FITB 10-Q Quarter ended Sept. 30, 2018

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2018

Commission File Number 001-33653

(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  ☒    No  ☐

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted 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 such files).    Yes  ☒    No  ☐

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

Large accelerated filer		☒		Accelerated filer		☐
Non-accelerated filer		☐		Smaller reporting company		☐
				Emerging growth company		☐

If an emerging growth company, indicate by check mark if the Registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.  ☐

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

There were 655,615,619 shares of the Registrant’s common stock, without par value, outstanding as of October 31, 2018.

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)			3
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			19
Business Segment Review			25
Risk Management—Overview			32
Credit Risk Management			33
Market Risk Management			46
Liquidity Risk Management			50
Operational Risk Management			53
Compliance Risk Management			53
Capital Management			54
Off-Balance Sheet Arrangements			56
Quantitative and Qualitative Disclosures about Market Risk (Item 3)			57
Controls and Procedures (Item 4)			57
Condensed Consolidated Financial Statements and Notes (Item 1)
Balance Sheets (unaudited)			58
Statements of Income (unaudited)			59
Statements of Comprehensive Income (unaudited)			60
Statements of Changes in Equity (unaudited)			61
Statements of Cash Flows (unaudited)			62
Notes to Condensed Consolidated Financial Statements (unaudited)			63
Part II. Other Information
Legal Proceedings (Item 1)			119
Risk Factors (Item 1A)			119
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			119
Exhibits (Item 6)			119
Signatures			120

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,” “potential,” “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 the Risk Factors section in Item 1A 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) deteriorating credit quality; (2) loan concentration by location or industry of borrowers or collateral; (3) problems encountered by other financial institutions; (4) inadequate sources of funding or liquidity; (5) unfavorable actions of rating agencies; (6) inability to maintain or grow deposits; (7) limitations on the ability to receive dividends from subsidiaries; (8) cyber-security risks; (9) Fifth Third’s ability to secure confidential information and deliver products and services through the use of computer systems and telecommunications networks; (10) failures by third-party service providers; (11) inability to manage strategic initiatives and/or organizational changes; (12) inability to implement technology system enhancements; (13) failure of internal controls and other risk management systems; (14) losses related to fraud, theft or violence; (15) inability to attract and retain skilled personnel; (16) adverse impacts of government regulation; (17) governmental or regulatory changes or other actions; (18) failures to meet applicable capital requirements; (19) regulatory objections to Fifth Third’s capital plan; (20) regulation of Fifth Third’s derivatives activities; (21) regulatory objections to Fifth Third’s resolution plan; (22) deposit insurance premiums; (23) assessments for the orderly liquidation fund; (24) changes in LIBOR; (25) weakness in the national or local economies; (26) global political and economic uncertainty or negative actions; (27) changes in interest rates; (28) changes and trends in capital markets; (29) fluctuation of Fifth Third’s stock price; (30) volatility in mortgage banking revenue; (31) litigation, investigations, and enforcement proceedings by governmental authorities; (32) breaches of contractual covenants, representations and warranties; (33) competition and changes in the financial services industry; (34) changing retail distribution strategies, customer preferences and behavior; (35) risks relating to the potential merger with MB Financial, Inc. and Fifth Third’s ability to realize the anticipated benefits of the merger; (36) difficulties in identifying, acquiring or integrating suitable strategic partnerships, investments or acquisitions; (37) potential dilution from future acquisitions; (38) loss of income and/or difficulties encountered in the sale and separation of businesses, investments or other assets; (39) results of Worldpay Holding, LLC (formerly Vantiv Holding, LLC) a subsidiary of Worldpay, Inc. or other investments or acquired entities; (40) difficulties from or changes in Fifth Third’s investment in, relationship with, and nature of the operations of Worldpay Holding, LLC, a subsidiary of Worldpay, Inc.; (41) changes in accounting standards or interpretation or declines in the value of Fifth Third’s goodwill or other intangible assets; (42) inaccuracies or other failures from the use of models; (43) effects of critical accounting policies and judgments or the use of inaccurate estimates; (44) weather related events or other natural disasters; and (45) the impact of reputational risk created by these or other developments on such matters as business generation and retention, funding and liquidity.

1

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 (Loss) APR: Annual Percentage Rate ARM: Adjustable Rate Mortgage ASF: Available Stable Funding 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 CFPB: Consumer Financial Protection Bureau C&I: Commercial and Industrial DCF: Discounted Cash Flow DFA: Dodd-Frank Wall Street Reform & Consumer Protection Act DTCC: Depository Trust & Clearing Corporation 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) FINRA: Financial Industry Regulatory Authority FNMA: Federal National Mortgage Association FOMC: Federal Open Market Committee FRB: Federal Reserve Bank FTE: Fully Taxable Equivalent FTP: Funds Transfer Pricing FTS: Fifth Third Securities GDP: Gross Domestic Product GNMA: Government National Mortgage Association GSE: United States Government Sponsored Enterprise		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 NPR: Notice of Proposed Rulemaking NSFR: Net Stable Funding Ratio OAS: Option-Adjusted Spread OCI: Other Comprehensive Income (Loss) OREO: Other Real Estate Owned OTTI: Other-Than-Temporary Impairment PCA: Prompt Corrective Action RCC: Risk Compliance Committee RSF: Required Stable Funding SAR: Stock Appreciation Right SBA: Small Business Administration SCB: Stress Capital Buffer SEC: United States Securities and Exchange Commission SLB: Stress Leverage Buffer TBA: To Be Announced TCJA: Tax Cuts and Jobs Act TDR: Troubled Debt Restructuring TILA: Truth in Lending Act TRA: Tax Receivable Agreement U.S.: United States of America U.S. GAAP: United States Generally Accepted Accounting Principles VA: United States Department of Veteran Affairs VIE: Variable Interest Entity VRDN: Variable Rate Demand Note

2

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

The following is Management’s Discussion and Analysis of Financial Condition and Results of Operations 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. The Bancorp’s banking subsidiary is referred to as the Bank.

TABLE 1: Selected Financial Data
						For the three months																For the nine months
						ended September 30,								%								ended September 30,								%
($ in millions, except for per share data)						2018				2017				Change								2018				2017				Change
Income Statement Data
Net interest income (U.S. GAAP)		$					1,043				970				8			$					3,059				2,842				8
Net interest income (FTE) (a)(b)							1,047				977				7								3,071				2,861				7
Noninterest income							563				1,561				(64	)							2,215				2,648				(16	)
Total revenue (a)							1,610				2,538				(37	)							5,286				5,509				(4	)
Provision for loan and lease losses							86				67				28								142				193				(26	)
Noninterest expense							1,008				975				3								3,090				2,918				6
Net income attributable to Bancorp							433				1,014				(57	)							1,721				1,685				2
Net income available to common shareholders							418				999				(58	)							1,669				1,633				2
Common Share Data
Earnings per share - basic		$					0.62				1.37				(55	)		$					2.43				2.19				11
Earnings per share - diluted							0.61				1.35				(55	)							2.38				2.16				10
Cash dividends declared per common share							0.18				0.16				13								0.52				0.44				18
Book value per share							21.92				21.30				3								21.92				21.30				3
Market value per share							27.92				27.98				-								27.92				27.98				-
Financial Ratios
Return on average assets							1.21	%			2.85				(58	)							1.63	%			1.60				2
Return on average common equity							11.2				25.6				(56	)							15.0				14.3				5
Return on average tangible common equity (b)							13.5				30.4				(56	)							18.1				17.0				6
Dividend payout							29.0				11.7				148								21.4				20.1				6
Average total Bancorp shareholders’ equity as a percent of average assets							11.39				11.93				(5	)							11.43				11.83				(3	)
Tangible common equity as a percent of tangible assets (b)(h)							9.12				8.89				3								9.12				8.89				3
Net interest margin (a)(b)							3.23				3.07				5								3.20				3.03				6
Net interest rate spread (a)(b)							2.87				2.79				3								2.87				2.77				4
Efficiency (a)(b)							62.6				38.4				63								58.5				53.0				10
Credit Quality
Net losses charged-off		$					72				68				6			$					247				221				12
Net losses charged-off as a percent of average portfolio loans and leases							0.30	%			0.29				3								0.36	%			0.32				13
ALLL as a percent of portfolio loans and leases							1.17				1.31				(11	)							1.17				1.31				(11	)
Allowance for credit losses as a percent of portfolio loans and leases (c)							1.31				1.48				(11	)							1.31				1.48				(11	)
Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO							0.48				0.60				(20	)							0.48				0.60				(20	)
Average Balances
Loans and leases, including held for sale		$					93,977				92,617				1			$					93,363				92,686				1
Securities and other short-term investments							34,822				33,826				3								34,813				33,497				4
Assets							141,752				140,992				1								141,616				140,495				1
Transaction deposits (d)							97,315				94,927				3								97,303				95,916				1
Core deposits (e)							101,492				98,649				3								101,321				99,680				2
Wholesale funding (f)							20,613				21,529				(4	)							20,546				20,450				-
Bancorp shareholders’ equity							16,145				16,820				(4	)							16,187				16,623				(3	)
Regulatory Capital and Liquidity Ratios
CET1 capital (g)							10.67	%			10.59				1								10.67	%			10.59				1
Tier I risk-based capital (g)							11.78				11.72				1								11.78				11.72				1
Total risk-based capital (g)							14.94				15.16				(1	)							14.94				15.16				(1	)
Tier I leverage							10.10				9.97				1								10.10				9.97				1
Modified LCR							119				124				(4	)							119				124				(4	)

(a)	Amounts presented on an FTE basis. The FTE adjustment for the three months ended September 30, 2018 and 2017 was $4 and $7, respectively, and for the nine months ended September 30, 2018 and 2017 was $12 and $19, respectively.

(b)	These are non-GAAP measures. For further information, refer to 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)	Includes demand deposits, interest checking deposits, savings deposits, money market deposits and foreign office deposits.

(e)	Includes transaction deposits and other time deposits.

(f)	Includes certificates $100,000 and over, other deposits, federal funds purchased, other short-term borrowings and long-term debt.

(g)	Under the U.S. 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 in the Bancorp’s total risk-weighted assets.

(h)	Excludes unrealized gains and losses.

3

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

OVERVIEW

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At September 30, 2018, the Bancorp had $141.7 billion in assets and operated 1,152 full-service banking centers and 2,443 Fifth Third branded ATMs in ten 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 Wealth and Asset Management. The Bancorp also has an approximate 3.3% interest in Worldpay Holding, LLC (formerly Vantiv Holding, LLC). The carrying value of the Bancorp’s investment in Worldpay Holding, LLC was $424 million at September 30, 2018.

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, 2017. 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, net interest rate spread 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 FTE basis for presenting net interest income is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

The Bancorp’s revenues are dependent on both net interest income and noninterest income. For the three months ended September 30, 2018, net interest income on an FTE basis and noninterest income provided 65% and 35% of total revenue, respectively. For the nine months ended September 30, 2018, net interest income on an FTE basis and noninterest income provided 58% and 42% of total revenue, respectively. The Bancorp derives the majority of its revenues within the U.S. from customers domiciled in the U.S. Revenue from foreign countries and external customers domiciled in foreign countries was immaterial to the Condensed Consolidated Financial Statements for both the three and nine months ended September 30, 2018. 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 loss 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.

Noninterest income is derived from service charges on deposits, wealth and asset management revenue, corporate banking revenue, card and processing revenue, mortgage banking net revenue, net securities gains or losses and other noninterest income. Noninterest expense includes personnel costs, net occupancy expense, technology and communication costs, equipment expense, card and processing expense and other noninterest expense.

Worldpay, Inc. and Worldpay Holding, LLC Transactions

On January 16, 2018, Vantiv, Inc. completed its previously announced acquisition of Worldpay Group plc. with the resulting combined company named Worldpay, Inc. As a result of this transaction, the Bancorp recognized a gain of $414 million in other noninterest income during the first quarter of 2018 associated with the dilution in its ownership interest in Worldpay Holding, LLC from approximately 8.6% to approximately 4.9%.

On June 27, 2018, the Bancorp completed the sale of 5 million shares of Class A common stock of Worldpay, Inc. (formerly Vantiv, Inc.). The Bancorp had previously received these Class A shares in exchange for Class B Units of Worldpay Holding, LLC. The Bancorp recognized a gain of $205 million related to the sale. As a result of the sale, the Bancorp beneficially owns approximately 3.3% of Worldpay’s equity through its ownership of approximately 10.3 million Class B Units. At September 30, 2018, the Bancorp’s remaining interest in Worldpay Holding, LLC of $424 million continues to be accounted for as an equity method investment given the nature of Worldpay Holding, LLC’s structure as a limited liability company and contractual arrangements between Worldpay Holding, LLC and the Bancorp.

GS Holdings Transaction

In May 2018, GreenSky, Inc. launched an IPO and issued 38 million shares of Class A common stock for a valuation of $23 per share. In connection with this IPO, the Bancorp’s investment in GreenSky, LLC, which was comprised of 252,550 membership units, was converted to 2,525,498 units of the newly formed GreenSky Holdings, LLC (“GS Holdings”), representing a 1.4% interest in GS Holdings. The Bancorp’s units in GS Holdings are exchangeable on a one-to-one basis for Class A common stock or cash after the initial 180-day lock-up period expires.

4

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

At the time of the IPO, the Bancorp recognized a $16 million gain on its investment in GreenSky, LLC, which was included in other noninterest income in the Condensed Consolidated Statements of Income for the three and six months ended June 30, 2018. At September 30, 2018, the investment in GS Holdings was $45 million, which was included in equity securities in the Condensed Consolidated Balance Sheets.

Accelerated Share Repurchase Transactions

During the nine months ended September 30, 2018, the Bancorp entered into or settled 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 15 of the Notes to Condensed Consolidated Financial Statements. For a summary of the Bancorp’s accelerated share repurchase transactions that were entered into or settled during the nine months ended September 30, 2018, 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
December 19, 2017		$	273				7,727,273				824,367				8,551,640				March 19, 2018
February 12, 2018			318				8,691,318				1,015,731				9,707,049				March 26, 2018
May 25, 2018			235				6,402,244				1,172,122				7,574,366				June 15, 2018

Open Market Share Repurchase Transactions

Between July 20, 2018 and August 2, 2018, the Bancorp repurchased 16,945,020 shares, or approximately $500 million, of its outstanding common stock through open market repurchase transactions, which settled between July 24, 2018 and August 6, 2018. For more information on the open market share repurchase program, refer to Note 15 of the Notes to Condensed Consolidated Financial Statements.

Senior Notes Offering

On March 14, 2018, the Bancorp issued and sold $650 million of 3.95% senior fixed-rate notes, with a maturity of ten years, due on March 14, 2028. These notes will be redeemable by the Bancorp, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption date.

On June 5, 2018, the Bancorp issued and sold $250 million of senior floating-rate notes, with a maturity of three years, due on June 4, 2021. Interest on the floating-rate notes is 3-month LIBOR plus 47 bps. These notes will be redeemable, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption date.

On July 26, 2018 the Bank issued and sold $1.55 billion in aggregate principal amount of unsecured senior bank notes. The bank notes consisted of $500 million of 3.35% senior fixed-rate notes, with a maturity of three years, due on July 26, 2021; $300 million of senior floating-rate notes at three-month LIBOR plus 44 bps, with a maturity of three years, due on July 26, 2021; and $750 million of 3.95% senior fixed-rate notes, with a maturity of seven years, due July 28, 2025. The Bank entered into interest rate swaps to convert the fixed-rate notes due in 2021 and 2025 to a floating-rate, which resulted in an effective interest rate of one-month LIBOR plus 53 bps and 104 bps, respectively. These bank notes will be redeemable by the Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date.

2018 Branch Optimization Plan

Customer interactions and service and sales activity in Branch Banking continue to evolve with changing demographics and technology applications. Customers are increasingly utilizing digital tools to interact with their financial institutions in conducting their transactions while still utilizing physical branches for consultations and new product and service initiation. During the past three years, these developments and other business strategies led to a net decrease of 143 in the number of retail branches, or 11% of the Bancorp’s total branch count, through consolidations and sales.

The Bancorp continues to evaluate its retail network distribution in light of changes in customer behavior while developing new analytical tools that provide enhanced capabilities to optimize the profitability and growth potential of branches. In slower growth mature markets these developments enable the Bancorp to achieve efficiencies through well-executed branch consolidations without materially impacting deposit flows and/or revenue growth while maintaining the service quality standards. While continuing to evaluate such actions, the Bancorp is also focused on achieving higher retail household and deposit growth in other parts of its footprint – mainly in markets that exhibit faster economic growth and where the Bancorp has significant opportunities to capture higher market share. To that extent, based on the strategic business evaluation that was performed during the second quarter of 2018, over the next 2-3 years, as part of the 2018 Branch Optimization Plan, the Bancorp plans to close between 100-125 branches in more mature markets and open between 100-125 new branches in higher growth markets where the Bancorp already has an existing retail branch presence. With the existing local presence and familiarity with the customer demographics, and with newly developed analytical tools, the Bancorp expects to achieve higher growth rates as a result of these actions.

5

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

As of September 30, 2018, the Bancorp had identified 31 specific branches for closure under the 2018 Branch Optimization Plan with these closures expected to be completed prior to December 31, 2018. The Bancorp expects to identify the remaining branches to be closed under the 2018 Branch Optimization Plan prior to December 31, 2019. As part of the adoption of the 2018 Branch Optimization Plan, the Bancorp has also elected to sell 21 parcels of land which had previously been held for future branch expansion. For further information about the 2018 Branch Optimization plan, refer to Note 7 of the Notes to Condensed Consolidated Financial Statements.

Legislative and Regulatory Developments

On May 24, 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act (the “Reform Act”) was signed into law. Among other regulatory changes, the Reform Act amends various sections of the DFA, most impactful are changes to section 165 of DFA raising the asset thresholds for determining the application of Enhanced Prudential Standards for BHCs deemed systemically important. The Reform Act raised the asset thresholds in two separate timeframes, immediately removing BHCs with consolidated assets below $100 billion from the application of the Enhanced Prudential Standards. BHCs with consolidated assets greater than $100 billion but less than $250 billion, including Fifth Third Bancorp, would continue to be subject to the Enhanced Prudential Standards for 18 months after the date of enactment, unless the Board of Governors of the FRB acts prior to that time period to provide regulatory relief from the Enhanced Prudential Standards or elects to continue to subject these BHCs to some form of Enhanced Prudential Standards. However, the FRB is also authorized to exempt any BHC with assets between $100 billion and $250 billion from any Enhanced Prudential Standards prior to the end of the 18-month period or after.

Regardless of this regulatory outcome, the Reform Act requires the FRB to continue to subject BHCs with consolidated assets between $100 billion to $250 billion to a periodic supervisory stress test and to continue to apply risk committee requirements outlined in the DFA. The Reform Act also provides the FRB the authority to continue to subject BHCs with consolidated assets greater than $100 billion to Enhanced Prudential Standards if the FRB determines that application is warranted and appropriate to address risks to financial stability and promote safety and soundness taking into consideration certain factors including the BHC’s capital structure, riskiness, complexity, financial activities (including financial activities of subsidiaries), size, and any other risk-related factors that the FRB deems appropriate.

On October 31, 2018, the federal banking agencies issued two NPRs related to the implementation of the Reform Act. The proposed rules would establish four risk-based categories of institutions and apply tailored capital and liquidity requirements for each respective category. These proposals are subject to modification through the federal rulemaking process in accordance with the Administrative Procedures Act, but based upon Fifth Third’s interpretation of the NPRs, the Bancorp would qualify as a Category IV BHC subject to the least restrictive of the proposed requirements.

The ultimate benefits or consequences of the Reform Act on Fifth Third Bancorp, Fifth Third Bank and their respective subsidiaries and activities will be subject to the final form of these NPRs, and additional rulemakings issued by the FRB and additional federal regulators. Fifth Third cannot predict future changes in the applicable laws, regulations and regulatory agency policies, yet such changes may have a material effect on its business, financial condition or results of operations.

Earnings Summary

The Bancorp’s net income available to common shareholders for the third quarter of 2018 was $418 million, or $0.61 per diluted share, which was net of $15 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the third quarter of 2017 was $999 million, or $1.35 per diluted share, which was net of $15 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the nine months ended September 30, 2018 was $1.7 billion, or $2.38 per diluted share, which was net of $52 million in preferred stock dividends. For the nine months ended September 30, 2017, the Bancorp’s net income available to common shareholders was $1.6 billion, or $2.16 per diluted share, which was net of $52 million in preferred stock dividends.

Net interest income on an FTE basis (non-GAAP) was $1.0 billion and $3.1 billion for the three and nine months ended September 30, 2018, respectively, an increase of $70 million and $210 million compared to the same periods in the prior year. Net interest income was positively impacted by increases in both the yields and amounts of average loans and leases and average taxable securities for the three and nine months ended September 30, 2018 compared to the same periods in the prior year. Additionally, net interest income was positively impacted by the decisions of the FOMC to raise the target range of the federal funds rate 25 bps in December 2017, March 2018, June 2018 and September 2018. These positive impacts were partially offset by increases in the rates paid on average interest-bearing core deposits and average long-term debt for both the three and nine months ended September 30, 2018 compared to the same periods in the prior year. Net interest margin on an FTE basis (non-GAAP) was 3.23% and 3.20% for the three and nine months ended September 30, 2018, respectively, compared to 3.07% and 3.03% for the three and nine months ended September 30, 2017, respectively.

Noninterest income decreased $998 million for the three months ended September 30, 2018 compared to the same period in the prior year primarily due to decreases in other noninterest income and mortgage banking net revenue. Other noninterest income decreased $990 million during the three months ended September 30, 2018 compared to the three months ended September 30, 2017 primarily due to the gain on sale of Worldpay, Inc. shares recognized during the third quarter of 2017 and a reduction in equity method income from the Bancorp’s interest in Worldpay Holding, LLC. These reductions were partially offset by a decrease in the loss on the swap associated with the sale of Visa, Inc. Class B Shares and an increase in private equity investment income. Mortgage banking net revenue decreased $14 million for the three months ended September 30, 2018 compared to the same period in the prior year primarily due to a decrease in origination fees and gains on loan sales driven by a decrease in originations and lower margins due to the interest rate environment.

6

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

Noninterest income decreased $433 million for the nine months ended September 30, 2018 compared to the nine months ended September 30, 2017 primarily due to decreases in other noninterest income and mortgage banking net revenue. Other noninterest income decreased $443 million during the nine months ended September 30, 2018 compared to the same period in the prior year primarily due to the gain on sale of Worldpay, Inc. shares recognized during the third quarter of 2017, a reduction in equity method income from the Bancorp’s interest in Worldpay Holding, LLC and an increase in the net losses on disposition and impairment of bank premises and equipment. These reductions were partially offset by the gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc., the gain on the sale of Worldpay, Inc. shares recognized during the second quarter of 2018 and increases in private equity investment income and in insurance income. Mortgage banking net revenue decreased $12 million during the nine months ended September 30, 2018 compared to the same period in the prior year primarily due to a decrease in origination fees and gains on loan sales driven by a decrease in originations and lower margins due to the interest rate environment, partially offset by an increase in net mortgage servicing revenue driven by a decrease in net negative valuation adjustments and an increase in gross mortgage servicing fees.

Noninterest expense increased $33 million for the three months ended September 30, 2018 compared to the same period in the prior year primarily due to increases in personnel costs, technology and communications expense and other noninterest expense. Personnel costs increased $19 million for the three months ended September 30, 2018 compared to the same period in the prior year driven by an increase in base compensation, variable compensation, long-term incentive compensation and severance costs. Technology and communications expense increased $9 million for the three months ended September 30, 2018 compared to the same period in the prior year driven primarily by increased investment in regulatory, compliance and growth initiatives. Other noninterest expense increased $9 million for the three months ended September 30, 2018 compared to the same period in the prior year driven primarily by increased marketing expenses as a result of an increase in advertising volume related to the brand campaign and promotional offers.

Noninterest expense increased $172 million for the nine months ended September 30, 2018 compared to the same period in the prior year primarily due to increases in personnel costs, technology and communications expense and other noninterest expense. Personnel costs increased $120 million for the nine months ended September 30, 2018 compared to the same period in the prior year driven by an increase in base compensation, variable compensation, long-term incentive compensation and severance costs. Technology and communications expense increased $29 million for the nine months ended September 30, 2018 compared to the same period in the prior year driven primarily by increased investment in regulatory, compliance and growth initiatives. Other noninterest expense increased $25 million for the nine months ended September 30, 2018 compared to the same period in the prior year primarily due to increases in marketing expense, the impairment on affordable housing investments, loan and lease expense and donations expense, partially offset by an increase in the benefit for the reserve for unfunded commitments and a decrease in professional service fees.

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 $86 million and $142 million for the three and nine months ended September 30, 2018, respectively, compared to $67 million and $193 million for the comparable periods in 2017. Net losses charged-off as a percent of average portfolio loans and leases increased to 0.30% during the three months ended September 30, 2018 compared to 0.29% during the same period in the prior year and increased to 0.36% for the nine months ended September 30, 2018 compared to 0.32% for the same period in the prior year. At September 30, 2018, nonperforming portfolio assets as a percent of portfolio loans and leases and OREO decreased to 0.48% compared to 0.53% at December 31, 2017. For further discussion on credit quality refer to the Credit Risk Management subsection of the Risk Management section of MD&A.

Capital Summary

The Bancorp’s capital ratios exceed the “well-capitalized” guidelines as defined by the PCA requirements of the U.S. banking agencies. As of September 30, 2018, as calculated under the Basel III standardized approach, the CET1 capital ratio was 10.67%, the Tier I risk-based capital ratio was 11.78%, the Total risk-based capital ratio was 14.94% and the Tier I leverage ratio was 10.10%.

7

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

NON-GAAP FINANCIAL MEASURES

The following are non-GAAP measures which provide useful insight to the reader of the Condensed Consolidated Financial Statements but should be supplemental to primary U.S. GAAP measures and should not be read in isolation or relied upon as a substitute for the primary U.S. GAAP measures.

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 following table reconciles the non-GAAP financial measures of net interest income on an FTE basis, interest income on an FTE basis, net interest margin, net interest rate spread and the efficiency ratio to U.S. GAAP:

TABLE 3: Non-GAAP Financial Measures - Financial Measures and Ratios on an FTE basis
						For the three months ended												For the nine months ended
						September 30,												September 30,
($ in millions)						2018				2017								2018				2017
Net interest income (U.S. GAAP)		$					1,043				970								3,059				2,842
Add: FTE adjustment							4				7								12				19
Net interest income on an FTE basis (1)		$					1,047				977								3,071				2,861
Net interest income on an FTE basis (annualized) (2)							4,154				3,876								4,106				3,815
Interest income (U.S. GAAP)		$					1,315				1,152								3,790				3,344
Add: FTE adjustment							4				7								12				19
Interest income on an FTE basis		$					1,319				1,159								3,802				3,363
Interest income on an FTE basis (annualized) (3)							5,233				4,598								5,083				4,496
Interest expense (annualized) (4)		$					1,079				722								977				671
Noninterest income (5)							563				1,561								2,215				2,648
Noninterest expense (6)							1,008				975								3,090				2,918
Average interest-earning assets (7)							128,799				126,443								128,176				126,183
Average interest-bearing liabilities (8)							89,772				85,328								88,875				85,181
Ratios:
Net interest margin on an FTE basis (2) / (7)							3.23	%			3.07								3.20				3.03
Net interest rate spread on an FTE basis ((3) / (7)) - ((4) / (8))							2.87				2.79								2.87				2.77
Efficiency ratio on an FTE basis (6) / ((1) + (5))							62.6				38.4								58.5				53.0

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. This measure is useful for evaluating the performance of a business as it calculates the return available to common shareholders without the impact of intangible assets and their related amortization.

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

TABLE 4: Non-GAAP Financial Measures - Return on Average Tangible Common Equity
						For the three months ended												For the nine months ended
						September 30,												September 30,
($ in millions)						2018				2017								2018				2017
Net income available to common shareholders (U.S. GAAP)		$					418				999								1,669				1,633
Add: Intangible amortization, net of tax							1				-								3				1
Tangible net income available to common shareholders		$					419				999								1,672				1,634
Tangible net income available to common shareholders (annualized) (1)							1,662				3,963								2,235				2,179
Average Bancorp shareholders’ equity (U.S. GAAP)		$					16,145				16,820								16,187				16,623
Less: Average preferred stock							(1,331	)			(1,331	)							(1,331	)			(1,331)
Average goodwill							(2,462	)			(2,423	)							(2,460	)			(2,421)
Average intangible assets							(29	)			(18	)							(28	)			(15)
Average tangible common equity (2)		$					12,323				13,048								12,368				12,856
Return on average tangible common equity (1) / (2)							13.5	%			30.4								18.1				17.0

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 the U.S. banking agencies. These calculations are intended to complement the capital ratios defined by the U.S. banking agencies 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. The Bancorp encourages readers to consider its Condensed Consolidated Financial Statements in their entirety and not to rely on any single financial measure.

8

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

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

TABLE 5: Non-GAAP Financial Measures - Capital Ratios
		September 30,				December 31,
As of ($ in millions)		2018				2017
Total Bancorp Shareholders’ Equity (U.S. GAAP)		$	15,830				16,365
Less:  Preferred stock			(1,331)				(1,331)
Goodwill			(2,462)				(2,445)
Intangible assets			(28)				(27)
AOCI			775				(73)
Tangible common equity, excluding unrealized gains / losses (1)			12,784				12,489
Add:   Preferred stock			1,331				1,331
Tangible equity (2)		$	14,115				13,820
Total Assets (U.S. GAAP)		$	141,685				142,193
Less:  Goodwill			(2,462)				(2,445)
Intangible assets			(28)				(27)
AOCI, before tax			981				(92)
Tangible assets, excluding unrealized gains / losses (3)		$	140,176				139,629
Ratios:
Tangible equity as a percentage of tangible assets (2) / (3)			10.07 %				9.90
Tangible common equity as a percentage of tangible assets (1) / (3)			9.12				8.94

9

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 the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2017. There have been no material changes to the valuation techniques or models during the nine months ended September 30, 2018.

10

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 loans and leases (including yield-related fees), securities and other short-term investments 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 6 and 7 present the components of net interest income, net interest margin and net interest rate spread for the three and nine months ended September 30, 2018 and 2017, 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 and leases 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 debt and other securities included in other assets.

Net interest income on an FTE basis (non-GAAP) was $1.0 billion and $3.1 billion for the three and nine months ended September 30, 2018, respectively, an increase of $70 million and $210 million compared to the same periods in the prior year. Net interest income was positively impacted by increases in yields on average loans and leases of 53 bps and 51 bps, respectively, and yields on average taxable securities of 14 bps and 12 bps, respectively, for the three and nine months ended September 30, 2018 compared to the same periods in the prior year. Net interest income was also positively impacted by increases in average loans and leases of $1.4 billion and $677 million, respectively, and average taxable securities of $1.0 billion and $1.2 billion, respectively, for the three and nine months ended September 30, 2018, compared to the same periods in the prior year. Additionally, net interest income was positively impacted by the decisions of the FOMC to raise the target range of the federal funds rate 25 bps in December 2017, March 2018, June 2018 and September 2018. These positive impacts were partially offset by increases in the rates paid on average interest-bearing core deposits and average long-term debt for both the three and nine months ended September 30, 2018 compared to the same periods in the prior year. The rates paid on average interest-bearing core deposits increased 35 bps and 29 bps, respectively, for the three and nine months ended September 30, 2018 compared to the same periods in the prior year. The rates paid on average long-term debt increased 27 bps for both the three and nine months ended September 30, 2018 compared to the same periods in the prior year.

Net interest rate spread on an FTE basis (non-GAAP) was 2.87% during both the three and nine months ended September 30, 2018 compared to 2.79% and 2.77%, respectively, in the same periods in the prior year. Yields on average interest-earning assets increased 43 bps and 41 bps for the three and nine months ended September 30, 2018, respectively, partially offset by a 35 bps and 31 bps increase in rates paid on average interest-bearing liabilities for the three and nine months ended September 30, 2018, respectively, compared to the same periods in the prior year.

Net interest margin on an FTE basis (non-GAAP) was 3.23% and 3.20% for the three and nine months ended September 30, 2018, respectively, compared to 3.07% and 3.03% for the three and nine months ended September 30, 2017, respectively. The increase for both periods was driven primarily by the previously mentioned increases in the net interest rate spread partially offset by decreases in average free funding balances. The decreases in average free funding balances for both periods were driven by decreases in average demand deposits of $2.5 billion and $2.0 billion for the three and nine months ended September 30, 2018, respectively, compared to the same periods in the prior year.

Interest income on an FTE basis from loans and leases (non-GAAP) increased $139 million and $373 million for the three and nine months ended September 30, 2018, respectively, compared to the same periods in the prior year. The increases were primarily due to the aforementioned increases in yields on average loans and leases, as well as increases in the volume of average other consumer loans. 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 $21 million and $66 million for the three and nine months ended September 30, 2018, respectively, compared to the same periods in the prior year primarily as a result of the aforementioned increases in average taxable securities and yields on average taxable securities.

Interest expense on core deposits increased $67 million and $158 million for the three and nine months ended September 30, 2018, respectively, compared to the same periods in the prior year. The increases were primarily due to increases in the cost of average interest-bearing core deposits to 74 bps and 64 bps for the three and nine months ended September 30, 2018, respectively, from 39 bps and 35 bps for the three and nine months ended September 30, 2017, respectively. The increases in the cost of average interest-bearing core deposits for both periods were primarily due to increases in the rates paid on average interest checking deposits and average money market deposits. Refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s deposits.

Interest expense on average wholesale funding increased $23 million and $71 million for the three and nine months ended September 30, 2018, respectively, compared to the same periods in the prior year primarily due to the aforementioned increases in the rates paid on average long-term debt coupled with increases in average long-term debt. 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 nine months ended September 30, 2018, average wholesale funding represented 23% of average interest-bearing liabilities compared to 25% and 24% during the three and nine months ended September 30, 2017, 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 subsection of the Risk Management section of MD&A.

11

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

TABLE 6: Condensed Average Balance Sheets and Analysis of Net Interest Income on an FTE Basis
																										Attribution of Change in
For the three months ended		September 30, 2018												September 30, 2017												Net Interest Income (a)
										Average												Average
		Average				Revenue/				Yield/				Average				Revenue/				Yield/
($ in millions)		Balance				Cost				Rate				Balance				Cost				Rate				Volume				Yield/Rate				Total
Assets:
Interest-earning assets:
Loans and leases: (b)
Commercial and industrial loans		$	42,614				463				4.32	%		$	41,314				391				3.75	%		$	12				60				72
Commercial mortgage loans			6,664				77				4.57				6,814				66				3.85				(1	)			12				11
Commercial construction loans			4,870				63				5.14				4,533				48				4.23				4				11				15
Commercial leases			3,746				27				2.85				4,079				28				2.70				(2	)			1				(1	)
Total commercial loans and leases			57,894				630				4.32				56,740				533				3.72				13				84				97
Residential mortgage loans			16,226				146				3.58				16,206				142				3.48				-				4				4
Home equity			6,529				83				5.03				7,207				80				4.39				(8	)			11				3
Automobile loans			8,969				78				3.47				9,267				69				2.96				(3	)			12				9
Credit card			2,299				71				12.17				2,140				63				11.63				5				3				8
Other consumer loans			2,060				36				6.98				1,057				18				6.89				18				-				18
Total consumer loans			36,083				414				4.56				35,877				372				4.12				12				30				42
Total loans and leases		$	93,977				1,044				4.41	%		$	92,617				905				3.88	%		$	25				114				139
Securities:
Taxable			33,301				268				3.20				32,289				249				3.06				8				11				19
Exempt from income taxes (b)			69				1				4.35				65				1				5.33				-				-				-
Other short-term investments			1,452				6				1.74				1,472				4				1.16				-				2				2
Total interest-earning assets		$	128,799				1,319				4.07	%		$	126,443				1,159				3.64	%		$	33				127				160
Cash and due from banks			2,193												2,227
Other assets			11,837												13,532
Allowance for loan and lease losses			(1,077)												(1,210)
Total assets		$	141,752											$	140,992
Liabilities and Equity:
Interest-bearing liabilities:
Interest checking deposits		$	29,681				66				0.88	%		$	25,765				29				0.44	%		$	5				32				37
Savings deposits			13,231				4				0.11				13,889				2				0.06				-				2				2
Money market deposits			21,753				44				0.80				20,028				19				0.39				2				23				25
Foreign office deposits			317				-				0.33				395				-				0.21				-				-				-
Other time deposits			4,177				15				1.48				3,722				12				1.23				-				3				3
Total interest-bearing core deposits			69,159				129				0.74				63,799				62				0.39				7				60				67
Certificates $100,000 and over			2,596				12				1.85				2,625				9				1.38				-				3				3
Other deposits			578				3				1.95				560				2				1.16				-				1				1
Federal funds purchased			1,987				10				1.96				675				2				1.16				6				2				8
Other short-term borrowings			1,018				6				2.22				4,212				12				1.09				(13	)			7				(6	)
Long-term debt			14,434				112				3.09				13,457				95				2.82				7				10				17
Total interest-bearing liabilities		$	89,772				272				1.20	%		$	85,328				182				0.85	%		$	7				83				90
Demand deposits			32,333												34,850
Other liabilities			3,482												3,973
Total liabilities		$	125,587											$	124,151
Total equity		$	16,165											$	16,841
Total liabilities and equity		$	141,752											$	140,992
Net interest income (FTE) (c)						$	1,047											$	977							$	26				44				70
Net interest margin (FTE) (c)											3.23	%											3.07	%
Net interest rate spread (FTE) (c)											2.87												2.79
Interest-bearing liabilities to interest-earning assets											69.70												67.48

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

(b)	The FTE adjustments included in the above table were $4 and $7 for the three months ended September 30, 2018 and 2017, respectively.

(c)	Net interest income (FTE), net interest margin (FTE) and net interest rate spread (FTE) are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

12

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
																										Attribution of Change in
For the nine months ended		September 30, 2018												September 30, 2017												Net Interest Income (a)
										Average												Average
		Average				Revenue/				Yield/				Average				Revenue/				Yield/
($ in millions)		Balance				Cost				Rate				Balance				Cost				Rate				Volume				Yield/Rate				Total
Assets:
Interest-earning assets:
Loans and leases: (b)
Commercial and industrial loans		$	42,249				1,321				4.18	%		$	41,619				1,123				3.61	%		$	17				181				198
Commercial mortgage loans			6,591				217				4.40				6,873				189				3.68				(8	)			36				28
Commercial construction loans			4,762				175				4.90				4,277				128				4.01				17				30				47
Commercial leases			3,850				81				2.82				4,008				81				2.71				(3	)			3				-
Total commercial loans and leases			57,452				1,794				4.17				56,777				1,521				3.58				23				250				273
Residential mortgage loans			16,176				433				3.58				16,011				423				3.53				4				6				10
Home equity			6,695				242				4.83				7,389				232				4.19				(23	)			33				10
Automobile loans			9,000				221				3.29				9,486				204				2.88				(11	)			28				17
Credit card			2,248				205				12.16				2,121				188				11.84				12				5				17
Other consumer loans			1,792				91				6.79				902				45				6.70				45				1				46
Total consumer loans			35,911				1,192				4.44				35,909				1,092				4.06				27				73				100
Total loans and leases		$	93,363				2,986				4.28	%		$	92,686				2,613				3.77	%		$	50				323				373
Securities:
Taxable			33,272				797				3.20				32,067				738				3.08				28				31				59
Exempt from income taxes (b)			75				2				3.28				63				2				5.38				1				(1)				-
Other short-term investments			1,466				17				1.58				1,367				10				0.97				-				7				7
Total interest-earning assets		$	128,176				3,802				3.97	%		$	126,183				3,363				3.56	%		$	79				360				439
Cash and due from banks			2,182												2,202
Other assets			12,394												13,343
Allowance for loan and lease losses			(1,136)												(1,233)
Total assets		$	141,616											$	140,495
Liabilities and Equity:
Interest-bearing liabilities:
Interest checking deposits		$	28,938				165				0.76	%		$	26,176				73				0.38	%		$	9				83				92
Savings deposits			13,463				9				0.09				14,081				6				0.06				(1	)			4				3
Money market deposits			21,517				110				0.68				20,301				53				0.35				3				54				57
Foreign office deposits			393				1				0.28				409				1				0.17				-				-				-
Other time deposits			4,018				41				1.36				3,764				35				1.23				2				4				6
Total interest-bearing core deposits			68,329				326				0.64				64,731				168				0.35				13				145				158
Certificates $100,000 and over			2,346				28				1.58				2,609				27				1.36				(3	)			4				1
Other deposits			385				5				1.76				330				2				1.03				1				2				3
Federal funds purchased			1,258				17				1.80				542				4				0.94				8				5				13
Other short-term borrowings			1,959				25				1.70				3,441				24				0.92				(13	)			14				1
Long-term debt			14,598				330				3.02				13,528				277				2.75				24				29				53
Total interest-bearing liabilities		$	88,875				731				1.10	%		$	85,181				502				0.79	%		$	30				199				229
Demand deposits			32,992												34,949
Other liabilities			3,541												3,717
Total liabilities		$	125,408											$	123,847
Total equity		$	16,208											$	16,648
Total liabilities and equity		$	141,616											$	140,495
Net interest income (FTE) (c)						$	3,071											$	2,861							$	49				161				210
Net interest margin (FTE) (c)											3.20	%											3.03	%
Net interest rate spread (FTE) (c)											2.87												2.77
Interest-bearing liabilities to interest-earning assets											69.34												67.51

(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 $12 and $19 for the nine months ended September 30, 2018 and 2017, respectively.

(c)	Net interest income (FTE), net interest margin (FTE) and net interest rate spread (FTE) are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

Provision for Loan and Lease Losses

The Bancorp provides as an expense an amount for probable loan and lease losses within the loan and lease portfolio that is based on factors previously discussed in the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2017. 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 a charge-off. 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 $86 million and $142 million for the three and nine months ended September 30, 2018, respectively, compared to $67 million and $193 million during the same periods in the prior year. The increase in provision expense for the three months ended September 30, 2018 was primarily due to an increase in outstanding commercial loan balances and an increase in consumer reserve rates for certain products. The decrease in provision expense for the nine months ended September 30, 2018 was primarily due to a decrease in the level of commercial criticized assets combined with overall improved credit quality.

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