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 June 30, 2015

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 809,289,762 shares of the Registrant’s common stock, without par value, outstanding as of July 31, 2015.

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			8
Recent Accounting Standards			10
Critical Accounting Policies			10
Statements of Income Analysis			11
Balance Sheet Analysis			20
Business Segment Review			25
Risk Management—Overview			32
Credit Risk Management			33
Market Risk Management			46
Liquidity Risk Management			50
Operational Risk Management			51
Capital Management			52
Off-Balance Sheet Arrangements			55
Quantitative and Qualitative Disclosures about Market Risk (Item 3)			56
Controls and Procedures (Item 4)			56
Condensed Consolidated Financial Statements and Notes (Item 1)
Balance Sheets (unaudited)			57
Statements of Income (unaudited)			58
Statements of Comprehensive Income (unaudited)			59
Statements of Changes in Equity (unaudited)			60
Statements of Cash Flows (unaudited)			61
Notes to Condensed Consolidated Financial Statements (unaudited)			62

Part II. Other Information
Legal Proceedings (Item 1)			120
Risk Factors (Item 1A)			120
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			120
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) difficulties in separating the operations of any branches or other assets divested; (23) inability to achieve expected benefits from branch consolidations and planned sales within desired timeframes, if at all; (24) ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; and (25) 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

ASU: Accounting Standards Update

ATM: Automated Teller Machine

BCBS: Basel Committee on Banking Supervision

BHC: Bank Holding Company

BOLI: Bank Owned Life Insurance

BPO: Broker Price Opinion

bps: Basis Points

CCAR: Comprehensive Capital Analysis and Review

CDC: Fifth Third Community Development Corporation

CET1: Common Equity Tier 1

CFE: Collateralized Financing Entity

CFPB: United States Consumer Financial Protection Bureau

C&I: Commercial and Industrial

DCF: Discounted Cash Flow

DFA: Dodd-Frank Act

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

FHA: Federal Housing Administration

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

GNMA: Government National Mortgage Association

GSE: Government Sponsored Enterprise

HAMP: Home Affordable Modification Program

HARP: Home Affordable Refinance Program

HFS: Held for Sale

HQLA: High Quality Liquid Assets

IPO: Initial Public Offering

IRC: Internal Revenue Code

IRLC: Interest Rate Lock Commitment

ISDA: International Swaps and Derivatives Association, Inc.

LCR: Liquidity Coverage Ratio

LIBOR: London Interbank Offered Rate

LLC: Limited Liability Company

LTV: Loan-to-Value

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

MSR: Mortgage Servicing Right

N/A: Not Applicable

NII: Net Interest Income

NM: Not Meaningful

NSFR: Net Stable Funding Ratio

OAS: Option-Adjusted Spread

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

VA: Department of Veteran Affairs

VIE: Variable Interest Entity

VRDN: Variable Rate Demand Note

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

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

TABLE 1: Selected Financial Data


	For the three months ended June 30,								For the six months ended June 30,
($ in millions, except for per share data)	2015			2014		% Change			2015			2014		% Change
Income Statement Data
Net interest income^(a)	$	892			905		(1	)	$	1,744			1,803		(3	)
Noninterest income		556			736		(24	)		1,187			1,300		(9	)
Total revenue^(a)		1,448			1,641		(12	)		2,931			3,103		(6	)
Provision for loan and lease losses		79			76		4			148			146		1
Noninterest expense		947			954		(1	)		1,871			1,903		(2	)
Net income attributable to Bancorp		315			439		(28	)		676			756		(11	)
Net income available to common shareholders		292			416		(30	)		638			724		(12	)

Common Share Data
Earnings per share, basic	$	0.36			0.49		(27	)	$	0.78			0.85		(8	)
Earnings per share, diluted		0.36			0.49		(27	)		0.77			0.84		(8	)
Cash dividends declared per common share		0.13			0.13		—			0.26			0.25		4
Book value per share		17.62			16.74		5			17.62			16.74		5
Market value per share		20.82			21.35		(2	)		20.82			21.35		(2	)

Financial Ratios
Return on average assets		0.90	%		1.34		(33	)		0.98	%		1.17		(16	)
Return on average common equity		8.1			11.9		(32	)		8.9			10.5		(15	)
Return on average tangible common equity^(b)		9.7			14.4		(33	)		10.7			12.7		(16	)
Dividend payout ratio		36.1			26.5		36			33.3			29.4		13
Average total Bancorp shareholders’ equity as a percent of average assets		11.32			11.57		(2	)		11.40			11.55		(1	)
Tangible common equity^(b)		8.33			8.74		(5	)		8.33			8.74		(5	)
Net interest margin^(a)		2.90			3.15		(8	)		2.88			3.18		(9	)
Efficiency^(a)		65.4			58.2		12			63.8			61.4		4

Credit Quality
Net losses charged-off	$	86			101		(15	)	$	177			270		(34	)
Net losses charged-off as a percent of average portfolio loans and leases		0.37	%		0.45		(18	)		0.39	%		0.60		(35	)
ALLL as a percent of portfolio loans and leases		1.39			1.61		(14	)		1.39			1.61		(14	)
Allowance for credit losses as a percent of portfolio loans and leases^(c)		1.54			1.77		(13	)		1.54			1.77		(13	)
Nonperforming assets as a percent of portfolio loans, leases and other assets, including OREO^(d)		0.67			0.92		(27	)		0.67			0.92		(27	)

Average Balances
Loans and leases, including held for sale	$	92,739			91,241		2		$	92,202			90,742		2
Total securities and other short-term investments		30,563			23,940		28			29,805			23,443		27
Total assets		139,992			130,965		7			138,828			129,953		7
Transaction deposits^(e)		96,460			89,148		8			95,322			88,526		8
Core deposits^(f)		100,534			92,841		8			99,370			92,181		8
Wholesale funding^(g)		18,362			19,204		(4	)		18,632			18,726		(1	)
Bancorp shareholders’ equity		15,841			15,157		5			15,831			15,011		5


	Basel III Transitional^(h)			Basel I⁽ⁱ⁾					Basel III Transitional^(h)			Basel I⁽ⁱ⁾
Regulatory Capital Ratios
CET1 capital		9.42	%		N/A		NM			9.42	%		N/A		NM
Tier I risk-based capital		10.51			10.80		NM			10.51			10.80		NM
Total risk-based capital		13.69			14.30		NM			13.69			14.30		NM
Tier I leverage		9.44			9.86		NM			9.44			9.86		NM

	Basel III Fully Phased-In								Basel III Fully Phased-In
CET1 capital^(b)		9.31			N/A		NM			9.31			N/A		NM

(a)

Amounts presented on an FTE basis. The FTE adjustment for the three months ended June 30, 2015 and 2014 was $5 and for the six months ended June 30, 2015 and 2014 was $10.

(b)

The return on average tangible common equity, tangible common equity and CET1 capital (fully phased-in) 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.

(h)

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

(i)

These capital ratios were calculated under the Supervisory Agencies general risk-based capital rules (Basel I) which were in effect prior to January 1, 2015.

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

OVERVIEW

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At June 30, 2015, the Bancorp had $141.7 billion in assets, with 1,299 full-service Banking Centers, including 101 Bank Mart^® locations open seven days a week inside select grocery stores, and 2,630 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 an approximate 23% interest in Vantiv Holding, LLC. The carrying value of the Bancorp’s investment in Vantiv Holding, LLC was $415 million as of June 30, 2015.

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, 2014. Each of these items could have an impact on the Bancorp’s financial condition, results of operations and cash flows. In addition, refer to the Glossary of Abbreviations and Acronyms in this report for a list of terms included as a tool for the reader of this quarterly report on Form 10-Q. The abbreviations and acronyms identified therein are used throughout this MD&A, as well as the Condensed Consolidated Financial Statements and Notes to Condensed Consolidated Financial Statements.

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

The Bancorp’s revenues are dependent on both net interest income and noninterest income. For the three months ended June 30, 2015, net interest income on an FTE basis and noninterest income provided 62% and 38% of total revenue, respectively. For the six months ended June 30, 2015, 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 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 of MD&A, risk identification, measurement, monitoring, control and reporting are important to the management of risk and to the financial performance and capital strength of the Bancorp.

Net interest income is the difference between interest income earned on assets such as loans, leases and securities, and interest expense incurred on liabilities such as deposits, other short-term borrowings and long-term debt. Net interest income is affected by the general level of interest rates, the relative level of short-term and long-term interest rates, changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Generally, the rates of interest the Bancorp earns on its assets and pays on its liabilities are established for a period of time. The change in market interest rates over time exposes the Bancorp to interest rate risk through potential adverse changes to net interest income and financial position. The Bancorp manages this risk by continually analyzing and adjusting the composition of its assets and liabilities based on their payment streams and interest rates, the timing of their maturities and their sensitivity to changes in market interest rates. Additionally, in the ordinary course of business, the Bancorp enters into certain derivative transactions as part of its overall strategy to manage its interest rate and prepayment risks. The Bancorp is also exposed to the risk of 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, investment advisory revenue, mortgage banking net revenue, corporate banking revenue, card and processing revenue and other noninterest income. Noninterest expense is primarily driven by personnel costs, net occupancy expense, technology and communication costs, card and processing expense, equipment expense and other noninterest expense.

Branch Consolidation and Sales Plan

The Bancorp monitors changing customer preferences associated with the channels it uses for banking transactions to evaluate the efficiency, competitiveness and quality of the customer service experience in its consumer distribution network. As part of this ongoing assessment, the Bancorp may determine that it is no longer fully committed to maintaining full-service branches at certain of its existing banking center locations. Similarly, the Bancorp may also determine that it is no longer fully committed to building banking centers on certain parcels of land which had previously been held for future branch expansion. On June 16, 2015, the Bancorp’s Board of Directors authorized management to pursue a plan to further develop its distribution strategy, including a plan to consolidate and/or sell 105 operating branch locations and to sell an additional 31 parcels of undeveloped land that had been acquired by the Bancorp for future branch expansion.

The Bancorp performs assessments of the recoverability of long-lived assets when events or changes in circumstances indicate that their carrying values may not be recoverable. Impairment losses associated with such assessments and lower of cost or market adjustments were $98 million and $102 million for the three and six months ended June 30, 2015, respectively, and $18 million for both the three and six months ended June 30, 2014. The impairment losses were recorded in other noninterest income in the Condensed Consolidated Statements of Income. For more information on the branch consolidation and sales plan, refer to Note 7 of the Notes to Condensed Consolidated Financial Statements.

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

Accelerated Share Repurchase Transactions

During the six months ended June 30, 2015, the Bancorp entered into or settled 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, refer to Note 14 of the Notes to Condensed Consolidated Financial Statements. For a summary of the Bancorp’s accelerated share repurchase transactions that were entered into or settled during the six months ended June 30, 2015, refer to Table 2.

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
October 23, 2014	$	180		8,337,875		794,245		9,132,120		January 8, 2015
January 27, 2015		180		8,542,713		1,103,744		9,646,457		April 28, 2015
April 30, 2015		155		6,704,835		842,655		7,547,490		July 31, 2015

For further information on a subsequent event related to capital actions, refer to Note 22 of the Notes to Condensed Consolidated Financial Statements.

Legislative and Regulatory Developments

On July 21, 2010, the DFA 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 established the 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, requires changes to rules governing regulatory capital ratios and requires enhanced liquidity standards.

The FRB launched the 2015 capital planning and stress testing program, CCAR, on October 23, 2014. 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 5, 2015.

In March of 2015, the FRB disclosed its estimates of participating institutions results under the FRB supervisory stress scenario, including capital results, which assume all banks take certain consistently applied future capital actions. In addition, the FRB disclosed its estimates of participating institutions results under the FRB supervisory severe stress scenarios including capital results based on each company’s own base scenario capital actions.

On March 11, 2015, the Bancorp announced the results of its capital plan submitted to the FRB as part of the 2015 CCAR. The FRB indicated to the Bancorp that it did not object to the following capital actions for the period beginning April 1, 2015 and ending June 30, 2016:

•

The potential increase in the quarterly common stock dividend to $0.14 per share in 2016;

•

The potential repurchase of common shares in an amount up to $765 million;

•

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

For more information on the 2015 CCAR results, refer to the Capital Management section of MD&A.

The BHCs that participated in the 2015 CCAR, including the Bancorp, are required to conduct mid-cycle company-run stress tests using data as of March 31, 2015. The stress tests must be based on three BHC defined scenarios – baseline, adverse and severely adverse. The Bancorp submitted the results of its mid-cycle stress test to the FRB by the required July 6, 2015 submission date. For further information on the 2015 mid-cycle stress test, see the Capital Management section of MD&A.

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 of 2013 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 was 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 Loans and Leases subsection of the Balance Sheet Analysis section of MD&A 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 7 and 8 in the Statements of Income Analysis section of MD&A.

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

On January 17, 2014, given developments in industry practice, Fifth Third announced that it would 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 is continuing to offer the service to existing deposit advance customers until further regulatory guidance is finalized. The Bancorp currently expects these changes to the deposit advance product to negatively impact net interest income by approximately $95 million in 2015.

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 CET1 capital ratio. In July of 2013, U.S. banking regulators approved final enhanced regulatory capital requirements (Basel III Final Rule), which included modifications to the proposed rules. The Basel III Final Rule provided for certain banks, including the Bancorp, to opt out of including AOCI in Tier I capital and also retained the treatment of residential mortgage exposures consistent with the current Basel I capital rules. The Basel III Final Rule phases out the inclusion of certain TruPS as a component of Tier I capital. The Bancorp became subject to the Basel III Final Rule on January 1, 2015. The Bancorp made a one-time permanent election not to include AOCI in CET1 capital in the March 31, 2015 FFIEC 031 and FR Y-9C filings. For more information on the impact of the regulatory capital enhancements refer to the Capital Management section of MD&A.

On December 10, 2013, the banking agencies finalized section 619 of the DFA, known as the Volcker Rule, which became effective April 1, 2014. Though the final rule was effective April 1, 2014, the FRB granted the industry an extension of time until July 21, 2015 to conform certain of its activities related to proprietary trading to comply with the Volcker Rule. In addition, the FRB has granted the industry an extension of time until July 21, 2016, and announced its intention to grant a one year extension of the conformance period until July 21, 2017, to conform certain ownership interests in, sponsorship activities of and relationships with private equity or hedge funds as well as holding certain collateralized loan obligations that were in place as of December 31, 2013. It is possible that additional conformance period extensions could be granted either to the entire industry, or, upon request, to requesting banking organizations on a case-by-case basis. The final rule prohibits banks and bank holding companies from engaging in short-term proprietary trading of certain securities, derivatives, commodity futures and options on these instruments for their own account. The Volcker Rule also restricts banks and their affiliated entities from owning, sponsoring or having certain relationships with private equity and hedge funds, as well as holding certain collateralized loan obligations that are deemed to contain ownership interests. Exemptions are provided for certain activities such as underwriting, market making, hedging, trading in certain government obligations and organizing and offering a hedge fund or private equity fund. Fifth Third does not sponsor any private equity or hedge funds that, under the final rule, it is prohibited from sponsoring. As of June 30, 2015, the Bancorp held no collateralized loan obligations. As of June 30, 2015, the Bancorp had approximately $181 million in interests and approximately $38 million in binding commitments to invest in private equity funds that are affected by the Volcker Rule. It is expected that over time the Bancorp may need to sell or redeem these investments, however no formal plan to sell has been approved as of June 30, 2015. As a result of the announced conformance period extension, the Bancorp believes it is likely that these investments will be reduced over time in the ordinary course of events before compliance is required.

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 DFA, 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 District of Columbia 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. However, on January 20, 2015, the U.S. Supreme Court declined to hear an appeal of the Circuit Court reversal, thereby largely upholding the Current Rule and substantially reducing uncertainty surrounding debit card interchange fees the Bancorp is permitted to charge. Refer to the Noninterest Income subsection of the Statements of Income Analysis section of MD&A for further information regarding the Bancorp’s debit card interchange revenue.

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

Earnings Summary

The Bancorp’s net income available to common shareholders for the second quarter of 2015 was $292 million, or $0.36 per diluted share, which was net of $23 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the second quarter of 2014 was $416 million, or $0.49 per diluted share, which was net of $23 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the six months ended June 30, 2015 was $638 million, or $0.77 per diluted share, which was net of $38 million in preferred stock dividends. For the six months ended June 30, 2014, the Bancorp’s net income available to common shareholders was $724 million, or $0.84 per diluted share, which was net of $32 million in preferred stock dividends. Pre-provision net revenue was $496 million and $1.1 billion for the three and six months ended June 30, 2015, respectively, compared to $682 million and $1.2 billion for the same periods in 2014. 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 on an FTE basis was $892 million and $1.7 billion for the three and six months ended June 30, 2015, respectively, a decrease of $13 million and $59 million compared to the same periods in the prior year. Net interest income was negatively impacted by lower yields on the Bancorp’s interest-earning assets, changes made to the Bancorp’s deposit advance product beginning January 1, 2015, and increases in average long-term debt of $1.2 billion and $2.7 billion for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. These negative impacts were partially offset by increases in average taxable securities of $5.6 billion and $4.2 billion for the three and six months ended June 30, 2015, respectively, and increases in average loans and leases of $1.5 billion for both the three and six months ended June 30, 2015 compared to the same periods in the prior year. Net interest margin on an FTE basis was 2.90% and 2.88% for the three and six months ended June 30, 2015, respectively, compared to 3.15% and 3.18% for the three and six months ended June 30, 2014, respectively.

Noninterest income decreased $180 million for the three months ended June 30, 2015 compared to the same period in the prior year primarily due to a decrease in other noninterest income, partially offset by an increase in mortgage banking net revenue. Noninterest income decreased $113 million for the six months ended June 30, 2015 compared to the same period in the prior year primarily due to decreases in other noninterest income and corporate banking revenue, partially offset by an increase in mortgage banking net revenue. Other noninterest income decreased $225 million and $103 million for the three and six months ended June 30, 2015, respectively compared to the same period in the prior year. The decrease in other noninterest income for both periods was driven by a gain of $125 million on the sale of Vantiv, Inc. shares in the second quarter of 2014. In addition, the three and six months ended June 30, 2015 included impairment losses associated with lower of cost or market adjustments on long-lived assets of $98 million and $102 million, respectively, compared to $18 million for both the three and six months ended June 30, 2014. Mortgage banking net revenue increased $39 million and $16 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year primarily due to increases in net mortgage servicing revenue. Corporate banking revenue decreased $35 million for the six months ended June 30, 2015 compared to the same period in the prior year primarily driven by impairment charges of $34 million related to certain operating lease equipment that was recognized during the six months ended June 30, 2015.

Noninterest expense decreased $7 million and $32 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year primarily due to a decrease in other noninterest expense, partially offset by increases in personnel costs (salaries, wages and incentives plus employee benefits). Total other noninterest expense decreased $29 million for the three months ended June 30, 2015 compared to the same period in the prior year primarily due to decreases in losses and adjustments, partially offset by increases in the provision for the reserve for unfunded commitments and impairment on affordable housing investments. Total other noninterest expense decreased $68 million for the six months ended June 30, 2015 compared to the same period in the prior year primarily due to decreases in losses and adjustments and FDIC insurance and other taxes, partially offset by a decrease in the benefit from the reserve for unfunded commitments and increases in impairment on affordable housing investments and marketing expense. Total personnel costs increased $14 million and $21 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The increase for both periods was driven by increases in incentive compensation primarily in the mortgage business and base compensation.

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 $79 million and $148 million for the three and six months ended June 30, 2015, respectively, compared to $76 million and $146 million during the same periods in 2014. Net charge-offs as a percent of average portfolio loans and leases decreased to 0.37% during the three months ended June 30, 2015 compared to 0.45% during the same period in the prior year and decreased to 0.39% for the six months ended June 30, 2015 compared to 0.60% for the six months ended June 30, 2014. At June 30, 2015, nonperforming assets as a percent of portfolio loans, leases and other assets, including OREO (excluding nonaccrual loans held for sale) decreased to 0.67%, compared to 0.82% at December 31, 2014. 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 FRB. As of June 30, 2015, the transitional CET1 capital ratio was 9.42%, the transitional Tier I risk-based capital ratio was 10.51%, the transitional Total risk-based capital ratio was 13.69% and the transitional Tier I leverage ratio was 9.44%.

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

NON-GAAP FINANCIAL MEASURES

The following are non-GAAP measures which are important to the reader of the Condensed Consolidated Financial Statements but should be supplemental to primary GAAP 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 Modified LCR is important for comparability to other financial institutions. For a further discussion on liquidity management and the LCR, refer to the Liquidity Risk Management section of MD&A.

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


As of ($ in millions)	June 30, 2015
Estimated HQLA	$	21,715
Estimated net cash outflow		20,089

Estimated Modified LCR		108	%

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 ended June 30,						For the six months ended June 30,
($ in millions)	2015			2014			2015			2014
Net interest income (U.S. GAAP)	$	887			900			1,734			1,793
Add: Noninterest income		556			736			1,187			1,300
Less: Noninterest expense		(947	)		(954	)		(1,871	)		(1,903	)

Pre-provision net revenue	$	496			682			1,050			1,190

The Bancorp believes return on average tangible common equity is an important measure for comparative purposes with other financial institutions, but is not defined under U.S. GAAP, and therefore is considered a non-GAAP financial measure.

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

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


	For the three months ended June 30,						For the six months ended June 30,
($ in millions)	2015			2014			2015			2014
Net income available to common shareholders (U.S. GAAP)	$	292			416			638			724
Add: Intangible amortization, net of tax		—			1			1			1

Tangible net income available to common shareholders	$	292			417			639			725
Tangible net income available to common shareholders (annualized) (1)		1,171			1,673			1,278			1,451

Average Bancorp shareholders’ equity (U.S. GAAP)	$	15,841			15,157			15,831			15,011
Less: Average preferred stock		(1,331	)		(1,119	)		(1,331	)		(1,077	)
Average goodwill		(2,416	)		(2,416	)		(2,416	)		(2,416	)
Average intangible assets and other servicing rights		(15	)		(17	)		(15	)		(18	)

Average tangible common equity (2)	$	12,079			11,605			12,069			11,500
Return on average tangible common equity (1) / (2)		9.7	%		14.4			10.6			12.6

The Bancorp considers various measures when evaluating capital utilization and adequacy, including the tangible equity ratio and tangible common equity ratio, in addition to capital ratios defined by 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. Additionally, the Bancorp became subject to the Basel III Final Rule on January 1, 2015. The CET1 capital ratio is a new measure defined by the banking regulatory agencies under the Basel III Final Rule. The CET1 capital ratio has transition provisions that will be phased out over time. The Bancorp is presenting the CET1 capital ratio on a fully phased-in basis for comparative purposes with other organizations. 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 encourages readers to consider its Condensed Consolidated Financial Statements in their entirety and not to rely on any single financial measure.

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

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

TABLE 6: Non-GAAP Financial Measures—Capital Ratios


As of ($ in millions)	June 30, 2015			December 31, 2014
Total Bancorp shareholders’ equity (U.S. GAAP)	$	15,605			15,626
Less: Preferred stock		(1,331	)		(1,331	)
Goodwill		(2,416	)		(2,416	)
Intangible assets and other servicing rights		(14	)		(16	)

Tangible common equity, including unrealized gains / losses		11,844			11,863
Less: AOCI		(291	)		(429	)

Tangible common equity, excluding unrealized gains / losses (1)		11,553			11,434
Add: Preferred stock		1,331			1,331

Tangible equity (2)	$	12,884			12,765


Total assets (U.S. GAAP)	$	141,658			138,706
Less: Goodwill		(2,416	)		(2,416	)
Intangible assets and other servicing rights		(14	)		(16	)
AOCI, before tax		(448	)		(660	)

Tangible assets, excluding unrealized gains / losses (3)	$	138,780			135,614


Total Bancorp shareholders’ equity (U.S. GAAP)	$	N/A			15,626
Less: Goodwill and certain other intangibles		N/A			(2,476	)
Unrealized gains		N/A			(429	)
Add: Qualifying TruPS		N/A			60
Other		N/A			(17	)

Tier I risk-based capital		N/A			12,764
Less: Preferred stock		N/A			(1,331	)
Qualifying TruPS		N/A			(60	)
Qualified noncontrolling interests in consolidated subsidiaries		N/A			(1	)

Tier I common equity (4)	$	N/A			11,372


	Basel III Transitional			Basel I
Risk-weighted assets (5)^(a)	$	122,986			117,878

Ratios:
Tangible equity as a percent of tangible assets (2) / (3)		9.28	%		9.41
Tangible common equity as a percent of tangible assets (excluding unrealized gains/losses) (1) / (3)		8.33	%		8.43
Tier I common equity (4) / (5)^(b)		N/A	%		9.65


Basel III Final Rule—Transition to fully phased-in
CET1 capital (transitional)	$	11,582			N/A
Less: Adjustments to CET1 capital from transitional to fully phased-in^(c)		(12	)		N/A

CET1 capital (fully phased-in) (6)		11,570			N/A

Risk-weighted assets (transitional)		122,986			N/A
Add: Adjustments to risk-weighted assets from transitional to fully phased-in^(d)		1,280			N/A

Risk-weighted assets (fully phased-in) (7)	$	124,266			N/A

Estimated CET1 capital ratio under Basel III Final Rule (fully phased-in) (6) / (7)		9.31	%		N/A

(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)

The Bancorp became subject to the Basel III Final Rule on January 1, 2015. This codified in the federal banking regulations the risk-based capital ratios the Bancorp is now subject to, as such these ratios are no longer considered non-GAAP measures.

(c)

Primarily relates to disallowed intangible assets (other than goodwill and MSRs, net of associated deferred tax liabilities).

(d)

Primarily relates to higher risk weighting for MSRs.

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

RECENT ACCOUNTING STANDARDS

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

CRITICAL ACCOUNTING POLICIES

The Bancorp’s Condensed Consolidated Financial Statements are prepared in accordance with U.S. GAAP. Certain accounting policies require management to exercise judgment in determining methodologies, economic assumptions and estimates that may materially affect the Bancorp’s financial position, results of operations and cash flows. The Bancorp's critical accounting policies include the accounting for the ALLL, reserve for unfunded commitments, income taxes, valuation of servicing rights, fair value measurements, goodwill and legal contingencies. These accounting policies are discussed in detail in Management’s Discussion and Analysis – Critical Accounting Policies in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2014. No material changes were made to the valuation techniques or models during the six months ended June 30, 2015.

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

STATEMENTS OF INCOME ANALYSIS

Net Interest Income

Net interest income is the interest earned on securities, loans and leases (including yield-related fees) and other interest-earning assets less the interest paid for core deposits (includes transaction deposits and other time deposits) and wholesale funding (includes certificates—$100,000 and over, other deposits, federal funds purchased, 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 7 and 8 present the components of net interest income, net interest margin and net interest rate spread for the three and six months ended June 30, 2015 and 2014, 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 on an FTE basis was $892 million and $1.7 billion for the three and six months ended June 30, 2015, respectively, a decrease of $13 million and $59 million compared to the same periods in the prior year. Net interest income was negatively impacted by lower yields on the Bancorp’s interest-earning assets, changes made to the Bancorp’s deposit advance product beginning January 1, 2015, and increases in average long-term debt of $1.2 billion and $2.7 billion for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. These negative impacts were partially offset by increases in average taxable securities of $5.6 billion and $4.2 billion for the three and six months ended June 30, 2015, respectively, and increases in average loans and leases of $1.5 billion for both the three and six months ended June 30, 2015 compared to the same periods in the prior year. The net interest rate spread decreased to 2.72% and 2.70% during the three and six months ended June 30, 2015, respectively, from 2.99% and 3.03% in the same periods in the prior year due to a 25 bps and 27 bps decrease in yields on average interest-earning assets for the three and six months ended June 30, 2015, respectively, and a 2 bps and 6 bps increase in the rates paid on average interest-bearing liabilities for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year.

Net interest margin on an FTE basis was 2.90% and 2.88% for the three and six months ended June 30, 2015, respectively, compared to 3.15% and 3.18% for the three and six months ended June 30, 2014, respectively. The decrease from both periods in 2014 was driven primarily by the previously mentioned decrease in net interest rate spread coupled with an $8.1 billion and $7.8 billion increase in average interest-earning assets for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year partially offset by increases in average free funding balances.

Interest income on an FTE basis from loans and leases decreased $43 million compared to the three months ended June 30, 2014 and decreased $88 million compared to the six months ended June 30, 2014. The decrease for the three and six months ended June 30, 2015 was primarily the result of a decrease of 24 bps and 26 bps, respectively, in yields on average loans and leases partially offset by an increase of two percent in average loans and leases for both the three and six months ended June 30, 2015 compared to the same periods in the prior year. The decrease in yields for the three and six months ended June 30, 2015 was primarily due to a $25 million and $47 million, respectively, decline in interest income on other consumer loans and leases due to changes made to the Bancorp’s deposit advance product beginning January 1, 2015 coupled with a 13 bps and 16 bps, respectively, decrease in yields on average commercial and industrial loans compared to the same periods in the prior year. The increase in average loans and leases was driven primarily by increases in average commercial loans and leases. For more information on the Bancorp’s loan and lease portfolio, refer to the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A. Interest income from investment securities and other short-term investments increased $38 million and $60 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year primarily as a result of the aforementioned increases in average taxable securities.

Average core deposits increased $7.7 billion compared to the three months ended June 30, 2014 and increased $7.2 billion compared to the six months ended June 30, 2014. The increase from both the three and six months ended June 30, 2014 was primarily due to increases in average money market deposits, average interest checking deposits and average demand deposits partially offset by decreases in average savings deposits and average foreign office deposits. The cost of average interest-bearing core deposits decreased to 23 bps and 25 bps for the three and six months ended June 30, 2015, respectively, from 26 bps for both the three and six months ended June 30, 2014. Interest expense on deposits decreased during the three months ended June 30, 2015 primarily due to a 10 bps and 6 bps decrease in the rates paid on average money market deposits and average savings deposits, respectively, partially offset by a 41 bps increase in the rates paid on average certificates $100,000 and over. Interest expense on deposits was flat during the six months ended June 30, 2015 compared to the same period in the prior year primarily due to a 45 bps and 19 bps increase in the rates paid on average certificates $100,000 and over and average other time deposits offset by a $2.1 billion decrease in average certificates $100,000 and over. Refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s deposits.

For the three and six months ended June 30, 2015, interest expense on average wholesale funding increased $11 million and $29 million, respectively, compared to the same periods in the prior year. The increase for the three months ended June 30, 2015 was the result of an increase in interest expense related to long-term debt. Interest expense on long-term debt increased due to a $1.2 billion increase in average long-term debt for the three months ended June 30, 2015 compared to the same period in the prior year coupled with a 15 bps increase in the rates paid on average long-term debt. The increase for the six months ended June 30, 2015 was primarily the result of an increase in interest expense related to long-term debt partially offset by a decrease in interest expense on average certificates $100,000 and over. Interest expense on long-term debt increased due to a $2.7 billion increase in average long-term debt for the six months ended June 30, 2015 compared to the same period in the prior year coupled with a 8 bps increase in the rates paid on average long-term debt.

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

Refer to the Borrowings subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s borrowings. During both the three and six months ended June 30, 2015, average wholesale funding represented 22% of average interest-bearing liabilities compared to 24% and 23% during the three and six months ended June 30, 2014, 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 7: Condensed Average Balance Sheets and Analysis of Net Interest Income on an FTE basis


For the three months ended	June 30, 2015								June 30, 2014								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	$	42,554		$	334		3.14	%	$	41,451		$	338		3.27	%	$	9			(13	)		(4	)
Commercial mortgage		7,149			57		3.22			7,886			67		3.39			(7	)		(3	)		(10	)
Commercial construction		2,549			20		3.17			1,364			12		3.54			9			(1	)		8
Commercial leases		3,776			27		2.83			3,556			27		3.04			2			(2	)		—

Subtotal – commercial		56,028			438		3.13			54,257			444		3.28			13			(19	)		(6	)

Residential mortgage loans		13,375			123		3.69			13,202			129		3.93			2			(8	)		(6	)
Home equity		8,655			79		3.66			9,101			84		3.71			(4	)		(1	)		(5	)
Automobile loans		11,902			79		2.65			12,070			83		2.77			—			(4	)		(4	)
Credit card		2,296			59		10.33			2,232			56		10.06			1			2			3
Other consumer loans and leases		483			9		8.49			379			34		35.63			6			(31	)		(25	)

Subtotal – consumer		36,711			349		3.82			36,984			386		4.19			5			(42	)		(37	)

Total loans and leases		92,739			787		3.41			91,241			830		3.65			18			(61	)		(43	)
Securities:
Taxable		27,344			218		3.20			21,706			181		3.34			45			(8	)		37
Exempt from income taxes^(b)		59			1		4.82			52			1		4.69			—			—			—
Other short-term investments		3,160			2		0.25			2,182			1		0.28			1			—			1

Total interest-earning assets		123,302			1,008		3.28			115,181			1,013		3.53			64			(69	)		(5	)
Cash and due from banks		2,636								2,847
Other assets		15,354								14,417
Allowance for loan and lease losses		(1,300	)							(1,480	)

Total assets	$	139,992							$	130,965

Liabilities and Equity
Interest-bearing liabilities:
Interest checking	$	26,894		$	12		0.19	%	$	25,222		$	14		0.22	%	$	(1	)		(1	)		(2	)
Savings		15,156			3		0.05			16,509			4		0.11			1			(2	)		(1	)
Money market		18,071			10		0.23			13,942			12		0.33			2			(4	)		(2	)
Foreign office deposits		955			—		0.14			2,200			2		0.29			(1	)		(1	)		(2	)
Other time deposits		4,074			13		1.24			3,693			9		1.03			2			2			4
Certificates - $100,000 and over		2,558			8		1.24			3,840			8		0.83			(3	)		3			—
Federal funds purchased		326			—		0.12			606			—		0.10			—			—			—
Other short-term borrowings		1,705			1		0.12			2,234			1		0.10			—			—			—
Long-term debt		13,773			69		2.04			12,524			58		1.89			6			5			11

Total interest-bearing liabilities		83,512			116		0.56			80,770			108		0.54			6			2			8
Demand deposits		35,384								31,275
Other liabilities		5,215								3,724

Total liabilities		124,111								115,769
Total equity		15,881								15,196

Total liabilities and equity	$	139,992							$	130,965

Net interest income (FTE)				$	892							$	905				$	58			(71	)		(13	)
Net interest margin (FTE)							2.90	%							3.15	%
Net interest rate spread (FTE)							2.72								2.99
Interest-bearing liabilities to interest-earning assets							67.73								70.12

(a)

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

(b)

The FTE adjustments included in the above table were $5 for both the three months ended June 30, 2015 and 2014.

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

TABLE 8: Condensed Average Balance Sheets and Analysis of Net Interest Income on an FTE basis


For the six months ended	June 30, 2015								June 30, 2014								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	$	42,011		$	656		3.15	%	$	40,933		$	672		3.31	%	$	17			(33	)		(16	)
Commercial mortgage		7,198			116		3.25			7,934			134		3.41			(12	)		(6	)		(18	)
Commercial construction		2,375			38		3.20			1,242			22		3.51			18			(2	)		16
Commercial leases		3,746			53		2.87			3,582			54		3.06			3			(4	)		(1	)

Subtotal – commercial		55,330			863		3.15			53,691			882		3.31			26			(45	)		(19	)

Residential mortgage loans		13,444			250		3.76			13,252			259		3.94			3			(12	)		(9	)
Home equity		8,728			158		3.66			9,147			169		3.72			(8	)		(3	)		(11	)
Automobile loans		11,918			158		2.67			12,047			168		2.82			(1	)		(9	)		(10	)
Credit card		2,308			118		10.28			2,231			110		9.98			5			3			8
Other consumer loans/leases		474			23		9.61			374			70		37.74			15			(62	)		(47	)

Subtotal – consumer		36,872			707		3.86			37,051			776		4.23			14			(83	)		(69	)

Total loans and leases		92,202			1,570		3.43			90,742			1,658		3.69			40			(128	)		(88	)
Securities:
Taxable		25,235			406		3.25			21,049			349		3.34			67			(10	)		57
Exempt from income taxes^(b)		59			1		5.03			49			1		5.07			—			—			—
Other short-term investments		4,511			6		0.25			2,345			3		0.27			3			—			3

Total interest-earning assets		122,007			1,983		3.28			114,185			2,011		3.55			110			(138	)		(28	)
Cash and due from banks		2,733								2,848
Other assets		15,399								14,448
Allowance for loan and lease losses		(1,311	)							(1,528	)

Total assets	$	138,828							$	129,953

Liabilities and Equity
Interest-bearing liabilities:
Interest checking	$	26,889		$	26		0.20	%	$	25,565		$	28		0.22	%	$	—			(2	)		(2	)
Savings		15,165			5		0.06			16,705			9		0.11			(1	)		(3	)		(4	)
Money market		17,784			24		0.28			13,195			20		0.31			6			(2	)		4
Foreign office deposits		908			1		0.17			2,109			3		0.29			(1	)		(1	)		(2	)
Other time deposits		4,048			24		1.20			3,655			18		1.01			2			4			6
Certificates - $100,000 and over		2,620			16		1.20			4,703			18		0.75			(10	)		8			(2	)
Other deposits		—			—		—			—			—		0.05			—			—			—
Federal funds purchased		249			—		0.11			577			—		0.10			—			—			—
Other short-term borrowings		1,654			1		0.11			2,022			1		0.10			—			—			—
Long-term debt		14,109			142		2.03			11,424			111		1.95			26			5			31

Total interest-bearing liabilities		83,426			239		0.58			79,955			208		0.52			22			9			31
Demand deposits		34,576								30,952
Other liabilities		4,956								3,997

Total liabilities		122,958								114,904
Total equity		15,870								15,049

Total liabilities and equity	$	138,828							$	129,953

Net interest income (FTE)				$	1,744							$	1,803				$	88			(147	)		(59	)
Net interest margin (FTE)							2.88	%							3.18	%
Net interest rate spread (FTE)							2.70								3.03
Interest-bearing liabilities to interest-earning assets							68.38								70.02

(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 $10 for both the six months ended June 30, 2015 and 2014.

Provision for Loan and Lease Losses

The Bancorp provides as an expense an amount for probable 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, 2014. The provision is recorded to bring the ALLL to a level deemed appropriate by the Bancorp to cover losses inherent in the portfolio. Actual credit losses on loans and leases are charged against the ALLL. The amount of loans and leases actually removed from the Condensed Consolidated Balance Sheets 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 $79 million and $148 million for the three and six months ended June 30, 2015, respectively, compared to $76 million and $146 million during the three and six months ended June 30, 2014, respectively. The ALLL declined $29 million from December 31, 2014 to $1.3 billion at June 30, 2015. As of June 30, 2015, the ALLL as a percent of portfolio loans and leases decreased to 1.39%, compared to 1.47% at December 31, 2014.

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

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

Noninterest Income

Noninterest income decreased $180 million, or 24%, for the three months ended June 30, 2015 compared to the same period in the prior year and decreased $113 million, or nine percent, for the six months ended June 30, 2015 compared to the same period in the prior year.

The components of noninterest income for the three and six months ended June 30, 2015 and 2014 are as follows:

TABLE 9: Noninterest Income


	For the three months ended June 30,							For the six months ended June 30,
($ in millions)	2015		2014		% Change			2015		2014		% Change
Service charges on deposits	$	139		139		—		$	274		272		1
Investment advisory revenue		105		102		3			212		204		4
Mortgage banking net revenue		117		78		50			203		187		9
Corporate banking revenue		113		107		6			176		211		(17	)
Card and processing revenue		77		76		1			148		144		3
Other noninterest income		1		226		(100	)		165		268		(38	)
Securities gains, net		4		8		(50	)		9		14		(36	)

Total noninterest income	$	556		736		(24	)	$	1,187		1,300		(9	)

Service charges on deposits

Service charges on deposits were flat for the three months ended June 30, 2015 and increased $2 million for the six months ended June 30, 2015, compared to the same period in the prior year, primarily due to a $2 million increase in consumer overdraft fees.

Investment advisory revenue

Investment advisory revenue increased $3 million and $8 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in 2014. The increase for both periods was primarily driven by increases of $3 million and $5 million, respectively, in recurring securities brokerage fees driven by higher sales volume. The six months ended June 30, 2015 also included a $3 million increase in private client service fees due to an increase in personal asset management fees compared to the same period in the prior year. The Bancorp had approximately $304 billion and $305 billion in total assets under care as of June 30, 2015 and 2014, respectively, and managed $27 billion in assets for individuals, corporations and not-for-profit organizations for both period-ends.

Mortgage banking net revenue

Mortgage banking net revenue increased $39 million and $16 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year.

The components of mortgage banking net revenue are as follows:

TABLE 10: Components of Mortgage Banking Net Revenue


	For the three months ended June 30,						For the six months ended June 30,
($ in millions)	2015			2014			2015			2014
Origination fees and gains on loan sales	$	43			42			87			84
Net mortgage servicing revenue:
Gross mortgage servicing fees		56			62			115			125
MSR amortization		(39	)		(32	)		(73	)		(55	)
Net valuation adjustments on MSRs and free-standing derivatives entered into to economically hedge MSRs		57			6			74			33

Net mortgage servicing revenue		74			36			116			103

Mortgage banking net revenue	$	117			78			203			187

Origination fees and gains on loan sales increased $1 million and $3 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The increase for the three and six months ended June 30, 2015 was primarily the result of a 25% and 16% increase in residential mortgage loan originations from the three and six months ended June 30, 2014, respectively. Residential mortgage loan originations increased to $2.5 billion and $4.3 billion during the three and six months ended June 30, 2015, respectively, compared to $2.0 billion and $3.7 billion during the same periods in the prior year due to strong refinancing activity that occurred during the first half of 2015.

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 increased $38 million for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 driven primarily by an increase of $51 million in net valuation adjustments, partially offset by an increase in mortgage servicing rights amortization of $7 million.

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

Net mortgage servicing revenue increased $13 million for the six months ended June 30, 2015 compared to the same period in the prior year driven primarily by an increase of $41 million in net valuation adjustments partially offset by an increase in mortgage servicing rights amortization of $18 million.

The components of net valuation adjustments on the MSR portfolio and the impact of the non-qualifying hedging strategy are as follows:

TABLE 11: Components of Net Valuation Adjustments on MSRs


	For the three months ended June 30,						For the six months ended June 30,
($ in millions)	2015			2014			2015		2014
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio	$	(30	)		38			35		61
Recovery of (provision for) MSR impairment		87			(32	)		39		(28	)

Net valuation adjustments on MSR and free-standing derivatives entered into to economically hedge MSRs	$	57			6			74		33

Mortgage rates increased during the three and six months ended June 30, 2015 which caused modeled prepayment speeds to slow, which led to the recovery of temporary impairment on servicing rights during the respective periods. Mortgage rates decreased during the three and six months ended June 30, 2014 which caused modeled prepayment speeds to increase, which led to temporary impairment on servicing rights during the respective periods.

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. Refer to 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 June 30, 2015 and 2014 were $75.4 billion and $81.3 billion, respectively, with $61.7 billion and $68.1 billion, respectively, of residential mortgage loans serviced for others.

Corporate banking revenue

Corporate banking revenue increased $6 million for the three months ended June 30, 2015, compared to the same period in the prior year primarily due to increases in institutional sales revenue and business lending fees, partially offset by a decrease in syndication fees. Corporate banking revenue decreased $35 million for the six months ended June 30, 2015 compared to the six months ended June 30, 2014. The decrease compared to the six months ended June 30, 2014 was primarily driven by impairment charges of $34 million related to certain operating lease equipment that was recognized during the six months ended June 30, 2015. Refer to Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information. The six months ended June 30, 2015 also included a $19 million decrease in syndication fees as a result of decreased activity in the market. The decreases for the six months ended June 30, 2015 were partially offset by higher foreign exchange fees, institutional sales revenue and business lending fees compared to the same period in the prior year.

Card and processing revenue

Card and processing revenue increased $1 million and $4 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The increase for the three and six months ended June 30, 2015 was primarily the result of an increase in the number of actively used cards and an increase in customer spend volume. Debit card interchange revenue, included in card and processing revenue, was $35 million and $67 million for the three and six months ended June 30, 2015, respectively, compared to $33 million and $63 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 12: Components of Other Noninterest Income


	For the three months ended June 30,						For the six months ended June 30,
($ in millions)	2015			2014			2015			2014
Valuation adjustments on the warrant associated with Vantiv Holding, LLC	$	14			63			85			28
Operating lease income		22			21			44			42
Gain on loan sales		—			—			41			—
Equity method income from interest in Vantiv Holding, LLC		16			4			26			19
BOLI income		12			11			24			21
Cardholder fees		11			11			22			23
Consumer loan and lease fees		6			6			12			12
Banking center income		6			8			11			16
Insurance income		4			3			8			6
Gain on sale of Vantiv, Inc. shares		—			125			—			125
Net losses on disposition and impairment of bank premises and equipment		(98	)		(18	)		(101	)		(18	)
Loss on swap associated with the sale of Visa, Inc. class B shares		(2	)		(16	)		(19	)		(15	)
Other, net		10			8			12			9

Total other noninterest income	$	1			226			165			268

Other noninterest income decreased $225 million in the second quarter of 2015 compared to the second quarter of 2014 and decreased $103 million for the six months ended June 30, 2015 compared to the same period in the prior year. The decrease for both periods included the impact of a gain of $125 million on the sale of Vantiv, Inc. shares in the second quarter of 2014. The three and six months ended June 30, 2015 also included impairment losses associated with lower of cost or market adjustments on long-lived assets of $98 million and $102 million, respectively, compared to $18 million for the three and six months ended June 30, 2014. Refer to Note 7 of the Notes to Condensed Consolidated Financial Statements for additional information on bank premises and equipment.

In addition to the decreases above, the positive valuation adjustment on the stock warrant associated with Vantiv Holding, LLC was $14 million for the three months ended June 30, 2015 compared to the positive valuation adjustment of $63 million during the three months ended June 30, 2014. The positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC were $85 million for the six months ended June 30, 2015 compared to the positive valuation adjustments of $28 million during the six months ended June 30, 2014. The fair value of the stock warrant is calculated using the Black-Scholes valuation model, which utilizes several key inputs (Vantiv, Inc. stock price, strike price of the warrant and several unobservable inputs). The positive valuation adjustments for the three and six months ended June 30, 2015, were primarily due to increases of one percent and 13%, respectively, in Vantiv, Inc.’s share price from March 31, 2015 to June 30, 2015 and from December 31, 2014 to June 30, 2015, respectively. The positive valuation adjustments of $63 million and $28 million for the three and six months ended June 30, 2014, respectively, were primarily due to increases of 11% and three percent, respectively, in Vantiv, Inc.’s share price from March 31, 2014 to June 30, 2014 and from December 31, 2013 to June 30, 2014. For additional information on the valuation of the warrant, refer to Note 20 of the Notes to Condensed Consolidated Financial Statements. Equity method earnings from the Bancorp’s interest in Vantiv Holding, LLC increased $12 million and $7 million compared to the three and six months ended June 30, 2014, respectively, primarily due to charges taken by Vantiv Holding, LLC during the second quarter of 2014 related to an acquisition.

Other noninterest income also included a $14 million decrease in the negative valuation adjustment related to the Visa total return swap for the three months ended June 30, 2015 compared to the three months ended June 30, 2014. The six months ended June 30, 2015 included a $4 million increase in the negative valuation adjustments related to the Visa total return swap compared to the same period of the prior year. For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B shares, refer to Note 20 of the Notes to Condensed Consolidated Financial Statements. Gain on loan sales increased $41 million for the six months ended June 30, 2015 compared to the same period in the prior year primarily due to a $37 million gain on the sale of certain HFS residential mortgage loans classified as TDRs during the first quarter of 2015.

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

Noninterest Expense

Total noninterest expense decreased $7 million, or one percent, for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 primarily due to a decrease in other noninterest expense, partially offset by increases in personnel costs (salaries, wages and incentives plus employee benefits) and net occupancy expense. Total noninterest expense decreased $32 million, or two percent, for the six months ended June 30, 2015 compared to the six months ended June 30, 2014, primarily due to a decrease in other noninterest expense, partially offset by increases in personnel costs and card and processing expense.

The major components of noninterest expense are as follows:

TABLE 13: Noninterest Expense


	For the three months ended June 30,								For the six months ended June 30,
($ in millions)	2015			2014		% Change			2015			2014		% Change
Salaries, wages and incentives	$	383			368		4		$	752			727		3
Employee benefits		78			79		(1	)		176			180		(2	)
Net occupancy expense		83			79		5			162			158		3
Technology and communications		54			52		4			109			105		4
Card and processing expense		38			37		3			74			68		9
Equipment expense		31			30		3			61			60		2
Other noninterest expense		280			309		(9	)		537			605		(11	)

Total noninterest expense	$	947			954		(1	)	$	1,871			1,903		(2	)

Efficiency ratio on an FTE basis		65.4	%		58.2					63.8	%		61.4

Total personnel costs increased $14 million and $21 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The increase for both periods was driven by increases in incentive compensation, primarily in the mortgage business, and base compensation. Full-time equivalent employees totaled 18,527 at June 30, 2015 compared to 18,732 at June 30, 2014.

The major components of other noninterest expense are as follows:

TABLE 14: Components of Other Noninterest Expense


	For the three months ended June 30,					For the six months ended June 30,
($ in millions)	2015		2014			2015			2014
Impairment on affordable housing investments	$	38		32			75			64
Loan and lease		33		29			60			58
Marketing		27		25			54			46
FDIC insurance and other taxes		28		26			44			54
Operating lease		18		16			36			33
Losses and adjustments		15		72			29			137
Professional service fees		15		18			27			36
Travel		14		14			27			26
Postal and courier		11		12			23			24
Data processing		11		10			22			20
Recruitment and education		7		7			14			13
Insurance		4		4			9			8
Intangible asset amortization		1		1			1			2
(Benefit from) provision for the reserve for unfunded commitments		2		(11	)		(3	)		(19	)
Other, net		56		54			119			103

Total other noninterest expense	$	280		309			537			605

Total other noninterest expense decreased $29 million for the three months ended June 30, 2015 compared to the same period in the prior year primarily due to a decrease in losses and adjustments, partially offset by increases in the provision for the reserve for unfunded commitments and impairment on affordable housing investments. Losses and adjustments decreased $57 million for the three months ended June 30, 2015 compared to the three months ended June 30, 2014 primarily due to a decrease in legal settlements and reserve expense. The provision for the reserve for unfunded commitments was $2 million for the three months ended June 30, 2015 compared to the benefit from the reserve for unfunded commitments of $11 million for the same period in the prior year. The increase in the provision primarily reflects an increase in unfunded commitments for which the Bancorp holds reserves. Impairment on affordable housing investments increased $6 million for the three months ended June 30, 2015 compared to the same period in the prior year, primarily due to incremental losses resulting from previous growth in the portfolio.

Total other noninterest expense decreased $68 million for the six months ended June 30, 2015 compared to the same period in the prior year primarily due to decreases in losses and adjustments and FDIC insurance and other taxes, partially offset by a decrease in the benefit from the reserve for unfunded commitments and increases in impairment on affordable housing investments and marketing expense. Losses and adjustments decreased $108 million for the six months ended June 30, 2015 compared to the same period in the prior year primarily due to a decrease in legal settlements and reserve expense. FDIC insurance and other taxes decreased $10 million compared to the same period in the prior year primarily due to a settlement of a tax liability related to prior years during the first quarter of 2015. The benefit from the reserve for unfunded commitments was $3 million for the six months ended June 30, 2015 compared to $19 million for the same period in the prior year.

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

The decrease in the benefit recognized primarily reflects an increase in unfunded commitments for which the Bancorp holds reserves. Impairment on affordable housing investments increased $11 million for the six months ended June 30, 2015 compared to the same period in the prior year, primarily due to incremental losses resulting from previous growth in the portfolio. Marketing expense increased $8 million for the six months ended June 30, 2015 compared to the same period in the prior year primarily due to an increase in advertising expense.

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 65.4% and 63.8% for the three and six months ended June 30, 2015, respectively, compared to 58.2% and 61.4% for the three and six months ended June 30, 2014, respectively.

Applicable Income Taxes

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

TABLE 15: Applicable Income Taxes


	For the three months ended June 30,					For the six months ended June 30,
($ in millions)	2015			2014		2015		2014
Income before income taxes	$	417			606		902		1,044
Applicable income tax expense		108			167		232		287
Effective tax rate		26.1	%		27.6		25.8		27.5

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

The decrease in the effective tax rate for the three and six months ended June 30, 2015 compared to the same periods in the prior year resulted from the benefit from an increase in the amount of 2015 forecasted income tax credits.

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. Based on the accumulated excess tax benefit at June 30, 2015, the Bancorp was not required to recognize a non-cash charge to income tax expense related to stock-based awards for the three and six months ended June 30, 2015.

Based on the Bancorp’s stock price at June 30, 2015 and the amount of the Bancorp’s accumulation of an excess tax benefit through the period ended June 30, 2015, the Bancorp believes it will be required to recognize a $1 million non-cash charge to income tax expense over the next twelve months related to stock-based awards, primarily in the second quarter of 2016. 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 be required to recognize a non-cash charge to income tax expense greater than or less than $1 million over the next twelve months.

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 16 summarizes end of period loans and leases, including loans held for sale and Table 17 summarizes average total loans and leases, including loans held for sale.

TABLE 16: Components of Total Loans and Leases (includes held for sale)


	June 30, 2015				December 31, 2014
As of ($ in millions)	Balance		% of Total		Balance		% of Total
Commercial loans and leases:
Commercial and industrial loans	$	42,812		45	$	40,801		45
Commercial mortgage loans		7,165		8		7,410		8
Commercial construction loans		2,709		3		2,071		2
Commercial leases		3,882		4		3,721		4

Subtotal – commercial loans and leases		56,568		60		54,003		59

Consumer loans and leases:
Residential mortgage loans		13,792		15		13,582		15
Home equity		8,591		9		8,886		10
Automobile loans		11,914		13		12,037		13
Credit card		2,278		2		2,401		3
Other consumer loans and leases		555		1		436		—

Subtotal – consumer loans and leases		37,130		40		37,342		41

Total loans and leases	$	93,698		100	$	91,345		100

Total portfolio loans and leases (excludes loans held for sale)	$	92,703			$	90,084

Loans and leases, including loans held for sale, increased $2.4 billion, or three percent, from December 31, 2014. The increase from December 31, 2014 was the result of a $2.6 billion, or five percent, increase in commercial loans and leases partially offset by a $212 million, or one percent, decrease in consumer loans and leases.

Commercial loans and leases increased from December 31, 2014 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 $2.0 billion, or five percent, from December 31, 2014 and commercial construction loans increased $638 million, or 31%, from December 31, 2014 primarily as a result of an increase in new loan origination activity resulting from an increase in demand and targeted marketing efforts. Commercial mortgage loans decreased $245 million, or three percent, from December 31, 2014 primarily due to a decline in new loan origination activity driven by increased competition and an increase in paydowns.

Consumer loans and leases decreased from December 31, 2014 primarily due to decreases in home equity, automobile loans and credit card loans partially offset by an increase in residential mortgage loans. Home equity decreased $295 million, or three percent, from December 31, 2014 and automobile loans decreased $123 million, or one percent, from December 31, 2014 as payoffs exceeded new loan production. Credit card loans decreased $123 million, or five percent, from December 31, 2014 primarily due to seasonal trends from the paydown of year-end balances which were higher due to holiday spending. Residential mortgage loans increased $210 million, or two percent, from December 31, 2014 primarily due to the continued retention of certain conforming ARMs and certain other fixed-rate loans originated during the six months ended June 30, 2015.

TABLE 17: Components of Average Total Loans and Leases (includes held for sale)


	June 30, 2015				June 30, 2014
For the three months ended ($ in millions)	Balance		% of Total		Balance		% of Total
Commercial loans and leases:
Commercial and industrial loans	$	42,554		46	$	41,451		47
Commercial mortgage loans		7,149		7		7,886		9
Commercial construction loans		2,549		3		1,364		1
Commercial leases		3,776		4		3,556		4

Subtotal – commercial loans and leases		56,028		60		54,257		61

Consumer loans and leases:
Residential mortgage loans		13,375		14		13,202		14
Home equity		8,655		9		9,101		10
Automobile loans		11,902		13		12,070		13
Credit card		2,296		3		2,232		2
Other consumer loans and leases		483		1		379		—

Subtotal – consumer loans and leases		36,711		40		36,984		39

Total average loans and leases	$	92,739		100	$	91,241		100

Total average portfolio loans and leases (excludes loans held for sale)	$	92,173			$	90,549

Average loans and leases, including loans held for sale, increased $1.5 billion, or two percent, from June 30, 2014. The increase from June 30, 2014 was the result of a $1.8 billion, or three percent, increase in average commercial loans and leases partially offset by a $273 million, or one percent, decrease in average consumer loans and leases.

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

Average commercial loans and leases increased from June 30, 2014 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 $1.1 billion, or three percent, from June 30, 2014 and average commercial construction loans increased $1.2 billion, or 87%, from June 30, 2014 primarily as a result of an increase in new loan origination activity resulting from an increase in demand due to a strengthening economy and targeted marketing efforts. Average commercial mortgage loans decreased $737 million, or nine percent, from June 30, 2014 primarily due to a decline in new loan origination activity driven by increased competition and an increase in paydowns.

Average consumer loans and leases decreased from June 30, 2014 primarily due to decreases in average home equity and average automobile loans partially offset by an increase in average residential mortgage loans. Average home equity decreased $446 million, or five percent, from June 30, 2014 and average automobile loans decreased $168 million, or one percent, from June 30, 2014 as payoffs exceeded new loan production. Average residential mortgage loans increased $173 million, or one percent, from June 30, 2014 primarily driven by the continued retention of certain conforming ARMs and certain other fixed-rate loans.

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 $28.5 billion and $23.0 billion at June 30, 2015 and December 31, 2014, respectively. The taxable investment securities portfolio had an effective duration of 4.9 years at June 30, 2015 compared to 4.5 years at December 31, 2014.

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

At June 30, 2015, the Bancorp’s investment portfolio consisted primarily of AAA-rated available-for-sale securities. Securities classified as below investment grade were immaterial as of June 30, 2015 and December 31, 2014. 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 $4 million and $5 million in OTTI on its available-for-sale and other debt securities, included in securities gains, net, in the Condensed Consolidated Statements of Income, during the three and six months ended June 30, 2015, respectively. The Bancorp did not recognize OTTI during the three months ended June 30, 2014 and recognized $17 million of OTTI on its available-for-sale and other debt securities during the six months ended June 30, 2014. 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 six months ended June 30, 2015 and 2014.

TABLE 18: Components of Investment Securities


As of ($ in millions)	June 30, 2015		December 31, 2014
Available-for-sale and other: (amortized cost basis)
U.S. Treasury and federal agencies securities	$	1,544		1,545
Obligations of states and political subdivisions securities		172		185
Mortgage-backed securities:
Agency residential mortgage-backed securities^(a)		15,653		11,968
Agency commercial mortgage-backed securities		5,687		4,465
Non-agency commercial mortgage-backed securities		2,382		1,489
Asset-backed securities and other debt securities		1,344		1,324
Equity securities^(b)		701		701

Total available-for-sale and other securities	$	27,483		21,677

Held-to-maturity: (amortized cost basis)
Obligations of states and political subdivisions securities	$	156		186
Asset-backed securities and other debt securities		1		1

Total held-to-maturity securities	$	157		187

Trading: (fair value)
U.S. Treasury and federal agencies securities	$	9		14
Obligations of states and political subdivisions securities		17		8
Mortgage-backed securities:
Agency residential mortgage-backed securities		4		9
Asset-backed securities and other debt securities		13		13
Equity securities^(b)		327		316

Total trading securities	$	370		360

(a)

Includes interest-only mortgage-backed securities of $162 and $175 as of June 30, 2015 and December 31, 2014, respectively, recorded at fair value with fair value changes recorded in securities gains, net 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.

On an amortized cost basis, available-for-sale and other securities increased $5.8 billion, or 27%, from December 31, 2014 primarily due to increases in agency residential mortgage-backed securities, agency commercial mortgage-backed securities and non-agency commercial mortgage-backed securities. Agency residential mortgage-backed securities increased $3.7 billion, or 31%, from December 31, 2014 primarily due to the purchase of $11.7 billion of agency residential mortgage-backed securities partially offset by sales of $6.7 billion and paydowns of $1.3 billion during the six months ended June 30, 2015.

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

Agency commercial mortgage-backed securities increased $1.2 billion, or 27%, from December 31, 2014 primarily due to $2.6 billion in purchases of agency commercial mortgage-backed securities partially offset by $1.3 billion in sales and $91 million in paydowns on the portfolio during the six months ended June 30, 2015. Non-agency commercial mortgage-backed securities increased $893 million, or 60%, from December 31, 2014 primarily due to $1.3 billion in purchases of non-agency commercial mortgage-backed securities partially offset by $315 million in sales and $68 million in paydowns on the portfolio during the six months ended June 30, 2015.

On an amortized cost basis, available-for-sale and other securities were 22% and 18% of total interest-earning assets at June 30, 2015 and December 31, 2014, respectively. The estimated weighted-average life of the debt securities in the available-for-sale and other portfolio was 6.5 years at June 30, 2015 compared to 5.8 years at December 31, 2014. In addition, at June 30, 2015, the available-for-sale and other securities portfolio had a weighted-average yield of 3.29%, compared to 3.31% at December 31, 2014.

Information presented in Table 19 is on a weighted-average life basis, anticipating future prepayments. Yield information is presented on an FTE basis and is computed using amortized cost balances. Maturity and yield calculations for the total available-for-sale and other portfolio exclude equity securities that have no stated yield or maturity. Total net unrealized gains on the available-for-sale and other securities portfolio were $504 million at June 30, 2015 compared to $731 million at December 31, 2014. The decrease from December 31, 2014 was primarily due to an increase in interest rates during the six months ended June 30, 2015. 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 19: Characteristics of Available-for-Sale and Other Securities


As of June 30, 2015 ($ in millions)	Amortized Cost		Fair Value		Weighted-Average Life (in years)		Weighted-Average Yield
U.S. Treasury and federal agencies securities:
Average life of one year or less	$	51		51		0.6		2.98	%
Average life 1 – 5 years		1,493		1,564		1.6		3.64

Total		1,544		1,615		1.6		3.62
Obligations of states and political subdivisions securities:^(a)
Average life of one year or less		28		29		0.6		2.67
Average life 1 – 5 years		109		111		2.5		3.06
Average life 5 – 10 years		35		37		7.8		3.95

Total		172		177		3.3		3.18
Agency residential mortgage-backed securities:
Average life of one year or less		24		24		0.6		5.29
Average life 1 – 5 years		1,777		1,849		4.1		4.16
Average life 5 – 10 years		13,336		13,551		6.7		3.36
Average life greater than 10 years		516		530		13.3		3.50

Total		15,653		15,954		6.6		3.46
Agency commercial mortgage-backed securities:
Average life of one year or less		2		2		0.8		7.40
Average life 1 – 5 years		925		940		4.6		3.07
Average life 5 – 10 years		4,688		4,738		8.0		3.00
Average life greater than 10 years		72		71		13.3		3.08

Total		5,687		5,751		7.5		3.01
Non-agency commercial mortgage-backed securities:
Average life of one year or less		103		104		0.8		2.77
Average life 1 – 5 years		350		359		2.4		3.11
Average life 5 – 10 years		1,929		1,951		8.0		3.27

Total		2,382		2,414		6.9		3.23
Asset-backed securities and other debt securities:
Average life of one year or less		81		87		0.1		2.00
Average life 1 – 5 years		564		574		2.9		2.70
Average life 5 – 10 years		215		220		7.1		1.95
Average life greater than 10 years		484		493		14.4		2.08

Total		1,344		1,374		7.5		2.31
Equity securities		701		702

Total available-for-sale and other securities	$	27,483		27,987		6.5		3.29	%

(a)

Taxable-equivalent yield adjustments included in the above table are 0.00%, 0.00%, 2.09% and 0.42% for securities with an average life of 1 year or less, 1-5 years, 5-10 years and in total, respectively.

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

Deposits

The Bancorp’s deposit balances represent an important source of funding and revenue growth opportunity. The Bancorp continues to focus on core deposit growth in its retail and commercial franchises by improving customer satisfaction, building full relationships and offering competitive rates. Core deposits represented 71% of the Bancorp’s asset funding base at both June 30, 2015 and December 31, 2014.

TABLE 20: Deposits


	June 30, 2015				December 31, 2014
As of ($ in millions)	Balance		% of Total		Balance		% of Total
Demand	$	35,449		34	$	34,809		34
Interest checking		27,074		26		26,800		26
Savings		14,976		15		15,051		15
Money market		17,900		17		17,083		17
Foreign office		728		1		1,114		1

Transaction deposits		96,127		93		94,857		93
Other time		4,050		4		3,960		4

Core deposits		100,177		97		98,817		97
Certificates - $100,000 and over^(a)		2,846		3		2,895		3

Total deposits	$	103,023		100	$	101,712		100

(a)

Includes $1,414 and $1,483 of certificates $250,000 and over at June 30, 2015 and December 31, 2014, respectively.

Core deposits increased $1.4 billion, or one percent, from December 31, 2014 driven primarily by an increase of $1.3 billion, or one percent, in transaction deposits. Total transaction deposits increased from December 31, 2014 primarily due to increases in money market deposits, demand deposits and interest checking deposits partially offset by a decrease in foreign office deposits. Money market deposits increased $817 million, or five percent, from December 31, 2014 driven primarily by a promotional product offering and the acquisition of new customers. Demand deposits increased $640 million, or two percent, from December 31, 2014 primarily due to higher balances per account for commercial customers and consumer customer seasonality. Interest checking deposits increased $274 million, or one percent, from December 31, 2014 primarily due to the acquisition of new commercial customers. Foreign office deposits decreased $386 million, or 35%, primarily due to lower balances per account.

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

TABLE 21: Average Deposits


	June 30, 2015				June 30, 2014
($ in millions)	Balance		% of Total		Balance		% of Total
Demand	$	35,384		34	$	31,275		32
Interest checking		26,894		26		25,222		26
Savings		15,156		15		16,509		17
Money market		18,071		18		13,942		15
Foreign office		955		1		2,200		2

Transaction deposits		96,460		94		89,148		92
Other time		4,074		4		3,693		4

Core deposits		100,534		98		92,841		96
Certificates - $100,000 and over^(a)		2,558		2		3,840		4

Total average deposits	$	103,092		100	$	96,681		100

(a)

Includes $1,423 and $1,340 of average certificates $250,000 and over for the three months ended June 30, 2015 and 2014, respectively.

On an average basis, core deposits increased $7.7 billion, or eight percent, from June 30, 2014 due to increases of $7.3 billion, or eight percent, in average transaction deposits and $381 million, or 10%, in average other time deposits. The increase in average transaction deposits was driven by increases in average money market deposits, average demand deposits and average interest checking deposits partially offset by decreases in average savings deposits and average foreign office deposits. Average money market deposits increased $4.1 billion, or 30%, from June 30, 2014 primarily driven by a promotional product offering, an increase in average commercial account balances and new commercial customer accounts. The remaining increase in average money market deposits was due to balance migration from savings deposits which decreased $1.4 billion, or eight percent, from June 30, 2014. Average demand deposits increased $4.1 billion, or 13%, from June 30, 2014 primarily due to an increase in average commercial account balances and new commercial customer accounts. Average interest checking deposits increased $1.7 billion, or seven percent, from June 30, 2014 primarily due to an increase in average balance per account and new commercial customer accounts. Average foreign office deposits decreased $1.2 billion, or 57%, primarily due to lower average balances per account. Average other time deposits increased $381 million, or 10%, from June 30, 2014 primarily from the acquisition of new customers due to promotional interest rates since June 30, 2014. The Bancorp uses certificates $100,000 and over as a method to fund earning assets. Average certificates $100,000 and over decreased $1.3 billion, or 33%, from June 30, 2014 due primarily to the maturity and run-off of retail and institutional certificates of deposit since June 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 June 30, 2015 are summarized in the following table:

TABLE 22: Contractual Maturities of Certificates—$100,000 and over


($ in millions)
Three months or less	$	224
After three months through six months		502
After six months through 12 months		449
After 12 months		1,671

Total certificates - $100,000 and over	$	2,846

The contractual maturities of other time deposits and certificates $100,000 and over as of June 30, 2015 are summarized in the following table:

TABLE 23: Contractual Maturities of Other Time Deposits and Certificates $100,000 and over


($ in millions)
Next 12 months	$	2,430
13-24 months		1,387
25-36 months		1,156
37-48 months		345
49-60 months		1,538
After 60 months		40

Total other time deposits and certificates $100,000 and over	$	6,896

Borrowings

Total borrowings increased $1.1 billion, or seven percent, from December 31, 2014. Table 24 summarizes the end of period components of total borrowings. As of June 30, 2015, total borrowings as a percentage of interest-bearing liabilities were 21% compared to 20% at December 31, 2014.

TABLE 24: Borrowings


As of ($ in millions)	June 30, 2015		December 31, 2014
Federal funds purchased	$	126		144
Other short-term borrowings		4,136		1,556
Long-term debt		13,521		14,967

Total borrowings	$	17,783		16,667

Federal funds purchased decreased $18 million, or 13%, from December 31, 2014 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 $2.6 billion from December 31, 2014 driven by an increase of $2.9 billion in FHLB short-term borrowings, partially offset by a decrease in commercial repurchase agreements. For further information on the components of other short-term borrowings, refer to Note 13 of the Notes to Condensed Consolidated Financial Statements. Long-term debt decreased $1.4 billion, or 10%, from December 31, 2014 primarily driven by the maturity of $500 million of subordinated fixed-rate bank notes and $893 million of paydowns on long-term debt associated with automobile loan securitizations. For additional information regarding automobile securitizations, refer to Note 10 of the Notes to Condensed Consolidated Financial Statements.

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

TABLE 25: Average Borrowings


($ in millions)	June 30, 2015		June 30, 2014
Federal funds purchased	$	326		606
Other short-term borrowings		1,705		2,234
Long-term debt		13,773		12,524

Total average borrowings	$	15,804		15,364

Average total borrowings increased $440 million, or three percent, compared to June 30, 2014, due to an increase in average long-term debt partially offset by decreases in average federal funds purchased and average other short-term borrowings. The increase in average long-term debt of $1.2 billion, or 10%, was driven by the issuance of $850 million of unsecured senior bank notes during the third quarter of 2014, as well as the issuance of asset-backed securities by consolidated VIEs of $1.0 billion related to an automobile loan securitization during the fourth quarter of 2014. The impact of these issuances was partially offset by the aforementioned maturity of subordinated fixed-rate bank notes and paydowns on long-term debt associated with automobile loan securitizations since the second quarter of 2014. The level of average federal funds purchased and average other short-term borrowings can fluctuate significantly from period to period depending on funding needs and which sources are used to satisfy those needs. Additionally, the utilization of short-term funding remained low throughout 2014 and during the first half of 2015 due to strong deposit growth and to comply with regulatory standards which require greater dependency on long-term and stable funding. Information on the average rates paid on borrowings is discussed in the Net Interest Income subsection of the Statements of Income Analysis section of MD&A. In addition, refer to the Liquidity Risk Management section of MD&A for a discussion on the role of borrowings in the Bancorp’s liquidity management.

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

BUSINESS SEGMENT REVIEW

The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors. Additional information on each business segment is included in Note 21 of the Notes to Condensed Consolidated Financial Statements. Results of the Bancorp’s business segments are presented based on its management structure and management accounting practices. The structure and accounting practices are specific to the Bancorp; therefore, the financial results of the Bancorp’s business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as management’s accounting practices or businesses change.

The Bancorp manages interest rate risk centrally at the corporate level and employs an 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 federal funds, U.S. swap curve or swap rate. The credit rates for several deposit products were reset January 1, 2015 to reflect the current market rates and updated duration assumptions. These rates were generally lower than those in place during 2014, thus net interest income for deposit providing businesses was negatively impacted for the three and six months ended June 30, 2015.

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. Additionally, the business segments form synergies by taking advantage of cross-sell opportunities and when funding operations by accessing the capital markets as a collective unit.

The results of operations and financial position for the three and six months ended June 30, 2014 were adjusted to reflect the transfer of certain customers and Bancorp employees from Commercial Banking to Branch Banking, effective January 1, 2015. 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 26: Business Segment Net Income Available to Common Shareholders


	For the three months ended June 30,						For the six months ended June 30,
($ in millions)	2015			2014			2015			2014
Income Statement Data
Commercial Banking	$	206			208			368			366
Branch Banking		23			80			99			163
Consumer Lending		42			(15	)		91			(19	)
Investment Advisors		9			12			23			27
General Corporate and Other		29			154			89			220

Net income		309			439			670			757
Less: Net income attributable to noncontrolling interests		(6	)		—			(6	)		1

Net income attributable to Bancorp		315			439			676			756
Dividends on preferred stock		23			23			38			32

Net income available to common shareholders	$	292			416			638			724

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 27: Commercial Banking


	For the three months ended June 30,				For the six months ended June 30,
($ in millions)	2015		2014		2015		2014
Income Statement Data
Net interest income (FTE)^(a)	$	407		408		804		811
Provision for loan and lease losses		38		40		71		139
Noninterest income:
Corporate banking revenue		112		107		172		211
Service charges on deposits		71		70		140		138
Other noninterest income		49		39		92		76
Noninterest expense:
Salaries, incentives and employee benefits		75		75		155		157
Other noninterest expense		281		255		558		506

Income before taxes		245		254		424		434
Applicable income tax expense^(a)(b)		39		46		56		68

Net income	$	206		208		368		366

Average Balance Sheet Data
Commercial loans, including held for sale	$	52,839		50,987		52,165		50,367
Demand deposits		20,773		17,810		20,368		17,723
Interest checking deposits		9,272		8,047		9,259		8,167
Savings and money market deposits		6,564		5,761		6,310		5,761
Other time deposits and certificates—$100,000 and over		1,268		1,302		1,303		1,325
Foreign office deposits		950		2,190		901		2,099

(a)

Includes FTE adjustments of $5 for both the three months ended June 30, 2015 and 2014 and $10 for both the six months ended June 30, 2015 and 2014.

(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 $206 million for the three months ended June 30, 2015 compared to net income of $208 million for the three months ended June 30, 2014. The decrease was driven by an increase in noninterest expense and a decrease in net interest income on an FTE basis partially offset by a decrease in the provision for loan and lease losses and an increase in noninterest income. Net income was $368 million for the six months ended June 30, 2015 compared to net income of $366 million for the six months ended June 30, 2014. The increase was driven by a decrease in the provision for loan and lease losses partially offset by an increase in noninterest expense and decreases in net interest income on an FTE basis and noninterest income.

Net interest income on an FTE basis decreased $1 million and $7 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The decreases were primarily driven by a decline in yields of 19 bps and 20 bps on average commercial loans for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The decreases for both periods were partially offset by increases in FTP credits due to an increase in average demand deposits.

Provision for loan and lease losses decreased $2 million for the three months ended June 30, 2015 and $68 million for the six months ended June 30, 2015 compared to the same periods in the prior year primarily due to improved credit metrics. Net charge-offs as a percent of average portfolio loans and leases decreased to 28 bps for the three months ended June 30, 2015 compared to 32 bps for the same period in the prior year and decreased to 27 bps for the six months ended June 30, 2015 compared to 55 bps for the same period in the prior year.

Noninterest income increased $16 million and decreased $21 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The increase for the three months ended June 30, 2015 was driven by increases in other noninterest income and corporate banking revenue. Other noninterest income increased $10 million for the three months ended June 30, 2015 from the same period in the prior year driven by increases in foreign exchange translation gains and operating lease income. Corporate banking revenue increased $5 million for the three months ended June 30, 2015 from the same period in the prior year primarily driven by increases in institutional sales revenue and business lending fees partially offset by a decrease in syndication fees as a result of decreased activity in the market. The decrease for the six months ended June 30, 2015 was driven by a decrease in corporate banking revenue partially offset by an increase in other noninterest income. Corporate banking revenue decreased $39 million for the six months ended June 30, 2015 from the same period in the prior year primarily driven by a $34 million impairment charge related to certain operating lease equipment that was recognized during the first half of 2015. Refer to Note 8 of the Notes to Condensed Consolidated Financial Statements for additional information. The decrease was also driven by a decrease in syndication fees as a result of decreased activity in the market partially offset by increases in foreign exchange fees and business lending fees compared to the same period in the prior year. Other noninterest income increased $16 million for the six months ended June 30, 2015 from the same period in the prior year driven by increases in gains on loan sales and operating lease income.

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

Noninterest expense increased $26 million and $50 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year as a result of increases in other noninterest expense. The increase in other noninterest expense for both periods was primarily driven by increases in corporate overhead allocations, operating lease expense and impairment on affordable housing investments primarily due to incremental losses resulting from previous growth in the portfolio.

Average commercial loans increased $1.9 billion and $1.8 billion for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year 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 portfolio loans increased $1.2 billion for both the three and six months ended June 30, 2015 compared to the same periods in the prior year and average commercial construction portfolio loans increased $1.2 billion and $1.1 billion for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year primarily as a result of an increase in new loan origination activity resulting from an increase in demand due to a strengthening economy and targeted marketing efforts. Average commercial mortgage portfolio loans decreased $643 million and $612 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year primarily due to a decline in new loan origination activity driven by increased competition and an increase in paydowns.

Average core deposits increased $3.7 billion and $3.1 billion for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The increase for the three months ended June 30, 2015 was primarily driven by increases in average demand deposits, average interest checking deposits and average savings and money market deposits which increased $3.0 billion, $1.2 billion and $803 million, respectively, compared to the same period in the prior year. This was partially offset by a decrease in average foreign deposits of $1.2 billion for the three months ended June 30, 2015 compared to the same period in the prior year. The increase for the six months ended June 30, 2015 was primarily driven by increases in average demand deposits, average interest checking deposits and average savings and money market deposits which increased $2.6 billion, $1.1 billion and $549 million, respectively, compared to the same period in the prior year. This was partially offset by a decrease in average foreign deposits of $1.2 billion for the six months ended June 30, 2015 compared to the same period in the prior year.

Branch Banking

Branch Banking provides a full range of deposit and loan products to individuals and small businesses through 1,299 full-service Banking Centers. Branch Banking offers depository and loan products, such as checking and savings accounts, home equity loans and lines of credit, credit cards and loans for automobiles and other personal financing needs, as well as products designed to meet the specific needs of small businesses, including cash management services.

The following table contains selected financial data for the Branch Banking segment:

TABLE 28: Branch Banking


	For the three months ended June 30,					For the six months ended June 30,
($ in millions)	2015			2014		2015			2014
Income Statement Data
Net interest income	$	376			384		752			775
Provision for loan and lease losses		38			47		81			91
Noninterest income:
Service charges on deposits		68			68		133			133
Card and processing revenue		60			58		115			109
Investment advisory revenue		41			39		79			75
Other noninterest income		(75	)		6		(57	)		26
Noninterest expense:
Salaries, incentives and employee benefits		131			133		266			274
Net occupancy and equipment expense		64			62		124			122
Card and processing expense		36			34		70			63
Other noninterest expense		165			156		327			316

Income before taxes		36			123		154			252
Applicable income tax expense		13			43		55			89

Net income	$	23			80		99			163

Average Balance Sheet Data
Consumer loans, including held for sale	$	14,426			14,968		14,542			15,035
Commercial loans, including held for sale		1,973			2,172		1,982			2,224
Demand deposits		12,699			11,818		12,444			11,669
Interest checking deposits		9,174			9,051		9,143			9,161
Savings and money market deposits		25,637			23,835		25,583			23,295
Other time deposits and certificates - $100,000 and over		5,164			4,635		5,109			4,563

Net income was $23 million for the three months ended June 30, 2015 compared to net income of $80 million for the three months ended June 30, 2014. The decrease was driven by decreases in noninterest income and net interest income and an increase in noninterest expense partially offset by a decrease in the provision for loan and lease loss. Net income was $99 million for the six months ended June 30, 2015 compared to $163 million for the same period in the prior year. The decrease was driven by decreases in noninterest income and net interest income and an increase in noninterest expense partially offset by a decrease in the provision for loan and lease loss.

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

Net interest income decreased $8 million and $23 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The decreases for both periods were primarily driven by changes made to the Bancorp’s deposit advance product beginning January 1, 2015 and a decline in yields of 16 bps on average commercial loans for both the three and six months ended June 30, 2015 compared to the same periods in the prior year. The decreases for both periods were partially offset by a decrease in FTP charges on loans and leases due to a decrease in average balances and increases in FTP credits for demand deposits and other time deposits driven by average deposit growth and an increase in FTP credits for interest checking deposits due to an increase in FTP credit rates for this product.

Provision for loan and lease losses decreased $9 million and $10 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year primarily due to improved credit trends. Net charge-offs as a percent of average portfolio loans and leases decreased to 91 bps for the three months ended June 30, 2015 compared to 109 bps for the same period in the prior year and decreased to 97 bps for the six months ended June 30, 2015 compared to 107 bps for the same period in the prior year.

Noninterest income decreased $77 million and $73 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The decreases for both periods were primarily driven by a decrease in other noninterest income partially offset by increases in card and processing revenue and investment advisory revenue. Other noninterest income decreased $81 million and $83 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year primarily driven by impairment losses associated with lower of cost or market adjustments on long-lived assets of $98 million and $102 million, respectively, compared to $18 million for both the three and six months ended June 30, 2014. Refer to Note 7 of the Notes to Condensed Consolidated Financial Statements for additional information on bank premises and equipment and the branch consolidation and sales plan. Card and processing revenue increased $2 million and $6 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year primarily due to an increase in the number of actively used cards and an increase in customer spend volume. Investment advisory revenue increased $2 million and $4 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year primarily due to an increase in recurring securities and brokerage fees driven by higher sales volume.

Noninterest expense increased $11 million and $12 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The increases for both periods were due to increases in other noninterest expense and card and processing expense partially offset by a decrease in salaries, incentives and employee benefits. Other noninterest expense increased $9 million for the three months ended June 30, 2015 compared to the same period in the prior year primarily due to increases in corporate overhead allocations, marketing expense and higher operational losses. Other noninterest expense increased $11 million for the six months ended June 30, 2015 compared to the same period in the prior year due to higher operational losses and an increase in marketing expense. Card and processing expense increased $2 million and $7 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year driven by increased fraud prevention related expenses. These increases were partially offset by a decrease of $2 million and $8 million in salaries, incentives and employee benefits for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year driven by a decrease in employee benefits expense due to a change in the Bancorp’s employee benefit plan implemented in 2015.

Average consumer loans decreased $542 million for the three months ended June 30, 2015 and $493 million for the six months ended June 30, 2015 compared to the same periods in the prior year. These decreases were primarily driven by decreases in average home equity portfolio loans of $281 million and $242 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year and decreases in average residential mortgage portfolio loans of $266 million and $268 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year as payoffs exceeded new loan production. Average commercial loans decreased $199 million for the three months ended June 30, 2015 and $242 million for the six months ended June 30, 2015 compared to the same periods in the prior year. These decreases were primarily driven by decreases in average commercial mortgage portfolio loans of $127 million and $151 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year and decreases in average commercial and industrial portfolio loans of $83 million and $100 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year as payoffs exceeded new loan production.

Average core deposits increased $3.2 billion and $3.4 billion for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. These increases were primarily driven by net growth in average savings and money market deposits of $1.8 billion and $2.3 billion, respectively, and growth in average demand deposits of $881 million and $775 million, respectively, for the three and six months ended June 30, 2015 compared to the same periods in the prior year, due to an increase in average balances and new customer accounts.

Consumer Lending

Consumer Lending includes the Bancorp’s mortgage, home equity, automobile and other indirect lending activities. Direct lending activities include the origination, retention and servicing of mortgage and home equity loans or lines of credit, sales and securitizations of those loans, pools of loans or lines of credit, and all associated hedging activities. Indirect lending activities include extending loans to consumers through correspondent lenders and automobile dealers.

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

The following table contains selected financial data for the Consumer Lending segment:

TABLE 29: Consumer Lending


	For the three months ended June 30,					For the six months ended June 30,
($ in millions)	2015		2014			2015		2014
Income Statement Data
Net interest income	$	63		65			125		129
Provision for loan and lease losses		8		13			22		38
Noninterest income:
Mortgage banking net revenue		115		76			199		184
Other noninterest income		7		14			52		25
Noninterest expense:
Salaries, incentives and employee benefits		47		47			91		96
Other noninterest expense		65		118			123		234

Income (loss) before taxes		65		(23	)		140		(30	)
Applicable income tax expense (benefit)		23		(8	)		49		(11	)

Net income (loss)	$	42		(15	)		91		(19	)

Average Balance Sheet Data
Residential mortgage loans, including held for sale	$	8,840		8,732			8,935		8,775
Home equity		434		505			443		514
Automobile loans		11,402		11,514			11,412		11,484
Other consumer loans, including held for sale		15		20			19		23

Net income was $42 million for the three months ended June 30, 2015 compared to a net loss of $15 million for the same period in the prior year. The increase was driven by an increase in noninterest income and decreases in noninterest expense and the provision for loan and lease losses partially offset by a decrease in net interest income. Net income was $91 million for the six months ended June 30, 2015 compared to a net loss of $19 million for the same period in the prior year. The increase was driven by decreases in noninterest expense and the provision for loan and lease losses and an increase in noninterest income partially offset by a decrease in net interest income.

Net interest income decreased $2 million and $4 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The decreases were primarily driven by lower yields on average residential mortgage loans and average automobile loans partially offset by decreases in FTP charges on loans and leases.

Provision for loan and lease losses decreased $5 million and $16 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year primarily due to improved delinquency metrics on residential mortgage loans and home equity loans. Net charge-offs as a percent of average portfolio loans and leases decreased to 15 bps for the three months ended June 30, 2015 compared to 26 bps for the same period in the prior year and decreased to 22 bps for the six months ended June 30, 2015 compared to 38 bps for the same period in the prior year.

Noninterest income increased $32 million and $42 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The increase for the three months ended June 30, 2015 was driven by an increase in mortgage banking net revenue partially offset by a decrease in other noninterest income. Mortgage banking net revenue increased $39 million for the three months ended June 30, 2015 from the same period in the prior year as a result of a $39 million increase in net mortgage servicing revenue. Other noninterest income decreased $7 million for the three months ended June 30, 2015 from the same period in the prior year driven by a decrease in retail service fees. The increase for the six months ended June 30, 2015 was driven by increases in other noninterest income and mortgage banking net revenue. Other noninterest income increased $27 million for the six months ended June 30, 2015 from the same period in the prior year primarily driven by a $37 million gain on the sale of held for sale residential mortgage loans classified as TDRs in the first quarter of 2015. This increase was partially offset by a decrease in retail service fees. Mortgage banking net revenue increased $15 million for the six months ended June 30, 2015 from the same period in the prior year driven by a $12 million increase in net mortgage servicing revenue and a $3 million increase in mortgage origination fees and gains on loan sales. Refer to the Noninterest Income section of MD&A for additional information on the fluctuations in mortgage banking net revenue.

Noninterest expense decreased $53 million and $116 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year driven by decreases in other noninterest expense of $53 million and $111 million, respectively. The decrease for both periods was primarily due to decreased legal expenses and operational losses.

Average consumer loans and leases decreased $80 million and increased $13 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. Average residential mortgage loans, including held for sale, increased $108 million and $160 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year primarily due to the continued retention of certain conforming ARMs and certain other fixed-rate loans during the three and six months ended June 30, 2015. Average automobile loans decreased $112 million and $72 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year and average home equity loans decreased $71 million for both the three and six months ended June 30, 2015 compared to the same periods in the prior year as payoffs exceeded new loan production.

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

Investment Advisors

Investment Advisors provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. Investment Advisors is made up of four main businesses: FTS, an indirect wholly-owned subsidiary of the Bancorp; ClearArc Capital, Inc., an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker dealer services to the institutional marketplace. ClearArc Capital, Inc. provides asset management services. Fifth Third Private Bank offers holistic strategies to affluent clients in wealth planning, investing, insurance and wealth protection. Fifth Third Institutional Services provides advisory services for institutional clients including states and municipalities.

The following table contains selected financial data for the Investment Advisors segment:

TABLE 30: Investment Advisors


	For the three months ended June 30,				For the six months ended June 30,
($ in millions)	2015		2014		2015		2014
Income Statement Data
Net interest income	$	29		29		58		60
Provision for loan and lease losses		2		1		3		2
Noninterest income:
Investment advisory revenue		102		99		206		199
Other noninterest income		1		2		6		6
Noninterest expense:
Salaries, incentives and employee benefits		42		40		86		83
Other noninterest expense		73		71		145		139

Income before taxes		15		18		36		41
Applicable income tax expense		6		6		13		14

Net income	$	9		12		23		27

Average Balance Sheet Data
Loans and leases	$	2,709		2,271		2,605		2,240
Core deposits		9,739		9,340		9,765		9,448

Net income was $9 million for the three months ended June 30, 2015 compared to net income of $12 million for the same period in the prior year. The decrease was driven primarily by an increase in noninterest expense. Net income was $23 million for the six months ended June 30, 2015 compared to net income of $27 million for the same period in the prior year. The decrease was driven primarily by an increase in noninterest expense partially offset by an increase in noninterest income.

Net interest income was flat and decreased $2 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The decrease for the six months ended was primarily due to increases on FTP charges on loans and leases and an increase in interest expense on core deposits both driven by increases in average balances partially offset by an increase in interest income on loans and leases.

Provision for loan and lease losses increased $1 million for both the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. Net charge-offs as a percent of average portfolio loans and leases increased to 22 bps for the three months ended June 30, 2015 compared to 21 bps for the same period in the prior year and increased to 25 bps for the six months ended June 30, 2015 compared to 14 bps for the same period in the prior year.

Noninterest income increased $2 million and $7 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The increase for both periods was primarily due to a $3 million and $7 million increase in investment advisory revenue for the three and six months ended June 30, 2015, respectively, as a result of higher recurring securities and brokerage fees driven by higher sales volume. The increase for the six months ended June 30, 2015 also included growth in personal asset management fees.

Noninterest expense increased $4 million and $9 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year primarily driven by increases in other noninterest expense of $2 million and $6 million, respectively, due to increases in corporate overhead allocations. These increases are also driven by higher salaries, incentives and employee benefits primarily due to increased compensation expense.

Average loans and leases increased $438 million and $365 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year primarily due to increases in average residential mortgage loans and average other consumer loans primarily driven by increases in new loan origination activity partially offset by a decrease in average home equity loans as payoffs exceeded new loan production.

Average core deposits increased $399 million and $317 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year primarily due to growth in average interest checking balances as customers have opted to maintain excess funds in liquid transaction accounts as a result of interest rates remaining near historic lows.

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

General Corporate and Other

General Corporate and Other includes the unallocated portion of the investment securities portfolio, securities gains and losses, certain non-core deposit funding, unassigned equity, provision expense in excess of net charge-offs or a benefit from the reduction of the ALLL, the payment of preferred stock dividends and certain support activities and other items not attributed to the business segments.

Net interest income for the three months ended June 30, 2015 was $17 million compared to $19 million in the same period in the prior year. Net interest income for the six months ended June 30, 2015 was $5 million compared to $28 million in the same period in the prior year. Decreases in net interest income for both periods were primarily due to increases in FTP credits on deposits allocated to business segments driven by increases in average deposits. The remaining decrease in net interest income was due to an increase in interest expense on long-term debt and a decrease in the benefit related to the FTP charges on loans and leases partially offset by an increase in interest income on taxable securities. Results for the three and six months ended June 30, 2015 were impacted by a benefit of $7 million and $29 million, respectively, compared to a benefit of $25 million and $124 million for the three and six months ended June 30, 2014, respectively due to reductions in the ALLL.

Noninterest income decreased $152 million and $64 million for the three and six months ended June 30, 2015, respectively, compared to the same periods in the prior year. The decrease in noninterest income for both periods was driven by a gain of $125 million on the sale of Vantiv, Inc. shares in the second quarter of 2014. In addition, the positive valuation adjustment on the stock warrant associated with Vantiv Holding, LLC was $14 million for the three months ended June 30, 2015 compared to the positive valuation adjustment of $63 million during the three months ended June 30, 2014. The positive valuation adjustments on the stock warrant associated with Vantiv Holding, LLC were $85 million for the six months ended June 30, 2015 compared to the positive valuation adjustments of $28 million during the six months ended June 30, 2014. Noninterest income also included $2 million and $19 million of negative valuation adjustments related to the Visa total return swap for the three and six months ended June 30, 2015, respectively, compared with $16 million and $15 million, respectively, for the same periods in the prior year. Additionally, equity method earnings from the Bancorp’s interest in Vantiv Holding, LLC increased $12 million compared to the three months ended June 30, 2014 and increased $7 million compared to the six months ended June 30, 2014.

Noninterest expense for the three and six months ended June 30, 2015 was an expense of $7 million and $2 million, respectively, compared to an expense of $1 million and a benefit of $15 million for the three and six months ended June 30, 2014, respectively. The increase for the three months ended June 30, 2015 compared to the same period in the prior year was primarily due to increases in salaries, incentives and employee benefits and FDIC insurance and other taxes partially offset by increased corporate overhead allocations from General Corporate and Other to the other business segments. The increase for the six months ended June 30, 2015 compared to the same period in the prior year was primarily due to increases in salaries, incentives and employee benefits partially offset by a decrease in corporate overhead allocations from General Corporate and Other to the other business segments and a decrease in FDIC insurance and other taxes.

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

RISK MANAGEMENT – OVERVIEW

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

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

Economic capital is the amount of unencumbered financial resources required to support the Bancorp’s risks. The Bancorp measures economic capital under the assumption that it expects to maintain debt ratings at strong investment grade levels over time. The Bancorp’s capital policies require that the Operating Risk Capacity less the aforementioned buffer exceed the calculated economic capital required in its business.

Risk appetite is the aggregate amount of risk the Bancorp is willing to accept in pursuit of its strategic and financial objectives. By establishing boundaries around risk taking and business decisions, and by incorporating the needs and goals of its shareholders, regulators, rating agencies and customers, the Bancorp’s risk appetite is aligned with its priorities and goals. Risk tolerance is the maximum amount of risk applicable to each of the eight specific risk categories included in its Enterprise Risk Management Framework. This is expressed primarily in qualitative terms, however certain risk types also have quantitative metrics that are used to measure the Bancorp’s level of risk against its risk tolerances. The Bancorp’s risk appetite and risk tolerances are supported by risk targets and risk limits. Those limits are used to monitor the amount of risk assumed at a granular level. On a quarterly basis, the Risk and Compliance Committee of the Board reviews performance against key risk limits as well as current assessments of each of the eight risk types relative to the established tolerance. Any results over limits or outside of tolerance require the development of an action plan that describes actions to be taken to return the measure to within the limit or tolerance.

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

•

Enterprise Risk Management is responsible for developing and overseeing the implementation of risk programs and reporting that facilitate a broad integrated view of risk. The department also leads the continual fostering of a strong risk management culture and the framework, policies and committees that support effective risk governance, including the oversight of Sarbanes-Oxley compliance;

•

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

•

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

•

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

•

Operational Risk Management works with lines of business and regional management to maintain processes to monitor and manage all aspects of operational risk, including ensuring consistency in application of operational risk programs;

•

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

•

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

•

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

•

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

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

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

The Risk and Compliance Committee of the Board of Directors has approved the formation of key management governance committees that are responsible for evaluating risks and controls. The primary committee responsible for the oversight of risk management is the ERMC. Committees accountable to the ERMC, which support the core risk programs, are the Corporate Credit Committee, the Operational Risk Committee, the Management Compliance Committee, the Asset/Liability Committee and the Enterprise Marketing Committee. Other committees accountable to the ERMC oversee the ALLL, capital, model risk and regulatory change management functions. In addition, the Legal and Regulatory Reserve Committee, which is accountable to the Operational Risk Committee, reviews and monitors significant legal and regulatory matters to ensure that accruals for potential litigation losses are established when such losses are both probable and subject to reasonable estimation. There are also new products and initiatives processes applicable to every line of business to ensure an appropriate standard readiness assessment is performed before launching a new product or initiative. Significant risk policies approved by the management governance committees are also reviewed and approved by the Risk and Compliance Committee of the Board of Directors.

Credit Risk Review is an independent function responsible for evaluating the sufficiency of underwriting, documentation and approval processes for consumer and commercial credits, the accuracy of risk grades assigned to commercial credit exposure, nonaccrual status, specific reserves and monitoring for charge-offs. Credit Risk Review reports directly to the Risk and Compliance Committee of the Board of Directors and administratively to the Chief Auditor.

CREDIT RISK MANAGEMENT

The objective of the Bancorp’s credit risk management strategy is to quantify and manage credit risk on an aggregate portfolio basis, as well as to limit the risk of loss resulting from the failure of a borrower or counterparty to honor its financial or contractual obligations to the Bancorp. The Bancorp's credit risk management strategy is based on three core principles: conservatism, diversification and monitoring. The Bancorp believes that effective credit risk management begins with conservative lending practices. These practices include conservative exposure and counterparty limits and conservative underwriting, documentation and collection standards. The Bancorp's credit risk management strategy also emphasizes diversification on a geographic, industry and customer level as well as ongoing portfolio monitoring and timely management reviews of large credit exposures and credits experiencing deterioration of credit quality. Credit officers with the authority to extend credit are delegated specific authority amounts, the utilization of which is closely monitored. Underwriting activities are centrally managed, and ERM manages the policy and the authority delegation process directly. The Credit Risk Review function provides objective assessments of the quality of underwriting and documentation, the accuracy of risk grades and the charge-off, nonaccrual and reserve analysis process. The Bancorp’s credit review process and overall assessment of the adequacy of the allowance for credit losses is based on quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio. The Bancorp uses these assessments to promptly identify potential problem loans or leases within the portfolio, maintain an adequate reserve and take any necessary charge-offs. The Bancorp defines potential problem loans and leases as those rated substandard that do not meet the definition of a nonperforming asset or a restructured loan. Refer to Note 6 of the Notes to Condensed Consolidated Financial Statements for further information on the Bancorp’s credit grade categories, which are derived from standard regulatory rating definitions.

The following tables provide a summary of potential problem loans and leases:

TABLE 31: Potential Problem Loans and Leases

As of June 30, 2015 ($ in millions)

Carrying
Value

Unpaid
Principal
Balance

Exposure

Commercial and industrial

1,392

1,396

1,896

Commercial mortgage

227

228

229

Commercial construction

Commercial leases

Total potential problem loans and leases

1,654

1,659

2,163

TABLE 32: Potential Problem Loans and Leases


As of December 31, 2014 ($ in millions)	Carrying Value		Unpaid Principal Balance		Exposure
Commercial and industrial	$	1,022		1,028		1,344
Commercial mortgage		272		273		273
Commercial construction		7		7		11
Commercial leases		29		29		29

Total potential problem loans and leases	$	1,330		1,337		1,657

In addition to the individual review of larger commercial loans that exhibit probable or observed credit weaknesses, the commercial credit review process includes the use of two risk grading systems. The risk grading system currently utilized for reserve analysis purposes encompasses ten categories. The Bancorp also maintains a dual risk rating system for credit approval and pricing, portfolio monitoring and capital allocation that includes a “through-the-cycle” rating philosophy for modeling expected losses. The dual risk rating system includes thirteen probabilities of default grade categories and an additional six grade categories for estimating losses given an event of default. The probability of default and loss given default evaluations are not separated in the ten-category risk rating system. The Bancorp has completed significant validation and testing of the dual risk rating system as a commercial credit risk management tool.

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

The Bancorp is assessing the necessary modifications to the dual risk rating system outputs to develop a U.S. GAAP compliant ALLL model and will make a decision on the use of modified dual risk ratings for purposes of determining the Bancorp’s ALLL once the FASB has issued a final standard regarding proposed methodology changes to the determination of credit impairment as outlined in the FASB’s Proposed ASU-Financial Instruments-Credit Losses (Subtopic 825-15) issued on December 20, 2012. Scoring systems, various analytical tools and portfolio performance monitoring are used to assess the credit risk in the Bancorp's homogenous consumer and small business loan portfolios.

Overview

The outlook is for reasonably positive economic and employment growth in the U.S. during the remainder of 2015. The job market is slowly but steadily improving. Housing prices have largely stabilized and are increasing in many markets, but overall current economic conditions are causing weaker than desired qualified loan demand and a relatively low interest rate environment, which directly impacts the Bancorp’s growth and profitability.

Among consumer portfolios, residential mortgage and brokered home equity portfolios exhibited the most stress. As of June 30, 2015, consumer real estate loans originated from 2005 to 2008 represent approximately 22% of the consumer real estate portfolio and approximately 57% and 63% of total losses for the three and six months ended June 30, 2015, respectively. Loss rates continue to improve as newer vintages are performing within expectations. Currently, the level of new commercial real estate fundings is slightly above the amortization and pay-off of the portfolio with growth in the commercial construction portfolio as those markets have rebounded. The Bancorp continues to engage in other loss mitigation strategies such as reducing credit commitments, restructuring certain commercial and consumer loans, as well as utilizing commercial and consumer loan workout teams. For commercial and consumer loans owned by the Bancorp, loan modification strategies are developed that are workable for both the borrower and the Bancorp when the borrower displays a willingness to cooperate. These strategies typically involve either a reduction of the stated interest rate of the loan, an extension of the loan’s maturity date(s) with a stated rate lower than the current market rate for a new loan with similar risk, or in limited circumstances, a reduction of the principal balance of the loan or the loan’s accrued interest. For residential mortgage loans serviced for FHLMC and FNMA, the Bancorp participates in the HAMP and HARP 2.0 programs. For loans refinanced under the HARP 2.0 program, the Bancorp strictly adheres to the underwriting requirements of the program and promptly sells the refinanced loan back to the agencies. Loan restructuring under the HAMP program is performed on behalf of FHLMC or FNMA and the Bancorp does not take possession of these loans during the modification process. Therefore, participation in these programs does not significantly impact the Bancorp’s credit quality statistics. The Bancorp participates in trial modifications in conjunction with the HAMP program for loans it services for FHLMC and FNMA. As these trial modifications relate to loans serviced for others, they are not included in the Bancorp’s TDRs as they are not assets of the Bancorp. In the event there is a representation and warranty violation on loans sold through the programs, the Bancorp may be required to repurchase the sold loan. As of June 30, 2015, repurchased loans restructured or refinanced under these programs were immaterial to the Condensed Consolidated Financial Statements. Additionally, as of June 30, 2015, $17 million of loans refinanced under HARP 2.0 were included in loans held for sale in the Condensed Consolidated Balance Sheets. For the three and six months ended June 30, 2015, the Bancorp recognized $2 million and $4 million, respectively, of noninterest income in mortgage banking net revenue in the Condensed Consolidated Statements of Income related to the sale of loans restructured or refinanced under the HAMP and HARP 2.0 programs compared to $4 million and $8 million for the same periods in the prior year.

In the financial services industry, there has been heightened focus on foreclosure activity and processes. The Bancorp actively works with borrowers experiencing difficulties and has regularly modified or provided forbearance to borrowers where a workable solution could be found. Foreclosure is a last resort, and the Bancorp undertakes foreclosures only when it believes they are necessary and appropriate and is careful to ensure that customer and loan data are accurate.

At June 30, 2015, the Bancorp’s non-power producing energy portfolio balance was $1.7 billion, representing approximately two percent of total loans and leases. This portfolio continues to be an important part of the Bancorp’s commercial business strategy. Due to the sensitivity of this portfolio to downward movements in oil prices, the Bancorp has seen migration in the portfolio into criticized classifications during 2015. When establishing the ALLL, all portfolio and general economic factors are considered, including the level of criticized assets and the level of commodity prices.

Commercial Portfolio

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

The risk within the commercial loan and lease portfolio is managed and monitored through an underwriting process utilizing detailed origination policies, continuous loan level reviews, monitoring of industry concentration and product type limits and continuous portfolio risk management reporting. The origination policies for commercial real estate outline the risks and underwriting requirements for owner and nonowner-occupied and construction lending. Included in the policies are maturity and amortization terms, maximum LTVs, minimum debt service coverage ratios, construction loan monitoring procedures, appraisal requirements, pre-leasing requirements (as applicable), sensitivity and pro-forma analysis requirements and interest rate sensitivity. The Bancorp requires a valuation of real estate collateral, which may include third-party appraisals, be performed at the time of origination and renewal in accordance with regulatory requirements and on an as needed basis when market conditions justify. Although the Bancorp does not back test these collateral value assumptions, the Bancorp maintains an appraisal review department to order and review third-party appraisals in accordance with regulatory requirements. Collateral values on criticized assets with relationships exceeding $1 million are reviewed quarterly to assess the appropriateness of the value ascribed in the assessment of charge-offs and specific reserves. In addition, the Bancorp applies incremental valuation adjustments to older appraisals that relate to collateral dependent loans, which can currently be up to 20-30% of the appraised value based on the type of collateral. These incremental valuation adjustments generally reflect the age of the most recent appraisal as well as collateral type. Trends in collateral values, such as home price indices and recent asset dispositions, are monitored in order to determine whether changes to the appraisal adjustments are warranted. Other factors such as local market conditions or location may also be considered as necessary.

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

The Bancorp assesses all real estate and non-real estate collateral securing a loan and considers all cross collateralized loans in the calculation of the LTV ratio. The following tables provide detail on the most recent LTV ratios for commercial mortgage loans greater than $1 million, excluding impaired commercial mortgage loans individually evaluated. The Bancorp does not typically aggregate the LTV ratios for commercial mortgage loans less than $1 million.

TABLE 33: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million

As of June 30, 2015 ($ in millions)

LTV > 100%

LTV 80-100%

LTV < 80%

Commercial mortgage owner-occupied loans

158

322

1,987

Commercial mortgage nonowner-occupied loans

196

192

1,971

Total

354

514

3,958

TABLE 34: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million


As of December 31, 2014 ($ in millions)	LTV > 100%		LTV 80-100%		LTV < 80%

Commercial mortgage owner-occupied loans	$	148		248		1,982
Commercial mortgage nonowner-occupied loans		243		333		2,423

Total	$	391		581		4,405

The following table provides detail on commercial loans and leases by industry classification (as defined by the North American Industry Classification System), by loan size and by state, illustrating the diversity and granularity of the Bancorp’s commercial loans and leases as of:

TABLE 35: Commercial Loan and Lease Portfolio (excluding loans held for sale)


	June 30, 2015							December 31, 2014
($ in millions)	Outstanding			Exposure		Nonaccrual		Outstanding		Exposure		Nonaccrual
By industry:
Manufacturing	$	11,147			20,573		72		10,315		20,496		55
Financial services and insurance		6,156			12,620		13		6,097		13,557		20
Real estate		5,933			9,392		36		5,392		8,612		32
Business services		4,575			7,051		44		4,644		7,109		79
Wholesale trade		4,746			8,496		25		4,314		8,004		62
Healthcare		4,429			6,355		22		4,133		6,322		20
Retail trade		3,983			8,252		10		3,754		7,190		22
Transportation and warehousing		3,088			4,581		—		3,012		4,276		1
Communication and information		2,689			4,552		2		2,409		4,140		3
Construction		1,979			3,369		10		1,864		3,352		25
Accommodation and food		1,830			3,052		7		1,712		2,945		9
Mining		1,621			2,913		12		1,862		3,323		3
Entertainment and recreation		1,476			2,563		8		1,451		2,321		10
Utilities		978			2,682		—		1,044		2,551		—
Other services		819			1,166		10		881		1,207		11
Public administration		582			680		—		567		658		—
Agribusiness		341			510		7		318		444		11
Individuals		164			199		2		170		201		4
Other		4			4		7		14		17		—

Total	$	56,540			99,010		287		53,953		96,725		367

By loan size:
Less than $200,000		1	%		1		7		1		1		6
$200,000 to $1 million		4			3		16		5		3		15
$1 million to $5 million		10			8		27		11		9		22
$5 million to $10 million		8			7		30		8		7		19
$10 million to $25 million		24			22		20		25		22		24
Greater than $25 million		53			59		—		50		58		14

Total		100	%		100		100		100		100		100

By state:
Ohio		17	%		18		12		17		20		11
Michigan		8			7		7		9		8		11
Illinois		7			7		14		7		8		6
Florida		7			7		18		7		6		17
Indiana		5			5		6		5		5		5
North Carolina		4			4		1		3		4		2
Kentucky		3			3		3		3		3		2
Tennessee		3			3		1		3		3		—
Pennsylvania		3			3		4		3		2		7
All other states		43			43		34		43		41		39

Total		100	%		100		100		100		100		100

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

The Bancorp has identified certain categories of loans which it believes represent a higher level of risk compared to the rest of the Bancorp’s commercial loan portfolio, due to economic or market conditions within the Bancorp’s key lending areas. The following tables provide analysis of nonowner-occupied commercial real estate loans (excluding loans held for sale):

TABLE 36: Nonowner-Occupied Commercial Real Estate^(a)


As of June 30, 2015 ($ in millions)									Net Charge-offs (Recoveries) for June 30, 2015
By State:	Outstanding		Exposure		90 Days Past Due		Nonaccrual		Three Months Ended			Six Months Ended
Ohio	$	1,392		1,721		—		5		—			(1	)
Michigan		651		694		—		3		—			—
Florida		586		950		—		15		3			3
Illinois		547		970		—		6		—			—
North Carolina		377		609		—		—		(1	)		(1	)
Indiana		278		399		—		—		—			—
All other states		2,092		3,912		—		14		5			5

Total	$	5,923		9,255		—		43		7			6

(a)

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

TABLE 37: Nonowner-Occupied Commercial Real Estate^(a)


As of June 30, 2014 ($ in millions)									Net Charge-offs (Recoveries) for June 30, 2014
By State:	Outstanding		Exposure		90 Days Past Due		Nonaccrual		Three Months Ended			Six Months Ended
Ohio	$	1,157		1,619		—		11		(1	)		—
Michigan		806		879		—		17		5			5
Florida		544		745		—		5		1			1
Illinois		495		849		—		9		1			1
North Carolina		311		516		—		2		—			—
Indiana		214		317		—		3		—			—
All other states		1,445		2,518		—		4		—			—

Total	$	4,972		7,443		—		51		6			7

(a)

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

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

Consumer Portfolio

The Bancorp’s consumer portfolio is materially comprised of three categories of loans: residential mortgage loans, home equity and automobile loans. The Bancorp has identified certain categories within these loan types which it believes represent a higher level of risk compared to the rest of the consumer loan portfolio due to high loan amount to collateral value. The Bancorp does not update LTV ratios for the consumer portfolio subsequent to origination except as part of the charge-off process for real estate secured loans.

Residential Mortgage Portfolio

The Bancorp manages credit risk in the residential mortgage portfolio through conservative underwriting and documentation standards and geographic and product diversification. The Bancorp may also package and sell loans in the portfolio.

The Bancorp does not originate mortgage loans that permit customers to defer principal payments or make payments that are less than the accruing interest. The Bancorp originates both fixed and adjustable rate residential mortgage loans. Resets of rates on ARMs are not expected to have a material impact on credit costs in the current interest rate environment, as approximately $850 million of adjustable rate residential mortgage loans will have rate resets during the next twelve months. Approximately 60% of these resets are expected to experience an increase in rate, with an average increase of approximately a fifth of a percent.

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

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

TABLE 38: Residential Mortgage Portfolio Loans by LTV at Origination


	June 30, 2015					December 31, 2014
($ in millions)	Outstanding		Weighted Average LTV			Outstanding		Weighted Average LTV
LTV £ 80%	$	9,752		65.3	%	$	9,220		65.1	%
LTV > 80%, with mortgage insurance		1,250		93.6			1,206		93.8
LTV > 80%, no mortgage insurance		1,931		96.2			1,963		96.2

Total	$	12,933		72.8	%	$	12,389		73.0	%

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

TABLE 39: Residential Mortgage Portfolio Loans, LTV Greater than 80%, No Mortgage Insurance


As of June 30, 2015 ($ in millions)							Net Charge-offs for June 30, 2015
By State:	Outstanding		90 Days Past Due		Nonaccrual		Three Months Ended		Six Months Ended
Ohio	$	520		1		6		1		2
Illinois		321		—		1		—		1
Michigan		272		1		2		1		1
Florida		257		2		3		—		—
Indiana		126		—		2		—		—
North Carolina		106		—		1		—		—
Kentucky		78		—		—		—		—
All other states		251		1		2		—		—

Total	$	1,931		5		17		2		4

TABLE 40: Residential Mortgage Portfolio Loans, LTV Greater than 80%, No Mortgage Insurance



As of June 30, 2014 ($ in millions)							Net Charge-offs for June 30, 2014
By State:	Outstanding		90 Days Past Due		Nonaccrual		Three Months Ended		Six Months Ended
Ohio	$	593		3		15		1		3
Illinois		270		—		6		—		1
Michigan		323		1		7		1		2
Florida		265		1		7		—		1
Indiana		132		2		3		—		1
North Carolina		105		—		1		—		—
Kentucky		90		—		1		—		—
All other states		312		—		3		1		1

Total	$	2,090		7		43		3		9

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

Home Equity Portfolio

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

The ALLL provides coverage for probable and estimable losses in the home equity portfolio. The allowance attributable to the portion of the home equity portfolio that has not been restructured in a TDR is calculated on a pooled basis with senior lien and junior lien categories segmented in the determination of the probable credit losses in the home equity portfolio. The modeled loss factor for the home equity portfolio is based on the trailing twelve month historical loss rate for each category, as adjusted for certain prescriptive loss rate factors and certain qualitative adjustment factors to reflect risks associated with current conditions and trends. The prescriptive loss rate factors include adjustments for delinquency trends, LTV trends, refreshed FICO score trends and product mix. The qualitative factors include adjustments for credit administration and portfolio management, credit policy and underwriting and the national and local economy. The Bancorp considers home price index trends when determining the national and local economy qualitative factor.

The home equity portfolio is managed in two primary groups: loans outstanding with a combined LTV greater than 80% and those loans with a LTV 80% or less based upon appraisals at origination. The carrying value of the greater than 80% LTV home equity loans and 80% or less LTV home equity loans were $2.8 billion and $5.8 billion, respectively, as of June 30, 2015. Of the total $8.5 billion of outstanding home equity loans:

•

85% reside within the Bancorp’s Midwest footprint of Ohio, Michigan, Kentucky, Indiana and Illinois;

•

35% are in senior lien positions and 65% are in junior lien positions at June 30, 2015;

•

Over 80% of non-delinquent borrowers made at least one payment greater than the minimum payment during the three months ended June 30, 2015; and

•

The portfolio had an average refreshed FICO score of 740 at June 30, 2015 and December 31, 2014.

The Bancorp actively manages lines of credit and makes reductions in lending limits when it believes it is necessary based on FICO score deterioration and property devaluation. The Bancorp does not routinely obtain appraisals on performing loans to update LTV ratios after origination. However, the Bancorp monitors the local housing markets by reviewing various home price indices and incorporates the impact of the changing market conditions in its ongoing credit monitoring processes. For junior lien home equity loans which become 60 days or more past due, the Bancorp tracks the performance of the senior lien loans in which the Bancorp is the servicer and utilizes consumer credit bureau attributes to monitor the status of the senior lien loans that the Bancorp does not service. If the senior lien loan is found to be 120 days or more past due, the junior lien home equity loan is placed on nonaccrual status unless both loans are well-secured and in the process of collection. Additionally, if the junior lien home equity loan becomes 120 days or more past due and the senior lien loan is also 120 days or more past due, the junior lien home equity loan is assessed for charge-off. Refer to the Analysis of Nonperforming Assets section of MD&A for more information.

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

TABLE 41: Home Equity Portfolio Loans Outstanding by Refreshed FICO Score


	June 30, 2015					December 31, 2014
($ in millions)	Outstanding		% of Total			Outstanding		% of Total
Senior Liens:
FICO < 620	$	170		2	%	$	178		2	%
FICO 621-719		587		7			613		7
FICO > 720		2,217		26			2,257		25

Total Senior Liens		2,974		35			3,048		34
Junior Liens:
FICO < 620		434		5			471		6
FICO 621-719		1,481		17			1,542		17
FICO > 720		3,658		43			3,825		43

Total Junior Liens		5,573		65			5,838		66

Total	$	8,547		100	%	$	8,886		100	%

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

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

TABLE 42: Home Equity Portfolio Loans Outstanding by LTV at Origination

June 30, 2015

December 31, 2014

($ in millions)

Outstanding

Weighted
Average LTV

Outstanding

Weighted
Average LTV

Senior Liens:

LTV £ 80%

2,584

55.2

2,635

55.2

LTV > 80%

390

89.1

413

89.1

Total Senior Liens

2,974

59.9

3,048

Large accelerated filer

Accelerated filer

Non-accelerated filer

¨ (Do not check if a smaller reporting company)

Smaller reporting company