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 March 31, 2010

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 794,816,131 shares of the Registrant’s common stock, without par value, outstanding as of March 31, 2010.

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		6
Recent Accounting Standards Critical Accounting Policies Statements of Income Analysis		6 6 7
Balance Sheet Analysis		14
Business Segment Review		20
Quantitative and Qualitative Disclosures about Market Risk (Item 3)
Risk Management – Overview		26
Credit Risk Management		27
Market Risk Management		38
Liquidity Risk Management		41
Capital Management		42
Off-Balance Sheet Arrangements		43
Controls and Procedures (Item 4)		45
Condensed Consolidated Financial Statements and Notes (Item 1)
Balance Sheets (unaudited)		46
Statements of Income (unaudited)		47
Statements of Changes in Shareholders’ Equity (unaudited)		48
Statements of Cash Flows (unaudited)		49
Notes to Condensed Consolidated Financial Statements (unaudited)		50

Part II. Other Information
Legal Proceedings (Item 1)		81
Risk Factors (Item 1A)		81
Unregistered Sales of Equity Securities and Use of Proceeds (Item 2)		81
Exhibits (Item 6)		82
Signatures		83
Certifications

This report may contain forward-looking statements about Fifth Third Bancorp and/or the company as combined acquired entities within the meaning of Section 27A of the Securities Act of 1933, as amended, and Rule 175 promulgated thereunder, and Section 21E of the Securities Exchange Act of 1934, as amended, and Rule 3b-6 promulgated thereunder, that involve inherent risks and uncertainties. This report may contain certain forward-looking statements with respect to the financial condition, results of operations, plans, objectives, future performance and business of Fifth Third Bancorp and/or the combined company including statements preceded by, followed by or that include the words or phrases such as “will likely result,” “may,” “are expected to,” “is anticipated,” “estimate,” “forecast,” “projected,” “intends to,” or may include other similar words or phrases such as “believes,” “plans,” “trend,” “objective,” “continue,” “remain,” or similar expressions, or future or conditional verbs such as “will,” “would,” “should,” “could,” “might,” “can,” or similar verbs. There are a number of important factors that could cause future results to differ materially from historical performance and these forward-looking statements. Factors that might cause such a difference include, but are not limited to: (1) general economic conditions and weakening in the economy, specifically the real estate market, either nationally or in the states in which Fifth Third, one or more acquired entities and/or the combined company do business, are less favorable than expected; (2) deteriorating credit quality; (3) political developments, wars or other hostilities may disrupt or increase volatility in securities markets or other economic conditions; (4) changes in the interest rate environment reduce interest margins; (5) prepayment speeds, loan origination and sale volumes, charge-offs and loan loss provisions; (6) Fifth Third’s ability to maintain required capital levels and adequate sources of funding and liquidity; (7) maintaining capital requirements may limit Fifth Third’s operations and potential growth; (8) changes and trends in capital markets; (9) problems encountered by larger or similar financial institutions may adversely affect the banking industry and/or Fifth Third; (10) competitive pressures among depository institutions increase significantly; (11) effects of critical accounting policies and judgments; (12) changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board (FASB) or other regulatory agencies; (13) legislative or regulatory changes or actions, or significant litigation, adversely affect Fifth Third, one or more acquired entities and/or the combined company or the businesses in which Fifth Third, one or more acquired entities and/or the combined company are engaged; (14) ability to maintain favorable ratings from rating agencies; (15) fluctuation of Fifth Third’s stock price; (16) ability to attract and retain key personnel; (17) ability to receive dividends from its subsidiaries; (18) potentially dilutive effect of future acquisitions on current shareholders’ ownership of Fifth Third; (19) effects of accounting or financial results of one or more acquired entities; (20) difficulties in separating Fifth Third Processing Solutions from Fifth Third; (21) loss of income from any sale or potential sale of businesses that could have an adverse effect on Fifth Third’s earnings and future growth; (22) ability to secure confidential information through the use of computer systems and telecommunications networks; and (23) the impact of reputational risk created by these developments on such matters as business generation and retention, funding and liquidity. 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, 2009, 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 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 (the “Bancorp” or “Fifth Third”) financial condition and results of operations during the periods included in the Condensed Consolidated Financial Statements, which are a part of this filing. Reference to the Bancorp incorporates the parent holding company and all consolidated subsidiaries.

TABLE 1: Selected Financial Data


For the three months ended March 31 ($ in millions, except per share data)	2010			2009			% Change
Income Statement Data
Net interest income (a)	$	901		$	781		15
Noninterest income		627			697		(10	)
Total revenue (a)		1,528			1,478		3
Provision for loan and lease losses		590			773		(24	)
Noninterest expense		956			962		(1	)
Net income (loss)		(10	)		50		NM
Net income (loss) available to common shareholders		(72	)		(26	)	(175	)
Common Share Data
Earnings per share, basic		($.09	)		($.04	)	(125	)
Earnings per share, diluted		(.09	)		(.04	)	(125	)
Cash dividends per common share		.01			.01		—
Market value per share		13.56			2.92		364
Book value per share		12.31			13.61		(10	)
Financial Ratios (%)
Return on assets		(.04	)%		.17		NM
Return on average common equity		(3.0	)		(1.4	)	(114	)
Average equity as a percent of average assets		11.92			10.18		17
Tangible equity (b)		9.67			7.89		23
Tangible common equity (c)		6.37			4.23		51
Net interest margin (a)		3.63			3.06		19
Efficiency (a)		62.6			65.1		(4	)
Credit Quality
Net losses charged off	$	582		$	490		19
Net losses charged off as a percent of average loans and leases		3.01	%		2.37	%	26
Allowance for loan and lease losses as a percent of loans and leases		4.91			3.71		32
Allowance for credit losses as a percent of loans and leases (d)		5.25			3.99		31
Nonperforming assets as a percent of loans, leases and other assets, including other real estate owned (e)		4.02			3.19		26
Average Balances
Loans and leases, including held for sale	$	80,136		$	85,829		(7	)
Total securities and other short-term investments		20,559			17,835		15
Total assets		113,433			118,681		(4	)
Transaction deposits (f)		64,203			52,347		23
Core deposits (g)		76,262			66,848		14
Wholesale funding (h)		20,215			34,902		(42	)
Shareholders’ equity		13,518			12,084		12
Regulatory Capital Ratios (%)
Tier I capital		13.40	%		10.93		23
Total risk-based capital		17.55			15.13		16
Tier I leverage		12.00			10.29		17
Tier I common equity		6.97			4.50		55

(a)

Amounts presented on a fully taxable equivalent (FTE) basis. The FTE adjustments for the three months ended March 31, 2010 and 2009 were $4 and $5, 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 affected 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)

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

(g)

Includes transaction deposits plus other time deposits.

(h)

Includes certificates $100 thousand 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 March 31, 2010, the Bancorp had $113 billion in assets, operated 16 affiliates with 1,309 full-service Banking Centers, including 103 Bank Mart^® locations open seven days a week inside select grocery stores, and 2,364 Jeanie^® ATMs in the Midwestern and Southeastern regions of the United States. The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Investment Advisors.

The Bancorp believes that banking is first and foremost a relationship business where the strength of the competition and challenges for growth can vary in every market. The Bancorp believes its affiliate operating model provides a competitive advantage by 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 March 31, 2010, net interest income, on a fully taxable equivalent (FTE) basis, and noninterest income provided 59% and 41% 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 weakened economy within the Bancorp’s footprint.

Net interest income, net interest margin 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, mortgage banking net revenue, corporate banking revenue, fiduciary and investment management fees and card and processing revenue. Noninterest expense is primarily driven by personnel costs and occupancy expenses, costs incurred in the origination of loans and leases, and insurance premiums paid to the Federal Deposit Insurance Corporation (FDIC).

Earnings Summary

During the quarter ended March 31, 2010, the Bancorp continued to be affected by a challenging credit environment. The Bancorp’s net loss available to common shareholders for the quarter ended March 31, 2010 was $72 million, or $0.09 per diluted share, which included $62 million in preferred stock dividends. The Bancorp’s net loss available to common shareholders was $26 million, or $0.04 per diluted share, for the quarter ended March 31, 2009, which included $76 million in preferred stock dividends.

Net interest income (FTE) increased 15% in the first quarter of 2010 to $901 million, compared to $781 million in the same period last year. The primary reason for the increase in net interest income was a 59 basis point (bp) increase in the interest rate spread. This was the result of a mix shift from higher cost term deposits to lower cost deposit products throughout 2009 and into the first quarter of 2010 as well as a decrease in short term borrowings and long term debt, partially offset by reduced loan demand. First quarter 2010 and 2009 results included $21 million and $44 million, respectively, of net interest income due to the accretion of purchase accounting adjustments related to loans and deposits from acquisitions during 2008. In addition, there was a $6 million charge to net interest income related to the change in timing of expected cash flows on certain leveraged leases from a settlement with the IRS in the first quarter of 2009. Excluding these adjustments, net interest income increased $137 million, or 18%, from the first quarter of 2009. Net interest margin was 3.63% in the first quarter of 2010, an increase of 57 bp from the first quarter of 2009.

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

Noninterest income decreased 10% to $627 million in the first quarter of 2010 compared to the same period last year. First quarter 2010 results include $13 million in revenue from the Transition Service Agreement (TSA) entered into as part of the sale of a majority interest in the Bancorp’s merchant acquiring and financial institutions processing business in June 2009 (hereinafter the “Processing Business Sale”), while first quarter 2009 results include $54 million in charges related to one of the Bancorp’s Bank Owned Life Insurance (BOLI) policies. Excluding these items, noninterest income declined $137 million driven primarily by lower card and processing revenue due to the Processing Business Sale and a decrease in corporate banking revenue, partially offset by growth in mortgage banking net revenue and investment advisory revenue.

Noninterest expense remained relatively flat compared to the first quarter of 2009. A decrease in card and processing expense due to the Processing Business Sale in June 2009 as well as a lower provision for unfunded commitments and letters of credit were offset by higher FDIC insurance premiums and an increase in expenses related to representations and warranties on residential mortgage loans sold to third-parties. In addition, first quarter 2010 results include $13 million in operating expenses related to the previously discussed TSA.

The Bancorp does not originate subprime mortgage loans, does not hold credit default swaps and does not hold asset-backed securities (ABS) backed by subprime mortgage loans in its securities portfolio. However, the Bancorp has exposure to disruptions in the capital markets and weakened economic conditions. Throughout 2009 and into 2010, the Bancorp continued to be affected by high unemployment rates, weakened housing markets, particularly in the upper Midwest and Florida, and a challenging credit environment. Credit trends, however, began to show signs of stabilization at the end of 2009 and into the first quarter of 2010 and, as a result, the provision for loan and lease losses decreased 24% to $590 million for the three months ended March 31, 2010, compared to $773 million during the three months ended March 31, 2009. Net charge-offs as a percent of average loans and leases increased to 3.01% during the first quarter of 2010 compared to 2.37% during the first quarter of 2009. At March 31, 2010, nonperforming assets as a percent of loans, leases and other assets, including other real estate owned (excluding nonaccrual loans held for sale) were 4.02%, compared to 4.22% at December 31, 2009 and 3.19% at March 31, 2009. Refer to the Credit Risk Management section in Management’s Discussion and Analysis for more information on credit quality.

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 March 31, 2010, the Tier 1 capital ratio was 13.40%, the Tier 1 leverage ratio was 12.00% and the total risk-based capital ratio was 17.55%.

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

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 accounting principles generally accepted in the United States of America (U.S. GAAP) do 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.

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

TABLE 2: Non-GAAP Financial Measures


As of March 31 ($ in millions)	March 31, 2010			December 31, 2009		March 31, 2009
Total shareholders’ equity	$	13,408		13,497		12,102
Less:
Goodwill		(2,417	)	(2,417	)	(2,623	)
Intangible assets		(94	)	(106	)	(154	)
Accumulated other comprehensive income		(288	)	(241	)	(151	)

Tangible equity (a)		10,609		10,733		9,174
Less: preferred stock		(3,620	)	(3,609	)	(4,252	)

Tangible common equity (b)		6,989		7,124		4,922
Total assets		112,651		113,380		119,313
Less:
Goodwill		(2,417	)	(2,417	)	(2,623	)
Intangible assets		(94	)	(106	)	(154	)
Accumulated other comprehensive income, before tax		(443	)	(370	)	(233	)

Tangible assets, excluding unrealized gains / losses (c)	$	109,697		110,487		116,303

Ratios:
Tangible equity (a) / (c)		9.67	%	9.71	%	7.89	%
Tangible common equity (b) / (c)		6.37	%	6.45	%	4.23	%

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 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, 2009. No material changes have been made to the valuation techniques or models during the three months ended March 31, 2010.

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

STATEMENTS OF INCOME ANALYSIS

Net Interest Income

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

Table 3 presents the components of net interest income, net interest margin and net interest spread for the three months ended March 31, 2010 and 2009. 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 $901 million for the first quarter of 2010, an increase of $120 million from the first quarter of 2009. Net interest income was affected by the amortization and accretion of premiums and discounts on acquired loans and deposits that increased net interest income by $21 million during the first quarter of 2010, compared to an increase of $44 million for the first quarter of 2009. In addition, there was a $6 million charge to net interest income related to the change in timing of expected cash flows on certain leveraged leases related to the IRS settlement in the first quarter of 2009. Exclusive of the impact of these items, net interest income increased $137 million compared to the first quarter of 2009. Net interest income was positively impacted by improved pricing spreads on commercial loan originations, 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 and into 2010 and a decrease in the average rate paid on interest bearing liabilities. Net interest income was also impacted by a decrease in average interest bearing liabilities of $8.6 billion from the first quarter of 2009, driven primarily by growth in the Bancorp’s free-funding position. The shift in composition of average interest earning assets and average interest bearing liabilities resulted in an increase in the net interest rate spread to 3.33% for the three months ended March 31, 2010 from 2.74% in the same period last year.

Net interest margin increased to 3.63% in the first quarter of 2010 compared to 3.06% in the first quarter of 2009. Net interest margin was affected by the amortization and accretion of premiums and discounts on acquired loans and deposits that increased net interest margin approximately 9 bp in the first quarter of 2010 compared to 17 bp in the first quarter of 2009. In addition, the first quarter of 2009 had a 2 bp reduction to the net interest margin as a result of the charge related to the change in timing of expected cash flows on certain leveraged leases related to the IRS settlement as previously mentioned. Exclusive of these adjustments, net interest margin increased 63 bp on a year-over-year basis driven by improved pricing on new commercial loan originations and the previously mentioned shift in funding composition to lower cost core deposits, an increase in free-funding balances and a decrease in average rates paid on interest bearing liabilities.

Total average interest-earning assets decreased three percent from the first quarter of 2009. This decrease was driven by a 10% decrease in average commercial loans and two percent decrease in average consumer loans partially offset by a $2.7 billion, or 15%, increase in the average investment portfolio compared to the first quarter of 2009. The increase in the average investment portfolio compared to the first quarter of 2009 is a result of an increase in purchases of mortgage-backed securities and automobile asset-backed securities over the course of 2009. Further detail on the Bancorp’s investment securities portfolio can be found in the Investment Securities section of Management’s Discussion and Analysis.

Interest income (FTE) from loans and leases decreased $38 million, or four percent, compared to the first quarter of 2009. The decrease in interest income was a result of a four percent decrease in average loan and lease balances partially offset by a 14 bp increase in average yield. Exclusive of the amortization and accretion of premiums and discounts on acquired loans and leveraged lease charges discussed above, interest income (FTE) from loans and leases decreased $21 million compared to the prior year’s first quarter.

Interest income (FTE) from investment securities and short-term investments increased one percent compared to the first quarter of 2009 as a result of the 15% increase in the average investment portfolio partially offset by a 50 bp decrease in the average yield.

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

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


For the three months ended	March 31, 2010							March 31, 2009							Attribution of Change in Net Interest Income *(a)*
($ in millions)	Average Balance			Revenue/ Cost		Average Yield/ Rate		Average Balance			Revenue/ Cost		Average Yield/ Rate		Volume			Yield/ Rate			Total
Assets
Interest-earning assets:
Loans and leases (b):
Commercial and industrial loans	$	26,299		$	299	4.61	%	$	28,968		$	286	4.00	%	$	(28	)	$	41		$	13
Commercial mortgage		11,836			123	4.20			12,809			144	4.56			(10	)		(11	)		(21	)
Commercial construction		3,781			27	2.92			5,115			42	3.35			(10	)		(5	)		(15	)
Commercial leases		3,468			39	4.54			3,564			28	3.12			(1	)		12			11

Subtotal – commercial		45,384			488	4.36			50,456			500	4.02			(49	)		37			(12	)
Residential mortgage loans		9,478			121	5.18			10,921			162	6.04			(19	)		(22	)		(41	)
Home equity		12,338			122	4.02			12,763			135	4.28			(5	)		(8	)		(13	)
Automobile loans		10,185			157	6.24			8,687			137	6.40			23			(3	)		20
Credit card		1,940			51	10.76			1,825			49	10.89			3			(1	)		2
Other consumer loans/leases		811			24	11.87			1,177			18	6.18			(7	)		13			6

Subtotal – consumer		34,752			475	5.55			35,373			501	5.75			(5	)		(21	)		(26	)

Total loans and leases		80,136			963	4.87			85,829			1,001	4.73			(54	)		16			(38	)
Securities:
Taxable		17,240			180	4.23			16,283			176	4.39			10			(6	)		4
Exempt from income taxes (b)		175			3	7.08			262			5	7.44			(2	)		—			(2	)
Other short-term investments		3,144			1	0.18			1,290			1	0.19			—			—			—

Total interest-earning assets		100,695			1,147	4.62			103,664			1,183	4.63			(46	)		10			(36	)
Cash and due from banks		2,247							2,438
Other assets		14,262							15,363
Allowance for loan and lease losses		(3,771	)						(2,784	)

Total assets	$	113,433						$	118,681

Liabilities and Shareholders’ Equity
Interest-bearing liabilities:
Interest checking	$	19,533		$	14	0.28	%	$	14,229		$	10	0.27	%	$	4		$	—		$	4
Savings		18,469			31	0.67			16,272			36	0.89			4			(9	)		(5	)
Money market		4,622			5	0.46			4,559			8	0.72			—			(3	)		(3	)
Foreign office deposits		2,757			2	0.34			1,755			2	0.54			1			(1	)		—
Other time deposits		12,059			82	2.75			14,501			130	3.62			(20	)		(28	)		(48	)
Certificates - $100,000 and over		7,049			37	2.16			11,802			88	3.04			(29	)		(22	)		(51	)
Other deposits		8			—	0.02			247			—	0.23			—			—			—
Federal funds purchased		220			—	0.13			701			1	0.30			—			(1	)		(1	)
Other short-term borrowings		1,449			—	0.23			9,621			23	1.00			(12	)		(11	)		(23	)
Long-term debt		11,489			75	2.64			12,531			104	3.36			(8	)		(21	)		(29	)

Total interest-bearing liabilities		77,655			246	1.29			86,218			402	1.89			(60	)		(96	)		(156	)
Demand deposits		18,822							15,532
Other liabilities		3,438							4,847

Total liabilities		99,915							106,597
Shareholders’ equity		13,518							12,084

Total liabilities and shareholders’ equity	$	113,433						$	118,681

Net interest income				$	901						$	781			$	14		$	106		$	120
Net interest margin						3.63	%						3.06	%
Net interest rate spread						3.33							2.74
Interest-bearing liabilities to interest-earning assets						77.12			83.17

(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 $4 and $5 for the three months ended March 31, 2010 and 2009, respectively.

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

Average core deposits increased $9.4 billion, or 14%, compared to the first quarter of last year primarily due to an increase in average demand deposits, average interest checking balances and average savings balances partially offset by a decrease in average time deposits. The cost of average core deposits decreased 52 bp from the first quarter of 2009 to .94% in the first quarter of 2010 primarily as a result of a mix shift to lower cost core deposits and an 87 bp decrease in rates on average time deposits.

Interest expense on wholesale funding decreased $104 million, or 48%, compared to the first quarter of 2009 as a result of declining interest rates which resulted in a $55 million reduction of interest expense, as well as a 42% decrease in average balances which contributed $49 million in reduction of interest expense. During the first quarter of 2010, wholesale funding represented 26% of interest-bearing liabilities compared to 40% in the first quarter of 2009. The decline in wholesale funding balances is primarily a result of a decrease in other short term borrowings due to a repayment of Term Auction Facility funds which had an average balance in the first quarter of 2009 of $7.6 billion in addition to a $4.8 billion decrease in certificates of deposit $100,000 and over. The decreased reliance on wholesale funding in the first quarter of 2010 compared to the first quarter of 2009 was a result of growth of core deposits as previously mentioned, and an increase in the Bancorp’s average equity position compared to first quarter of 2009. Refer to the Capital Management section for additional information on the Bancorp’s capital actions taken in 2009.

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, 2009. 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 decreased to $590 million in the first quarter of 2010 compared to $773 million in the same period last year. The decrease in the provision expense from the first quarter of 2009 was due to a decline in the growth rate of commercial and consumer delinquencies and a decline in the growth of loss estimates once the loans become delinquent as general economic conditions and overall credit quality began to show signs of stabilization. As of March 31, 2010, the allowance for loan and lease losses as a percentage of loans and leases increased to 4.91% from 3.71% at March 31, 2009.

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

Noninterest Income

For the three months ended March 31, 2010, noninterest income decreased by $70 million, or 10%, on a year-over-year basis. The components of noninterest income for these periods are as follows:

TABLE 4: Noninterest Income


For the three months ended March 31 ($ in millions)	2010		2009			Percent Change
Mortgage banking net revenue	$	152	$	134		14
Service charges on deposits		142		146		(3	)
Investment advisory revenue		91		79		14
Corporate banking revenue		81		113		(28	)
Card and processing revenue		73		223		(67	)
Other noninterest income		74		10		633
Securities gains (losses), net		14		(24	)	NM
Securities gains, net – non-qualifying hedges on mortgage servicing rights		—		16		(100	)

Total noninterest income	$	627	$	697		(10	)

NM: Not meaningful

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

Mortgage banking net revenue increased to $152 million in the first quarter of 2010 from $134 million in the same period last year. The components of mortgage banking net revenue for the three months ended March 31, 2010 and 2009 are shown in Table 5.

TABLE 5: Components of Mortgage Banking Net Revenue


For the three months ended March 31 ($ in millions)	2010			2009
Origination fees and gains on loan sales	$	71		$	131
Servicing revenue:
Servicing fees		53			45
Servicing rights amortization		(23	)		(43	)
Net valuation adjustments on servicing rights and free-standing derivatives entered into to economically hedge MSR		51			1

Net servicing revenue		81			3

Mortgage banking net revenue	$	152		$	134

Origination fees and gains on loan sales decreased by $60 million, or 46%, due to a decline in originations and a decrease in the sales margin on loans sold. The decrease in loan originations and lower sales margins contributed approximately $38 million and $22 million, respectively, to the decrease in origination fees and gains on loan sales. Mortgage originations decreased $1.6 billion, or 31%, to $3.5 billion compared to the same quarter last year. This decline was primarily the result of interest rates remaining stable during the current quarter and the resulting decline in refinancing activity to $2.5 billion of originations compared to $4.4 billion during the same period in the prior year. Refinancing activity peaked in the second and third quarters of 2009 when mortgage rates were at historical lows.

Mortgage net servicing revenue increased $78 million compared to the same period last year as a decrease in refinancing activity resulted in reduced prepayments and reduced amortization expense on the existing servicing portfolio. As a result, servicing fee revenue increased by $8 million, or 18%, compared to the prior year quarter while amortization expense decreased by $20 million, or 47%, compared to the first quarter of 2009. Net servicing revenue is comprised of gross servicing fees and related amortization as well as valuation adjustments on mortgage servicing rights and mark-to-market adjustments on both settled and outstanding free-standing derivative financial instruments. The Bancorp’s total residential mortgage loans serviced at March 31, 2010 and 2009 was $59.5 billion and $52.5 billion, respectively, with $50.3 billion and $41.5 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 9 of the Notes to Condensed Consolidated Financial Statements. The Bancorp maintains a non-qualifying hedging strategy to manage a portion of the risk associated with changes in impairment on the mortgage servicing rights (MSR) portfolio. The Bancorp recognized a gain from derivatives economically hedging MSRs of $58 million, offset by a temporary impairment of $7 million, resulting in a net gain of $51 million for the three months ended March 31, 2010. For the three months ended March 31, 2009, the Bancorp recognized a gain from derivatives economically hedging MSRs of $70 million, offset by a temporary impairment of $69 million, resulting in a net gain of $1 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 as a component of its non-qualifying hedging strategy. There were no sales of securities related to the Bancorp’s non-qualifying hedging strategy during the first quarter of 2010. Gains recognized on the sales of securities related to the Bancorp’s non-qualifying hedging strategy were $16 million during the first quarter of 2009.

Service charges on deposits decreased by $4 million, or three percent, in the first quarter of 2010 compared to the same period last year. Commercial deposits revenue decreased $1 million, or one percent, compared to the prior year. This decrease was driven by a $4 million increase in earnings credits on compensating balances resulting from changes in short-term interest rates offset by growth in service charges of $3 million, or two percent. 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 deposit accounts multiplied by the crediting rate.

Consumer deposit revenue decreased $3 million, or five percent, in the first quarter of 2010 compared to the same period last year. The decrease in consumer service charges was attributable to changes in overdraft polices resulting in overdraft occurrences decreasing nine percent compared to the first quarter of 2009. The Bancorp is evaluating the impact Regulation E will have on the magnitude of service charges on deposit accounts. Regulation E is a Federal Reserve Board rule effective July 1, 2010 that prohibits financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. The Bancorp continues to develop deposit products that generate alternative revenue streams through voluntary customer adoption such as its secure checking and rewards checking products. Further, it is likely a number of the Bancorp’s customers will elect to set up overdraft protection by linking their checking account to a savings account, credit card or home equity line with the Bancorp. These actions should mitigate the potential negative impact Regulation E will have on deposit service charge revenue.

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

Investment advisory revenue increased $12 million, or 14%, from the first quarter of 2009. The Bancorp experienced double digit increases across most major categories within investment advisory revenue. Brokerage fee income, which includes Fifth Third Securities income, increased $7 million, or 30%, to $32 million in the first quarter of 2010 as improved market performance resulted in increased activity and brokerage commissions. Revenue from private client services increased $3 million, or 10%, compared to the first quarter of 2009. Improved market performance resulted in higher levels of managed assets, increasing personal trust fees by $3 million, or 11% compared to March 31, 2009. As of March 31, 2010, the Bancorp had approximately $190 billion in assets under care and managed $25 billion in assets for individuals, corporations and not-for-profit organizations.

Corporate banking revenue decreased $32 million, or 28% from the first quarter of 2009. The decline in corporate banking revenue was largely attributable to decreases of $15 million, $10 million, and $7 million in lease remarketing fees, international income, and servicing fees on loans serviced for others, respectively, compared to the first quarter of 2009. Lease remarketing fees decreased primarily due to a reduction in lease remarketing activity compared to the first quarter of 2009 while international income decreased due to the impact of current economic conditions on foreign exchange and letter of credit volume. Service fees on loans serviced for others were primarily impacted by a change in U.S. GAAP adopted by the Bancorp on January 1, 2010. For further discussion of the impact of new accounting guidance adopted during the quarter, see Note 3 of the Notes to Condensed Consolidated Financial Statements.

On June 30, 2009, the Bancorp completed the sale of a majority interest in its merchant acquiring and financial institutions processing businesses. As part of this transaction, the Bancorp retained certain debit and credit card interchange revenue. The financial institutions and merchant processing portions of the business which were sold historically comprised approximately 70% of total card and processing revenue. As a result of the Processing Business Sale, card and processing revenue decreased $150 million, or 67%, in the first quarter of 2010 compared to the first quarter of 2009. Gross card issuer interchange revenue increased $7 million, or 12%, compared to the first quarter of 2009 due to strong growth in debit card transaction volumes, partially offset by lower credit card usage. Merchant processing and financial institutions revenue was $80 million and $75 million, respectively, in the first quarter of 2009.

The major components of other noninterest income are as follows:

TABLE 6: Components of Other Noninterest Income


For the three months ended March 31 ($ in millions)	2010			2009
Gain on loan sales	$	25		$	13
Operating lease income		16			14
Cardholder fees		11			13
Bank owned life insurance income (loss)		11			(43	)
Insurance income		9			12
Consumer loan and lease fees		6			12
Banking center income		5			6
Loss on sale of other real estate owned		(16	)		(14	)
Other		7			(3	)

Total other noninterest income	$	74		$	10

Other noninterest income increased $64 million in the first quarter of 2010 compared to the same period last year primarily due to a $54 million increase in BOLI income and a $12 million increase in gains on loan sales. The first quarter of 2009 included a $54 million charge to reduce the cash surrender value of one of the Bancorp’s BOLI policies to reflect reserves recorded in connection with the intent to surrender the policy, as well as losses related to market value declines. The gain on loan sales in the first quarter of 2010 primarily resulted from gains realized from the sale of commercial loans that were designated as held for sale. Other income increased primarily due to $13 million in revenue related to the TSA entered into as a result of the Processing Business Sale in June of 2009.

Net securities gains totaled $14 million in the first quarter of 2010 compared to $24 million of net securities losses during the first quarter of 2009. Net securities losses in 2009 included $18 million in losses attributed to the reclassification of securities related to deferred compensation plans from available-for-sale to trading.

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

Noninterest Expense

Total noninterest expense decreased $6 million, or one percent, in the first quarter of 2010 compared to the same period last year. A decrease in card and processing expense due to the Processing Business Sale in June of 2009 and a lower provision for unfunded commitments and letters of credit were mostly offset by higher FDIC insurance premiums and charges to representation and warranty reserves related to residential mortgage loans.

The major components of noninterest expense are as follows:

TABLE 7: Noninterest Expense


For the three months ended March 31 ($ in millions)	2010		2009		Percent Change
Salaries, wages and incentives	$	329	$	327	1
Employee benefits		86		83	3
Net occupancy expense		76		79	(3	)
Technology and communications		45		45	—
Equipment expense		30		31	(5	)
Card and processing expense		25		67	(63	)
Other noninterest expense		365		330	11

Total noninterest expense	$	956	$	962	(1	)

Total personnel costs (salaries, wages and incentives plus employee benefits) increased one percent for the three months ended March 31, 2010, compared to the same period last year, driven by an increase in stock compensation and variable compensation expense, partially offset by a decline in base compensation from a decrease in the number of employees. Full time equivalent employees totaled 20,038 as of March 31, 2010 compared to 20,618 as of March 31, 2009. The decrease in full time equivalent employees from March 31, 2009 is primarily due to the transfer of employees on January 1, 2010 to FTPS Holding, LLC in accordance with the terms of the Processing Business Sale in June of 2009.

Card and processing expense includes third-party processing expenses, card management fees and other bankcard processing expenses. Card and processing expense decreased 63% compared to the same period last year due to the Process Business Sale in the second quarter of 2009. As part of the Processing Business Sale, the Bancorp entered into the TSA that resulted in the Bancorp incurring approximately $13 million in operating expenses during the three months ended March 31, 2010 that were offset with revenue from the TSA recorded in other noninterest income.

The efficiency ratio (noninterest expense divided by the sum of net interest income (FTE) and noninterest income) was 62.6% and 65.1% for the three months ended March 31, 2010 and 2009, respectively. The Bancorp continues to focus on efficiency initiatives as part of its core emphasis on operating leverage and on expense control.

The major components of other noninterest expense are as follows:

TABLE 8: Components of Other Noninterest Expense


For the three months ended March 31 ($ in millions)	2010		2009
FDIC insurance and other taxes	$	69	$	44
Losses and adjustments		63		26
Loan and lease		48		55
Affordable housing investments impairment		23		19
Marketing		21		16
Insurance		14		11
Intangible asset amortization		12		16
Postal and courier		12		15
Travel		12		9
Professional services fees		11		18
Operating lease		11		10
Provision for unfunded commitments and letters of credit		9		36
Recruitment and education		7		8
Data processing		6		5
Other		47		42

Total other noninterest expense	$	365	$	330

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

Total other noninterest expense increased by $35 million from the first quarter of 2009 primarily due to FDIC insurance premiums from higher assessment rates during the first quarter of 2010 and increased charges to representation and warranty reserves on residential mortgage loans sold to third-parties included in losses and adjustments. The expense for representation and warranties totaled $39 million during the three months ended March 31, 2010 and resulted from a higher volume of repurchase demands and an increase in losses recognized once a loan is repurchased. These increases were partially offset by a decreased provision for unfunded commitments and letters of credit due to lower estimates of inherent losses resulting from a decline in the growth rate of commercial and consumer delinquencies and a decline in the growth of loss estimates once the unfunded commitments are drawn upon and become delinquent.

Applicable Income Taxes

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

TABLE 9: Applicable Income Taxes


For the three months ended March 31 ($ in millions)	2010		2009
Loss before income taxes	($22	)	($262	)
Applicable income tax benefit	(12	)	(312	)
Effective tax rate	53.0	%	119.0	%

Applicable income tax benefit 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 quarter ended March 31, 2010 was higher than normal and included a $24 million tax benefit resulting from the settlement of certain uncertain tax positions with the IRS during the quarter and a $14 million non-cash charge relating to previously recognized tax benefits associated with stock-based compensation that will not be realized. The effective tax rate for the quarter ended March 31, 2009 was primarily impacted by the pre-tax loss in the first quarter of 2009, a $106 million tax benefit due to the impact of the decision to surrender one of the Bancorp’s BOLI policies and the determination that losses on the policy recorded in prior periods are now expected to be tax deductible, in addition to a $55 million tax benefit resulting from an agreement with the IRS to settle all of the Bancorp’s disputed leverage leases for all open years. See Note 13 of the Notes to Condensed Consolidated Financial Statements for further information.

Deductibility of Executive Compensation.

Certain sections of the Internal Revenue Code limit the deductibility of compensation paid to or earned by certain executive officers of a public company. This has historically limited compensation to $1 million per executive officer, and the Bancorp’s compensation philosophy has been to position pay to ensure deductibility. However, both the limit and the allowable compensation vehicles have changed as a result of the Bancorp’s participation in TARP. In particular, the Bancorp is not permitted to deduct compensation earned by certain executive officers in excess of $500,000 per executive officer as a result of the Bancorp’s participation in TARP. Therefore, a portion of the compensation earned by certain executive officers is not deductible by the Bancorp. The impact on the Bancorp’s tax liability as a result of payments in excess of this $500,000 per executive officer limit is approximately $4 million. The limitation of the deductibility of compensation earned by certain executive officers will continue until the Bancorp ends its participation in TARP. However, once the Bancorp has paid back its TARP funds, certain limitations will continue to apply to some forms of compensation granted while under TARP. The Bancorp’s Compensation Committee determined that the underlying executive compensation programs are appropriate and necessary to attract, retain and motivate senior executives, and that failing to meet these objectives creates more risk for the Bancorp and its value than the financial impact of losing the tax deduction.

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

BALANCE SHEET ANALYSIS

Loans and Leases

The Bancorp classifies its loans and leases based upon the primary purpose of the loan. Tables 10 and 11 summarize the end of period and average total loans and leases, including loans held for sale.

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


	March 31, 2010			December 31, 2009			March 31, 2009
($ in millions)	Balance		% of Total	Balance		% of Total	Balance		% of Total
Commercial:
Commercial and industrial loans	$	26,134	33	$	25,687	34	$	28,627	34
Commercial mortgage loans		11,865	15		11,936	15		12,768	15
Commercial construction loans		3,396	4		3,871	5		4,930	6
Commercial leases		3,389	4		3,535	4		3,521	4

Subtotal – commercial		44,784	56		45,029	58		49,846	59

Consumer:
Residential mortgage loans		9,239	12		9,846	12		10,972	13
Home equity		12,186	15		12,174	15		12,710	15
Automobile loans		10,180	13		8,995	11		8,688	10
Credit card		1,863	3		1,990	3		1,816	2
Other consumer loans and leases		778	1		812	1		1,139	1

Subtotal – consumer		34,246	44		33,817	42		35,325	41

Total loans and leases	$	79,030	100		78,846	100		85,171	100

Total loans and leases (excludes loans held for sale)	$	77,423			76,779			82,569

Total loans and leases, including loans held for sale, at March 31, 2010 decreased $6.1 billion, or seven percent, compared to March 31, 2009 and were relatively flat compared to December 31, 2009. The decrease in total loans and leases from March 31, 2009 was a result of a 10% decrease in total commercial loans and a three percent decrease in total consumer loans. On January 1, 2010 the Bancorp consolidated certain commercial and industrial loans, automobile loans, and home equity loans with outstanding balances of $670 million, $1.1 billion and $257 million, respectively, at March 31, 2010 in accordance with a change in U.S. GAAP. For further discussion on this topic, refer to Notes 3 and 8 of the Notes to Condensed Consolidated Financial Statements

Total commercial loans and leases decreased $5.1 billion or 10% compared to March 31, 2009 due to decreases across each commercial loan category. Commercial and industrial loan balances decreased $2.5 billion, or nine percent, compared to March 31, 2009 as a result of a decrease in customer demand for new originations, decrease in customer line utilization rates from 41% to 34% and tighter underwriting standards applied to both new loan originations and renewals, partially offset by the impact of the previously mentioned change in U.S. GAAP. Included in the commercial and industrial balance at March 31, 2010 were approximately $1.2 billion loans issued in conjunction with the Processing Business Sale in the second quarter of 2009. Commercial mortgage loans decreased $903 million, or seven percent, from March 31, 2009 primarily as a result of tighter lending requirements in an overall effort to limit exposure to commercial real estate. Commercial construction loans decreased $1.5 billion, or 31%, from March 31, 2009 due to management’s strategy to suspend new lending on commercial non-owner occupied real estate beginning in 2008. Total commercial leases decreased approximately four percent compared to March 31, 2009 as a result of general declines in leasing activity attributable to weak economic conditions.

Total commercial loans and leases decreased $244 million, or one percent, from December 31, 2009 as a result of decreases in commercial mortgage loans and commercial construction loans partially offset by an increase in commercial and industrial loans. Commercial and industrial loan balances increased $447 million, or two percent, compared to December 31, 2009 due to the change in U.S. GAAP previously mentioned. Commercial mortgage loans decreased $71 million, or one percent, compared to December 31, 2009 as a result of tighter lending requirements in an overall effort to limit exposure to commercial real estate. Commercial construction loans decreased $475 million, or 12%, from December 31, 2009 primarily due to approximately $285 million in loans that were reclassified as commercial mortgage loans due to completion of the construction project in the first quarter of 2010 and management’s strategy to suspend new lending on commercial non-owner occupied real estate beginning in 2008. Total commercial leases decreased approximately four percent compared to December 31, 2009 as a result of general declines in leasing activity attributable to weak economic conditions.

Total consumer loans and leases decreased $1.1 billion, or three percent, compared to March 31, 2009 primarily due to decreases in residential mortgage loans, home equity loans and other consumer loans partially offset by an increase in automobile loans. Residential mortgage loans decreased $1.7 billion, or 16%, from March 31, 2009 primarily as a result of a decrease in new residential mortgage loan originations as many customers took advantage of attractive interest rates in the first quarter of 2009. Home equity loans decreased $524 million, or four percent, from March 31, 2009 primarily as a result of tighter underwriting standards implemented in 2008 that limited the Bancorp’s exposure as home values deteriorated throughout 2009 and into 2010 which was partially offset by the previously mentioned change in U.S. GAAP. Automobile loans increased $1.5 billion, or 17%, compared to March 31, 2009 primarily as a result of the previously mentioned change in U.S. GAAP. In addition, the Bancorp continued to experience growth in new automobile loan originations in the first quarter of 2010. Credit card loans increased $47 million, or three percent, from March 31, 2009 primarily as a result of continued success in cross selling credit card products to existing customers. Other consumer loans and leases, primarily made up automobile leases and student loans designated as held-for-sale, decreased $361 million, or 32%, compared to the prior year same quarter due to a decline in new originations as a result of tighter underwriting standards across the other consumer loan and lease portfolio

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

Total consumer loans and leases increased $428 million, or one percent, compared to December 31, 2009. The increase from December 31, 2009 was a result of the previously mentioned impact on automobile loans and home equity loan balances at March 31, 2010 from the change in U.S. GAAP partially offset by a decrease in residential mortgage loans. Residential mortgage loans decreased $607 million, or six percent, from December 31, 2009 due to a decrease in new residential mortgage loan originations. Home equity loans were relatively flat compared to December 31, 2009 as decreases in balances were offset by the previously mentioned change in U.S. GAAP. Automobile loans increased $1.2 billion, or 13%, compared to December 31, 2009, primarily as a result of the previously mentioned change in U.S. GAAP. Credit card loans decreased $127 million, or six percent, from December 31, 2009 as a result of pay downs on existing balances due to seasonality. Other consumer loans and leases decreased $34 million, or four percent 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.

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


	March 31, 2010			December 31, 2009			March 31, 2009
($ in millions)	Balance		% of Total	Balance		% of Total	Balance		% of Total
Commercial:
Commercial and industrial loans	$	26,299	33	$	25,838	32	$	28,968	34
Commercial mortgage loans		11,836	15		12,126	15		12,809	15
Commercial construction loans		3,781	5		4,134	5		5,115	6
Commercial leases		3,468	4		3,574	5		3,564	4

Subtotal – commercial		45,384	57		45,672	57		50,456	59

Consumer:
Residential mortgage loans		9,478	12		10,142	13		10,921	13
Home equity		12,338	15		12,291	16		12,763	15
Automobile loans		10,185	13		8,973	11		8,687	10
Credit card		1,940	2		1,982	2		1,825	2
Other consumer loans and leases		811	1		860	1		1,177	1

Subtotal – consumer		34,752	43		34,248	43		35,373	41

Total average loans and leases	$	80,136	100	$	79,920	100	$	85,829	100

Total portfolio loans and leases (excludes held for sale)	$	78,381		$	77,601		$	83,561

Average total commercial loans and leases decreased $5.1 billion, or 10%, compared to the first quarter of 2009 and $288 million, or one percent, compared to the fourth quarter of 2009. The decrease in average total commercial loans and leases was driven by lower customer line utilization rates, lower demand for new loans, and tighter underwriting standards implemented in 2008 offset by the impact of the change in U.S. GAAP, which required the Bancorp to consolidate previously sold loans.

Average total consumer loans and leases decreased $621 million, or two percent, compared to the first quarter of 2009 and increased $504 million, or one percent, compared to the fourth quarter of 2009. The previously mentioned change in accounting principle contributed approximately $1.2 billion to average automobile loans and $262 million to average home equity loans in the first quarter of 2010. The decrease in the average consumer loan balances from the first quarter of 2009 is primarily a result of a 13% decrease in average residential mortgage loans due to lower origination volumes in the first quarter of 2010. The increase compared to the fourth quarter of 2009 was a result of the previously mentioned change in U.S GAAP. Excluding the impact of this change, average consumer loan balances continued to decline as a result of lower customer demand and tighter underwriting standards.

Investment Securities

The Bancorp uses investment securities as a means of managing interest rate risk, providing liquidity support and providing collateral for pledging purposes. As of March 31, 2010, total investment securities were $17.6 billion compared to $18.9 billion at December 31, 2009 and $18.7 billion at March 31, 2009.

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 other than temporary impairment (OTTI). See Note 5 of the Notes to Condensed Consolidated Financial Statements for further information on OTTI.

At March 31, 2010, December 31, 2009 and March 31, 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 mortgage loans in its investment portfolio at March 31, 2010, December 31, 2009 or March 31, 2009. Additionally, there was approximately $139 million of securities classified as below investment grade as of March 31, 2010, $178 million as of December 31, 2009 and $105 million as of March 31, 2009.

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

TABLE 12: Components of Investment Securities


($ in millions)	March 31, 2010		December 31, 2009	March 31, 2009
Available-for-sale and other: (amortized cost basis)
U.S. Treasury and Government agencies	$	474	464	185
U.S. Government sponsored agencies		2,141	2,143	2,351
Obligations of states and political subdivisions		221	240	300
Agency mortgage-backed securities		11,069	11,074	9,391
Other bonds, notes and debentures		1,186	2,541	3,097
Other securities		1,432	1,417	1,318

Total available-for-sale and other securities	$	16,523	17,879	16,642

Held-to-maturity: (amortized cost basis)
Obligations of states and political subdivisions	$	350	350	353
Other bonds, notes and debentures		5	5	5

Total held-to-maturity	$	355	355	358

Trading: (fair value)
Variable rate demand notes	$	189	235	1,229
Other securities		116	120	178

Total trading	$	305	355	1,407

As of March 31, 2010, available-for-sale securities on an amortized cost basis decreased $1.4 billion from December 31, 2009 and $119 million from March 31, 2009. The decrease from December 31, 2009 was primarily a result of a change in U.S. GAAP that required the Bancorp to consolidate certain variable interest entities (VIEs), resulting in the elimination of approximately $805 million in commercial paper and $236 million of residual interest classified as available-for-sale securities. See Note 3 of the Notes to Condensed Consolidated Financial Statements for further information. Further impacting the available-for-sale securities were approximately $151 million of commercial mortgage backed securities and commercial mortgage obligations sold in the first quarter of 2010 and $150 million in paydowns on other asset backed securities. In addition, during the fourth quarter of 2009 the Bancorp purchased approximately $2.0 billion in agency mortgage-backed securities classified as available-for-sale. These securities were purchased primarily to replace VRDNs held in the trading portfolio, as the rates on mortgage-backed securities presented better investment opportunities than the VRDNs, which were experiencing declining coupon rates.

At March 31, 2010, available-for-sale securities were 17% of total interest-earning assets, compared to 18% at December 31, 2009 and 16% at March 31, 2009. The estimated weighted-average life of the debt securities in the available-for-sale portfolio was 5.3 years at March 31, 2010 compared to 4.4 years at December 31, 2009 and 3.1 years at March 31, 2009. The increase in the weighted-average life of the debt securities portfolio from March 31, 2009 was primarily driven by the weighted-average lives of agency mortgage-backed securities. This can be attributed to a general decline in estimates of prepayment speeds as the combination of a portfolio with lower coupon rates compared to prior year and the stabilization of mortgage interest rates has led to a portfolio with a longer average life. At March 31, 2010, the fixed-rate securities within the available-for-sale securities portfolio had a weighted-average yield of 4.54% compared to 4.48% at December 31, 2009 and 4.56% at March 31, 2009.

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. Market rates declined throughout 2009 and into 2010. This market rate decline led to unrealized gains on agency mortgage-backed securities of $376 million, $308 million, and $263 million as of March 31, 2010, December 31, 2009 and March 31, 2009, respectively. Total net unrealized gains on the available-for-sale securities portfolio was $412 million at March 31, 2010 compared to $334 million at December 31, 2009 and $274 million at March 31, 2009.

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

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


As of March 31, 2010 ($ 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	$	101	101	0.4	1.99	%
Average life 1 – 5 years		125	125	2.0	1.14
Average life 5 – 10 years		247	241	9.3	3.40
Average life greater than 10 years		1	1	11.5	1.46

Total		474	468	5.5	2.50

U.S. Government sponsored agencies:
Average life of one year or less		166	169	0.5	3.10
Average life 1 – 5 years		51	51	2.5	1.54
Average life 5 – 10 years		1,924	1,929	6.7	3.63
Average life greater than 10 years		—	—	—	—

Total		2,141	2,149	6.1	3.54

Obligations of states and political subdivisions (a):
Average life of one year or less		117	118	0.2	7.43
Average life 1 – 5 years		25	26	3.2	6.92
Average life 5 – 10 years		38	38	6.5	6.97
Average life greater than 10 years		41	42	11.5	4.25

Total		221	224	3.7	6.71

Agency mortgage-backed securities:
Average life of one year or less		173	177	0.7	4.46
Average life 1 – 5 years		3,383	3,518	3.3	4.55
Average life 5 – 10 years		7,436	7,669	6.4	4.74
Average life greater than 10 years		77	81	10.8	5.64

Total		11,069	11,445	5.4	4.68

Other bonds, notes and debentures (b):
Average life of one year or less		194	195	0.5	4.31
Average life 1 – 5 years		738	763	1.8	5.11
Average life 5 – 10 years		163	170	6.0	7.31
Average life greater than 10 years		91	87	20.6	7.34

Total		1,186	1,215	3.6	5.45

Other securities (c)		1,432	1,434

Total available-for-sale and other securities	$	16,523	16,935	5.3	4.54	%

(a)

Taxable-equivalent yield adjustments included in the above table are 2.54%, 0.78%, 0.20%, 0.51% and 1.56% 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 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 decreased $50 million, or 14%, compared to December 31, 2009 and $1.1 billion compared to March 31, 2009. The decrease from March 31, 2009 was driven by the sale of VRDNs which were held by the Bancorp in its trading securities portfolio. These securities were purchased from the market during 2008 and 2009 through FTS who was also the remarketing agent. During the fourth quarter of 2009, the rates on these securities began to decline substantially, and as a result the Bancorp sold a majority of its VRDNs and replaced them with higher-yielding investments. For more information on the VRDNs, see Note 11 of the Notes to Condensed Consolidated Financial Statements. Trading securities included $7 million and $13 million of auction rate securities as of March 31, 2010 and December 31, 2009, respectively. The unrealized loss on these securities was immaterial to the Bancorp as of March 31, 2010 and December 31, 2009. Auction rate securities held by the Bancorp were immaterial as of March 31, 2009.

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 by improving customer satisfaction, building full relationships, and offering competitive rates. At March 31, 2010, core deposits represented 68% of the Bancorp’s asset funding base, compared to 68% at December 31, 2009 and 57% at March 31, 2009.

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

Core deposits increased $381 million, or one percent, compared to December 31, 2009 and $9.0 billion, or 13%, compared to March 31, 2009. The increase compared to December 31, 2009 is due to increases of $1.2 billion, $351 million and $390 million in savings, money market, and foreign office deposits, respectively, partially offset by decreases of $809 million and $823 million in interest checking and other time deposits, respectively. The increase in consumer savings was driven by strong growth in consumer savings accounts that provide customers an incentive to maintain both a savings and checking account with the Bancorp. The decrease in interest checking is due to a decrease of $1.6 billion in public funds accounts partially offset by increases of $369 million and $385 million in commercial and consumer accounts, respectively. Public funds accounts increased by $4.0 billion during 2009 in part due to increased protection provided by FDIC programs, including the Transaction Account Guarantee program. As the economy began to stabilize, the Bancorp experienced declines in public funds accounts during the first quarter of 2010. Other time deposits decreased compared to December 31, 2009 due to the run-off of higher priced consumer time deposits originated in the second half of 2008. The increase in core deposits compared to March 31, 2009 is due to increases in interest checking, demand, and savings accounts of $4.6 billion, $3.1 billion, and $2.6 billion, respectively, partially offset by a $2.9 billion decrease in other time deposits. The increase in interest checking and demand deposits compared to the first quarter of 2009 was due to the migration of customer balances from maturing higher priced certificates included in other time deposits as interest rates remain near historical lows and in part to increased protection provided by FDIC insurance programs.

Included in core deposits are foreign office deposits, which are Eurodollar sweep accounts for the Bancorp’s commercial customers. These accounts bear interest at rates slightly higher than money market accounts, but the Bancorp does not have to pay FDIC insurance nor provide collateral. The Bancorp uses these deposits, as well as certificates of deposit $100,000 and over, as a method to fund earning asset growth. Certificates $100,000 and over at March 31, 2010 decreased by $1.1 billion, or 14%, compared to December 31, 2009 and by $5.2 billion, or 44%, compared to March 31, 2009 as customers opted to maintain their balances in liquid accounts due to the low rate environment.

On an average basis, core deposits increased $4.4 billion, or six percent, compared to the fourth quarter of 2009 and $9.4 billion, or 14%, compared to the first quarter of 2009 primarily due to increased protection provided by FDIC insurance programs and customers maintaining balances in liquid transaction deposit accounts while interest rates remain near historical lows.

TABLE 14: Deposits


($ in millions)	March 31, 2010			December 31, 2009			March 31, 2009
($ in millions)	Balance		% of Total	Balance		% of Total	Balance		% of Total
Demand	$	19,482	23	$	19,411	23	$	16,370	21
Interest checking		19,126	23		19,935	24		14,510	18
Savings		19,099	23		17,898	21		16,517	21
Money market		4,782	6		4,431	5		4,353	5
Foreign office		2,844	3		2,454	3		1,671	2

Transaction deposits		65,333	78		64,129	76		53,421	67
Other time		11,643	14		12,466	15		14,571	18

Core deposits		76,976	92		76,595	91		67,992	85
Certificates - $100,000 and over		6,596	8		7,700	9		11,784	15
Other foreign office		2	—		10	—		6	—

Total deposits	$	83,574	100	$	84,305	100	$	79,782	100

TABLE 15: Average Deposits


($ in millions)	March 31, 2010			December 31, 2009		March 31, 2009
($ in millions)	Balance		% of Total	Balance	% of Total	Balance		% of Total
Demand	$	18,822	23	18,137	23	$	15,532	20
Interest checking		19,533	23	16,324	20		14,229	18
Savings		18,469	22	17,540	22		16,272	21
Money market		4,622	6	4,279	5		4,559	6
Foreign office		2,757	3	2,516	3		1,755	2

Transaction deposits		64,203	77	58,796	73		52,347	67
Other time		12,059	14	13,049	16		14,501	18

Core deposits		76,262	91	71,845	89		66,848	85
Certificates - $100,000 and over		7,049	9	8,200	11		11,802	15
Other foreign office		8	—	51	—		247	—

Total average deposits	$	83,319	100	80,096	100	$	78,897	100

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

Borrowings

Total borrowings increased $473 million, or four percent, compared to December 31, 2009 and declined $11.0 billion, or 47%, from March 31, 2009. The increase in total borrowings compared to December 31, 2009 was primarily a result of an increase in long-term debt while the decrease of $11.0 billion from March 31, 2009 was the result of a combination of balance sheet activity and capital actions taken by the Bancorp throughout 2009. Total loans and leases decreased $6.1 billion and total core deposits increased $9.0 billion from March 31, 2009 which resulted in a decrease of the funding position of the Bancorp by approximately $15.1 billion. In the second quarter of 2009, the Processing Business Sale provided $562 million of cash and the Bancorp raised an additional $1.0 billion through the issuance of common equity in the public market decreasing the Bancorp’s funding needs. As of March 31, 2010, December 31, 2009 and March 31, 2009, total borrowings as a percentage of interest-bearing liabilities were 16%, 16% and 27%, respectively.

Total short-term borrowings were $1.6 billion at March 31, 2010 and December 31, 2009 compared to $11.4 billion at March 31, 2009. The decrease in short term borrowings from March 31, 2009 is due to the repayment of $9.3 billion of Term Auction Facility funds which were held by the Bancorp as of March 31, 2009. The Bancorp’s overall reduced reliance on short-term funding can be attributed to declining asset balances and strong deposit performance.

Long-term debt at March 31, 2010 increased four percent compared to December 31, 2009 and decreased 10% compared to March 31, 2009. The increase from December 31, 2009 was primarily the result of a change in U.S. GAAP that required the Bancorp to consolidate long term debt on January 1, 2010 that had an outstanding balance of $1.1 billion as of March 31, 2010. For further discussion on this topic refer to Notes 3 and 8 of the Notes to Condensed Consolidated Financial Statements. This activity was partially offset by the maturity of $800 million of long term debt in the first quarter of 2010. The decrease from the first quarter of the prior year was a result of the previously mentioned items in addition to $1.2 billion in bank notes maturing in the second quarter of 2009.

Information on the average rates paid on borrowings is discussed in the Statements of Income Analysis in Management’s Discussion and Analysis. In addition, refer to the Liquidity Risk Management section for a discussion on the role of borrowings in the Bancorp’s liquidity management.

TABLE 16: Borrowings


($ in millions)	March 31, 2010		December 31, 2009		March 31, 2009
Federal funds purchased	$	271	$	182	$	363
Other short-term borrowings		1,359		1,415		11,076
Long-term debt		10,947		10,507		12,178

Total borrowings	$	12,577		12,104	$	23,617

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

BUSINESS SEGMENT REVIEW

At March 31, 2010, 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 18 of the Notes to Condensed Consolidated Financial Statements.

Results of the Bancorp’s business segments are presented based on its management structure and management accounting practices. The structure and accounting practices are specific to the Bancorp; therefore, the financial results of the Bancorp’s business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as management accounting practices are improved and businesses change.

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, historical financial information for the merchant acquiring and financial institutions processing businesses has been reclassified under General Corporate and Other for all periods presented. Interchange revenue previously recorded in the Processing Solutions segment and associated with cards currently included in Branch Banking is now included in the Branch Banking segment 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 Business is recorded in General Corporate and Other as noninterest income.

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 London Interbank Offered Rate (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 for loan and lease losses based on the actual net charge-offs experienced by the loans owned by each segment. Provision for loan and lease losses in excess of net charge-offs is captured in General Corporate and Other. The financial results of the business segments include allocations for shared services and headquarters expenses. Even with these allocations, the financial results are not necessarily indicative of the business segments’ financial condition and results of operations as if they existed as independent entities. Additionally, the business segments form synergies by taking advantage of cross-sell opportunities and when funding operations by accessing the capital markets as a collective unit. Net income (loss) by business segment is summarized in Table 17.

TABLE 17: Business Segment Results


For the three months ended March 31 ($ in millions)	2010			2009
Commercial Banking	$	51		$	68
Branch Banking		44			75
Consumer Lending		6			29
Investment Advisors		13			17
General Corporate and Other		(124	)		(139	)

Net income (loss)		(10	)		50
Dividends on preferred stock		62			76

Net loss available to common shareholders		($72	)		($26	)

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 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 18: Commercial Banking


For the three months ended March 31 ($ in millions)	2010			2009
Income Statement Data
Net interest income (FTE) (a)	$	377		$	335
Provision for loan and lease losses		278			218
Noninterest income:
Corporate banking revenue		76			108
Service charges on deposits		48			48
Other noninterest income		37			28
Noninterest expense:
Salaries, incentives and benefits		65			59
Other noninterest expenses		172			180

Income before taxes		23			62
Applicable income tax benefit (a)		(28	)		(6	)

Net income	$	51		$	68

Average Balance Sheet Data
Commercial loans	$	39,152		$	43,207
Demand deposits		10,522			7,516
Interest checking		10,010			5,298
Savings and money market		2,678			2,765
Certificates over $100,000		3,174			4,044
Foreign office deposits		1,518			1,288

(a)

Includes fully taxable-equivalent adjustments of $3 for the three months ended March 31, 2010 and 2009.

Commercial Banking net income decreased $17 million in the first quarter of 2010 compared to the same period in the prior year due to an increase in the provision for loan and lease losses and a decline in corporate banking revenue, partially offset by increases in net interest income and the income tax benefit for the quarter. The increase in net interest income from the first quarter of 2009 was the result of a mix shift from higher cost term deposits to lower cost deposit products throughout 2009 and into the first quarter of 2010, partially offset by reduced loan demand and a $12 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 $4.1 billion, or nine percent, compared to the prior year’s comparable quarter, including decreases of $2.0 billion and $1.3 billion in commercial and industrial and commercial construction loans, respectively. The overall decrease in commercial loans and leases is due to lower customer demand for new originations, lower utilization rates on corporate lines and tighter underwriting standards applied to both new commercial loan originations and renewals. These impacts were partially offset by the consolidation of approximately $724 million of certain commercial and industrial loans on January 1, 2010, which had a remaining balance as of March 31, 2010 of $670 million. For further information on the consolidation of loans, see Note 3 of the Notes to Condensed Consolidated Financial Statements.

Provision for loan and lease losses increased $60 million, or 28%, compared to the first quarter of 2009 due to net charge offs as a percent of average loans and leases increasing to 289 bp from 206 bp in the first quarter of 2009. This was primarily due to weakened economic conditions in the Bancorp’s commercial footprint, particularly in Michigan and Florida.

Average core deposits increased $7.9 billion, or 47%, compared to the first quarter of 2009 as the Commercial Banking segment realized significant growth in both demand deposits and interest checking accounts reflecting excess customer liquidity as well as increased protection provided by the FDIC insurance programs.

Noninterest income decreased $23 million, or 13%, compared to the same quarter last year due to a decrease in corporate banking revenue which was driven by declines of $15 million in lease remarketing fees and $7 million in international income. In addition, servicing fees on loans serviced for others decreased $7 million, which was primarily impacted by a change in U.S. GAAP adopted by the Bancorp on January 1, 2010. Other noninterest income increased from the prior year as a result of gains recognized on the sale of loans, partially offset by higher losses on sales of OREO.

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

Noninterest expense remained relatively flat compared to the first quarter of 2009. Increased personnel costs, higher FDIC insurance premiums as a result of increased assessment rates and impairment on low income housing investments were offset by a decline in loan and lease expense from collections activities as well as lower realized losses on derivatives.

The Commercial Banking segment had an income tax benefit in the first quarter of 2010 resulting from tax credits related to investments in Qualified Zone Academy Bonds (QZABs) and low income housing and new market tax credit investments. In the first quarter of 2009, the tax benefit was due to the settlement of litigation with the IRS related to leveraged leases.

Branch Banking

Branch Banking provides a full range of deposit and loan and lease products to individuals and small businesses through 1,309 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 19: Branch Banking


For the three months ended March 31 ($ in millions)	2010		2009
Income Statement Data
Net interest income	$	382	$	380
Provision for loan and lease losses		153		128
Noninterest income:
Service charges on deposits		92		96
Card and processing revenue		67		60
Investment advisory income		25		19
Other noninterest income		29		28
Noninterest expense:
Salaries, incentives and benefits		134		125
Net occupancy and equipment expense		55		54
Other noninterest expense		185		160

Income before taxes		68		116
Applicable income tax expense		24		41

Net income	$	44	$	75

Average Balance Sheet Data
Consumer loans	$	13,037		13,177
Commercial loans		5,009		5,558
Demand deposits		6,652		6,146
Interest checking		7,325		7,408
Savings and money market		18,750		16,231
Other time		11,806		14,184

Net income decreased $31 million, or 41%, compared to the first quarter of 2009 due to increases in the provision for loan and lease losses and noninterest expense partially offset by modest growth in total revenue. Net interest income increased slightly compared to the first quarter of 2009 as the segment’s deposit mix shifted towards lower cost transaction and savings accounts.

Average loans and leases decreased $689 million, or four percent, compared to the first quarter of 2009 due primarily to decreases in commercial loans and home equity loans of $549 million and $281 million, respectively, compared to the first quarter of 2009 partially offset by an increase of $144 million in residential mortgage loans. The commercial loans decrease was due to $190 million of net charge-offs since the first quarter of 2009 and decreased customer line utilization. The home equity loans decrease was primarily due to $222 million in net charge-offs since the first quarter of 2009 and the impact of tighter underwriting standards implemented in 2008 in order to limit the Bancorp’s exposure to home value deterioration, partially offset by an increase of approximately $263 million in home equity loans consolidated on January 1, 2010 in accordance with a change in U.S. GAAP. For further discussion of the impact of new accounting guidance adopted by the Bancorp during the quarter, see Note 3 of the Notes to Condensed Consolidated Financial Statements. The growth in residential mortgage loans was due to an increase in originations through a streamlined refinance product initiated through the Branch Banking segment.

Average core deposits increased $515 million, or one percent, compared to the first quarter of 2009. Increases of $2.5 billion and $506 million in savings and money market deposits and demand deposits, respectively, were offset by a decrease of $2.4 billion in other time deposits. The change in the deposit mix compared to the first quarter of 2009 is due to migration of customer balances from maturing higher priced certificates included in other time deposits into liquid transaction deposits and strong growth in the Bancorp’s relationship savings account.

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

Provision for loan and lease losses increased $25 million, or 20%, compared to the first quarter of 2009 due to net charge-offs as a percent of average loan and leases increasing to 345 bp compared to 277 bp during the first quarter of 2009. Net charge-offs increased by $20 million and $7 million in the commercial and credit card portfolios, respectively, compared to the first quarter of 2009. The increases in commercial net charge-offs were due to economic stress on small businesses, particularly in Florida and Michigan while the credit card net charge-offs increased as unemployment remained elevated.

Noninterest income increased $10 million, or five percent, compared to the first quarter of 2009 primarily due to increases of $7 million and $6 million in card and processing revenue and investment advisory fees, respectively, partially offset by a decrease of $4 million in service charges on deposits. Growth in card and processing revenue was due to an increase in interchange fees resulting from increased transaction volumes. Investment advisory fees increased due to an increase in brokerage accounts opened through the Bancorp’s Branch Bank network. Service charges on deposits decreased primarily due to a 9% decrease in overdraft occurrences compared to the first quarter of 2009.

Noninterest expense increased $35 million, or 10% percent, compared to the first quarter of 2009 primarily due to increases of $9 million in salaries, incentives and benefits expense, and $25 million in other noninterest expense. The increase in salaries, incentives and benefits is due to an increase in front line branch personnel and increased incentive accruals attributable to success in opening new deposit and brokerage accounts during the quarter. The increase in other noninterest expense was driven by a $13 million increase in card and processing expense, a component of other noninterest expense. This was due to expenses incurred by the Bancorp in accordance with the terms of the Processing Business Sale which occurred in June of 2009. In addition, other noninterest expense increased $6 million due to higher FDIC insurance premiums compared to the first quarter of 2009.

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 20: Consumer Lending


For the three months ended March 31 ($ in millions)	2010		2009
Income Statement Data
Net interest income	$	109	$	136
Provision for loan and lease losses		137		135
Noninterest income:
Mortgage banking net revenue		145		131
Other noninterest income		10		27
Noninterest expense:
Salaries, incentives and benefits		38		45
Other noninterest expense		80		69

Income before taxes		9		45
Applicable income tax expense		3		16

Net income	$	6	$	29

Average Balance Sheet Data
Residential mortgage loans	$	9,187	$	10,763
Home equity		899		1,051
Automobile loans		9,461		7,845
Consumer leases		473		735

Net income decreased $23 million compared to the first quarter of 2009 as decreases in net interest income and other noninterest income were partially offset by an increase in mortgage banking net revenue. Net interest income decreased $27 million compared to the first quarter of 2009 as a result of a $6 million decrease in the accretion of purchase accounting adjustments related to the acquisition of First Charter, a 69% decrease in the average investment securities portfolio, a 15% decrease in average residential mortgage loans, and a 59 bp decrease on the yield of residential mortgage loans partially offset by a 21% increase in the average automobile portfolio. The decrease in average residential mortgage loans was a result of runoff of residential mortgage loans held in the portfolio and a high percentage of new origination volume that was sold in the secondary market. The investment portfolio decreased from $1.5 billion in the first quarter of 2009 to $480 million in the first quarter of 2010 due to a reduction in the amount of mortgage-backed securities used to hedge the MSR portfolio. Average automobile loans increased from the first quarter in the prior year due to a change in U.S. GAAP that required the Bancorp to consolidate certain automobile loans on January 1, 2010. The average balance on these consolidated automobile loans during the first quarter of 2010 was approximately $1.2 billion.

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

Provision for loan and lease losses as a percent of average loan and leases increased from 285 bp in the first quarter of 2009 to 289 bp in the first quarter of 2010 due to an increase in residential mortgage net charge-offs partially offset by a decrease in automobile net charge-offs. The increase in residential mortgage net charge-offs compared to the first quarter of 2009 was due to a weakening of economic conditions and deteriorating real estate values within the Bancorp’s footprint. During the first quarter of 2010, Michigan and Florida accounted for approximately 68% of the residential mortgage charge-offs in the Consumer Lending segment. The 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 March 31, 2010, the Bancorp had restructured approximately $1.2 billion of residential mortgage loans to mitigate losses. The decrease in automobile net charge-offs from the first quarter of 2009 is primarily due to tighter underwriting standards implemented in 2008, maturation of the automobile portfolio and higher resale values on automobiles sold at auction. Cumulative losses for the 2009 originations through March 31, 2010 have been lower than those experienced on the 2006 through 2008 vintage loans over the same time period subsequent to origination.

Mortgage banking net revenue increased as a result of mortgage servicing rights (MSR) valuation adjustments, including mark-to-market adjustments on free-standing derivatives used to economically hedge the MSR portfolio, partially offset by a decrease in residential mortgage loan origination activities. MSR valuation adjustments represented a net gain of $51 million in the first quarter of 2010, compared with a net gain of $1 million in the first quarter of 2009. Consumer Lending had residential mortgage originations of $3.1 billion during the first quarter of 2010, a decrease of 37% from 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 that has continued into the first quarter of 2010. Other noninterest income decreased $17 million primarily due to decreases in securities gains related to mortgage servicing rights hedging activities.

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 Banking; 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 Banking 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. Table 21 contains selected financial data for the Investment Advisors segment.

TABLE 21: Investment Advisors


For the three months ended March 31 ($ in millions)	2010		2009
Income Statement Data
Net interest income	$	38	$	37
Provision for loan and lease losses		13		10
Noninterest income:
Investment advisory revenue		88		77
Other noninterest income		3		6
Noninterest expense:
Salaries, incentives and benefits		38		34
Other noninterest expense		58		49

Income before taxes		20		27
Applicable income tax expense		7		10

Net income	$	13	$	17

Average Balance Sheet Data
Loans and leases	$	2,731		3,288
Core deposits		5,706		4,518

Net income decreased $4 million compared to the first quarter of 2009 as an increase in investment advisory revenue was more than offset by increases in operating expenses. Average loan balances decreased 17% primarily due to decreased commercial line utilization and average core deposit balances increased 26% compared to the first quarter of 2009 due to increases in interest checking of $628 million and an increase in foreign deposits of $824 million.

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

Noninterest income increased $8 million, or nine percent, compared to the first quarter of 2009, as investment advisory income increased $11 million, or 14%, to $88 million. The increase in investment advisory revenue was primarily due to an increase in brokerage fee income of $7 million, or 30%, and an increase in private client services income of $3 million, or 10%, compared to the first quarter of 2009. The increase in brokerage fee income was due to revenue generated as Investment Advisors leveraged the Branch Banking segments’ network to deepen customer relationships across the spectrum of services provided by the Bancorp. Improved market performance also resulted in increased activity and brokerage commissions. As of March 31, 2010, the Bancorp had $190 billion in assets under care and $25 billion in managed assets compared to $166 billion in assets under care and $23 billion in managed assets at March 31, 2009. Salaries, incentives, and benefits increased by $4 million or 12%, due to an increase in bonus and incentive accruals compared to the first quarter of 2009 as the increase in investment advisory revenue resulted in increased performance based compensation. Other noninterest expenses increased $9 million, or 18%, primarily due to the increased level of activity and growth in assets under care which increased operating expenses.

General Corporate and Other

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

The first quarter of 2010 results were primarily impacted by a significant decline in provision expense in excess of net charge-offs, which decreased from $282 million in the first quarter of 2009 to $9 million in the first quarter of 2010, due to improvement in credit trends. The results for the first quarter of 2010 also include a $9 million charge to noninterest income due to mark-to-market adjustments on the total return swap associated with the sale of the Bancorp’s Visa, Inc. Class B shares. The results for the first quarter of 2009 included a tax benefit of $106 million from the decision to surrender one of the Bancorp’s BOLI policies partially offset by a $54 million BOLI charge for reserves recorded in connection with the intent to surrender the policy, as well as losses related to market value declines.

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 assumption of risk requires robust and active risk management practices that comprise an integrated and comprehensive set of activities, measures and strategies that apply to the entire organization. The Bancorp has established a Risk Appetite Framework that provides the foundations of corporate risk capacity, risk appetite and risk tolerances. The Bancorp’s risk capacity is represented by its available financial resources. Risk capacity sets an absolute limit on risk-assumption in the Bancorp’s annual and strategic plans. The Bancorp’s policy currently discounts its risk capacity by five percent to provide a buffer; as a result, the Bancorp’s risk appetite is limited by policy to 95% of its risk capacity.

Economic capital is the amount of unencumbered financial resources necessary to support the Bancorp’s risks. The Bancorp measures economic capital under the assumption that it expects to maintain debt ratings at strong investment grade levels over time. The Bancorp’s capital policies require that the economic capital necessary in its business not exceed its risk capacity less the aforementioned buffer.

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

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

•

Enterprise Risk Management Programs is responsible for developing risk programs and reporting that facilitate a broad integrated view of risk. The department also leads the ongoing development of a strong risk management culture and the framework, policies and committees that support effective risk governance.

•

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 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 and Sarbanes-Oxley compliance. 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.

Quantitative and Qualitative Disclosures About Market Risk (continued)

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 six 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 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 Management 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, 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.

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 centrally managed, 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 the adequacy of the allowance for credit losses is based on quarterly assessments of the probable estimated losses inherent in the loan and lease portfolio. The Bancorp uses these assessments to promptly identify potential problem loans or leases within the portfolio, maintain an adequate reserve and take any necessary charge-offs. 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 six 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 and small business loan portfolios.

Overview

General economic conditions remained weak throughout most of 2009 but showed some signs of moderation in the first quarter of 2010. These conditions negatively impacted the 2009 performance of a majority of the Bancorp’s loan and lease products. Geographically, the Bancorp continues to experience the most stress in Michigan and Florida due to the decline in real estate values. Real estate value deterioration, as measured by the Home Price Index, was most prevalent in Florida due to past real estate price appreciation and related over-development, and in Michigan due in part to cutbacks in automobile manufacturing and the state’s economic downturn. Among commercial portfolios, the homebuilder and developer and the remaining non-owner occupied commercial real estate portfolios remained under stress throughout 2009. Among consumer portfolios, residential mortgage and brokered home equity portfolios exhibited the most stress. Management suspended homebuilder and developer lending in the fourth quarter of 2007 and new commercial non-owner occupied real estate lending in the second quarter of 2008, discontinued the origination of brokered home equity products at the end of 2007, and raised underwriting standards across both the commercial and consumer loan product offerings. Since the fourth quarter of 2008, in an effort to reduce loan exposure to the real estate and construction industries and obtain the highest realizable value, the Bancorp has sold or moved (in anticipation of a sale) certain commercial loans to ‘held-for-sale’. Throughout 2009 and into the first quarter of 2010, the Bancorp continued to aggressively engage in other loss mitigation strategies such as reducing credit commitments, restructuring certain commercial and consumer loans, tightening underwriting standards on commercial loans and across the consumer loan portfolio, as well as expanding commercial and consumer loan workout teams.

Quantitative and Qualitative Disclosures About Market Risk (continued)

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 credit product type.

The risk within the commercial loan and lease portfolio is managed and monitored through an underwriting process utilizing detailed origination policies, continuous loan level reviews, monitoring of industry concentration and product type limits and continuous portfolio risk management reporting. The origination policies for commercial real estate outline the risks and underwriting requirements for owner and non-owner occupied and construction lending. Included in the policies are maturity and amortization terms, maximum 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 exists in the evaluation process.

Table 22 provides detail on commercial loan and leases 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 22: Commercial Loan and Lease Portfolio


	2010					2009
As of March 31 ($ in millions)	Outstanding			Exposure	Nonaccrual	Outstanding		Exposure	Nonaccrual
By industry:
Real estate	$	9,648		11,174	761	$	11,378	13,654	509
Manufacturing		6,578		13,551	197		7,573	14,077	147
Financial services and insurance		4,332		8,762	94		3,588	8,062	37
Construction		3,453		4,951	570		4,748	6,955	727
Healthcare		3,135		5,146	61		3,140	5,197	52
Retail trade		2,691		5,463	82		3,369	6,352	175
Business services		2,663		4,740	56		2,770	5,046	38
Transportation & warehousing		2,480		2,968	58		2,587	3,071	27
Wholesale trade		2,415		4,708	46		2,397	4,627	36
Other services		1,067		1,660	34		1,201	1,698	25
Accommodation and food		1,004		1,490	59		1,123	1,605	29
Communication and information		788		1,397	8		901	1,465	19
Mining		772		1,186	20		855	1,269	17
Entertainment and recreation		728		936	16		739	995	36
Individuals		715		890	23		1,024	1,297	40
Public administration		677		971	9		724	931	—
Agribusiness		533		700	72		612	779	16
Utilities		505		1,400	—		498	1,241	—
Other		356		772	6		216	398	7

Total	$	44,540		72,865	2,172	$	49,443	78,719	1,937

By loan size:
Less than $200,000		3	%	2	5		3	2	5
$200,000 to $1 million		12		9	20		12	9	21
$1 million to $5 million		24		20	36		25	21	39
$5 million to $10 million		13		11	17		23	22	14
$10 million to $25 million		24		25	18		14	15	14
Greater than $25 million		24		33	4		23	31	7

Total		100	%	100	100		100	100	100

By state:
Ohio		27	%	30	16		26	30	16
Michigan		16		14	17		17	15	18
Florida		9		7	25		9	7	16
Illinois		8		9	9		8	9	10
Indiana		6		6	5		7	7	8
Kentucky		5		4	5		5	5	6
North Carolina		3		3	6		3	3	1
Tennessee		2		3	3		2	2	4
Pennsylvania		2		2	—		2	2	1
All other states		22		22	14		21	20	20

Total		100	%	100	100		100	100	100

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 23 – 28 provide analysis of each of the categories of loans as of and for the three months ended March 31, 2010 and 2009.

TABLE 23: Non-Owner Occupied Commercial Real Estate


As of March 31, 2010 ($ in millions)						For the three months ended March 31, 2010
By State:	Outstanding		Exposure	90 Days Past Due	Nonaccrual	Net Charge-offs
Ohio	$	2,871	3,126	12	177	21
Michigan		2,067	2,186	7	165	41
Florida		1,455	1,525	5	351	33
Illinois		779	895	13	80	14
North Carolina		658	686	2	123	13
Indiana		478	496	—	43	10
All other states		976	1,074	3	137	12

Total	$	9,284	9,988	42	1,076	144

TABLE 24: Non-Owner Occupied Commercial Real Estate


As of March 31, 2009 ($ in millions)						For the three months ended March 31, 2009
By State:	Outstanding		Exposure	90 Days Past Due	Nonaccrual	Net Charge-offs
Ohio	$	3,052	3,553	21	160	18
Michigan		2,285	2,601	51	144	25
Florida		1,833	2,084	35	260	49
Illinois		899	1,076	2	80	9
North Carolina		907	1,048	3	77	6
Indiana		618	722	1	69	1
All other states		1,279	1,707	9	156	31

Total	$	10,873	12,791	122	946	139

TABLE 25: Home Builder and Developer (a)


As of March 31, 2010 ($ in millions)						For the three months ended March 31, 2010
By State:	Outstanding		Exposure	90 Days Past Due	Nonaccrual	Net Charge-offs
Ohio	$	303	463	1	61	6
Florida		286	303	—	126	14
Michigan		223	289	2	64	28
North Carolina		192	208	2	80	7
Indiana		93	119	—	12	7
All other states		227	313	1	69	19

Total	$	1,324	1,695	6	412	81

(a)

Home Builder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of $183 and a total exposure of $410 are also included in Table 23: Non-Owner Occupied Commercial Real Estate

TABLE 26: Home Builder and Developer (a)


As of March 31, 2009 ($ in millions)						For the three months ended March 31, 2009
By State:	Outstanding		Exposure	90 Days Past Due	Nonaccrual	Net Charge-offs
Ohio	$	486	772	4	82	4
Florida		448	547	12	112	11
Michigan		433	612	13	81	15
North Carolina		373	456	2	81	5
Indiana		119	173	—	22	1
All other states		463	619	7	133	28

Total	$	2,322	3,179	38	511	64

(a)

Home Builder and Developer loans, exclusive of commercial and industrial loans with an outstanding balance of $360 and a total exposure of $741 are also included in Table 24: Non-Owner Occupied Commercial Real Estate

Quantitative and Qualitative Disclosures About Market Risk (continued)

TABLE 27: Automobile Manufacturing


As of March 31, 2010 ($ in millions)						For the three months ended March 31, 2010
By State:	Outstanding		Exposure	90 Days Past Due	Nonaccrual	Net Charge-offs
Michigan	$	208	464	—	11	—
Ohio		117	300	—	1	1
Illinois		45	142	—	—	—
Kentucky		26	40	—	—	—
All other states		11	83	—	—	—

Total	$	407	1,029	—	12	1

TABLE 28: Automobile Manufacturing


As of March 31, 2009 ($ in millions)						For the three months ended March 31, 2009
By State:	Outstanding		Exposure	90 Days Past Due	Nonaccrual	Net Charge-offs
Michigan	$	328	688	1	1	—
Ohio		160	380	—	—	—
Illinois		80	154	—	—	—
Kentucky		47	78	—	—	—
All other states		25	91	—	—	—

Total	$	640	1,391	1	1	—

Consumer Portfolio

The Bancorp’s consumer portfolio is materially comprised of three categories of loans: residential mortgage loans, home equity loans, and automobile loans. While each of these loans has unique features, they have a common risk characteristic of loan amount to collateral value.

Residential Mortgage Portfolio

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

The Bancorp does not originate mortgage loans that permit customers to defer principal payments or make payments that are less than the accruing interest. The Bancorp originates both fixed and adjustable rate residential mortgage loans. Resets of rates on adjustable rate mortgages are not expected to have a material impact on credit costs in the current interest rate environment, as approximately $1.0 billion of adjustable rate residential mortgage loans will have rate resets in 2010 with approximately 6% of those resets experiencing increases in monthly payments. Of those loans with projected increases in 2010, 98% will see resets at less than 1/8%.

Certain residential mortgage products have contractual features that may increase credit exposure to the Bancorp in the event of a decline in housing prices. These types of mortgage products offered by the Bancorp include loans with high loan-to-value (LTV) ratios, multiple loans on the same collateral that when combined result in an LTV greater than 80% (80/20 loans) and interest-only loans. The Bancorp monitors residential mortgages loans with greater than 80% LTV ratio and no mortgage insurance as it believes these loans represent a higher level of risk. Tables 29 and 30 provide analysis of the residential mortgage loans outstanding with a greater than 80% LTV ratio and no mortgage insurance as of March 31, 2010 and 2009, respectively.

TABLE 29: Residential Mortgage Loans Outstanding, LTV Greater than 80%, No Mortgage Insurance


As of March 31, 2010 ($ in millions)					For the three months ended March 31, 2010
By State:	Outstanding		90 Days Past Due	Nonaccrual	Net Charge-offs
Ohio	$	660	6	24	4
Florida		371	8	48	12
Michigan		340	2	10	6
North Carolina		155	3	7	7
Indiana		141	1	7	1
Kentucky		90	1	3	—
Illinois		60	1	4	2
All other states		138	2	4	1

Total	$	1,955	24	107	33

Quantitative and Qualitative Disclosures About Market Risk (continued)

TABLE 30: Residential Mortgage Loans Outstanding, LTV Greater than 80%, No Mortgage Insurance


As of March 31, 2009 ($ in millions)					For the three months ended March 31, 2009
By State:	Outstanding		90 Days Past Due	Nonaccrual	Net Charge-offs
Ohio	$	737	8	26	4
Florida		464	11	58	12
Michigan		385	3	13	6
North Carolina		195	2	4	—
Indiana		161	3	6	1
Kentucky		106	1	3	—
Illinois		66	1	4	2
All other states		164	2	6	2

Total	$	2,278	31	120	27

Home Equity Portfolio

The home equity portfolio is managed in two categories, loans outstanding with a LTV greater than 80% and those loans with a LTV of less than 80%. The carrying value of the greater than 80% LTV home equity loans and less than 80% LTV home equity loans were $4.9 billion and $7.3 billion, respectively, as of March 31, 2010. Of the total $12.2 billion of outstanding home equity loans, 82% reside within the Bancorp’s Midwest footprint of Ohio, Michigan, Kentucky, Indiana and Illinois. The portfolio had an average FICO score of 730 as of March 31, 2010 and 2009.

The Bancorp actively manages lines of credit and makes reductions in lending limits when it believes it is necessary based on FICO score deterioration and property devaluation. The Bancorp has not originated brokered home equity loans since 2007. The Bancorp believes that home equity loans with a greater than 80% LTV ratio present a higher level of risk. The following tables provide analysis of these loans as of March 31, 2010 and 2009.

TABLE 31: Home Equity Loans Outstanding with LTV Greater than 80%


As of March 31, 2010 ($ in millions)						For the three months ended March 31, 2010
By State:	Outstanding		Exposure	90 Days Past Due	Nonaccrual	Net Charge-offs
Ohio	$	1,691	2,421	11	6	10
Michigan		1,076	1,401	11	6	14
Illinois		510	696	6	3	4
Indiana		493	685	3	2	4
Kentucky		460	660	3	2	3
Florida		188	237	5	2	6
All other states		512	608	8	3	8

Total	$	4,930	6,708	47	24	49

TABLE 32: Home Equity Loans Outstanding with LTV Greater than 80%


As of March 31, 2009 ($ in millions)						For the three months ended March 31, 2009
By State:	Outstanding		Exposure	90 Days Past Due	Nonaccrual	Net Charge-offs
Ohio	$	1,700	2,429	13	7	9
Michigan		1,081	1,407	16	6	14
Illinois		513	698	8	7	6
Indiana		495	687	5	3	3
Kentucky		462	662	5	2	2
Florida		189	237	7	5	7
All other states		514	611	12	3	9

Total	$	4,954	6,731	66	33	50

Automobile Portfolio

The automobile portfolio is characterized by direct and indirect lending products to consumers. As of March 31, 2010, the automobile loan portfolio was comprised of approximately 47% in new automobile loans. It is a common competitive practice to advance on automobile loans an amount in excess of the automobile value due to the inclusion of taxes, title, and other fees paid at closing. The Bancorp monitors its exposure to these higher risk accounts. The following tables provide analysis of the Bancorp’s automobile loans with a LTV at origination greater than 100% as of March 31, 2010 and 2009.

Quantitative and Qualitative Disclosures About Market Risk (continued)

TABLE 33: Automobile Loans Outstanding with LTV Greater than 100% at Origination


As of March 31, 2010 ($ in millions)					For the three months ended March 31, 2010
By State:	Outstanding		90 Days Past Due	Nonaccrual	Net Charge-offs
Ohio	$	476	1	—	2
Illinois		421	1	—	2
Michigan		288	1	—	1
Indiana		243	—	—	1
Florida		213	1	—	2
Kentucky		206	—	—	1
All other states		2,348	4	1	12

Total	$	4,195	8	1	21

TABLE 34: Automobile Loans Outstanding with LTV Greater than 100% at Origination


As of March 31, 2009 ($ in millions)					For the three months ended March 31, 2009
By State:	Outstanding		90 Days Past Due	Nonaccrual	Net Charge-offs
Ohio	$	458	1	—	3
Illinois		375	1	—	3
Michigan		286	1	—	2
Indiana		241	—	—	1
Florida		218	1	—	3
Kentucky		200	1	—	1
All other states		1,831	5	1	16

Total	$	3,609	10	1	29

Analysis of Nonperforming Assets

Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is uncertain; restructured consumer loans which are 90 days past due based on the restructured terms and credit card loans immediately upon restructuring; restructured commercial loans which have not yet met the requirements to be classified as a performing asset; and certain other assets, including other real estate owned and repossessed equipment. A summary of nonperforming assets is included in Table 35. Typically, loans are reported on nonaccrual status if principal or interest has been in default for 90 days or more unless the loan is both well-secured and in the process of collection. When a loan is placed on nonaccrual status, the accrual of interest, amortization of loan premiums, accretion of loan discounts and amortization or accretion of deferred net loan fees or costs are discontinued and previously accrued, but unpaid interest is reversed. Commercial loans on nonaccrual status are reviewed for impairment at least quarterly. If the principal or a portion of the principal is deemed a loss, the loss amount is charged off to the allowance for loan and lease losses.

Total nonperforming assets, including loans held for sale, were $3.4 billion at March 31, 2010, compared to $3.5 billion at December 31, 2009 and $3.1 billion at March 31, 2009. At March 31, 2010, $243 million of nonaccrual commercial loans were held-for-sale compared to $224 million and $403 million as of December 31, 2009 and March 31, 2009, respectively. The nonaccrual loans in held for sale consisted primarily of real estate secured loans in Michigan and Florida, and were carried at the lower of cost or fair value. Nonperforming assets as a percentage of total loans, leases and other assets, including other real estate owned and nonperforming loans held for sale, as of March 31, 2010 was 4.24% compared to 4.38% as of December 31, 2009 and 3.57% as of March 31, 2009. Excluding the held-for-sale nonaccrual loans, nonperforming assets as a percentage of total loans, leases and other assets, including other real estate owned, as of March 31, 2010 was 4.02% compared to 4.22% as of December 31, 2009 and 3.19% as of March 31, 2009. The composition of nonaccrual credits continues to be concentrated in real estate as 75% of nonaccrual credits were secured by real estate as of March 31, 2010 compared to 77% as of December 31, 2009 and 78% as of March 31, 2009.

Excluding nonperforming loans held-for-sale, commercial nonperforming loans and leases were $2.2 billion, $2.4 billion and $1.9 billion at March 31, 2010, December 31, 2009 and March 31, 2009, respectively. The increase from March 31, 2009 was driven by increases in nonperforming loans related to the real estate industry; however, the impact of previously implemented loss mitigation activities resulted in a decrease in the nonperforming loans related to the real estate industry as well as an overall decline in commercial nonperforming loans compared to December 31, 2009.

Quantitative and Qualitative Disclosures About Market Risk (continued)

Consumer nonperforming loans and leases were $561 million at March 31, 2010 compared to $555 million at December 31, 2009 and $459 million at March 31, 2009. The increase in consumer nonperforming loans is primarily attributable to declines in the housing markets in Michigan and Florida, the rise in unemployment, and an increase in bankruptcy filings. Michigan and Florida accounted for 43% of total consumer nonperforming loans and leases as of March 31, 2010, compared to 42% at March 31, 2009. The Bancorp has devoted significant attention to loss mitigation activities and has proactively restructured certain loans. Consumer restructured loans are reviewed, and if repayment is likely, are recorded as performing loans. Consumer restructured loans contributed $271 million to nonperforming loans as of March 31, 2010 compared to $258 and $167 million in restructured loans as of December 31, 2009 and March 31, 2009, respectively. As of March 31, 2010, redefault rates for restructured residential mortgages loans, home equity loans and credit cards were 28%, 15% and 18% respectively.

Repossessed personal property and other real estate owned (OREO) increased to $396 million at March 31, 2010 compared to $297 million at December 31, 2009 due to an increase in OREO of $99 million. The increase in OREO was driven by an increase in foreclosed commercial properties of $94 million compared to December 31, 2009 primarily due to increases of $57 and $28 million in foreclosures securing commercial mortgage and commercial construction loans, respectively. Michigan and Florida accounted for 42% of foreclosed real estate at March 31, 2010. Repossessed personal property and other real estate owned increased $144 million compared to March 31, 2009 due to an increase in OREO of $148 million. This increase was primarily due to increases of $114 and $34 million in foreclosures securing commercial mortgage and commercial construction loans, respectively.

For the first quarter of 2010, interest income of $49 million would have been recorded if the nonaccrual and renegotiated loans and leases on nonaccrual status had been current in accordance with their terms. Although this value helps demonstrate the costs of carrying nonaccrual credits, the Bancorp does not expect to recover the full amount of interest as nonaccrual loans and leases are generally carried below their principal balance.

TABLE 35: Summary of Nonperforming Assets and Delinquent Loans


($ in millions)	March 31, 2010			December 31, 2009	March 31, 2009
Nonaccrual loans and leases:
Commercial and industrial loans	$	746		734	$	667
Commercial mortgage loans		853		898		692
Commercial construction loans		479		646		551
Commercial leases		55		67		27
Residential mortgage loans		266		275		265
Home equity		23		21		25
Automobile loans		1		1		2
Other consumer loans and leases		—		—		—
Restructured loans and leases:
Commercial loans		39		47		—
Residential mortgage loans		142		137		81
Home equity		27		33		39
Automobile loans		1		1		1
Credit card		101		87		46

Total nonperforming loans and leases		2,733		2,947		2,396
Repossessed personal property and other real estate owned		396		297		252

Total nonperforming assets (a)		3,129		3,244		2,648
Nonaccrual loans held for sale		243		224		403

Total nonperforming assets including loans held for sale	$	3,372		3,468		3,051

90 days past due loans and leases:
Commercial and industrial loans	$	63		118		131
Commercial mortgage loans		44		59		124
Commercial construction loans		9		17		49
Commercial leases		4		4		6
Residential mortgage loans (b)		157		189		231
Home equity		89		99		105
Automobile loans		13		17		18
Credit card		57		64		68
Other consumer loans and leases		—		—		1

Total 90 days past due loans and leases	$	436		567	$	733

Nonperforming assets as a percent of total loans, leases and other assets, including other real estate owned (a)		4.02	%	4.22		3.19
Allowance for loan and lease losses as a percent of nonperforming assets (a)		122		116		116

(a)

Does not include loans held for sale.

(b)

Information for all periods presented excludes advances made pursuant to servicing agreements to Government National Mortgage Association (GNMA) mortgage pools whose repayments are insured by the Federal Housing Administration or guaranteed by the Department of Veterans Affairs. As of March 31, 2010, December 31, 2009 and March 31, 2009, these advances were $167, $130 and $55, respectively.

Quantitative and Qualitative Disclosures About Market Risk (continued)

Analysis of Net Loan Charge-offs

Net charge-offs as a percent of average loans and leases were 3.01% for the first quarter of 2010, compared to 2.37% for the first quarter of 2009. Table 36 provides a summary of credit loss experience and net charge-offs as a percentage of average loans and leases outstanding by loan category.

The ratio of commercial loan net charge-offs to average commercial loans outstanding increased to 3.07% in first quarter of 2010 compared to 2.08% in the first quarter of 2009. Real estate related industries continued to comprise the majority of losses incurred as 67% of charge-offs greater than $2 million during the first quarter of 2010 involved loans in the construction or real estate industries of which: 27% were located in Michigan and 23% in Florida, reflecting the real estate price deterioration in those regions since the first quarter of 2009. Commercial net charge-offs remained elevated in Michigan and Florida during the current quarter as 44%, 53%, and 40%, of commercial and industrial, commercial mortgage, and commercial construction net charge-offs, respectively, were located in these states. This compares to 48%, 66% and 42% for each of these respective categories during the first quarter of 2009.

The ratio of consumer loan net charge-offs to average consumer loans outstanding increased to 2.93% in the first quarter of 2010 compared to 2.82% in the first quarter of 2009. Residential mortgage net charge-offs increased to $88 million in the first quarter of 2010 compared to $75 million in the first quarter of 2009 due to increased foreclosure rates in the Bancorp’s key lending markets. Florida and Michigan continue to rank among the top states in total mortgage foreclosures. The Bancorp’s Florida and Michigan markets experienced the most stress and accounted for over 53% and 15%, respectively, of the residential mortgage net charge-offs during the first quarter of 2010 compared to 67% and 12% during the first quarter of 2009.

Compared to the first quarter of 2009, home equity net charge-offs were flat as increases of $3 million and $1 million in net charge-offs in Ohio and Michigan, respectively, were offset by a $3 million decrease in Florida home equity net charge-offs. Brokered home equity loans represented 40% of home equity charge-offs during the first quarter of 2010, despite representing only 16% of home equity lines and loans as of March 31, 2010. Management responded to the performance of the brokered home equity portfolio by eliminating this channel of origination in 2007. In addition, management actively manages lines of credit and makes reductions in lending limits when it believes it is necessary based on FICO score deterioration and property devaluation.

The ratio of automobile loan net charge-offs to average automobile loans decreased to 1.27% in the first quarter of 2010 compared to 2.17% in the first quarter of 2009 due to tighter underwriting standards implemented in 2008, maturation of the automobile portfolio and higher resale values on automobiles sold at auction. Cumulative losses for the 2009 originations through March 31, 2010 have been lower than those experienced on the 2006 to 2008 vintage loans over the same time period subsequent to origination. The net charge-off ratio on credit card balances increased compared to the same quarter last year as unemployment levels have remained elevated in the Bancorp’s footprint. Future changes in credit card net charge-offs are expected to continue to trend with changes in unemployment. The Bancorp employs a risk-adjusted pricing methodology to ensure adequate compensation is received for those products that have higher credit costs.

Quantitative and Qualitative Disclosures About Market Risk (continued)

TABLE 36: Summary of Credit Loss Experience


For the three months ended March 31 ($ in millions)	2010			2009
Losses charged off:
Commercial and industrial loans	($	175	)	($	116	)
Commercial mortgage loans		(102	)		(79	)
Commercial construction loans		(80	)		(78	)
Commercial leases		(4	)		—
Residential mortgage loans		(88	)		(75	)
Home equity		(75	)		(73	)
Automobile loans		(44	)		(56	)
Credit card		(46	)		(38	)
Other consumer loans and leases		(8	)		(6	)

Total losses		(622	)		(521	)
Recoveries of losses previously charged off:
Commercial and industrial loans		14			13
Commercial mortgage loans		3			2
Commercial construction loans		2			2
Commercial leases		—			—
Residential mortgage loans		—			—
Home equity		2			1
Automobile loans		13			10
Credit card		2			2
Other consumer loans and leases		4			1

Total recoveries		40			31
Net losses charged off:
Commercial and industrial loans		(161	)		(103	)
Commercial mortgage loans		(99	)		(77	)
Commercial construction loans		(78	)		(76	)
Commercial leases		(4	)		—
Residential mortgage loans		(88	)		(75	)
Home equity		(73	)		(72	)
Automobile loans		(31	)		(46	)
Credit card		(44	)		(36	)
Other consumer loans and leases		(4	)		(5	)

Total net losses charged off	($	582	)	($	490	)

Net charge-offs as a percent of average loans and leases (excluding held for sale):
Commercial and industrial loans		2.49	%		1.45	%
Commercial mortgage loans		3.42			2.50
Commercial construction loans		8.57			6.21
Commercial leases		0.44			—

Total commercial loans		3.07			2.08

Residential mortgage loans		4.46			3.27
Home equity		2.38			2.28
Automobile loans		1.27			2.17
Credit card		9.23			7.92
Other consumer loans and leases		2.07			1.63

Total consumer loans		2.93			2.82

Total net losses charged-off		3.01	%		2.37	%

Allowance for Credit Losses

The allowance for credit losses is comprised of the allowance for loan and lease losses and the reserve for unfunded commitments. The allowance for loan and lease losses provides coverage for probable and estimable losses in the loan and lease portfolio. The Bancorp evaluates the allowance each quarter to determine its adequacy to cover inherent losses. Several factors are taken into consideration in the determination of the overall allowance for loan and lease losses, including an unallocated component. These factors include, but are not limited to, the overall risk profile of the loan and lease portfolios, net charge-off experience, the extent of impaired loans and leases, the level of nonaccrual loans and leases, the level of 90 days past due loans and leases and the overall percentage level of the allowance for loan and lease losses. The Bancorp also considers overall asset quality trends, credit administration and portfolio management practices, risk identification practices, credit policy and underwriting practices, overall portfolio growth, portfolio concentrations and current national and local economic conditions that might impact the portfolio. More information on the allowance for loan and lease losses can be found in Management’s Discussion and Analysis - Critical Accounting Policies in the Bancorp’s Annual Report on Form 10-K for the year ended December 31, 2009.

Quantitative and Qualitative Disclosures About Market Risk (continued)

TABLE 37: Changes in Allowance For Credit Losses


For the three months ended March 31 ($ in millions)	2010			2009
Allowance for loan and lease losses:
Balance, beginning of period	$	3,749		2,787
Impact of change in accounting principle		45		—
Net losses charged off		(582	)	(490	)
Provision for loan and lease losses		590		773

Balance, end of period	$	3,802		3,070

Reserve for unfunded commitments:
Balance, beginning of period	$	294		195
Impact of change in accounting principle		(43	)	—
Provision for unfunded commitments		9		36

Balance, end of period	$	260		231

In the first quarter of 2010, the Bancorp did not substantively change any material aspect of its overall approach in the determination of the allowance for loan and lease losses and there have been no material changes in assumptions or estimation techniques as compared to prior periods that impacted the determination of the current period allowance. In addition to the allowance for loan and lease losses, the Bancorp maintains a reserve for unfunded commitments recorded in other liabilities in the Condensed Consolidated Balance Sheets. The methodology used to determine the adequacy of this reserve is similar to the Bancorp’s methodology for determining the allowance for loan and lease losses. The provision for unfunded commitments is included in other noninterest expense in the Condensed Consolidated Statements of Income.

Certain inherent, but unconfirmed losses are probable within the loan and lease portfolio. The Bancorp’s current methodology for determining the level of losses is based on historical loss rates, current credit grades, specific allocation on impaired commercial credits above specified thresholds and other qualitative adjustments. Due to the heavy reliance on realized historical losses and the credit grade rating process, the model derived required reserves tend to slightly lag the deterioration in the portfolio, in a stable or deteriorating credit environment, and tend not to be as responsive when improved conditions have presented themselves. Given these model limitations, the qualitative adjustment factors may be incremental or decremental to the quantitative model results. An unallocated component to the allowance for loan and lease losses is maintained to recognize the imprecision in estimating and measuring loss. The unallocated allowance as a percent of total portfolio loans and leases at March 31, 2010 and December 31, 2009 was .25%, or five percent of the total allowance compared to .28% or 7.50% of the total allowance, as of March 31, 2009. The decrease in the unallocated allowance compared to the prior year was a result of many of the impacts of recent economic events being more fully incorporated into the historical loss rates within the portfolio specific models as well as early signs of stabilization in real estate values in certain of the Bancorp’s lending markets. These recent economic events include, but are not limited to, falling home prices, rising unemployment, bankruptcy filings and fluctuating commodity prices.

As shown in Table 38, the allowance for loan and lease losses as a percent of the total loan and lease portfolio increased to 4.91% at March 31, 2010, compared to 4.88% at December 31, 2009 and 3.71% at March 31, 2009. The allowance for loan and lease losses was $3.8 billion, $3.7 billion and $3.1 billion as of March 31, 2010, December 31, 2009 and March 31, 2009, respectively. The slight increase compared to December 31, 2009 is reflective of a number of factors including a $45 million increase to the allowance for loan and lease losses to recognize reserves associated with loans consolidated on January 1, 2010 due to a change in U.S. GAAP, increased loss estimates due to real estate price deterioration in certain of the Bancorp’s key lending markets offset by declining delinquency trends and a decrease in the amount of impaired loans compared to December 31, 2009. The increase compared to March 31, 2009 is primarily due to increased loss estimates resulting from real estate price deterioration in some of the Bancorp’s key lending markets and increased stress to the commercial loan and lease portfolio. For further discussion on the impact of new accounting guidance adopted during the quarter, see Note 3 of the Notes to Condensed Consolidated Financial Statements.

The Bancorp’s determination of the allowance for commercial loans is sensitive to the risk grades it assigns to these loans. In the event that 10% of commercial loans in each risk category would experience a downgrade of one risk category, the allowance for commercial loans would increase by approximately $233 million at March 31, 2010. In addition, the Bancorp’s determination of the allowance for residential and consumer loans is sensitive to changes in estimated loss rates. In the event that estimated loss rates would increase by 10%, the allowance for residential and consumer loans would increase by approximately $102 million at March 31, 2010. As several qualitative and quantitative factors are considered in determining the allowance for loan and lease losses, these sensitivity analyses do not necessarily reflect the nature and extent of future changes in the allowance for loan and lease losses. They are intended to provide insights into the impact of adverse changes to risk grades and estimated loss rates and do not imply any expectation of future deterioration in the risk ratings or loss rates. Given current processes employed by the Bancorp, management believes the risk grades and estimated loss rates currently assigned are appropriate.

Quantitative and Qualitative Disclosures About Market Risk (continued)

Impaired commercial loans subject to specific evaluation were $1.5 billion as of March 31, 2010, compared to $1.7 billion as of December 31, 2009, and $1.2 billion, as of March 31, 2009. Impaired commercial loans above specified thresholds require individual review to determine loan and lease reserves.

Real estate values have continued to deteriorate, as measured by the Home Price Index, with metropolitan areas in Florida, Michigan and Ohio experiencing larger declines than the national average. The deterioration in real estate values has increased the inherent loss once a loan defaults, particularly for residential mortgage and home equity loans with high loan-to-value ratios.

Economic trends such as gross domestic product, unemployment rate, home sales and inventory and bankruptcy filings have historically provided indicators of trends in loan and lease loss rates. Compared to December 31, 2009, trends in general economic conditions in the national and local economies have generally improved resulting in stabilizing reserve factors used to determine the losses inherent within the loan and lease portfolio.

The Bancorp continually reviews its credit administration and loan and lease portfolio and makes changes based on the performance of its products. Management discontinued the origination of brokered home equity products at the end of 2007, suspended homebuilder lending in the fourth quarter of 2007 and new commercial non-owner occupied real estate lending in 2008, and raised underwriting standards across both the commercial and consumer loan product offerings.

The reserve for unfunded commitments was $260 million at March 31, 2010 compared to $294 and $231 million at December 31, 2009 and March 31, 2009, respectively. The decrease compared to December 31, 2009 is due to a $43 million decrease to release reserves associated with the aforementioned loans that were previously off balance sheet but were consolidated on January 1, 2010 due to a change in U.S. GAAP. The reserve for these loans is included in the Condensed Consolidated Balance Sheet as a component of the allowance for loan and lease losses at March 31, 2010.

TABLE 38: Attribution of Allowance for Loans and Lease Losses to Portfolio Loans and Leases


($ in millions)	March 31, 2010			December 31, 2009	March 31, 2009
Allowance attributed to:
Commercial and industrial loans	$	1,325		1,282	1,000
Commercial mortgage loans		803		734	455
Commercial construction loans		349		380	255
Commercial leases		111		121	89
Residential mortgage loans		376		375	373
Consumer loans		638		660	659
Consumer leases		3		4	8
Unallocated		197		193	231

Total allowance for loan and lease losses	$	3,802		3,749	3,070

Portfolio loans and leases:
Commercial and industrial loans		26,131		25,683	28,617
Commercial mortgage loans		11,744		11,803	12,560
Commercial construction loans		3,277		3,784	4,745
Commercial leases		3,388		3,535	3,521
Residential mortgage loans		7,918		8,035	8,875
Consumer loans		24,521		23,439	23,548
Consumer leases		444		500	703

Total portfolio loans and leases		77,423		76,779	82,569

Attributed allowance as a percent of respective portfolio loans:
Commercial and industrial loans		5.07	%	4.99	3.49
Commercial mortgage loans		6.84		6.22	3.62
Commercial construction loans		10.64		10.04	5.38
Commercial leases		3.27		3.42	2.53
Residential mortgage loans		4.75		4.67	4.20
Consumer loans		2.60		2.81	2.80
Consumer leases		.68		.80	1.19
Unallocated (as a percent of total portfolio loans and leases)		.25		.25	.28

Total portfolio loans and leases		4.91	%	4.88	3.71

Quantitative and Qualitative Disclosures About Market Risk (continued)

MARKET RISK MANAGEMENT

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

•

Assets and liabilities may mature or reprice at different times;

•

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

•

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

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

Net Interest Income (NII) Simulation Model

The Bancorp employs a variety of measurement techniques to identify and manage its interest rate risk, including the use of an NII simulation model to analyze the sensitivity of net interest income to changing interest rates. The model is based on contractual and assumed cash flows and repricing characteristics for all of the Bancorp’s financial instruments and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and liabilities. The model also includes senior management’s projections of the future volume and pricing of each of the product lines offered by the Bancorp as well as other pertinent assumptions. Actual results may differ from these simulated results due to timing, magnitude and frequency of interest rate changes as well as changes in market conditions and management strategies.

The Bancorp’s Executive Asset Liability Management Committee (ALCO), which includes senior management representatives and is accountable to the Enterprise Risk Management Committee, monitors and manages interest rate risk within Board approved policy limits. In addition to the risk management activities of ALCO, the Bancorp has a Market Risk Management function as part of ERM that provides independent oversight of market risk activities. The Bancorp’s interest rate risk exposure is currently evaluated by measuring the anticipated change in net interest income over 12-month and 24-month horizons assuming a 100 bp parallel ramped increase and a 200 bp parallel ramped increase in interest rates. The Fed Funds interest rate, targeted by the Federal Reserve at a range of 0% to 0.25%, is currently set at a level that would be negative in parallel ramped decrease scenarios; therefore, those scenarios were omitted from the interest rate risk analyses for March 31, 2010. In accordance with the current policy, the rate movements are assumed to occur over one year and are sustained thereafter.

At March 31, 2010, the Bancorp’s simulated exposure to a change in interest rates as described above was effectively neutral in year one and asset sensitive in year two. Table 39 shows the Bancorp’s estimated net interest income sensitivity profile and ALCO policy limits as of March 31, 2010:

TABLE 39: Estimated NII Sensitivity Profile


	Percent Change in NII (FTE)			ALCO Policy Limits
Change in Interest Rates (bp)	12 Months		13 to 24 Months	12 Months		13 to 24 Months
+200	0.46	%	2.41	(5.00	)	(7.00	)
+100	0.39		1.50	—		—

Market Value of Equity

The Bancorp also employs market value of equity (MVE) as a measurement tool in managing interest rate risk. Whereas the earnings simulation highlights exposures over a relatively short time horizon, the MVE analysis incorporates all cash flows over the estimated remaining life of all balance sheet and derivative positions. The MVE of the balance sheet, at a point in time, is defined as the discounted present value of asset and derivative cash flows less the discounted value of liability cash flows. The sensitivity of MVE to changes in the level of interest rates is a measure of longer-term interest rate risk. MVE values only the current balance sheet and does not incorporate the growth assumptions used in the earnings simulation model. As with the earnings simulation model, assumptions about the timing and variability of existing balance sheet cash flows are critical in the MVE analysis. Particularly important are assumptions driving prepayments and the expected changes in balances and pricing of transaction deposit portfolios. The following table shows the Bancorp’s MVE sensitivity profile as of March 31, 2010:

Quantitative and Qualitative Disclosures About Market Risk (continued)

TABLE 40: Estimated MVE Sensitivity Profile


Change in Interest Rates (bp)	Change in MVE		ALCO Policy Limits
+200	(2.99	%)	(15.0	)
+100	(1.15	)
+25	(0.17	)
-25	0.09

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

Use of Derivatives to Manage Interest Rate Risk

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

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

The Bancorp also establishes derivative contracts with major financial institutions to economically hedge significant exposures assumed in commercial customer accommodation derivative contracts. Generally, these contracts have similar terms in order to protect the Bancorp from market volatility. Credit risk arises from the possible inability of counterparties to meet the terms of their contracts, which the Bancorp minimizes through collateral arrangements, approvals, limits and monitoring procedures. The notional amount and fair values of these derivatives as of March 31, 2010 are included in Note 10 of the Notes to Condensed Consolidated Financial Statements.

Portfolio Loans and Leases and Interest Rate Risk

Although the Bancorp’s portfolio loans and leases contain both fixed and floating/adjustable rate products, the rates of interest earned by the Bancorp on the outstanding balances are generally established for a period of time. The interest rate sensitivity of loans and leases is directly related to the length of time the rate earned is established. Table 41 summarizes the expected principal cash flows of the Bancorp’s portfolio loans and leases as of March 31, 2010. Additionally, Table 42 displays a summary of expected principal cash flows occurring after one year for both fixed and floating/adjustable rate loans, as of March 31, 2010.

TABLE 41: Portfolio Loan and Lease Contractual Maturities


($ in millions)	Less than 1 year		1 – 5 years	Greater than 5 years	Total
Commercial and industrial loans	$	10,850	12,234	3,047	26,131
Commercial mortgage loans		5,584	4,711	1,449	11,744
Commercial construction loans		1,711	1,009	557	3,277
Commercial leases		525	1,359	1,504	3,388

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Smaller reporting company