earning assets. Net interest rate spread is the difference between the average yield earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin is typically greater than net interest rate spread due to the interest income earned on those assets that are funded by noninterest-bearing liabilities, or free funding, such as demand deposits or shareholders’ equity.

Tables 4 and 5 present the components of net interest income, net interest margin and net interest rate spread for the three and six months ended June 30, 2014 and 2013, as well as the relative impact of changes in the balance sheet and changes in interest rates on net interest income. Nonaccrual loans and leases and loans held for sale have been included in the average loan and lease balances. Average outstanding securities balances are based on amortized cost with any unrealized gains or losses on available-for-sale securities included in other assets.

Net interest income was $905 million and $1.8 billion for the three and six months ended June 30, 2014, respectively, an increase of $20 million and $26 million compared to the three and six months ended June 30, 2013, respectively. Net interest income was positively impacted by increases in average taxable securities of $6.4 billion and $5.8 billion for the three and six months ended June 30, 2014, respectively, coupled with increases in yields on these securities of 25 bps and 30 bps for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year. Net interest income also included the impact of increases in average loans and leases of $1.8 billion and $1.6 billion for the three and six months ended June 30, 2014, respectively, as well as a decrease in rates paid on long-term debt compared to the same periods in the prior year. These benefits were partially offset by lower yields on loans and leases and increases in average long-term debt of $5.0 billion and $3.9 billion for the three and six months ended June 30, 2014, respectively. The net interest rate spread decreased to 2.99% and 3.03% during the three and six months ended June 30, 2014, respectively, from 3.16% and 3.20% in the same periods in 2013, as the benefit of the decrease in rates on average interest-bearing liabilities was more than offset by a 20 bps and 23 bps decrease in yields on average interest-earning assets for the three and six months ended June 30, 2014, respectively.

Net interest margin was 3.15% and 3.18% for the three and six months ended June 30, 2014, respectively, compared to 3.33% and 3.38% for the three and six months ended June 30, 2013, respectively. The decrease from both periods in 2013 was driven primarily by the previously mentioned decrease in net interest rate spreads, partially offset by increases in average free funding balances.

Interest income from loans and leases decreased $39 million compared to the three months ended June 30, 2013 and decreased $97 million compared to the six months ended June 30, 2013. The decrease from the three and six months ended June 30, 2013 was primarily the result of a decrease of 24 bps and 28 bps, respectively, in yields on average loans and leases partially offset by an increase of two percent in average loans and leases for the three and six months ended June 30, 2014 compared to the same periods in the prior year. The increase in average loans and leases for the three and six months ended June 30, 2014 was driven primarily by an increase of 10% and 11%, respectively, in average commercial and industrial loans partially offset by a decrease in average residential mortgage loans of 12% and 11%, respectively, compared to the same periods in the prior year. For more information on the Bancorp’s loan and lease portfolio, see the Loans and Leases section of the Balance Sheet Analysis section of MD&A. Interest income from investment securities and other short-term investments increased $63 million and $120 million compared to the three and six months ended June 30, 2013, respectively. The increase was primarily the result of an increase in average taxable securities of $6.4 billion and $5.8 billion for the three and six months ended June 30, 2014 coupled with a 25 bps and 30 bps increase in yields on average taxable securities for the three and six months ended June 30, 2014, respectively.

Average core deposits increased $7.3 billion compared to the three months ended June 30, 2013 and increased $7.0 billion compared to the six months ended June 30, 2013. The increase from both the three and six months ended June 30, 2013 was primarily due to an increase in average money market deposits, average interest checking deposits and average demand deposits partially offset by decreases in average savings deposits and average other time deposits. The cost of average core deposits decreased to 17 bps for the three and six months ended June 30, 2014 from 18 bps and 19 bps for the three and six months ended June 30, 2013, respectively. This decrease was primarily the result of a mix shift to lower cost core deposits as a result of run-off of higher priced CDs coupled with a decrease of 45 bps and 48 bps in the rate paid on other time deposits for the three and six months ended June 30, 2014, respectively, partially offset by an increase of 9 bps and 7 bps in the rates paid on average money market deposits compared to the three and six months ended June 30, 2013, respectively.

For the three months ended June 30, 2014, interest expense on average wholesale funding increased $3 million compared to the three months ended June 30, 2013, primarily as a result of an increase in interest expense related to long-term debt partially offset by a $2.7 billion decrease in average certificates $100,000 and over. Interest expense on long-term debt increased during the three months ended June 30, 2014 compared to the same period in the prior year, driven by a $5.0 billion increase in average long-term debt partially offset by a 76 bps decrease in the rate paid on long-term debt primarily due to the redemption of $750 million of outstanding TruPS during the fourth quarter of 2013.

For the six months ended June 30, 2014, interest expense on average wholesale funding decreased $2 million compared to the six months ended June 30, 2013, primarily as a result of a decrease in interest expense on certificates $100,000 and over and other short term borrowings partially offset by an increase in interest expense on long-term debt. Interest expense on certificates $100,000 and over decreased during the six months ended June 30, 2014 compared to the same period in the prior year primarily due to a 17 bps decrease in the rate paid on certificates $100,000 and over coupled with a $572 million decrease in average certificates $100,000 and over. Interest expense on other short-term borrowings decreased during the six months ended June 30, 2014 compared to the same period in the prior year, primarily due to a $2.1 billion decrease in average short-term borrowings. Interest expense on long-term debt increased during the six months ended June 30,

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

2014 compared to the same period in the prior year, primarily due to a $3.9 billion increase in average long-term debt partially offset by a decrease in the rate paid on long-term debt of 84 bps primarily due to the redemption of $750 million of outstanding TruPS during the fourth quarter of 2013. Refer to the Borrowings section of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s borrowings. During the three and six months ended June 30, 2014, average wholesale funding represented 24% and 23%, respectively, of average interest bearing liabilities compared to 24% during the three and six months ended June 30, 2013. 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 4: Condensed Average Balance Sheets and Analysis of Net Interest Income


For the three months ended	June 30, 2014								June 30, 2013								Attribution of Change in Net Interest Income^(a)
($ in millions)	Average Balance			Revenue/ Cost		Average Yield/ Rate			Average Balance			Revenue/ Cost		Average Yield/ Rate			Volume			Yield/Rate			Total
Assets
Interest-earning assets:
Loans and leases:^(b)
Commercial and industrial loans	$	41,451		$	338		3.27	%	$	37,636		$	336		3.58	%	$	33			(31	)		2
Commercial mortgage		7,886			67		3.39			8,627			79		3.65			(7	)		(5	)		(12	)
Commercial construction		1,364			12		3.54			717			6		3.41			6			—			6
Commercial leases		3,556			27		3.04			3,553			30		3.36			—			(3	)		(3	)

Subtotal – commercial		54,257			444		3.28			50,533			451		3.58			32			(39	)		(7	)
Residential mortgage loans		13,202			129		3.93			14,984			146		3.91			(18	)		1			(17	)
Home equity		9,101			84		3.71			9,625			90		3.76			(5	)		(1	)		(6	)
Automobile loans		12,070			83		2.77			11,887			94		3.16			1			(12	)		(11	)
Credit card		2,232			56		10.06			2,071			51		9.97			5			—			5
Other consumer loans/leases		379			34		35.63			373			37		39.49			1			(4	)		(3	)

Subtotal – consumer		36,984			386		4.19			38,940			418		4.31			(16	)		(16	)		(32	)

Total loans and leases		91,241			830		3.65			89,473			869		3.89			16			(55	)		(39	)
Securities:
Taxable		21,706			181		3.34			15,346			118		3.09			53			10			63
Exempt from income taxes^(b)		52			1		4.69			55			1		5.01			—			—			—
Other short-term investments		2,182			1		0.28			1,561			1		0.24			—			—			—

Total interest-earning assets		115,181			1,013		3.53			106,435			989		3.73			69			(45	)		24
Cash and due from banks		2,847								2,359
Other assets		14,417								15,198
Allowance for loan and lease losses		(1,480	)							(1,780	)

Total assets	$	130,965							$	122,212

Liabilities and Equity
Interest-bearing liabilities:
Interest checking	$	25,222		$	14		0.22	%	$	22,796		$	13		0.23	%	$	1			—			1
Savings		16,509			4		0.11			18,864			6		0.12			(2	)		—			(2	)
Money market		13,942			12		0.33			8,918			6		0.24			3			3			6
Foreign office deposits		2,200			2		0.29			1,418			1		0.29			1			—			1
Other time deposits		3,693			9		1.03			3,859			14		1.48			(1	)		(4	)		(5	)
Certificates - $100,000 and over		3,840			8		0.83			6,519			13		0.82			(5	)		—			(5	)
Other deposits		—			—		—			10			—		0.08			—			—			—
Federal funds purchased		606			—		0.10			560			—		0.11			—			—			—
Other short-term borrowings		2,234			1		0.10			2,867			1		0.18			—			—			—
Long-term debt		12,524			58		1.89			7,552			50		2.65			25			(17	)		8

Total interest-bearing liabilities		80,770			108		0.54			73,363			104		0.57			22			(18	)		4
Demand deposits		31,275								29,682
Other liabilities		3,724								4,908

Total liabilities		115,769								107,953
Total equity		15,196								14,259

Total liabilities and equity	$	130,965							$	122,212

Net interest income				$	905							$	885				$	47			(27	)		20
Net interest margin							3.15	%							3.33	%
Net interest rate spread							2.99								3.16
Interest-bearing liabilities to interest-earning assets							70.12								68.93

(a)

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

(b)

The FTE adjustments included in the above table were $5 for the three months ended June 30, 2014 and 2013.

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

TABLE 5: Condensed Average Balance Sheets and Analysis of Net Interest Income


For the six months ended	June 30, 2014								June 30, 2013								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	$	40,933		$	672		3.31	%	$	37,033		$	686		3.74	%	$	68			(82	)		(14	)
Commercial mortgage		7,934			134		3.41			8,801			159		3.64			(15	)		(10	)		(25	)
Commercial construction		1,242			22		3.51			709			12		3.32			9			1			10
Commercial leases		3,582			54		3.06			3,555			59		3.37			—			(5	)		(5	)

Subtotal – commercial		53,691			882		3.31			50,098			916		3.69			62			(96	)		(34	)
Residential mortgage loans		13,252			259		3.94			14,925			292		3.94			(33	)		—			(33	)
Home equity		9,147			169		3.72			9,748			181		3.75			(11	)		(1	)		(12	)
Automobile loans		12,047			168		2.82			11,991			191		3.22			1			(24	)		(23	)
Credit card		2,231			110		9.98			2,070			101		9.82			7			2			9
Other consumer loans/leases		374			70		37.74			347			74		42.84			5			(9	)		(4	)

Subtotal – consumer		37,051			776		4.23			39,081			839		4.33			(31	)		(32	)		(63	)

Total loans and leases		90,742			1,658		3.69			89,179			1,755		3.97			31			(128	)		(97	)
Securities:
Taxable		21,049			349		3.34			15,285			230		3.04			95			24			119
Exempt from income taxes^(b)		49			1		5.07			53			1		5.21			—			—			—
Other short-term investments		2,345			3		0.27			1,566			2		0.25			1			—			1

Total interest-earning assets		114,185			2,011		3.55			106,083			1,988		3.78			127			(104	)		23
Cash and due from banks		2,848								2,292
Other assets		14,448								15,108
Allowance for loan and lease losses		(1,528	)							(1,815	)

Total assets	$	129,953							$	121,668

Liabilities and Equity
Interest-bearing liabilities:
Interest checking	$	25,565		$	28		0.22	%	$	23,277		$	26		0.23	%	$	2			—			2
Savings		16,705			9		0.11			19,218			12		0.12			(2	)		(1	)		(3	)
Money market		13,195			20		0.31			8,428			10		0.24			6			4			10
Foreign office deposits		2,109			3		0.29			1,261			2		0.28			1			—			1
Other time deposits		3,655			18		1.01			3,920			29		1.49			(2	)		(9	)		(11	)
Certificates - $100,000 and over		4,703			18		0.75			5,275			24		0.92			(2	)		(4	)		(6	)
Other deposits		—			—		0.05			25			—		0.12			—			—			—
Federal funds purchased		577			—		0.10			625			—		0.13			—			—			—
Other short-term borrowings		2,022			1		0.10			4,141			4		0.18			(2	)		(1	)		(3	)
Long-term debt		11,424			111		1.95			7,529			104		2.79			44			(37	)		7

Total interest-bearing liabilities		79,955			208		0.52			73,699			211		0.58			45			(48	)		(3	)
Demand deposits		30,952								29,127
Other liabilities		3,997								4,798

Total liabilities		114,904								107,624
Total equity		15,049								14,044

Total liabilities and equity	$	129,953							$	121,668

Net interest income				$	1,803							$	1,777				$	82			(56	)		26
Net interest margin							3.18	%							3.38	%
Net interest rate spread							3.03								3.20
Interest-bearing liabilities to interest-earning assets							70.02								69.47

(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 $10 and $9 for the six months ended June 30, 2014 and 2013, respectively.

Provision for Loan and Lease Losses

The Bancorp provides as an expense an amount for probable loan and lease losses within the loan and lease portfolio that is based on factors previously discussed in the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2013. 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 $76 million and $146 million for the three and six months ended June 30, 2014, respectively, compared to $64 million and $126 million during the same periods in 2013. The increase in the provision expense for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013 was primarily due to an increase in certain impaired commercial loans during the first quarter of 2014 partially offset by decreases in nonperforming loans and leases and improved delinquency metrics for the three and six months ended June 30, 2014. The ALLL declined $124 million from $1.6 billion at December 31, 2013 to $1.5 billion at June 30, 2014. As of June 30, 2014, the ALLL as a percent of portfolio loans and leases decreased to 1.61%, compared to 1.79% at December 31, 2013.

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

Refer to the Credit Risk Management section of MD&A as well as Note 6 of the Notes to Condensed Consolidated Financial Statements for more detailed information on the provision for loan and lease losses, including an analysis of loan portfolio composition, nonperforming assets, net charge-offs, and other factors considered by the Bancorp in assessing the credit quality of the loan and lease portfolio and the ALLL.

Noninterest Income

Noninterest income decreased $324 million, or 31%, for the second quarter of 2014 compared to the second quarter of 2013 and decreased $503 million, or 28%, for the six months ended June 30, 2014 compared to the same period in the prior year.

The components of noninterest income for the three and six months ended June 30, 2014 and 2013 are as follows:

TABLE 6: Noninterest Income


	For the three months							For the six months
	ended June 30,							ended June 30,
($ in millions)	2014		2013		% Change			2014		2013		% Change
Service charges on deposits	$	139		136		2		$	272		267		2
Corporate banking revenue		107		106		1			211		205		3
Investment advisory revenue		102		98		4			204		198		3
Mortgage banking net revenue		78		233		(67	)		187		453		(59	)
Card and processing revenue		76		67		12			144		132		9
Other noninterest income		226		414		(45	)		268		523		(49	)
Securities gains, net		8		—		NM			14		17		(14	)
Securities gains, net - non-qualifying hedges on mortgage servicing rights		—		6		(100	)		—		8		(100	)

Total noninterest income	$	736		1,060		(31	)	$	1,300		1,803		(28	)

Service charges on deposits

Service charges on deposits increased $3 million and $5 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year. Commercial deposit revenue increased $6 million and $9 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year primarily due to both new customer acquisition and product expansion. For the three and six months ended June 30, 2014, consumer deposit revenue decreased $3 million and $4 million, respectively, compared to the same periods in the prior year due to a decrease in consumer checking fees from a decline in the percentage of consumer customers being charged service fees.

Corporate banking revenue

Corporate banking revenue increased $1 million and $6 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year. The increase was primarily due to an increase in syndication fees and institutional sales revenue partially offset by decreases in business lending fees, interest rate derivative revenue and lease remarketing fees.

Investment advisory revenue

Investment advisory revenue increased $4 million and $6 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in 2013. The increase for both periods was primarily due to increases of $4 million and $8 million in private client service fees for the three and six months ended June 30, 2014, respectively, partially offset by declines in securities and brokerage fees. The Bancorp had approximately $305 billion and $313 billion in total assets under care as of June 30, 2014 and 2013, respectively, and managed $27 billion in assets for individuals, corporations and not-for-profit organizations for both period-ends.

Mortgage banking net revenue

Mortgage banking net revenue decreased $155 million and $266 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year.

The components of mortgage banking net revenue are as follows:

TABLE 7: Components of Mortgage Banking Net Revenue


	For the three months						For the six months
	ended June 30,						ended June 30,
($ in millions)	2014			2013			2014			2013
Origination fees and gains on loan sales	$	42			150		$	84			319
Net mortgage servicing revenue:
Gross mortgage servicing fees		62			62			125			124
Mortgage servicing rights amortization		(32	)		(51	)		(55	)		(104	)
Net valuation adjustments on mortgage servicing rights and free-standing derivatives entered into to economically hedge MSR		6			72			33			114

Net mortgage servicing revenue		36			83			103			134

Mortgage banking net revenue	$	78			233		$	187			453

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

Origination fees and gains on loan sales decreased $108 million and $235 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year. The decrease for the three and six months ended June 30, 2014 was primarily the result of a 74% and 75% declines in residential mortgage loan originations from the three and six months ended June 30, 2013, respectively. Residential mortgage loan originations decreased to $2.0 billion and $3.7 billion during the three and six months ended June 30, 2014, respectively, compared to $7.5 billion and $14.9 billion during the same periods in the prior year due to strong refinancing activity that occurred during the first half of 2013.

Net mortgage servicing revenue is comprised of gross mortgage servicing fees and related mortgage 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 used to economically hedge the MSR portfolio. Net mortgage servicing revenue decreased $47 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 driven primarily by a decrease of $66 million in net valuation adjustments, partially offset by a decrease in mortgage servicing rights amortization of $19 million. Net mortgage servicing revenue decreased $31 million for the six months ended June 30, 2014 compared to the same period in the prior year driven primarily by a decrease of $81 million in net valuation adjustments partially offset by a decrease in mortgage servicing rights amortization of $49 million.

The net valuation adjustment gain of $6 million during the second quarter of 2014 included $38 million in gains from derivatives economically hedging the MSRs partially offset by temporary impairment of $32 million on the MSRs. The net valuation adjustment gain of $33 million for the six months ended June 30, 2014 included $61 million in gains from derivatives economically hedging the MSRs partially offset by temporary impairment of $28 million on the MSRs. Mortgage rates decreased during the three and six months ended June 30, 2014 which caused modeled prepayment speeds to increase, which led to the temporary impairment on servicing rights during the respective periods. The net valuation adjustment gain of $72 million during the second quarter of 2013 included $102 million in recovery of temporary impairment on the MSR portfolio partially offset by $30 million in losses from derivatives economically hedging the MSRs. The net valuation adjustment gain of $114 million for the six months ended June 30, 2013 included $151 million of recovery of temporary impairment on the MSR portfolio partially offset by $37 million in losses from derivatives economically hedging the MSR portfolio.

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.

The Bancorp’s total residential loans serviced as of June 30, 2014 and 2013 were $81.3 billion and $81.7 billion, respectively, with $68.1 billion, and $67.2 billion, respectively, of residential mortgage loans serviced for others.

In addition to the derivative positions used to economically hedge the MSR portfolio, the Bancorp acquires various securities as a component of its non-qualifying hedging strategy. The Bancorp did not sell securities related to the non-qualifying hedging strategy for the three and six months ended June 30, 2014. Net gains on sales of these securities were $6 million and $8 million for the three and six months ended June 30, 2013, respectively, recorded in securities gains, net, non-qualifying hedges on mortgage servicing rights in the Bancorp’s Condensed Consolidated Statements of Income.

Card and processing revenue

Card and processing revenue increased $9 million and $12 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year. The increase for the three and six months ended June 30, 2014 was primarily the result of an increase in the number of actively used cards as well as higher processing fees related to additional ATM locations. Debit card interchange revenue, included in card and processing revenue, was $33 million and $63 million for the three and six months ended June 30, 2014, respectively, compared to $31 million and $59 million for the same periods in the prior year.

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

Other noninterest income

The major components of other noninterest income are as follows:

TABLE 8: Components of Other Noninterest Income


	For the three months						For the six months
	ended June 30,						ended June 30,
($ in millions)	2014			2013			2014			2013
Gain on sale of Vantiv, Inc. shares	$	125			242		$	125			242
Valuation adjustments on stock warrant associated with Vantiv Holding, LLC		63			76			28			110
Operating lease income		21			18			42			34
Cardholder fees		11			12			23			23
BOLI income		11			20			21			31
Banking center income		8			8			16			18
Consumer loan and lease fees		6			7			12			13
Equity method income from interest in Vantiv Holding, LLC		4			19			19			36
Insurance income		3			8			6			16
Loss on swap associated with the sale of Visa, Inc. class B shares		(16	)		(5	)		(15	)		(12	)
Loss on OREO		(3	)		(5	)		(14	)		(15	)
Other, net		(7	)		14			5			27

Total other noninterest income	$	226			414		$	268			523

Other noninterest income decreased $188 million in the second quarter of 2014 compared to the second quarter of 2013 and $255 million for the six months ended June 30, 2014 compared to the same period in the prior year. The decrease for both periods was driven by a gain of $125 million on the sale of Vantiv, Inc. shares in the second quarter of 2014 compared to a gain of $242 million related to the sale of Vantiv, Inc. shares recorded in the second quarter of 2013. In addition, the positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC decreased $13 million and $82 million, respectively, for the three and six months ended June 30, 2014 from the comparable prior year periods. The fair value of the stock warrant is calculated using the Black-Scholes valuation model, which utilizes several key inputs (Vantiv, Inc. stock price, strike price of the warrant and several unobservable inputs). The positive valuation adjustments of $63 million and $28 million for the three and six months ended June 30, 2014, respectively, were primarily due to an increase of 11% and three percent, respectively, in Vantiv, Inc.’s share price from December 31, 2013 to June 30, 2014. The positive valuation adjustments of $76 million and $110 million for the three and six months ended June 30, 2013, respectively, were primarily due to an increase of 16% and 35%, respectively, in Vantiv, Inc.’s share price from December 31, 2012 to June 30, 2013. For additional information on the valuation of the warrant, see Note 21 of the Notes to Condensed Consolidated Financial Statements.

Equity method earnings from the Bancorp’s interest in Vantiv Holding, LLC decreased $15 million and $17 million compared to the three and six months ended June 30, 2013, respectively. The decrease for the three months ended June 30, 2014 was primarily due to charges taken by Vantiv Holding, LLC related to an acquisition. The decrease for the six months ended June 30, 2014 was also due to Vantiv’s acquisition charges and a decrease in the Bancorp’s ownership percentage of Vantiv Holding, LLC from 28% as of June 30, 2013 to 23% as of June 30, 2014 due primarily to share sales.

Other noninterest income also included an $11 million increase in the loss related to the Visa total return swap for the three months ended June 30, 2014 compared to the three months ended June 30, 2013. For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B shares, see Note 21 of the Notes to Condensed Consolidated Financial Statements. BOLI income decreased $9 million and $10 million for the three and six months ended June 30, 2014 compared to the same period in the prior year primarily due to a $10 million settlement in the second quarter of 2013 related to a previously surrendered BOLI policy. The “other” caption decreased $21 million and $22 million for the three and six months ended June 30, 2014, respectively, compared to the prior year periods primarily due to a $17 million impairment charge in the second quarter of 2014 for branches and land. For more information on this impairment charge, see Note 7 of the Notes to Condensed Consolidated Financial Statements.

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

Noninterest Expense

Total noninterest expense decreased $81 million, or eight percent, for the three months ended June 30, 2014, and decreased $110 million, or five percent, for the six months ended June 30, 2014 compared to the three and six months ended June 30, 2013, respectively.

The major components of noninterest expense are as follows:

TABLE 9: Noninterest Expense


	For the three months ended June 30,									For the six months ended June 30,
($ in millions)	2014			2013			% Change			2014			2013			% Change
Salaries, wages and incentives	$	368			404			(9	)	$	727			803			(10	)
Employee benefits		79			83			(5	)		180			197			(8	)
Net occupancy expense		79			76			3			158			155			2
Technology and communications		52			50			4			105			99			6
Card and processing expense		37			33			10			68			65			5
Equipment expense		30			28			9			60			56			8
Other noninterest expense		309			361			(14	)		605			638			(5	)

Total noninterest expense	$	954			1,035			(8	)	$	1,903			2,013			(5	)

Efficiency ratio		58.2	%		53.2	%					61.4	%		56.2	%

Total personnel costs (salaries, wages and incentives plus employee benefits) decreased $40 million and $93 million, respectively, for the three and six months ended June 30, 2014 compared to the same periods in 2013. The decrease for both periods was driven by a decrease in incentive compensation primarily in the mortgage business due to lower production levels and a decrease in base compensation and employee benefits as a result of a decline in the number of full-time equivalent employees. Full time equivalent employees totaled 18,732 at June 30, 2014 compared to 20,569 at June 30, 2013.

TABLE 10: Components of Other Noninterest Expense


	For the three months ended June 30,						For the six months ended June 30,
($ in millions)	2014			2013			2014			2013
Losses and adjustments	$	72			92		$	137			129
Affordable housing investments impairment		32			27			64			47
Loan and lease		29			46			58			87
FDIC insurance and other taxes		26			33			54			67
Marketing		25			32			46			59
Professional service fees		18			17			36			31
Operating lease		16			13			33			26
Travel		14			15			26			28
Postal and courier		12			12			24			24
Data processing		10			12			20			22
Recruitment and education		7			6			13			12
Insurance		4			4			8			9
OREO expense		3			3			8			7
Intangible asset amortization		1			2			2			4
Benefit from the reserve for unfunded commitments and letters of credit		(11	)		(2	)		(19	)		(13	)
Other, net		51			49			95			99

Total other noninterest expense	$	309			361		$	605			638

Total other noninterest expense decreased $52 million for the three months ended June 30, 2014 compared to the same period in 2013. Losses and adjustments decreased $20 million for the three months ended June 30, 2014 compared to the three months ended June 30, 2013 primarily due to a decrease in the provision for representation and warranty claims, partially offset by higher legal settlements and reserves expense. The provision for representation and warranty claims decreased $16 million for the three months ended June 30, 2014 compared to the same period in the prior year due to improving underlying repurchase metrics and the settlement in the fourth quarter of 2013 with FHLMC. Litigation settlements and reserves expense increased $10 million for the three months ended June 30, 2014 compared to the same period in the prior year due to increased litigation and regulatory activity. Loan and lease expenses decreased $17 million due to lower loan closing and appraisal costs due to a decline in mortgage originations. FDIC insurance and other taxes decreased $7 million due to a change in the mix of the Bancorp’s funding base.

Total other noninterest expense decreased $33 million for the six months ended June 30, 2014 compared to the same period in 2013. Loan and lease expenses decreased $29 million due to lower loan closing and appraisal costs due to a decline in mortgage originations. Impairment on affordable housing investments increased $17 million for the six months ended June 30, 2014 compared to the same period in 2013, as the prior period included a $9 million benefit from the sale of affordable housing investments. Losses and adjustments increased $8 million for the six months ended June 30, 2014 compared to the six months ended June 30, 2013 primarily due to an increase in litigation settlements and reserves expense, partially offset by a $31 million decrease in the provision for representation and warranty claims for the reasons noted previously. Total litigation settlements and reserves expense increased $43 million compared to the same period in the prior year due to increased litigation and regulatory activity. FDIC insurance and other taxes decreased $13 million compared to the same period in the prior year primarily due to the change in the mix of the Bancorp’s funding base and higher capital levels.

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

The Bancorp continues to focus on efficiency initiatives as part of its core emphasis on operating leverage and expense control. The efficiency ratio (noninterest expense divided by the sum of net interest income (FTE) and noninterest income) was 58.2% and 61.4% for the three and six months ended June 30, 2014, respectively, compared to 53.2% and 56.2% for the three and six months ended June 30, 2013, respectively.

Applicable Income Taxes

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

TABLE 11: Applicable Income Taxes


	For the three months					For the six months
	ended June 30,					ended June 30,
($ in millions)	2014			2013		2014			2013
Income before income taxes	$	606			841	$	1,044			1,432
Applicable income tax expense		167			250		287			429
Effective tax rate		27.6	%		29.7		27.5	%		30.0

Applicable income tax expense for all periods includes the benefit from tax-exempt income, tax-advantaged investments, and tax credits, partially offset by the effect of certain nondeductible expenses. The tax credits are associated with the Low-Income Housing Tax Credit program established under Section 42 of the Internal Revenue Code (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.

As required under U.S. GAAP, the Bancorp established a deferred tax asset for stock-based awards granted to its employees and directors. When the actual tax deduction for these stock-based awards is less than the expense previously recognized for financial reporting or when the awards expire unexercised and where the Bancorp has not accumulated an excess tax benefit for previously exercised or released stock-based awards, the Bancorp is required to write-off the deferred tax asset previously established for these stock-based awards. The stock-based awards granted in March of 2003 had an exercise period that expired in March of 2013. As these stock-based awards were not exercised on or before their expiration date and because the Bancorp did not have an accumulated excess tax benefit, the Bancorp was required to write-off the $12 million deferred tax asset established for these awards during the first quarter of 2013. Based on the Bancorp’s stock price at June 30, 2014 and the Bancorp’s accumulation of an excess tax benefit through the period ended June 30, 2014, the Bancorp does not believe it will be necessary to recognize a non-cash charge to income tax expense over the next twelve months related to stock-based awards. However, the Bancorp cannot predict its stock price or whether its employees will exercise other stock-based awards with lower exercise prices in the future. Therefore, it is possible the Bancorp may recognize a non-cash charge to income tax expense in the future.

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

BALANCE SHEET ANALYSIS

Loans and Leases

The Bancorp classifies loans and leases based upon their primary purpose. Table 12 summarizes end of period loans and leases, including loans held for sale and Table 13 summarizes average total loans and leases, including loans held for sale.

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


	June 30, 2014				December 31, 2013
As of ($ in millions)	Balance		% of Total		Balance		% of Total
Commercial:
Commercial and industrial loans	$	41,364		45		39,347		45
Commercial mortgage loans		7,807		9		8,069		9
Commercial construction loans		1,426		2		1,041		1
Commercial leases		3,572		4		3,626		4

Subtotal – commercial		54,169		60		52,083		59

Consumer:
Residential mortgage loans		13,250		15		13,570		15
Home equity		9,056		10		9,246		10
Automobile loans		12,050		13		11,984		13
Credit card		2,261		2		2,294		3
Other consumer loans and leases		380		—		381		—

Subtotal – consumer		36,997		40		37,475		41

Total loans and leases	$	91,166		100		89,558		100

Total portfolio loans and leases (excludes loans held for sale)	$	90,484				88,614

Loans and leases, including loans held for sale, increased $1.6 billion, or two percent, from December 31, 2013. The increase from December 31, 2013 was the result of a $2.1 billion, or four percent, increase in commercial loans and leases partially offset by a $478 million, or one percent, decrease in consumer loans and leases.

Commercial loans and leases increased from December 31, 2013 primarily due to an increase in commercial and industrial loans and commercial construction loans partially offset by a decrease in commercial mortgage loans. Commercial and industrial loans increased $2.0 billion, or five percent, from December 31, 2013 and commercial construction loans increased $385 million, or 37%, from December 31, 2013 as a result of an increase in new loan origination activity from higher demand due to a strengthening economy and targeted marketing efforts. Commercial mortgage loans decreased $262 million, or three percent, from December 31, 2013 due to continued run-off as the level of new originations was less than the repayments on the existing portfolio.

Consumer loans and leases decreased from December 31, 2013 primarily due to a decrease in residential mortgage loans and home equity. Residential mortgage loans decreased $320 million, or two percent, primarily due to a decline in loans held for sale of $292 million from reduced origination volumes. Home equity decreased $190 million, or two percent, from December 31, 2013 as payoffs exceeded new loan production.

TABLE 13: Components of Average Total Loans and Leases (includes held for sale)


	June 30, 2014				June 30, 2013
For the three months ended ($ in millions)	Balance		% of Total		Balance		% of Total
Commercial:
Commercial and industrial loans	$	41,451		47		37,636		42
Commercial mortgage loans		7,886		9		8,627		10
Commercial construction loans		1,364		1		717		1
Commercial leases		3,556		4		3,553		4

Subtotal – commercial		54,257		61		50,533		57

Consumer:
Residential mortgage loans		13,202		14		14,984		17
Home equity		9,101		10		9,625		11
Automobile loans		12,070		13		11,887		13
Credit card		2,232		2		2,071		2
Other consumer loans and leases		379		—		373		—

Subtotal – consumer		36,984		39		38,940		43

Total average loans and leases	$	91,241		100		89,473		100

Total average portfolio loans and leases (excludes loans held for sale)	$	90,549				86,707

Average loans and leases, including loans held for sale, increased $1.8 billion, or two percent, from June 30, 2013. The increase from June 30, 2013 was the result of a $3.7 billion, or seven percent, increase in average commercial loans and leases partially offset by a $2.0 billion, or five percent, decrease in average consumer loans and leases.

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

Average commercial loans and leases increased from June 30, 2013 primarily due to an increase in average commercial and industrial loans and average commercial construction loans partially offset by a decrease in average commercial mortgage loans. Average commercial and industrial loans increased $3.8 billion, or 10%, from June 30, 2013 and average commercial construction loans increased $647 million, or 90%, from June 30, 2013 due to an increase in new loan origination activity from an increase in demand due to a strengthening economy and targeted marketing efforts. Average commercial mortgage loans decreased $741 million, or nine percent, from June 30, 2013 due to continued run-off as the level of new originations was less than the repayments on the current portfolio.

Average consumer loans and leases decreased from June 30, 2013 primarily due to a decrease in average residential mortgage loans and average home equity, partially offset by increases in average automobile loans and average credit card loans. Average residential mortgage loans decreased $1.8 billion, or 12%, from June 30, 2013 primarily due to a decline in average loans held for sale of $2.1 billion from reduced origination volumes driven by higher mortgage rates partially offset by the continued retention of certain shorter term residential mortgage loans originated through the Bancorp’s retail branches. Average home equity decreased $524 million, or five percent, from June 30, 2013 as payoffs exceeded new loan production. Average automobile loans increased $183 million, or two percent, from June 30, 2013 driven by loan originations exceeding run-offs. Average credit card loans increased $161 million, or eight percent, from June 30, 2013 primarily due to an increase in open and active accounts driven by the volume of new customer accounts.

Investment Securities

The Bancorp uses investment securities as a means of managing interest rate risk, providing liquidity support and providing collateral for pledging purposes. Total investment securities were $23.4 billion at June 30, 2014 and $19.1 billion at December 31, 2013.

Securities are classified as trading when bought and held principally for the purpose of selling them in the near term. Securities are classified as available-for-sale when, in management’s judgment, they may be sold in response to, or in anticipation of, changes in market conditions. Securities that management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost.

At June 30, 2014, the Bancorp’s investment portfolio consisted primarily of AAA-rated available-for-sale securities. The Bancorp did not hold asset-backed securities backed by subprime mortgage loans in its investment portfolio. Additionally, securities classified as below investment grade were immaterial as of June 30, 2014 and December 31, 2013. The Bancorp’s management has evaluated the securities in an unrealized loss position in the available-for-sale and held-to-maturity portfolios for OTTI. The Bancorp did not recognize OTTI for the three months ended June 30, 2014 and recognized $17 million of OTTI on its available-for-sale and other debt securities during the six months ended June 30, 2014. During the three and six months ended June 30, 2013, the Bancorp recognized $12 million of OTTI. The Bancorp did not recognize any OTTI on any of its available-for-sale equity securities or held-to-maturity debt securities during the three and six months ended June 30, 2014 and 2013.

TABLE 14: Components of Investment Securities


	June 30,		December 31,
As of ($ in millions)	2014		2013
Available-for-sale and other: (amortized cost basis)
U.S. Treasury and government agencies	$	26		26
U.S. Government sponsored agencies		1,522		1,523
Obligations of states and political subdivisions		186		187
Agency mortgage-backed securities^(a)		13,657		12,294
Other bonds, notes and debentures^(b)		6,069		3,514
Other securities^(c)		724		865

Total available-for-sale and other securities	$	22,184		18,409

Held-to-maturity: (amortized cost basis)
Obligations of states and political subdivisions	$	193		207
Other bonds, notes and debentures		1		1

Total held-to-maturity	$	194		208

Trading: (fair value)
U.S. Treasury and government agencies	$	—		1
U.S. Government sponsored agencies		6		4
Obligations of states and political subdivisions		24		13
Agency mortgage-backed securities		8		3
Other bonds, notes and debentures		13		7
Other securities^(c)		310		315

Total trading	$	361		343

(a)

Includes interest-only mortgage-backed securities of $201 and $262 as of June 30, 2014 and December 31, 2013, respectively, recorded at fair value with fair value changes recorded in securities gains, net and securities gains, net non-qualifying hedges on mortgage servicing rights in the Condensed Consolidated Financial Statements.

(b)

Includes $3,051 and $0 of agency CMBS, $1,586 and $1,368 of non-agency CMBS, and $1,225 and $1,400 of ABS as of June 30, 2014 and December 31, 2013, respectively.

(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.

On an amortized cost basis, available-for-sale and other securities increased $3.8 billion, or 21%, from December 31, 2013 primarily due to increases in other bonds, notes, and debentures and agency mortgage-backed securities. Other bonds, notes, and debentures increased $2.6 billion, or 73%, due primarily to the purchase of $3.5 billion of agency commercial mortgage-backed securities and asset-backed securities

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

partially offset by the sale of $1.1 billion of asset-backed securities, collateralized loan obligations, commercial mortgage-backed securities and corporate bonds and $34 million of paydowns during the six months ended June 30, 2014. Agency mortgage-backed securities increased $1.4 billion, or 11%, from December 31, 2013 primarily due to $4.9 billion in purchases of agency mortgage-backed securities partially offset by $2.4 billion in sales and $862 million in paydowns on the portfolio during the six months ended June 30, 2014.

On an amortized cost basis, available-for-sale and other securities were 19% and 16% of total interest-earning assets at June 30, 2014 and December 31, 2013, respectively. The estimated weighted-average life of the debt securities in the available-for-sale portfolio was 6.7 years at both June 30, 2014 and December 31, 2013. In addition, at June 30, 2014, the available-for-sale securities portfolio had a weighted-average yield of 3.35%, compared to 3.39% at December 31, 2013.

Information presented in Table 15 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. Total net unrealized gains on the available-for-sale securities portfolio were $630 million at June 30, 2014 compared to $188 million at December 31, 2013. The increase from December 31, 2013 was primarily due to a decrease in interest rates during the six months ended June 30, 2014. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally increases when interest rates decrease or when credit spreads contract.

TABLE 15: Characteristics of Available-for-Sale and Other Securities


As of June 30, 2014 ($ in millions)	Amortized Cost		Fair Value		Weighted-Average Life (in years)		Weighted-Average Yield
U.S. Treasury and government agencies:
Average life 1 – 5 years	$	25		25		2.2		0.80	%
Average life 5 – 10 years		1		1		5.2		1.50

Total		26		26		2.2		0.81
U.S. Government sponsored agencies:
Average life 1 – 5 years		1,522		1,630		2.5		3.65

Total		1,522		1,630		2.5		3.65
Obligations of states and political subdivisions:^(a)
Average life of one year or less		36		36		0.8		0.05
Average life 1 – 5 years		115		120		3.3		3.62
Average life 5 – 10 years		28		30		8.3		3.89
Average life greater than 10 years		7		8		10.7		2.84

Total		186		194		3.9		2.94
Agency mortgage-backed securities:
Average life of one year or less		76		77		0.5		5.36
Average life 1 – 5 years		1,523		1,596		4.0		3.88
Average life 5 – 10 years		11,034		11,277		6.5		3.34
Average life greater than 10 years		1,024		1,066		12.1		3.84

Total		13,657		14,016		6.6		3.45
Other bonds, notes and debentures:
Average life of one year or less		87		89		0.4		2.97
Average life 1 – 5 years		1,278		1,320		3.0		2.78
Average life 5 – 10 years		3,682		3,761		8.2		3.13
Average life greater than 10 years		1,022		1,048		13.8		3.13

Total		6,069		6,218		7.9		3.05
Other securities		724		730

Total available-for-sale and other securities	$	22,184		22,814		6.7		3.35	%

(a)

Taxable-equivalent yield adjustments included in the above table are 0.02%, 0.00%, 2.07%, 1.51% and 0.37% for securities with an average life of 1 year or less, 1-5 years, 5-10 years, greater than 10 years and in total, respectively.

Deposits

The Bancorp’s deposit balances represent an important source of funding and revenue growth opportunity. The Bancorp continues to focus on core deposit growth in its retail and commercial franchises by improving customer satisfaction, building full relationships and offering competitive rates. Core deposits represented 70% and 71% of the Bancorp’s asset funding base at June 30, 2014 and December 31, 2013, respectively.

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

TABLE 16: Deposits


	June 30, 2014				December 31, 2013
As of ($ in millions)	Balance		% of Total		Balance		% of Total
Demand	$	32,140		33		32,634		32
Interest checking		24,744		26		25,875		26
Savings		16,087		17		17,045		17
Money market		14,216		15		11,644		12
Foreign office		1,418		1		1,976		2

Transaction deposits		88,605		92		89,174		89
Other time		3,724		4		3,530		4

Core deposits		92,329		96		92,704		93
Certificates-$100,000 and over		3,623		4		6,571		7

Total deposits	$	95,952		100		99,275		100

Core deposits decreased $375 million from December 31, 2013 driven by a decrease of $569 million, or one percent, in transaction deposits partially offset by an increase of $194 million, or five percent, in other time deposits. Total transaction deposits decreased from December 31, 2013 due to decreases in interest checking deposits, savings deposits, foreign office deposits and demand deposits, partially offset by an increase in money market deposits. Interest checking deposits decreased $1.1 billion, or four percent, primarily due to consumer customer seasonality and lower commercial customer balances. Foreign office deposits decreased $558 million, or 28%, primarily due to a decrease in commercial customer balances. Demand deposits decreased $494 million, or two percent, from December 31, 2013 primarily due to uninvested trust funds held in demand deposit accounts at December 31, 2013 that were invested during the first quarter of 2014. This decrease was partially offset by an increase in commercial customer account balances. Money market deposits increased $2.6 billion, or 22%, from December 31, 2013 driven by a promotional product offering which drove balance migration from savings deposits which decreased $958 million, or six percent, from December 31, 2013 and the acquisition of new customers. The increase in other time deposits from December 31, 2013 was primarily the result of the acquisition of new customers due to competitive interest rates.

The Bancorp uses certificates $100,000 and over as a method to fund earning assets. At June 30, 2014, certificates $100,000 and over decreased $2.9 billion compared to December 31, 2013 primarily due to the maturity and run-off of retail and institutional certificates of deposit during the first six months of 2014.

The following table presents average deposits for the three months ending:

TABLE 17: Average Deposits


	June 30, 2014				June 30, 2013
			% of				% of
($ in millions)	Balance		Total		Balance		Total
Demand	$	31,275		32		29,682		32
Interest checking		25,222		26		22,796		25
Savings		16,509		17		18,864		20
Money market		13,942		15		8,918		10
Foreign office		2,200		2		1,418		2

Transaction deposits		89,148		92		81,678		89
Other time		3,693		4		3,859		4

Core deposits		92,841		96		85,537		93
Certificates-$100,000 and over		3,840		4		6,519		7
Other		—		—		10		—

Total average deposits	$	96,681		100		92,066		100

On an average basis, core deposits increased $7.3 billion, or nine percent, from June 30, 2013 due to an increase of $7.5 billion, or nine percent, in average transaction deposits partially offset by a decrease of $166 million, or four percent, in average other time deposits. The increase in average transaction deposits was driven by increases in average money market deposits, average interest checking deposits, average demand deposits and average foreign office deposits partially offset by a decrease in average savings deposits. Average money market deposits increased $5.0 billion, or 56%, from June 30, 2013 primarily due to a promotional product offering which drove balance migration from savings deposits which decreased $2.4 billion, or 12%, from June 30, 2013. The remaining increase in average money market deposits is due to an increase in average commercial account balances and new commercial customer accounts. Average interest checking deposits increased $2.4 billion, or 11%, from June 30, 2013 primarily due to an increase in average balance per account and new commercial customer accounts. Average demand deposits increased $1.6 billion, or five percent, from June 30, 2013 due to an increase in average balance per account and new commercial customer accounts. Average foreign office deposits increased $782 million, or 55%, from June 30, 2013 due primarily to an increase in average balance per account. Average other time deposits decreased $166 million, or four percent, from June 30, 2013 primarily as a result of continued run-off of certificates of deposits due to the low interest rate environment, as customers have opted to maintain balances in more liquid transaction accounts. Average certificates $100,000 and over decreased $2.7 billion, or 41%, from June 30, 2013 due to the maturity and run-off of retail and institutional certificates of deposit during the first six months of 2014.

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

Contractual maturities

The contractual maturities of certificates $100,000 and over as of June 30, 2014 are summarized in the following table:

TABLE 18: Contractual Maturities of Certificates—$100,000 and over


($ in millions)
Three months or less	$	946
After three months through six months		722
After six months through 12 months		421
After 12 months		1,534

Total	$	3,623

The contractual maturities of other time deposits and certificates $100,000 and over as of June 30, 2014 are summarized in the following table:

TABLE 19: Contractual Maturities of Other Time Deposits and Certificates $100,000 and over


($ in millions)
Next 12 months	$	3,871
13-24 months		1,325
25-36 months		712
37-48 months		897
49-60 months		274
After 60 months		268

Total	$	7,347

Borrowings

Total borrowings increased $6.0 billion, or 53%, from December 31, 2013. Table 20 summarizes the end of period components of total borrowings. As of June 30, 2014, total borrowings as a percentage of interest-bearing liabilities were 21% compared to 14% at December 31, 2013.

TABLE 20: Borrowings


As of ($ in millions)	June 30, 2014		December 31, 2013
Federal funds purchased	$	153		284
Other short-term borrowings		3,146		1,380
Long-term debt		13,961		9,633

Total borrowings	$	17,260		11,297

Federal funds purchased decreased $131 million, or 46%, from December 31, 2013 driven by a decrease in excess balances in reserve accounts held at Federal Reserve Banks that the Bancorp purchased from other member banks on an overnight basis. Other short-term borrowings increased $1.8 billion from December 31, 2013 driven by an increase of $1.8 billion in short-term FHLB borrowings. The level of these borrowings can fluctuate significantly from period to period depending on funding needs and which sources are used to satisfy those needs. Long-term debt increased by $4.3 billion, or 45%, from December 31, 2013 primarily driven by the issuance of $2.0 billion of unsecured senior notes and the issuance of asset-backed securities by consolidated VIEs of $2.8 billion related to automobile loan securitizations during the six months ended June 30, 2014, partially offset by $464 million of paydowns on long-term debt associated with automobile loan securitizations. For additional information regarding automobile securitizations and long-term debt issuances, see Note 9 and Note 13, respectively, of the Notes to Condensed Consolidated Financial Statements.

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

TABLE 21: Average Borrowings


($ in millions)	June 30, 2014		June 30, 2013
Federal funds purchased	$	606		560
Other short-term borrowings		2,234		2,867
Long-term debt		12,524		7,552

Total average borrowings	$	15,364		10,979

Average total borrowings increased $4.4 billion, or 40%, compared to June 30, 2013, primarily due to increases in average long-term debt and average federal funds purchased partially offset by a decrease in average other short-term borrowings. The increase in average long-term debt was driven by the aforementioned issuances of long-term debt as discussed above as well as the issuance of $3.1 billion of unsecured senior notes during 2013 and the issuance of $750 million of subordinated notes during the fourth quarter of 2013, as well as the issuance of asset-backed securities by a consolidated VIE of $1.3 billion related to an automobile loan securitization during the third quarter of 2013. The impact of these issuances was partially offset by the maturity of $1.3 billion of senior notes during the second quarter of 2013 and the redemption of $750 million of outstanding TruPS during the fourth quarter of 2013. The level of average other short-term borrowings and average federal funds purchased can fluctuate significantly from period to period depending on funding needs and which sources are used to satisfy those needs. Information on the average rates paid on borrowings is discussed in the net interest income section of 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 22 of the Notes to Condensed Consolidated Financial Statements. Results of the Bancorp’s business segments are presented based on its management structure and management accounting practices. The structure and accounting practices are specific to the Bancorp; therefore, the financial results of the Bancorp’s business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as management’s accounting practices or businesses change.

The Bancorp manages interest rate risk centrally at the corporate level and employs a FTP methodology at the business segment level. This methodology insulates the business segments from interest rate volatility, enabling them to focus on serving customers through loan and deposit products. The FTP system assigns charge rates and credit rates to classes of assets and liabilities, respectively, based on expected duration and the U.S. swap curve. Matching duration allocates interest income and interest expense to each 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 interest-bearing liabilities and by the review of the estimated durations for the indeterminate-lived deposits. The credit rate provided for demand deposit accounts is reviewed annually based upon the account type, its estimated duration and the corresponding fed funds, U.S. swap curve or swap rate. The credit rates for several deposit products were reset January 1, 2014 to reflect the current market rates and updated duration assumptions. These rates were generally higher than those in place during 2013, thus net interest income for deposit providing businesses was positively impacted for the three and six months ended June 30, 2014.

The business segments are charged provision expense based on the actual net charge-offs experienced on the loans and leases owned by each segment. Provision expense attributable to loan and lease growth and changes in ALLL factors are captured in General Corporate and Other. The financial results of the business segments include allocations for shared services and headquarters expenses. 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.

The results of operations and financial position for the three and six months ended June 30, 2013 were adjusted to reflect the transfer of certain customers and Bancorp employees from Branch Banking to Commercial Banking, effective January 1, 2014. In addition, the prior year balances were adjusted to reflect a change in internal allocation methodology.

Net income (loss) by business segment is summarized in the following table:

TABLE 22: Business Segment Net Income Available to Common Shareholders


	For the three months					For the six months
	ended June 30,					ended June 30,
($ in millions)	2014			2013		2014			2013
Income Statement Data
Commercial Banking	$	214			213	$	378			412
Branch Banking		75			48		154			82
Consumer Lending		(15	)		67		(22	)		138
Investment Advisors		12			7		27			23
General Corporate & Other		153			256		220			348

Net income		439			591		757			1,003
Less: Net income attributable to noncontrolling interests		—			—		1			(10	)

Net income attributable to Bancorp		439			591		756			1,013
Dividends on preferred stock		23			9		32			18

Net income available to common shareholders	$	416			582	$	724			995

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 23: Commercial Banking


	For the three months				For the six months
	ended June 30,				ended June 30,
($ in millions)	2014		2013		2014		2013
Income Statement Data
Net interest income (FTE)^(a)	$	414		392	$	824		781
Provision for loan and lease losses		40		39		139		84
Noninterest income:
Corporate banking revenue		108		103		212		201
Service charges on deposits		71		65		141		131
Other noninterest income		40		42		77		71
Noninterest expense:
Salaries, incentives and benefits		75		73		157		163
Other noninterest expense		255		228		506		436

Income before taxes		263		262		452		501
Applicable income tax expense^(a)(b)		49		49		74		89

Net income	$	214		213	$	378		412

Average Balance Sheet Data
Commercial loans, including held for sale	$	51,582		47,672	$	50,962		47,231
Demand deposits		18,350		16,310		18,259		16,343
Interest checking		8,119		7,016		8,237		7,099
Savings and money market		5,905		4,736		5,903		4,622
Certificates-$100,000 and over		1,280		1,291		1,302		1,282
Foreign office deposits and other deposits		2,196		1,403		2,105		1,248

(a)

Includes FTE adjustments of $5 for the three months ended June 30, 2014 and 2013 and $10 and $9 for the six months ended June 30, 2014 and 2013, respectively.

(b)

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

Net income was $214 million for the three months ended June 30, 2014, compared to net income of $213 million for the three months ended June 30, 2013. The increase was driven by increases in net interest income and noninterest income, partially offset by an increase in noninterest expense. For the six months ended June 30, 2014, net income was $378 million compared to $412 million for the same period of the prior year. The decrease was driven by increases in noninterest expense and the provision for loan and lease losses, partially offset by increases in net interest income and noninterest income.

Net interest income increased $22 million and $43 million for the three and six months ended June 30, 2014, respectively, compared to the same periods of the prior year. The increases were primarily driven by growth in average commercial construction loans, an increase in FTP credits due to an increase in average demand deposits and a decrease in FTP charges, partially offset by a decline in yields of 29 bps and 33 bps on average commercial loans for the three and six months ended June 30, 2014, respectively, compared to the same periods of the prior year.

Provision for loan and lease losses increased $1 million for the three months ended June 30, 2014 and $55 million for the six months ended June 30, 2014, compared to the same periods of the prior year. The increase for the six months ended June 30, 2014 compared to the same period of the prior year was due to an increase in net charge-offs related to certain impaired commercial loans in the first quarter of 2014. Net charge-offs as a percent of average portfolio loans and leases decreased to 32 bps for the three months ended June 30, 2014 compared to 33 bps for the same period of the prior year and increased to 55 bps for the six months ended June 30, 2014 compared to 36 bps for the same period of the prior year.

Noninterest income increased $9 million and $27 million for the three and six months ended June 30, 2014, respectively, compared to the same periods in the prior year. The increase for the three months ended June 30, 2014 was due to increases in service charges on deposits and corporate banking revenue, partially offset by a decrease in other noninterest income. Service charges on deposits increased $6 million for the three months ended June 30, 2014 from the same period in the prior year primarily driven by higher commercial deposit revenue which increased due to the acquisition of new customers and higher deposit balances. Corporate banking revenue increased $5 million for the three months ended June 30, 2014 from the same period in the prior year primarily driven by increases in syndication fees and institutional sales revenue, partially offset by decreases in interest rate derivative revenue, lease remarketing fees and business lending fees. The decrease in other noninterest income for the three months ended June 30, 2014 was primarily due to decreases in gains on loan sales, partially offset by an increase in operating lease income. The increase for the six months ended June 30, 2014 was due to increases in corporate banking revenue, service charges on deposits and other noninterest income. Corporate banking revenue increased $11 million for the six months ended June 30, 2014 from the same period in the prior year primarily driven by increases in syndication fees and institutional sales revenue, partially offset by decreases in interest rate derivative revenue, business lending fees and lease remarketing fees. Service charges on deposits increased $10 million for the six months ended June 30,

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

2014 from the same period of the prior year primarily driven by higher commercial deposit revenue which increased due to the acquisition of new customers and higher deposit balances. The increase in other noninterest income for the six months ended June 30, 2014 was primarily due to an increase in operating lease income partially offset by a decrease in gains on loan sales.

Noninterest expense increased $29 million for the three months ended June 30, 2014 compared to the same period of the prior year primarily driven by an increase in other noninterest expense. The increase in other noninterest expense was primarily due to increases in corporate overhead allocations, litigation expense, impairment on affordable housing investments and operating lease expense. Noninterest expense increased $64 million for the six months ended June 30, 2014 compared to the same period of the prior year driven by an increase in other noninterest expense, partially offset by a decrease in salaries, incent

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company