Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

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Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (MD&A)

The following is Management’s Discussion and Analysis of Financial Condition and Results of Operations of certain significant factors that have affected Fifth Third Bancorp’s (the “Bancorp” or “Fifth Third”) financial condition and results of operations during the periods included in the Consolidated Financial Statements, which are a part of this filing. Reference to the Bancorp incorporates the parent holding company and all consolidated subsidiaries. The Bancorp’s banking subsidiary is referred to as the Bank.

OVERVIEW

This overview of MD&A highlights selected information in the financial results of the Bancorp and may not contain all of the information that is important to you. For a more complete understanding of trends, events, commitments, uncertainties, liquidity, capital resources and critical accounting policies and estimates, you should carefully read this entire document. Each of these items could have an impact on the Bancorp’s financial condition, results of operations and cash flows. In addition, refer to the Glossary of Abbreviations and Acronyms in this report for a list of terms included as a tool for the reader of this Annual Report on Form

10-K.

The abbreviations and acronyms identified therein are used throughout this MD&A, as well as the Consolidated Financial Statements and Notes to Consolidated Financial Statements.

Net interest income, net interest margin, net interest rate spread and the efficiency ratio are presented in MD&A on an FTE basis. The FTE basis adjusts for the

tax-favored

status of income from certain loans and securities held by the Bancorp that are not taxable for federal income tax purposes. The Bancorp believes this presentation to be the preferred industry measurement of net interest income as it provides a relevant comparison between taxable and

non-taxable

amounts. The FTE basis for presenting net interest income is a

non-GAAP

measure. For further information, refer to the

Non-GAAP

Financial Measures section of MD&A.

The Bancorp’s revenues are dependent on both net interest income and noninterest income. For the year ended December 31, 2019, net interest income on an FTE basis and noninterest income provided 58% and 42% of total revenue, respectively. The Bancorp derives the majority of its revenues within the U.S. from customers domiciled in the U.S. Revenue from foreign countries and external customers domiciled in foreign countries was immaterial to the Consolidated Financial Statements. Changes in interest rates, credit quality, economic trends and the capital markets are primary factors that drive the performance of the Bancorp. As discussed later in the Risk Management section of MD&A, risk identification, assessment, management, monitoring and independent governance reporting of risk are important to the management of risk and to the financial performance and capital strength of the Bancorp.

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

The Bancorp is also exposed to the risk of loss on its loan and lease portfolio as a result of changing expected cash flows caused by borrower credit events, such as loan defaults and inadequate collateral.

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

Acquisition of MB Financial, Inc.

On March 22, 2019, Fifth Third Bancorp completed its acquisition of MB Financial, Inc. in a stock and cash transaction valued at approximately $3.6 billion. MB Financial, Inc. was headquartered in Chicago, Illinois with reported assets of approximately $20 billion and 86 branches (91 locations) as of December 31, 2018 and was the holding company of MB Financial Bank, N.A. The acquisition resulted in a combined company with a larger Chicago market presence and core deposit funding base while also building scale in a strategically important market.

Under the terms of the agreement, the Bancorp acquired 100% of the common stock of MB Financial, Inc. In exchange, common shareholders of MB Financial, Inc. received 1.45 shares of Fifth Third Bancorp common stock and $5.54 in cash for each share of MB Financial, Inc. common stock, for a total value per share of $42.49, based on the $25.48 closing price of Fifth Third Bancorp’s common stock on March 21, 2019. Upon closing of the transaction, MB Financial, Inc. became a subsidiary of the Bancorp. However, MB Financial, Inc.’s 6.00%

non-cumulative

Series C perpetual preferred stock with a fair value of $197 million remained outstanding and was recognized as a noncontrolling interest on the Consolidated Balance Sheets. Through its ownership of all of the common stock, the Bancorp controlled 95% of the voting equity interests in MB Financial, Inc. with the remainder attributable to the preferred shareholders’ noncontrolling interest.

On June 24, 2019, MB Financial, Inc. entered into an Agreement and Plan of Merger with the Bancorp to provide for the merger of MB Financial, Inc. with and into the Bancorp, with the Bancorp as the surviving corporation. A special meeting of MB Financial, Inc.’s stockholders was held on August 23, 2019 at which the holders of MB Financial, Inc.’s common stock and preferred stock, voting together as a single class, approved the merger. In the merger, each outstanding share of MB Financial, Inc.’s preferred stock was converted into the right to receive one share of a newly created series of preferred stock of the Bancorp having substantially the same terms as the MB Financial, Inc. preferred stock. See the Preferred Stock Transactions section for additional information.

The acquisition of MB Financial, Inc. constituted a business combination and was accounted for under the acquisition method of accounting. Accordingly, the assets acquired, liabilities assumed and noncontrolling interest recognized were recorded at their estimated fair values as of the acquisition date. These fair value estimates are considered preliminary as of December 31, 2019. Fair value estimates, including loans and leases, intangible assets, bank premises and equipment, certain

tax-related

matters and goodwill, are subject to change for up to one year after the acquisition date as additional information becomes available.

44 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Bank Merger

On May 3, 2019 MB Financial Bank, N.A. merged with and into Fifth Third Bank (now Fifth Third Bank, National Association), with Fifth Third Bank, National Association as the surviving entity. Fifth Third Bank, National Association is an indirect subsidiary of Fifth Third Bancorp.

Worldpay Holding, LLC and Worldpay, Inc. Transactions

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

During the fourth quarter of 2019, the Bancorp entered into an agreement with Fidelity National Information Services, Inc. and Worldpay, Inc. under which Worldpay, Inc. may be obligated to pay up to approximately $366 million to the Bancorp to terminate and settle certain remaining TRA cash flows, totaling an estimated $720 million, upon the exercise of certain call options by

Worldpay, Inc. or certain put options by the Bancorp (“Worldpay, Inc. TRA transaction”). If exercised, certain of the obligations would be settled with four quarterly payments beginning in April 2020, a second set of the obligations would be settled with four quarterly payments beginning in April 2022, and a third set of the obligations would be settled with four quarterly payments beginning in April 2023. In 2019, the Bancorp recognized a gain of approximately $345 million in other noninterest income associated with these options. This agreement did not impact the TRA payment recognized in the fourth quarter of 2019.

Accelerated Share Repurchase Transactions

The Bancorp entered into or settled a number of accelerated share repurchase transactions during the year ended December 31, 2019. As part of these transactions, the Bancorp entered into forward contracts in which the final number of shares delivered at settlement was based generally on a discount to the average daily volume weighted-average price of the Bancorp’s common stock during the term of the repurchase agreements. For more information on the accelerated share repurchase program, refer to Note 25 of the Notes to Consolidated Financial Statements. For a summary of the Bancorp’s accelerated share repurchase transactions that were entered into or settled during the year ended December 31, 2019, refer to Table 1.

TABLE 1: SUMMARY OF ACCELERATED SHARE REPURCHASE TRANSACTIONS


Repurchase Date	Amount ($ in millions)		Shares Repurchased on Repurchase Date		Shares Received from Forward Contract Settlement		Total Shares Repurchased		Settlement Date
March 27, 2019 (a)		913		31,779,280		2,026,584		33,805,864		June 28, 2019
April 29, 2019 (b)		200		6,015,570		1,217,805		7,233,375		May 23, 2019 - May 24, 2019
August 7, 2019		100		3,150,482		694,238		3,844,720		August 16, 2019
August 9, 2019 (b)		200		6,405,426		1,475,487		7,880,913		August 28, 2019
October 25, 2019		300		9,020,163		1,149,121		10,169,284		December 17, 2019

(a)	This accelerated share repurchase transaction consisted of two supplemental confirmations each with a notional amount of $456.5 million.

(b)	This accelerated share repurchase transaction consisted of two supplemental confirmations each with a notional amount of $100 million.

Open Market Share Repurchase Transactions

Between July 29, 2019 and July 30, 2019, the Bancorp repurchased 1,667,735 shares, or approximately $50 million, of its outstanding common stock through open market repurchase transactions, which settled between July 31, 2019 and August 1, 2019. For more information on the open market share repurchase program, refer to Note 25 of the Notes to Consolidated Financial Statements.

Preferred Stock Transactions

On August 26, 2019, the Bancorp issued 200,000 shares of 6.00%

non-cumulative

perpetual Class B preferred stock, Series A. Each preferred share has a $1,000 liquidation preference. These shares were issued to the holders of MB Financial, Inc.’s 6.00%

non-cumulative

perpetual preferred stock, Series C, in conjunction with the merger of MB Financial, Inc. with and into Fifth Third Bancorp. This transaction resulted in the elimination of the noncontrolling interest in MB Financial, Inc. which was previously reported in the Bancorp’s Consolidated Financial Statements. The newly issued shares of Class B preferred stock, Series A were recognized by the Bancorp at the carrying value previously assigned to the MB Financial, Inc. Series C preferred stock prior to the transaction.

On September 17, 2019, the Bancorp issued in a registered public offering 10,000,000 depositary shares, representing 10,000 shares of 4.95%

non-cumulative

dividend payment date on or after September 30, 2024 and (ii) in whole, but not in part, at any time following a regulatory capital event. The Series K preferred shares are not convertible into Bancorp common shares or any other securities. For more information on preferred stock transactions, refer to Note 25 of the Notes to Consolidated Financial Statements.

Senior Notes Offerings

On January 25, 2019, the Bancorp issued and sold $1.5 billion of senior notes to third-party investors. The senior notes bear a fixed-rate of interest of 3.65% per annum. The notes are unsecured, senior obligations of the Bancorp. Payment of the full principal amounts of the notes is due upon maturity on January 25, 2024. These fixed-rate senior notes will be redeemable by the Bancorp, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount plus accrued and unpaid interest up to, but excluding, the redemption date.

On February 1, 2019, the Bank issued and sold, under its bank notes program, $300 million in unsecured senior floating-rate bank notes due on February 1, 2022. Interest on the floating-rate notes is three-month LIBOR plus 64 bps. These notes will be redeemable by the Bank, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest up to, but excluding, the redemption date.

On October 28, 2019, the Bancorp issued and sold $750 million of senior notes to third-party investors. The senior notes bear a fixed-rate of interest of 2.375% per annum.

45 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The notes are unsecured, senior obligations of the Bancorp. Payment of the full principal amounts of the notes is due upon maturity on January 28, 2025. These notes will be redeemable at the Bancorp’s option, in whole or in part, at any time or from time to time, on or after April 25, 2020, and prior to December 29, 2024, in each case at a redemption price, plus accrued and unpaid interest thereon, if any, to, but excluding, the redemption date, equal to the greater of (i) 100% of the aggregate principal amount of the notes being redeemed on that redemption date; and (ii) the sum of the present values of the remaining scheduled payments of principal and interest on the notes being redeemed that would be due if the notes to be redeemed matured on December 29, 2024 discounted to the redemption date on a semi-annual basis at the applicable treasury rate plus 15 bps. Additionally, these notes will be redeemable by the Bancorp, in whole or in part, on or after the date that is 30 days prior to the maturity date at a redemption price equal to 100% of the principal amount of the notes to be redeemed plus accrued and unpaid interest thereon to, but excluding, the redemption date. For additional information on these senior notes offerings, refer to Note 18 of the Notes to Consolidated Financial Statements.

For further information on a subsequent event related to long-term debt, refer to Note 33 of the Notes to Consolidated Financial Statements.

Automobile Loan Securitization

In a securitization transaction that occurred in 2019, the Bancorp transferred approximately $1.43 billion in automobile loans to a bankruptcy remote trust which subsequently issued approximately $1.37 billion of asset-backed notes, of which approximately $68 million of the asset-backed notes were retained by the Bancorp, resulting in approximately $1.3 billion of outstanding notes included in long-term debt in the Consolidated Balance Sheets. Additionally, the bankruptcy remote trust was deemed to be a VIE and the Bancorp, as the primary beneficiary, consolidated the VIE. The third-party holders of the asset-backed notes do not have recourse to the general assets of the Bancorp.

GS Holdings and GreenSky, Inc. Transactions

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

one-to-one

basis for Class A common stock or cash.

During the first quarter of 2019, all of the Bancorp’s units in GS Holdings were converted for Class A common stock on a

one-to-one

basis. The Bancorp sold all of its Class A common stock during 2019 and, therefore, no longer beneficially owns any of GreenSky, Inc.’s equity securities.

Conversion to a National Bank Charter

On September 10, 2019, Fifth Third Bancorp announced that Fifth Third Bank had received approval from the OCC to convert from an Ohio state-chartered bank to a national bank. The Bank converted to a national bank charter on November 14, 2019. As a result of the conversion, the Bank is subject to supervision and regulation by the OCC and subject to the National Bank Act and is no longer subject to supervision and regulation by the Ohio Division of Financial Institutions. Additionally, while the FRB is no longer the Bank’s primary federal regulator, the Bank remains a member of the Federal Reserve System.

LIBOR Transition

In July 2017, the Chief Executive of the United Kingdom Financial Conduct Authority (the “FCA”), which regulates LIBOR, announced that FCA will stop persuading or compelling banks to submit rates for the calculation of LIBOR to the administrator of LIBOR after 2021. Since then, central banks around the world, including the Federal Reserve, have commissioned working groups of market participants and official sector representatives with the goal of finding suitable replacements for LIBOR. The Bancorp has substantial exposure to LIBOR-based products within its commercial lending, commercial deposits, business banking, consumer lending, capital markets lines of business and corporate treasury function. It is expected that a transition away from the widespread use of LIBOR to alternative reference rates will occur over the course of the next few years. Although the full impact of such reforms and actions remains unclear, the Bancorp is preparing to transition from LIBOR to these alternative reference rates.

The Bancorp’s transition plan includes a number of key work streams, including continued engagement with central bank and industry working groups and regulators, active client engagement, comprehensive review of legacy documentation, internal operational readiness, and risk management, among other things, to facilitate the transition to alternative reference rates.

The transition away from LIBOR is expected to be gradual and complicated. There remain a number of unknown factors regarding the transition from LIBOR that could impact the Bancorp’s business, including, for example, the pace of the transition to replacement rates, including industry coalescence around an alternative benchmark, such as SOFR, our ability to identify exposures to LIBOR across our business lines, the specific terms and parameters for any potential alternative reference rates, the prices of and the liquidity of trading markets for products based on the alternative reference rates, our ability to transition to and develop appropriate systems and analytics for one or more alternative reference rates, our ability to maintain contractual continuity and our ability to identify and remediate any operational issues. For a further discussion of the various risks the Bancorp faces in connection with the expected replacement of LIBOR on its operations, see “Risk Factors—Market Risks—The replacement of LIBOR could adversely affect Fifth Third’s revenue or expenses and the value of those assets or obligations.” in Item 1A. Risk Factors of this Annual Report on Form

10-K.

Legislative and Regulatory Developments

On October 31, 2018, the Board of Governors of the FRB released a series of regulatory proposals to implement the Economic Growth, Regulatory Relief, and Consumer Protection Act (“Reform Act”). Among the proposals, the Board of Governors, joined by the Department of Treasury, OCC and the FDIC proposed to remove the application of the LCR regulations and the NSFR from certain BHCs that qualify under the proposal as “Category IV” institutions, primarily those BHCs with consolidated assets between $100 billion and $250 billion, including Fifth Third Bancorp. On October 10, 2019, the Board of Governors of the FRB announced it finalized the rules that tailor its regulations for banks to more closely match their risk profile. Fifth Third, as a Category IV institution, will no longer be subject to the LCR regulations and the NSFR regulations. The final rules were effective December 31, 2019.

In August and September 2019, the five regulatory agencies charged with implementing the Volcker Rule released final amendments to the Volcker Rule regulations that tailor the Volcker Rule’s compliance requirements to the amount of a firm’s trading activity, revise the definition of a trading account, clarify certain key provisions in the Volcker Rule and simplify the information that covered entities are required to provide to regulatory agencies. The Bancorp believes the amendments to the Volcker Rule are not material to its business operations.

46 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 2: CONDENSED CONSOLIDATED STATEMENTS OF INCOME


For the years ended December 31 ($ in millions, except per share data)	2019		2018		2017		2016			2015
Interest income (FTE) (a)	$	6,271		5,199		4,515		4,218			4,049
Interest expense		1,457		1,043		691		578			495
Net Interest Income (FTE) (a)		4,814		4,156		3,824		3,640			3,554
Provision for credit losses		471		207		261		366			400
Net Interest Income After Provision for Credit Losses (FTE) (a)		4,343		3,949		3,563		3,274			3,154
Noninterest income		3,536		2,790		3,224		2,696			3,003
Noninterest expense		4,660		3,958		3,782		3,737			3,643
Income Before Income Taxes (FTE) (a)		3,219		2,781		3,005		2,233			2,514
Fully taxable equivalent adjustment		17		16		26		25			21
Applicable income tax expense		690		572		799		665			814
Net Income		2,512		2,193		2,180		1,543			1,679
Less: Net income attributable to noncontrolling interests		-		-		-		(4	)		(6)
Net Income Attributable to Bancorp		2,512		2,193		2,180		1,547			1,685
Dividends on preferred stock		93		75		75		75			75
Net Income Available to Common Shareholders	$	2,419		2,118		2,105		1,472			1,610
Earnings per share - basic	$	3.38		3.11		2.86		1.92			2.00
Earnings per share - diluted	$	3.33		3.06		2.81		1.91			1.97
Cash dividends declared per common share	$	0.94		0.74		0.60		0.53			0.52

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

Earnings Summary

The Bancorp’s net income available to common shareholders for the year ended December 31, 2019 was $2.4 billion, or $3.33 per diluted share, which was net of $93 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the year ended December 31, 2018 was $2.1 billion, or $3.06 per diluted share, which was net of $75 million in preferred stock dividends.

Net interest income on an FTE basis

(non-GAAP)

was $4.8 billion and $4.2 billion for the years ended December 31, 2019 and 2018, respectively. Net interest income was positively impacted by increases in average commercial and industrial loans and average commercial mortgage loans from the year ended December 31, 2018. Additionally, net interest income benefited from an increase in yields on average loans and leases from the year ended December 31, 2018. These positive impacts were partially offset by increases in both the rates paid on and balances of average interest-bearing core deposits and average long-term debt as well as an increase in average certificates $100,000 and over for the year ended December 31, 2019 compared to the year ended December 31, 2018. Additionally, net interest income was negatively impacted by the August 2019, September 2019 and October 2019 decisions of the FOMC to lower the target range of the federal funds rate. Net interest income for the year ended December 31, 2019 included $65 million of amortization and accretion of premiums and discounts on acquired loans and leases and assumed deposits and long-term debt from acquisitions. Net interest margin on an FTE basis

(non-GAAP)

was 3.31% for the year ended December 31, 2019 compared to 3.22% for the year ended December 31, 2018.

Noninterest income increased $746 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to increases in other noninterest income, corporate banking revenue, mortgage banking net revenue and wealth and asset management revenue. Other noninterest income increased $337 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to the recognition of gains on the sale of Worldpay Inc. shares driven by the Bancorp’s sale of shares during the first quarter of 2019, an increase in the income from the TRA associated with Worldpay, Inc., an increase in operating lease income and a decrease in the net losses on disposition and impairment of bank premises and equipment.

These benefits were partially offset by the gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc. recognized during the first quarter of 2018 as well as an increase in the loss on the swap associated with the sale of Visa, Inc. Class B Shares. Corporate banking revenue increased $132 million for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase from the prior year was primarily driven by increases in leasing business revenue, lease remarketing fees, institutional sales revenue and business lending fees of $50 million, $44 million, $26 million and $21 million, respectively. The increase in leasing business revenue was driven by the acquisition of MB Financial, Inc. These benefits were partially offset by a decrease of $8 million in syndication fees from the year ended December 31, 2018. Mortgage banking net revenue increased $75 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to a $75 million increase in origination fees and gains on loan sales due to the lower interest rate environment. Wealth and asset management revenue increased $43 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to an increase of $37 million in private client service fees. This increase was driven by increased sales production and strong market performance as well as the full-year benefit from acquisitions in 2018 and the acquisition of MB Financial, Inc.

Noninterest expense increased $702 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to increases in personnel costs, technology and communications expense and other noninterest expense. Personnel costs increased $303 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 driven by $90 million in merger-related expenses for the year ended December 31, 2019, the addition of personnel costs from the acquisition of MB Financial, Inc. and higher deferred compensation expense. Technology and communications expense increased $137 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 driven by $71 million in merger-related expenses for the year ended December 31, 2019, as well as increased investment in contemporizing information technology architecture, mitigating information security risks and growth initiatives.

47 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Other noninterest expense increased $209 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 and included the impact of an increase of $23 million in merger-related expenses related to the acquisition of MB Financial, Inc. as well as increases in operating lease expense, intangible amortization expense, losses and adjustments and loan and lease expense, partially offset by a decrease in FDIC insurance and other taxes.

For more information on net interest income, noninterest income and noninterest expense, refer to the Statements of Income Analysis section of MD&A.

Credit Summary

The provision for credit losses was $471 million and $207 million for the years ended December 31, 2019 and 2018, respectively. Net losses

charged-off

as a percent of average portfolio loans and leases remained at 0.35% for both the years ended December 31, 2019 and

At December 31, 2019, nonperforming portfolio assets as a percent of portfolio loans and leases and OREO increased to 0.62% compared to 0.41% at December 31, 2018. For further discussion on credit quality, refer to the Credit Risk Management subsection of the Risk Management section of MD&A.

Capital Summary

The Bancorp’s capital ratios exceed the “well-capitalized” guidelines as defined by the U.S. banking agencies. As of December 31, 2019, as calculated under the Basel III standardized approach, the CET1 capital ratio was 9.75%, the Tier I risk-based capital ratio was 10.99%, the Total risk-based capital ratio was 13.84% and the Tier I leverage ratio was 9.54%.

NON-GAAP

FINANCIAL MEASURES

The following are

non-GAAP

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

The FTE basis adjusts for the

tax-favored

non-taxable

amounts.

The following table reconciles the

non-GAAP

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

TABLE 3:

NON-GAAP

FINANCIAL MEASURES - FINANCIAL MEASURES AND RATIOS ON AN FTE BASIS


For the years ended December 31 ($ in millions)	2019			2018		2017
Net interest income (U.S. GAAP)	$	4,797			4,140		3,798
Add: FTE adjustment		17			16		26
Net interest income on an FTE basis (1)	$	4,814			4,156		3,824

Interest income (U.S. GAAP)	$	6,254			5,183		4,489
Add: FTE adjustment		17			16		26
Interest income on an FTE basis (2)	$	6,271			5,199		4,515

Interest expense (3)	$	1,457			1,043		691
Noninterest income (4)		3,536			2,790		3,224
Noninterest expense (5)		4,660			3,958		3,782
Average interest-earning assets (6)		145,404			128,905		126,293
Average interest-bearing liabilities (7)		104,708			89,959		85,090

Ratios:
Net interest margin on an FTE basis (1) / (6)		3.31	%		3.22		3.03
Net interest rate spread on an FTE basis ((2) / (6)) - ((3) / (7))		2.92			2.87		2.76
Efficiency ratio on an FTE basis (5) / ((1) + (4))		55.8			57.0		53.7

The Bancorp believes return on average tangible common equity is an important measure for comparative purposes with other financial institutions, but is not defined under U.S. GAAP, and therefore is considered a

non-GAAP

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

measures average tangible common equity excluding AOCI. The Bancorp believes this is a useful return measure as it calculates the return available to common shareholders without the impact of intangible assets, their related amortization as well as the volatility primarily associated with fluctuations of unrealized gains and losses on the Bancorp’s

available-for-sale

debt and other securities and cash flow hedge derivatives.

48 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table reconciles the

non-GAAP

financial measure of return on average tangible common equity to U.S. GAAP:

TABLE 4:

NON-GAAP

FINANCIAL MEASURE - RETURN ON AVERAGE TANGIBLE COMMON EQUITY


For the years ended December 31 ($ in millions)	2019			2018
Net income available to common shareholders (U.S. GAAP)	$	2,419			2,118
Add: Intangible amortization, net of tax		35			4
Tangible net income available to common shareholders (1)	$	2,454			2,122

Average Bancorp shareholders’ equity (U.S. GAAP)	$	19,902			15,970
Less: Average preferred stock		(1,470	)		(1,331	)
Average goodwill		(3,888	)		(2,462	)
Average intangible assets		(169	)		(29	)

Average tangible common equity, including AOCI (2)	$	14,375			12,148
Less: Average AOCI		(875	)		575

Average tangible common equity, excluding AOCI (3)	$	13,500			12,723

Return on average tangible common equity, including AOCI (1) / (2)		17.1	%		17.5
Return on average tangible common equity, excluding AOCI (1) / (3)		18.2			16.7

The Bancorp considers various measures when evaluating capital utilization and adequacy, including the tangible equity ratio and tangible common equity ratio, in addition to capital ratios defined by the U.S. banking agencies. These calculations are intended to complement the capital ratios defined by the U.S. banking agencies for both absolute and comparative purposes.

Because U.S. GAAP does not include capital ratio measures, the Bancorp believes there are no comparable U.S. GAAP financial measures to these ratios. These ratios are not formally defined by U.S. GAAP or codified in the federal banking regulations and, therefore, are considered to be

non-GAAP

financial measures. The Bancorp encourages readers to consider its Consolidated Financial Statements in their entirety and not to rely on any single financial measure.

The following table reconciles

non-GAAP

capital ratios to U.S. GAAP:

TABLE 5:

NON-GAAP

FINANCIAL MEASURES - CAPITAL RATIOS


As of December 31 ($ in millions)	2019			2018
Total Bancorp Shareholders’ Equity (U.S. GAAP)	$	21,203			16,250
Less: Preferred stock		(1,770	)		(1,331	)
Goodwill		(4,252	)		(2,478	)
Intangible assets		(201	)		(40	)
AOCI		(1,192	)		112
Tangible common equity, excluding unrealized gains / losses (1)		13,788			12,513
Add: Preferred stock		1,770			1,331
Tangible equity (2)	$	15,558			13,844

Total Assets (U.S. GAAP)	$	169,369			146,069
Less: Goodwill		(4,252	)		(2,478	)
Intangible assets		(201	)		(40	)
AOCI, before tax		(1,509	)		142
Tangible assets, excluding unrealized gains / losses (3)	$	163,407			143,693

Ratios:
Tangible equity as a percentage of tangible assets (2) / (3)		9.52	%		9.63
Tangible common equity as a percentage of tangible assets (1) / (3)		8.44			8.71

49 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RECENT ACCOUNTING STANDARDS

Note 1 of the Notes to Consolidated Financial Statements provides a discussion of the significant new accounting standards applicable to the

Bancorp during 2019 and the expected impact of significant accounting standards issued, but not yet required to be adopted.

CRITICAL ACCOUNTING POLICIES

The Bancorp’s Consolidated Financial Statements are prepared in accordance with U.S. GAAP. Certain accounting policies require management to exercise judgment in determining methodologies, economic assumptions and estimates that may materially affect the Bancorp’s financial position, results of operations and cash flows. The Bancorp’s critical accounting policies include the accounting for the ALLL, reserve for unfunded commitments, valuation of servicing rights, fair value measurements, goodwill and legal contingencies. There have been no material changes to the valuation techniques or models described below during the year ended December 31, 2019.

ALLL

The Bancorp disaggregates its portfolio loans and leases into portfolio segments for purposes of determining the ALLL. The Bancorp’s portfolio segments include commercial, residential mortgage and consumer. The Bancorp further disaggregates its portfolio segments into classes for purposes of monitoring and assessing credit quality based on certain risk characteristics. For an analysis of the Bancorp’s ALLL by portfolio segment and credit quality information by class, refer to Note 7 of the Notes to Consolidated Financial Statements.

The Bancorp maintains the ALLL to absorb probable loan and lease losses inherent in its portfolio segments. The ALLL is maintained at a level the Bancorp considers to be adequate and is based on ongoing quarterly assessments and evaluations of the collectability and historical loss experience of loans and leases. Credit losses are charged and recoveries are credited to the ALLL. Provisions for loan and lease losses are based on the Bancorp’s review of the historical credit loss experience and such factors that, in management’s judgment, deserve consideration under existing economic conditions in estimating probable credit losses. The Bancorp’s strategy for credit risk management includes a combination of conservative exposure limits significantly below legal lending limits and conservative underwriting, documentation and collections standards. The strategy also emphasizes diversification on a geographic, industry and customer level, regular credit examinations and quarterly management reviews of large credit exposures and loans experiencing deterioration of credit quality.

The Bancorp’s methodology for determining the ALLL requires significant management judgment and is based on historical loss rates, current credit grades, specific allocation on loans modified in a TDR and impaired commercial credits above specified thresholds and other qualitative adjustments. Allowances on individual commercial loans and leases, TDRs and historical loss rates are reviewed quarterly and adjusted as necessary based on changing borrower and/or collateral conditions and actual collection and

charge-off

experience. An unallocated allowance is maintained to recognize the imprecision in estimating and measuring losses when evaluating allowances for pools of loans and leases.

Larger commercial loans and leases included within aggregate borrower relationship balances exceeding $1 million that exhibit probable or observed credit weaknesses, as well as loans that have been modified in a TDR, are subject to individual review for impairment. The Bancorp considers the current value of collateral, credit quality of any guarantees, the guarantor’s liquidity and willingness to cooperate, the loan or lease structure and other factors when evaluating whether an individual loan or lease is impaired.

Other factors may include the industry and geographic region of the borrower, size and financial condition of the borrower, cash flow and leverage of the borrower and the Bancorp’s evaluation of the borrower’s management. When individual loans and leases are impaired, allowances are determined based on management’s estimate of the borrower’s ability to repay the loan or lease given the availability of collateral and other sources of cash flow, as well as an evaluation of legal options available to the Bancorp. Allowances for impaired loans and leases are measured based on the present value of expected future cash flows discounted at the loan’s effective interest rate, fair value of the underlying collateral or readily observable secondary market values. The Bancorp evaluates the collectability of both principal and interest when assessing the need for a loss accrual.

Historical credit loss rates are applied to commercial loans and leases that are not impaired or are impaired, but smaller than the established threshold of $1 million and thus not subject to specific allowance allocations. The loss rates are derived from migration analyses for several portfolio stratifications, which track the historical net

charge-off

experience sustained on loans and leases according to their internal risk grade. The risk grading system utilized for allowance analysis purposes encompasses ten categories.

Homogenous loans in the residential mortgage and consumer portfolio segments are not individually risk graded. Rather, standard credit scoring systems and delinquency monitoring are used to assess credit risks and allowances are established based on the expected net charge-offs. Loss rates are based on the trailing twelve-month net

charge-off

history by loan category. Historical loss rates may be adjusted for certain prescriptive and qualitative factors that, in management’s judgment, are necessary to reflect losses inherent in the portfolio. The prescriptive loss rate factors include adjustments for delinquency trends, LTV trends, refreshed FICO score trends and product mix.

The Bancorp also considers qualitative factors in determining the ALLL. These include adjustments for changes in policies or procedures in underwriting, monitoring or collections, economic conditions, portfolio mix, lending and risk management personnel, results of internal audit and quality control reviews, collateral values, geographic concentrations, estimated loss emergence period and specific portfolio loans backed by enterprise valuations and private equity sponsors. The Bancorp considers home price index trends in its footprint and the volatility of collateral valuation trends when determining the collateral value qualitative factor.

When evaluating the adequacy of allowances, consideration is given to regional geographic concentrations and the closely associated effect changing economic conditions have on the Bancorp’s customers. Refer to the Allowance for Credit Losses subsection of the Risk Management section of MD&A for a discussion on the Bancorp’s ALLL sensitivity analysis.

Reserve for Unfunded Commitments

The reserve for unfunded commitments is maintained at a level believed by management to be sufficient to absorb estimated probable losses related to unfunded credit facilities and is included in other liabilities in the Consolidated Balance Sheets. The determination of the adequacy of the reserve is based upon an evaluation of the unfunded credit facilities, including an assessment of historical commitment utilization experience, credit risk grading and historical loss rates based on credit grade migration.

50 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This process takes into consideration the same risk elements that are analyzed in the determination of the adequacy of the Bancorp’s ALLL, as previously discussed. Net adjustments to the reserve for unfunded commitments are included in provision for credit losses in the Consolidated Statements of Income.

Valuation of Servicing Rights

When the Bancorp sells loans through either securitizations or individual loan sales in accordance with its investment policies, it often obtains servicing rights. The Bancorp may also purchase servicing rights. The Bancorp has elected to measure all existing classes of its servicing rights at fair value at each reporting date with changes in the fair value of servicing rights reported in earnings in the period in which the changes occur. Servicing rights are valued using internal OAS models. Significant management judgment is necessary to identify key economic assumptions used in estimating the fair value of the servicing rights including the prepayment speeds of the underlying loans, the weighted-average life, the OAS and the weighted-average coupon rate, as applicable. The primary risk of material changes to the value of the servicing rights resides in the potential volatility in the economic assumptions used, particularly the prepayment speeds. In order to assist in the assessment of the fair value of servicing rights, the Bancorp obtains external valuations of the servicing rights portfolio from third parties and participates in peer surveys that provide additional confirmation of the reasonableness of key assumptions utilized in the internal OAS model. For additional information on servicing rights, refer to Note 14 of the Notes to Consolidated Financial Statements.

Fair Value Measurements

The Bancorp measures certain financial assets and liabilities at fair value in accordance with U.S. GAAP, which defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Bancorp employs various valuation approaches to measure fair value including the market, income and cost approaches.

The market approach uses prices or relevant information generated by market transactions involving identical or comparable assets or liabilities. The income approach involves discounting future amounts to a single present amount and is based on current market expectations about those future amounts. The cost approach is based on the amount that currently would be required to replace the service capacity of the asset.

U.S. GAAP establishes a fair value hierarchy, which prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets or liabilities (Level 1) and the lowest priority to unobservable inputs (Level 3). A financial instrument’s categorization within the fair value hierarchy is based upon the lowest level of input that is significant to the instrument’s fair value measurement. For additional information on the fair value hierarchy and fair value measurements, refer to Note 1 of the Notes to Consolidated Financial Statements.

The Bancorp’s fair value measurements involve various valuation techniques and models, which involve inputs that are observable, when available. Valuation techniques and parameters used for measuring assets and liabilities are reviewed and validated by the Bancorp on a quarterly basis. Additionally, the Bancorp monitors the fair values of significant assets and liabilities using a variety of methods including the evaluation of pricing runs and exception reports based on certain analytical criteria, comparison to previous trades and overall review and assessments for reasonableness. The level of management judgment necessary to determine fair value varies based upon the methods used in the determination of fair value. Financial instruments that are measured at fair value using quoted prices in active markets (Level 1) require minimal judgment. The valuation of financial instruments when quoted market prices are not available (Levels 2 and 3) may require significant management judgment to assess whether quoted prices for similar instruments exist, the impact of changing market conditions including reducing liquidity in the capital markets and the use of estimates surrounding significant unobservable inputs. Table 6 provides a summary of the fair value of financial instruments carried at fair value on a recurring basis and the amounts of financial instruments valued using Level 3 inputs.

TABLE 6: FAIR VALUE SUMMARY


As of ($ in millions)	December 31, 2019					December 31, 2018
	Balance			Level 3		Balance		Level 3
Assets carried at fair value	$	40,446			1,194		35,792		1,124
As a percent of total assets		24	%		1		25		1

Liabilities carried at fair value	$	890			171		1,012		133
As a percent of total liabilities		1	%		-		1		-

Refer to Note 29 of the Notes to Consolidated Financial Statements for further information on fair value measurements including a description of the valuation methodologies used for significant financial instruments.

Goodwill

Business combinations entered into by the Bancorp typically include the acquisition of goodwill. U.S. GAAP requires goodwill to be tested for impairment at the Bancorp’s reporting unit level on an annual basis, which for the Bancorp is September 30, and more frequently if events or circumstances indicate that there may be impairment. Refer to Note 1 of the Notes to Consolidated Financial Statements for a discussion on the methodology used by the Bancorp to assess goodwill for impairment.

Impairment exists when a reporting unit’s carrying amount of goodwill exceeds its implied fair value. In testing goodwill for impairment, U.S. GAAP permits the Bancorp to first assess qualitative factors to determine whether it is

more likely than not that the fair value of a reporting unit is less than its carrying amount. In this qualitative assessment, the Bancorp evaluates events and circumstances which may include, but are not limited to, the general economic environment, banking industry and market conditions, the overall financial performance of the Bancorp, the performance of the Bancorp’s common stock, the key financial performance metrics of the Bancorp’s reporting units and events affecting the reporting units to determine if it is not more likely than not that the fair value of a reporting unit is less than its carrying amount. If the

two-step

impairment test is required or the decision to bypass the qualitative assessment is elected, the Bancorp would be required to perform the first step (Step 1) of the goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount, including goodwill. If the carrying amount of the reporting unit exceeds its fair value, Step 2 of the goodwill impairment test is performed to measure the amount of impairment loss, if any.

51 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The fair value of a reporting unit is the price that would be received to sell the unit as a whole in an orderly transaction between market participants at the measurement date. As none of the Bancorp’s reporting units are publicly traded, individual reporting unit fair value determinations cannot be directly correlated to the Bancorp’s stock price. The determination of the fair value of a reporting unit is a subjective process that involves the use of estimates and judgments, particularly related to cash flows, the appropriate discount rates and an applicable control premium. The Bancorp employs an income-based approach, utilizing the reporting unit’s forecasted cash flows (including a terminal value approach to estimate cash flows beyond the final year of the forecast) and the reporting unit’s estimated cost of equity as the discount rate. Significant management judgment is necessary in the preparation of each reporting unit’s forecasted cash flows surrounding expectations for earnings projections, growth and credit loss expectations and actual results may differ from forecasted results. Additionally, the Bancorp determines its market capitalization based on the average of the closing price of the Bancorp’s stock during the month including the measurement date, incorporating an additional control premium, and compares this market-based fair value measurement to the aggregate fair value of the Bancorp’s reporting units in order to corroborate the results of the income approach.

When required to perform Step 2, the Bancorp compares the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. If the carrying amount exceeds the implied fair value, an impairment loss equal to that excess amount is recognized. A recognized impairment loss cannot exceed the carrying amount of that goodwill and cannot be reversed in future periods even if the fair value of the reporting unit subsequently recovers.

During Step 2, the Bancorp determines the implied fair value of goodwill for a reporting unit by assigning the fair value of the reporting unit to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination. Significant management judgment is necessary in the identification and valuation of unrecognized intangible assets and the valuation of the reporting unit’s recorded assets and liabilities. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. This assignment process is only performed for purposes of testing goodwill for impairment. The Bancorp does not adjust the carrying values of recognized assets or liabilities (other than goodwill, if appropriate), nor does it recognize previously unrecognized intangible assets in the Consolidated Financial Statements as a result of this assignment process. Refer to Note 11 of the Notes to Consolidated Financial Statements for further information regarding the Bancorp’s goodwill.

Legal Contingencies

The Bancorp and its subsidiaries are parties to numerous claims and lawsuits as well as threatened or potential actions or claims concerning matters arising from the conduct of its business activities. The outcome of claims or litigation and the timing of ultimate resolution are inherently difficult to predict and significant judgment may be required in the determination of both the probability of loss and whether the amount of the loss is reasonably estimable. The Bancorp’s estimates are subjective and are based on the status of legal and regulatory proceedings, the merit of the Bancorp’s defenses and consultation with internal and external legal counsel. An accrual for a potential litigation loss is established when information related to the loss contingency indicates both that a loss is probable and that the amount of loss can be reasonably estimated. Refer to Note 20 of the Notes to Consolidated Financial Statements for further information regarding the Bancorp’s legal proceedings.

52 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

STATEMENTS OF INCOME ANALYSIS

Net Interest Income

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

Tables 7 and 8 present the components of net interest income, net interest margin and net interest rate spread for the years ended December 31, 2019, 2018 and 2017, as well as the relative impact of changes in the average balance sheet and changes in interest rates on net interest income. Nonaccrual loans and leases and loans and leases held for sale have been included in the average loan and lease balances. Average outstanding securities balances are based on amortized cost with any unrealized gains or losses included in average other assets.

Net interest income on an FTE basis

(non-GAAP)

was $4.8 billion and $4.2 billion for the years ended December 31, 2019 and 2018, respectively. Net interest income was positively impacted by increases in average commercial and industrial loans and average commercial mortgage loans of $7.5 billion and $3.2 billion, respectively, from the year ended December 31, 2018. Additionally, net interest income benefited from an increase in yields on average loans and leases of 34 bps from the year ended December 31, 2018. These positive impacts were partially offset by increases in both the rates paid on and balances of average interest-bearing core deposits and average long-term debt as well as an increase in average certificates $100,000 and over for the year ended December 31, 2019 compared to the year ended December 31, 2018. The rates paid on average interest-bearing core deposits increased 26 bps and average interest-bearing core deposits increased $12.9 billion from the year ended December 31, 2018. The rates paid on average long-term debt increased 24 bps and average long-term debt increased $818 million from the year ended December 31, 2018. Average certificates $100,000 and over increased $2.1 billion from the year ended December 31, 2018. Additionally, net interest income was negatively impacted by the August 2019, September 2019 and October 2019 decisions of the FOMC to lower the target range of the federal funds rate. Net interest income for the year ended December 31, 2019 included $65 million of amortization and accretion of premiums and discounts on acquired loans and leases and assumed deposits and long-term debt from acquisitions.

Net interest rate spread on an FTE basis

(non-GAAP)

was 2.92% during the year ended December 31, 2019 compared to 2.87% during the year ended December 31, 2018. Yields on average interest-earning assets increased 28 bps, partially offset by a 23 bps increase in rates paid on average interest-bearing liabilities for the year ended December 31, 2019 compared to the year ended December 31, 2018.

Net interest margin on an FTE basis

(non-GAAP)

was 3.31% for the year ended December 31, 2019 compared to 3.22% for the year ended December 31, 2018. The increase for the year ended December 31, 2019 was driven primarily by the previously mentioned increase in the net interest rate spread as well as an increase in average free funding balances. The increase in average free funding balances was driven by increases in average shareholders’ equity and average demand deposits of $4.0 billion and $1.7 billion, respectively, for the year ended December 31, 2019 compared to the year ended December 31, 2018.

Interest income on an FTE basis

(non-GAAP)

from loans and leases increased $975 million compared to the year ended December 31, 2018 primarily due to the aforementioned increases in the balances of average commercial and industrial loans and average commercial mortgage loans as well as the increase in yields on average loans and leases. For more information on the Bancorp’s loan and lease portfolio, refer to the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A. Interest income on an FTE basis

(non-GAAP)

from investment securities and other short-term investments increased $97 million from the year ended December 31, 2018 primarily as a result of an increase in average taxable securities.

Interest expense on core deposits increased $301 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to the previously mentioned increases in both the cost and balances of average interest-bearing core deposits. The increases in both the cost and balances of average interest-bearing core deposits were primarily due to increases in the rates paid on and balances of both average interest checking deposits and average money market deposits. Refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s deposits.

Interest expense on wholesale funding increased $113 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to the aforementioned increase in the rates paid on and balances of average long-term debt and increases in average certificates $100,000 and over. These increases were partially offset by a decrease in average other short-term borrowings of $565 million for the year ended December 31, 2019 compared to the year ended December 31, 2018. Refer to the Borrowings subsection of the Balance Sheet Analysis section of MD&A for additional information on the Bancorp’s borrowings. Average wholesale funding represented 21% and 23% of average interest-bearing liabilities during the years ended December 31, 2019 and 2018, respectively. For more information on the Bancorp’s interest rate risk management, including estimated earnings sensitivity to changes in market interest rates, see the Market Risk Management subsection of the Risk Management section of MD&A.

53 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 7: CONSOLIDATED AVERAGE BALANCE SHEET AND ANALYSIS OF NET INTEREST INCOME ON AN FTE BASIS



For the years ended December 31	2019							2018							2017

($ in millions)	Average Balance			Revenue/ Cost		Average Yield/ Rate		Average Balance			Revenue/ Cost		Average Yield/ Rate		Average Balance			Revenue/ Cost		Average Yield/ Rate

Assets:
Interest-earning assets:
Loans and leases: (a)
Commercial and industrial loans	$	50,168			2,313		4.61%	$	42,668			1,826		4.28%	$	41,577			1,514		3.64%
Commercial mortgage loans		9,905			476		4.81		6,661			298		4.47		6,844			256		3.74
Commercial construction loans		5,174			278		5.37		4,793			240		5.01		4,374			179		4.09
Commercial leases		3,578			119		3.31		3,795			108		2.84		4,011			82		2.04

Total commercial loans and leases		68,825			3,186		4.63		57,917			2,472		4.27		56,806			2,031		3.58

Residential mortgage loans		17,337			635		3.66		16,150			580		3.59		16,053			566		3.53
Home equity		6,286			324		5.16		6,631			326		4.92		7,308			310		4.24
Indirect secured consumer loans		10,345			423		4.08		8,993			304		3.38		9,407			275		2.92
Credit card		2,437			304		12.49		2,280			279		12.25		2,141			253		11.84
Other consumer loans		2,564			196		7.63		1,905			132		6.94		1,016			68		6.68

Total consumer loans		38,969			1,882		4.83		35,959			1,621		4.51		35,925			1,472		4.10

Total loans and leases	$	107,794			5,068		4.70%	$	93,876			4,093		4.36%	$	92,731			3,503		3.78%
Securities:
Taxable	$	35,429			1,160		3.28%	$	33,487			1,079		3.22%	$	32,106			993		3.09%
Exempt from income taxes (a)		41			2		3.97		66			2		3.37		66			4		5.45
Other short-term investments		2,140			41		1.91		1,476			25		1.68		1,390			15		1.04

Total interest-earning assets	$	145,404			6,271		4.31%	$	128,905			5,199		4.03%	$	126,293			4,515		3.57%
Cash and due from banks		2,748							2,200							2,224
Other assets		16,903							12,203							13,236
Allowance for loan and lease losses		(1,119	)						(1,125	)						(1,226	)

Total assets	$	163,936						$	142,183						$	140,527

Liabilities and Equity:
Interest-bearing liabilities:
Interest checking deposits	$	36,658			396		1.08%	$	29,818			252		0.85%	$	26,382			109		0.41%
Savings deposits		14,041			22		0.16		13,330			14		0.10		13,958			8		0.06
Money market deposits		25,879			272		1.05		21,769			162		0.74		20,231			74		0.37
Foreign office deposits		209			1		0.63		363			1		0.33		388			1		0.20
Other time deposits		5,470			98		1.79		4,106			59		1.44		3,771			46		1.23

Total interest-bearing core deposits		82,257			789		0.96		69,386			488		0.70		64,730			238		0.37
Certificates $100,000 and over		4,504			97		2.14		2,426			41		1.69		2,564			36		1.38
Other deposits		265			6		2.27		476			9		1.94		277			3		1.05
Federal funds purchased		1,267			29		2.26		1,509			30		1.97		557			6		1.01
Other short-term borrowings		1,046			28		2.67		1,611			29		1.82		3,158			30		0.96
Long-term debt		15,369			508		3.30		14,551			446		3.06		13,804			378		2.74

Total interest-bearing liabilities	$	104,708			1,457		1.39%	$	89,959			1,043		1.16%	$	85,090			691		0.81%
Demand deposits		34,343							32,634							35,093
Other liabilities		4,897							3,603							3,897

Total liabilities	$	143,948						$	126,196						$	124,080
Total equity	$	19,988						$	15,987						$	16,447

Total liabilities and equity	$	163,936						$	142,183						$	140,527

Net interest income (FTE) (b)				$	4,814						$	4,156						$	3,824
Net interest margin (FTE) (b)							3.31%							3.22%							3.03%
Net interest rate spread (FTE) (b)							2.92							2.87							2.76
Interest-bearing liabilities to interest-earning assets							72.01							69.79							67.37

(a)	The FTE adjustments included in the above table were $17 , $16 and $26 for the years ended December 31, 2019 , 2018 and 2017, respectively.

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

54 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


TABLE 8: CHANGES IN NET INTEREST INCOME ATTRIBUTABLE TO VOLUME AND YIELD/RATE (a)

For the years ended December 31	2019 Compared to 2018								2018 Compared to 2017

($ in millions)	Volume			Yield/Rate		Total			Volume			Yield/Rate			Total

Assets:
Interest-earning assets:
Loans and leases:
Commercial and industrial loans	$	338			149		487			41			271			312
Commercial mortgage loans		154			24		178			(7	)		49			42
Commercial construction loans		20			18		38			18			43			61
Commercial leases		(6	)		17		11			(4	)		30			26

Total commercial loans and leases		506			208		714			48			393			441

Residential mortgage loans		43			12		55			3			11			14
Home equity		(17	)		15		(2	)		(31	)		47			16
Indirect secured consumer loans		50			69		119			(12	)		41			29
Credit card		20			5		25			17			9			26
Other consumer loans		50			14		64			61			3			64

Total consumer loans		146			115		261			38			111			149

Total loans and leases	$	652			323		975			86			504			590
Securities:
Taxable		63			18		81			44			42			86
Exempt from income taxes		-			-		-			(1	)		(1	)		(2)
Other short-term investments		12			4		16			1			9			10

Total change in interest income	$	727			345		1,072			130			554			684

Liabilities:
Interest-bearing liabilities:
Interest checking deposits	$	65			79		144			15			128			143
Savings deposits		-			8		8			-			6			6
Money market deposits		35			75		110			7			81			88
Foreign office deposits		(1	)		1		-			-			-			-
Other time deposits		22			17		39			5			8			13

Total interest-bearing core deposits		121			180		301			27			223			250
Certificates $100,000 and over		43			13		56			(2	)		7			5
Other deposits		(4	)		1		(3	)		3			3			6
Federal funds purchased		(5	)		4		(1	)		15			9			24
Other short-term borrowings		(12	)		11		(1	)		(20	)		19			(1)
Long-term debt		25			37		62			22			46			68

Total change in interest expense	$	168			246		414			45			307			352

Total change in net interest income	$	559			99		658			85			247			332

(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.

Provision for Credit Losses

The Bancorp provides as an expense an amount for probable credit losses within the loan and lease portfolio and the portfolio of unfunded loan commitments and letters of credit that is based on factors previously discussed in the Critical Accounting Policies section of MD&A. The provision is recorded to bring the ALLL and reserve for unfunded commitments to a level deemed appropriate by the Bancorp to cover losses inherent in the portfolios. Actual credit losses on loans and leases are charged against the ALLL. The amount of loans and leases actually removed from the Consolidated Balance Sheets is referred to as a

charge-off.

Net charge-offs include current period charge-offs less recoveries on previously

charged-off

loans and leases.

The provision for credit losses was $471 million for the year ended December 31, 2019 compared to $207 million for the same period in the prior year. The increase in provision expense for the year ended December 31, 2019 compared to the prior year was primarily due to increases in specific reserves on certain impaired commercial loans and the level of commercial criticized assets as well as increases in both outstanding loan balances and unfunded commitments in 2019, exclusive of loans and leases acquired in the MB Financial, Inc. acquisition.

The ALLL increased $99 million from December 31, 2018 to $1.2 billion at December 31, 2019. At December 31, 2019, the ALLL as a percent of portfolio loans and leases decreased to 1.10%, compared to 1.16% at December 31, 2018. This decrease reflects the impact of the MB Financial, Inc. acquisition, which added approximately $13.4 billion in portfolio loans and leases at the acquisition date. Loans acquired by the Bancorp through a purchase business combination are recorded at fair value as of the acquisition date. The Bancorp does not carry over the acquired company’s ALLL, nor does the Bancorp add to its existing ALLL as part of purchase accounting. The reserve for unfunded commitments increased $13 million from December 31, 2018 to $144 million at December 31, 2019. This increase reflects the impact of the MB Financial, Inc. acquisition, which included approximately $8 million in reserves for unfunded commitments at the acquisition date.

Refer to the Credit Risk Management subsection of the Risk Management section of MD&A as well as Note 7 of the Notes to Consolidated Financial Statements for more detailed information on the provision for credit losses, including an analysis of loan and lease portfolio composition, nonperforming assets, net charge-offs and other factors considered by the Bancorp in assessing the credit quality of the loan and lease portfolio, ALLL, and reserve for unfunded commitments.

55 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Noninterest Income

Noninterest income increased $746 million for the year ended December 31, 2019 compared to the year ended December 31, 2018. The following table presents the components of noninterest income:

TABLE 9: COMPONENTS OF NONINTEREST INCOME


For the years ended December 31 ($ in millions)	2019		2018			2017		2016		2015
Corporate banking revenue	$	570		438			353		432		384
Service charges on deposits		565		549			554		558		563
Wealth and asset management revenue		487		444			419		404		418
Card and processing revenue		360		329			313		319		302
Mortgage banking net revenue		287		212			224		285		348
Other noninterest income		1,224		887			1,357		688		979
Securities gains (losses), net		40		(54	)		2		10		9
Securities gains (losses), net - non-qualifying hedges on MSRs		3		(15	)		2		-		-
Total noninterest income	$	3,536		2,790			3,224		2,696		3,003

Corporate banking revenue

Corporate banking revenue increased $132 million for the year ended December 31, 2019 compared to the year ended December 31, 2018. The increase from the prior year was primarily driven by increases in leasing business revenue, lease remarketing fees, institutional sales revenue and business lending fees of $50 million, $44 million, $26 million and $21 million, respectively. The increase in leasing business revenue was driven by the acquisition of MB Financial, Inc. These benefits were partially offset by a decrease of $8 million in syndication fees from the year ended December 31, 2018.

Service charges on deposits

Service charges on deposits increased $16 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to an increase of $31 million in commercial deposit fees, partially offset by a decrease of $14 million in consumer deposit fees.

Wealth and asset management revenue

Wealth and asset management revenue increased $43 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to an increase of $37 million in private client service fees.

This increase was driven by increased sales production and strong market performance as well as the full-year benefit from acquisitions in 2018 and the acquisition of MB Financial, Inc. The Bancorp’s trust and registered investment advisory businesses had approximately $413 billion and $356 billion in total assets under care as of December 31, 2019 and 2018, respectively, and managed $49 billion and $37 billion in assets for individuals, corporations and

not-for-profit

organizations as of December 31, 2019 and 2018, respectively.

Card and processing revenue

Card and processing revenue increased $31 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily driven by increases in the number of actively used cards, customer spend volume and other interchange revenue.

Mortgage banking net revenue

Mortgage banking net revenue increased $75 million for the year ended December 31, 2019 compared to the year ended December 31, 2018.

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

TABLE 10: COMPONENTS OF MORTGAGE BANKING NET REVENUE


For the years ended December 31 ($ in millions)	2019			2018			2017
Origination fees and gains on loan sales	$	175			100			138
Net mortgage servicing revenue:
Gross mortgage servicing fees		267			216			206
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs		(155	)		(104	)		(120	)
Net mortgage servicing revenue		112			112			86
Total mortgage banking net revenue	$	287			212			224

Origination fees and gains on loan sales increased $75 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 driven by an increase in originations due to the lower interest rate environment. Residential mortgage loan originations increased to $11.6 billion for the year ended December 31, 2019 from $7.1 billion for the year ended December 31, 2018.

Net mortgage servicing revenue remained flat for the year ended December 31, 2019 compared to the year ended December 31, 2018 as an increase in gross mortgage servicing fees of $51 million was offset by an increase in net negative valuation adjustments of $51 million from the year ended 2018. Refer to Table 11 for the components of net valuation adjustments on the MSR portfolio and the impact of the

non-qualifying

hedging strategy.

56 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 11: COMPONENTS OF NET VALUATION ADJUSTMENTS ON MSRs


For the years ended December 31 ($ in millions)	2019			2018			2017
Changes in fair value and settlement of free-standing derivatives purchased to economically hedge the MSR portfolio	$	221			(21	)		2
Changes in fair value:
Due to changes in inputs or assumptions		(203	)		42			(1	)
Other changes in fair value		(173	)		(125	)		(121	)
Net valuation adjustments on MSRs and free-standing derivatives purchased to economically hedge MSRs	$	(155	)		(104	)		(120	)

Mortgage rates decreased during the year ended December 31, 2019 which caused modeled prepayment speeds to rise. The fair value of the MSR portfolio decreased $203 million due to changes to inputs to the valuation model including prepayment speeds and OAS assumptions and decreased $173 million due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs for the year ended December 31, 2019.

Mortgage rates increased during the year ended December 31, 2018 which caused modeled prepayment speeds to slow. The fair value of the MSR portfolio increased $42 million due to changes to inputs to the valuation model including prepayment speeds and OAS assumptions and decreased $125 million due to the passage of time, including the impact of regularly scheduled repayments, paydowns and payoffs for the year ended December 31, 2018.

Further detail on the valuation of MSRs can be found in Note 14 of the Notes to Consolidated Financial Statements. The Bancorp maintains a

non-qualifying

hedging strategy to manage a portion of the risk associated with changes in the valuation of the MSR portfolio.

Refer to Note 15 of the Notes to Consolidated Financial Statements for more information on the free-standing derivatives used to economically hedge the MSR portfolio.

In addition to the derivative positions used to economically hedge the MSR portfolio, the Bancorp acquires various securities as a component of its

non-qualifying

hedging strategy. The Bancorp recognized net gains of $3 million during the year ended December 31, 2019, and net losses of $15 million during the year ended December 31, 2018, recorded in securities gains (losses), net -

non-qualifying

hedges on MSRs in the Bancorp’s Consolidated Statements of Income.

The Bancorp’s total residential mortgage loans serviced at December 31, 2019 and 2018 were $98.4 billion and $79.2 billion, respectively, with $80.7 billion and $63.2 billion, respectively, of residential mortgage loans serviced for others.

Other noninterest income

The following table presents the components of other noninterest income:

TABLE 12: COMPONENTS OF OTHER NONINTEREST INCOME


For the years ended December 31 ($ in millions)	2019			2018			2017
Gain on sale of Worldpay, Inc. shares	$	562			205			1,037
Income from the TRA associated with Worldpay, Inc.		346			20			44
Operating lease income		151			84			96
Private equity investment income		65			63			36
BOLI income		60			56			52
Cardholder fees		58			56			54
Consumer loan and lease fees		23			23			23
Banking center income		22			21			20
Insurance income		19			20			8
Net gains (losses) on loan sales		3			2			(2)
Equity method income from interest in Worldpay Holding, LLC		2			1			47
Loss on swap associated with the sale of Visa, Inc. Class B Shares		(107	)		(59	)		(80)
Net losses on disposition and impairment of bank premises and equipment		(23	)		(43	)		-
Loss on sale of business		(4	)		-			-
Gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc.		-			414			-
Other, net		47			24			22
Total other noninterest income	$	1,224			887			1,357

Other noninterest income increased $337 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to the recognition of gains on the sale of Worldpay Inc. shares driven by the Bancorp’s sale of shares during the first quarter of 2019, an increase in the income from the TRA associated with Worldpay, Inc., an increase in operating lease income and a decrease in the net losses on disposition and impairment of bank premises and equipment. These benefits were partially offset by the gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc. recognized during the first quarter of 2018 as well as an increase in the loss on the swap associated with the sale of Visa, Inc. Class B Shares.

The Bancorp recognized a $562 million gain on the sale of Worldpay, Inc. shares for the year ended December 31, 2019 compared to a $205 million gain on the sale of Worldpay, Inc. shares for the year ended December 31, 2018.

Income from the TRA associated with Worldpay Inc. increased $326 million from the year ended December 31, 2018 primarily driven by a $345 million gain recognized in the fourth quarter of 2019 from the Worldpay, Inc. TRA transaction. For additional information, refer to Note 21 of the Notes to Consolidated Financial Statements. Operating lease income increased $67 million during the year ended December 31, 2019 compared to the year ended December 31, 2018 driven by the acquisition of MB Financial, Inc. Net losses on disposition and impairment of bank premises and equipment decreased $20 million during the year ended December 31, 2019 compared to the same period in the prior year driven by the impact of impairment charges of $28 million during the year ended December 31, 2019 compared to $45 million during the year ended December 31, 2018. For more information, refer to Note 8 of the Notes to Consolidated Financial Statements.

57 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Bancorp recognized a $414 million gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc. during the year ended December 31, 2018. For the year ended December 31, 2019, the Bancorp recognized negative valuation adjustments of $107 million related to the Visa total return swap compared to negative valuation adjustments of $59 million during the year ended December 31, 2018.

The increase from the prior year was primarily due to the impact of litigation developments during 2019 and an increase in Visa, Inc.’s share price. For additional information on the valuation of the swap associated with the sale of Visa, Inc. Class B Shares, refer to Note 19, Note 20 and Note 29 of the Notes to Consolidated Financial Statements.

Noninterest Expense

Noninterest expense increased $702 million for the year ended December 31, 2019 compared to the year ended December 31, 2018, primarily due to increases in personnel costs (salaries, wages and incentives plus employee benefits), technology and communications expense and other noninterest expense.

The following table presents the components of noninterest expense:

TABLE 13: COMPONENTS OF NONINTEREST EXPENSE


For the years ended December 31 ($ in millions)	2019			2018		2017		2016		2015
Salaries, wages and incentives	$	2,001			1,783		1,633		1,612		1,525
Employee benefits		417			332		356		339		323
Technology and communications		422			285		245		234		224
Net occupancy expense		332			292		295		299		321
Card and processing expense		130			123		129		132		153
Equipment expense		129			123		117		118		124
Other noninterest expense		1,229			1,020		1,007		1,003		973
Total noninterest expense	$	4,660			3,958		3,782		3,737		3,643
Efficiency ratio on an FTE basis (a)		55.8	%		57.0		53.7		59.0		55.6

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

The Bancorp recognized $222 million and $31 million of merger-related expenses related to the MB Financial, Inc. acquisition for the years ended December 31, 2019 and 2018, respectively.

The following table provides a summary of merger-related expenses recorded in noninterest expense:

TABLE 14: MERGER-RELATED EXPENSES


For the years ended December 31 ($ in millions)	2019		2018
Salaries, wages and incentives	$	87		1
Employee benefits		3		-
Technology and communications		71		6
Net occupancy expense		13		-
Card and processing expense		1		1
Equipment expense		1		-
Other noninterest expense		46		23
Total	$	222		31

Personnel costs increased $303 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 driven by $90 million in merger-related expenses for the year ended December 31, 2019, the addition of personnel costs from the acquisition of MB Financial, Inc. and higher deferred compensation expense. Full-time equivalent employees totaled 19,869 at December 31, 2019 compared to 17,437 at December 31, 2018.

Technology and communications expense increased $137 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 driven by $71 million in merger-related expenses for the year ended December 31, 2019, as well as increased investment in contemporizing information technology architecture, mitigating information security risks and growth initiatives.

58 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table presents the components of other noninterest expense:

TABLE 15: COMPONENTS OF OTHER NONINTEREST EXPENSE



For the years ended December 31 ($ in millions)	2019		2018			2017
Marketing	$	162		147			114
Loan and lease		142		112			102
Operating lease		124		76			87
Losses and adjustments		102		61			59
FDIC insurance and other taxes		81		119			127
Professional service fees		70		67			83
Data processing		70		57			58
Travel		68		52			46
Intangible amortization		45		5			2
Postal and courier		38		35			42
Donations		30		21			28
Recruitment and education		28		32			35
Supplies		14		13			14
Insurance		14		13			12
Loss (gain) on partnership investments		2		(4	)		14
Other, net		239		214			184
Total other noninterest expense	$	1,229		1,020			1,007

Other noninterest expense increased $209 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 and included the impact of an increase of $23 million of merger-related expenses related to the acquisition of MB Financial, Inc. as well as increases in operating lease expense, intangible amortization expense, losses and adjustments, and loan and lease expense, partially offset by a decrease in FDIC insurance and other taxes.

Operating lease expense and intangible amortization expense increased $48 million and $40 million, respectively, for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily driven by the acquisition of MB Financial, Inc.

Losses and adjustments increased $41 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily driven by increases in credit valuation adjustments on derivatives as well as legal settlements. Loan and lease expense increased $30 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily as a result of an increase in loan closing costs due to an increase in residential mortgage loan originations. FDIC insurance and other taxes decreased $38 million for the year ended December 31, 2019 compared to the year ended December 31, 2018 primarily due to the elimination of the FDIC surcharge in the fourth quarter of 2018.

Applicable Income Taxes

Applicable income tax expense for all periods includes the benefit from

tax-exempt

income,

tax-advantaged

investments, certain gains on sales of leveraged leases that are exempt from federal taxation and tax credits (and other related tax benefits), partially offset by the effect of proportional amortization of qualifying LIHTC investments and certain nondeductible expenses. The tax credits are associated with the

Low-Income

Housing Tax Credit program established under Section 42 of the IRC, the New Markets Tax Credit program established under Section 45D of the IRC, the Rehabilitation Investment Tax Credit program established under Section 47 of the IRC and the Qualified Zone Academy Bond program established under Section 1397E of the IRC.

The effective tax rates for the years ended December 31, 2019 and 2018 were primarily impacted by $160 million and $189 million, respectively, of

low-income

housing tax credits and other tax benefits and $40 million and $23 million, respectively, of tax benefits from tax exempt income, and were partially offset by $140 million and $154 million, respectively, of proportional amortization related to qualifying LIHTC investments. The increase in the effective tax rate for the year ended December 31, 2019 from 2018 was impacted by the increase in state income taxes. The effective tax rate for the year ended December 31, 2017 was impacted by a $253 million benefit from the remeasurement of deferred taxes as a result of the reduction in the federal income tax rate from 35 percent to 21 percent for years beginning after December 31, 2017.

The U.S. government enacted comprehensive tax legislation, the TCJA, on December 22, 2017. The TCJA made broad and complex changes to the U.S. tax code including, but not limited to, reducing the federal statutory corporate tax rate from 35 percent to 21 percent effective for tax years beginning after December 31, 2017.

U.S. GAAP requires the Bancorp to recognize the tax effects of changes in tax laws and rates on its deferred taxes in the period in which the law is enacted. As a result, for the year ended December 31, 2017, the Bancorp remeasured its deferred tax assets and liabilities and recognized an income tax benefit of approximately $253 million. For the year ended December 31, 2017, the Bancorp was subject to a federal statutory corporate tax rate of 35 percent. For years beginning after December 31, 2017, the Bancorp is subject to a federal statutory corporate tax rate of 21 percent.

For stock-based awards, U.S. GAAP requires that the tax consequences for the difference between the expense recognized for financial reporting and the Bancorp’s actual tax deduction for the stock-based awards be recognized through income tax expense in the interim periods in which they occur. The Bancorp cannot predict its stock price or whether and when its employees will exercise stock-based awards in the future. Based on its stock price at December 31, 2019, the Bancorp estimates that it may be necessary to recognize $6 million of additional income tax benefit over the next twelve months related to the settlement of stock-based awards, primarily in the first half of 2020. However, the amount of income tax expense or benefit recognized upon settlement may vary significantly from expectations based on the Bancorp’s stock price and the number of SARs exercised by employees.

59 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

TABLE 16: APPLICABLE INCOME TAXES



For the years ended December 31 ($ in millions)	2019			2018		2017		2016		2015
Income before income taxes	$	3,202			2,765		2,979		2,208		2,493
Applicable income tax expense		690			572		799		665		814

Effective tax rate		21.6	%		20.7		26.8		30.1		32.6

60 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BUSINESS SEGMENT REVIEW

The Bancorp reports on four business segments: Commercial Banking, Branch Banking, Consumer Lending and Wealth and Asset Management. Additional information on each business segment is included in Note 32 of the Notes to Consolidated Financial Statements. Results of the Bancorp’s business segments are presented based on its management structure and management accounting practices. The structure and accounting practices are specific to the Bancorp; therefore, the financial results of the Bancorp’s business segments are not necessarily comparable with similar information for other financial institutions. The Bancorp refines its methodologies from time to time as management’s accounting practices and businesses change.

The Bancorp manages interest rate risk centrally at the corporate level. By employing an FTP methodology, the business segments are insulated from most benchmark interest rate volatility, enabling them to focus on serving customers through the origination of loans and acceptance of deposits. The FTP methodology assigns charge and credit rates to classes of assets and liabilities, respectively, based on the estimated amount and timing of cash flows for each transaction. Assigning the FTP rate based on matching the duration of cash flows allocates interest income and interest expense to each business segment so its resulting net interest income is insulated from future changes in benchmark interest rates. The Bancorp’s FTP methodology also allocates the contribution to net interest income of the asset-generating and deposit-providing businesses on a duration-adjusted basis to better attribute the driver of the performance. As the asset and liability durations are not perfectly matched, the residual impact of the FTP methodology is captured in General Corporate and Other. The charge and credit rates are determined using the FTP rate curve, which is based on an estimate of Fifth Third’s marginal borrowing cost in the wholesale funding markets.

The FTP curve is constructed using the U.S. swap curve, brokered CD pricing and unsecured debt pricing.

The Bancorp adjusts the FTP charge and credit rates as dictated by changes in interest rates for various interest-earning assets and interest-bearing liabilities and by the review of behavioral assumptions, such as prepayment rates on interest-earning assets and the estimated durations for indeterminate-lived deposits. Key assumptions, including the credit rates provided for deposit accounts, are reviewed annually. Credit rates for deposit products and charge rates for loan products may be reset more frequently in response to changes in market conditions. The credit rates for several deposit products were reset January 1, 2019 to reflect the current market rates and updated market assumptions. These rates were generally higher than those in place during 2018, thus net interest income for deposit-providing business segments was positively impacted during 2019. FTP charge rates on assets were affected by the prevailing level of interest rates and by the duration and repricing characteristics of the portfolio. As overall market rates increased, the FTP charge increased for asset-generating business segments during 2019.

The Bancorp’s methodology for allocating provision for credit losses expense to the business segments includes charges or benefits associated with changes in criticized commercial loan levels in addition to actual net charge-offs experienced by the loans and leases owned by each business segment. Provision for credit losses expense attributable to loan and lease growth and changes in ALLL factors is captured in General Corporate and Other. The financial results of the business segments include allocations for shared services and headquarters expenses. Additionally, the business segments form synergies by taking advantage of cross-sell opportunities and funding operations by accessing the capital markets as a collective unit.

The following table summarizes net income (loss) by business segment:


TABLE 17: NET INCOME (LOSS) BY BUSINESS SEGMENT
For the years ended December 31 ($ in millions)	2019		2018			2017
Income Statement Data
Commercial Banking	$	1,424		1,139			827
Branch Banking		860		702			455
Consumer Lending		92		(1	)		17
Wealth and Asset Management		112		97			65
General Corporate and Other		24		256			816
Net income	$	2,512		2,193			2,180

61 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Commercial Banking

Commercial Banking offers credit intermediation, cash management and financial services to large and middle-market businesses and government and professional customers.

In addition to the traditional lending and depository offerings, Commercial Banking products and services include global cash management, foreign exchange and international trade finance, derivatives and capital markets services, asset-based lending, real estate finance, public finance, commercial leasing and syndicated finance.

The following table contains selected financial data for the Commercial Banking segment:

TABLE 18: COMMERCIAL BANKING


For the years ended December 31 ($ in millions)	2019		2018			2017
Income Statement Data
Net interest income (FTE) (a)	$	2,377		1,729			1,678
Provision for (benefit from) credit losses		183		(26	)		38
Noninterest income:
Corporate banking revenue		565		432			348
Service charges on deposits		308		273			287
Other noninterest income		314		212			203
Noninterest expense:
Personnel costs		466		344			294
Other noninterest expense		1,155		919			940
Income before income taxes (FTE)		1,760		1,409			1,244
Applicable income tax expense (a)(b)		336		270			417
Net income	$	1,424		1,139			827
Average Balance Sheet Data
Commercial loans and leases, including held for sale	$	65,475		54,748			53,743
Demand deposits		16,424		16,560			19,519
Interest checking deposits		18,259		12,203			9,080
Savings and money market deposits		4,904		4,128			5,337
Other time deposits and certificates $100,000 and over		332		377			899
Foreign office deposits		209		362			372

(a)	Includes FTE adjustments of $17 , $16 and $26 for the years ended December 31, 2019, 2018 and 2017, respectively.

(b)	Applicable income tax expense for all periods includes the tax benefit from tax-exempt income, tax-advantaged investments and tax credits partially offset by the effect of certain nondeductible expenses. Refer to the Applicable Income Taxes subsection of the Statements of Income Analysis section of MD&A for additional information.

Comparison of the year ended 2019 with 2018

Net income was $1.4 billion for the year ended December 31, 2019 compared to net income of $1.1 billion for the year ended December 31, 2018. The increase in net income was driven by increases in net interest income on an FTE basis and noninterest income partially offset by increases in noninterest expense and provision for credit losses.

Net interest income on an FTE basis increased $648 million from the year ended December 31, 2018 primarily driven by increases in both average balances and yields on commercial loans and leases, increases in FTP credits on interest checking deposits and increases in FTP credit rates on demand deposits. These increases were partially offset by increases in FTP charges on loans and leases and increases in both average balances and rates paid on interest checking deposits.

Provision for credit losses increased $209 million from the year ended December 31, 2018 driven by the impact of an increase in criticized asset levels partially offset by a decrease in net charge-offs on commercial and industrial loans. Net charge-offs as a percent of average portfolio loans and leases decreased to 14 bps for the year ended December 31, 2019 compared to 18 bps for the year ended December 31, 2018.

Noninterest income increased $270 million from the year ended December 31, 2018 driven by increases in corporate banking revenue, other noninterest income and service charges on deposits. Corporate banking revenue increased $133 million from the year ended December 31, 2018 driven by increases in leasing business revenue, lease remarketing fees, institutional sales revenue and business lending fees.

Other noninterest income increased $102 million from the year ended December 31, 2018 primarily due to increases in operating lease income, card and processing revenue and private equity investment income. Service charges on deposits increased $35 million from the year ended December 31, 2018 primarily driven by an increase in commercial deposit fees.

Noninterest expense increased $358 million from the year ended December 31, 2018 due to increases in other noninterest expense and personnel costs. Other noninterest expense increased $236 million from the year ended December 31, 2018 primarily due to increases in corporate overhead allocations, operating lease expense, intangible amortization expense and losses and adjustments. Personnel costs increased $122 million from the year ended December 31, 2018 due to increases in base compensation and incentive compensation primarily as a result of the MB Financial, Inc. acquisition as well as an increase in employee benefits expense.

Average commercial loans and leases increased $10.7 billion from the year ended December 31, 2018 primarily due to increases in average commercial and industrial loans and average commercial mortgage loans. Average commercial and industrial loans increased $7.4 billion from the year ended December 31, 2018 primarily as a result of the acquisition of MB Financial, Inc. as well as an increase in loan originations. Average commercial mortgage loans increased $3.2 billion from the year ended December 31, 2018 as a result of the acquisition of MB Financial, Inc. and increases in loan originations as well as permanent financing from the Bancorp’s commercial construction loan portfolio.

Average core deposits increased $6.6 billion from the year ended December 31, 2018 primarily driven by increases in average interest checking deposits and average savings and money market deposits partially offset by decreases in average foreign office deposits and average demand deposits.

62 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Average interest checking deposits increased $6.1 billion from the year ended December 31, 2018 primarily due to balance migration from demand deposit accounts and an increase in average balances per commercial customer account as well as the acquisition of MB Financial, Inc. Average savings and money market deposits increased $776 million from the year ended December 31, 2018 primarily due to the acquisition of MB Financial, Inc. and an increase in average balances per commercial customer account. Average foreign office deposits decreased $153 million from the year ended December 31, 2018 driven by balance migration into interest checking deposits. Average demand deposits decreased $136 million from the year ended December 31, 2018 primarily driven by balance migration into interest checking deposits partially offset by the acquisition of MB Financial, Inc.

Comparison of the year ended 2018 with 2017

Net income was $1.1 billion for the year ended December 31, 2018 compared to net income of $827 million for the year ended December 31, 2017. The increase in net income was driven by increases in noninterest income and net interest income on an FTE basis and a decrease in the provision for credit losses partially offset by an increase in noninterest expense.

Net interest income on an FTE basis increased $51 million from the year ended December 31, 2017 primarily driven by increases in yields on average commercial loans and leases and increases in FTP credits on interest checking deposits. These increases were partially offset by increases in FTP charge rates on loans and leases, increases in the rates paid on core deposits and decreases in FTP credits on demand deposits driven by lower average balances.

Provision for credit losses decreased $64 million from the year ended December 31, 2017 primarily driven by a decrease in commercial criticized asset levels as well as a decrease in net charge-offs. Net charge-offs as a percent of average portfolio loans and leases decreased to 18 bps for the year ended December 31, 2018 compared to 19 bps for the year ended December 31, 2017.

Noninterest income increased $79 million from the year ended December 31, 2017 primarily driven by an increase in corporate banking revenue and other noninterest income partially offset by a decrease in service charges on deposits. Corporate banking revenue increased $84 million from the year ended December 31, 2017 driven by increases in lease remarketing fees, institutional sales revenue, syndication fees, contract revenue from commercial customer derivatives and foreign exchange fees partially offset by decreases in letter of credit fees and business lending fees.

The increase in lease remarketing fees for the year ended December 31, 2018 included the impact of $52 million of impairment charges related to certain operating lease assets that were recognized during the year ended December 31, 2017. Other noninterest income increased $9 million from the year ended December 31, 2017 primarily due to an increase in private equity investment income. Service charges on deposits decreased $14 million from the year ended December 31, 2017.

Noninterest expense increased $29 million from the year ended December 31, 2017 due to an increase in personnel costs partially offset by a decrease in other noninterest expense. Personnel costs increased $50 million from the year ended December 31, 2017 primarily due to increased incentive compensation and base compensation. Other noninterest expense decreased $21 million from the year ended December 31, 2017 primarily due to the impact of gains and losses on partnership investments and decreases in operating lease expense and consulting expense partially offset by an increase in corporate overhead allocations.

Average commercial loans increased $1.0 billion from the year ended December 31, 2017 primarily due to increases in average commercial and industrial loans and average commercial construction loans partially offset by decreases in average commercial leases and average commercial mortgage loans. Average commercial and industrial loans increased $973 million from the year ended December 31, 2017 as a result of an increase in loan originations, a decrease in payoffs and an increase in drawn balances on existing revolving lines of credit. Average commercial construction loans increased $404 million from the year ended December 31, 2017 primarily due to increases in draw levels on existing commitments. Average commercial leases decreased $218 million from the year ended December 31, 2017 primarily as a result of a planned reduction in indirect

non-relationship

based lease originations. Average commercial mortgage loans decreased $154 million from the year ended December 31, 2017 due to an increase in paydowns in the fourth quarter of 2017 and lower loan origination activity through the first two quarters of 2018.

Average core deposits decreased $1.1 billion from the year ended December 31, 2017. The decrease was driven by decreases in average demand deposits of $3.0 billion and average savings and money market deposits of $1.2 billion compared to the year ended December 31, 2017 primarily due to lower average balances per account. These decreases were partially offset by an increase in average interest checking deposits of $3.1 billion compared to the year ended December 31, 2017 primarily due to balance migration from demand deposit accounts and an increase in average balances per commercial customer account as well as the acquisition of new commercial customers.

63 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Branch Banking

Branch Banking provides a full range of deposit and loan products to individuals and small businesses through 1,149 full-service banking centers. Branch Banking offers depository and loan products, such as checking and savings accounts, home equity loans

and lines of credit, credit cards and loans for automobiles and other personal financing needs, as well as products designed to meet the specific needs of small businesses, including cash management services.

The following table contains selected financial data for the Branch Banking segment:

TABLE 19: BRANCH BANKING


For the years ended December 31 ($ in millions)	2019		2018		2017
Income Statement Data
Net interest income	$	2,371		2,034		1,782
Provision for credit losses		224		171		153
Noninterest income:
Card and processing revenue		285		266		251
Service charges on deposits		260		275		265
Wealth and asset management revenue		158		150		141
Other noninterest income		99		63		99
Noninterest expense:
Personnel costs		601		536		526
Net occupancy and equipment expense		221		225		228
Card and processing expense		123		121		127
Other noninterest expense		915		846		800
Income before income taxes		1,089		889		704
Applicable income tax expense		229		187		249
Net income	$	860		702		455
Average Balance Sheet Data
Consumer loans	$	13,200		13,034		13,008
Commercial loans		2,170		1,938		1,918
Demand deposits		15,802		14,336		13,895
Interest checking deposits		10,716		10,187		10,226
Savings and money market deposits		33,173		29,473		27,603
Other time deposits and certificates $100,000 and over		7,532		5,348		4,965

Comparison of the year ended 2019 with 2018

Net income was $860 million for the year ended December 31, 2019 compared to net income of $702 million for the year ended December 31, 2018. The increase was driven by increases in net interest income and noninterest income partially offset by increases in noninterest expense and provision for credit losses.

Net interest income increased $337 million from the year ended December 31, 2018. The increase was primarily due to increases in FTP credits on core deposits and certificates $100,000 and over as well as increases in average balances of other consumer loans and credit card. These benefits were partially offset by increases in both the rates paid on and average balances of savings and money market deposits and other time deposits and certificates $100,000 and over as well as an increase in FTP charge rates on loans and leases.

Provision for credit losses increased $53 million from the year ended December 31, 2018 primarily due to increases in net charge-offs on credit card and other consumer loans. Net charge-offs as a percent of average portfolio loans and leases increased to 144 bps for the year ended December 31, 2019 compared to 114 bps for the year ended December 31, 2018.

Noninterest income increased $48 million from the year ended December 31, 2018 driven by increases in other noninterest income, card and processing revenue and wealth and asset management revenue partially offset by a decrease in service charges on deposits. Other noninterest income increased $36 million from the year ended December 31, 2018 primarily due to the impact of impairment on bank premises and equipment recognized during 2018. Card and processing revenue increased $19 million from the year ended December 31, 2018 primarily driven by increases in the number of actively used cards and customer spend volume.

Wealth and asset management revenue increased $8 million from the year ended December 31, 2018 primarily driven by increases in brokerage fees and private client service fees. Service charges on deposits decreased $15 million from the year ended December 31, 2018 due to a decrease in consumer deposit fees partially offset by an increase in commercial deposit fees.

Noninterest expense increased $132 million from the year ended December 31, 2018 primarily due to increases in other noninterest expense and personnel costs. Other noninterest expense increased $69 million from the year ended December 31, 2018 primarily due to increases in corporate overhead allocations, intangible amortization expense and loan and lease expense partially offset by a decrease in FDIC insurance and other taxes. Personnel costs increased $65 million from the year ended December 31, 2018 due to higher base compensation primarily as a result of the MB Financial, Inc. acquisition as well as increases in employee benefits expense and incentive compensation.

Average consumer loans increased $166 million from the year ended December 31, 2018 primarily driven by an increase in average other consumer loans of $649 million primarily due to growth in

point-of-sale

loan originations. This increase was partially offset by decreases in average home equity loans of $303 million and average residential mortgage loans of $259 million as payoffs exceeded loan production.

Average core deposits increased $7.0 billion from the year ended December 31, 2018 primarily driven by growth in average savings and money market deposits of $3.7 billion and growth in average demand deposits of $1.5 billion. These increases were primarily due to the acquisition of MB Financial, Inc. as well as promotional product offerings, which drove consumer customer acquisition and growth in balances from existing customers.

64 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The increase in average core deposits also included an increase in interest checking deposits of $529 million from the year ended December 31, 2018 primarily as a result of the acquisition of MB Financial, Inc. Average other time deposits and certificates $100,000 and over increased $2.2 billion from the year ended December 31, 2018 primarily as a result of the acquisition of MB Financial, Inc. as well as promotional product offerings, which drove increased production.

Comparison of the year ended 2018 with 2017

Net income was $702 million for the year ended December 31, 2018 compared to net income of $455 million for the year ended December 31, 2017. The increase was driven by an increase in net interest income partially offset by increases in noninterest expense and provision for credit losses.

Net interest income increased $252 million from the year ended December 31, 2017. The increase was primarily due to increases in FTP credit rates on core deposits as well as increases in interest income on other consumer loans driven by higher average balances. These benefits were partially offset by increases in FTP charge rates on loans and leases and increases in the rates paid on savings and money market deposits. In addition, the increase in net interest income was partially offset by the impact of a $12 million benefit in the first quarter of 2017 related to a revised estimate of refunds to be offered to certain bankcard customers.

Provision for credit losses increased $18 million from the year ended December 31, 2017 primarily due to an increase in net charge-offs on other consumer loans and credit card. Net charge-offs as a percent of average portfolio loans and leases increased to 114 bps for the year ended December 31, 2018 compared to 102 bps for the year ended December 31, 2017.

Noninterest income decreased $2 million from the year ended December 31, 2017 primarily driven by a decrease in other noninterest income partially offset by increases in card and processing revenue, service charges on deposits and wealth and asset management revenue. Other noninterest income decreased $36 million from the year ended December 31, 2017 primarily due to the impact of impairments on bank premises and equipment.

Card and processing revenue increased $15 million from the year ended December 31, 2017 primarily driven by increases in the number of actively used cards and customer spend volume. Service charges on deposits increased $10 million from the year ended December 31, 2017 primarily due to an increase in consumer deposit fees. Wealth and asset management revenue increased $9 million from the year ended December 31, 2017 primarily driven by increases in private client service fees and brokerage fees.

Noninterest expense increased $47 million from the year ended December 31, 2017 primarily due to increases in other noninterest expense and personnel costs. Other noninterest expense increased $46 million from the year ended December 31, 2017 primarily due to increases in corporate overhead allocations and loan and lease expense. Personnel costs increased $10 million from the year ended December 31, 2017 primarily due to higher base compensation driven by an increase in the Bancorp’s minimum wage as a result of benefits received from the TCJA.

Average consumer loans increased $26 million from the year ended December 31, 2017 primarily driven by an increase in average other consumer loans of $1.0 billion primarily due to growth in

point-of-sale

loan originations. This increase from the year ended December 31, 2017 was partially offset by decreases in average home equity loans of $530 million and average residential mortgage loans of $310 million as payoffs exceeded new loan production.

Average core deposits increased $2.6 billion from the year ended December 31, 2017 primarily driven by growth in average savings and money market deposits of $1.9 billion and growth in average demand deposits of $441 million. Average savings and money market deposits increased as a result of promotional rate offers facilitated by the rising-rate environment and growth in the Fifth Third Preferred Banking program. Average demand deposits increased primarily due to an increase in average balances per customer account and the acquisition of new customers driven by increased marketing efforts. Other time deposits and certificates $100,000 and over increased $383 million from the year ended December 31, 2017 primarily due to shifting customer preferences as a result of the rising-rate environment.

65 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Consumer Lending

Consumer Lending includes the Bancorp’s residential mortgage, automobile and other indirect lending activities. Residential mortgage activities within Consumer Lending include the origination, retention and servicing of residential mortgage loans, sales and securitizations of those loans, pools of loans, and all associated hedging activities.

Residential mortgages are primarily originated through a dedicated sales force and through third-party correspondent lenders. Automobile and other indirect lending activities include extending loans to consumers through automobile dealers, motorcycle dealers, powersport dealers, recreational vehicle dealers and marine dealers.

The following table contains selected financial data for the Consumer Lending segment:

TABLE 20: CONSUMER LENDING



For the years ended December 31 ($ in millions)	2019		2018			2017
Income Statement Data
Net interest income	$	325		237			240
Provision for credit losses		49		42			40
Noninterest income:
Mortgage banking net revenue		279		206			217
Other noninterest income		17		(1	)		20
Noninterest expense:
Personnel costs		196		192			189
Other noninterest expense		259		210			222
Income (loss) before income taxes		117		(2	)		26
Applicable income tax expense (benefit)		25		(1	)		9
Net income (loss)	$	92		(1	)		17
Average Balance Sheet Data
Residential mortgage loans, including held for sale	$	13,027		11,803			11,494
Home equity		220		243			293
Indirect secured consumer loans		10,109		8,676			8,939

Comparison of the year ended 2019 with 2018

Net income was $92 million for the year ended December 31, 2019 compared to a net loss of $1 million for the year ended December 31, 2018. The increase was driven by increases in noninterest income and net interest income partially offset by increases in noninterest expense and provision for credit losses.

Net interest income increased $88 million from the year ended December 31, 2018 primarily driven by increases in both yields on and average balances of indirect secured consumer loans and residential mortgage loans as well as an increase in FTP credits on demand deposits. These benefits were partially offset by increases in FTP charges on loans and leases.

Provision for credit losses increased $7 million from the year ended December 31, 2018 primarily driven by an increase in net charge-offs on indirect secured consumer loans partially offset by a decrease in net charge-offs on residential mortgage loans. Net charge-offs as a percent of average portfolio loans and leases increased to 22 bps for the year ended December 31, 2019 compared to 21 bps for the year ended December 31, 2018.

Noninterest income increased $91 million from the year ended December 31, 2018 driven by increases in mortgage banking net revenue and other noninterest income. Mortgage banking net revenue increased $73 million from the year ended December 31, 2018 primarily driven by an increase in origination fees and gains on loan sales. Refer to the Noninterest Income subsection of the Statements of Income Analysis section of MD&A for additional information on the fluctuations in mortgage banking net revenue. Other noninterest income increased $18 million from the year ended December 31, 2018 primarily due to the recognition of $3 million of gains on securities acquired as a component of the Bancorp’s

non-qualifying

hedging strategy of MSRs during the year ended December 31, 2019 compared to the recognition of $15 million of losses during the year ended December 31, 2018.

Noninterest expense increased $53 million from the year ended December 31, 2018 primarily due to an increase in other noninterest expense primarily driven by increases in corporate overhead allocations, loan and lease expense and losses and adjustments.

Average consumer loans increased $2.6 billion from the year ended December 31, 2018 primarily driven by increases in average indirect secured consumer loans and average residential mortgage loans. Average indirect secured consumer loans increased $1.4 billion from the year ended December 31, 2018 primarily driven by the acquisition of MB Financial, Inc. and higher loan production exceeding payoffs. Average residential mortgage loans increased $1.2 billion from the year ended December 31, 2018 primarily driven by the acquisition of MB Financial, Inc.

Comparison of the year ended 2018 with 2017

Consumer Lending incurred a net loss of $1 million for the year ended December 31, 2018 compared to net income of $17 million for the year ended December 31, 2017. The decrease was driven by a decrease in noninterest income partially offset by a decrease in noninterest expense.

Net interest income decreased $3 million from the year ended December 31, 2017 primarily driven by an increase in FTP charge rates on loans and leases partially offset by increases in yields on average automobile loans and average residential mortgage loans.

Provision for credit losses increased $2 million from the year ended December 31, 2017. Net charge-offs as a percent of average portfolio loans and leases increased to 21 bps for the year ended December 31, 2018 compared to 20 bps for the year ended December 31, 2017.

Noninterest income decreased $32 million from the year ended December 31, 2017 driven by decreases in other noninterest income and mortgage banking net revenue. Other noninterest income decreased $21 million from the year ended December 31, 2017 primarily due to an increase in the loss on securities acquired as a component of the Bancorp’s

non-qualifying

hedging strategy of MSRs resulting from increased interest rates. Mortgage banking net revenue decreased $11 million from the year ended December 31, 2017 primarily driven by a decrease in mortgage origination fees and gains on loan sales partially offset by an increase in net mortgage servicing revenue.

66 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Noninterest expense decreased $9 million from the year ended December 31, 2017 driven by a decrease in other noninterest expense partially offset by an increase in personnel costs. Other noninterest expense decreased $12 million from the year ended December 31, 2017 primarily due to decreases in corporate overhead allocations and operational losses. Personnel costs increased $3 million from the year ended December 31, 2017 primarily due to an increase in base compensation.

Average consumer loans decreased $4 million from the year ended December 31, 2017. Average indirect secured consumer loans decreased $263 million from the year ended December 31, 2017 as payoffs exceeded new loan production due to a strategic shift focusing on improving risk-adjusted returns.

Average home equity decreased $50 million from the year ended December 31, 2017 as the vintage portfolio continued to pay down. Average residential mortgage loans increased $309 million from the year ended December 31, 2017 primarily driven by the continued retention of certain agency conforming ARMs and certain other fixed-rate loans.

Wealth and Asset Management

Wealth and Asset Management provides a full range of investment alternatives for individuals, companies and

not-for-profit

organizations. Wealth and Asset Management is made up of four main businesses: FTS, an indirect wholly-owned subsidiary of the Bancorp; Fifth Third Insurance Agency; Fifth Third Private Bank; and Fifth Third Institutional Services. FTS offers full service retail brokerage services to individual clients and broker-dealer services to

the institutional marketplace. Fifth Third Insurance Agency assists clients with their financial and risk management needs. Fifth Third Private Bank offers wealth management strategies to high net worth and ultra-high net worth clients through wealth planning, investment management, banking, insurance, trust and estate services. Fifth Third Institutional Services provides advisory services for institutional clients including middle market businesses,

non-profits,

states and municipalities.

The following table contains selected financial data for the Wealth and Asset Management segment:

TABLE 21: WEALTH AND ASSET MANAGEMENT



For the years ended December 31 ($ in millions)	2019		2018		2017
Income Statement Data
Net interest income	$	182		182		154
Provision for credit losses		-		12		6
Noninterest income:
Wealth and asset management revenue		469		429		407
Other noninterest income		20		27		12
Noninterest expense:
Personnel costs		217		202		181

Other noninterest expense		312		302		287
Income before income taxes		142		122		99
Applicable income tax expense		30		25		34

Net income	$	112		97		65
Average Balance Sheet Data
Loans and leases, including held for sale	$	3,580		3,421		3,277

Core deposits		9,701		9,332		8,782

Comparison of the year ended 2019 with 2018

Net income was $112 million for the year ended December 31, 2019 compared to net income of $97 million for the year ended December 31, 2018. The increase in net income was driven by an increase in noninterest income as well as a decrease in provision for credit losses partially offset by an increase in noninterest expense.

Net interest income remained flat for the year ended December 31, 2019 compared to the year ended December 31, 2018. Net interest income was positively impacted by increases in FTP credits on interest checking deposits and savings and money market deposits as well as increases in both yields on and average balances of loans and leases. These positive impacts were offset by an increase in the rates paid on interest checking deposits as well as an increase in FTP charges on loans and leases.

Provision for credit losses decreased $12 million from the year ended December 31, 2018 driven by a decrease in net charge-offs on commercial and industrial loans. This decrease was partially offset by the impact of the benefit of lower criticized asset levels for the year ended December 31, 2018.

Noninterest income increased $33 million from the year ended December 31, 2018 due to an increase in wealth and asset management revenue partially offset by a decrease in other noninterest income. Wealth and asset management revenue increased $40 million from the year ended December 31, 2018 primarily due to an increase in private client service fees driven by increased sales production and strong market performance as well as the full-year benefit from acquisitions in 2018 and the acquisition of MB Financial, Inc.

Other noninterest income decreased $7 million from the year ended December 31, 2018 primarily due to a loss on sale of a business recognized during the second quarter of 2019.

Noninterest expense increased $25 million from the year ended December 31, 2018 due to increases in personnel costs and other noninterest expense. Personnel costs increased $15 million from the year ended December 31, 2018 primarily due to higher base compensation driven by the full-year impact from acquisitions in 2018 and the acquisition of MB Financial, Inc. Other noninterest expense increased $10 million from the year ended December 31, 2018 primarily driven by an increase in corporate overhead allocations partially offset by a decrease in FDIC insurance and other taxes.

Average loans and leases increased $159 million from the year ended December 31, 2018 primarily due to an increase in average residential mortgage loans driven by the acquisition of MB Financial, Inc., partially offset by a decrease in average commercial and industrial loans as payoffs exceeded new loan production.

Average core deposits increased $369 million from the year ended December 31, 2018 primarily due to an increase in average interest checking deposits primarily as a result of the acquisition of MB Financial, Inc. as well as an increase in average savings and money market deposits.

67 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Comparison of the year ended 2018 with 2017

Net income was $97 million for the year ended December 31, 2018 compared to net income of $65 million for the year ended December 31, 2017. The increase in net income was driven by increases in noninterest income and net interest income partially offset by increases in noninterest expense and the provision for credit losses.

Net interest income increased $28 million from the year ended December 31, 2017 primarily due to increases in FTP credit rates on interest checking deposits and savings and money market deposits as well as increases in yields on average loans and leases. These positive impacts were partially offset by increases in the rates paid on interest checking deposits as well as an increase in FTP charge rates on loans and leases.

Provision for credit losses increased $6 million from the year ended December 31, 2017 driven by an increase in net charge-offs partially offset by the impact of the benefit of lower commercial criticized assets. Net charge-offs as a percent of average portfolio loans and leases increased to 52 bps for the year ended December 31, 2018 compared to 11 bps for the year ended December 31, 2017.

Noninterest income increased $37 million from the year ended December 31, 2017 due to increases in wealth and asset management revenue and other noninterest income. Wealth and asset management revenue increased $22 million from the year ended December 31, 2017 primarily due to increases in private client service fees and brokerage fees. These increases were driven by an increase in average assets under management as a result of market performance and increased asset production. Other noninterest income increased $15 million from the year ended December 31, 2017 due to an increase in insurance income as a result of the full year impact of acquisitions from 2017.

Noninterest expense increased $36 million from the year ended December 31, 2017 due to increases in personnel costs and other noninterest expense. Personnel costs increased $21 million from the year ended December 31, 2017 due to higher base compensation and incentive compensation primarily driven by the aforementioned acquisitions completed during 2017. Other noninterest expense increased $15 million from the year ended December 31, 2017 primarily driven by an increase in corporate overhead allocations.

Average loans and leases increased $144 million from the year ended December 31, 2017 driven by increases in average commercial and industrial loans and average residential mortgage loans due to increases in loan origination activity. These increases were partially offset by a decline in average home equity balances.

Average core deposits increased $550 million from the year ended December 31, 2017 primarily due to increases in average interest checking deposits and average savings and money market deposits.

General Corporate and Other

General Corporate and Other includes the unallocated portion of the investment securities portfolio, securities gains and losses, certain

non-core

deposit funding, unassigned equity, unallocated provision for credit losses expense or a benefit from the reduction of the ALLL, the payment of preferred stock dividends and certain support activities and other items not attributed to the business segments.

Comparison of the year ended 2019 with 2018

Net interest income decreased $415 million from the year ended December 31, 2018 primarily driven by an increase in FTP credits on deposits allocated to the business segments and increases in interest expense on long-term debt.

These negative impacts were partially offset by an increase in the benefit related to FTP charges on loans and leases and an increase in interest income on taxable securities.

Provision for credit losses increased $7 million from the year ended December 31, 2018 primarily due to increases in both outstanding loan balances and unfunded commitments in 2019, exclusive of loans and leases acquired in the MB Financial, Inc. acquisition. This was partially offset by an increase in the allocation of provision expense to the business segments driven by an increase in commercial criticized asset levels.

Noninterest income increased $309 million from the year ended December 31, 2018 primarily driven by the recognition of a $562 million gain on the sale of Worldpay, Inc. shares for the year ended December 31, 2019 in addition to a $345 million gain recognized in the fourth quarter of 2019 from the Worldpay, Inc. TRA transaction compared to a $205 million gain on the sale of Worldpay, Inc. shares for the year ended December 31, 2018 and a $414 million gain recognized in the first quarter of 2018 related to Vantiv, Inc.’s acquisition of Worldpay Group plc. The increase from the year ended December 31, 2018 also included securities gains of $40 million during the year ended December 31, 2019 compared to securities losses of $54 million during the year ended December 31, 2018. These positive impacts were partially offset by an increase in the loss on the swap associated with the sale of Visa, Inc. Class B Shares. The Bancorp recognized negative valuation adjustments of $107 million related to the Visa total return swap for the year ended December 31, 2019 compared to negative valuation adjustments of $59 million during the year ended December 31, 2018.

Noninterest expense increased $139 million from the year ended December 31, 2018. The increase was primarily due to increases in technology and communications expense, personnel costs and net occupancy expense driven by merger-related expenses as a result of the acquisition of MB Financial, Inc. partially offset by an increase in corporate overhead allocations from General Corporate and Other to the other business segments. Refer to the Noninterest Expense subsection of the Statements of Income Analysis section of MD&A for additional information on merger-related expenses.

Comparison of the year ended 2018 with 2017

Net interest income increased $4 million from the year ended December 31, 2017 primarily driven by an increase in the benefit related to the FTP charge rates on loans and leases as well as an increase in interest income on taxable securities. These benefits were partially offset by increases in FTP credit rates on deposits allocated to the business segments and increases in interest expense on long-term debt and federal funds purchased.

Provision for credit losses decreased $16 million from the year ended December 31, 2017 primarily due to an increased benefit from the reserve for unfunded commitments partially offset by the decrease in the allocation of provision expense to the business segments driven by a decrease in commercial criticized assets.

Noninterest income decreased $510 million from the year ended December 31, 2017 primarily driven by the recognition of a $1.0 billion gain on the sale of Worldpay, Inc. shares during the third quarter of 2017. The decrease was partially offset by the recognition of a $205 million gain on the sale of Worldpay, Inc. shares during the second quarter of 2018 and a $414 million gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc. during the first quarter of 2018. Additionally, equity method earnings from the Bancorp’s interest in Worldpay Holding, LLC decreased $46 million from the year ended December 31, 2017 primarily due to a decrease in the Bancorp’s ownership interest in Worldpay Holding, LLC and the impact of a reduction in Worldpay Holding, LLC net income.

68 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Income from the TRA associated with Worldpay, Inc. decreased to $20 million during the year ended December 31, 2018 compared to $44 million for the year ended December 31, 2017. These decreases were partially offset by a decrease in the loss on the swap associated with the sale of Visa, Inc. Class B Shares. For the year ended December 31, 2018, the Bancorp recognized negative valuation adjustments of $59 million related to the Visa total return swap compared to negative valuation adjustments of $80 million during the year ended December 31, 2017.

Noninterest expense increased $79 million from the year ended December 31, 2017. The increase was primarily due to increases in personnel expenses, technology and communications expense and marketing expense partially offset by an increase in corporate overhead allocations from General Corporate and Other to the other business segments.

69 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

FOURTH QUARTER REVIEW

The Bancorp’s 2019 fourth quarter net income available to common shareholders was $701 million, or $0.96 per diluted share, compared to net income available to common shareholders of $530 million, or $0.71 per diluted share, for the third quarter of 2019 and net income available to common shareholders of $432 million, or $0.64 per diluted share, for the fourth quarter of 2018.

Net interest income on an FTE basis was $1.2 billion for the fourth quarter of 2019, a decrease of $14 million from the third quarter of 2019 and an increase of $147 million from the fourth quarter of 2018. The decrease from the third quarter of 2019 was primarily driven by lower short-term market rates, partially offset by growth in the indirect secured consumer portfolio, as well as the favorable impact of previously executed cash flow hedges. The increase from the fourth quarter 2018 was primarily driven by an increase in interest-earning assets, including the impact from the MB Financial, Inc. acquisition, partially offset by the declining-rate environment. Net interest income for the fourth quarter of 2019 included $18 million of amortization and accretion of premiums and discounts on acquired loans and leases and assumed deposits and long-term debt from acquisitions compared to $28 million in the third quarter of 2019 and an immaterial amount in the fourth quarter of 2018.

Noninterest income was $1.0 billion for the fourth quarter of 2019, an increase of $295 million compared to the third quarter of 2019 and $460 million compared to the fourth quarter of 2018. The increase from the third quarter of 2019 was primarily due to an increase in other noninterest income, partially offset by a decrease in mortgage banking net revenue and corporate banking revenue. The year-over-year increase was primarily the result of an increase in other noninterest income.

Service charges on deposits were $149 million for the fourth quarter of 2019, an increase of $6 million compared to the previous quarter and $14 million compared to the fourth quarter of 2018. The increases from both the previous quarter and the fourth quarter of 2018 were primarily driven by higher commercial deposit fees. The increase from the third quarter of 2019 was also driven by higher consumer deposit fees.

Corporate banking revenue was $153 million for the fourth quarter of 2019, a decrease of $15 million compared to the third quarter of 2019 and an increase of $23 million compared to the fourth quarter of 2018. The decrease from the previous quarter was primarily driven by a decrease in leasing business revenue, partially offset by an increase in loan syndication revenue. The increase compared to the fourth quarter of 2018 was primarily driven by an increase in leasing business revenue primarily resulting from the MB Financial, Inc. acquisition, as well as an increase in corporate bond fees.

Mortgage banking net revenue was $73 million for the fourth quarter of 2019 compared to $95 million in the third quarter of 2019 and $54 million in the fourth quarter of 2018. The decrease in mortgage banking net revenue compared to the third quarter of 2019 was primarily driven by lower origination fees and gains on loan sales, partially offset by an increase in origination volumes. The increase in mortgage banking net revenue compared to the fourth quarter of 2018 was primarily driven by higher mortgage originations. Mortgage banking net revenue is affected by net valuation adjustments, which include MSR valuation adjustments caused by fluctuating OAS, earning rates and prepayment speeds, as well as

mark-to-market

adjustments on free-standing derivatives used to economically hedge the MSR portfolio. Net negative valuation adjustments on MSRs were $47 million and $40 million in the fourth and third quarters of 2019, respectively, and $24 million in the fourth quarter of 2018. Originations for the fourth quarter of 2019 were $3.8 billion, compared with $3.4 billion in the previous quarter and $1.6 billion the fourth quarter of 2018.

Originations for the fourth quarter of 2019 resulted in gains of $49 million on mortgages sold, compared with gains of $64 million for the previous quarter and $23 million for the fourth quarter of 2018. Gross mortgage servicing fees were $72 million in the fourth quarter of 2019, $71 million in the third quarter of 2019 and $54 million in the fourth quarter of 2018.

Wealth and asset management revenue was $129 million for the fourth quarter of 2019, an increase of $5 million from the previous quarter and $20 million from the fourth quarter of 2018. The increase from the third quarter of 2019 was primarily driven by higher personal asset management revenue and brokerage fees. The increase compared to the fourth quarter of 2018 was primarily driven by higher personal asset management revenue.

Card and processing revenue was $95 million for the fourth quarter of 2019, an increase of $1 million from the third quarter of 2019 and $11 million from the fourth quarter of 2018. The increase from the fourth quarter of 2018 was primarily driven by increases in the number of actively used cards, customer spend volume and other interchange revenue.

Other noninterest income was $427 million for the fourth quarter of 2019, an increase of $316 million compared to the third quarter of 2019 and $334 million from the fourth quarter of 2018. The increase from both the third quarter of 2019 and the fourth quarter of 2018 was primarily due to an increase in the income from the TRA associated with Worldpay, Inc. driven by the Worldpay, Inc. TRA transaction in the fourth quarter of 2019, partially offset by an increase in negative valuation adjustments related to the Visa total return swap.

The net gains on investment securities were $10 million for the fourth quarter of 2019 compared to $5 million in the third quarter of 2019 and net losses of $32 million for the fourth quarter of 2018. The increase in gains from the previous quarter was primarily due to realized gains on

available-for-sale

debt and other securities. The increase in gains from the fourth quarter of 2018 was primarily related to unrealized losses on equity securities in the fourth quarter of 2018. Net losses on securities held as

non-qualifying

hedges for MSRs were $1 million for the fourth quarter of 2019 compared to immaterial net losses for the third quarter of 2019 and net gains of $2 million for the fourth quarter of 2018.

Noninterest expense was $1.2 billion for the fourth quarter of 2019, an increase of $1 million from the previous quarter and $185 million from the fourth quarter of 2018. The increase in noninterest expense compared to the fourth quarter of 2018 was primarily related to increases in other noninterest expense, personnel costs and technology and communications expense. The increase in other noninterest expense was primarily driven by increases in donations expense, operating lease expense, loan and lease expense and intangible amortization. The increase in personnel costs was driven by the addition of personnel costs from the acquisition of MB Financial, Inc. and higher deferred compensation expense. The increase in technology and communications expense was driven by increased investment in contemporizing information technology architecture, mitigating information security risks and growth initiatives.

The ALLL as a percentage of portfolio loans and leases was 1.10% as of December 31, 2019, compared to 1.04% as of September 30, 2019 and 1.16% as of December 31, 2018. The provision for credit losses was $162 million in the fourth quarter of 2019 compared with $134 million in the third quarter of 2019 and $97 million in the fourth quarter of 2018. Net losses

charged-off

were $113 million in the fourth quarter of 2019, or 41 bps of average portfolio loans and leases on an annualized basis, compared with net losses

charged-off

of $99 million in the third quarter of 2019 and $83 million in the fourth quarter of 2018.

70 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 22: QUARTERLY INFORMATION (unaudited)


		2019					2018
For the three months ended ($ in millions, except per share data)			12/31	9/30	6/30	3/31		12/31	9/30	6/30	3/31
Net interest income (a)	$		1,232	1,246	1,250	1,086		1,085	1,047	1,024	999
Provision for credit losses			162	134	85	90		97	84	14	13
Noninterest income			1,035	740	660	1,101		575	563	743	909
Noninterest expense			1,160	1,159	1,243	1,097		975	972	1,001	1,010
Net income attributable to Bancorp			734	549	453	775		455	436	602	701
Net income available to common shareholders			701	530	427	760		432	421	579	686
Earnings per share, basic			0.97	0.72	0.57	1.14		0.65	0.62	0.84	0.98
Earnings per share, diluted			0.96	0.71	0.57	1.12		0.64	0.61	0.82	0.96

(a)	Amounts presented on an FTE basis. The FTE adjustment was $4 for both the three months ended December 31, 2019 and September 30, 2019 , $ 5 for the three months ended June 30, 2019 and $4 for the three months ended March 31, 2019 . The FTE adjustment was $4 for the three months ended December 31, 2018, September 30, 2018 and June 30, 2018 and $3 for the three months ended March 31, 2018.

COMPARISON OF THE YEAR ENDED 2018 WITH 2017

The Bancorp’s net income available to common shareholders for the year ended December 31, 2018 was $2.1 billion, or $3.06 per diluted share, which was net of $75 million in preferred stock dividends. The Bancorp’s net income available to common shareholders for the year ended December 31, 2017 was $2.1 billion, or $2.81 per diluted share, which was net of $75 million in preferred stock dividends.

The provision for credit losses was $207 million for the year ended December 31, 2018 compared to $261 million for the same period in the prior year. The decrease in provision expense for the year ended December 31, 2018 compared to the prior year was primarily due to a decrease in the level of commercial criticized assets combined with overall improved credit quality, partially offset by an increase in outstanding commercial loan balances and an increase in consumer reserve rates for certain products. The ALLL declined $93 million from December 31, 2017 to $1.1 billion at December 31, 2018. At December 31, 2018, the ALLL as a percent of portfolio loans and leases decreased to 1.16%, compared to 1.30% at December 31, 2017.

Net interest income on an FTE basis

(non-GAAP)

was $4.2 billion and $3.8 billion for the years ended December 31, 2018 and 2017, respectively. Net interest income was positively impacted by increases in yields on average loans and leases and average taxable securities and an increase in average taxable securities for the year ended December 31, 2018 compared to the year ended December 31, 2017. Additionally, net interest income was positively impacted by the decisions of the FOMC to raise the target range of the federal funds rate 25 bps in December 2017, March 2018, June 2018, September 2018 and December 2018. These positive impacts were partially offset by increases in the rates paid on average interest-bearing core deposits and average long-term debt during the year ended December 31, 2018 compared to the year ended December 31, 2017. Net interest margin on an FTE basis

(non-GAAP)

was 3.22% and 3.03% for the years ended December 31, 2018 and 2017, respectively.

Noninterest income decreased $434 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to a decrease in other noninterest income, partially offset by increases in corporate banking revenue, wealth and asset management revenue and card and processing revenue.

Other noninterest income decreased $470 million from the year ended December 31, 2017 primarily due to the gain on sale of Worldpay, Inc. shares recognized in the prior year, a reduction in equity method income from the Bancorp’s interest in Worldpay Holding, LLC, the impact of the net losses on disposition and impairment of bank premises and equipment and income from the TRA associated with Worldpay, Inc. recognized in the prior year. These reductions were partially offset by the gain related to Vantiv, Inc.’s acquisition of Worldpay Group plc., an increase in private equity investment income, as well as a decrease in the loss on the swap associated with the sale of Visa, Inc. Class B Shares. Corporate banking revenue increased $85 million for the year ended December 31, 2018 compared to the year ended December 31, 2017. The increase from the prior year was primarily driven by increases in lease remarketing fees, institutional sales revenue, syndication fees and contract revenue from commercial customer derivatives. Wealth and asset management revenue increased $25 million from the year ended December 31, 2017 primarily due to increases in private client service fees and brokerage fees. Card and processing revenue increased $16 million from the year ended December 31, 2017 primarily due to increases in the number of actively used cards and customer spend volume.

Noninterest expense increased $176 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to increases in personnel costs, technology and communications expense and other noninterest expense. Personnel costs increased $126 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 driven by increases in base compensation, performance-based compensation and severance costs. The increase in base compensation was primarily due to an increase in the Bancorp’s minimum wage as a result of benefits received from the TCJA and personnel additions associated with strategic investments and acquisitions. Technology and communications expense increased $40 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 driven primarily by increased investment in regulatory, compliance and growth initiatives. Other noninterest expense increased $13 million for the year ended December 31, 2018 compared to the year ended December 31, 2017 primarily due to increases in marketing expense and loan and lease expense, partially offset by an increase in gains on partnership investments and decreases in professional service fees and FDIC insurance and other taxes.

71 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

BALANCE SHEET ANALYSIS

Loans and Leases

The Bancorp classifies its commercial loans and leases based upon primary purpose and consumer loans based upon product or collateral. Table 23 summarizes end of period loans and leases, including loans and leases held for

sale, Table 24 summarizes loans and leases acquired in the MB Financial, Inc. acquisition and Table 25 summarizes average total loans and leases, including loans and leases held for sale.


TABLE 23: COMPONENTS OF LOANS AND LEASES (INCLUDING LOANS AND LEASES HELD FOR SALE)
As of December 31 ($ in millions)	2019		2018		2017		2016		2015
Commercial loans and leases:
Commercial and industrial loans	$	50,677		44,407		41,170		41,736		42,151
Commercial mortgage loans		10,964		6,977		6,610		6,904		6,991
Commercial construction loans		5,090		4,657		4,553		3,903		3,214
Commercial leases		3,363		3,600		4,068		3,974		3,854
Total commercial loans and leases		70,094		59,641		56,401		56,517		56,210
Consumer loans:
Residential mortgage loans		17,988		16,041		16,077		15,737		14,424
Home equity		6,083		6,402		7,014		7,695		8,336
Indirect secured consumer loans (a)		11,538		8,976		9,112		9,983		11,497
Credit card		2,532		2,470		2,299		2,237		2,360
Other consumer loans		2,723		2,342		1,559		680		658
Total consumer loans		40,864		36,231		36,061		36,332		37,275
Total loans and leases	$	110,958		95,872		92,462		92,849		93,485
Total portfolio loans and leases (excluding loans and leases held for sale)	$	109,558		95,265		91,970		92,098		92,582

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

Total loans and leases, including loans and leases held for sale, increased $15.1 billion from December 31, 2018. The increase in total loans and leases was primarily driven by the impact of the MB Financial, Inc. acquisition, which added $13.4 billion in total loans and leases upon acquisition.

Table 24 summarizes the detail of loans and leases acquired from MB Financial, Inc. on March 22, 2019.


TABLE 24: LOANS AND LEASES ACQUIRED
($ in millions)
Commercial loans and leases:
Commercial and industrial loans	$	6,546
Commercial mortgage loans		3,586
Commercial construction loans		495
Commercial leases		444
Total commercial loans and leases		11,071
Consumer loans:
Residential mortgage loans		1,319
Home equity		170
Indirect secured consumer loans		800
Credit card		19
Other consumer loans		44
Total consumer loans		2,352
Total loans and leases	$	13,423
Total portfolio loans and leases (excluding loans and leases held for sale)	$	13,411

The following discussion excludes the impact of loans and leases acquired in the MB Financial, Inc. acquisition. Commercial loans and leases decreased $618 million from December 31, 2018 due to decreases in commercial leases, commercial and industrial loans and commercial construction loans, partially offset by an increase in commercial mortgage loans. Commercial leases decreased $681 million, or 19%, from December 31, 2018 primarily as a result of a planned reduction in indirect

non-relationship

based lease originations. Commercial and industrial loans decreased $276 million, or 1%, from December 31, 2018 primarily due to elevated payoff levels. Commercial construction loans decreased $62 million, or 1%, from December 31, 2018 primarily due to decreased draw levels on existing commitments. Commercial mortgage loans increased $401 million, or 6%, from December 31, 2018 primarily as a result of increases in loan originations and permanent financing from the Bancorp’s commercial construction loan portfolio.

The following discussion excludes the impact of loans and leases acquired in the MB Financial, Inc. acquisition. Consumer loans increased $2.3 billion from December 31, 2018 due to increases in indirect secured consumer loans, residential mortgage loans, other consumer loans and credit card, partially offset by a decrease in home equity. Indirect secured consumer loans increased $1.8 billion, or 20%, from December 31, 2018 primarily as a result of loan production exceeding payoffs. Residential mortgage loans increased $628 million, or 4%, from December 31, 2018 primarily driven by the continued retention of certain agency conforming ARMs and certain other fixed-rate loans. Other consumer loans increased $337 million, or 14%, from December 31, 2018 primarily due to growth in

point-of-sale

loan originations. Credit card increased $43 million, or 2%, from December 31, 2018 primarily due to increases in balance-active customers and the balance per active customer. Home equity decreased $489 million, or 8%, from December 31, 2018 as payoffs exceeded new loan production.

72 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


TABLE 25: COMPONENTS OF AVERAGE LOANS AND LEASES (INCLUDING LOANS AND LEASES HELD FOR SALE)
For the years ended December 31 ($ in millions)	2019		2018		2017		2016		2015
Commercial loans and leases:
Commercial and industrial loans	$	50,168		42,668		41,577		43,184		42,594
Commercial mortgage loans		9,905		6,661		6,844		6,899		7,121
Commercial construction loans		5,174		4,793		4,374		3,648		2,717
Commercial leases		3,578		3,795		4,011		3,916		3,796
Total commercial loans and leases		68,825		57,917		56,806		57,647		56,228
Consumer loans:
Residential mortgage loans		17,337		16,150		16,053		15,101		13,798
Home equity		6,286		6,631		7,308		7,998		8,592
Indirect secured consumer loans		10,345		8,993		9,407		10,708		11,847
Credit card		2,437		2,280		2,141		2,205		2,303
Other consumer loans		2,564		1,905		1,016		661		571
Total consumer loans		38,969		35,959		35,925		36,673		37,111
Total average loans and leases	$	107,794		93,876		92,731		94,320		93,339
Total average portfolio loans and leases (excluding loans and leases held for sale)	$	106,840		93,216		92,068		93,426		92,423

Average loans and leases, including loans and leases held for sale, increased $13.9 billion, or 15%, from December 31, 2018 as a result of a $10.9 billion, or 19%, increase in average commercial loans and leases as well as a $3.0 billion, or 8%, increase in average consumer loans.

Average commercial loans and leases increased from December 31, 2018 due to increases in average commercial and industrial loans, average commercial mortgage loans and average commercial construction loans, partially offset by a decrease in average commercial leases. Average commercial and industrial loans increased $7.5 billion, or 18%, from December 31, 2018 primarily due to the impact of the acquisition of MB Financial, Inc. and an increase in loan originations. Average commercial mortgage loans increased $3.2 billion, or 49%, from December 31, 2018 primarily due to the impact of the acquisition of MB Financial, Inc. and increases in loan originations as well as permanent financing from the Bancorp’s commercial construction loan portfolio. Average commercial construction loans increased $381 million, or 8%, from December 31, 2018 primarily as a result of the acquisition of MB Financial, Inc. Average commercial leases decreased $217 million, or 6%, from December 31, 2018 primarily as a result of a planned reduction in indirect

non-relationship

based lease originations, partially offset by commercial leases acquired in the MB Financial, Inc. acquisition.

Average consumer loans increased from December 31, 2018 due to increases in indirect secured consumer loans, residential mortgage loans, other consumer loans and credit card, partially offset by a decrease in home equity. Average indirect secured consumer loans increased $1.4 billion, or 15%, from December 31, 2018 primarily due to the acquisition of MB Financial, Inc. and higher loan production exceeding payoffs. Average residential mortgage loans increased $1.2 billion, or 7%, from December 31, 2018 primarily driven by the acquisition of MB Financial, Inc. Average other consumer loans increased $659 million, or 35%, from December 31, 2018 primarily due to growth in

point-of-sale

loan originations. Average credit card increased $157 million, or 7%, from December 31, 2018 primarily due to increases in balance-active customers and the average balance per active customer. Average home equity decreased $345 million, or 5%, from December 31, 2018 as payoffs exceeded new loan production, partially offset by home equity acquired in the MB Financial, Inc. acquisition.

Investment Securities

The Bancorp uses investment securities as a means of managing interest rate risk, providing collateral for pledging purposes and for liquidity to satisfy regulatory requirements. Total investment securities were $36.9 billion and $33.6 billion at December 31, 2019 and December 31, 2018, respectively. The taxable

available-for-sale

debt and other investment securities portfolio had an effective duration of 5.1 years at December 31, 2019 compared to 5.0 years at December 31, 2018.

Debt securities are classified as

available-for-sale

when, in management’s judgment, they may be sold in response to, or in anticipation of, changes in market conditions. Securities that management has the intent and ability to hold to maturity are classified as

held-to-maturity

and reported at amortized cost.

Debt securities are classified as trading when bought and held principally for the purpose of selling them in the near term. At December 31, 2019, the Bancorp’s investment portfolio consisted primarily of

AAA-rated

available-for-sale

debt and other securities. The Bancorp held an immaterial amount in below-investment grade

available-for-sale

debt and other securities at both December 31, 2019 and 2018. For the year ended December 31, 2019, the Bancorp recognized $1 million of OTTI on its

available-for-sale

debt and other securities. For the year ended December 31, 2018, the Bancorp did not recognize any OTTI on its

available-for-sale

debt and other securities. Refer to Note 1 of the Notes to Consolidated Financial Statements for the Bancorp’s methodology for both classifying investment securities and evaluating securities in an unrealized loss position for OTTI.

73 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table summarizes the end of period components of investment securities:


TABLE 26: COMPONENTS OF INVESTMENT SECURITIES

As of December 31 ($ in millions)	2019		2018		2017		2016		2015

Available-for-sale debt and other securities (amortized cost basis):
U.S. Treasury and federal agencies securities	$	74		98		98		547		1,155
Obligations of states and political subdivisions securities		18		2		43		44		50
Mortgage-backed securities:
Agency residential mortgage-backed securities (a)		13,746		16,403		15,281		15,525		14,811
Agency commercial mortgage-backed securities		15,141		10,770		10,113		9,029		7,795
Non-agency commercial mortgage-backed securities		3,242		3,305		3,247		3,076		2,801
Asset-backed securities and other debt securities		2,189		1,998		2,183		2,106		1,363
Other securities (b)		556		552		612		607		604

Total available-for-sale debt and other securities	$	34,966		33,128		31,577		30,934		28,579

Held-to-maturity securities (amortized cost basis):
Obligations of states and political subdivisions securities	$	15		16		22		24		68
Asset-backed securities and other debt securities		2		2		2		2		2

Total held-to-maturity securities	$	17		18		24		26		70

Trading debt securities (fair value):
U.S. Treasury and federal agencies securities	$	2		16		12		23		19
Obligations of states and political subdivisions securities		9		35		22		39		9
Agency residential mortgage-backed securities		55		68		395		8		6
Asset-backed securities and other debt securities		231		168		63		15		19

Total trading debt securities	$	297		287		492		85		53

Total equity securities (fair value)	$	564		452		439		416		432

(a)	Includes interest-only mortgage-backed securities recorded at fair value with fair value changes recorded in securities gains (losses), net in the Consolidated Statements of Income.

(b)	Other securities consist of FHLB, FRB and DTCC restricted stock holdings that are carried at cost.

On an amortized cost basis,

available-for-sale

debt and other securities increased $1.8 billion, or 6%, from December 31, 2018 primarily due to increases in agency commercial mortgage-backed securities, partially offset by decreases in agency residential mortgage-backed securities.

On an amortized cost basis,

available-for-sale

debt and other securities were 24% and 25% of total interest-earning assets at December 31, 2019 and December 31, 2018, respectively. The estimated weighted-average life of the debt securities in the

available-for-sale

debt and other securities portfolio was 6.6 and 6.5 years at December 31, 2019 and 2018, respectively. In addition, at December 31, 2019 and 2018 the

available-for-sale

debt and other securities portfolio had a weighted-average yield of 3.22% and 3.25%, respectively.

Information presented in Table 27 is on a weighted-average life basis, anticipating future prepayments. Yield information is presented on an FTE basis and is computed using amortized cost balances. Maturity and yield calculations for the total

available-for-sale

debt and other securities portfolio exclude other securities that have no stated yield or maturity. Total net unrealized gains on the

available-for-sale

debt and other securities portfolio were $1.1 billion at December 31, 2019 compared to net unrealized losses of $298 million at December 31, 2018. The fair value of investment securities is impacted by interest rates, credit spreads, market volatility and liquidity conditions. The fair value of investment securities generally increases when interest rates decrease or when credit spreads contract.

74 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


TABLE 27: CHARACTERISTICS OF AVAILABLE-FOR-SALE DEBT AND OTHER SECURITIES
As of December 31, 2019 ($ in millions)	Amortized Cost		Fair Value		Weighted-Average Life (in years)		Weighted-Average Yield
U.S. Treasury and federal agencies securities:
Average life 1 – 5 years	$	74		75		3.1		2.12
Total	$	74		75		3.1		2.12 %
Obligations of states and political subdivisions securities: (a)
Average life of 1 year or less		-		-		0.1		7.47
Average life 1 – 5 years		18		18		3.2		1.74
Total	$	18		18		3.2		1.76 %
Agency residential mortgage-backed securities:
Average life 1 – 5 years		5,259		5,376		3.9		3.28
Average life 5 – 10 years		7,592		7,823		6.8		3.11
Average life greater than 10 years		895		916		13.9		3.21
Total	$	13,746		14,115		6.1		3.18 %
Agency commercial mortgage-backed securities: (b)
Average life of 1 year or less		195		199		0.3		2.82
Average life 1 – 5 years		3,833		3,962		3.2		3.14
Average life 5 – 10 years		7,915		8,212		7.5		3.13
Average life greater than 10 years		3,198		3,320		13.5		3.27
Total	$	15,141		15,693		7.6		3.16 %
Non-agency commercial mortgage-backed securities:
Average life of 1 year or less		1		1		0.4		3.83
Average life 1 – 5 years		1,421		1,470		3.9		3.32
Average life 5 – 10 years		1,820		1,894		5.8		3.25
Total	$	3,242		3,365		5.0		3.28 %
Asset-backed securities and other debt securities:
Average life of 1 year or less		36		36		0.8		3.57
Average life 1 – 5 years		1,175		1,192		2.8		3.99
Average life 5 – 10 years		935		933		7.0		3.68
Average life greater than 10 years		43		45		11.5		3.43
Total	$	2,189		2,206		4.7		3.84 %
Other securities		556		556
Total available-for-sale debt and other securities	$	34,966		36,028		6.6		3.22 %

(a)	Taxable-equivalent yield adjustments included in the above table are 1.57%, 0.00% and 0.01% for securities with an average life of 1 year or less, 1-5 years and in total, respectively.

(b)	Taxable-equivalent yield adjustments included in the above table are 0.00%, 0.00%, 0.00%, 0.03% and 0.01% for securities with an average life of 1 year or less, 1-5 years, 5-10 years, greater than 10 years and in total, respectively.

Deposits

The Bancorp’s deposit balances represent an important source of funding and revenue growth opportunity. The Bancorp continues to focus on core deposit growth in its retail and commercial franchises by improving customer satisfaction, building full relationships and offering competitive rates.

Average core deposits represented 71% and 72% of the Bancorp’s average asset funding base for the years ended December 31, 2019 and 2018, respectively.

The following table presents the end of period components of deposits:


TABLE 28: COMPONENTS OF DEPOSITS
As of December 31 ($ in millions)	2019		2018		2017		2016		2015
Demand	$	35,968		32,116		35,276		35,782		36,267
Interest checking		40,409		34,058		27,703		26,679		26,768
Savings		14,248		12,907		13,425		13,941		14,601
Money market		27,277		22,597		20,097		20,749		18,494
Foreign office		221		240		484		426		464
Transaction deposits		118,123		101,918		96,985		97,577		96,594
Other time		5,237		4,490		3,775		3,866		4,019
Core deposits		123,360		106,408		100,760		101,443		100,613
Certificates $100,000 and over (a)		3,702		2,427		2,402		2,378		2,592
Total deposits	$	127,062		108,835		103,162		103,821		103,205

(a)	Includes $2.1 billion, $1.2 billion, $1.3 billion, $1.3 billion and $1.5 billion of institutional, retail and wholesale certificates $250,000 and over at December 31, 2019 , 2018, 2017, 2016 and 2015, respectively.

Total deposits increased $18.2 billion, or 17%, from December 31, 2018 driven by the MB Financial, Inc. acquisition as the Bancorp assumed commercial and consumer deposit balances of $14.5 billion at acquisition.

Table 29 summarizes the detail of deposits assumed as a result of the MB Financial, Inc. acquisition on March 22, 2019.

75 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


TABLE 29: DEPOSITS ASSUMED
($ in millions)
Demand	$	6,010
Interest checking		2,408
Savings		1,175
Money market		2,571
Total transaction deposits		12,164
Other time		546
Total core deposits		12,710
Certificates $100,000 and over		1,779
Total deposits	$	14,489

The following discussion excludes the impact of deposits assumed in the MB Financial, Inc. acquisition. Core deposits increased $4.2 billion, or 4%, from December 31, 2018, driven by an increase in transaction deposits. Transaction deposits increased $4.0 billion, or 4%, from December 31, 2018 primarily due to increases in interest checking deposits and money market deposits partially offset by a decrease in demand deposits. Interest checking deposits increased $3.9 billion, or 12%, from December 31, 2018 primarily as a result of higher balances per commercial customer account and balance migration from demand deposit accounts.

Money market deposits increased $2.1 billion, or 9%, from December 31, 2018 primarily as a result of promotional product offerings, which drove consumer customer acquisition. Demand deposits decreased $2.2 billion, or 7%, from December 31, 2018 primarily as a result of balance migration into interest checking deposits and lower balances per commercial customer account.

The following table presents the components of average deposits for the years ended December 31:


TABLE 30: COMPONENTS OF AVERAGE DEPOSITS
($ in millions)	2019		2018		2017		2016		2015
Demand	$	34,343		32,634		35,093		35,862		35,164
Interest checking		36,658		29,818		26,382		25,143		26,160
Savings		14,041		13,330		13,958		14,346		14,951
Money market		25,879		21,769		20,231		19,523		18,152
Foreign office		209		363		388		497		817
Transaction deposits		111,130		97,914		96,052		95,371		95,244
Other time		5,470		4,106		3,771		4,010		4,051
Core deposits		116,600		102,020		99,823		99,381		99,295
Certificates $100,000 and over (a)		4,504		2,426		2,564		2,735		2,869
Other		265		476		277		333		57
Total average deposits	$	121,369		104,922		102,664		102,449		102,221

(a)	Includes $2.6 billion , $1.1 billion, $1.4 billion, $1.5 billion and $1.6 billion of average institutional, retail and wholesale certificates $250,000 and over during the years ended December 31, 2019 , 2018, 2017, 2016 and 2015, respectively.

On an average basis, core deposits increased $14.6 billion, or 14%, from December 31, 2018 due to an increase of $13.2 billion and $1.4 billion in average transaction deposits and average other time deposits, respectively. The increase in average transaction deposits was driven by increases in average interest checking deposits, average money market deposits and average demand deposits. Average interest checking deposits increased $6.8 billion, or 23%, from December 31, 2018 primarily due to the MB Financial, Inc. acquisition as well as balance migration from demand deposit accounts and an increase in average balances per commercial customer account. Average money market deposits increased $4.1 billion, or 19%, from December 31, 2018 primarily due to the MB Financial, Inc. acquisition as well as promotional product offerings,

which drove consumer customer acquisition. Average demand deposits increased $1.7 billion, or 5%, from December 31, 2018 primarily due to the MB Financial, Inc. acquisition, partially offset by balance migration into interest checking deposits and lower balances per commercial customer account. The increase in average other time deposits was primarily due to the MB Financial, Inc. acquisition as well as promotional rate offers.

Average certificates $100,000 and over increased $2.1 billion from December 31, 2018 primarily due to the MB Financial, Inc. acquisition as well as an increase in retail brokered certificates of deposit issued since December 31, 2018. Average other deposits decreased $211 million primarily due to a decrease in average Eurodollar trade deposits.

Contractual Maturities

The contractual maturities of certificates $100,000 and over as of December 31, 2019 are summarized in the following table:


TABLE 31: CONTRACTUAL MATURITIES OF CERTIFICATES $100,000 AND OVER
($ in millions)
Next 3 months	$	1,884
3-6 months		806
6-12 months		525
After 12 months		487
Total certificates $100,000 and over	$	3,702

76 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The contractual maturities of other time deposits and certificates $100,000 and over as of December 31, 2019 are summarized in the following table:


TABLE 32: CONTRACTUAL MATURITIES OF OTHER TIME DEPOSITS AND CERTIFICATES $100,000 AND OVER
($ in millions)
Next 12 months	$	7,714
13-24 months		914
25-36 months		186
37-48 months		52
49-60 months		66
After 60 months		7
Total other time deposits and certificates $100,000 and over	$	8,939

Borrowings

The Bancorp accesses a variety of short-term and long-term funding sources. Borrowings with original maturities of one year or less are classified as short-term and include federal funds purchased and other short-term borrowings.

Average total borrowings as a percent of average interest-bearing liabilities were 17% at December 31, 2019 compared to 20% at December 31, 2018.

The following table summarizes the end of period components of borrowings:


TABLE 33: COMPONENTS OF BORROWINGS
As of December 31 ($ in millions)	2019		2018		2017		2016		2015
Federal funds purchased	$	260		1,925		174		132		151
Other short-term borrowings		1,011		573		4,012		3,535		1,507
Long-term debt		14,970		14,426		14,904		14,388		15,810
Total borrowings	$	16,241		16,924		19,090		18,055		17,468

Total borrowings decreased $683 million, or 4%, from December 31, 2018 due to a decrease in federal funds purchased, partially offset by increases in long-term debt and other short-term borrowings. Federal funds purchased decreased $1.7 billion from December 31, 2018 primarily due to a reduction in short-term funding needs as a result of deposit growth. Long-term debt increased $544 million from December 31, 2018 primarily driven by the issuance of $2.3 billion of unsecured senior fixed-rate notes, $300 million of unsecured senior floating-rate bank notes, the issuance of asset-backed securities of $1.3 billion related to an automobile loan securitization and $148 million of fair value adjustments associated with interest rate swaps hedging long-term debt. These increases were partially offset by the maturities of $2.6 billion of unsecured senior bank notes, $500 million of unsecured senior notes and $689 million of paydowns on long-term debt associated with automobile loan securitizations during the year ended December 31, 2019.

For additional information regarding the automobile loan securitization and long-term debt issuances, refer to Note 13 and Note 18, respectively, of the Notes to Consolidated Financial Statements. Other short-term borrowings increased $438 million from December 31, 2018 as a result of increases in collateral held related to certain derivatives and in securities sold under repurchase agreements driven by an increase in commercial customer activity. The level of other short-term borrowings can fluctuate significantly from period to period depending on funding needs and which sources are used to satisfy those needs. For further information on the components of other short-term borrowings, refer to Note 17 of the Notes to Consolidated Financial Statements. For further information on a subsequent event related to long-term debt, refer to Note 33 of the Notes to Consolidated Financial Statements.

The following table summarizes the components of average borrowings:


TABLE 34: COMPONENTS OF AVERAGE BORROWINGS
For the years ended December 31 ($ in millions)	2019		2018		2017		2016		2015
Federal funds purchased	$	1,267		1,509		557		506		920
Other short-term borrowings		1,046		1,611		3,158		2,845		1,721
Long-term debt		15,369		14,551		13,804		15,394		14,644
Total average borrowings	$	17,682		17,671		17,519		18,745		17,285

Total average borrowings increased $11 million compared to December 31, 2018, due to an increase in average long-term debt, partially offset by decreases in average other short-term borrowings and average federal funds purchased. Average long-term debt increased $818 million compared to December 31, 2018. The increase was driven primarily by the issuances of long-term debt during the first half of 2019 which consisted of $1.5 billion of unsecured senior fixed-rate notes, $300 million of unsecured senior floating-rate bank notes and the issuance of asset-backed securities of $1.3 billion related to an automobile loan securitization.

The increase was partially offset by the maturities of unsecured senior bank notes, unsecured senior notes and paydowns on long-term debt associated with automobile loan securitizations, as discussed above, during the year ended December 31, 2019. Average other short-term borrowings decreased $565 million compared to December 31, 2018, driven primarily by a decrease in average FHLB advances. Average federal funds purchased decreased $242 million primarily due to a reduction in short-term funding needs as a result of average deposit growth. Information on the average rates paid on borrowings is discussed in the Net Interest Income subsection of the Statements of Income Analysis section of MD&A. In addition, refer to the Liquidity Risk Management subsection of the Risk Management section of MD&A for a discussion on the role of borrowings in the Bancorp’s liquidity management.

77 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

RISK MANAGEMENT - OVERVIEW

Risk management is critical to effectively serving customers’ financial needs while protecting the Bancorp and achieving strategic goals. It is also essential to reducing the volatility of earnings and safeguarding the Bancorp’s brand and reputation. Further, risk management is integral to the Bancorp’s strategic, financial, and capital planning processes. It is essential that the Bancorp’s business strategies consistently align to its overall risk appetite and capital considerations.

Key elements of Fifth Third’s Risk Management Framework are as follows:

	●	The Bancorp ensures transparency of risk through defined risk policies, governance, and a reporting structure that includes the Risk and Compliance Committee of the Board of Directors, the Enterprise Risk Management Committee, and risk management committees.

	●	The Bancorp establishes a risk appetite in alignment with its strategic, financial, and capital plans. The Bancorp’s risk appetite is defined using quantitative metrics and qualitative measures to ensure prudent risk taking, drive balanced decision making, and ensure that no excessive risks are taken.

	●	Fifth Third’s core values and culture provide a foundation for supporting sound risk management practices by setting expectations for appropriate conduct and accountability across the organization. All employees are expected to conduct themselves in alignment with Fifth Third’s core values and Code of Business Conduct & Ethics, which may be found on www.53.com, while carrying out their responsibilities. Fifth Third’s Corporate Responsibility and Reputation Committee provides oversight of business conduct policies, programs and strategies, and monitors reporting of potential misconduct, trends or themes across the enterprise. Prudent risk management is a responsibility that is expected from all employees across the first, second and third lines of defense and is a foundational element of Fifth Third’s culture.

Fifth Third drives accountability for managing risk through its Three Lines of Defense structure:

	●	The first line of defense is comprised of front line units that create risk and are accountable for managing risk. These groups are the Bancorp’s primary risk takers and are responsible for implementing effective internal controls and maintaining processes for identifying, assessing, controlling, and mitigating the risks associated with their activities consistent with established risk appetite and limits. The first line of defense also includes business units that provide information technology, operations, servicing, processing, or other support.

	●	The second line of defense, or Independent Risk Management, consists of Risk Management, Compliance, and Credit Review. The second line is responsible for developing frameworks and policies to govern risk-taking activities, overseeing risk-taking of the organization, advising on controlling that risk, and providing input on key risk decisions. Risk Management complements the front line’s management of risk taking activities through its monitoring and reporting responsibilities, including adherence to the risk appetite. Additionally, Risk Management is responsible for identifying, measuring, monitoring, and controlling aggregate and emerging risks enterprise-wide.

	●	The third line of defense is Internal Audit, which provides oversight of the first and second lines of defense, and independent assurance to the Board on the effectiveness of governance, risk management, and internal controls.

The Bancorp has eight defined risk types and manages each to a prescribed tolerance. The risk types are as follows:

	●	Credit Risk

	●	Liquidity Risk

	●	Market Risk (including Interest Rate Risk and Price Risk)

	●	Regulatory Compliance Risk

	●	Legal Risk

	●	Operational Risk

	●	Reputational Risk

	●	Strategic Risk

Fifth Third’s Risk Management processes ensure a consistent and comprehensive approach in how to identify, measure and assess, manage, monitor, and report risks. The Bancorp has also established processes and programs to manage and report concentration risks; to ensure robust talent, compensation, and performance management; and to aggregate risks across the enterprise.

Below are the Bancorp’s core principles and qualitative factors that define its risk appetite and are used to ensure the Bancorp is operating in a safe and sound manner:

	●	Act with integrity in all activities.

	●	Understand the risks the Bancorp takes, and ensure that they are in alignment with its business strategies and risk appetite.

	●	Avoid risks that cannot be understood, managed or monitored.

	●	Provide transparency of risk to the Bancorp’s management and Board, and escalate risks and issues as necessary.

	●	Ensure Fifth Third’s products and services are aligned to its core customer base and are designed, delivered and maintained to provide value and benefit to customers and to Fifth Third.

	●	Do not offer products or services that are not appropriate or suitable for customers.

	●	Focus on providing operational excellence by providing reliable, accurate, and efficient services to meet customer’s needs.

	●	Maintain a strong financial position to ensure that the Bancorp meets its objectives through all economic cycles with sufficient capital and liquidity, even under stressed conditions.

	●	Protect the Bancorp’s reputation by thoroughly understanding the consequences of business strategies, products and processes.

	●	Conduct business in compliance with all applicable laws, rules and regulations and in alignment with internal policies and procedures.

Risk appetite is measured and monitored to ensure:

	●	Risk-taking activities remain aligned with the Bancorp’s established risk appetite, tolerances, and limits;

	●	Business decisions are based on a holistic and forward-looking view of risk and returns, including interactions between risks and results of stress tests, leading to an efficient use of capital;

	●	Risk management activities are maintained through periods of economic decline, as well as periods of economic growth when risk management can be most critical and challenging.

78 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Quantitative metrics and limits are used to provide a view of the overall risk profile of the Bancorp, which includes monitoring top risks and areas of concentration risk.

Fifth Third’s success is dependent on effective risk management and understanding and controlling the risks taken in order to deliver sustainable returns for employees and shareholders. The Bancorp’s goal is to ensure that aggregate risks do not exceed its risk capacity, and that risks taken are supportive of the Bancorp’s portfolio diversification and profitability objectives. Fifth Third’s strategic plan is approved by the Board of Directors annually. The strategic plan includes a comprehensive assessment of risks that currently have an impact on the Bancorp or risks that could have an impact to risk appetite and impact to capital, liquidity, and earnings during the time period covered by the plan.

Fifth Third’s Risk Management Framework states its risk appetite and the linkage to strategic and capital planning, defines and sets the tolerance for each of the eight risk types, explains the process used to manage risk across the enterprise and sets forth its risk governance structure.

	●	The Board of Directors (the “Board”) and executive management define the risk appetite, which is considered in the development of business strategies, and forms the basis for enterprise risk management. The Bancorp’s risk appetite is set annually in alignment with the strategic, capital and financial plans, and is reviewed by the Board on an annual basis.

	●	The Risk Management Process provides a consistent and integrated approach for managing risks and ensuring appropriate risk mitigants and controls are in place, and risks and issues are appropriately escalated. Five components are utilized for effective risk management; identifying, assessing, managing, monitoring and independent governance reporting of risk.

	●	The Board and executive management have identified eight risk types (defined above) for monitoring the overall risk of the Bancorp, and have also qualitatively established a risk tolerance, which is defined as the maximum amount of risk the Bancorp is willing to take for each of the eight risk types. These risk types are assessed using quantitative measurements and qualitative factors on an ongoing basis and reported to the Board each quarter, or more frequently, if necessary. In addition, each business and operational function (first line of defense) is accountable for proactively identifying and managing risk using its risk management process. Risk tolerances and risk limits are also established, where appropriate, in order to ensure that business and operational functions across the enterprise are able to monitor and manage risks at a more granular level, while ensuring that aggregate risks across the enterprise do not exceed the overall risk appetite.

	●	The Bancorp’s risk governance structure includes management committees operating under delegation from, and providing information directly or indirectly to, the Board. The Bancorp Board delegates certain responsibilities to Board sub-committees, including the RCC as outlined in each respective Committee Charter, which may be found on www.53.com. The ERMC, which reports to the RCC, comprises senior management from across the Bancorp and reviews and approves risk management frameworks and policies, oversees the management of all risk types to ensure that aggregated risks remain within the Bancorp’s risk appetite and fosters a risk culture to ensure appropriate escalation and transparency of risks.

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 the failure of a borrower or counterparty to honor its financial or contractual obligations to the Bancorp. 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 which are described below. These practices include the use of intentional risk-based limits for single name exposures and counterparty selection criteria designed to reduce or eliminate exposure to borrowers who have higher than average default risk and defined weaknesses in financial performance. The Bancorp carefully designed and monitors 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 ongoing portfolio monitoring and timely management reviews of large credit exposures and credits experiencing deterioration of credit quality. Credit officers with the authority to extend credit are delegated specific authority amounts, the utilization of which is closely monitored. Underwriting activities

are centrally managed, and ERM manages the policy and the authority delegation process directly. The Credit Risk Review function provides independent and 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 allowance for credit losses and take any necessary charge-offs. The Bancorp defines potential problem loans and leases as those rated substandard that do not meet the definition of a nonaccrual loan or a restructured loan. Refer to Note 7 of the Notes to Consolidated Financial Statements for further information on the Bancorp’s credit grade categories, which are derived from standard regulatory rating definitions. In addition, stress testing is performed on various commercial and consumer portfolios using the CCAR model and for certain portfolios, such as real estate and leveraged lending, the stress testing is performed by Credit department personnel at the individual loan level during credit underwriting.

79 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following tables provide a summary of potential problem portfolio loans and leases:


TABLE 35: POTENTIAL PROBLEM PORTFOLIO LOANS AND LEASES

As of December 31, 2019 ($ in millions)	Carrying Value (a)		Unpaid Principal Balance		Exposure

Commercial and industrial loans	$	1,100		1,120		1,488
Commercial mortgage loans		342		390		342
Commercial construction loans		75		82		84
Commercial leases		61		61		61

Total potential problem portfolio loans and leases	$	1,578		1,653		1,975

(a) Includes $287 million of PCI and $363 million of non-PCI loans and leases as of December 31, 2019 acquired in the MB Financial, Inc. acquisition.

TABLE 36: POTENTIAL PROBLEM PORTFOLIO LOANS AND LEASES

As of December 31, 2018 ($ in millions)	Carrying Value		Unpaid Principal Balance		Exposure

Commercial and industrial loans	$	646		647		854
Commercial mortgage loans		152		152		152
Commercial leases		31		31		31

Total potential problem portfolio loans and leases	$	829		830		1,037

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 allowance for credit loss analysis purposes encompasses ten categories. The Bancorp also maintains a dual risk rating system for credit approval and pricing, portfolio monitoring and capital allocation that includes a

“through-the-cycle”

rating philosophy for assessing a borrower’s creditworthiness. A

“through-the-cycle”

rating philosophy uses a grading scale that assigns ratings based on average default rates through an entire business cycle for borrowers with similar financial performance. The dual risk rating system includes thirteen probabilities of default grade categories and an additional eleven grade categories for estimating losses given an event of default. The probability of default and loss given default evaluations are not separated in the

ten-category

risk rating system. The Bancorp has completed significant validation and testing of the dual risk rating system as a commercial credit risk management tool. The Bancorp has also developed U.S. GAAP compliant CECL models as part of the Bancorp’s adoption of ASU

2016-13

“

Measurement of Credit Losses on Financial Instruments

,” which was adopted by the Bancorp on January 1, 2020. These validated CECL models use separate probabilities of default and loss given default ratings to estimate credit losses. Scoring systems, various analytical tools and portfolio performance monitoring are used to assess the credit risk in the Bancorp’s homogenous consumer and small business loan portfolios.

Overview

U.S. economic growth slowed in the fourth quarter due to weakness in the manufacturing sector and a softer trend in consumer spending. Financial conditions eased during the quarter as the expansion of the FRB’s balance sheet eased funding pressures in the overnight funding markets. Also, the phase one trade deal between the U.S. and China eased concerns around an escalation of the trade conflict. The easing in financial conditions, along with the trade agreement, supported a rally in equity and credit markets as investors upgraded their outlook for global growth and earnings in 2020. FRB officials have strongly suggested that the FOMC is expected to hold interest rates steady for 2020, indicating that observation of a sustained and significant increase in inflation would be needed before considering raising rates.

The theme of slower growth was also reflected in the employment market where job growth, growth in average hourly wages and growth in hours worked slowed in 2019 when compared to 2018. Despite the softer job growth, the unemployment rate declined to 3.5% in 2019 from 3.9% in 2018 as job growth outpaced the growth in the labor force.

Even though employment growth slowed in 2019, the lowest unemployment rate in a half century along with the availability of consumer credit continued to support consumer confidence and spending while lower interest rates supported a rebound in the housing market. Existing home sales reached a

two-year

high leaving inventories at their lowest level since 1999. Low inventories along with stronger price gains will limit the growth in home sales in 2020.

Geopolitics will continue to play a significant role in the outlook for global growth. Although the U.S. and China reached a trade agreement in early January 2020, the path to a broader trade deal appears unlikely before the November U.S. election. U.S. concerns around national security, human rights, enforcement, and Chinese subsidies for state-owned enterprises remain outstanding with no clear solution. Meanwhile, geopolitical challenges outside the U.S. will continue to limit the upside potential of the global economy.

Commercial Portfolio

The Bancorp’s credit risk management strategy seeks to minimize concentrations of risk through diversification. The Bancorp has commercial loan concentration limits based on industry, lines of business within the commercial segment, geography and credit product type. The risk within the commercial loan and lease portfolio is managed and monitored through an underwriting process utilizing detailed origination policies, continuous loan level reviews, monitoring of industry concentration and product type limits and continuous portfolio risk management reporting.

The Bancorp provides loans to a variety of customers ranging from large multi-national firms to middle market businesses, sole proprietors and high net worth individuals. The origination policies for commercial and industrial loans outline the risks and underwriting requirements for loans to businesses in various industries. Included in the policies are maturity and amortization terms, collateral and leverage requirements, cash flow coverage measures and hold limits. The Bancorp aligns credit and sales teams with specific industry expertise to better monitor and manage different industry segments of the portfolio.

80 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The acquired commercial and industrial portfolio is comprised primarily of small business and middle market commercial loans but also includes specialty lending products, including lease banking, small business leasing and asset-based lending. These products serve distinct client needs and broaden Fifth Third’s lending capabilities.

The portfolios have been evaluated for credit quality and will be managed within Fifth Third’s credit risk framework to ensure adherence to risk appetite.

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


TABLE 37: COMMERCIAL LOAN AND LEASE PORTFOLIO (EXCLUDING LOANS AND LEASES HELD FOR SALE)

	2019						2018

As of December 31 ($ in millions)	Outstanding		Exposure		Nonaccrual		Outstanding		Exposure		Nonaccrual

By Industry:
Manufacturing	$	11,996		22,079		87		10,387		19,290		48
Real estate		11,320		16,993		9		8,327		13,055		10
Financial services and insurance		7,214		15,398		-		6,805		13,192		1
Business services		5,170		8,579		75		4,426		7,161		17
Healthcare		4,984		7,206		38		4,343		6,198		36
Wholesale trade		4,502		7,715		17		3,127		5,481		14
Retail trade		3,948		8,255		39		3,726		7,496		6
Accommodation and food		3,745		6,525		21		3,435		5,626		28
Communication and information		3,166		5,567		2		2,923		5,111		-
Mining		3,046		4,966		37		2,427		4,363		38
Transportation and warehousing		2,880		4,996		12		2,807		4,729		19
Construction		2,526		5,327		4		2,498		4,718		4
Entertainment and recreation		1,905		3,327		40		1,798		3,354		1
Other services		1,224		1,662		4		855		1,104		4
Utilities		991		2,672		-		835		2,531		-
Public administration		782		1,107		-		465		669		-
Agribusiness		344		554		9		323		511		2
Other		151		153		3		-		-		-
Individuals		64		128		-		64		130		-

Total	$	69,958		123,209		397		59,571		104,719		228

By Loan Size:
Less than $200,000		1 %		1		4		1		1		5
$200,000 to $1 million		3		3		6		2		2		9
$1 million to $5 million		9		7		22		6		6		18
$5 million to $10 million		7		6		11		6		5		19
$10 million to $25 million		20		17		27		19		16		38
Greater than $25 million		60		66		30		66		70		11

Total		100 %		100		100		100		100		100

By State:
Illinois		15 %		12		18		6		5		8
Ohio		10		11		6		13		14		10
Florida		7		7		6		8		8		21
Michigan		6		6		7		7		6		10
Indiana		4		4		2		4		4		8
Georgia		3		4		11		5		5		11
North Carolina		3		3		10		3		3		-
Tennessee		3		3		1		3		3		-
Kentucky		2		2		9		2		3		2
Other		47		48		30		49		49		30

Total		100 %		100		100		100		100		100

The origination policies for commercial real estate outline the risks and underwriting requirements for owner and nonowner-occupied and construction lending. Included in the policies are maturity and amortization terms, maximum LTVs, minimum debt service coverage ratios, construction loan monitoring procedures, appraisal requirements,

pre-leasing

requirements (as applicable),

pro-forma

analysis requirements and interest rate sensitivity. The Bancorp requires a valuation of real estate collateral, which may include third-party appraisals, be performed at the time of origination and renewal in accordance with regulatory requirements and on an

as-needed

basis when market conditions justify.

Although the Bancorp does not back test these collateral value assumptions, the Bancorp maintains an appraisal review department to order and review third-party appraisals in accordance with regulatory requirements. Collateral values on criticized assets with relationships exceeding $1 million are reviewed quarterly to assess the appropriateness of the value ascribed in the assessment of charge-offs and specific reserves.

81 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Bancorp assesses all real estate and

non-real

estate collateral securing a loan and considers all cross-collateralized loans in the calculation of the LTV ratio. The following tables provide detail on the most recent LTV ratios for commercial mortgage loans greater than $1 million, excluding impaired commercial mortgage loans individually evaluated.

The Bancorp does not typically aggregate the LTV ratios for commercial mortgage loans less than $1 million.


TABLE 38: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION

As of December 31, 2019 ($ in millions)	LTV > 100%		LTV 80-100%		LTV < 80%

Commercial mortgage owner-occupied loans	$	126		393		3,199
Commercial mortgage nonowner-occupied loans		58		107		4,562

Total	$	184		500		7,761


TABLE 39: COMMERCIAL MORTGAGE LOANS OUTSTANDING BY LTV, LOANS GREATER THAN $1 MILLION

As of December 31, 2018 ($ in millions)	LTV > 100%		LTV 80-100%		LTV < 80%

Commercial mortgage owner-occupied loans	$	126		172		2,119
Commercial mortgage nonowner-occupied loans		40		29		2,731

Total	$	166		201		4,850

The Bancorp views

non-owner-occupied

commercial real estate as a higher credit risk product compared to some other commercial loan

portfolios due to the higher volatility of the industry.

The following tables provide an analysis of nonowner-occupied commercial real estate loans by state (excluding loans held for sale):


TABLE 40: NONOWNER-OCCUPIED COMMERCIAL REAL ESTATE (EXCLUDING LOANS HELD FOR SALE) (a)

As of December 31, 2019 ($ in millions)									For the Year Ended December 31, 2019

					90 Days
	Outstanding		Exposure		Past Due		Nonaccrual		Net Charge-offs

By State:
Illinois	$	3,097		3,639		6		-		2
Ohio		1,402		1,861		-		1		-
Florida		951		1,605		-		-		-
Michigan		714		849		-		-		-
North Carolina		635		1,040		-		-		-
Indiana		582		865		-		-		-
Georgia		351		897		-		-		-
All other states		2,883		4,569		-		-		-

Total	$	10,615		15,325		6		1		2

(a)	Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.


TABLE 41: NONOWNER-OCCUPIED COMMERCIAL REAL ESTATE (EXCLUDING LOANS HELD FOR SALE) (a)

As of December 31, 2018 ($ in millions)									For the Year Ended December 31, 2018

					90 Days
	Outstanding		Exposure		Past Due		Nonaccrual		Net Charge-offs

By State:
Illinois	$	750		1,076		-		-		-
Ohio		1,574		1,918		-		-		-
Florida		978		1,536		-		-		-
Michigan		657		771		-		-		-
North Carolina		646		872		-		-		-
Indiana		528		853		-		-		-
Georgia		357		729		-		-		-
All other states		2,590		4,187		-		2		1

Total	$	8,080		11,942		-		2		1

(a)	Included in commercial mortgage loans and commercial construction loans in the Loans and Leases subsection of the Balance Sheet Analysis section of MD&A.

Consumer Portfolio

Consumer credit risk management utilizes a framework that encompasses consistent processes for identifying, assessing, managing, monitoring and reporting credit risk. These processes are supported by a credit risk governance structure that includes Board oversight, policies, risk limits and risk committees.

The Bancorp’s consumer portfolio is materially comprised of five categories of loans: residential mortgage loans, home equity, indirect secured consumer loans, credit card and other consumer loans.

The Bancorp has identified certain credit characteristics within these five categories of loans which it believes represent a higher level of risk compared to the rest of the consumer loan portfolio. The Bancorp does not update LTVs for the consumer portfolio subsequent to origination except as part of the

charge-off

process for real estate secured loans. Among consumer portfolios, legacy underwritten residential mortgage and brokered home equity portfolios exhibited the most stress during the past credit crisis.

82 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

As of December 31, 2019, consumer real estate loans, consisting of residential mortgage loans and home equity loans, originated from 2005 through 2008 represent approximately 10% of the consumer real estate portfolio. These loans accounted for 50% of total consumer real estate secured net charge-offs for the year ended December 31, 2019. Current loss rates in the residential mortgage and home equity portfolios are below

pre-crisis

levels. In addition to the consumer real estate portfolio, credit risk management continues to closely monitor the indirect secured consumer portfolio performance, which includes automobile loans. The automobile market has exhibited industry-wide gradual loosening of credit standards such as lower FICOs, longer terms and higher LTVs. The Bancorp has adjusted credit standards focused on improving risk-adjusted returns while maintaining credit risk tolerance. The Bancorp actively manages the automobile portfolio through concentration limits, which mitigate credit risk through limiting the exposure to lower FICO scores, higher advance rates and extended term originations.

Residential mortgage portfolio

The Bancorp manages credit risk in the residential mortgage portfolio through underwriting guidelines that limit exposure to higher LTVs and lower FICO scores. Additionally, the portfolio is governed by concentration limits that ensure geographic, product

and channel diversification. The Bancorp may also package and sell loans in the portfolio.

The Bancorp does not originate residential mortgage loans that permit customers to defer principal payments or make payments that are less than the accruing interest. The Bancorp originates both fixed-rate and ARM loans. Within the ARM portfolio approximately $671 million of ARM loans will have rate resets during the next twelve months. Of these resets, 29% are expected to experience an increase in rate, with an average increase of approximately 1%. Underlying characteristics of these borrowers are relatively strong with a weighted-average origination DTI of 32% and weighted-average origination LTV of 71%.

Certain residential mortgage products have contractual features that may increase credit exposure to the Bancorp in the event of a decline in housing values. These types of mortgage products offered by the Bancorp include loans with high LTVs, multiple loans secured by the same collateral that when combined result in an LTV greater than 80% and interest-only loans. The Bancorp has deemed residential mortgage loans with greater than 80% LTVs and no mortgage insurance as loans that represent a higher level of risk.

Portfolio residential mortgage loans from 2010 and later vintages represented 94% of the portfolio as of December 31, 2019 and had a weighted-average origination LTV of 73% and a weighted-average origination FICO of 760.

The following table provides an analysis of the residential mortgage portfolio loans outstanding by LTV at origination:


TABLE 42: RESIDENTIAL MORTGAGE PORTFOLIO LOANS BY LTV AT ORIGINATION

	2019					2018

			Weighted-					Weighted-
As of December 31 ($ in millions)	Outstanding		Average LTV			Outstanding		Average LTV

LTV ≤ 80%	$	12,100		66.3	%	$	11,540		66.7 %
LTV > 80%, with mortgage insurance (a)		2,373		95.2			2,010		95.1
LTV > 80%, no mortgage insurance		2,251		93.1			1,954		94.2

Total	$	16,724		74.3	%	$	15,504		74.3 %

(a)	Includes loans with both borrower and lender paid mortgage insurance.

The following tables provide an analysis of the residential mortgage portfolio loans outstanding by state with a greater than 80% LTV and no mortgage insurance:


TABLE 43: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE

As of December 31, 2019 ($ in millions)							For the Year Ended December 31, 2019

			90 Days				Net Charge-offs
	Outstanding		Past Due		Nonaccrual		(Recoveries)

By State:
Ohio	$	482		3		4		1
Illinois		468		2		3		1
Florida		305		2		1		(1)
Michigan		217		2		1		-
Indiana		175		1		1		-
North Carolina		139		-		2		-
Kentucky		93		-		-		-
All other states		372		3		3		1

Total	$	2,251		13		15		2

83 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


TABLE 44: RESIDENTIAL MORTGAGE PORTFOLIO LOANS, LTV GREATER THAN 80%, NO MORTGAGE INSURANCE

As of December 31, 2018 ($ in millions)							For the Year Ended December 31, 2018

			90 Days
	Outstanding		Past Due		Nonaccrual		Net Charge-offs

By State:
Ohio	$	436		2		3		1
Illinois		390		1		1		-
Florida		284		1		2		-
Michigan		217		1		1		-
Indiana		144		1		1		-
North Carolina		92		-		1		-
Kentucky		81		-		-		-
All other states		310		3		2		1

Total	$	1,954		9		11		2

Home equity portfolio

The Bancorp’s home equity portfolio is primarily comprised of home equity lines of credit. Beginning in the first quarter of 2013, the Bancorp’s newly originated home equity lines of credit have a

10-year

interest-only draw period followed by a

20-year

amortization period. The home equity line of credit previously offered by the Bancorp was a revolving facility with a

20-year

term, minimum payments of interest-only and a balloon payment of principal at maturity. Peak maturity years for the balloon home equity lines of credit are 2025 to 2028 and approximately 25% of the balances mature before 2025.

The ALLL provides coverage for probable and estimable losses in the home equity portfolio. The allowance attributable to the portion of the home equity portfolio that has not been restructured in a TDR is determined on a pooled basis with senior lien and junior lien categories segmented in the determination of the probable credit losses in the home equity portfolio. The loss factor for the home equity portfolio is based on the trailing twelve-month historical loss rate for each category, as adjusted for certain prescriptive loss rate factors and certain qualitative adjustment factors to reflect risks associated with current conditions and trends. The prescriptive loss rate factors include adjustments for delinquency trends, LTV trends and refreshed FICO score trends. The qualitative factors include adjustments for changes in policies or procedures in underwriting, monitoring or collections, economic conditions, portfolio mix, lending and risk management personnel, results of internal audit and quality control reviews, collateral values and geographic concentrations. The Bancorp considers home price index trends in its footprint and the volatility of collateral valuation trends when determining the collateral value qualitative factor.

The home equity portfolio is managed in two primary groups: loans outstanding with a combined LTV greater than 80% and those loans with an LTV of 80% or less based upon appraisals at origination.

For additional information on these loans, refer to Table 46 and Table 47. Of the total $6.1 billion of outstanding home equity loans:

	●	90% reside within the Bancorp’s Midwest footprint of Ohio, Michigan, Kentucky, Indiana and Illinois as of December 31, 2019;

	●	37% are in senior lien positions and 63% are in junior lien positions at December 31, 2019;

	●	79% of non-delinquent borrowers made at least one payment greater than the minimum payment during the year ended December 31, 2019; and

	●	The portfolio had a weighted-average refreshed FICO score of 745 at December 31, 2019.

The Bancorp actively manages lines of credit and makes adjustments in lending limits when it believes it is necessary based on FICO score deterioration and property devaluation. The Bancorp does not routinely obtain appraisals on performing loans to update LTVs after origination. However, the Bancorp monitors the local housing markets by reviewing various home price indices and incorporates the impact of the changing market conditions in its ongoing credit monitoring processes. For junior lien home equity loans which become 60 days or more past due, the Bancorp tracks the performance of the senior lien loans in which the Bancorp is the servicer and utilizes consumer credit bureau attributes to monitor the status of the senior lien loans that the Bancorp does not service. If the senior lien loan is found to be 120 days or more past due, the junior lien home equity loan is placed on nonaccrual status unless both loans are well-secured and in the process of collection. Additionally, if the junior lien home equity loan becomes 120 days or more past due and the senior lien loan is also 120 days or more past due, the junior lien home equity loan is assessed for

charge-off.

Refer to the Analysis of Nonperforming Assets subsection of the Risk Management section of MD&A for more information.

84 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table provides an analysis of home equity portfolio loans outstanding disaggregated based upon refreshed FICO score:


TABLE 45: HOME EQUITY PORTFOLIO LOANS OUTSTANDING BY REFRESHED FICO SCORE

	2019				2018
As of December 31 ($ in millions)	Outstanding		% of Total		Outstanding		% of Total

Senior Liens:
FICO ≤ 659	$	219		4 %	$	218		4 %
FICO 660-719		330		5		318		5
FICO ≥ 720		1,732		28		1,791		28

Total senior liens		2,281		37		2,327		37
Junior Liens:
FICO ≤ 659		446		7		469		7
FICO 660-719		716		12		769		12
FICO ≥ 720		2,640		44		2,837		44

Total junior liens		3,802		63		4,075		63

Total	$	6,083		100 %	$	6,402		100 %


The Bancorp believes that home equity portfolio loans with a greater than 80% combined LTV present a higher level of risk. The following table provides an analysis of the home equity portfolio loans outstanding in a senior and junior lien position by LTV at origination:
TABLE 46: HOME EQUITY PORTFOLIO LOANS OUTSTANDING BY LTV AT ORIGINATION

	2019				2018
As of December 31 ($ in millions)	Outstanding		Weighted- Average LTV		Outstanding		Weighted- Average LTV

Senior Liens:
LTV ≤ 80%	$	1,964		53.8 %	$	2,022		54.5 %
LTV > 80%		317		88.8		305		88.8

Total senior liens		2,281		58.9		2,327		59.2
Junior Liens:
LTV ≤ 80%		2,213		66.8		2,367		67.2
LTV > 80%		1,589		89.7		1,708		90.1

Total junior liens		3,802		77.4		4,075		78.0

Total	$	6,083		70.3 %	$	6,402		70.9 %

The following tables provide an analysis of home equity portfolio loans outstanding by state with a combined LTV greater than 80%:


TABLE 47: HOME EQUITY PORTFOLIO LOANS OUTSTANDING WITH AN LTV GREATER THAN 80%

As of December 31, 2019 ($ in millions)									For the Year Ended December 31, 2019

	Outstanding		Exposure		90 Days Past Due		Nonaccrual		Net Charge-offs

By State:
Ohio	$	1,145		2,431		-		11		3
Michigan		239		413		-		6		1
Illinois		169		279		-		5		3
Indiana		105		196		-		5		1
Kentucky		95		191		-		2		-
Florida		50		78		-		2		1
All other states		103		162		-		4		1

Total	$	1,906		3,750		-		35		10

85 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


TABLE 48: HOME EQUITY PORTFOLIO LOANS OUTSTANDING WITH AN LTV GREATER THAN 80%

As of December 31, 2018 ($ in millions)									For the Year Ended December 31, 2018
	Outstanding		Exposure		90 Days Past Due		Nonaccrual		Net Charge-offs

By State:
Ohio	$	1,082		2,146		-		8		2
Michigan		297		492		-		4		1
Illinois		200		321		-		4		2
Indiana		133		231		-		2		-
Kentucky		118		224		-		2		-
Florida		59		86		-		2		-
All other states		124		188		-		3		1

Total	$	2,013		3,688		-		25		6

Indirect secured consumer portfolio

The indirect secured consumer portfolio is comprised of $10.7 billion of automobile loans and $882 million of indirect motorcycle, powersport, recreational vehicle and marine loans. The Bancorp’s indirect secured consumer portfolio balances have increased since December 31, 2018 due to the acquisition of MB Financial, Inc. and an increase in loan origination activity.

Additionally, the concentration of lower FICO (

≤

origination balances remained within targeted credit risk tolerance during the year ended December 31, 2019. All concentration and guideline changes are monitored monthly to ensure alignment with original credit performance and return projections.

The following table provides an analysis of indirect secured consumer portfolio loans outstanding disaggregated based upon FICO score:


TABLE 49: INDIRECT SECURED CONSUMER PORTFOLIO LOANS OUTSTANDING BY FICO SCORE AT ORIGINATION

	2019				2018
As of December 31 ($ in millions)	Outstanding		% of Total		Outstanding		% of Total

FICO ≤ 690	$	1,681		15 %	$	1,604		18 %
FICO > 690		9,857		85		7,372		82

Total	$	11,538		100 %	$	8,976		100 %

As of December 31, 2019, 95% of the indirect secured consumer loan portfolio is comprised of automobile loans, powersport loans and motorcycle loans. It is a common industry practice to advance on these types of loans an amount in excess of the collateral value due to the inclusion of negative equity

trade-in,

maintenance/warranty products, taxes, title and other fees paid at

closing. The Bancorp monitors its exposure to these higher risk loans. The remainder of the indirect secured consumer loan portfolio is comprised of marine and recreational vehicle loans. Credit policy limits the maximum advance rate on these to 100% of collateral value.

The following table provides an analysis of indirect secured consumer portfolio loans outstanding by LTV at origination:


TABLE 50: INDIRECT SECURED CONSUMER PORTFOLIO LOANS OUTSTANDING BY LTV AT ORIGINATION

	2019				2018
As of December 31 ($ in millions)	Outstanding		Weighted- Average LTV		Outstanding		Weighted- Average LTV

LTV ≤ 100%	$	7,420		81.3 %	$	5,591		82.3 %
LTV > 100%		4,118		113.4		3,385		112.9

Total	$	11,538		93.1 %	$	8,976		94.2 %

The following table provides an analysis of the Bancorp’s indirect secured consumer portfolio loans outstanding with an LTV at origination greater than 100% as of and for the years ended:


TABLE 51: INDIRECT SECURED CONSUMER PORTFOLIO LOANS OUTSTANDING WITH AN LTV GREATER THAN 100%

($ in millions)	Outstanding		90 Days Past Due and Accruing		Nonaccrual		Net Charge-offs

December 31, 2019	$	4,118		7		4		37
December 31, 2018		3,385		7		1		28

Credit card portfolio

The credit card portfolio consists of predominately prime accounts with 97% of balances existing within the Bancorp’s footprint as of December 31, 2019.

At December 31, 2019 and 2018, 67% and 71%, respectively, of the outstanding balances were originated through branch-based relationships with the remainder coming from direct mail campaigns and online acquisitions.

86 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table provides an analysis of credit card portfolio loans outstanding disaggregated based upon FICO score at origination:


TABLE 52: CREDIT CARD PORTFOLIO LOANS OUTSTANDING BY FICO SCORE AT ORIGINATION

	2019				2018
As of December 31 ($ in millions)	Outstanding		% of Total		Outstanding		% of Total

FICO ≤ 659	$	107		4 %	$	82		3 %
FICO 660-719		834		33		711		29
FICO ≥ 720		1,591		63		1,677		68

Total	$	2,532		100 %	$	2,470		100 %

Other consumer portfolio loans

Other consumer portfolio loans are comprised of secured and unsecured loans originated through the Bancorp’s branch network as well as

point-of-sale

loans originated in connection with third-party financial technology companies.

The Bancorp had $289 million in unfunded commitments associated with loans originated in connection with third-party financial technology companies as of December 31, 2019. The Bancorp closely monitors the credit performance of

point-of-sale

loans which, for the Bancorp, is impacted by the credit loss protection coverage provided by the third-party financial technology companies.

The following table provides an analysis of other consumer portfolio loans outstanding by product type at origination:


TABLE 53: OTHER CONSUMER PORTFOLIO LOANS OUTSTANDING BY PRODUCT TYPE AT ORIGINATION

	2019				2018
As of December 31 ($ in millions)	Outstanding		% of Total		Outstanding		% of Total

Unsecured	$	783		29 %	$	610		26 %
Other secured		530		19		510		22
Point-of-sale		1,410		52		1,222		52

Total	$	2,723		100 %	$	2,342		100 %

Analysis of Nonperforming Assets

Nonperforming assets include nonaccrual loans and leases for which ultimate collectability of the full amount of the principal and/or interest is uncertain; restructured commercial, credit card and certain consumer loans which have not yet met the requirements to be classified as a performing asset; restructured consumer loans which are 90 days past due based on the restructured terms unless the loan is both well-secured and in the process of collection; and certain other assets, including OREO and other repossessed property. A summary of nonperforming assets is included in Table 54. For further information on the Bancorp’s policies related to accounting for delinquent and nonperforming loans and leases, refer to the Nonaccrual Loans and Leases section of Note 1 of the Notes to Consolidated Financial Statements.

Nonperforming assets were $687 million at December 31, 2019 compared to $411 million at December 31, 2018. At December 31, 2019, $7 million of nonaccrual loans were held for sale, compared to $16 million at December 31, 2018.

Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO were 0.62% as of December 31, 2019 compared to 0.41% as of December 31, 2018. Nonaccrual loans and leases secured by real estate were 35% of nonaccrual loans and

leases as of December 31, 2019 compared to 34% as of December 31, 2018.

Portfolio commercial nonaccrual loans and leases were $397 million at December 31, 2019, an increase of $169 million from December 31, 2018. Portfolio consumer nonaccrual loans were $221 million at December 31, 2019, an increase of $101 million from December 31, 2018. Refer to Table 55 for a rollforward of the portfolio nonaccrual loans and leases.

OREO and other repossessed property was $62 million at December 31, 2019, compared to $47 million at December 31, 2018. The Bancorp recognized $6 million and $7 million in losses on the transfer, sale or write-down of OREO properties during the years ended December 31, 2019 and 2018, respectively.

During the years ended December 31, 2019 and 2018, approximately $35 million and $30 million, respectively, of interest income would have been recognized if the nonaccrual and renegotiated loans and leases on nonaccrual status had been current in accordance with their original terms. Although these values help demonstrate the costs of carrying nonaccrual credits, the Bancorp does not expect to recover the full amount of interest as nonaccrual loans and leases are generally carried below their principal balance.

87 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

TABLE 54: SUMMARY OF NONPERFORMING ASSETS AND DELINQUENT LOANS



As of December 31 ($ in millions)	2019			2018		2017		2016		2015

Nonaccrual portfolio loans and leases:
Commercial and industrial loans	$	118			54		144		302		82
Commercial mortgage loans		21			9		12		27		56
Commercial construction loans		1			-		-		-		-
Commercial leases		26			18		-		2		-
Residential mortgage loans (a)		12			10		17		17		28
Home equity		55			56		56		55		62
Indirect secured consumer loans		1			-		-		-		-
Other consumer loans		2			1		-		-		-
Nonaccrual portfolio restructured loans and leases:
Commercial and industrial loans		220			139		132		176		177
Commercial mortgage loans		9			4		14		14		25
Commercial leases		2			4		4		2		1
Residential mortgage loans (a)		79			12		13		17		23
Home equity		39			13		18		18		17
Indirect secured consumer loans		6			1		1		2		2
Credit card		27			27		26		28		33

Total nonaccrual portfolio loans and leases (b)		618			348		437		660		506
OREO and other repossessed property (c)		62			47		52		78		141

Total nonperforming portfolio loans and leases and OREO		680			395		489		738		647
Nonaccrual loans held for sale		-			-		5		4		1
Nonaccrual restructured loans held for sale		7			16		1		9		11

Total nonperforming assets	$	687			411		495		751		659

Portfolio loans and leases 90 days past due and still accruing:
Commercial and industrial loans	$	11			4		3		4		7
Commercial mortgage loans		15			2		-		-		-
Residential mortgage loans (a)		50			38		57		49		40
Home equity		1			-		-		-		-
Indirect secured consumer loans		10			12		10		9		10
Credit card		42			37		27		22		18
Other consumer loans		1			-		-		-		-

Total portfolio loans and leases 90 days past due and still accruing	$	130			93		97		84		75

Nonperforming portfolio assets as a percent of portfolio loans and leases and OREO		0.62	%		0.41		0.53		0.80		0.70
ALLL as a percent of nonperforming portfolio assets		177			279		245		170		197

(a)

Information for all periods presented excludes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. These advances were $261 , $195, $290, $312 and $335 as of December 31, 2019 , 2018, 2017, 2016 and 2015, respectively. The Bancorp recognized losses of $4 , $5, $5, $6 and $8 for the years ended December 31, 2019 , 2018, 2017, 2016 and 2015, respectively.

(b)	Includes $16 , $6, $3, $4 and $6 of nonaccrual government insured commercial loans whose repayments are insured by the SBA at December 31, 2019 , 2018, 2017, 2016 and 2015, respectively, of which $11, $2, $3, $1 and $2 were restructured nonaccrual government insured commercial loans at December 31, 2019 , 2018, 2017, 2016 and 2015, respectively.

(c)	Upon completion of Fifth Third Bank’s conversion to a national charter, the Bancorp conformed to OCC guidance with regard to branch-related real estate no longer intended to be used for banking purposes. The impact of the change resulted in an increase to OREO of approximately $30 million with an offsetting reduction to bank premises and equipment.

88 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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


TABLE 55: ROLLFORWARD OF PORTFOLIO NONACCRUAL LOANS AND LEASES

For the year ended December 31, 2019 ($ in millions)	Commercial		Residential Mortgage		Consumer		Total

Balance, beginning of period	$	228		22		98		348
Transfers to nonaccrual status		456		107		176		739
Acquired nonaccrual loans		8		-		-		8
Transfers to accrual status		-		(20)		(72)		(92)
Transfers to held for sale		(17)		-		-		(17)
Loan paydowns/payoffs		(165)		(9)		(30)		(204)
Transfers to OREO		(5)		(7)		(4)		(16)
Charge-offs		(127)		(2)		(38)		(167)
Draws/other extensions of credit		19		-		-		19

Balance, end of period	$	397		91		130		618



For the year ended December 31, 2018 ($ in millions)

Balance, beginning of period	$	306		30		101		437
Transfers to nonaccrual status		252		34		139		425
Transfers to accrual status		(3)		(22)		(67)		(92)
Transfers to held for sale		(28)		-		-		(28)
Loan paydowns/payoffs		(175)		(8)		(32)		(215)
Transfers to OREO		(3)		(10)		(7)		(20)
Charge-offs		(157)		(2)		(36)		(195)
Draws/other extensions of credit		36		-		-		36

Balance, end of period	$	228		22		98		348

Troubled Debt Restructurings

A loan is accounted for as a TDR if the Bancorp, for economic or legal reasons related to the borrower’s financial difficulties, grants a concession to the borrower that it would not otherwise consider. TDRs include concessions granted under reorganization, arrangement or other provisions of the Federal Bankruptcy Act. A TDR typically involves a modification of terms such as a reduction of the stated interest rate or remaining principal amount of the loan, a reduction of accrued interest or an extension of the maturity date at a stated interest rate lower than the current market rate for a new loan with similar risk.

At the time of modification, the Bancorp maintains certain consumer loan TDRs (including certain residential mortgage loans, home equity loans and other consumer loans) on accrual status, provided there is reasonable assurance of repayment and performance according to the modified terms based upon a current, well-documented credit evaluation. Loans discharged in a Chapter 7 bankruptcy and not reaffirmed by the borrower are classified as collateral-dependent TDRs and placed on nonaccrual status regardless of the borrower’s payment history or capacity to repay in the future.

These loans are returned to accrual status provided there is a sustained payment history of twelve months after bankruptcy and collectability is reasonably assured for all remaining contractual payments. Commercial loans modified as part of a TDR are maintained on accrual status provided there is a sustained payment history of six months or greater prior to the modification in accordance with the modified terms and all remaining contractual payments under the modified terms are reasonably assured of collection. TDRs of commercial loans and credit card loans that do not have a sustained payment history of six months or greater in accordance with the modified terms remain on nonaccrual status until a

six-month

payment history is sustained.

Consumer restructured loans on accrual status totaled $965 million and $961 million at December 31, 2019 and 2018, respectively. As of December 31, 2019, the percentage of restructured residential mortgage loans, home equity loans, and credit card loans that are past due 30 days or more from their modified terms were 32%, 19% and 38%, respectively.

The following tables summarize portfolio TDRs by loan type and delinquency status:


TABLE 56: ACCRUING AND NONACCRUING PORTFOLIO TDRs

		Accruing
As of December 31, 2019 ($ in millions)		Current		30-89 Days Past Due		90 Days or More Past Due		Nonaccruing		Total

Commercial loans (a)	$		23		-		-		231		254
Residential mortgage loans (b)			552		49		134		79		814
Home equity			199		8		-		39		246
Indirect secured consumer loans			6		-		-		6		12
Credit card			14		3		-		27		44

Total (c)	$		794		60		134		382		1,370

(a)	Excludes restructured nonaccrual loans held for sale.

(b)	Information includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. As of December 31, 2019 , these advances represented $321 of current loans, $40 of 30-89 days past due loans and $109 of 90 days or more past due loans.

(c)

Upon completion of Fifth Third Bank’s conversion to a national charter, the Bancorp conformed to OCC guidance with regard to non-reaffirmed loans included in Chapter 7 bankruptcy filings to be accounted for as TDRs and collateral dependent loans regardless of payment history and capacity to pay in the future. The impact of the change resulted in an increase to TDRs of approximately $105, of which $83 were transferred to nonaccrual status.

89 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


TABLE 57: ACCRUING AND NONACCRUING PORTFOLIO TDRs
		Accruing
As of December 31, 2018 ($ in millions)		Current		30-89 Days Past Due		90 Days or More Past Due		Nonaccruing		Total
Commercial loans (a)	$		60		-		-		147		207
Residential mortgage loans (b)			552		52		120		12		736
Home equity			203		12		-		13		228
Indirect secured consumer loans			5		-		-		1		6
Credit card			14		3		-		27		44
Total	$		834		67		120		200		1,221

(a)	Excludes restructured nonaccrual loans held for sale.

(b)	Information includes advances made pursuant to servicing agreements for GNMA mortgage pools whose repayments are insured by the FHA or guaranteed by the VA. As of December 31, 2018, these advances represented $321 of current loans, $42 of 30-89 days past due loans and $101 of 90 days or more past due loans.

Analysis of Net Loan Charge-offs

Net charge-offs were 35 bps of average portfolio loans and leases for both the years ended December 31, 2019 and 2018. Table 58 provides a summary of credit loss experience and net charge-offs as a percentage of average portfolio loans and leases outstanding by loan category.

The ratio of commercial loan and lease net charge-offs to average portfolio commercial loans and leases was 16 bps during the year ended December 31, 2019, compared to 23 bps during the year ended December 31, 2018.

The decrease was primarily due to an increase in average commercial loans and leases as a result of the MB Financial, Inc. acquisition as well as a decrease in net charge-offs on commercial and industrial loans of $29 million.

The ratio of consumer loan net charge-offs to average portfolio consumer loans was 68 bps for the year ended December 31, 2019 compared to 56 bps for the year ended December 31, 2018. The increase was primarily due to increases in net charge-offs on credit card and other consumer loans of $33 million and $17 million, respectively.

90 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


TABLE 58: SUMMARY OF CREDIT LOSS EXPERIENCE
For the years ended December 31 ($ in millions)		2019			2018			2017			2016			2015
Losses charged-off:
Commercial and industrial loans	$		(120	)		(151	)		(136	)		(205	)		(253	)
Commercial mortgage loans			-			(5	)		(16	)		(22	)		(39	)
Commercial construction loans			-			-			-			-			(4	)
Commercial leases			(7	)		(1	)		(2	)		(5	)		(2	)
Residential mortgage loans			(9	)		(13	)		(15	)		(19	)		(28	)
Home equity			(28	)		(23	)		(32	)		(41	)		(55	)
Indirect secured consumer loans			(81	)		(63	)		(58	)		(54	)		(46	)
Credit card			(156	)		(125	)		(94	)		(89	)		(94	)
Other consumer loans (a)			(109	)		(69	)		(28	)		(21	)		(21	)
Total losses charged-off			(510	)		(450	)		(381	)		(456	)		(542	)
Recoveries of losses previously charged-off:
Commercial and industrial loans			17			19			25			33			24
Commercial mortgage loans			2			6			4			7			12
Commercial construction loans			-			-			-			1			1
Commercial leases			-			-			-			1			-
Residential mortgage loans			5			6			8			9			11
Home equity			10			11			13			14			16
Indirect secured consumer loans			31			23			21			19			18
Credit card			22			24			10			9			12
Other consumer loans (a)			54			31			2			1			2
Total recoveries of losses previously charged-off			141			120			83			94			96
Net losses charged-off:
Commercial and industrial loans			(103	)		(132	)		(111	)		(172	)		(229	)
Commercial mortgage loans			2			1			(12	)		(15	)		(27	)
Commercial construction loans			-			-			-			1			(3	)
Commercial leases			(7	)		(1	)		(2	)		(4	)		(2	)
Residential mortgage loans			(4	)		(7	)		(7	)		(10	)		(17	)
Home equity			(18	)		(12	)		(19	)		(27	)		(39	)
Indirect secured consumer loans			(50	)		(40	)		(37	)		(35	)		(28	)
Credit card			(134	)		(101	)		(84	)		(80	)		(82	)
Other consumer loans			(55	)		(38	)		(26	)		(20	)		(19	)
Total net losses charged-off	$		(369	)		(330	)		(298	)		(362	)		(446	)
Net losses charged-off as a percent of average portfolio loans and leases:
Commercial and industrial loans			0.20	%		0.31			0.27			0.40			0.54
Commercial mortgage loans			(0.02	)		(0.01	)		0.17			0.23			0.38
Commercial construction loans			-			-			-			(0.01	)		0.11
Commercial leases			0.21			0.03			0.06			0.10			0.04
Total commercial loans and leases			0.16			0.23			0.22			0.33			0.46
Residential mortgage loans			0.03			0.04			0.04			0.07			0.13
Home equity			0.28			0.17			0.26			0.33			0.46
Indirect secured consumer loans			0.48			0.45			0.39			0.33			0.24
Credit card			5.49			4.44			3.93			3.69			3.60
Other consumer loans			2.16			1.93			2.57			2.93			3.26
Total consumer loans			0.68			0.56			0.49			0.48			0.51
Total net losses charged-off as a percent of average portfolio loans and leases			0.35	%		0.35			0.32			0.39			0.48

(a)	For the years ended December 31, 2019 and 2018, the Bancorp recorded $48 and $29, respectively, in both losses charged-off and recoveries of losses charged-off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.

Allowance for Credit Losses

The allowance for credit losses is comprised of the ALLL and the reserve for unfunded commitments. The ALLL provides coverage for probable and estimable losses in the loan and lease portfolio. The Bancorp evaluates the ALLL each quarter to determine its adequacy to cover inherent losses. Several factors are taken into consideration in the determination of the overall ALLL, including an unallocated component. These factors include, but are not limited to, the overall risk profile of the loan and lease portfolios, net

charge-off

experience, the extent of impaired loans and leases, the level of nonaccrual loans and leases, the level of 90 days past due loans and leases and the overall level of the ALLL as a percent of portfolio loans and leases.

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 economic conditions that might impact the portfolio. Refer to the Critical Accounting Policies section of MD&A for more information.

During the year ended December 31, 2019, the Bancorp did not substantively change any material aspect of its overall approach in the determination of the ALLL and there have been no material changes in assumptions or estimation techniques as compared to prior periods that impacted the determination of the current period allowance. In addition to the ALLL, the Bancorp maintains a reserve for unfunded commitments recorded in other liabilities in the Consolidated Balance Sheets.

91 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The methodology used to determine the adequacy of this reserve is similar to the Bancorp’s methodology for determining the ALLL. The provision for the reserve for unfunded commitments is included in provision for credit losses in the Consolidated Statements of Income.

The ALLL attributable to the portion of the residential mortgage and consumer loan portfolios that has not been restructured in a TDR is calculated on a pooled basis with the segmentation based on the similarity of credit risk characteristics. Loss factors for consumer loans are developed for each pool based on the trailing twelve-month historical loss rate, as adjusted for certain prescriptive loss rate factors and certain qualitative adjustment factors. The prescriptive loss rate factors and qualitative adjustments are designed to reflect risks associated with current conditions and trends which are not believed to be fully reflected in the trailing twelve-month historical loss rate. For real estate backed consumer loans, the prescriptive loss rate factors include adjustments for delinquency trends, LTV trends, refreshed FICO score trends and product mix, and the qualitative factors include adjustments for changes in policies or procedures in underwriting, monitoring or collections, economic conditions, portfolio mix, lending and risk management personnel, results of internal audit and quality control reviews, collateral values and geographic concentrations. The Bancorp considers home price index trends in

its footprint and the volatility of collateral valuation trends when determining the collateral value qualitative factor.

The Bancorp’s determination of the ALLL for commercial loans and leases is sensitive to the risk grades it assigns to these loans and leases. In the event that 10% of commercial loans and leases in each risk category would experience a downgrade of one risk category, the allowance for commercial loans and leases would increase by approximately $171 million at December 31, 2019. In addition, the Bancorp’s determination of the ALLL for residential mortgage loans and consumer loans is sensitive to changes in estimated loss rates. In the event that estimated loss rates would increase by 10%, the ALLL for residential mortgage loans and consumer loans would increase by approximately $37 million at December 31, 2019. As several qualitative and quantitative factors are considered in determining the ALLL, these sensitivity analyses do not necessarily reflect the nature and extent of future changes in the ALLL. They are intended to provide insights into the impact of adverse changes to risk grades and estimated loss rates and do not imply any 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.


TABLE 59: CHANGES IN ALLOWANCE FOR CREDIT LOSSES
For the years ended December 31 ($ in millions)		2019		2018		2017		2016		2015
ALLL:
Balance, beginning of period	$	1,103		1,196		1,253		1,272		1,322
Losses charged-off (a)		(510	)	(450	)	(381	)	(456	)	(542	)
Recoveries of losses previously charged-off (a)		141		120		83		94		96
Provision for loan and lease losses		468		237		261		343		396
Deconsolidation of a VIE		-		-		(20	)	-		-
Balance, end of period	$	1,202		1,103		1,196		1,253		1,272
Reserve for unfunded commitments:
Balance, beginning of period	$	131		161		161		138		135
Reserve for acquired unfunded commitments		8		-		-		-		-
Provision for (benefit from) the reserve for unfunded commitments		5		(30	)	-		23		4
Losses charged-off		-		-		-		-		(1	)
Balance, end of period	$	144		131		161		161		138

(a)	For the years ended December 31, 2019 and 2018, the Bancorp recorded $48 and $29, respectively, in both losses charged-off and recoveries of losses charged-off related to customer defaults on point-of-sale consumer loans for which the Bancorp obtained recoveries under third-party credit enhancements.

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 restructured loans and other qualitative adjustments. Due to the heavy reliance on realized historical losses and the credit grade rating process, the model-derived estimate of the ALLL tends to slightly lag behind the deterioration in the portfolio in a stable or deteriorating credit environment, and tends 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 of the ALLL is maintained to recognize the imprecision in estimating and measuring loss. The unallocated allowance as a percent of total portfolio loans and leases at December 31, 2019 and 2018 was 0.11% and 0.12%, respectively. The unallocated allowance was approximately 10% of the total allowance at both December 31, 2019 and 2018.

As shown in Table 60, the ALLL as a percent of portfolio loans and leases was 1.10% at December 31, 2019, compared to 1.16% at December 31, 2018. This decrease reflects the impact of the MB Financial, Inc. acquisition, which added approximately $13.4 billion in portfolio loans and leases at the acquisition date. Loans acquired by the Bancorp through a purchase business combination are recorded at fair value as of the acquisition date. The Bancorp does not carry over the acquired company’s ALLL, nor does the Bancorp add to its existing ALLL as part of purchase accounting. The ALLL was $1.2 billion and $1.1 billion at December 31, 2019 and 2018, respectively.

92 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS


TABLE 60: ATTRIBUTION OF ALLOWANCE FOR LOAN AND LEASE LOSSES TO PORTFOLIO LOANS AND LEASES

As of December 31 ($ in millions)	2019			2018		2017		2016		2015

Attributed ALLL:
Commercial and industrial loans	$	561			515		651		718		652
Commercial mortgage loans		87			80		65		82		117
Commercial construction loans		45			32		23		16		24
Commercial leases		17			18		14		15		47
Residential mortgage loans		73			81		89		96		100
Home equity		37			36		46		58		67
Indirect secured consumer loans		53			42		38		42		40
Credit card		168			156		117		102		99
Other consumer loans		40			33		33		12		11
Unallocated		121			110		120		112		115

Total attributed ALLL	$	1,202			1,103		1,196		1,253		1,272

Portfolio loans and leases:
Commercial and industrial loans	$	50,542			44,340		41,170		41,676		42,131
Commercial mortgage loans		10,963			6,974		6,604		6,899		6,957
Commercial construction loans		5,090			4,657		4,553		3,903		3,214
Commercial leases		3,363			3,600		4,068		3,974		3,854
Residential mortgage loans		16,724			15,504		15,591		15,051		13,716
Home equity		6,083			6,402		7,014		7,695		8,301
Indirect secured consumer loans		11,538			8,976		9,112		9,983		11,493
Credit card		2,532			2,470		2,299		2,237		2,259
Other consumer loans		2,723			2,342		1,559		680		657

Total portfolio loans and leases	$	109,558			95,265		91,970		92,098		92,582

Attributed ALLL as a percent of respective portfolio loans and leases:
Commercial and industrial loans		1.11	%		1.16		1.58		1.72		1.55
Commercial mortgage loans		0.79			1.15		0.98		1.19		1.68
Commercial construction loans		0.88			0.69		0.51		0.41		0.75
Commercial leases		0.51			0.50		0.34		0.38		1.22
Residential mortgage loans		0.44			0.52		0.57		0.64		0.73
Home equity		0.61			0.56		0.66		0.75		0.81
Indirect secured consumer loans		0.46			0.47		0.42		0.42		0.35
Credit card		6.64			6.32		5.09		4.56		4.38
Other consumer loans		1.47			1.41		2.12		1.76		1.67
Unallocated (as a percent of portfolio loans and leases)		0.11			0.12		0.13		0.12		0.12

Attributed ALLL as a percent of portfolio loans and leases		1.10	%		1.16		1.30		1.36		1.37

In June 2016, the FASB issued ASU

2016-13

which establishes a new approach to estimate credit losses on certain types of financial instruments. The new approach changes the impairment model for most financial assets, and will require the use of an “expected credit loss” model for financial instruments measured at amortized cost and certain other instruments. The ASU is effective for the Bancorp on January 1, 2020.

Based on portfolio characteristics and economic conditions and expectations as of January 1, 2020, the Bancorp recorded a combined increase to the ALLL and reserve for unfunded commitments on January 1, 2020 of approximately $650 million upon the adoption of ASU

2016-13.

The increase is based on economic forecasts that the Bancorp considers reasonable and supportable for a period of three years followed by a reversion to long-term historical loss rates for the remaining contractual life (adjusted for expected prepayments) phased in over a period of two years. The estimated increase in the ALLL is primarily attributable to longer duration consumer loans.

This increase includes the differences between the purchase accounting treatment of loans and leases acquired in the MB Financial, Inc. acquisition and the treatment under ASU

2016-13.

In the legacy portfolio, excluding the MB Financial, Inc. loans and leases, the Bancorp recognized an increase to the ALLL of approximately $475 million.

The impact on the Bancorp’s ALLL in future periods may vary significantly from the adoption date as it will be based on changes in economic conditions, economic forecasts and the composition and credit quality of the Bancorp’s loan and lease portfolio.

The adoption of ASU

2016-13

will also have an impact on the provision for credit losses in periods after adoption, which could differ materially from historical trends. For additional information on ASU

2016-13,

refer to Note 1 of the Notes to Consolidated Financial Statements.

MARKET RISK MANAGEMENT

Market risk is the

day-to-day

potential for the value of a financial instrument to fluctuate due to movements in market factors. The Bancorp’s market risk includes risks resulting from movements in interest rates, foreign exchange rates, equity prices and commodity prices. Interest rate risk, a component of market risk, primarily impacts the Bancorp’s income categories through changes in interest income on earning assets and the cost of interest-bearing liabilities, and through fee items that are related to interest sensitive activities such as mortgage origination and servicing income and through earnings credits earned on commercial deposits that offset commercial deposit fees. Management considers interest rate risk a prominent market risk in terms of its potential impact on earnings. Interest rate risk may occur for any one or more of the following reasons:

	●	Assets and liabilities mature or reprice at different times;

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

	●	The expected maturities of various assets or liabilities shorten or lengthen as interest rates change.

93 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

In addition to the direct impact of interest rate changes on NII and interest-sensitive fees, interest rates can impact earnings through their effect on loan and deposit demand, credit losses, mortgage origination volumes, 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 manage this risk, given numerous possible future interest rate scenarios. A series of Policy Limits and Key Risk Indicators are employed to ensure that this risk is managed within the Bancorp’s risk tolerance.

In addition to the traditional forms of interest rate risk discussed in this section, the Bancorp is exposed to interest rate risk associated with the retirement and replacement of LIBOR. For more information on the LIBOR transition, refer to the Overview section of MD&A.

Interest Rate Risk Management Oversight

The Bancorp’s ALCO, which includes senior management representatives and is accountable to the ERMC, 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.

Net Interest Income Sensitivity

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 NII to changes in interest rates. The model is based on contractual and estimated cash flows and repricing characteristics for all of the Bancorp’s assets, liabilities and

off-balance

sheet exposures and incorporates market-based assumptions regarding the effect of changing interest rates on the prepayment rates of certain assets and attrition rates of certain 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 simulated results due to timing, magnitude and frequency of interest rate changes, deviations from projected assumptions, as well as from changes in market conditions and management strategies.

As of December 31, 2019, the Bancorp’s interest rate risk exposure is governed by a risk framework that utilizes the change in NII over

12-month

and

24-month

horizons assuming a 200 bps parallel ramped increase and a 100 bps parallel ramped decrease in interest rates.

Additionally, the Bancorp routinely analyzes various potential and extreme scenarios, including ramps, shocks and

non-parallel

shifts in rates to assess where risks to net interest income persist or develop as changes in the balance sheet and market rates evolve.

In order to recognize the risk of noninterest-bearing demand deposit balance

run-off

in a rising interest rate environment, the Bancorp’s NII sensitivity modeling assumes that approximately $750 million of additional demand deposit balances

run-off

over 24 months above what is included in senior management’s baseline projections for each 100 bps increase in short-term market interest rates. Similarly, the Bancorp’s NII sensitivity modeling incorporates approximately $750 million of incremental growth in noninterest-bearing deposit balances over 24 months above senior management’s baseline projections for each 100 bps decrease in short-term market interest rates. The incremental balance

run-off

and growth are modeled to flow into and out of funding products that reprice in conjunction with short-term market rate changes.

Another important deposit modeling assumption is the amount by which interest-bearing deposit rates will increase or decrease when market interest rates increase or decrease. This deposit repricing sensitivity is known as the beta, and it represents the expected amount by which Bancorp deposit rates will change for a given change in short-term market rates. The Bancorp’s NII sensitivity modeling assumes a weighted-average rising-rate interest-bearing deposit beta of 71% at December 31, 2019, which is approximately 10 to 30 percentage points higher than the average beta that the Bancorp experienced in the FRB tightening cycles from June 2004 to June 2006 and from December 2015 to December 2018. The Bancorp’s NII sensitivity modeling assumes a weighted-average falling-rate interest-bearing deposit beta of 41% at December 31, 2019. In addition, the modeling assumes there is no lag between the timing of changes in market rates and the timing of deposit repricing despite such timing lags having occurred in prior rate cycles.

The Bancorp continually evaluates the sensitivity of its interest rate risk measures to these important deposit modeling assumptions. The Bancorp also regularly monitors the sensitivity of other important modeling assumptions, such as loan and security prepayments and early withdrawals on fixed-rate customer liabilities.

The following table shows the Bancorp’s estimated NII sensitivity profile and ALCO policy limits as of December 31:


TABLE 61: ESTIMATED NII SENSITIVITY PROFILE AND ALCO POLICY LIMITS

	2019												2018

	% Change in NII (FTE)						ALCO Policy Limits						% Change in NII (FTE)						ALCO Policy Limits

Change in Interest Rates (bps)	12 Months			13-24 Months			12 Months			13-24 Months			12 Months			13-24 Months			12 Months		13-24 Months

+ 200 Ramp over 12 months		(0.22	) %		3.94			(4.00)			(6.00)			(0.01	)%		2.11			(4.00)		(6.00)
+ 100 Ramp over 12 months		(0.16	)		2.07			N/A			N/A			0.09			1.34			N/A		N/A
- 100 Ramp over 12 months		(2.66	)		(7.90	)		(8.00	)		(12.00	)		(2.83	)		(6.70	)		N/A		N/A
- 150 Ramp over 12 months		N/A			N/A			N/A			N/A			(4.34	)		(10.58	)		(8.00)		(12.00)

At December 31, 2019, the Bancorp’s NII sensitivity under the parallel rate ramp increases is near neutral in the first year and would benefit in the second year. Under the parallel 100 bps ramp decrease in interest rates, the Bancorp’s NII would decline in both the first and second years. The asymmetric NII sensitivity profile is attributable to the combination of floating-rate assets, including the predominantly floating-rate commercial loan portfolio, and certain intermediate-term fixed-rate liabilities and managed-rate deposits.

Reductions in the yield of the commercial loan portfolio would be expected to be only partially offset by a decline in the cost of interest-bearing deposits in this scenario. However, proactive management of the securities and derivatives portfolios has reduced the near-term risk to declining market rates.

94 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The changes in the estimated NII sensitivity profile as of December 31, 2019 compared to December 31, 2018 were primarily attributable to the acquisition of MB Financial, Inc., which had a more asset-sensitive balance sheet. The down rate scenarios were also impacted by lower market interest rates and a higher composition of

low-cost

deposits, which results in deposits hitting their floor rates more quickly in the current year scenarios.

However, the strategic repositioning of the investment portfolio into securities that are less callable in the near term more than offset the impact of the MB Financial, Inc. acquisition on NII at risk in year one and partially offset the impact in year two.

Tables 62 and 63 provide the sensitivity of the Bancorp’s estimated NII profile at December 31, 2019 to changes to certain deposit balance and deposit repricing sensitivity (betas) assumptions.

The following table includes the Bancorp’s estimated NII sensitivity profile with an immediate $1 billion decrease and an immediate $1 billion increase in demand deposit balances as of December 31, 2019:


TABLE 62: ESTIMATED NII SENSITIVITY ASSUMING A $1 BILLION CHANGE IN DEMAND DEPOSIT BALANCES
	% Change in NII (FTE)
	Immediate $1 Billion Balance Decrease						Immediate $1 Billion Balance Increase
Change in Interest Rates (bps)	12 Months			13-24 Months			12 Months			13-24 Months
+ 200 Ramp over 12 months		(0.43)	%		3.54			(0.02	)		4.34
+ 100 Ramp over 12 months		(0.26)			1.87			(0.05	)		2.27
- 100 Ramp over 12 months		(2.77)			(8.10	)		(2.56	)		(7.70	)

The following table includes the Bancorp’s estimated NII sensitivity profile with a 25% increase and a 25% decrease to the corresponding deposit beta assumptions as of December 31, 2019. The resulting weighted-average rising-rate interest-bearing deposit betas included in this analysis were approximately 88% and 53%, respectively, and 51% and 31%, respectively, for falling rates as of December 31, 2019:
TABLE 63: ESTIMATED NII SENSITIVITY WITH DEPOSIT BETA ASSUMPTION CHANGES
	% Change in NII (FTE)
	Betas 25% Higher						Betas 25% Lower
Change in Interest Rates (bps)	12 Months			13-24 Months			12 Months			13-24 Months
+ 200 Ramp over 12 months		(3.52)	%		(2.27	)		3.07			10.15
+ 100 Ramp over 12 months		(1.80)			(1.01	)		1.48			5.15
- 100 Ramp over 12 months		(1.73)			(6.16	)		(3.60	)		(9.64	)

Economic Value of Equity Sensitivity

The Bancorp also uses EVE as a measurement tool in managing interest rate risk. Whereas the NII sensitivity analysis highlights the impact on forecasted NII on an FTE basis

(non-GAAP)

over one and

two-year

time horizons, EVE is a

point-in-time

analysis of the economic sensitivity of current positions that incorporates all cash flows over their estimated remaining lives. The EVE of the balance sheet is defined as the discounted present value of all asset and net derivative cash flows less the discounted value of all liability cash flows.

Due to this longer horizon, the sensitivity of EVE to changes in the level of interest rates is a measure of longer-term interest rate risk. EVE values only the current balance sheet and does not incorporate the balance growth assumptions used in the NII sensitivity analysis. As with the NII simulation model, assumptions about the timing and variability of existing balance sheet cash flows are critical in the EVE analysis. Particularly important are assumptions driving loan and security prepayments and the expected balance attrition and pricing of indeterminate-lived deposits.

The following table shows the Bancorp’s estimated EVE sensitivity profile as of December 31:


TABLE 64: ESTIMATED EVE SENSITIVITY PROFILE
	2019		2018
Change in Interest Rates (bps)	Change in EVE	ALCO Policy Limit	Change in EVE	ALCO Policy Limit
+ 200 Shock	(5.12) %	(12.00)	(7.09)	(12.00)
+ 100 Shock	(2.01)	N/A	(3.21)	N/A
- 100 Shock	N/A	N/A	(1.01)	N/A
- 150 Shock	(6.07)	(12.00)	N/A	N/A
- 200 Shock	N/A	N/A	(5.27)	(12.00)

The EVE sensitivity is moderately negative in both a +200 bps rising-rate and a

-150

bps declining-rate market rate scenario at December 31, 2019. The changes in the estimated EVE sensitivity profile from December 31, 2018 were primarily related to noninterest-bearing deposits growth from the acquisition of MB Financial, Inc. and a decrease in market interest rates.

These items were partially offset by strategic repositioning of the investment portfolio into securities that are less callable in the near term.

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.

95 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Since EVE measures the discounted present value of cash flows over the estimated lives of instruments, the change in EVE does not directly correlate to the degree that earnings would be impacted over a shorter time horizon (e.g., the current fiscal year). Further, EVE does not take into account factors such as future balance sheet growth, changes in product mix, changes in yield curve relationships and changing product spreads that could mitigate or exacerbate the impact of changes in interest rates. The NII simulations and EVE analyses do not necessarily include certain actions that management may undertake to manage risk in response to actual changes in interest rates.

The Bancorp regularly evaluates its exposures to a static balance sheet forecast, LIBOR, Prime Rate and other basis risks, yield curve twist risks and embedded options risks. In addition, the impacts on NII on an FTE basis and EVE of extreme changes in interest rates are modeled, wherein the Bancorp employs the use of yield curve shocks and environment-specific scenarios.

Use of Derivatives to Manage Interest Rate Risk

An integral component of the Bancorp’s interest rate risk management strategy is its use of derivative instruments to minimize significant fluctuations in earnings caused by changes in market interest rates.

Examples of derivative instruments that the Bancorp may use as part of its interest rate risk management strategy include interest rate swaps, interest rate floors, interest rate caps, forward contracts, forward starting interest rate swaps, options, swaptions and TBA securities.

Tables 65 and 66 show all swap and floor positions that are utilized for purposes of managing the Bancorp’s exposures to the variability of interest rates. These positions are used to convert the contractual interest rate index of agreed-upon amounts of assets and liabilities (i.e., notional amounts) to another interest rate index or to hedge forecasted transactions for the variability in cash flows attributable to the contractually specified interest rate. The volume, maturity and mix of portfolio swaps change frequently as the Bancorp adjusts its broader interest rate risk management objectives and the balance sheet positions to be hedged. For further information, including the notional amount and fair values of these derivatives, refer to Note 15 of the Notes to Consolidated Financial Statements.

The following tables present additional information about the interest rate swaps and floors used in Fifth Third’s asset and liability management activities:


TABLE 65: WEIGHTED-AVERAGE MATURITY, RECEIVE RATE AND PAY RATE ON QUALIFYING HEDGING INSTRUMENTS

	Notional		Fair		Remaining		Receive			LIBOR Index /
As of December 31, 2019 ($ in millions)	Amount		Value		(years)		Rate			Strike

Interest rate swaps – cash flow – receive-fixed	$	7,000		(2)		3.9		3.0	%		1 ML
Interest rate swaps – cash flow – receive-fixed – forward starting (a)		1,000		-		5.0		3.2			1 ML
Interest rate swaps – fair value – receive-fixed		2,705		393		6.8		4.4			1 ML / 3 ML

Total interest rate swaps	$	10,705		391


Interest rate floors – cash flow – receive-fixed	$	3,000		115		5.0		1.7			1 ML / 2.25%

(a) Forward starting swaps will become effective January 2, 2020.
TABLE 66: WEIGHTED-AVERAGE MATURITY, RECEIVE RATE AND PAY RATE ON QUALIFYING HEDGING INSTRUMENTS

	Notional		Fair		Remaining		Receive			LIBOR Index /
As of December 31, 2018 ($ in millions)	Amount		Value		(years)		Rate			Strike

Interest rate swaps – cash flow – receive-fixed	$	5,000		(13)		4.6		3.0	%		1 ML
Interest rate swaps – cash flow – receive-fixed – forward starting (a)		3,000		1		5.7		3.1			1 ML
Interest rate swaps – fair value – receive-fixed		3,455		260		6.3		3.8			1 ML / 3 ML

Total interest rate swaps	$	11,455		248


Interest rate floors – cash flow – forward starting (b)	$	3,000		69		6.0		N/A			1 ML / 2.25%

(a)	Forward starting swaps will become effective January 2, 2020.

(b)	Forward starting floors became effective December 16, 2019.

Additionally, as part of its overall risk management strategy relative to its residential mortgage banking activities. The Bancorp enters into forward contracts accounted for as free-standing derivatives to economically hedge IRLCs that are also considered free-standing derivatives. The Bancorp economically hedges its exposure to residential mortgage loans held for sale through the use of forward contracts and mortgage options as well. See the Residential Mortgage Servicing Rights and Interest Rate Risk section for the discussion of the use of derivatives to economically hedge this exposure.

The Bancorp also enters into derivative contracts with major financial institutions to economically hedge market risks assumed in interest rate derivative contracts with commercial customers. Generally, these contracts have similar terms in order to protect the Bancorp from market volatility. Credit risk arises from the possible inability of the counterparties to meet the terms of their contracts, which the Bancorp minimizes through collateral arrangements, approvals, limits and monitoring procedures. The Bancorp has risk limits and internal controls in place to help ensure excessive risk is not being taken in providing this service to customers.

These controls include an independent determination of interest rate volatility and credit equivalent exposure on these contracts and counterparty credit approvals performed by independent risk management. For further information, including the notional amount and fair values of these derivatives, refer to Note 15 of the Notes to 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.

96 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following table summarizes the carrying value of the Bancorp’s portfolio loans and leases expected cash flows, excluding interest receivable, as of December 31, 2019:


TABLE 67: PORTFOLIO LOANS AND LEASES EXPECTED CASH FLOWS

($ in millions)	Less than 1 year		1-5 years		Over 5 years		Total

Commercial and industrial loans	$	29,675		20,144		723		50,542
Commercial mortgage loans		4,143		6,038		782		10,963
Commercial construction loans		2,452		2,499		139		5,090
Commercial leases		925		1,647		791		3,363

Total commercial loans and leases		37,195		30,328		2,435		69,958

Residential mortgage loans		3,290		7,469		5,965		16,724
Home equity		1,924		3,306		853		6,083
Indirect secured consumer loans		4,266		6,590		682		11,538
Credit card		506		2,026		-		2,532
Other consumer loans		1,433		1,117		173		2,723

Total consumer loans		11,419		20,508		7,673		39,600

Total portfolio loans and leases	$	48,614		50,836		10,108		109,558

Additionally, the following table displays a summary of expected cash flows, excluding interest receivable, occurring after one year for both fixed and floating/adjustable-rate loans and leases as of December 31, 2019:


TABLE 68: PORTFOLIO LOANS AND LEASES EXPECTED CASH FLOWS OCCURRING AFTER 1 YEAR

		Interest Rate

($ in millions)		Fixed	Floating or Adjustable

Commercial and industrial loans	$	3,162	17,705
Commercial mortgage loans		1,542	5,278
Commercial construction loans		35	2,603
Commercial leases		2,438	-

Total commercial loans and leases		7,177	25,586

Residential mortgage loans		9,880	3,554
Home equity		485	3,674
Indirect secured consumer loans		7,254	18
Credit card		472	1,554
Other consumer loans		1,037	253

Total consumer loans		19,128	9,053

Total portfolio loans and leases	$	26,305	34,639

Residential Mortgage Servicing Rights and Interest Rate Risk

The fair value of the residential MSR portfolio was $993 million and $938 million at December 31, 2019 and December 31, 2018, respectively. The portfolio of servicing rights included $263 million of servicing rights acquired in the acquisition of MB Financial, Inc. on March 22, 2019. The value of servicing rights can fluctuate sharply depending on changes in interest rates and other factors. Generally, as interest rates decline and loans are prepaid to take advantage of refinancing, the total value of existing servicing rights declines because no further servicing fees are collected on repaid loans. The Bancorp maintains a

non-qualifying

hedging strategy relative to its mortgage banking activity in order to manage a portion of the risk associated with changes in the value of its MSR portfolio as a result of changing interest rates.

The Bancorp recognized net gains of $224 million and net losses of $36 million, respectively, on its

non-qualifying

hedging strategy during the years ended December 31, 2019 and 2018. These amounts include net gains of $3 million and net losses of $15 million, respectively, on securities related to the Bancorp’s

non-qualifying

hedging strategy during the years ended December 31, 2019 and 2018. The Bancorp may adjust its hedging strategy to reflect its assessment of the composition of its MSR portfolio, the cost of hedging and the anticipated effectiveness of the hedges given the economic environment. Refer to Note 14 of the Notes to Consolidated Financial Statements for further discussion on servicing rights and the instruments used to hedge interest rate risk on MSRs.

Foreign Currency Risk

The Bancorp may enter into foreign exchange derivative contracts to economically hedge certain foreign denominated loans. The derivatives are classified as free-standing instruments with the revaluation gain or loss being recorded in other noninterest income in the Consolidated Statements of Income. The balance of the Bancorp’s foreign denominated loans at December 31, 2019 and 2018 was $880 million and $948 million, respectively. The Bancorp also enters into foreign exchange contracts for the benefit of commercial customers to hedge their exposure to foreign currency fluctuations. Similar to the hedging of interest rate risk from interest rate derivative contracts entered into with commercial customers, the Bancorp also enters into foreign exchange contracts with major financial institutions to economically hedge a substantial portion of the exposure from client driven foreign exchange activity.

97 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The Bancorp has risk limits and internal controls in place to help ensure excessive risk is not being taken in providing this service to customers. These controls include an independent determination of currency volatility and credit equivalent exposure on these contracts, counterparty credit approvals and country limits performed by independent risk management.

Commodity Risk

The Bancorp also enters into commodity contracts for the benefit of commercial customers to hedge their exposure to commodity price fluctuations. Similar to the hedging of foreign exchange and

interest rate risk from interest rate derivative contracts, the Bancorp also enters into commodity contracts with major financial institutions to economically hedge a substantial portion of the exposure from client driven commodity activity. The Bancorp may also offset this risk with exchange-traded commodity contracts. The Bancorp has risk limits and internal controls in place to help ensure excessive risk is not taken in providing this service to customers. These controls include an independent determination of commodity volatility and credit equivalent exposure on these contracts and counterparty credit approvals performed by independent risk management.

LIQUIDITY RISK MANAGEMENT

The goal of liquidity management is to provide adequate funds to meet changes in loan and lease demand, unexpected levels of deposit withdrawals and other contractual obligations. Mitigating liquidity risk is accomplished by maintaining liquid assets in the form of cash and investment securities, maintaining sufficient unused borrowing capacity in the debt markets and delivering consistent growth in core deposits. A summary of certain obligations and commitments to make future payments under contracts is included in Note 19 of the Notes to Consolidated Financial Statements.

The Bancorp’s Treasury department manages funding and liquidity based on

point-in-time

metrics as well as forward-looking projections, which incorporate different sources and uses of funds under base and stress scenarios. Liquidity risk is monitored and managed by the Treasury department with independent oversight provided by ERM, and a series of Policy Limits and Key Risk Indicators are established to ensure risks are managed within the Bancorp’s risk tolerance. The Bancorp maintains a contingency funding plan that provides for liquidity stress testing, which assesses the liquidity needs under varying market conditions, time horizons, asset growth rates and other events. The contingency plan provides for ongoing monitoring of unused borrowing capacity and available sources of contingent liquidity to prepare for unexpected liquidity needs and to cover unanticipated events that could affect liquidity. The contingency plan also outlines the Bancorp’s response to various levels of liquidity stress and actions that should be taken during various scenarios.

Liquidity risk is monitored and managed for both Fifth Third Bancorp and its subsidiaries. The Bancorp receives substantially all of its liquidity from dividends from its subsidiaries, primarily Fifth Third Bank, National Association. Subsidiary dividends are supplemented with term debt to enable the Bancorp to maintain sufficient liquidity to meet its cash obligations, including debt service and scheduled maturities, common and preferred dividends, unfunded commitments to subsidiaries and other planned capital actions in the form of share repurchases. Liquidity resources are more limited at the Bancorp, making its liquidity position more susceptible to market disruptions. Bancorp liquidity is assessed using a cash coverage horizon, ensuring the entity maintains sufficient liquidity to withstand a period of sustained market disruption while meeting its anticipated obligations over an extended stressed horizon.

The Bancorp’s ALCO, which includes senior management representatives and is accountable to the ERMC, monitors and manages liquidity and funding 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 liquidity risk management.

Sources of Funds

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

Table 67 of the Market Risk Management subsection of the Risk Management section of MD&A illustrates the expected maturities from loan and lease repayments. Of the $36.0 billion of securities in the Bancorp’s

available-for-sale

debt and other securities portfolio at December 31, 2019, $3.4 billion in principal and interest is expected to be received in the next 12 months and an additional $3.8 billion is expected to be received in the next 13 to 24 months. For further information on the Bancorp’s securities portfolio, refer to the Investment Securities subsection of the Balance Sheet Analysis section of MD&A.

Asset-driven liquidity is provided by the Bancorp’s ability to sell or securitize loans and leases. In order to reduce the exposure to interest rate fluctuations and to manage liquidity, the Bancorp has developed securitization and sale procedures for several types of interest-sensitive assets. A majority of the long-term, fixed-rate single-family residential mortgage loans underwritten according to FHLMC or FNMA guidelines are sold for cash upon origination. Additional assets such as certain other residential mortgage loans, certain commercial loans, home equity loans, automobile loans and other consumer loans are also capable of being securitized or sold. The Bancorp sold or securitized loans and leases totaling $9.7 billion during the year ended December 31, 2019 compared to $5.5 billion during the year ended December 31, 2018. For further information, refer to Note 13 and Note 14 of the Notes to Consolidated Financial Statements.

Core deposits have historically provided the Bancorp with a sizeable source of relatively stable and

low-cost

funds. The Bancorp’s average core deposits and average shareholders’ equity funded 83% of its average total assets for both the years ended December 31, 2019 and 2018. In addition to core deposit funding, the Bancorp also accesses a variety of other short-term and long-term funding sources, which include the use of the FHLB system. Certificates $100,000 and over and certain deposits in the Bancorp’s foreign branch located in the Cayman Islands are wholesale funding tools utilized to fund asset growth. Management does not rely on any one source of liquidity and manages availability in response to changing balance sheet needs.

As of December 31, 2019, $4.8 billion of debt or other securities were available for issuance under the current Bancorp’s Board of Directors’ authorizations and the Bancorp is authorized to file any necessary registration statements with the SEC to permit ready access to the public securities markets; however, access to these markets may depend on market conditions. During the year ended December 31, 2019, the Bancorp issued and sold $1.5 billion of 3.65% senior fixed-rate notes and $750 million of 2.375% senior fixed-rate notes.

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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Additionally, during the year ended December 31, 2019, the Bancorp issued in a registered public offering 10,000,000 depositary shares, representing 10,000 shares of 4.95%

non-cumulative

Series K perpetual preferred stock, for net proceeds of approximately $242 million.

As of December 31, 2019, the Bank’s global bank note program had a borrowing capacity of $25.0 billion, of which $19.3 billion was available for issuance. During the year ended 2019, the Bank issued and sold $300 million of senior floating-rate bank notes. For further information on a subsequent event related to long-term debt, refer to Note 33 of the Notes to Consolidated Financial Statements. Additionally, at December 31, 2019, the Bank had approximately $48.3 billion of borrowing capacity available through secured borrowing sources including the FRB and FHLB.

In a securitization transaction that occurred in 2019, the Bancorp transferred approximately $1.43 billion in automobile loans to a bankruptcy remote trust which subsequently issued approximately $1.37 billion of asset-backed notes, of which approximately $68 million of the asset-backed notes were retained by the Bancorp, and resulted in approximately $1.3 billion of outstanding notes included in long-term debt in the Consolidated Balance Sheets. The bankruptcy remote trust was deemed to be a VIE and the Bancorp, as the primary beneficiary, consolidated the VIE. The third-party holders of the asset-backed notes do not have recourse to the general assets of the Bancorp. Refer to Note 18 of the Notes to Consolidated Financial Statements for additional information.

Liquidity Coverage Ratio and Net Stable Funding Ratio

On October 10, 2019, the Board of Governors of the FRB announced it finalized the rules that tailor its regulations for banks to more closely match their risk profile. Fifth Third, as a Category IV institution, is no longer subject to the LCR regulations and the NSFR regulations, effective December 31, 2019.

Credit Ratings

The cost and availability of financing to the Bancorp and Bank are impacted by its credit ratings. A downgrade to the Bancorp’s or Bank’s credit ratings could affect its ability to access the credit markets and increase its borrowing costs, thereby adversely impacting the Bancorp’s or Bank’s financial condition and liquidity. Key factors in maintaining high credit ratings include a stable and diverse earnings stream, strong credit quality, strong capital ratios and diverse funding sources, in addition to disciplined liquidity monitoring procedures.

The Bancorp’s and Bank’s credit ratings are summarized in Table 69. The ratings reflect the ratings agency’s view on the Bancorp’s and Bank’s capacity to meet financial commitments.*

*As an investor, you should be aware that a security rating is not a recommendation to buy, sell or hold securities, that it may be subject to revision or withdrawal at any time by the assigning rating organization and that each rating should be evaluated independently of any other rating. Additional information on the credit rating ranking within the overall classification system is located on the website of each credit rating agency.


TABLE 69: AGENCY RATINGS


As of March 2, 2020	Moody’s		Standard and Poor’s		Fitch		DBRS

Fifth Third Bancorp:
Short-term borrowings		No rating		A-2		F1		R-1L
Senior debt		Baa1		BBB+		A-		A
Subordinated debt		Baa1		BBB		BBB+		AL
Fifth Third Bank, National Association:
Short-term borrowings		P-2		A-2		F1		R-1M
Short-term deposit		P-1		No rating		F1		No rating
Long-term deposit		Aa3		No rating		A		AH
Senior debt		A3		A-		A-		AH
Subordinated debt		Baa1		BBB+		BBB+		A
Rating Agency Outlook for Fifth Third Bancorp and Fifth Third Bank, National Association:		Stable		Stable		Stable		Stable

OPERATIONAL RISK MANAGEMENT

Operational risk is the risk to current or projected financial condition and resilience arising from inadequate or failed internal processes or systems, human errors or misconduct, or adverse external events that are neither market nor credit-related. Operational risk is inherent in the Bancorp’s activities and can manifest itself in various ways including fraudulent acts, business interruptions, inappropriate behavior of employees, unintentional failure to comply with applicable laws and regulations, poor design or delivery of products and services, cyber security or physical security incidents and privacy breaches or failure of vendors to perform in accordance with their arrangements. These events could result in financial losses, litigation and regulatory fines, as well as other damage to the Bancorp. The Bancorp’s risk management goal is to keep operational risk at appropriate levels consistent with the Bancorp’s risk appetite, financial strength, the characteristics of its businesses, the markets in which it operates and the competitive and regulatory environment to which it is subject.

To control, monitor and govern operational risk, the Bancorp maintains an overall Risk Management Framework which comprises governance oversight, risk assessment, capital measurement, monitoring and reporting as well as a formal three lines of defense approach. ERM is responsible for prescribing the framework to the lines of business and corporate functions and providing independent oversight of its implementation (second line of defense). Business Controls groups are in place in each of the lines of business to ensure consistent implementation and execution of managing

day-to-day

operational risk (first line of defense).

The Bancorp’s risk management framework consists of five integrated components, including identifying, assessing, managing, monitoring and independent governance reporting of risk. The corporate Operational Risk Management function within Enterprise Risk is responsible for developing and overseeing the implementation of the Bancorp’s approach to managing operational risk.

99 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

This includes providing governance, awareness and training, tools, guidance and oversight to support implementation of key risk programs and systems as they relate to operational risk management, such as risk and control self-assessments, new product/initiative risk reviews, key risk indicators, Vendor Risk Management, cyber security risk management and review of operational losses. The function is also responsible for developing reports that support the proactive management of operational risk across the enterprise. The lines of business and corporate functions are responsible for managing the operational risks associated with their areas in accordance with the risk management framework. The framework is intended to enable the Bancorp to function with a sound and well-controlled operational environment. These processes support the Bancorp’s goals to minimize future operational losses and strengthen the Bancorp’s performance by maintaining sufficient capital to absorb operational losses that are incurred.

The Bancorp also maintains a robust information security program to support the management of cyber security risk within the organization with a focus on prevention, detection and recovery processes. Fifth Third utilizes a wide array of techniques to secure its operations and proprietary information such as Board-approved policies and programs, network monitoring and testing, access controls and dedicated security personnel.

Fifth Third has adopted the National Institute of Standards and Technology Cybersecurity Framework for the management and deployment of cyber security controls and is an active participant in the financial sector information sharing organization structure, known as the Financial Services Information Sharing and Analysis Center. To ensure resiliency of key Bancorp functions, Fifth Third also employs redundancy protocols that include a robust business continuity function that works to mitigate any potential impacts to Fifth Third customers and its systems.

Fifth Third also focuses on the reporting and escalation of operational control issues to senior management and the Board of Directors. The Operational Risk Committee is the key committee that oversees and supports Fifth Third in the management of operational risk across the enterprise. The Operational Risk Committee reports to the ERMC, which reports to the Risk and Compliance Joint Committee of the Board of Directors of Fifth Third Bancorp and Fifth Third Bank, National Association.

Fifth Third’s operational risk management and information security programs have been actively engaged to evaluate and oversee MB Financial, Inc.’s products and processes to ensure risks are understood, well managed and in alignment with the Bancorp’s risk appetite.

COMPLIANCE RISK MANAGEMENT

Regulatory compliance risk is defined as the risk of legal or regulatory sanctions, financial loss or damage to reputation as a result of noncompliance with (i) applicable laws, regulations, rules and other regulatory requirements (including but not limited to the risk of consumers experiencing economic loss or other legal harm as a result of noncompliance with consumer protection laws, regulations and requirements); (ii) internal policies and procedures, standards of best practice or codes of conduct; and (iii) principles of integrity and fair dealing applicable to Fifth Third’s activities and functions. Fifth Third focuses on managing regulatory compliance risk in accordance with the Bancorp’s integrated risk management framework, which ensures consistent processes for identifying, assessing, managing, monitoring and reporting risks. The Bancorp’s risk management goal is to keep compliance risk at appropriate levels consistent with the Bancorp’s risk appetite.

To mitigate compliance risk, Compliance Risk Management provides independent oversight to ensure consistency and sufficiency in the execution of the program, and ensures that lines of business, regions and support functions are adequately identifying, assessing and monitoring compliance risks and adopting proper mitigation strategies. The lines of business and enterprise functions are responsible for managing the compliance risks associated with their areas.

Additionally, the Chief Compliance Officer is responsible for establishing and overseeing the Compliance Risk Management program which implements key compliance processes, including but not limited to, executive- and board-level governance and reporting routines, compliance-related policies, risk assessments, key risk indicators, issues tracking, regulatory compliance testing and monitoring and privacy. The Chief Compliance Officer also partners with the Financial Crimes Division to oversee anti-money laundering processes and partners with the Community and Economic Development team to oversee the Bancorp’s compliance with the Community Reinvestment Act.

Fifth Third also focuses on the reporting and escalation of compliance issues to senior management and the Board of Directors. The Management Compliance Committee, which is chaired by the Chief Compliance Officer, is the key committee that oversees and supports Fifth Third in the management of compliance risk across the enterprise. The Management Compliance Committee oversees Fifth Third-wide compliance issues, industry best practices, legislative developments, regulatory concerns and other leading indicators of compliance risk. The Management Compliance Committee reports to the ERMC, which reports to the Risk and Compliance Joint Committee of the Board of Directors of Fifth Third Bancorp and Fifth Third Bank, National Association.

Fifth Third’s compliance risk management and anti-money laundering programs have been actively engaged to evaluate and oversee MB Financial, Inc.’s products and processes to ensure risks are understood, well managed and in alignment with the Bancorp’s risk appetite.

100 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

CAPITAL MANAGEMENT

Management regularly reviews the Bancorp’s capital levels to help ensure it is appropriately positioned under various operating environments. The Bancorp has established a Capital Committee which is responsible for making capital plan recommendations to management. These recommendations are reviewed by the ERMC and the annual capital plan is approved by the Board of Directors.

The Capital Committee is responsible for execution and oversight of the capital actions of the capital plan.

Regulatory Capital Ratios

The Basel III Final Rule sets minimum regulatory capital ratios as well as defines the measure of “well-capitalized” for insured depository institutions.


TABLE 70: PRESCRIBED CAPITAL RATIOS

	Minimum			Well-Capitalized

CET1 capital:
Fifth Third Bancorp		4.50	%	N/A
Fifth Third Bank, National Association		4.50		6.50
Tier I risk-based capital:
Fifth Third Bancorp		6.00		6.00
Fifth Third Bank, National Association		6.00		8.00
Total risk-based capital:
Fifth Third Bancorp		8.00		10.00
Fifth Third Bank, National Association		8.00		10.00
Tier I leverage:
Fifth Third Bancorp		4.00		N/A
Fifth Third Bank, National Association		4.00		5.00

The Bancorp is subject to a capital conservation buffer of 2.5%, in addition to the minimum capital ratios, in order to avoid limitations on certain capital distributions and discretionary bonus payments to executive officers. The capital conservation buffer was

phased-in

over a three-year period beginning on January 1, 2016 at 0.625%, increasing by an additional 0.625% each year, culminating on January 1, 2019 at the fully

phased-in

rate of 2.5%. The Bancorp exceeded these “well-capitalized” and “capital conservation buffer” ratios for all periods presented.

In April 2018, the federal banking regulators proposed transitional arrangements to permit banking organizations to phase in the

day-one

impact of the adoption of ASU

2016-13,

referred to as the current expected credit loss model, on regulatory capital over a period of three years. The proposed rule was adopted as final effective July 1, 2019. The

phase-in

provisions of the final rule are optional for a banking organization that experiences a reduction in retained earnings due to CECL adoption as of the beginning of the fiscal year in which the banking organization adopts CECL. A banking organization that elects the

phase-in

provisions of the final rule for regulatory capital purposes must phase in 25% of the transitional amounts impacting regulatory capital in the first year of

adoption of CECL, 50% in the second year, 75% in the third year, with full impact beginning in the fourth year. The Bancorp adopted ASU

2016-13

on January 1, 2020 and plans to elect the

phase-in

option for the impact of CECL on regulatory capital with its regulatory filings as of March 31, 2020. For additional information on ASU

2016-13,

refer to Note 1 of the Notes to Consolidated Financial Statements.

On July 22, 2019, the federal banking regulators published the Regulatory Capital Simplification final rule in the Federal Register. Under the final rule,

non-advanced

approach banks, such as the Bancorp, will be subject to simpler regulatory capital requirements for mortgage servicing assets, certain deferred tax assets arising from temporary differences and investments in the capital of unconsolidated financial institutions than those currently applied. The final rule increases the deduction threshold for mortgage servicing assets, certain deferred tax assets arising from temporary differences and investments in the capital of unconsolidated financial institutions from 10% to 25% of CET1, but increases the risk-weighted assets percentage for the

non-deducted

elements from 100% to 250%. The final rule pertaining to these regulatory capital elements is effective on April 1, 2020.

The following table summarizes the Bancorp’s capital ratios as of December 31:


TABLE 71: CAPITAL RATIOS

($ in millions)	2019	2018	2017	2016	2015

Average total Bancorp shareholders’ equity as a percent of average assets	12.14 %	11.23	11.69	11.57	11.24
Tangible equity as a percent of tangible assets (a)(c)	9.52	9.63	9.79	9.72	9.46
Tangible common equity as a percent of tangible assets (a)(c)	8.44	8.71	8.83	8.77	8.50

Regulatory capital:
CET1 capital	$ 13,847	12,534	12,517	12,426	11,917
Tier I capital	15,616	13,864	13,848	13,756	13,260
Total regulatory capital	19,661	17,723	17,887	17,972	17,134
Risk-weighted assets (b)	142,065	122,432	117,997	119,632	121,290

Regulatory capital ratios:
CET1 capital	9.75 %	10.24	10.61	10.39	9.82
Tier I risk-based capital	10.99	11.32	11.74	11.50	10.93
Total risk-based capital	13.84	14.48	15.16	15.02	14.13
Tier I leverage	9.54	9.72	10.01	9.90	9.54

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

(b)	Under the U.S. banking agencies’ Basel III Final Rule, assets and credit equivalent amounts of off-balance sheet exposures are calculated according to the standardized approach for risk-weighted assets. The resulting values are added together resulting in the Bancorp’s total risk-weighted assets.

(c)	Excludes AOCI.

101 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Capital Planning

In 2011 the FRB adopted the capital plan rule, which requires BHCs with consolidated assets of $50 billion or more to submit annual capital plans to the FRB for review. Under the rule, these capital plans must include detailed descriptions of the following: the BHC’s internal processes for assessing capital adequacy; the policies governing capital actions such as common stock issuances, dividends and share repurchases; and all planned capital actions over a nine-quarter planning horizon.

Furthermore, each BHC must report to the FRB the results of stress tests conducted by the BHC under a number of scenarios that assess the sources and uses of capital under baseline and stressed economic conditions.

During the first quarter of 2019, the FRB provided relief from certain regulatory requirements related to supervisory stress testing and

company-run

stress testing for the 2019 stress test cycle, including disclosure requirements. As a result, the Bancorp was not required to submit a capital plan or participate in CCAR 2019. The requirement for the Bancorp to submit an annual capital plan to the FRB has been extended until April 5, 2020. However, the Bancorp remains subject to the requirement to develop and maintain a capital plan, and the Board of Directors of the Bancorp must review and approve the capital plan. The FRB further clarified that relief from the 2019 stress test cycle should not be construed as relief from any regulatory capital requirements and that the Bancorp will be subject to the full CCAR 2020 stress test requirements.

In June of 2019, the Bancorp announced its capital distribution capacity of approximately $2 billion for the period of July 1, 2019 through June 30, 2020. This includes the ability to execute share repurchases up to $1.24 billion as well as increase quarterly common stock dividends by up to $0.03 per share. These distributions will be governed under the FRB’s 2019 extended stress test process for BHCs with less than $250 billion of total consolidated assets.

Preferred Stock Transactions

On August 26, 2019, the Bancorp issued 200,000 shares of 6.00%

non-cumulative

perpetual Class B preferred stock,

Series A. Each preferred share has a $1,000 liquidation preference. These shares were issued to the holders of MB Financial, Inc.’s 6.00%

non-cumulative

On September 17, 2019, the Bancorp issued in a registered public offering 10,000,000 depositary shares, representing 10,000 shares of 4.95%

non-cumulative

perpetual preferred stock, Series K, for net proceeds of approximately $242 million. Each preferred share has a $25,000 liquidation preference. Subject to any required regulatory approval, the Bancorp may redeem the Series K preferred shares at its option (i) in whole or in part, on any dividend payment date on or after September 30, 2024 and (ii) in whole, but not in part, at any time following a regulatory capital event. The Series K preferred shares are not convertible into Bancorp common shares or any other securities.

Dividend Policy and Stock Repurchase Program

The Bancorp’s common stock dividend policy and stock repurchase program reflect its earnings outlook, desired payout ratios, the need to maintain adequate capital levels, the ability of its subsidiaries to pay dividends, the need to comply with safe and sound banking practices as well as meet regulatory requirements and expectations. The Bancorp declared dividends per common share of $0.94 and $0.74 during the years ended December 31, 2019 and 2018, respectively. The Bancorp entered into or settled a number of accelerated share repurchase and open market share repurchase transactions during the years ended December 31, 2019 and 2018. Refer to Note 25 of the Notes to Consolidated Financial Statements for additional information on the accelerated share repurchase and open market share repurchase transactions.

The following table summarizes shares authorized for repurchase as part of publicly announced plans or programs:


TABLE 72: SHARE REPURCHASES

For the years ended December 31	2019		2018

Shares authorized for repurchase at January 1		60,564,282		23,147,891
Additional authorizations (a)		80,474,957		87,383,525
Share repurchases (b)		(64,601,891)		(49,967,134)

Shares authorized for repurchase at December 31		76,437,348		60,564,282

Average price paid per share (b)	$	26.05		29.44

(a)

During the second quarter of 2019, the Bancorp announced that its Board of Directors had authorized management to purchase 100 million shares of the Bancorp’s common stock through the open market or in any private party transactions. The authorization does not include specific price targets or an expiration date. This share repurchase authorization replaces the Board’s previous authorization pursuant to which approximately 20 million shares remained available for repurchase by the Bancorp.

(b)	Excludes 2,693,318 and 2,155,189 shares repurchased during the years ended December 31, 2019 and 2018, respectively, in connection with various employee compensation plans. These purchases are not included in the calculation for average price paid per share and do not count against the maximum number of shares that may yet be repurchased under the Board of Directors’ authorization.

102 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OFF-BALANCE

SHEET ARRANGEMENTS

In the ordinary course of business, the Bancorp enters into financial transactions that are considered

off-balance

sheet arrangements as they involve varying elements of market, credit and liquidity risk in excess of the amounts recognized in the Bancorp’s Consolidated Balance Sheets. The Bancorp’s

off-balance

sheet arrangements include commitments, guarantees, contingent liabilities and transactions with

non-consolidated

VIEs. A brief discussion of these transactions is as follows:

Commitments

The Bancorp has certain commitments to make future payments under contracts, including commitments to extend credit, letters of credit, forward contracts related to residential mortgage loans held for sale, purchase obligations, capital commitments for private equity investments and capital expenditures. Refer to Note 19 of the Notes to Consolidated Financial Statements for additional information on commitments.

Guarantees and Contingent Liabilities

The Bancorp has performance obligations upon the occurrence of certain events provided in certain contractual arrangements, including residential mortgage loans sold with representation and warranty provisions or credit recourse. Refer to Note 19 of the Notes to Consolidated Financial Statements for additional information on guarantees and contingent liabilities.

Transactions with

Non-consolidated

VIEs

The Bancorp engages in a variety of activities that involve VIEs, which are legal entities that lack sufficient equity to finance their activities, or the equity investors of the entities as a group lack any of the characteristics of a controlling interest. The investments in those entities in which the Bancorp was determined not to be the primary beneficiary but holds a variable interest in the entity are accounted for under the equity method of accounting or other accounting standards as appropriate and not consolidated. Refer to Note 13 of the Notes to Consolidated Financial Statements for additional information on

non-consolidated

VIEs.

103 Fifth Third Bancorp

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Contractual Obligations and Other Commitments

The Bancorp has certain obligations and commitments to make future payments under contracts. The aggregate contractual obligations and commitments at December 31, 2019 are shown in Table 73. As of December 31, 2019, the Bancorp had unrecognized tax benefits that, if recognized, would impact the effective tax rate

in future periods. Due to the uncertainty of the amounts to be ultimately paid as well as the timing of such payments, all uncertain tax liabilities that have not been paid have been excluded from the following table. For further detail on the impact of income taxes, refer to Note 22 of the Notes to Consolidated Financial Statements.


TABLE 73: CONTRACTUAL OBLIGATIONS AND OTHER COMMITMENTS
As of December 31, 2019 ($ in millions)	Less than 1 year		1-3 years		3-5 years		Greater than 5 years		Total
Contractually obligated payments due by period:
Deposits with no stated maturity (a)(b)	$	118,123		-		-		-		118,123
Long-term debt (a)(c)		2,172		5,271		2,853		4,674		14,970
Time deposits (a)(d)		7,714		1,100		118		7		8,939
Short-term borrowings (a)(e)		1,271		-		-		-		1,271
Forward contracts related to residential mortgage loans held for sale (f)		2,901		-		-		-		2,901
Operating lease obligations (g)		90		157		125		280		652
Partnership investment commitments (h)		230		131		28		39		428
Pension benefit payments (i)		16		34		33		70		153
Purchase obligations and capital expenditures (j)		133		58		6		-		197
Finance lease obligations (g)		6		10		4		26		46
Total contractually obligated payments due by period	$	132,656		6,761		3,167		5,096		147,680
Other commitments by expiration period:
Commitments to extend credit (k)	$	28,673		16,263		22,654		8,181		75,771
Letters of credit (l)		1,022		518		592		5		2,137
Total other commitments by expiration period	$	29,695		16,781		23,246		8,186		77,908

(a)	Interest-bearing obligations are principally used to fund interest-earning assets. Interest charges on contractual obligations were excluded from reported amounts, as the potential cash outflows would have corresponding cash inflows from interest-earning assets.

(b)	Includes demand, interest checking, savings, money market and foreign office deposits. For additional information, refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A.

(c)	Includes debt obligations with an original maturity of greater than one year. Refer to Note 18 of the Notes to Consolidated Financial Statements for additional information on these debt instruments.

(d)	Includes other time deposits and certificates $100,000 and over. For additional information, refer to the Deposits subsection of the Balance Sheet Analysis section of MD&A.

(e)	Includes federal funds purchased and borrowings with an original maturity of less than one year. For additional information, refer to Note 17 of the Notes to Consolidated Financial Statements.

(f)	Refer to Note 15 of the Notes to Consolidated Financial Statements for additional information on forward contracts to sell residential mortgage loans.

(g)	Refer to Note 10 of the Notes to Consolidated Financial Statements for additional information on lease obligations.

(h)	Includes LIHTC and New Markets Tax Credit investments. For additional information, refer to Note 13 of the Notes to Consolidated Financial Statements.

(i)	Refer to Note 23 of the Notes to Consolidated Financial Statements for additional information on pension obligations.

(j)	Represents agreements to purchase goods or services and includes commitments to various general contractors for work related to banking center construction.

(k)

Commitments to extend credit are agreements to lend, typically having fixed expiration dates or other termination clauses that may require payment of a fee. Many of the commitments to extend credit may expire without being drawn upon. The total commitment amounts include capital commitments for private equity investments and do not necessarily represent future cash flow requirements. For additional information, refer to Note 19 of the Notes to Consolidated Financial Statements.

(l)	Letters of credit are conditional commitments issued to guarantee the performance of a customer to a third party. For additional information, refer to Note 19 of the Notes to Consolidated Financial Statements.

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