Edgar Filing: FIFTH THIRD BANCORP

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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 September 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 824,006,919 shares of the Registrant’s common stock, without par value, outstanding as of October 31, 2014.

LOGO

FINANCIAL CONTENTS


Part I. Financial Information
Glossary of Abbreviations and Acronyms			2
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)
Selected Financial Data			3
Overview			4
Non-GAAP Financial Measures			9
Recent Accounting Standards			11
Critical Accounting Policies			11
Statements of Income Analysis			12
Balance Sheet Analysis			20
Business Segment Review			25
Risk Management—Overview			33
Credit Risk Management			34
Market Risk Management			48
Liquidity Risk Management			51
Capital Management			52
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)			121
Risk Factors (Item 1A)			121
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			121
Exhibits (Item 6)			121
Signatures			122
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 as updated by our Quarterly Reports on Form 10-Q. 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 and adequate sources of funding and liquidity may limit Fifth Third’s operations and potential growth; (8) changes and trends in capital markets; (9) problems encountered by larger or similar financial institutions may adversely affect the banking industry and/or Fifth Third; (10) competitive pressures among depository institutions increase significantly; (11) 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.

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

CDC: Fifth Third Community Development Corporation

CFE: Collateralized Financing Entity

CFPB: United States Consumer Financial Protection Bureau

C&I: Commercial and Industrial

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

HQLA: High Quality Liquid Assets

IPO: Initial Public Offering

IRC: Internal Revenue Code

IRLC: Interest Rate Lock Commitment

ISDA: International Swaps and Derivatives Association, Inc.

LCR: Liquidity Coverage Ratio

LIBOR: London Interbank Offered Rate

LLC: Limited Liability Company

LTV: Loan-to-Value

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

MSR: Mortgage Servicing Right

N/A: Not Applicable

NII: Net Interest Income

NM: Not Meaningful

NSFR: Net Stable Funding Ratio

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 September 30,								For the nine months ended September 30,
($ in millions, except for per share data)	2014			2013		% Change			2014			2013		% Change
Income Statement Data
Net interest income^(a)	$	908			898		1		$	2,712			2,675		1
Noninterest income		520			721		(28	)		1,820			2,524		(28	)
Total revenue^(a)		1,428			1,619		(12	)		4,532			5,199		(13	)
Provision for loan and lease losses		71			51		40			216			176		23
Noninterest expense		888			959		(7	)		2,792			2,972		(6	)
Net income attributable to Bancorp		340			421		(19	)		1,096			1,433		(24	)
Net income available to common shareholders		328			421		(22	)		1,052			1,415		(26	)

Common Share Data
Earnings per share, basic	$	0.39			0.47		(17	)	$	1.25			1.62		(23	)
Earnings per share, diluted		0.39			0.47		(17	)		1.23			1.58		(22	)
Cash dividends per common share		0.13			0.12		8			0.38			0.35		9
Book value per share		16.87			15.84		7			16.87			15.84		7
Market value per share		20.02			18.05		11			20.02			18.05		11

Financial Ratios (%)
Return on average assets		1.02	%		1.35		(25	)		1.12	%		1.57		(28	)
Return on average common equity		9.2			12.1		(24	)		10.0			13.9		(28	)
Dividend payout ratio		33.3			25.5		31			30.4			21.6		41
Average Bancorp shareholders’ equity as a percent of average assets		11.71			11.71		—			11.61			11.58		—
Tangible common equity^(b)		8.64			9.27		(7	)		8.64			9.27		(7	)
Net interest margin^(a)		3.10			3.31		(6	)		3.16			3.35		(6	)
Efficiency^(a)		62.1			59.2		5			61.6			57.2		8

Credit Quality
Net losses charged off	$	115			109		6		$	384			353		9
Net losses charged off as a percent of average loans and leases^(d)		0.50	%		0.49		1			0.57	%		0.54		5
ALLL as a percent of portfolio loans and leases		1.56			1.92		(19	)		1.56			1.92		(19	)
Allowance for credit losses as a percent of portfolio loans and leases^(c)		1.71			2.11		(19	)		1.71			2.11		(19	)
Nonperforming assets as a percent of portfolio loans, leases and other assets, including other real estate owned^(d)		0.88			1.16		(24	)		0.88			1.16		(24	)

Average Balances
Loans and leases, including held for sale	$	91,428			89,154		3		$	90,973			89,170		2
Total securities and other short-term investments		24,927			18,528		35			23,944			17,452		37
Total assets		132,220			123,346		7			130,717			122,233		7
Transaction deposits^(e)		89,360			83,245		7			88,807			81,962		8
Core deposits^(f)		93,160			86,921		7			92,511			85,800		8
Wholesale funding^(g)		19,787			16,924		17			19,084			17,369		10
Bancorp shareholders’ equity		15,486			14,440		7			15,170			14,149		7

Regulatory Capital Ratios (%)
Tier I risk-based capital		10.83	%		11.21		(3	)		10.83	%		11.21		(3	)
Total risk-based capital		14.34			14.43		(1	)		14.34			14.43		(1	)
Tier I leverage		9.82			10.64		(8	)		9.82			10.64		(8	)
Tier I common equity^(b)		9.64			9.95		(3	)		9.64			9.95		(3	)

(a)

Amounts presented on an FTE basis. The FTE adjustment for the three months ended September 30, 2014 and 2013 was $5 and for the nine months ended September 30, 2014 and 2013 was $15.

(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 September 30, 2014, the Bancorp had $134.2 billion in assets, operated 15 affiliates with 1,308 full-service Banking Centers, including 102 Bank Mart^® locations open seven days a week inside select grocery stores, and 2,639 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 $388 million as of September 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 September 30, 2014, net interest income, on an FTE basis, and noninterest income provided 64% and 36% of total revenue, respectively. For the nine months ended September 30, 2014, net interest income, on an FTE basis, and noninterest income provided 60% and 40% of total revenue, respectively. The Bancorp derives the majority of its revenues within the 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, other short-term borrowings and long-term debt. Net interest income is affected by the general level of interest rates, the relative level of short-term and long-term interest rates, changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Generally, the rates of interest the Bancorp earns on its assets and pays on its liabilities are established for a period of time. The change in market interest rates over time exposes the Bancorp to interest rate risk through potential adverse changes to net interest income and financial position. The Bancorp manages this risk by continually analyzing and adjusting the composition of its assets and liabilities based on their payment streams and interest rates, the timing of their maturities and their sensitivity to changes in market interest rates. Additionally, in the ordinary course of business, the Bancorp enters into certain derivative transactions as part of its overall strategy to manage its interest rate and prepayment risks. The Bancorp is also exposed to the risk of 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, technology and communication costs and other noninterest expense.

Accelerated Share Repurchase Transactions

During 2013 and the nine months ended September 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 15 of the Notes to Condensed Consolidated Financial Statements. For a summary of the Bancorp’s accelerated share repurchase transactions that were entered into or settled during the nine months ended September 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
July 24, 2014		225		9,352,078		1,896,685		11,248,763		October 14, 2014

For further information on a subsequent event related to capital actions refer to Note 24.

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 15 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.

On September 5, 2014, the Bank issued and sold $850 million of 2.875% unsecured senior fixed-rate bank notes, with a maturity of seven years, due on October 1, 2021. 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 14 of the Notes to Condensed Consolidated Financial Statements.

Automobile Loan Securitizations

During the nine months ended September 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 10 and Note 24 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.

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

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). As required, the Bancorp reported the mid-cycle stress test results to the FRB on July 7, 2014. In addition, the Bancorp published a Form 8-K providing a summary of the results under the severely adverse scenario on September 18, 2014, which is available on Fifth Third’s website at https://www.53.com. These results represented estimates of the Bancorp’s results from the second quarter of 2014 through the second quarter of 2016 under the severely adverse scenario, which is considered highly unlikely to occur.

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. The Bancorp’s deposit 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 6 and 7 in the Statements of Income Analysis section of MD&A. 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 expected to phase out the service to existing customers by the end of 2014. To avoid a disruption to its existing customers during the extension period while the banking industry awaits further regulatory guidance on the deposit advance product, on November 3, 2014, Fifth Third announced changes to its current deposit advance product for existing customers beginning January 1, 2015, including a lower transaction fee, an extended repayment period and a reduced maximum advance period. The Bancorp currently expects to continue to offer the service to existing deposit advance customers until further regulatory guidance is provided. The Bancorp is currently in the process of evaluating the impact to its Condensed Consolidated Financial Statements from changes to the deposit advance product.

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. With respect to certain aspects of the Volcker Rule prohibitions, such as the ability to continue to hold covered fund investments, the Bancorp anticipates that it will request an extension to conform its activities to the Volcker Rule if an industry-wide extension is not granted by the Federal Reserve. 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 September 30, 2014, the Bancorp held no collateralized loan obligations. As of September 30, 2014, the Bancorp had approximately $177 million in interests and approximately $66 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 September 30, 2014. The Bancorp believes it is likely that these investments will be reduced over time in the ordinary course of events before compliance is required.

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

On October 10, 2014, the U.S. Banking Agencies published final rules implementing a quantitative liquidity requirement consistent with the LCR standard established by the BCBS 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. In addition, a modified LCR requirement was implemented for BHCs with $50 billion or more in total consolidated assets but that are not internationally active, such as Fifth Third. The modified LCR is effective January 1, 2016 and requires BHCs to calculate its LCR on a monthly basis. 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. The merchants have filed a petition for writ of certiorari to the U.S. Supreme Court. 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.

Earnings Summary

The Bancorp’s net income available to common shareholders for the third quarter of 2014 was $328 million, or $0.39 per diluted share, which was net of $12 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the third quarter of 2013 was $421 million, or $0.47 per diluted share. The Bancorp’s net income available to common shareholders for the nine months ended September 30, 2014 was $1.1 billion, or $1.23 per diluted share, which was net of $44 million in preferred stock dividends. For the nine months ended September 30, 2013, the Bancorp’s net income available to common shareholders was $1.4 billion, or $1.58 per diluted share, which was net of $18 million in preferred stock dividends. Pre-provision net revenue was $535 million and $1.7 billion for the three and nine months ended September 30, 2014, respectively, compared to $655 million and $2.2 billion for 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 $908 million and $2.7 billion for the three and nine months ended September 30, 2014, respectively, compared to $898 million and $2.7 billion for the three and nine months ended September 30, 2013, respectively. For the three and nine months ended September 30, 2014, net interest income was positively impacted by increases in average taxable securities of $6.0 billion and $5.8 billion, respectively, coupled with increases in yields on these securities of 12 bps and 24 bps for the three and nine months ended September 30, 2014, respectively, compared to the same periods in the prior year. Net interest income also included the benefit of increases in average loans and leases of $2.3 billion and $1.8 billion for the three and nine months ended September 30, 2014, respectively, as well as a decrease 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 $6.5 billion and $4.8 billion for the three and nine months ended September 30, 2014, respectively, compared to the same periods in the prior year. Net interest margin was 3.10% and 3.16% for the three and nine months ended September 30, 2014, respectively, compared to 3.31% and 3.35% for the same periods in the prior year.

Noninterest income decreased $201 million and $704 million for the three and nine months ended September 30, 2014, respectively, compared to the same periods in the prior year primarily due to decreases in mortgage banking net revenue and other noninterest income. Mortgage banking net revenue decreased $60 million and $326 million for the three and nine months ended September 30, 2014, respectively, compared to the same periods in the prior year primarily due to decreases in net mortgage servicing revenue and origination fees and gains on loan sales. Other noninterest income decreased $152 million and $408 million for the three and nine months ended September 30, 2014, respectively, compared to the same periods in the prior year. The decrease for the three months ended September 30, 2014 included the impact of a gain of $85 million on the sale of Vantiv, Inc. shares in the third quarter of 2013. The decrease for the nine months ended September 30, 2014 included the impact of a gain of $125 million on the sale of Vantiv, Inc. shares in the second quarter of 2014 compared to gains totaling $327 million during the nine months ended September 30, 2013. Additionally, other noninterest income decreased for the three and nine months ended September 30, 2014 compared to the same periods in the prior year due to an increase in the negative 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 $71 million and $180 million for the three and nine months ended September 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 $135 million for the three and nine months ended September 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 $40 million for the three months ended September 30, 2014 compared to the same period in the prior year primarily due to decreases in litigation settlements and reserve expenses, loan closing and appraisal costs, and

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

FDIC insurance and other taxes. Other noninterest expense decreased $70 million for the nine months ended September 30, 2014 compared to the same period in the prior year primarily due to decreases in loan closing and appraisal costs, FDIC insurance and other taxes, marketing expenses, and the provision for representation and warranty claims partially offset by an increase in impairment on affordable housing investments and litigation settlements and reserve expenses.

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

Credit Summary

The provision for loan and lease losses was $71 million and $216 million for the three and nine months ended September 30, 2014, respectively, compared to $51 million and $176 million during the same periods in 2013. Net charge-offs as a percent of average portfolio loans and leases increased to 0.50% during the third quarter of 2014 compared to 0.49% during the third quarter of 2013 and increased to 0.57% for the nine months ended September 30, 2014 compared to 0.54% for the nine months ended September 30, 2013. At September 30, 2014, nonperforming assets as a percent of portfolio loans, leases and other assets, including OREO (excluding nonaccrual loans held for sale) decreased to 0.88%, 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 September 30, 2014, the Tier I risk-based capital ratio was 10.83%, the Tier I leverage ratio was 9.82% and the Total risk-based capital ratio was 14.34%.

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

NON-GAAP FINANCIAL MEASURES

The Bancorp considers many factors when determining the adequacy of its liquidity profile, including its LCR as defined by the U.S. Banking Agencies Basel III LCR final rule. Generally, the LCR is designed to ensure banks maintain an adequate level of unencumbered HQLA to satisfy the estimated net cash outflows under a 30-day stress scenario. The Bancorp will be subject to the Modified LCR whereby the net cash outflow under the 30-day stress scenario is multiplied by a factor of 0.7. The final rule is not effective for the Bancorp until January 1, 2016. The Bancorp believes there is no comparable U.S. GAAP financial measure to LCR. The Bancorp believes providing an estimated LCR is important for comparability to other financial institutions. For a further discussion on liquidity management and the LCR, see the Liquidity Risk Management section of MD&A.

TABLE 3: Non-GAAP Financial Measures—Liquidity Coverage Ratio


As of ($ in millions)	September 30, 2014
High Quality Liquid Assets	$	18,627
Estimated net cash outflow		20,237

Estimated Modified LCR		92	%

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 pre-tax earnings before the impact of provision expense.

The following table reconciles the non-GAAP financial measure of pre-provision net revenue to U.S. GAAP:

TABLE 4: Non-GAAP Financial Measures—Pre-Provision Net Revenue


	For the three months				For the nine months
	ended September 30,				ended September 30,
($ in millions)	2014		2013		2014		2013
Income before income taxes (U.S. GAAP)	$	464		604		1,509		2,037
Add: Provision expense (U.S. GAAP)		71		51		216		176

Pre-provision net revenue		535		655		1,725		2,213

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.

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

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

TABLE 5: Non-GAAP Financial Measures—Capital Ratios


As of ($ in millions)	September 30, 2014			December 31, 2013
Total Bancorp shareholders’ equity (U.S. GAAP)	$	15,404			14,589
Less: Preferred stock		(1,331	)		(1,034	)
Goodwill		(2,416	)		(2,416	)
Intangible assets		(16	)		(19	)

Tangible common equity, including unrealized gains / losses		11,641			11,120
Less: Accumulated other comprehensive income		(301	)		(82	)

Tangible common equity, excluding unrealized gains / losses (1)		11,340			11,038
Add: Preferred stock		1,331			1,034

Tangible equity (2)	$	12,671			12,072

Total assets (U.S. GAAP)	$	134,188			130,443
Less: Goodwill		(2,416	)		(2,416	)
Intangible assets		(16	)		(19	)
Accumulated other comprehensive income, before tax		(463	)		(126	)

Tangible assets, excluding unrealized gains / losses (3)	$	131,293			127,882

Total Bancorp shareholders’ equity (U.S. GAAP)	$	15,404			14,589
Less: Goodwill and certain other intangibles		(2,484	)		(2,492	)
Accumulated other comprehensive income		(301	)		(82	)
Add: Qualifying TruPS		60			60
Other		(18	)		19

Tier I risk-based capital		12,661			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)	$	11,269			10,963

Risk-weighted assets ^(a) (5)	$	116,917			115,969
Ratios:
Tangible equity (2) / (3)		9.65	%		9.44
Tangible common equity (1) / (3)		8.64	%		8.63
Tier I common equity (4) / (5)		9.64	%		9.45

Basel III Final Rule—Estimated Tier I common equity ratio
Tier I common equity (Basel I)	$	11,269			10,963
Add: Adjustment related to capital components^(b)		99			82

Estimated Tier I common equity under Basel III Final Rule without AOCI (opt out) (6)		11,368			11,045
Add: Adjustment related to AOCI^(c)		301			82

Estimated Tier I common equity under Basel III Final Rule with AOCI (non opt out) (7)		11,669			11,127

Estimated risk-weighted assets under Basel III Final Rule ^(d) (8)		121,219			122,074

Estimated Tier I common equity ratio under Basel III Final Rule (opt out) (6) / (8)		9.38	%		9.05
Estimated Tier I common equity ratio under Basel III Final Rule (non opt out) (7) / (8)		9.63	%		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 the Basel III Final Rule, 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 nine months ended September 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 6 and 7 present the components of net interest income, net interest margin and net interest rate spread for the three and nine months ended September 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 $908 million and $2.7 billion for the three and nine months ended September 30, 2014, respectively, an increase of $10 million and $37 million compared to the same periods in the prior year. Net interest income was positively impacted by increases in average taxable securities of $6.0 billion and $5.8 billion for the three and nine months ended September 30, 2014, respectively, coupled with increases in yields on these securities of 12 bps and 24 bps for the three and nine months ended September 30, 2014, respectively, compared to the same periods in the prior year. Net interest income also included the benefit of increases in average loans and leases of $2.3 billion and $1.8 billion for the three and nine months ended September 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 $6.5 billion and $4.8 billion for the three and nine months ended September 30, 2014, respectively, compared to the same periods in the prior year. The net interest rate spread decreased to 2.93% and 2.99% during the three and nine months ended September 30, 2014, respectively, from 3.14% and 3.18% in the same periods in 2013, driven by a 19 bps and 21 bps decrease in yields on average interest-earning assets for the three and nine months ended September 30, 2014, respectively.

Net interest margin was 3.10% and 3.16% for the three and nine months ended September 30, 2014, respectively, compared to 3.31% and 3.35% for the three and nine months ended September 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 $29 million compared to the three months ended September 30, 2013 and decreased $125 million compared to the nine months ended September 30, 2013. The decrease from the three and nine months ended September 30, 2013 was primarily the result of a decrease of 22 bps and 26 bps, respectively, in yields on average loans and leases partially offset by an increase of three percent and two percent in average loans and leases for the three and nine months ended September 30, 2014, respectively, compared to the same periods in the prior year. The increase in average loans and leases for the three and nine months ended September 30, 2014 was driven primarily by an increase of nine percent and 10%, respectively, in average commercial and industrial loans partially offset by a decrease in average residential mortgage loans of seven percent and 10%, 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 $55 million and $175 million compared to the three and nine months ended September 30, 2013, respectively, driven by the factors discussed above.

Average core deposits increased $6.2 billion compared to the three months ended September 30, 2013 and increased $6.7 billion compared to the nine months ended September 30, 2013. The increase from both the three and nine months ended September 30, 2013 was primarily due to an increase in average money market deposits, average interest checking deposits and average demand deposits partially offset by a decrease in average savings deposits. The cost of average core deposits was 18 bps for the three and nine months ended September 30, 2014 compared to 17 bps and 18 bps for the same periods in the prior year. Interest expense on money market deposits increased during the three and nine months ended September 30, 2014 compared to the same periods in the prior year driven by a $5.5 billion and $5.0 billion increase in average money market deposits and a 13 bps and 9 bps increase in the rate paid on average money market deposits. This increase was partially offset by a decrease of 26 bps and 41 bps in the rate paid on other time deposits for the three and nine months ended September 30, 2014, respectively, compared to the same periods in the prior year. Refer to the Deposits section of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s deposits.

For the three and nine months ended September 30, 2014, interest expense on average wholesale funding increased $10 million and $9 million, respectively, compared to the same periods in the prior year. The increase for both periods was primarily a result of increases in interest expense related to long-term debt partially offset by decreases in average certificates $100,000 and over. Interest expense on long-term debt increased during the three and nine months ended September 30, 2014 compared to the same periods in the prior year, driven by a $6.5 billion and $4.8 billion increase in average long-term debt partially offset by a 67 bps and 79 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 and the lower cost of new debt issuances. Interest expense on average certificates $100,000 and over decreased during the three and nine months ended September 30, 2014 compared to the same periods in the prior year driven by a $4.0 billion and $1.7 billion decrease in average certificates $100,000 and over. 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 nine months ended September 30, 2014, average wholesale funding represented 24% of average interest bearing liabilities compared to 23% and 24% during the three and nine months ended September 30, 2013, respectively. For more information on the Bancorp’s interest rate risk management, including estimated earnings sensitivity to changes in market interest rates, see the Market Risk Management section of MD&A.

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

TABLE 6: Condensed Average Balance Sheets and Analysis of Net Interest Income


For the three months ended	September 30, 2014								September 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	$	41,525		$	340		3.25	%	$	38,145		$	336		3.49	%	$	28			(24	)		4
Commercial mortgage		7,637			64		3.34			8,280			75		3.60			(6	)		(5	)		(11	)
Commercial construction		1,565			14		3.49			797			7		3.71			7			—			7
Commercial leases		3,576			27		2.96			3,574			29		3.22			—			(2	)		(2	)

Subtotal – commercial		54,303			445		3.25			50,796			447		3.49			29			(31	)		(2	)

Residential mortgage loans		13,342			129		3.84			14,333			140		3.87			(10	)		(1	)		(11	)
Home equity		9,009			84		3.69			9,432			89		3.74			(4	)		(1	)		(5	)
Automobile loans		12,105			83		2.72			12,083			92		3.02			—			(9	)		(9	)
Credit card		2,295			57		9.87			2,140			53		9.93			4			—			4
Other consumer loans/leases		374			34		36.98			370			40		42.84			—			(6	)		(6	)

Subtotal – consumer		37,125			387		4.14			38,358			414		4.29			(10	)		(17	)		(27	)

Total loans and leases		91,428			832		3.61			89,154			861		3.83			19			(48	)		(29	)
Securities:
Taxable		22,594			188		3.32			16,590			134		3.20			49			5			54
Exempt from income taxes^(b)		50			1		5.34			44			1		5.08			—			—			—
Other short-term investments		2,283			2		0.26			1,894			1		0.26			1			—			1

Total interest-earning assets		116,355			1,023		3.49			107,682			997		3.68			69			(43	)		26
Cash and due from banks		2,862								2,380
Other assets		14,461								15,015
Allowance for loan and lease losses		(1,458	)							(1,731	)

Total assets	$	132,220							$	123,346

Liabilities and Equity
Interest-bearing liabilities:
Interest checking	$	24,926		$	14		0.22	%	$	23,116		$	13		0.23	%	$	—			1			1
Savings		15,759			4		0.09			18,026			5		0.11			—			(1	)		(1	)
Money market		15,222			14		0.37			9,693			6		0.24			4			4			8
Foreign office deposits		1,663			1		0.29			1,755			1		0.29			—			—			—
Other time deposits		3,800			10		1.07			3,676			12		1.33			—			(2	)		(2	)
Certificates - $100,000 and over		3,339			8		0.96			7,315			14		0.74			(9	)		3			(6	)
Other deposits		—			—		—			17			—		0.08			—			—			—
Federal funds purchased		520			—		0.09			464			—		0.10			—			—			—
Other short-term borrowings		1,973			1		0.10			1,675			1		0.21			1			(1	)		—
Long-term debt		13,955			63		1.80			7,453			47		2.47			31			(15	)		16

Total interest-bearing liabilities		81,157			115		0.56			73,190			99		0.54			27			(11	)		16
Demand deposits		31,790								30,655
Other liabilities		3,749								5,023

Total liabilities		116,696								108,868
Total equity		15,524								14,478

Total liabilities and equity	$	132,220							$	123,346

Net interest income				$	908							$	898				$	42			(32	)		10
Net interest margin							3.10	%							3.31	%
Net interest rate spread							2.93								3.14
Interest-bearing liabilities to interest-earning assets							69.75								67.97

(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 September 30, 2014 and 2013.

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

TABLE 7: Condensed Average Balance Sheets and Analysis of Net Interest Income


For the nine months ended	September 30, 2014								September 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	$	41,133		$	1,012		3.29	%	$	37,407		$	1,022		3.65	%	$	96			(106	)		(10	)
Commercial mortgage		7,834			198		3.39			8,626			234		3.63			(21	)		(15	)		(36	)
Commercial construction		1,351			35		3.50			738			19		3.45			16			—			16
Commercial leases		3,580			81		3.03			3,561			88		3.32			1			(8	)		(7	)

Subtotal – commercial		53,898			1,326		3.29			50,332			1,363		3.62			92			(129	)		(37	)

Residential mortgage loans		13,283			388		3.90			14,726			432		3.92			(42	)		(2	)		(44	)
Home equity		9,101			253		3.71			9,641			270		3.75			(15	)		(2	)		(17	)
Automobile loans		12,066			251		2.78			12,022			283		3.15			1			(33	)		(32	)
Credit card		2,252			168		9.94			2,094			154		9.86			13			1			14
Other consumer loans/leases		373			105		37.48			355			114		42.84			6			(15	)		(9	)

Subtotal – consumer		37,075			1,165		4.20			38,838			1,253		4.31			(37	)		(51	)		(88	)

Total loans and leases		90,973			2,491		3.66			89,170			2,616		3.92			55			(180	)		(125	)
Securities:
Taxable		21,570			537		3.33			15,725			364		3.09			144			29			173
Exempt from income taxes^(b)		50			2		5.16			50			2		5.17			—			—			—
Other short-term investments		2,324			5		0.27			1,677			3		0.25			2			—			2

Total interest-earning assets		114,917			3,035		3.53			106,622			2,985		3.74			201			(151	)		50
Cash and due from banks		2,853								2,322
Other assets		14,451								15,076
Allowance for loan and lease losses		(1,504	)							(1,787	)

Total assets	$	130,717							$	122,233

Liabilities and Equity
Interest-bearing liabilities:
Interest checking	$	25,349		$	42		0.22	%	$	23,222		$	40		0.23	%	$	2			—			2
Savings		16,386			12		0.10			18,816			17		0.12			(3	)		(2	)		(5	)
Money market		13,878			35		0.33			8,854			16		0.24			11			8			19
Foreign office deposits		1,959			4		0.29			1,428			3		0.28			1			—			1
Other time deposits		3,704			28		1.03			3,838			41		1.44			(2	)		(11	)		(13	)
Certificates - $100,000 and over		4,243			26		0.81			5,962			38		0.84			(10	)		(2	)		(12	)
Other deposits		—			—		0.02			22			—		0.11			—			—			—
Federal funds purchased		558			—		0.09			571			1		0.12			(1	)		—			(1	)
Other short-term borrowings		2,006			2		0.10			3,310			4		0.18			—			(2	)		(2	)
Long-term debt		12,277			174		1.90			7,504			150		2.69			77			(53	)		24

Total interest-bearing liabilities		80,360			323		0.54			73,527			310		0.56			75			(62	)		13
Demand deposits		31,235								29,642
Other liabilities		3,913								4,873

Total liabilities		115,508								108,042
Total equity		15,209								14,191

Total liabilities and equity	$	130,717							$	122,233

Net interest income				$	2,712							$	2,675				$	126			(89	)		37
Net interest margin							3.16	%							3.35	%
Net interest rate spread							2.99								3.18
Interest-bearing liabilities to interest-earning assets							69.93								68.96

(a)

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

(b)

The FTE adjustments included in the above table were $15 for the nine months ended September 30, 2014 and 2013.

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 $71 million and $216 million for the three and nine months ended September 30, 2014, respectively, compared to $51 million and $176 million during the same periods in 2013. The increase for the three months ended September 30, 2014 compared to the same period of the prior year was primarily due to an increase in net charge-offs related to commercial and industrial loans in the third quarter of 2014. The increase for the nine months ended September 30, 2014 compared to the same period of the prior year was primarily due to an increase in net charge-offs related to certain impaired commercial loans in the first quarter of 2014 and the

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

previously mentioned increase in net charge-offs related to commercial and industrial loans in the third quarter of 2014 partially offset by decreases in nonperforming loans and leases and improved delinquency metrics for the nine months ended September 30, 2014. The ALLL declined $168 million from $1.6 billion at December 31, 2013 to $1.4 billion at September 30, 2014. As of September 30, 2014, the ALLL as a percent of portfolio loans and leases decreased to 1.56%, compared to 1.79% at December 31, 2013.

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 $201 million, or 28%, for the third quarter of 2014 compared to the third quarter of 2013 and decreased $704 million, or 28%, for the nine months ended September 30, 2014 compared to the same period in the prior year.

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

TABLE 8: Noninterest Income


	For the three months ended September 30,							For the nine months ended September 30,
($ in millions)	2014		2013		% Change			2014		2013		% Change
Service charges on deposits	$	145		140		4		$	418		407		3
Corporate banking revenue		100		102		(2	)		311		307		1
Investment advisory revenue		103		97		6			307		295		4
Mortgage banking net revenue		61		121		(49	)		248		574		(57	)
Card and processing revenue		75		69		9			218		201		9
Other noninterest income		33		185		(82	)		300		708		(57	)
Securities gains, net		3		2		40			18		19		(7	)
Securities gains, net - non-qualifying hedges on mortgage servicing rights		—		5		(100	)		—		13		(100	)

Total noninterest income	$	520		721		(28	)	$	1,820		2,524		(28	)

Service charges on deposits

Service charges on deposits increased $5 million and $11 million for the three and nine months ended September 30, 2014, respectively, compared to the same periods in the prior year. Commercial deposit revenue increased $5 million and $14 million for the three and nine months ended September 30, 2014, respectively, compared to the same periods in the prior year primarily due to new customer acquisition and product expansion. For the three months ended September 30, 2014, consumer deposit revenue was flat. For the nine months ended September 30, 2014, consumer deposit revenue decreased $3 million compared to the same period in the prior year primarily due to a decrease in consumer checking and savings fees from a decline in the percentage of consumer customers being charged service fees, partially offset by an increase in overdraft fees.

Corporate banking revenue

Corporate banking revenue decreased $2 million for the three months ended September 30, 2014, compared to the same period in the prior year primarily due to decreases in business lending and syndication fees, partially offset by an increase in international revenue. Corporate banking revenue increased $4 million for the nine months ended September 30, 2014 compared to the same period in 2013 due to an increase in institutional sales and letter of credit fees, partially offset by a decrease in business lending fees.

Investment advisory revenue

Investment advisory revenue increased $6 million and $12 million for the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013. The increase for both periods was primarily driven by increases of $5 million and $13 million in private client service fees due to growth in personal asset management fees for the three and nine months ended September 30, 2014, respectively, compared to the same periods in 2013. The Bancorp had approximately $303 billion and $318 billion in total assets under care as of September 30, 2014 and 2013, respectively, and managed $26 billion and $27 billion in assets for individuals, corporations and not-for-profit organizations as of September 30, 2014 and 2013, respectively.

Mortgage banking net revenue

Mortgage banking net revenue decreased $60 million and $326 million for the three and nine months ended September 30, 2014, respectively, compared to the same periods in the prior year.

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

The components of mortgage banking net revenue are as follows:

TABLE 9: Components of Mortgage Banking Net Revenue


	For the three months						For the nine months
	ended September 30,						ended September 30,
($ in millions)	2014			2013			2014			2013
Origination fees and gains on loan sales	$	34			74		$	117			393
Net mortgage servicing revenue:
Gross mortgage servicing fees		61			63			186			187
Mortgage servicing rights amortization		(33	)		(39	)		(88	)		(143	)
Net valuation adjustments on mortgage servicing rights and free-standing derivatives entered into to economically hedge MSR		(1	)		23			33			137

Net mortgage servicing revenue		27			47			131			181

Mortgage banking net revenue	$	61			121		$	248			574

Origination fees and gains on loan sales decreased $40 million and $276 million for the three and nine months ended September 30, 2014, respectively, compared to the same periods in the prior year. The decrease for the three and nine months ended September 30, 2014 was primarily the result of a 57% and 71% decline in residential mortgage loan originations from the three and nine months ended September 30, 2013, respectively. Residential mortgage loan originations decreased to $2.1 billion and $5.8 billion during the three and nine months ended September 30, 2014, respectively, compared to $4.8 billion and $19.7 billion during the same periods in the prior year due to strong refinancing activity that occurred during the nine months ended September 30, 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 $20 million for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 driven primarily by a decrease of $24 million in net valuation adjustments, partially offset by a decrease in mortgage servicing rights amortization of $6 million. Net mortgage servicing revenue decreased $50 million for the nine months ended September 30, 2014 compared to the same period in the prior year driven primarily by a decrease of $104 million in net valuation adjustments partially offset by a decrease in mortgage servicing rights amortization of $55 million.

The net valuation adjustment loss of $1 million during the third quarter of 2014 included $22 million in losses from derivatives economically hedging the MSRs partially offset by a recovery of temporary impairment of $21 million on the MSRs. The net valuation adjustment gain of $33 million for the nine months ended September 30, 2014 included $40 million in gains from derivatives economically hedging the MSRs partially offset by temporary impairment of $7 million on the MSRs. Mortgage rates increased during the three months ended September 30, 2014 which caused modeled prepayment speeds to slow, which led to the recovery of temporary impairment on servicing rights during the period. Mortgage rates decreased during the nine months ended September 30, 2014 which caused the modeled prepayment speeds to increase, which led to the temporary impairment on servicing rights during the period. The net valuation adjustment gain of $23 million during the third quarter of 2013 included $24 million in gains from derivatives economically hedging the MSRs partially offset by temporary impairment of $1 million on the MSRs. The net valuation adjustment gain of $137 million for the nine months ended September 30, 2013 included a recovery of temporary impairment of $150 million on the MSR portfolio partially offset by $13 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 11 of the Notes to Condensed Consolidated Financial Statements. The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in the valuation on the MSR portfolio. See Note 12 of the Notes to Condensed Consolidated Financial Statements for more information on the free-standing derivatives used to economically hedge the MSR portfolio.

The Bancorp’s total residential loans serviced as of September 30, 2014 and 2013 were $80.3 billion and $82.8 billion, respectively, with $66.8 billion and $69.0 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 nine months ended September 30, 2014. Net gains on sales of these securities were $5 million and $13 million for the three and nine months ended September 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 $6 million and $17 million for the three and nine months ended September 30, 2014, respectively, compared to the same periods in the prior year. The increase for the three and nine months ended September 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 $32 million and $95 million for the three and nine months ended September 30, 2014, respectively, compared to $31 million and $90 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 10: Components of Other Noninterest Income


	For the three months						For the nine months
	ended September 30,						ended September 30,
($ in millions)	2014			2013			2014			2013
Gain on sale of Vantiv, Inc. shares	$	—			85		$	125			327
Operating lease income		21			20			63			54
Cardholder fees		11			12			34			35
Equity method income from interest in Vantiv Holding, LLC		13			18			33			54
BOLI income		11			10			32			41
Banking center income		8			9			23			26
Consumer loan and lease fees		7			7			19			20
Insurance income		3			5			9			21
Valuation adjustments on stock warrant associated with Vantiv Holding, LLC		(53	)		6			(26	)		116
Loss on swap associated with the sale of Visa, Inc. class B shares		(3	)		(2	)		(19	)		(13	)
Loss on OREO		—			(5	)		(13	)		(20	)
Other, net		15			20			20			47

Total other noninterest income	$	33			185		$	300			708

Other noninterest income decreased $152 million in the third quarter of 2014 compared to the third quarter of 2013 and decreased $408 million for the nine months ended September 30, 2014 compared to the same period in the prior year. The decrease for the three months ended September 30, 2014 was driven by a gain of $85 million on the sale of Vantiv, Inc. shares in the third quarter of 2013. In addition, the negative valuation adjustment on the stock warrant associated with Vantiv Holding, LLC was $53 million compared to the positive valuation adjustment of $6 million during the three months ended September 30, 2013. The decrease for the nine months ended September 30, 2014 was driven by a gain of $125 million on the sale of Vantiv, Inc. shares in the second quarter of 2014 compared to gains totaling $327 million during the nine months ended September 30, 2013. In addition, the negative valuation adjustments on the stock warrant associated with Vantiv Holding, LLC were $26 million compared to the positive valuation adjustments of $116 million during the nine months ended September 30, 2013. 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 negative valuation adjustments for the three and nine months ended September 30, 2014, were primarily due to decreases of eight percent and five percent, respectively, in Vantiv, Inc.’s share price from June 30, 2014 to September 30, 2014 and from December 31, 2013 to September 30, 2014, respectively. The positive valuation adjustments of $6 million and $116 million for the three and nine months ended September 30, 2013, respectively, were primarily due to increases of one percent and 37%, respectively, in Vantiv, Inc.’s share price from June 30, 2013 to September 30, 2013 and from December 31, 2012 to September 30, 2013. For additional information on the valuation of the warrant, see Note 22 of the Notes to Condensed Consolidated Financial Statements.

Equity method earnings from the Bancorp’s interest in Vantiv Holding, LLC decreased $5 million and $21 million compared to the three and nine months ended September 30, 2013, respectively. The decrease for the three months ended September 30, 2014 was primarily due to a decrease in the Bancorp’s ownership percentage of Vantiv Holding, LLC from 25% as of September 30, 2013 to 23% as of September 30, 2014 due primarily to share sales. The decrease for the nine months ended September 30, 2014 was primarily due to charges taken by Vantiv Holding, LLC related to an acquisition and a decrease in the Bancorp’s ownership percentage of Vantiv Holding, LLC.

Other noninterest income also included a $6 million increase in the loss related to the Visa total return swap for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013. For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B shares, see Note 22 of the Notes to Condensed Consolidated Financial Statements. BOLI income decreased $9 million for the nine months ended September 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 $27 million for the nine months ended September 30, 2014, compared to the prior year period 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 $71 million, or seven percent, for the three months ended September 30, 2014, and decreased $180 million, or six percent, for the nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013, respectively.

The major components of noninterest expense are as follows:

TABLE 11: Noninterest Expense


	For the three months ended September 30,									For the nine months ended September 30,
($ in millions)	2014			2013			% Change			2014			2013			% Change
Salaries, wages and incentives	$	357			389			(8	)	$	1,083			1,193			(9	)
Employee benefits		75			83			(9	)		255			280			(9	)
Net occupancy expense		78			75			4			236			230			3
Technology and communications		53			52			2			158			151			5
Card and processing expense		37			33			12			104			97			8
Equipment expense		30			29			4			90			85			6
Other noninterest expense		258			298			(13	)		866			936			(8	)

Total noninterest expense	$	888			959			(7	)	$	2,792			2,972			(6	)

Efficiency ratio		62.1	%		59.2	%					61.6	%		57.2	%

Total personnel costs (salaries, wages and incentives plus employee benefits) decreased $40 million and $135 million, respectively, for the three and nine months ended September 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 18,503 at September 30, 2014 compared to 20,256 at September 30, 2013.

TABLE 12: Components of Other Noninterest Expense


	For the three months ended September 30,					For the nine months ended September 30,
($ in millions)	2014			2013		2014			2013
Losses and adjustments	$	21			35	$	158			164
Affordable housing investments impairment		33			29		97			77
Loan and lease		29			39		88			125
FDIC insurance and other taxes		22			31		76			98
Marketing		28			32		75			91
Professional service fees		15			19		51			52
Operating lease		16			15		49			41
Travel		14			13		40			42
Postal and courier		12			11		36			36
Data processing		10			10		30			32
Recruitment and education		7			7		20			20
Insurance		4			4		12			13
OREO expense		4			5		12			12
Intangible asset amortization		1			2		3			6
(Benefit from) provision for the reserve for unfunded commitments		(8	)		1		(28	)		(13	)
Other, net		50			45		147			140

Total other noninterest expense	$	258			298	$	866			936

Total other noninterest expense decreased $40 million for the three months ended September 30, 2014 compared to the same period in 2013. Losses and adjustments decreased $14 million for the three months ended September 30, 2014 compared to the three months ended September 30, 2013 primarily due to a decrease in legal settlements and reserve expense. Loan and lease expenses decreased $10 million due to lower loan closing and appraisal costs due to a decline in mortgage originations. FDIC insurance and other taxes decreased $9 million primarily due to the implementation of the large bank assessment fee, which included billings for prior periods, during the quarter ended September 30, 2013, the change in the mix of the Bancorp’s funding base and higher capital levels and a change in tax laws during 2014. The benefit from the reserve for unfunded commitments was $8 million for the three months ended September 30, 2014 compared to the provision for unfunded commitments of $1 million for the same period in the prior year. The increase in the benefit recognized reflects a decrease in estimated loss rates related to unfunded commitments due to improved credit trends, partially offset by an increase in unfunded commitments for which the Bancorp holds reserves.

Total other noninterest expense decreased $70 million for the nine months ended September 30, 2014 compared to the same period in 2013. Loan and lease expenses decreased $37 million for the nine months ended September 30, 2014 compared to the same period in the prior year due to lower loan closing and appraisal costs driven by a decline in mortgage originations. FDIC insurance and other taxes decreased $22 million compared to the same period in the prior year due to the reasons previously mentioned. Marketing expense decreased $16 million for the nine months ended September 30, 2014 compared to the same period in 2013 due to management’s expense control efforts. Losses and adjustments decreased $6 million for the nine months ended September 30, 2014 compared to the nine months ended September 30, 2013 primarily due to a decrease in the provision for representation and warranty claims of $26 million due to improving underlying repurchase

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

metrics and the settlement in the fourth quarter of 2013 with FHLMC, partially offset by a $22 million increase in litigation settlements and reserves expense due to increased litigation and regulatory activity. The benefit from the reserve for unfunded commitments was $28 million for the nine months ended September 30, 2014 compared to $13 million for the same period in the prior year. The increase in the benefit recognized reflects a decrease in estimated loss rates related to unfunded commitments due to improved credit trends, partially offset by an increase in unfunded commitments for which the Bancorp holds reserves. Impairment on affordable housing investments increased $20 million for the nine months ended September 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.

The Bancorp continues to focus on efficiency initiatives as part of its core emphasis on operating leverage and expense control. The efficiency ratio (noninterest expense divided by the sum of net interest income (FTE) and noninterest income) was 62.1% and 61.6% for the three and nine months ended September 30, 2014, respectively, compared to 59.2% and 57.2% for the three and nine months ended September 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 13: Applicable Income Taxes


	For the three months					For the nine months
	ended September 30,					ended September 30,
($ in millions)	2014			2013		2014			2013
Income before income taxes	$	464			604	$	1,509			2,037
Applicable income tax expense		124			183		411			613
Effective tax rate		26.7	%		30.3		27.2	%		30.1

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

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 recognize a non-cash charge to income tax expense upon the write-off of 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 recognize a non-cash charge to income tax expense of $12 million for the write-off of the deferred tax asset previously established for these awards during the first quarter of 2013. Based on the Bancorp’s stock price at September 30, 2014 and the Bancorp’s accumulation of an excess tax benefit through the period ended September 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 14 summarizes end of period loans and leases, including loans held for sale and Table 15 summarizes average total loans and leases, including loans held for sale.

TABLE 14: Components of Total Loans and Leases (includes held for sale)


	September 30, 2014				December 31, 2013
As of ($ in millions)	Balance		% of Total		Balance		% of Total
Commercial:
Commercial and industrial loans	$	41,111		45		39,347		45
Commercial mortgage loans		7,566		8		8,069		9
Commercial construction loans		1,704		2		1,041		1
Commercial leases		3,555		4		3,626		4

Subtotal – commercial		53,936		59		52,083		59

Consumer:
Residential mortgage loans		13,520		15		13,570		15
Home equity		8,987		10		9,246		10
Automobile loans		12,121		13		11,984		13
Credit card		2,317		3		2,294		3
Other consumer loans and leases		384		—		381		—

Subtotal – consumer		37,329		41		37,475		41

Total loans and leases	$	91,265		100		89,558		100

Total portfolio loans and leases (excludes loans held for sale)	$	90,624				88,614

Loans and leases, including loans held for sale, increased $1.7 billion, or two percent, from December 31, 2013. The increase from December 31, 2013 was the result of a $1.9 billion, or four percent, increase in commercial loans and leases partially offset by a $146 million decrease in consumer loans and leases.

Commercial loans and leases increased from December 31, 2013 primarily due to increases in commercial and industrial loans and commercial construction loans partially offset by a decrease in commercial mortgage loans. Commercial and industrial loans increased $1.8 billion, or four percent, from December 31, 2013 and commercial construction loans increased $663 million, or 64%, 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 $503 million, or six 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 home equity partially offset by an increase in automobile loans. Home equity decreased $259 million, or three percent, from December 31, 2013 as payoffs exceeded new loan production. Automobile loans increased $137 million, or one percent, from December 31, 2013 driven by loan originations exceeding run-off of the existing portfolio.

TABLE 15: Components of Average Total Loans and Leases (includes held for sale)


	September 30, 2014				September 30, 2013
For the three months ended ($ in millions)	Balance		% of Total		Balance		% of Total
Commercial:
Commercial and industrial loans	$	41,525		45		38,145		43
Commercial mortgage loans		7,637		8		8,280		9
Commercial construction loans		1,565		2		797		1
Commercial leases		3,576		4		3,574		4

Subtotal – commercial		54,303		59		50,796		57

Consumer:
Residential mortgage loans		13,342		15		14,333		16
Home equity		9,009		10		9,432		11
Automobile loans		12,105		13		12,083		14
Credit card		2,295		3		2,140		2
Other consumer loans and leases		374		—		370		—

Subtotal – consumer		37,125		41		38,358		43

Total average loans and leases	$	91,428		100		89,154		100

Total average portfolio loans and leases (excludes loans held for sale)	$	90,799				87,272

Average loans and leases, including loans held for sale, increased $2.3 billion, or three percent, from September 30, 2013. The increase from September 30, 2013 was the result of a $3.5 billion, or seven percent, increase in average commercial loans and leases partially offset by a $1.2 billion, or three 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 September 30, 2013 primarily due to increases 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 $3.4 billion, or nine percent, from September 30, 2013 and average commercial construction loans increased $768 million, or 96%, from September 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 $643 million, or eight percent, from September 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 September 30, 2013 primarily due to decreases in average residential mortgage loans and average home equity partially offset by an increase in average credit card loans. Average residential mortgage loans decreased $991 million, or seven percent, from September 30, 2013 primarily due to a decline in average loans held for sale of $1.3 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 and the decision to retain certain conforming ARMs and certain other fixed-rate loans originated during the three months ended September 30, 2014. Average home equity decreased $423 million, or four percent, from September 30, 2013 as payoffs exceeded new loan production. Average credit card loans increased $155 million, or seven percent, from September 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 $23.5 billion at September 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 September 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 September 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 recognized $7 million and $24 million in OTTI, included in securities gains, net, in the Bancorp’s Condensed Consolidated Statements of Income, on its available-for-sale and other debt securities for the three and nine months ended September 30, 2014, respectively. During the three and nine months ended September 30, 2013, the Bancorp recognized $45 million and $57 million of OTTI on its available-for-sale and other debt securities, respectively. The Bancorp did not recognize OTTI on any of its available-for-sale equity securities or held-to-maturity debt securities during the three and nine months ended September 30, 2014 and 2013.

TABLE 16: Components of Investment Securities


As of ($ in millions)	September 30, 2014		December 31, 2013
Available-for-sale and other: (amortized cost basis)
U.S. Treasury and federal agencies	$	1,645		1,549
Obligations of states and political subdivisions		186		187
Mortgage-backed securities:
Agency residential mortgage-backed securities^(a)		12,762		12,294
Agency commercial mortgage-backed securities		4,226		—
Non-agency commercial mortgage-backed securities		1,524		1,368
Asset-backed securities and other debt securities		1,329		2,146
Equity securities^(b)		720		865

Total available-for-sale and other securities	$	22,392		18,409

Held-to-maturity: (amortized cost basis)
Obligations of states and political subdivisions	$	190		207
Asset-backed securities and other debt securities		1		1

Total held-to-maturity	$	191		208

Trading: (fair value)
U.S. Treasury and federal agencies	$	14		5
Obligations of states and political subdivisions		32		13
Mortgage-backed securities:
Agency residential mortgage-backed securities		9		3
Asset-backed securities and other debt securities		19		7
Equity securities^(b)		315		315

Total trading	$	389		343

(a)

Includes interest-only mortgage-backed securities of $192 and $262 as of September 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)

Equity 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.

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

On an amortized cost basis, available-for-sale and other securities increased $4.0 billion, or 22%, from December 31, 2013 primarily due to increases in agency residential mortgage-backed securities and agency commercial mortgage-backed securities partially offset by a decrease in asset-backed securities and other debt securities. Agency residential mortgage-backed securities increased $468 million, or four percent, from December 31, 2013 due primarily to the purchase of $5.4 billion of collateralized mortgage obligations partially offset by sales of $3.5 billion and paydowns of $1.5 billion during the nine months ended September 30, 2014. Agency commercial mortgage-backed securities increased $4.2 billion from December 31, 2013 primarily due to $4.3 billion in purchases of agency commercial mortgage-backed securities partially offset by $20 million in sales and $12 million in paydowns on the portfolio during the nine months ended September 30, 2014. Asset-backed securities and other debt securities decreased $817 million, or 38%, from December 31, 2013 due primarily to sales of $1.1 billion of asset-backed securities and collateralized loan obligations and paydowns on the portfolio of $28 million partially offset by the purchase of $248 million of asset-backed securities during the nine months ended September 30, 2014.

On an amortized cost basis, available-for-sale and other securities were 19% and 16% of total interest-earning assets at September 30, 2014 and December 31, 2013, respectively. The estimated weighted-average life of the debt securities in the available-for-sale portfolio was 6.8 years at September 30, 2014 compared to 6.7 years at December 31, 2013. In addition, at September 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 17 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 $520 million at September 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 nine months ended September 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 17: Characteristics of Available-for-Sale and Other Securities


As of September 30, 2014 ($ in millions)	Amortized Cost		Fair Value		Weighted-Average Life (in years)		Weighted-Average Yield
U.S. Treasury and federal agencies:
Average life 1 – 5 years	$	1,645		1,739		2.4		3.49	%

Total		1,645		1,739		2.4		3.49
Obligations of states and political subdivisions:^(a)
Average life of one year or less		36		36		0.5		0.03
Average life 1 – 5 years		115		119		3.1		3.62
Average life 5 – 10 years		30		32		8.1		3.66
Average life greater than 10 years		5		6		10.6		3.78

Total		186		193		3.6		2.94
Agency residential mortgage-backed securities:
Average life of one year or less		64		65		0.3		5.02
Average life 1 – 5 years		1,470		1,536		4.0		4.27
Average life 5 – 10 years		10,323		10,519		6.6		3.35
Average life greater than 10 years		905		940		11.8		4.10

Total		12,762		13,060		6.6		3.52
Agency commercial mortgage-backed securities:
Average life 1 – 5 years		110		110		5.0		2.17
Average life 5 – 10 years		3,354		3,374		8.2		3.07
Average life greater than 10 years		762		771		14.6		3.48

Total		4,226		4,255		9.3		3.12
Non-agency commercial mortgage-backed securities:
Average life of one year or less		52		53		0.6		2.46
Average life 1 – 5 years		598		615		2.5		3.02
Average life 5 – 10 years		874		901		8.0		3.69

Total		1,524		1,569		5.6		3.38
Asset-backed securities and other debt securities:
Average life of one year or less		88		93		0.1		2.01
Average life 1 – 5 years		540		553		3.3		2.68
Average life 5 – 10 years		228		236		6.8		1.87
Average life greater than 10 years		473		488		14.4		2.03

Total		1,329		1,370		7.7		2.27
Equity securities		720		726

Total available-for-sale and other securities	$	22,392		22,912		6.8		3.35	%

(a)

Taxable-equivalent yield adjustments included in the above table are 0.01%, 0.00%, 1.94%, 2.01% 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 September 30, 2014 and December 31, 2013, respectively.

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

TABLE 18: Deposits


	September 30, 2014				December 31, 2013
As of ($ in millions)	Balance		% of Total		Balance		% of Total
Demand	$	32,258		32		32,634		32
Interest checking		24,930		26		25,875		26
Savings		15,355		16		17,045		17
Money market		16,199		17		11,644		12
Foreign office		1,577		2		1,976		2

Transaction deposits		90,319		93		89,174		89
Other time		3,856		4		3,530		4

Core deposits		94,175		97		92,704		93
Certificates-$100,000 and over		3,117		3		6,571		7

Total deposits	$	97,292		100		99,275		100

Core deposits increased $1.5 billion, or two percent, from December 31, 2013 driven by an increase of $1.1 billion, or one percent, in transaction deposits and an increase of $326 million, or nine percent, in other time deposits. Total transaction deposits increased from December 31, 2013 due to an increase in money market deposits, partially offset by decreases in savings deposits, interest checking deposits, foreign office deposits and demand deposits. Money market deposits increased $4.6 billion, or 39%, from December 31, 2013 driven by a promotional product offering which drove balance migration from savings deposits which decreased $1.7 billion, or 10%, from December 31, 2013 and the acquisition of new customers. Interest checking deposits decreased $945 million, or four percent, primarily due to consumer customer seasonality during the fourth quarter of 2013 and lower commercial customer balances. Foreign office deposits decreased $399 million, or 20%, primarily due to a decrease in commercial customer balances. Demand deposits decreased $376 million, or one 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. Other time deposits increased $326 million, or nine percent, from December 31, 2013 primarily from the acquisition of new customers due to promotional interest rates.

The Bancorp uses certificates $100,000 and over as a method to fund earning assets. At September 30, 2014, certificates $100,000 and over decreased $3.5 billion, or 53%, compared to December 31, 2013 primarily due to the maturity and run-off of retail and institutional certificates of deposit during the nine months ended September 30, 2014.

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

TABLE 19: Average Deposits


	September 30, 2014				September 30, 2013
			% of				% of
($ in millions)	Balance		Total		Balance		Total
Demand	$	31,790		33		30,655		32
Interest checking		24,926		26		23,116		25
Savings		15,759		16		18,026		19
Money market		15,222		16		9,693		10
Foreign office		1,663		2		1,755		2

Transaction deposits		89,360		93		83,245		88
Other time		3,800		4		3,676		4

Core deposits		93,160		97		86,921		92
Certificates-$100,000 and over		3,339		3		7,315		8
Other		—		—		17		—

Total average deposits	$	96,499		100		94,253		100

On an average basis, core deposits increased $6.2 billion, or seven percent, from September 30, 2013 due to an increase of $6.1 billion, or seven percent, in average transaction deposits and an increase of $124 million, or three 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 and average demand deposits, partially offset by a decrease in average savings deposits. Average money market deposits increased $5.5 billion, or 57%, from September 30, 2013 primarily due to a promotional product offering which drove balance migration from savings deposits which decreased $2.3 billion, or 13%, from September 30, 2013. The remaining increase in average money market deposits was due to an increase in average commercial account balances and new commercial customer accounts. Average interest checking deposits increased $1.8 billion, or eight percent, from September 30, 2013 primarily due to an increase in average balance per account and new commercial customer accounts. Average demand deposits increased $1.1 billion, or four percent, from September 30, 2013 due to an increase in average commercial account balances and new commercial customer accounts. Average other time deposits increased $124 million, or three percent, from September 30, 2013 primarily from the acquisition of new customers due to promotional interest rates. Average certificates $100,000 and over decreased $4.0 billion, or 54%, from September 30, 2013 due primarily to the maturity and run-off of retail and institutional certificates of deposit during the nine months ended September 30, 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 September 30, 2014 are summarized in the following table:

TABLE 20: Contractual Maturities of Certificates—$100,000 and over


($ in millions)
Three months or less	$	456
After three months through six months		732
After six months through 12 months		326
After 12 months		1,603

Total	$	3,117

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

TABLE 21: Contractual Maturities of Other Time Deposits and Certificates $100,000 and over


($ in millions)
Next 12 months	$	3,038
13-24 months		1,479
25-36 months		819
37-48 months		803
49-60 months		565
After 60 months		269

Total	$	6,973

Borrowings

Total borrowings increased $5.9 billion, or 52%, from December 31, 2013. Table 22 summarizes the end of period components of total borrowings. As of September 30, 2014, total borrowings as a percentage of interest-bearing liabilities were 21% compared to 14% at December 31, 2013.

TABLE 22: Borrowings


As of ($ in millions)	September 30, 2014		December 31, 2013
Federal funds purchased	$	148		284
Other short-term borrowings		2,730		1,380
Long-term debt		14,336		9,633

Total borrowings	$	17,214		11,297

Federal funds purchased decreased $136 million, or 48%, 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 $1.4 billion, or 98%, from December 31, 2013 driven by an increase of $1.4 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 $4.7 billion, or 49%, from December 31, 2013 primarily driven by the issuance of $2.9 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 nine months ended September 30, 2014, partially offset by $921 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 10 and Note 14, respectively, of the Notes to Condensed Consolidated Financial Statements.

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

TABLE 23: Average Borrowings


($ in millions)	September 30, 2014		September 30, 2013
Federal funds purchased	$	520		464
Other short-term borrowings		1,973		1,675
Long-term debt		13,955		7,453

Total average borrowings	$	16,448		9,592

Average total borrowings increased $6.9 billion, or 71%, compared to September 30, 2013, due to increases in average long-term debt, average federal funds purchased and average other short-term borrowings. The increase in average long-term debt of $6.5 billion, or 87%, was driven by the aforementioned issuances of long-term debt as discussed above as well as the issuance of $1.8 billion of unsecured senior bank notes and the issuance of $750 million of subordinated notes during the fourth quarter of 2013. The impact of these issuances was partially offset by 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 23 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 nine months ended September 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 nine months ended September 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 24: Business Segment Net Income Available to Common Shareholders


	For the three months				For the nine months
	ended September 30,				ended September 30,
($ in millions)	2014		2013		2014			2013
Income Statement Data
Commercial Banking	$	217		216	$	594			628
Branch Banking		91		59		243			143
Consumer Lending		1		15		(19	)		151
Investment Advisors		13		20		40			45
General Corporate & Other		18		111		240			457

Net income		340		421		1,098			1,424
Less: Net income attributable to noncontrolling interests		—		—		2			(9	)

Net income attributable to Bancorp		340		421		1,096			1,433
Dividends on preferred stock		12		—		44			18

Net income available to common shareholders	$	328		421	$	1,052			1,415

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 25: Commercial Banking


	For the three months				For the nine months
	ended September 30,				ended September 30,
($ in millions)	2014		2013		2014		2013
Income Statement Data
Net interest income (FTE)^(a)	$	423		406	$	1,246		1,187
Provision for loan and lease losses		47		39		184		122
Noninterest income:
Corporate banking revenue		98		100		311		300
Service charges on deposits		72		67		214		198
Other noninterest income		48		49		122		121
Noninterest expense:
Salaries, incentives and benefits		73		74		230		235
Other noninterest expense		249		240		756		676

Income before taxes		272		269		723		773
Applicable income tax expense^(a)(b)		55		53		129		145

Net income	$	217		216	$	594		628

Average Balance Sheet Data
Commercial loans, including held for sale	$	51,664		47,967	$	51,186		47,479
Demand deposits		18,956		17,662		18,484		16,787
Interest checking		7,668		6,832		8,043		7,009
Savings and money market		5,755		4,882		5,846		4,709
Certificates-$100,000 and over		1,523		1,282		1,376		1,282
Foreign office deposits and other deposits		1,659		1,739		1,955		1,413

(a)

Includes FTE adjustments of $5 for the three months ended September 30, 2014 and 2013 and $15 for the nine months ended September 30, 2014 and 2013.

(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 $217 million for the three months ended September 30, 2014, compared to net income of $216 million for the three months ended September 30, 2013. The increase was driven by increases in net interest income and noninterest income, partially offset by increases in the provision for loan and lease losses and noninterest expense. For the nine months ended September 30, 2014, net income was $594 million compared to $628 million for the same period in 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 $17 million and $59 million for the three and nine months ended September 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 25 bps and 30 bps on average commercial

Large accelerated filer

Accelerated filer

Non-accelerated filer

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Smaller reporting company