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,June 30, 2012

Commission File Number 001-33653

 

 

 

LOGOLOGO

(Exact name of Registrant as specified in its charter)

 

 

 

Ohio 31-0854434

(State or other jurisdiction

of incorporation or organization)

 

(I.R.S. Employer

Identification Number)

Fifth Third Center

Cincinnati, Ohio 45263

(Address of principal executive offices)

Registrant’s telephone number, including area code: (800) 972-3030

 

 

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

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

 

Large accelerated filer x  Accelerated filer ¨
Non-accelerated filer ¨  (Do not check if a smaller reporting company)  Smaller reporting company ¨

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

There were 920,056,340918,913,253 shares of the Registrant’s common stock, without par value, outstanding as of March 31,June 30, 2012.

 

 

 


LOGOLOGO

FINANCIAL CONTENTS

 

Part I. Financial Information

  

Glossary of Terms

   3  

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

  

Selected Financial Data

   4  

Overview

   5  

Non-GAAP Financial Measures

   78  

Recent Accounting Standards

   89  

Critical Accounting Policies

   89  

Statements of Income Analysis

   910  

Balance Sheet Analysis

   1518  

Business Segment Review

   2225  

Risk Management–Management—Overview

   2832  

Credit Risk Management

   2933  

Market Risk Management

   4649  

Liquidity Risk Management

   5053  

Capital Management

   5154  

Off-Balance Sheet Arrangements

   5456  

Quantitative and Qualitative Disclosures about Market Risk (Item 3)

   5558  

Controls and Procedures (Item 4)

   5558  

Condensed Consolidated Financial Statements and Notes (Item 1)

  

Balance Sheets (unaudited)

   5659  

Statements of Income (unaudited)

   5860  

Statements of Comprehensive Income (unaudited)

   5961  

Statements of Changes in Equity (unaudited)

   6062  

Statements of Cash Flows (unaudited)

   6163  

Notes to Condensed Consolidated Financial Statements (unaudited)

   6264  

Part II. Other Information

  

Legal Proceedings (Item 1)

   112118  

Risk Factors (Item 1A)

   112118  

Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)

   112118  

Exhibits (Item 6)

   112118  

Signatures

   114119  

Certifications

  

FORWARD-LOOKING STATEMENTS

This report may contain forward-looking statements about Fifth Third Bancorp and/or the company as combined acquired entities 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, that involve inherent risks and uncertainties. This report may contain certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Fifth Third Bancorp and/or the combined company including statements preceded by, followed by or that include the words or phrases such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general economic conditions and weakening in the economy, specifically the real estate market, either nationally or in the states in which Fifth Third, one or more acquired entities and/or the combined company do business, are less favorable than expected; (2) deteriorating credit quality; (3) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (4) changes in the interest rate environment reduce interest margins; (5) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; (6) Fifth Third’s ability to maintain required capital levels and adequate sources of funding and liquidity; (7) maintaining capital requirements may limit Fifth Third’s operations and potential growth; (8) changes and trends in capital markets; (9) problems encountered by larger or similar financial institutions may adversely affect the banking industry and/or Fifth Third; (10) competitive pressures among depository institutions increase significantly; (11) effects of critical accounting policies and judgments; (12) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (FASB) or other regulatory agencies; (13) legislative or regulatory changes or actions, or significant litigation, adversely affect Fifth Third, one or more acquired entities and/or the combined company or the businesses in which Fifth Third, one or more acquired entities and/or the combined company are engaged, including the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act); (14) ability to maintain favorable ratings from rating agencies; (15) fluctuation of Fifth Third’s stock price; (16) ability to attract and retain key personnel; (17) ability to receive dividends from its subsidiaries; (18) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (19) effects of accounting or financial results of one or more acquired entities; (20) difficulties from the separation of Vantiv Holding, LLC from Fifth Third; (21) loss of income from any sale or potential sale of businesses that could have an adverse effect on Fifth Third’s earnings and future growth; (22) ability to secure confidential information through the use of computer systems and telecommunications networks; and (23) the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity.

Glossary of Terms

 

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

 

ALCOALCO::Asset Liability Management Committee

ALLL:Allowance for Loan and Lease Losses

AOCI:Accumulated Other Comprehensive Income

ARM:Adjustable Rate Mortgage

ATM:Automated Teller Machine

BOLI:Bank Owned Life Insurance

bp:Basis point(s)

CCAR:Comprehensive Capital Analysis and Review

CDC:Fifth Third Community Development Corporation

CFPB:United States Consumer Financial Protection Bureau

C&I:Commercial and Industrial

DCF:Discounted Cash Flow

DDAs:Demand Deposit Accounts

ERISA:Employee Retirement Income Security Act

ERM:Enterprise Risk Management

ERMC:Enterprise Risk Management Committee

EVE:Economic Value of Equity

FASB:Financial Accounting Standards Board

FDIC:Federal Deposit Insurance Corporation

FHLB:Federal Home Loan Bank

FHLMC:Federal Home Loan Mortgage Corporation

FICO:Fair Isaac Corporation (credit rating)

FNMA:Federal National Mortgage Association

FRB:Federal Reserve Bank

FTAM:Fifth Third Asset Management, Inc.

FTE:Fully Taxable Equivalent

FTP:Funds Transfer Pricing

FTS:Fifth Third Securities

GNMA:Government National Mortgage Association

GSE:Government Sponsored Enterprise

  

GSE:HAMP Government Sponsored Enterprise: Home Affordable Modification Program

HFS:HARP: Home Affordable Refinance Program

HFS: Held for Sale

IFRS:IFRS: International Financial Reporting Standards

IPO:IPO: Initial Public Offering

IRC:IRC: Internal Revenue Code

IRLC:IRLC: Interest Rate Lock Commitment

IRS:IRS: Internal Revenue Service

LIBOR:LIBOR: London InterBank Offered Rate

LLC:LLC: Limited Liability Company

LTV:LTV: Loan-to-Value

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

MSR:MSR: Mortgage Servicing Right

NII:NII: Net Interest Income

NM:NM: Not Meaningful

NYSE:OCI New York Stock Exchange

OCI:: Other Comprehensive Income

OREO:OREO: Other Real Estate Owned

OTTI:OTTI: Other-Than-Temporary Impairment

PMI:PMI: Private Mortgage Insurance

SEC:SEC: United States Securities and Exchange Commission

TARP:TARP: Troubled Asset Relief Program

TBA:TBA: To Be Announced

TDR:TDR: Troubled Debt Restructuring

TruPS: Trust Preferred Securities

U.S. GAAP:GAAP: Accounting principles generally accepted in the United States of America

VIE:VIE: Variable Interest Entity

VRDN:VRDN: Variable Rate Demand Note

U.S.: United States of America

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

 

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

TABLE 1: Selected Financial Data

 

                                                                        
  For the three months
ended March 31,
       For the three months
ended June 30,
     For the six months
ended June 30,
     

($ in millions, except for per share data)

  2012 2011   % Change   2012 2011   % Change 2012 2011   % Change 

Income Statement Data

              

Net interest income(a)

  $903   884    2    $ 899   869    3  $1,802   1,752    3 

Noninterest income

   769   584    32    678   656    3   1,448   1,240    17 

Total revenue(a)

   1,672   1,468    14    1,577   1,525    3   3,250   2,992    9 

Provision for loan and lease losses

   91   168    (46   71   113    (37  162   281    (42

Noninterest expense

   973   918    6    937   901    4   1,911   1,819    5 

Net income attributable to Bancorp

   430   265    62    385   337    14   815   602    35 

Net income available to common shareholders

   421   88    377    376   328    15   797   417    91 
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Common Share Data

              

Earnings per share, basic

  $0.46   0.10    360    $0.41   0.36    14  $0.87   0.46    89 

Earnings per share, diluted

   0.45   0.10    350    0.40   0.35    14   0.85   0.46    85 

Cash dividends per common share

   0.08   0.06    33    0.08   0.06    33   0.16   0.12    33 

Book value per share

   14.30   12.80    12    14.56   13.23    10   14.56   13.23    10 

Market value per share

   14.04   13.89    1    13.40   12.75    5   13.40   12.75    5 
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Financial Ratios (%)

              

Return on assets

   1.49  0.97    54    1.32   1.22    8   1.40   1.09    28 

Return on average common equity

   13.1   3.1    323    11.4   11.0    4   12.2   7.2    69 

Dividend payout ratio

   17.4   60.0    (71   19.5   16.7    17   18.4   26.1    (30

Average equity as a percent of average assets

   11.49   11.77    (2   11.58   11.12    4   11.54   11.44    1 

Tangible common equity(b)

   9.02   8.39    8    9.15   8.64    6   9.15   8.64    6 

Net interest margin(a)

   3.61   3.71    (3   3.56   3.62    (2  3.59   3.66    (2

Efficiency(a)

   58.3   62.5    (7   59.4   59.1    1   58.8   60.8    (3
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Credit Quality

              

Net losses charged off

  $220   367    (40   $ 181   304    (40 $401   671    (40

Net losses charged off as a percent of average loans and leases

   1.08  1.92    (44   0.88   1.56    (44  0.98   1.74    (44

ALLL as a percent of loans and leases

   2.59   3.62    (28   2.45   3.35    (27  2.45   3.35    (27

Allowance for credit losses as a percent of loans and leases(c)

   2.81   3.89    (28   2.66   3.61    (26  2.66   3.61    (26

Nonperforming assets as a percent of loans, leases and other assets, including other real estate owned(d)

   2.03   2.73    (26   1.96   2.66    (26  1.96   2.66    (26
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Average Balances

              

Loans and leases, including held for sale

  $83,757   79,379    6    $84,508   79,153    7  $84,132   79,265    6 

Total securities and other short-term investments

   16,735   17,290    (3   17,168   17,192    —      16,952   17,241    (2

Total assets

   116,325   110,844    5    117,654   111,200    6   116,989   111,023    5 

Transaction deposits(e)

   77,135   70,161    10    77,621   71,506    9   77,378   70,838    9 

Core deposits(f)

   81,686   77,524    5    81,980   78,244    5   81,833   77,887    5 

Wholesale funding(g)

   16,596   16,430    1    17,533   16,433    7   17,065   16,430    4 

Bancorp shareholders’ equity

   13,366   13,052    2    13,628   12,365    10   13,497   12,706    6 
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 

Regulatory Capital Ratios (%)

              

Tier I capital

   12.20  12.20    —    

Tier I risk-based capital

   12.31   11.93    3   12.31   11.93    3 

Total risk-based capital

   16.07   16.27    (1   16.24   16.03    1   16.24   16.03    1 

Tier I leverage

   11.31   11.21    1    11.39   11.03    3   11.39   11.03    3 

Tier I common equity(b)

   9.64   8.99    7    9.77   9.20    6   9.77   9.20    6 
  

 

  

 

   

 

   

 

  

 

   

 

  

 

  

 

   

 

 
(a)Amounts presented on an FTE basis. The FTE adjustment was$5for the three months endedMarch 31,June 30, 2012 and 2011.2011 was$4 and $5, respectively, and for the six months endedJune 30, 2012 and 2011 was$9.
(b)The tangible common equity and Tier I common equity ratios are non-GAAP measures. For further information, see the Non-GAAP Financial Measures section of the MD&A.
(c)The allowance for credit losses is the sum of the ALLL and the reserve for unfunded commitments.
(d)Excludes nonaccrual loans held for sale.
(e)Includes demand, interest checking, savings, money market and foreign office deposits.
(f)Includes transaction deposits plus other time deposits.
(g)Includes certificates $100,000 and over, other deposits, federal funds purchased, other short-term borrowings and long-term debt.

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

 

 

OVERVIEW

Fifth Third Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At March 31,June 30, 2012, the Bancorp had $117$117.5 billion in assets, operated 15 affiliates with 1,3151,322 full-service Banking Centers, including 105 Bank Mart® locations open seven days a week inside select grocery stores, and 2,4042,409 ATMs in 12 states throughout the Midwestern and Southeastern regions of the United States. The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors. The Bancorp also has an approximate 39% interest in Vantiv Holding, LLC, formerly Fifth Third Processing Solutions, LLC.

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

The Bancorp believes that banking is first and foremost a relationship business where the strength of the competition and challenges for growth can vary in every market. The Bancorp believes its affiliate operating model provides a competitive advantage by emphasizing individual relationships. Through its affiliate operating model, individual managers at all levels within the affiliates are given the opportunity to tailor financial solutions for their customers.

The Bancorp’s revenues are dependent on both net interest income and noninterest income. For the three months ended March 31,June 30, 2012, net interest income, on an FTE basis, and noninterest income provided 54%57% and 46%43% of total revenue, respectively. The Bancorp derives the majority of its revenues within the United States from customers domiciled in the United States. Revenue from foreign countries and external customers domiciled in foreign countries is immaterial to the Bancorp’s Condensed Consolidated Financial Statements. Changes in interest rates, credit quality, economic trends and the capital markets are primary factors that drive the performance of the Bancorp. As discussed later in the Risk Management section, risk identification, measurement, monitoring, control and reporting are important to the management of risk and to the financial performance and capital strength of the Bancorp.

Net interest income is the difference between interest income earned on assets such as loans, leases and securities, and interest expense incurred on liabilities such as deposits, short-term borrowings and long-term debt. Net interest income is affected by the general level of interest rates, the relative level of short-term and long-term interest rates, changes in interest rates and changes in the amount and composition of interest-earning assets and interest-bearing liabilities. Generally, the rates of interest the Bancorp earns on its assets and pays on its liabilities are established for a period of time. The change in market interest rates over time exposes the Bancorp to interest rate risk through potential adverse changes to net interest income and financial position. The Bancorp manages this risk by continually analyzing and adjusting the composition of its assets and liabilities based on their payment streams and interest rates, the timing of their maturities and their sensitivity to changes in market interest rates. Additionally, in the ordinary course of business, the Bancorp enters into certain derivative transactions as part of its overall strategy to manage its interest rate and prepayment risks. The Bancorp is also exposed to the risk of losses on its loan and lease portfolio, as a result of changing expected cash flows caused by loan defaults and inadequate collateral due to a weakened economy within the Bancorp’s footprint.

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

Noninterest income is derived primarily from mortgage banking net revenue, service charges on deposits, corporate banking revenue, investment advisory revenue and card and processing revenue. Noninterest expense is primarily driven by personnel costs, net occupancy expenses, costs incurred in the origination of loans and leasestechnology and insurance premiums paid to the FDIC.communications costs.

Senior Notes Offerings

On March 7, 2012, the Bancorp issued $500 million of Senior Notes to third party investors, and entered into a Supplemental Indenture with Wilmington Trust Company, as Trustee, which modified the existing Indenture for Senior Debt Securities dated as of April 30, 2008. The Supplemental Indenture and the Indenture define the rights of the Senior Notes, which Senior Notes are represented by a Global Security dated as of March 7, 2012. The Senior Notes bear a fixed rate of interest of 3.50% per annum. The notes are unsecured, senior obligations of the Bancorp. Payment of the full principal amount of the notes will be due upon maturity on March 15, 2022. The notes will not be subject to the redemption at the Bancorp’s option at any time until 30 days prior to maturity. For additional information regarding long-term debt, see Note 11 of the Notes to the Condensed Consolidated Financial Statements.

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

CCAR Results

On March 13, 2012, the Bancorp announced the results of its capital plan submitted to the FRB as part of the 2012 CCAR. The FRB indicated to the Bancorp that it did not object to the following capital actions: a continuation of its quarterly common dividend of $0.08 per share; the redemption of up to $1.4 billion in certain trust preferred securities;TruPS; and the repurchase of common shares in an amount equal to any after-tax gains attributable torealized by the Bancorp from the sale of Vantiv, Inc. IPO.

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

common shares by either the Bancorp or Vantiv, Inc.

The FRB indicated to the Bancorp that it did object to other elements of its capital plan, including increases in its quarterly common dividend and the initiation of common share repurchases other than those described in the paragraph above. Fifth Third intends to resubmitThe Bancorp resubmitted its capital plan to the FRB as soon as practicable in orderon June 8, 2012 and expects to addressreceive a response within approximately 75 days of the reasonsresubmission date. The resubmitted plan included capital actions and distributions for the covered period through March 31, 2013 that were substantially similar to those included in the original submission, with adjustments primarily reflecting the change in the expected timing of capital actions and distributions relative to the timing assumed in the original submission.

Accelerated Share Repurchase

Based upon the FRB’s objections.indication that it did not object to certain capital actions submitted by the Bancorp as part of the 2012 CCAR, on April 23, 2012, the Bancorp entered into an accelerated share repurchase transaction with a counterparty pursuant to which the Bancorp purchased 4,838,710 shares or approximately $75 million of its outstanding common stock on April 26, 2012. As part of this transaction, the Bancorp entered into a forward contract in which the final number of shares delivered at settlement of the accelerated share repurchase transaction was based on a discount to the average daily volume-weighted average price of the Bancorp’s common stock during the term of the Repurchase Agreement. The accelerated share repurchase was treated as two separate transactions (i) the acquisition of treasury shares on the acquisition date and (ii) a forward contract indexed to the Bancorp’s stock. At settlement of the forward contract on June 1, 2012, the Bancorp received an additional 631,986 shares which were recorded as an adjustment to the basis in the treasury shares purchased on the acquisition date.

Redemption of TruPS

In connection with the 2012 CCAR results, on July 2, 2012, the Bancorp announced that it submitted redemption notices to the trustee for redemption on August 15, 2012, of all $575 million of the outstanding TruPS issued by Fifth Third Capital Trust V. The Fifth Third Capital Trust V securities have a current distribution rate of 7.25% and a scheduled maturity date of August 15, 2067, although they may be redeemed at any time on or after August 15, 2012. The redemption price will be $25 per security, which reflects 100% of the liquidation amount, plus accrued and unpaid distributions to the actual redemption date of $0.453125 per security. The Bancorp will recognize an estimated loss on extinguishment of $17 million of these TruPS on August 15, 2012 which will be reflected in the Bancorp’s Condensed Consolidated Financial Statements for the quarter ending September 30, 2012.

Additionally, on August 8, 2012, the Bancorp redeemed all $862.5 million of the outstanding TruPS issued by Fifth Third Capital Trust VI. The Bancorp had previously announced on July 9, 2012, that it had submitted redemption notices to the trustee for redemption of the outstanding TruPS issued by Fifth Third Capital Trust VI with a distribution rate at redemption of 7.25% and a scheduled maturity date of November 15, 2067. The redemption price was $25 per security, which reflected 100% of the liquidation amount, plus accrued and unpaid distributions through the actual redemption date of $0.422917 per security. The Bancorp recognized a $9 million loss on extinguishment of these TruPS on August 8, 2012 which will be reflected in the Bancorp’s Condensed Consolidated Financial Statements for the quarter ending September 30, 2012. The redemptions were funded with available cash.

See Note 21 of the Notes to Condensed Consolidated Financial Statements for further information.

Vantiv, Inc. IPO

On June 30, 2009, the Bancorp completed the sale of a majority interest in its processing business to Advent International. As part of this transaction, the processing business was contributed into a partnership now known as Vantiv Holding, LLC. Vantiv, Inc., formed by Advent and owned by certain funds managed by Advent, acquired an approximate 51% interest in Vantiv Holding, LLC for cash and warrants. The Bancorp retained the remaining approximate 49% interest in Vantiv Holding.

During the first quarter of 2012, Vantiv, Inc. priced an IPO of its shares and contributed the net proceeds to Vantiv Holding, LLC for additional ownership interests. As a result of this offering, the Bancorp’s ownership of Vantiv Holding, LLC was reduced to approximately 39% and will continue to be accounted for as an equity method investment in the Condensed Consolidated Financial Statements. The impact of the capital contributions to Vantiv Holding, LLC and the resulting dilution in the Bancorp’s interest resulted in the recognition of a pre-tax gain of $115 million ($75 million after-tax) by the Bancorp.Bancorp in the first quarter of 2012.

As of March 31,June 30, 2012, the Bancorp continued to hold approximately 84 million units of Vantiv Holding, LLC and a warrant to purchase approximately 20 million incremental Vantiv Holding, LLC non-voting units, both of which may be exchanged for common stock of Vantiv, Inc. on a one for one basis or at Vantiv, Inc’s option for cash. In addition, the Bancorp holds approximately 84 million Class B common shares of Vantiv, Inc. The Class B common shares give the Bancorp voting rights, but no economic interest in Vantiv, Inc. The voting rights attributable to the Class B common shares are limited to 18.5% of the voting power in Vantiv, Inc. at any time other than in connection with a stockholder vote with respect to a change in control in Vantiv, Inc. These securities are subject to certain terms and restrictions.

Accelerated Share RepurchaseManagement’s Discussion and Analysis of Financial Condition and Results of Operations (continued)

On April 23, 2012, the Bancorp entered into an accelerated share repurchase transaction with a counterparty pursuant to which the Bancorp will purchase $75 million of its outstanding common stock. The Bancorp will repurchase the shares as part of its previously announced share repurchase program. Under the Master Confirmation, supplemented by a Supplemental Confirmation (together, the “Repurchase Agreement”) between the Bancorp and the counterparty, the Bancorp will pay $75 million and receive a substantial majority of the shares underlying the Repurchase Agreement on April 26, 2012. The actual number of shares of the Bancorp’s common stock to be delivered to the counterparty 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. At settlement, the counterparty may be obligated to deliver additional shares of the Bancorp’s common stock to the Bancorp, or the Bancorp may be obligated to make a delivery of common stock, or a payment of cash at the Bancorp’s election, to the counterparty. The Bancorp expects the settlement of the transaction to occur on or before July 26, 2012.

Legislative Developments

On July 21, 2010, the Dodd-Frank Act was signed into law. This act implements changes to the financial services industry and affects the lending, deposit, investment, trading and operating activities of financial institutions and their holding companies. The legislation establishes a CFPB responsible for implementing and enforcing compliance with consumer financial laws, changes the methodology for determining deposit insurance assessments, gives the FRB the ability to regulate and limit interchange rates charged to merchants for the use of debit cards, enacts new limitations on proprietary trading, broadens the scope of derivative instruments subject to regulation, requires on-going stress tests and the submission of annual capital plans for certain organizations and requires changes to regulatory capital ratios. This act also calls for federal regulatory agencies to conduct multiple studies over the next several years in order to implement its provisions.

The Bancorp was impacted by a number of the components of the Dodd-Frank Act which were implemented during 2011. The CFPB began operations on July 21, 2011 and holds primary responsibility for regulating consumer protection by enforcing existing consumer laws, writing new consumer legislation, conducting bank examinations, monitoring and reporting on markets, as well as collecting and tracking consumer complaints. The FRB final rule implementing the Dodd-Frank Act’s “Durbin Amendment,” which limits debit card interchange fees, was issued on July 21, 2011 for transactions occurring after September 30, 2011. The final rule established a cap on the fees banks with more than $10 billion in assets can charge merchants for debit card transactions. The fee was set at $0.21 per transaction plus an additional 5 bp of the transaction amount and $0.01 to cover fraud losses. The FRB repealed Regulation Q as mandated by the Dodd-Frank Act on July 21, 2011. Regulation Q was implemented as part of the Glass-Steagall Act in the 1930’s and provided a prohibition against the payment of interest on demand deposits. While the total impact of the Dodd-Frank Act on the Bancorp is not currently known, the impact is expected to be substantial and may have an adverse impact on the Bancorp’s financial performance and growth opportunities.

In December of 2010 and revised in June of 2011, the Basel Committee on Banking Supervision issued Basel III, a global regulatory framework, to enhance international capital standards. In June of 2012, U.S. banking regulators proposed enhancements to the regulatory capital requirements for U.S. banks, which implement aspects of Basel III, such as re-defining the regulatory capital elements and minimum capital ratios, introducing regulatory capital buffers above those minimums, revising the agencies rules for calculating risk-weighted assets and introducing a new Tier I common equity ratio. The Bancorp continues to evaluate these proposals and their potential impact. For more information on the impact of the proposed regulatory capital enhancements, refer to the Capital Management section of the MD&A.

Earnings Summary

The Bancorp’s net income available to common shareholders for the three months ended March 31,second quarter of 2012 was $421$376 million, or $0.45$0.40 per diluted share, which was net of $9 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the second quarter ended March 31,of 2011 was $88$328 million, or $0.10$0.35 per diluted share, which was net of $177$9 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the six months ended June 30, 2012 was $797 million, or $0.85 per diluted share, which was net of $18 million in preferred stock dividends. For the six months ended June 30, 2011, the Bancorp’s net income available to common shareholders was $417 million, or $0.46 per diluted share, which was net of $185 million in preferred stock dividends. The preferred stock dividends duringfor the first quarter ofsix months ended June 30, 2011 included $153 million in discount accretion resulting from the Bancorp’s repurchase of Series F preferred stock.

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

Net interest income was $903increased three percent to $899 million for the quarter ended March 31,June 30, 2012 compared to $884$869 million in the firstsecond quarter of 2011. Net interest income in the firstsecond quarter of 2012 was positively impacted by a $3.8$5.4 billion increase in average interest earning assets,loans and leases, a 2327 bp decrease in the average rate paid on interest bearinginterest-bearing liabilities compared to the firstsecond quarter of 2011 and a mix shift to lower cost deposit products. These effects were partially offset by a 29 bp decrease in the average yield on interest-earning assets. Net interest earningincome was $1.8 billion for the six months ended June 30, 2012 and 2011. Net interest income in the first half of 2012 was positively impacted by a $4.9 billion increase in average loans and leases and a 25 bp decrease in the average rate paid on interest-bearing liabilities compared to the six months ended June 30, 2011 and a mix shift to lower cost deposit products. These effects were partially offset by a 29 bp decrease in the average yield on interest-earning assets. Net interest margin was 3.61%3.56% and 3.71%3.59% for the three and six months ended March 31,June 30, 2012, respectively, compared to 3.62% and 2011, respectively.3.66% for the same periods in the prior year.

Noninterest income increased $185$22 million, or 32%,three percent, in the firstsecond quarter of 2012 compared to the same period in 2011, primarily as the result of the previously mentioned gainprior year. The increase from the Vantiv, Inc. IPO and a $102 millionsecond quarter of 2011 was primarily due to an increase in mortgage banking net revenue resulting fromand other noninterest income partially offset by a decrease in card and processing revenue. Mortgage banking net revenue increased $21 million, or 13%, primarily due to an increase in origination fees and gains on loan sales.sales partially offset by an increase in losses on net valuation adjustments on servicing rights and free-standing derivatives entered into to economically hedge the MSR portfolio. Other noninterest income increased $20 million, or 25%, primarily due to an increase in positive valuation adjustments on the Vantiv, Inc. warrants. These impacts were partially offset by a $21$25 million decrease in card and processing revenue primarily as a result of the implementation of the Durbin Amendment. Noninterest income increased $208 million, or 17%, for the six months ended June 30, 2012 compared to the same period in 2011. The increase from the first half of 2011 was primarily due to an increase in mortgage banking net revenue and other noninterest income partially offset by a decrease in card and processing revenue. Mortgage banking net revenue increased $123 million, or 47%, primarily due to an increase in origination fees and gains on loan sales partially offset by an increase in losses on net valuation adjustments on servicing rights and free-standing derivatives entered into to economically hedge the MSR portfolio. Other noninterest income increased $115 million, or 71%, primarily due to a $115 million gain from the Vantiv, Inc. IPO. These impacts were partially offset by a $47 million decrease in card and processing revenue primarily as a result of the implementation of the Durbin Amendment.

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

Noninterest expense increased $55$36 million, or sixfour percent, in the firstsecond quarter of 2012 and increased $92 million, or five percent, for the six months ended June 30, 2012 compared to the same periodperiods in 2011,2011. The increase for both periods was primarily due to a $63increases of $33 million increaseand $95 million, respectively, in total personnel costs (salaries, wages and incentives plus employee benefits) and a $14 million decrease in the benefit from the provision for unfunded commitments and letters of credit. These effects were partially offset by a $34 million decrease in FDIC insurance and other taxes.costs.

Credit Summary

The Bancorp does not originate subprime mortgage loans and does not hold asset-backed securities backed by subprime mortgage loans in its securities portfolio. However, the Bancorp has exposure to disruptions in the capital markets and weakened economic conditions. Over the last few years, the Bancorp has continued to be negatively affected by high unemployment rates, weakened housing markets, particularly in the upper MidwestMichigan and Florida, and a challenging credit environment. Credit trends have improved more recently, and as a result, the provision for loan and lease losses decreased to $91$71 million inand $162 million for the first quarter ofthree and six months ended June 30, 2012 compared to $168$113 million inand $281 million, respectively, for the same period last year.periods in 2011. In addition, net charge-offs as a percent of average loans and leases decreased to 1.08%0.88% during the firstsecond quarter of 2012 compared to 1.92%1.56% during the same period last year.second quarter of 2011 and decreased to 0.98% for the six months ended June 30, 2012 compared to 1.74% for the six months ended June 30, 2011. At March 31,June 30, 2012, nonperforming assets as a percent of loans, leases and other assets, including OREO (excluding nonaccrual loans held for sale) decreased to 2.03%1.96%, compared to 2.23% at December 31, 2011 and 2.73%2.66% at March 31,June 30, 2011. For further discussion on credit quality, see the Credit Risk Management section in MD&A.

Capital Summary

The Bancorp’s capital ratios exceed the “well-capitalized” guidelines as defined by the Board of Governors of the Federal Reserve System. As of March 31,June 30, 2012, the Tier I risk-based capital ratio was 12.20%12.31%, the Tier I leverage ratio was 11.31%11.39% and the total risk-based capital ratio was 16.07%16.24%.

NON-GAAP FINANCIAL MEASURES

The Bancorp considers various measures when evaluating capital utilization and adequacy, including the tangible equity ratio, tangible common equity ratio and Tier I common equity ratio, in addition to capital ratios defined by banking regulators. These calculations are intended to complement the capital ratios defined by banking regulators for both absolute and comparative purposes. Because U.S. GAAP does not include capital ratio measures, the Bancorp believes there are no comparable U.S. GAAP financial measures to these ratios. These ratios are not formally defined by U.S. GAAP or codified in the federal banking regulations and, therefore, are considered to be non-GAAP financial measures. Since analysts and banking regulators may assess the Bancorp’s capital adequacy using these ratios, the Bancorp believes they are useful to provide investors the ability to assess its capital adequacy on the same basis.

The Bancorp believes these non-GAAP measures are important because they reflect the level of capital available to withstand unexpected market conditions. Additionally, presentation of these measures allows readers to compare certain aspects of the Bancorp’s capitalization to other organizations. However, because there are no standardized definitions for these ratios, the Bancorp’s calculations may not be comparable with other organizations, and the usefulness of these measures to investors may be limited. As a result, the Bancorp encourages readers to consider its Condensed Consolidated Financial Statements in their entirety and not to rely on any single financial measure.

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

The following table reconciles non-GAAP financial measures to U.S. GAAP as of or for the three months ended:

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

 

 

TABLE 2: Non-GAAP Financial Measures

 

($ in millions)

  March 31,
2012
 December 31,
2011
 March 31,
2011
   June 30,
2012
 December 31,
2011
 June 30,
2011
 

Income before income taxes (U.S. GAAP)

  $603   418   377   $565   418   506 

Add: Provision expense (U.S. GAAP)

   91   55   168    71   55   113 
  

 

  

 

  

 

   

 

  

 

  

 

 

Pre-provision net revenue

   694   473   545    636    473   619 

Net income available to common shareholders (U.S. GAAP)

  $421   305   88   $376   305   328 

Add: Intangible amortization, net of tax

   3   3   5    2   3   4 
  

 

  

 

  

 

   

 

  

 

  

 

 

Tangible net income available to common shareholders

   424   308   93    378    308   332 

Total Bancorp shareholders’ equity (U.S. GAAP)

  $13,560   13,201   12,163   $13,773   13,201   12,572 

Less: Preferred stock

   (398  (398  (398   (398  (398  (398

Goodwill

   (2,417  (2,417  (2,417   (2,417  (2,417  (2,417

Intangible assets

   (36  (40  (55   (33  (40  (49
  

 

  

 

  

 

   

 

  

 

  

 

 

Tangible common equity, including unrealized gains / losses

   10,709   10,346   9,293    10,925   10,346   9,708 

Less: Accumulated other comprehensive income

   (468  (470  (263   (454  (470  (396
  

 

  

 

  

 

   

 

  

 

  

 

 

Tangible common equity, excluding unrealized gains / losses (1)

   10,241   9,876   9,030    10,471   9,876   9,312 

Add: Preferred stock

   398   398   398    398   398   398 
  

 

  

 

  

 

   

 

  

 

  

 

 

Tangible equity (2)

  $10,639   10,274   9,428   $
10,869
 
  10,274   9,710 
  

 

  

 

  

 

   

 

  

 

  

 

 

Total assets (U.S. GAAP)

  $116,747   116,967   110,485   $117,543   116,967   110,805 

Less: Goodwill

   (2,417  (2,417  (2,417   (2,417  (2,417  (2,417

Intangible assets

   (36  (40  (55   (33  (40  (49

Accumulated other comprehensive income, before tax

   (720  (723  (405   (698  (723  (609
  

 

  

 

  

 

   

 

  

 

  

 

 

Tangible assets, excluding unrealized gains / losses (3)

  $113,574   113,787   107,608   $114,395   113,787   107,730 
  

 

  

 

  

 

   

 

  

 

  

 

 

Total Bancorp shareholders’ equity (U.S. GAAP)

  $13,560   13,201   12,163   $13,773   13,201   12,572 

Less: Goodwill and certain other intangibles

   (2,518  (2,514  (2,546   (2,512  (2,514  (2,536

Accumulated other comprehensive income

   (468  (470  (263   (454  (470  (396

Add: Qualifying trust preferred securities

   2,248   2,248   2,763    2,248   2,248   2,312 

Other

   38   38   12    38   38   20 
  

 

  

 

  

 

   

 

  

 

  

 

 

Tier I capital

   12,860   12,503   12,129 

Tier I risk-based capital

   13,093   12,503   11,972 

Less: Preferred stock

   (398  (398  (398   (398  (398  (398

Qualifying trust preferred securities

   (2,248  (2,248  (2,763

Qualifying TruPS

   (2,248  (2,248  (2,312

Qualified noncontrolling interests in consolidated subsidiaries

   (50  (50  (30   (51  (50  (30
  

 

  

 

  

 

   

 

  

 

  

 

 

Tier I common equity (4)

  $10,164   9,807   8,938   $10,396     9,807   9,232 
  

 

  

 

  

 

   

 

  

 

  

 

 

Risk-weighted assets (5)(a)

  $105,412   104,945   99,392   $106,398     104,945   100,320 
    

Ratios:

        

Tangible equity (2) / (3)

   9.37  9.03   8.76    9.50   9.03   9.01 

Tangible common equity (1) / (3)

   9.02  8.68   8.39    9.15   8.68   8.64 

Tier I common equity (4) / (5)

   9.64  9.35   8.99    9.77   9.35   9.20 

 

(a)Under the banking agencies’ risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together, along with the measure for market risk, resulting in the Bancorp’s total risk-weighted assets.

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 value of the Bancorp’s assets or liabilities and results of operations and cash flows. The Bancorp’s critical accounting policies include the accounting for the ALLL, reserve for unfunded commitments, income taxes, valuation of servicing rights, fair value measurements and goodwill. These accounting policies are discussed in detail in Management’s Discussion and Analysis – Critical Accounting Policies in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2011. No material changes were made to the valuation techniques or models during the threesix months ended March 31,June 30, 2012.

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

 

 

STATEMENTS OF INCOME ANALYSIS

Net Interest Income

Net interest income is the interest earned on securities, loans and leases (including yield-related fees) and other interest-earning assets less the interest paid for core deposits (includes transaction deposits and other time deposits) and wholesale funding (includes certificates of deposit $100,000 and over, other deposits, federal funds purchased, 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 rateyield 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.

TableTables 3 presentsand 4 present the components of net interest income, net interest margin and net interest rate spread for the three and six months ended March 31,June 30, 2012 and 2011, as well as the relative impact of changes in the balance sheet and changes in interest rates on net interest income. Nonaccrual loans and leases and loans held for sale have been included in the average loan and lease balances. Average outstanding securities balances are based on amortized cost with any unrealized gains or losses on available-for-sale securities included in other assets.

Net interest income was $903$899 million for the firstsecond quarter of 2012, an increase of $19$30 million compared to the firstsecond quarter of 2011. Net interest income was $1.8 billion for the six months ended June 30, 2012, an increase of $50 million from the six months ended June 30, 2011. Included within net interest income are amounts related to the accretion of discounts on acquired loans and deposits, primarily as a result of acquisitions in previous years, which increased net interest income by $8$11 million and $13$19 million during the first quarter ofthree and six months ended June 30, 2012, respectively, compared to $10 million and $23 million during the three and six months ended June 30, 2011, respectively. The original purchase accounting discounts reflected the high discount rates in the market at the time of the acquisitions; the total loan discounts are being accreted into net interest income over the remaining period to maturity of the loans acquired. Based upon the remaining period to maturity, and excluding the impact of prepayments, the Bancorp anticipates recognizing approximately $9$8 million in additional net interest income during the remainder of 2012 as a result of the amortization and accretion of premiums and discounts on acquired loans and deposits.

For the three and six months ended March 31,June 30, 2012, net interest income was positively impacted by a $4.4 billionan increase in average loans and leases of $5.4 billion and $4.9 billion, respectively, as well as a decrease in interest expense compared to the same periodperiods in 2011. Partially offsetting theseThese benefits were partially offset by lower yields on the Bancorp’s interest-earning assets. The increase in average loans and leases for both periods was driven primarily by increases in commercial and industrial loans and residential mortgage loans compared to the quarter ended March 31,same periods in 2011. The decrease in interest expense for the three and six months ended June 30, 2012 was primarily the result of a 23 bp decreasedecreases in the raterates paid on interest bearing liabilities fromof 27 bp and 25 bp, respectively, compared to the quarter ended March 31,same periods in 2011, coupled with a continued mix shift to lower cost core deposits, partially offset by increased interest expense on long-term debt.deposits. For the quarterthree and six months ended March 31,June 30, 2012, the net interest rate spread decreased to 3.39%3.35% and 3.37%, respectively, from 3.45%3.37% and 3.41% in the first quarter ofsame periods in 2011 as the benefit of the decrease in rates on interest bearing liabilities was more than offset by a 29 bp decrease in yield on average interest earnings assets.assets in both periods when compared to the same periods in 2011.

Net interest margin was 3.61%3.56% and 3.59% for the quarterthree and six months ended March 31,June 30, 2012, respectively, compared to 3.71% in3.62% and 3.66% for the same period in 2011.three and six months ended June 30, 2011, respectively. Net interest margin was impacted by the amortization and accretion of premiums and discounts on acquired loans and deposits that resulted in an increase in net interest margin of 4 bp and 3 bp during the first quarter ofthree and six months ended June 30, 2012, respectively, compared to ana 4 bp and 8 bp increase of 5 bp during the first quarter ofthree and six months ended June 30, 2011. Exclusive of these amounts, net interest margin decreased 86 bp and 2 bp for the quarterthree and six months ended March 31,June 30, 2012 compared to the same periodperiods in the prior yearyear. The decrease from both periods in 2011 was driven primarily as the result ofby the previously mentioned decline in the yield on average interest-earning assets and securities and higher average balances on interest earning assets, partially offset by a mix shift to lower cost core deposits, the decline in rates paid on interest bearing liabilities and an increase in free funding balances.

Total average interest-earning assets increased four percent for the quarterthree and six months ended March 31,June 30, 2012 increased six percent and five percent, respectively, compared to the prior yearthree and six months ended June 30, 2011. The increase from the three and six months ended June 30, 2011 was primarily as the result of a 15%an increase of 17% and 16%, respectively, in average commercial and industrial loans and a 20%an increase of 23% and 21%, respectively, in average residential mortgage loans. For more information on the Bancorp’s loan and lease portfolio, see the Loans and Leases subsectionsection of the Balance Sheet Analysis sectionanalysis of MD&A.

Interest income from loans and leases decreased $12$2 million compared to the second quarter of 2011 and $13 million, or one percent, compared to the six months ended June 30, 2011. The decrease from the three months and six months ended MarchJune 30, 2011 was primarily the result of a decrease of 28 bp and 31 2011 driven primarily by a 33 bp, decreaserespectively, in average loan yields partially offset by aan increase of seven percent and six percent, increaserespectively, in average loans. Yields across much of the loan and lease portfolio decreased as the result of lower interest rates on newly originated loans. Interest income from investment securities and short-term investments decreased $8$17 million, or five percent, from11%, compared to the prior yearthree months ended June 30, 2011 primarily as the result of a 2849 bp decrease in the average yield on taxable securities. Interest income from investment securities and short-term investments decreased $25 million, or eight percent, compared to the six months ended June 30, 2011 primarily due to a 38 bp decrease in the average yield on taxable securities.

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

Average core deposits increased $4.2$3.7 billion, or five percent, compared to the threesecond quarter of 2011 and increased $3.9 billion, or five percent, compared to the six months ended March 31, 2011June 30, 2011. The increase from both periods was primarily due to an increase in average demand deposits and average interest checking deposits partially offset by decreases in average foreign office deposits and average other time deposits. The cost of average core deposits decreased to 21 bp and 22 bp infor the first quarter ofthree and six months ended June 30, 2012, compared to 45respectively, from 39 bp fromand 42 bp for the prior year.three and six months ended June 30, 2011. This decrease was primarily the result of a mix shift to lower cost core deposits as a result of run-off of higher priced CDs combined with a 22decreases of 14 bp decreaseand 18 bp in the rate paid on average savings deposits and a 74decreases of 80 bp decrease in the rate paidand 77 bp on average other time deposits compared to the three and six months ended March 31, 2011.June 30, 2011, respectively.

InterestFor the three months ended June 30, 2012, interest expense on wholesale funding was flat for the quarter ended March 31, 2012,decreased $15 million, or 14%, compared to the same periodthree months ended June 30, 2011 primarily as a result of an $825 million decrease in the prior year, asaverage certificates of deposit $100,000 and over incurred bothand a $1.0 billion$858 million decrease in long-term debt. In addition, the rate paid on average balances coupled withcertificates $100,000 and over decreased by 55 bp. During the six months ended June 30, 2012, interest expense on wholesale funding decreased $16 million, or eight percent, compared to the six months ended June 30, 2011 as a 44result of a $936 million decrease in rates paid on average certificates $100,000 and over, a $670 million decrease in long-term debt and a 50 bp decrease in rate,rates paid on average certificates $100,000 and over partially offset by a 4621 bp increase in the rate paid on long-term debt. During the quartersthree and six months ended March 31,June 30, 2012, and 2011, wholesale funding represented 24% and 23%, respectively, of interest bearing liabilities.liabilities compared to 23% during the three and six months ended June 30, 2011. Refer to the Borrowings subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s borrowings. For more information on the Bancorp’s interest rate risk management, including estimated earnings sensitivity to changes in market interest rates, see the Market Risk Management section of MD&A.

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

 

 

TABLE 3: Condensed Average Balance Sheets and Analysis of Net Interest Income

 

For the three months ended

  March 31, 2012 March 31, 2011 Attribution of Change in
Net Interest Income(a)
   June 30, 2012 June 30, 2011 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   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

  $31,421  $328    4.20 $27,404  $301    4.45 $45   (18  27   $32,770   $337    4.13  $27,970  $304    4.35  $49   (16  33 

Commercial mortgage

   10,077   99    3.95   10,816   110    4.11   (7  (4  (11   9,873   93    3.81   10,491   105    4.00   (7  (5  (12

Commercial construction

   1,008   8    3.04   2,085   16    3.15   (7  (1  (8   886   7    3.05   1,950   15    3.01   (8  —      (8

Commercial leases

   3,543   33    3.79   3,364   35    4.17   1   (3  (2   3,471   32    3.68   3,349   34    4.06   1   (3  (2
  

 

  

 

   

 

  

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Subtotal – commercial

   46,049   468    4.09   43,669   462    4.29   32   (26  6    47,000   469    4.01   43,760   458    4.19   35   (24  11 

Residential mortgage loans

   12,928   134    4.17   10,736   124    4.67   24   (14  10    13,059   134    4.12   10,655   120    4.54   26   (12  14 

Home equity

   10,606   101    3.85   11,376   111    3.96   (7  (3  (10   10,430   98    3.80   11,144   109    3.91   (8  (3  (11

Automobile loans

   11,882   118    3.99   11,070   139    5.10   11   (32  (21   11,755   110    3.76   11,188   134    4.81   6   (30  (24

Credit card

   1,926   45    9.43   1,852   48    10.43   2   (5  (3   1,915   47    9.92   1,834   45    9.91   2   —      2 

Other consumer loans/leases

   366   37    40.13   676   31    18.54   (18  24   6    349   37    42.87   572   31    22.02   (15  21   6 
  

 

  

 

   

 

  

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Subtotal – consumer

   37,708   435    4.64   35,710   453    5.14   12   (30  (18   37,508   426    4.57   35,393   439    4.99   11   (24  (13
  

 

  

 

   

 

  

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total loans and leases

   83,757   903    4.34   79,379   915    4.67   44   (56  (12   84,508   895    4.26   79,153   897    4.54   46   (48  (2

Securities:

                        

Taxable

   15,313   140    3.68   15,156   147    3.96   2   (9  (7   15,548   134    3.48   15,115   150    3.97   3   (19  (16

Exempt from income taxes(b)

   59   1    5.60   197   2    4.77   (2  1   (1   62   1    5.02   96   2    6.41   (1  —      (1

Other short-term investments

   1,363   1    0.26   1,937   1    0.25   —      —      —       1,558   1    0.24   1,981   1    0.25   —      —      —    
  

 

  

 

   

 

  

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total interest-earning assets

   100,492   1,045    4.18   96,669   1,065    4.47   44   (64  (20   101,676   1,031    4.08   96,345   1,050    4.37   48   (67  (19

Cash and due from banks

   2,345      2,268          2,264      2,356       

Other assets

   15,734      14,897          15,835      15,298       

Allowance for loan and lease losses

   (2,246     (2,990         (2,121     (2,799      
  

 

     

 

         

 

     

 

       

Total assets

  $116,325     $110,844         $117,654      $111,200       
  

 

     

 

         

 

     

 

       

Liabilities and Equity

                        

Interest-bearing liabilities:

                        

Interest checking

  $22,308  $12    0.22 $18,539  $13    0.28 $1   (2  (1  $
23,548
  
 $12    0.22  $18,701  $12    0.26  $2   (2  —    

Savings

   21,944   11    0.21   21,324   23    0.43   1   (13  (12   22,143   11    0.19   21,817   18    0.33   1   (8  (7

Money market

   4,543   3    0.22   5,136   4    0.32   —      (1  (1   4,258   2    0.22   5,009   4    0.29   (1  (1  (2

Foreign office deposits

   2,277   2    0.26   3,580   3    0.31   (1  —      (1   1,321   1    0.27   3,805   3    0.29   (2  —      (2

Other time deposits

   4,551   18    1.62   7,363   42    2.36   (14  (10  (24   4,359   17    1.60   6,738   40    2.40   (12  (11  (23

Certificates—$100,000 and over

   3,178   12    1.55   4,226   21    1.99   (5  (4  (9

Certificates - $100,000 and over

   3,130   12    1.50   3,955   20    2.05   (3  (5  (8

Other deposits

   19   —       0.08   1   —       0.05   —      —      —       23   —       0.13   2   —       0.02   —      —      —    

Federal funds purchased

   370   —       0.10   310   —       0.14   —      —      —       408   —       0.15   344   —       0.11   —      —      —    

Other short-term borrowings

   3,261   1    0.12   1,638   1    0.19   1   (1  —       4,303   2    0.17   1,605   1    0.16   1   —      1 

Long-term debt

   9,768   83    3.41   10,255   74    2.95   (3  12   9    9,669   75    3.11   10,527   83    3.16   (7  (1  (8
  

 

  

 

   

 

  

 

  

 

   

 

  

 

  

 

  

 

   

 

  

 

   

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total interest-bearing liabilities

   72,219   142    0.79   72,372   181    1.02   (20  (19  (39   73,162   132    0.73   72,503   181    1.00   (21  (28  (49

Demand deposits

   26,063      21,582          26,351      22,174       

Other liabilities

   4,627      3,809          4,462      4,129       
  

 

     

 

         

 

     

 

       

Total liabilities

   102,909      97,763          103,975      98,806       

Total equity

   13,416      13,081          13,679      12,394       
  

 

     

 

         

 

     

 

       

Total liabilities and equity

  $116,325     $110,844         $117,654      $111,200       
  

 

     

 

         

 

     

 

       

Net interest income

   $903     $884    $64   (45  19    $899     $869    $69   (39  30 

Net interest margin

      3.61     3.71         3.56      3.62    

Net interest rate spread

      3.39      3.45          3.35      3.37    

Interest-bearing liabilities to interest-earning assets

Interest-bearing liabilities to interest-earning assets

  

    71.86      74.87          71.96      75.25    
     

 

     

 

         

 

     

 

    
(a)Changes in interest not solely due to volume or yield/rate are allocated in proportion to the absolute dollar amount of change in volume and yield/rate.
(b)The FTE adjustments included in the above table are$54 and $5 for the three months endedMarch 31,June 30, 2012 and 2011, respectively.

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

TABLE 4: Condensed Average Balance Sheets and Analysis of Net Interest Income

For the six months ended

  June 30, 2012  June 30, 2011  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

  $32,095   $665    4.16  $27,689  $605    4.40  $94   (34  60 

Commercial mortgage

   9,975   192    3.88   10,652   214    4.06   (13  (9  (22

Commercial construction

   947   14    3.05   2,017   31    3.08   (17  —      (17

Commercial leases

   3,507   65    3.73   3,356   69    4.12   3   (7  (4
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal – commercial

   46,524   936    4.05   43,714   919    4.24   67   (50  17 

Residential mortgage loans

   12,994   268    4.15   10,695   244    4.60   50   (26  24 

Home equity

   10,518   200    3.82   11,259   220    3.94   (13  (7  (20

Automobile loans

   11,819   228    3.87   11,130   273    4.95   18   (63  (45

Credit card

   1,920   92    9.67   1,843   93    10.17   4   (5  (1

Other consumer loans/leases

   357   74    41.46   624   62    20.14   (34  46   12 
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Subtotal – consumer

   37,608   862    4.61   35,551   892    5.06   25   (55  (30
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total loans and leases

   84,132   1,798    4.30   79,265   1,811    4.61   92   (105  (13

Securities:

            

Taxable

   15,430   275    3.58   15,135   298    3.96   6   (29  (23

Exempt from income taxes(b)

   61   1    5.31   147   3    5.31   (2  —      (2

Other short-term investments

   1,461   2    0.25   1,959   2    0.25   —      —      —    
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total interest-earning assets

   101,084   2,076    4.13   96,506   2,114    4.42   96   (134  (38

Cash and due from banks

   2,304      2,313       

Other assets

   15,785      15,098       

Allowance for loan and lease losses

   (2,184     (2,894      
  

 

 

     

 

 

       

Total assets

  $116,989      $111,023       
  

 

 

     

 

 

       

Liabilities and Equity

            

Interest-bearing liabilities:

            

Interest checking

  $22,928  $25    0.22  $18,621  $25    0.27  $4   (4  —    

Savings

   22,043   22    0.20   21,572   40    0.38   2   (20  (18

Money market

   4,401   5    0.22   5,072   8    0.30   (1  (2  (3

Foreign office deposits

   1,799   2    0.26   3,693   6    0.30   (3  (1  (4

Other time deposits

   4,455   36    1.61   7,049   83    2.38   (25  (22  (47

Certificates-$100,000 and over

   3,154   24    1.52   4,090   41    2.02   (8  (9  (17

Other deposits

   21   —       0.11   2   —       0.03   —      —      —    

Federal funds purchased

   389   —       0.13   327   —       0.12   —      —      —    

Other short-term borrowings

   3,782   3    0.15   1,622   2    0.18   1   —      1 

Long-term debt

   9,719   157    3.26   10,389   157    3.05   (10  10   —    
  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Total interest-bearing liabilities

   72,691   274    0.76   72,437   362    1.01   (40  (48  (88

Demand deposits

   26,207      21,880       

Other liabilities

   4,544      3,970       
  

 

 

     

 

 

       

Total liabilities

   103,442      98,287       

Total equity

   13,547      12,736       
  

 

 

     

 

 

       

Total liabilities and equity

  $116,989     $111,023       
  

 

 

     

 

 

       

Net interest income

   $1,802     $1,752    $136   (86  50 

Net interest margin

      3.59      3.66    

Net interest rate spread

      3.37      3.41    

Interest-bearing liabilities to interest-earning assets

      71.91      75.06    
     

 

 

     

 

 

    
(a)Changes in interest not solely due to volume or yield/rate are allocated in proportion to the absolute dollar amount of change in volume and yield/rate.
(b)The FTE adjustments included in the above table are$9 for the six months endedJune 30, 2012 and 2011.

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, 2011. The provision is recorded to bring the ALLL to a level deemed appropriate by the Bancorp to cover losses inherent in the portfolio. Actual credit losses on loans and leases are charged against the ALLL. The amount of loans actually removed from the Condensed Consolidated Balance Sheets is referred to as charge-offs. Net charge-offs include current period charge-offs less recoveries on previously charged-off loans and leases.

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

 

 

The provision for loan and lease losses decreased to $91was $71 million and $162 million for the three and six months ended March 31,June 30, 2012 compared to $168$113 million and $281 million during the same periodperiods in 2011. The decrease in provision expense compared to the same periodperiods in the prior year was due to decreases in nonperforming loans and leases, improved delinquency metrics in commercial and consumer loans and leases, and improvement in underlying loss trends. The ALLL declined $679$598 million from $2.8$2.6 billion at MarchJune 30, 2011 to $2.0 billion at June 30, 2012. The ALLL declined $239 million from December 31, 2011 to $2.1 billion at March 31,June 30, 2012. As of March 31,June 30, 2012, the ALLL as a percent of loans and leases decreased to 2.59%2.45%, compared to 3.62%2.78% at MarchDecember 31, 2011 and 3.35% at June 30, 2011.

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

Noninterest Income

Noninterest income increased $185$22 million, or 32%,three percent, for the three months ended March 31,second quarter of 2012 compared to the threesecond quarter of 2011 and increased $208 million, or 17%, for the six months ended March 31, 2011.June 30, 2012 compared to the same period in the prior year. The components of noninterest income for the three and six months ended June 30, 2012 and 2011 are as follows:

TABLE 4:5: Noninterest Income

 

  For the three months       For the three months     For the six months     
  ended March 31,   Percent   ended June 30,     ended June 30,     

($ in millions)

  2012   2011   Change   2012   2011   % Change 2012   2011   % Change 

Mortgage banking net revenue

  $204    102    100   $183    162    13  $387    264    47 

Service charges on deposits

   129    124    4    130    126    4   260    250    4 

Corporate banking revenue

   97    86    13    102    95    7   199    181    10 

Investment advisory revenue

   96    98    (2   93    95    (2  190    193    (2

Card and processing revenue

   59    80    (26   64    89    (28  122    169    (28

Other noninterest income

   175    81    116    103    83    25   279    164    71 

Securities gains, net

   9    8    13    3    6    (50  11    14    (21

Securities gains, net-non-qualifying hedges on mortgage servicing rights

   —       5    NM  

Securities gains, net - non-qualifying hedges on mortgage servicing rights

   —       —       NM    —       5    NM  
  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

 

Total noninterest income

  $769    584    32   $678    656    3  $1,448    1,240    17 
  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

 

Mortgage banking net revenue

Mortgage banking net revenue increased $102$21 million infor the first quarter ofthree months ended June 30, 2012 compared to the first quarter ofthree months ended June 30, 2011 and increased $123 million during the six months ended June 30, 2012 compared to the six months ended June 30, 2011. The components of mortgage banking net revenue are as follows:

TABLE 5:6: Components of Mortgage Banking Net Revenue

 

  For the three months For the six months 
  For the three months
ended March 31,
   ended June 30, ended June 30, 

($ in millions)

  2012 2011   2012 2011 2012 2011 

Origination fees and gains on loan sales

  $174   62   $183   64  $357   126 

Net servicing revenue:

        

Gross servicing fees

   61   58    63   58   124   116 

Servicing rights amortization

   (46  (28   (41  (25  (86  (53

Net valuation adjustments on servicing rights and free-standing derivatives entered into to economically hedge MSR

   15   10    (22  65   (8  75 
  

 

  

 

   

 

  

 

  

 

  

 

 

Net servicing revenue

   30   40    —      98   30   138 
  

 

  

 

   

 

  

 

  

 

  

 

 

Mortgage banking net revenue

  $204   102   $183   162  $387   264 
  

 

  

 

   

 

  

 

  

 

  

 

 

Origination fees and gains on loan sales increased $112$119 million inand $231 million for the first quarter ofthree and six months ended June 30, 2012, respectively, compared to the same periodthree and six months ended June 30, 2011. The increase from both periods in 2011 asthe prior year was primarily the result of a 64%an 89% and 76% increase in residential mortgage loan originations compared tofrom the three and six months ended June 30, 2011, respectively, coupled with an increase in profit margins on sold residential mortgage loans. Residential mortgage loan originations increased to $6.4$5.9 billion during the firstsecond quarter of 2012 compared to $3.9$3.1 billion during the same period insecond quarter of 2011 and increased to $12.4 billion during the six months ended June 30, 2012 from $7.1 billion during the six months ended June 30, 2011. The increase in originations is primarily due to strong refinancing activity as mortgage rates remain at historical lows.lows coupled with an increase in refinancing activity under the HARP 2.0 program.

Net servicing revenue is comprised of gross servicing fees and related servicing rights amortization as well as valuation adjustments on MSRs and mark-to-market adjustments on both settled and outstanding free-standing derivative financial instruments used to economically hedge the MSR portfolio. Net servicing revenue decreased $10$98 million duringand $108 million for the first quarter ofthree and six months ended June 30, 2012 compared to the same period in 2011, driven primarily by an $18 million increase in servicing rights amortization as a result of an increase in prepayments.

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

 

 

compared to the three and six months ended June 30, 2011, driven primarily by decreases of $87 million and $83 million, respectively, in net valuation adjustments.

The net valuation adjustment loss of $22 million during the second quarter of 2012 included $60 million of temporary impairment on the MSRs partially offset by $38 million in gains from derivatives economically hedging the MSRs. Mortgage rates decreased slightly for the three months ended June 30, 2012. This caused modeled prepayments speeds to increase, which led to the temporary impairment on servicing rights during the three months ended June 30, 2012. The derivatives economically hedging the MSRs only partially offset the temporary impairment on servicing rights as a result of inefficiencies in the Bancorp’s non-qualifying hedging strategy. The net valuation adjustment of $15$65 million during the firstsecond quarter of 2011 included $129 million in gains from derivatives economically hedging the MSRs partially offset by $64 million in temporary impairment on the MSR portfolio. The net valuation adjustment loss of $8 million for the six months ended June 30, 2012 included an $11$49 million recovery onof temporary impairment on the MSRs as well as $4partially offset by $42 million in gains from derivatives economically hedging the MSRs. The gain in the net valuation adjustment is reflective of refinancing activity$75 million for the six months ended June 30, 2011 included $102 million in recent years that has contributed to prepayments being less sensitive to lower mortgage rates due to customers taking advantagegains from derivatives economically hedging the MSR portfolio partially offset by $27 million of these lower rates in earlier periods, as well astemporary impairment on the impact of tighter underwriting standards.MSR portfolio. Gross servicing fees increased $3$5 million infrom the firstsecond quarter of 2012 compared to2011 and $8 million from the same period insix months ended June 30, 2011 as a result of an increase in the size of the Bancorp’s servicing portfolio. The Bancorp’s total residential loans serviced as of March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011 was $72.9were $74.8 billion, $70.6 billion and $66.0$66.8 billion, respectively, with $60.4$61.6 billion, $57.1 billion and $55.4$56.0 billion, respectively, of residential mortgage loans serviced for others.

Servicing rights are deemed impaired when a borrower’s loan rate is distinctly higher than prevailing rates. Impairment on servicing rights is reversed when the prevailing rates return to a level commensurate with the borrower’s loan rate. Further detail on the valuation of MSRs can be found in Note 9 of the Notes to Condensed Consolidated Financial Statements. The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in the valuation on the MSR portfolio. See Note 10 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. There were no sales of securities related to the Bancorp’s non-qualifying hedging strategy during the first quarter ofthree months ended June 30, 2012 and 2011 and six months ended June 30, 2012. Net gains on sales of these securities were $5 million for the quartersix months ended March 31,June 30, 2011, which were recorded in securities gains, net, non-qualifying hedges on mortgage servicing rights in the Bancorp’s Condensed Consolidated Statements of Income.

Service charges on deposits

Service charges on deposits increased $5$4 million inand $10 million for the first quarter ofthree and six months ended June 30, 2012, respectively, compared to the same period inthree and six months ended June 30, 2011. This increase was primarily driven by commercial deposit revenue which increased $5 million or seven percent,and $10 million for the three and six months ended June 30, 2012, respectively, compared to the first quarter of 2011same periods in the prior year due to an increase in commercial accountnew customer relationships. Earnings credits paid on customer balances were flat compared to the first quarter of 2011. Commercial customers receive earnings credits to offset the fees charged for banking services on their deposit accounts such as account maintenance, lockbox, ACH transactions, wire transfers and other ancillary corporate treasury management services. Earnings credits are based on the customer’s average balance in qualifying deposits multiplied by the crediting rate. Qualifying deposits include demand deposits and interest-bearing checking accounts. The Bancorp has a standard crediting rate that is adjusted as necessary based on the competitive market conditions and changes in short-term interest rates.

Corporate banking revenue

Corporate banking revenue increased $11$7 million inand $18 million for the first quarter ofthree and six months ended June 30, 2012, respectively, compared to the same period inthree and six months ended June 30, 2011. The increase fromcompared to the prior yearthree months ended June 30, 2011 was primarily driven by higherdue to increases in foreign exchange income, business lending fees and institutional sales. The increase compared to the six months ended June 30, 2011 included the impact of the previously mentioned factors coupled with a $9 million increase in syndication fees due to increased market and business activity during the first quarter of 2012. In addition, improved business lending fees, institutional sales revenue and lease fees contributed to the increase compared to prior year primarily as a result of increased refinancing activities in the current market environment.activity.

Investment advisory revenue

Investment advisory revenue was relatively flat indecreased $2 million and $3 million for the first quarter ofthree and six months ended June 30, 2012, respectively, compared to the same periodperiods in 2011, as2011. The decrease from both prior year periods was primarily driven by a decline in mutual fund fees was offset by the positive impact of an overall increase in equity and bond market values. As of March 31, 2012, thefees. The Bancorp had approximately $296$291 billion and $276 billion in total assets under care as of June 30, 2012 and 2011, respectively, and managed $26$25 billion in assets for individuals, corporations and not-for-profit organizations.organizations for both comparative periods.

On April 5, 2012, the Bancorp announced that FTAM entered into two agreements under which a third party will acquire assets of 16 mutual funds from FTAM and another third party will acquire certain assets relating to the management of Fifth Third money market funds. The closings of the transactions are subject to certain conditions and approvals and are expected to be completed in the third quarter of 2012. The transactions are not expected to have a material impact on the Bancorp’s results.

Card and processing revenue

Card and processing revenue decreased $21$25 million inand $47 million for the first quarter ofthree and six months ended June 30, 2012 compared to the same period inthree and six months ended June 30, 2011. The decrease was primarily the result of the impact of the implementation of the Dodd-Frank Act’s debit card interchange fee cap in the fourth quarter of 2011. This impact was partially offset by increased debit and credit card transaction volumes.

Other noninterest income

The major components of other noninterest income are as follows:

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

 

 

TABLE 6:7: Components of Other Noninterest Income

 

  For the three months For the six months 
  For the three months
ended March 31,
   ended June 30, ended June 30, 

($ in millions)

  2012 2011   2012 2011 2012 2011 

Gain on Vantiv, Inc. IPO

  $115   —      $—      —     $115   —    

Operating lease income

   14   15    15   14   29   30 

Cardholder fees

   11   9    12   9   22   18 

BOLI income

   9   11    9   11   18   21 

Banking center income

   8   7   15   14 

Gain on loan sales

   8   8   14   25 

Insurance income

   7   8    7   5   14   13 

Consumer loan and lease fees

   7   7    7   8   13   15 

Banking center income

   7   7 

Gain on loan sales

   5   17 

Loss on sale of OREO

   (17  (2   (19  (26  (36  (28

Equity method (loss) earnings from interest in Vantiv Holding, LLC

   (24  9 

Equity method earnings from interest in Vantiv Holding, LLC

   26   6   2   15 

Other, net

   41   —       30   41   73   41 
  

 

  

 

   

 

  

 

  

 

  

 

 

Total other noninterest income

  $175   81   $103   83  $279   164 
  

 

  

 

   

 

  

 

  

 

  

 

 

Other noninterest income increased $94$20 million, or 25%, in the firstsecond quarter of 2012 compared to the second quarter of 2011 and $115 million, or 71%, for the six months ended June 30, 2012 compared to the same period in the prior year. The increase compared to the second quarter of 2011 was primarily due to a $115$28 million gain fromincrease in positive valuation adjustments on the Vantiv, Inc. IPO. Excluding this impact,warrants issued as part of the Bancorp’s sale of its processing business sale, recorded in the “other” caption above. Additionally, other noninterest income declined $21included a $20 million compared to the first quarter of 2011, driven by $24 millionincrease in losses related to the equity method income recorded from the Bancorp’s ownership interest in Vantiv Holding, LLC. The $24LLC and a $7 million of equity method losses is comprised of $34 million in debt termination charges incurred in connection with the refinancing of Vantiv Holding, LLC debt held by the Bancorp partially offset by $10 million in first quarter equity method earnings. Additionally, other noninterest income decreased due to a $19 million charge related to the increase in fair value of the liability on the swap associated with the sale of Visa, Inc. Class B shares; a decrease of $12 million in the gainsloss on loan sales and a $15 million increase in losses on the sale of OREO. These impacts were partially offset by $46a $7 million reduction in income related to the Visa total return swap and $17 million in positivelower of cost or market adjustments associated with bank premises held-for-sale. The increase compared to the six months ended June 30, 2011 was primarily due to a $115 million gain from the Vantiv, Inc. IPO recognized in the first quarter of 2012 and a $77 million increase in gains on the valuation adjustments on theof warrants and put options issued as part of the Bancorp’s sale of its processing business, recorded in the “other” caption above.caption. The increase was partially offset by $34 million in debt termination charges, included in equity method earnings, incurred in the first quarter of 2012 related to Vantiv Holding, LLC’s debt refinancing and $17 million in lower of cost or market adjustments associated with bank premises held-for-sale. For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B shares and the valuation of warrants and put options associated with the sale of the processing business, see Note 1819 of the Notes to Condensed Consolidated Financial Statements.

Noninterest Expense

Total noninterest expense increased $55$36 million, or four percent, for the three months ended June 30, 2012, and $92 million, or five percent, for the six percent, in the first quarter ofmonths ended June 30, 2012 compared to the same period in 2011.three and six months ended June 30, 2011, respectively. The major components of other noninterest expense are as follows:

TABLE 7:8: Noninterest Expense

 

  For the three months   For the six months   
  For the three months
ended March 31,
   Percent
Change
   ended June 30,   ended June 30,   

($ in millions)

  2012 2011     2012 2011 % Change 2012 2011 % Change 

Salaries, wages and incentives

  $399   351    14   $393   365   8  $792   716   11 

Employee benefits

   112   97    15    84   79   6   195   176   11 

Net occupancy expense

   77   77    —       74   75   (1  151   152   (1

Technology and communications

   47   45    4    48   48   1   95   93   2 

Card and processing expense

   30   29    3    30   29   4   60   58   4 

Equipment expense

   27   29    (7   27   28   (2  55   57   (4

Other noninterest expense

   281   290    (3   281   277   1   563   567   (1
  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total noninterest expense

  $973   918    6   $937   901   4  $1,911   1,819   5 
  

 

  

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Efficiency ratio

   58.3  62.5      59.4   59.1    58.8   60.8  
  

 

  

 

     

 

  

 

   

 

  

 

  

Total personnel costs increased $63$33 million or 14%,and $95 million, respectively, for the three and six months ended June 30, 2012 compared to the first quarter of 2011same periods in 2011. The increase from both periods in the prior year was primarily due to an increase in base and incentive compensation driven by higher compensation costs reflecting strong results within mortgage and corporate banking,improved production levels, as well as higher employee benefits expense due primarily to an increase in medical claims under the Bancorp’s self-insured medical plan and a seasonal increase in payroll tax expense. Full time equivalent employees totaled 21,20620,888 at March 31,June 30, 2012 compared to 20,83720,953 at March 31,June 30, 2011.

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

 

 

TABLE 8:9: Components of Other Noninterest Expense

 

  For the three months For the six months 
  For the three months
ended March 31,
   ended June 30, ended June 30, 

($ in millions)

  2012 2011   2012 2011 2012 2011 

Loan and lease

  $45   46   $46   48  $91   94 

Marketing

   36   31   59   53 

Losses and adjustments

   40   29    29   22   69   51 

FDIC insurance and other taxes

   27   50   45   101 

Affordable housing investments impairment

   27   25    19   26   46   50 

Marketing

   23   22 

FDIC insurance and other taxes

   18   52 

Professional services fees

   15   12   25   26 

Travel

   13   14   25   26 

Postal and courier

   13   13    12   12   25   25 

Travel

   13   12 

Professional services fees

   11   15 

Operating lease

   10   11    10   10   21   21 

Recruitment and education

   7   7    7   8   14   15 

OREO

   5   13    5   6   10   18 

Insurance

   5   12    5   1   10   13 

Intangible asset amortization

   4   7    4   6   7   13 

Provision for unfunded commitments and letters of credit

   (2  (16   (1  (14  (3  (30

Other, net

   62   42    54   45   119   91 
  

 

  

 

   

 

  

 

  

 

  

 

 

Total other noninterest expense

  $281   290   $281   277  $563   567 
  

 

  

 

   

 

  

 

  

 

  

 

 

Total other noninterest expense increased $4 million and decreased $9$4 million, orrespectively, for the three percent, in the first quarter ofand six months ended June 30, 2012 compared to the same periodperiods in 2011. Other noninterest expense was impactedThe provision for representation and warranty claims, included in losses and adjustments, increased by a $34$5 million declineand $14 million, respectively, for the three and six months ended June 30, 2012 compared to the same periods in the prior year primarily due to an increase in demand requests during the first half of 2012. FDIC insurance and other taxes due primarily todecreased $23 million and $56 million, respectively, for the three and six months ended June 30, 2012 compared to the same periods in the prior year. The decrease in FDIC expense reduction from an agreement reached on certain outstanding disputes for non-income tax related assessments. Additionally, contributingand other taxes is primarily attributable to this decline was the FDIC’s implementation of amended regulations, effective April 1, 2011, that revised the Federal Deposit Insurance Act. The amended regulations modified the definition of an institution’s deposit insurance assessment base from domestic deposits to quarterly average total assets less quarterly average tangible equity (defined as Tier I capital) as well asa decrease in the assessment rate calculation.due to changes in the level and measurement of higher risk assets and improved credit quality metrics. These effects were partially offset by a $12 million increase in legal expense, a $12 million increase in debt termination charges and a $7 million increasedecrease in the expense related to the reserve for representation and warranty claims, recorded in losses and adjustments. In addition,benefit from the provision for unfunded commitments and letters of credit was a benefit of $2$13 million inand $27 million, respectively, for the first quarter ofthree and six months ended June 30, 2012 compared to a benefit of $16 million during the same periodperiods in 2011. The reduction in the benefit was due to a leveling off of loss ratesimproving credit trends in the first quarterhalf of 2012 as well as an increase in the unfunded commitments for which the Bancorp holds reserves as of June 30, 2012 compared to the first quarter ofJune 30, 2011.

The Bancorp continues to focus on efficiency initiatives as part of its core emphasis on operating leverage and expense control. The efficiency ratio (noninterest expense divided by the sum of net interest income (FTE) and noninterest income) was 58.3%59.4% and 58.8% for the three and six months ended March 31,June 30, 2012 compared to 62.5% in59.1% and 60.8% for the same period inthree and six months ended June 30, 2011.

Applicable Income Taxes

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

TABLE 9:10: Applicable Income Taxes

 

  For the three months   For the six months 
  For the three months
ended March 31,
   ended June 30,   ended June 30, 

($ in millions)

  2012 2011   2012 2011   2012 2011 

Income before income taxes

  $603   377   $565   506   $1,168   883 

Applicable income tax expense

   173   112    180   169    352   281 

Effective tax rate

   28.6  29.7    31.8   33.3    30.2   31.8 
  

 

  

 

   

 

  

 

   

 

  

 

 

Applicable income tax expense for all periods includes the benefit from tax-exempt income, tax-advantaged investments, certain gains on sales of leases that are exempt from federal taxation and tax credits, partially offset by the effect of certain nondeductible expenses. The tax credits are associated with the Low-Income Housing Tax Credit program established under Section 42 of the IRC, the New Markets Tax Credit program established under Section 45D of the IRC, the Rehabilitation Investment Tax Credit program established under Section 47 of the IRC, and the Qualified Zone Academy Bond program established under Section 1397E of the IRC. The decrease in the effective tax rate for the three and six months ended June 30, 2012 from the comparable prior year periods was primarily due to a decrease in the amount of income tax expense associated with previously recognized tax benefits associated with stock-based awards that will not be realized.

Deductibility of Executive Compensation

Certain sections of the IRC limit the deductibility of compensation paid to or earned by certain executive officers of a public company. This has historically limited the deductibility of certain executive compensation to $1 million per executive officer, and the Bancorp’s compensation philosophy has been to position pay to ensure deductibility. However, both the amount of the executive compensation that is deductible for certain executive officers and the allowable compensation vehicles changed as a result of the Bancorp’s participation in TARP. In particular, the Bancorp was not permitted to deduct compensation earned by certain executive officers in excess of $500,000 per executive officer as a result of the Bancorp’s participation in TARP. Therefore, a portion of the compensation earned by certain executive officers was

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

 

 

not deductible by the Bancorp for the period in which the Bancorp participated in TARP. Subsequent to ending its participation in TARP, certain limitations on the deductibility of executive compensation will continue to apply to some forms of compensation earned while under TARP. The Bancorp’s Compensation Committee determined that the underlying executive compensation programs are appropriate and necessary to attract, retain and motivate senior executives, and that failing to meet these objectives creates more risk for the Bancorp and its value than the financial impact of losing the tax deduction. For the year ended 2011, the total tax impact for non-deductible compensation was $2 million.

BALANCE SHEET ANALYSIS

Loans and Leases

The Bancorp classifies its loans and leases based upon the primary purpose of the loan. Table 1011 summarizes end of period loans and leases, including loans held for sale and Table 1112 summarizes average total loans and leases, including loans held for sale.

TABLE 10:11: Components of Total Loans and Leases (includes held for sale)

 

  March 31, 2012   December 31, 2011   March 31, 2011   June 30, 2012   December 31, 2011   June 30, 2011 

($ in millions)

  Balance   % of Total   Balance   % of Total   Balance   % of Total   Balance   % of Total   Balance   % of Total   Balance   % of Total 

Commercial:

                        

Commercial and industrial loans

  $32,203    39    30,828    38    27,431    35   $32,625    39    30,828    38    28,155    36 

Commercial mortgage loans

   9,976    12    10,214    12    10,617    14    9,697    12    10,214    12    10,331    13 

Commercial construction loans

   916    1    1,037    1    2,020    3    834    1    1,037    1    1,805    2 

Commercial leases

   3,512    4    3,531    4    3,367    4    3,471    4    3,531    4    3,326    4 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal – commercial

   46,607    56    45,610    55    43,435    56    46,627    56    45,610    55    43,617    55 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Consumer:

                        

Residential mortgage loans

   12,523    15    13,474    16    10,556    13    13,217    15    13,474    16    10,838    14 

Home equity

   10,493    13    10,719    13    11,222    14    10,378    13    10,719    13    11,048    14 

Automobile loans

   11,832    14    11,827    14    11,129    14    11,739    14    11,827    14    11,315    14 

Credit card

   1,896    2    1,978    2    1,821    2    1,943    2    1,978    2    1,856    2 

Other consumer loans and leases

   346    —       364    —       593    1    318    —       364    —       478    1 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal – consumer

   37,090    44    38,362    45    35,321    44    37,595    44    38,362    45    35,535    45 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total loans and leases

  $83,697    100    83,972    100    78,756    100   $84,222    100    83,972    100    79,152    100 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total portfolio loans and leases (excludes loans held for sale)

  $82,113      81,018      77,465     $82,359      81,018      77,967   
  

 

     

 

     

 

     

 

     

 

     

 

   

Total loans and leases, including held for sale, decreased $275increased $250 million from December 31, 2011 and increased $4.9$5.1 billion, or six percent, from March 31,June 30, 2011. The decrease from December 31, 2011 was due to a decrease of $1.3 billion, or three percent, in consumer loans and leases partially offset by an increase of $997 million, or two percent, in commercial loans and leases. The increase from MarchDecember 31, 2011 was due to an increase of $3.2$1.0 billion, or two percent, in commercial loans and leases partially offset by a decrease of $767 million, or two percent in consumer loans and leases. The increase from June 30, 2011 was due to an increase of $3.0 billion, or seven percent, in commercial loans and leases and an increase of $1.8$2.1 billion, or fivesix percent, in consumer loans and leases.

Total commercial loans and leases increased from December 31, 2011 and March 31,June 30, 2011 primarily due to an increase in commercial and industrial loans partially offset by a decrease in commercial mortgage loans and commercial construction loans. Commercial and industrial loans increased $1.4$1.8 billion, or foursix percent, from December 31, 2011 and $4.8$4.5 billion, or 17%16%, from March 31,June 30, 2011 due to an increase in new loan origination activity due tofrom an increase in demand due to a strengthening economy and an increase in line utilization rates.increased sales force personnel. Commercial construction loans decreased $121$203 million, or 12%20%, from December 31, 2011 and $1.1 billion,$971 million, or 55%54%, from March 31,June 30, 2011 and commercial mortgage loans decreased $238$517 million, or twofive percent, from December 31, 2011 and $641$634 million, or six percent, from March 31,June 30, 2011 due to continued run-off in these loan categories. The run-off reflects weak customer demand tightened underwriting standards and previous suspensions of new homebuilder and developer lending and non-owner occupied real estate lending.

Total consumer loans and leases decreased from December 31, 2011 primarily due to a decrease in residential mortgage loans and home equity loans. Residential mortgage loans decreased $951$257 million, or seventwo percent, from December 31, 2011 due to the sale of $1.4 billion ofa decrease in residential mortgage loans held for sale duringpartially offset by an increase in portfolio residential mortgage loans. Residential mortgage loans held for sale decreased $1.0 billion from December 31, 2011 primarily due to strong refinancing in the firstfourth quarter of 2012. The decrease in2011 and the timing of delivery of loans. Portfolio residential mortgage loans was partially offset byincreased $757 million from December 31, 2011 due to management’s decision to retain certain shorter term residential mortgage loans originated through the Bancorp’s retail branches. Home equity loans decreased $226$341 million, or twothree percent, due to decreased customer demand.from December 31, 2011 as payoffs exceeded new loan production.

Total consumer loans and leases increased from March 31,June 30, 2011 primarily due to an increase in residential mortgage loans and automobile loans partially offset by a decrease in home equity loans.loans and other consumer loans and leases. Residential mortgage loans increased $2.0$2.4 billion, or 19%22%, from March 31,June 30, 2011 primarily due to management’s decision to retain certain shorter term residential mortgage loans originated through the Bancorp’s retail branches throughout 2011 and 2012 and stronger loan production in the first quarterhalf of 2012 compared to the first quarterhalf of 2011. Automobile loans increased $703$424 million, or sixfour percent, from March 31,compared to June 30, 2011 due to strong origination volumes through consistent and competitive pricing, enhanced customer service with our dealership network, and disciplined sales execution. Home equity loans decreased $729$670 million, or sevensix percent, due to decreased customer demand.from June 30, 2011 as payoffs exceeded new loan production. Other consumer loans and

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

 

 

leases decreased $160 million, or 33%, from June 30, 2011 due to the runoff of automobile leases as the Bancorp stopped originating automobile leases in November of 2008.

TABLE 11:12: Components of Average Total Loans and Leases (includes held for sale)

 

  March 31, 2012   December 31, 2011   March 31, 2011   June 30, 2012   December 31, 2011   June 30, 2011 

For the three months ended ($ in millions)

  Balance   % of Total   Balance   % of Total   Balance   % of Total   Balance   % of Total   Balance   % of Total   Balance   % of Total 

Commercial:

                        

Commercial and industrial loans

  $31,421    38    29,954    36    27,404    34   $32,770    39    29,954    36    27,970    36 

Commercial mortgage loans

   10,077    12    10,350    13    10,816    14    9,873    12    10,350    13    10,491    13 

Commercial construction loans

   1,008    1    1,155    1    2,085    3    886    1    1,155    1    1,950    2 

Commercial leases

   3,543    4    3,352    4    3,364    4    3,471    4    3,352    4    3,349    4 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal – commercial

   46,049    55    44,811    54    43,669    55    47,000    56    44,811    54    43,760    55 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Consumer:

                        

Residential mortgage loans

   12,928    16    12,638    16    10,736    14    13,059    16    12,638    16    10,655    14 

Home equity

   10,606    13    10,810    13    11,376    14    10,430    12    10,810    13    11,144    14 

Automobile loans

   11,882    14    11,696    14    11,070    14    11,755    14    11,696    14    11,188    14 

Credit card

   1,926    2    1,906    2    1,852    2    1,915    2    1,906    2    1,834    2 

Other consumer loans and leases

   366    —       417    1    676    1    349    —       417    1    572    1 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal – consumer

   37,708    45    37,467    46    35,710    45    37,508    44    37,467    46    35,393    45 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total average loans and leases

  $83,757    100    82,278    100    79,379    100   $84,508    100    82,278    100    79,153    100 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total portfolio loans and leases (excludes loans held for sale)

  $81,500      79,914      77,636   

Total average portfolio loans and leases (excludes loans held for sale)

  $82,586      79,914      77,937   
  

 

     

 

     

 

     

 

     

 

     

 

   

Average total loans and leases, including held for sale, increased $1.5$2.2 billion, or twothree percent, from December 31, 2011 and increased $4.4$5.4 billion, or sixseven percent, from March 31,June 30, 2011. The increase from December 31, 2011 was primarily driven by an increase of $1.2$2.2 billion, or threefive percent, in average commercial loans and leases. The increase from June 30, 2011 was due to an increase of $3.2 billion, or seven percent, in average commercial loans and leases and an increase of $241 million, or one percent, in average consumer loans and leases. The increase from March 31, 2011 was due to an increase of $2.4 billion, or five percent, in average commercial loans and leases and an increase of $2.0$2.1 billion, or six percent, in average consumer loans and leases.

Average total commercial loans and leases increased from December 31, 2011 due to an increase of $1.5$2.8 billion, or fivenine percent, in average commercial and industrial loans, partially offset by a decrease of $273$477 million, or threefive percent, in average commercial mortgage loans, and a decrease of $147$269 million, or 13%23%, in average commercial construction loans. Average commercial and industrial loans increased due to an increase in new loan origination activity due to increased demand. Average commercial mortgage loans and average commercial construction loans decreased due to continued run-off in these loan categories asthe reasons previously discussed. Average total commercial loans and leases increased from March 31,June 30, 2011 due to an increase of $4.0$4.8 billion, or 15%17%, in average commercial and industrial loans, partially offset by a decrease of $1.1 billion, or 52%55%, in average commercial construction loans and a decrease of $739$618 million, or sevensix percent, in average commercial mortgage loans due to the reasons previously discussed.

The increase in averageAverage total consumer loans and leasesincreased $41 million from December 31, 2011 was due to an increase of $421 million, or three percent, in average residential mortgage loans and average automobile loans, partially offset by a decrease of $380 million, or four percent, in average home equity loans. Average residential mortgage loans increased $290 million, or two percent,from December 31, 2011 due to management’s decision to retaincontinued strong refinancing activity associated with historically low interest rates as well as the continued retention of certain branch originated fixed-rate residential mortgages with shorter term residential mortgage loans originated through the Bancorp’s retail branches. Average automobile loans increased $186 million, or two percent, due to seasonality.terms. Average home equity loans decreased $204 million, or two percent, due to decreased customer demand. The increase in averagefrom December 31, 2011 as payoffs exceeded new loan production.

Average total consumer loans and leasesincreased from March 31,June 30, 2011 was due to an increase of $2.2$2.4 billion, or 20%23%, in average residential mortgage loans and an increase of $812$567 million, or sevenfive percent, in average automobile loans partially offset by a decrease of $770$714 million, or sevensix percent, in average home equity loans and a decrease of $223 million, or 39%, in average other consumer loans and leases due to the reasons previously discussed in the year-over-year end of period discussion above.

Investment Securities

The Bancorp uses investment securities as a means of managing interest rate risk, providing liquidity support and providing collateral for pledging purposes. As of March 31, 2012, totalTotal investment securities were $16.6$16.1 billion compared toat June 30, 2012 and 2011 and $15.9 billion at December 31, 2011 and $15.7 billion at March 31, 2011.

Securities are classified as trading when bought and held principally for the purpose of selling them in the near term. Securities are classified as available-for-sale when, in management’s judgment, they may be sold in response to, or in anticipation of, changes in market conditions. Securities that management has the intent and ability to hold to maturity are classified as held-to-maturity and reported at amortized cost. The Bancorp’s management has evaluated the securities in an unrealized loss position in the available-for-sale and held-to-maturity portfolios for OTTI. See Note 4 of the Notes to the Condensed Consolidated Financial Statements for further information on OTTI.

At March 31,June 30, 2012, the Bancorp’s investment portfolio consisted primarily of AAA-rated available-for-sale securities. The Bancorp did not hold asset-backed securities backed by subprime mortgage loans in its investment portfolio. Additionally, there was approximately $119$117 million of securities classified as below investment grade as of March 31,June 30, 2012, compared to $122 million as of December 31, 2011 and $134$131 million as of March 31,June 30, 2011. The Bancorp’s management has evaluated the securities in an unrealized loss position in the available-for-sale and held-to-maturity portfolios for OTTI. The Bancorp recognized $17 million of OTTI on its available-for-sale investment securities portfolio during the three and six months ended June 30, 2012 and an immaterial amount was recognized during the three and six months ended June 30, 2011. The Bancorp did not recognize any OTTI on any of its held to maturity investment securities during the three and six

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

 

 

months ended June 30, 2012 and 2011. See Note 4 of the Notes to the Condensed Consolidated Financial Statements for further information on OTTI.

TABLE 12:13: Components of Investment Securities

 

($ in millions)

  March 31,
2012
   December 31,
2011
   March 31,
2011
   June 30,
2012
   December 31,
2011
   June 30,
2011
 

Available-for-sale and other: (amortized cost basis)

            

U.S. Treasury and government agencies

  $51    171    225   $51    171    199 

U.S. Government sponsored agencies

   1,782    1,782    1,669    1,781    1,782    2,141 

Obligations of states and political subdivisions

   210    96    152    205    96    113 

Agency mortgage-backed securities

   9,834    9,743    10,439    8,807    9,743    10,269 

Other bonds, notes and debentures(a)

   2,315    1,792    1,177    2,743    1,792    1,135 

Other securities(b)

   1,149    1,030    1,045    1,231    1,030    1,032 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total available-for-sale and other securities

  $15,341    14,614    14,707   $14,818    14,614    14,889 
  

 

   

 

   

 

   

 

   

 

   

 

 

Held-to-maturity: (amortized cost basis)

            

Obligations of states and political subdivisions

  $319    320    341   $303    320    340 

Other bonds, notes and debentures

   2    2    5    2    2    4 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total held-to-maturity

  $321    322    346   $305    322    344 
  

 

   

 

   

 

   

 

   

 

   

 

 

Trading: (fair value)

            

Obligations of states and political subdivisions

  $20    9    21   $14    9    38 

Agency mortgage-backed securities

   19    11    35    19    11    33 

Other bonds, notes and debentures

   11    13    11    11    13    11 

Other securities

   145    144    149    156    144    135 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total trading

  $195    177    216   $200    177    217 
  

 

   

 

   

 

   

 

   

 

   

 

 
(a)Other bonds, notes, and debentures consist of non-agency mortgage backed securities, certain other asset backed securities (primarily automobile and commercial loan backed securities) and corporate bond securities.
(b)Other securities consist of FHLB and FRB restricted stock holdings that are carried at par, FHLMC and FNMA preferred stock holdings and certain mutual fund holdings and equity security holdings.

Available-for-sale securities on an amortized cost basis increased $727$204 million, or five percent,1%, from December 31, 2011 primarily due to an increase in other bonds, notes, and debentures and other securities and obligations of states and political subdivisions, partially offset by a decrease in U.S. Treasuryagency-mortgage backed securities. Agency mortgage-backed securities decreased $936 million, or 10%, primarily due to sales of collateralized mortgage obligations and governmentmortgage-backed securities totaling $814 million during the first half of 2012. The remaining decrease is due to principal and interest pay downs on agency securities.mortgage-backed securities being reinvested in other bonds, notes, and debentures. Other bonds, notes, and debentures increased $523$951 million, or 29%53%, primarily due to $580 million$1.1 billion in purchases of commercial mortgage-backed securities, asset-backed securities, and corporate bonds during the first quarterhalf of 2012. Other securities increased $119$201 million, or 12%20%, as excess cash from the run-offrunoff of short-term investmentsagency mortgage-backed securities was re-invested primarilyinvested in money market mutual funds. The increase of $114 million, or 119%, in obligations of states and political subdivision securities was due to a decrease of $120 million, or 70%, in U.S. Treasury and government agencies securities as these securities matured and the excess cash was reinvested in obligations of states and political subdivisions securities.

Available-for-sale securities on an amortized cost basis increased $634decreased $71 million or four percent, from March 31,June 30, 2011 primarily due to a decrease in agency mortgage-backed securities and U.S. Government sponsored agency securities partially offset by an increase in other bonds, notes, and debentures partially offset by a decrease in agency-mortgage backed securities. Other bonds, notes, and debentures increased $1.1debentures. Agency mortgage-backed securities decreased $1.5 billion, or 97%14%, as excess cash fromprimarily due to sales of collateralized mortgage obligations and mortgage-backed securities totaling $1.4 billion during the maturitiessecond half of 2011 and first half of 2012.The remaining decrease is due to principal and interest pay downs on agency mortgage-backed securities wasbeing reinvested in other bonds, notes, and debentures. The remaining increase in other bonds, notes and debentures waswhich increased $1.6 billion, or 142%. Government sponsored agency securities decreased $360 million, or 17%, due to purchasessales in the second half of commercial mortgage backed securities, asset-backed securities, and corporate bonds during the year.2011.

At March 31,June 30, 2012 and March 31, 2011, available-for-sale securities were 15% of total interest-earning assets compared to 14% at December 31, 2011 and 16% at June 30, 2011. The estimated weighted-average life of the debt securities in the available-for-sale portfolio was 3.94.0 years at March 31,June 30, 2012, 3.6 years at December 31, 2011, and 4.64.5 years at March 31,June 30, 2011. In addition, at March 31,June 30, 2012, the available-for-sale securities portfolio had a weighted-average yield of 3.69%3.64%, compared to 3.66% at December 31, 2011 and 4.30%4.28% at March 31,June 30, 2011.

Information presented in Table 1314 is on a weighted-average life basis, anticipating future prepayments. Yield information is presented on an FTE basis and is computed using historical cost balances. Maturity and yield calculations for the total available-for-sale portfolio exclude equity securities that have no stated yield or maturity. Total net unrealized gains on the available-for-sale securities portfolio were $752$734 million at March 31,June 30, 2012, compared to $748 million at December 31, 2011 and $428$613 million at March 31,June 30, 2011. The increase in net unrealized gains from March 31,June 30, 2011 was due to a continued low interest rate environment.

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

 

 

TABLE 13:14: Characteristics of Available-for-Sale and Other Securities

 

As of March 31, 2012 ($ in millions)

  Amortized Cost   Fair Value   Weighted-Average
Life (in years)
   Weighted-Average
Yield
 

As of June 30, 2012 ($ in millions)

  Amortized Cost   Fair Value   Weighted-Average
Life (in years)
   Weighted-Average
Yield
 

U.S. Treasury and government agencies:

                

Average life of one year or less

  $50    50    0.5    1.44  $50    50    0.2    1.43 

Average life 5 – 10 years

   1    1    6.9    1.61    1    1    6.6    1.48 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   51    51    0.6    1.44    51    51    0.3    1.44 

U.S. Government sponsored agencies:

                

Average life of one year or less

   50    51    0.5    1.54    154    156    0.7    2.51 

Average life 1 – 5 years

   1,129    1,231    3.9    3.39    1,516    1,689    4.2    3.57 

Average life 5 – 10 years

   603    672    5.2    3.69    111    121    5.4    2.95 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   1,782    1,954    4.3    3.44    1,781    1,966    4.0    3.44 

Obligations of states and political subdivisions:(a)

                

Average life of one year or less

   121    121    0.1    3.94    1    1    0.2    8.05 

Average life 1 – 5 years

   53    53    2.9    0.11    91    91    3.0    1.40 

Average life 5 – 10 years

   34    38    8.5    5.92    111    117    6.7    4.56 

Average life greater than 10 years

   2    2    12.3    0.01    2    2    12.1    0.01 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   210    214    2.3    3.27    205    211    5.2    3.14 

Agency mortgage-backed securities:

                

Average life of one year or less

   500    517    0.7    4.80    564    581    0.7    5.01 

Average life 1 – 5 years

   8,520    8,975    3.5    3.91    7,080    7,484    3.2    4.08 

Average life 5 – 10 years

   798    849    7.4    3.90    1,163    1,214    5.7    3.12 

Average life greater than 10 years

   16    17    10.4    4.24 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   9,834    10,358    3.7    3.96    8,807    9,279    3.4    4.01 

Other bonds, notes and debentures:

                

Average life of one year or less

   209    216    0.5    5.33    208    213    0.4    5.06 

Average life 1 – 5 years

   1,366    1,393    3.2    2.61    1,616    1,658    3.5    2.38 

Average life 5 – 10 years

   649    662    6.6    2.49    432    449    6.0    3.06 

Average life greater than 10 years

   91    94    27.5    3.26    487    491    16.7    2.25 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

   2,315    2,365    4.9    2.85    2,743    2,811    6.0    2.67 

Other securities

   1,149    1,151        1,231    1,234     
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total available-for-sale and other securities

  $15,341    16,093    3.9    3.69  $14,818    15,552    4.0    3.64 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
(a)Taxable-equivalent yield adjustments included in the above table are 0.14%2.68%, 0.03%0.02%, 2.00%0.62%, 0.01% and 0.42%0.35% for securities with an average life of one year or less, 1-5 years, 5-10 years, greater than 10 years and in total, respectively.

Deposits

The Bancorp’s deposit balances represent an important source of funding and revenue growth opportunity. The Bancorp continues to focus on core deposit growth in its retail and commercial franchises by improving customer satisfaction, building full relationships and offering competitive rates. Core deposits represented 71%69% of the Bancorp’s asset funding base for all periods presented.at June 30, 2012 and 2011 and 71% at December 31, 2011.

TABLE 14:15: Deposits

 

  March 31, 2012   December 31, 2011   March 31, 2011   June 30, 2012   December 31, 2011   June 30, 2011 

($ in millions)

  Balance   % of
Total
   Balance   % of
Total
   Balance   % of
Total
   Balance   % of
Total
   Balance   % of
Total
   Balance   % of
Total
 

Demand

  $26,385    31    27,600    32    22,066    27   $26,251    31    27,600    32    22,589    28 

Interest checking

   23,971    28    20,392    24    18,597    23    23,197    28    20,392    24    18,072    22 

Savings

   22,245    26    21,756    25    21,697    26    22,011    26    21,756    25    21,764    27 

Money market

   4,275    5    4,989    6    5,184    6    4,223    5    4,989    6    4,859    6 

Foreign office

   1,251    1    3,250    4    3,569    4    1,265    1    3,250    4    3,271    4 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Transaction deposits

   78,127    91    77,987    91    71,113    86    76,947    91    77,987    91    70,555    87 

Other time

   4,446    5    4,638    5    7,043    9    4,261    5    4,638    5    6,399    8 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Core deposits

   82,573    96    82,625    96    78,156    95    81,208    96    82,625    96    76,954    95 

Certificates - $100,000 and over

   3,162    4    3,039    4    4,160    5 

Certificates-$100,000 and over

   3,065    4    3,039    4    3,642    5 

Other

   56    —       46    —       1    —       —       —       46    —       2    —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total deposits

  $85,791    100    85,710    100    82,317    100   $84,273    100    85,710    100    80,598    100 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Core deposits decreased $52 million$1.4 billion, or two percent, from December 31, 2011, driven by a decrease of $192$1.0 billion, or one percent, in transaction deposits and a decrease of $377 million, or foureight percent, in other time deposits. The decrease in transaction deposits is primarily due to a decrease in demand deposits, money market deposits, and foreign office deposits partially offset by an increase in interest checking deposits. Demand deposits decreased $1.3 billion, or five percent, due to seasonality as commercial customers opted to hold excess cash at December 31, 2011 and reinvest the cash during the first half of $1402012. Interest checking deposits increased $2.8 billion, or 14%, from December 31, 2011 partially driven by account migration from foreign office deposits which decreased $2.0 billion, or 61%, and money market deposits which decreased $766 million, in transaction deposits.or 15%, from December 31, 2011. The decrease in other time deposits from December 31,

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

2011 was primarily the result of continued run-off of certificates of deposits due to the low interest rate environment, as customers have opted to maintain balances in more liquid transaction accounts. The increase in transaction deposits was primarily the result of increases in interest checking deposits and savings deposits, partially offset by decreases in foreign office deposits and demand deposits. Interest checking deposits increased $3.6 billion, or 18%, from December 31, 2011 partially driven by account migration from foreign office deposits which decreased $2.0 billion, or 62%. The remaining increase in interest checking deposits was due to an increase in new accounts from the

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

preferred checking program introduced in February 2011 and an increase due to customers migrating from maturing certificates of deposits to interest checking deposits due to the low interest rate environment. Saving deposits increased $489 million, or two percent, from December 31, 2011 primarily due to growth from customers migrating from maturing certificates of deposits to saving deposits due to the low interest rate environment and the impact of the relationship savings program. Demand deposits decreased $1.2 billion, or four percent, due to seasonality as commercial customers opted to hold excess cash at December 31, 2011 and reinvest the cash during the first quarter of 2012.

Core deposits increased $4.4$4.3 billion, or six percent, from March 31,compared to June 30, 2011 driven by an increase of $7.0$6.4 billion, or 10%,nine percent, in transaction deposits, partially offset by a decrease of $2.6$2.1 billion, or 37%33%, in other time deposits. The increase in transaction deposits was primarily due to an increase in demandinterest checking deposits and interest checkingdemand deposits, partially offset by a decrease in foreign office deposits. Interest checking deposits increased $5.4$5.1 billion, or 29%28%, from March 31,June 30, 2011 partially driven by account migration from foreign office deposits which decreased $2.3$2.0 billion, or 65%61%, and money market deposits which decreased $636 million, or 13%. The remaining increase in interest checking deposits was due to growth from maturing certificates of deposits and an increase in new accountscontinued growth from the preferred checking program which was introduced in February of 2011. Demand deposits increased $4.3$3.7 billion, or 20%16%, from March 31,June 30, 2011 primarily due to an increase in new accounts, growth from maturing certificates of deposits, asand commercial customers are opting to hold money in demand deposit accounts rather than investing excess cash in demand deposits.given current market conditions. Other time deposits decreased $2.6 billion, or 37%, compared to March 31, 2011, primarily as a result of continued run-off of certificates of deposits due to the low interest rate environment, as customers have opted to maintain balances in more liquid transaction accounts.

The Bancorp uses certificates $100,000 and over, as a method to fund earning asset growth. At March 31,June 30, 2012, certificates $100,000 and over increased $123$26 million, or fourone percent, compared to December 31, 2011 and decreased $1.0 billion,$577 million, or 24%16%, from March 31,June 30, 2011. The increase from December 31, 2011 was due to an increase in new commercial customer deposits greater than $100,000 due to increased marketing efforts and the decrease from March 31,June 30, 2011 was due to continued run-off fromattributable to the low rate environment.

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

TABLE 15:16: Average Deposits

 

  March 31, 2012   December 31, 2011   March 31, 2011   June 30, 2012   December 31, 2011   June 30, 2011 

($ in millions)

  Balance   % of
Total
   Balance   % of
Total
   Balance   % of
Total
   Balance   % of
Total
   Balance   % of
Total
   Balance   % of
Total
 

Demand

  $26,063    31    26,069    31    21,582    27   $26,351    31    26,069    31    22,174    27 

Interest checking

   22,308    26    19,263    23    18,539    23    23,548    27    19,263    23    18,701    23 

Savings

   21,944    26    21,715    26    21,324    26    22,143    26    21,715    26    21,817    27 

Money market

   4,543    5    5,255    6    5,136    6    4,258    5    5,255    6    5,009    6 

Foreign office

   2,277    3    3,325    4    3,580    4    1,321    2    3,325    4    3,805    4 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Transaction deposits

   77,135    91    75,627    90    70,161    86    77,621    91    75,627    90    71,506    87 

Other time

   4,551    5    4,960    6    7,363    9    4,359    5    4,960    6    6,738    8 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Core deposits

   81,686    96    80,587    96    77,524    95    81,980    96    80,587    96    78,244    95 

Certificates - $100,000 and over

   3,178    4    3,085    4    4,226    5 

Certificates-$100,000 and over

   3,130    4    3,085    4    3,955    5 

Other

   19    —       16    —       1    —       23    —       16    —       2    —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

��

 

   

 

   

 

   

 

   

 

 

Total average deposits

  $84,883    100    83,688    100    81,751    100   $85,133    100    83,688    100    82,201    100 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

On an average basis, core deposits increased $1.1$1.4 billion, or onetwo percent, compared to December 31, 2011 due to an increase of $1.5$2.0 billion, or twothree percent, in average transaction deposits partially offset by a decrease of $409$601 million, or eight percent,12%, in other time deposits. The increase in average other timetransaction deposits was driven by an increase in average interest checking deposits partially offset by a decrease in average foreign office deposits and average money market deposits. Average interest checking deposits increased $3.0$4.3 billion, or 16%22%, from December 31, 2011 partially driven by the account migration from average foreign office deposits mentioned above which decreased $1.0$2.0 billion, or 32%60%, from December 31, 2011 and from average money market deposits which decreased $997 million, or 19%, from December 31, 2011. The remaining increase in average interest checking deposits was due to an increasecontinued growth in new accounts from the preferred checking program which was introduced in February of 2011 and growth from maturing certificates of deposits. The decrease of $409 million, or eight percent, in average other time deposits was primarily the result of continued run-off of certificates of deposits due to the low interest rate environment, as customers have opted to maintain balances in more liquid transaction accounts.

Average core deposits increased $4.2$3.7 billion, or five percent, from March 31,June 30, 2011 due to an increase of $7.0$6.1 billion, or 10%,nine percent, in average transaction deposits partially offset by a decrease of $2.8$2.4 billion, or 38%35%, in average other time deposits. The increase in average core deposits was due to the account migration froman increase in average demand deposits and average interest checking deposits partially offset by a decrease in foreign office deposits and money market deposits due to interest checking deposits and migrationthe reasons discussed above in the end of period year over year section. The decrease in average other time deposits into transaction accounts,was due to the impact of historically low interest rates and excess customer liquidity discussed above.

Other time deposits and certificates $100,000 and over totaled $7.6$7.3 billion, $7.7 billion, and $11.2$10.0 billion at March 31,June 30, 2012, December 31, 2011, and March 31,June 30, 2011, respectively. Substantially all of these deposits were interest bearing. The contractual maturities of these deposits as of March 31,June 30, 2012 are summarized in the following table.

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

 

 

TABLE 16:17: Contractual Maturities of Other Time Deposits and Certificates $100,000 and over

 

($ in millions)

  March 31, 2012   June 30, 2012 

Next 12 months

  $4,157   $3,785 

13-24 months

   2,047    2,199 

25-36 months

   784    852 

37-48 months

   352    213 

49-60 months

   215    224 

After 60 months

   53    53 
  

 

   

 

 

Total

  $7,608   $7,326 
  

 

   

 

 

Certificates $100,000 and over were $3.2$3.1 billion, $3.0 billion, and $4.2$3.6 billion at March 31,June 30, 2012, December 31, 2011, and March 31,June 30, 2011, respectively. The contractual maturities of these deposits as of March 31,June 30, 2012 are summarized in the following table.

TABLE 17:18: Contractual Maturities of Certificates - $100,000 and over

 

($ in millions)

  March 31, 2012   June 30, 2012 

Three months or less

  $654   $540 

After three months through six months

   290    575 

After six months through twelve months

   924 

After twelve months

   1,294 

After six months through 12 months

   563 

After 12 months

   1,387 
  

 

   

 

 

Total

  $3,162   $3,065 
  

 

   

 

 

Borrowings

Total borrowings decreased $423 million,increased $1.7 billion, or three13 percent, from both December 31, 2011 and increased $660 million, or five percent, compared to March 31,June 30, 2011. The decreaseincrease in total borrowings from December 31, 2011 was primarily due to a decrease in other short-term borrowings and the increase from March 31, 2011 was primarily due to an increase in other short-term borrowings and federal funds purchased and the increase from June 30, 2011 was primarily due to an increase in other short-term borrowings and federal funds purchased partially offset by a decrease in long-term debt. As of March 31,June 30, 2012, and December 31, 2011, total borrowings as a percentage of interest-bearing liabilities were 19%20% compared to 17%19% at Marchboth December 31, 2011 and June 30, 2011.

TABLE 18:19: Borrowings

 

($ in millions)

  March 31, 2012   December 31, 2011   March 31, 2011   June 30, 2012   December 31, 2011   June 30, 2011 

Federal funds purchased

  $319    346    332   $641    346    403 

Other short-term borrowings

   2,877    3,239    1,297    4,613    3,239    2,702 

Long-term debt

   9,648    9,682    10,555    9,685    9,682    10,152 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total borrowings

  $12,844    13,267    12,184   $14,939    13,267    13,257 
  

 

   

 

   

 

   

 

   

 

   

 

 

Other short-term borrowings decreased $362Federal funds purchased increased by $295 million, or 11%85%, from December 31, 2011 driven by a decreasean increase in excess balances in reserve accounts held at Federal Reserve Banks that the Bancorp purchased from other member banks on an overnight basis. Other short-term borrowings increased $1.4 billion, or 42%, from December 31, 2011 driven by an increase of $175 million$1.6 billion in short-term FHLB borrowings andpartially offset by a decrease of $169$293 million in securities sold under repurchase agreements which are accounted for as collateralized financing transactions.

Federal funds purchased increased by $238 million, or 59%, from June 30, 2011, driven by an increase in excess balances in reserve accounts held at Federal Reserve Banks that the Bancorp purchased from other member banks on an overnight basis. Other short-term borrowings increased $1.6$1.9 billion, or 122%71%, from March 31,June 30, 2011 driven by an increase of $1.3$1.9 billion in short-term FHLB borrowings, which replaced certificates of deposits greater than $100,000 as customers opted to maintain their balances in more liquid accounts. The increase in short-term FHLB borrowings was partially offset by the decline in demand deposits due to seasonality. Long-term debt decreased $907$467 million, or ninefive percent, from March 31,June 30, 2011 primarily due to the termination of $250$375 million of structured repurchase agreements classified as long-term debt, the redemption of $519 million of certain trust preferred securities, at par, classified as long-term debt and the decrease of $503 million in long-term FHLB advances, partially offset by the issuance of $500 million of senior notes by the Bancorp to third party investors in the first quarter of 2012. In addition the Bancorp redeemed $85 million of outstanding home equity securitization debt from the market in 2011, which was accounted for as an extinguishment of debt.

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

TABLE 19:20: Average Borrowings

 

($ in millions)

  March 31, 2012   December 31, 2011   March 31, 2011   June 30, 2012   December 31, 2011   June 30, 2011 

Federal funds purchased

  $370    348    310   $408    348    344 

Other short-term borrowings

   3,261    3,793    1,638    4,303    3,793    1,605 

Long-term debt

   9,768    9,707    10,255    9,669    9,707    10,527 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total average borrowings

  $13,399    13,848    12,203   $14,380    13,848    12,476 
  

 

   

 

   

 

   

 

   

 

   

 

 

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

Average total borrowings decreased $449increased $532 million, or threefour percent, compared to December 31, 2011, primarily due to the previously mentioned decreaseincrease in average other short-term borrowings, partially offset by an increase in average long-term debt.borrowings. Average total borrowings increased $1.2$1.9 billion, or 10%15%, compared to March 31,June 30, 2011, primarily due to the previously mentioned increase in average other short-term borrowings partially offset by a decrease in average long-term debt.

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

Information on the average rates paid on borrowings is discussed in the Net Interest Income section of the MD&A. In addition, refer to the Liquidity Risk Management section for a discussion on the role of borrowings in the Bancorp’s liquidity management.

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

 

 

BUSINESS SEGMENT REVIEW

The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors. Additional detailed financial information on each business segment is included in Note 1920 of the Notes to Condensed Consolidated Financial Statements. Results of the Bancorp’s business segments are presented based on its management structure and management accounting practices. The structure and accounting practices are specific to the Bancorp; therefore, the financial results of the Bancorp’s business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as management’s accounting practices are improved or businesses change.

The Bancorp manages interest rate risk centrally at the corporate level and employs a FTP methodology at the business segment level. This methodology insulates the business segments from interest rate volatility, enabling them to focus on serving customers through loan originations and deposit taking. The FTP system assigns charge rates and credit rates to classes of assets and liabilities, respectively, based on expected duration and the LIBORU.S. swap curve. Matching duration allocates interest income and interest expense to each segment so its resulting net interest income is insulated from interest rate risk. In a rising rate environment, the Bancorp benefits from the widening spread between deposit costs and wholesale funding costs. However, the Bancorp’s FTP system credits this benefit to deposit-providing businesses, such as Branch Banking and Investment Advisors, on a duration-adjusted basis. The net impact of the FTP methodology is captured in General Corporate and Other.

The Bancorp adjusts the FTP charge and credit rates as dictated by changes in interest rates for various interest-earning assets and liabilities and by the review of the estimated durations for the indeterminate-lived deposits. The credit rate provided for DDAs is reviewed annually based upon the account type, its estimated duration and the corresponding fed funds, LIBORU.S. swap curve or swap rate. The credit rates for several deposit products were reset January 1, 2012 to reflect the current market rates and updated duration assumptions. These rates were lower than those in place during 2011, thus net interest income for deposit providing businesses was negatively impacted for the three and six months ended March 31,June 30, 2012.

The business segments are charged provision expense based on the actual net charge-offs experienced by the loans owned by each segment. Provision expense attributable to loan growth and changes in factors in the ALLL are captured in General Corporate and Other. The financial results of the business segments include allocations for shared services and headquarters expenses. Even with these allocations, the financial results are not necessarily indicative of the business segments’ financial condition and results of operations as if they existed as independent entities. Additionally, the business segments form synergies by taking advantage of cross-sell opportunities and when funding operations, by accessing the capital markets as a collective unit. Net income (loss) by business segment is summarized in the following table.

TABLE 20:21: Business Segment Net Income Available to Common Shareholders

 

  For the three months
ended March 31,
   For the three months
ended June 30,
   For the six months
ended June 30,
 

($ in millions)

  2012   2011   2012   2011   2012   2011 

Income Statement Data

            

Commercial Banking

  $142    89   $163    88   $305    170 

Branch Banking

   29    18    50    54    79    73 

Consumer Lending

   48    (26   33    30    81    5 

Investment Advisors

   7    9    8    10    16    18 

General Corporate & Other

   204    175    131    155    335    336 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net income

   430    265    385    337    816    602 

Less: Net income attributable to noncontrolling interest

   —       —       —       —       1    —    
  

 

   

 

   

 

   

 

   

 

   

 

 

Net income attributable to Bancorp

   430    265    385    337    815    602 

Dividends on preferred stock

   9    177    9    9    18    185 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net income available to common shareholders

  $421    88   $376    328   $797    417 
  

 

   

 

   

 

   

 

   

 

   

 

 

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

 

 

Commercial Banking

Commercial Banking offers credit intermediation, cash management and financial services to large and middle-market businesses and government and professional customers. In addition to the traditional lending and depository offerings, Commercial Banking products and services include global cash management, foreign exchange and international trade finance, derivatives and capital markets services, asset-based lending, real estate finance, public finance, commercial leasing and syndicated finance. The following table contains selected financial data for the Commercial Banking segment.

TABLE 21:22: Commercial Banking

 

  For the three months
ended March 31,
   For the three months
ended June 30,
 For the six months
ended June 30,
 

($ in millions)

  2012   2011   2012   2011 2012   2011 

Income Statement Data

           

Net interest income (FTE)(a)

  $352    333   $352    339  $705    671 

Provision for loan and lease losses

   76    152    61    147   137    299 

Noninterest income:

           

Corporate banking revenue

   93    81    97    90   190    172 

Service charges on deposits

   54    50    54    52   109    101 

Other noninterest income

   30    44    26    21   55    65 

Noninterest expense:

           

Salaries, incentives and benefits

   74    58    65    60   137    117 

Other noninterest expense

   214    210    204    216   420    427 
  

 

   

 

   

 

   

 

  

 

   

 

 

Income before taxes

   165    88    199    79   365    166 

Applicable income tax expense (benefit)(a) (b)

   23    (1   36    (9  60    (4
  

 

   

 

   

 

   

 

  

 

   

 

 

Net income

  $142    89   $163    88  $305    170 
  

 

   

 

   

 

   

 

  

 

   

 

 

Average Balance Sheet Data

           

Commercial loans

  $40,362    38,022 

Commercial loans, including held for sale

  $41,388    38,049  $40,875    38,034 

Demand deposits

   14,843    11,981    14,478    12,075   14,660    12,028 

Interest checking

   8,370    8,300    7,728    7,959   8,049    8,129 

Savings and money market

   2,606    2,920    2,666    2,721   2,636    2,820 

Certificates over $100,000

   1,855    2,039    1,851    1,818   1,853    1,928 

Foreign office deposits

   1,379    1,934    1,290    1,841   1,334    1,888 

 

(a)Includes FTE adjustments of$4 for each of the three months endedMarch 31,June 30, 2012and 2011,$9 for the six months endedJune 30, 2012 and $8 for the six months ended June 30, 2011.
(b)Applicable income tax benefit for all periods includes the tax benefit from tax-exempt income and business tax credits, partially offset by the effect of certain nondeductible expenses. Refer to the Applicable Income Taxes section of MD&A for additional information.

Net income was $142$163 million for the three months ended March 31,June 30, 2012, compared to net income of $89$88 million for the three months ended March 31,June 30, 2011. The increase in net income was primarily driven by a decrease in the provision for loan and lease losses, lower noninterest expense, higher noninterest income and higher net interest income. For the six months ended June 30, 2012, net income was $305 million compared to $170 million for the same period of the prior year. The increase in net income was driven by a decrease in the provision for loan and lease losses, higher noninterest income and higher net interest income, partially offset by higher noninterest expense.

Net interest income increased $19$13 million and $34 million for the three and six months ended June 30, 2012, respectively, compared to the same periods of the prior year. The increases were driven primarily by growth in average commercial and industrial loans, and an increase in the FTP credits related to commercial deposits, partially offset by a decline in yields of 1214 bps and 30 bps, respectively, on average commercial loans.

Provision for loan and lease losses decreased $76 million.$86 million and $162 million for the three and six months ended June 30, 2012 compared to the same periods of the prior year as a result of improved credit trends. Net charge-offs as a percent of average loans and leases decreased to 7559 bps for 2012 compared to 162 bps for 2011 largely due to a decrease in net charge-offs on commercial and industrial and commercial mortgage loans and the improvement in credit trends across all commercial loan types.

Noninterest income was relatively flat for the three months ended March 31,June 30, 2012 compared to 155 bps for the same period of the prior year and decreased to 67 bps for the six months ended June 30, 2012 compared to 159 bps for the same period of the prior year.

Noninterest income increased $14 million in the second quarter of 2012 compared to the second quarter of 2011, primarily due to an increase in corporate banking revenue and an increase in other noninterest income. The increase in corporate banking revenue is primarily due to increases in business lending fees, which were driven by refinancing activities in the current market environment. The increase in other noninterest income was primarily driven by a decrease in losses recognized on the sale of OREO. For the six months ended June 30, 2012, noninterest income increased $16 million compared to the same period in 2011, as increasesof the prior year due to an increase in corporate banking revenue wereand service charges on deposits partially offset by a decrease in other noninterest income. The increase in corporate banking revenue is primarilyfor the six months ended June 30, 2012, was due to an $8 million increase in syndication fees and a $6 million increase in business lending fees. The increase in syndication fees and business lending fees was driven by refinancing activities in the current market environment. The decrease in other noninterest income was primarily driven by an increasea decrease in lossesgains recognized on the sale of OREO and loans.loans, partially offset by an increase in corporate overhead allocations.

Noninterest expense decreased $7 million and increased $20$13 million for the three and six months ended June 30, 2012 compared to the same periods of the prior year. The decrease for the three months ended March 31, 2011 asJune 30, 2012 was driven by a resultdecrease in other noninterest expense,

Management’s Discussion and Analysis of increases in salaries, incentivesFinancial Condition and benefits. TheResults of Operations (continued)

partially offset by an increase in salaries, incentives and benefits of $16$5 million compared to the same period of the prior year. The increase for the six months ended June 30, 2012 was primarily the resultdriven by an increase in salaries, incentives and benefits of increased incentive compensation due to improved production levels. FDIC insurance expense, which is recorded$20 million, partially offset by a decrease in other noninterest expense increased $2 million due to a change in the methodology in determining FDIC insurance premiums to one based on total assets less tangible equity as opposedcompared to the previous method that was based on domestic deposits.same period of the prior year. Both the three and six months ended June 30, 2012 included an $8 million benefit from the sale of affordable housing investments in other noninterest expense.

Average commercial loans increased $2.3$3.3 billion and $2.8 billion for the three and six months ended June 30, 2012 compared to the same periods of the prior year primarily due to an increase in average commercial and industrial loans which increased $4.0 billion as a result of an increase in new loan origination activity.loans. The increase in commercial and industrial loans was partially offset by decreases in average commercial construction and mortgage loans. Average commercial and industrial loans increased $4.9 billion and $4.5 billion, respectively, for the three and six months ended June 30, 2012 compared to the same periods of the prior year as a result of an increase in new loan origination activity. Average commercial mortgage loans decreased $752$649 million due to tighter underwriting standards implemented in prior quarters in an effort to limit exposure to commercial real estate. Averageand $699 million, respectively, for the three and six months ended June 30, 2012 and average commercial construction loans decreased $959$955 million and $957 million, respectively, for the three and six months ended June 30, 2012 compared to the same periods of the prior year, due to continued run-off fromin these loan categories. The run-off reflects weak customer demand and previous suspensions of new homebuilder and developer lending and non-owner occupied real estate lending.

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

Average core deposits increased $2.1$1.6 billion for the three months ended June 30, 2012 compared to the three months ended June 30, 2011, and $1.8 billion for the six months ended June 30, 2012 compared to the same period of 2011. The increase was primarily driven by strong growth in DDAs,demand deposit accounts, which increased $2.9$2.4 billion and $2.6 billion, respectively, for the three and six months ended June 30, 2012 compared to the same periods of the prior year. The increase in DDAs was partially offset by decreases in interest bearing deposits of $808$842 million and $825 million, respectively, for the three and six months ended June 30, 2012 compared to the same periods of the prior year, as customers opted to maintain their balances in more liquid accounts due to interest rates remaining near historical lows.

Branch Banking

Branch Banking provides a full range of deposit and loan and lease products to individuals and small businesses through 1,3151,322 full-service Banking Centers. Branch Banking offers depository and loan products, such as checking and savings accounts, home equity loans and lines of credit, credit cards and loans for automobiles and other personal financing needs, as well as products designed to meet the specific needs of small businesses, including cash management services. The following table contains selected financial data for the Branch Banking segment.

TABLE 22:23: Branch Banking

 

  For the three months 
  ended March 31,   For the three months
ended June 30,
   For the six months
ended June 30,
 

($ in millions)

  2012   2011   2012   2011   2012   2011 

Income Statement Data

            

Net interest income

  $335    339   $342    359   $677    698 

Provision for loan and lease losses

   86    116    69    98    155    214 

Noninterest income:

            

Service charges on deposits

   74    73    75    73    149    147 

Card and processing revenue

   60    77    70    86    130    163 

Investment advisory revenue

   31    28    32    29    64    58 

Other noninterest income

   25    26    28    25    52    49 

Noninterest expense:

            

Salaries, incentives and benefits

   149    148    143    148    293    297 

Net occupancy and equipment expense

   60    59    60    59    119    117 

Card and processing expense

   28    28    29    28    57    55 

Other noninterest expense

   157    165    169    156    326    321 
  

 

   

 

   

 

   

 

   

 

   

 

 

Income before taxes

   45    27    77    83    122    111 

Applicable income tax expense

   16    9    27    29    43    38 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net income

  $29    18   $50    54   $79    73 
  

 

   

 

   

 

   

 

   

 

   

 

 

Average Balance Sheet Data

            

Consumer loans

  $14,815    13,804   $14,871    13,912   $14,843    13,858 

Commercial loans

   4,611    4,569    4,598    4,651    4,605    4,610 

Demand deposits

   9,297    7,882    9,798    8,329    9,457    8,107 

Interest checking

   9,087    7,548    9,499    8,061    9,293    7,806 

Savings and money market

   22,654    21,786    22,928    22,349    22,791    22,069 

Other time and certificates - $100,000 and over

   5,668    9,073 

Other time and certificates-$100,000 and over

   5,454    8,387    5,561    8,727 

Net income increased $11was $50 million compared tofor the three months ended March 31, 2011,June 30, 2012, compared to net income of $54 million for the three months ended June 30, 2011. The decrease was driven by a decrease in net interest income and noninterest income and an increase in noninterest expense, partially offset by a decline in the provision for loan and lease losses. For the six months ended June 30, 2012, net income was $79 million compared to $73 million for the same period of the prior year. The increase was driven by a decline in the provision for loan and lease losses, and a declinepartially offset by an increase in noninterest expense partially offset byand a decrease in net interest income and noninterest income.

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

Net interest income decreased $4$17 million and $21 million, respectively, for the three and six months ended June 30, 2012 compared to the same periods of the prior year. The primary drivers of the decline includedeclines are decreases in the FTP credits for DDAschecking and lower yields on average commercial and consumer loans.savings products. These decreases wereare partially offset by a favorable shiftshifts from certificates of deposit to lower cost transaction and savings products in conjunction with deposit rate cuts, resulting in a decline in interest expense on core deposits, of $35 million compared to 2011 and an increase in average consumer loans.higher loan interest income driven by higher loan balances.

Provision for loan and lease losses for the three months ended March 31,June 30, 2012 decreased $30$29 million compared to the comparablesecond quarter of 2011, and declined $59 million for the six months ended June 30, 2012 compared to the same period of the prior year period. The decline in the provision was theas a result of improved credit trends across all consumer and commercial loan types.trends. Net charge-offs as a percent of average loans and leases decreased to 179143 bps for the three months ended March 31,June 30, 2012 compared to 256212 bps for three months ended March 31, 2011.June 30, 2011 and decreased to 160 bps for the six months ended June 30, 2012 compared to 234 bps for the same period of the prior year. The decrease isdecreases are the result of improved credit trends and tighter underwriting standards.

Noninterest income decreased $14$8 million and $22 million, respectively, for the three and six months ended June 30, 2012 compared to the same periods of the prior year. The decrease wasThese declines were primarily driven by lower card and processing revenue, which declined $17$16 million and $33 million, respectively, primarily due to the implementation of the Dodd-Frank Act’s debit card interchange fee cap in the fourth quarter of 2011, partially offset by higher debit and credit card transaction volumes andfrom the impact of the Bancorp’s initial mitigation activity. The decrease wasactivity and allocated commission revenue associated with merchant sales. These declines were partially offset by investment advisory revenue which increased $3 million and $6 million for the three and six months ended June 30, 2012 compared to the same periods of 2011, due to improved market performance.

Noninterest expense decreased $6increased $10 million and $5 million, respectively, from the three and six months ended March 31,June 30, 2011, primarily driven by decreasesincreases in other noninterest expense, which declined $8increased $13 million and $5 million, respectively. The increase for the three months ended June 30, 2012 was primarily due to increases in corporate overhead allocations. The increase for the six months ended June 30, 2012 was primarily due to increases in corporate overhead allocations, partially offset by a decrease in FDIC insurance expense. The increases in other noninterest expense resulting from the previously mentioned change in methodology used to determine FDIC insurance premiums,were partially offset by higher corporate overhead allocations.

Management’s Discussiondecreases in salaries, incentives and Analysisbenefits of Financial Condition$5 million and Results$4 million for the three and six months ended June 30, 2012 compared to the same periods of Operations (continued)

the prior year.

Average consumer loans increased $1.0 billion$959 million for the second quarter of 2012 and $985 million for the six months ended June 30, 2012 compared to the same periods in 2012the prior year. These increases were primarily due to increases in average residential mortgage loans of $1.4 billion for both the three and six months ended June 30, 2012 compared to the same periods in the prior year due to the retention of certain portions ofshorter-term originated mortgage loans rather than selling them in the secondary market. The increaseincreases in average residential mortgage loans waswere partially offset by a decreasedecreases in average home equity loans of $507$528 million due to decreased customer demand and continued tighter underwriting standards. Average commercial loans were flat$518 million, respectively, for the three and six months ended June 30, 2012 compared to March 31, 2011.the same periods of the prior year as payoffs exceeded new loan production.

Average core deposits increased by $1.2 billion and $1.1 billion for the three and six months ended June 30, 2012 compared to the same periods in the prior year as the growth in transaction accounts due to excess customer liquidity and historically low interest rates slightly outpaced the run-off of higher priced certificates of deposit.other time deposits.

Consumer Lending

Consumer Lending includes the Bancorp’s mortgage, home equity, automobile and other indirect lending activities. Mortgage and home equity lending activities include the origination, retention and servicing of mortgage and home equity loans or lines of credit, sales and securitizations of those loans, pools of loans or lines of credit, and all associated hedging activities. Indirect lending activities include extending loans to consumers through mortgage brokers and automobile dealers. The following table contains selected financial data for the Consumer Lending segment.

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

TABLE 23:24: Consumer Lending

 

  For the three months 
  ended March 31,   For the three months
ended June 30,
   For the six months
ended June 30,
 

($ in millions)

  2012   2011   2012   2011   2012   2011 

Income Statement Data

            

Net interest income

  $80    90   $77    81   $157    171 

Provision for loan and lease losses

   54    94    49    55    103    149 

Noninterest income:

            

Mortgage banking net revenue

   201    99    179    160    380    259 

Other noninterest income

   10    15    10    7    20    22 

Noninterest expense:

            

Salaries, incentives and benefits

   56    44    56    39    112    83 

Other noninterest expense

   106    106    110    108    217    213 
  

 

   

 

   

 

   

 

   

 

   

 

 

Income (loss) before taxes

   75    (40

Applicable income tax expense (benefit)

   27    (14

Income before taxes

   51    46    125    7 

Applicable income tax expense

   18    16    44    2 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net income (loss)

  $48    (26

Net income

  $33    30   $81    5 
  

 

   

 

   

 

   

 

   

 

   

 

 

Average Balance Sheet Data

            

Residential mortgage loans

  $10,009    9,273   $9,898    8,906   $9,953    9,088 

Home equity

   672    773    651    740    662    756 

Automobile loans

   11,211    10,384    11,097    10,510    11,154    10,447 

Consumer leases

   61    246    41    181    51    213 

Net income was $48$33 million and $81 million for the three and six months ended March 31,June 30, 2012 compared to a net lossincome of $26$30 million and $5 million, respectively, for the three months ended March 31, 2011. The increasesame periods in the prior year. For both comparative periods, the increases in net income waswere driven by an increase in noninterest income and a decline in the provision for loan and lease losses, partially offset by decreasesa decrease in net interest income and an increase in noninterest expense.

Net interest income decreased $10$4 million duefor the three months ended June 30, 2012 compared to the three months ended June 30, 2011 and decreased $14 million for the six months ended June 30, 2012 compared to the six months ended June 30, 2011. These decreases were primarily driven by lower yields on average automobile loans due to continued competition on new originations, partially offset by increases in average loan balances for residential mortgage and automobile loans.

Provision for loan and lease losses decreased $40$6 million and $46 million, respectively, for the three and six months ended March 31,June 30, 2012, compared to the same periods of the prior year, as delinquency metrics and underlying loss trends improved across all consumer loan types. Net charge-offs as a percent of average loans and leases decreased to 10899 bps for the current quarterthree months ended June 30, 2012 compared to 200113 bps for the comparablesame period of the prior year quarter.and decreased to 103 bps for the six months ended June 30, 2012 compared to 156 bps for the same period of the prior year.

Noninterest income increased $97$22 million for the three months ended June 30, 2012 and increased $119 million for the six months ended June 30, 2012 compared to the same periods of the prior year. The increase from both periods in the prior year was primarily due to increases in mortgage banking net revenue which increased $102 million. Theof $19 million and $121 million for the three and six months ended June 30, 2012, respectively. These increases for the three and six months ended June 30, 2012 were driven by an increase in mortgage banking net revenue was driven by increased residential mortgage origination activity due to mortgage rates dropping to historical lows during the three months ended March 31, 2012. Additionally, the increase was driven by gains on loan sales of $112$117 million and $229 million due to an increase in profit margins on sold residential mortgage loans coupled with higher origination volumes, partially offset by an increasea decrease in MSR amortization expense of $18 million. Netnet residential mortgage servicing revenue increased dueof $98 million and $108 million for the three and six months ended June 30, 2012 compared to an increase in the sizesame periods of the Bancorp’s servicing portfolio.prior year.

Noninterest expense increased $12$19 million and $33 million, respectively, for the three and six months ended June 30, 2012 compared to the three months ended March 31, 2011 due tosame periods of the increase inprior year. For both periods, the increases were driven by salaries, incentives and benefits which increased primarily as a result of higher mortgage loan originations in the current quarter than the same quarter in the prior year.originations.

Average consumer loans and leases increased $1.3 billion for both the three and six months ended June 30, 2012 compared to the same periods of the prior year. Average automobile loans increased $587 million and $707 million, respectively, compared to the three and six months ended March 31, 2011. Average automobile loans increased $827 millionJune 30, 2012 due to a strategic focus to increase automobile lending throughout 2011 and for the three months ended March 31, 2012 through consistent and competitive pricing, disciplined sales execution, and enhanced customer service with our dealership network. Average residential mortgage loans increased $736$992 million as a resultand $865 million, respectively, for the three and six months ended June 30, 2012, compared to the same periods of the higher origination volumes discussed previously.prior year, due to the low interest rate environment. The increases were partially offset by decreases in home equity and consumer leases. Average home equity loans decreased $101$89 million and $94 million, respectively, for the three and six months ended June 30, 2012 compared to the same periods in the prior year due to continued run-off in the discontinued brokered home equity product. Average consumer leases decreased $185$140 million and $162 million, respectively, for the three and six months ended June 30, 2012 compared to the same periods in the prior year due to run-off as the Bancorp discontinued this product in the fourth quarter of 2008.

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

 

 

Investment Advisors

Investment Advisors provides a full range of investment alternatives for individuals, companies and not-for-profit organizations. Investment Advisors is made up of four main businesses: FTS, an indirect wholly-owned subsidiary of the Bancorp; FTAM, an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker dealer services to the institutional marketplace. FTAM provides asset management services and also advises the Bancorp’s proprietary family of mutual funds. Fifth Third Private Bank offers holistic strategies to affluent clients in wealth planning, investing, insurance and wealth protection. Fifth Third Institutional Services provideprovides advisory services for institutional clients including states and municipalities. The following tableTable 25 contains selected financial data for the Investment Advisors segment.

As previously mentioned, the Bancorp entered into two separate agreements in April of 2012, to sell certain assets relating to the management of Fifth Third money market funds and 16 mutual funds from FTAM. The transactions are expected to be completed in the third quarter of 2012. The transactions will reduce the money market assets managed by Fifth Third by approximately $5 billion and will create a new sub-advisory relationship with FTAM and the third-party. The transactions are not expected to have a material impact on the Bancorp’s results.

TABLE 24:25: Investment Advisors

 

  For the three months
ended March 31,
   For the three months
ended June 30,
   For the six months
ended June 30,
 

($ in millions)

  2012   2011   2012   2011   2012   2011 

Income Statement Data

            

Net interest income

  $27    28   $29    28   $57    56 

Provision for loan and lease losses

   3    5    2    4    6    9 

Noninterest income:

            

Investment advisory revenue

   94    95    91    92    185    187 

Other noninterest income

   3    3    7    3    11    6 

Noninterest expense:

            

Salaries, incentives and benefits

   44    43    41    42    84    85 

Other noninterest expense

   66    64    71    62    138    127 
  

 

   

 

   

 

   

 

   

 

   

 

 

Income before taxes

   11    14    13    15    25    28 

Applicable income tax expense

   4    5    5    5    9    10 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net income

  $7    9   $8    10   $16    18 
  

 

   

 

   

 

   

 

   

 

   

 

 

Average Balance Sheet Data

            

Loans and leases

  $1,911    2,130   $1,898    2,063   $1,905    2,096 

Core deposits

   7,370    6,455    7,495    6,746    7,432    6,601 

Net income decreased $2was $8 million and $16 million for the three and six months ended June 30, 2012 compared to net income of $10 million and $18 million, respectively, for the three months ended March 31, 2011 primarily due to a declinesame periods in the prior year. For both comparative periods, the decreases in net interest income andwere driven by an increase in noninterest expense, partially offset by an increase in noninterest income and a decrease in the provision for loan and lease losses.

Net interest income decreasedincreased $1 million fromfor both the first quarterthree and six months ended June 30, 2012 compared to the same periods of 2011the prior year due to a decrease in interest expense on core deposits, partially offset by a decline in average loan and lease balances as well as declines in yields on loans and leases.

Provision for loan and leases losses decreased $2 million fromand $3 million, respectively, for the three and six months ended March 31, 2011.June 30, 2012 compared to the same periods of the prior year as a result of improved credit trends across all loan types. Net charge-offs as a percent of average loans and leases decreased to 7354 bps for the three months ended March 31,June 30, 2012 compared to 9486 bps for the threesame period of the prior year and decreased to 64 bps for the six months ended March 31, 2011 reflecting moderationJune 30, 2012 compared to 90 bps for the same period of general economic conditions during 2011 and the first quarter of 2012.prior year.

Noninterest income was relatively flatincreased $3 million for both the three and six months ended June 30, 2012 compared to the three months ended March 31, 2011same periods of the prior year, primarily driven by a gain on the sale of loans held for sale, partially offset by lower mutual fund fees offset by increasedand private client services revenue, which reflected an overall increase in market performance.revenue.

Noninterest expense increased $3$8 million and $10 million, respectively, for the three and six months ended June 30, 2012 compared to the three months ended March 31, 2011 due to a $2 million increase in other noninterest expense. The increase is due to an increasesame periods of $5 millionthe prior year, primarily driven by increases in corporate overhead allocations partially offset by decreased FDIC insurance expense of $2 million.$5 million and $10 million for the three and six months ended June 30, 2012.

Average loans and leases decreased $219$165 million and $191 million, respectively, for the three and six months ended June 30, 2012, compared to the three months ended March 31, 2011. The decrease wassame periods of the prior year. These decreases were primarily driven by declines in home equity loans of $152$85 million and $118 million, respectively, for the three and six months ended June 30, 2012 due to tighter underwriting standards. Average core deposits increased $915$749 million, or 11%, and $831 million, or 13%, respectively, for the three and six months ended June 30, 2012 compared to the three months ended March 31, 2011same periods of the prior year due to growth in interest checking as customers have opted to maintain excess funds in liquid transaction accounts as a result of interest rates remaining near historic lows.lows, partially offset by account migration from foreign office deposits.

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

General Corporate and Other

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

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

Results for the three months and six months ended March 31,June 30, 2012 and 2011 were impacted by a benefit of $128$110 million and $199$239 million, respectively, due to reductions in the ALLL. The decrease in provision expense for both periods was due to a decrease in nonperforming assets and improvement in delinquency metrics and underlying loss trends. The change in net income compared to the prior year was impacted by a $115 million benefit related to the initial public offering of Vantiv, Inc., partially offset by $24 million in losses related to the equity method income recorded from the Bancorp’s ownership interest in Vantiv Holding, LLC. The $24 million of losses is comprised of $34 million in charges related to Vantiv Holding, LLC’s bank debt refinancing and debt termination charges partially offset by $10 million in the first quarter equity method income earnings for Vantiv Holding, LLC. The results for the three months ended March 31, 2012 were impacted byALLL, dividends on preferred stock of $9 million compared to $177and $18 million, respectively, and net interest income of $99 million and $206 million, respectively. Second quarter 2012 noninterest income results included $56 million in positive valuation adjustments on the comparable prior year period. InVantiv warrant, $17 million in negative value adjustments associated with bank premises held-for-sale, and a $11 million reduction in other noninterest income related to the prior year,valuation of a total return swap entered into as part of the 2009 sale of Visa, Inc. Class B shares. For the three and six months ended June 30, 2011, results were impacted by a benefit of $191 million and $390 million, respectively, due to reductions in the ALLL, dividends on preferred stock included $153of $9 million and $185 million, respectively, and net interest income of $62 million and $156 million, respectively. For the three and six months ended June 30, 2012 and 2011, benefits to provision expense resulting from reductions in accretion on the remaining issuance discount on the Series F preferred stockALLL were driven by general improvements in connection with its redemption on February 2, 2011.credit quality and declines in net-charge-offs.

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

 

 

RISK MANAGEMENT – OVERVIEW

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

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

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

Risk appetite is the aggregate amount of risk the Bancorp is willing to accept in pursuit of its strategic and financial objectives. By establishing boundaries around risk taking and business decisions, and by incorporating the needs and goals of its shareholders, regulators, rating agencies and customers, the Bancorp’s risk appetite is aligned with its priorities and goals. Risk tolerance is the maximum amount of risk applicable to each of the eight specific risk categories included in its Enterprise Risk Management Framework. This is expressed primarily in qualitative terms. The Bancorp’s risk appetite and risk tolerances are supported by risk targets and risk limits. Those limits are used to monitor the amount of risk assumed at a granular level.

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

Risk management oversight and governance is provided by the Risk and Compliance Committee of the Board of Directors and through multiple management committees whose membership includes a broad cross-section of line-of-business, affiliate and support

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

 

 

representatives. The Risk and Compliance Committee of the Board of Directors consists of five outside directors and has the responsibility for the oversight of risk management for the Bancorp, as well as for the Bancorp’s overall aggregate risk profile. The Risk and Compliance Committee of the Board of Directors has approved the formation of key management governance committees that are responsible for evaluating risks and controls. The primary committee responsible for the oversight of risk management is the ERMC. Committees accountable to the ERMC, which support the core risk programs, are the Corporate Credit Committee, the Operational Risk Committee, the Management Compliance Committee, the Asset/Liability Committee and the Enterprise Marketing Committee. Other committees accountable to the ERMC oversee the ALLL, capital and community reinvestment act/fair lending functions. There are also new products and initiatives processes applicable to every line of business to ensure an appropriate standard readiness assessment is performed before launching a new product or initiative. Significant risk policies approved by the management governance committees are also reviewed and approved by the Risk and Compliance Committee of the Board of Directors.

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

CREDIT RISK MANAGEMENT

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

TABLE 25:26: Potential Problem Loans

 

As of March 31, 2012 ($ in millions)

  Carrying
Value
   Unpaid
Principal
Balance
   Exposure 

As of June 30, 2012 ($ in millions)

  Carrying
Value
   Unpaid
Principal
Balance
   Exposure 

Commercial and industrial

  $1,390    1,391    1,739   $1,152    1,154    1,394 

Commercial mortgage

   1,143    1,143    1,145    1,039    1,039    1,042 

Commercial construction

   163    163    183    133    133    157 

Commercial leases

   47    47    47    18    18    18 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $2,743    2,744    3,114   $2,342    2,344    2,611 
  

 

   

 

   

 

   

 

   

 

   

 

 

TABLE 26:27: Potential Problem Loans

 

As of December 31, 2011 ($ in millions)

  Carrying
Value
   Unpaid
Principal
Balance
   Exposure 

Commercial and industrial

  $1,376    1,376    1,744 

Commercial mortgage

   1,215    1,216    1,223 

Commercial construction

   239    240    258 

Commercial leases

   33    33    33 
  

 

 

   

 

 

   

 

 

 

Total

  $2,863    2,865    3,258 
  

 

 

   

 

 

   

 

 

 

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

 

 

TABLE 27:28: Potential Problem Loans

 

As of March 31, 2011 ($ in millions)

  Carrying
Value
   Unpaid
Principal
Balance
   Exposure 

As of June 30, 2011 ($ in millions)

  Carrying
Value
   Unpaid
Principal
Balance
   Exposure 

Commercial and industrial

  $1,835    1,836    1,852   $1,500    1,501    1,891 

Commercial mortgage

   1,460    1,462    1,463    1,396    1,398    1,402 

Commercial construction

   322    322    322    322    323    361 

Commercial leases

   30    30    30    78    78    78 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $3,647    3,650    3,667   $3,296    3,300    3,732 
  

 

   

 

   

 

   

 

   

 

   

 

 

In addition to the individual review of larger commercial loans that exhibit probable or observed credit weaknesses, the commercial credit review process includes the use of two risk grading systems. The risk grading system currently utilized for reserve analysis purposes encompasses ten categories. The Bancorp also maintains a dual risk rating system for credit approval and pricing, portfolio monitoring and capital allocation that providesincludes a “through-the-cycle” rating philosophy for modeling expected losses. The dual risk rating system includes thirteen probabilities of default grade categories and an additional six grade categories for estimating losses given an event of default. The probability of default and loss given default evaluations are not separated in the ten-gradeten-category risk rating system. The Bancorp has completed significant validation and testing of the dual risk rating system as a commercial credit risk management tool. The Bancorp is assessing the necessary modifications to the dual risk rating system outputs to develop a GAAP compliant ALLL model and will make a decision on the implementationuse of themodified dual risk rating modelratings for purposes of determining the Bancorp’s ALLL once the FASB has issued a final standard regarding previously proposed methodology changes to the determination of credit impairment as outlined in the “Accounting for Financial Instruments and Revisions to the Accounting for Derivative Instruments and Hedging ActivitiesActivities” Exposure Draft and Supplementary Document dated May 2010 and January 2011, respectively. Scoring systems, various analytical tools and delinquency monitoring are used to assess the credit risk in the Bancorp’s homogenous consumer and small business loan portfolios.

Overview

The economy maintained a moderate recovery throughout 2011 and the first quarterhalf of 2012. Geographically, the Bancorp continues to experience the most stress in Michigan and Florida due to the decline in real estate values. Real estate value deterioration, as measured by the Home Price Index, was most prevalent in Florida due to past real estate price appreciation and related over-development, and in Michigan due in part to cutbacks in automobile manufacturing and the state’s economic downturn. Among commercial portfolios, the homebuilder, residential developer and portions of the remaining non-owner occupied commercial real estate portfolios continue to remain under stress.

Among consumer portfolios, residential mortgage and brokered home equity portfolios exhibited the most stress. Management suspended homebuilder and developer lending in the fourth quarter of 2007 and new commercial non-owner occupied real estate lending in the second quarter of 2008, discontinued the origination of brokered home equity products at the end of 2007 and tightened underwriting standards across both the commercial and consumer loan product offerings. Since the fourth quarter of 2008, in an effort to reduce loan exposure to the real estate and construction industries, the Bancorp has sold certain consumer loans and sold or transferred to held for sale certain commercial loans. TheThroughout 2011 and 2012, the Bancorp has continued to aggressively engage in other loss mitigation strategies such as reducing credit commitments, restructuring certain commercial and consumer loans, actively managingtightening underwriting standards on commercial loans and across the consumer loan portfolio, as well as utilizing expanded commercial and consumer loan workout teams. For commercial and consumer loans owned by the Bancorp, loan modification strategies are developed that are workable for both the borrower and the Bancorp when the borrower displays a willingness to cooperate. These strategies typically involve either a reduction of the stated interest rate of the loan, an extension of the loan’s maturity date(s) with a stated rate lower than the current market rate for a new loan with similar risk, or in limited circumstances, a reduction of the principal balance of the loan or the loan’s accrued interest. For residential mortgage loans serviced for FHLMC and FNMA, the Bancorp participates in the HAMP and HARP 2.0 programs. For loans refinanced under the HARP 2.0 program, the Bancorp strictly adheres to the underwriting requirements of the program and promptly sells the refinanced loan back to the agencies. Loan restructuring under the HAMP program is performed on behalf of FHLMC or FNMA and the Bancorp does not take possession of these loans during the modification process. Therefore, participation in these programs does not significantly impact the Bancorp’s credit quality statistics. The Bancorp participates in trial modifications in conjunction with the HAMP program for loans it services for FHLMC and FNMA. As these trial modifications relate to loans serviced for others, they are not included in the Bancorp’s troubled debt restructurings as they are not assets of the Bancorp. In the event there is a representation and warranty violation on loans sold through the programs, the Bancorp may be required to repurchase the sold loan. As of June 30, 2012, repurchased loans restructured or refinanced under these programs were immaterial to the Bancorp’s Condensed Consolidated Financial Statements. Additionally, as of June 30, 2012, $526 million of loans refinanced under HARP 2.0 were included in loans held for sale in the Bancorp’s Condensed Consolidated Balance Sheets. For the three and six months ended June 30, 2012, the Bancorp recognized $49 million and $89 million of fee income in mortgage banking net revenue in the Bancorp’s Condensed Consolidated Statements of Income related to the sale of loans restructured or refinanced under the HAMP and HARP 2.0 programs.

In the financial services industry, there has been heightened focus on foreclosure activity and processes. Fifth ThirdThe Bancorp actively works with borrowers experiencing difficulties and has regularly modified or provided forbearance to borrowers where a workable solution could be

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

found. Foreclosure is a last resort, and the Bancorp undertakes foreclosures only when it believes they are necessary and appropriate and are careful to ensure that customer and loan data are accurate. Reviews of the Bancorp’s foreclosure process and procedures conducted in 2010 did not reveal any material deficiencies. These reviews were expanded and extended in 2011 to improve our processes as additional aspects of the industry’s foreclosure practices have come under intensified scrutiny and criticism. These reviews are complete and the Bancorp may determine to amendhas enhanced some of its processes and procedures as a result of these reviews. While any impact to the Bancorpaddress some concerns that ultimately results from continued reviews cannot yet be determined, management currently believes that such impact will not materially adversely affect the Bancorp’s results of operations, liquidity or capital resources. Additionally, banking regulatory agencieswere raised and other federal andto comply with changes in state governmental authorities have continued to review the foreclosure process of mortgage servicers such as Fifth Third beyond the initial examinations of the largest mortgage servicers they conducted over the past 18 months. These ongoing reviews and issues have been settled with the largest mortgage servicers, the state attorney generals and various regulators. We are reviewing the settlements in conjunction with Fifth Third’s business process and continue to monitor the situation as it evolves.laws.

Commercial Portfolio

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

The risk within the commercial loan and lease portfolio is managed and monitored through an underwriting process utilizing detailed origination policies, continuous loan level reviews, monitoring of industry concentration and product type limits and continuous portfolio risk management reporting. The origination policies for commercial real estate outline the risks and underwriting requirements for owner and non-owner occupied and construction lending. Included in the policies are maturity and amortization terms, maximum LTVs, minimum debt service coverage ratios, construction loan monitoring procedures, appraisal requirements, pre-leasing requirements (as applicable) and sensitivity and pro-forma analysis requirements. The Bancorp requires a valuation of real estate collateral, which may include third-party appraisals, be performed at the time of origination and renewal in accordance with regulatory requirements and on an as needed basis when market conditions justify. Although the Bancorp does not back test these collateral value assumptions, the Bancorp maintains an appraisal review department to order and review third-party appraisals in accordance with regulatory requirements. Collateral values on criticized

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

assets with relationships exceeding $1 million are reviewed quarterly to assess the appropriateness of the value ascribed in the assessment of charge-offs and specific reserves. In addition, the Bancorp applies incremental valuation haircuts to older appraisals that relate to collateral dependent loans, which can currently be up to 25-40% of the appraised value based on the type of collateral. These incremental valuation haircuts generally reflect the age of the most recent appraisal as well as collateral type. Trends in collateral values, such as home price indices and recent asset dispositions, are monitored in order to determine whether adjustments to the appraisal haircuts are warranted. Other factors such as local market conditions or location may also be considered as necessary.

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

TABLE 28:29: Commercial Mortgage Loans Outstanding by LTV, Loans Greater Than $1 Million

 

As of March 31, 2012 ($ in millions)

  LTV > 100%   LTV 80-100%   LTV < 80% 

As of June 30, 2012 ($ in millions)

  LTV > 100%   LTV 80-100%   LTV < 80% 

Commercial mortgage owner-occupied loans

  $445    359    2,385   $426    330    2,419 

Commercial mortgage nonowner-occupied loans

   569    644    2,125    515    585    2,028 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $1,014    1,003    4,510   $941    915    4,447 
  

 

   

 

   

 

   

 

   

 

   

 

 

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

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

 

 

TABLE 29:30: Commercial Loan and Lease Portfolio (Excluding loans held for sale)

 

  2012   2011   2012    2011 

As of March 31 ($ in millions)

  Outstanding Exposure   Nonaccrual   Outstanding Exposure   Nonaccrual 

As of June 30 ($ in millions)

  Outstanding Exposure   Nonaccrual   Outstanding Exposure   Nonaccrual 

By industry:

                    

Manufacturing

  $9,359   17,329    106   $7,392   14,732    117   $9,567   17,638    133   $7,881   15,298    109 

Real estate

   6,317   7,045    279    8,090   9,281    345    6,014   6,966    287    7,757   8,782    359 

Financial services and insurance

   4,771   10,449    53    3,782   8,423    65    4,680   11,039    48    3,824   8,733    117 

Business services

   4,015   6,216    65    3,397   5,253    67    4,225   6,291    76    3,498   5,718    76 

Wholesale trade

   3,858   6,904    42    3,059   5,709    76    3,693   6,904    34    3,211   5,873    72 

Healthcare

   3,503   5,268    18    3,406   5,123    29    3,552   5,563    18    3,278   4,994    28 

Transportation and warehousing

   2,670   3,551    12    2,043   2,537    14    2,679   3,599    8    2,063   2,713    21 

Retail trade

   2,439   5,535    47    2,379   5,300    49    2,517   5,646    45    2,363   5,543    41 

Construction

   2,133   3,321    184    2,611   3,868    224    2,091   3,225    153    2,519   3,663    223 

Communication and information

   1,259   2,132    3    1,061   1,688    7    1,377   2,344    19    937   1,650    7 

Mining

   1,173   2,113    7    912   1,647    —       1,202   2,175    7    1,023   1,694    —    

Other services

   1,108   1,500    40    1,067   1,479    47 

Accommodation and food

   1,129   1,733    18    1,026   1,579    61    1,103   1,751    17    1,062   1,584    55 

Other services

   995   1,458    45    1,078   1,457    44 

Entertainment and recreation

   925   1,283    18    794   1,044    18    957   1,327    17    844   1,095    18 

Utilities

   647   1,953    —       604   1,684    —       529   1,900    —       559   1,656    —    

Public administration

   436   703    —       619   825    4    479   709    —       607   778    4 

Individuals

   431   477    20    418   473    8    386   429    20    426   477    8 

Agribusiness

   416   562    71    445   570    81    378   535    61    435   587    67 

Other

   1   2    —       85   149    2    26   30    —       82   140    1 
  

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

 

Total

  $46,477   78,034    988   $43,201   71,342    1,211   $46,563   79,571    983   $43,436   72,457    1,253 
  

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

 

By loan size:

                    

Less than $200,000

   2  2    7    3  2    7      2    7      2    7 

$200,000 to $1 million

   7   6    22    10   7    24    7   6    20    9   7    22 

$1 million to $5 million

   18   14    33    21   17    30    17   12    29    20   16    27 

$5 million to $10 million

   12   10    15    13   11    9    12   10    11    13   10    13 

$10 million to $25 million

   27   24    20    26   26    25    27   25    27    26   26    23 

Greater than $25 million

   34   44    3    27   37    5    35   45    6    29   39    8 
  

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

 

Total

   100  100    100    100  100    100    100   100    100    100   100    100 
  

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

 

By state:

                    

Ohio

   23  26    17    25  29    15    22   25    16    25   28    19 

Michigan

   13   11    22    15   13    21    12   11    21    14   12    19 

Florida

   8   6    16    8   7    16    8   6    14    8   6    15 

Illinois

   7   8    12    8   8    13    8   8    11    8   8    11 

Indiana

   5   5    9    6   6    8    5   5    9    6   5    11 

Kentucky

   4   4    4    5   4    4    4   4    4    4   4    5 

North Carolina

   3   3    4    3   3    3    3   3    3    3   3    4 

Tennessee

   3   3    3    3   3    1    3   3    2    3   3    1 

Pennsylvania

   2   2    1    2   2    2    2   2    1    2   2    2 

All other states

   32   32    12    25   25    17    33   33    19    27   29    13 
  

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

 

Total

   100  100    100    100  100    100    100   100    100    100   100    100 
  

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

   

 

  

 

   

 

 

The Bancorp has identified certain categories of loans which it believes represent a higher level of risk compared to the rest of the Bancorp’s loan portfolio, due to economic or market conditions within the Bancorp’s key lending areas. The following table providestables provide analysis of each of the categories of loans (excluding loans held for sale) by state as of March 31,and for the three and six months ended June 30, 2012 and 2011.

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

 

 

TABLE 30: Non-Owner Occupied Commercial Real Estate

$xxxx.xx$xxxx.xx$xxxx.xx$xxxx.xx$xxxx.xx

As of March 31, 2012 ($ in millions)

           For the three months
ended March 31, 2012
 

By State:

  Outstanding   Exposure   90 Days
Past Due
   Nonaccrual   Net Charge-offs 

Ohio

  $1,855    2,029    1    87    4 

Michigan

   1,353    1,379    —       76    13 

Florida

   673    706    —       56    11 

Illinois

   405    445    —       48    4 

Indiana

   295    298    —       13    —    

North Carolina

   278    311    —       21    2 

All other states

   594    624    —       31    —    
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $5,453    5,792    1    332    34 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TABLE 31: Non-Owner Occupied Commercial Real Estate

 

$xxxx.xx$xxxx.xx$xxxx.xx$xxxx.xx$xxxx.xx

As of March 31, 2011 ($ in millions)

           For the three months
ended March 31, 2011
 

As of June 30, 2012 ($ in millions)

As of June 30, 2012 ($ in millions)

             Net Charge-offs for
June 30, 2012
 

By State:

  Outstanding   Exposure   90 Days
Past Due
   Nonaccrual   Net Charge-offs   Outstanding   Exposure   90 Days
Past Due
   Nonaccrual   Three Months
Ended
 Six Months Ended 

Ohio

  $2,232    2,494    24    93    24   $1,415    1,482    —       93    6   10 

Michigan

   1,627    1,736    —       72    11    1,270    1,293    —       84    8   22 

Florida

   930    985    2    105    5    652    677    —       56    4   13 

Illinois

   498    583    —       60    10    409    443    —       42    2   6 

Indiana

   375    438    —       22    2    296    299    —       12    —      —    

North Carolina

   359    410    1    31    1    253    289    —       15    1   3 

All other states

   677    747    —       28    6    867    1,022    —       27    (5  (5
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

 

Total

  $6,698    7,393    27    411    59   $5,162    5,505    —       329    16   49 
  

 

   

 

   

 

   

 

   

 

   

 

   

��

 

   

 

   

 

   

 

  

 

 

TABLE 32: Non-Owner Occupied Commercial Real Estate

As of June 30, 2011 ($ in millions)  

   

 

           Net Charge-offs for
June 30, 2011
 

By State:

  Outstanding   Exposure   90 Days
Past Due
   Nonaccrual   Three Months
Ended
   Six Months Ended 

Ohio

  $2,130    2,416    43    117    7    30 

Michigan

   1,572    1,649    1    65    8    19 

Florida

   786    879    2    89    25    30 

Illinois

   443    504    —       68    1    11 

Indiana

   365    408    6    17    1    3 

North Carolina

   346    394    —       35    5    7 

All other states

   644    711    —       26    5    11 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $6,286    6,961    52    417    52    111 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

TABLE 33: Home Builder and Developer(a)

 

$xxx.xx$xxx.xx$xxx.xx$xxx.xx$xxx.xx

As of March 31, 2012 ($ in millions)

           For the three  months
ended March 31, 2012
 

As of June 30, 2012 ($ in millions)

As of June 30, 2012 ($ in millions)

   

 

           Net Charge-offs for
June 30, 2012
 

By State:

  Outstanding   Exposure   90 Days
Past Due
   Nonaccrual   Net Charge-offs   Outstanding   Exposure   90 Days
Past Due
   Nonaccrual   Three Months
Ended
   Six Months Ended 

Ohio

  $132    196    1    12    4   $138    187    —       9    2    6 

Michigan

   82    105    —       5    5    74    95    —       3    —       5 

Florida

   51    68    —       16    9    43    128    —       15    2    11 

North Carolina

   43    47    —��      9    —       37    41    —       7    —       1 

Indiana

   50    54    —       10    —       26    30    —       9    —       —    

Illinois

   13    23    —       11    3    10    19    —       8    —       2 

All other states

   52    62    —       11    —       48    59    —       10    —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $423    555    1    74    21   $376    559    —       61    4    25 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
(a)Home Builder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of$10088 and a total exposure of$186235 are also included in Table 30:31: Non-Owner Occupied Commercial Real Estate.

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

TABLE 33:34: Home Builder and Developer(a)

 

As of March 31, 2011 ($ in millions)

           For the three months
ended March 31, 2011
 

As of June 30, 2011 ($ in millions)

As of June 30, 2011 ($ in millions)

           Net Charge-offs for
June 30, 2011
 

By State:

  Outstanding   Exposure   90 Days
Past Due
   Nonaccrual   Net Charge-offs   Outstanding   Exposure   90 Days
Past Due
   Nonaccrual   Three Months
Ended
   Six Months Ended 

Ohio

  $189    278    —       31    13   $168    243    —       25    2    15 

Michigan

   146    190    —       16    2    132    167    1    13    2    5 

Florida

   97    109    —       37    3    84    96    —       32    5    8 

North Carolina

   66    80    —       13    —       63    73    —       17    3    3 

Indiana

   59    75    —       11    —       57    72    —       11    —       1 

Illinois

   29    50    —       11    1    27    39    —       14    1    2 

All other states

   65    89    1    11    3    66    83    —       16    —       1 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $651    871    1    130    22   $597    773    1    128    13    35 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 
(a)Home Builder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of $131$128 and a total exposure of $257$242 are also included in Table 31:32: Non-Owner Occupied Commercial Real Estate.

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

 

 

Consumer Portfolio

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

Residential Mortgage Portfolio

The Bancorp manages credit risk in the mortgage portfolio through conservative underwriting and documentation standards and geographic and product diversification. The Bancorp may also package and sell loans in the portfolio or may purchase mortgage insurance for the loans sold in order to mitigate credit risk.

The Bancorp does not originate mortgage loans that permit customers to defer principal payments or make payments that are less than the accruing interest. The Bancorp originates both fixed and adjustable rate residential mortgage loans. Resets of rates on adjustable rate mortgages are not expected to have a material impact on credit costs in the current interest rate environment, as approximately $1.1$1.2 billion of adjustable rate residential mortgage loans will have rate resets during the next twelve months, with approximately onetwo percent of those resets expected to experience an increase in monthly payments in comparison to the monthly payment at the time of origination.

Certain residential mortgage products have contractual features that may increase credit exposure to the Bancorp in the event of a decline in housing values. These types of mortgage products offered by the Bancorp include loans with high LTV ratios, multiple loans on the same collateral that when combined result in an LTV greater than 80% and interest-onlyinterest only loans. The Bancorp monitors residential mortgage loans with greater than 80% LTV ratio and no mortgage insurance as it believes these loans represent a higher level of risk. The following table provides an analysis of the residential mortgage portfolio loans outstanding, excluding held for sale, by LTV at origination:

TABLE 34:35: Residential Mortgage Portfolio Loans by LTV at Origination

 

  March 31, 2012 December 31, 2011 March 31, 2011   June 30, 2012 December 31, 2011 June 30, 2011 

($ in millions)

  Outstanding   Weighted
Average
LTV’s
 Outstanding   Weighted
Average
LTV’s
 Outstanding   Weighted
Average
LTV’s
   Outstanding   Weighted
Average
LTV
 Outstanding   Weighted
Average
LTV
 Outstanding   Weighted
Average
LTV
 

LTV£ 80%

  $8,252    66.4  7,876    66.6  6,961    67.5

LTV£ 80 %

  $8,503    66.3   7,876    66.6   7,241    67.4 

LTV > 80%, with mortgage insurance

   1,102    93.3   1,030    92.7   900    93.1    1,105    93.4   1,030    92.7   904    93.1 

LTV > 80%, no mortgage insurance

   1,740    95.7   1,766    95.6   1,669    95.5    1,821    95.7   1,766    95.6   1,704    95.6 
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total

  $11,094    73.7  10,672    73.9  9,530    74.9  $11,429    73.6   10,672    73.9   9,849    74.7 
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

The following tables provide analysis of the residential mortgage portfolio loans outstanding, excluding held for sale, with a greater than 80% LTV ratio and no mortgage insurance as of March 31,and for the three and six months ended June 30, 2012 and 2011:

TABLE 35:36: Residential Mortgage Portfolio Loans, LTV Greater Than 80%, No Mortgage Insurance

 

As of March 31, 2012 ($ in millions)

              For the three months
ended March 31, 2012
 

As of June 30, 2012 ($ in millions)

              Net Charge-offs for
June 30, 2012
 

By State:

  Outstanding   90 Days
Past Due
   Nonaccrual   Net
Charge-offs
   Outstanding   90 Days
Past Due
   Nonaccrual   Three Months
Ended
   Six Months
Ended
 

Ohio

  $598    3    25    4   $607    3    24    4    8 

Michigan

   307    1    14    3    310    1    12    3    6 

Florida

   257    1    19    4    257    1    19    4    9 

North Carolina

   113    2    5    1 

Illinois

   134    1    3    1    162    1    4    1    1 

Indiana

   109    1    2    —       116    1    4    1    1 

North Carolina

   115    —       6    2    2 

Kentucky

   86    1    3    —       89    —       3    —       1 

All other states

   136    1    4    1    165    3    2    1    2 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $1,740    11    75    14   $1,821    10    74    16    30 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

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

 

 

TABLE 36: Residential Mortgage Loans Outstanding, LTV Greater Than 80%, No Mortgage Insurance

 

 

As of March 31, 2011 ($ in millions)

           For the three months
ended March 31, 2011
 

By State:

  Outstanding   90 Days
Past Due
   Nonaccrual   Net
Charge-offs
 

Ohio

  $576    4    25    4 

Michigan

   299    1    16    5 

Florida

   284    4    25    12 

North Carolina

   125    3    4    1 

Indiana

   112    1    4    1 

Kentucky

   77    1    3    —    

Illinois

   77    1    1    —    

All other states

   119    1    4    2 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $1,669    16    82    25 
  

 

 

   

 

 

   

 

 

   

 

 

 

TABLE 37: Residential Mortgage Loans Outstanding, LTV Greater Than 80%, No Mortgage Insurance

As of June 30, 2011 ($ in millions)

           Net Charge-offs for
June 30, 2011
 

By State:

  Outstanding   90 Days
Past Due
   Nonaccrual   Three Months
Ended
   Six Months
Ended
 

Ohio

  $587    3    25    3    7 

Michigan

   304    1    15    2    7 

Florida

   283    2    26    6    17 

North Carolina

   122    1    6    —       1 

Indiana

   112    1    4    1    2 

Illinois

   89    —       2    —       1 

Kentucky

   83    —       3    —       1 

All other states

   124    1    3    1    2 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $1,704    9    84    13    38 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Home Equity Portfolio

The Bancorp’s home equity portfolio is primarily comprised of home equity lines of credit. The home equity line of credit offered by the Bancorp is a revolving facility with a 20-year term, minimum payments of interest only and a balloon payment of principal at maturity.

The ALLL provides coverage for probable and estimable losses in the home equity portfolio. The allowance attributable to the portion of the home equity portfolio that has not been restructured in a TDR is determined on a single homogenous pool basis reflecting the Bancorp’s belief that the credit risk characteristics of this portfolio are of sufficient similarity such that additional portfolio segmentation is not necessary for determining the probable credit losses in the home equity portfolio. The modeled loss factor for the home equity portfolio is based on the trailing twelve month historical loss rate, as adjusted for certain prescriptive loss rate factors and certain qualitative adjustment factors to reflect risks associated with current conditions and trends. The prescriptive loss rate factors include adjustments for delinquency trends, LTV trends, refreshed FICO score trends and product mix. The qualitative factors include adjustments for credit administration and portfolio management, credit policy and underwriting and the national and local economy. The Bancorp considers home price index trends when determining the national and local economy qualitative factor.

The home equity portfolio is managed in two primary categories: loans outstanding with a LTV greater than 80% and those loans with a LTV 80% or less based upon appraisals at origination. The carrying value of the greater than 80% LTV home equity loans and 80% or less LTV home equity loans were $3.9 billion and $6.6$6.5 billion, respectively, as of March 31,June 30, 2012. Of the total $10.5$10.4 billion of outstanding home equity loans:

 

82% reside within the Bancorp’s Midwest footprint of Ohio, Michigan, Kentucky, Indiana and Illinois

 

31%32% are in first lien positions and 69%68% are in second lien positions at March 31,June 30, 2012

 

For approximately 1/3 of the home equity portfolio in a second lien position, the first lien is either owned or serviced by the Bancorp

 

Over 80% of non-delinquent borrowers made at least one payment greater than the minimum payment during the three months ended March 31,June 30, 2012

 

The portfolio had an average refreshed FICO score of 735 and 734 and 732 at March 31,June 30, 2012 and 2011, respectively.

The Bancorp actively manages lines of credit and makes reductions in lending limits when it believes it is necessary based on FICO score deterioration and property devaluation. The Bancorp does not routinely obtain appraisals on performing loans to update LTV ratios after origination. However, the Bancorp monitors the local housing markets by reviewing various home price indices and incorporates the impact of the changing market conditions in its on-going credit monitoring processes. For second lien home equity loans, the Bancorp is unable to track the performance of the first lien loans if it does not service the first lien loan, but instead monitors the refreshed FICO scores as part of its assessment of the home equity portfolio. The following table provides an analysis of home equity loans outstanding disaggregated based upon refreshed FICO score:

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

 

 

TABLE 37:38: Home Equity Loans Outstanding by Refreshed FICO Score

 

  March 31, 2012 December 31, 2011 March 31, 2011   June 30, 2012 December 31, 2011 June 30, 2011 

($ in millions)

  Outstanding   % of
Total
 Outstanding   % of
Total
 Outstanding   % of
Total
   Outstanding   % of
Total
 Outstanding   % of
Total
 Outstanding   % of
Total
 

First Liens:

                    

FICO < 620

  $238    2  214    2  266    2  $208      214      221    

FICO 621-719

   673    6   643    6   675    6    623    6   643    6   663    6 

FICO > 720

   2,392    23   2,466    23   2,469    22    2,490    24   2,466    23   2,541    23 
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total First Liens

   3,303    31   3,323    31   3,410    30    3,321    32   3,323    31   3,425    31 

Second Liens:

                    

FICO < 620

   739    7  750    7  869    8   726    7   750    7   773    7 

FICO 621-719

   1,900    18   1,929    18   2,053    18    1,868    18   1,929    18   1,989    18 

FICO > 720

   4,551    44   4,717    44   4,890    44    4,462    43   4,717    44   4,861    44 
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total Second Liens

   7,190    69   7,396    69   7,812    70    7,056    68   7,396    69   7,623    69 
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total

  $10,493    100  10,719    100  11,222    100  $10,377    100   10,719    100   11,048    100 
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

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

TABLE 38:39: Home Equity Loans Outstanding by LTV at Origination

 

  March 31, 2012 December 31, 2011 March 31, 2011   June 30, 2012 December 31, 2011 June 30, 2011 

($ in millions)

  Outstanding   Weighted
Average
LTV’s
 Outstanding   Weighted
Average
LTV’s
 Outstanding   Weighted
Average
LTV’s
   Outstanding   Weighted
Average
LTV
 Outstanding   Weighted
Average
LTV
 Outstanding   Weighted
Average
LTV
 

First Liens:

                    

LTV£ 80%

  $2,788    54.9  2,800    54.9  2,862    55.0

LTV£ 80 %

  $2,817    54.9   2,800    54.9   2,887    55.0 

LTV > 80%

   515    89.2   523    89.2   548    89.3    504    89.0   523    89.2   538    89.3 
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total First Liens

   3,303    60.4   3,323    60.4   3,410    60.6    3,321    60.3   3,323    60.4   3,425    60.6 

Second Liens;

                    

LTV£ 80%

   3,793    67.2   3,882    67.3   4,021    67.3 

LTV£ 80 %

   3,705    67.3   3,882    67.3   3,917    67.3 

LTV > 80%

   3,397    91.8   3,514    91.8   3,791    92.0    3,351    91.7   3,514    91.8   3,706    91.9 
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total Second Liens

   7,190    80.9   7,396    81.0   7,812    81.3    7,056    80.7   7,396    81.0   7,623    81.2 
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total

  $10,493    73.8  10,719    74.0  11,222    74.4  $10,377    73.7   10,719    74.0   11,048    74.3 
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

The following tables provide analysis of home equity loans by state with LTV greater than 80% as of March 31,June 30, 2012 and 2011.

TABLE 39:40: Home Equity Loans Outstanding with LTV Greater than 80%

 

As of March 31, 2012 ($ in millions)

           For the three  months
ended March 31, 2012
 

As of June 30, 2012 ($ in millions)

                  Net Charge-offs for June 30, 2012 

By State:

  Outstanding   Exposure   90 Days
Past Due
   Nonaccrual   Net
Charge-offs
   Outstanding   Exposure   90 Days
Past Due
   Nonaccrual   Three Months
Ended
   Six Months
Ended
 

Ohio

  $1,346    2,040    10    6    8   $1,327    2,017    9    6    6    14 

Michigan

   860    1,175    8    4    7    838    1,156    8    4    7    14 

Illinois

   437    620    6    2    6    444    630    6    2    4    9 

Indiana

   377    560    2    2    1    371    552    3    2    1    2 

Kentucky

   354    534    2    1    2    348    528    2    1    1    3 

Florida

   140    184    3    2    3    136    180    3    2    2    5 

All other states

   398    513    6    3    4    391    511    4    3    5    10 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $3,912    5,626    37    20    31   $3,855    5,574    35    20    26    57 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

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

 

 

TABLE 40:41: Home Equity Loans Outstanding with LTV Greater than 80%

 

As of March 31, 2011 ($ in millions)

           For the three months
ended March 31, 2011
 

As of June 30, 2011 ($ in millions)

                  Net Charge-offs for June 30, 2011 

By State:

  Outstanding   Exposure   90 Days
Past Due
   Nonaccrual   Net
Charge-offs
   Outstanding   Exposure   90 Days
Past Due
   Nonaccrual   Three Months
Ended
   Six Months
Ended
 

Ohio

  $1,501    2,215    10    7    9   $1,467    2,174    10    6    8    17 

Michigan

   951    1,272    9    5    10    928    1,251    8    5    9    19 

Illinois

   465    648    5    2    4    459    643    5    2    5    9 

Indiana

   424    614    3    3    3    414    603    2    2    2    5 

Kentucky

   396    591    3    2    2    389    580    4    1    1    3 

Florida

   160    206    5    4    6    156    202    5    4    3    10 

All other states

   442    548    5    4    6    431    539    7    3    6    11 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $4,339    6,094    40    27    40   $4,244    5,992    41    23    34    74 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Automobile Portfolio

The automobile portfolio is characterized by direct and indirect lending products to consumers. As of March 31,June 30, 2012, 48%49% of the automobile loan portfolio is comprised of new automobiles. It is a common practice to advance on automobile loans an amount in excess of the automobile value due to the inclusion of taxes, title, and other fees paid at closing. The Bancorp monitors its exposure to these higher risk loans. The following table provides an analysis of automobile loans outstanding by LTV at origination:

TABLE 41:42: Automobile Loans Outstanding with LTV at Origination

 

  March 31, 2012 December 31, 2011 March 31, 2011   June 30, 2012 December 31, 2011 June 30, 2011 

($ in millions)

  Outstanding   Weighted
Average
LTV’s
 Outstanding   Weighted
Average
LTV’s
 Outstanding   Weighted
Average
LTV’s
   Outstanding   Weighted
Average
LTV
 Outstanding   Weighted
Average
LTV
 Outstanding   Weighted
Average
LTV
 

LTV£ 100%

  $7,865    81.7   7,805    81.7   7,084    81.8 

LTV£100 %

  $7,876    81.7   7,805    81.7   7,310    81.8 

LTV > 100%

   3,967    111.2   4,022    111.5   4,045    112.4    3,863    111.0   4,022    111.5   4,005    112.1 
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total

  $11,832    91.9   11,827    92.1   11,129    93.3   $11,739    91.6   11,827    92.1   11,315    92.8 
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

The following tables provide analysis of the Bancorp’s automobile loans with a LTV at origination greater than 100% as of March 31,June 30, 2012 and 2011, respectively.

TABLE 42:43: Automobile Loans Outstanding with LTV Greater than 100%

 

As of March 31, 2012 ($ in millions)

           For the three
months ended
March 31, 2012
 

As of June 30, 2012 ($ in millions)

              Net Charge-offs for June 30, 2012 

By State:

  Outstanding   90 Days
Past Due
   Nonaccrual   Net
Charge-offs
   Outstanding   90 Days
Past Due
   Nonaccrual   Three Months
Ended
   Six Months
Ended
Ended
 

Ohio

  $413    1    —       1   $406    1    —       1    1 

Illinois

   268    —       —       1    248    —       —       1    1 

Michigan

   235    —       —       —       224    —       —       1    1 

Florida

   194    —       —       —       192    —       —       —       —    

Indiana

   173    —       —       —       164    —       —       —       1 

Kentucky

   150    —       —       —       143    —       —       —       1 

All other states

   2,534    3    2    4    2,486    3    2    5    9 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $3,967    4    2    6   $3,863    4    2    8    14 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

TABLE 44: Automobile Loans Outstanding with LTV Greater than 100%

As of June 30, 2011 ($ in millions)

              Net Charge-offs for June 30, 2011 

By State:

  Outstanding   90 Days
Past Due
   Nonaccrual   Three Months
Ended
   Six Months
Ended
 

Ohio

  $425    1    —       —       2 

Illinois

   333    1    —       1    1 

Michigan

   255    —       —       —       1 

Indiana

   191    —       —       —       1 

Florida

   190    —       —       1    2 

Kentucky

   167    —       —       —       1 

All other states

   2,444    2    1    3    10 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $4,005    4    1    5    18 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

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

 

 

TABLE 43: Automobile Loans Outstanding with LTV Greater than 100%

As of March 31, 2011 ($ in millions)

              For the three months
ended March 31, 2011
 

By State:

  Outstanding   90 Days
Past Due
   Nonaccrual   Net
Charge-offs
 

Ohio

  $430    —       —       1 

Illinois

   355    —       —       1 

Michigan

   262    —       —       1 

Indiana

   200    —       —       1 

Florida

   197    —       —       1 

Kentucky

   172    —       —       1 

All other states

   2,429    5    2    7 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $4,045    5 ��  2    13 
  

 

 

   

 

 

   

 

 

   

 

 

 

European Exposure

The Bancorp has no direct sovereign exposure to any European nation as of March 31,June 30, 2012. In providing services to our customers, the Bancorp routinely enters into financial transactions with foreign domiciled and U.S. subsidiaries of foreign businesses as well as foreign financial institutions. These financial transactions are in the form of loans, loan commitments, letters of credit, derivatives and securities. The Bancorp’s risk appetite for foreign country exposure is managed by having established country exposure limits. The Bancorp’s total exposure to European domiciled or owned businesses and European financial institutions was $2.3 billion and funded exposure was $1.4 billion as of March 31,June 30, 2012. Additionally, the Bancorp was within its established country exposure limits for all European countries.

Certain European countries have been experiencing increased levels of stress throughout 2011 and during the threesix months ended March 31,June 30, 2012 including Portugal,Greece, Ireland, Italy, GreecePortugal and Spain. The Bancorp’s total exposure to businesses domiciled or owned by companies and financial institutions in these countries was approximately $179$176 million and funded exposure was $124$119 million as of March 31,June 30, 2012. The following table provides detail about the Bancorp’s exposure to all European domiciled and owned businesses and financial institutions as of March 31,June 30, 2012:

TABLE 44:45: European Exposure

 

  Sovereigns   Financial Institutions   Non-Financial
Institutions
   Total 
  Total   Funded   Total   Funded   Total   Funded   Total   Funded   Sovereigns   Financial Institutions   Non-Financial
Institutions
   Total 

($ in millions)

  Exposure   Exposure   Exposure   Exposure   Exposure   Exposure   Exposure (a)   Exposure   Total
Exposure
   Funded
Exposure
   Total
Exposure
   Funded
Exposure
   Total
Exposure
   Funded
Exposure
   Total
Exposure (a)
   Funded
Exposure
 

Peripheral Europe(b)

  $—       —       11    —       168    124    179    124   $—       —       15    —       161    119    176    119 

Other Eurozone(c)

   —       —       44    34    1,275    742    1,319    776    —       —       25    25    1,297    762    1,322    787 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Eurozone

   —       —       55    34    1,443    866    1,498    900    —       —       40    25    1,458    881    1,498    906 

Other Europe(d)

   —       —       22    18    820    496    842    514    —       —       25    20    771    441    796    461 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total Europe

  $—       —       77    52    2,263    1,362    2,340    1,414   $—       —       65    45    2,229    1,322    2,294    1,367 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(a)Total exposure includes funded and unfunded commitments, net of collateral; funded exposure excludes unfunded exposure.
(b)Peripheral Europe includes Portugal,Greece, Ireland, Italy, GreecePortugal and Spain.
(c)Other Eurozone includes countries participating in the European common currency (Euro).
(d)Other Europe includes European countries not part of the Euro (primarily the United Kingdom and Switzerland).

Analysis of Nonperforming Assets

Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is uncertain; restructured commercial and credit card loans which have not yet met the requirements to be classified as a performing asset; restructured consumer loans which are 90 days past due based on the restructured terms unless the loan is both well-secured and in the process of collection; and certain other assets, including OREO and other repossessed property. A summary of nonperforming assets is included in Table 45.46. Residential mortgage loans are placed on nonaccrual status when principal and interest payments have become past due 150 days unless such loans are both well secured and in the process of collection. Residential mortgage loans may stay on nonperforming status for an extended time as the foreclosure process typically lasts longer than 180 days. Typically home equity loans are reported on nonaccrual status if principal or interest has been in default for 180 days or more unless the loan is both well secured and in the process of collection. Automobile and other consumer loans and leases that have been modified in a TDR and subsequently become past due 90 days are placed on nonaccrual status. Credit card loans that have been modified in a TDR are classified as nonaccrual unless such loans have a sustained repayment performance of six months or greater and the Bancorp is reasonably assured of repayment in accordance with the restructured terms. Well secured loans are collateralized by perfected security interests in real and/or personal property for which the Bancorp estimates proceeds from sale would be sufficient to recover the outstanding principal and accrued interest balance of the loan and pay all costs to sell

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

the collateral. The Bancorp considers a loan in the process of collection if collection efforts or legal action is proceeding and the Bancorp expects to collect funds sufficient to bring the loan current or recover the entire outstanding principal and accrued interest balance. When a loan is placed on nonaccrual status, the accrual of interest, amortization of loan premiums, accretion of loan discounts and amortization or accretion of deferred net loan fees or costs are discontinued and previously accrued, but unpaid interest is reversed. Commercial loans on nonaccrual status are reviewed for impairment at least quarterly. If the principal or a portion of the principal is deemed a loss, the loss amount is charged off to the ALLL.

Total nonperforming assets, including loans held for sale, were $1.8$1.7 billion at March 31,June 30, 2012 compared to $2.0 billion at December 31, 2011 and $2.3 billion at March 31,June 30, 2011. At March 31,June 30, 2012, $117$60 million of nonaccrual loans, consisting primarily of real estate secured loans, were held for sale, compared to $138 million and $216$176 million at December 31, 2011 and March 31,June 30, 2011, respectively.

Nonperforming assets as a percentage of total loans, leases and other assets, including OREO and nonaccrual loans held for sale as of March 31,June 30, 2012 were 2.13%1.99%, compared to 2.32% as of December 31, 2011 and 2.96%2.84% as of March 31,June 30, 2011. Excluding nonaccrual loans held for sale, nonperforming assets as a percentage of total portfolio loans, leases and other assets, including OREO were 2.03%1.96% as of March 31,June 30, 2012, compared to 2.23% as of December 31, 2011 and 2.73%2.66% as of March 31,June 30, 2011. The composition of nonaccrual loans and leases continues to be concentrated in real estate as 69% of nonaccrual loans and leases were secured by real estate as of March 31,June 30, 2012 and December 31, 2011 compared with 67%66% as of March 31,June 30, 2011.

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

Commercial nonperforming loans and leases were $1.1$1.0 billion at March 31,June 30, 2012, a decrease of $91$153 million from December 31, 2011 and a decrease of $322$386 million from March 31,June 30, 2011 due to the impact of loss mitigation actions and moderation in general economic conditions. Excluding commercial nonperforming loans and leases held for sale, commercial nonperforming loans and leases at March 31,June 30, 2012 decreased $70$75 million and $223$270 compared to December 31, 2011 and March 31,June 30, 2011, respectively. The decrease from both prior periods was due to a continued decrease in new nonaccruals due to improved delinquency metrics and an improvement in underlying loss trends.

Consumer nonperforming loans and leases were $364$359 million at March 31,June 30, 2012, a decrease of $16$21 million from December 31, 2011 and a decrease of $70$27 million from March 31,June 30, 2011. The decrease compared to December 31, 2011for both periods is due to the continued moderation in general economic conditions in 2012. The decrease compared to March 31, 2011 was mainly due to a $59 million decrease in other consumer loans and leases due primarily to charge-offs taken on certain consumer loans acquired during the fourth quarter of 2010 as the result of a foreclosure on a commercial loan collateralized by individual consumer loans. These loans were fully charged off in 2011. Home equity nonaccrual levels were flat compared tofrom December 31, 2011 compared to June 30, 2012 and March 31, 2011 as the Bancorp continuesdecreased $4 million compared to fully charge-off a high proportion of the severely delinquent loans at 180 days past due.June 30, 2011. Geography continues to be a large driver of nonaccrual activity as Florida properties represent approximately 16%15% and 8% of residential mortgage and home equity balances, respectively, but represent 46%53% and 18%19% of nonaccrual loans for each category. Consumer restructured loans on accrual status totaled $1.6 billion at March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011. As of March 31,June 30, 2012, redefault rates, defined as 30 days delinquent in accordance with the loan’s modified terms, onpercentage of restructured residential mortgage were 26%, 15% onloans, home equity loans, and credit card loans that are past due 30 days or more are 27%, 13% and 14% on home equity loans., respectively. Refer to Table 47 for a rollforward of the nonperforming loans and leases.

OREO and other repossessed property was $321$277 million at March 31,June 30, 2012, compared to $378 million at December 31, 2011 and $481$449 million at March 31,June 30, 2011. The decrease from December 31, 2011 and March 31,June 30, 2011 was primarily due to a decrease in new OREO properties coupled with the sale of large OREO properties and improvements in general economic conditions during 2011 and in the first quarterhalf of 2012. The Bancorp recognized $23$22 million and $77$32 million in losses on the sale or write-down of OREO properties for the three months ended March 31,June 30, 2012 and 2011, respectively and $45 million and $109 million for the six months ended June 30, 2012 and 2011, respectively. These losses are primarily reflective of the continued stress in the Michigan and Florida markets for commercial real estate and residential mortgage loans as Michigan and Florida represented 16%6% and 26%18%, respectively, of total OREO losses infor the first quarter ofsix months ended June 30, 2012 compared with 12%32% and 14%33%, respectively, infor the first quarter ofsix months ended June 30, 2011. Properties in Michigan and Florida accounted for 38%35% of foreclosed real estate at March 31,June 30, 2012, compared to 42% at December 31, 2011 and 44%45% as of March 31,June 30, 2011.

For the three and six months ended March 31,June 30, 2012 and 2011, approximately $27 million and $33$54 million, respectively, of interest income would have been recordedrecognized if the nonaccrual and renegotiated loans and leases on nonaccrual status had been current in accordance with their original terms. For the three and six months ended June 30, 2011 approximately $32 million and $65 million, respectively, of interest income would have been recognized. Although these values help demonstrate the costs of carrying nonaccrual credits, the Bancorp does not expect to recover the full amount of interest as nonaccrual loans and leases are generally carried below their principal balance.

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

 

 

TABLE 45:46: Summary of Nonperforming Assets and Delinquent Loans

 

($ in millions)

 March 31, 2012 December 31, 2011 March 31, 2011   June 30,
2012
 December 31,
2011
   June 30,
2011
 

Nonaccrual loans and leases:

        

Commercial and industrial loans

 $358    408   477   $377   408    485 

Commercial mortgage loans

  347    358   415    357   358    417 

Commercial construction loans

  118    123   159    99   123    147 

Commercial leases

  8    9   11    3   9    16 

Residential mortgage loans

  135    134   140    135   134    145 

Home equity

  26    25   24    30   25    26 

Automobile loans

  1    —      1    1   —       1 

Other consumer loans and leases

  1    1   60    —      1    3 

Restructured loans and leases:

        

Commercial and industrial loans

  84    79   95    77   79    122 

Commercial mortgage loans

  58    63   38    57   63    47 

Commercial construction loans

  13    15   9    13   15    13 

Commercial leases

  2    3   7    —      3    6 

Residential mortgage loans

  130    141   121    125   141    127 

Home equity

  24    29   32    24   29    32 

Automobile loans

  2    2   2    2   2    2 

Credit card

  45    48   54    42   48    50 
 

 

  

 

  

 

   

 

  

 

   

 

 

Total nonperforming loans and leases(d)

  1,352    1,438   1,645    1,342   1,438    1,639 

OREO and other repossessed property(c)

  321    378   481    277   378    449 
 

 

  

 

  

 

   

 

  

 

   

 

 

Total nonperforming assets

  1,673    1,816   2,126    1,619   1,816    2,088 

Nonaccrual loans held for sale

  117    138   216    60   138    176 
 

 

  

 

  

 

   

 

  

 

   

 

 

Total nonperforming assets including loans held for sale

 $1,790    1,954   2,342   $1,679   1,954    2,264 
 

 

  

 

  

 

   

 

  

 

   

 

 

Loans and leases 90 days past due and accruing

        

Commercial and industrial loans

 $2    4   8   $2   4    7 

Commercial mortgage loans

  30    3   8    22   3    12 

Commercial construction loans

  —      1   23    —      1    48 

Commercial leases

   —      —       1 

Residential mortgage loans(b)

  73    79   98    80   79    87 

Home equity

  74    74   84    67   74    84 

Automobile loans

  8    9   9    8   9    10 

Credit card and other

  29    30   36    24   30    30 
 

 

  

 

  

 

   

 

  

 

   

 

 

Total loans and leases 90 days past due and accruing

 $216    200   266 

Total loans and leases 90 days past due and accruing(e)

  $203   200    279 
 

 

  

 

  

 

   

 

  

 

   

 

 

Nonperforming assets as a percent of portfolio loans, leases and other assets, including OREO(a)

  2.03  2.23   2.73    1.96   2.23    2.66 

Allowance for loan and lease losses as a percent of nonperforming assets(a)

  127    124   132    125   124    125 
 

 

  

 

  

 

   

 

  

 

   

 

 

 

(a)Excludes nonaccrual loans held for sale.
(b)Information for all periods presented excludes advances made pursuant to servicing agreements to GNMA mortgage loan pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. As ofMarch 31,June 30, 2012, these advances were$359, and as of December 31, 2011 and March 31,June 30, 2011 these advances were$320, $309 and $298,$271, respectively. The Bancorp recognized $1 million and immaterial$2 of credit losses for both the three and six months endedJune 30, 2012 and an immaterial amount and $1 for the three and six months ended March 31, 2012 andJune 30, 2011, respectively, due to claim denials and curtailments associated with these advances.
(c)Excludes$70, $64 and $54 of OREO related to government insured loans atJune 30, 2012, December 31, 2011, and June 30, 2011, respectively.
(d)Includes$13, $17, and $20 of nonaccrual government insured commercial loans whose repayments are insured by the Small Business Administration atJune 30, 2012, December 31, 2012, and June 30, 2011, respectively, and$1 and $2 of restructured nonaccrual government insured loans atJune 30, 2012and December 31, 2011, respectively, and an immaterial amount at June 30, 2011.
(e)Includes an immaterial amount of government insured commercial loans 90 days past due and accruing whose repayments are insured by the Small Business Administration atJune 30, 2012, December 31, 2011, and June 30, 2011.

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

 

 

The following table provides a rollforward of portfolio nonperforming loans and leases, by portfolio segment:

TABLE 46:47: Rollforward of Portfolio Nonperforming Loans and Leases

 

    Residential         Residential     

For the three months ended March 31, 2012 ($ in millions)

  Commercial Mortgage Consumer Total 

For the six months ended June 30, 2012 ($ in millions)

  Commercial Mortgage Consumer Total 

Beginning Balance

  $1,058   275   105   1,438   $1,058   275   105   1,438 

Transfers to nonperforming

   168   87   97   352    371   175   191   737 

Transfers to performing

   (1  (15  (21  (37   (1  (23  (39  (63

Transfers to performing (restructured)

   (2  (12  (24  (38   (6  (27  (49  (82

Transfers to held for sale

   (3  —      —      (3   (6  —      —      (6

Loans sold from portfolio

   (8  (4  —      (12   (12  (4  —      (16

Loan paydowns/payoffs

   (94  (24  (4  (122   (217  (53  (7  (277

Transfers to OREO

   (36  (18  —      (54   (51  (37  —      (88

Charge-offs

   (101  (24  (56  (181   (180  (46  (106  (332

Draws/other extensions of credit

   7   —      2   9    27   —      4   31 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Ending Balance

  $988   265   99   1,352   $983   260   99   1,342 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

For the three months ended March 31, 2011

     

For the six months ended June 30, 2011 ($ in millions)

     

Beginning Balance

  $1,214   268   198   1,680   $1,214   268   198   1,680 

Transfers to nonperforming

   329   103   130   562    669   203   244   1,116 

Transfers to performing

   (2  (15  (20  (37   (12  (25  (45  (82

Transfers to performing (restructured)

   —      (29  (22  (51   —      (45  (46  (91

Transfers to held for sale

   (16  —      —      (16   (31  —      —      (31

Loans sold from portfolio

   (12  (1  —      (13   (19  (1  (21  (41

Loan paydowns/payoffs

   (108  (13  (5  (126   (199  (36  (9  (244

Transfers to OREO

   (37  (18  —      (55   (76  (33  —      (109

Charge-offs

   (164  (35  (110  (309   (305  (60  (211  (576

Draws/other extensions of credit

   7   1   2   10    12   1   4   17 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Ending Balance

  $1,211   261   173   1,645   $1,253   272   114   1,639 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Troubled Debt Restructurings

If a borrower is experiencing financial difficulty, the Bancorp may consider, in certain circumstances, modifying the terms of their loan to maximize collection of amounts due. Typically, these modifications reduce the loan interest rate, extend the loan term, or in limited circumstances, reduce the principal balance of the loan. These modifications are classified as TDRs.

At the time of modification, the Bancorp maintains certain consumer loan TDRs (including residential mortgage loans, home equity loans, and other consumer loans) on accrual status, provided there is reasonable assurance of repayment and performance according to the modified terms based upon a current, well-documented credit evaluation. Commercial loan TDRs and credit card TDRs are classified as nonaccrual loans and are typically returned to accrual status upon a six month period of sustained performance under the restructured terms. The following table summarizes TDRs by loan type and delinquency status.

TABLE 47:48: Performing and Nonperforming TDRs

 

  Performing           Performing         
      30-89 Days   90 Days or               30-89 Days   90 Days or         

As of March 31, 2012 ($ in millions)

  Current   Past Due   More Past Due   Nonaccrual   Total 

As of June 30, 2012 (S in millions)

  Current   Past Due   More Past Due   Nonaccrual   Total 

Commercial

  $476    5    —       157   $638   $451    4    —       147    602 

Residential mortgages(a)

   1,002    59    64    130    1,255     991    78    71    125    1,265 

Home equity

   379    36    —       24    439     381    34    —       24    439 

Automobile

   35    2    —       2    39 

Credit card

   42    —       —       45    87    42    —       —       42    84 

Other consumer

   40    2    —       2    44 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $1,939    102    64    358   $2,463   $1,900    118    71    340    2,429 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(a)Information includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. As of March 31,June 30, 2012, these advances represented $81$95 of current loans $15and $18 of 30-89 days past due loans and $49 of 90 days or more past due loans.

Analysis of Net Loan Charge-offs

Net charge-offs were 10888 bps and 192156 bps of average loans and leases for the three months ended March 31,June 30, 2012 and 2011, respectively and were 98 bps and 174 bps for the six months ended June 30, 2012 and 2011, respectively. Table 4849 provides a summary of credit loss experience and net charge-offs as a percentage of average loans and leases outstanding by loan category.

The ratio of commercial loan and lease net charge-offs to average commercial loans and leases decreased to 8967 bps and 77 bps during the three and six months ended March 31,June 30, 2012 compared to 152130 bps and 141 bps during the three and six months ended March 31, 2011, asJune 30, 2011. The decreases are a result of decreases in net charge-offs of $62 million. Decreases in net charge-offs were realized across all commercial loan types$63 million and were primarily due to improvements in general$127 million for the three and six months ended June 30, 2012 from

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

 

 

the same periods in the prior year coupled with an increase in the average commercial loan and lease balance of $5.4 billion and $4.4 billion, respectively. Decreases in net charge-offs were realized across all commercial loan types, excluding commercial leases, and were primarily due to improvements in general economic conditions and previous actions taken by the Bancorp to address problem loans. Actions taken by the Bancorp include suspending homebuilder and developer lending in 2007 and non-owner occupied commercial real estate lending in 2008 and tightened underwriting standards across all commercial loan product offerings. Net charge-offs for the three and six months ended March 31,June 30, 2012 related to non-owner occupied commercial real estate were $34$16 million and $49 million compared to $59$52 million and $111 million for the three and six months ended March 31,June 30, 2011. Net charge-offs related to non-owner occupied commercial real estate are recorded in the commercial mortgage loans and commercial construction loans captions in Table 48.49. Net charge-offs on these loans represented 33%22% and 36% of total commercial loan and lease net charge-offs for the threesix months ended March 31,June 30, 2012 and March 31,June 30, 2011, respectively.

The ratio of consumer loan and lease net charge-offs to average consumer loans and leases decreased to 133116 bps and 126 bps during the three and six months ended March 31,June 30, 2012 compared to 243189 bps and 216 bps during the three and six months ended March 31,June 30, 2011. ResidentialNet charge-offs on residential mortgage loan net charge-offs,loans, which typically involve partial charge-offs based upon appraised values of underlying collateral, were flat for the three months ended June 30, 2011 compared to the three months ended June 30, 2012. Residential mortgage loan net charge-offs for the six months ended June 30, 2012 decreased $28 million from the same period in the prior year as a result of improvements in delinquencies and a decrease in the average loss recorded per charge-off. The Bancorp’s Florida and Michigan markets accounted for 54%52% and 16%15% of net charge-offs on residential mortgage loans in the portfolio during the threesix months ended March 31,June 30, 2012 compared to 57%61% and 17%13% for the threesix months ended March 31,June 30, 2011, respectively. Fifth ThirdThe Bancorp expects the composition of the residential mortgage portfolio to improve as it continues to retain high quality, shorter duration residential mortgage loans that are originated through its branch network as a low-cost, refinance product of conforming residential mortgage loans.

Home equity net charge-offs decreased $17$15 million and $32 million compared to the three and six months ended March 31,June 30, 2011, primarily due to decreases in net charge-offs in the Michigan market and reduced net charge-offs of brokered home equity products. Management responded to the performance of the brokered home equity portfolio by eliminating this channel of origination in 2007. In addition, management actively manages lines of credit and makes reductions in lending limits when it believes it is necessary based on FICO score deterioration and property devaluation.

Automobile loan net charge-offs decreased $11$1 million and $13 million compared to the three and six months ended March 31,June 30, 2011, due to the origination of high credit quality loans as a result of tighter underwriting standards and higher resale on automobiles sold at auction.

Credit card net charge-offs decreased $11$10 million and $20 million compared to the three and six months ended March 31,June 30, 2011 reflecting improving delinquency trends, aggressive line management, and stabilization in unemployment levels. The Bancorp utilizes a risk-adjusted pricing methodology to ensure adequate compensation is received for those products that have higher credit costs.

Other consumer loan net charge-offs decreased $18$34 million and $50 million compared to the three and six months ended March 31,June 30, 2011, as the prior year period contained charge-offs associated with certain consumer loans that were acquired during the fourth quarter of 2010 when the Bancorp foreclosed on a commercial loan that was collateralized by individual consumer loans.

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

 

 

TABLE 48:49: Summary of Credit Loss Experience

 

For the three months ended March 31 ($ in millions)

  2012 2011 
  For the three months For the six months 
  ended June 30, ended June 30, 

($ in millions)

  2012 2011 2012 2011 

Losses charged off:

        

Commercial and industrial loans

  $(60  (90  $(53  (86  (112  (176

Commercial mortgage loans

   (37  (58   (28  (51  (65  (109

Commercial construction loans

   (20  (27   (6  (21  (26  (48

Commercial leases

   —      (1   (8  —      (8  (1

Residential mortgage loans

   (38  (67   (38  (37  (76  (104

Home equity

   (50  (66   (43  (58  (93  (124

Automobile loans

   (16  (28   (13  (18  (29  (47

Credit card

   (24  (33   (24  (31  (47  (63

Other consumer loans and leases

   (8  (27   (6  (41  (16  (68
  

 

  

 

   

 

  

 

  

 

  

 

 

Total losses

   (253  (397   (219  (343  (472  (740

Recoveries of losses previously charged off:

        

Commercial and industrial loans

   6   7    7   10   13   17 

Commercial mortgage loans

   7   4    3   4   10   8 

Commercial construction loans

   2   1    6   1   9   2 

Commercial leases

   —      —       1   2   1   2 

Residential mortgage loans

   1   2    2   1   3   3 

Home equity

   4   3    4   4   8   7 

Automobile loans

   7   8    6   10   13   18 

Credit card

   4   2    6   3   9   5 

Other consumer loans and leases

   2   3    3   4   5   7 
  

 

  

 

   

 

  

 

  

 

  

 

 

Total recoveries

   33   30    38   39   71   69 

Net losses charged off:

        

Commercial and industrial loans

   (54  (83   (46  (76  (99  (159

Commercial mortgage loans

   (30  (54   (25  (47  (55  (101

Commercial construction loans

   (18  (26   —      (20  (17  (46

Commercial leases

   —      (1   (7  2   (7  1 

Residential mortgage loans

   (37  (65   (36  (36  (73  (101

Home equity

   (46  (63   (39  (54  (85  (117

Automobile loans

   (9  (20   (7  (8  (16  (29

Credit card

   (20  (31   (18  (28  (38  (58

Other consumer loans and leases

   (6  (24   (3  (37  (11  (61
  

 

  

 

   

 

  

 

  

 

  

 

 

Total net losses charged off

  $(220  (367  $(181  (304  (401  (671
  

 

  

 

   

 

  

 

  

 

  

 

 

Net charge-offs as a percent of average loans and leases (excluding held for sale):

        

Commercial and industrial loans

   0.69  1.22    0.57   1.10   0.62   1.16 

Commercial mortgage loans

   1.18   2.04    1.04   1.83   1.11   1.94 

Commercial construction loans

   7.30   5.24    (0.12  4.09   3.83   4.68 

Commercial leases

   0.01   0.04    0.87   (0.25  0.44   (0.10
  

 

  

 

   

 

  

 

  

 

  

 

 

Total commercial loans

   0.89   1.52    0.67   1.30   0.77   1.41 
  

 

  

 

   

 

  

 

  

 

  

 

 

Residential mortgage loans

   1.39   2.83    1.28   1.50   1.33   2.15 

Home equity

   1.76   2.23    1.50   1.94   1.63   2.08 

Automobile loans

   0.33   0.73    0.21   0.29   0.27   0.51 

Credit card

   4.18   6.60    3.78   6.08   3.98   6.34 

Other consumer loans and leases

   5.51   17.16    3.95   26.47   4.75   21.45 
  

 

  

 

   

 

  

 

  

 

  

 

 

Total consumer loans and leases

   1.33   2.43    1.16   1.89   1.26   2.16 
  

 

  

 

   

 

  

 

  

 

  

 

 

Total net losses charged off

   1.08  1.92    0.88   1.56   0.98   1.74 
  

 

  

 

   

 

  

 

  

 

  

 

 

Allowance for Credit Losses

The allowance for credit losses is comprised of the ALLL and the reserve for unfunded commitments. The ALLL provides coverage for probable and estimable losses in the loan and lease portfolio. The Bancorp evaluates the ALLL each quarter to determine its adequacy to cover inherent losses. Several factors are taken into consideration in the determination of the overall ALLL, including an unallocated component. These factors include, but are not limited to, the overall risk profile of the loan and lease portfolios, net charge-off experience, the extent of impaired loans and leases, the level of nonaccrual loans and leases, the level of 90 days past due loans and leases and the overall percentage level of the ALLL. The Bancorp also considers overall asset quality trends, credit administration and portfolio management practices, risk identification practices, credit policy and underwriting practices, overall portfolio growth, portfolio concentrations and current national and local economic conditions that might impact the portfolio. More information on the ALLL can be found in Management’s Discussion and Analysis — Critical Accounting Policies in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2011.

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

The ALLL attributable to the portion of the residential and consumer loan and lease portfolio that has not been restructured is determined on a pooled basis with the segmentation being based on the similarity of credit risk characteristics. Loss factors for real estate backed consumer

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

loans are developed for each pool based on the trailing twelve month historical loss rate, as adjusted for certain prescriptive loss rate factors and certain qualitative adjustment factors. The prescriptive loss rate factors and qualitative adjustments are designed to reflect risks associated with current conditions and trends which are not believed to be fully reflected in the trailing twelve month historical loss rate. For real estate backed consumer loans, the prescriptive loss rate factors include adjustments for delinquency trends, LTV trends, refreshed FICO score trends and product mix, and the qualitative factors include adjustments for credit administration and portfolio management practices, credit policy and underwriting practices and the national and local economy. The Bancorp considers home price index trends in its footprint when determining the national and local economy qualitative factor. The Bancorp also considers the volatility of collateral valuation trends when determining the unallocated component of the ALLL.

TABLE 49:50: Changes in Allowance for Credit Losses

 

  For the three months
ended March 31,
   For the three months
ended June 30,
 For the six months
ended June 30,
 

($ in millions)

  2012 2011   2012 2011 2012 2011 

ALLL:

        

Balance, beginning of period

  $2,255   3,004   $2,126   2,805   2,255   3,004 

Losses charged off

   (253  (397   (219  (343  (472  (740

Recoveries of losses previously charged off

   33   30    38   39   71   69 

Provision for loan and lease losses

   91   168    71   113   162   281 
  

 

  

 

   

 

  

 

  

 

  

 

 

Balance, end of period

  $2,126   2,805   $2,016   2,614   2,016   2,614 
  

 

  

 

   

 

  

 

  

 

  

 

 

Reserve for unfunded commitments:

        

Balance, beginning of period

  $181   227   $179   211   181   231 

Provision for loan and lease losses

   (2  (16   (1  (14  (3  (34
  

 

  

 

   

 

  

 

  

 

  

 

 

Balance, end of period

  $179   211   $178   197   178   197 
  

 

  

 

   

 

  

 

  

 

  

 

 

In the first quarterhalf of 2012, the Bancorp did not substantively change any material aspect of its overall approach in the determination of the ALLL and there have been no material changes in assumptions or estimation techniques as compared to prior periods that impacted the determination of the current period allowance. In addition to the ALLL, the Bancorp maintains a reserve for unfunded commitments recorded in other liabilities in the Condensed Consolidated Balance Sheets. The methodology used to determine the adequacy of this reserve is similar to the Bancorp’s methodology for determining the ALLL. The provision for unfunded commitments is included in other noninterest expense in the Condensed Consolidated Statements of Income.

Certain inherent, but unconfirmed losses are probable within the loan and lease portfolio. The Bancorp’s current methodology for determining the level of losses is based on historical loss rates, current credit grades, specific allocation on impaired commercial credits above specified thresholds and other qualitative adjustments. Due to the heavy reliance on realized historical losses and the credit grade rating process, the model-derived required reserves tend to slightly lag behind the deterioration in the portfolio in a stable or deteriorating credit environment, and tend not to be as responsive when improved conditions have presented themselves. Given these model limitations, the qualitative adjustment factors may be incremental or decremental to the quantitative model results.

An unallocated component to the ALLL is maintained to recognize the imprecision in estimating and measuring loss. The unallocated allowance as a percent of total portfolio loans and leases was 0.15% at March 31,June 30, 2012 and 0.17% at December 31, 2011 and March 31, 2011 was 0.16%, 0.17% and 0.19%, respectively.June 30, 2011. The unallocated allowance was flat at six percent of the total allowance from December 31, 2011 to March 31,June 30, 2012, and was five percent at March 31,June 30, 2011. The increase in the unallocated allowance as a percentage of the total allowance from March 31,June 30, 2011 was driven by additional sustained market volatility in the U.S. markets that has provided indications that loss events may be occurring at a rate greater than the rate captured within the Bancorp’s model.

As shown in Table 50,51, the ALLL as a percent of the total loan and lease portfolio was 2.59%2.45% at March 31,June 30, 2012 compared to 2.78% at December 31, 2011 and 3.62%3.35% at March 31,June 30, 2011. The ALLL was $2.1$2.0 billion as of March 31,June 30, 2012, compared to $2.3 billion as of December 31, 2011 and $2.8$2.6 billion at March 31,June 30, 2011. The decreasedecreases from both prior periods is reflective of a number of factors including decreases in nonperforming loans and leases, improved delinquency metrics in commercial and consumer loans and leases and improvement in underlying loss trends.

The Bancorp’s determination of the ALLL for commercial loans is sensitive to the risk grades it assigns to these loans. In the event that 10% of commercial loans in each risk category would experience a downgrade of one risk category, the allowance for commercial loans would increase by approximately $137$148 million at March 31,June 30, 2012. In addition, the Bancorp’s determination of the allowance for residential and consumer loans is sensitive to changes in estimated loss rates. In the event that estimated loss rates would increase by 10%, the allowance for residential and consumer loans would increase by approximately $70$55 million at March 31,June 30, 2012. As several qualitative and quantitative factors are considered in determining the ALLL, these sensitivity analyses do not necessarily reflect the nature and extent of future changes in the ALLL. They are intended to provide insights into the impact of adverse changes to risk grades and estimated loss rates and do not imply any

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

expectation of future deterioration in the risk ratings or loss rates. Given current processes employed by the Bancorp, management believes the risk grades and estimated loss rates currently assigned are appropriate.

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

TABLE 50:51: Attribution of Allowance for Loan and Lease Losses to Portfolio Loans and Leases

 

($ in millions)

 March 31, 2012 December 31, 2011 March 31, 2011  June 30, 2012 December 31, 2011 June 30, 2011 

Allowance attributed to:

      

Commercial and industrial loans

 $886   929   1,093  $841   929   1,077 

Commercial mortgage loans

  402   441   526   383   441   485 

Commercial construction loans

  63   77   140   49   77   108 

Commercial leases

  73   80   96   74   80   94 

Residential mortgage loans

  233   227   286   232   227   268 

Home equity

  184   195   241   169   195   231 

Automobile loans

  40   43   70   37   43   61 

Credit card

  98   106   153   90   106   136 

Other consumer loans and leases

  19   21   55   20   21   24 

Unallocated

  128   136   145   121   136   130 
 

 

  

 

  

 

  

 

  

 

  

 

 

Total ALLL

 $2,126   2,255   2,805  $2,016   2,255   2,614 
 

 

  

 

  

 

  

 

  

 

  

 

 

Portfolio loans and leases:

      

Commercial and industrial loans

 $32,155   30,783   27,344  $32,612   30,783   28,099 

Commercial mortgage loans

  9,909   10,138   10,510   9,662   10,138   10,233 

Commercial construction loans

  901   1,020   1,980   822   1,020   1,778 

Commercial leases

  3,512   3,531   3,367   3,467   3,531   3,326 

Residential mortgage loans

  11,094   10,672   9,530   11,429   10,672   9,849 

Home equity

  10,493   10,719   11,222   10,377   10,719   11,048 

Automobile loans

  11,832   11,827   11,129   11,739   11,827   11,315 

Credit card

  1,896   1,978   1,821   1,943   1,978   1,856 

Other consumer loans and leases

  321   350   562   308   350   463 
 

 

  

 

  

 

  

 

  

 

  

 

 

Total portfolio loans and leases

 $82,113   81,018   77,465  $82,359   81,018   77,967 
 

 

  

 

  

 

  

 

  

 

  

 

 

Attributed allowance as a percent of respective portfolio loans and leases:

      

Commercial and industrial loans

  2.76  3.02   4.00   2.58   3.02   3.83 

Commercial mortgage loans

  4.06   4.35   5.00   3.96   4.35   4.74 

Commercial construction loans

  6.99   7.55   7.07   5.96   7.55   6.07 

Commercial leases

  2.08   2.27   2.85   2.13   2.27   2.83 

Residential mortgage loans

  2.10   2.13   3.00   2.03   2.13   2.72 

Home equity

  1.75   1.82   2.15   1.63   1.82   2.09 

Automobile loans

  0.34   0.36   0.63   0.32   0.36   0.54 

Credit card

  5.17   5.36   8.40   4.63   5.36   7.33 

Other consumer loans and leases

  5.92   6.00   9.79   6.49   6.00   5.18 

Unallocated (as a percent of total portfolio loans and leases)

  0.16   0.17   0.19   0.15   0.17   0.17 
 

 

  

 

  

 

  

 

  

 

  

 

 

Attributed allowance as a percent of total portfolio loans and leases

  2.59  2.78   3.62   2.45   2.78   3.35 
 

 

  

 

  

 

  

 

  

 

  

 

 

MARKET RISK MANAGEMENT

Market risk arises from the potential for market fluctuations in interest rates, foreign exchange rates and equity prices that may result in potential reductions in net income. Interest rate risk, a component of market risk, is the exposure to adverse changes in net interest income or financial position due to changes in interest rates. Management considers interest rate risk a prominent market risk in terms of its potential impact on earnings. Interest rate risk can occur for any one or more of the following reasons:

 

Assets and liabilities may mature or reprice at different times;

 

Short-term and long-term market interest rates may change by different amounts; or

 

The expected maturity of various assets or liabilities may shorten or lengthen as interest rates change.

In addition to the direct impact of interest rate changes on net interest income, interest rates can indirectly impact earnings through their effect on loan demand, credit losses, mortgage originations, the value of servicing rights and other sources of the Bancorp’s earnings. Stability of the Bancorp’s net income is largely dependent upon the effective management of interest rate risk. Management continually reviews the Bancorp’s balance sheet composition and earnings flows and models the interest rate risk, and possible actions to reduce this risk, given numerous possible future interest rate scenarios.

Net Interest Income Simulation Model

The Bancorp utilizes a variety of measurement techniques to identify and manage its interest rate risk, including the use of an NII simulation model to analyze the sensitivity of net interest income to changing interest rates. The model is based on contractual and assumed cash flows

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

and repricing characteristics for all of the Bancorp’s financial instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes senior management’s projections of the future volume and pricing of each of the product lines offered by the Bancorp as well as other pertinent assumptions. Actual results may differ from these simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.

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

The Bancorp’s Executive ALCO, which includes senior management representatives and is accountable to the Enterprise Risk Management Committee, monitors and manages interest rate risk within Board approved policy limits. In addition to the risk management activities of ALCO, the Bancorp has a Market Risk Management function as part of ERM that provides independent oversight of market risk activities. The Bancorp’s interest rate risk exposure is currently evaluated by measuring the anticipated change in net interest income over 12-month12 month and 24-month24 month horizons assuming a 100 bps parallel ramped increase and a 200 bps parallel ramped increase in interest rates. The Fed Funds interest rate, targeted by the Federal Reserve at a range of 0% to 0.25%, is currently set at a level that would be negative in parallel ramped decrease scenarios; therefore, those scenarios were omitted from the interest rate risk analyses at March 31,June 30, 2012. In accordance with the current policy, the rate movements are assumed to occur over one year and are sustained thereafter.

At March 31,June 30, 2012, and 2011, the Bancorp’s interest rate risk profile reflects moderate asset sensitivity in year one in contrast to a relatively neutral profile at June 30, 2011 with increasedyear two asset sensitivity inincreases from year two.one at both June 30, 2012 and June 30, 2011. The following table shows the Bancorp’s estimated net interest income sensitivity profile and ALCO policy limits as of March 31:June 30:

TABLE 51:52: Estimated NII Sensitivity Profile

 

  2012   2011         2012   2011       
  Percent Change in NII
(FTE)
   Percent Change in
NII (FTE)
   ALCO Policy Limits   % Change��in NII (FTE)   % Change in NII (FTE)   ALCO Policy Limits 

Change in Interest Rates (bps)

  12 Months 13 to 24
Months
   12
Months
 13 to 24
Months
   12
Months
 13 to 24
Months
   12 Months 13 to 24
Months
   12 Months 13 to 24
Months
   12 Months 13 to 24
Months
 

+ 200

   1.00  5.09    0.98  4.37    (5.00  (7.00   2.42   8.91    0.42   6.09    (5.00  (7.00

+ 100

   0.46   2.36    0.57   2.52    —      —       1.06   4.18    0.20   3.27    —      —    

The 12 months and 13 to 24 months net interest income at risk reported as of March 31, 2012 for the +200 and +100 bps scenarios were relatively flat compared with March 31, 2011. Changes in net interest income at risk at March 31,June 30, 2012 compared to March 31,June 30, 2011 are the result of differencesgrowth in balance sheet compositioncore deposit balances and lower market interest rates.rates, partially offset by increases in fixed-rate loan balances.

Economic Value of Equity

The Bancorp also utilizes EVE as a measurement tool in managing interest rate risk. Whereas the net interest income simulation model highlights exposures over a relatively short time horizon, the EVE analysis incorporates all cash flows over the estimated remaining life of all balance sheet and derivative positions. The EVE of the balance sheet, at a point in time, is defined as the discounted present value of asset and net derivative cash flows less the discounted value of liability cash flows. The sensitivity of EVE to changes in the level of interest rates is a measure of longer-term interest rate risk. EVE values only the current balance sheet and does not incorporate the growth assumptions used in the earnings simulation model. As with the earnings simulation model, assumptions about the timing and variability of existing balance sheet cash flows are critical in the EVE analysis. Particularly important are assumptions driving loan and security prepayments and the expected changes in balancesbalance attrition and pricing of transaction deposit portfolios.

The following table shows the Bancorp’s EVE sensitivity profile as of March 31:June 30:

TABLE 52:53: Estimated EVE Sensitivity Profile

 

   2012  2011    

Change in Interest Rates (bps)

  Change in EVE  Change in EVE  ALCO Policy Limits 

+200

   1.92  (0.20)%   (15.00

+100

   1.40   0.09  

+25

   0.35   0.03  

-25

   (0.33  (0.14 
   2012  2011    

Change in Interest Rates (bps)

  Change in EVE  Change in EVE  ALCO Policy Limits 

+ 200

   1.18   (1.94)%   (15.00

+ 100

   1.00   (0.49) 

+ 25

   0.32   (0.04 

- 25

   (0.30  (0.17 

The EVE at risk profile suggests a positive effect from market rate increases of +25 bps through the +200 bps scenarios for 2012. The EVE at risk reported at March 31,June 30, 2012 for the +200 basis points scenario shows a change to a modest asset sensitive position compared to March 31,June 30, 2011. The primary factors contributing to the change are the decline in market interest rates over the course of 2011,this time period, growth in core deposits and changes in the MSR risk profile, partially offset by the impact of an increase in fixed-rate loans.loan balances.

While an instantaneous shift in interest rates is used in this analysis to provide an estimate of exposure, the Bancorp believes that a gradual shift in interest rates would have a much more modest impact. Since EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (e.g., the current fiscal year). Further, EVE does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships and changing product spreads that could mitigate or exacerbate the adverse impact of changes in interest rates. The NII simulation and EVE analyses do not necessarily include certain actions that management may undertake to manage this risk in response to anticipated changes in interest rates.

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

 

 

interest rates. The NII simulations and EVE analyses do not necessarily include certain actions that management may undertake to manage risk in response to anticipated changes in interest rates.

The Bancorp regularly evaluates its exposures to LIBOR and Prime basis risks, nonparallel shifts in the yield curve and embedded options risk. In addition, the impact on NII and EVE of extreme changes in interest rates is modeled, wherein the Bancorp employs the use of yield curve shocks and environment-specific scenarios.

Use of Derivatives to Manage Interest Rate Risk

An integral component of the Bancorp’s interest rate risk management strategy is its use of derivative instruments to minimize significant fluctuations in earnings caused by changes in market interest rates. Examples of derivative instruments that the Bancorp may use as part of its interest rate risk management strategy include interest rate swaps, interest rate floors, interest rate caps, forward contracts, principal only swaps, options, swaptions and TBA securities.

As part of its overall risk management strategy relative to its mortgage banking activity, the Bancorp enters into forward contracts accounted for as free-standing derivatives to economically hedge interest rate lock commitments that are also considered free-standing derivatives. Additionally, the Bancorp economically hedges its exposure to mortgage loans held for sale through the use of forward contracts and mortgage options.

The Bancorp also establishes derivative contracts with major financial institutions to economically hedge significant exposures assumed in commercial customer accommodation derivative contracts. Generally, these contracts have similar terms in order to protect the Bancorp from market volatility. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts, which the Bancorp minimizes through collateral arrangements, approvals, limits and monitoring procedures. For further information including the notional amount and fair values of these derivatives, see Note 10 of the Notes to Condensed Consolidated Financial Statements.

Portfolio Loans and Leases and Interest Rate Risk

Although the Bancorp’s portfolio loans and leases contain both fixed and floating/adjustable rate products, the rates of interest earned by the Bancorp on the outstanding balances are generally established for a period of time. The interest rate sensitivity of loans and leases is directly related to the length of time the rate earned is established. Table 5354 summarizes the expected principal cash flows of the Bancorp’s portfolio loans and leases as of March 31,June 30, 2012.

TABLE 53:54: Portfolio Loan and Lease Contractual Maturities

 

($ in millions)

  Less than 1 year   1-5 years   Over 5 years   Total 

As of June 30, 2012 ($ in millions)

  Less than 1 year   1-5 years   Over 5 years   Total 

Commercial and industrial loans

  $10,097    19,954    2,104    32,155   $9,908    20,603    2,101    32,612 

Commercial mortgage loans

   4,589    4,303    1,017    9,909    4,593    4,074    995    9,662 

Commercial construction loans

   445    277    179    901    395    270    157    822 

Commercial leases

   577    1,484    1,451    3,512    569    1,465    1,433    3,467 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal - commercial loans and leases

   15,708    26,018    4,751    46,477    15,465    26,412    4,686    46,563 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Residential mortgage loans

   2,909    4,798    3,387    11,094    3,718    4,493    3,218    11,429 

Home equity

   1,088    2,749    6,656    10,493    1,120    2,692    6,565    10,377 

Automobile loans

   4,921    6,702    209    11,832    4,711    6,808    220    11,739 

Credit card

   534    1,362    —       1,896    554    1,389    —       1,943 

Other consumer loans and leases

   253    64    4    321    271    34    3    308 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Subtotal - consumer loans and leases

   9,705    15,675    10,256    35,636    10,374    15,416    10,006    35,796 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $25,413    41,693    15,007    82,113   $25,839    41,828    14,692    82,359 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Additionally, Table 5455 displays a summary of expected principal cash flows occurring after one year for both fixed and floating/adjustable rate loans as of March 31,June 30, 2012.

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

 

 

TABLE 54:55: Portfolio Loan and Lease Principal Cash Flows Occurring After One Year

 

   Interest Rate 
  Interest Rate 

($ in millions)

  Fixed   Floating or Adjustable 

As of June 30, 2012 ($ in millions)

  Fixed   Floating or Adjustable 

Commercial and industrial loans

  $3,813    18,245   $3,783    18,921 

Commercial mortgage loans

   1,704    3,616    1,643    3,426 

Commercial construction loans

   166    290    145    282 

Commercial leases

   2,935    —       2,898    —    
  

 

   

 

   

 

   

 

 

Subtotal - commercial loans and leases

   8,618    22,151    8,469    22,629 
  

 

   

 

   

 

   

 

 

Residential mortgage loans

   6,203    1,982    5,689    2,022 

Home equity

   1,221    8,184    1,195    8,062 

Automobile loans

   6,862    49    6,980    48 

Credit card

   605    757    581    808 

Other consumer loans and leases

   29    39    15    22 
  

 

   

 

   

 

   

 

 

Subtotal - consumer loans and leases

   14,920    11,011    14,460    10,962 
  

 

   

 

   

 

   

 

 

Total

  $23,538    33,162   $22,929    33,591 
  

 

   

 

   

 

   

 

 

Residential Mortgage Servicing Rights and Interest Rate Risk

The net carrying amount of the residential MSR portfolio was $767$736 million, $681 million and $894$847 million as of March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, respectively. The value of servicing rights can fluctuate sharply depending on changes in interest rates and other factors. Generally, as interest rates decline and loans are prepaid to take advantage of refinancing, the total value of existing servicing rights declines because no further servicing fees are collected on repaid loans. The Bancorp maintains a non-qualifying hedging strategy relative to its mortgage banking activity in order to manage a portion of the risk associated with changes in the value of its MSR portfolio as a result of changing interest rates.

Mortgage rates increaseddecreased slightly during both the firstsecond quarter of 2012 and the same period in the prior year. This caused modeled prepayments speeds to decrease,increase, which led to a recovery of $11$60 million in temporary impairment on servicing rights during the three months ended March 31,June 30, 2012 and a recovery of $37compared to $64 million in temporary impairment on servicing rights during the three months ended March 31,June 30, 2011. Servicing rights are deemed temporarily impaired when a borrower’s loan rate is distinctly higher than prevailing rates. Temporary impairment on servicing rights is reversed when the prevailing rates return to a level commensurate with the borrower’s loan rate. In addition to the mortgage servicing rights valuation, the Bancorp recognized net gains of $4$38 million on its non-qualifying hedging strategy for the three months ended March 31,June 30, 2012, compared to net lossesgains of $22$129 million for the three months ended March 31,June 30, 2011. There were no security salesNet losses on the sale of securities related to the Bancorp’s non-qualifying hedging strategy were immaterial for the three months ended March 31, 2012. The net losses on the non-qualifying hedging strategy included $5 millionsecond quarter of net gains on the sale of securities during the first quarter ofboth 2012 and 2011. During the fourth quarter of 2011, the Bancorp assessed the composition of its MSR portfolio, the cost of hedging and the anticipated effectiveness of the hedges given the economic environment. Based on this review, the Bancorp adjusted its MSR hedging strategy to exclude the hedging of MSRs related to certain mortgage loans originated in 2008 and prior, representing approximately 20%18% of the carrying value of the MSR portfolio as of March 31,June 30, 2012. The prepayment behavior of these loans is expected to be less sensitive to changes in interest rates as tighter industry underwriting standards, borrower credit characteristics and home price values have had a greater impact based on changes in the market and underwriting environment.prepayment speeds. Thus, the predictive power of traditional prepayment models that are based solely on these loansthe historical dependency of prepayment speeds on market interest rates may not be reliable which reducesfor these loans. As a result, the Bancorp has considered these additional factors as it models prepayment speeds when valuing the MSRs. The Bancorp utilizes valuation opinions from servicing brokers, peer surveys and its historical prepayment experience in validating the modeled prepayment speeds utilized in the fair value measurement of the MSRs. As these additional factors have had an impact on prepayment speeds, the effectiveness of traditional hedging strategies utilizing benchmark interest rate based hedge strategies. Thederivatives has been reduced. In addition to the market factors that impact prepayment speeds, the Bancorp is exposed to prepayment risk on these loans in the event borrowers refinance at higher than expected levels due to government intervention or other factors. The Bancorp continues to monitor the performance of these MSRs and may decide to hedge this portion of the MSR portfolio in future periods. See Note 9 of the Notes to Condensed Consolidated Financial Statements for further discussion on servicing rights and the instruments used to hedge interest rate risk on MSRs.

Foreign Currency Risk

The Bancorp may enter into foreign exchange derivative contracts to economically hedge certain foreign denominated loans. The derivatives are classified as free-standing instruments with the revaluation gain or loss being recorded in other noninterest income in the Condensed Consolidated Statements of Income. The balance of the Bancorp’s foreign denominated loans at March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011 was $414$387 million, $374 million and $296$369 million, respectively. The Bancorp also enters into foreign exchange contracts for the benefit of commercial customers involved in international trade to hedge their exposure to foreign currency fluctuations. The Bancorp has internal controls in place to help ensure excessive risk is not being taken in providing this service to customers. These controls include an independent determination of currency volatility and credit equivalent exposure on these contracts, counterparty credit approvals and country limits.

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

 

 

LIQUIDITY RISK MANAGEMENT

The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand, unexpected levels of deposit withdrawals and other contractual obligations. Mitigating liquidity risk is accomplished by maintaining liquid assets in the form of investment securities, maintaining sufficient unused borrowing capacity in the debt markets and delivering consistent growth in core deposits. A summary of certain obligations and commitments to make future payments under contracts is included in Note 12 of the Notes to Condensed Consolidated Financial Statements.

The Bancorp maintains a contingency funding plan that assesses the liquidity needs under various scenarios of market conditions, asset growth and credit rating downgrades. The plan includes liquidity stress testing which measures various sources and uses of funds under the different scenarios. The contingency plan provides for ongoing monitoring of unused borrowing capacity and available sources of contingent liquidity to prepare for unexpected liquidity needs and to cover unanticipated events that could affect liquidity.

Sources of Funds

The Bancorp’s primary sources of funds relate to cash flows from loan and lease repayments, payments from securities related to sales and maturities, the sale or securitization of loans and leases and funds generated by core deposits, in addition to the use of public and private debt offerings.

Projected contractual maturities from loan and lease repayments are included in Table 5354 of the Market Risk Management section of MD&A. Of the $16.1$15.6 billion of securities in the Bancorp’s available-for-sale portfolio at March 31,June 30, 2012, $4.2$4.1 billion in principal and interest is expected to be received in the next 12 months and an additional $2.9$2.6 billion is expected to be received in the next 13 to 24 months. For further information on the Bancorp’s securities portfolio, see the Investment Securities subsection of the Balance Sheet Analysis section of MD&A.

Asset-driven liquidity is provided by the Bancorp’s ability to sell or securitize loan and lease assets. In order to reduce the exposure to interest rate fluctuations and to manage liquidity, the Bancorp has developed securitization and sale procedures for several types of interest-sensitive assets. A majority of the long-term, fixed-rate single-family residential mortgage loans underwritten according to FHLMC or FNMA guidelines are sold for cash upon origination. Additional assets such as residential mortgages, certain commercial loans, home equity loans, automobile loans and other consumer loans are also capable of being securitized or sold. ForThe Bancorp sold loans totaling $4.7 billion and $11.6 billion, respectively, for the three and six months ended March 31, 2012June 30, 2012. During the three and six months ended June 30, 2011, the Bancorp sold loans totaling $6.9$2.7 billion and $4.0$6.7 billion, respectively. For further information on the transfer of financial assets, see Note 9 of the Notes to Condensed Consolidated Financial Statements.

Core deposits have historically provided the Bancorp with a sizeable source of relatively stable and low cost funds. The Bancorp’s average core deposits and shareholders’ equity funded 80%81% of its average total assets for the firstsecond quarter of 2012, compared to 81% for the fourth quarter of 2011 and 82% for the firstsecond quarter of 2011. In addition to core deposit funding, the Bancorp also accesses a variety of other short-term and long-term funding sources, which include the use of the FHLB system. Certificates of deposit carrying a balance of $100,000 or more and deposits in the Bancorp’s foreign branch located in the Cayman Islands are wholesale funding tools utilized to fund asset growth. Management does not rely on any one source of liquidity and manages availability in response to changing balance sheet needs.

The Bancorp has a shelf registration in place with the SEC permitting ready access to the public debt markets and qualifies as a “well-known seasoned issuer” under the SEC rules. As of March 31,June 30, 2012, $5.6 billion of debt or other securities were available for issuance from this shelf registration under the current Bancorp’s Board of Directors’ authorizations,authorizations; however, access to these markets may depend on market conditions. The Bancorp also has $19.0 billion of funding available for issuance through private offerings of debt securities pursuant to its bank note program and currently has approximately $32.6$32.1 billion of borrowing capacity available through secured borrowing sources including the FHLB and FRB.

On March 7, 2012, the Bancorp issued $500 million in aggregate principal amount of 3.50% Senior Notes due March 15, 2022. See Note 11 of the Notes to Condensed Consolidated Financial Statements for additional information regarding the Senior Notes.

On August 8, 2012, the Bancorp redeemed all $862.5 million of the outstanding TruPS issued by Fifth Third Capital Trust VI. The Fifth Third Capital Trust VI securities had a current distribution rate of 7.25% and a scheduled maturity date of November 15, 2067, although they were redeemable at any time on or after November 15, 2012 or at any time prior to November 15, 2012 within 90 days of the occurrence of a Capital Treatment Event. In addition, on August 15, 2012, the Bancorp will redeem all $575 million of the outstanding TruPS issued by Fifth Third Capital Trust V. The Fifth Third Capital Trust V securities have a current distribution rate of 7.25% and a scheduled maturity date of August 15, 2067, and may be redeemed at any time on or after August 15, 2012. See Note 21 of the Notes to Condensed Consolidated Financial Statements for additional information regarding the TruPS.

Credit Ratings

The cost and availability of financing to the Bancorp are impacted by its credit ratings. A downgrade to the Bancorp’s credit ratings could affect its ability to access the credit markets and increase its borrowing costs, thereby adversely impacting the Bancorp’s financial condition

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

and liquidity. Key factors in maintaining high credit ratings include a stable and diverse earnings stream, strong credit quality, strong capital ratios and diverse funding sources, in addition to disciplined liquidity monitoring procedures.

The Bancorp’s senior debt credit ratings are summarized in Table 55.56. The ratings reflect the ratings agencies view on the Bancorp’s capacity to meet financial commitments. * Additional information on senior debt credit ratings is as follows:

 

Moody’s “Baa1” rating is considered a medium-grade obligation and is the fourth highest ranking within its overall classification system;

 

Standard & Poor’s “BBB” rating indicates the obligor’s capacity to meet its financial commitment is adequate and is the fourth highest ranking within its overall classification system;

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

 

Fitch Ratings’ “A-” rating is considered high credit quality and is the third highest ranking within its overall classification system; and

 

DBRS Ltd.’s “A (low)” rating is considered satisfactory credit quality and is the third highest ranking within its overall classification system.

 

*As an investor, you should be aware that a security rating is not a recommendation to buy, sell or hold securities, that it may be subject to revision or withdrawal at any time by the assigning rating organization and that each rating should be evaluated independently of any other rating.

TABLE 55:56: Agency Ratings

 

As of May 10,August 8, 2012

  Moody’s  Standard and Poor’s  Fitch  DBRS

Fifth Third Bancorp:

        

Short-term

  No rating  A-2  F1  R-1L

Senior debt

  Baa1  BBB  A-    AL

Subordinated debt

  Baa2  BBB-  BBB+  BBBH

Fifth Third Bank:

        

Short-term

  P-2  A-2  F1  R-1L

Long-term deposit

  A3  No rating  A  A

Senior debt

  A3  BBB+  A-    A

Subordinated debt

  Baa1  BBB  BBB+  A (low)
  

 

  

 

  

 

  

 

CAPITAL MANAGEMENT

Management regularly reviews the Bancorp’s capital position to help ensure it is appropriately positioned under various operating environments. The Bancorp has established a Capital Committee, which is responsible for all capital related decisions. The Capital Committee makes recommendations to management involving capital actions. These recommendations are reviewed and approved by the Enterprise Risk Management Committee.

Capital Ratios

The U.S banking agencies established quantitative measures that assign risk weightings to assets and off-balance sheet items and also define and set minimum regulatory capital requirements. The U.S. banking agencies define “well capitalized” ratios for Tier I and total risk-based capital as 6% and 10%, respectively. The Bancorp exceeded these “well-capitalized” ratios for all periods presented.

The Basel II advanced approach framework was finalized by U.S. banking agencies in 2007. Core banks, defined as those with consolidated total assets in excess of $250 billion or on balance sheet foreign exposures of $10 billion were required to adopt the advanced approach effective April 1, 2008. The Bancorp is not subject to the requirements of Basel II.

The Dodd-Frank Act requires more stringent prudential standards, including capital and liquidity requirements, for larger institutions. It addresses the quality of capital components by limiting the degree to which certain hybrid instruments can be included. The Dodd-Frank Act will phase out the inclusion of certain trust preferred securitiesTruPS as a component of Tier I risk-based capital beginning January 1, 2013. At March 31,June 30, 2012, the Bancorp’s Tier I risk-based capital included $2.2 billion of trust preferred securitiesTruPS representing approximately 213211 bps of risk-weighted assets.

In December of 2010 and revised in June of 2011, the Basel Committee on Banking Supervision issued Basel III, a global regulatory framework, to enhance the international capital standards. It imposes a stricter definitionIn June of 2012, U.S. banking regulators proposed enhancements to the regulatory capital with greater reliance on common equityrequirements for U.S. banks, which implement aspects of Basel III, such as re-defining the regulatory capital elements and sets higher minimum capital requirements. It createsratios, introducing regulatory capital buffers above those minimums, revising the agencies rules for calculating risk-weighted assets and introducing a new capital measure, Tier I common equity which proposes changesratio. The Bancorp continues to theevaluate these proposals and their potential impact. Its current calculationestimate of the pro-forma fully phased in Tier I common equity ratio at June 30, 2012 under the proposed capital rules is approximately 9%* compared with 9.77% as calculated under the existing Basel I capital framework. The primary drivers of the change from the existing Basel I capital framework to the Basel III proposal are an increase in Tier I common equity of approximately 50 bp (primarily from including AOCI) which would be more than offset by the impact of increases in risk-weighted assets (primarily from 1-4 family senior and junior lien residential mortgages and commitments with an original maturity of one year or less). The pro forma Tier I common equity ratio exceeds the proposed minimum Tier I common equity ratio of 7% comprised of a minimum of 4.5% plus a capital conservation buffer of 2.5%. The pro forma Tier I common equity ratio does not include the effect of any mitigating actions the Bancorp and several other financial institutions. The U.S. banking agencies are in the process of developing rules to implement the new capital standards as part of the Collins Amendment within the Dodd-Frank Act. Management believes that the Bancorp’s capital levels will continue to exceed U.S. “well-capitalized” standards, including the adoption of U.S. rules that incorporate changes under Basel III, to the extent applicable.may

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

 

 

undertake to offset the impact of the proposed capital enhancements. For further discussion on the Basel I Tier I common equity ratio, see the Non-GAAP Financial Measures section of MD&A.

*The pro forma Tier I common equity ratio is management’s estimate based upon its current interpretation of the three draft Federal Register notices proposing enhancements to regulatory capital requirements published in June 2012. The actual impact to the Bancorp’s Tier I common equity ratio may change significantly due to further clarification of the agencies proposals or revisions to the agencies final rules, which remain subject to public comment.

TABLE 56:57: Capital Ratios

 

($ in millions)

  March 31,
2012
 December 31,
2011
   March 31,
2011
   June 30,
2012
 December 31,
2011
   June 30,
2011
 

Average equity as a percent of average assets

   11.49  11.41    11.77    11.58   11.41    11.12 

Tangible equity as a percent of tangible assets(a)

   9.37   9.03    8.76    9.50   9.03    9.01 

Tangible common equity as a percent of tangible assets(a)

   9.02   8.68    8.39    9.15   8.68    8.64 
          

Tier I capital

  $12,860   12,503    12,129   $13,093   12,503    11,972 

Total risk-based capital

   16,936   16,885    16,175    17,281   16,885    16,085 

Risk-weighted assets(b)

   105,412   104,945    99,392    106,398   104,945    100,320 
          

Regulatory capital ratios:

          

Tier I capital

   12.20  11.91    12.20    12.31   11.91    11.93 

Total risk-based capital

   16.07   16.09    16.27    16.24   16.09    16.03 

Tier I leverage

   11.31   11.10    11.21    11.39   11.10    11.03 

Tier I common equity(a)

   9.64   9.35    8.99    9.77   9.35    9.20 

 

a)For further information on these ratios, see the Non-GAAP Financial Measures section of the MD&A.
b)Under the banking agencies’ risk-based capital guidelines, assets and credit equivalent amounts of derivatives and off-balance sheet exposures are assigned to broad risk categories. The aggregate dollar amount in each risk category is multiplied by the associated risk weight of the category. The resulting weighted values are added together resulting in the Bancorp’s total risk-weighted assets.

Under the Dodd-Frank Act financial reform legislation, TruPS were to be phased out of Tier I capital over three years beginning in 2013. The new regulations proposed by U.S. banking regulators also propose to cease Tier I capital treatment for outstanding TruPS with a similar phasing period. On August 8, 2012, The Bancorp redeemed all $862.5 million of Capital Trust VI TruPS due to a determination of a Capital Treatment Event. On July 2, 2012, the Bancorp announced that it submitted a redemption notice to call the $575 million of Capital Trust V TruPS on August 15, 2012. The pro forma regulatory capital ratios for the Bancorp as of June 30, 2012, including the impact of the Bancorp’s call of $1.4 billion in TruPS in July of 2012, were as follows: Tier I capital ratio of 10.95%, Total risk-based capital ratio of 14.89% and Tier I leverage ratio of 10.14%.

2012 Capital Actions

As part of the 2012 CCAR, on January 9, 2012, the Bancorp submitted to the FRB a capital plan approved by its Board of Directors covering the period from January 1, 2012 to March 31, 2013. The mandatory elements of the capital plan are an assessment of the expected use and sources of capital over the planning horizon, a description of all planned capital actions over the planning horizon, a discussion of any expected changes to the Bancorp’s business plan that are likely to have a material impact on its capital adequacy or liquidity, a detailed description of the Bancorp’s process for assessing capital adequacy and the Bancorp’s capital policy.

The FRB assessed the comprehensiveness of the capital plan, the reasonableness of the assumptions and the analysis underlying the capital plan and reviewed the robustness of the capital adequacy process, the capital policy and the Bancorp’s ability to maintain capital above the minimum regulatory capital ratio and above a Tier 1I common ratio of 5 percent on a pro forma basis under expected and stressful conditions throughout the planning horizon.

On March 13, 2012 the Bancorp announced the FRB’s response to the capital plan it submitted as part of the 2012 CCAR. The FRB indicated that it did not object to the following capital actions: a continuation of its quarterly common dividend of $0.08 per share; the redemption of up to $1.4 billion in certain trust preferred securities;TruPS; and the repurchase of common shares in an amount equal to any after-tax gains realized by Fifth Third from the sale of Vantiv, Inc. common shares by either Fifth Third or Vantiv, Inc.

The FRB indicated to the Bancorp that it did object to other elements of its capital plan, including increases in its quarterly common dividend and the initiation of common share repurchases other than those described in the paragraph above. Fifth Third intends to resubmitThe Bancorp resubmitted its capital plan to the FRB as soon as practicable in orderon June 8, 2012 and expects to addressreceive a response within approximately 75 days of the reasonsresubmission date. The resubmitted plan included capital actions and distributions for the FRB’s objections.covered period through March 31, 2013 that were substantially similar to those included in the original submission, with adjustments primarily reflecting the change in the expected timing of capital actions and distributions relative to the timing assumed in the original submission.

Dividend Policy and Stock Repurchase Program

The Bancorp’s common stock dividend policy and stock repurchase program reflect its earnings outlook, desired payout ratios, the need to maintain adequate capital levels, the ability of its subsidiaries to pay dividends, the need to comply with safe and sound banking practices as

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

well as meet regulatory requirements and expectations. The Bancorp declared dividends per common share of $0.08 and $0.06 during the firstsecond quarter of 2012 and 2011, respectively, and $0.16 and $0.12 for the six months ended June 30, 2012 and 2011, respectively.

On April 23, 2012, the Bancorp entered into an accelerated share repurchase transaction with a counterparty pursuant to which the Bancorp will purchasepurchased 4,838,710 shares or approximately $75 million of its outstanding common stock. Thestock on April 26, 2012. As part of this transaction, the Bancorp expectsentered into a forward contract in which the final number of shares delivered at settlement of the transaction to occur on or before July 26, 2012. Fifth Third is repurchasing the shares of its common stock as part of the 30 millionaccelerated share repurchase program, which has approximately 19 million shares remaining.

The actual number of shares of the Bancorp common stock to be delivered by a third party will betransaction was based generally on a discount to the average daily volume-weighted average pricesprice of the Bancorp’s common stock during the term of the Repurchase Agreement. At settlement,The accelerated share repurchase was treated as two separate transactions (i) the third party may be obligatedacquisition of treasury shares on the acquisition date and (ii) a forward contract indexed to deliver additional shares of the Bancorp’s common stock to the Bancorp, or the Bancorp may be obligated to make a delivery of common stock or a payment of cash to the third party at the Bancorp’s election. The Bancorp expects thestock. At settlement of the forward contract on June 1, 2012, the Bancorp received an additional 631,986 shares which were recorded as an adjustment to the basis in the treasury shares purchased on the acquisition date.

Upon completion of the accelerated share repurchase transaction, the Bancorp has remaining authority to occur on or before July 26, 2012.

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

repurchase approximately 14 million shares under its previously announced share repurchase program.

TABLE 57:58: Share Repurchases

 

Period

Total Number of
Shares
Purchases(a)
Average
Price Paid
Per Share
Total Number of Shares
Purchased as Part of

Publicly Announced
Plans or Programs
Maximum Number of
Shares that  May Yet be
Purchased Under the
Plans or Programs(b)

January 1, 2012 - January 31, 2012

—  $—  —  19,201,518 

February 1, 2012 - February 29, 2012

—  —  —  19,201,518 

March 1, 2012 - March 31, 2012

—  —  —  19,201,518 

Total

—  $—  —  19,201,518 

Period

  Total Number of
Shares
Purchases(a)
   Average
Price
Paid Per
Share
  Total Number of Shares
Purchased as Part of
Publicly Announced
Plans or Programs
   Maximum Number of
Shares that May Yet be
Purchased Under the
Plans or Programs(b)
 

April 1, 2012 - April 30, 2012

   4,838,710    $15.50    4,838,710    14,362,808   

May 1, 2012 - May 31, 2012

   —       —      —       14,362,808   

June 1, 2012 - June 30, 2012

   631,986     —  (c)   631,986    13,730,822   
  

 

 

   

 

 

  

 

 

   

 

 

 

Total

   5,470,696    $13.71    5,470,696    13,730,822   
  

 

 

   

 

 

  

 

 

   

 

 

 
(a)The Bancorp repurchased 152,7351,530,032 shares during the firstsecond quarter of 2012 in connection with various employee compensation plans. These purchases are not included in the calculation for average price paid per share and do not count against the maximum number of shares that may yet be purchased under the Board of Directors’ authorization.
(b)In May 2007, the Bancorp announced that its Board of Directors had authorized management to purchase 30 million shares of the Bancorp’s common stock through the open market or in any private transaction. The authorization does not include specific price targets or an expiration date.

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

(c)Shares received from the counterparty as final settlement of the Repurchase Agreement.

OFF-BALANCE SHEET ARRANGEMENTS

In the ordinary course of business, the Bancorp enters into financial transactions to extend credit and various forms of commitments and guarantees that may be considered off-balance sheet arrangements. These transactions involve varying elements of market, credit and liquidity risk. Refer to Note 1213 of the Notes to Condensed Consolidated Financial Statements for additional information. A discussion of these transactions is as follows:

Residential Mortgage Loan Sales

Conforming residential mortgage loans sold to unrelated third parties are generally sold with representation and warranty recourse provisions. Such provisions include the loan’s compliance with applicable loan criteria, including certain documentation standards per agreements with unrelated third parties. Additional reasons for the Bancorp having to repurchase the loans include appraisal standards with the collateral, fraud related to the loan application and the rescission of mortgage insurance. Under these provisions, the Bancorp is required to repurchase any previously sold loan for which the representation or warranty of the Bancorp proves to be inaccurate, incomplete or misleading. As of MarchJune 30, 2012, December 31, 20122011 and December 31,June 30, 2011, the Bancorp maintained reserves related to these loans sold with the representation and warranty recourse provisions totaling $57 million, $55 million compared to $73and $60 million, at March 31, 2011,respectively, which were included in other liabilities in the Bancorp’s Condensed Consolidated Balance Sheets. For further information on residential mortgage loans sold with representation and warranty recourse provisions, see Note 1213 of the Notes to Condensed Consolidated Financial Statements.

For the three months ended March 31,June 30, 2012 and 2011, the Bancorp paid $8$9 million and $21$14 million, respectively, in the form of make whole payments and repurchased $27$39 million and $26$25 million, respectively, in outstanding principal of loans to satisfy investor demands. For the six months ended June 30, 2012 and 2011, the Bancorp paid $17 million and $29 million, respectively, in the form of make whole payments and repurchased $65 million and $51 million, respectively, of loans to satisfy investor demands. Total repurchase demand requests during the three months ended March 31,June 30, 2012 and 2011 were $94$84 million and $83$89 million, respectively. Total repurchase demand requests during the six months ended June 30, 2012 and 2011 were $210 million and $172 million, respectively. Total outstanding repurchase demand inventory was $78$97 million at March 31,June 30, 2012 compared to $66 million at December 31, 2011 and $146$127 million at March 31,June 30, 2011.

The Bancorp sold certain residential mortgage loans in the secondary market with credit recourse. In the event of any customer default, pursuant to the credit recourse provided, the Bancorp is required to reimburse the third party. The maximum amount of credit risk in the event of non-performance by the underlying borrowers is equivalent to the total outstanding balance. In the event of non-performance, the

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

Bancorp has rights to the underlying collateral value securing the loan. At March 31,June 30, 2012 the outstanding balances on these loans sold with credit recourse was $742$721 million compared to $772 million at December 31, 2011 and $917$875 million at March 31,June 30, 2011. The Bancorp maintained an estimated credit loss reserve on these loans sold with credit recourse of $19 million at June 30, 2012, $17 million at March 31, 2012 and December 31, 2011 compared to $14and $20 million at March 31,June 30, 2011, which was recorded in other liabilities in the Condensed Consolidated Balance Sheets. To determine the credit loss reserve, the Bancorp used an approach that is consistent with its overall approach in estimating credit losses for various categories of residential mortgage loans held in its loan portfolio. For further information on residential mortgage loans sold with credit recourse, see Note 1213 of the Notes to Condensed Consolidated Financial Statements.

Private Mortgage Insurance

For certain mortgage loans originated by the Bancorp, borrowers may be required to obtain PMI provided by third-party insurers. In some instances, these insurers cede a portion of the PMI premiums to the Bancorp, and the Bancorp provides reinsurance coverage within a specified range of the total PMI coverage. The Bancorp’s reinsurance coverage typically ranges from 5% to 10% of the total PMI coverage.

The Bancorp’s maximum exposure in the event of nonperformance by the underlying borrowers is equivalent to the Bancorp’s total outstanding reinsurance coverage, which was $74$67 million at March 31,June 30, 2012, $77 million at December 31, 2011 and $122$92 million at March 31,June 30, 2011. As of March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, the Bancorp maintained a reserve of $25$24 million, $27 million and $52$33 million, respectively, related to exposures within the reinsurance portfolio which was included in other liabilities in the Condensed Consolidated Balance Sheets. During the second quarter of 2009, the Bancorp suspended the practice of providing reinsurance of private mortgage insurance for newly originated mortgage loans. In the third quarter of 2010, the Bancorp allowed one of its third-party insurers to terminate its reinsurance agreement with the Bancorp, resulting in the Bancorp releasing collateral to the insurer in the form of investment securities and other assets with a carrying value of $19 million, and the insurer assuming the Bancorp’s obligations under the reinsurance agreement, resulting in a decrease to the Bancorp’s reserve liability of $20 million and a decrease in the Bancorp’s maximum exposure of $53 million. In the second quarter of 2011, the Bancorp allowed one of its third-party insurers to terminate its reinsurance agreement with the Bancorp, resulting in the Bancorp releasing collateral to the insurer in the form of investment securities and other assets with a carrying value of $5 million, and the insurer assuming the Bancorp’s obligations under the reinsurance agreement, resulting in a decrease to the Bancorp’s reserve liability of $11 million and a decrease in the Bancorp’s maximum exposure of $27 million.

Quantitative and Qualitative Disclosure Aboutabout Market Risk (Item 3)

 

Information presented in the Market Risk Management section of Management’s Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference.

Controls and Procedures (Item 4)

 

The Bancorp conducted an evaluation, under the supervision and with the participation of the Bancorp’s management, including the Bancorp’s Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of the Bancorp’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act). Based on the foregoing, as of the end of the period covered by this report, the Bancorp’s Chief Executive Officer and Chief Financial Officer concluded that the Bancorp’s disclosure controls and procedures were effective, at the reasonable assurance level, to ensure that information required to be disclosed in the reports the Bancorp files and submits under the Exchange Act is recorded, processed, summarized and reported as and when required and to provide reasonable assurance that information required to be disclosed by the Bancorp in such reports is accumulated and communicated to the Bancorp’s management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure. The Bancorp’s management also conducted an evaluation of internal control over financial reporting to determine whether any changes occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, the Bancorp’s internal control over financial reporting. Based on this evaluation, there has been no such change during the period covered by this report.

Fifth Third Bancorp and Subsidiaries

Condensed Consolidated Financial Statements and Notes (Item 1)

 

CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)

 

 

  As of   As of 

($ in millions, except share data)

  March 31,
2012
 December 31,
2011
 March 31,
2011
   June 30,
2012
 December
31, 2011
 June 30,
2011
 

Assets

        

Cash and due from banks(a)

  $2,235   2,663   2,121   $2,393   2,663   2,380 

Available-for-sale and other securities(b)

   16,093   15,362   15,135    15,552   15,362   15,502 

Held-to-maturity securities(c)

   321   322   346    305   322   344 

Trading securities

   195   177   216    200   177   217 

Other short-term investments(a)

   1,628   1,781   2,481    1,964   1,781   1,370 

Loans held for sale(d)

   1,584   2,954   1,291    1,863   2,954   1,185 

Portfolio loans and leases:

        

Commercial and industrial loans

   32,155   30,783   27,344    32,612   30,783   28,099 

Commercial mortgage loans(a)

   9,909   10,138   10,510    9,662   10,138   10,233 

Commercial construction loans

   901   1,020   1,980    822   1,020   1,778 

Commercial leases

   3,512   3,531   3,367    3,467   3,531   3,326 

Residential mortgage loans(e)

   11,094   10,672   9,530    11,429   10,672   9,849 

Home equity(a)

   10,493   10,719   11,222    10,377   10,719   11,048 

Automobile loans(a)

   11,832   11,827   11,129    11,739   11,827   11,315 

Credit card

   1,896   1,978   1,821    1,943   1,978   1,856 

Other consumer loans and leases

   321   350   562    308   350   463 
  

 

  

 

  

 

   

 

  

 

  

 

 

Portfolio loans and leases

   82,113   81,018   77,465    82,359   81,018   77,967 

Allowance for loan and lease losses(a)

   (2,126  (2,255  (2,805   (2,016  (2,255  (2,614
  

 

  

 

  

 

   

 

  

 

  

 

 

Portfolio loans and leases, net

   79,987   78,763   74,660    80,343   78,763   75,353 

Bank premises and equipment

   2,485   2,447   2,389    2,506   2,447   2,395 

Operating lease equipment

   495   497   513    511   497   492 

Goodwill

   2,417   2,417   2,417    2,417   2,417   2,417 

Intangible assets

   36   40   55    33   40   49 

Servicing rights

   767   681   894    736   681   847 

Other assets(a)

   8,504   8,863   7,967    8,720   8,863   8,254 
  

 

  

 

  

 

   

 

  

 

  

 

 

Total Assets

  $116,747   116,967   110,485   $117,543   116,967   110,805 
  

 

  

 

  

 

   

 

  

 

  

 

 

Liabilities

        

Deposits:

        

Demand

  $26,385   27,600   22,066   $26,251   27,600   22,589 

Interest checking

   23,971   20,392   18,597    23,197   20,392   18,072 

Savings

   22,245   21,756   21,697    22,011   21,756   21,764 

Money market

   4,275   4,989   5,184    4,223   4,989   4,859 

Other time

   4,446   4,638   7,043    4,261   4,638   6,399 

Certificates - $100,000 and over

   3,162   3,039   4,160    3,065   3,039   3,642 

Foreign office and other

   1,307   3,296   3,570    1,265   3,296   3,273 
  

 

  

 

  

 

   

 

  

 

  

 

 

Total deposits

   85,791   85,710   82,317    84,273   85,710   80,598 

Federal funds purchased

   319   346   332    641   346   403 

Other short-term borrowings

   2,877   3,239   1,297    4,613   3,239   2,702 

Accrued taxes, interest and expenses

   1,436   1,469   844    1,491   1,469   1,067 

Other liabilities(a)

   3,066   3,270   2,948    3,016   3,270   3,282 

Long-term debt(a)

   9,648   9,682   10,555    9,685   9,682   10,152 
  

 

  

 

  

 

   

 

  

 

  

 

 

Total Liabilities

   103,137   103,716   98,293    103,719   103,716   98,204 
  

 

  

 

  

 

   

 

  

 

  

 

 

Equity

        

Common stock(f)

   2,051   2,051   2,051    2,051   2,051   2,051 

Preferred stock(g)

   398   398   398    398   398   398 

Capital surplus

   2,803   2,792   2,824    2,752   2,792   2,769 

Retained earnings

   7,902   7,554   6,752    8,201   7,554   7,024 

Accumulated other comprehensive income

   468   470   263    454   470   396 

Treasury stock

   (62  (64  (125   (83  (64  (66
  

 

  

 

  

 

   

 

  

 

  

 

 

Total Bancorp shareholders’ equity

   13,560   13,201   12,163    13,773   13,201   12,572 

Noncontrolling interests

   50   50   29    51   50   29 
  

 

  

 

  

 

   

 

  

 

  

 

 

Total Equity

   13,610   13,251   12,192    13,824   13,251   12,601 
  

 

  

 

  

 

   

 

  

 

  

 

 

Total Liabilities and Equity

  $116,747   116,967   110,485   $117,543   116,967   110,805 
  

 

  

 

  

 

   

 

  

 

  

 

 
(a)Includes$199, $30 and $54$42 of cash,$4, $7 and $7of$7 of other short-term investments,$5051, $50 and $29 of commercial mortgage loans,$2170, $223 and $236$231 of home equity loans,$10575, $259 and $529$424 of automobile loans,($7)3), ($10) and ($12)11) of ALLL,$3, $4 and $5$4 of other assets,$3,2,$4 and $10$8 of other liabilities,$12573, $191and $492$365 of long-term debt from consolidated VIEs that are included in their respective captions above atMarch 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, respectively. See Note 8.
(b)Amortized cost of$15,34114,818, $14,614 and $14,707$14,889 atMarch 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, respectively.
(c)Fair value of$321305, $322 and $346$344 atMarch 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, respectively.
(d)Includes$1,4291,788, $2,751 and $1,017$978 of residential mortgage loans held for sale measured at fair value atMarch 31,June 30, 2012, December 31, 2011and March 31,June 30, 2011, respectively.
(e)Includes$6776, $65 and $54$59 of residential mortgage loans measured at fair value atMarch 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, respectively.

Fifth Third Bancorp and Subsidiaries

CondensedConsolidated Financial Statements and Notes (Item 1)

(f)Common shares: Stated value $2.22 per share; authorized 2,000,000,000; outstanding atMarch 31,June 30, 2012 – 920,056,340918,913,253 (excludes 3,836,2404,979,328 treasury shares), December 31, 2011 – 919,804,436 (excludes 4,088,145 treasury shares) and March 31,June 30, 2011 – 918,728,008919,818,137 (excludes 5,164,5734,074,443 treasury shares).
(g)317,680 shares of undesignated no par value preferred stock are authorized of which none had been issued; 8.5% non-cumulative Series G convertible (into 2,159.8272 common shares) perpetual preferred stock with a $25,000 liquidation preference: 46,000 authorized,16,450issued and outstanding atMarch 31,June 30, 2012, December 31, 2011, and March 31,June 30, 2011.

See Notes to Condensed Consolidated Financial Statements.

Fifth Third Bancorp and Subsidiaries

Condensed Consolidated Financial Statements and Notes (continued)

 

 

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (unaudited)

 

 

  For the three months ended   For the six months ended 
  For the three months ended
March 31,
   June 30,   June 30, 

($ in millions, except per share data)

  2012   2011   2012   2011   2012   2011 

Interest Income

            

Interest and fees on loans and leases

  $898    910   $891    893    1,789    1,803 

Interest on securities

   141    149    135    151    276    300 

Interest on other short-term investments

   1    1    1    1    2    2 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total interest income

   1,040    1,060    1,027    1,045    2,067    2,105 

Interest Expense

            

Interest on deposits

   58    106    55    97    114    203 

Interest on other short-term borrowings

   1    1    2    1    3    2 

Interest on long-term debt

   83    74    75    83    157    157 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total interest expense

   142    181    132    181    274    362 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net Interest Income

   898    879    895    864    1,793    1,743 

Provision for loan and lease losses

   91    168    71    113    162    281 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net Interest Income After Provision for Loan and Lease Losses

   807    711    824    751    1,631    1,462 

Noninterest Income

            

Mortgage banking net revenue

   204    102    183    162    387    264 

Service charges on deposits

   129    124    130    126    260    250 

Corporate banking revenue

   97    86    102    95    199    181 

Investment advisory revenue

   96    98    93    95    190    193 

Card and processing revenue

   59    80    64    89    122    169 

Other noninterest income

   175    81    103    83    279    164 

Securities gains, net

   9    8    3    6    11    14 

Securities gains, net-non-qualifying hedges on mortgage servicing rights

   —       5 

Securities gains, net - non-qualifying hedges on mortgage servicing rights

   —       —       —       5 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total noninterest income

   769    584    678    656    1,448    1,240 

Noninterest Expense

            

Salaries, wages and incentives

   399    351    393    365    792    716 

Employee benefits

   112    97    84    79    195    176 

Net occupancy expense

   77    77    74    75    151    152 

Technology and communications

   47    45    48    48    95    93 

Card and processing expense

   30    29    30    29    60    58 

Equipment expense

   27    29    27    28    55    57 

Other noninterest expense

   281    290    281    277    563    567 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total noninterest expense

   973    918    937    901    1,911    1,819 
  

 

   

 

   

 

   

 

   

 

   

 

 

Income Before Income Taxes

   603    377    565    506    1,168    883 

Applicable income tax expense

   173    112    180    169    352    281 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net Income

   430    265    385    337    816    602 

Less: Net income attributable to noncontrolling interests

   —       —       —       —       1    —    
  

 

   

 

   

 

   

 

   

 

   

 

 

Net Income Attributable to Bancorp

   430    265    385    337    815    602 

Dividends on preferred stock

   9    177    9    9    18    185 
  

 

   

 

   

 

   

 

   

 

   

 

 

Net Income Available to Common Shareholders

  $421    88   $376    328    797    417 
  

 

   

 

   

 

   

 

   

 

   

 

 

Earnings Per Share

  $0.46    0.10   $0.41    0.36    0.87    0.46 

Earnings Per Diluted Share

  $0.45    0.10   $0.40    0.35    0.85    0.46 
  

 

   

 

   

 

   

 

   

 

   

 

 

Average common shares - basic

   915,225,816    880,829,800    913,540,510    914,600,600    914,383,163    897,808,489 

Average common shares - diluted

   957,415,527    894,841,321    954,622,463    955,477,616    956,015,935    907,506,319 

Cash dividends declared per share

  $0.08    0.06   $0.08    0.06    0.16    0.12 
  

 

   

 

   

 

   

 

   

 

   

 

 

See Notes to Condensed Consolidated Financial Statements.

Fifth Third Bancorp and Subsidiaries

Condensed Consolidated Financial Statements and Notes (continued)

 

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)

 

 

  For the three months ended For the six months ended 
  For the three months ended
March 31,
   June 30, June 30, 

($ in millions)

  2012 2011   2012 2011 2012 2011 

Net income

  $430   265   $385   337   816   602 

Other comprehensive income, net of tax:

   

Unrealized gains on available-for-sale securities:

   

Unrealized holding gains (losses) on available-for-sale securities arising during period

   7   (37

Other comprehensive (loss) income, net of tax:

     

Unrealized (losses) gains on available-for-sale securities:

     

Unrealized holding (losses) gains on available-for-sale securities arising during period

   (10  125   (3  88 

Less: Reclassification adjustment for net gains included in net income

   (5  (7   (2  (4  (6  (11

Unrealized gains on cash flow hedge derivatives:

        

Unrealized holding gains on cash flow hedge derivatives arising during period

   6   —       10   21   16   21 

Less: Reclassification adjustment for net gains included in net income

   (13  (9   (14  (11  (27  (20

Defined benefit pension plans:

        

Prior service cost arising during period

   —      —    

Net actuarial loss arising during period

   3   2    2   2   4   4 
  

 

  

 

   

 

  

 

  

 

  

 

 

Other comprehensive loss

   (2  (51

Other comprehensive (loss) income

   (14  133   (16  82 

Comprehensive income

   428   214    371   470   800   684 

Less: Comprehensive income attributable to noncontrolling interests

   —      —       —      —      1   —    
  

 

  

 

   

 

  

 

  

 

  

 

 

Comprehensive income attributable to Bancorp

  $428   214   $371   470   799   684 
  

 

  

 

   

 

  

 

  

 

  

 

 

See Notes to Condensed Consolidated Financial Statements.

Fifth Third Bancorp and Subsidiaries

Condensed Consolidated Financial Statements and Notes (continued)

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN EQUITY (unaudited)

 

 

  Bancorp Shareholders’ Equity         Bancorp Shareholders’ Equity       

($ in millions, except per share data)

  Common
Stock
   Preferred
Stock
 Capital
Surplus
 Retained
Earnings
 Accumulated
Other
Comprehensive
Income (Loss)
 Treasury
Stock
 Total
Bancorp
Shareholders’
Equity
 Non-
Controlling
Interests
   Total
Equity
   Common
Stock
   Preferred
Stock
 Capital
Surplus
 Retained
Earnings
 Accumulated
Other
Comprehensive
Income
 Treasury
Stock
 Total
Bancorp
Shareholders’
Equity
 Non-
Controlling
Interests
   Total
Equity
 

Balance at December 31, 2010

  $1,779    3,654   1,715   6,719   314   (130  14,051   29    14,080   $1,779    3,654   1,715   6,719   314   (130  14,051   29    14,080 

Net income

       265     265   —       265        602     602     602 

Other comprehensive income (loss)

        (51   (51    (51        82    82     82 
  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Cash dividends declared:

                        

Common stock at $0.06 per share

��      (55    (55    (55

Common stock at $0.12 per share

       (110    (110    (110

Preferred stock

       (24    (24    (24       (33    (33    (33

Issuance of common stock

   272     1,376      1,648     1,648    272     1,376      1,648     1,648 

Redemption of preferred shares, Series F

     (3,408      (3,408    (3,408     (3,408      (3,408    (3,408

Redemption of stock warrant

      (280     (280    (280      (280     (280    (280

Accretion of preferred dividends, Series F

     153    (153    —        —         153    (153    —        —    

Stock-based compensation expense

      14     1   15     15       27      27     27 

Stock-based awards issued or exercised, including treasury shares issued

      (3    4   1     1       (12    5   (7    (7

Restricted stock grants

      (59    59   —        —    

Loans repaid related to the exercise of stock based awards, net

      1      1     1       1      1     1 

Other

     (1  1      —        —         (1  1   (1    (1    (1
  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Balance at March 31, 2011

   2,051    398   2,824   6,752   263   (125  12,163   29    12,192 

Balance at June 30, 2011

   2,051    398   2,769   7,024   396   (66  12,572   29    12,601 
  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Balance at December 31, 2011

   2,051    398   2,792   7,554   470   (64  13,201   50    13,251    2,051    398   2,792   7,554   470   (64  13,201   50    13,251 

Net income

       430     430   —       430        815     815   1    816 

Other comprehensive income (loss)

        (2   (2    (2        (16   (16    (16
  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Cash dividends declared:

                        

Common stock at $0.08 per share

       (74    (74    (74

Common stock at $0.16 per share

       (148    (148    (148

Preferred stock

       (9    (9    (9       (18    (18    (18

Shares acquired for treasury

         (75  (75    (75

Stock-based compensation expense

      14      14     14       32      32     32 

Stock-based awards issued or exercised, including treasury shares issued

      (1    1   —        —          (23    4   (19    (19

Restricted stock grants

      (1    1   —        —          (49    49   —        —    

Other

      (1  1     —        —           (2   3   1     1 
  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

Balance at March 31, 2012

   2,051    398   2,803   7,902   468   (62  13,560   50    13,610 

Balance at June 30, 2012

   2,051    398   2,752   8,201   454   (83  13,773   51    13,824 
  

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

   

 

   

 

  

 

  

 

  

 

  

 

  

 

  

 

   

 

 

See Notes to Condensed Consolidated Financial Statements.

Fifth Third Bancorp and Subsidiaries

Condensed Consolidated Financial Statements and Notes (continued)

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) 
   For the three months
ended March 31,
 

($ in millions)

  2012  2011 

Operating Activities

   

Net income

  $430   265 

Adjustments to reconcile net income to net cash provided by operating activities:

   

Provision for loan and lease losses

   91   168 

Depreciation, amortization and accretion

   128   112 

Stock-based compensation expense

   19   17 

Provision for deferred income taxes

   50   89 

Realized securities gains

   (9  (8

Realized securities gains - non-qualifying hedges on mortgage servicing rights

   —      (5

Recovery of MSR impairment

   (11  (37

Net losses (gains) on sales of loans and fair value adjustments on loans held for sale

   1   (63

Capitalized mortgage servicing rights

   (121  (63

Proceeds from sales of loans held for sale

   7,029   4,046 

Loans originated for sale, net of repayments

   (5,646  (3,039

Dividends representing return on equity method investments

   11   3 

Gain on Vantiv, Inc. IPO

   (115  —    

Net change in:

   

Trading securities

   (16  80 

Other assets

   88   322 

Accrued taxes, interest and expenses

   (120  (104

Other liabilities

   86   100 
  

 

 

  

 

 

 

Net Cash Provided by Operating Activities

   1,895   1,883 
  

 

 

  

 

 

 

Investing Activities

   

Sales:

   

Available-for-sale securities

   231   64 

Loans

   57   96 

Disposal of bank premises and equipment

   —      1 

Repayments / maturities:

   

Available-for-sale securities

   1,076   1,038 

Held-to-maturity securities

   —      6 

Purchases:

   

Available-for-sale securities

   (2,046  (903

Bank premises and equipment

   (95  (57

Proceeds from sale and dividends representing return of equity method investments

   39   5 

Net change in:

   

Other short-term investments

   153   (966

Loans and leases

   (1,395  (544

Operating lease equipment

   (8  (45
  

 

 

  

 

 

 

Net Cash Used in Investing Activities

   (1,988  (1,305
  

 

 

  

 

 

 

Financing Activities

   

Net change in:

   

Core deposits

   (51  796 

Certificates - $100,000 and over, including other foreign office

   133   (127

Federal funds purchased

   (27  53 

Other short-term borrowings

   (363  (277

Dividends paid on common shares

   (74  (55

Dividends paid on preferred shares

   (9  (24

Proceeds from issuance of long-term debt

   500   1,260 

Repayment of long-term debt

   (444  (203

Issuance of common shares

   —      1,648 

Redemption of preferred shares, Series F

   —      (3,408

Redemption of stock warrant

   —      (280

Other

   —      1 
  

 

 

  

 

 

 

Net Cash Used In Financing Activities

   (335  (616
  

 

 

  

 

 

 

Decrease in Cash and Due from Banks

   (428  (38

Cash and Due from Banks at Beginning of Period

   2,663   2,159 
  

 

 

  

 

 

 

Cash and Due from Banks at End of Period

  $2,235   2,121 
  

 

 

  

 

 

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)

   For the six months
ended June 30,
 

($ in millions)

  2012  2011 

Operating Activities

   

Net income

  $816   602 

Adjustments to reconcile net income to net cash provided by operating activities:

   

Provision for loan and lease losses

   162   281 

Depreciation, amortization and accretion

   254   215 

Stock-based compensation expense

   37   31 

Provision for deferred income taxes

   84   (228

Realized securities gains

   (29  (15

Realized securities gains - non-qualifying hedges on mortgage servicing rights

   —      (5

Realized securities losses

   18   1 

Provision for MSR impairment

   49   27 

Net gains on sales of loans and fair value adjustments on loans held for sale

   (67  (59

Bank premises and equipment impairment

   17   —    

Capitalized mortgage servicing rights

   (190  (105

Proceeds from sales of loans held for sale

   11,801   6,812 

Loans originated for sale, net of repayments

   (10,572  (5,700

Dividends representing return on equity method investments

   13   7 

Gain on Vantiv, Inc. IPO

   (115  —    

Net change in:

   

Trading securities

   (22  80 

Other assets

   (64  125 

Accrued taxes, interest and expenses

   (81  373 

Other liabilities

   (38  452 
  

 

 

  

 

 

 

Net Cash Provided by Operating Activities

   2,073   2,894 
  

 

 

  

 

 

 

Investing Activities

   

Sales:

   

Available-for-sale securities

   1,616   935 

Loans

   157   201 

Disposal of bank premises and equipment

   2   1 

Repayments / maturities:

   

Available-for-sale securities

   2,003   1,753 

Held-to-maturity securities

   16   8 

Purchases:

   

Available-for-sale securities

   (3,856  (2,689

Bank premises and equipment

   (193  (119

Proceeds from sale and dividends representing return of equity method investments

   75   9 

Net change in:

   

Other short-term investments

   (182  145 

Loans and leases

   (1,946  (1,501

Operating lease equipment

   (34  (34
  

 

 

  

 

 

 

Net Cash Used in Investing Activities

   (2,342  (1,291
  

 

 

  

 

 

 

Financing Activities

   

Net change in:

   

Core deposits

   (1,416  (406

Certificates - $100,000 and over, including other foreign office

   (20  (643

Federal funds purchased

   295   124 

Other short-term borrowings

   1,374   1,128 

Dividends paid on common shares

   (148  (110

Dividends paid on preferred shares

   (9  (33

Proceeds from issuance of long-term debt

   512   1,463 

Repayment of long-term debt

   (498  (858

Repurchase of treasury shares

   (75  —    

Issuance of common shares

   —      1,648 

Redemption of preferred shares, Series F

   —      (3,408

Redemption of stock warrant

   —      (280

Other

   (16  (7
  

 

 

  

 

 

 

Net Cash Used In Financing Activities

   (1  (1,382
  

 

 

  

 

 

 

(Decrease) Increase in Cash and Due from Banks

   (270  221 

Cash and Due from Banks at Beginning of Period

   2,663   2,159 
  

 

 

  

 

 

 

Cash and Due from Banks at End of Period

  $2,393   2,380 
  

 

 

  

 

 

 

See Notes to Condensed Consolidated Financial Statements. Note 2 contains cash payments related to interest and income taxes in addition to noncash investing and financing activities.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

1. Basis of Presentation

The Condensed Consolidated Financial Statements include the accounts of the Bancorp and its majority-owned subsidiaries and VIEs in which the Bancorp has been determined to be the primary beneficiary. Other entities, including certain joint ventures, in which the Bancorp has the ability to exercise significant influence over operating and financial policies of the investee, but upon which the Bancorp does not possess control, are accounted for by the equity method and not consolidated. Those entities in which the Bancorp does not have the ability to exercise significant influence are generally carried at the lower of cost or fair value. Intercompany transactions and balances have been eliminated.

In the opinion of management, the unaudited Condensed Consolidated Financial Statements include all adjustments, which consist of normal recurring accruals, necessary to present fairly the financial position as of March 31,June 30, 2012 and 2011, the results of operations and comprehensive income for the three and six months ended March 31,June 30, 2012 and 2011, the cash flows for the threesix months ended March 31,June 30, 2012 and 2011 and the changes in equity for the threesix months ended March 31,June 30, 2012 and 2011. In accordance with U.S. GAAP and the rules and regulations of the SEC for interim financial information, these statements do not include certain information and footnote disclosures required for complete annual financial statements and it is suggested that these Condensed Consolidated Financial Statements be read in conjunction with the latest annual financial statements. The results of operations and comprehensive income for the three and six months ended March 31,June 30, 2012 and 2011 and the cash flows and changes in equity for the threesix months ended March 31,June 30, 2012 and 2011 are not necessarily indicative of the results to be expected for the full year. Financial information as of December 31, 2011 has been derived from the annual audited Consolidated Financial Statements of the Bancorp.

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates. Certain reclassifications have been made to prior periods’ Condensed Consolidated Financial Statements and related notes to conform to the current period presentation.

2. Supplemental Cash Flow Information

Cash payments related to interest and income taxes in addition to noncash investing and financing activities are presented in the following table for the threesix months ended March 31:June 30:

 

($ in millions)

  2012   2011   2012   2011 

Cash payments:

        

Interest

  $150    172   $266    342 

Income taxes

   48    15    178    21 

Transfers:

        

Portfolio loans to held for sale loans

   17    43    20    58 

Held for sale loans to portfolio loans

   57    11    68    16 

Portfolio loans to OREO

   80    106    141    168 

Held for sale loans to OREO

   3    10    7    36 

3. Accounting and Reporting Developments

Reconsideration of Effective Control for Repurchase Agreements

In April 2011, the FASB issued amended guidance clarifying when the Bancorp can recognize a sale upon the transfer of financial assets subject to a repurchase agreement. That determination is based, in part, on whether the Bancorp has maintained effective control over the transferred financial assets. Under the amended guidance, the FASB concluded that the assessment of effective control should focus on a transferor’s contractual rights and obligations with respect to transferred financial assets, not on whether the transferor has the practical ability to perform in accordance with those rights or obligations. The Bancorp accounts for all of its existing repurchase agreements as secured borrowings, and therefore the adoption of this amended guidance on January 1, 2012 did not have a material impact on the Bancorp’s Condensed Consolidated Financial Statements.

Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs

In May 2011, the FASB issued amended guidance that results in common fair value measurement and disclosure requirements between U.S. GAAP and IFRS. Under the amended guidance, the Bancorp is required to expand its disclosure for fair value instruments categorized within Level 3 of the fair value hierarchy to include (1) the valuation processes used by the Bancorp; and (2) a narrative description of the sensitivity of the fair value measurement to changes in unobservable inputs for recurring fair value measurements and the interrelationships between those unobservable inputs, if any. The Bancorp is also required to disclose the categorization by level of the fair value hierarchy for items that are not measured at fair value in the statement of financial position but for which the fair value is required to be disclosed (e.g. portfolio loans). The amended guidance was adopted by the Bancorp on January 1, 2012 and the required disclosures are included in Note 18.19.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

Presentation of Comprehensive Income

In June 2011, the FASB issued amended guidance on the presentation requirements for comprehensive income. The amended guidance requires the Bancorp to present total comprehensive income, the components of net income and the components of other comprehensive income on the face of the financial statements, either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The amended guidance does not change the items that must be reported in other comprehensive income or when an item of other comprehensive income must be reclassified to net income. This amended guidance was adopted by the Bancorp on January 1, 2012 and has been applied retrospectively. The Bancorp presents comprehensive income in two separate but consecutive statements, and has included the requirements of the amended guidance in the Condensed Consolidated Statements of Comprehensive Income.

Testing Goodwill for Impairment

In September 2011, the FASB issued amended guidance on testing goodwill for impairment. The amended guidance simplifies how the Bancorp is required to test goodwill for impairment and permits the Bancorp to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount. If, after assessing the totality of events or circumstances, the Bancorp determines it is not more likely than not that the fair value of a reporting unit is less than its carrying amount, then performing the two-step impairment test would be unnecessary. However, if the Bancorp concludes otherwise, it would then be required to perform Step 1 of the goodwill impairment test, and continue to Step 2, if necessary. The amended guidance is effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 and was adopted by the Bancorp on January 1, 2012.

Disclosures about Offsetting Assets and Liabilities

In December 2011, the FASB issued amended guidance related to disclosures about offsetting assets and liabilities. The amended guidance requires the Bancorp to disclose both gross information and net information about financial instruments, including derivatives, and transactions eligible for offset in the Condensed Consolidated Balance Sheets as well as financial instruments and transactions subject to agreements similar to a master netting arrangement. The amended guidance will be applied retrospectively and is effective for fiscal years, and interim periods within those years, beginning on or after January 1, 2013.

4. Securities

The following table provides the amortized cost, fair value and unrealized gains and losses for the major categories of the available-for-sale and held-to-maturity securities portfolios as of:

 

March 31, 2012 ($ in millions)

  Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
 Fair
Value
 

June 30, 2012 ($ in millions)

  Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
 Fair
Value
 

Available-for-sale and other:

              

U.S. Treasury and government agencies

  $51    —       —      51   $51    —       —      51 

U.S. Government sponsored agencies

   1,782    172    —      1,954    1,781    185    —      1,966 

Obligations of states and political subdivisions

   210    4    —      214    205    6    —      211 

Agency mortgage-backed securities

   9,834    525    (1  10,358    8,807    477    (5  9,279 

Other bonds, notes and debentures

   2,315    55    (5  2,365    2,743    74    (6  2,811 

Other securities(a)

   1,149    2    —      1,151    1,231    3    —      1,234 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

Total

  $15,341    758    (6  16,093   $14,818    745    (11  15,552 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

Held-to-maturity:

              

Obligations of states and political subdivisions

  $319    —       —      319   $303    —       —      303 

Other debt securities

   2    —       —      2    2    —       —      2 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

Total

  $321    —       —      321   $305    —       —      305 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

December 31, 2011 ($ in millions)

  Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
 Fair
Value
   Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
 Fair
Value
 

Available-for-sale and other:

              

U.S. Treasury and government agencies

  $171    —       —      171   $171    —       —      171 

U.S. Government sponsored agencies

   1,782    180    —      1,962    1,782    180    —      1,962 

Obligations of states and political subdivisions

   96    5    —      101    96    5    —      101 

Agency mortgage-backed securities

   9,743    542    (1  10,284    9,743    542    (1  10,284 

Other bonds, notes and debentures

   1,792    29    (9  1,812    1,792    29    (9  1,812 

Other securities(a)

   1,030    2    —      1,032    1,030    2    —      1,032 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

Total

  $14,614    758    (10  15,362   $14,614    758    (10  15,362 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

Held-to-maturity:

              

Obligations of states and political subdivisions

  $320    —       —      320   $320    —       —      320 

Other debt securities

   2    —       —      2    2    —       —      2 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

Total

  $322    —       —      322   $322    —       —      322 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

March 31, 2011 ($ in millions)

  Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
 Fair
Value
 

June 30, 2011 ($ in millions)

  Amortized
Cost
   Unrealized
Gains
   Unrealized
Losses
 Fair
Value
 

Available-for-sale and other:

              

U.S. Treasury and government agencies

  $225    3    —      228   $199    7    —      206 

U.S. Government sponsored agencies

   1,669    70    —      1,739    2,141    118    —      2,259 

Obligations of states and political subdivisions

   152    1    —      153    113    2    —      115 

Agency mortgage-backed securities

   10,439    385    (39  10,785    10,269    475    (4  10,740 

Other bonds, notes and debentures

   1,177    20    (14  1,183    1,135    17    (6  1,146 

Other securities(a)

   1,045    3    (1  1,047    1,032    4    —      1,036 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

Total

  $14,707    482    (54  15,135   $14,889    623    (10  15,502 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

Held-to-maturity:

              

Obligations of states and political subdivisions

  $341    —       —      341   $340    —       —      340 

Other debt securities

   5    —       —      5    4    —       —      4 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

Total

  $346    —       —      346   $344    —       —      344 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

 

(a)Other securities consist of FHLB and FRB restricted stock holdings of$497 and$346, respectively, atJune 30, 2012, $497 and $345, respectively, at March 31, 2012 and December 31, 2011, and $524$497 and $344, respectively, at March 31,June 30, 2011, that are carried at cost, and certain mutual fund and equity security holdings.

The following table presents realized gains and losses that were recognized in income from available-for-sale securities:

 

  For the three months ended
March 31,
   For the three months ended
June 30,
   For the six months ended
June 30,
 

($ in millions)

  2012   2011   2012 2011   2012 2011 

Realized gains

  $7    12   $21   5    28   17 

Realized losses

   —       —       (1  —       (1  —    

OTTI

   (17  —       (17  —    
  

 

   

 

   

 

  

 

   

 

  

 

 

Net realized gains

  $7    12   $3   5    10   17 
  

 

   

 

   

 

  

 

   

 

  

 

 

Trading securities totaled $195$200 million as of March 31,June 30, 2012, compared to $177 million at December 31, 2011 and $216$217 million at March 31,June 30, 2011. NetGross realized gains and losses on trading securities were immaterial to the Bancorp for the three months ended March 31,June 30, 2012 and net2011. Gross realized gains were immaterial to the Bancorp for the six months ended June 30, 2012 and were $1 million for the six months ended June 30, 2011. Gross realized losses were immaterial to the Bancorp for the threesix months ended March 31,June 30, 2012 and were $1 million for the six months ended June 30, 2011. Net unrealized gains on trading securities were $2immaterial for the three months ended June 30, 2012 and were $1 million at March 31,for the six months ended June 30, 2012 $5 million at December 31, 2011, and net unrealized losses were $1 million at March 31, 2011.and $2 million for the three and six months ended June 30, 2011, respectively.

At March 31,June 30, 2012, December 31, 2011, and March 31,June 30, 2011 securities with a fair value of $12.6$12.7 billion, $13.3 billion, and $10.6$10.8 billion, respectively, were pledged to secure borrowings, public deposits, trust funds, derivative contracts and for other purposes as required or permitted by law.

The expected maturity distribution of the Bancorp’s agency mortgage-backed securities and the contractual maturity distribution of the Bancorp’s other available-for-sale and held-to-maturity securities as of March 31,June 30, 2012 are shown in the following table.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

  Available-for-Sale and Other   Held-to-Maturity   Available-for-Sale and Other   Held-to-Maturity 

($ in millions)

  Amortized Cost   Fair Value   Amortized Cost   Fair Value   Amortized Cost   Fair Value   Amortized Cost   Fair Value 

Debt securities:(a)

                

Under 1 year

  $612    629    36    36   $669    686    21    21 

1-5 years

   10,473    11,044    254    254    9,525    10,121    253    253 

5-10 years

   1,996    2,125    16    16    1,814    1,888    20    20 

Over 10 years

   1,111    1,144    15    15    1,579    1,623    11    11 

Other securities

   1,149    1,151    —       —       1,231    1,234    —       —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $15,341    16,093    321    321   $14,818    15,552    305    305 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(a)Actual maturities may differ from contractual maturities when there exists a right to call or prepay obligations with or without call or prepayment penalties.

The following table provides the fair value and gross unrealized losses on available-for-sale securities in an unrealized loss position, aggregated by investment category and length of time the individual securities have been in a continuous unrealized loss position as of:

 

  Less than 12 months 12 months or more Total   Less than 12 months 12 months or more Total 

($ in millions)

  Fair Value   Unrealized
Losses
 Fair Value   Unrealized
Losses
 Fair Value   Unrealized
Losses
   Fair Value   Unrealized
Losses
 Fair Value   Unrealized
Losses
 Fair Value   Unrealized
Losses
 

March 31, 2012

          

June 30, 2012

          

U.S. Treasury and government agencies

  $—       —      —       —      —       —      $—       —      —       —      —       —    

U.S. Government sponsored agencies

   —       —      —       —      —       —       —       —      —       —      —       —    

Obligations of states and political subdivisions

   85    —      1    —      86    —       —       —      —       —      —       —    

Agency mortgage-backed securities

   78    (1  2    —      80    (1   405    (5  —       —      405    (5

Other bonds, notes and debentures

   337    (5  10    —      347    (5   310    (6  —       —      310    (6

Other securities

   13    —      —       —      13    —       —       —      —       —      —       —    
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total

  $513    (6  13    —      526    (6  $715    (11  —       —      715    (11
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

December 31, 2011

                    

U.S. Treasury and government agencies

  $70    —      1    —      71    —      $70    —      1    —      71    —    

U.S. Government sponsored agencies

   —       —      —       —      —       —       —       —      —       —      —       —    

Obligations of states and political subdivisions

   —       —      2    —      2    —       —       —      2    —      2    —    

Agency mortgage-backed securities

   34    (1  6    —      40    (1   34    (1  6    —      40    (1

Other bonds, notes and debentures

   523    (4  38    (5  561    (9   523    (4  38    (5  561    (9

Other securities

   6    —      —       —      6    —       6    —      —       —      6    —    
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total

  $633    (5  47    (5  680    (10  $633    (5  47    (5  680    (10
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

March 31, 2011

          

June 30, 2011

          

U.S. Treasury and government agencies

  $—       —      1    —      1    —      $—       —      —       —      —       —    

U.S. Government sponsored agencies

   50    —      —       —      50    —       —       —      —       —      —       —    

Obligations of states and political subdivisions

   5    —      3    —      8    —       —       —      3    —      3    —    

Agency mortgage-backed securities

   1,807    (39  —       —      1,807    (39   606    (4  —       —      606    (4

Other bonds, notes and debentures

   511    (11  38    (3  549    (14   324    (3  37    (3  361    (6

Other securities

   5    (1  —       —      5    (1   —       —      —       —      —       —    
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Total

  $2,378    (51  42    (3  2,420    (54  $930    (7  40    (3  970    (10
  

 

   

 

  

 

   

 

  

 

   

 

   

 

   

 

  

 

   

 

  

 

   

 

 

Other-Than-Temporary Impairments

The Bancorp recognized $17 million of OTTI, included in securities gains, net, in the Bancorp’s Condensed Consolidated Statements of Income, on its available-for-sale debt securities for the three and six months ended June 30, 2012 and no OTTI was recognized on the Bancorp’s held-to-maturity debt securities during the comparable prior year periods. During the three and six months ended March 31, 2012June 30, 2011 the Bancorp recognized an immaterial amount of OTTI on its available-for-sale debt securities and 2011,no OTTI was recognized on the Bancorp’s held-to-maturity debt securities during the comparable prior year periods. The Bancorp did not recognize OTTI on any of its available-for-sale or held-to-maturity debt or equity securities. At March 31, 2011, twosecurities during the three and six months ended June 30, 2012 and 2011. Less than one percent of unrealized losses in the available-for-sale securities portfolio were represented by non-rated securities. The percentage was immaterialsecurities at MarchJune 30, 2012, December 31, 20122011, and December 31,June 30, 2011.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

5. Loans and Leases

The Bancorp diversifies its loan and lease portfolio by offering a variety of loan and lease products with various payment terms and rate structures. Lending activities are concentrated within those states in which the Bancorp has banking centers and are primarily located in the Midwestern and Southeastern regions of the United States. The Bancorp’s commercial loan portfolio consists of lending to various industry types. Management periodically reviews the performance of its loan and lease products to evaluate whether they are performing within acceptable interest rate and credit risk levels and changes are made to underwriting policies and procedures as needed. The Bancorp maintains an allowance to absorb loan and lease losses inherent in the portfolio. For further information on credit quality and the ALLL, see Note 6.

The following table provides a summary of the total loans and leases classified by primary purpose as of:

 

($ in millions)

  March 31,
2012
   December 31,
2011
   March 31,
2011
   June 30,
2012
   December 31,
2011
   June 30,
2011
 

Loans and leases held for sale:

            

Commercial and industrial loans

  $48    45    87   $13    45    56 

Commercial mortgage loans

   67    76    107    35    76    98 

Commercial construction loans

   15    17    40    12    17    27 

Commercial leases

   4    —       —    

Residential mortgage loans

   1,429    2,802    1,026    1,789    2,802    989 

Other consumer loans and leases

   25    14    31    10    14    15 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total loans and leases held for sale

  $1,584    2,954    1,291   $1,863    2,954    1,185 
  

 

   

 

   

 

   

 

   

 

   

 

 

Portfolio loans and leases:

            

Commercial and industrial loans

  $32,155    30,783    27,344   $32,612    30,783    28,099 

Commercial mortgage loans

   9,909    10,138    10,510    9,662    10,138    10,233 

Commercial construction loans

   901    1,020    1,980    822    1,020    1,778 

Commercial leases

   3,512    3,531    3,367    3,467    3,531    3,326 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total commercial loans and leases

   46,477    45,472    43,201    46,563    45,472    43,436 
  

 

   

 

   

 

   

 

   

 

   

 

 

Residential mortgage loans

   11,094    10,672    9,530    11,429    10,672    9,849 

Home equity

   10,493    10,719    11,222    10,377    10,719    11,048 

Automobile loans

   11,832    11,827    11,129    11,739    11,827    11,315 

Credit card

   1,896    1,978    1,821    1,943    1,978    1,856 

Other consumer loans and leases

   321    350    562    308    350    463 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total consumer loans and leases

   35,636    35,546    34,264    35,796    35,546    34,531 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total portfolio loans and leases

  $82,113    81,018    77,465   $82,359    81,018    77,967 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total portfolio loans and leases are recorded net of unearned income, which totaled $905$838 million as of March 31,June 30, 2012, $942 million as of December 31, 2011, and $1.0 billion$953 million as of March 31,June 30, 2011. Additionally, portfolio loans and leases are recorded net of unamortized premiums and discounts, deferred loan fees and costs, and fair value adjustments (associated with acquired loans or loans designated as fair value upon origination) which totaled a net premium of $62$67 million, $45 million, and $4$20 million as of March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, respectively.

The following table presents a summary of the total loans and leases owned by the Bancorp as of and for the threesix months ended March 31:June 30:

 

  Balance   Balance of Loans 90
Days or More Past Due
   Net
Charge-Offs
   Balance   Balance of Loans 90
Days  or More Past Due
   Net
Charge-Offs
 

($ in millions)

  2012   2011   2012   2011   2012   2011   2012   2011   2012   2011   2012   2011 

Commercial and industrial loans

  $32,203    27,431   $2    8   $54    83   $32,625    28,155   $2    7   $100    159 

Commercial mortgage loans

   9,976    10,617    30    8    30    54    9,697    10,331    22    12    55    101 

Commercial construction loans

   916    2,020    —       23    18    26    834    1,805    —       48    18    46 

Commercial leases

   3,512    3,367    —       —       —       1    3,471    3,326    —       1    7    (1

Residential mortgage loans

   12,523    10,556    73    98    37    65    13,218    10,838    80    87    73    101 

Home equity loans

   10,493    11,222    74    84    46    63    10,377    11,048    67    84    85    117 

Automobile loans

   11,832    11,129    8    9    9    20    11,739    11,315    8    10    16    28 

Credit card

   1,896    1,821    29    36    20    31    1,943    1,856    24    30    38    59 

Other consumer loans and leases

   346    593    —       —       6    24    318    478    —       —       9    61 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total loans and leases

  $83,697    78,756   $216    266   $220    367   $84,222    79,152   $203    279   $401    671 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Less: Loans held for sale

  $1,584    1,291           $1,863    1,185         
  

 

   

 

           

 

   

 

         

Total portfolio loans and leases

  $82,113    77,465           $82,359    77,967         
  

 

   

 

           

 

   

 

         

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

6. Credit Quality and the Allowance for Loan and Lease Losses

The Bancorp disaggregates ALLL balances and transactions in the ALLL by portfolio segment. Credit quality related disclosures for loans and leases are further disaggregated by class.

The following tables summarize transactions in the ALLL by portfolio segment:

 

For the three months ended March 31, 2012

($ in millions)

  Commercial Residential
Mortgage
 Consumer Unallocated Total 

For the three months ended June 30, 2012

($ in millions)

  Commercial Residential
Mortgage
 Consumer Unallocated Total 

Transactions in the ALLL:

            

Balance, beginning of period

  $1,527   227   365   136   2,255   $1,424   233   341   128   2,126 

Losses charged off

   (117  (38  (98  —      (253   (95  (38  (86  —      (219

Recoveries of losses previously charged off

   15   1   17   —      33    17   2   19   —      38 

Provision for loan and lease losses

   (1  43   57   (8  91    1   35   42   (7  71 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Balance, end of period

  $1,424   233   341   128   2,126   $1,347   232   316   121   2,016 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

For the three months ended March 31, 2011

($ in millions)

  Commercial Residential
Mortgage
 Consumer Unallocated Total 

For the three months ended June 30, 2011

($ in millions)

  Commercial Residential
Mortgage
 Consumer Unallocated Total 

Transactions in the ALLL:

            

Balance, beginning of period

  $1,989   310   555   150   3,004   $1,855   286   519   145   2,805 

Losses charged off

   (176  (67  (154  —      (397   (158  (37  (148  —      (343

Recoveries of losses previously charged off

   12   2   16   —      30    17   1   21   —      39 

Provision for loan and lease losses

   30   41   102   (5  168    50   18   60   (15  113 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

Balance, end of period

  $1,855   286   519   145   2,805   $1,764   268   452   130   2,614 
  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

 

For the six months ended June 30, 2012

($ in millions)

  Commercial Residential
Mortgage
 Consumer Unallocated Total 

Transactions in the ALLL:

      

Balance, beginning of period

  $1,527   227   365   136   2,255 

Losses charged off

   (211  (76  (185  —      (472

Recoveries of losses previously charged off

   33   3   35   —      71 

Provision for loan and lease losses

   (2  78   101   (15  162 
  

 

  

 

  

 

  

 

  

 

 

Balance, end of period

  $1,347   232   316   121   2,016 
  

 

  

 

  

 

  

 

  

 

 

For the six months ended June 30, 2011

($ in millions)

  Commercial Residential
Mortgage
 Consumer Unallocated Total 

Transactions in the ALLL:

      

Balance, beginning of period

  $1,989   310   555   150   3,004 

Losses charged off

   (334  (104  (302  —      (740

Recoveries of losses previously charged off

   29   3   37   —      69 

Provision for loan and lease losses

   80   59   162   (20  281 
  

 

  

 

  

 

  

 

  

 

 

Balance, end of period

  $1,764   268   452   130   2,614 
  

 

  

 

  

 

  

 

  

 

 

The following tables provide a summary of the ALLL and related loans and leases classified by portfolio segment:

 

As of March 31, 2012 ($ in millions)

  Commercial   Residential
Mortgage
   Consumer   Unallocated   Total 

As of June 30, 2012 ($ in millions)

  Commercial   Residential
Mortgage
   Consumer   Unallocated   Total 

ALLL:(a)

                    

Individually evaluated for impairment

  $132    130    65    —       327   $116    129    63    —       308 

Collectively evaluated for impairment

   1,291    102    276    —       1,669    1,230    102    253    —       1,585 

Loans acquired with deteriorated credit quality

   1    1    —       —       2    1    1    —       —       2 

Unallocated

   —       —       —       128    128    —       —       —       121    121 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total ALLL

  $1,424    233    341    128    2,126   $1,347    232    316    121    2,016 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Loans and leases:(b)

                    

Individually evaluated for impairment

  $1,158    1,247    570    —       2,975   $1,198    1,265    562    —       3,025 

Collectively evaluated for impairment

   45,317    9,772    23,972    —       79,061    45,363    10,080    23,805    —       79,248 

Loans acquired with deteriorated credit quality

   2    8    —       —       10    2    8    —       —       10 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total portfolio loans and leases

  $46,477    11,027    24,542    —       82,046   $46,563    11,353    24,367    —       82,283 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

 

(a)Includes $14$15 related to leveraged leases.
(b)Excludes $67$76 of residential mortgage loans measured at fair value, and includes $1,027$967 of leveraged leases, net of unearned income.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

As of December 31, 2011 ($ in millions)

  Commercial   Residential
Mortgage
   Consumer   Unallocated   Total 

ALLL:(a)

          

Individually evaluated for impairment

  $155    130    65    —       350 

Collectively evaluated for impairment

   1,371    96    300    —       1,767 

Loans acquired with deteriorated credit quality

   1    1    —       —       2 

Unallocated

   —       —       —       136    136 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ALLL

  $1,527    227    365    136    2,255 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases:(b)

          

Individually evaluated for impairment

  $1,170    1,258    574    —       3,002 

Collectively evaluated for impairment

   44,299    9,341    24,300    —       77,940 

Loans acquired with deteriorated credit quality

   3    8    —       —       11 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total portfolio loans and leases

  $45,472    10,607    24,874    —       80,953 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)Includes $14 related to leveraged leases.
(b)Excludes $65 of residential mortgage loans measured at fair value, and includes $1,022 of leveraged leases, net of unearned income.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

As of March 31, 2011 ($ in millions)

  Commercial   Residential
Mortgage
   Consumer   Unallocated   Total 

ALLL:(a)

          

Individually evaluated for impairment

  $286    123    107    —       516 

Collectively evaluated for impairment

   1,568    161    412    —       2,141 

Loans acquired with deteriorated credit quality

   1    2    —       —       3 

Unallocated

   —       —       —       145    145 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ALLL

  $1,855    286    519    145    2,805 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases:(b)

          

Individually evaluated for impairment

  $1,086    1,193    655    —       2,934 

Collectively evaluated for impairment

   42,111    8,272    24,071    —       74,454 

Loans acquired with deteriorated credit quality

   4    11    8    —       23 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total portfolio loans and leases

  $43,201    9,476    24,734    —       77,411 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2011 ($ in millions)

  Commercial   Residential
Mortgage
   Consumer   Unallocated   Total 

ALLL:(a)

          

Individually evaluated for impairment

  $245    126    74    —       445 

Collectively evaluated for impairment

   1,518    141    378    —       2,037 

Loans acquired with deteriorated credit quality

   1    1    —       —       2 

Unallocated

   —       —       —       130    130 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ALLL

  $1,764    268    452    130    2,614 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans and leases:(b)

          

Individually evaluated for impairment

  $1,181    1,220    589    —       2,990 

Collectively evaluated for impairment

   42,252    8,559    24,093    —       74,904 

Loans acquired with deteriorated credit quality

   3    11    —       —       14 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total portfolio loans and leases

  $43,436    9,790    24,682    —       77,908 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(a)Includes $14$18 related to leveraged leases.
(b)Excludes $54$59 of residential mortgage loans measured at fair value, includes $1,039$1,015 of leveraged leases, net of unearned income.

CREDIT RISK PROFILE

Commercial Portfolio Segment

For purposes of monitoring the credit quality and risk characteristics of its commercial portfolio segment, the Bancorp disaggregates the segment into the following classes: commercial and industrial, commercial mortgage owner-occupied, commercial mortgage nonowner-occupied, commercial construction and commercial leasing.

To facilitate the monitoring of credit quality within the commercial portfolio segment, and for purposes of analyzing historical loss rates used in the determination of the ALLL for the commercial portfolio segment, the Bancorp utilizes the following categories of credit grades: pass, special mention, substandard, doubtful or loss. The five categories, which are derived from standard regulatory rating definitions, are assigned upon initial approval of credit to borrowers and updated periodically thereafter. Pass ratings, which are assigned to those borrowers that do not have identified potential or well defined weaknesses and for which there is a high likelihood of orderly repayment, are updated periodically based on the size and credit characteristics of the borrower. All other categories are updated on a quarterly basis during the month preceding the end of the calendar quarter.

The Bancorp assigns a special mention rating to loans and leases that have potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may, at some future date, result in the deterioration of the repayment prospects for the loan or lease or the Bancorp’s credit position.

The Bancorp assigns a substandard rating to loans and leases that are inadequately protected by the current sound worth and paying capacity of the borrower or of the collateral pledged. Substandard loans and leases have well defined weaknesses or weaknesses that could jeopardize the orderly repayment of the debt. Loans and leases in this grade also are characterized by the distinct possibility that the Bancorp will sustain some loss if the deficiencies noted are not addressed and corrected.

The Bancorp assigns a doubtful rating to loans and leases that have all the attributes of a substandard rating with the added characteristic that the weaknesses make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The possibility of loss is extremely high, but because of certain important and reasonable specific pending factors that may work to the advantage of and strengthen the credit quality of the loan or lease, its classification as an estimated loss is deferred until its more exact status may be determined. Pending factors may include a proposed merger or acquisition, liquidation proceeding, capital injection, perfecting

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

liens on additional collateral or refinancing plans.

Loans and leases classified as loss are considered uncollectible and are charged off in the period in which they are determined to be uncollectible. Because loans and leases in this category are fully charged down, they are not included in the following tables.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

The following table summarizes the credit risk profile of the Bancorp’s commercial portfolio segment, by class:

 

As of March 31, 2012 ($ in millions)

  Pass   Special
Mention
   Substandard   Doubtful   Total 

Commercial and industrial loans

  $28,761    1,479    1,805    110    32,155 

Commercial mortgage loans owner-occupied

   3,850    509    802    15    5,176 

Commercial mortgage loans nonowner-occupied

   3,172    566    971    24    4,733 

Commercial construction loans

   326    218    342    15    901 

Commercial leases

   3,414    40    57    1    3,512 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $39,523    2,812    3,977    165    46,477 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

As of June 30, 2012 ($ in millions)

  Pass   Special
Mention
   Substandard   Doubtful   Total 

Commercial and industrial loans

  $29,379    1,575    1,626    32    32,612 

Commercial mortgage loans owner-occupied

   3,902    491    752    7    5,152 

Commercial mortgage loans nonowner-occupied

   3,015    559    922    14    4,510 

Commercial construction loans

   364    170    285    3    822 

Commercial leases

   3,388    56    23    —       3,467 
  

 

   

 

   

 

   

 

   

 

 

Total

  $40,048    2,851    3,608    56    46,563 
  

 

   

 

   

 

   

 

   

 

 

As of December 31, 2011 ($ in millions)

  Pass   Special
Mention
   Substandard   Doubtful   Total   Pass   Special
Mention
   Substandard   Doubtful   Total 

Commercial and industrial loans

  $27,199    1,641    1,831    112    30,783   $27,199    1,641    1,831    112    30,783 

Commercial mortgage loans owner-occupied

   3,893    567    778    28    5,266    3,893    567    778    28    5,266 

Commercial mortgage loans nonowner-occupied

   3,328    521    984    39    4,872    3,328    521    984    39    4,872 

Commercial construction loans

   343    235    413    29    1,020    343    235    413    29    1,020 

Commercial leases

   3,434    52    44    1    3,531    3,434    52    44    1    3,531 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $38,197    3,016    4,050    209    45,472   $38,197    3,016    4,050    209    45,472 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

As of March 31, 2011 ($ in millions)

  Pass   Special
Mention
   Substandard   Doubtful   Total 

As of June 30, 2011 ($ in millions)

  Pass   Special
Mention
   Substandard   Doubtful   Total 

Commercial and industrial loans

  $23,092    1,788    2,350    114    27,344   $24,268    1,594    2,077    160    28,099 

Commercial mortgage loans owner-occupied

   4,027    435    801    18    5,281    3,995    430    779    25    5,229 

Commercial mortgage loans nonowner-occupied

   3,352    659    1,152    66    5,229    3,195    640    1,134    35    5,004 

Commercial construction loans

   1,029    412    516    23    1,980    948    303    473    54    1,778 

Commercial leases

   3,273    46    46    2    3,367    3,232    52    40    2    3,326 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $34,773    3,340    4,865    223    43,201   $35,638    3,019    4,503    276    43,436 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

 

Consumer Portfolio Segment

For purposes of monitoring the credit quality and risk characteristics of its consumer portfolio segment, the Bancorp disaggregates the segment into the following classes: home equity, automobile loans, credit card, and other consumer loans and leases. The Bancorp’s residential mortgage portfolio segment is also a separate class.

The Bancorp considers repayment performance as the best indicator of credit quality for residential mortgage and consumer loans, which includes both the delinquency status and performing versus nonperforming status of the loans. The delinquency status of all residential mortgage and consumer loans is presented by class in the age analysis section below while the performing versus nonperforming status is presented in the table below. Residential mortgage loans that have principal and interest payments that have become past due 150 days and home equity loans with principal and interest payments that have become past due 180 days are classified as nonperforming unless such loans are both well secured and in the process of collection. Automobile and other consumer loans and leases that have been modified in a TDR and subsequently become past due 90 days are classified as nonperforming. Credit card loans that have been modified in a TDR are classified as nonperforming unless such loans have a sustained repayment performance of six months or greater and are reasonably assured of repayment in accordance with the restructured terms. Well secured loans are collateralized by perfected security interests in real and/or personal property for which the Bancorp estimates proceeds from sale would be sufficient to recover the outstanding principal and accrued interest balance of the loan and pay all costs to sell the collateral. The Bancorp considers a loan in the process of collection if collection efforts or legal action is proceeding and the Bancorp expects to collect funds sufficient to bring the loan current or recover the entire outstanding principal and accrued interest balance.

The following table presents a summary of the Bancorp’s residential mortgage and consumer portfolio segments disaggregated into performing versus nonperforming status as of:

    March 31, 2012   December 31, 2011   March 31, 2011 

($ in millions)

  Performing   Nonperforming   Performing   Nonperforming   Performing   Nonperforming 

Residential mortgage loans(a)

  $10,762    265    10,332    275    9,215    261 

Home equity

   10,443    50    10,665    54    11,166    56 

Automobile loans

   11,829    3    11,825    2    11,126    3 

Credit card

   1,851    45    1,930    48    1,767    54 

Other consumer loans and leases

   320    1    349    1    502    60 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $35,205    364    35,101    380    33,776    434 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(a)Excludes$67, $65, and $54 of loans measured at fair value atMarch 31, 2012, December 31, 2011, and March 31, 2011, respectively.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

    June 30, 2012   December 31, 2011   June 30, 2011 

($ in millions)

  Performing   Nonperforming   Performing   Nonperforming   Performing   Nonperforming 

Residential mortgage loans(a)

  $11,093    260    10,332    275    9,518    272 

Home equity

   10,323    54    10,665    54    10,990    58 

Automobile loans

   11,736    3    11,825    2    11,312    3 

Credit card

   1,901    42    1,930    48    1,806    50 

Other consumer loans and leases

   308    —       349    1    460    3 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $35,361    359    35,101    380    34,086    386 
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

(a)Excludes$76, $65, and $59 of loans measured at fair value atJune 30, 2012, December 31, 2011, and June 30, 2011, respectively.

Age Analysis of Past Due Loans and Leases

The following tables summarize the Bancorp’s recorded investment in portfolio loans and leases by age and class:

 

      Past Due               Past Due         

As of March 31, 2012

($ in millions)

  Current
Loans and
Leases
   30-89
Days
   90 Days
and
Greater(c)
   Total
Past
Due
   Total Loans
and Leases
   90 Days Past
Due and Still
Accruing
 

As of June 30, 2012

($ in millions)

  Current
Loans and
Leases
   30-89
Days
   90 Days
and
Greater(c)
 Total
Past Due
   Total Loans
and Leases
   90 Days Past
Due and  Still
Accruing
 

Commercial:

                       

Commercial and industrial loans

  $31,872    77    206    283    32,155    2   $32,360    41    211    252    32,612    2 

Commercial mortgage owner-occupied loans

   5,010    30    136    166    5,176    30    4,992    28    132    160    5,152    22 

Commercial mortgage nonowner-occupied loans

   4,516    48    169    217    4,733    —       4,306    36    168    204    4,510    —    

Commercial construction loans

   782    5    114    119    901    —       714    3    105    108    822    —    

Commercial leases

   3,507    1    4    5    3,512    —       3,464    1    2    3    3,467    —    

Residential mortgage loans(a) (b)

   10,594    97    336    433    11,027    73    10,917    99    337    436    11,353    80 

Consumer:

                       

Home equity

   10,250    118    125    243    10,493    74    10,131    125    121    246    10,377    67 

Automobile loans

   11,771    50    11    61    11,832    8    11,680    49    10    59    11,739    8 

Credit card

   1,795    31    70    101    1,896    29    1,851    40    52    92    1,943    24 

Other consumer loans and leases

   319    1    1    2    321    —       308    —       —      —       308    —    
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

 

Total portfolio loans and leases(a)

  $80,416    458    1,172    1,630    82,046    216 

Total portfolio loans and leases(a) (d)

  $80,723    422    1,138    1,560    82,283    203 
  

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

 

 

(a)Excludes $67$76 of loans measured at fair value.
(b)Information for current residential mortgage loans includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. As of March 31,June 30, 2012, $49$50 of these loans were 30-89 days past due and $320$359 were 90 days or more past due. The Bancorp recognized $1$2 of losses for the three and six months ended March 31,June 30, 2012 due to claim denials and curtailments associated with these advances.
(c)Includes accrual and nonaccrual loans and leases.
(d)Includes$1 of government insured commercial loans 30-89 days past due and accruing whose repayments are insured by the Small Business Administration atJune 30, 2012 and an immaterial amount of government insured commercial loans 90 days past due and still accruing.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

       Past Due         

As of December 31, 2011

($ in millions)

  Current
Loans and
Leases
   30-89
Days
   90 Days
and
Greater(c)
  Total
Past Due
   Total Loans
and Leases
   90 Days Past
Due and Still
Accruing
 

Commercial:

           

Commercial and industrial loans

  $30,493    49    241    290    30,783    4 

Commercial mortgage owner-occupied loans

   5,088    62    116    178    5,266    1 

Commercial mortgage nonowner-occupied loans

   4,649    41    182    223    4,872    2 

Commercial construction loans

   887    12    121    133    1,020    1 

Commercial leases

   3,521    4    6    10    3,531    —    

Residential mortgage loans(a) (b)

   10,149    110    348    458    10,607    79 

Consumer:

           

Home equity

   10,455    136    128    264    10,719    74 

Automobile loans

   11,744    71    12    83    11,827    9 

Credit card

   1,873    33    72    105    1,978    30 

Other consumer loans and leases

   348    1    1    2    350    —    
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

Total portfolio loans and leases(a)

  $79,207    519    1,227    1,746    80,953    200 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

       Past Due         

As of December 31, 2011

($ in millions)

  Current
Loans and
Leases
   30-89
Days
   90 Days
and
Greater(c)
  Total
Past Due
   Total Loans
and Leases
   90 Days Past
Due and Still

Accruing
 

Commercial:

           

Commercial and industrial loans

  $30,493    49    241    290    30,783    4 

Commercial mortgage owner-occupied loans

   5,088    62    116    178    5,266    1 

Commercial mortgage nonowner-occupied loans

   4,649    41    182    223    4,872    2 

Commercial construction loans

   887    12    121    133    1,020    1 

Commercial leases

   3,521    4    6    10    3,531    —    

Residential mortgage loans(a) (b)

   10,149    110    348    458    10,607    79 

Consumer:

           

Home equity

   10,455    136    128    264    10,719    74 

Automobile loans

   11,744    71    12    83    11,827    9 

Credit card

   1,873    33    72    105    1,978    30 

Other consumer loans and leases

   348    1    1    2    350    —    
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

Total portfolio loans and leases(a) (d)

  $79,207    519    1,227    1,746    80,953    200 
  

 

 

   

 

 

   

 

 

  

 

 

   

 

 

   

 

 

 

 

(a)Excludes $65 of loans measured at fair value.
(b)Information for current residential mortgage loans includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. As of December 31, 2011, $45 of these loans were 30-89 days past due and $309 were 90 days or more past due. The Bancorp recognized an immaterial amount of losses for the year ended December 31, 2011 due to claim denials and curtailments associated with these advances.
(c)Includes accrual and nonaccrual loans and leases.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

(d)Includes an immaterial amount of government insured commercial loans 30-89 and 90 days past due and accruing whose repayments are insured by the Small Business Administration at December 31, 2011.

 

      Past Due               Past Due         

As of March 31, 2011

($ in millions)

  Current
Loans and
Leases
   30-89
Days
   90 Days
and
Greater(c)
 Total
Past Due
   Total Loans
and Leases
   90 Days Past
Due and Still
Accruing
 

As of June 30, 2011

($ in millions)

  Current
Loans and
Leases
   30-89
Days
   90 Days
and
Greater(c)
 Total
Past Due
   Total Loans
and Leases
   90 Days Past
Due and  Still
Accruing
 

Commercial:

                      

Commercial and industrial loans

  $26,920    132    292    424    27,344    8   $27,737    70    292    362    28,099    7 

Commercial mortgage owner-occupied loans

   5,094    57    130    187    5,281    4    5,064    41    124    165    5,229    8 

Commercial mortgage nonowner-occupied loans

   4,931    103    195    298    5,229    4    4,746    37    221    258    5,004    4 

Commercial construction loans

   1,775    50    155    205    1,980    23    1,556    40    182    222    1,778    48 

Commercial leases

   3,352    5    10    15    3,367    —       3,314    3    9    12    3,326    1 

Residential mortgage loans(a) (b)

   9,001    119    356    475    9,476    98    9,334    102    354    456    9,790    87 

Consumer:

                      

Home equity

   10,946    136    140    276    11,222    84    10,775    130    143    273    11,048    84 

Automobile loans

   11,050    67    12    79    11,129    9    11,234    68    13    81    11,315    10 

Credit card

   1,703    36    82    118    1,821    36    1,755    28    73    101    1,856    30 

Other consumer loans and leases

   500    2    60    62    562    —       459    1    3    4    463    —    
  

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

 

Total portfolio loans and leases(a)

  $75,272    707    1,432    2,139    77,411    266 

Total portfolio loans and leases(a) (d)

  $75,974    520    1,414    1,934    77,908    279 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

 

 

(a)Excludes $54$59 of loans measured at fair value.
(b)Information for current residential mortgage loans includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. As of March 31,June 30, 2011, $50$28 of these loans were 30-89 days past due and $298$271 were 90 days or more past due. The Bancorp recognized an immaterial amount of losses for the three months ended March 31,June 30, 2011 and $1 million for the six months ended June 30, 2011 due to claim denials and curtailments associated with these advances.
(c)Includes accrual and nonaccrual loans and leasesleases.
(d)Includes $1 of government insured loans 30-89 days past due and accruing of government insured commercial loans whose repayments are insured by the Small Business Administration at June 30, 2011 and an immaterial amount of government insured commercial loans 90 days past due and still accruing.

Impaired Loans and Leases

Larger commercial loans included within aggregate borrower relationship balances exceeding $1 million that exhibit probable or observed credit weaknesses are subject to individual review for impairment. The Bancorp also performs an individual review on loans that are restructured in a troubled debt restructuring. The Bancorp considers the current value of collateral, credit quality of any guarantees, the loan structure, and other factors when evaluating whether an individual loan is impaired. Other factors may include the geography and industry of the borrower, size and financial condition of the borrower, cash flow and leverage of the borrower, and the Bancorp’s evaluation of the borrower’s management. Smaller-balance homogenous loans that are collectively evaluated for impairment are not included in the following tables.

The following tables summarize the Bancorp’s impaired loans and leases (by class) that were subject to individual review:

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

The following tables summarize the Bancorp’s impaired loans and leases (by class) that were subject to individual review:

As of March 31, 2012

($ in millions)

  Unpaid
Principal
Balance
   Recorded
Investment(a)
   Allowance 

As of June 30, 2012

($ in millions)

  Unpaid
Principal
Balance
   Recorded
Investment(a)
   Allowance 

With a related allowance recorded:

            

Commercial:

            

Commercial and industrial loans

  $367    248     92   $284    198     80 

Commercial mortgage owner-occupied loans

   88    69     9    68    55     8 

Commercial mortgage nonowner-occupied loans

   227    159     19    229    174     19 

Commercial construction loans

   142    85     12    152    108     9 

Commercial leases

   4    4     1    12    4     1 

Restructured residential mortgage loans

   1,044    997     131    1,045    996     129 

Restructured consumer:

            

Home equity

   401    398     47    404    401     45 

Automobile loans

   39    39     5    36    36     5 

Credit card

   95    87     13    97    84     13 

Other consumer loans and leases

   2     2     —    
  

 

   

 

   

 

   

 

   

 

   

 

 

Total impaired loans with a related allowance

  $2,409    2,088     329   $2,327    2,056     309 
  

 

   

 

   

 

   

 

   

 

   

 

 

With no related allowance recorded:

            

Commercial:

            

Commercial and industrial loans

  $275    228     —      $334    260     —    

Commercial mortgage owner-occupied loans

   99    88     —       130    117     —    

Commercial mortgage nonowner-occupied loans

   205    179     —       264    209     —    

Commercial construction loans

   130    94     —       115    68     —    

Commercial leases

   6    6     —       7    7     —    

Restructured residential mortgage loans

   312    258     —       323    269     —    

Restructured consumer:

            

Home equity

   44    41     —       40    38     —    

Automobile loans

   3    3     —       3    3     —    
  

 

   

 

   

 

   

 

   

 

   

 

 

Total impaired loans with no related allowance

   1,074    897     —       1,216    971     —    
  

 

   

 

   

 

   

 

   

 

   

 

 

Total impaired loans and leases

  $3,483    2,985     329   $3,543    3,027     309 
  

 

   

 

   

 

   

 

   

 

   

 

 

 

(a)Includes$481455, $1,125$1,140 and$499494, respectively, of commercial, residential mortgage and consumer TDRs on accrual status;$157147,$130125 and$7168, respectively, of commercial, residential mortgage and consumer TDRs on nonaccrual status.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

As of December 31, 2011

($ in millions)

  Unpaid
Principal
Balance
   Recorded
Investment(a)
   Allowance 

With a related allowance recorded:

      

Commercial:

      

Commercial and industrial loans

  $330    246     102 

Commercial mortgage owner-occupied loans

   66    52     10 

Commercial mortgage nonowner-occupied loans

   203    147     24 

Commercial construction loans

   213    120     18 

Commercial leases

   11    10     2 

Restructured residential mortgage loans

   1,091    1,038     131 

Restructured consumer:

      

Home equity

   401    397     46 

Automobile loans

   37    37     5 

Credit card

   94    88     14 

Other consumer loans and leases

   2    2     —    
  

 

 

   

 

 

   

 

 

 

Total impaired loans with a related allowance

  $2,448    2,137     352 
  

 

 

   

 

 

   

 

 

 

With no related allowance recorded:

      

Commercial:

      

Commercial and industrial loans

  $375    265     —    

Commercial mortgage owner-occupied loans

   78    69     —    

Commercial mortgage nonowner-occupied loans

   191    157     —    

Commercial construction loans

   143    105     —    

Commercial leases

   2    2     —    

Restructured residential mortgage loans

   276    228     —    

Restructured consumer:

      

Home equity

   48    46     —    

Automobile loans

   4    4     —    
  

 

 

   

 

 

   

 

 

 

Total impaired loans with no related allowance

   1,117    876     —    
  

 

 

   

 

 

   

 

 

 

Total impaired loans and leases

  $3,565    3,013     352 
  

 

 

   

 

 

   

 

 

 

 

(a)Includes $390, $1,117 and $495, respectively, of commercial, residential mortgage and consumer TDRs on accrual status; $160, $141 and $79, respectively, of commercial, residential mortgage and consumer TDRs on nonaccrual status.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

As of March 31, 2011

($ in millions)

  Unpaid
Principal
Balance
   Recorded
Investment(a)
   Allowance 

As of June 30, 2011

($ in millions)

  Unpaid
Principal
Balance
   Recorded
Investment(a)
   Allowance 

With a related allowance recorded:

            

Commercial:

            

Commercial and industrial loans

  $479    351     162   $414    394    184 

Commercial mortgage owner-occupied loans

   107    66     17    49    38    5 

Commercial mortgage nonowner-occupied loans

   169    117     21    208    162    30 

Commercial construction loans

   252    159     39    207    156    19 

Commercial leases

   10    10     48    12    19    8 

Restructured residential mortgage loans

   1,094    1,044     125    1,101    1,053    127 

Restructured consumer:

            

Home equity

   395    393     52    392    389    50 

Automobile loans

   35    34     5    36    36    5 

Credit card

   112    99     19    105    96    18 

Other consumer loans and leases

   87    84     31    5    5    1 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total impaired loans with a related allowance

  $2,740    2,357     519   $2,529    2,348    447 
  

 

   

 

   

 

   

 

   

 

   

 

 

With no related allowance recorded:

            

Commercial:

            

Commercial and industrial loans

  $178    142     —      $210    155    —    

Commercial mortgage owner-occupied loans

   64    54     —       60    83    —    

Commercial mortgage nonowner-occupied loans

   171    144     —       148    139    —    

Commercial construction loans

   73    43     —       70    34    —    

Commercial leases

   4    4     —       4    4    —    

Restructured residential mortgage loans

   201    160     —       221    178    —    

Restructured consumer:

            

Home equity

   50    48     —       62    59    —    

Automobile loans

   5    5     —       4    4    —    
  

 

   

 

   

 

   

 

   

 

   

 

 

Total impaired loans with no related allowance

   746    600     —       779    656    —    
  

 

   

 

   

 

   

 

   

 

   

 

 

Total impaired loans and leases

  $3,486    2,957     519   $3,308    3,004    447 
  

 

   

 

   

 

   

 

   

 

   

 

 

 

(a)Includes $243, $1,083,$266, $1,088, and $515,$505, respectively, of commercial, residential mortgage and consumer TDRs on accrual status; $149, $121$188, $127 and $148,$84, respectively, of commercial, residential mortgage and consumer TDRs on nonaccrual status.

The following table summarizes the Bancorp’s average impaired loans and leases and interest income by class:

 

  For the three months ended   For the six months ended 
  For the three months
ended March 31, 2012
   June 30, 2012   June 30, 2012 

($ in millions)

  Average
Recorded
Investment
   Interest
Income
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
   Average
Recorded
Investment
   Interest
Income
Recognized
 

Commercial:

            

Commercial and industrial loans

  $494    1   $467    1   $481    2 

Commercial mortgage owner-occupied loans

   139    1    164    1    152    2 

Commercial mortgage nonowner-occupied loans

   320    2    361    2    341    4 

Commercial construction loans

   202    1    177    1    190    2 

Commercial leases

   11    —       10    —       11    —    

Restructured residential mortgage loans

   1,262    12    1,270    13    1,266    25 

Restructured consumer:

            

Home equity

   444    6    438    12    441    18 

Automobile loans

   41    —       39    1    40    1 

Credit card

   80    1    86    1    83    2 

Other consumer loans and leases

   —       —       —       —    
  

 

   

 

   

 

   

 

   

 

   

 

 

Total impaired loans and leases

  $2,993    24   $3,012    32   $3,005    56 
  

 

   

 

   

 

   

 

   

 

   

 

 

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

  For the three months ended   For the six months ended 
  June 30, 2011   June 30, 2011 
  Average   Interest   Average   Interest 
  For the three months ended
March 31, 2011
   Recorded   Income   Recorded   Income 

($ in millions)

  Average
Recorded
Investment
   Interest
Income
Recognized
   Investment   Recognized   Investment   Recognized 

Commercial:

            

Commercial and industrial loans

  $509    13   $521    12    495    25 

Commercial mortgage owner-occupied loans

   109    5    121    5    126    10 

Commercial mortgage nonowner-occupied loans

   277    8    280    8    290    16 

Commercial construction loans

   206    5    197    6    183    11 

Commercial leases

   14    —       19    —       23    —    

Restructured residential mortgage loans

   1,196    10    1,222    11    1,209    21 

Restructured consumer:

            

Home equity

   441    6    440    11    444    17 

Automobile loans

   39    —       40    1    39    1 

Credit card

   86    1    100    1    98    2 

Other consumer loans and leases

   82    —       40    —       56    —    
  

 

   

 

   

 

   

 

   

 

   

 

 

Total impaired loans and leases

  $2,959    48   $2,980    55    2,963    103 
  

 

   

 

   

 

   

 

   

 

   

 

 

Nonperforming Assets:

The following table summarizes the Bancorp’s nonperforming loans and leases, by class, as of:

 

  June 30,   December 31,   June 30, 

($ in millions)

  March 31,
2012
   December 31,
2011
   March 31,
2011
   2012   2011   2011 

Commercial:

            

Commercial and industrial loans

  $442    487    572   $454    487    607 

Commercial mortgage owner-occupied loans

   180    170    271    174    170    286 

Commercial mortgage nonowner-occupied loans

   225    251    182    240    251    178 

Commercial construction loans

   131    138    168    112    138    160 

Commercial leases

   10    12    18    3    12    22 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total commercial loans and leases

   988    1,058    1,211    983    1,058    1,253 
  

 

   

 

   

 

   

 

   

 

   

 

 

Residential mortgage loans

   265    275    261    260    275    272 

Consumer:

            

Home equity

   50    54    56    54    54    58 

Automobile loans

   3    2    3    3    2    3 

Credit card

   45    48    54    42    48    50 

Other consumer loans and leases

   1    1    60    —       1    3 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total consumer loans and leases

   99    105    173    99    105    114 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total nonperforming loans and leases(a)

  $1,352    1,438    1,645 

Total nonperforming loans and leases(a) (c)

  $1,342    1,438    1,639 
  

 

   

 

   

 

   

 

   

 

   

 

 

OREO and other repossessed property(b)

   321    378    481    277    378    449 
  

 

   

 

   

 

   

 

   

 

   

 

 

 

(a)Excludes$11760,$138 and $216$176 of nonaccrual loans held for sale atMarch 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, respectively.
(b)Excludes$69,70, $64 and $53$54 of OREO related to government insured loans atMarch 31,June 30, 2012, December 31, 2011 and MarchJune 30, 2011, respectively.
(c)Includes$13, $17, and $20 of nonaccrual government insured commercial loans whose repayments are insured by the Small Business Administration atJune 30, 2012, December 31, 2012, and June 30, 2011, respectively, and$1 and $2 of restructured nonaccrual government insured commercial loans atJune 30, 2012and December 31, 2011, respectively.respectively, and an immaterial amount at June 30, 2011.

Troubled Debt Restructurings

If a borrower is experiencing financial difficulty, the Bancorp may consider, in certain circumstances, modifying the terms of their loan to maximize collection of amounts due. Within each of the Bancorp’s loan classes, TDRs typically involve either a reduction of the stated interest rate of the loan, an extension of the loan’s maturity date(s) atwith a stated rate lower than the current market rate for a new loan with similar risk, or in limited circumstances, a reduction of the principal balance of the loan or the loan’s accrued interest. Modifying the terms of loans may result in an increase or decrease to the ALLL depending upon the terms modified, the method used to measure the ALLL for a loan prior to modification, and whether any charge-offs were recorded on the loan before or at the time of modification. Refer to the ALLL section of Note 1 in the Bancorp’s Form 10-K for information on the Bancorp’s ALLL methodology. Upon modification of a loan, the Bancorp measures the related impairment as the difference between the estimated future cash flows, discounted at the original effective yield of the loan, expected to be collected on the modified loan and the carrying value of the loan. The resulting measurement may result in the need for minimal or no valuation allowance because it is probable that all cash flows will be collected under the modified terms of the loan. In addition, if the stated interest rate was increased in a TDR, the cash flows on the modified loan, using pre modificationthe pre-modification interest rate as the discount rate, often exceed the recorded investment of the loan. Conversely, the Bancorp often recognizes an impairment loss as an

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

increase to the ALLL upon a modification that reduces the stated interest rate on a loan. If a TDR involves a reduction of the principal balance of the loan or the loan’s accrued interest, that amount is charged off to the ALLL. As of March 31,June 30, 2012, December 31, 2011, and March 31,June 30, 2011, the Bancorp had $20$24 million, $42 million, and $38$37 million in line of credit commitments, respectively, and $1$25 million in letter of credit commitments at June 30, 2012 and $1 million at December 31, 2011 and June 30, 2011, respectively, to lend additional funds to borrowers whose terms have been modified in a troubled debt restructuring.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

The following table provides a summary of loans modified in a TDR by the Bancorp during the three months ended March 31,June 30, 2012.

($ in millions)(a)

  Number of loans
modified in a TDR
during the period(b)
   Recorded investment
in loans modified

in a TDR
during the period
   Increase
(Decrease)
to ALLL upon
modification
  Charge-offs
recognized upon
modification
 

Commercial:

       

Commercial and industrial loans

   11   $10    (6  —    

Commercial mortgage owner-occupied loans

   9    7    (1  —    

Commercial mortgage nonowner-occupied loans

   10    16    (6  —    

Commercial construction loans

   —       —       (4  —    

Residential mortgage loans

   557    91    8   —    

Consumer:

       

Home equity

   359    23    1   —    

Automobile loans

   222    4    1   —    

Credit card

   2,991    20    3   —    
  

 

 

   

 

 

   

 

 

  

 

 

 

Total portfolio loans and leases

   4,159   $171    (4  —    
  

 

 

   

 

 

   

 

 

  

 

 

 

The following table provides a summary of loans modified in a TDR by the Bancorp during the six months ended June 30, 2012:

 

($ in millions)(a)

  Number of loans
modified in a TDR
during the period(b)
   Recorded investment
in loans modified

in a TDR
during the period
   Increase
(Decrease)
to ALLL upon
modification
 Charge-offs
recognized upon
modification
   Number of loans
modified in a TDR
during the period(b)
   Recorded investment
in loans modified

in a TDR
during the period
   Increase
(Decrease)
to ALLL upon
modification
 Charge-offs
recognized upon
modification
 

Commercial:

              

Commercial and industrial loans

   30    $15    (3  —       41   $25    (9  —    

Commercial mortgage owner-occupied loans

   27     8    (2  —       36    15    (3  —    

Commercial mortgage nonowner-occupied loans

   30     51    1   —       40    67    (5  —    

Commercial construction loans

   11     36    —      —       11    36    (4  —    

Residential mortgage loans

   480     78    7   —       1,037    169    15   —    

Consumer:

              

Home equity

   311     19    1   —       670    42    2   —    

Automobile loans

   339     5    1   —       561    9    2   —    

Credit card

   2,741     18    2   —       5,732    38    5   —    
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

Total portfolio loans and leases

   3,969    $230    7   —       8,128   $401    3   —    
  

 

   

 

   

 

  

 

   

 

   

 

   

 

  

 

 

 

(a)Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality.
(b)Represents number of loans post-modification.

The Bancorp considers TDRs that become 90 days or more past due under the modified terms as subsequently defaulted. For commercial loans not subject to individual review for impairment, the historical loss rates that are applied to such commercial loans for purposes of determining the allowance include historical losses associated with subsequent defaults on loans previously modified in a TDR. For consumer loans, the Bancorp performs a qualitative assessment of the adequacy of the consumer ALLL by comparing the consumer ALLL to forecasted consumer losses over the projected loss emergence period (the forecasted losses include the impact of subsequent defaults of consumer TDRs). When a residential mortgage, home equity, auto or other consumer loan that has been modified in a TDR subsequently defaults, the present value of expected cash flows used in the measurement of the potential impairment loss is generally limited to the expected net proceeds from the sale of the loan’s underlying collateral and any resulting impairment loss is reflected as a charge-off or an increase in ALLL. When a credit card loan that has been modified in a TDR subsequently defaults, the calculation of the impairment loss is consistent with the Bancorp’s calculation for other credit card loans that have become 90 days or more past due.

The following table provides a summary of subsequent defaults that occurred during the three months ended March 31,June 30, 2012 and within 12 months of the restructuring date:

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

($ in millions)(a)

  Number of
Contracts
   Recorded
Investment
 

Commercial:

    

Commercial mortgage owner-occupied loans

   2   $1 

Commercial mortgage nonowner-occupied loans

   1    —    

Residential mortgage loans

   62    14 

Consumer:

    

Home equity

   17    1 

Automobile loans

   9    —    

Credit card

   4    —    
  

 

 

   

 

 

 

Total portfolio loans and leases

   95   $16 
  

 

 

   

 

 

 

The following table provides a summary of subsequent defaults that occurred during the six months ended June 30, 2012 and within 12 months of the restructuring date:

 

($ in millions)(a)

  Number of
Contracts
   Recorded
Investment
   Number of
Contracts
   Recorded
Investment
 

Commercial:

        

Commercial mortgage owner-occupied loans

   2   $1 

Commercial mortgage nonowner-occupied loans

   1   $1    2    1 

Commercial construction loans

   2    3    2    3 

Residential mortgage loans

   64    11    126    25 

Consumer:

        

Home equity

   31    2    48    3 

Automobile loans

   12    —       21    —    

Credit card

   17    —       21    —    
  

 

   

 

   

 

   

 

 

Total portfolio loans and leases

   127   $17    222   $33 
  

 

   

 

   

 

   

 

 

 

(a)Excludes all loans and leases held for sale and loans acquired with deteriorated credit quality.

7. Intangible Assets

Intangible assets consist of servicing rights, core deposit intangibles, customer lists, non-compete agreements and cardholder relationships. Intangible assets, excluding servicing rights, are amortized on either a straight-line or an accelerated basis over their estimated useful lives and have an estimated remaining weighted-average life at March 31,June 30, 2012 of 43.6 years. The Bancorp reviews intangible assets for possible impairment whenever events or changes in circumstances indicate that carrying amounts may not be recoverable. For more information on servicing rights, see Note 9. The details of the Bancorp’s intangible assets are shown in the following table.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

($ in millions)

  Gross Carrying
Amount
   Accumulated
Amortization
  Valuation
Allowance
  Net Carrying
Amount
 

As of June 30, 2012

      

Mortgage servicing rights

  $2,710    (1,367  (607  736 

Core deposit intangibles

   180    (154  —      26 

Other

   44    (37  —      7 
  

 

 

   

 

 

  

 

 

  

 

 

 

Total intangible assets

  $2,934    (1,558  (607  769 
  

 

 

   

 

 

  

 

 

  

 

 

 

As of December 31, 2011

      

Mortgage servicing rights

  $2,520    (1,281  (558  681 

Core deposit intangibles

   439    (407  —      32 

Other

   44    (36  —      8 
  

 

 

   

 

 

  

 

 

  

 

 

 

Total intangible assets

  $3,003    (1,724  (558  721 
  

 

 

   

 

 

  

 

 

  

 

 

 

As of June 30, 2011

      

Mortgage servicing rights

  $2,389    (1,199  (343  847 

Core deposit intangibles

   439    (400  —      39 

Other

   44    (34  —      10 
  

 

 

   

 

 

  

 

 

  

 

 

 

Total intangible assets

  $2,872    (1,633  (343  896 
  

 

 

   

 

 

  

 

 

  

 

 

 

 

($ in millions)

  Gross Carrying
Amount
   Accumulated
Amortization
  Valuation
Allowance
  Net Carrying
Amount
 

As of March 31, 2012

      

Mortgage servicing rights

  $2,641    (1,327  (547  767 

Core deposit intangibles

   180    (152  —      28 

Other

   44    (36  —      8 
  

 

 

   

 

 

  

 

 

  

 

 

 

Total intangible assets

  $2,865    (1,515  (547  803 
  

 

 

   

 

 

  

 

 

  

 

 

 

As of December 31, 2011

      

Mortgage servicing rights

  $2,520    (1,281  (558  681 

Core deposit intangibles

   439    (407  —      32 

Other

   44    (36  —      8 
  

 

 

   

 

 

  

 

 

  

 

 

 

Total intangible assets

  $3,003    (1,724  (558  721 
  

 

 

   

 

 

  

 

 

  

 

 

 

As of March 31, 2011

      

Mortgage servicing rights

  $2,347    (1,174  (279  894 

Core deposit intangibles

   439    (395  —      44 

Other

   44    (33  —      11 
  

 

 

   

 

 

  

 

 

  

 

 

 

Total intangible assets

  $2,830    (1,602  (279  949 
  

 

 

   

 

 

  

 

 

  

 

 

 

As of March 31,June 30, 2012, all of the Bancorp’s intangible assets were being amortized. Amortization expense recognized on intangible assets, including servicing rights, for the three months ending March 31,ended June 30, 2012 and 2011 was $50$44 million and $35$31 million, respectively. For the six months ended June 30, 2012 and 2011, amortization expense was $94 million and $66 million, respectively. Estimated amortization expense for the years ending December 31,remainder of 2012 through 2016 is as follows:

Fifth Third Bancorp and Subsidiaries

   Mortgage   Other     

($ in millions)

  Servicing
Rights
   Intangible
Assets
   Total 

Remainder of 2012

  $179    9    188 

2013

   195    8    203 

2014

   157    4    161 

2015

   128    2    130 

2016

   104    2    106 
  

 

 

   

 

 

   

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

   Mortgage   Other     

($ in millions)

  Servicing Rights   Intangible Assets   Total 

Remainder of 2012

  $143    6    149 

2013

   233    8    241 

2014

   184    4    188 

2015

   148    2    150 

2016

   119    2    121 
  

 

 

   

 

 

   

 

 

 

8. Variable Interest Entities

The Bancorp, in the normal course of business, engages in a variety of activities that involve VIEs, which are legal entities that lack sufficient equity to finance their activities, or the equity investors of the entities as a group lack any of the characteristics of a controlling interest. The primary beneficiary of a VIE is generally the enterprise that has both the power to direct the activities most significant to the economic performance of the VIE and the obligation to absorb losses or receive benefits that could potentially be significant to the VIE. For certain investment funds, the primary beneficiary is the enterprise that will absorb a majority of the fund’s expected losses or receive a majority of the fund’s expected residual returns. The Bancorp evaluates its interest in certain entities to determine if these entities meet the definition of a VIE and whether the Bancorp is the primary beneficiary and should consolidate the entity based on the variable interests it held both at inception and when there is a change in circumstances that requires a reconsideration. If the Bancorp is determined to be the primary beneficiary of a VIE, it must account for the VIE as a consolidated subsidiary. If the Bancorp is determined not to be the primary beneficiary of a VIE but holds a variable interest in the entity, such variable interests are accounted for under the equity method of accounting or other accounting standards as appropriate.

Consolidated VIEs

The following table provides a summary of the classifications of consolidated VIE assets, liabilities and noncontrolling interests included in the Bancorp’s Condensed Consolidated Balance Sheets as of:

June 30, 2012 ($ in millions)

  Home Equity
Securitization
   Automobile Loan
Securitization
  CDC
Investments
  Total 

Assets:

      

Cash and due from banks

  $—       9   —      9 

Other short-term investments

   —       4   —      4 

Commercial mortgage loans

   —       —      51   51 

Automobile loans

   —       75   —      75 

ALLL

   —       (1  (2  (3

Other assets

   —       1   2   3 
  

 

 

   

 

 

  

 

 

  

 

 

 

Total assets

   —       88   51   139 
  

 

 

   

 

 

  

 

 

  

 

 

 

Liabilities:

      

Other liabilities

  $—       2   —      2 

Long-term debt

   —       73   —      73 
  

 

 

   

 

 

  

 

 

  

 

 

 

Total liabilities

  $—       75   —      75 
  

 

 

   

 

 

  

 

 

  

 

 

 

Noncontrolling interests

      51   51 
  

 

 

   

 

 

  

 

 

  

 

 

 

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

$XXXX$XXXX$XXXX$XXXX

March 31, 2012 ($ in millions)

  Home Equity
Securitization
 Automobile Loan
Securitization
 CDC
Investments
 Total 

Assets:

     

Cash and due from banks

  $6   13   —      19 

Other short-term investments

   —      4   —      4 

Commercial mortgage loans

   —      —      50   50 

Home equity

   217   —      —      217 

Automobile loans

   —      105   —      105 

ALLL

   (4  (1  (2  (7

Other assets

   1   —      2   3 
  

 

  

 

  

 

  

 

 

Total assets

   220   121   50   391 
  

 

  

 

  

 

  

 

 

Liabilities:

     

Other liabilities

  $—      3   —      3 

Long-term debt

   19   106   —      125 
  

 

  

 

  

 

  

 

 

Total liabilities

  $19   109   —      128 
  

 

  

 

  

 

  

 

 

Noncontrolling interests

     50   50 
  

 

  

 

  

 

  

 

 

December 31, 2011 ($ in millions)

  Home Equity
Securitization
 Automobile Loan
Securitizations
 CDC
Investments
 Total   Home Equity
Securitization
 Automobile Loan
Securitizations
 CDC
Investments
 Total 

Assets:

          

Cash and due from banks

  $5   25   —      30   $5   25   —      30 

Other short-term investments

   —      7   —      7    —      7   —      7 

Commercial mortgage loans

   —      —      50   50    —      —      50   50 

Home equity

   223   —      —      223    223   —      —      223 

Automobile loans

   —      259   —      259    —      259   —      259 

ALLL

   (5  (3  (2  (10   (5  (3  (2  (10

Other assets

   1   1   2   4    1   1   2   4 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total assets

   224   289   50   563    224   289   50   563 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Liabilities:

          

Other liabilities

  $—      4   —      4    —      4   —      4 

Long-term debt

   22   169   —      191    22   169   —      191 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total liabilities

  $22   173   —      195   $22   173   —      195 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Noncontrolling interest

     50   50      50   50 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

March 31, 2011 ($ in millions)

  Home Equity
Securitization
 Automobile Loan
Securitizations
 CDC
Investments
 Total 

June 30, 2011 ($ in millions)

  Home Equity
Securitization
 Automobile Loan
Securitizations
 CDC
Investments
 Total 

Assets:

          

Cash and due from banks

  $7   47   —      54   $6   36   —      42 

Other short-term investments

   —      7   —      7    —      7   —      7 

Commercial mortgage loans

   —      —      29   29    —      —      29   29 

Home equity

   236   —      —      236    231   —      —      231 

Automobile loans

   —      529   —      529    —      424   —      424 

ALLL

   (5  (6  (1  (12   (5  (5  (1  (11

Other assets

   1   3   1   5    1   2   1   4 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total assets

   239   580   29   848    233   464   29   726 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Liabilities:

          

Other liabilities

  $—      10   —      10    —      8   —      8 

Long-term debt

   50   442   —      492    35   330   —      365 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Total liabilities

  $50   452   —      502   $35   338   —      373 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Noncontrolling interest

     29   29      29   29 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Home Equity and Automobile Loan Securitizations

The Bancorp previously sold $903 million of home equity lines of credit to an isolated trust. Additionally, the Bancorp previously sold $2.7 billion of automobile loans to an isolated trust and conduits in three separate transactions. Each of these transactions isolated the related loans through the use of a VIE that, under accounting guidance effective prior to January 1, 2010, was not consolidated by the Bancorp. The VIEs were funded through loans from large multi-seller asset-backed commercial paper conduits sponsored by third party agents, asset-backed securities issued with varying levels of credit subordination and payment priority, and residual interests. The Bancorp retained residual interests in these entities and, therefore, has an obligation to absorb losses and a right to receive benefits from the VIEs that could potentially be significant to the VIEs. In addition, the Bancorp retained servicing rights for the underlying loans and, therefore, holds the power to direct

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

the activities of the VIEs that most significantly impact the economic performance of the VIEs. As a result, the Bancorp determined it is the primary beneficiary of these VIEs and, effective January 1, 2010, these VIEs were consolidated in the Bancorp’s Condensed Consolidated Financial Statements. On February 8, 2012, the Bancorp exercised cleanup call options on an automobile securitization conduit and an isolated trust and acquired all remaining automobile loans, the proceeds of which were used by the conduit and trust to repay outstanding debt. On April 12, 2012, the Bancorp exercised its cleanup call option on the home equity isolated trust and acquired all remaining home equity loans, the proceeds of which were used by the trust to repay outstanding debt. The assets of each VIE are restricted to the settlement of the long-term debt and other liabilities of the respective entity. Third-party holders of this debt do not have recourse to the general assets of the Bancorp.

The economic performance of the VIEs is most significantly impacted by the performance of the underlying loans. The principal risks to which the entities are exposed include credit risk and interest rate risk. Credit risk is managed through credit enhancement in the form of reserve accounts, overcollateralization, excess interest on the loans, the subordination of certain classes of asset-backed securities to other classes, and in the case of the home equity transaction, an insurance policy with a third party guaranteeing payment of accrued and unpaid interest and principal on the securities. Interest rate risk is managed by interest rate swaps between the VIEs and third parties.

CDC Investments

CDC, a wholly owned subsidiary of the Bancorp, was created to invest in projects to create affordable housing, revitalize business and residential areas, and preserve historic landmarks. CDC generally co-invests with other unrelated companies and/or individuals and typically makes investments in a separate legal entity that owns the property under development. The entities are usually formed as limited

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

partnerships and LLCs, and CDC typically invests as a limited partner/investor member in the form of equity contributions. The economic performance of the VIEs is driven by the performance of their underlying investment projects as well as the VIEs’ ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. Typically, the general partner or managing member will be the party that has the right to make decisions that will most significantly impact the economic performance of the entity. The Bancorp serves as the managing member of certain LLCs invested in business revitalization projects. The Bancorp has provided an indemnification guarantee to the investor members of these LLCs related to the qualification of tax credits generated by the investor member’s investment. Accordingly, the Bancorp concluded that it is the primary beneficiary and, therefore, has consolidated these VIEs. As a result, the investor membersmembers’ interests in these VIEs are presented as noncontrolling interests in the Bancorp’s Condensed Consolidated Financial Statements. This presentation includes reporting separately the equity attributable to the noncontrolling interests in the Condensed Consolidated Balance Sheets and Condensed Consolidated Statements of Changes in Equity and reporting separately the comprehensive income attributable to the noncontrolling interests in the Condensed Consolidated Statements of Income and Condensed Consolidated Statements of Comprehensive Income. Additionally, the net income attributable to the noncontrolling interests is reported separately in the Condensed Consolidated Statements of Income. The Bancorp’s maximum exposure related to the indemnification at March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, was $16$17 million, $10 million and $9 million, respectively, which is based on an amount required to meet the investor member’s defined target rate of return.

Non-consolidated VIEs

The following tables provide a summary of assets and liabilities carried on the Bancorp’s Condensed Consolidated Balance Sheets related to non-consolidated VIEs for which the Bancorp holds a variable interest, but is not the primary beneficiary to the VIE, as well as the Bancorp’s maximum exposure to losses associated with its interests in the entities:

 

   Total   Total   Maximum 

As of March 31, 2012 ($ in millions)

  Assets   Liabilities   Exposure 

CDC investments

  $1,249    265    1,249 

Private equity investments

   166    —       325 

Money market funds

   158    —       165 

Loans provided to VIEs

   1,568    —       2,419 

Restructured loans

   9    —       10 

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

  Total   Total   Maximum 

As of June 30, 2012 ($ in millions)

  Assets   Liabilities   Exposure 

CDC investments

  $1,306    300    1,306 

Private equity investments

   173    —       321 

Money market funds

   59    —       65 

Loans provided to VIEs

   1,625    —       2,675 

Restructured loans

   8    —       9 
  

 

   

 

   

 

 
  Total   Total   Maximum   Total   Total   Maximum 

As of December 31, 2011 ($ in millions)

  Assets   Liabilities   Exposure   Assets   Liabilities   Exposure 

CDC investments

  $1,243    269    1,243   $1,243    269    1,243 

Private equity investments

   161    3    327    161    3    327 

Money market funds

   53    —       62    53    —       62 

Loans provided to VIEs

   1,370    —       2,203    1,370    —       2,203 

Restructured loans

   10    —       12    10    —       12 
  

 

   

 

   

 

 

As of March 31, 2011 ($ in millions)

  Total
Assets
   Total
Liabilities
   Maximum
Exposure
 
  Total   Total   Maximum 

As of June 30, 2011 ($ in millions)

  Assets   Liabilities   Exposure 

CDC investments

  $1,252    278    1,252   $1,282    282    1,282 

Private equity investments

   98    2    280    114    2    298 

Money market funds

   60    —       70    59    —       66 

Loans provided to VIEs

   1,170    —       1,928    1,236    —       2,010 

Restructured loans

   11    —       12    12    —       14 
  

 

   

 

   

 

 

CDC Investments

As noted previously, CDC typically invests in VIEs as a limited partner or investor member in the form of equity contributions. The Bancorp has determined that it is not the primary beneficiary of these VIEs because it lacks the power to direct the activities that most significantly impact the economic performance of the underlying project or the VIEs’ ability to operate in compliance with the rules and regulations necessary for the qualification of tax credits generated by equity investments. This power is held by the general partners/managing members who exercise full and exclusive control of the operations of the VIEs. Accordingly, the Bancorp accounts for these investments under the equity method of accounting.

The Bancorp’s funding requirements are limited to its invested capital and any additional unfunded commitments for future equity contributions. The Bancorp’s maximum exposure to loss as a result of its involvement with the VIEs is limited to the carrying amounts of the investments, including the unfunded commitments. The carrying amounts of these investments, which are included in other assets in the Condensed Consolidated Balance Sheets, and the liabilities related to the unfunded commitments, which are included in other liabilities in the Condensed Consolidated Balance Sheets, are included in the previous tables for all periods presented. The Bancorp has no other liquidity arrangements or obligations to purchase assets of the VIEs that would expose the Bancorp to a loss. In certain arrangements, the general

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

partner/managing member of the VIE has guaranteed a level of projected tax credits to be received by the limited partners/investor members, thereby minimizing a portion of the Bancorp’s risk.

Private Equity Investments

The Bancorp invests as a limited partner in private equity funds which provide the Bancorp an opportunity to obtain higher rates of return on invested capital, while also creating cross-selling opportunities for the Bancorp’s commercial products. Each of the limited partnerships has an unrelated third-party general partner responsible for appointing the fund manager. The Bancorp has not been appointed fund manager for any of these private equity funds. The funds finance primarily all of their activities from the partners’ capital contributions and investment returns. Under the VIE consolidation guidance still applicable to the funds, the Bancorp has determined that it is not the primary beneficiary of the funds because it does not absorb a majority of the funds’ expected losses or receive a majority of the funds’ expected residual returns. Therefore, the Bancorp accounts for its investments in these limited partnerships under the equity method of accounting.

The Bancorp is exposed to losses arising from negative performance of the underlying investments in the private equity funds. As a limited partner, the Bancorp’s maximum exposure to loss is limited to the carrying amounts of the investments plus unfunded commitments. The carrying amounts of these investments, which are included in other assets in the Condensed Consolidated Balance Sheets, are included in the above tables. Also, as of March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, the unfunded commitment amounts to the funds were $159$148 million, $166 million and $182$184 million, respectively. The Bancorp made capital contributions of $11$13 million and $10$5 million, respectively, to private equity funds during the three months ended March 31,June 30, 2012 and 2011. The Bancorp made capital contributions of $24 million and $15 million, respectively, to private equity funds during the six months ended June 30, 2012 and 2011.

Money Market Funds

Under U.S. GAAP, money market funds are generally not considered VIEs because they are generally deemed to have sufficient equity at risk to finance their activities without additional subordinated financial support, and the fund shareholders do not lack the characteristics of a controlling interest. However, when a situation arises where an investment manager provides credit support to a fund, even when not contractually required to do so, the investment manager is deemed under U.S. GAAP to have provided an implicit guarantee of the fund’s performance to the fund’s shareholders. Such an implicit guarantee would require the investment manager and other variable interest holders to reconsider the VIE status of the fund, as well as all other similar funds where such an implicit guarantee is now deemed to exist.

In the fourth quarter of 2010, the Bancorp voluntarily provided credit support of less than $1 million to a money market fund managed by FTAM. Accordingly, the Bancorp was required to analyze the money market funds and similar funds managed by FTAM under the VIE consolidation guidance still applicable to these funds to determine the primary beneficiary of each fund. In analyzing these funds, the

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Bancorp determined that interest rate risk and credit risk are the two main risks to which the funds are exposed. After analyzing the interest rate risk variability and credit risk variability associated with these funds, the Bancorp determined that it is not the primary beneficiary of these funds because it does not absorb a majority of the funds’ expected losses or receive a majority of the funds’ expected residual returns. Therefore, the Bancorp’s investments in these funds are included as other securities in the Bancorp’s Condensed Consolidated Balance Sheets.

Loans Provided to VIEs

The Bancorp has provided funding to certain unconsolidated VIEs sponsored by third parties. These VIEs are generally established to finance certain consumer and small business loans originated by third parties. The entities are primarily funded through the issuance of a loan from the Bancorp or a syndication through which the Bancorp is involved. The sponsor/administrator of the entities is responsible for servicing the underlying assets in the VIEs. Because the sponsor/administrator, not the Bancorp, holds the servicing responsibilities, which include the establishment and employment of default mitigation policies and procedures, the Bancorp does not hold the power to direct the activities most significant to the economic performance of the entity and, therefore, is not the primary beneficiary.

The principal risk to which these entities are exposed is credit risk related to the underlying assets. The Bancorp’s maximum exposure to loss is equal to the carrying amounts of the loans and unfunded commitments to the VIEs. The Bancorp’s outstanding loans to these VIEs, included in commercial loans in the Condensed Consolidated Balance Sheets, are included in the previous tables for all periods presented. Also, as of March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, the Bancorp’s unfunded commitments to these entities were $851 million,$1.1 billion, $833 million, and $758$774 million, respectively. The loans and unfunded commitments to these VIEs are included in the Bancorp’s overall analysis of the ALLL and reserve for unfunded commitments, respectively. The Bancorp does not provide any implicit or explicit liquidity guarantees or principal value guarantees to these VIEs.

Restructured Loans

As part of loan restructuring efforts, the Bancorp received equity capital from certain borrowers to facilitate the restructuring of the borrower’s debt. These borrowers meet the definition of a VIE because the Bancorp was involved in their refinancing and because their equity capital is insufficient to fund ongoing operations. These restructurings were intended to provide the VIEs with serviceable debt levels while providing the Bancorp an opportunity to maximize the recovery of the loans. The VIEs finance their operations from earned income, capital contributions, and through restructured debt agreements. Assets of the VIEs are used to settle their specific obligations, including loan payments due to the Bancorp. The Bancorp continues to maintain its relationship with these VIEs as a lender and minority shareholder,

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

however, it is not involved in management decisions and does not have sufficient voting rights to control the membership of the respective boards. Therefore, the Bancorp accounts for its equity investments in these VIEs under the equity method or cost method based on its percentage of ownership and ability to exercise significant influence.

The Bancorp’s maximum exposure to loss as a result of its involvement with these VIEs is limited to the equity investments, the principal and accrued interest on the outstanding loans, and any unfunded commitments. Due to the VIEs’ short-term cash deficit projections at the restructuring dates, the Bancorp determined that the initial fair value of its equity investments in these VIEs was zero. As of March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, the Bancorp’s carrying value of these equity investments was immaterial.immaterial to the Bancorp’s Condensed Consolidated Balance Sheets. Additionally, the Bancorp had outstanding loans to these VIEs, included in commercial loans in the Condensed Consolidated Balance Sheets, which are included in the above tables for all periods presented. The Bancorp’s unfunded loan commitments to these VIEs were $1 million as of March 31,June 30, 2012 and 2011, and $2 million atas of December 31, 2011 and June 30, 2011. The loans and unfunded commitments to these VIEs are included in the Bancorp’s overall analysis of the ALLL and reserve for unfunded commitments, respectively. The Bancorp does not provide any implicit or explicit liquidity guarantees or principal value guarantees to these VIEs.

9. Sales of Residential Mortgage Receivables and Mortgage Servicing Rights

The Bancorp sold fixed and adjustable rate residential mortgage loans during the three and six months ended March 31,June 30, 2012 and 2011. In those sales, the Bancorp obtained servicing responsibilities and the investors have no recourse to the Bancorp’s other assets for failure of debtors to pay when due. The Bancorp receives annual servicing fees based on a percentage of the outstanding balance. The Bancorp identifies classes of servicing assets based on financial asset type and interest rates.

Information related to residential mortgage loan sales and the Bancorp’s mortgage banking activity, which is included in mortgage banking net revenue in the Condensed Consolidated Statements of Income, is as follows for the three months ended March 31:follows:

 

($ in millions)

  2012   2011 

Residential mortgage loan sales

  $6,939    3,976 

Origination fees and gains on loan sales

   174    62 

Servicing fees

   61    58 
  

 

 

   

 

 

 

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

   For the three months
ended June 30,
   For the six months
ended June 30,
 

($ in millions)

  2012   2011   2012   2011 

Residential mortgage loan sales

  $4,709    2,727    11,648    6,703 

Origination fees and gains on loan sales

   183    64    357    126 

Servicing fees

   63    58    124    116 
  

 

 

   

 

 

   

 

 

   

 

 

 

Servicing Assets

The following table presents changes in the servicing assets related to residential mortgage loans for the threesix months ended March 31:June 30:

 

($ in millions)

  2012 2011   2012 2011 

Carrying amount as of the beginning of the period

  $1,239   1,138   $1,239   1,138 

Servicing obligations that result from the transfer of residential mortgage loans

   121   63    190   105 

Amortization

   (46  (28   (86  (53
  

 

  

 

   

 

  

 

 

Carrying amount before valuation allowance

   1,314   1,173    1,343   1,190 
  

 

  

 

   

 

  

 

 

Valuation allowance for servicing assets:

      

Beginning balance

   (558  (316   (558  (316

Servicing recovery

   11   37 

Servicing impairment

   (49  (27
  

 

  

 

   

 

  

 

 

Ending balance

   (547  (279   (607  (343
  

 

  

 

   

 

  

 

 

Carrying amount as of the end of the period

  $767   894   $736   847 
  

 

  

 

   

 

  

 

 

Temporary impairment or impairment recovery, affected through a change in the MSR valuation allowance, is captured as a component of mortgage banking net revenue in the Condensed Consolidated Statements of Income. The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in the value of the MSR portfolio. This strategy includes the purchase of free-standing derivatives and various available-for-sale securities. The interest income, mark-to-market adjustments and gain or loss from sale activities associated with these portfolios are expected to economically hedge a portion of the change in value of the MSR portfolio caused by fluctuating discount rates, earnings rates and prepayment speeds.

The fair value of the servicing asset is based on the present value of expected future cash flows. The following table displays the beginning and ending fair value for the threesix months ended March 31:June 30:

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

$1,239$1,239

($ in millions)

  2012   2011 

Fixed rate residential mortgage loans:

    

Beginning balance

  $649    791 

Ending balance

   732    859 

Adjustable rate residential mortgage loans:

    

Beginning balance

   32    31 

Ending balance

   35    35 
  

 

 

   

 

 

 

($ in millions)

  2012   2011 

Fixed rate residential mortgage loans:

    

Beginning balance

  $649    791 

Ending balance

   702    813 

Adjustable rate residential mortgage loans:

    

Beginning balance

   32    31 

Ending balance

   34    34 
  

 

 

   

 

 

 

The following table presents activity related to valuations of the MSR portfolio and the impact of the non-qualifying hedging strategy, which is included in the Condensed Consolidated Statements of Income for the three months ended March 31:Income:

 

  For the three months For the six months 
$1,239$1,239  ended June 30, ended June 30, 

($ in millions)

  2012   2011   2012 2011 2012 2011 

Securities gains, net—non-qualifying hedges on MSRs

  $—       5   $—      —      —      5 

Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio (Mortgage banking net revenue)

   4    (27   38   129   42   102 

Recovery of MSR impairment (Mortgage banking net revenue)

   11    37 

Provision for MSR impairment (Mortgage banking net revenue)

   (60  (64  (49  (27
  

 

   

 

   

 

  

 

  

 

  

 

 

As of March 31,June 30, 2012 and 2011, the key economic assumptions used in measuring the interests that continued to be held by the Bancorp at the date of sale or securitization resulting from transactions completed during the three months ended March 31, 2012 and 2011 were as follows:ended:

 

     March 31, 2012   March 31, 2011      June 30, 2012   June 30, 2011 
  Rate  Weighted-
Average
Life (in
years)
   Prepayment
Speed (annual)
 Discount Rate
(annual)
 Weighted-
Average
Default rate
   Weighted-
Average
Life (in
years)
   Prepayment
Speed (annual)
 Discount Rate
(annual)
 Weighted-
Average
Default rate
   Rate  Weighted-
Average
Life (in
years)
   Prepayment
Speed
(annual)
 Discount
Rate
(annual)
 Weighted-
Average
Default
rate
   Weighted-
Average
Life (in
years)
   Prepayment
Speed
(annual)
 Discount
Rate
(annual)
 Weighted-
Average
Default
rate
 

Residential mortgage loans:

                            

Servicing assets

  Fixed   7.5    8.2   10.6   N/A     8.1    7.2   10.5   N/A    Fixed   6.9    9.1   10.4   N/A     6.6    11.0   10.5   N/A  

Servicing assets

  Adjustable   3.8    21.9   11.5   N/A     3.4    24.0   11.4   N/A    Adjustable   3.7    22.2   11.4   N/A     3.7    22.4   11.5   N/A  
  

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

  

 

   

 

  

 

   

 

  

 

  

 

   

 

   

 

  

 

  

 

 

Based on historical credit experience, expected credit losses for residential mortgage loan servicing assets have been deemed immaterial, as the Bancorp sold the majority of the underlying loans without recourse. At March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, the Bancorp serviced $60.4$61.6 billion, $57.1 billion and $55.4$56.0 billion, respectively, of residential mortgage loans for other investors. The value of interests that continue to be held by the Bancorp is subject to credit, prepayment and interest rate risks on the sold financial assets. At March 31,June 30, 2012, the sensitivity of the current fair value of residual cash flows to immediate 10%, 20% and 50% adverse changes in prepayment speed assumptions and immediate 10% and 20% adverse changes in thoseother assumptions are as follows:

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

              Prepayment
Speed Assumption
  Residual Servicing
Cash Flows
 
       Fair   Weighted-
Average
Life (in
      Impact of Adverse
Change on Fair Value
  Discount  Impact of
Adverse Change
on Fair Value
 

($ in millions)(a)

  Rate  Value   years)   Rate  10%  20%  50%  Rate  10%  20% 

Residential mortgage loans:

              

Servicing assets

  Fixed  $702    5.1    15.2  $(36  (69  (155  10.6  $(24  (47

Servicing assets

  Adjustable   34    3.1    27.1   (2  (3  (7  11.7   (1  (2

 

              Prepayment  Residual Servicing  Weighted-Average 
              Speed Assumption  Cash Flows  Default 
      Fair   Weighted-
Average
Life (in
      Impact of
Adverse Change
on Fair Value
  Discount  Impact of
Adverse Change
on Fair Value
     Impact of
Adverse Change
on Fair Value
 

($ in millions)

  Rate  Value   years)   Rate  10%  20%  Rate  10%  20%  Rate  10%   20% 

Residential mortgage loans:

                 

Servicing assets

  Fixed  $732    5.4    14.4  $(37  (70  10.6  $(27  (51  —    —       —    

Servicing assets

  Adjustable   35    3.1    26.5   (2  (3  11.8   (1  (2  —      —       —    
(a)The impact of the weighted-average default rate on the current fair value of residual cash flows for all scenarios is immaterial.

These sensitivities are hypothetical and should be used with caution. As the figures indicate, changes in fair value based on a 10% and 20% variationthese variations in the assumptions typically cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. The Bancorp believes variations of these levels are reasonably possible, however there is the potential that adverse changes in key assumptions could be even greater. Also, in the previous table, the effect of a variation in a particular assumption on the fair value of the interests that continue to be held by the Bancorp is calculated without changing any other assumption; in reality, changes in one factor may result in changes in another (for example, increases in market interest rates may result in lower prepayments and increased credit losses), which might magnify or counteract these sensitivities.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

10. Derivative Financial Instruments

The Bancorp maintains an overall risk management strategy that incorporates the use of derivative instruments to reduce certain risks related to interest rate, prepayment and foreign currency volatility. Additionally, the Bancorp holds derivative instruments for the benefit of its commercial customers and for other business purposes. The Bancorp does not enter into unhedged speculative derivative positions.

The Bancorp’s interest rate risk management strategy involves modifying the repricing characteristics of certain financial instruments so that changes in interest rates do not adversely affect the Bancorp’s net interest margin and cash flows. Derivative instruments that the Bancorp may use as part of its interest rate risk management strategy include interest rate swaps, interest rate floors, interest rate caps, forward contracts, options and swaptions. Interest rate swap contracts are exchanges of interest payments, such as fixed-rate payments for floating-rate payments, based on a stated notional amount and maturity date. Interest rate floors protect against declining rates, while interest rate caps protect against rising interest rates. Forward contracts are contracts in which the buyer agrees to purchase, and the seller agrees to make delivery of, a specific financial instrument at a predetermined price or yield. Options provide the purchaser with the right, but not the obligation, to purchase or sell a contracted item during a specified period at an agreed upon price. Swaptions are financial instruments granting the owner the right, but not the obligation, to enter into or cancel a swap.

Prepayment volatility arises mostly from changes in fair value of the largely fixed-rate MSR portfolio, mortgage loans and mortgage-backed securities. The Bancorp may enter into various free-standing derivatives (principal-only swaps, interest rate swaptions, interest rate floors, mortgage options, TBAs and interest rate swaps) to economically hedge prepayment volatility. Principal-only swaps are total return swaps based on changes in the value of the underlying mortgage principal-only trust. TBAs are a forward purchase agreement for a mortgage-backed securities trade whereby the terms of the security are undefined at the time the trade is made.

Foreign currency volatility occurs as the Bancorp enters into certain loans denominated in foreign currencies. Derivative instruments that the Bancorp may use to economically hedge these foreign denominated loans include foreign exchange swaps and forward contracts.

The Bancorp also enters into derivative contracts (including foreign exchange contracts, commodity contracts and interest rate contracts) for the benefit of commercial customers and other business purposes. The Bancorp may economically hedge significant exposures related to these free-standing derivatives by entering into offsetting third-party contracts with approved, reputable counterparties with substantially matching terms and currencies. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts. The Bancorp’s exposure is limited to the replacement value of the contracts rather than the notional, principal or contract amounts. Credit risk is minimized through credit approvals, limits, counterparty collateral and monitoring procedures.

The Bancorp’s derivative assets contain certain contracts in which the Bancorp requires the counterparties to provide collateral in the form of cash and securities to offset changes in the fair value of the derivatives, including changes in the fair value due to credit risk of the counterparty. As of March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, the balance of collateral held by the Bancorp for derivative assets was $1.1 billion, $1.2 billion and $837$989 million, respectively. The credit component negatively impacting the fair value of derivative assets associated with customer accommodation contracts as of March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011 was $24$23 million, $28 million and $39$30 million, respectively.

In measuring the fair value of derivative liabilities, the Bancorp considers its own credit risk, taking into consideration collateral maintenance requirements of certain derivative counterparties and the duration of instruments with counterparties that do not require collateral maintenance. When necessary, the Bancorp primarily posts collateral in the form of cash and securities to offset changes in fair value of the

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

derivatives, including changes in fair value due to the Bancorp’s credit risk. As of March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, the balance of collateral posted by the Bancorp for derivative liabilities was $720$927 million, $788 million and $603$646 million, respectively. Certain of the Bancorp’s derivative liabilities contain credit-risk related contingent features that could result in the requirement to post additional collateral upon the occurrence of specified events. As of March 31,June 30, 2012, the fair value of the additional collateral that could be required to be posted as a result of the credit-risk related contingent features being triggered was not material to the Bancorp’s Condensed Consolidated Financial Statements. The posting of collateral has been determined to remove the need for consideration of credit risk. As a result, the Bancorp determined that the impact of the Bancorp’s credit risk to the valuation of its derivative liabilities was immaterial to the Bancorp’s Condensed Consolidated Financial Statements.

The Bancorp holds certain derivative instruments that qualify for hedge accounting treatment and are designated as either fair value hedges or cash flow hedges. Derivative instruments that do not qualify for hedge accounting treatment, or for which hedge accounting is not established, are held as free-standing derivatives. All customer accommodation derivatives are held as free-standing derivatives.

The fair value of derivative instruments is presented on a gross basis, even when the derivative instruments are subject to master netting arrangements. Derivative instruments with a positive fair value are reported in other assets in the Condensed Consolidated Balance Sheets while derivative instruments with a negative fair value are reported in other liabilities in the Condensed Consolidated Balance Sheets. Cash collateral payables and receivables associated with the derivative instruments are not added to or netted against the fair value amounts. The following tables reflect the notional amounts and fair values for all derivative instruments included in the Condensed Consolidated Balance Sheets as of:

Fifth Third Bancorp and Subsidiaries

       Fair Value 
   Notional   Derivative   Derivative 

March 31, 2012 ($ in millions)

  Amount   Assets   Liabilities 

Qualifying hedging instruments

      

Fair value hedges:

      

Interest rate swaps related to long-term debt

  $4,080    562    —    
  

 

 

   

 

 

   

 

 

 

Total fair value hedges

     562    —    
  

 

 

   

 

 

   

 

 

 

Cash flow hedges:

      

Interest rate floors related to C&I loans

   1,500    77    —    

Interest rate swaps related to C&I loans

   1,000    58    —    

Interest rate caps related to long-term debt

   500    —       —    

Interest rate swaps related to long-term debt

   250    —       4 
  

 

 

   

 

 

   

 

 

 

Total cash flow hedges

     135    4 
  

 

 

   

 

 

   

 

 

 

Total derivatives designated as qualifying hedging instruments

     697    4 
  

 

 

   

 

 

   

 

 

 

Derivatives not designated as qualifying hedging instruments

      

Free-standing derivatives—risk management and other business purposes

      

Interest rate contracts related to MSRs

   8,077    201    —    

Forward contracts related to held for sale mortgage loans

   8,769    21    10 

Interest rate swaps related to long-term debt

   195    1    2 

Stock warrants associated with sale of the processing business

   228    157    —    

Swap associated with the sale of Visa, Inc. Class B shares

   507    —       22 
  

 

 

   

 

 

   

 

 

 

Total free-standing derivatives—risk management and other business purposes

     380    34 
  

 

 

   

 

 

   

 

 

 

Free-standing derivatives—customer accommodation:

      

Interest rate contracts for customers

   26,185    655    674 

Interest rate lock commitments

   4,307    20    3 

Commodity contracts

   2,110    156    151 

Foreign exchange contracts

   17,473    191    178 

Derivative instruments related to equity linked CDs

   33    2    2 
  

 

 

   

 

 

   

 

 

 

Total free-standing derivatives—customer accommodation

     1,024    1,008 
  

 

 

   

 

 

   

 

 

 

Total derivatives not designated as qualifying hedging instruments

     1,404    1,042 
  

 

 

   

 

 

   

 

 

 

Total

    $2,101    1,046 
  

 

 

   

 

 

   

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

       Fair Value 
   Notional   Derivative   Derivative 

June 30, 2012 ($ in millions)

  Amount   Assets   Liabilities 

Qualifying hedging instruments

      

Fair value hedges:

      

Interest rate swaps related to long-term debt

  $4,080    640    —    
  

 

 

   

 

 

   

 

 

 

Total fair value hedges

     640    —    
  

 

 

   

 

 

   

 

 

 

Cash flow hedges:

      

Interest rate floors related to C&I loans

   1,500    58    —    

Interest rate swaps related to C&I loans

   1,000    64    —    

Interest rate caps related to long-term debt

   500    —       —    

Interest rate swaps related to long-term debt

   250    —       3 
  

 

 

   

 

 

   

 

 

 

Total cash flow hedges

     122    3 
  

 

 

   

 

 

   

 

 

 

Total derivatives designated as qualifying hedging instruments

     762    3 
  

 

 

   

 

 

   

 

 

 

Derivatives not designated as qualifying hedging instruments

      

Free-standing derivatives—risk management and other business purposes

      

Interest rate contracts related to MSRs

   8,577    238    —    

Forward contracts related to held for sale mortgage loans

   7,382    9    37 

Interest rate swaps related to long-term debt

   136    1    1 

Stock warrants associated with sale of the processing business

   475    213    —    

Swap associated with the sale of Visa, Inc. Class B shares

   532    —       29 
  

 

 

   

 

 

   

 

 

 

Total free-standing derivatives—risk management and other business purposes

     461    67 
  

 

 

   

 

 

   

 

 

 

Free-standing derivatives—customer accommodation:

      

Interest rate contracts for customers

   27,147    671    691 

Interest rate lock commitments

   4,887    55    1 

Commodity contracts

   2,316    120    112 

Foreign exchange contracts

   18,020    237    221 

Derivative instruments related to equity linked CDs

   25    1    1 
  

 

 

   

 

 

   

 

 

 

Total free-standing derivatives—customer accommodation

     1,084    1,026 
  

 

 

   

 

 

   

 

 

 

Total derivatives not designated as qualifying hedging instruments

     1,545    1,093 
  

 

 

   

 

 

   

 

 

 

Total

    $2,307    1,096 
  

 

 

   

 

 

   

 

 

 

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

       Fair Value 
   Notional   Derivative   Derivative 

December 31, 2011 ($ in millions)

  Amount   Assets   Liabilities 

Qualifying hedging instruments

      

Fair value hedges:

      

Interest rate swaps related to long-term debt

  $4,080    662    —    
  

 

 

   

 

 

   

 

 

 

Total fair value hedges

     662    —    
  

 

 

   

 

 

   

 

 

 

Cash flow hedges:

      

Interest rate floors related to C&I loans

   1,500    91    —    

Interest rate swaps related to C&I loans

   1,500    59    —    

Interest rate caps related to long-term debt

   500    —       —    

Interest rate swaps related to long-term debt

   250    —       5 
  

 

 

   

 

 

   

 

 

 

Total cash flow hedges

     150    5 
  

 

 

   

 

 

   

 

 

 

Total derivatives designated as qualifying hedging instruments

     812    5 
  

 

 

   

 

 

   

 

 

 

Derivatives not designated as qualifying hedging instruments

      

Free-standing derivatives—risk management and other business purposes

      

Interest rate contracts related to MSRs

   3,077    187    —    

Forward contracts related to held for sale mortgage loans

   5,705    8    54 

Interest rate swaps related to long-term debt

   311    1    3 

Put options associated with sale of the processing business

   978    —       1 

Stock warrants associated with sale of the processing business

   223    111    —    

Swap associated with the sale of Visa, Inc. Class B shares

   436    —       78 
      
  

 

 

   

 

 

   

 

 

 

Total free-standing derivatives—risk management and other business purposes

     307    136 
  

 

 

   

 

 

   

 

 

 

Free-standing derivatives—customer accommodation:

      

Interest rate contracts for customers

   30,000    774    795 

Interest rate lock commitments

   3,835    33    1 

Commodity contracts

   2,074    134    130 

Foreign exchange contracts

   17,909    294    275 

Derivative instruments related to equity linked CDs

   34    2    2 
  

 

 

   

 

 

   

 

 

 

Total free-standing derivatives—customer accommodation

     1,237    1,203 
  

 

 

   

 

 

   

 

 

 

Total derivatives not designated as qualifying hedging instruments

     1,544    1,339 
  

 

 

   

 

 

   

 

 

 

Total

    $2,356    1,344 
  

 

 

   

 

 

   

 

 

 

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

      Fair Value       Fair Value 
  Notional   Derivative   Derivative   Notional   Derivative   Derivative 

March 31, 2011 ($ in millions)

  Amount   Assets   Liabilities 

June 30, 2011 ($ in millions)

  Amount   Assets   Liabilities 

Qualifying hedging instruments

            

Fair value hedges:

            

Interest rate swaps related to long-term debt

  $4,355    376    —      $4,080    422    —    
  

 

   

 

   

 

   

 

   

 

   

 

 

Total fair value hedges

     376    —         422    —    
  

 

   

 

   

 

   

 

   

 

   

 

 

Cash flow hedges:

            

Interest rate floors related to C&I loans

   1,500    135    —       1,500    128    —    

Interest rate swaps related to C&I loans

   2,000    13    15    2,000    42    18 

Interest rate caps related to long-term debt

   1,500    4    —       1,500    1    —    

Interest rate swaps related to long-term debt

   302    —       8    250    —       9 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total cash flow hedges

     152    23      171    27 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total derivatives designated as qualifying hedging instruments

     528    23      593    27 
  

 

   

 

   

 

   

 

   

 

   

 

 

Derivatives not designated as qualifying hedging instruments

            

Free-standing derivatives—risk management and other business purposes

            

Interest rate contracts related to MSRs

   21,677    138    25    16,452    196    31 

Forward contracts related to held for sale mortgage loans

   2,529    3    10    2,210    6    9 

Interest rate swaps related to long-term debt

   457    3    7    373    2    6 

Foreign exchange contracts for trading purposes

   2,202    7    6    1,681    2    2 

Put options associated with sale of the processing business

   769    —       8    901    —       7 

Stock warrants associated with sale of the processing business

   175    76    —       205    104    —    

Swap associated with the sale of Visa, Inc. Class B shares

   363    —       28    416    —       12 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total free-standing derivatives—risk management and other business purposes

     227    84      310    67 
  

 

   

 

   

 

   

 

   

 

   

 

 

Free-standing derivatives—customer accommodation:

            

Interest rate contracts for customers

   28,748    629    656    28,607    675    700 

Interest rate lock commitments

   1,523    9    1    1,729    6    2 

Commodity contracts

   1,949    123    116    1,939    85    78 

Foreign exchange contracts

   17,928    308    301    20,848    293    281 

Derivative instruments related to equity linked CDs

   54    2    2    42    2    2 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total free-standing derivatives—customer accommodation

     1,071    1,076      1,061    1,063 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total derivatives not designated as qualifying hedging instruments

     1,298    1,160      1,371    1,130 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

    $1,826    1,183     $1,964    1,157 
  

 

   

 

   

 

   

 

   

 

   

 

 

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

Fair Value Hedges

The Bancorp may enter into interest rate swaps to convert its fixed-rate funding to floating-rate. Decisions to convert fixed-rate funding to floating are made primarily through consideration of the asset/liability mix of the Bancorp, the desired asset/liability sensitivity and interest rate levels. As of March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, certain interest rate swaps met the criteria required to qualify for the “shortcut” method of accounting. Based on this shortcut method of accounting treatment, no ineffectiveness is assumed. For interest rate swaps that do not meet the shortcut requirements, an assessment of hedge effectiveness using regression analysis was performed and such swaps were accounted for using the “long-haul” method. The long-haul method requires a quarterly assessment of hedge effectiveness and measurement of ineffectiveness. For interest rate swaps accounted for as a fair value hedge using the long-haul method, ineffectiveness is the difference between the changes in the fair value of the interest rate swap and changes in fair value of the related hedged item attributable to the risk being hedged. The ineffectiveness on interest rate swaps hedging fixed-rate funding is reported within interest expense in the Condensed Consolidated Statements of Income. The following table reflects the change in fair value of interest rate contracts, designated as fair value hedges, as well as the change in fair value of the related hedged items attributable to the risk being hedged, included in the Condensed Consolidated Statements of Income:

 

$XXXX$XXXX$XXXX
  Condensed Consolidated  March 31,   Condensed Consolidated  For the three months For the six months 

For the three months ended ($ in millions)

  

Statements of Income Caption

  2012 2011 
  Condensed Consolidated  ended June 30, ended June 30, 

($ in millions)

  2012 2011 2012 2011 

Interest rate contracts:

            

Change in fair value of interest rate swaps hedging long-term debt

  Interest on long-term debt  $(100  (66  Interest on long-term debt  $78   46   (22  (20

Change in fair value of hedged long-term debt

  Interest on long-term debt   92   65 

Change in fair value of hedged long-term debt attributable to the risk being hedged

  Interest on long-term debt   (78  (52  14   13 

Cash Flow Hedges

The Bancorp may enter into interest rate swaps to convert floating-rate assets and liabilities to fixed rates or to hedge certain forecasted transactions. The assets or liabilities may be grouped in circumstances where they share the same risk exposure for which the Bancorp desired to hedge. The Bancorp may also enter into interest rate caps and floors to limit cash flow variability of floating rate assets and liabilities. As of March 31,June 30, 2012, all hedges designated as cash flow hedges are assessed for effectiveness using regression analysis. Ineffectiveness is generally measured as the amount by which the cumulative change in the fair value of the hedging instrument exceeds the present value of the cumulative change in the hedged item’s expected cash flows attributable to the risk being hedged. Ineffectiveness is reported within other noninterest income in the Condensed Consolidated Statements of Income. The effective portion of the cumulative gains or losses on cash flow hedges are reported within accumulated other comprehensive income and are reclassified from accumulated other comprehensive income to current period earnings when the forecasted transaction affects earnings. As of June 30, 2012, the maximum length of time over which the Bancorp is hedging its exposure to the variability in future cash flows is 44 months.

Reclassified gains and losses on interest rate contracts related to commercial and industrial loans are recorded within interest income while reclassified gains and losses on interest rate contracts related to long-term debt are recorded within interest expense in the Condensed Consolidated Statements of Income. As of March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, $732011, $69 million, $80 million and $58$68 million, respectively, of deferred gains, net of tax, on cash flow hedges were recorded in accumulated other comprehensive income in the Condensed Consolidated Balance Sheets. As of March 31,June 30, 2012, $73$56 million in net deferred gains, net of tax, recorded in accumulated other comprehensive income are expected to be reclassified into earnings during the next twelve12 months. During the three and six months ended March 31,June 30, 2012 and March 31, 2011, there were no gains or losses reclassified into earnings associated with the discontinuance of cash flow hedges because it was probable that the original forecasted transaction would not occur.

The following table presents the net gains (losses) recorded in the Condensed Consolidated Statements of Income and accumulated other comprehensive income in the Condensed Consolidated Statements of Comprehensive Income relating to derivative instruments designated as cash flow hedges.hedges:

 

$XXXX$XXXX

For the three months ended March 31: ($ in millions)

  2012   2011 

Amount of net gain recognized in OCI

  $9    —    

Amount of net gain reclassified from OCI into net income

   20    15 

Amount of ineffectiveness recognized in other noninterest income

   —       —    
  

 

 

   

 

 

 
   For the three months  For the six months 
   ended June 30,  ended June 30, 

($ in millions)

  2012  2011  2012  2011 

Amount of net gain (loss) recognized in OCI

  $16   (32  25   (32

Amount of net (loss) gain reclassified from OCI into net income

   (21  16   (41  31 
  

 

 

  

 

 

  

 

 

  

 

 

 

Free-Standing Derivative Instruments – Risk Management and Other Business Purposes

As part of its overall risk management strategy relative to its mortgage banking activity, the Bancorp may enter into various free-standing derivatives (principal-only swaps, interest rate swaptions, interest rate floors, mortgage options, TBAs and interest rate swaps) to economically hedge changes in fair value of its largely fixed-rate MSR portfolio. Principal-only swaps hedge the mortgage-LIBOR spread because these swaps appreciate in value as a result of tightening spreads. Principal-only swaps also provide prepayment protection by

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

increasing in value when prepayment speeds increase, as opposed to MSRs that lose value in a faster prepayment environment. Receive fixed/pay floating interest rate swaps and swaptions increase in value when interest rates do not increase as quickly as expected.

The Bancorp enters into forward contracts and mortgage options to economically hedge the change in fair value of certain residential mortgage loans held for sale due to changes in interest rates. Interest rate lock commitments issued on residential mortgage loan commitments that will be held for sale are also considered free-standing derivative instruments and the interest rate exposure on these

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

commitments is economically hedged primarily with forward contracts. Revaluation gains and losses from free-standing derivatives related to mortgage banking activity are recorded as a component of mortgage banking net revenue in the Condensed Consolidated Statements of Income.

Additionally, the Bancorp may enter into free-standing derivative instruments (options, swaptions and interest rate swaps) in order to minimize significant fluctuations in earnings and cash flows caused by interest rate and prepayment volatility. The gains and losses on these derivative contracts are recorded within other noninterest income in the Condensed Consolidated Statements of Income.

In conjunction with the sale of the processing business in 2009, the Bancorp received warrants and issued put options, which are accounted for as free-standing derivatives. The put options expired as a result of the Vantiv, Inc. initial public offering in March of 2012. Refer to Note 1819 for further discussion of significant inputs and assumptions used in the valuation of the warrants.

In conjunction with the sale of Visa, Inc. Class B shares in 2009, the Bancorp entered into a total return swap in which the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Class B shares into Class A shares. This total return swap is accounted for as a free-standing derivative. See Note 1819 for further discussion of significant inputs and assumptions used in the valuation of this instrument.

The Bancorp entered into certain derivatives (forwards, futures and options) related to its foreign exchange business. These derivative contracts were not designated against specific assets or liabilities or to forecasted transactions. Therefore, these instruments did not qualify for hedge accounting. The Bancorp economically hedged the exposures related to these derivative contracts by entering into offsetting contracts with approved, reputable, independent counterparties with substantially similar terms. Revaluation gains and losses on these foreign currency derivative contracts were recorded within other noninterest income in the Condensed Consolidated Statements of Income. The net gains (losses) recorded in the Condensed Consolidated Statements of Income relating to free-standing derivative instruments used for risk management and other business purposes are summarized in the following table:

 

$XXXX$XXXX$XXXX
  Condensed Consolidated  March 31,   

Condensed Consolidated

Statements of

Income Caption

  For the three months
ended June 30,
 For the six months
ended June 30,
 

For the three months ended ($ in millions)

  

Statements of Income Caption

  2012 2011 

($ in millions)

  

Condensed Consolidated

Statements of

Income Caption

  2012 2011 2012 2011 

Interest rate contracts:

          

Forward contracts related to residential mortgage loans held for sale

  Mortgage banking net revenue  $57   (83

Forward contracts related to mortgage loans held for sale

  Mortgage banking net revenue  $(39  4   17   (79

Interest rate swaps and swaptions related to MSR portfolio

  Mortgage banking net revenue   4   (27  Mortgage banking net revenue   38   129   42   102 

Interest rate swaps related to long-term debt

  Other noninterest income   1   2   Other noninterest income   1   3   2   4 

Foreign exchange contracts:

            

Foreign exchange contracts for trading purposes

  Other noninterest income   —      (1  Other noninterest income   —      —      —      (1

Equity contracts:

            

Warrants associated with sale of the processing business

  Other noninterest income   45   (2

Stock warrants associated with sale of the processing business

  Other noninterest income   56   28   102   25 

Put options associated with sale of the processing business

  Other noninterest income   1   —      Other noninterest income   —      2   1   1 

Swap associated with sale of Visa, Inc. Class B shares

  Other noninterest income   (19  (9  Other noninterest income   (11  (4  (29  (13
    

 

  

 

  

 

  

 

 

Free-Standing Derivative Instruments – Customer Accommodation

The majority of the free-standing derivative instruments the Bancorp enters into are for the benefit of its commercial customers. These derivative contracts are not designated against specific assets or liabilities on the Bancorp’s Condensed Consolidated Balance Sheets or to forecasted transactions and, therefore, do not qualify for hedge accounting. These instruments include foreign exchange derivative contracts entered into for the benefit of commercial customers involved in international trade to hedge their exposure to foreign currency fluctuations and commodity contracts to hedge such items as natural gas and various other derivative contracts. The Bancorp may economically hedge significant exposures related to these derivative contracts entered into for the benefit of customers by entering into offsetting contracts with approved, reputable, independent counterparties with substantially matching terms. The Bancorp hedges its interest rate exposure on commercial customer transactions by executing offsetting swap agreements with primary dealers. Revaluation gains and losses on interest rate, foreign exchange, commodity and other commercial customer derivative contracts are recorded as a component of corporate banking revenue in the Condensed Consolidated Statements of Income.

The Bancorp enters into risk participation agreements, under which the Bancorp assumes credit exposure relating to certain underlying interest rate derivative contracts. The Bancorp only enters into these risk participation agreements in instances in which the Bancorp has participated in the loan that the underlying interest rate derivative contract was designed to hedge. The Bancorp will make payments under

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

these agreements if a customer defaults on its obligation to perform under the terms of the underlying interest rate derivative contract. As of March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, the total notional amount of the risk participation agreements was $824$957 million, $808 million and $834$723 million, respectively, and the fair value was a liability of $2 million at March 31,June 30, 2012, and December 31, 2011 and $1 million at March 31,June 30, 2011, which is included in interest rate contracts for customers. As of March 31,June 30, 2012, the risk participation agreements had an average life of 2.42.8 years.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

The Bancorp’s maximum exposure in the risk participation agreements is contingent on the fair value of the underlying interest rate derivative contracts in an asset position at the time of default. The Bancorp monitors the credit risk associated with the underlying customers in the risk participation agreements through the same risk grading system currently utilized for establishing loss reserves in its loan and lease portfolio. Risk ratings of the notional amount of risk participation agreements under this risk rating system are summarized in the following table:

 

  March 31,   December 31,   March 31,   June 30,   December 31,   June 30, 

As of ($ in millions)

  2012   2011   2011   2012   2011   2011 

Pass

  $781    772    756   $914    772    645 

Special mention

   14    14    21    —       14    34 

Substandard

   29    18    56    43    18    43 

Doubtful

   —       4    1    —       4    —    

Loss

   —       —       —       —       —       1 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $824    808    834   $957    808    723 
  

 

   

 

   

 

   

 

   

 

   

 

 

The net gains (losses) recorded in the Condensed Consolidated Statements of Income relating to free-standing derivative instruments used for customer accommodation are summarized in the following table:

 

$XXX$XXX$XXX
  Condensed Consolidated  March 31,   

Condensed Consolidated

Statements of Income Caption

  For the three months
ended June 30,
 For the six months
ended June 30,
 

For the three months ended ($ in millions)

  

Statements of Income Caption

  2012   2011 

($ in millions)

  

Condensed Consolidated

Statements of Income Caption

  2012 2011 2012   2011 

Interest rate contracts:

            

Interest rate contracts for customers (contract revenue)

  Corporate banking revenue  $6    7   Corporate banking revenue  $8   7   14    15 

Interest rate contracts for customers (credit losses)

  Other noninterest expense   —       (2  Other noninterest expense   —      (10  —       (12

Interest rate contracts for customers (credit portion of fair value adjustment)

  Other noninterest expense   3    7   Other noninterest expense   —      3   3    10 

Interest rate lock commitments

  Mortgage banking net revenue   50    24   Mortgage banking net revenue   125   31   175    55 

Commodity contracts:

              

Commodity contracts for customers (contract revenue)

  Corporate banking revenue   2    1   Corporate banking revenue   3   2   5    3 

Commodity contracts for customers (credit portion of fair value adjustment)

  Other noninterest expense   1   1   —       1 

Foreign exchange contracts:

              

Foreign exchange contracts—customers (contract revenue)

  Corporate banking revenue   15    16   Corporate banking revenue   19   15   34    31 

Foreign exchange contracts—customers (credit portion of fair value adjustment)

  Other noninterest expense   2    (5  Other noninterest expense   (1  5   1    1 
    

 

   

 

 

11. Long-Term Debt

On March 7, 2012, the Bancorp issued $500 million of senior notes to third party investors, and entered into a Supplemental Indenture dated March 7, 2012 with Wilmington Trust Company, as Trustee, which modified the existing Indenture for Senior Debt Securities dated April 30, 2008 between the Bancorp and the Trustee. The Supplemental Indenture and the Indenture define the rights of the Senior Notes, which Senior Notes are represented by a Global Security dated as of March 7, 2012. The Senior Notes bear a fixed rate of interest of 3.50% per annum. The notes are unsecured, senior obligations of the Bancorp. Payment of the full principal amounts of the notes will be due upon maturity on March 15, 2022. The notes are not subject to redemption at the Bancorp’s option at any time until 30 days prior to maturity.

On March 29, 2012, the Bancorp terminated $375 million of structured repurchase agreements classified as long-term debt. As a result of these terminations in the first quarter of 2012, the Bancorp recorded a $9 million loss on the extinguishment within other noninterest expense in the Condensed Consolidated Statements of Income.

For further information on subsequent events related to long-term debt refer to Note 21.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

12. Capital Actions

On April 23, 2012, the Bancorp entered into an accelerated share repurchase transaction with a counterparty pursuant to which the Bancorp purchased 4,838,710 shares, or approximately $75 million, of its outstanding common stock on April 26, 2012. As part of this transaction, the Bancorp entered into a forward contract in which the final number of shares delivered at settlement of the accelerated share repurchase transaction was based on a discount to the average daily volume-weighted average price of the Bancorp’s common stock during the term of the Repurchase Agreement. The accelerated share repurchase was treated as two separate transactions (i) the acquisition of treasury shares on the acquisition date and (ii) a forward contract indexed to the Bancorp’s stock. At settlement of the forward contract on June 1, 2012, the Bancorp received an additional 631,986 shares which were recorded as an adjustment to the basis in the treasury shares purchased on the acquisition date.

13. Commitments, Contingent Liabilities and Guarantees

The Bancorp, in the normal course of business, enters into financial instruments and various agreements to meet the financing needs of its customers. The Bancorp also enters into certain transactions and agreements to manage its interest rate and prepayment risks, provide funding, equipment and locations for its operations and invest in its communities. These instruments and agreements involve, to varying degrees, elements of credit risk, counterparty risk and market risk in excess of the amounts recognized in the Bancorp’s Condensed Consolidated Balance Sheets. The creditworthiness of counterparties for all instruments and agreements is evaluated on a case-by-case basis in accordance with the Bancorp’s credit policies. The Bancorp’s significant commitments, contingent liabilities and guarantees in excess of the amounts recognized in the Condensed Consolidated Balance Sheets are discussed in further detail below:

Commitments

The Bancorp has certain commitments to make future payments under contracts. The following table reflects a summary of significant commitments as of:

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

($ in millions)

  March 31,
2012
   December 31,
2011
   March 31,
2011
   June 30,
2012
   December 31,
2011
   June 30,
2011
 

Commitments to extend credit

  $49,111    47,719    44,220   $51,205    47,719    45,099 

Forward contracts to sell mortgage loans

   8,769    5,705    2,529    7,382    5,705    2,210 

Letters of credit

   4,709    4,744    5,317    4,581    4,744    5,096 

Noncancelable lease obligations

   826    851    851    809    851    840 

Capital commitments for private equity investments

   159    166    182    148    166    184 

Purchase obligations

   109    115    60    104    115    122 

Capital expenditures

   56    41    41    49    41    49 

Capital lease obligations

   24    26    30    22    26    19 
  

 

   

 

   

 

   

 

   

 

   

 

 

Commitments to extend credit

Commitments to extend credit are agreements to lend, typically having fixed expiration dates or other termination clauses that may require payment of a fee. Since many of the commitments to extend credit may expire without being drawn upon, the total commitment amounts do not necessarily represent future cash flow requirements. The Bancorp is exposed to credit risk in the event of nonperformance by the counterparty for the amount of the contract. Fixed-rate commitments are also subject to market risk resulting from fluctuations in interest rates and the Bancorp’s exposure is limited to the replacement value of those commitments. As of March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, the Bancorp had a reserve for unfunded commitments totaling $179$178 million, $181 million and $211$197 million, respectively, included in other liabilities in the Condensed Consolidated Balance Sheets. The Bancorp monitors the credit risk associated with commitments to extend credit using the same risk rating system utilized within its loan and lease portfolio. Risk ratings under this risk rating system are summarized in the following table:

 

($ in millions)

  March 31,
2012
   December 31,
2011
   March 31,
2011
   June 30,
2012
   December 31,
2011
   June 30,
2011
 

Pass

  $48,401    46,825    43,179   $50,549    46,825    44,090 

Special mention

   326    480    453    354    480    520 

Substandard

   361    403    572    302    403    451 

Doubtful

   23    11    16    —       11    38 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $49,111    47,719    44,220   $51,205    47,719    45,099 
  

 

   

 

   

 

   

 

   

 

   

 

 

Forward contracts to sell mortgage loans

The Bancorp enters into forward contracts to economically hedge the change in fair value of certain residential mortgage loans held for sale due to changes in interest rates. The outstanding notional amounts of these forward contracts are included in the summary of significant commitments table above for all periods presented.

Letters of credit

Standby and commercial letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party and, as of March 31,June 30, 2012, expire as summarized in the following table:

Fifth Third Bancorp and Subsidiaries

($ in millions)

    

Less than 1 year(a)

  $1,997 

1 - 5 years(a)

   2,588 

Over 5 years

   124 
  

 

 

 

Total

  $4,709 
  

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

($ in millions)

    

Less than 1 year(a)

  $1,991 

1 - 5 years(a)

   2,515 

Over 5 years

   75 
  

 

 

 

Total

  $4,581 
  

 

 

 

(a)Includes $53$56 and $7$12 issued on behalf of commercial customers to facilitate trade payments in U.S. dollars and foreign currencies which expire less than one year and between one and five years, respectively.

Standby letters of credit accounted for 99% of total letters of credit at March 31,June 30, 2012 and 98% at December 31, 2011 and March 31,June 30, 2011 and are considered guarantees in accordance with U.S. GAAP. Approximately 51%52%, 54% and 57%58% of the total standby letters of credit were fully secured as of March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, respectively. In the event of nonperformance by the customers, the Bancorp has rights to the underlying collateral, which can include commercial real estate, physical plant and property, inventory, receivables, cash and marketable securities. The reserve related to these standby letters of credit, which was included in other liabilities in the Condensed Consolidated Balance Sheets, was $5 million at March 31,June 30, 2012 and December 31, 2011 and $4 million at March 31,June 30, 2011. The Bancorp monitors the credit risk associated with letters of credit using the same risk rating system utilized within its loan and lease portfolio. Risk ratings under this risk rating system are summarized in the following table:

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

As of ($ in millions)

  March 31,
2012
   December 31,
2011
   March 31,
2011
   June 30,
2012
   December 31,
2011
   June 30,
2011
 

Pass

  $4,282    4,338    4,789   $4,081    4,338    4,605 

Special mention

   148    149    163    220    149    193 

Substandard

   276    254    363    280    254    288 

Doubtful

   2    2    1    —       2    9 

Loss

   1    1    1    —       1    1 
  

 

   

 

   

 

   

 

   

 

   

 

 

Total

  $4,709    4,744    5,317   $4,581    4,744    5,096 
  

 

   

 

   

 

   

 

   

 

   

 

 

At March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, the Bancorp had outstanding letters of credit that were supporting certain securities issued as VRDNs. The Bancorp facilitates financing for its commercial customers, which consist of companies and municipalities, by marketing the VRDNs to investors. The VRDNs pay interest to holders at a rate of interest that fluctuates based upon market demand. The VRDNs generally have long-term maturity dates, but can be tendered by the holder for purchase at par value upon proper advance notice. When the VRDNs are tendered, a remarketing agent generally finds another investor to purchase the VRDNs to keep the securities outstanding in the market. As of MarchJune 30, 2012, December 31, 20122011 and December 31,June 30, 2011, FTS acted as the remarketing agent to issuers on $2.8 billion, $2.9 billion of VRDNs compared withand $3.2 billion, at March 31, 2011.respectively, of VRDNs. As remarketing agent, FTS is responsible for finding purchasers for VRDNs that are put by investors. The Bancorp issues letters of credit, as a credit enhancement, to the VRDNs remarketed by FTS, in addition to $416$400 million, $440 million and $521$539 million in VRDNs remarketed by third parties at March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, respectively. These letters of credit are included in the total letters of credit balance provided in the previous table. For the VRDNs remarketed by third parties, in some cases the remarketing agent has failed to remarket the securities and has instructed the indenture trustee to draw upon $2 million of letters of credit issued by the Bancorp at March 31, 2011. The amount of failed remarketing draws on letters of credit issued by the Bancorp was immaterial to the Bancorp’s Condensed Consolidated Financial Statements at March 31,June 30, 2012, and December 31, 2011 and June 30, 2011. The Bancorp recorded these draws as commercial loans in its Condensed Consolidated Balance Sheets.

Noncancelable lease obligations and other commitments

The Bancorp’s subsidiaries have entered into a number of noncancelable lease agreements. The minimum rental commitments under noncancelable lease agreements are shown in the summary of significant commitments table. The Bancorp has also entered into a limited number of agreements for work related to banking center construction and to purchase goods or services.

Contingent Liabilities

Private mortgage reinsurance

For certain mortgage loans originated by the Bancorp, borrowers may be required to obtain PMI provided by third-party insurers. In some instances, these insurers cede a portion of the PMI premiums to the Bancorp, and the Bancorp provides reinsurance coverage within a specified range of the total PMI coverage. The Bancorp’s reinsurance coverage typically ranges from 5% to 10% of the total PMI coverage. The Bancorp’s maximum exposure in the event of nonperformance by the underlying borrowers is equivalent to the Bancorp’s total outstanding reinsurance coverage, which was $74$67 million at March 31,June 30, 2012, $77 million at December 31, 2011 and $122$92 million at March 31,June 30, 2011. As of March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, the Bancorp maintained a reserve of $25$24 million, $27 million and $52$33 million, respectively, related to exposures within the reinsurance portfolio which was included in other liabilities in the Condensed Consolidated Balance Sheets. During the second quarter of 2009, the Bancorp suspended the practice of providing reinsurance of private mortgage insurance for newly originated mortgage loans. In the third quarter of 2010, the Bancorp allowed one of its third-party insurers to terminate its reinsurance agreement with the Bancorp, resulting in the Bancorp releasing collateral to the insurer in the form of investment securities and other assets with a carrying value of $19 million, and the insurer assuming the Bancorp’s obligations under the reinsurance agreement, resulting in a decrease to the Bancorp’s reserve liability of $20 million and decrease in the Bancorp’s maximum exposure of $53 million. In the second quarter of 2011, the Bancorp allowed one of its third-party insurers to terminate its reinsurance agreement with the

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Bancorp, resulting in the Bancorp releasing collateral to the insurer in the form of investment securities and other assets with a carrying value of $5 million, and the insurer assuming the Bancorp’s obligations under the reinsurance agreement, resulting in a decrease to the Bancorp’s reserve liability of $11 million and decrease in the Bancorp’s maximum exposure of $27 million.

Legal claims

There are legal claims pending against the Bancorp and its subsidiaries that have arisen in the normal course of business. See Note 1314 for additional information regarding these proceedings.

Guarantees

The Bancorp has performance obligations upon the occurrence of certain events under financial guarantees provided in certain contractual arrangements as discussed in the following sections.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Residential mortgage loans sold with representation and warranty provisions

Conforming residential mortgage loans sold to unrelated third parties are generally sold with representation and warranty provisions. A contractual liability arises only in the event of a breach of these representations and warranties and, in general, only when a loss results from the breach. The Bancorp may be required to repurchase any previously sold loan or indemnify (make whole) the investor or insurer for which the representation or warranty of the Bancorp proves to be inaccurate, incomplete or misleading.

The Bancorp establishes a residential mortgage repurchase reserve related to various representations and warranties that reflects management’s estimate of losses based on a combination of factors. Such factors incorporate historical investor audit and repurchase demand rates, appeals success rates and historical loss severity. At the time of a loan sale, the Bancorp records a representation and warranty reserve at the estimated fair value of the Bancorp’s guarantee and continually updates the reserve during the life of the loan as losses in excess of the reserve become probable and reasonably estimable. The provision for the estimated fair value of the representation and warranty guarantee arising from the loan sales is recorded as an adjustment to the gain on sale, which is included in other noninterest income at the time of sale. Updates to the reserve are recorded in other noninterest expense. The majority of repurchase demands occur within the first 36 months following origination.

The Bancorp maintained reserves related to these loans sold with representation and warranty provisions, which were included in other liabilities on the Condensed Consolidated Balance Sheets, totaling $57 million, $55 million and $60 million as of March 31,June 30, 2012, and December 31, 2011 and $73 million at March 31, 2011.June 30, 2011, respectively. The following table summarizes activity in the reserve for representation and warranty provisions:

 

  For the three months
ended March 31,
   For the three months
ended June 30,
 For the six months
ended June 30,
 

($ in millions)

  2012 2011   2012 2011 2012 2011 

Balance, beginning of period

  $55   85   $55   73   55   85 

Net additions to the reserve

   14   8    15   6   29   14 

Losses charged against the reserve

   (14  (20   (13  (19  (27  (39
  

 

  

 

   

 

  

 

  

 

  

 

 

Balance, end of period

  $55   73   $57   60   57   60 
  

 

  

 

   

 

  

 

  

 

  

 

 

The following table provides a rollforward of unresolved claims by claimant type for the threesix months ended March 31,June 30, 2012:

 

  GSE Private Label   GSE Private Label 

($ in millions)

  Units Dollars Units Dollars   Units Dollars Units Dollars 

Balance, beginning of period

   328  $47   109  $19    328  $47   109  $19 

New demands

   773   93   61   1    1,546   207   119   3 

Loan paydowns/payoffs

   (15  (2  —      —       (22  (3  —      —    

Resolved claims

   (672  (78  (58  (2   (1,385  (172  (111  (4
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Balance, end of period

   414  $60   112  $18    467  $79   117  $18 
  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

 

Residential mortgage loans sold with credit recourse

The Bancorp sold certain residential mortgage loans in the secondary market with credit recourse. In the event of any customer default, pursuant to the credit recourse provided, the Bancorp is required to reimburse the third party. The maximum amount of credit risk in the event of nonperformance by the underlying borrowers is equivalent to the total outstanding balance. In the event of nonperformance, the Bancorp has rights to the underlying collateral value securing the loan. The outstanding balances on these loans sold with credit recourse were $742$721 million, $772 million and $917$875 million at March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, respectively, and the delinquency rates were 6.4%6.0%, 6.7% and 7.6%8.1% at March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011. The Bancorp maintained an estimated credit loss reserve on these loans sold with credit recourse of $19 million, $17 million and $20 million at March 31,June 30, 2012, and December 31, 2011 and $14 million at March 31,June 30, 2011, recorded in other liabilities in the Condensed Consolidated Balance Sheets. To determine the credit loss reserve, the Bancorp used

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

an approach that is consistent with its overall approach in estimating credit losses for various categories of residential mortgage loans held in its loan portfolio.

Margin accounts

FTS, a subsidiary of the Bancorp, guarantees the collection of all margin account balances held by its brokerage clearing agent for the benefit of its customers. FTS is responsible for payment to its brokerage clearing agent for any loss, liability, damage, cost or expense incurred as a result of customers failing to comply with margin or margin maintenance calls on all margin accounts. The margin account balance held by the brokerage clearing agent was $18$20 million, $14 million and $10$13 million at March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, respectively. In the event of any customer default, FTS has rights to the underlying collateral provided. Given the existence of the underlying collateral provided and negligible historical credit losses, the Bancorp does not maintain a loss reserve related to the margin accounts.

Long-term borrowing obligations

The Bancorp had fully and unconditionally guaranteed certain long-term borrowing obligations issued by wholly-owned issuing trust entities of $2.2 billion at March 31,June 30, 2012 and December 31, 2011 and $2.9$2.3 billion at March 31,June 30, 2011.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Visa litigation

The Bancorp, as a member bank of Visa prior to Visa’s reorganization and IPO (the “IPO”) of its Class A common shares in 2008, had certain indemnification obligations pursuant to Visa’s certificate of incorporation and by-laws and in accordance with their membership agreements. In accordance with Visa’s by-laws prior to the IPO, the Bancorp could have been required to indemnify Visa for the Bancorp’s proportional share of losses based on the pre-IPO membership interests. As part of its reorganization and IPO, the Bancorp’s indemnification obligation was modified to include only certain known litigation (the “Covered Litigation”) as of the date of the restructuring. This modification triggered a requirement to recognize a $3 million liability for the year ended December 31, 2007 equal to the fair value of the indemnification obligation. Additionally during 2007, the Bancorp recorded $169 million for its share of litigation formally settled by Visa and for probable future litigation settlements. In conjunction with the IPO, the Bancorp received 10.1 million of Visa’s Class B shares based on the Bancorp’s membership percentage in Visa prior to the IPO. The Class B shares are not transferable (other than to another member bank) until the later of the third anniversary of the IPO closing or the date which the Covered Litigation has been resolved; therefore, the Bancorp’s Class B shares were classified in other assets and accounted for at their carryover basis of $0. Visa deposited $3 billion of the proceeds from the IPO into a litigation escrow account, established for the purpose of funding judgments in, or settlements of, the Covered Litigation. If Visa’s litigation committee determines that the escrow account is insufficient, then Visa will issue additional Class A shares and deposit the proceeds from the sale of the shares into the litigation escrow account. When Visa funds the litigation escrow account, the Class B shares are subject to dilution through an adjustment in the conversion rate of Class B shares into Class A shares. During 2008, the Bancorp recorded additional reserves of $71 million for probable future settlements related to the Covered Litigation and recorded its proportional share of $169 million of the Visa escrow account net against the Bancorp’s litigation reserve.

During 2009, Visa announced it had deposited an additional $700 million into the litigation escrow account. As a result of this funding, the Bancorp recorded its proportional share of $29 million of these additional funds as a reduction to its net Visa litigation reserve liability and a reduction to noninterest expense. Later in 2009, the Bancorp completed the sale of Visa, Inc. Class B shares for proceeds of $300 million. As part of this transaction the Bancorp entered into a total return swap in which the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Class B shares into Class A shares. The swap terminates on the later of the third anniversary of Visa’s IPO or the date on which the Covered Litigation is settled. The Bancorp calculates the fair value of the swap based on its estimate of the probability and timing of certain Covered Litigation settlement scenarios and the resulting payments related to the swap. The counterparty to the swap as a result of its ownership of the Class B shares will be impacted by dilutive adjustments to the conversion rate of the Class B shares into Class A shares caused by any Covered Litigation losses in excess of the litigation escrow account. If actual judgments in, or settlements of, the Covered Litigation significantly exceed current expectations, then additional funding by Visa of the litigation escrow account and the resulting dilution of the Class B shares could result in a scenario where the Bancorp’s ultimate exposure associated with the Covered Litigation (the “Visa Litigation Exposure”) exceeds the value of the Class B shares owned by the swap counterparty (the “Class B Value”). In the event the Bancorp concludes that it is probable that the Visa Litigation Exposure exceeds the Class B Value, the Bancorp would record a litigation reserve liability and a corresponding amount of other noninterest expense for the amount of the excess. Any such litigation reserve liability would be separate and distinct from the fair value derivative liability associated with the total return swap.

As of the date of the Bancorp’s sale of Visa Class B shares and through March 31,June 30, 2012, the Bancorp has concluded that it is not probable that the Visa Litigation Exposure will exceed the Class B Value.value. Based on this determination, upon the sale of Class B shares, the Bancorp reversed its net Visa litigation reserve liability and recognized a free-standing derivative liability associated with the total return swap with an initial fair value of $55 million. The sale of the Class B shares, recognition of the derivative liability and reversal of the net litigation reserve liability resulted in a pre-tax benefit of $288 million ($187 million after-tax) recognized by the Bancorp for the year ended December 31, 2009. In the second quarter of 2010, Visa funded an additional $500 million into the escrow account which resulted in further dilution in the conversion of Class B shares into Class A shares and required the Bancorp to make a $20 million cash payment (which reduced the swap liability) to the swap counterparty in accordance with the terms of the swap contract. In the fourth quarter of 2010, Visa funded an additional $800 million into the litigation escrow account which resulted in further dilution in the conversion of Class B shares into Class A shares and required the Bancorp to make a $35 million cash payment (which reduced the swap liability) to the swap counterparty in accordance with the terms of the swap contract. In the second quarter of 2011, Visa funded an additional $400 million into the litigation escrow account. Upon

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Visa’s funding of the litigation escrow account in the second quarter of 2011, along with additional terms of the total return swap, the Bancorp made a $19 million cash payment (which reduced the swap liability) to the swap counterparty. During the fourth quarter of 2011, Visa announced it decided to fund an additional $1.565 billion into the litigation escrow account which increased the swap liability approximately $54 million. Upon Visa’s funding of the litigation escrow account in the first quarter of 2012, along with additional terms of the total return swap, the Bancorp made a $75 million cash payment (which reduced the swap liability) to the swap counterparty. On July 13, 2012, Visa, the Bancorp, and other parties signed a Memorandum of Understanding to enter into a settlement agreement to resolve the claims of the class plaintiffs in the matter styledIn re Payment Card Interchange Fee and Merchant Discount Antitrust Litigation, No. 05 – MD – 1720, refer to Note 14 for further information. On July 24, 2012, Visa funded an additional $150 million into the litigation escrow account which resulted in further dilution in the conversion of Class B shares into Class A shares and required the Bancorp to make a $6 million cash payment (which will reduce the swap liability) to the swap counterparty in the third quarter of 2012. The fair value of the swap liability was $22$29 million, $78 million and $28$12 million at March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, respectively.

13.14. Legal and Regulatory Proceedings

During April 2006, the Bancorp was added as a defendant in a consolidated antitrust class action lawsuit originally filed against Visa®, MasterCard® and several other major financial institutions in the United States District Court for the Eastern District of New York. The plaintiffs, merchants operating commercial businesses throughout the U.S. and trade associations, claim that the interchange fees charged by card-issuing banks are unreasonable and seek injunctive relief and unspecified damages. In addition to being a named defendant, the Bancorp

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

is also subject to a possible indemnification obligation of Visa as discussed in Note 1213 and has also entered into with Visa, MasterCard and certain other named defendants judgment and loss sharing agreements that attempt to allocate financial responsibilityagreements. On July 13, 2012, the parties to the parties theretolitigation entered into a Memorandum of Understanding to settle the claims in the event certain settlements or judgments occur.consolidated antitrust class action lawsuit. The Bancorp has remaining reserves related to this litigation of approximately $50 million as of June 30, 2012, $49 million as of March 31, 2012 and December 31, 2011 and $31 million as of March 31,June 30, 2011. Refer to Note 1213 for further information regarding the Bancorp’s net litigation reserve and ownership interest in Visa. Fact and expert discovery in the litigation has been essentially completed. A motion for class action certification, certain defense motions to dismiss, and cross-motions for summary judgments are pending. A tentative trial date has been set for the third quarter of 2012.

In September 2007, Ronald A. Katz Technology Licensing, L.P. (Katz) filed a suit in the United States District Court for the Southern District of Ohio against the Bancorp and its Ohio banking subsidiary. In the suit, Katz alleges that the Bancorp and its Ohio bank are infringing on Katz’s patents for interactive call processing technology by offering certain automated telephone banking and other services. This lawsuit is one of many related patent infringement suits brought by Katz in various courts against numerous other defendants. Katz is seeking unspecified monetary damages and penalties as well as injunctive relief in the suit. Management believes there are substantial defenses to these claims and intends to defend them vigorously. The impact of the final disposition of this lawsuit cannot be assessed at this time.

For the year ended December 31, 2008, five putative securities class action complaints were filed against the Bancorp and its Chief Executive Officer, among other parties. The five cases have been consolidated under the caption Local 295/Local 851 IBT Employer Group Pension Trust and Welfare Fund v. Fifth Third Bancorp. et al., Case No. 1:08CV00421, and are currently pending in the United States District Court for the Southern District of Ohio. The lawsuits allege violations of federal securities laws related to disclosures made by the Bancorp in press releases and filings with the SEC regarding its quality and sufficiency of capital, credit losses and related matters, and seeking unquantified damages on behalf of putative classes of persons who either purchased the Bancorp’s securities or trust preferred securities,TruPS, or acquired the Bancorp’s securities pursuant to the acquisition of First Charter Corporation. These cases remain in the discovery stages of litigation. The impact of the final disposition of these lawsuits cannot be assessed at this time. In addition to the foregoing, two cases were filed in the United States District Court for the Southern District of Ohio against the Bancorp and certain officers alleging violations of ERISA based on allegations similar to those set forth in the securities class action cases filed during the same period of time. The two cases alleging violations of ERISA were dismissed by the trial court, and are being appealed to the United States Sixth Circuit Court of Appeals.

In September 2011, DataTreasury Corporation filed a suit in the United States District Court for the Eastern District of Texas against the Bancorp and its banking subsidiary. In the suit, DataTreasury allegesalleged that the Bancorp and its banking subsidiary are infringinginfringed on DataTreasury’s patents for imaged-based check processing. ThisThe lawsuit iswas one of many related patent infringement suits brought by DataTreasury against numerous other defendants. In May 2012, the Bancorp and its banking subsidiary entered into a settlement agreement with DataTreasury is seeking unspecified monetary damages and penalties.resolving the lawsuit. The settlement amount was not material to the Bancorp’s financial condition, results of operations or cash flows.

The Bancorp and its subsidiaries are not parties to any other material litigation. However, there are other litigation matters that arise in the normal course of business. While it is impossible to ascertain the ultimate resolution or range of financial liability with respect to these contingent matters, management believes any resulting liability from these other actions would not have a material effect upon the Bancorp’s consolidated financial position, results of operations or cash flows.

The Bancorp and/or its affiliates are or may become involved from time to time in information-gathering requests, reviews, investigations and proceedings (both formal and informal) by government and self-regulatory agencies, including the SEC, regarding their respective businesses. Such matters may result in material adverse consequences, including without limitation, adverse judgments, settlements, fines, penalties, orders, injunctions or other actions, amendments and/or restatements of the Bancorp’s SEC filings and/or financial statements, as applicable, and/or determinations of material weaknesses in our disclosure controls and procedures. The SEC is investigating and has made several requests for information, including by subpoena, concerning issues which the Bancorp understands relate to accounting and reporting

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

matters involving certain of its commercial loans. This could lead to an enforcement proceeding by the SEC which, in turn, may result in one or more such material adverse consequences.

The Bancorp is party to numerous claims and lawsuits concerning matters arising from the conduct of its business activities. The outcome of litigation and the timing of ultimate resolution are inherently difficult to predict. The following factors, among others, contribute to this lack of predictability: plaintiff claims often include significant legal uncertainties, damages alleged by plaintiffs are often unspecified or overstated, discovery may not have started or may not be complete and material facts may be disputed or unsubstantiated. As a result of these factors, the Bancorp is not always able to provide an estimate of the range of reasonably possible outcomes for each claim. A reserve for a potential litigation loss is established when information related to the loss contingency indicates both that a loss is probable and that the amount of loss can be reasonably estimated. Any such reserve is adjusted from time to time thereafter as appropriate to reflect changes in circumstances. The Bancorp also determines, when possible (due to the uncertainties described above), estimates of reasonably possible losses or ranges of reasonably possible losses, in excess of amounts reserved. Under U.S. GAAP, an event is “reasonably possible” if “the chance of the future event or events occurring is more than remote but less than likely” and an event is “remote” if “the chance of the future event or events occurring is slight.” Thus, references to the upper end of the range of reasonably possible loss for cases in which the Bancorp is able to estimate a range of reasonably possible loss mean the upper end of the range of loss for cases for which the Bancorp believes the risk of loss is more than slight. For matters where the Bancorp is able to estimate such possible losses or ranges of possible losses, the

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

Bancorp currently estimates that it is reasonably possible that it could incur losses related to legal proceedings including the matters discussed above in an aggregate amount up to approximately $55$49 million in excess of amounts reserved, with it also being reasonably possible that no losses will be incurred in these matters. The estimates included in this amount are based on the Bancorp’s analysis of currently available information, and as new information is obtained the Bancorp may change its estimates.

For these matters and others where an unfavorable outcome is reasonably possible but not probable, there may be a range of possible losses in excess of the established reserve that cannot be estimated. Based on information currently available, advice of counsel, available insurance coverage and established reserves, the Bancorp believes that the eventual outcome of the actions against the Bancorp and/or its subsidiaries, including the matters described above, will not, individually or in the aggregate, have a material adverse effect on the Bancorp’s consolidated financial position. However, in the event of unexpected future developments, it is possible that the ultimate resolution of those matters, if unfavorable, may be material to Bancorp’s results of operations for any particular period, depending, in part, upon the size of the loss or liability imposed and the operating results for the applicable period.

14.15. Related Party Transactions

On June 30, 2009, the Bancorp completed the sale of a majority interest in its processing business to Advent International. As part of this transaction the processing business was contributed into a partnership, now known as Vantiv Holding, LLC. Vantiv, Inc., formed by Advent International and owned by certain funds managed by Advent International acquired an approximate 51% interest in Vantiv Holding, LLC for cash and warrants. The Bancorp retained the remaining approximate 49% interest in Vantiv Holding, LLC.

During the first quarter of 2012, Vantiv, Inc. priced an initial public offering of its shares and contributed the net proceeds to Vantiv Holding, LLC for additional ownership interests. As a result of this offering, the Bancorp’s ownership of Vantiv Holding, LLC was reduced to approximately 39% and will continue to be accounted for as an equity method investment in the Condensed Consolidated Financial Statements. The impact of the capital contributions to Vantiv Holding, LLC and the resulting dilution in the Bancorp’s interest resulted in a pre-tax gain of $115 million ($75 million after-tax) recognized by the Bancorp.Bancorp in the first quarter of 2012.

As of March 31,June 30, 2012, the Bancorp continued to hold approximately 84 million units of Vantiv Holding, LLC and a warrant to purchase approximately 20 million incremental Vantiv Holding, LLC non-voting units, both of which may be exchanged for common stock of Vantiv, Inc. on a one for one basis or at Vantiv, Inc.’s option for cash. In addition, the Bancorp holds approximately 84 million Class B common shares of Vantiv, Inc. The Class B common shares give the Bancorp voting rights, but no economic interest in Vantiv, Inc. The voting rights attributable to the Class B common shares are limited to 18.5% of the voting power in Vantiv, Inc. at any time other than in connection with a stockholder vote with respect to a change in control in Vantiv, Inc. These securities are subject to certain terms and restrictions.

15.16. Income Taxes

The following table provides a summary of the Bancorp’s unrecognized tax benefits as of:

($ in millions)

  March 31,
2012
   December 31,
2011
   March 31,
2011
 

Tax positions that would impact the effective tax rate, if recognized

  $14    14    15 

Tax positions where the ultimate deductibility is highly certain, but for which there is uncertainty about the timing of the deduction

   —       —       1 
  

 

 

   

 

 

   

 

 

 

Unrecognized tax benefits

  $14    14    16 
  

 

 

   

 

 

   

 

 

 

Any interest and penalties incurred in connection withprovision for income taxes are accrued as a component of tax expense. The Bancorp had accrued interest liabilities, net of the related tax benefits, of $3 million, $3was $180 million and $2$169 million at March 31,for the three months ended June 30, 2012 December 31, 2011 and March 31, 2011, respectively. No significant liabilitiesThe provision for income taxes was $352 million and $281 million for the six months ended June 30, 2012 and 2011, respectively. The effective tax rates for the three months ended June 30, 2012 and 2011 were recorded31.8% and 33.3%, respectively. The effective tax rates for penalties.

While it is reasonably possible thatthe six months ended June 30, 2012 and 2011 were 30.2% and 31.8%, respectively. The decrease in the effective tax rate for the three and six months ended June 30, 2012 from the three and six months ended June 30, 2011 was primarily due to a decrease in the amount of the unrecognized tax benefit with respectnon-cash charges relating to certain of the Bancorp’s uncertain tax positions could increase or decrease during the next 12 months, the Bancorp believes it is unlikely that its unrecognizedpreviously recognized tax benefits associated with stock-based awards that will change by a material amount during the next 12 months.

Deferred tax assets are included as a component of other assets in the Condensed Consolidated Balance Sheets and deferred tax liabilities are included as a component of accrued taxes, interest and expenses in the Condensed Consolidated Balance Sheets. Where applicable, deferred tax assets relating to state net operating losses are presented net of specific valuation allowances. The Bancorp determined that a valuation allowance is not needed against the remaining deferred tax assets as of March 31, 2012, December 31, 2011 and March 31, 2011. The Bancorp considered all of the positive and negative evidence available to determine whether it is more likely than not that the deferred tax assets will ultimately be realized and based upon that evidence, the Bancorp believes it is more likely than not that the deferred tax assets recorded at March 31, 2012, December 31, 2011 and March 31, 2011 will ultimately be realized. The Bancorp reached this conclusion as the Bancorp has taxable income in the carryback period and it is expected that the Bancorp’s remaining deferred tax assets will be realized through the reversal of its existing taxable temporary differences and its projected future taxable income.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

As required under U.S. GAAP, the Bancorp established a deferred tax asset for stock-based awards granted to its employees. When the actual tax deduction for these stock-based awards is less than the expense previously recognized for financial reporting or when the awards expire unexercised, the Bancorp is required to write-off the deferred tax asset previously established for these stock-based awards. As a result of the Bancorp’s stock price as of March 31, 2012, it is probable that the Bancorp will be required to record an additional $19 million of income tax expense during the second quarter of 2012 and $13 million of income tax expense during the first quarter of 2013. However, the Bancorp cannot predict its stock price or whether its employees will exercise other stock-based awards with lower exercise prices in the future; therefore, it is possible that the total impact to income tax expense will be greater than or less than these amounts.

The statute of limitations for the Bancorp’s federal income tax returns remains open for tax years 2008 through 2011. On occasion, as various state and local taxing jurisdictions examine the returns of the Bancorp and its subsidiaries, the Bancorp may agree to extend the statute of limitations for a short period of time. Otherwise, with the exception of a few states with insignificant uncertain tax positions, the statutes of limitations for state income tax returns remain open only for tax years in accordance with each state’s statutes.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

16.17. Accumulated Other Comprehensive Income

The activity of the components of other comprehensive income and accumulated other comprehensive income for the threesix months ended March 31,June 30, 2012 and 2011 was as follows:

 

$XXX$XXX$XXX$XXX$XXX$XXX
  Total Other Total Accumulated Other   Total Other Total Accumulated Other 
  Comprehensive Income Comprehensive Income   Comprehensive Income Comprehensive Income 
  Pretax Tax Net Beginning Net Ending   Pretax Tax Net Beginning Net Ending 

($ in millions)

  Activity Effect Activity Balance Activity Balance   Activity Effect Activity Balance Activity Balance 

2012

              

Unrealized holding gains on available-for-sale securities arising during period

  $10   (3  7    

Unrealized holding losses on available-for-sale securities arising during period

  $(4  1   (3   

Reclassification adjustment for net gains included in net income

   (7  2   (5      (10  4   (6   
  

 

  

 

  

 

      

 

  

 

  

 

    

Net unrealized gains on available-for-sale securities

   3   (1  2   485   2   487    (14  5   (9  485   (9  476 

Unrealized holding gains on cash flow hedge derivatives arising during period

   9   (3  6       25   (9  16    

Reclassification adjustment for net gains on cash flow hedge derivatives included in net income

   (20  7   (13      (41  14   (27   
  

 

  

 

  

 

      

 

  

 

  

 

    

Net unrealized gains on cash flow hedge derivatives

   (11  4   (7  80   (7  73    (16  5   (11  80   (11  69 

Defined benefit plans:

              

Net prior service cost

   —      —      —       

Net actuarial loss

   4   (1  3       7   (3  4    
  

 

  

 

  

 

      

 

  

 

  

 

    

Defined benefit plans, net

   4   (1  3   (95  3   (92   7   (3  4   (95  4   (91
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

Total

  $(4  2   (2  470   (2  468   $(23  7   (16  470   (16  454 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

  

 

 

 

$XXX$XXX$XXX$XXX$XXX$XXX
  Total Other Total Accumulated Other   Total Other Total Accumulated Other 
  Comprehensive Income Comprehensive Income   Comprehensive Income Comprehensive Income 
  Pretax Tax Net Beginning Net Ending   Pretax Tax Net Beginning Net   Ending 

($ in millions)

  Activity Effect Activity Balance Activity Balance   Activity Effect Activity Balance Activity   Balance 

2011

               

Unrealized holding losses on available-for-sale securities arising during period

  $(57  20   (37   

Unrealized holding gains on available-for-sale securities arising during period

  $135   (47  88     

Reclassification adjustment for net gains included in net income

   (12  5   (7      (17  6   (11    
  

 

  

 

  

 

      

 

  

 

  

 

     

Net unrealized gains on available-for-sale securities

   (69  25   (44  321   (44  277    118   (41  77   321   77    398 

Unrealized holding gains on cash flow hedge derivatives arising during period

   —      —      —          32   11   21     

Reclassification adjustment for net gains on cash flow hedge derivatives included in net income

   (15  6   (9      (31  (11  (20    
  

 

  

 

  

 

      

 

  

 

  

 

     

Net unrealized gains on cash flow hedge derivatives

   (15  6   (9  67   (9  58    1   —      1   67   1    68 

Defined benefit plans:

               

Net prior service cost

   —      —      —       

Net actuarial loss

   3   (1  2       6   (2  4     
  

 

  

 

  

 

      

 

  

 

  

 

     

Defined benefit plans, net

   3   (1  2   (74  2   (72   6   (2  4   (74  4    (70
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

   

 

 

Total

  $(81  30   (51  314   (51  263   $125   (43  82   314   82    396 
  

 

  

 

  

 

  

 

  

 

  

 

   

 

  

 

  

 

  

 

  

 

   

 

 

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

17.18. Earnings Per Share

The calculation of earnings per share and the reconciliation of earnings per share and earnings per diluted share were as follows:

 

  2012 2011   2012 2011 

For the three months ended March 31,

(in millions, except per share data)

  Income   Average
Shares
   Per
Share
Amount
 Income   Average
Shares
   Per
Share
Amount
 

For the three months ended June 30,

(in millions, except per share data)

  Income   Average
Shares
   Per
Share
Amount
 Income   Average
Shares
   Per
Share
Amount
 

Earnings per share:

                      

Net income attributable to Bancorp

  $430       265       $385       337     

Dividends on preferred stock

   9       177        9       9     
  

 

      

 

       

 

   

 

   

 

  

 

   

 

   

 

 

Net income available to common shareholders

   421       88        376       328     

Less: Income allocated to participating securities

   2       —           3       2     
  

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

 

Net income allocated to common shareholders

  $419    915    0.46   88    881    0.10   $373    914    0.41   326    915    0.36 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

 

Earnings per diluted share:

                      

Net income available to common shareholders

  $421       88       $376       328     

Effect of dilutive securities:

                      

Stock-based awards

   —       6    —      —       7    —       —       5    —      —       4    —    

Series G convertible preferred stock

   9    36    (0.01  —       —       —       9    36    (0.01  9    36    (0.01

Warrants related to Series F preferred stock

   —       —       —      —       7    —       —       —       —      —       —       —    
  

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

 

Net income available to common shareholders plus assumed conversions

   430       88        385       337     

Less: Income allocated to participating securities

   2       —           3       2     
  

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

 

Net income allocated to common shareholders plus assumed conversions

  $428    957    0.45   88    895    0.10   $382    955    0.40   335    955    0.35 
  

 

   

 

   

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

   

 

   

 

 
  2012 2011 

For the six months ended June 30,

(in millions, except per share data)

  Income   Average
Shares
   Per
Share
Amount
 Income   Average
Shares
   Per
Share
Amount
 

Earnings per share:

           

Net income attributable to Bancorp

  $815       602     

Dividends on preferred stock

   18       185     
  

 

      

 

     

Net income available to common shareholders

   797       417     

Less: Income allocated to participating securities

   5       2     
  

 

   

 

   

 

  

 

   

 

   

 

 

Net income allocated to common shareholders

  $792    914    0.87   415    898    0.46 
  

 

   

 

   

 

  

 

   

 

   

 

 

Earnings per diluted share:

           

Net income available to common shareholders

  $797       417     

Effect of dilutive securities:

           

Stock-based awards

   —       6    —      —       6    —    

Series G convertible preferred stock

   18    36    (0.02  —       —       —    

Warrants related to Series F preferred stock

   —       —       —      —       4    —    
  

 

   

 

   

 

  

 

   

 

   

 

 

Net income available to common shareholders plus assumed conversions

   815       417     

Less: Income allocated to participating securities

   5       3     
  

 

   

 

   

 

  

 

   

 

   

 

 

Net income allocated to common shareholders plus assumed conversions

  $810    956    0.85   414    908    0.46 
  

 

   

 

   

 

  

 

   

 

   

 

 

Shares are excluded from the computation of net income per diluted share when their inclusion has an anti-dilutive effect on earnings per share. The diluted earnings per share computation for the three and six months ended March 31,June 30, 2012 and 2011 excludes 3039 million and 2434 million, respectively, of stock appreciation rights and 75 million and 106 million, respectively, of stock options. Foroptions and 3 million and 2 million, respectively, of unvested restricted stock that has not yet been exercised. The diluted earnings per share computation for the three and six months ended March 31,June 30, 2011 excludes 30 million and 27 million, respective, of stock appreciation rights, 8 million and 9 million, respectively, of stock options and 2 million and 1 million shares, respectively, of unvested restricted stock that had not yet been exercised. Additionally, for the six months ended June 30, 2011, 36 million shares related to the Bancorp’s Series G convertible preferred stock were excluded from the computation of net income per diluted share because their inclusion would have been anti-dilutive to earnings per share.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

18.19. Fair Value Measurements

The Bancorp measures certain financial assets and liabilities at fair value in accordance with U.S. GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. U.S. GAAP also establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. The three levels within the fair value hierarchy are described as follows:

Level 1 – Quoted prices (unadjusted) in active markets for identical assets or liabilities that the Bancorp has the ability to access at the measurement date.

Level 2 – Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include: quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in markets that are not active; inputs other than quoted prices that are observable for the asset or liability; and inputs that are derived principally from or corroborated by observable market data by correlation or other means.

Level 3 – Unobservable inputs for the asset or liability for which there is little, if any, market activity at the measurement date. Unobservable inputs reflect the Bancorp’s own assumptions about what market participants would use to price the asset or liability. The inputs are developed based on the best information available in the circumstances, which might include the Bancorp’s own financial data such as internally developed pricing models, discounted cash flow methodologies, as well as instruments for which the fair value determination requires significant management judgment.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables summarize assets and liabilities measured at fair value on a recurring basis, including residential mortgage loans held for sale for which the Bancorp has elected the fair value option as of:

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

  Fair Value Measurements Using       Fair Value Measurements Using     

March 31, 2012 ($ in millions)

  Level  1(c) Level 2(c) Level 3   Total Fair Value 

June 30, 2012 ($ in millions)

  Level  1(c) Level 2(c) Level 3   Total Fair Value 

Assets:

            

Available-for-sale securities:

            

U.S. Treasury and government agencies

  $51     —      —       51   $51     —      —       51 

U.S. Government sponsored agencies

   —      1,954     —       1,954    —      1,966     —       1,966 

Obligations of states and political subdivisions

   —      214     —       214    —      211     —       211 

Agency mortgage-backed securities

   —      10,358     —       10,358    —      9,279     —       9,279 

Other bonds, notes and debentures

   —      2,365     —       2,365    —      2,811     —       2,811 

Other securities(a)

   304         —       309    80     311     —       391 
  

 

  

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Available-for-sale securities(a)

   355     14,896     —       15,251    131     14,578     —       14,709 

Trading securities:

            

Obligations of states and political subdivisions

   —      19     1    20    —      13     1    14 

Agency mortgage-backed securities

   —      19     —       19    —      19     —       19 

Other bonds, notes and debentures

   —      11     —       11    —      11     —       11 

Other securities

   145     —      —       145    156     —      —       156 
  

 

  

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Trading securities

   145     49     1    195    156     43     1    200 

Residential mortgage loans held for sale

   —      1,429     —       1,429    —      1,788     —       1,788 

Residential mortgage loans(b)

   —      —      67    67    —      —      76    76 

Derivative assets:

            

Interest rate contracts

   22     1,552     21    1,595        1,672     55    1,736 

Foreign exchange contracts

   —      191     —       191    —      237     —       237 

Equity contracts

   —      —      159    159    —      —      214    214 

Commodity contracts

   —      156     —       156    —      120     —       120 
  

 

  

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Derivative assets

   22     1,899     180    2,101        2,029     269    2,307 
  

 

  

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Total assets

  $522     18,273     248    19,043   $296     18,438     346    19,080 
  

 

  

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Liabilities:

            

Derivative liabilities

            

Interest rate contracts

  $11     678     4    693   $37     695     1    733 

Foreign exchange contracts

   —      178     —       178    —      221     —       221 

Equity contracts

   —      —      24    24    —      —      30    30 

Commodity contracts

   —      151     —       151    —      112     —       112 
  

 

  

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Derivative liabilities

   11     1,007     28    1,046    37     1,028     31    1,096 

Short positions

           —       6            —       10 
  

 

  

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Total liabilities

  $16     1,008     28    1,052   $46     1,029     31    1,106 
  

 

  

 

  

 

   

 

   

 

  

 

  

 

   

 

 

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

    Fair Value Measurements Using     

December 31, 2011 ($ in millions)

  Level 1   Level 2   Level 3   Total Fair Value 

Assets:

        

Available-for-sale securities:

        

U.S. Treasury and Government agencies

  $171    —       —       171 

U.S. Government sponsored agencies

   —       1,962    —       1,962 

Obligations of states and political subdivisions

   —       101    —       101 

Agency mortgage-backed securities

   —       10,284    —       10,284 

Other bonds, notes and debentures

   —       1,812    —       1,812 

Other securities(a)

   185    5    —       190 
  

 

 

   

 

 

   

 

 

   

 

 

 

Available-for-sale securities(a)

   356    14,164    —       14,520 

Trading securities:

        

Obligations of states and political subdivisions

   —       8    1    9 

Agency mortgage-backed securities

   —       11    —       11 

Other bonds, notes and debentures

   —       13    —       13 

Other securities

   144    —       —       144 
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading securities

   144    32    1    177 

Residential mortgage loans held for sale

   —       2,751    —       2,751 

Residential mortgage loans(b)

   —       —       65    65 

Derivative assets:

        

Interest rate contracts

   8    1,773    34    1,815 

Foreign exchange contracts

   —       294    —       294 

Equity contracts

   —       —       113    113 

Commodity contracts

   —       134    —       134 
  

 

 

   

 

 

   

 

 

   

 

 

 

Derivative assets

   8    2,201    147    2,356 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $508    19,148    213    19,869 
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        

Derivative liabilities

        

Interest rate contracts

  $54    802    2    858 

Foreign exchange contracts

   —       275    —       275 

Equity contracts

   —       —       81    81 

Commodity contracts

   —       130    —       130 
  

 

 

   

 

 

   

 

 

   

 

 

 

Derivative liabilities

   54    1,207    83    1,344 

Short positions

   2    4    —       6 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $56    1,211    83    1,350 
  

 

 

   

 

 

   

 

 

   

 

 

 

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

    Fair Value Measurements Using     

June 30, 2011 ($ in millions)

  Level 1   Level 2   Level 3   Total Fair Value 

Assets:

        

Available-for-sale securities:

        

U.S. Treasury and government agencies

  $206    —       —       206 

U.S. Government sponsored agencies

   —       2,259    —       2,259 

Obligations of states and political subdivisions

   —       115    —       115 

Agency mortgage-backed securities

   —       10,740    —       10,740 

Other bonds, notes and debentures

   —       1,146    —       1,146 

Other securities(a)

   188    7    —       195 
  

 

 

   

 

 

   

 

 

   

 

 

 

Available-for-sale securities(a)

   394    14,267    —       14,661 

Trading securities:

        

Obligations of states and political subdivisions

   —       37    1    38 

Agency mortgage-backed securities

   —       33    —       33 

Other bonds, notes and debentures

   —       11    —       11 

Other securities

   135    —       —       135 
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading securities

   135    81    1    217 

Residential mortgage loans held for sale

   —       978    —       978 

Residential mortgage loans(b)

   —       —       59    59 

Derivative assets:

        

Interest rate contracts

   6    1,463    9    1,478 

Foreign exchange contracts

   —       295    —       295 

Equity contracts

   —       —       106    106 

Commodity contracts

   —       85    —       85 
  

 

 

   

 

 

   

 

 

   

 

 

 

Derivative assets

   6    1,843    115    1,964 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $535    17,169    175    17,879 
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        

Derivative liabilities

        

Interest rate contracts

  $9    762    4    775 

Foreign exchange contracts

   —       283    —       283 

Equity contracts

   —       —       21    21 

Commodity contracts

   —       78    —       78 
  

 

 

   

 

 

   

 

 

   

 

 

 

Derivative liabilities

   9    1,123    25    1,157 

Short positions

   6    6    —       12 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $15    1,129    25    1,169 
  

 

 

   

 

 

   

 

 

   

 

 

 

 

    Fair Value Measurements Using     

March 31, 2011 ($ in millions)

  Level 1   Level 2   Level 3   Total Fair Value 

Assets:

        

Available-for-sale securities:

        

U.S. Treasury and government agencies

  $228    —       —       228 

U.S. Government sponsored agencies

   —       1,739    —       1,739 

Obligations of states and political subdivisions

   —       153    —       153 

Agency mortgage-backed securities

   —       10,785    —       10,785 

Other bonds, notes and debentures

   —       1,183    —       1,183 

Other securities(a)

   174    5    —       179 
  

 

 

   

 

 

   

 

 

   

 

 

 

Available-for-sale securities(a)

   402    13,865    —       14,267 

Trading securities:

        

Obligations of states and political subdivisions

   —       20    1    21 

Agency mortgage-backed securities

   —       35    —       35 

Other bonds, notes and debentures

   —       11    —       11 

Other securities

   50    99    —       149 
  

 

 

   

 

 

   

 

 

   

 

 

 

Trading securities

   50    165    1    216 

Residential mortgage loans held for sale

   —       1,017    —       1,017 

Residential mortgage loans(b)

   —       —       54    54 

Derivative assets:

        

Interest rate contracts

   3    1,295    12    1,310 

Foreign exchange contracts

   —       315    —       315 

Equity contracts

   —       —       78    78 

Commodity contracts

   —       123    —       123 
  

 

 

   

 

 

   

 

 

   

 

 

 

Derivative assets

   3    1,733    90    1,826 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total assets

  $455    16,780    145    17,380 
  

 

 

   

 

 

   

 

 

   

 

 

 

Liabilities:

        

Derivative liabilities

        

Interest rate contracts

  $10    710    2    722 

Foreign exchange contracts

   —       307    —       307 

Equity contracts

   —       —       38    38 

Commodity contracts

   —       116  �� —       116 
  

 

 

   

 

 

   

 

 

   

 

 

 

Derivative liabilities

   10    1,133    40    1,183 

Short positions

   8    2    —       10 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total liabilities

  $18    1,135    40    1,193 
  

 

 

   

 

 

   

 

 

   

 

 

 
(a)Excludes FHLB and FRB restricted stock totaling$497 and$345346, respectively, atMarch 31,June 30, 2012, $497 and $345, respectively, at December 31, 2011, and $524$497 and $344, respectively at March 31,June 30, 2011.
(b)Includes residential mortgage loans originated as held for sale and subsequently transferred to held for investment.
(c)During the three months ended March 31,June 30, 2012, no assets or liabilities were transferred between Level 1 and Level 2.

The following is a description of the valuation methodologies used for significant instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-sale and trading securities

Where quoted prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy. Level 1 securities include government bonds and exchange traded equities. If quoted market prices are not available, then fair values are estimated using pricing models, quoted prices of securities with similar characteristics, or discounted cash flows. Examples of such instruments, which are classified within Level 2 of the valuation hierarchy, include agency and non-agency mortgage-backed securities, other asset-backed securities, obligations of U.S. Government sponsored agencies, and corporate and municipal bonds. Agency mortgage-backed securities, obligations of U.S. Government sponsored agencies, and corporate and municipal bonds are generally valued using a market approach based on observable prices of securities with similar characteristics.

Non-agency mortgage-backed securities and other asset-backed securities are generally valued using an income approach based on discounted cash flows, incorporating prepayment speeds, performance of underlying collateral and specific tranche-level attributes. In certain cases where there is limited activity or less transparency around inputs to the valuation, securities are classified within Level 3 of the valuation hierarchy.

Residential mortgage loans held for sale

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

Residential mortgage loans held for sale

For residential mortgage loans held for sale, fair value is estimated based upon mortgage-backed securities prices and spreads to those prices or, for certain ARM loans, DCF models that may incorporate the anticipated portfolio composition, credit spreads of asset-backed securities with similar collateral and market conditions. The anticipated portfolio composition includes the effect of interest rate spreads and discount rates due to loan characteristics such as the state in which the loan was originated, the loan amount and the ARM margin. Residential mortgage loans held for sale that are valued based on mortgage backed securities prices are classified within Level 2 of the valuation hierarchy as the valuation is based on external pricing for similar instruments. ARM loans classified as held for sale are also classified within Level 2 of the valuation hierarchy due to the use of observable inputs in the DCF model. These observable inputs include interest rate spreads from agency mortgage-backed securities market rates and observable discount rates.

Residential mortgage loans

Residential mortgage loans held for sale that are reclassified to held for investment are transferred from Level 2 to Level 3 of the fair value hierarchy. It is the Bancorp’s policy to value any transfers between levels of the fair value hierarchy based on end of period fair values.

For residential mortgage loans reclassified from held for sale to held for investment, the fair value estimation is based on mortgage-backed securities prices, interest rate risk and an internally developed credit component. Therefore, these loans are classified within Level 3 of the valuation hierarchy. An adverse change in the loss rate or severity assumption would result in a decrease in fair value of the related loan. The Secondary Marketing Department, which reports to the Bancorp’s Chief Operating Officer, in conjunction with the Consumer Credit Risk Department, which reports to the Bancorp’s Chief Risk Officer, are responsible for determining the valuation methodology for residential mortgage loans held for investment. The Secondary Marketing Department reviews loss severity assumptions quarterly to determine if adjustments are necessary based on decreases in observable housing market data. This group also reviews trades in comparable benchmark securities and adjusts the values of loans as necessary. Consumer Credit Risk is responsible for the credit component of the fair value which is based on internally developed loss rate models that take into account historical loss rates and loss severities based on underlying collateral values.

Derivatives

Exchange-traded derivatives valued using quoted prices and certain over-the-counter derivatives valued using active bids are classified within Level 1 of the valuation hierarchy. Most derivative contracts are valued using discounted cash flow or other models that incorporate current market interest rates, credit spreads assigned to the derivative counterparties and other market parameters and, therefore, are classified within Level 2 of the valuation hierarchy. Such derivatives include basic and structured interest rate swaps and options. Derivatives that are valued based upon models with significant unobservable market parameters are classified within Level 3 of the valuation hierarchy. At March 31,June 30, 2012, December 31, 2011 and March 31,June 30, 2011, derivatives classified as Level 3, which are valued using an option-pricing model containing unobservable inputs, consisted primarily of warrants and put rights associated with the sale of the processing business to Advent International and a total return swap associated with the Bancorp’s sale of Visa, Inc. Class B shares. Level 3 derivatives also include interest rate lock commitments, which utilize internally generated loan closing rate assumptions as a significant unobservable input in the valuation process.

In connection with the sale of the processing business, the Bancorp provided Advent International with certain put options that were exercisable in the event of certain circumstances. In addition, the associated warrants allow the Bancorp to purchase approximately 20 million incremental nonvoting units in Vantiv Holding, LLC under certain defined conditions involving change of control. The put options expired as a result of the Vantiv, Inc. initial public offering in March of 2012. The fair value of the warrants areis calculated in conjunction with a third party valuation provider by applying Black-Scholes option valuation models using probability weighted scenarios.

For the warrants, an increase in the expected term (years), the expected volatility and the risk free rate assumptions would result in an increase in the fair value; correspondingly, a decrease in these assumptions would result in a decrease in the fair value. The Accounting and Treasury Departments, both of which report to the Bancorp’s Chief Financial Officer, determined the valuation methodology for the warrants and put option. Accounting and Treasury review changes in fair value on a quarterly basis for reasonableness based on changes in historical and implied volatilities, probability weightings of the related scenarios, and other assumptions.

Under the terms of the total return swap, the Bancorp will make or receive payments based on subsequent changes in the conversion rate of the Visa, Inc. Class B shares into Class A shares. The fair value of the total return swap was calculated using a discounted cash flow model based on unobservable inputs consisting of management’s estimate of the probability of certain litigation scenarios, timing of litigation settlements and payments related to the swap. The significant assumptions used in the model as of March 31,June 30, 2012 are the Visa litigation loss estimate in excess, or shortfall, of the Bancorp’s proportional share of escrow funds and the timing of the resolution of the Covered Litigation.

An increase in the loss estimate or a delay in the resolution of the Covered Litigation would result in an increase in fair value; correspondingly, a decrease in the loss estimate or an acceleration of the resolution of the Covered Litigation would result in a decrease in fair value. The Accounting and Treasury Departments determined the valuation methodology for the total return swap. Accounting and Treasury review the changes in fair value on a quarterly basis for reasonableness based on Visa stock price changes, litigation contingencies, and escrow funding.

The net fair value of the interest rate lock commitments at June 30, 2012 was $54 million. Immediate decreases in current interest rates of 25

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

The net fair value of the interest rate lock commitments at March 31, 2012 was $18 million. Immediate decreases in current interest rates of 25 bps and 50 bps would result in increases in the fair value of the interest rate lock commitments of approximately $24$18 million and $43$32 million, respectively. Immediate increases of current interest rates of 25 bps and 50 bps would result in decreases in the fair value of the interest rate lock commitments of approximately $29$22 million and $60$51 million, respectively. The decrease in fair value of interest rate lock commitments due to immediate 10% and 20% adverse changes in the assumed loan closing rates would be approximately $2$6 million and $3$11 million, respectively, and the increase in fair value due to immediate 10% and 20% favorable changes in the assumed loan closing rates would be approximately $2$6 million and $3$11 million, respectively. These sensitivities are hypothetical and should be used with caution, as changes in fair value based on a variation in assumptions typically cannot be extrapolated because the relationship of the change in assumptions to the change in fair value may not be linear.

The Secondary Marketing Department and the Consumer Line of Business Finance Department, which reports to the Bancorp’s Chief Financial Officer, are responsible for determining the valuation methodology for IRLCs. Secondary Marketing, in conjunction with a third party valuation provider, periodically review closing rate assumptions and recent loan sales to determine if adjustments are needed for current market conditions not reflected in historical data.

The following tables are a reconciliation of assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3):

 

  Fair Value Measurements Using Significant Unobservable Inputs (Level  3)   Fair Value Measurements Using Significant Unobservable Inputs (Level  3) 
  Trading
Securities
  Residential
Mortgage
Loans
  Interest Rate
Derivatives,
Net(a)
  Equity
Derivatives,
Net(a)
  Total
Fair  Value
 
For the three months ended March 31, 2012   
For the three months ended June 30, 2012  Trading
Securities
   Residential
Mortgage
Loans
  

Interest Rate

Derivatives,

 

Equity

Derivatives,

 Total
Fair Value
 

($ in millions)

  Trading
Securities
  Residential
Mortgage
Loans
  Interest Rate
Derivatives,
Net(a)
  Equity
Derivatives,
Net(a)
  Total
Fair  Value
    Net(a) Net(a) 

Beginning balance

     $1    67   17    135    220 

Total gains or losses (realized/unrealized):

          

Included in earnings

   —      (1  49    28    76    —       —      125    45    170 

Purchases

   —      —      —      —      —       —       —      —      —      —    

Settlements

   —      (3  (64  75    8    —       (3  (88  4    (87

Transfers into Level 3(b)

   —      6   —      —      6    —       12   —      —      12 
  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

 

Ending balance

  $1   67   17    135   $220   $1    76   54    184    315 
  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

 

Changes in unrealized gains or losses for the period included in earnings for assets held at March 31, 2012(c)

  $—      (1  17    28   $44 

Changes in unrealized gains or losses for the period included in earnings for assets held at June 30, 2012(c)

  $—       —      54    45    99 
  

 

  

 

  

 

  

 

  

 

   

 

   

 

  

 

  

 

  

 

 
  Fair Value Measurements Using Significant Unobservable Inputs (Level  3) 
  Trading
Securities
  Residential
Mortgage
Loans
  Interest Rate
Derivatives,
Net(a)
  Equity
Derivatives,
Net(a)
  Total
Fair Value
 
For the three months ended March 31, 2011   

($ in millions)

   

Beginning balance

  $6   46   2    53   $107 

Total gains or losses (realized/unrealized):

      

Included in earnings

   —      —      24    (13  11 

Included in other comprehensive income

   —      —      —      —      —    

Sales

   (5     (5

Settlements

   —      (2  (16  —      (18

Transfers into Level 3(b)

   —      10   —      —      10 
  

 

  

 

  

 

  

 

  

 

 

Ending balance

  $1   54   10    40   $105 
  

 

  

 

  

 

  

 

  

 

 

The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at March 31, 2011(c)

  $—      —      8    (12 $(4
  

 

  

 

  

 

  

 

  

 

 

    Fair Value Measurements Using Significant Unobservable Inputs (Level  3) 
For the three months ended June 30, 2011  Trading
Securities
   Residential
Mortgage
Loans
  

Interest Rate

Derivatives,

  

Equity

Derivatives,

  Total
Fair Value
 

($ in millions)

     Net(a)  Net(a)  

Beginning balance

  $1    54   10    40    105 

Total gains or losses (realized/unrealized):

       

Included in earnings

   —       1   31    26    58 

Included in other comprehensive income

   —       —      —      —      —    

Sales

   —       —      —      —      —    

Settlements

   —       (1  (36  19    (18

Transfers into Level 3(b)

   —       5   —      —      5 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  $1    59   5    85    150 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2011(c)

  $—       1   4    26    31 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

    Fair Value Measurements Using Significant Unobservable Inputs (Level  3) 
For the six months ended June 30, 2012  Trading
Securities
   Residential
Mortgage

Loans
  Interest Rate
Derivatives,
  Equity
Derivatives,
  Total
Fair Value
 

($ in millions)

     Net(a)  Net(a)  

Beginning balance

  $1    65   32    32    130 

Total gains or losses (realized/unrealized):

       

Included in earnings

   —       —      175    74    249 

Purchases

   —       —      —      —      —    

Settlements

   —       (6  (153  78    (81

Transfers into Level 3(b)

   —       17   —      —      17 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  $1    76   54    184    315 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

Changes in unrealized gains or losses for the period included in earnings for assets held at June 30, 2012(c)

  $—       —      71    74    145 
  

 

 

   

 

 

  

 

 

  

 

 

  

 

 

 

    Fair Value Measurements Using Significant Unobservable Inputs (Level  3) 
For the six months ended June 30, 2011  Trading
Securities
  Residential
Mortgage

Loans
  Interest Rate
Derivatives,
  Equity
Derivatives,
  Total
Fair Value
 

($ in millions)

    Net(a)  Net(a)  

Beginning balance

  $6   46   2    53   $107 

Total gains or losses (realized/unrealized):

      

Included in earnings

   —      1   55    13    69 

Included in other comprehensive income

   —      —      —      —      —    

Sales

   (5  —      —      —      (5

Settlements

   —      (3  (52  19    (36

Transfers into Level 3(b)

   —      15   —      —      15 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

Ending balance

  $1   59   5    85   $150 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at June 30, 2011(c)

  $—      1   4    13   $18 
  

 

 

  

 

 

  

 

 

  

 

 

  

 

 

 

 

(a)Net interest rate derivatives include derivative assets and liabilities of$2155and$41,, respectively, as ofMarch 31,June 30, 2012 and $12$9 and $2,$4, respectively, as of March 31,June 30, 2011. Net equity derivatives include derivative assets and liabilities of$159214 and$2430, respectively, as ofMarch 31, June 30,2012,, and $78$106 and $38,$21, respectively, as of March 31,June 30, 2011.
(b)Includes residential mortgage loans held for sale that were transferred to held for investment.
(c)Includes interest income and expense.

The total gains and losses included in earnings for assets and liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) were recorded in the Condensed Consolidated Statements of Income as follows:

   For the three months
ended June 30,
   For the six months
ended June 30,
 

($ in millions)

  2012   2011   2012   2011 

Mortgage banking net revenue

   125    33    175    57 

Other noninterest income

   45    25    74    12 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gains

  $170    58    249    69 
  

 

 

   

 

 

   

 

 

   

 

 

 

The total gains and losses included in earnings attributable to changes in unrealized gains and losses related to Level 3 assets and liabilities still held at June 30, 2012 and 2011 were recorded in the Condensed Consolidated Statements of Income as follows:

   For the three months
ended June 30,
   For the six months
ended June 30,
 

($ in millions)

  2012   2011   2012   2011 

Mortgage banking net revenue

   54    6    71    6 

Other noninterest income

   45    25    74    12 
  

 

 

   

 

 

   

 

 

   

 

 

 

Total gains

  $99    31    145    18 
  

 

 

   

 

 

   

 

 

   

 

 

 

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

   For the three months
ended March 31,
 

($ in millions)

  2012   2011 

Mortgage banking net revenue

   49    24 

Other noninterest income

   27    (13
  

 

 

   

 

 

 

Total gains

  $76    11 
  

 

 

   

 

 

 

The total gains and losses included in earnings for the three months ended March 31, 2012 and 2011 attributable to changes in unrealized gains and losses related to Level 3 assets and liabilities still held at March 31, 2012 and 2011 were recorded in the Condensed Consolidated Statements of Income as follows:

   For the three months
ended March 31,
 

($ in millions)

  2012   2011 

Mortgage banking net revenue

   16    8 

Corporate banking revenue

   —       (12

Other noninterest income

   28    —    
  

 

 

   

 

 

 

Total (losses) gains

  $44    (4
  

 

 

   

 

 

 

The following table presents information as of March 31,June 30, 2012 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets and liabilities measured on a recurring basis.

 

($’s in millions)                
($ in millions)                

Financial Instrument

  Fair Value   

Valuation Technique

  

Significant Unobservable Inputs

  Ranges of Inputs Weighted-
Average*
   Fair Value   

Valuation Technique

  

Significant Unobservable Inputs

  Ranges of
Inputs
 Weighted-
Average
 

Residential mortgage loans

  $67   Loss rate model  Interest rate risk factor Credit risk factor   

 

(88.3) -16.3

2.3 -61.1


  

 

5.2

4.5


  $76   Loss rate model  Interest rate risk factor Credit risk factor   

 

(90.8) - 16.5

2.2 - 68.4


  

 

5.5

4.4


  

 

       

 

  

 

   

 

       

 

  

 

 

IRLCs, net

   18   Discounted cash flow model  Loan closing rates   9.9 -87.0  56.5   54   Discounted cash flow  Loan closing rates   9.9 - 86.9  54.0
  

 

       

 

  

 

   

 

       

 

  

 

 

Stock warrants associated with the sale of the processing business

   157   Discounted cash flow model  

Expected term (years)

Expected volatility(a)

Risk free rate

Expected dividend rate

   

 

 

 

2.0 -17.3

29.3 -41.7

0.4 -3.3

—  

  

  

  

 

 

 

5.0

35.5

1.0

—  

 

  

   213   Discounted cash flow  

Expected term (years) Expected volatility(a)

Risk free rate

Expected dividend rate

   

 

 

 

1.75 - 17.0

29.0 - 41.2

0.3 - 2.6

—  

  

  

  

 

 

 

4.8

35.4

0.8

—  

  

  

        

 

  

 

 

Swap associated with the sale of Visa, Inc. Class B shares

   (22)    Discounted cash flow model  Timing of the resolution of the Covered Litigation   
 
12/31/13 -
12/31/16
  
  
  NM     (29)    Discounted cash flow  

Timing of the resolution

of the Covered Litigation

   

 

6/30/2013 -

6/30/2015

  

  

  NM  
  

 

       

 

  

 

   

 

       

 

  

 

 

 

(a)Based on historical and implied volatilities of comparable companies assuming similar expected terms.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are measured at fair value on a nonrecurring basis. These assets and liabilities are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. The following tables represent those assets that were subject to fair value adjustments during the quarters ended March 31,June 30, 2012 and 2011 and still held as of the end of the period, and the related losses from fair value adjustments on assets sold during the period as well as assets still held as of the end of the period.

 

        Total Losses 
   Fair Value Measurements Using   For the three months 

As of March 31, 2012($ in millions)

  Level 1   Level 2   Level 3   Total   ended March 31, 2012 

Commercial loans held for sale(a)

  $ —      —      2    2    (1

Commercial and industrial loans

   —       —       69    69    (30

Commercial mortgage loans

   —       —       81    81    (13

Commercial construction loans

   —       —       37    37    (12

MSRs

   —       —       767    767    11 

OREO property

   —       —       120    120    (23
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $—       —       1,076    1,076    (68
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

        Total Losses  Total Losses 
   Fair Value Measurements Using   For the three months
ended June 30, 2012
  For the six  months
ended June 30, 2012
 

As of June 30, 2012($ in millions)

  Level 1   Level 2   Level 3   Total    

Commercial loans held for sale(a)

  $—      —       8    8    (5  (6

Commercial and industrial loans

   —       —       77    77    (25  (56

Commercial mortgage loans

   —       —       95    95    (16  (29

Commercial construction loans

   —       —       26    26    (5  (16

MSRs

   —       —       736    736    (60  (49

OREO property

   —       —       134    134    (22  (45
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total

  $—       —       1,076    1,076    (133  (201
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

 

        Total Losses  Total Losses 
   Fair Value Measurements Using   For the three months  For the six months 

As of June 30, 2011 ($ in millions)

  Level 1   Level 2   Level 3   Total   ended June 30, 2011  ended June 30, 2011 

Commercial loans held for sale(a)

  $—       —       17    17    (9  (25

Commercial and industrial loans

   —       —       115    115    (114  (199

Commercial mortgage loans

   —       —       109    109    (22  (53

Commercial construction loans

   —       —       35    35    (19  (38

MSRs

   —       —       847    847    (63  (27

OREO property

   —       —       153    153    (32  (109
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

Total

  $—       —       1,276    1,276    (259  (451
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

  

 

 

 

 

        Total Losses 
   Fair Value Measurements Using   For the three months 

As of March 31, 2011 ($ in millions)

  Level 1   Level 2   Level 3   Total   ended March 31, 2011 

Commercial loans held for sale(a)

  $—       —       48    48    (16

Commercial and industrial loans

   —       —       104    104    (85

Commercial mortgage loans

   —       —       80    80    (31

Commercial construction loans

   —       —       48    48    (19

MSRs

   —       —       894    894    37 

OREO property

   —       —       173    173    (77
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $—       —       1,347    1,347    (191
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
(a)Includes commercial nonaccrual loans held for sale.

The following table presents information as of March 31,June 30, 2012 about significant unobservable inputs related to the Bancorp’s material categories of Level 3 financial assets and liabilities measured on a nonrecurring basis.

Fifth Third Bancorp and Subsidiaries

($’s in millions)                 

Financial Instrument

  Fair
Value
   

Valuation Technique

  

Significant Unobservable
Inputs

  Ranges of
Inputs
  Weighted-Average 

Commercial loans held for sale

  $2   Appraised value  Cost to sell   NM    10.0

OREO property

   120   Appraised value  Cost to sell   NM    10.0
  

 

 

       

 

 

  

 

 

 

Commercial and industrial loans

   69   Discounted cash flow  Default rates   100  NM  
    model  Loss severities   0 -84.2  15.8
  

 

 

       

 

 

  

 

 

 

Commercial mortgage loans

   81   Discounted cash flow  Default rates   100  NM  
    model  Loss severities   0 -100  23.3
  

 

 

       

 

 

  

 

 

 

Commercial construction loans

   37   Discounted cash flow  Default rates   100  NM  
    model  Loss severities   0 -100  40.9
  

 

 

       

 

 

  

 

 

 
          (Fixed) 14.4

MSRs

   767   Discounted cash flow  Prepayment speed   0 -100  (Adjustable) 26.5
    model      (Fixed) 10.6
      Discount rates   9.4 -18.0  (Adjustable) 11.8
  

 

 

       

 

 

  

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

($ in millions)                 

Financial Instrument

  Fair
Value
   

Valuation Technique

  

Significant Unobservable
Inputs

  Ranges of
Inputs
  Weighted-Average 

Commercial loans held for sale

  $8   Discounted cash flow  Appraised value   NM    NM  
      Cost to sell   NM    10.0
  

 

 

       

 

 

  

 

 

 

Commercial and industrial loans

   77   Discounted cash flow  Default rates   100  NM  
      

Collateral value

   NM    NM  
      Loss severities   0 -100  15.7

Commercial mortgage loans

   95   Discounted cash flow  Default rates   100  NM  
      

Collateral value

   NM    NM  
      Loss severities   0 -100  9.4
  

 

 

       

 

 

  

 

 

 

Commercial construction loans

   26   Discounted cash flow  Default rates   100  NM  
      

Collateral value

   NM    NM  
      Loss severities   0 -62.8  3.6
  

 

 

       

 

 

  

 

 

 
          (Fixed) 15.2

MSRs

   736   Discounted cash flow  Prepayment speed   0 -100  (Adjustable) 27.1
          (Fixed) 10.6
      Discount rates   9.4 -18.0  (Adjustable) 11.7
  

 

 

       

 

 

  

 

 

 

OREO property

   134   Appraised value  Appraised value   NM    NM  
  

 

 

       

 

 

  

 

 

 

Commercial loans held for sale

During the three months ended March 31,second quarter of 2012, the Bancorp transferred $4$3 million of commercial loans from the portfolio to loans held for sale that upon transfer were measured at fair value. These loans, along with existing commercial loans held for sale, had fair value adjustments totaling $1$5 million and $6 million, respectively, for the three and six months ended June 30, 2012 and were based on discounted cash flow models incorporating appraisals of the underlying collateral. Therefore, these loans were classified within Level 3 of the valuation hierarchy. An adverse change in the fair value of the underlying collateral would result in a decrease in the fair value measurement. The Accounting Department determines the procedures for valuation of commercial HFS loans which may include a comparison to recently executed transactions of similar type loans. A monthly review of the portfolio is performed for reasonableness. Quarterly, appraisals approaching a year-old are updated and the Real Estate Valuation group, which reports to the Chief Credit Officer, in conjunction with the Commercial Line of Business review the third party appraisals for reasonableness. Additionally, the Commercial Line of Business Finance Department, which reports to the Bancorp Chief Financial Officer, in conjunction with Accounting review all loan appraisal values, carry values and vintages.

Commercial loans held for investment

During the first quarterhalf of 2012 and 2011, the Bancorp recorded nonrecurring impairment adjustments to certain commercial and industrial, commercial mortgage and commercial construction loans held for investment. Such amounts are generally based on the fair value of the underlying collateral supporting the loan and were classified within Level 3 of the valuation hierarchy. An adverse change in the fair value of the underlying collateral would result in a decrease in the fair value measurement. In cases where the carrying value exceeds the fair value, an impairment loss is recognized. The fair values and recognized impairment losses are reflected in the previous table.

MSRs

MSRs do not trade in an active, open market with readily observable prices. While sales of MSRs do occur, the precise terms and conditions typically are not readily available. Accordingly, the Bancorp estimates the fair value of MSRs using internal discounted cash flow models

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

with certain unobservable inputs, primarily prepayment speed assumptions, discount rates and weighted average lives, resulting in a classification within Level 3 of the valuation hierarchy. Refer to Note 9 for further information on the assumptions used in the valuation of the Bancorp’s MSRs. The Secondary Marketing Department and Treasury Department are responsible for determining the valuation methodology for MSRs. Representatives from Secondary Marketing, Treasury, Accounting and Risk Management are responsible for reviewing key assumptions used in the internal discounted cash flow model. Two external valuations of the MSR portfolio are obtained from third parties that use valuation models in order to assess the reasonableness of the internal discounted cash flow model. Additionally, the Bancorp participates in peer surveys that provide additional confirmation of the reasonableness of key assumptions utilized in the MSR valuation process and the resulting MSR prices.

OREO

During the first quarterhalf of 2012 and 2011, the Bancorp recorded nonrecurring adjustments to certain commercial and residential real estate properties classified as OREO and measured at the lower of carrying amount or fair value, less costs to sell. Nonrecurringvalue. These nonrecurring losses included in the above table are primarily due to declines in real estate values of the OREO properties. These losses include $6$3 million and $9 million in losses, recorded as charge-offs, on new OREO properties transferred from loans during the periodthree and $17six months ended June 30, 2012, respectively, and $19 million and $36 million in losses for the three and six months ended June 30, 2012, recorded in other noninterest income, attributable to fair value

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

adjustments on OREO properties subsequent to their transfer from loans. Such fair value amounts are generally based on appraisals of the property values, resulting in a classification within Level 3 of the valuation hierarchy. In cases where the carrying amount exceeds the fair value, less costs to sell, an impairment loss is recognized. The previous tables reflect the fair value measurements of the properties before deducting the estimated costs to sell.

Fair Value Option

The Bancorp elected to measure certain residential mortgage loans held for sale under the fair value option as allowed under U.S. GAAP. Electing to measure residential mortgage loans held for sale at fair value reduces certain timing differences and better matches changes in the value of these assets with changes in the value of derivatives used as economic hedges for these assets. Management’s intent to sell residential mortgage loans classified as held for sale may change over time due to such factors as changes in the overall liquidity in markets or changes in characteristics specific to certain loans held for sale. Consequently, these loans may be reclassified to loans held for investment and maintained in the Bancorp’s loan portfolio. In such cases, the loans will continue to be measured at fair value. Residential loans with fair values of $6 million and $10 million were transferred to the Bancorp’s portfolio during the three months ended March 31, 2012 and 2011, respectively. The net impact related to fair value adjustments on these loans was a loss of $1 million during the three months ended March 31, 2012. Fair value adjustments on residential mortgage loans transferred to the Bancorp’s portfolio during the first quarter of 2011 were immaterial.

Fair value changes included in earnings for each of the three and six months ended June 30, 2012 for instruments held at March 31,June 30, 2012 and 2011 for which the fair value option was elected including changes in fair value of the underlying IRLCs included gains of $109 million and losses of $8 million, respectively.$97 million. Additionally, fair value changes included in earnings for the three and six months ended June 30, 2012 for instruments for which the fair value option was elected but are no longer held by the Bancorp at March 31,June 30, 2012 included gains of $109 million and $267 million, respectively. Fair value changes included in earnings for each of the three and six months ended June 30, 2011 for instruments held at June 30, 2011 for which the fair value option was elected including changes in fair value of the underlying IRLCs included gains of $35 million. Additionally, fair value changes included in earnings for the three and six months ended June 30, 2011 for instruments for which the fair value option was elected but are no longer held by the Bancorp at June 30, 2011 included gains of $188$41 and $73 million, and losses of $18 million during the first quarter of 2012 and 2011, respectively. These gains and losses are reported in mortgage banking net revenue in the Condensed Consolidated Statements of Income.

Valuation adjustments related to instrument-specific credit risk for residential mortgage loans measured at fair value negatively impacted the fair value of those loans by $3 million at March 31,June 30, 2012, $3 million at December 31, 2011 and $5$4 million at March 31,June 30, 2011. Interest on residential mortgage loans measured at fair value is accrued as it is earned using the effective interest method and is reported as interest income in the Condensed Consolidated Statements of Income.

The following table summarizes the difference between the fair value and the principal balance for residential mortgage loans measured at fair value as of:

 

($ in millions)

  Aggregate
Fair Value
   Aggregate Unpaid
Principal Balance
   Difference 

March 31, 2012

      

Residential mortgage loans measured at fair value

  $1,496    1,443    53 

Past due loans of 90 days or more

   4    4    —    

Nonaccrual loans

   —       —       —    

December 31, 2011

      

Residential mortgage loans measured at fair value

   2,816    2,693    123 

Past due loans of 90 days or more

   4    5    (1

March 31, 2011

      

Residential mortgage loans measured at fair value

  $1,071    1,040    31 

Past due loans of 90 days or more

   4    4    —    

Nonaccrual loans

   1    1    —    

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

($ in millions)

  Aggregate
Fair Value
   Aggregate Unpaid
Principal Balance
   Difference 

June 30, 2012

      

Residential mortgage loans measured at fair value

  $1,864    1,767    97 

Past due loans of 90 days or more

   3    4    (1

Nonaccrual loans

   —       —       —    

December 31, 2011

      

Residential mortgage loans measured at fair value

   2,816    2,693    123 

Past due loans of 90 days or more

   4    5    (1

Nonaccrual loans

   —       —       —    

June 30, 2011

      

Residential mortgage loans measured at fair value

   1,037    1,002    35 

Past due loans of 90 days or more

   3    4    (1

Nonaccrual loans

   —       —       —    

Fair Value of Certain Financial Instruments

The following tables summarize the carrying amounts and estimated fair values for certain financial instruments, excluding financial instruments measured at fair value on a recurring basis.

Fifth Third Bancorp and Subsidiaries

    Net Carrying  Fair Value Measurements Using   Total 

As of March 31, 2012 ($ in millions)

  Amount  Level 1   Level 2   Level 3   Fair Value 

Financial assets:

         

Cash and due from banks

  $2,235   2,235    —       —       2,235 

Other securities

   842   —       842    —       842 

Held-to-maturity securities

   321   —       —       321    321 

Other short-term investments

   1,628   1,628    —       —       1,628 

Loans held for sale

   155   —       —       155    155 

Portfolio loans and leases:

         

Commercial and industrial loans

   31,269   —       —       32,075    32,075 

Commercial mortgage loans

   9,507   —       —       8,697    8,697 

Commercial construction loans

   838   —       —       689    689 

Commercial leases

   3,439   —       —       3,203    3,203 

Residential mortgage loans(a)

   10,794   —       —       10,627    10,627 

Home equity

   10,309   —       —       9,866    9,866 

Automobile loans

   11,792   —       —       11,755    11,755 

Credit card

   1,798   —       —       1,903    1,903 

Other consumer loans and leases

   302   —       —       319    319 

Unallocated allowance for loan and lease losses

   (128  —       —       —       —    
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Total portfolio loans and leases, net(a)

   79,920   —       —       79,134    79,134 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities:

         

Deposits

   85,791     85,912    —       85,912 

Federal funds purchased

   319   319    —       —       319 

Other short-term borrowings

   2,877   —       2,877    —       2,877 

Long-term debt

   9,648   8,305    1,861    —       10,166 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Notes to Condensed Consolidated Financial Statements (unaudited)

    Net Carrying  Fair Value Measurements Using   Total 

As of June 30, 2012 ($ in millions)

  Amount  Level 1   Level 2   Level 3   Fair Value 

Financial assets:

         

Cash and due from banks

  $2,393   2,393    —       —       2,393 

Other securities

   843   —       843    —       843 

Held-to-maturity securities

   305   —       —       305    305 

Other short-term investments

   1,964   1,964    —       —       1,964 

Loans held for sale

   75   —       —       75    75 

Portfolio loans and leases:

         

Commercial and industrial loans

   31,771   —       —       32,928    32,928 

Commercial mortgage loans

   9,279   —       —       8,519    8,519 

Commercial construction loans

   773   —       —       622    622 

Commercial leases

   3,393   —       —       3,283    3,283 

Residential mortgage loans(a)

   11,121   —       —       11,144    11,144 

Home equity

   10,208   —       —       9,917    9,917 

Automobile loans

   11,702   —       —       11,672    11,672 

Credit card

   1,853   —       —       1,999    1,999 

Other consumer loans and leases

   288   —       —       305    305 

Unallocated allowance for loan and lease losses

   (121  —       —       —       —    
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Total portfolio loans and leases, net(a)

  $80,267   —       —       80,389    80,389 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

Financial liabilities:

         

Deposits

   84,273     84,385    —       84,385 

Federal funds purchased

   641   641    —       —       641 

Other short-term borrowings

   4,613   —       4,613    —       4,613 

Long-term debt

   9,685   8,314    2,097    —       10,411 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

 

 

(a)Excludes$6776of residential mortgage loans measured at fair value on a recurring basis.

 

  Net Carrying   

As of December 31, 2011 ($ in millions)

  Net Carrying
Amount
 Fair Value   Amount Fair Value 

Financial assets:

      

Cash and due from banks

  $2,663   2,663   $2,663   2,663 

Other securities

   842   842    842   842 

Held-to-maturity securities

   322   322    322   322 

Other short-term investments

   1,781   1,781    1,781   1,781 

Loans held for sale

   203   203    203   203 

Portfolio loans and leases:

      

Commercial and industrial loans

   29,854   30,300    29,854   30,300 

Commercial mortgage loans

   9,697   8,870    9,697   8,870 

Commercial construction loans

   943   791    943   791 

Commercial leases

   3,451   3,237    3,451   3,237 

Residential mortgage loans(a)

   10,380   9,978    10,380   9,978 

Home equity

   10,524   9,737    10,524   9,737 

Automobile loans

   11,784   11,747    11,784   11,747 

Credit card

   1,872   1,958    1,872   1,958 

Other consumer loans and leases

   329   346    329   346 

Unallocated allowance for loan and lease losses

   (136  —       (136  —    
  

 

  

 

   

 

  

 

 

Total portfolio loans and leases, net(a)

   78,698   76,964   $78,698   76,964 
  

 

  

 

   

 

  

 

 

Financial liabilities:

      

Deposits

   85,710   85,599    85,710   85,599 

Federal funds purchased

   346   346    346   346 

Other short-term borrowings

   3,239   3,239    3,239   3,239 

Long-term debt

   9,682   10,197    9,682   10,197 
  

 

  

 

   

 

  

 

 

 

(a)Excludes $65 of residential mortgage loans measured at fair value on a recurring basis.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

As of March 31, 2011 ($ in millions)

  Net Carrying
Amount
 Fair
Value
 
  Net Carrying   

As of June 30, 2011 ($ in millions)

  Amount Fair Value 

Financial assets:

      

Cash and due from banks

  $2,121   2,121   $2,380   2,380 

Other securities

   868   868    841   841 

Held-to-maturity securities

   346   346    344   344 

Other short-term investments

   2,481   2,481    1,370   1,370 

Loans held for sale

   274   274    207   207 

Portfolio loans and leases:

      

Commercial and industrial loans

   26,251   27,690    27,022   28,447 

Commercial mortgage loans

   9,984   9,053    9,748   9,252 

Commercial construction loans

   1,840   1,309    1,670   1,328 

Commercial leases

   3,271   2,926    3,232   2,917 

Residential mortgage loans(a)

   9,190   8,250    9,522   8,617 

Home equity

   10,981   9,575    10,817   9,660 

Automobile loans

   11,059   11,077    11,254   11,301 

Credit card

   1,668   1,771    1,720   1,795 

Other consumer loans and leases

   507   559    439   482 

Unallocated allowance for loan and lease losses

   (145  —       (130  —    
  

 

  

 

   

 

  

 

 

Total portfolio loans and leases, net(a)

   74,606   72,210   $75,294   73,799 
  

 

  

 

   

 

  

 

 

Financial liabilities:

      

Deposits

   82,317   82,511    80,598   80,770 

Federal funds purchased

   332   332    403   403 

Other short-term borrowings

   1,297   1,297    2,702   2,702 

Long-term debt

   10,555   11,088    10,152   10,675 
  

 

  

 

   

 

  

 

 

 

(a)Excludes $54$59 million of residential mortgage loans measured at fair value on a recurring basis.

Cash and due from banks, other securities, other short-term investments, deposits, federal funds purchased and other short-term borrowings

For financial instruments with a short-term or no stated maturity, prevailing market rates and limited credit risk, carrying amounts approximate fair value. Those financial instruments include cash and due from banks, FHLB and FRB restricted stock, other short-term investments, certain deposits (demand, interest checking, savings, money market and foreign office deposits), and federal funds purchased. Fair values for other time deposits, certificates of deposit $100,000 and over and other short-term borrowings were estimated using a discounted cash flow calculation that applied prevailing LIBOR/swap interest rates for the same maturities.

Held-to-maturity securities

The Bancorp’s held-to-maturity securities are primarily composed of instruments that provide income tax credits as the economic return on the investment. The fair value of these instruments is estimated based on current U.S. Treasury tax credit rates.

Loans held for sale

Fair values for commercial loans held for sale were valued based on executable bids when available, or on discounted cash flow models incorporating appraisals of the underlying collateral, as well as assumptions about investor return requirements and amounts and timing of expected cash flows. Fair values for other consumer loans held for sale are based on contractual values upon which the loans may be sold to a third party, and approximate their carrying value.

Portfolio loans and leases, net

Fair values were estimated by discounting future cash flows using the current market rates of loans to borrowers with similar credit characteristics and similar remaining maturities.

Long-term debt

Fair value of long-term debt was based on quoted market prices, when available, or a discounted cash flow calculation using LIBOR/swap interest rates and, in some cases, a spread for new issuances with similar terms.

19.20. Business Segments

The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors. Results of the Bancorp’s business segments are presented based on its management structure and management accounting practices. The structure and accounting practices are specific to the Bancorp; therefore, the financial results of the Bancorp’s business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as management’s accounting practices are improved and businesses change.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

The Bancorp manages interest rate risk centrally at the corporate level by employing a FTP methodology. This methodology insulates the business segments from interest rate volatility, enabling them to focus on serving customers through loan originations and deposit taking. The

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

FTP system assigns charge rates and credit rates to classes of assets and liabilities, respectively, based on expected duration and the LIBORU.S. swap curve. Matching duration allocates interest income and interest expense to each segment so its resulting net interest income is insulated from interest rate risk. In a rising rate environment, the Bancorp benefits from the widening spread between deposit costs and wholesale funding costs. However, the Bancorp’s FTP system credits this benefit to deposit-providing businesses, such as Branch Banking and Investment Advisors, on a duration-adjusted basis. The net impact of the FTP methodology is captured in General Corporate and Other.

The Bancorp adjusts the FTP charge and credit rates as dictated by changes in interest rates for various interest-earning assets and liabilities and by the review of the estimated durations for the indeterminate-lived deposits. The credit rate provided for DDAs is reviewed annually based upon the account type, its estimated duration and the corresponding fed funds, LIBORU.S. swap curve or swap rate. The credit rates for several deposit products were reset January 1, 2012 to reflect the current market rates and updated market assumptions. These rates were lower than those in place during 2011, thus net interest income for deposit providing businesses was negatively impacted during 2012.

The business segments are charged provision expense based on the actual net charge-offs experienced by the loans owned by each segment. Provision expense attributable to loan growth and changes in factors in the ALLL are captured in General Corporate and Other. The financial results of the business segments include allocations for shared services and headquarters expenses. Even with these allocations, the financial results are not necessarily indicative of the business segments’ financial condition and results of operations as if they existed as independent entities. Additionally, the business segments form synergies by taking advantage of cross-sell opportunities and when funding operations, by accessing the capital markets as a collective unit.

 

  Commercial   Branch   Consumer   Investment   General     

($ in millions, except per share data)

  Banking   Banking   Lending   Advisors   Corporate Eliminations Total 

Three months ended March 31, 2012

            

($ in millions)

  Commercial
Banking
   Branch
Banking
   Consumer
Lending
   Investment
Advisors
   General
Corporate
 Eliminations Total 

Three months ended June 30, 2012

            

Net interest income

  $348    335    80    27    108   —      898   $348    342    77    29    99   —      895 

Provision for loan and lease losses

   76    86    54    3    (128  —      91    61    69    49    2    (110  —      71 

Net interest income after provision for loan and lease losses

   272    249    26    24    236   —      807 
  

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Net interest income after provision for loan

            

and lease losses

   287    273    28    27    209   —      824 

Noninterest income:

                        

Mortgage banking net revenue

   —       3    201    —       —      —      204    —       4    179    —       —      —      183 

Service charges on deposits

   54    74    —       1    —      —      129    54    75    —       1    —      —      130 

Corporate banking revenue

   93    3    —       1    —       97    97    4    —       1    —      —      102 

Investment advisory revenue

   2    31    —       94    —      (31)(a)   96    2    32    —       91    —      (32)(a)   93 

Card and processing revenue

   12    60    —       1    (14  —      59    12    70    —       1    (19  —      64 

Other noninterest income

   16    19    10    —       130   —      175    12    20    10    4    57   —      103 

Securities gains, net

   —       —       —       —       9   —      9    —       —       —       —       3   —      3 

Securities gains, net—non-qualifying hedges on mortgage servicing rights

   —       —       —       —       —      —      —       —       —       —       —       —      —      —    
  

 

   

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total noninterest income

   177    190    211    97    125   (31  769    177    205    189    98    41   (32  678 

Noninterest expense:

                        

Salaries, wages and incentives

   58    112    44    35    150   —      399    56    113    47    35    142   —      393 

Employee benefits

   16    37    12    9    38   —      112    9    30    9    6    30   —      84 

Net occupancy expense

   5    47    2    3    20   —      77    5    47    2    3    17   —      74 

Technology and communications

   2    1    —       —       44   —      47    2    1    —       —       45   —      48 

Card and processing expense

   1    28    —       —       1   —      30    1    29    —       —       —      —      30 

Equipment expense

   1    13    —       —       13   —      27    —       13    —       —       14   —      27 

Other noninterest expense

   205    156    104    63    (216  (31  281    196    168    108    68    (227  (32  281 
  

 

   

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total noninterest expense

   288    394    162    110    50   (31  973    269    401    166    112    21   (32  937 
  

 

   

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Income before income taxes

   161    45    75    11    311   —      603    195    77    51    13    229   —      565 

Applicable income tax expense

   19    16    27    4    107   —      173    32    27    18    5    98   —      180 
  

 

   

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Net income

   142    29    48    7    204   —      430    163    50    33    8    131   —      385 

Less: Net income attributable to noncontrolling interests

   —       —       —       —       —      —      —    

Less: Net income attributable to noncontrolling interest

   —       —       —       —       —      —      —    
  

 

   

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Net income attributable to Bancorp

   142    29    48    7    204   —      430    163    50    33    8    131   —      385 

Dividends on preferred stock

   —       —       —       —       9   —      9    —       —       —       —       9   —      9 
  

 

   

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Net income available to common shareholders

  $142    29    48    7    195   —      421   $163    50    33    8    122   —      376 
  

 

   

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total goodwill

  $613    1,656    —       148    —      —      2,417   $613    1,656    —       148    —      —      2,417 
  

 

   

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total assets

  $46,388    48,544    23,155    7,684    (9,024  —      116,747   $46,691    48,156    23,538    7,721    (8,563  —      117,543 
  

 

   

 

   

 

   

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

(a) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Condensed Consolidated Statements of Income.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

($ in millions)

  Commercial
Banking
  Branch
Banking
   Consumer
Lending
   Investment
Advisors
   General
Corporate
  Eliminations
  Total 

Three months ended June 30, 2011

           

Net interest income

  $334   359    81    28    62   —      864 

Provision for loan and lease losses

   147   98    55    4    (191  —      113 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net interest income after provision for loan and lease losses

   187   261    26    24    253   —      751 

Noninterest income:

           

Mortgage banking net revenue

   —      2    160    —       —      —      162 

Service charges on deposits

   52   73    —       1    —      —      126 

Corporate banking revenue

   90   4    —       1    —      —      95 

Investment advisory revenue

   3   29    —       92    —      (29)(a)   95 

Card and processing revenue

   10   86    —       1    (8  —      89 

Other noninterest income

   8   19    7    —       49   —      83 

Securities gains, net

   —      —       —       —       6   —      6 

Securities gains, net—non-qualifying hedges on mortgage servicing rights

   —      —       —       —       —      —      —    
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Total noninterest income

   163   213    167    95    47   (29  656 

Noninterest expense:

           

Salaries, wages and incentives

   50   115    31    36    133   —      365 

Employee benefits

   10   33    8    6    22   —      79 

Net occupancy expense

   5   46    2    3    19   —      75 

Technology and communications

   3   1    1    —       43   —      48 

Card and processing expense

   1   28    —       —       —      —      29 

Equipment expense

   1   13    —       —       14    28 

Other noninterest expense

   206   155    105    59    (219  (29  277 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Total noninterest expense

   276   391    147    104    12   (29  901 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Income before income taxes

   74   83    46    15    288   —      506 

Applicable income tax (benefit) expense

   (14  29    16    5    133   —      169 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net income

   88   54    30    10    155   —      337 

Less: Net income attributable to noncontrolling interest

   —      —       —       —       —      —      —    
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net income attributable to Bancorp

   88   54    30    10    155   —      337 

Dividends on preferred stock

   —      —       —       —       9   —      9 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net income available to common shareholders

  $88   54    30    10    146   —      328 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Total goodwill

  $613   1,656    —       148    —      —      2,417 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Total assets

  $43,571   46,961    22,044    6,833    (8,604  —      110,805 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

 

(a)Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Condensed Consolidated Statements of Income.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

 

 Commercial Branch Consumer Investment   General     

($ in millions, except per share data)

 Banking Banking Lending Advisors   Corporate Eliminations Total 

Three months ended March 31, 2011

        

($ in millions)

  Commercial
Banking
   Branch
Banking
   Consumer
Lending
   Investment
Advisors
   General
Corporate
 Eliminations Total 

Six months ended June 30, 2012

            

Net interest income

 $329   339   90   28    93   —      879   $696    677    157    57    206   —      1,793 

Provision for loan and lease losses

  152   116   94   5    (199  —      168    137    155    103    6    (239  —      162 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Net interest income (loss) after provision for loan and lease losses

  177   223   (4  23    292   —      711 

Net interest income after provision for loan and lease losses

   559    522    54    51    445   —      1,631 

Noninterest income:

                    

Mortgage banking net revenue

  —      3   99   —       —      —      102    —       6    380    1    —      —      387 

Service charges on deposits

  50   73   —      1    —      —      124    109    149    —       2    —      —      260 

Corporate banking revenue

  81   3   —      1    1   —      86    190    7    —       2    —      —      199 

Investment advisory revenue

  3   28   —      95    —      (28)(a)   98    4    64    —       185    1   (64)(a)   190 

Card and processing revenue

  9   77   —      1    (7  —      80    23    130    —       2    (33  —      122 

Other noninterest income

  32   20   10   —       19   —      81    28    39    20    4    188   —      279 

Securities gains, net

  —      —      —      —       8   —      8    —       —       —       —       11   —      11 

Securities gains, net—non-qualifying hedges on mortgage servicing rights

  —      —      5    —       —      —      5     —       —       —       —       —      —      —    
 

 

  

 

  

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total noninterest income

  175   204   114   98    21   (28  584    354    395    400    196    167   (64  1,448 

Noninterest expense:

                    

Salaries, wages and incentives

  45   114   33   34    125   —      351    113    226    91    69    293   —      792 

Employee benefits

  13   34   11   9    30   —      97    24    67    21    15    68   —      195 

Net occupancy expense

  5   46   2   2    22   —      77    11    93    4    6    37   —      151 

Technology and communications

  3   1   —      —       41   —      45    4    2    —       —       89   —      95 

Card and processing expense

  1   28   —      —       —      —      29    2    57    —       —       1   —      60 

Equipment expense

  —      13   —      —       16    29    1    26    —       —       28   —      55 

Other noninterest expense

  201   164   104   62    (213  (28  290    402    324    213    132    (444  (64  563 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total noninterest expense

  268   400   150   107    21   (28  918    557    795    329    222    72   (64  1,911 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Income (loss) before income taxes

  84   27   (40  14    292   —      377 

Applicable income tax (benefit) expense

  (5  9   (14  5    117   —      112 

Income before income taxes

   356    122    125    25    540   —      1,168 

Applicable income tax expense

   51    43    44    9    205   —      352 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Net income (loss)

  89   18   (26  9    175   —      265 

Net income

   305    79    81    16    335   —      816 

Less: Net income attributable to noncontrolling interest

  —      —      —      —       —      —      —       —       —       —       —       1   —      1 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Net income (loss) attributable to Bancorp

  89   18   (26  9    175   —      265 

Net income attributable to Bancorp

   305    79    81    16    334   —      815 

Dividends on preferred stock

  —      —      —      —       177   —      177    —       —       —       —       18   —      18 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Net income (loss) available to common shareholders

 $89   18   (26  9    (2  —      88 

Net income available to common shareholders

  $305    79    81    16    316   —      797 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total goodwill

 $613   1,656   —      148    —      —      2,417   $613    1,656    —       148    —      —      2,417 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

Total assets

 $43,461   47,205   21,982   6,794    (8,957  —      110,485   $46,691    48,156    23,538    7,721    (8,563  —      117,543 
 

 

  

 

  

 

  

 

   

 

  

 

  

 

   

 

   

 

   

 

   

 

   

 

  

 

  

 

 

(a) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Condensed Consolidated Statements of Income

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

 

(a)Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Condensed Consolidated Statements of Income.

($ in millions)

  Commercial
Banking
  Branch
Banking
   Consumer
Lending
   Investment
Advisors
   General
Corporate
  Eliminations  Total 

Six months ended June 30, 2011

           

Net interest income

  $662   698    171    56    156   —      1,743 

Provision for loan and lease losses

   299   214    149    9    (390  —      281 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net interest income after provision for loan and lease losses

   363   484    22    47    546   —      1,462 

Noninterest income:

           

Mortgage banking net revenue

   —      4    259    1    —      —      264 

Service charges on deposits

   101   147    —       2    —      —      250 

Corporate banking revenue

   172   7    —       1    1   —      181 

Investment advisory revenue

   6   58    —       187    —      (58)(a)   193 

Card and processing revenue

   19   163    —       2    (15  —      169 

Other noninterest income

   40   38    17    —       69   —      164 

Securities gains, net

   —      —       —       —       14   —      14 

Securities gains, net—non-qualifying hedges on mortgage servicing rights

   —      —       5    —       —      —      5 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Total noninterest income

   338   417    281    193    69   (58  1,240 

Noninterest expense:

           

Salaries, wages and incentives

   95   229    64    70    258   —      716 

Employee benefits

   22   68    19    15    52   —      176 

Net occupancy expense

   10   92    4    5    41   —      152 

Technology and communications

   6   2    1    1    83   —      93 

Card and processing expense

   2   55    —       —       1   —      58 

Equipment expense

   1   25    —       —       31   —      57 

Other noninterest expense

   408   319    208    121    (431  (58  567 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Total noninterest expense

   544   790    296    212    35   (58  1,819 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Income before income taxes

   157   111    7    28    580   —      883 

Applicable income tax (benefit) expense

   (13  38    2    10    244   —      281 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net income

   170   73    5    18    336   —      602 

Less: Net income attributable to noncontrolling interest

   —      —       —       —       —      —      —    
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net income attributable to Bancorp

   170   73    5    18    336   —      602 

Dividends on preferred stock

   —      —       —       —       185   —      185 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Net income available to common shareholders

  $170   73    5    18    151   —      417 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Total goodwill

  $613   1,656    —       148    —      —      2,417 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

Total assets

  $43,571   46,961    22,044    6,833    (8,604  —      110,805 
  

 

 

  

 

 

   

 

 

   

 

 

   

 

 

  

 

 

  

 

 

 

(a) Revenue sharing agreements between Investment Advisors and Branch Banking are eliminated in the Condensed Consolidated Statements of Income.

Fifth Third Bancorp and Subsidiaries

Notes to Condensed Consolidated Financial Statements (unaudited)

21. Subsequent Events

Redemption of TruPS

On July 2, 2012, the Bancorp announced that it submitted redemption notices to the trustee for redemption on August 15, 2012, of all $575 million of the outstanding TruPS issued by Fifth Third Capital Trust V. The Fifth Third Capital Trust V securities have a current distribution rate of 7.25% and a scheduled maturity date of August 15, 2067, although they may be redeemed at any time on or after August 15, 2012. The redemption price will be $25 per security, which reflects 100% of the liquidation amount, plus accrued and unpaid distributions to the actual redemption date of $0.453125 per security. Additionally, as of June 30, 2012, the Bancorp had $17 million in remaining unamortized debt issuances costs associated with the Fifth Third Capital Trust V issuance that will be recognized as a loss on extinguishment upon redemption of the TruPS in the third quarter of 2012. The redemptions will be funded with available cash.

On July 9, 2012, the Bancorp announced that it submitted redemption notices to the trustee for redemption of the outstanding TruPS issued by Fifth Third Capital Trust VI, and on August 8, 2012, the Bancorp redeemed all $862.5 million of the outstanding TruPS issued by Fifth Third Capital Trust VI. The securities had a distribution rate of 7.25% and a scheduled maturity date of November 15, 2067. Pursuant to the terms of the TruPS, the securities of Fifth Third Capital Trust VI were redeemable within ninety days of a Capital Treatment Event. The Bancorp has determined that a Capital Treatment Event occurred upon the authorization for publication in the Federal Register of a Joint Notice of Proposed Rulemaking by the Board of Governors of the Federal Reserve System, the FDIC and the Office of the Comptroller of the Currency addressing, among other matters, Section 171 of the Dodd-Frank Act of 2010 and providing detailed information regarding the cessation of Tier I capital treatment for outstanding TruPS. The redemption price was $25 per security, which reflected 100% of the liquidation amount, plus accrued and unpaid distributions to the actual redemption date of $0.422917 per security. The Bancorp recognized a $9 million loss on extinguishment of these TruPS on August 8, 2012 which will be reflected in the Bancorp’s Condensed Consolidated Financial Statements for the quarter ending September 30, 2012. The redemptions were funded with available cash.

The pro forma regulatory capital ratios, including the impact of the redemptions of the aforementioned TruPS, for the Bancorp as of June 30, 2012 are as follows:

   As of June
30, 2012
  Pro Forma
Ratio
 

Tier I risk-based capital

   12.31   10.95 

Total risk-based capital

   16.24   14.89 

Tier I leverage

   11.39   10.14 

PART II. OTHER INFORMATION

Legal Proceedings (Item 1)

Refer to Note 1314 of the Notes to Condensed Consolidated Financial Statements in Part I, Item 1 for information regarding legal proceedings.

Risk Factors (Item 1A)

There have been no material changes made during the firstsecond quarter of 2012 to any of the risk factors as previously disclosed in the Registrant’s periodic securities filings.

Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)

Refer to the “Capital Management” section within Management’s Discussion and Analysis in Part I, Item 32 for information regarding purchases and sales of equity securities by the Bancorp during the firstsecond quarter of 2012.

Defaults Upon Senior Securities (Item 3)

None.

Mine Safety Disclosures (Item 4)

Not applicable.

Other Information (Item 5)

None.

Exhibits (Item 6)

 

 3.1SecondThird Amended Articles of Incorporation of Fifth Third Bancorp, as amended. Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008.

 

 3.2Amended Code of Regulations of Fifth Third Bancorp as of June 15, 2010. Incorporated by reference to the Registrant’s Current Report on Form 8-K filed on June 21, 2010.

4.1Second Supplemental Indenture dated as of March 7, 2012 between Fifth Third Bancorp and Wilmington Trust Company, as Trustee, to the Indenture for Senior Debt Securities dated as of April 30, 2008 between Fifth Third and the Trustee. Incorporated by reference to the Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on March 7,17, 2012.

 

 4.2Global Security dated as of March 7, 2012 representing Fifth Third Bancorp’s $500,000,000 3.500% Senior Notes due 2022. Incorporated by reference to the Registrant’s Current Report on Form 8-K/A filed with the Securities and Exchange Commission on March 7, 2012.

10.1Exchange Agreement dated as of March 21, 2012 by and among Vantiv, Inc., Vantiv Holding, LLC, Fifth Third Bank, FTPS Partners, LLC and such other holders of Class B Units and Class C Non-Voting Units that are from time to time parties of the Exchange Agreement. Incorporated by reference to the Registrant’s Schedule 13D filed with the Commission on April 2, 2012.

10.2Second Amended & Restated Limited Liability Company Agreement (excluding certain exhibits) dated as of March 21, 2012 by and among Vantiv, Inc., Fifth Third Bank, FTPS Partners, LLC, Vantiv Holding, LLC and each person who becomes a member after March 21, 2012. Incorporated by reference to the Registrant’s Schedule 13D filed with the Commission on April 2, 2012.

10.3Recapitalization Agreement dated as of March 21, 2012 by and among Vantiv, Inc., Vantiv Holding, LLC, Fifth Third Bank, FTPS Partners, LLC, JPDN Enterprises, LLC and certain stockholders of Vantiv, Inc. Incorporated by reference to the Registrant’s Schedule 13D filed with the Commission on April 2, 2012.

10.4Registration Rights Agreement dated as of March 21, 2012 by and among Vantiv, Inc., Fifth Third Bank, FTPS Partners, LLC, JPDN Enterprises, LLC and certain stockholders of Vantiv, Inc. Incorporated by reference to the Registrant’s Schedule 13D filed with the Commission on April 2, 2012.

10.5Warrant dated June 30, 2009 issued by Vantiv Holding, LLC to Fifth Third Bank. Incorporated by reference to the Registrant’s Schedule 13D filed with the Commission on April 2, 2012.

10.6Form of Executive Agreement effective January 17, 2012, between Fifth Third Bancorp and Tayfun Tuzun. Incorporated by reference to Registrant’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on February 29, 2012. *

10.7Form of Amended Executive Agreements effective January 19, 2012, between Fifth Third Bancorp and Daniel T. Poston and Paul L. Reynolds. Incorporated by reference to Registrant’s Current Report on Form 8-K filed with the Securities and Exchange Commission on January 24, 2012. *

10.8Description of Vantiv, Inc. Director Compensation for Paul L. Reynolds and Greg D. Carmichael. Incorporated by reference to Exhibit 10.8 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012. On May 10, 2012, Daniel T. Poston was elected as a Class B Director of Vantiv, Inc. to replace Paul L. Reynolds. Mr. Poston will be subject to a substantially similar compensation arrangement as described in Exhibit 10.8 of the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2012.*

10.2Master Confirmation, as supplemented by a Supplemental Confirmation, for accelerated share repurchase transaction dated April 23, 2012 between Fifth Third Bancorp and Goldman, Sachs & Co.**

 

 12.1Computations of Consolidated Ratios of Earnings to Fixed Charges.

 

 12.2Computations of Consolidated Ratios of Earnings to Combined Fixed Charges and Preferred Stock Dividend Requirements.

 

 31(i)Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.

 31(ii)Certification Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.

 

 32(i)Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Executive Officer.

 

 32(ii)Certification Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 by Chief Financial Officer.

 

 101Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Condensed Consolidated Balance Sheets, (ii) the Condensed Consolidated Statements of Income, (iii) the Condensed Consolidated Statements of Changes in Equity, (iv) the Condensed Consolidated Statements of Cash Flows, and (v) the Notes to Condensed Consolidated Financial Statements tagged as blocks of text and in detail***.

 

*Denotes management contract or compensatory plan or arrangement.

 

**An application for confidential treatment for selected portions of this exhibit has been filed with the Securities and Exchange Commission.

***As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

  Fifth Third Bancorp
  Registrant
Date: May 10,August 8, 2012  /s/ Daniel T. Poston
  Daniel T. Poston
  Executive Vice President and
  Chief Financial Officer

 

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