FITB 10-Q Quarter ended March 31, 2019

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 March 31, 2019

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  ☒

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:		Trading Symbol(s):		Name of each exchange on which registered:
Common Stock, Without Par Value		FITB		The NASDAQ Stock Market LLC
Depositary Shares Representing a 1/1000 th Ownership Interest in a Share of 6.625% Fixed-to-Floating Rate Non-Cumulative Perpetual Preferred Stock, Series I		FITBI		The NASDAQ Stock Market LLC

There were 734,386,147 shares of the Registrant’s common stock, without par value, outstanding as of April 30, 2019.

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			7
Recent Accounting Standards			9
Critical Accounting Policies			9
Statements of Income Analysis			10
Balance Sheet Analysis			17
Business Segment Review			24
Risk Management—Overview			30
Credit Risk Management			31
Market Risk Management			44
Liquidity Risk Management			48
Operational Risk Management			51
Compliance Risk Management			51
Capital Management			52
Off-Balance Sheet Arrangements			54
Quantitative and Qualitative Disclosures about Market Risk (Item 3)			55
Controls and Procedures (Item 4)			55
Condensed Consolidated Financial Statements and Notes (Item 1)
Balance Sheets (unaudited)			56
Statements of Income (unaudited)			57
Statements of Comprehensive Income (unaudited)			58
Statements of Changes in Equity (unaudited)			59
Statements of Cash Flows (unaudited)			60
Notes to Condensed Consolidated Financial Statements (unaudited)			61
Part II. Other Information
Legal Proceedings (Item 1)			118
Risk Factors (Item 1A)			118
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)			118
Exhibits (Item 6)			118
Signature			119

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 our most recent Annual Report on Form 10-K as updated by our Quarterly Report 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) deposit insurance premiums; (22) assessments for the orderly liquidation fund; (23) replacement of LIBOR; (24) weakness in the national or local economies; (25) global political and economic uncertainty or negative actions; (26) changes in interest rates; (27) changes and trends in capital markets; (28) fluctuation of Fifth Third’s stock price; (29) volatility in mortgage banking revenue; (30) litigation, investigations and enforcement proceedings by governmental authorities; (31) breaches of contractual covenants, representations and warranties; (32) competition and changes in the financial services industry; (33) changing retail distribution strategies, customer preferences and behavior; (34) risks relating to the merger with MB Financial, Inc. and Fifth Third’s ability to realize anticipated benefits of the merger; (35) difficulties in identifying, acquiring or integrating suitable strategic partnerships, investments or acquisitions; (36) potential dilution from future acquisitions; (37) loss of income and/or difficulties encountered in the sale and separation of businesses, investments or other assets; (38) results of investments or acquired entities; (39) changes in accounting standards or interpretation or declines in the value of Fifth Third’s goodwill or other intangible assets; (40) inaccuracies or other failures from the use of models; (41) effects of critical accounting policies and judgments or the use of inaccurate estimates; (42) weather-related events or other natural disasters; and (43) 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.

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 subsidiaries are referred to as Fifth Third Bank and MB Financial Bank, N.A.

TABLE 1: Selected Financial Data
		For the three months ended March 31,								% Change
($ in millions, except for per share data)		2019				2018
Income Statement Data
Net interest income (U.S. GAAP)		$	1,082				996				9
Net interest income (FTE) (a)(b)			1,086				999				9
Noninterest income			1,101				909				21
Total revenue (a)			2,187				1,908				15
Provision for credit losses (c)			90				13				592
Noninterest expense			1,097				1,010				9
Net income attributable to Bancorp			775				701				11
Net income available to common shareholders			760				686				11
Common Share Data
Earnings per share - basic		$	1.14				0.98				16
Earnings per share - diluted			1.12				0.96				17
Cash dividends declared per common share			0.22				0.16				38
Book value per share			24.77				21.44				16
Market value per share			25.22				31.75				(21	)
Financial Ratios
Return on average assets			2.11	%			2.01				5
Return on average common equity			19.6				18.8				4
Return on average tangible common equity (b)			23.9				22.6				6
Dividend payout			19.3				16.3				18
Average total Bancorp shareholders’ equity as a percent of average assets			11.43				11.41				-
Tangible common equity as a percent of tangible assets (b)(i)			8.21				9.03				(9	)
Net interest margin (a)(b)			3.28				3.18				3
Net interest rate spread (a)(b)			2.87				2.88				-
Efficiency (a)(b)			50.2				52.9				(5	)
Credit Quality
Net losses charged-off		$	77				81				(5	)
Net losses charged-off as a percent of average portfolio loans and leases			0.32	%			0.36				(11	)
ALLL as a percent of portfolio loans and leases			1.02				1.24				(18	)
Allowance for credit losses as a percent of portfolio loans and leases (d)			1.14				1.40				(19	)
Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO			0.45				0.55				(18	)
Average Balances
Loans and leases, including held for sale		$	98,362				92,869				6
Securities and other short-term investments			36,101				34,677				4
Total Assets			148,968				141,450				5
Transaction deposits (e)			100,647				97,018				4
Core deposits (f)			105,507				100,874				5
Wholesale funding (g)			22,187				20,558				8
Bancorp shareholders’ equity			17,025				16,146				5
Regulatory Capital and Liquidity Ratios
CET1 capital (h)			9.60	%			10.82				(11	)
Tier I risk-based capital (h)			10.67				11.95				(11	)
Total risk-based capital (h)			13.68				15.25				(10	)
Tier I leverage			10.32				10.11				2
Modified LCR			113				113				-

(a)	Amounts presented on an FTE basis. The FTE adjustment for the three months ended March 31, 2019 and 2018 was $4 and $3, respectively .

(b)	These are non-GAAP measures. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

(c)	The provision for credit losses is the sum of the provision for loan and lease losses and the provision for (benefit from) the reserve for unfunded commitments.

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

(e)	Includes demand deposits, interest checking deposits, savings deposits, money market deposits and foreign office deposits.

(f)	Includes transaction deposits and 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 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 resulting in the Bancorp’s total risk-weighted assets.

(i)	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 March 31, 2019, the Bancorp had $167.9 billion in assets and operated 1,207 full-service banking centers and 2,559 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.

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, 2018. 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 March 31, 2019, net interest income on an FTE basis and noninterest income each provided 50% of total revenue. 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 the three months ended March 31, 2019. 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, technology and communication costs, net occupancy expense, card and processing expense, equipment expense and other noninterest expense.

Acquisition of MB Financial, Inc.

On March 22, 2019, Fifth Third Bancorp completed its acquisition of MB Financial, Inc. in a stock and cash transaction valued at approximately $3.6 billion. MB Financial, Inc. was headquartered in Chicago, Illinois with reported assets of approximately $20 billion and 86 branches as of December 31, 2018 and is the holding company of MB Financial Bank, N.A. Under the terms of the agreement, the Bancorp acquired 100% of the common stock of MB Financial, Inc. In exchange, common shareholders of MB Financial, Inc. received 1.45 shares of Fifth Third Bancorp common stock and $5.54 in cash for each share of MB Financial, Inc. common stock, for a total value per share of $42.49, based on the $25.48 closing price of Fifth Third Bancorp’s common stock on March 21, 2019. Upon closing of the transaction, MB Financial, Inc. became a subsidiary of the Bancorp. However, MB Financial, Inc.’s preferred stock with a fair value of $197 million remains outstanding and is recognized as a noncontrolling interest on the Condensed Consolidated Balance Sheets. Through its ownership of all of the common stock, the Bancorp controls 95% of the voting equity interests in MB Financial, Inc.

The acquisition of MB Financial, Inc. constituted a business combination and was accounted for under the acquisition method of accounting. Accordingly, the assets acquired, liabilities assumed and noncontrolling interest recognized were recorded at their estimated fair values as of the acquisition date. These fair value estimates are considered preliminary as of March 31, 2019 due to the timing of the close of the acquisition. For more information on the acquisition of MB Financial, Inc., refer to Note 3 of the Notes to Condensed Consolidated Financial Statements.

Worldpay Holding, LLC Transactions

On March 18, 2019, the Bancorp exchanged its remaining 10,252,826 Class B Units of Worldpay Holding, LLC for 10,252,826 shares of Class A common stock of Worldpay, Inc., and subsequently sold those shares. As a result of this transaction, the Bancorp recognized a gain of $562 million in other noninterest income during the first quarter of 2019. As a result of the sale, the Bancorp no longer beneficially owns any of Worldpay, Inc.’s equity securities.

4

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

Accelerated Share Repurchase Transaction

During the three months ended March 31, 2019, the Bancorp entered into an accelerated share repurchase transaction. As part of this transaction, the Bancorp entered into a forward contract in which the final number of shares delivered at settlement will be 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 agreement. For more information on the accelerated share repurchase program, refer to Note 18 of the Notes to Condensed Consolidated Financial Statements. For a summary of the Bancorp’s accelerated share repurchase transaction that was entered into during the three months ended March 31, 2019, refer to Table 2.

TABLE 2: Summary of Accelerated Share Repurchase Transaction

Repurchase Date

Amount ($ in millions)

Shares Repurchased on Repurchase Date

Shares Received from Forward Contract Settlement

Total Shares Repurchased

Settlement Date

March 27, 2019

$

913

31,779,280

(a)

(a)

(a)

(a)	This accelerated share repurchase transaction consists of two supplemental confirmations each with a notional amount of $456.5 million. The settlement of the transaction is expected to occur on or before June 28, 2019.

Senior Notes Offerings

On January 25, 2019, the Bancorp issued and sold $1.5 billion of 3.65% senior fixed-rate notes, with a maturity of five years, due on January 25, 2024. 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 up to, but excluding, the redemption date.

On February 1, 2019, Fifth Third Bank issued and sold, under its bank notes program, $300 million of senior floating-rate notes, with a maturity of three years, due on February 1, 2022. Interest on the floating-rate notes is 3-month LIBOR plus 64 bps. These notes will be redeemable by Fifth Third 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 of the notes to be redeemed plus accrued and unpaid interest up to, but excluding, the redemption date.

GS Holdings and GreenSky, Inc. Transactions

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 were exchangeable on a one-to-one basis for Class A common stock or cash.

During the first quarter of 2019, all of the Bancorp’s units in GS Holdings were converted for Class A common stock on a one-to-one basis and the Bancorp sold 85,000 shares for an immaterial gain that was recognized in the Condensed Consolidated Statements of Income. During the second quarter of 2019, the Bancorp sold its remaining shares of Class A common stock for a gain of approximately $1 million that will be recognized in the second quarter of 2019 Condensed Consolidated Statements of Income. As a result of the sale in the second quarter of 2019, the Bancorp no longer beneficially owns any of GreenSky, Inc.’s equity securities.

Earnings Summary

The Bancorp’s net income available to common shareholders for the first quarter of 2019 was $760 million, or $1.12 per diluted share, which was net of $15 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the first quarter of 2018 was $686 million, or $0.96 per diluted share, which was net of $15 million in preferred stock dividends.

Net interest income on an FTE basis (non-GAAP) was $1.1 billion and $999 million for the three months ended March 31, 2019 and 2018, respectively. Net interest income was positively impacted by increases in yields on average loans and leases of 62 bps for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Net interest income also benefited from an increase in average commercial and industrial loans of $4.3 billion for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. 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 March 2018, June 2018, September 2018 and December 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 the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Due to the timing of the close of the MB Financial, Inc. acquisition, amortization and accretion of premiums and discounts on acquired loans and deposits had an immaterial impact on net interest income for the three months ended March 31, 2019. Net interest margin on an FTE basis (non-GAAP) was 3.28% for the three months ended March 31, 2019 compared to 3.18% for the three months ended March 31, 2018.

Noninterest income increased $192 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to increases in other noninterest income and corporate banking revenue. Other noninterest income increased $132 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to the gain on sale of WorldPay, Inc. shares and a decrease in the loss on the swap associated with the sale of Visa, Inc. Class B shares partially offset by the gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc. recognized during the first quarter of 2018. Corporate banking revenue increased $24 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The increase from the prior year was primarily driven by increases in institutional sales, lease remarketing fees and business lending fees of $9 million, $9 million and $6 million, respectively. These increases were partially offset by a decrease in foreign exchange fees of $2 million.

Noninterest expense increased $87 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to increases in personnel costs (salaries, wages and incentives plus employee benefits), technology and communications expense and other noninterest expense.

5

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

The increase in noninterest expense included the recognition by the Bancorp of $76 million of merger-related expenses related to the MB Financial, Inc. acquisition for the three months ended March 31, 2019. Personnel costs increased $53 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily driven by $35 million of merger-related expenses, the addition of personnel costs from the acquisition of MB Financial, Inc. and higher deferred compensation expense. Technology and communications expense increased $15 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily driven by $11 million of merger-related expenses and increased investment in regulatory, compliance and growth initiatives. Other noninterest expense increased $18 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to the recognition of $30 million of merger-related expenses related to the acquisition of MB Financial, Inc. Those expenses included $20 million in acquisition expenses recorded in other, net, $6 million in professional service fees and $4 million in marketing expense. These increases were partially offset by a decrease in FDIC insurance and other taxes.

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 credit losses was $90 million and $13 million for the three months ended March 31, 2019 and 2018, respectively. Net losses charged-off as a percent of average portfolio loans and leases were 0.32% during the first quarter of 2019 compared to 0.36% during the first quarter of 2018. At March 31, 2019, nonperforming portfolio assets as a percent of portfolio loans and leases and OREO increased to 0.45% compared to 0.41% at December 31, 2018. 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 March 31, 2019, as calculated under the Basel III standardized approach, the CET1 capital ratio was 9.60%, the Tier I risk-based capital ratio was 10.67%, the Total risk-based capital ratio was 13.68% and the Tier I leverage ratio was 10.32%.

6

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 March 31,
($ in millions)		2019				2018
Net interest income (U.S. GAAP)		$	1,082				996
Add: FTE adjustment			4				3
Net interest income on an FTE basis (1)		$	1,086				999
Net interest income on an FTE basis (annualized) (2)			4,404				4,052
Interest income (U.S. GAAP)		$	1,433				1,206
Add: FTE adjustment			4				3
Interest income on an FTE basis		$	1,437				1,209
Interest income on an FTE basis (annualized) (3)			5,828				4,903
Interest expense (annualized) (4)		$	1,424				852
Noninterest income (5)			1,101				909
Noninterest expense (6)			1,097				1,010
Average interest-earning assets (7)			134,463				127,546
Average interest-bearing liabilities (8)			97,137				87,607
Ratios:
Net interest margin on an FTE basis (2) / (7)			3.28	%			3.18
Net interest rate spread on an FTE basis ((3) / (7)) - ((4) / (8))			2.87				2.88
Efficiency ratio on an FTE basis (6) / ((1) + (5))			50.2				52.9

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.

7

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

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

TABLE 4: Non-GAAP Financial Measures - Return on Average Tangible Common Equity
($ in millions)		March 31, 2019				March 31, 2018
Net income available to common shareholders (U.S. GAAP)		$	760				686
Add: Intangible amortization, net of tax			2				1
Tangible net income available to common shareholders		$	762				687
Tangible net income available to common shareholders (annualized) (1)			3,090				2,786
Average Bancorp’s shareholders’ equity (U.S. GAAP)		$	17,025				16,146
Less: Average preferred stock			(1,331	)			(1,331	)
Average goodwill			(2,682	)			(2,455	)
Average intangible assets			(58	)			(27	)
Average tangible common equity (2)		$	12,954				12,333
Return on average tangible common equity (1) / (2)			23.9	%			22.6

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 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.

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

TABLE 5: Non-GAAP Financial Measures - Capital Ratios
As of ($ in millions)		March 31, 2019				December 31, 2018
Total Bancorp Shareholders’ Equity (U.S. GAAP)		$	19,647				16,250
Less: Preferred stock			(1,331	)			(1,331	)
Goodwill			(4,321	)			(2,478	)
Intangible assets			(218	)			(40	)
AOCI			(409	)			112
Tangible common equity, excluding unrealized gains / losses (1)			13,368				12,513
Add: Preferred stock			1,331				1,331
Tangible equity (2)		$	14,699				13,844
Total Assets (U.S. GAAP)		$	167,853				146,069
Less: Goodwill			(4,321	)			(2,478	)
Intangible assets			(218	)			(40	)
AOCI, before tax			(518	)			142
Tangible assets, excluding unrealized gains / losses (3)		$	162,796				143,693
Ratios:
Tangible equity as a percentage of tangible assets (2) / (3)			9.03	%			9.63
Tangible common equity as a percentage of tangible assets (1) / (3)			8.21				8.71

8

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

RECENT ACCOUNTING STANDARDS

Note 4 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, 2018. There have been no material changes to the valuation techniques or models during the three months ended March 31, 2019.

9

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.

Table 6 presents the components of net interest income, net interest margin and net interest rate spread for the three months ended March 31, 2019 and 2018, 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 included in other assets.

Net interest income on an FTE basis (non-GAAP) was $1.1 billion and $999 million for the three months ended March 31, 2019 and 2018, respectively. Net interest income was positively impacted by increases in yields on average loans and leases of 62 bps for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. Net interest income also benefited from an increase in average commercial and industrial loans of $4.3 billion for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. 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 March 2018, June 2018, September 2018 and December 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 the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The rates paid on average interest-bearing core deposits and average long-term debt increased 47 bps and 49 bps, respectively, for the three months ended March 31, 2019 compared to the same period in the prior year. Due to the timing of the close of the MB Financial, Inc. acquisition, amortization and accretion of premiums and discounts on acquired loans and deposits had an immaterial impact on net interest income for the three months ended March 31, 2019.

Net interest rate spread on an FTE basis (non-GAAP) was 2.87% during the three months ended March 31, 2019 compared to 2.88% in the same period in 2018. Rates paid on average interest-bearing liabilities increased 49 bps, partially offset by a 48 bps increase in the yields on average interest-earning assets for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

Net interest margin on an FTE basis (non-GAAP) was 3.28% for the three months ended March 31, 2019 compared to 3.18% for the three months ended March 31, 2018. The increase from the three months ended March 31, 2018 was driven primarily by the increase in net interest income attributable to increases in average interest-earning assets and the yields on interest-earning assets, partially offset by a decrease in average free funding balances. The decrease in average free funding balances was driven by a decrease in average demand deposits of $3.3 billion for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

Interest income on an FTE basis from loans and leases (non-GAAP) increased $206 million during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 driven by the previously mentioned increase in yields on average loan and leases, as well as increases in the balance of average commercial and industrial loans, average other consumer loans and average commercial mortgage 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 $22 million during the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily as a result of increases in average taxable securities and yields on average taxable securities.

Interest expense on core deposits increased $97 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to an increase in the cost of average interest-bearing core deposits to 99 bps for the three months ended March 31, 2019 from 52 bps for the three months ended March 31, 2018. The increase in the cost of average interest-bearing core deposits was primarily due to an increase in the cost of 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 $44 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to increases in the rates paid on average long-term debt and average other short-term borrowings, partially offset by a decrease in average other short-term borrowings. 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 months ended March 31, 2019 and 2018, average wholesale funding represented 23% of average interest-bearing liabilities. 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.

10

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
For the three months ended		March 31, 2019												March 31, 2018												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		$	46,070				530				4.67	%		$	41,799				409				3.96	%		$	44				77				121
Commercial mortgage loans			7,417				88				4.80				6,588				68				4.20				10				10				20
Commercial construction loans			4,838				66				5.55				4,671				53				4.59				2				11				13
Commercial leases			3,555				27				3.08				3,960				27				2.78				(3	)			3				-
Total commercial loans and leases			61,880				711				4.66				57,018				557				3.96				53				101				154
Residential mortgage loans			16,150				147				3.71				16,086				143				3.60				(1	)			5				4
Home equity			6,356				84				5.34				6,889				78				4.62				(6	)			12				6
Indirect secured consumer loans			9,176				86				3.79				9,064				70				3.12				1				15				16
Credit card			2,396				75				12.63				2,224				68				12.36				5				2				7
Other consumer loans			2,404				44				7.49				1,588				25				6.58				15				4				19
Total consumer loans			36,482				436				4.85				35,851				384				4.35				14				38				52
Total loans and leases		$	98,362				1,147				4.73	%		$	92,869				941				4.11	%		$	67				139				206
Securities:
Taxable			34,320				281				3.32				33,133				263				3.21				9				9				18
Exempt from income taxes (b)			28				-				4.80				73				-				1.40				-				-				-
Other short-term investments			1,753				9				1.97				1,471				5				1.37				2				2				4
Total interest-earning assets		$	134,463				1,437				4.33	%		$	127,546				1,209				3.85	%		$	78				150				228
Cash and due from banks			2,217												2,175
Other assets			13,391												12,924
Allowance for loan and lease losses			(1,103	)											(1,195	)
Total assets		$	148,968											$	141,450
Liabilities and Equity:
Interest-bearing liabilities:
Interest checking deposits		$	33,697				97				1.18	%		$	28,403				44				0.63	%		$	9				44				53
Savings deposits			13,052				5				0.15				13,546				3				0.07				(1	)			3				2
Money market deposits			23,133				59				1.03				20,750				27				0.53				4				28				32
Foreign office deposits			208				-				0.60				494				-				0.13				-				-				-
Other time deposits			4,860				22				1.80				3,856				12				1.25				4				6				10
Total interest-bearing core deposits			74,950				183				0.99				67,049				86				0.52				16				81				97
Certificates $100,000 and over			3,358				18				2.13				2,284				8				1.49				6				4				10
Other deposits			726				4				2.43				379				1				1.44				2				1				3
Federal funds purchased			2,019				12				2.43				692				2				1.43				7				3				10
Other short-term borrowings			646				6				3.62				2,423				8				1.34				(9	)			7				(2	)
Long-term debt			15,438				128				3.35				14,780				105				2.86				4				19				23
Total interest-bearing liabilities		$	97,137				351				1.46	%		$	87,607				210				0.97	%		$	26				115				141
Demand deposits			30,557												33,825
Other liabilities			4,227												3,852
Total liabilities		$	131,921											$	125,284
Total equity		$	17,047											$	16,166
Total liabilities and equity		$	148,968											$	141,450
Net interest income (FTE) (c)						$	1,086											$	999							$	52				35				87
Net interest margin (FTE) (c)											3.28	%											3.18	%
Net interest rate spread (FTE) (c)											2.87												2.88
Interest-bearing liabilities to interest-earning assets											72.24												68.69

(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 $3 for the three months ended March 31, 2019 and 2018, 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 Credit Losses

The Bancorp provides as an expense an amount for probable credit losses within the loan and lease portfolio and the portfolio of unfunded loan commitments and letters of credit 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, 2018. The provision is recorded to bring the ALLL and reserve for unfunded commitments to a level deemed appropriate by the Bancorp to cover losses inherent in the portfolios. 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 are 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 credit losses was $90 million and $13 million for the three months ended March 31, 2019 and 2018, respectively. The increase in provision expense for the three months ended March 31, 2019 compared to the same period in the prior year was primarily due to the impact of lower commercial criticized assets and overall reserve rates during the three months ended March 31, 2018, combined with an increase in total outstanding loan balances as of March 31, 2019, exclusive of loans and leases acquired in the MB Financial, Inc. acquisition.

11

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

The ALLL increased $12 million from December 31, 2018 to $1.1 billion at March 31, 2019. At March 31, 2019, the ALLL as a percent of portfolio loans and leases decreased to 1.02%, compared to 1.16% at December 31, 2018. This decrease reflects the impact of the MB Financial, Inc. acquisition, which added approximately $13.5 billion in portfolio loans and leases at the acquisition date. Loans acquired by the Bancorp through a purchase business combination are recorded at fair value as of the acquisition date. The Bancorp does not carry over the acquired company’s ALLL, nor does the Bancorp add to its existing ALLL as part of purchase accounting. The reserve for unfunded commitments increased $2 million from December 31, 2018 to $133 million at March 31, 2019. This increase reflects the impact of the MB Financial, Inc. acquisition, which included approximately $1 million in reserves for unfunded commitments at the acquisition date.

Refer to the Credit Risk Management subsection of the Risk Management section of MD&A as well as Note 7 of the Notes to Condensed Consolidated Financial Statements for more detailed information on the provision for credit 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, ALLL and reserve for unfunded commitments.

Noninterest Income

Noninterest income increased $192 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

The following table presents the components of noninterest income:

TABLE 7: Components of Noninterest Income
			For the three months ended
			March 31,
($ in millions)			2019				2018				% Change
Service charges on deposits		$	131				137				(4	)
Wealth and asset management revenue			112				113				(1	)
Corporate banking revenue			112				88				27
Card and processing revenue			79				79				-
Mortgage banking net revenue			56				56				-
Other noninterest income			592				460				29
Securities gains (losses), net			16				(11	)			NM
Securities gains (losses), net - non-qualifying hedges on MSRs			3				(13	)			NM
Total noninterest income		$	1,101				909				21

Service charges on deposits

Service charges on deposits decreased $6 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to decreases of $5 million in commercial deposit fees and $1 million in consumer deposit fees.

Wealth and asset management revenue

Wealth and asset management revenue decreased $1 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The decrease from the prior year included a $2 million decrease in securities and broker income driven by market volatility and a $2 million decrease in institutional fees as a result of restructuring the Bancorp’s investment management business to focus on core client strategies. These decreases were partially offset by a $3 million increase in private client services driven by acquisitions since the quarter ended March 31, 2018. The Bancorp’s trust and registered investment advisory businesses had approximately $394 billion and $363 billion in total assets under care as of March 31, 2019 and 2018, respectively, and managed $44 billion and $37 billion in assets for individuals, corporations and not-for-profit organizations as of March 31, 2019 and 2018, respectively.

Corporate banking revenue

Corporate banking revenue increased $24 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018. The increase from the prior year was primarily driven by increases in institutional sales, lease remarketing fees and business lending fees of $9 million, $9 million and $6 million, respectively. These increases were partially offset by a decrease in foreign exchange fees of $2 million.

Mortgage banking net revenue

Mortgage banking net revenue was flat for the three months ended March 31, 2019 compared to the three months ended March 31, 2018.

12

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

The following table presents the components of mortgage banking net revenue:

TABLE 8: Components of Mortgage Banking Net Revenue
		For the three months ended March 31,
($ in millions)		2019				2018
Origination fees and gains on loan sales		$	25				24
Net mortgage servicing revenue:
Gross mortgage servicing fees			55				53
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs			(24	)			(21	)
Net mortgage servicing revenue			31				32
Total mortgage banking net revenue		$	56				56

Origination fees and gains on loan sales increased $1 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily driven by an increase in the positive fair value adjustments on portfolio loans held at fair value due to the interest rate environment. Residential mortgage loan originations remained flat at $1.6 billion for both the three months ended March 31, 2019 and 2018.

Net mortgage servicing revenue decreased $1 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to an increase in net negative valuation adjustments of $3 million, partially offset by an increase in gross mortgage servicing fees of $2 million. Refer to Table 9 for the components of net valuation adjustments on the MSR portfolio and the impact of the non-qualifying hedging strategy.

TABLE 9: Components of Net Valuation Adjustments on MSRs
		For the three months ended March 31,
($ in millions)		2019				2018
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio		$	60				(49	)
Changes in fair value:
Due to changes in inputs or assumptions			(57	)			57
Other changes in fair value			(27	)			(29	)
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs		$	(24	)			(21	)

Mortgage rates decreased during the three months ended March 31, 2019 which caused modeled prepayment speeds to rise. The fair value of the MSR portfolio decreased $57 million due to changes to inputs to the valuation model including prepayment speeds and OAS spread assumptions and decreased $27 million due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs during the three months ended March 31, 2019. Mortgage rates increased during the three months ended March 31, 2018 which caused modeled prepayment speeds to slow. The fair value of the MSR portfolio increased $57 million due to changes to inputs to the valuation model including prepayment speeds and OAS spread assumptions and decreased $29 million due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs during the three months ended March 31, 2018.

Further detail on the valuation of MSRs can be found in Note 14 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 of the MSR portfolio. Refer to Note 15 of the Notes to Condensed Consolidated Financial Statements for more information on the free-standing derivatives used to economically hedge the MSR portfolio.

In addition to the derivative positions used to economically hedge the MSR portfolio, the Bancorp acquires various securities as a component of its non-qualifying hedging strategy. The Bancorp recognized net gains of $3 million and net losses of $13 million during the three months ended March 31, 2019 and 2018, respectively, recorded in securities gains (losses), net - non-qualifying hedges on MSRs in the Bancorp’s Condensed Consolidated Statements of Income.

The Bancorp’s total residential mortgage loans serviced as of March 31, 2019 and 2018 were $101.3 billion and $77.2 billion, respectively, with $83.9 billion and $61.0 billion, respectively, of residential mortgage loans serviced for others.

13

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

Other noninterest income

The following table presents the components of other noninterest income:

TABLE 10: Components of Other Noninterest Income
		For the three months ended March 31,
($ in millions)			2019				2018
Gain on sale of Worldpay, Inc. shares		$	562				-
Operating lease income			21				23
Cardholder fees			14				14
BOLI income			14				13
Insurance income			6				6
Consumer loan and lease fees			5				5
Banking center income			5				5
Private equity investment income			4				20
Equity method income (loss) from interest in Worldpay Holding, LLC			2				(1	)
Net gains (losses) on loan sales			1				(1	)
Loss on swap associated with the sale of Visa, Inc. Class B Shares			(31	)			(39	)
Net losses on disposition and impairment of bank premises and equipment			(20	)			(8	)
Gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc.			-				414
Other, net			9				9
Total other noninterest income		$	592				460

Other noninterest income increased $132 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to the gain on sale of WorldPay, Inc. shares and a decrease in the loss on the swap associated with the sale of Visa, Inc. Class B shares partially offset by the gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc. recognized during the first quarter of 2018. Additionally, the increase in other noninterest income was partially offset by a decrease in private equity investment income and an increase in the losses on disposition and impairment of bank premises and equipment.

The Bancorp recognized a $562 million gain related to the sale of WorldPay, Inc. shares during the three months ended March 31, 2019. The Bancorp recognized a $414 million gain related to Vantiv, Inc’s acquisition of WorldPay Group plc. during the three months ended March 31, 2018. For additional information, refer to Note 21 of the Notes to Condensed Consolidated Financial Statements.

The Bancorp recognized a $31 million loss on the swap associated with the sale of Visa, Inc. Class B shares during the three months ended March 31, 2019 compared with a $39 million loss during the three months ended March 31, 2018.

Private equity investment income decreased $16 million for the three months ended March 31, 2019 compared to the same period in the prior year primarily due to the recognition of positive net valuation adjustments on certain private equity investments in the first quarter of 2018. For additional information on the valuation of private equity investments, refer to Note 25 of the Notes to Condensed Consolidated Financial Statements. Net losses on disposition and impairment of bank premises and equipment increased $12 million for the three months ended March 31, 2019 compared to the three months ended 2018. The increase was driven by the impact of impairment charges of $20 million during the three months ended March 31, 2019 compared to $8 million during the three months ended March 31, 2018. For additional information, refer to Note 8 of the Notes to Condensed Consolidated Financial Statements.

Noninterest Expense

Noninterest expense increased $87 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to increases in personnel costs (salaries, wages and incentives plus employee benefits), technology and communications expense and other noninterest expense. The following table presents the components of noninterest expense:

TABLE 11: Components of Noninterest Expense
		For the three months ended March 31,
($ in millions)			2019				2018				% Change
Salaries, wages and incentives		$	479				447				7
Employee benefits			131				110				19
Technology and communications			83				68				22
Net occupancy expense			75				75				-
Card and processing expense			31				29				7
Equipment expense			30				31				(3	)
Other noninterest expense			268				250				7
Total noninterest expense		$	1,097				1,010				9
Efficiency ratio on an FTE basis (a)			50.2	%			52.9

(a)	This is a non-GAAP measure. For further information, refer to the Non-GAAP Financial Measures section of MD&A.

14

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

The Bancorp recognized $76 million of merger-related expenses related to the MB Financial, Inc. acquisition for the three months ended March 31, 2019. The following table provides a summary of merger-related expenses recorded in noninterest expense for the three months ended March 31, 2019:

TABLE 12: Merger-Related Expenses
($ in millions)		Merger-Related Expense
Salaries, wages and incentives		$	32
Employee benefits			3
Technology and communications			11
Other noninterest expense			30
Total		$	76

Personnel costs increased $53 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily driven by $35 million of merger-related expenses, the addition of personnel costs from the acquisition of MB Financial, Inc. and higher deferred compensation expense. Full-time equivalent employees totaled 20,115 at March 31, 2019 compared to 18,344 at March 31, 2018.

Technology and communications expense increased $15 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily driven by $11 million of merger-related expenses and increased investment in regulatory, compliance and growth initiatives.

The following table presents the components of other noninterest expense:

TABLE 13: Components of Other Noninterest Expense
		For the three months ended March 31,
($ in millions)		2019				2018
Marketing		$	36				32
Loan and lease			27				26
Losses and adjustments			22				17
FDIC insurance and other taxes			20				32
Professional service fees			19				13
Operating lease			18				21
Data processing			16				14
Travel			14				13
Recruitment and education			11				8
Postal and courier			9				9
Donations			3				3
Supplies			3				3
Insurance			3				3
Loss on partnership investments			-				2
Other, net			67				54
Total other noninterest expense		$	268				250

Other noninterest expense increased $18 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to the recognition of $30 million of merger-related expenses related to the acquisition of MB Financial, Inc. Those expenses included $20 million in acquisition expenses recorded in other, net, $6 million in professional service fees and $4 million in marketing expense. These increases were partially offset by a decrease in FDIC insurance and other taxes.

FDIC insurance and other taxes decreased $12 million for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 primarily due to the elimination of the FDIC surcharge in the fourth quarter of 2018.

Applicable Income Taxes

The following table presents the Bancorp’s income before income taxes, applicable income tax expense and effective tax rate:

TABLE 14: Applicable Income Taxes
		For the three months ended March 31,
($ in millions)		2019				2018
Income before income taxes		$	996				882
Applicable income tax expense			221				181
Effective tax rate			22.2	%			20.5

Applicable income tax expense for all periods includes the benefit from tax-exempt income, tax-advantaged investments and tax credits (and other related tax benefits), partially offset by the effect of proportional amortization of qualifying LIHTC investments and certain nondeductible expenses. The tax credits are primarily 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.

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

The increase in the effective tax rate for the three months ended March 31, 2019 compared to the same period in the prior year was primarily related to an increase in state income tax expense and a decrease in expected low-income housing tax credits and other tax benefits, partially offset by a decrease of proportional amortization of qualifying LIHTC investments.

For stock-based awards, U.S. GAAP requires that the tax consequences for the difference between the expense recognized for financial reporting and the Bancorp’s actual tax deduction for the stock-based awards be recognized through income tax expense in the interim periods in which they occur. The Bancorp cannot predict its stock price or whether and when its employees will exercise stock-based awards in the future. Based on its stock price at March 31, 2019, the Bancorp estimates that it may be necessary to recognize $4 million of additional income tax benefit over the next twelve months related to the settlement of stock-based awards, primarily in the second quarter of 2019. However, the amount of income tax expense or benefit recognized upon settlement may vary significantly from expectations based on the Bancorp’s stock price and the number of SARs exercised by employees.

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

BALANCE SHEET ANALYSIS

Loans and Leases

The Bancorp classifies its commercial loans and leases based upon primary purpose and consumer loans based upon product or collateral. Table 15 summarizes end of period loans and leases, including loans and leases held for sale, Table 16 summarizes loans acquired in the MB Financial, Inc. acquisition and Table 17 summarizes average total loans and leases, including loans and leases held for sale.

TABLE 15: Components of Total Loans and Leases (including loans and leases held for sale)
		March 31, 2019								December 31, 2018
As of ($ in millions)		Carrying Value				% of Total				Carrying Value				% of Total
Commercial loans and leases:
Commercial and industrial loans		$	51,925				47	%		$	44,407				46	%
Commercial mortgage loans			10,689				10				6,977				7
Commercial construction loans			5,231				5				4,657				5
Commercial leases			3,909				3				3,600				4
Total commercial loans and leases			71,754				65				59,641				62
Consumer loans:
Residential mortgage loans			17,437				16				16,041				17
Home equity			6,435				6				6,402				7
Indirect secured consumer loans (a)			10,031				9				8,976				9
Credit card			2,388				2				2,470				3
Other consumer loans			2,489				2				2,342				2
Total consumer loans			38,780				35				36,231				38
Total loans and leases		$	110,534				100	%		$	95,872				100	%
Total portfolio loans and leases (excluding loans and leases held for sale)		$	109,842							$	95,265

(a)	The Bancorp acquired indirect motorcycle, powersports, recreational vehicles and marine loans in the acquisition of MB Financial, Inc. These loans are included in addition to automobile loans in the line item “indirect secured consumer loans”.

Total loans and leases, including loans and leases held for sale, increased $14.7 billion from December 31, 2018. The increase in total loans and leases was primarily driven by the impact of the MB Financial, Inc. acquisition, which added $13.5 billion in total loans and leases upon acquisition. Table 16 summarizes the detail of loans and leases acquired from MB Financial, Inc. on March 22, 2019.

TABLE 16: Loans and Leases Acquired
($ in millions)
Commercial loans and leases:
Commercial and industrial loans		$	6,604
Commercial mortgage loans			3,531
Commercial construction loans			496
Commercial leases			436
Total commercial loans and leases			11,067
Consumer loans:
Residential mortgage loans			1,397
Home equity			174
Indirect secured consumer loans			802
Credit card			19
Other consumer loans			43
Total consumer loans			2,435
Total loans and leases		$	13,502
Total portfolio loans and leases (excluding loans and leases held for sale)		$	13,490

The following discussion excludes the impact of the MB Financial, Inc. acquisition. Commercial loans and leases increased $1.0 billion from December 31, 2018 due to increases in commercial and industrial loans, commercial mortgage loans and commercial construction loans, partially offset by a decrease in commercial leases. Commercial and industrial loans increased $914 million, or two percent, from December 31, 2018 primarily as a result of an increase in loan originations as well as a decrease in payoffs during the three months ended March 31, 2019. Commercial mortgage loans increased $181 million, or three percent, from December 31, 2018 primarily as a result of an increase in loan originations and increases in permanent financing from the Bancorp’s commercial construction loan portfolio. Commercial construction loans increased $78 million, or two percent, from December 31, 2018 primarily as a result of lower payoffs and paydowns as well as increases in draw levels on existing commitments as a result of seasonal trends. Commercial leases decreased $127 million, or four percent, from December 31, 2018 primarily as a result of a planned reduction in indirect non-relationship based lease originations.

The following discussion excludes the impact of the MB Financial, Inc. acquisition. Consumer loans increased $114 million from December 31, 2018 primarily due to increases in indirect secured consumer loans and other consumer loans, partially offset by decreases in home equity and credit card. Indirect secured consumer loans increased $253 million, or three percent, from December 31, 2018 primarily as a result of loan production exceeding payoffs. Other consumer loans increased $104 million, or four percent, from December 31, 2018 primarily as a result of growth in point-of-sale loan originations. Home equity decreased $141 million, or two percent, from December 31, 2018 as payoffs exceeded loan production. Credit card decreased $101 million, or four percent, from December 31, 2018 primarily as a result of decreases in balance-active customers and average balance per active customer, driven by seasonal paydowns in year-end balances.

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

TABLE 17: Components of Average Loans and Leases (including loans and leases held for sale)

		March 31, 2019								March 31, 2018
For the three months ended ($ in millions)		Carrying Value				% of Total				Carrying Value				% of Total
Commercial loans and leases:
Commercial and industrial loans		$	46,070				48	%		$	41,799				45	%
Commercial mortgage loans			7,417				8				6,588				7
Commercial construction loans			4,838				5				4,671				5
Commercial leases			3,555				4				3,960				4
Total commercial loans and leases			61,880				65				57,018				61
Consumer loans:
Residential mortgage loans			16,150				16				16,086				18
Home equity			6,356				6				6,889				7
Indirect secured consumer loans (a)			9,176				9				9,064				10
Credit card			2,396				2				2,224				2
Other consumer loans			2,404				2				1,588				2
Total consumer loans			36,482				35				35,851				39
Total average loans and leases		$	98,362				100	%		$	92,869				100	%
Total average portfolio loans and leases (excluding loans and leases held for sale)		$	97,773							$	92,334

(a)	The Bancorp acquired indirect motorcycle, powersports, recreational vehicles and marine loans in the acquisition of MB Financial, Inc. These loans are included in addition to automobile loans in the line item “indirect secured consumer loans”.

Average loans and leases, including loans and leases held for sale, increased $5.5 billion from March 31, 2018 as a result of a $4.9 billion, or nine percent, increase in average commercial loans and leases as well as a $631 million, or two percent, increase in average consumer loans.

Average commercial loans and leases increased from March 31, 2018 due to increases in average commercial and industrial loans, average commercial mortgage loans and average commercial construction loans, partially offset by a decrease in average commercial leases. Average commercial and industrial loans increased $4.3 billion, or 10%, from March 31, 2018 primarily as a result of an increase in loan originations as well as a decrease in payoffs and the impact of the acquisition of MB Financial, Inc. Average commercial mortgage loans increased $829 million, or 13%, from March 31, 2018 primarily as a result of an increase in loan origination activity and the impact of the acquisition of MB Financial, Inc. Average commercial construction loans increased $167 million, or four percent, from March 31, 2018 primarily as a result of an increase in draw levels on existing commitments. Average commercial leases decreased $405 million, or 10%, from March 31, 2018 primarily as a result of a planned reduction in indirect non-relationship based lease originations.

Average consumer loans increased from March 31, 2018 due to increases in average other consumer loans, average credit card, average indirect secured consumer loans and average residential mortgage loans, partially offset by a decrease in average home equity loans. Average other consumer loans increased $816 million, or 51%, from March 31, 2018 primarily due to growth in point-of-sale loan originations. Average credit card increased $172 million, or eight percent, from March 31, 2018 primarily due to increases in balance-active customers and average balance per active customer. Average indirect secured consumer loans increased $112 million, or one percent, from March 31, 2018 primarily due to the acquisition of MB Financial, Inc. Average residential mortgage loans increased $64 million from March 31, 2018 primarily driven by the acquisition of MB Financial, Inc. Average home equity decreased $533 million, or eight percent, from March 31, 2018 as payoffs exceeded loan production.

Investment Securities

The Bancorp uses investment securities as a means of managing interest rate risk, providing collateral for pledging purposes and for liquidity to satisfy regulatory requirements. Total investment securities were $35.8 billion and $33.6 billion at March 31, 2019 and December 31, 2018, respectively. The taxable available-for-sale debt and other investment securities portfolio had an effective duration of 4.8 years at March 31, 2019 compared to 5.0 years at December 31, 2018.

Debt 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. Debt securities are classified as trading when bought and held principally for the purpose of selling them in the near term. At March 31, 2019, the Bancorp’s investment portfolio consisted primarily of AAA-rated available-for-sale debt and other securities. The Bancorp held an immaterial amount in below-investment grade available-for-sale debt and other securities at both March 31, 2019 and December 31, 2018. During both the three months ended March 31, 2019 and 2018 the Bancorp did not recognize any OTTI on its available-for-sale debt and other securities.

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