Edgar Filing: FIFTH THIRD BANCORP

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Quarterly Report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended September 30, 2009

Commission File Number 001-33653

LOGO

(Exact name of Registrant as specified in its charter)

Ohio

31-0854434

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

Fifth Third Center

Cincinnati, Ohio 45263

(Address of principal executive offices)

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes x No ¨

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

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨ No x

There were 795,316,187 shares of the Registrant’s common stock, without par value, outstanding as of September 30, 2009.

LOGO

INDEX


Part I. Financial Information
Management’s Discussion and Analysis of Financial Condition and Results of Operations (Item 2)
Selected Financial Data		3
Overview		4
Non-GAAP Financial Measures		5
Recent Accounting Standards		6
Critical Accounting Policies		6
Statements of Income Analysis		7
Balance Sheet Analysis		15
Business Segment Review		21
Quantitative and Qualitative Disclosures about Market Risk (Item 3)
Risk Management – Overview		26
Credit Risk Management		27
Market Risk Management		36
Liquidity Risk Management		39
Capital Management		40
Off-Balance Sheet Arrangements		41
Controls and Procedures (Item 4)		42
Condensed Consolidated Financial Statements and Notes (Item 1)
Balance Sheets (unaudited)		43
Statements of Income (unaudited)		44
Statements of Changes in Shareholders’ Equity (unaudited)		45
Statements of Cash Flows (unaudited)		46
Notes to Condensed Consolidated Financial Statements (unaudited)		47

Part II. Other Information
Legal Proceedings (Item 1)		83
Risk Factors (Item 1A)		83
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)		83
Exhibits (Item 6)		84
Signatures		85
Certifications

This report contains forward-looking statements about Fifth Third Bancorp within the meaning of Sections 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and 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 including statements preceded by, followed by or that include the words or phrases such as “believes,” “expects,” “anticipates,” “plans,” “trend,” “objective,” “continue,” “remain” or similar expressions or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” “may” or similar expressions. 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; (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) lower than expected gains related to any sale or potential sale of businesses; (21) difficulties in separating Fifth Third Processing Solutions from Fifth Third; (22) 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; (23) ability to secure confidential information through the use of computer systems and telecommunications networks; and (24) the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity. Additional information concerning factors that could cause actual results to differ materially from those expressed or implied in the forward-looking statements is available in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2008, filed with the United States Securities and Exchange Commission (SEC). Copies of this filing are available at no cost on the SEC’s Web site at www.sec.gov or on the Fifth Third’s Web site at www.53.com. Fifth Third undertakes no obligation to release revisions to these forward-looking statements or reflect events or circumstances after the date of this report.

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

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

TABLE 1: Selected Financial Data


	For the three months ended September 30,							For the nine months ended September 30,
($ in millions, except per share data)	2009			2008		% Change		2009			2008	% Change
Income Statement Data
Net interest income (a)	$	874		1,068		(18	)	$	2,491		2,638	(6	)
Noninterest income		851		717		19			4,130		2,304	79
Total revenue (a)		1,725		1,785		(3	)		6,621		4,942	34
Provision for loan and lease losses		952		941		1			2,766		2,203	26
Noninterest expense		876		967		(9	)		2,859		2,543	12
Net income (loss)		(97	)	(56	)	(74	)		835		29	NM
Net income (loss) available to common shareholders		(159	)	(81	)	(97	)		670		3	NM
Common Share Data
Earnings per share, basic	$	(0.20	)	(0.14	)	(43	)	$	1.00		0.01	NM
Earnings per share, diluted		(0.20	)	(0.14	)	(43	)		0.91		0.01	NM
Cash dividends per common share		0.01		0.15		(93	)		0.03		0.74	(96	)
Market value per share		10.13		11.90		(15	)		10.13		11.90	(15	)
Book value per share		12.69		16.65		(24	)		12.69		16.65	(24	)
Financial Ratios
Return on assets		(0.34	)%	(0.19	)	(79	)		0.96	%	0.03	NM
Return on average common equity		(6.1	)	(3.3	)	(85	)		10.1		—	NM
Average equity as a percent of average assets		12.24		9.45		30			11.06		8.83	25
Tangible equity (b)		10.08		6.19		63			10.08		6.19	63
Tangible common equity (c)		6.74		5.23		29			6.74		5.23	29
Net interest margin (a)		3.43		4.24		(19	)		3.25		3.57	(9	)
Efficiency (a)		50.8		54.2		(6	)		43.2		51.4	(16	)
Credit Quality
Net losses charged off	$	756		463		63		$	1,872		1,082	73
Net losses charged off as a percent of average loans and leases		3.75	%	2.17	%	73			3.06	%	1.74	76
Allowance for loan and lease losses as a percent of loans and leases		4.69		2.41		95			4.69		2.41	95
Allowance for credit losses as a percent of loans and leases (d)		5.06		2.56		98			5.06		2.56	98
Nonperforming assets as a percent of loans, leases and other assets, including other real estate owned (e)(f)		4.04		2.86		42			4.04		2.86	42
Average Balances
Loans and leases, including held for sale	$	82,888		85,772		(3	)	$	84,560		85,302	(1	)
Total securities and other short-term investments		18,065		14,515		24			17,888		13,494	33
Total assets		113,453		114,784		(1	)		115,985		112,732	3
Transaction deposits (g)		55,607		52,399		6			54,034		53,204	2
Core deposits (h)		69,871		63,179		11			68,492		63,599	8
Wholesale funding (i)		25,947		37,036		(30	)		30,707		35,145	(13	)
Shareholders’ equity		13,885		10,843		28			12,826		9,953	29
Regulatory Capital Ratios
Tier I capital		13.23	%	8.57		54			13.23	%	8.57	54
Total risk-based capital		17.48		12.30		42			17.48		12.30	42
Tier I leverage		12.34		8.77		41			12.34		8.77	41
Tier I common equity		7.03		5.18		36			7.03		5.18	36

(a)

Amounts presented on a fully taxable equivalent basis. The taxable equivalent adjustments for the three months ended September 30, 2009 and 2008 were $5 million and for the nine months ended September 30, 2009 and 2008 were $15 million and $17 million, respectively.

(b)

The tangible equity ratio is calculated as tangible equity (shareholders’ equity less goodwill, intangible assets and accumulated other comprehensive income) divided by tangible assets (total assets less goodwill, intangible assets and tax effected accumulated other comprehensive income.) For further information, see the Non-GAAP Financial Measures section of the MD&A.

(c)

The tangible common equity ratio is calculated as tangible common equity (shareholders’ equity less preferred stock, goodwill, intangible assets and accumulated other comprehensive income) divided by tangible assets (defined above.) For further information, see the Non-GAAP Financial Measures section of the MD&A.

(d)

The allowance for credit losses is the sum of the allowance for loan and lease losses and the reserve for unfunded commitments.

(e)

Excludes nonaccrual loans held for sale.

(f)

During the first quarter of 2009, the Bancorp modified its nonaccrual policy to exclude consumer troubled debt restructuring (TDR) loans less than 90 days past due as they were performing in accordance with restructuring terms. For comparability purposes, prior periods were adjusted to reflect this reclassification.

(g)

Includes demand, interest checking, savings, money market and foreign office deposits of commercial customers.

(h)

Includes transaction deposits plus other time deposits.

(i)

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

NM: Not meaningful

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

OVERVIEW

This overview of management’s discussion and analysis 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.

The Bancorp is a diversified financial services company headquartered in Cincinnati, Ohio. At September 30, 2009, the Bancorp had $111 billion in assets, operated 16 affiliates with 1,306 full-service banking centers including 100 Bank Mart^® locations open seven days a week inside select grocery stores and 2,372 Jeanie^® ATMs throughout the Midwest and Southeast regions of the United States. As of September 30, 2009, the Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors.

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. Its affiliate operating model provides a competitive advantage by keeping the decisions close to the customer and by emphasizing individual relationships. Through its affiliate operating model, individual managers from the banking center to the executive level 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 September 30, 2009, net interest income, on a fully taxable equivalent (FTE) basis, and noninterest income provided 51% and 49% of total revenue, respectively. 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 weakening economy within the Bancorp’s footprint.

Net interest income, net interest margin, net interest rate spread and the efficiency ratio are presented in Management’s Discussion and Analysis of Financial Condition and Results of Operations 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 service charges on deposits, corporate banking revenue, mortgage banking revenue, fiduciary and investment management fees, and card and processing revenue. Noninterest expense is primarily driven by personnel costs and occupancy expenses, in addition to expenses incurred in the processing of credit and debit card transactions for its customers.

Earnings Summary

During the third quarter of 2009, the Bancorp continued to be affected by a challenging credit environment and the continued economic slowdown. The Bancorp’s net loss for the quarter was $97 million. Preferred dividends of $62 million for the quarter included $53 million related to the Series F preferred stock held by the U.S. Treasury and $9 million paid to Series G preferred stock holders. Including preferred dividends, the net loss available to common shareholders was $159 million in the third quarter of 2009 compared to a net loss of $81 million in the third quarter of 2008. Diluted net loss per share was $0.20 in the third quarter of 2009 compared to a net loss of $.14 per diluted share in the third quarter of 2008.

Net interest income (FTE) decreased 18%, from $1.1 billion in the third quarter of 2008 to $869 million in third quarter of 2009. Net interest margin was 3.43% in the third quarter of 2009, a decrease of 81 basis points (bp) from the third quarter of 2008. Third quarter 2009 and 2008 results included $27 million and $226 million, respectively, in loan and deposit discount accretion related to

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

the First Charter acquisition. Excluding this impact in both periods, net interest income increased by one percent and net interest margin remained flat.

Noninterest income increased 19%, from $717 million in the third quarter of 2008 to $851 million in the third quarter of 2009. Third quarter 2009 results included a $244 million gain from the sale of the Bancorp’s Visa, Inc. Class B common shares and $38 million in revenue associated with the transition service agreement (TSA) entered into as part of the “Processing Business Sale,” which involved the sale of a majority interest in the Bancorp’s merchant acquiring and financial institutions processing businesses. As part of the sale, the Bancorp entered into the TSA, which requires the Bancorp to provide services to the processing business to support its operations during the deconversion period. Third quarter 2008 results included a $76 million gain related to a litigation settlement stemming from a prior acquisition, a $51 million reduction due to other than temporary impairment (OTTI) charges on Federal National Mortgage Association (FNMA) and Federal Home Loan Mortgage Corporation (FHLMC) preferred stock, and a $27 million charge to lower the cash surrender value of a Bank-Owned Life Insurance (BOLI) policy. Excluding these items, and investment securities gains/losses in both periods, noninterest income of $561 million decreased by $199 million, or 26%, from third quarter 2008. The decline was largely driven by the impact of the sale of the processing business, which included the former merchant processing and financial institutions businesses that traditionally drove the majority of card and processing revenue.

Noninterest expense decreased 9%, or $91 million, compared to the third quarter of 2008 which was driven by a reduction in core expenses due to the sale of the processing business as well as broad-based expense control, partially offset by higher provision expense for unfunded commitments. Additionally, third quarter of 2009 results included the release of $73 million in Visa litigation reserves, which included a $44 million reduction in connection with the sale of the Bancorp’s Class B common shares, along with a $29 million reduction due to Visa’s funding of an additional $700 million into the litigation escrow account.

The Bancorp does not originate subprime mortgage loans, hold credit default swaps or 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 weakening economic conditions. The housing markets that weakened throughout 2008, remained weak into the third quarter of 2009, particularly in the upper Midwest and Florida, however, home sales have signaled a reversal of their downward trends and home prices have begun to stabilize. Additionally, economic conditions remained weak as overall unemployment rates have continued to rise, putting significant stress on the Bancorp’s commercial and consumer loan portfolios. Consequently, the provision for loan and lease losses increased to $952 million for the third quarter of 2009 compared to $941 million for the third quarter of 2008. Net charge-offs as a percent of average loans and leases were 3.75% in the third quarter of 2009 compared to 2.17% in the third quarter of 2008. At September 30, 2009, nonperforming assets as a percent of loans, leases and other assets, including other real estate owned (OREO) and excluding nonaccrual loans held for sale, increased to 4.04% from 2.86% at September 30, 2008. Including $288 million of nonaccrual loans classified as held-for-sale in the third quarter of 2009, total nonperforming assets were $3.5 billion compared with $2.5 billion in the third quarter of 2008.

The Bancorp’s capital ratios exceed the “well-capitalized” guidelines as defined by the Board of Governors of the Federal Reserve System (FRB). As of September 30, 2009, the Tier 1 capital ratio was 13.23%, the Tier 1 leverage ratio was 12.34%, the total risk-based capital ratio was 17.48% and the Tier 1 common equity ratio, a new measure that originated from the Supervisory Capital Assessment Program (SCAP) and defined as tier 1 common equity divided by total risk weighted assets, was 7.03%.

NON-GAAP FINANCIAL MEASURES

The Bancorp considers various measures when evaluating capital utilization and adequacy, including the tangible equity ratio and tangible common equity ratio, in addition to capital ratios defined by banking regulators. These calculations are intended to complement the capital ratios defined by banking regulators for both absolute and comparative purposes. Because U.S. GAAP does not include capital ratio measures, the Bancorp believes there are no comparable U.S. GAAP financial measures to these ratios.

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.

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

The following table reconciles Non-GAAP financial measures to U.S. GAAP as of September 30:

TABLE 2: Non-GAAP Financial Measures


($ in millions)	2009		2008
Total shareholders’ equity	13,688		10,696
Less:
Goodwill	(2,417	)	(3,592	)
Intangible assets	(119	)	(188	)
Accumulated other comprehensive income	(285	)	60
Tangible equity (a)	10,867		6,976
Less: preferred stock	(3,599	)	(1,082	)
Tangible common equity (b)	7,268		5,894

Total assets	110,740		116,294
Less:
Goodwill	(2,417	)	(3,592	)
Intangible assets	(119	)	(188	)
Accumulated other comprehensive income, before tax	(438	)	92
Tangible assets, excluding unrealized gains / losses (c)	107,766		112,606

Ratios:
Tangible equity (a) / (c)	10.08	%	6.19	%
Tangible common equity (b) / (c)	6.74	%	5.23	%

RECENT ACCOUNTING STANDARDS

Note 3 of the Notes to Condensed Consolidated Financial Statements provides a complete discussion of the significant new accounting standards recently adopted by 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 accounting principles generally accepted in the United States of America (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 allowance for loan and lease losses, 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, 2008. No material changes have been made to the valuation techniques or models during the nine months ended September 30, 2009.

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 debt securities, loans and leases (including yield-related fees) and other interest-earning assets less the interest paid for core deposits (includes transaction deposits and other time deposits) and wholesale funding (includes certificates $100,000 and over, other deposits, federal funds purchased, 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 spread is the difference between the average rate earned on interest-earning assets and the average rate paid on interest-bearing liabilities. Net interest margin is typically greater than net interest rate spread due to the interest income earned on those assets that are funded by noninterest-bearing liabilities, or free funding, such as demand deposits or shareholders’ equity.

Tables 3 and 4 present the components of net interest income, net interest margin and net interest spread for the three and nine months ended September 30, 2009 and 2008. 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 (FTE) was $874 million for the third quarter of 2009, a decrease of $194 million from the third quarter of 2008. For the nine months ended September 30, 2009, net interest income was $2.5 billion, a decrease of $147 million from the same period in 2008. Net interest income was affected by the amortization and accretion of premiums and discounts on acquired loans and deposits, primarily from the First Charter Acquisition, that increased net interest income by $29 million during the third quarter of 2009, compared to an increase of $226 million in the third quarter of 2008. For the nine months ended September 30, 2009 and 2008, net interest income increased $111 million and $273 million, respectively, from the amortization and accretion of premiums and discounts on acquired loans and deposits. Additionally, the nine month periods ended September 30, 2009 and 2008 were impacted by the recalculation of cash flows on certain leveraged leases that reduced interest income on commercial leases by approximately $6 million and $130 million, respectively. Excluding these impacts, net interest income increased $3 million in the third quarter of 2009 and decreased $107 million for the nine months ended September 30, 2009, compared to the three and nine month periods for the prior year, respectively. Net interest income was positively impacted by improved pricing spreads on loan originations and a shift in funding composition to lower cost core deposits as higher priced term deposits issued in the second half of 2008 continued to mature throughout 2009. For the three and nine months ended September 30, 2009, net interest income was also impacted by increases of $666 million and $3.7 billion, respectively, in average interest-earning assets as well as a decline of $7.2 billion and $2.2 billion, respectively, in average interest-bearing liabilities driven by growth in the Bancorp’s free-funding position. The improvements to net interest income due to the benefits of the increase in the Bancorp’s free-funding position were offset by declines in the net interest rate spread, which was 3.10% and 2.93% for the three and nine months ended September 30, 2009, respectively, down from 3.91% and 3.21% in the same periods last year.

Net interest margin decreased to 3.43% in the third quarter of 2009 compared to 4.24% in the third quarter of 2008. The third quarter of 2008 was impacted by the amortization and accretion of premiums and discounts on acquired loans and deposits that increased net interest margin by approximately 90 bps, while the impact in the third quarter of 2009 was an 11 bp increase. Exclusive of this adjustment, net interest margin for the third quarter of 2009 decreased 2 bps compared to the same period in 2008 and declined 9 bps for the nine months ended September 30, 2009 compared to the same period in 2008.

Total average interest-earning assets increased one percent from the third quarter of 2008 and increased four percent for the nine months ended September 30, 2009 compared to the same period in 2008. For the third quarter 2009, average total commercial loans decreased seven percent while residential mortgage and home equity loans both remained relatively flat. For the nine months ended September 30, 2009, average total commercial loans decrease two percent, while home equity loans increased four percent. Additionally, the average investment portfolio increased $3.5 billion, or 24%, in the three months ended September 30, 2009, compared to the third quarter of 2008 and increased $4.4 billion, or 33%, in the nine months ended September 30, 2009, compared to the same period in 2008. The increase in the average investment portfolio during 2009 is a result of the increase in purchases of mortgage-backed securities and automobile asset-backed securities, the purchase of investment grade commercial paper from an unconsolidated qualifying special purpose entity (QSPE) and an increase in VRDNs held in the Bancorp’s trading portfolio. Further detail on the Bancorp’s investment securities portfolio can be found in the Balance Sheet Analysis section.

Interest income (FTE) from loans and leases decreased $392 million, or 28%, compared to the third quarter of 2008. This decrease was the result of a 168 bp decrease in average rates and three percent decrease in average loan and lease balances. Exclusive of amortization and accretion of premiums and discounts on loans and leveraged lease charges discussed above, interest income (FTE) from loans and leases decreased $215 million compared to the prior year quarter. For the nine months ended September 30, 2009, interest income (FTE) from loans and leases decreased $740 million, or 20%, compared to the same period in 2008, due to a 112 bps decrease in average rates and one percent decrease in average loan and lease balances. Exclusive of amortization and accretion of premiums and discounts on loans and leveraged lease charges discussed above, interest income (FTE) from loans and leases decreased $720 million in the nine months ended September 30, 2009 compared to the same period in the prior year.

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

TABLE 3: Condensed Consolidated Average Balance Sheets and Analysis of Net Interest Income (FTE)


For the three months ended	September 30, 2009							September 30, 2008							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 loans	$	27,416		$	302	4.36	%	$	28,284		$	389	5.46	%	$	(12	)	$	(75	)	$	(87	)
Commercial mortgage		12,449			132	4.22			13,257			290	8.71			(17	)		(141	)		(158	)
Commercial construction		4,475			31	2.74			6,110			107	6.97			(24	)		(52	)		(76	)
Commercial leases		3,522			41	4.59			3,642			35	3.85			(1	)		7			6
Subtotal – commercial		47,862			506	4.19			51,293			821	6.37			(54	)		(261	)		(315	)
Residential mortgage loans		10,820			143	5.23			10,711			190	7.05			2			(49	)		(47	)
Home equity		12,452			129	4.10			12,534			181	5.76			(1	)		(51	)		(52	)
Automobile loans		8,871			141	6.32			8,303			132	6.32			9			—			9
Credit card		1,955			49	9.87			1,720			43	9.93			6			—			6
Other consumer loans/leases		928			22	9.59			1,211			15	4.93			(5	)		12			7
Subtotal – consumer		35,026			484	5.48			34,479			561	6.47			11			(88	)		(77	)
Total loans and leases		82,888			990	4.73			85,772			1,382	6.41			(43	)		(349	)		(392	)
Securities:
Taxable		16,850			180	4.24			13,310			161	4.81			40			(21	)		19
Exempt from income taxes (b)		246			4	7.05			315			5	7.38			(1	)		—			(1	)
Other short-term investments		969			—	0.10			890			5	2.21			—			(5	)		(5	)
Total interest-earning assets		100,953			1,174	4.61			100,287			1,553	6.16			(4	)		(375	)		(379	)
Cash and due from banks		2,257							2,468
Other assets		13,724							13,683
Allowance for loan and lease losses		(3,481	)						(1,654	)
Total assets	$	113,453						$	114,784
Liabilities
Interest-bearing liabilities:
Interest checking	$	14,869		$	9	0.24	%	$	13,843		$	27	0.78	%	$	1		$	(19	)	$	(18	)
Savings		16,967			29	0.67			16,154			53	1.29			2			(26	)		(24	)
Money market		4,280			6	0.55			6,051			25	1.67			(6	)		(13	)		(19	)
Foreign office deposits		2,432			3	0.43			2,126			7	1.37			1			(5	)		(4	)
Other time deposits		14,264			116	3.24			10,780			90	3.31			29			(3	)		26
Certificates - $100,000 and over		10,055			65	2.56			11,623			87	2.97			(11	)		(11	)		(22	)
Other foreign office deposits		95			—	0.19			395			2	1.83			(1	)		(1	)		(2	)
Federal funds purchased		404			—	0.15			1,013			5	1.78			(1	)		(4	)		(5	)
Other short-term borrowings		5,285			4	0.32			9,613			59	2.46			(19	)		(36	)		(55	)
Long-term debt		10,108			68	2.67			14,392			130	3.63			(33	)		(29	)		(62	)
Total interest-bearing liabilities		78,759			300	1.51			85,990			485	2.25			(38	)		(147	)		(185	)
Demand deposits		17,059							14,225
Other liabilities		3,750							3,721
Total liabilities		99,568							103,936
Shareholders’ equity		13,885							10,848
Total liabilities and shareholders’ equity	$	113,453						$	114,784

Net interest income				$	874						$	1,068			$	34		$	(228	)	$	(194	)
Net interest margin						3.43	%						4.24	%
Net interest rate spread						3.10							3.91
Interest-bearing liabilities to interest-earning assets						78.02							85.74

(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 fully taxable-equivalent adjustments included in the above table are $5 million for the three months ended September 30, 2009 and 2008.

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

TABLE 4: Condensed Consolidated Average Balance Sheets and Analysis of Net Interest Income (FTE)


For the nine months ended	September 30, 2009							September 30, 2008								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 loans	$	28,135		$	870	4.14	%	$	27,821		$	1,143		5.49	%	$	13		$	(286	)	$	(273	)
Commercial mortgage		12,641			417	4.41			12,635			664		7.02			—			(247	)		(247	)
Commercial construction		4,808			107	2.97			5,797			262		6.04			(39	)		(116	)		(155	)
Commercial leases		3,532			109	4.13			3,704			(16	)	(.57	)		1			124			125
Subtotal – commercial		49,116			1,503	4.09			49,957			2,053		5.49			(25	)		(525	)		(550	)
Residential mortgage loans		11,137			470	5.64			11,216			539		6.42			(4	)		(65	)		(69	)
Home equity		12,616			394	4.17			12,132			539		5.94			21			(166	)		(145	)
Automobile loans		8,751			416	6.36			9,092			431		6.33			(17	)		2			(15	)
Credit card		1,882			144	10.26			1,694			120		9.46			14			10			24
Other consumer loans/leases		1,058			61	7.64			1,211			46		5.14			(5	)		20			15
Subtotal – consumer		35,444			1,485	5.60			35,345			1,675		6.33			9			(199	)		(190	)
Total loans and leases		84,560			2,988	4.72			85,302			3,728		5.84			(16	)		(724	)		(740	)
Securities:
Taxable		16,639			537	4.32			12,477			459		4.92			139			(61	)		78
Exempt from income taxes (b)		250			14	7.51			360			20		7.34			(6	)		—			(6	)
Other short-term investments		999			1	0.15			657			12		2.47			4			(15	)		(11	)
Total interest-earning assets		102,448			3,540	4.62			98,796			4,219		5.70			121			(800	)		(679	)
Cash and due from banks		2,347							2,354
Other assets		14,327							12,847
Allowance for loan and lease losses		(3,137	)						(1,265	)
Total assets	$	115,985						$	112,732
Liabilities
Interest-bearing liabilities:
Interest checking	$	14,647		$	29	0.26	%	$	14,357		$	108		1.00	%	$	2		$	(81	)	$	(79	)
Savings		16,651			96	0.77			16,270			173		1.42			4			(81	)		(77	)
Money market		4,334			21	0.63			6,511			101		2.08			(26	)		(54	)		(80	)
Foreign office deposits		1,970			7	0.49			2,246			30		1.79			(3	)		(20	)		(23	)
Other time deposits		14,458			373	3.45			10,395			289		3.72			106			(22	)		84
Certificates - $100,000 and over		11,098			233	2.81			8,545			218		3.40			57			(42	)		15
Other foreign office deposits		193			—	0.21			2,394			48		2.69			(24	)		(24	)		(48	)
Federal funds purchased		548			1	0.22			3,297			66		2.67			(31	)		(34	)		(65	)
Other short-term borrowings		7,620			40	0.70			6,735			127		2.51			14			(101	)		(87	)
Long-term debt		11,248			249	2.96			14,174			421		3.97			(77	)		(95	)		(172	)
Total interest-bearing liabilities		82,767			1,049	1.69			84,924			1,581		2.49			22			(554	)		(532	)
Demand deposits		16,432							13,820
Other liabilities		3,960							4,033
Total liabilities		103,159							102,777
Shareholders’ equity		12,826							9,955
Total liabilities and shareholders’ equity	$	115,985						$	112,732

Net interest income				$	2,491						$	2,638				$	99		$	(246	)	$	(147	)
Net interest margin						3.25	%							3.57	%
Net interest rate spread						2.93								3.21
Interest-bearing liabilities to interest-earning assets						80.79								85.96

(a)

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

(b)

The fully taxable-equivalent adjustments included in the above table are $15 million and $17 million for the nine months ended September 30, 2009 and 2008, respectively.

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

Interest income (FTE) from investment securities and short-term investments for the three months ended September 30, 2009, increased $13 million, or eight percent, compared to the third quarter of 2008 and increased $61 million, or 13% percent, in the nine months ended September 30, 2009 compared to the same period in 2008. The increase in the third quarter was a result of an increase in the average taxable investment portfolio balance of $3.5 billion, or 27%, partially offset by a 57 bp decrease in the weighted-average yield on those investments. The increase in interest income for the nine months ended September 30, 2009 was a result of an increase in the average taxable investment portfolio balance of $4.2 billion, or 33%, partially offset by a 60 bp decrease in the weighted-average yield on those investments.

For the three months ended September 30, 2009, average core deposits increased $6.7 billion, or 11%, compared to the third quarter of 2008, and $4.9 billion, or 8%, for the nine months ended September 30, 2009, compared to the same period in 2008, primarily due to increased demand deposits, interest checking, savings and consumer certificates of deposit, partially offset by a decline in money market accounts. The cost of interest-bearing core deposits was 1.25% in the third quarter of 2009, which was a 41 bp decrease from 1.66% in the third quarter of 2008. The three and nine month declines are a result of the decrease in short-term market interest rates.

For the three months ended September 30, 2009, interest expense on wholesale funding decreased 52% compared the third quarter of 2008 due to declining interest rates and a 30% decrease in average balances. Average long-term debt decreased $4.3 billion, or 30%, with the yield decreasing 96 bps, compared to the third quarter of 2008 driven by a $1.0 billion FHLB advance maturing in the first quarter of 2009 and $1.2 billion in bank notes maturing in the second quarter of 2009. This led to a reduction in interest expense of $62 million for the third quarter of 2009, compared to the third quarter of 2008. Net interest income was also impacted by a 46% decline in average short-term borrowings, including federal funds purchased, compared to the third quarter of 2008, which led to a reduction in interest expense of $60 million. Interest expense on wholesale funding decreased 40% for the nine months ended September 30, 2009 compared to the same period in 2008 due to declining interest rates and a 13% decrease in average balances. During the three and nine months ended September 30, 2009, wholesale funding represented 33% and 37%, respectively, of interest-bearing liabilities compared to 43% and 41% in the same periods of 2008. Additionally, the Bancorp’s equity position increased compared to the third quarter of 2008 due to the issuance of $1 billion of common stock, in an at the market offering of 157,955,960 shares at $6.33, in the second quarter of 2009 and the sale of $3.4 billion of senior preferred shares and related warrants to the U.S. Treasury on December 31, 2008 under its Capital Purchase Program (CPP).

Provision for Loan and Lease Losses

The Bancorp provides as an expense an amount for probable loan and lease losses within the loan portfolio that is based on factors discussed in the Critical Accounting Policies section of the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2008. The provision is recorded to bring the allowance for loan and lease losses to a level deemed appropriate by the Bancorp. Actual credit losses on loans and leases are charged against the allowance for loan and lease losses. The amount of loans actually removed from the Condensed Consolidated Balance Sheets is referred to as charge-offs. Net charge-offs include current period charge-offs less recoveries on previously charged-off loans and leases.

The provision for loan and lease losses increased to $952 million in the third quarter of 2009 compared to $941 million in the same period last year. The primary factors in the increase were the growth in nonperforming assets, the overall increase in commercial and consumer delinquencies, and the increase in loss estimates once loans become delinquent due to the deterioration in residential real estate collateral values in certain of the Bancorp’s key lending markets. As of September 30, 2009, the allowance for loan and lease losses as a percent of loans and leases increased to 4.69% from 2.41% at September 30, 2008.

Refer to the Credit Risk Management section for more detailed information on the provision for loan and lease losses including an analysis of loan portfolio composition, non-performing assets, net charge-offs, and other factors considered by the Bancorp in assessing the credit quality of the loan portfolio and the allowance for loan and lease losses.

Noninterest Income

For the three months ended September 30, 2009, noninterest income was $851 million, an increase of $134 million compared to the three months ended September 30, 2008, driven primarily by a gain from the sale of the Bancorp’s Visa, Inc. Class B common shares in the third quarter of 2009 and an increase in mortgage banking net revenue, partially offset by the reduction in card and processing revenue following the Processing Business sale on June 30, 2009. For the nine months ended September 30, 2009, noninterest income increased $1.8 billion compared to the same period in 2008, driven primarily by the gain on the sale of the Processing Business.

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

The components of noninterest income for the three and nine month periods ended September 30, 2009 and 2008 are as follows:

TABLE 5: Noninterest Income


	For the three months ended September 30,						Percent Change		For the nine months ended September 30,						Percent Change
($ in millions)	2009			2008			Percent Change		2009			2008			Percent Change
Service charges on deposits	$	164		$	172		(4	)	$	472		$	478		(1	)
Mortgage banking net revenue		140			45		208			421			228		85
Corporate banking revenue		86			104		(18	)		301			323		(7	)
Investment advisory revenue		74			90		(18	)		222			275		(19	)
Card and processing revenue		74			235		(69	)		539			682		(21	)
Gain on sale of Processing Business		(6	)		—		NM			1,758			—		NM
Other noninterest income		311			112		177			372			339		10
Securities gains (losses), net		8			(63	)	NM			(12	)		(45	)	(73	)
Securities gains, net – non-qualifying hedges on mortgage servicing rights		—			22		(100	)		57			24		137
Total noninterest income	$	851		$	717		19		$	4,130		$	2,304		79

NM	Percentage change is not meaningful.

Service charges on deposits were down $8 million in the third quarter of 2009 compared to the same period last year. This was driven by a nine percent decrease in consumer service charges due to lower transaction volume. Commercial service charges increased two percent compared to the third quarter of 2008, reflecting an increase in customer accounts and lower market interest rates, as reduced earnings credit rates paid on customer balances have resulted in higher realized net service fees to pay for treasury management services. 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 noninterest-bearing checking accounts. The Bancorp has a standard crediting rate that is adjusted as necessary based on competitive market conditions and changes in short-term interest rates. Retail deposit revenue remained relatively flat in the third quarter of 2009 compared to the same period last year.

Mortgage banking net revenue increased to $140 million in the third quarter of 2009 from $45 million in the same period last year. The components of mortgage banking revenue for the three and nine months ended September 30, 2009 and 2008 are shown in Table 6.

TABLE 6: Components of Mortgage Banking Net Revenue


	For the three months ended September 30,					For the nine months ended September 30,
($ in millions)	2009			2008		2009			2008
Origination fees and gains on loan sales	$	96		43		$	387		214
Servicing revenue:
Servicing fees		50		39			145		122
Servicing rights amortization		(29	)	(22	)		(120	)	(86	)
Net valuation adjustments on servicing rights and free-standing derivatives entered into to economically hedge MSR		23		(15	)		9		(22	)
Net servicing revenue		44		2			34		14
Mortgage banking net revenue	$	140		45		$	421		228

Mortgage banking net revenue increased significantly compared to both the prior year third quarter and the nine months ended September 30, 2008 due to strong growth in originations and higher sales margins. Mortgage originations more than doubled from the third quarter last year to $4.6 billion due to the continued decline in interest rates from the latter part of 2008 as well as government programs, which have been designed to provide significant tax and other incentives to first-time homebuyers. Third quarter 2009 originations resulted in gains on mortgages sold of $96 million, compared to $43 million in the third quarter of 2008. The variance for the nine months ended September 30, 2009 compared to the same period in 2008 was driven by an increase in originations to $16.9 billion which resulted in an increase in origination fees and gains on mortgages sold of $173 million.

Net servicing revenue for the three months ended September 30, 2009 increased $42 million compared to the same period last year. This was due to an increase in servicing fees of $11 million, partially offset by an increase in the amortization of servicing rights of $7 million, as well as a net gain of $23 million on the net valuation adjustments on mortgage servicing rights (MSRs), compared to a net loss of $15 million in the prior year. For the nine months ended September 30, 2009, residential mortgage net servicing revenue increased $20 million compared to the same period last year. This was due to an increase of $22 million in servicing fees and a net gain of $9 million on the net valuation adjustments on MSRs compared to a net loss of $22 million in the prior year, partially offset by an increase in the amortization of servicing rights of $33 million. The Bancorp’s total residential mortgage loans

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

serviced at September 30, 2009 and 2008 were $57 billion and $50 billion, respectively, with $47 billion and $39 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 mortgage servicing rights can be found in Note 7 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 impairment on the MSR portfolio. The Bancorp recognized a gain from derivatives economically hedging MSRs of $61 million, offset by a temporary impairment on the MSR portfolio of $38 million, resulting in a net gain of $23 million for the three months ended September 30, 2009. For the three months ended September 30, 2008, the Bancorp recognized a gain from derivatives economically hedging MSRs of $8 million, offset by a temporary impairment on the MSR portfolio of $23 million, resulting in a net loss of $15 million. In the nine months ended September 30, 2009, the Bancorp recognized a gain from derivatives economically hedging MSRs of $65 million, offset by a temporary impairment on the MSR portfolio of $56 million, resulting in a net gain of $9 million. For the nine months ended September 30, 2008, the Bancorp recognized a loss from derivatives economically hedging MSRs of $23 million, partially offset by a reversal of temporary impairment on the MSR portfolio of $1 million, resulting in a net loss of $22 million. See Note 10 of the Notes to Condensed Consolidated Financial Statements for more information on the free-standing derivatives used to hedge the MSR portfolio. In addition to the derivative positions used to economically hedge the MSR portfolio, the Bancorp acquires various securities that are classified as available-for-sale and included as a component of its non-qualifying hedging strategy. There were no sales of securities related to mortgage servicing rights during the third quarter of 2009, compared to sales resulting in a net gain of $22 million during the third quarter of 2008, however the sale of these securities resulted in a net gain of $57 million for the nine months ended September 30, 2009 compared to a gain of $24 million for the comparative period in 2008.

Corporate banking revenue decreased 18% to $86 million in the third quarter of 2009 from the same period in 2008. For the nine months ended September 30, 2009, corporate banking revenue decreased $22 million, or seven percent, compared to the same period in 2008. The decline in corporate banking revenue in both the three and nine month periods ended September 30, 2009 was largely attributable to a lower volume of interest rate derivative sales and foreign exchange revenue, partially offset by growth in institutional sales and business lending fees. The Bancorp is committed to providing a comprehensive range of financial services to large and middle-market businesses and continues to see opportunities to expand its product offering.

Investment advisory revenues decreased $16 million, or 18%, from the third quarter of 2008. The Bancorp experienced double digit decreases across all major categories within investment advisory revenue. Brokerage fee income, which includes Fifth Third Securities income, decreased 18%, to $19 million in the third quarter of 2009 as investors continued to migrate balances from stock and bond funds to money markets funds resulting in reduced commission-based transactions. Mutual fund revenue decreased 30%, to $10 million in the third quarter of 2009 compared to the third quarter of 2008, reflecting lower valuations on assets under management and a continued shift to money market funds and other lower fee products. As of September 30, 2009, the Bancorp had approximately $184 billion in assets under care and managed $25 billion in assets for individuals, corporations and not-for-profit organizations.

Card and processing revenue decreased 69% in the third quarter of 2009 compared to the same period last year due to the sale of the processing business in the second quarter of 2009. As part of the transaction, the Bancorp retained certain debit and credit card interchange revenue and sold the financial institutions and merchant portions of the business, which historically comprised approximately 70% of total card and processing revenue. Card revenue increased by $3 million from the third quarter of 2008 due to strong growth in debit card transaction volumes and average dollar amount per transaction, partially offset by lower credit card usage.

The major components of other noninterest income are as follows:

TABLE 7: Components of Other Noninterest Income


	For the three months ended September 30,						For the nine months ended September 30,
($ in millions)		2009			2008			2009			2008
Operating lease income	$	15		$	13		$	44		$	34
Cardholder fees		12			15			36			43
Bank owned life insurance income (loss)		12			(13	)		(14	)		(136	)
Consumer loan and lease fees		11			13			34			39
Insurance income		10			7			36			28
Gain on loan sales		8			—			29			—
Banking center income		5			7			17			24
Gain on sale/redemption of Visa, Inc. ownership interests		244			—			244			273
Loss on sale of other real estate owned (OREO)		(22	)		(12	)		(49	)		(38	)
Litigation settlement		—			76			—			76
Other		16			6			(5	)		(4	)
Total other noninterest income	$	311			112		$	372			339

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

Other noninterest income increased $199 million in the third quarter of 2009 compared to the same period last year, driven primarily by the $244 million gain on the sale of the Bancorp’s Visa, Inc. Class B shares as well as revenue of $38 million related to the TSA entered into as part of the Processing Business Sale. Third quarter 2008 results included a $76 million gain relating to a litigation settlement stemming from a prior acquisition partially offset by a $27 million charge to lower the cash surrender value of a BOLI policy. For the nine months ended September 30, 2009, other noninterest income increased $33 million compared to the same period in 2008. Results from the nine months ended September 30, 2009 include the gain on sale of Visa shares and TSA revenue discussed above, as well as $29 million of gains on loan sales, offset by additional charges of $54 million related to one of the Bancorp’s BOLI policies, $39 million in fair value adjustments related to commercial loans held for sale and a $15 million impairment charge on a facility the Bancorp intends to vacate. The nine months ended September 30, 2008 results include the litigation settlement discussed above, as well as a $273 million gain from the redemption of a portion of the Bancorp’s ownership interest in, offset by charges of $179 million to reduce the cash surrender value of one of the Bancorp’s BOLI policies. The loss on sale of OREO increased compared to the third quarter of 2008 due to both an increase in the volume of OREO sales coupled with further collateral deterioration.

Net securities gains totaled $8 million in the third quarter of 2009, compared to net securities losses of $63 million in the third quarter of 2008. The net securities losses in the third quarter of 2008 include other than temporary impairment charges of $28 million and $23 million relating to FNMA and FHLMC preferred stock, respectively, along with a $12 million impairment charge on subordinated tranches and residual interests related to previous automobile loan securitizations.

Noninterest Expense

Total noninterest expense decreased $91 million, or nine percent, for the three months ended September 30, 2009 compared to the same period last year. This was primarily due to the reversal of the Visa litigation reserve and lower card and processing expense, partially offset by higher personnel expenses, provision for unfunded commitments, as well as increased Federal Deposit Insurance Corporation (FDIC) insurance costs. Total noninterest expense increased $316 million, or 12%, for the nine months ended September 30, 2009 compared to the same period last year. This increase was driven by higher FDIC insurance costs, including a special assessment, increased loan processing expense and provision for unfunded commitments, which exceeded lower card and processing expenses.

The major components of noninterest expense are as follows:

TABLE 8: Noninterest Expense


	For the three months ended September 30,				Percent Change		For the nine months ended September 30,			Percent Change
($ in millions)	2009		2008		Percent Change		2009		2008	Percent Change
Salaries, wages and incentives	$	335	$	321	4		$	1,008	1,000	1
Employee benefits		83		72	16			241	216	11
Net occupancy expense		75		77	(3	)		233	222	5
Technology and communications		43		47	(7	)		133	142	(6	)
Equipment expense		30		34	(12	)		92	95	(3	)
Card and processing expense		25		70	(64	)		167	203	(18	)
Other noninterest expense		285		346	(18	)		985	665	48
Total noninterest expense	$	876	$	967	(9	)	$	2,859	2,543	12

Total personnel costs (salaries, wages and incentives plus employee benefits) increased six percent and three percent for the three and nine months ended September 30, 2009, respectively, compared to the same periods last year, driven by an increase in variable compensation, partially offset by a decrease in base compensation. The decrease in base compensation is due to a reduction in full time equivalent employees from 21,522 as of September 30, 2008 to 20,559 as of September 30, 2009.

Card and processing expense, which includes third-party processing expenses, card management fees and other bankcard processing expenses, was down 64% and 18% for the three and nine months ended September 30, 2009, respectively, due primarily to the sale of the Bancorp’s processing business in the second quarter of 2009.

The efficiency ratio (noninterest expense divided by the sum of net interest income (FTE) and noninterest income) was 50.8% and 54.2% for the three months ended September 30, 2009 and 2008, respectively. The Bancorp continues to focus on efficiency initiatives, as part of its core emphasis on operating leverage and on expense control.

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

The major components of other noninterest expense are as follows:

TABLE 9: Components of Other Noninterest Expense


	For the three months ended September 30,					For the nine months ended September 30,
($ in millions)	2009			2008		2009			2008
Loan processing and collections	$	53			46	$	174			123
FDIC insurance and other taxes		48			17		199			47
Provision for unfunded commitments and letters of credit		45			17		89			35
Affordable housing investments impairment		22			17		60			48
Marketing		18			29		53			74
Professional services fees		16			50		47			78
Intangible asset amortization		13			17		44			40
Postal and courier		13			14		41			41
Travel		11			14		29			41
Insurance		11			5		38			13
Operating lease		10			9		29			23
Recruitment and education		7			7		22			24
Supplies		7			8		20			24
Visa litigation reserve		(73	)		45		(73	)		(107	)
Other		84			51		213			161
Total other noninterest expense	$	285		$	346	$	985		$	665

Total other noninterest expense for the three months ended September 30, 2009 decreased by $61 million compared to the same period last year. The third quarter of 2009 results include a reduction in the Visa litigation reserve of $73 million, while the third quarter of 2008 included a reserve charge of $45 million related to Visa’s settlement with Discover. The third quarter of 2008 also included $36 million related to legal expenses associated with a legal settlement from a prior acquisition. Excluding these items, other noninterest expense increased $93 million, primarily due to increased FDIC insurance costs from higher assessment rates during the third quarter of 2009 and increased provision for unfunded commitments due to credit deterioration since 2008.

Total other noninterest expense for the nine months ended September 30, 2009 increased by $320 million compared to the same period last year, mainly due to increased loan related expenses from higher mortgage origination volume and expenses incurred from the management of problem assets, increased provision for unfunded commitments due to additional credit deterioration and higher FDIC insurance costs driven by a special assessment charge of $55 million in the second quarter of 2009 coupled with higher FDIC insurance assessment rates during 2009.

Applicable Income Taxes

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

TABLE 10: Applicable Income Taxes


	For the three months ended September 30,					For the nine months ended September 30,
($ in millions)	2009			2008		2009			2008
Income (loss) before income taxes	$	(108	)	(128	)	$	981		179
Applicable income tax expense		(11	)	(72	)		146		150
Effective tax rate		10.2	%	56.6			14.9	%	84.0

Applicable income tax expense for all periods includes the benefit from tax-exempt income, tax-advantaged investments and general business tax credits, partially offset by the effect of nondeductible expenses. The effective tax rate for the three months ended September 30, 2009 was impacted by the third quarter pre-tax loss and changes in estimates used in projecting the estimated effective tax rate for the year. The effective tax rate for the nine months ended September 30, 2009 was impacted by pre-tax losses in the first and third quarters of 2009, a $106 million tax benefit related to the one of the Bancorp’s BOLI policies, a $55 million reduction in income tax expense related to the Bancorp’s leveraged lease litigation settlement with the IRS partially offset by the $1.8 billion pre-tax gain on the sale of the Processing Business which had an effective rate of approximately 40%. The effective tax rates for the three and nine months ended September 30, 2008 were primarily impacted by a charge to tax expense of approximately $140 million in the third quarter of 2008 required for interest related to the tax treatment of certain of the Bancorp’s leveraged leases for previous tax years. Additionally, see Note 14 of the Notes to Condensed Consolidated Financial Statements for further information on income taxes.

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

BALANCE SHEET ANALYSIS

Loans and Leases

Tables 11 and 12 summarize the end of period and average total loans and leases, including loans held for sale. The Bancorp classifies its loans and leases based upon the primary purpose of the loan.

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


	September 30, 2009			December 31, 2008			September 30, 2008
($ in millions)	Balance		% of Total	Balance		% of Total	Balance		% of Total
Commercial:
Commercial loans	$	26,215	33	$	29,220	34	$	29,424	34
Commercial mortgage loans		12,252	15		12,952	15		13,355	16
Commercial construction loans		4,268	5		5,114	6		6,002	7
Commercial leases		3,584	5		3,666	5		3,642	4
Subtotal – commercial		46,319	58		50,952	60		52,423	61
Consumer:
Residential mortgage loans		9,955	12		10,292	12		10,292	12
Home equity		12,377	15		12,752	15		12,599	14
Automobile loans		8,972	11		8,594	10		8,306	10
Credit card		1,973	3		1,811	2		1,688	2
Other consumer loans and leases		886	1		1,194	1		1,190	1
Subtotal – consumer		34,163	42		34,643	40		34,075	39
Total loans and leases	$	80,482	100	$	85,595	100	$	86,498	100
Total portfolio loans and leases (excludes held for sale)	$	78,419		$	84,143		$	85,498

Total loans and leases decreased $6 billion, or seven percent, compared to September 30, 2008 and $5.1 billion or six percent from December 31, 2008. The decrease in total loans and leases from the third and fourth quarters of 2008 were primarily due to declines in the commercial loan portfolio. The consumer loan portfolio was relatively flat compared to the same quarter in the prior year and down one percent from December 31, 2008.

Total commercial loans and leases decreased $6.1 billion, or 12%, compared to September 30, 2008 and $4.6 billion or nine percent from December 31, 2008 primarily as a result of lower customer demand, net charge-offs of $1.1 billion during 2009, a decrease in line utilization rates, and tighter underwriting standards implemented since the third quarter of 2008 across all commercial loan products with a significant focus on commercial construction loans. Tighter underwriting standards were applied to both new loan originations as well as outstanding loans reviewed for renewal. Commercial construction loans decreased $1.7 billion or 29% and $846 million or 17% from the periods ended September 30 and December 31, 2008, respectively, due to management’s strategy to suspend new lending on commercial non-owner occupied real estate in the second quarter of 2008, coupled with continued paydowns and net charge-offs of $282 million. Commercial mortgage loans decreased $1.1 billion, or eight percent, from September 30, 2008 and $700 million, or five percent, from December 31, 2008 due to tighter lending requirements and the Bancorp’s effort to limit overall exposure to commercial mortgages. The commercial loan product balance decreased $3.2 billion, or 11% from September 30, 2008 and $3 billion or 10% from December 31, 2008 due to an overall decrease in customer line utilization, net charge-offs of $535 million during 2009 and tighter underwriting standards implemented since the third quarter of 2008. Included in the commercial loan product balance was $1.25 billion in loans issued in conjunction with the Processing Business Sale in the second quarter of 2009. Included within commercial loans was approximately $77 million in draws on outstanding letters of credit that were supporting certain securities issued as VRDNs. For further information on these arrangements, see the Off-Balance Sheet Arrangements section and Note 11 of the Notes to Condensed Consolidated Financial Statements.

Total consumer loans and leases outstanding were relatively flat compared to September 30, 2008 and down $480 million, or one percent, from December 31, 2008, as a result of a decrease in residential mortgage loans, other consumer loans and home equity loans offset by a growth in automobile loan originations and credit card loans. Residential mortgage loans decreased $337 million or three percent from both September 30, 2008 and December 31, 2008 due to approximately $188 million of portfolio loans sales in the first and second quarters of 2009 and principal pay downs and charge-offs exceeding held-for-investment originations. Other consumer loans and leases, primarily consisting of automobile leases and student loans designated as held-for-sale, decreased $304 million, or 26%, compared to the prior year same quarter and $308 million, or 26%, from the prior year end due to a decline in new originations as a result of tighter underwriting standards across the other consumer loan and lease portfolio. Home equity loans decreased $222 million, or two percent, from the third quarter of 2008 and $375 million, or three percent, from the fourth quarter of 2008 due to tighter underwriting standards on loan to value ratios. The growth in automobile loans of $666 million, or eight percent, compared to September 30, 2008 and $378 million, or four percent, compared to December 31, 2008 was a result of an increase in automobile loan originations due to the federal government offering cash rebates on new automobile purchases in the “Cash for Clunkers” program. Credit card loans increased $285 million, or 17%, compared to the third quarter of 2008 and $162 million or

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

nine percent compared to the fourth quarter of 2008 as a result of the Bancorp’s continued success in cross-selling credit cards to its existing retail customer base.

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


For the three months ended	September 30, 2009			December 31, 2008			September 30, 2008
($ in millions) for the three months ended	Balance		% of Total	Balance		% of Total	Balance		% of Total
Commercial:
Commercial loans	$	27,416	33	$	30,227	35	$	28,284	33
Commercial mortgage loans		12,449	15		13,194	15		13,257	16
Commercial construction loans		4,475	6		5,990	7		6,110	7
Commercial leases		3,522	4		3,610	4		3,643	4
Subtotal – commercial		47,862	58		53,021	61		51,294	60
Consumer:
Residential mortgage loans		10,820	13		10,327	12		10,711	12
Home equity		12,452	15		12,677	14		12,534	15
Automobile loans		8,871	11		8,428	10		8,303	10
Credit card		1,955	2		1,748	2		1,720	2
Other consumer loans and leases		928	1		1,225	1		1,210	1
Subtotal – consumer		35,026	42		34,405	39		34,478	40
Total average loans and leases	$	82,888	100	$	87,426	100	$	85,772	100
Total portfolio loans and leases (excludes held for sale)	$	80,060		$	86,369		$	84,695

Average total commercial loans and leases decreased $3.4 billion, or seven percent, compared to the third quarter of 2008 and $5.2 billion, or 10%, compared to the fourth quarter of 2008. The decrease in average total commercial loans and leases was primarily driven by declines in commercial construction loans, commercial loans and commercial mortgage loans, as previously mentioned, which decreased by 27%, three percent, and six percent, respectively, compared to the third quarter of 2008 and 25%, nine percent and six percent, respectively, compared to the fourth quarter of 2008. The decrease in commercial construction loans was primarily due to the suspension of new originations on non-owner occupied commercial real estate loans, while the decrease in commercial loans and commercial mortgage loans was due to a decrease of utilization rates, tighter underwriting standards as previously mentioned and an overall decrease in customer demand for commercial loan products.

Average total consumer loans and leases increased $548 million, or two percent, compared to the third quarter of 2008 as a result of an increase in automobile loans of seven percent, credit card loans of 14% and residential mortgage loans of one percent partially offset by a decrease in other consumer loans and leases of 23%. Average total consumer loans and leases increased $621 million, or two percent, compared to the fourth quarter of 2008 as a result of an increase in automobile loans of five percent, credit card loans of 12% and residential mortgage loans of five percent partially offset by a decrease in other consumer loans and leases of 24%. Residential mortgage loan balances increased from the third and fourth quarter of 2008 on an average basis but decreased as of period end due to strong originations in the second quarter of 2009 that led to a warehousing of residential mortgages, designated as held-for-sale, which were later sold during the third quarter of 2009.

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 September 30, 2009, total investment securities were $17.1 billion compared to $14.3 billion at December 31, 2008 and $14.5 billion at September 30, 2008.

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. The evaluation was performed on the basis of the duration of the decline in value of the security, the severity of that decline, the Bancorp’s intent to hold these securities to the earlier of the recovery of the loss or maturity and the determination of whether it was more-likely-than-not that the Bancorp would not be required to sell the security before the recovery of its cost basis. During the third quarter of 2009, the Bancorp did not recognize OTTI on any of its available-for-sale or held-to-maturity securities.

At September 30, 2009, the Bancorp’s investment portfolio primarily consisted of AAA-rated agency mortgage-backed securities. The Bancorp did not hold asset-backed securities backed by subprime loans in its securities portfolio at September 30, 2009, December 31, 2008 or September 30, 2008.

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

TABLE 13: Components of Investment Securities


($ in millions)	September 30, 2009		December 31, 2008		September 30, 2008
Available-for-sale and other: (amortized cost basis)
U.S. Treasury and Government agencies	$	367	$	186	$	187
U.S. Government sponsored agencies		1,745		1,651		329
Obligations of states and political subdivisions		310		323		357
Agency mortgage-backed securities		9,115		8,529		9,773
Other bonds, notes and debentures		2,556		613		1,552
Other securities		1,167		1,248		1,051
Total available-for-sale and other securities	$	15,260	$	12,550	$	13,249
Held-to-maturity:
Obligations of states and political subdivisions	$	351	$	355	$	355
Other bonds, notes and debentures		5		5		5
Total held-to-maturity securities	$	356	$	360	$	360
Trading:
Variable rate demand notes	$	966	$	1,140	$	366
Other securities		113		51		549
Total trading securities	$	1,079	$	1,191	$	915

On an amortized cost basis at September 30, 2009, available-for-sale securities increased $2.7 billion and $2.0 billion compared to December 31, 2008 and September 30, 2008, respectively. In the first quarter of 2009, financial market volatility created attractive investment opportunities. As a result, the Bancorp purchased $1.4 billion in AAA-rated automobile asset-backed securities, and $1.5 billion of agency issued mortgage backed securities and debentures to manage the interest rate risk of the Bancorp. At September 30, 2009, available-for-sale securities have increased to 16% of interest-earning assets, compared to 12% at December 31, 2008 and 13% at September 30, 2008. The estimated weighted-average life of the debt securities in the available-for-sale portfolio was 4.0 years at September 30, 2009 compared to 3.2 years at December 31, 2008 and 6.0 years at September 30, 2008. The decrease in the weighted-average life of the debt securities portfolio from September 30, 2008 was primarily attributed to the agency mortgage backed securities portfolio as declines in market rates increased the likelihood that borrowers will refinance, thus decreasing the weighted-average life. The increase in the weighted-average life of the debt securities portfolio from December 31, 2008 was primarily driven by the weighted-average lives of agency mortgage-backed securities. This can be attributed to a general change in estimates of prepayment speeds as mortgage interest rates have stabilized, which increases the average life of the portfolio, as well as additional purchases of lower coupon securities that have a longer average life. At September 30, 2009, the fixed-rate securities within the available-for-sale securities portfolio had a weighted-average yield of 4.71% compared to 5.08% at December 31, 2008 and 5.26% at September 30, 2008. The available-for-sale portfolio, which is largely comprised of fixed-rate securities, benefited from the decline in market rates, which led to a net unrealized gain of $422 million at September 30, 2009 compared to a net unrealized gain of $178 million at December 31, 2008 and a net unrealized loss of $72 million at September 30, 2008.

Since the second half of 2007, the Bancorp has purchased investment grade commercial paper from an unconsolidated QSPE that is wholly owned by an independent third-party. The commercial paper has maturities ranging from one day to 90 days and is backed by the assets held by the QSPE. As of the September 30, 2009, December 31, 2008 and September 30, 2008, the Bancorp held $841 million, $143 million and $1.0 billion, respectively, of this commercial paper in its available-for-sale portfolio. Refer to the Off-Balance Sheet Arrangements section of the MD&A for more information on the QSPE.

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

Information presented in Table 13 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.

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


As of September 30, 2009 ($ 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	$	142	$	143	0.8	2.08	%
Average life 1 – 5 years		75		75	2.5	1.27
Average life 5 – 10 years		149		149	9.6	3.27
Average life greater than 10 years		1		1	11.5	1.40
Total		367		368	4.8	2.40
U.S. Government sponsored agencies:
Average life of one year or less		85		86	0.5	2.86
Average life 1 – 5 years		82		86	1.5	3.35
Average life 5 – 10 years		1,578		1,600	7.3	3.73
Average life greater than 10 years		—		—	—	—
Total		1,745		1,772	6.7	3.67
Obligations of states and political subdivisions (a):
Average life of one year or less		203		204	0.3	5.83
Average life 1 – 5 years		19		19	2.7	7.39
Average life 5 – 10 years		48		49	6.8	6.87
Average life greater than 10 years		40		42	11.8	3.91
Total		310		314	3.0	5.84
Agency mortgage-backed securities:
Average life of one year or less		307		315	0.7	4.94
Average life 1 – 5 years		6,607		6,869	3.6	5.12
Average life 5 – 10 years		2,200		2,299	5.8	5.16
Average life greater than 10 years		1		1	10.3	4.22
Total		9,115		9,484	4.0	5.10
Other bonds, notes and debentures (b):
Average life of one year or less		1,344		1,345	0.2	2.21
Average life 1 – 5 years		1,008		1,039	2.1	6.05
Average life 5 – 10 years		135		128	8.7	7.51
Average life greater than 10 years		69		56	23.1	7.21
Total		2,556		2,568	2.1	4.14
Other securities (c)		1,167		1,176
Total available-for-sale and other securities	$	15,260	$	15,682	4.0	4.71	%

(a)

Taxable-equivalent yield adjustments included in the above table are 1.99%, 1.49%, 0.20%, 0.01% and 1.43% 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.

(b)

Other bonds, notes, and debentures consist of commercial paper, non-agency mortgage backed securities, certain other asset backed securities (primarily automobile and commercial loan backed securities) and corporate bond securities.

(c)

Other securities consist of Federal Home Loan Bank (FHLB) and Federal Reserve Bank restricted stock holdings that are carried at par, Federal Home Loan Mortgage Corporation (FHLMC) and Federal National Mortgage Association (FNMA) preferred stock holdings, certain mutual fund holdings and equity security holdings.

Trading securities increased from $915 million to $1.1 billion as of September 30, 2009, compared to September 30, 2008, and decreased $112 million from December 31, 2008. The increase from September 30, 2008 was driven by an additional $600 million of VRDNs held by the Bancorp at September 30, 2009, offset by a decrease of $436 million in other securities held in its trading portfolio. The VRDNs were purchased from the market during 2008 and 2009, through FTS, who was also the remarketing agent. For more information on the Bancorp’s obligations in remarketing VRDNs, see Note 10 of the Notes to Condensed Consolidated Financial Statements.

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

Deposits

Deposit balances represent an important source of funding and revenue growth opportunity. The Bancorp is continuing to focus on core deposit growth in its retail and commercial franchises through improving customer loyalty, offering competitive rates and enhancing its product offerings.

TABLE 15: Deposits


($ in millions)	September 30, 2009			December 31, 2008			September 30, 2008
($ in millions)	Balance		% of Total	Balance		% of Total	Balance		% of Total
Demand	$	17,666	22	$	15,287	19	$	14,241	18
Interest checking		15,168	19		14,222	18		13,251	17
Savings		17,098	22		16,063	20		15,955	21
Money market		4,378	5		4,689	6		5,352	7
Foreign office		2,356	3		2,144	3		1,999	3
Transaction deposits		56,666	71		52,405	66		50,798	66
Other time		13,725	17		14,350	19		11,778	15
Core deposits		70,391	88		66,755	85		62,576	81
Certificates - $100,000 and over		8,962	12		11,851	15		13,173	17
Other foreign office		5	—		7	—		1,711	2
Total deposits	$	79,358	100	$	78,613	100	$	77,460	100

At September 30, 2009, core deposits represented 64% of the Bancorp’s asset funding base, compared to 56% at December 31, 2008 and 54% at September 30, 2008. Core deposits grew five percent and 12% compared to December 31, 2008 and September 30, 2008, respectively, primarily due to increases in demand, interest checking and savings accounts. Driving these increases was growth in the number of consumer and commercial accounts, as well as higher account balances.

TABLE 16: Average Deposits


		September 30, 2009		December 31, 2008			September 30, 2008
($ in millions)	Balance		% of Total	Balance	% of Total	Balance		% of Total
Demand	$	17,059	21	14,602	19	$	14,225	19
Interest checking		14,869	19	13,698	18		13,843	18
Savings		16,967	21	15,960	20		16,154	22
Money market		4,280	5	4,983	6		6,051	8
Foreign office		2,432	3	1,876	2		2,126	3
Transaction deposits		55,607	69	51,119	65		52,399	70
Other time		14,264	18	13,337	18		10,780	14
Core deposits		69,871	87	64,456	83		63,179	84
Certificates - $100,000 and over		10,055	13	12,468	16		11,623	15
Other foreign office		95	—	1,090	1		395	1
Total deposits	$	80,021	100	78,014	100	$	75,197	100

On an average basis, core deposits increased eight percent and 11% from December 31, 2008 and September 30, 2008, respectively, driven by strong demand and interest checking account balance growth as well as an increase in other time deposits, partially offset by a decrease in money market balances. Average demand deposits grew 17% and 20% from December 31, 2008 and September 30, 2008, respectively, driven by continued strong growth in commercial demand deposits. This is a result of increased attractiveness of commercial demand deposit accounts mitigating risk through FDIC insurance of demand deposit accounts (DDAs) and a lower economic benefit from sweeping balances into interest-bearing vehicles, which continued to drive a shift from commercial money market demand accounts.

Borrowings

Total borrowings declined $9.6 billion from December 31, 2008, and $10.0 billion, from September 30, 2008, as the result of a combination of balance sheet activity and capital actions taken by the Bancorp during the second and third quarters of 2009. Portfolio loan balances declined $5.7 billion and $7.1 billion from both December 31, 2008 and September 30, 2008, respectively. This, coupled with increases in deposits of $745 million and $1.9 billion from December 31, 2008 and September 30, 2008, respectively, resulted in decreases of the funding positions of approximately $6.4 billion and $9.0 billion from those prior periods. Further, in the second quarter of 2009, the sale of the processing business provided $562 million of cash, and the Bancorp raised an additional $1.0 billion through the issuance of common equity in the public market, further decreasing the need for additional funding. As of September 30, 2009, December 31, 2008 and September 30, 2008, total borrowings as a percentage of interest-bearing liabilities were 19%, 27% and 28%, respectively.

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

TABLE 17: Borrowings


($ in millions)	September 30, 2009		December 31, 2008	September 30, 2008
Federal funds purchased	$	433	287	$	2,521
Other short-term borrowings		3,674	9,959		8,791
Long-term debt		10,162	13,585		12,947
Total borrowings	$	14,269	23,831	$	24,259

Total short-term borrowings were $4.1 billion at September 30, 2009, down from $10.2 billion and $11.3 billion at December 31, 2008 and September 30, 2008, respectively. In addition to the Bancorp’s overall reduced reliance on short-term funding, as discussed previously, the Bancorp has also experienced a shift in funding composition as it has moved away from federal funds due to market illiquidity and uncertainty in the federal funds market during the past year. Other short-term borrowings as of September 30, 2009 include approximately $2.3 billion in Term Auction Facility funds and $800 million in short term debt scheduled to mature in the first quarter of 2010.

Long-term debt at September 30, 2009 decreased 25% and 22% compared to December 31, 2008 and September 30, 2008, respectively. This was due in part to a $1.0 billion FHLB advance maturing in the first quarter of 2009 and $1.2 billion in bank notes maturing in the second quarter of 2009.

Information on the average rates paid on borrowings is included within the Statements of Income Analysis. Additionally, 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. Further detailed financial information on each business segment is included in Note 20 of the Notes to Condensed Consolidated Financial Statements.

On June 30, 2009, the Bancorp completed the Processing Business Sale, which represented the sale of a majority interest in the Bancorp’s merchant acquiring and financial institutions processing businesses. Financial data for the merchant acquiring and financial institutions processing businesses was originally reported in the former Processing Solutions segment through June 30, 2009. As a result of the sale, the Bancorp no longer presents Processing Solutions as a segment and therefore, financial information for the merchant acquiring and financial institutions processing businesses has been reclassified under General Corporate and Other for all periods presented. Additionally, the Bancorp retained its retail credit card and commercial multi-card service businesses, which were also originally reported in the former Processing Solutions segment through June 30, 2009, and are now included in the Consumer Lending and Commercial Banking segments, respectively, for all periods presented. Revenue from the remaining ownership interest in the processing businesses is recorded in General Corporate and Other as noninterest income.

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 accounting practices are improved and businesses change.

The Bancorp manages interest rate risk centrally at the corporate level by employing a funds transfer pricing (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 FTP system assigns charge rates and credit rates to classes of assets and liabilities, respectively, based on expected duration and the LIBOR 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 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 allowance for loan and lease losses 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 were to exist 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 as follows:

TABLE 18: Business Segment Results


	For the three months ended September 30,					For the nine months ended September 30,
($ in millions)		2009		2008			2009		2008
Commercial Banking	$	(124	)	152		$	(57	)	392
Branch Banking		89		196			247		514
Consumer Lending		3		(5	)		34		19
Investment Advisors		12		29			38		90
General Corporate and Other		(77	)	(428	)		573		(986	)
Net income (loss)	$	(97	)	(56	)	$	835		29
Dividends on preferred stock		62		25			165		26
Net income (loss) available to common shareholders	$	(159	)	(81	)		670		3

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

Commercial Banking

Commercial Banking offers banking, cash management and financial services to large and middle-market businesses, government and professional customers. In addition to the traditional lending and depository offerings, Commercial Banking products and services include, among others, 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 table below contains selected financial data for the Commercial Banking segment.

TABLE 19: Commercial Banking


	For the three months ended September 30,				For the nine months ended September 30,
($ in millions)		2009		2008		2009		2008
Income Statement Data
Net interest income (FTE) (a)	$	351		492	$	1,026		1,177
Provision for loan and lease losses		447		236		955		517
Noninterest income:
Corporate banking revenue		74		98		272		301
Service charges on deposits		49		46		146		136
Other noninterest income		(8	)	24		47		59
Noninterest expense:
Salaries, incentives and benefits		55		62		169		187
Other noninterest expenses		190		166		578		480
Income (loss) before taxes		(226	)	196		(211	)	489
Applicable income tax expense (a)		(102	)	44		(154	)	97
Net income (loss)	$	(124	)	152	$	(57	)	392
Average Balance Sheet Data
Commercial loans	$	41,053		43,811	$	42,080		42,494
Demand deposits		8,829		6,327		8,196		6,064
Interest checking		5,910		4,396		5,619		4,539
Savings and money market		2,400		4,008		2,504		4,388
Certificates over $100,000		4,668		2,138		4,528		1,889
Foreign office deposits		1,375		1,842		1,214		1,935

(a)

Includes taxable-equivalent adjustments of $3 million and $4 million for the three months ended September 30, 2009 and 2008, respectively, and $7 million for the nine months ended September 30, 2009 and 2008.

Net income decreased $276 million compared to the third quarter of 2008 due to a decline in net interest income and corporate banking revenue coupled with an increase in provision for loan and lease losses that was partially offset by an income tax benefit and a decrease in salaries and wage expense. The decline in net interest income was driven by a $140 million decrease in the accretion of discounts on loans and deposits associated with the acquisition of First Charter in the second quarter of 2008. Average commercial loans and leases decreased $2.8 billion, or six percent, compared to the prior year’s comparable quarter, including decreases of $1.7 billion and $742 million in commercial construction and commercial mortgages, respectively. The overall decrease in commercial loans and leases is due to lower utilization rates on corporate lines in addition to tighter lending standards, implemented throughout the second half of 2008.

Average core deposits increased 12% compared to the third quarter of 2008 as the Commercial Banking segment saw growth in both demand deposits and interest checking accounts related to increased protection provided by the FDIC insurance programs. Additionally, commercial customers opted to shift from savings and money market accounts, due to the low interest rate environment, to certificates over $100,000, which were significantly higher than the same period last year. Demand deposits and interest checking accounts increased from the prior year quarter resulting from increased attractiveness to customers due to mitigating risk through FDIC insurance of demand deposit and savings accounts and a lower economic benefit from sweeping balance into interest-bearing vehicles. Net charge-offs as a percent of average loans and leases increased to 435 bp from 213 bp in the third quarter of 2008. Net charge-offs increased in comparison to the prior year quarter due to weakening economic conditions and the continuing deterioration of credit within the Bancorp’s footprint, particularly in Michigan and Florida, involving commercial loans and commercial mortgage loans.

Noninterest income decreased approximately $53 million, or 32%, compared to the same quarter last year due to a decrease of $24 million in corporate banking revenue and a decrease of $32 million in other noninterest income. Corporate banking revenue decreased compared to the prior year primarily due to a decrease of $11 million in international income, $7 million in servicing fees on loans serviced for others, and $4 million on derivative fee income. Other noninterest income declined from the prior year primarily as a result of valuation declines in the held-for-sale commercial loan portfolio and losses recognized on the sale of loans.

Noninterest expense increased $17 million, or seven percent, compared to the third quarter of 2008 primarily due to FDIC insurance cost increase as a result of higher assessment rates, higher loan and lease expense from increased collections activities compared to the third quarter of 2008 and recorded impairment on low income housing investments partially offset by a decrease in salaries and wage expense due to fewer bonuses and incentive compensation.

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

Branch Banking

Branch Banking provides a full range of deposit and loan and lease products to individuals and small businesses through 1,306 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 automobile and other personal financing needs, as well as products designed to meet the specific needs of small businesses, including cash management services. The table below contains selected financial data for the Branch Banking segment.

TABLE 20: Branch Banking


	For the three months ended September 30,			For the nine months ended September 30,
($ in millions)		2009	2008		2009	2008
Income Statement Data
Net interest income	$	396	477	$	1,171	1,294
Provision for loan and lease losses		149	87		426	226
Noninterest income:
Service charges on deposits		113	124		321	336
Electronic payment processing		66	63		189	180
Investment advisory income		22	20		60	65
Other noninterest income		26	30		87	100
Noninterest expense:
Salaries, incentives and benefits		123	129		370	383
Net occupancy and equipment expenses		54	52		162	149
Other noninterest expenses		159	143		489	423
Income before taxes		138	303		381	794
Applicable income tax expense		49	107		134	280
Net income	$	89	196	$	247	514
Average Balance Sheet Data
Consumer loans	$	13,067	12,738	$	13,141	12,551
Commercial loans		5,259	5,857		5,406	5,562
Demand deposits		6,394	6,206		6,298	5,974
Interest checking		7,298	7,877		7,433	7,987
Savings and money market		17,162	16,240		16,719	16,271
Other time		17,225	13,470		17,521	13,153

Net income decreased $107 million, or 55%, compared to the third quarter of 2008 resulting from lower net interest income, a higher provision for loan and lease losses and higher FDIC insurance costs. Net interest income decreased $81 million, or 17% percent, due to a $26 million decrease in interest income from the accretion of discounts associated with the acquisition of First Charter in the second quarter of 2008 and an increase in interest expense as customers shifted from lower interest earning savings and money market accounts to higher yielding other time deposit accounts.

Average loans and leases decreased one percent compared to the third quarter of 2008 as average commercial loans declined $598 million or 10% which was partially offset by a three percent increase in consumer loans and leases. Average commercial loan product balances decreased $343 million or 11% and average commercial construction loans decreased $222 million or eight percent compared to the third quarter of 2008, as a result of tighter underwriting standards implemented since the third quarter of 2008 across all commercial loan products with a significant focus on commercial construction loans. Average credit card loans increased $241 million, or 16 percent compared to the third quarter of 2008 as a result of continued success in cross-selling credit cards to existing retail customers. Home equity loans increased $108 million, or one percent, as interest rates remained low and branch customers opened new equity loans. The increase within the consumer loan and lease portfolio was partially offset by a decrease in automobile loans of $159 million, or 18%, as customers took advantage of the government’s “Cash for Clunkers” program resulting in increased indirect automobile financing from sources other than Branch Banking. Average core deposits increased nine percent over the third quarter of 2008 with 28% growth in consumer certificates of deposits offset by a seven percent decrease in interest checking deposits. Net charge-offs as a percent of average loan and leases increased to 328bp from 187 bp in the third quarter of 2008. Net charge-offs increased in comparison to the prior year quarter as a result of higher charge-offs involving commercial loans reflecting borrower stress, home equity lines and loans from a decrease in home prices within the Bancorp’s footprint and credit card charge-offs due to borrower stress and an increase in consumer bankruptcy fillings.

Noninterest income decreased four percent compared to the third quarter of 2008 as charges on consumer deposits decreased $8 million, or seven percent due to lower transaction volumes. Noninterest expense increased $12 million, or four percent, compared to the third quarter of 2008 primarily due to higher FDIC insurance costs, which increased $28 million due to higher assessment rates partially offset by a decrease in salaries, incentives, and benefits of $6 million and marketing expenses of $4 million.

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

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 or pools of loans or lines of credit and all associated hedging activities. Other indirect lending activities include loans to consumers through mortgage brokers, automobile dealers and federal and private student education loans. The table below contains selected financial data for the Consumer Lending segment.

TABLE 21: Consumer Lending


	For the three months ended September 30,					For the nine months ended September 30,
($ in millions)	2009		2008			2009		2008

Income Statement Data
Net interest income	$	114		136		$	385		353
Provision for loan and lease losses		142		128			446		315
Noninterest income:
Mortgage banking net revenue		135		44			406		215
Other noninterest income		12		30			88		60
Noninterest expense:
Salaries, incentives and benefits		44		32			146		108
Other noninterest expenses		71		58			235		176
Income (loss) before taxes		4		(8	)		52		29
Applicable income tax expense		1		(3	)		18		10
Net income (loss)	$	3	$	(5	)	$	34	$	19
Average Balance Sheet Data
Residential mortgage loans	$	10,563		10,574		$	10,907		10,869
Automobile loans		8,112		7,376			7,952		8,138
Home equity		977		1,114			1,014		1,164
Consumer leases		592		815			664		798

Net income increased $8 million from the third quarter of 2009 compared to the third quarter of 2008, as growth in mortgage banking net revenue more than offset the decrease in net interest income, the growth in provision for loan and lease losses, the increase in residential mortgage volume-based expenses, and the increase in other credit-related expenses. Net interest income for the third quarter of 2009 decreased $22 million compared to the third quarter of 2008, driven by a combination of the impact of restructured loans, reduced discount accretion from acquisitions, and a decrease in the interest carry on securities held to hedge the mortgage servicing rights as the balance of these securities has decreased. Net charge-offs as a percent of average loan and leases increased from 267 bp in the third quarter of 2008 to 311 bp in the third quarter of 2009. Net charge-offs in the third quarter of 2009 on residential mortgage loans increased $14 million compared to prior year’s same quarter. Residential mortgage charge-offs increased due to a weakening economy and deteriorating real estate values within the Bancorp’s footprint, particularly in Michigan and Florida. During the third quarter of 2009, Michigan and Florida accounted for approximately 75% of the residential mortgage charge-offs. The Consumer Lending segment continues to focus on managing credit risk through the restructuring of certain residential mortgage loans and careful consideration of underwriting and collection standards. As of September 30, 2009, the Bancorp had restructured approximately $917 million of residential mortgage loans that are still accruing interest as they are in compliance with their modified terms.

Mortgage banking net revenue increased due to strong growth in originations and high sales margins during the third quarter of 2009. Consumer Lending had mortgage originations of $4.4 billion, an increase of 119% over the same quarter last year. The Bancorp remains committed to being a prime mortgage originator and has benefited from a decrease in interest rates during the latter part of 2008 and into the third quarter of 2009. Noninterest expense increased by $25 million compared to the third quarter of 2008 driven by a $14 million increase due to the growth in mortgage originations and driven by $11 million increase from other credit-related expenses.

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: Fifth Third Securities, Inc., (FTS) an indirect wholly-owned subsidiary of the Bancorp, Fifth Third Asset Management, Inc., an indirect wholly-owned subsidiary of the Bancorp, Fifth Third Private Bank, and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker dealer services to the institutional marketplace. Fifth Third Asset Management, Inc., 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 provide advisory services for institutional clients including states and municipalities. The table below contains selected financial data for the Investment Advisors segment.

TABLE 22: Investment Advisors


	For the three months ended September 30,				For the nine months ended September 30,
($ in millions)	2009		2008		2009		2008
Income Statement Data
Net interest income	$	41		50	$	116		147
Provision for loan and lease losses		16		11		42		21
Noninterest income:
Investment advisory income		79		89		231		276
Other noninterest income		5		7		18		22
Noninterest expense:
Salaries, incentives and benefits		35		38		106		120
Other noninterest expenses		56		53		155		165
Income before taxes		18		44		62		139
Applicable income tax expense		6		15		24		49
Net income	$	12	$	29	$	38	$	90
Average Balance Sheet Data
Loans and leases	$	3,062		3,599		3,183		3,548
Core deposits		5,113		4,308		4,830		4,751

Net income decreased $17 million compared to the third quarter of 2008 due to decreases in investment advisory revenue, net interest income and an increase in provision expense. Average loans declined 15% and average core deposit increased 19% compared to the third quarter of 2008.

Noninterest income decreased $12 million, or 13%, compared to the third quarter of 2008, as investment advisory income decreased 11%, to $79 million, with private client services income declining $4 million, or 11% and institutional income declining $4 million, or 20%, driven by lower asset values on assets managed compared to the third quarter of 2008. Included within investment advisory income is securities and brokerage income, which declined $1 million, or three percent, compared to the third quarter of 2008, reflecting a decline in transaction-based revenue as well as the continued shift in assets from equity products to lower yielding money market funds due to market volatility.

Noninterest expense was flat compared to the third quarter of 2008 as compensation expenses and incentive compensation decreased $3 million offset by a increase in FDIC insurance premium expense of $2 million and other noninterest expense items of $1 million. As of September 30, 2009, the Bancorp had $184 billion in assets under care and $25 billion in managed assets.

General Corporate and Other

General Corporate and Other includes the unallocated portion of the investment securities portfolio, securities gains/losses, historical data from the merchant processing and financial institution businesses included in the Processing Business Sale, certain non-core deposit funding, unassigned equity, provision expense in excess of net charge-offs, the payment of preferred stock dividends and certain support activities and other items not attributed to the business segments.

The net loss reported in the third quarter of 2009 declined compared to the third quarter of 2008. The third quarter of 2009 results were primarily impacted by a $288 million benefit from the sale of Visa Inc. Class B common shares and the previous reversal of $29 million in existing litigation reserves. In addition, the provision for loan and lease losses decreased from $479 million in the third quarter of 2008 to $198 million in the third quarter of 2009, due to a slower rate of continued declines in credit quality and decrease in real estate values across much of the Bancorp’s footprint.

Quantitative and Qualitative Disclosures About Market Risk (Item 3)

RISK MANAGEMENT – OVERVIEW

Managing risk is an essential component of successfully operating a financial services company. The Bancorp’s risk management function is responsible for the identification, measurement, monitoring, control and reporting of risk and mitigation of those risks that are inconsistent with the Bancorp’s risk profile. The Enterprise Risk Management division (ERM), led by the Bancorp’s Chief Risk Officer, ensures consistency in the Bancorp’s approach to managing and monitoring risk 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 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 are managed through the Bancorp’s risk program. ERM includes the following key functions:

•

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 grading system, allowance for loan and lease losses (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 the line of business risk managers, affiliates and lines of business to maintain processes to monitor and manage all aspects of operational risk including ensuring consistency in application of enterprise operational risk programs, Sarbanes-Oxley compliance, and serving as a policy clearinghouse for the Bancorp, including policies relating to credit, market and operational risk. In addition, the Bank Protection function 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 the Treasury, Mortgage Company, 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 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 newly created Enterprise Risk Management Committee (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 Executive Asset Liability Committee and the Enterprise Marketing Committee. Other committees accountable to the ERMC include the Loan Loss Reserve Committee, Capital Committee and the Retail Distribution Governance Committee. 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, counter-party credit risk, the accuracy of risk grades assigned to commercial credit exposure, appropriate accounting for charge-offs, and non-accrual 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.

Quantitative and Qualitative Disclosures About Market Risk (continued)

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 monthly management reviews of large credit exposures and credits experiencing deterioration of credit quality. Lending officers with the authority to extend credit are delegated specific authority amounts, the utilization of which is closely monitored. Underwriting activities are centralized, and ERM manages the policy and the authority delegation process directly. The Credit Risk Review function, which reports to the Risk and Compliance Committee of the Board of Directors, 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 required allowances 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. 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 that provides for thirteen probabilities of default grade categories and an additional nine grade categories for estimating actual losses given an event of default. The probability of default and loss given default evaluations are not separated in the ten-grade risk rating system. The Bancorp has completed significant validation and testing of the dual risk rating system. Scoring systems, various analytical tools and delinquency monitoring are used to assess the credit risk in the Bancorp’s homogenous consumer loan portfolios.

Overview

General economic conditions continued to deteriorate from the third quarter of 2008, which had an adverse impact across the majority of the Bancorp’s loan and lease products. Geographically, the Bancorp experienced the most stress in the states of Michigan and Florida due to the decline in real estate prices. Real estate price 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 portfolios, the commercial homebuilder and developer, remaining non-owner occupied commercial real estate, residential mortgage and brokered home equity portfolios exhibited the most stress. Management suspended 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 raised underwriting standards across both the consumer and commercial loan product offerings. During the fourth quarter of 2008, in an effort to reduce loan exposure to the real estate and construction industries and obtain the highest realizable value, the Bancorp sold or moved to held-for-sale $1.3 billion in commercial loans. Throughout 2009, the Bancorp continued to aggressively engage in other loss mitigation techniques such as reducing lines of credit, restructuring certain consumer and commercial loans, tightening underwriting standards on commercial loans and across the consumer loan portfolio as well as expanding commercial and consumer loan workout teams. The following credit information presents the Bancorp’s loan portfolio diversification, an analysis of nonperforming loans and loans charged-off, and a discussion of the allowance for credit losses.

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 and real estate project type.

The risk within the commercial real estate portfolio is managed and monitored through an underwriting process utilizing detailed origination policies, continuous loan level reviews, the 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 occupied, non-owner occupied and construction lending. Included in the policies are maturity and amortization terms, maximum loan-to-values (LTV), 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 an appraisal of collateral be performed at origination and on an as needed basis, in conformity with market conditions and regulatory requirements. Independent reviews are performed on appraisals to ensure the appraiser is qualified and consistency in the evaluation process exists.

Quantitative and Qualitative Disclosures About Market Risk (continued)

Table 23 provides detail on total commercial loan and leases, including held-for-sale, by major 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.

TABLE 23: Total Commercial Loan and Lease (a)


As of September 30 ($ in millions)	2009					2008
As of September 30 ($ in millions)	Outstanding			Exposure	Nonaccrual	Outstanding	Exposure	Nonaccrual
By industry:
Real estate	$	10,506		12,160	1,028	12,728	15,669	636
Manufacturing		6,607		13,188	212	7,602	14,502	113
Financial services and insurance		4,380		8,816	44	3,512	7,991	29
Construction		4,162		5,814	888	5,656	8,575	748
Healthcare		3,000		4,966	87	3,013	4,974	17
Business services		2,693		4,822	46	2,760	5,172	36
Retail trade		2,647		5,583	120	3,878	7,193	113
Transportation and warehousing		2,552		3,027	33	2,754	3,255	33
Wholesale trade		2,279		4,539	58	2,611	4,635	18
Other services		1,178		1,614	30	1,159	1,672	19
Accommodation and food		1,021		1,496	53	1,137	1,582	63
Communication and information		880		1,406	13	937	1,546	10
Mining		786		1,199	25	788	1,278	18
Individuals		768		973	29	1,153	1,505	45
Public administration		742		911	—	740	959	—
Entertainment and recreation		715		929	27	734	992	23
Agribusiness		598		723	25	639	814	8
Utilities		493		1,359	—	483	1,228	—
Other		312		591	—	139	318	4
Total	$	46,319		74,116	2,718	52,423	83,860	1,933
By loan size:
Less than $200,000		3	%	2	4	3	2	4
$200,000 to $1 million		12		8	18	12	9	15
$1 million to $5 million		24		28	38	26	22	38
$5 million to $10 million		14		11	19	14	13	21
$10 million to $25 million		24		22	16	23	24	20
Greater than $25 million		23		29	5	22	30	2
Total		100	%	100	100	100	100	100
By state:
Ohio		27	%	31	15	25	29	12
Michigan		17		15	18	18	17	32
Florida		9		7	27	10	8	26
Illinois		8		6	9	9	9	5
Indiana		6		6	6	7	7	7
Kentucky		5		5	5	5	5	5
North Carolina		3		3	5	3	3	2
Tennessee		2		2	4	3	2	3
Pennsylvania		2		2	—	2	2	—
All other states		21		23	11	18	18	8
Total		100	%	100	100	100	100	100

(a)

Outstanding reflects total commercial customer loan and lease balances, including held for sale and net of unearned income, and exposure reflects total commercial customer lending commitments.

Quantitative and Qualitative Disclosures About Market Risk (continued)

The Bancorp has identified certain categories of loans which it believes represent a higher level of risk, as compared to the rest of the Bancorp’s loan portfolio, due to economic or market conditions in the Bancorp’s key lending areas. Tables 24-27 provide an analysis of each of the categories of loans as of and for the three and nine months ended September 30, 2009.

TABLE 24: Non-Owner Occupied Commercial Real Estate


As of September 30, 2009 ($ in millions)						Net Charge-offs for September 2009
By State:	Outstanding		Exposure	90 Days Past Due	Non Accrual	Three Months Ended	Nine Months Ended
Ohio	$	2,962	3,269	39	224	40	82
Michigan		2,112	2,337	59	196	39	100
Florida		1,654	1,776	71	443	72	144
Illinois		848	979	9	121	12	33
North Carolina		801	875	15	139	20	33
Indiana		546	623	3	60	8	18
All other states		1,106	1,426	89	135	25	75
Total	$	10,029	11,285	285	1,318	216	485

TABLE 25: Home Builder and Developer (a)


As of September 30, 2009 ($ in millions)						Net Charge-offs for September 2009
By State:	Outstanding		Exposure	90 Days Past Due	Non Accrual	Three Months Ended	Nine Months Ended
Ohio	$	423	611	11	92	13	24
Michigan		348	459	25	76	13	43
Florida		341	386	14	163	43	75
North Carolina		299	336	11	104	14	29
Indiana		117	149	—	22	2	3
All other states		318	428	18	102	23	74
Total	$	1,846	2,369	79	559	108	248

(a)

Home Builder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of $244 million and a total exposure of $537 million are also included in Table 24: Non-Owner Occupied Commercial Real Estate.

TABLE 26: Automobile Dealers


As of September 30, 2009 ($ in millions)						Net Charge-offs for September 2009
By State:	Outstanding		Exposure	90 Days Past Due	Non Accrual	Three Months Ended	Nine Months Ended
Ohio	$	315	622	—	14	5	26
Illinois		237	409	2	12	—	19
Michigan		200	362	2	4	—	3
Florida		120	194	1	10	—	12
Kentucky		37	59	—	5	2	3
All other states		270	491

Large accelerated filer

Accelerated filer

Non-accelerated filer

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Smaller reporting company